Annual Report & Accounts 2020

Insurance

that is personal,

inclusive and

a force for good

Direct Line Insurance Group plc Annual Report & Accounts 2020

Contents2020 highlights

Profit before

tax

£451.4m

(2019: £509.7m)

Return on

tangibleequity

19.9%

(2019: 20.8%)

Combined

operatingratio

1,2

91.0%

(2019: 92.2%)

Solvency

capitalratio

1,3

191%

(2019: 189% adjusted

)

Operating

profit

£522.1m

(2019: £546.9m)

Dividends and

capital returns

£595.2m

(Includes £195.5m special dividend

to replace the cancelled 2019

final dividend)

(2019: £128.6m adjusted

)

Customers

450k+

Customers benefited

from support measures

People

£3.8m

Invested in free shares

for our people

Society

£7m+

Donated to charities

and good causes

Planet

100%

Carbon neutral

via offsetting

Strategic report

Introduction 1

2020 highlights timeline 2

Investment case 4

Business model 6

Chair’s statement 8

Section 172(1) statement 10

Chief Executive Officer’s review 11

Market overview 16

Our key performance indicators 18

Finance review 20

Operating review 36

Sustainability 44

Streamlined Energy and Carbon

Reporting 68

Non-financial information

statement 68

Risk management 69

Governance

Chair’s introduction 76

Board of Directors 78

Executive Committee 81

Corporate governance report 83

Committee reports 97

Directors’ Remuneration Report 113

Directors’ report 140

Financial Statements

Contents 145

Independent Auditor’s report 146

Consolidated Financial Statements 157

Notes to the Consolidated

Financial Statements 162

Parent Company Financial

Statements 215

Notes to the Parent Company

Financial Statements 217

Other information

Additional information 222

Glossary and Appendices 224

Forward-looking Statements

Disclaimer 231

Contact information 232

Notes:

1. See glossary on pages 224 to 226 for definitions and Appendix A –Alternative

performance measures on pages 227 to 230 for reconciliation to financial

statement line items.

2. 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 on page 224 for definitions.

3. Estimates based on the Group’s Solvency II partial internal model.

4. The 2019 comparatives for dividends and capital returns and the solvency capital

ratio have been adjusted to remove the cancelled 2019 final dividend and £120

million of share buyback. (The reported numbers were solvency capital ratio of

165% and capital returns of £447.0 million). See page 18 for further details.

5. See page 28 for the dividend policy.

For more information please visit

www.directlinegroup.co.uk

Introduction

Our vision is to create a world where

insurance is personal, inclusive and a force

for good.

To deliver this we need to build an insurance

company of the future with technology and

data at its core, adapting to an ever-changing

world, delivering more for customers at speed.

As we navigated the challenges that 2020

presented, we focused on supporting our

customers, the wellbeing of our people,

contributing to society and stepping up

our plans to tackle climate change.

We believe embracing sustainable practices

creates a better corporate culture, more

reliable products and brings long-term

rewards for our shareholders.

Strategic Report

www.directlinegroup.co.uk 1

£2m

distributed in

twoweeks

900+

travel insurance

customers

repatriated

Introduction

2020

January

Claims teams take

over 6,500 calls from

customers helping to

support them following

Storm Ciara

Sign Social

MobilityPledge

New ad campaign

launches for

Direct Line

March May

Green Flag refreshes

"Green Flag Rescue Me"

app allowing more claims

to be serviced digitally

Our Travel team continues

to settle claims for over

26,000 customers and

repatriate over 900

customers stranded

abroad

Our Finance team delivers

a new cloud-based Oracle

accounting ledger and

claims payment system

2020 Highlights

Privilege offers full end-to-

end motor insurance service

onnew platform, for both

new business andrenewal

customers

Direct Line for Business

rolls out new Van and

Tradesperson products

onits digital platform

Covid-19: The Group

moves the majority

ofitsoperations to

homeworking,

guaranteeing usual pay

regardless of whether

individual working

practices are affected

£3.5 million Community

Fund launches,

distributing £2 million

intwo weeks to charities

supporting the most vulnerable

Strategic Report

August October

Group announces intention

to set Science-Based

Targets to strengthen

ourdisclosures on

tacklingemissions

Strong Churchill

newbusiness growth,

increased share of new

business on PCWs across

Motor and Home

Group announces new

diversity and inclusion

targets for improving

Black, Asian and Minority

Ethnic representation in

senior leadership roles

New “Mileage

MoneyBack”

proposition offers

Direct Line Motor

customers

aflexible

approach

tomanage

their car

insurance

We’re reimagining how we work,

to be more agile. Empowering

you to transform what we do.

December

Group becomes a 100%

carbon-neutral business

by investing in high social

impact projects to offset our

Scope 1, 2 and 3

emissions

Launch a new counter

fraud operating system

Notes:

1. Scope 3 emissions which are under our direct control

– see page 61.

2. Payment deferrals, mileage refunds for motor customers,

waiving cancellation fees andreducing cover.

450k+

customers benefit from

support measures

Task Force on Climate-

related Financial

Disclosures: Issue

ourfirst comprehensive

disclosure on how

theGroup approaches

climate change risks and

opportunities

Find out more about our

plans for 2021 in the Chief

Executive Officer’s Review

on pages 11 to 17

Darwin live on four price

comparison websites

(“PCWs”)

Migrates to a new

mainframe platform

as part of the

Group’s technology

transformation

Group successfully

transitions a number

ofbusiness areas to

agileways of working

Investment case

Transforming to drive competitiveness

Diversified business

model

As a UK-focused company, we have the ability

to be a deep specialist in our chosen markets

and our range of channels and products gives

us real diversification and scale.

Gross written premiums (£m)

Operating profit (£m)

Delivering strong

shareholder returns

We have a track record of delivering strong

returns to shareholders, having distributed

£1.2 billion in dividends over the past three

years. This, together with our share price

performance, has delivered an attractive

totalshareholder return.

£1.2bn

Dividends paid to shareholders

in the last three years

2020: £3,180.4m

2020: £522.1m

567.8

417.8

577.9

1,616.9

528.9

436.0

586.6

1,651.6

50.4

6.8

101.4

363.5

54.6

39.1

150.6

302.6

Motor

Home

Rescue and other personal lines

Commercial

110

100

31 Dec

2018

31 Dec

2019

31 Dec

2020

1 Jan

2018

DLG

FTSE 350 (excluding investment trusts)

Total shareholder return (%)

This represents the cumulative dividends paid and

change in share price over a three-year period

2019: £3,203.1m

2019: £546.9m

4 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Transforming to drive

competitiveness

We are transforming our technology and

changing the way we work to increase the

competitiveness of our business, with the

aimofimproving the quality of our earnings,

with agreater proportion coming from

current-yearbusiness.

Best at direct

To be the UK’s leading insurer, because we anticipate our

customers’ needs and develop services and products

they want to buy.

Win on price comparison websites (PCWs)

To deliver a step change in our pricing and trading

capability so that our leading PCW brands win

customers from our competitors.

Extend our reach

To utilise the potential of our investments and

capabilities to win more customers through acquisitions

and brand partnerships.

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.

See page 12 for more information

Improving the sustainability

of our earnings

In 2020 we made good progress against our

targets to improve the sustainability of our

earnings, growing current-year contribution

tooperating profit and delivering a strong

combined operating ratio. Our focus on

supporting our customers, our people and

wider society led to an increase in costs in 2020.

Costs

Target: Expense ratio

1,2

of20% in 2023

2020:

24.5%

Normalised current-year operating profit

1,3

Target: At least 50% contribution to total operating profit

by2021

2020:

65.4%

Following an elevated contribution in 2020 due to lower

claims frequency associated with Covid-19 disruption

Normalised combined operating ratio (“COR”)

1,4

Target: Between 93-95% throughout the medium term

2020:

91.7%

Return on tangible equity (“RoTE”)

Target: At least 15% per annum over the long term

2020:

19.9%

Notes:

1. See glossary on pages 224 to 226 for definitions and Appendix A – Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

2. Applies to operating expenses excluding restructuring andone-off costs.

3. Normalised for weather and changes to the Ogden discountrate. Reported contribution 66.7%.

4. Normalised for weather and changes to the Ogden discountrate. Reported COR 91.0%.

www.directlinegroup.co.uk 5

Business model

Notes:

1. Includes Direct Line, Churchill, Privilege, Darwin and partner brands: RBS, NatWest. © Ipsos MORI 2021, Financial ResearchSurvey

(FRS), sixmonths ended January 2021. c. 14,000 adults (aged 16+) surveyed across Great Britain. Interviews were conducted online and

by telephone, and weighted to reflect the overall profile of the adult population.

2. Mintel Vehicle Recovery – September 2020.

3. Mintel Pet Insurance – August 2020 & Mintel Travel Insurance – February 2021.

Protecting our

customers

We know how to build brand value and

have some of the most loved brands

inthe UK which are available direct,

through PCWs, or via specialist brokers.

We also partner with some of the UK’s

leading banks.

Giving customers a choice

of brands and channels

We help people carry on with their

lives, giving them peace of mind now

and in the future.

Across the business we have a number

of real strengths and our customers

and our people are at the heart of

our business.

Motor

Home

Rescue and

other personal

lines

Commercial

We are one of the leading

providers of rescue, travel

and pet insurance in the UK.

Green Flag is the third largest

roadside recovery provider

We are also the second

largest travel and the

fourth largest pet insurer

We protect commercial

businesses through our brands,

including NIG and Direct Line

for Business

We are Britain’s leading

personal motor insurer

measured by in-force policies

mainly represented through

our well-known brands Direct

Line, Churchill, Privilege, our

Darwin brand, and also

through our partners

We are one of Britain’s leading

personal home insurers

measured by in-force policies

We reach our customers by

selling home insurance

products through our brands

Direct Line, Churchill and

Privilege, and our partner

NatWest Group

DLG

PARTNERSHIPS

6 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Our customers

We earn our customers’ trust by

demonstrating how we are acting

intheir best interests.

Premiums

Our diversified model enables us

tooffer a range of products across

arange of distribution channels.

Investment return

Our diversified investment portfolio

provides additional income whilst

alsoensuring we can support our

long-term claim commitments.

Seepage 33.

Accident repair centres

We own 21 accident repair centres,

the largest owned network of any

insurer, delivering lower repair costs

and providing data-led insight

enabling us to react to emerging

trends and helping inform pricing.

Claims management

We have deep specialism in claims

handling, including market-leading

counter-fraud capability.

Costs

We invest in market-leading brands

and strong customer service, whilst

targeting cost reduction measures in

order to increase our competitiveness.

Tax

We manage our tax obligations

responsibly contributing either

directly or indirectly £888 million

intax to the Exchequer this year.

Seemore on page 35.

We have a number of

strengths, from strong

brands to rich data, to

leading claims skills, that are

hard to replicate and provide

real long-term value.

This is how we

create value

A triple win

We aim to deliver a

sustainable and thriving

business that generates

attractive shareholder

returns.

Our people

We encourage a culture that celebrates

difference and empowers people

sothat they can thrive.

Shareholders

We have a track record of delivering

strong returns to shareholders.

This, together with our share price

performance, has delivered an

attractive total shareholder return.

Society

We use our expertise to improve

outcomesfor society and the

communities weserve.

The planet

We protect our business from the

impact ofclimate change and give

back more to the planet than we

take out.

450k+

Customers benefited

from support measures

£7m+

Donated to charities

and good causes

100%

Carbon neutral

via offsetting

£3.8m

Invested in free

shares for our people

£1.2bn

Paid in dividends

over the last three

years

A win for customers

by sharing real value with them.

A win for our people and shareholders

who are invested in our success.

A win for society and the planet

because our long-term success is intrinsically linked to the

success of the community and environment around us.

www.directlinegroup.co.uk 7

Chair’s statement

I would like to start my first statement as Chair by

recognising the efforts of all my Direct Line Group

(the “Group”) colleagues in navigating the turbulent

conditions that we experienced in 2020.

The resilience and adaptability demonstrated by our

people has been commendable. The Covid-19 pandemic

has affected all our stakeholders and I am proud of

thesenior leadership team for responding swiftly and

effectively and for addressing the rapidly changing needs

of the Group’s stakeholders, including our customers,

ourworkforce and the communities we serve.

In the extraordinary market conditions caused by

lockdowns and market uncertainty related to Brexit

andother global economic factors, our disciplined

underwriting model produced a combined operating ratio

of 91.0% (2019: 92.2%). Profit before tax was down 11.4% to

£451.4 million (2019: £509.7 million) but our strong capital

position has enabled us to increase our final dividend to

14.7 pence and commence a share buyback of up to

£100 million. This is on top of the £30 million share buyback

we made in March 2020 before we prudently cancelled the

programme against a background of market volatility.

New leadership and Board changes

I am delighted to have been chosen by my fellow

Directors to succeed Mike Biggs as Chair following his

retirement from office in August 2020. It was a pleasure

tohave served with him as an independent Non-Executive

Director and, on behalf of the Board, I extend our thanks

to Mike for his exemplary stewardship of the Board as

Chair since before the Company separated from the

RoyalBank of Scotland and listed on the London Stock

Exchange in 2012. Mike formed the Board, led it through

the IPO and was instrumental in defining the Group’s

enviable culture and ambition. We are indebted to him

forhis wisdom, for the contribution of his deep experience,

honed over four decades in the financial services sector,

and for his legacy of inclusivity and solidarity in the Board’s

culture. The selection process which led to my appointment

as Chair is summarised in the Governance report on

page91.

Working for all

our stakeholders

In 2020, our resilience and agility enabled us to support

ourcustomers and communities, distribute surplus capital

andprogress building the capability designed to deliver

oursustainable strategy.

Danuta Gray

Chair of the Board

“The resilience and adaptability demonstrated

by our people has been commendable.”

We announced in December that Jane Hanson, who was

appointed as an independent Non-Executive Director in

December 2011, will be stepping down from the Board at

the conclusion of the Annual General Meeting in May 2021.

On behalf of the Board, I would like to thank Jane for her

energetic leadership of the Board Risk Committee and for

her hard work as a member of the Audit, Investment and

Sustainability Committees.

Adrian Joseph OBE joined the Board as an independent

Non-Executive Director on 1 January 2021. As the business

is transformed into a technology- and data-led company,

with the customer at its heart, Adrian’s deep experience of

digital, artificial intelligence and data will be an important

addition to the Board’s capabilities.

We are committed to our diversity and inclusion agenda,

including our target of increasing female representation

in our senior leadership team. Details about the progress

we are making on Board diversity appear in our

Nomination and Governance Committee report on pages

106 to 108 and further information about changes to the

Board and its Committees is set out on page 91.

8 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Strategy

Our vision is to create a world where insurance is personal,

inclusive and a force for good. Our purpose is to help

people carry on with their lives, giving them peace of mind

now and in the future. We have worked exceptionally hard

to deliver against that purpose throughout the

challenging events of 2020.

Our strategic objectives aim to ensure that we build

technological and organisational capability to continue

providing products which meet our customers’ changing

needs and are available through multiple channels, to

continue providing outstanding customer service and

value for money, to create value for our investors, to

support our communities and to protect the environment.

Dividend and capital management

The Group’s solvency capital ratio as at 31 December 2020,

prior to any proposed dividends or incremental capital

returns, was 213%.The Board has recommended a final

dividend of 14.7 pence per share, an increase of 2.1% on

thespecial interim dividend of 14.4 pence announced

withour interim results, which reflected a full catch up

ofthe cancelled 2019 final dividend.

Reflecting the strength of the Group’s capital position,

andin line with our dividend policy to return capital

toshareholders which is expected to be surplus to the

Group’s requirements for a prolonged period, the Group

intends to commence a share buyback programme.

TheBoard has approved a share buyback programme

ofup to £100 million, with an initial tranche of up to

£50million expected to be completed by the time of

thehalf-yearresults.

After the proposed final dividend and £100 million share

buyback, the estimated solvency capital ratio was 191%

asat 31 December 2020. The Group has outstanding Tier 2

debt issued in 2012 with nominal value of £250 million and

a first call date during the first half of 2022. Excluding this

debt, the Group’s solvency ratio after the proposed final

dividend and share buyback would be 172%. In February

2021, the Group acquired the head lease of its Bromley

office site, which reduced the Group’s coverage ratio by

anadditional 6 percentage points.

Assuming a return to more normal circumstances, the

Group intends to move towards the middle of its risk

appetite range of 140% to 180% of its solvency capital

requirement, consistent with its previously stated target.

Our customers

Customer experience is at the heart of everything we do,

and it is the central element that connects all our people

regardless of role. We recognise that the Covid-19 pandemic

has had a huge, in some cases devastating, effect on many

of our customers and we have sought to respond with

sensitivity to customers whose travel plans have been

disrupted, who find themselves under financial strain, or

who have experienced bereavement. The Board oversees

the Group’s conduct, aiming to ensure that the Group acts

in our customers’ best interests and that there is an active

and constructive dialogue with its insurance regulators on

customer conduct matters.

Linking remuneration to performance

We remain focused on ensuring that executive pay is

aligned with the Group’s strategy of targeting sustainable

shareholder and customer value, that it reflects investor

experience and, particularly in respect of 2020, that it

reflects the way in which the business has interacted

withits customers, its people and its communities.

A significant proportion of executive remuneration is

delivered through shares and shareholding requirements

and our incentive schemes’ performance measures are

aligned with the long-term performance measures

considered important by investors.

Working for all

our stakeholders

The Group’s share price on 31 December 2020 was

319.0 pence (2019: 312.5 pence). Total shareholder return

(“TSR”), which includes dividend payments, increased by

9.0 percentage points for the year (2019: 7.0 percentage

point increase). During 2020, the Group’s share price grew

by 2.1% (2019: 1.9% decrease), reflecting increased investor

confidence following the Capital Markets Day at the end

of2019 and the delivery of strong financial results in

March2020. This was partially offset by concerns over

margin contraction in Motor and Home following the

publication of the FCA’s Pricing Practices Report (“PPR”)

which put pressure on UK Personal Lines stocks.

In April 2020, the Group took the difficult decision to

cancel the 2019 final dividend of 14.4 pence and the

£150million share buyback programme, in recognition

ofheightened uncertainty in the macroeconomic

environment due to Covid-19, although its solvency

position was strong. At the time of the interim results in

August 2020, the Group’s financial resilience in the face of

Covid-19 enabled it to declare a regular interim dividend

and catch-up on the cancelled 2019 final dividend. We are

grateful to our shareholders for their understanding

during this challenging period.

Over the past three years, the Group has delivered a TSR

of7.9% compared to the FTSE 350 (excluding investment

trusts) reduction of 5.0%, having returned £1.2 billion to

shareholders during the period.

More information on the Group’s remuneration policy and

share awards is disclosed in the Directors’ remuneration

report on pages 113 to 139.

“We have responded with sensitivity to the

huge disruption that Covid-19 has caused to

many of our customers.”

www.directlinegroup.co.uk 9

Chair’s statement continued

Sustainability and culture

In December 2020, we published our first Task Force on

Climate-related Financial Disclosures Report and our

firstSustainability Report. These set out the progress

theGroup has made against its Environment, Social

andGovernance agenda, including the Group’s intention

to setScience Based Targets which will strengthen our

disclosures across Scope 1, Scope 2 and Scope 3 emissions,

as well as the actions we took in response to the Covid-19

pandemic to support our people, customers and

communities. For definitions of terms used, please see

theglossary on pages 224 to 226.

Climate-related risks and opportunities have grown in

importance for us as a business. As an insurance company,

understanding and managing risk is of fundamental

importance, and we recognise that climate change poses

material long-term risks to the business.

We are embracing the sustainable practices that we

believe underpin a better corporate culture, offering

products that meet our customers’ needs and providing

greater long-term sustainability for investors.

The Board believes that working for all our stakeholders

isthe foundation needed for delivering long-term

sustainability. The Board recognises the importance of

setting the tone of the Group’s culture and embedding it

throughout the organisation. More information about this

can be found in the Governance introduction on page 76.

In November 2019, we set out our vision for building a

world where insurance is personal, inclusive and a force

forgood. At that time, we could not have anticipated

theextraordinary events of 2020 and now more than ever,

itisessential that we live up to that ambition and play

ourpartin supporting the communities we serve. The DLG

Community Fund of £3.5 million is being used to support

the communities where our largest sites are based as well

as several national charities.

Our People

We pride ourselves in having an empowering culture that

celebrates difference and authenticity, and encourages

each colleague to bring their whole self to work. The

Group’s success and resilience is due in no small part to

the contribution of its people. In a year which could have

produced very different outcomes, the Board and I are

grateful for the hard work, initiative and commitment of

our people, who have continued to live the Group’s values

and to demonstrate dedication to serving our customers.

I would also like to thank each member of the Board for

their significant contribution, commitment and service

and I look forward to my first full year as Chair of the Board

working with them in supporting and encouraging our

management team in the execution of the Group’s

ambitious strategy.

DANUTA GRAY

Chair of the Board

Section 172(1) statement

Direct Line Group is a leading motor, home and

commercial insurer which depends on its reputation

forhigh standards of business conduct and on the trust

and confidence of its stakeholders to operate sustainably

in the long term. The Group seeks to put its customers’

best interests first, continually invests in and engages

with its employees, supports the communities in which

it operates and strives to generate value for shareholders.

The Directors of Direct Line Insurance Group plc

(the “Company”) have been subject to the duties

codified in law, which include the duty to act in the

wayin which they consider, in good faith, would be

most likely to promote the success of the Group for

thebenefit of its members as a whole, having regard

tothe stakeholders and matters set out in Section 172(1)

ofthe Companies Act 2006 (“Section 172(1)”).

The Board recognises that the Group has a range of

stakeholders with diverse interests and an analysis of its

principal stakeholders can be found on pages 48 to 61

and on page 86.

Section 172(1) considerations are embedded in decision-

making at Board-level and are demonstrated

throughout its governance framework.

The underlying principles of promoting the success of

the Company for the benefit of its members as a whole,

and of considering stakeholders when making decisions

that could affect them, is understood by the senior

leadership team and consideration and respect for

stakeholders is demonstrated throughout the Group.

The Group has adapted to a change of working

practices throughout the year and keeps engagement

mechanisms under review so that they remain effective

and so that the Board understands the evolving needs

of its stakeholders.

In taking decisions, the Directors carefully consider

thebalance of interests of the stakeholders who might

be affected. The Board and its Committees discuss

stakeholders and their interests during the cycle of

Board meetings, and in 2020 we increased both the

frequency and length of meetings, not least to focus on

stakeholder needs as a result of the Covid-19 pandemic.

We are committed to ensuring that the Group takes

action both to protect the business and to reduce its

direct and indirect impact on the environment.

In March 2020, the Board considered it prudent to

cancel its share buyback programme and, in April 2020,

to cancel the 2019 final dividend as a result of

thevolatile conditions arising from the Covid-19

pandemic, although an interim and a special interim

dividend were paid later in the year when conditions

stabilised and on the basis of a strong capital position.

See pages 86 to 87 for more detailed examples of how

the Board considered Section 172(1) when making

decisions that affected its stakeholders.

10 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Chief Executive Officer’s review

Navigating an

extraordinary year

I am proud of what the Group has achieved during 2020.

Once again, we have demonstrated financial resilience by

delivering another good set of results, whilst supporting

our customers, our people and local communities through

the challenges of the pandemic. Despite the disruption

and uncertainty that 2020 has brought, we have made

real progress towards becoming a technology-driven

business which can adapt quickly to the changing world

around us and deliver more for our customers at speed.

We could not have done this without our highly engaged

people, who have demonstrated the commitment and

flexibility needed to do what it takes for our customers

and to drive forward our business plans regardless of their

personal circumstances. I am grateful to them for their

dedication, skill and support.

Business performance and the impact

of Covid-19

In 2020, we delivered another year of strong profitability

atthe same time as growing our direct own brand policy

count. The investments we have made in systems and

capability over the last few years are showing through

inthis growth and are contributing to underlying

improvements in current-year underwriting profitability.

Overall Covid-19 led to a modest net benefit to the result.

Despite the impact of the pandemic, we made further

progress in delivering the change required to implement

the Group’s transformation plans.

Despite the many challenges we faced in the year as a result of

the Covid-19 pandemic, we traded well and prioritised support

forour customers, our people and local communities. I am proud

that our people, even when working remotely, have continued

both to care for our customers and to help us build an insurance

company of the future.

Penny James

Chief Executive Officer

We traded well through the year, delivering growth in

ourHome, Commercial and Green Flag Rescue businesses

despite prolonged periods of lockdown when new

business shopping dropped significantly. Retention has

held up well. In contrast average premiums have fallen as

risk mix has reduced, with fewer new drivers on the road

as no driving tests have been conducted for parts of the

year and fewer new cars have been purchased. In the

midst of these trends we are happy to see direct own

brand policy growth of 2.2% and gross written premium

broadly flat.

At a headline level we delivered operating profit of

£522.1million, a combined operating ratio of 91.0% and

areturn on tangible equity of 19.9%, well ahead of our

target of atleast 15% over the long term. Operating profit

of £522.1 million was £24.8 million lower than 2019

(£546.9 million) due to higher major weather costs

of£43.0 million (2019: £6.0 million) and reduced

prior-year reserve releases, partially offset by improved

current-yearprofitability.

“In 2020, we delivered another year of strong

profitability at the same time as growing our

direct own brand policy count.”

www.directlinegroup.co.uk 11

Do the right

thing

Aim higher Take

ownership

Say it like

it is

Work

together

Bring all

of yourself

to work

We help people carry on with

their lives, giving them peace

of mind now and in the future

We want to create a world

where insurance is personal,

inclusive and a force for good

Our vision and purpose

Our values

Customers

Sustainability pillars

People Society Planet Governance

– Superhero branding campaign

launched

– New Motor “Mileage MoneyBack”

proposition

– Launched Van and Tradesperson

products onnew Direct Line for

Business platform

– Green Flag awarded “Superbrand”

status

– Privilege Motor new business

andrenewals now live on the

newplatform

– Increased PCW focus including

Churchill Home

– Darwin brand launched on two

more PCWs

– Churchill Motor started roll-out to

new platform in Q1 2021

– Agreed a two-year extension with

NatWest Group for Home

– Enhanced API capabilities to enable

potential Home partners to link

andtest

– Increased our presence in the

on-demand mobility market

– Launched new market-leading

Motor counter-fraud system

– Expanded electric vehicle

repaircapabilities

– Launched a free on-line risk

management portal for every NIG

policyholder

– Green Flag launched a new

cloud-based claims system

– New agile operating model

embedded across digital, data

andpricing

– Increased proportion of service

interactions through digital

channels

– Launched new property strategy

following success of remote working

– Our people continued to deliver

ourtransformation agenda while

working remotely

– Our engagement scores remained

high as we focused on the security

and wellbeing of our people

– Awarding free shares and ensuring

all eligible employees receive a

bonus for the year

Performance against strategic objectives

See page 44 for more information

Technical edge Nimble and cost efficient Great people

Best at direct Win on price comparison

websites

Extend our reach

Forging ahead with our strategy

Chief Executive Officer’s review continued

12 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Overall, the impact of the pandemic led to a modest net

benefit to our financial result, with the effects

concentrated in four main areas:

– Reduction in motor claims frequency falling to below

normal levels from Q2

– Increase in Travel claims, relating to both claims

volumes and claims handling costs as well as additional

commission payments

– An estimated £6 million in Covid-19 related business

interruption claims

– Investments to support our customers, people and

society totalling £93 million

Motor claims frequency levels were significantly lower

than normal due predominantly to lockdown restrictions

leading to claims frequency falling to around half normal

levels during Q2. Whilst it increased during the second

half of the year, claims frequency did not return to

pre-Covid-19 levels during 2020. However, severity costs

have increased due to the costs of making accident repair

centres Covid-19 safe, longer repair times and

consequently higher credit hire costs. We have seen an

increase in the volume of claims within our Travel business

and so have also incurred additional claims handling

costssupporting our customers. In terms of business

interruption, our standard wordings were clear from

theoutset and we were not party to the FCA’s test case

nor the appeal to the Supreme Court, which has been

relevant to many commercial insurers, and our overall

Covid-19 related business interruption claims are

estimated at £6million.

Consistent with our “Force for Good” vision, we have

invested extensively in our customers in the form of

premium refunds, waived fees and reduced premiums,

and also in our people by protecting jobs at the most

critical points in lockdown, preserving salaries and

incentives in return for flexibility and investing in

strengthening home working capability. And finally

wehave invested in society: we have helped local

communities with over £7 million of donations helping

100,000s of households and contributing to the ABI

Covid-19 Support Fund. In total these initiatives represent

an impact of around £93 million, of which £34 million is

within our operating expenses and £59 million is within

our loss ratio.

Prior to the pandemic we had set out to achieve

improvements in our current-year loss ratio and therefore

to improve the profitability of the business we write.

Offsetting this we had expected to see the level of releases

from prior year business reduce, reflecting changes in the

level of Motor excess of loss reinsurance some years ago.

During 2020, prior-year reserve releases reduced to

£173.8 million (2019: £294.5 million). Although the

improvements in our loss ratio undoubtedly benefited

from the impact of the Covid-19 pandemic, we are

confident we have made progress in increasing the

current-year contribution to operating profit.

Overall we have sought to do the right thing by all our

stakeholders throughout 2020, and believe the underlying

performance and quality of change delivery in the year

indicate we are on track to deliver on our targets.

Strategic update

2020 was always a critical change delivery year on our

path to building the insurance company of the future

– technology and data led but with the customer at its

heart. I have been very pleased by our ability to continue

delivering major transformational change, even from

ourhomes. The table opposite outlines some of our

keyachievements.

Many of the foundation blocks are now in place and we

are increasingly moving to extracting benefits from the

technology we have implemented rather than focusing

purely on technology delivery.

As we transform the business both in terms of the

technology we use and our agility, we are changing the

way the organisation works. We have found through 2020

that we can create and protect the culture of the Group,

even with almost everyone working from home, and our

regular people surveys tell us that our people want the

personal flexibility that homeworking offers. Our intention,

therefore, is to take this opportunity to change the way we

use our premises in future so they support collaboration,

training and teamwork rather than being an everyday

place of work for most people.

We will remain focused around our core hub sites so our

people can get together, but believe our approach gives

both cost savings and advantages for our people, allowing

us to support greater social mobility and assist us in

identifying top talent. To this end we are reviewing our

office site property strategy and have chosen to buy

outour Bromley lease, the run costs of which were above

market rate. This will accelerate the costs from the future

17 years of the lease and so we will take a charge to

Solvency II own funds in 2021 of £85 million as we

effectively de-leverage the business and, in return, make

savings in excess of £10 million per annum from 2022,

incremental to our original cost target plans. We will then

have greater freedom to create the nature of property

usage this business needs.

“As we transform the business both in terms of

the technology we use and our agility, we are

changing the way the organisation works.”

A further effect was felt in our investment portfolio where

we saw investment return fall from £134.6 million in 2019

to £95.1million in 2020, reflecting the dual impact of lower

reinvestment rates and a small number of writedowns

inthe investment portfolio. When we look at some of

thevolatility in the market over the period we are pleased

with the overall performance of the portfolio.

www.directlinegroup.co.uk 13

With the potential impact of the FCA Pricing Practices

report, discussed in the Market Overview section later,

combined with whiplash reform, currently due to be

effective from May 2021, a mixed picture is emerging in

terms of lockdowns in H1 and uncertainty over the

long-term level of driving in our new “normal”, and there

areclearly many moving parts.

That said, capital generation has been strong and our

perception is that the level of risk in the system, with

vaccines rolling out and a Brexit deal in place, is beginning

to reduce. As a result we are declaring a final dividend

of14.7 pence per share and announcing a share buyback

programme, as we reiterate our target of operating

around the middle of our risk appetite range of 140% to

180% in normal circumstances. The share buyback will

be for up to £100 million, with an initial tranche of up to

£50 million expected to be completed by the time of

the half-year results.

As you move through the Strategic report we will seek

notonly to guide you through understanding our financial

performance and how that positions us for the future

butalso to bring to life examples of the technology

development and the benefit we believe it will bring.

Ihope it will allow you to feel why we are so excited about

the progress we have made and the opportunity ahead.

Looking into 2021 we will be continuing the roll-out of

ourtechnology transformation and increasingly turning

our attention to utilising these new platforms to deliver

benefits for our customers.

Our plans include:

– Continuing the migration of Direct Line and Churchill

Motor policies onto our new platform, enabling us to

improve customers’ online journey and extend our

product range even further.

– Continuing the journey towards greater digitalisation,

applying advanced analytical techniques to enhance

the customer experience.

– Rolling out a new policy and pricing system for Green

Flag enabling it to grow beyond traditional breakdown

services and look after customers’ motoring needs in

and out of an emergency.

– Being well placed for customers and at a competitive

advantage to other players in a post FCA pricing

practices market.

We are also heavily focused on improving efficiency in

order to meet our cost targets by:

– Continuing organisational transformation to further

digitalise customer journeys, automate business

processes and adopt new ways of working, as we aim

tostep change both customer experience and the

efficiency of our cost base.

– Realising the benefits of agile ways of working

throughout the organisation with the aim of reducing

the cost and increasing the pace of change.

These plans are designed with fantastic customer experience

and propositions at their heart. Supporting ouractivities

and central to the long-term sustainability of the business,

we have deeply embedded and fundamental principles:

– Our values sit at the very heart of our everyday behaviours.

– 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.

‘Bring all of yourself to work’ is a value lived vibrantly

across the Group but after extensive discussions with

our people, we launched anewdiversity and inclusion

strategy and set ourselves stretching targets around

ethnicity and gender in our leadership so that we are

truly inclusive and reflect the customers weserve.

Chief Executive Officer’s review continued

14 Direct Line Group Annual Report and Accounts 2020

Strategic Report

2020 - a year like no other

Notes:

1. See glossary on pages 224 to 226 for definitions.

2. Scope 3 emissions which are under our direct control.

3. For more information please see our published 2020 TCFD Report on

the Group’s website at www.directlinegroup.co.uk/2020_TCFD.

Supporting

our customers

Supporting

ourpeople

Supporting

our communities

Supporting a

greener future

450k+

Over 450,000

customers supported

through payment

deferrals, waiving

cancellation feesand

mileage refunds

26k+

More than 26,000

customer travel claims

settled and over 900

customers repatriated

Free

Free Rescue cover,

fast-track claims and

free home emergencies

cover for NHS staff

9,000

Moved 9,000 people

tohome working and

supported our motor

accident repair centres

to open safely and keep

Britain moving

Protected

Protected roles and

salaries during initial

lockdown, without

government support,

and offered maximum

flexibility to help our

people manage home

and work

Free

£3.8 million distributed

as a thank you to

ourpeople

£3.5m

Established our first

Community Fund which

distributed £3.5 million

to250 charities, helping

over 200,000 people

£1.5m

Extended our

Community Fund

into2021 with £1.5

million to support

charities dealing with

the impact ofthe

Covid-19 pandemic

£3.6m

Contributed

£3.6million to

theAssociation

of British

Insurers

Covid-19

Support

Fund

Reduce

Committed to setting

Science-Based Targets

for Scope

1, 2 and 3 to

help the Group reduce

itscarbonfootprint

Carbon

neutral

Became a 100% carbon-

neutral business by

investing in high social

impact projects to

offset our Scope

1, 2

and 3

emissions

Report

Published our first Task

Force on Climate-related

Financial Disclosures

(“TCFD”) Report

www.directlinegroup.co.uk 15

Chief Executive Officer’s review continued

Market overview

Consumer trends

In 2020 we saw a number of

trends emerging through the

year. Ultimately these tell us that

our strategy is the right one.

Those trends are:

– Consumers’ willingness to

interact digitally has been

transformed. Digitalisation is

atthe heart of our technology

transformation so this trend is

entirely aligned with our plans.

– Agility is a must. We need to

bequicker at implementing

changes to fulfil changing

customer needs.

– The working model has

changed. Knowing our people

can deliver from home has

provided an opportunity to

change how we use our offices

in a way that supports what

ourpeople tell us they want

and offers opportunities to

recruit people irrespective

ofgeography.

– Car technology continues

toevolve rapidly. Having the

largest owned repair network

of any UK insurer gives us the

opportunity to develop further

commercial insights.

– Cross collaboration is a must.

We can achieve more by

working together; co-operation

across industries is essential to

tackling climate change and

ensuring greater diversity.

Financial Conduct Authority

Pricing Practices

In September 2020 the FCA released

its General Insurance Pricing

Practices Final Report, which remains

a key focus for us. It included the

FCA’s proposed remedy package

aiming toensure retail home and

motor insurance products offer fair

value to customers. The FCA

recognised that insurers do not make

excessive profits and their key

proposal was that firms should offer

renewal prices no higher than the

equivalent new business price

through the same sales channel. The

consultation period ended on 25

January 2021 and we look forward to

understanding the final details some

time in Q2 2021.

This is an area where we have already

been proactive for several years by

implementing a range of measures

toreduce the differential in pricing

between our new business and

renewal customers. We are

supportive of the aims of the FCA and

believe that, in a world where prices

become less of a differentiator, our

strong brands, diversified business

model and the capabilities we are

building will enable us to win in the

future market. On the way there is

uncertainty around the detailed

application of the rules, the timelines

for implementation and the nature

ofshort-term volatility as the market

rebalances. We have prepared for a

range of outcomes and we continue

to work with the FCA to assist it

in navigating some of the issues

andareseeking to help shape the

right outcome for our customers

andshareholders.

Climate

The impact of climate change has far

reaching implications for economies

around the world. Our Planet pillar,

which aims to protect our business

from the impact of climate change

and give back to the planet more

than we take out, drives our

approach. We recognise that our

actions as a business can contribute

to climate risk mitigation and help

accelerate the transition to a low

carbon and sustainable future.

Wetake this seriously and have

continued to challenge ourselves

toreduce emissions and energy

consumption through greater

transparency.

We have previously published our

Scope 1 and 2 emissions

, but this year

we wanted to go further. For the first

time we broke down our emissions

across our offices and our accident

repair centres to help us to focus our

plans on where we can have the most

impact. Alongside this we evaluated

our Scope 3 emissions

starting with

those under our direct control and

purchased goods and services which

make a substantial contribution

toour overall emissions. Our first

comprehensive TCFD report

(seepage 62) provides us with a

roadmap to strengthen our strategic

response in tackling climate change

and we see the Bank of England’s

Climate Biennial Exploratory Scenario

(“CBES”), in which the Group has been

invited to participate, as a way to help

enhance our climate change scenario

analysis capability.

The Group’s focus in 2021 is to

evaluate the Scope 3 emissions

arising out of our investment portfolio

and we will begin to scope out

Science-Based Targets, which are a

set of goals to provide a clear route

“We recognise that our

actions as a business can

contribute to climate risk

mitigation and help accelerate

the transition to a low carbon

and sustainable future.”

16 Direct Line Group Annual Report and Accounts 2020

Strategic Report

“Given the progress we are making on our

transformation, we enter 2021 with real

momentum and are confident in delivering

ourvision of being a technology and data led

insurance company of the future with our

customers at its heart.”

Outlook

The capability delivered as the Group looks to transition

from technology transformation into business

transformation underpins the improvement in the

current-year profitability and provides a platform for

growth, underwriting improvements and cost efficiency.

Through increased digitalisation and self-serve, enabled

by new ways of working, we aim to deliver significant

customer and efficiency improvements and underpin

ourtarget of an operating expense ratio of 20% by 2023.

The new ways of working during 2020 have enabled us to

think more ambitiously about how we use our office space

and we have therefore launched a property strategy

which aims to help deliver incremental savings to this

target. In addition, greater pricing sophistication and

counter-fraud initiatives aim to continue the improvement

in the current-year loss ratio. The Group remains on track

to maintain the contribution from current-year operating

profit at more than half of the Group’s total operating

profit and we reiterate our ongoing target of achieving

atleast a 15% return on tangible equity per annum.

The Group targets a combined operating ratio of 93-95% for

2021 and over the medium term, normalised for weather,

although we acknowledge there will be increased

uncertainty for a period as we progress through the

implementation of the FCA pricing practices proposals and

as the market reacts to the ongoing Covid-19 pandemic.

2020 has been a testing year for everyone and I am proud

of how we have responded as a Group, demonstrating

throughout the resilience of our business model. We had

strong momentum coming into the Covid-19 crisis and

have delivered a good financial result whilst

simultaneously navigating the Covid-19 pandemic,

supporting our various stakeholders and staying true to

our vision and purpose throughout. Given the progress we

are making on our transformation, we enter 2021 with real

momentum and are confident in delivering our vision of

being a technology and data led insurance company of

the future with our customers at its heart.

Penny James

Chief Executive Officer

toreduce emissions, to submit to

the Science Based Target Initiative

(“SBTi”) for approval. Finally, we

know that we are on a journey

andcannot reduce our emissions

overnight, therefore we became

carbon neutral through offsetting,

aswe work to reduce our emissions

over time.

Note:

1. See glossary on pages 224 to 226

fordefinitions.

UK economy and Brexit

Following the recession in 2020,

economic uncertainty is expected to

remain high throughout H1 2021 as

aresult of the Covid-19 pandemic,

although the UK Government has

acted to support UK businesses

andemployees and prevent lasting

damage to the economy. However,

the uncertainty surrounding the

pandemic makes the overall impact

and recovery progress unclear.

The disruption to global trade

andsupply chains caused by the

pandemic could increase the risk

ofinflation in the long term. The

Group’s investment portfolio

ispositioned defensively and

additional steps could be taken,

such as further shifting the portfolio

towards ‘defensive’ sectors or

increasing more allocation to cash.

The portfolio also contains a

proportion of short-maturity bonds

which could be sold relatively

quickly if necessary.

As a UK-based business with UK

customers, we identified that the

biggest potential financial exposure

for theGroup, from a disruptive or

disorderly Brexit, would be to

market volatility. We continue

towork through the operational

effects of Brexit for customers and

supply chains but the potential

effects have been helped by a trade

deal which has avoided otherwise

expected tariffs on EU goods

needed to serve our customers.

www.directlinegroup.co.uk 17

Our key performance indicators

Combined operating

ratio

(%)

Definition Aim

Remuneration

Notes:

1. See glossary on pages 224 to 226 and Appendix A – Alternative performance measures on pages 227 to 230 for reconciliation to

financial statement line items.

2. The 2019 dividends and capital returns have been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share

buyback as announced in March/April 2020. (The reported number were dividends and capital returns of £447.0 million).

3. The 2019 solvency capital ratio has been adjusted to remove the cancelled 14.4p final dividend and £120 million of the share buyback

as announced in March/April 2020. (The reported number was a solvency capital ratio of 165%.)

Expense ratio

Commission ratio

Loss ratio

16 17 18 19 20

25.311.5

9.1 25.7

7.1

8.6

6.5

60.9

56.0

61.9

57.9

61.9

23.2

24.5

97.7

90.8

91.6

92.2

91.0

Basic earnings

per share

(pence)

16 17 18 19 20

20.4

31.8

33.3

29.5

25.8

Capital returns

(£m)

Buybacks

Special

Ordinary

16 17 18 19 20

136.9199.5

279.0

287.6

98.6

100

205.3

113.7

595.2595.2

195.5195.5

299.7299.7

336.4

484.3

401.3

128.6

2020 COL BAR TO BE IN PANTONE 275

Return on tangible

equity

(%)

19.919.9

16 17 18 19 20

14.2

23.0

21.6

20.8

Buybacks

Special

Ordinary

16 17 18 19 20

136.9199.5

279.0

287.6

98.6

100

205.3

113.7

595.2595.2

195.5195.5

299.7299.7

336.4

484.3

401.3

128.6

2020 COL BAR TO BE IN PANTONE 275

This is calculated by

dividing the earnings

attributable to shareholders

less coupon payments

inrespect of Tier 1 notes

bythe weighted average

number of Ordinary Shares

in issue.

The amount of cash paid

individends to shareholders

and amount of share

buybacks funded from

theGroup’s retained

profits.(See page 192 for

dividend breakdown).

The return generated

onthecapital that

shareholders have in the

business. This iscalculated

by dividing adjusted

earnings by average

tangible equity.

A measure of financial year

underwriting profitability.

ACOR of less than

100%indicates profitable

underwriting. The COR is

the sum of claims, expense

and commission ratios and

compares the cost of doing

business against net

earned premium generated.

We have not set a target.

However, growing earnings

per share is considered

anindicator of a healthy

business.

We aim to grow the regular

dividend in line with

business growth.

Additionally, we look to

return any capital to

shareholders which is

expected to be surplus to

our requirements for a

prolonged period.

We aim to achieve at least

a15% RoTE per annum over

the long term.

We aim to make an

underwriting profit.

Thetarget in the medium

term is a COR inthe range

of 93% to 95% normalised

forweather.

This is a broad measure

ofearnings and reflects

theresults of the Group

after tax less Tier 1 coupon

payments. We base part

ofthe AIP awards on profit

before tax.

We base Long-Term

Incentive Plan (“LTIP”)

awards partly on relative

total shareholder return

performance, which

includes dividends.

Directors also receive

dividends on their

beneficial shareholdings

and accrue these on

unvested LTIP awards.

We base the LTIP awards

partly on adjusted RoTE

overa three-year

performance period.

We base part of the Annual

Incentive Plan (“AIP”)

awards on profit before tax.

The COR is closely linked

tothis.

For additional performance

information see page 24

For additional performance

information see page 27

For additional performance

information see page 28

For additional performance

information see page 27

For additional information

see pages 117 and 123

For additional information

see page 117 and 123

For additional information

see pages 117 and 127

For additional information

see page 117 and 127

Expense ratio

Commission ratio

Loss ratio

16 17 18 19 20

25.311.5

9.1 25.7

7.1

8.6

6.5

60.9

56.0

61.9

57.9

61.9

23.2

24.5

97.7

90.8

91.6

92.2

91.0

18 Direct Line Group Annual Report and Accounts 2020

Strategic Report

4. Estimates based on the Group’s Solvency II partial internal model.

5. On an aggregated 12-month rolling basis, with 2013 rebased to 100.

6. For the Group’s principal underwriter, U K Insurance Limited.

7. FCA complaints reporting requirements have changed for periods after 29 June 2016. Before 29 June 2016, only complaints resolved

after two business days were classed as FCA reportable. From July 2016 all complaints resolved are classed as FCA reportable.

Solvency capital

ratio

3,4

(%)

16 17 18 19 20

165.0

170.0

189.0

191.0191.0

Employee engagement

(%)

74.074.0

78.0

16 17 18 19 20

73.0

78.0

81.0

Net promoter score

5,6

(points)

158.0158.0

16 17 18 19 20

129.1

144.0

155.0

145.6

Customer complaints

6,7

(%)

0.510.51

16 17 18 19 20

0.89

0.78

0.77

0.63

Definition Aim Remuneration

For additional performance

information see page 28

For additional People

information see page 50

For additional performance

information see page 48

For additional information

see page 117

For additional information

see page 117 and 125

For additional information

see page 117 and 124

For additional information

see page 117 and 124

Engagement is about

being proud to work for

theGroup and helping us

to succeed. It means that

employees are not just

happy or satisfied, but

doing something to help us

achieve our Company goals.

Net promoter score (“NPS”)

is an index that measures

the willingness of

customers to recommend

products or services to

others. It is used to gauge

customers’ overall

experience with a product

or service, and customers’

loyalty to a brand.

The number of complaints

we received during the

yearas a proportion of

theaverage number of

in-force policies.

A risk-based measure

expressing the level of

capital resources held as

apercentage of the level

ofcapital that is required

under Solvency II.

To make the Group best

foremployees and best for

ourcustomers. We gauge

employee engagement

through our employee

opinion survey and we

aimfor high employee

engagement scores

eachyear.

We aim to increase our net

promoter score over time.

This measure indicates

where our customer service

has not met expectations

tothe extent that the

customer has initiated

acomplaint. We aim to

improve this over time.

Under normal

circumstances, the Group

aims to maintain a solvency

capital ratio around the

middle of the risk appetite

range of 140% to 180%.

The AIP awards include

aweighting to a balance

ofemployee metrics,

includingengagement.

The AIP awards include

aweighting to a balance

ofcustomer metrics,

includingNPS.

The AIP awards include

aweighting to a balance

ofcustomer metrics,

including complaints.

Solvency capital ratio

within our risk appetite

isan indicator ofcapital

strength, which is one of

the gateways for the AIP

awards and an underpin

forLTIP awards.

www.directlinegroup.co.uk 19

Finance review

We made good progress against our targets to improve the

sustainability of our earnings in a challenging environment

andmaintained our balance sheet strength.

Neil Manser

Acting Chief Financial Officer

Direct own brands in-force policies grew by 2.2% driven by

strong segments of growth across the business including

Home, Commercial and Green Flag Rescue, whilst Motor

was broadly stable. Total in-force policies reduced due to

lower partnerships and Travel volumes.

Direct own brands gross written premium was stable with

growth across Home and Commercial direct own brands

and Green Flag Rescue offset by lower average premiums

in Motor. Overall gross written premium reduced by 0.7%

due to falling partnership and Travel premium.

Increased major weather costs of £43.0 million (2019:

£6.0million) contributed to lower operating profit of

£522.1million, £24.8 million (4.5%) lower than 2019 (£546.9

million). Covid-19 restrictions reduced claims frequency in

Motor and Commercial, although this was partially offset

by investment in initiatives to protect our customers,

people and society, lower investment asset returns and

the impact of the Covid-19 pandemic on Travel. Overall,

the impact of the pandemic was a modest net benefit

tothe result.

Combined operating ratio improved to 91.0% (2019: 92.2%).

Normalised combined operating ratio

, of 91.7%, was ahead

of target of 93% to 95% predominantly due to the lower

claims frequency in Motor.

Progress on the Group’s transformation continued to drive

improved current-year profitability via increased pricing

and underwriting sophistication in Commercial and

improved counter-fraud capability in Motor.

Profit before tax of £451.4 million was £58.3 million lower

than 2019, following the reduction in operating profit

alongside £39.4 million of restructuring and one-off costs

as the Group invested in cost-saving initiatives.

Proposed final ordinary dividend of 14.7 pence per share,

increased 2.1%

and announcing a share buyback

programme of up to £100 million. Intention to move back

towards the middle of the Group’s capital risk appetite

range assuming more normal circumstances.

Notes:

1. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

2. The 2019 final dividend of 14.4 pence was subsequently

cancelled and paid as a special interim dividend in 2020.

Financial highlights

Strong capital

position, good results

20 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Financial highlights continued

FY 2020

£m

FY 2019

£m

In-force policies (thousands) 14,615 14,789

Of which: direct own brands (thousands) 7,454 7,290

Gross written premium 3,180.4 3,203.1

Of which: direct own brands 2,225.6 2,227.8

Net earned premium 2,960.5 2,984.9

Underwriting profit 267.8 232.1

Instalment and other operating income 159.2 180.2

Investment return 95.1 134.6

Operating profit 522.1 546.9

Restructuring and other one-off costs (39.4) (11.2)

Finance costs (31.3) (26.0)

Profit before tax 451.4 509.7

Tax (84.2) (89.8)

Profit after tax 367.2 419.9

Key metrics

Current-year attritional loss ratio

1,2

62.3% 71.6%

Loss ratio

1,2

57.9% 61.9%

Commission ratio

1,2

8.6% 7.1%

Expense ratio

1,2

24.5% 23.2%

Combined operating ratio

1,2

91.0% 92.2%

Investment income yield

2.1% 2.4%

Net investment income yield

1.8% 2.1%

Investment return yield

1.6% 2.2%

Basic earnings per share (pence) 25.8 29.5

Diluted earnings per share (pence) 25.5 29.2

Return on tangible equity

19.9% 20.8%

Return on equity 13.1% 15.5%

Dividend per share – interim (pence) 7.4 7.2

– final (pence) 14.7 14.4

– total ordinary (pence) 22.1 21.6

– special (pence) 14.4 –

Share buyback actioned (10.4 million shares) 30.0 –

Share buyback proposed

100.0 150.0

31 Dec

2020

31 Dec

2019

Net asset value per share (pence) 199.7 193.4

Tangible net asset value per share(pence) 141.5 142.0

Solvency capital ratio post dividends

3,4

191% 165%

Notes:

1. A reduction in the ratio represents an improvement as a proportion of net earned premium, while an increase in the ratio represents

adeterioration.

2. See glossary on pages 224 to 226 for definitions and appendix A – Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

3. The solvency capital ratio as reported at 31 December 2019 is after taking into account the then expected 14.4p final dividend and

the£150 million share buyback announced on 3 March 2020. The impacts of the cancellation of the dividend (as announced on

8April2020) and of the share buyback programme (as announced on 19 March 2020 after £30 million of the buyback had been

executed) would have added 24 percentage points to the ratio as reported to give an adjusted solvency capital ratio of 189%.

4. Estimates based on the Group’s Solvency II partial internal model.

www.directlinegroup.co.uk 21

premium deflation; additional travel claims and claims

handling costs; and business interruption claims in

Commercial. These factors together had a net positive

impact on the underwriting result.

Outside of the impact from Covid-19, prior-year releases

reduced to £173.8 million during 2020 (2019: £294.5

million), reflecting changes in the level of Motor excess

ofloss reinsurance some years ago and were materially

offset by improvements in the underlying current-year

lossratio across Motor and Commercial.

Overall this delivered an increase in underwriting profit

to£267.8 million (2019: £232.1 million).

Lower motor premium and claims volumes, primarily

arising from the Covid-19 pandemic, led to a reduction in

instalment and other operating income to £159.2million

(2019: £180.2 million).

Investment return decreased to £95.1 million (2019:

£134.6million), reflecting the dual impact of lower

reinvestment rates and lower valuations on property in

the investment portfolio.

Taking all of this together, operating profit decreased

by£24.8 million to £522.1 million (2019: £546.9 million)

andcurrent-year operating profit, as a proportion of total

operating profit, improved to 66.7% (65.4% on a

normalised basis). Whilst current-year profitability has

benefited from the impact of Covid-19 related factors in

2020, the Group remains on track for its target of

achieving more than half of the Group’s annual operating

profit from current-year earnings by the end of2021.

In-force policies and gross written premium

In-force policies (thousands)

31 Dec

2020

31 Dec

2019

Direct own brands 3,943 3,921

Partnerships 118 122

Motor 4,061 4,043

Direct own brands 1,837 1,765

Partnerships 801 829

Home 2,638 2,594

Rescue 3,400 3,450

Travel 3,499 3,648

Pet 145 157

Other personal lines 61 122

Rescue and other personal lines 7,105 7,377

Of which: Green Flag direct 1,114 1,063

Direct own brands 560 541

NIG and other 251 234

Commercial 811 775

Total in-force policies 14,615 14,789

Of which: direct own brands 7,454 7,290

Operating profit (£m)

Current-year operating proﬁt

Prior-year reserve releases

100

200

300

400 500 600

£173.8m (33.3%)

£294.5m (53.8%)

£348.3m (66.7%)

£252.4m (46.2%)

Performance

Operating profit

FY 2020

£m

FY 2019

£m

Underwriting profit 267.8 232.1

Instalment and

other operating income 159.2 180.2

Investment return 95.1 134.6

Operating profit 522.1 546.9

Note:

1. See glossary on pages 224 to 226 for definitions and

appendix A – Alternative performance measures on pages

227 to 230 for reconciliation to financial statement line items.

The Group again delivered an operating profit in

2020above £500 million and saw underlying progress

towards achieving more than 50% of the profit arising

from the current year. The results have been affected

by the usual variability around weather events but

theaddition of the factors surrounding Covid-19 make

them more difficult to navigate than in previous years.

First, the Group experienced major weather event

claims of £43.0million in 2020, below our expectations

of £64 million but higher than the very benign weather

experienced in 2019 (£6.0million).

Second, the impact of the Covid-19 pandemic can

beseen across all the main lines within the income

statement, with the largest impact from reduced

claims frequency in Motor. Whilst it is difficult to be

exact about the impact of Covid-19 on the results, as

thelength of the pandemic has made initially ‘one-off’

impacts now more business as usual in their nature, (for

example motor market pricing), this review will indicate

the broad direction of these impacts.

Overall the Group incurred £93 million in supporting

customers, our people and society as part of our “Force

for Good” initiatives. This support included customer

refunds, job protection, charity donations and supplier

support measures. Over this period the Group has not

taken any Government support. The cost of these

initiatives are all recognised in the underwriting result.

Furthermore, within the underwriting result there are

four additional factors: a net reduction in motor claims

from significantly reduced driving, partly offset by

higher claims severity; a reduction in motor premiums

as a result of fewer new drivers and market-wide

Finance review continued

22 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Own brand policies increased to 7.5 million (2019:

7.3million) driven by growth in Home, Commercial and

Green Flag Rescue, whilst Motor was broadly stable. Total

in-force policies reduced slightly to 14.6 million (2019: 14.8

million) primarily due to reductions in Home partnerships,

as Prudential and Sainsbury’s partnerships are closed to

new business, and the impact of Covid-19 on Travel sales.

Gross written premium

FY 2020

£m

FY 2019

£m

Direct own brands 1,567.6 1,591.7

Partnerships 49.3 59.9

Motor 1,616.9 1,651.6

Direct own brands 411.6 407.7

Partnerships 166.3 178.9

Home 577.9 586.6

Rescue 166.7 167.5

Travel 134.0 151.3

Pet 72.8 72.6

Other personal lines 44.3 44.6

Rescue and other personal lines 417.8 436.0

Of which: Green Flag direct 83.1 79.0

Direct own brands 163.3 149.4

NIG and other 404.5 379.5

Commercial 567.8 528.9

Total gross written premium 3,180.4 3,203.1

Of which: direct own brands 2,225.6 2,227.8

Gross written premium of £3,180.4 million (2019: £3,203.1

million) reduced by 0.7% with strong premium growth in

Commercial offset by lower Motor and Home partnership

premiums and the impact of Covid-19 disruption in Travel.

Direct own brands gross written premium was broadly

stable at £2,225.6million (2019: £2,227.8million). Growth

across Commercial, Green Flag Rescue and Home own

brands was offset by Motor.

Underwriting profit and combined operating ratio

FY 2020 FY 2019

Underwriting profit (£ million) 267.8 232.1

Loss ratio 57.9% 61.9%

Commission ratio 8.6 % 7.1%

Expense ratio 24.5% 23.2%

Combined operating ratio 91.0% 92.2%

Note:

1. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230

forreconciliation.

Overall underwriting profit increased to £267.8 million

(2019: £232.1 million) with an improvement in the

combined operating ratio to 91.0% (2019: 92.2%).

The loss ratio improved significantly to 57.9% (2019: 61.9%)

as higher major weather-related claims and lower

prior-year reserve releases were more than offset by

thenet positive effect of Covid-19 related factors. These

included reduced claims frequency in Motor, only partially

offset by premium deflation in Motor, higher claims

handling costs in Travel and a cautious estimate of Travel

claims. The improvement in the loss ratio was partially

offset by a higher commission ratio and higher expense

ratio. The commission ratio increased primarily as a

resultof increased profit share payments, particularly on

packaged bank accounts, and volume related commission

payments to PCWs, while the expense ratio increased

dueto investment in initiatives to protect our customers,

people and society. Excluding costs related to the protection

of our customers and people against the Covid-19

pandemic, the Group made progress in reducing its

underlying expense base.

www.directlinegroup.co.uk 23

Finance review continued

Ratio analysis by division

Notes

Motor

£m

Home

£m

Rescue and

other

personal lines

£m

Commercial

£m

Total

Group

£m

For the year ended 31 December 2020

Net earned premium 4 1,484.8 555.8 422.9 497.0 2,960.5

Net insurance claims 4 888.1 309.1 261.1 255.3 1,713.6

Prior-year reserve releases 34 100.6 10.8 5.6 56.8 173.8

Major weather events n/a (27.0) n/a (16.0) (43.0)

Attritional net insurance claims 988.7 292.9 266.7 296.1 1,844.4

Loss ratio – current-year attritional 66.6% 52.7% 63.0% 59.6% 62.3%

Loss ratio – prior-year reserve releases (6.8%) (1.9%) (1.3%) (11.4%) (5.9%)

Loss ratio – major weather events

n/a 4.8% n/a 3.2% 1.5%

Loss ratio – reported 4 59.8% 55.6% 61.7% 51.4% 57.9%

Commission ratio 4 3.2% 8.1% 16.4% 18.7% 8.6%

Expense ratio 4 24.7% 23.4% 23.9% 25.4% 24.5%

Combined operating ratio 4 87.7% 87.1% 102.0% 95.5% 91.0%

Current-year combined operating ratio 94.5% 89.0% 103.3% 106.9% 96.9%

For the year ended 31 December 2019

Net earned premium 4 1,507.7 573.6 425.2 478.4 2,984.9

Net insurance claims 4 1,043.3 268.4 284.4 251.5 1,847.6

Prior-year reserve releases 34 180.5 41.4 7.6 65.0 294.5

Major weather events n/a (3.0) n/a (3.0) (6.0)

Attritional net insurance claims 1,223.8 306.8 292.0 313.5 2,136.1

Loss ratio – current-year attritional 81.2% 53.5% 68.7% 65.6% 71.6%

Loss ratio – prior-year reserve releases (11.9%) (7.2%) (1.8%) (13.6%) (9.9%)

Loss ratio – major weather events

n/a 0.5% n/a 0.7% 0.2%

Loss ratio – reported 4 69.3% 46.8% 66.9% 52.7% 61.9%

Commission ratio 4 2.6% 9.7% 6.4% 18.5% 7.1%

Expense ratio 4 22.9% 23.8% 22.1% 24.5% 23.2%

Combined operating ratio 4 94.8% 80.3% 95.4% 95.7% 92.2%

Current-year combined operating ratio 106.6% 87.6% 97.2% 109.2% 102.1%

Note:

1. Home and Commercial claims for major weather events, including inland and coastal flooding and storms.

Motor Home RoPL Commercial Total

60%

50%

40%

30%

20%

10%

70%

80%

90%

100%

110%

Loss ratio Commission ratio Expense ratio Current-year combined operating ratio

59.8%

3.2%

24.7%

106.6%

94.5%

55.6%

8.1%

23.4%

89.0%

87.6%

61.7%

16.4%

23.9%

103.3%

97.2%

51.4%

18.7%

25.4%

106.9%

109.2%

57.9%

8.6%

24.5%

96.9%

102.1%

2020

69.3%

2.6%

22.9%

2019 2020

46.8%

9.7%

23.8%

2019 2020

66.9%

6.4%

22.1%

2019 2020

52.7%

18.5%

24.5%

2019 2020

61.9%

7.1%

23.2%

2019

Ratio analysis by division

24 Direct Line Group Annual Report and Accounts 2020

Strategic Report

The current-year attritional loss ratio excludes prior-year

reserve releases and claims costs from major weather

events, although in 2020 it was impacted by Covid-19

disruption. The Group’s current-year attritional loss ratio

of62.3% improved by 9.3 percentage points compared

to2019, due to reduced Motor claims frequency alongside

improved underlying current-year performance across

alllines. Home and Commercial experienced increased

major weather costs, up £24.0 million and £13.0 million

respectively compared to 2019.

Prior-year reserve releases reduced in 2020 to £173.8million

(2019: £294.5million), equivalent to 5.9% of net earned

premium (2019: 9.9%) and were concentrated towards

more recent accident years. In 2019 prior-year reserve

releases included a £16.9 million reserve strengthening

inrelation to the change in the Ogden discount rate to

minus 0.25%. Assuming current claims trends continue,

prior-year reserve releases are expected to remain a

significant contribution toprofits. The sensitivity analysis

on page 32 includes information on the effect of

claimsinflation.

The Group’s current-year combined operating ratio

improved by 5.2 percentage points to 96.9% (2019: 102.1%)

as a 9.3 percentage point improvement to the current-

year attritional loss ratio was partly offset by a 1.3 percentage

point increase in claims due to major weather events, a

1.5percentage point increase in the commission ratio and

a 1.3 percentage point increase in the expense ratio.

Operating expenses before restructuring and

one-off costs

Note

FY 2020

£m

FY 2019

£m

Staff costs

255.6 261.5

IT and other

operating expenses

1,2

196.0 158.0

Marketing 10 106.6 113.9

Insurance levies 10 80.4 81.5

Depreciation and

amortisation

3,4

10 85.8 78.8

Total operating

expenses before

restructuring and

one-off costs 724.4 693.7

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. Depreciation and amortisation includes a £6.6 million

impairment charge (2019: £1.3 million), which relates to

capitalised software development costs for ongoing IT projects

primarily relating to development of new systems.

4. Includes depreciation on right-of-use assets of £14.8 million

(2019: £14.2 million).

Operating expenses before restructuring and one-off costs

increased by £30.7 million to £724.4 million (2019: £693.7

million). Thisresulted in an increase in the expense ratio

of1.3 percentage points to 24.5% (2019: 23.2%). The increase

incosts was entirely due to investment in initiatives for our

customers, people, suppliers and the wider society in the

context of the Covid-19 pandemic. In total these initiatives

are estimated to have increased operating expenses by

£34 million and in some cases had the effect of delaying

cost saving programmes which were planned for 2020.

Adjusting for these initiatives, operating expenses were

broadly flat year on year and we reiterate our 20% expense

ratio ambition for 2023.

Instalment and other operating income

Note

FY 2020

£m

FY 2019

£m

Instalment income 109.3 114.0

Other operating

income:

Revenue from

vehicle recovery and

repair services 7 24.0 28.3

Vehicle replacement

referral income 7 12.2 19.1

Legal services

income 7 8.8 11.3

Other income

7 4.9 7.5

Other operating

income 49.9 66.2

Total instalment and

other operating

income 159.2 180.2

Note:

1. Other income includes mainly fee income from insurance

intermediary services.

Instalment and other operating income, which is primarily

driven by premium and claims volumes, decreased by

£21.0million to £159.2million. Instalment income fell

primarily due to lower motor premium, whereas lower

other operating income reduced due to Covid-19 related

lower motor claims frequency.

www.directlinegroup.co.uk 25

Finance review continued

Investment return

Note

FY 2020

£m

FY 2019

£m

Investment income 127.1 146.4

Hedging to a sterling

floating rate basis (20.3) (22.1)

Net investment

income 106.8 124.3

Net realised and

unrealised (losses)/

gains excluding

hedging (11.7) 10.3

Total investment

return 6 95.1 134.6

Investment yields

FY 2020 FY 2019

Investment income yield

2.1% 2.4%

Net investment income yield

1.8% 2.1%

Investment return yield

1.6% 2.2%

Note:

1. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

Total investment return decreased by £39.5 million to

£95.1million (2019: £134.6 million) with a reduction in

investment income and write downs on investment

property. Lower reinvestment rates, following interest rate

cuts made by both the US Federal Reserve and the Bank

of England during Q1 2020, led to a lower net investment

income yield of 1.8% (2019: 2.1%).

Realised and unrealised losses excluding hedging were

predominantly driven by lower investment property

valuations and a reduction in gains from bond disposals.

Overall the investment portfolio performed well in the

context of challenging market conditions.

In 2021, the Group expects a net investment income yield

of around 1.5% with minimal gains.

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

(“PPOs”) and non-

PPO liabilities in an optimal manner; and

– to deliver a suitable risk-adjusted investment return

commensurate with the Group’s risk appetite.

Reconciliation of operating profit

Note

FY 2020

£m

FY 2019

£m

Motor 4 363.5 302.6

Home 4 101.4 150.6

Rescue and other

personal lines 4 6.8 39.1

Commercial 4 50.4 54.6

Operating profit 4 522.1 546.9

Restructuring and

one-off costs (39.4) (11.2)

Finance costs 11 (31.3) (26.0)

Profit before tax 4 451.4 509.7

Tax 12 (84.2) (89.8)

Profit for the year

attributable to the

owners of the

Company 367.2 419.9

Operating profit by segment

All divisions contributed to profit in 2020, demonstrating

the diversity of the Group’s multi-product, multi-brand

and multi-channel portfolio. Motor operating profit

increased significantly primarily due to the reduction in

claims frequency whereas Home operating profit reduced

primarily due to higher weather-related costs and lower

prior-year reserve releases. Commercial continued to

generate strong profit despite higher weather claims

while improved Rescue operating profit of £51.2 million

(2019: £45.2 million) offset a weak result in other personal

lines, mainly from Travel.

Restructuring and one-off costs

In order to support its cost reduction targets, the Group

announced approximately £60 million of restructuring

and one-off costs across 2019 and 2020 at its Capital

Markets Day in November 2019. The Group incurred

£39.4million of restructuring and one-off costs in 2020

bringing the total cost to date to £50.6 million. As part of

the Group’s response to the Covid-19 pandemic to support

its people it paused some elements of its restructuring

programme. The Group expects the remaining £9 million

in relation to this cost reduction programme to be

incurred during 2021.

In addition, the Group is reviewing its office site property

strategy and has bought out the lease of its Bromley

officethus accelerating payment of an existing long-term

liability. This transaction will incur restructuring costs of

£85 million in 2021.

26 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Finance costs

Finance costs increased to £31.3 million (2019: £26.0

million) primarily due to interest on the £260 million Tier 2

subordinated debt issued in June 2020.

Effective corporation tax rate

The effective tax rate for 2020 was 18.7% (2019: 17.6%),

whichwas slightly lower than the standard UK corporation

tax rateof 19.0% (2019: 19.0%) driven primarily by tax relief

for the Tier1 coupon payments partly offset by

disallowable expenses. The effective rate is higher than

2019, which benefited from the release of an overprovision

from a prior year.

On 3 March 2021 the Chancellor announced that the rate

of UK corporation tax will increase to 25% from 1 April 2023.

This is not reflected in the figures above as it was not

substantively enacted at the balance sheet date, however,

the effect is not expected to be material.

Profit for the year and return on tangible equity

Profit for the year was lower at £367.2 million (2019: £419.9

million) in line with the reduction in operating profit as

well as increased restructuring and one-off costs and

finance costs.

Return on tangible equity decreased to 19.9% (2019: 20.8%)

due primarily to a £24.4 million decrease inadjusted

profit

after tax to £384.1 million (2019: £408.5 million). Profit after

tax was adjusted for restructuring and one-off costs and

coupon payments in respect of Tier 1 notes.

Note:

1. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

Earnings per share

Basic earnings per share decreased by 12.5% to 25.8 pence

(2019: 29.5 pence). Diluted earnings per share decreased

by 12.7% to 25.5 pence (2019: 29.2 pence) mainly reflecting

the reduction in profit after tax.

Cash flow

The Group’s cash and cash equivalents increased by

£271.9 million during the year (2019: £196.1 million decrease)

to £1,168.2 million.

The Group generated operating cash flows before

movements in working capital of £398.6 million (2019:

£370.3 million), an increase of £28.3 million due to the

increase in profit for the year adjusted for non-cash

movements. After taking into account movements in

working capital, the Group generated £402.6 million

(2019: £182.4 million), an increase of £220.2 million. The

Group has considerable assets under management; the

cash generated from these reduced by £58.0 million to

£315.9 million following reductions in the Group’s assets

under management, as a result of dividend payments.

Netcash generated from operating activities was £584.7

million (2019: £462.1 million).

Net cash used in investing activities of £161.0 million

reflected the Group’s continuing investment in its major

ITprogrammes (2020: £140.7 million, 2019: £175.7 million).

Net cash used in financing activities of £151.8 million

comprised £312.5 million (2019: £420.7 million) in dividends

and Tier 1 capital coupon payments in the year, partly

offset by net proceeds of £257.2 million on the Tier 2

subordinated debt issued in June. Dividends paid in the

year comprised the 7.4 pence first interim dividend and

14.4 pence special dividend announced in the half-year

results in 2020.

Net cash used in financing and investing activities partly

offset the £584.7 million generated from operating

activities and resulted in a net increase in cash and cash

equivalents of £271.9 million (2019: £196.1 million decrease)

to £1,168.2 million (2019: £896.3 million).

The levels of cash and other highly liquid sources of funding

that the Group holds to cover its claims obligations is

continually monitored to ensure that the levels remain

within the Group’s risk appetite.

Net asset value

At 31 December Note

2020

£m

2019

£m

Net assets

16 2,699.7 2,643.6

Goodwill and other

intangible assets 16 (786.8) (702.5)

Tangible net assets 16 1,912.9 1,941.1

Closing number of

Ordinary Shares

(millions) 16 1,351.8 1,366.6

Net asset value per

share (pence) 16 199.7 193.4

Tangible net asset

value per share

(pence) 16 141.5 142.0

Note:

1. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230 for

reconciliation to financial statement line items.

Net assets at 31December 2020 increased to

£2,699.7 million (31December 2019: £2,643.6 million)

andtangible net assets decreased to £1,912.9 million

(31December 2019: £1,941.1 million) reflecting the 2020

retained profit and increases in available-for-sale reserves.

This was offset by additional expenditure on intangible

assets as the Group continued to invest in thebusiness.

www.directlinegroup.co.uk 27

Finance review continued

Balance sheet management

Capital management and dividend policy

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 has recommended a final dividend of

14.7pence per share (2019: 14.4 pence), an increase of

2.1%on the special interim dividend of 14.4 pence per

share announced at the time of the interim results which

reflected a full catch up of the cancelled 2019 final

dividend. The Board has also approved a share buyback

ofup to £100 million, with an initial tranche of up to

£50million expected to be completed by the time of

thehalf-year results. This reflects the Board’s continued

confidence in the Group’s capital position and the

sustainability of its earnings. In normal circumstances,

theBoard expects the Group to operate around the

middle of its solvency capital ratio risk appetite range

of140% to 180%.

After the dividend and share buyback, the estimated

solvency capital ratio was 191% as at 31 December 2020.

The Group has outstanding Tier 2 debt issued in 2012 with

nominal value of £250 million and a first call date during

the first half of 2022. Excluding this debt, the Group’s

solvency ratio after the dividend and share buyback would

be 172%. In February 2021, the Group acquired the head

lease of its Bromley office site, which reduced the Group’s

coverage ratio by an additional 6 percentage points.

The final dividend will be paid on 20 May 2021 to

shareholders on the register on 9 April 2021. The ex-

dividend date will be 8 April 2021.

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 31 December 2020.

Capital position

At 31 December 2020, the Group held a Solvency II capital

surplus of £1.22 billion above its regulatory capital

requirements, which was equivalent to an estimated

solvency capital ratio of 191%, after the proposed final

dividend and share buyback.

The Group’s SCR and solvency capital ratio are as follows:

At 31 December 2020 2019

Solvency capital requirement

(£ billion) 1.34 1.32

Capital surplus above solvency

capital requirement (£ billion) 1.22 0.85

Solvency capital ratio after

proposed final dividend and

share buyback 191% 165%

Movement in capital surplus

2020

£bn

2019

£bn

Capital surplus at 1 January 0.85 0.89

Capital generation excluding

market movements 0.59 0.60

Market movements (0.02) 0.06

Capital generation 0.57 0.66

Change in solvency capital

requirement (0.02) (0.06)

Surplus generation 0.55 0.60

Capital expenditure (0.16) (0.19)

Tier 2 debt issue 0.26 –

Cancellation of 2019 year-end

distribution and reinstatement

for 2020 half year

0.12 –

Interim dividend (0.10) (0.10)

Final dividend

(0.20) (0.20)

Share buyback (0.10) (0.15)

Net surplus movement 0.37 (0.04)

Capital surplus at 31 December 1.22 0.85

Notes:

1. Relates to the cancellation of the 2019 cash dividend (£198

million) and share buyback (£120 million) offset by the special

dividend subsequently declared at half year 2020.

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.

28 Direct Line Group Annual Report and Accounts 2020

Strategic Report

In 2020, the Group generated £0.57 billion of Solvency II

capital and added £0.26 billion via a Tier 2 debt issue,

whilst cancelled distributions added £0.12 billion to own

funds. This was offset by £0.16 billion of capital expenditure

and distributions of £0.40 billion. Capital expenditure

reflects the significant investment the Group is making

inbuilding future capability, including the development

ofthe next generation core personal lines IT systems.

In2021 annual capital expenditure levels are expected

toreduce to around £120 million. In addition, £85 million

ofrestructuring costs in relation to the purchase of the

Bromley office lease will decrease capital generation

in2021.

Change in solvency capital requirement

2020

£bn

Solvency capital requirement at 1 January 1.32

Model and parameter changes –

Exposure changes 0.02

Solvency capital requirement at 31 December 1.34

The Group’s SCR has increased by £0.02 billion in the year

due to exposure changes. Model and parameter changes

were largely offsetting.

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 31 December 2020. The impact on

the Group’s solvency capital ratio arises from movements

inboth the Group’s solvency capital requirement and

ownfunds.

Impact on solvency capital

ratio

Scenario

31 Dec

2020

31 Dec

2019

Deterioration of small bodily

injury motor claims equivalent to

that experienced in 2008/09 (6pts) (7pts)

One-off catastrophe loss

equivalent to the 1990 storm

“Daria” (8pts) (9pts)

One-off catastrophe loss based

on extensive flooding of the River

Thames (8pts) (9pts)

Change in Solvency II reserving

basis for PPOs to use a real

discount rate of minus 1%

(10pts) (8pts)

100bps increase in credit spreads

(9pts) (9pts)

100bps decrease in interest rates

with no change in the PPO real

discount rate (3pts) 1pt

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 PRA discount rate curve.

2. Only includes the impact on available-for-sale (“AFS”) assets

(excludes illiquid assets such as infrastructure debt) and

assumes no change to the SCR.

Movement in capital surplus (£bn)

1.2

1.1

1.0

0.9

0.8

1.3

1.4

1.5

1.6

1.7

Capital

surplus at

1 January

Capital

generation

excluding

market

movements

Market

movements

Change in

solvency

capital

requirement

Capital

expenditure

Dividends

and share

buyback

Cancellation of

2019 capital

distribution

Tier 2

debt issue

Capital

surplus at

31 December

0.85

0.59

0.02

0.16

0.12

0.40

0.26

1.22

0.02

Capital

generation

£0.57bn

Net surplus

movement

£0.37bn

Surplus

generation

£0.55bn

www.directlinegroup.co.uk 29

Finance review continued

Own funds

The following table splits the Group’s own funds by tier on

a Solvency II basis.

At 31 December

2020

£bn

2019

£bn

Tier 1 capital before foreseeable

distributions 1.84 1.80

Foreseeable dividend and share

buyback (0.30) (0.35)

Tier 1 capital – unrestricted 1.54 1.45

Tier 1 capital – restricted 0.38 0.37

Tier 1 capital 1.92 1.82

Tier 2 capital – subordinated debt 0.53 0.26

Tier 3 capital – deferred tax 0.11 0.09

Total own funds 2.56 2.17

During 2020, the Group’s own funds increased from

£2.17billion to £2.56 billion. Tier 1 capital after foreseeable

distributions represents 75% of own funds and 143% of the

estimated SCR. Tier 2 capital relates solely to the Group’s

£0.53 billion subordinated debt. 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

At 31 December

2020

£bn

2019

£bn

Total shareholders’ equity 2.70 2.64

Goodwill and intangible assets (0.79) (0.70)

Change in valuation of technical

provisions 0.04 (0.06)

Other asset and liability

adjustments (0.11) (0.08)

Foreseeable dividend and share

buyback (0.30) (0.35)

Tier 1 capital – unrestricted 1.54 1.45

Tier 1 capital – restricted 0.38 0.37

Tier 1 capital 1.92 1.82

Tier 2 capital – subordinated debt 0.53 0.26

Tier 3 capital – deferred tax 0.11 0.09

Total own funds 2.56 2.17

Reconciliation of IFRS shareholders’ equity

to Solvency II own funds (£bn)

2.00

1.50

1.00

0.50

2.50

3.00

Total

shareholders’

equity

Goodwill

and

intangible

assets

Change

in valuation

of technical

provisions

Other

asset and

liability

adjustments

Foreseeable

dividend

and share

buyback

Total

own

funds

2.70

1.54

0.38

0.53

0.11

0.79

0.04

0.11

0.30

2.56

Tier 1 capital – restricted

Tier 1 capital – unrestricted

Tier 3 capital

Tier 2 capital

Leverage

The Group’s financial leverage increased by 5.6 percentage

points to 24.2% (2019: 18.6%). The increase was primarily

due to the issue of £260 million of Tier 2 subordinated

debt in June 2020.

At 31 December

2020

£m

2019

£m

Shareholders’ equity 2,699.7 2,643.6

Tier 1 notes 346.5 346.5

Financial debt – subordinated debt 516.6 259.0

Total capital employed 3,562.8 3,249.1

Financial-leverage ratio

24.2% 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.

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 associated

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.

30 Direct Line Group Annual Report and Accounts 2020

Strategic Report

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 current Ogden

discount rate is minus 0.25% for England and Wales, minus

0.75% in Scotland, and 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 of England and Wales.

The Ogden discount rate will be reviewed again at the

latest in 2024. 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 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. This is known as the

PPOpropensity.

The Group’s prior-year reserve releases were £173.8 million

(2019: £294.5 million) with good experience in large bodily

injury claims being a key contributor.

Looking forward, the Group expects to continue setting its

initial management best estimate with an appropriate

degree of conservatism. Assuming current claims trends

continue, the contribution from prior-year reserve releases

is expected to remain significant.

Claims reserves net of reinsurance 2020

(£m)

£2,591.7m

518.5

104.8

289.5

1,678.9

Claims reserves net of reinsurance 2019

(£m)

£2,670.0m

516.1

88.5

266.3

1,799.1

Motor

Home

Rescue and other personal lines

Commercial

www.directlinegroup.co.uk 31

The Covid-19 pandemic has led to the largest shock to the UK economy on record and the outlook remains unusually

uncertain at year end 2020. Much depends on the evolution of the pandemic and measures taken to protect public

health, as well as the transition to the new trading arrangements between the EU and the UK. In addition to concerns

about general indicators of economic health, such as falls in gross domestic product, rising unemployment and rising

public sector debt ratios, the Group’s reserves are exposed to the risk of changes in claims development patterns and

claims inflation resulting from the pandemic. Changes in claims frequency present greater uncertainty for the unearned

part of the business, whereas uncertainty over the level of claims severity has a greater impact on the earned claims

reserves. Claims severity risk is particularly acute with respect to care costs for large bodily injury claims and car repair

costs due to potential supply chain interruptions. The Group has therefore developed additional claims inflation

scenarios, which look at 100 basis point changes in the claims inflation assumed in the actuarial best estimate over the

next two years and these can be found in the table below.

Sensitivity analysis – the discount rate used in relation to PPOs, changes in the assumed Ogden

discount rate and claims inflation

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 , the Ogden discount rate or claims inflation) 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

At 31 December

2020

£m

2019

£m

PPOs

Impact of an increase in the discount rate used in the calculation of present values

of 100 basis points 45.9 48.5

Impact of a decrease in the discount rate used in the calculation of present values

of 100 basis points (62.7) (66.5)

Ogden discount rate

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%) 43.7 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%) (61.1) (75.0)

Claims inflation

Impact of a decrease in claims inflation by 100 basis points for two consecutive years

(new scenario in 2020) 32.4 –

Impact of an increase in claims inflation by 100 basis points for two consecutive years

(new scenario in 2020) (32.2) –

Notes:

1. These sensitivities are net of reinsurance and exclude the impact of taxation.

2. These sensitivities reflect one-off impacts at 31 December and should not be interpreted as predictions.

3. The sensitivities relating to an increase or decrease in the real discount rate used for PPOs illustrate a movement in the time value of

money from the assumed level of 0% for reserving. The PPO sensitivity has been calculated as the direct impact of the change in the

real discount rate with all other factors remaining unchanged.

4. Ogden discount rate sensitivity has been calculated on 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. 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 reserves as at 31 December 2020. It does not take into account any second order impacts such as changes in

PPO propensity or reinsurance bad debt assumptions.

Reinsurance

The objectives of the Group’s reinsurance strategy are to reduce the volatility of earnings, facilitate effective capital

management, and transfer risk outside the Group’s risk appetite. This is achieved by transferring risk exposure through

various reinsurance programmes:

– Catastrophe reinsurance to protect against an accumulation of claims arising from a natural perils event. The retained

deductible is £130 million and cover is placed annually on 1 July up to a modelled 1-in-200 year loss event of £1,125 million.

– Motor reinsurance to protect against a single claim or an accumulation of large claims which renews on 1 January.

Theretained deductible is set at an indexed level of £1 million per claim but the reinsurance is only 75% placed up to

alevel of £10 million and the protection above £10 million is subject to an additional aggregate retention of £37.5

million. This programme was renewed on 1 January 2021.

– Commercial property risk reinsurance to protect against large individual claims with a retained deductible of £4.0million

which renews annually on 1 July.

Finance review continued

32 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Investment portfolio

The investment strategy aims to deliver several objectives, which are summarised below:

– to ensure there is sufficient liquidity available within the investment portfolio to meet stressed liquidity scenarios

– to match PPO and non-PPO liabilities in an optimal manner

– to deliver a suitable risk-adjusted investment return commensurate with the Group’s risk appetite

Asset and liability management

The following table summarises the Group’s high-level approach to asset and liability management.

Liabilities Assets Characteristics

More than 10 years, for example PPOs Property and infrastructure debt Inflation-linked or floating

Short and medium term − all other claims Investment-grade credit Fixed – “Key rate duration

matched”

Tier 1 equity Investment-grade credit Fixed

Tier 2 sub-debt (swapped fixed to floating) Commercial real estate loans and cash Floating

Tier 2 sub-debt (fixed) Investment-grade credit and cash Fixed or floating

Surplus − tangible equity Investment-grade credit, short-term high

yield, cash and government debt

securities

Fixed or floating

Asset allocation and benchmarks – U K Insurance Limited

The current strategic asset benchmarks for U K Insurance Limited are detailed in the following table:

At 31 December

Benchmark

holding

2020

Actual

holding

2020

Benchmark

holding

2019

Actual

holding

2019

Investment-grade credit 66.0% 63.8% 65.0% 62.5%

High yield 6.0% 6.0% 6.0% 6.9%

Investment-grade private placements 3.0% 1.8% 3.0% 1.8%

Credit 75.0% 71.6% 74.0% 71.2%

Sovereign 3.0% 0.4% 5.0% 1.7%

Total debt securities 78.0% 72.0% 79.0% 72.9%

Infrastructure debt 4.0% 4.5% 5.0% 4.9%

Commercial real estate loans 6.5% 3.5% 4.0% 3.7%

Cash and cash equivalents 6.0% 15.0% 7.0% 13.4%

Investment property 5.5% 5.0% 5.0% 5.1%

Total investment holdings 100.0% 100.0% 100.0% 100.0%

www.directlinegroup.co.uk 33

Finance review continued

Investment holdings and yields – total Group

2020 2019

Allocation

(£m)

Income

(£m)

Yield

(%)

Allocation

(£m)

Income

(£m)

Yield

(%)

Investment-grade credit

3,736.6 76.3 2.1% 3,676.8 82.1 2.3%

High-yield 349.0 18.9 5.1% 390.8 21.2 5.4%

Investment-grade private placements 103.9 2.7 2.6% 104.0 2.8 2.6%

Credit 4,189.5 97.9 2.3% 4,171.6 106.1 2.3%

Sovereign

25.5 0.7 1.1% 99.8 2.3 1.8%

Total debt securities 4,215.0 98.6 2.3% 4,271.4 108.4 2.5%

Infrastructure debt 264.5 5.8 2.1% 278.1 7.0 2.5%

Commercial real estate loans 206.7 6.5 3.3% 205.7 6.9 3.4%

Cash and cash equivalents

1,168.2 2.5 0.2% 896.3 7.9 0.8%

Investment property 292.1 13.7 4.7% 291.7 16.2 5.3%

Equity investments

3.2 – 0.0% – – 0.0%

Total Group 6,149.7 127.1 2.1% 5,943.2 146.4 2.4%

Notes:

1. Asset allocation at 31 December 2020 includes investment portfolio derivatives, which have a mark-to-market asset value of £7.7

million included in investment-grade credit and £0.3 million in sovereign debt (31 December 2019: £81.8 million and nil respectively).

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. Equity investments consist of an equity fund which is valued based on external valuation reports received from a third-party

fundmanager.

At 31 December 2020, total investment holdings of £6,149.7 million were 3.5% higher than at the start of the year,

primarily reflecting the cash received on issue of the Tier 2 subordinated debt. Total debt securities were £4,215.0 million

(31 December 2019: £4,271.4 million), of which 2.6% were rated as ‘AAA’ and a further 54.4% were rated as ‘AA’ or ‘A’.

Theaverage duration at 31 December 2020 of total debt securities was 2.8 years (31 December 2019: 2.5 years).

At 31 December 2020, total unrealised gains, net of tax, on available-for-sale investments were £83.9 million

(31 December 2019: £47.5 million).

Tax management

The Board recognises that the Group has an important responsibility to manage its tax position effectively. The

Boardhas delegated day-to-day management of taxes to the Chief Financial Officer and oversight is provided by the

Audit Committee.

These arrangements are intended to ensure that the Group: complies with applicable laws and regulations; meets its

obligations as a contributor and a collector of taxes on behalf of the tax authorities; and manages its tax affairs

efficiently, claiming reliefs and other incentives where appropriate.

Tax authorities

The Group has open and cooperative relationships with the tax authorities with whom it deals in the countries where

the Group operates, namely the UK, the Republic of Ireland, South Africa and India.

Tax policy and governance

The Group’s tax policy has been reviewed and approved by the Audit Committee. The Group Tax function supports the

Chief Financial Officer in ensuring the policy is adhered to at an operational level.

For more information please see our published Group Tax policy on the Group’s website at https://www.directlinegroup.

co.uk/en/who-we-are/governance/other-policies.html.

34 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Neil Manser

Acting Chief Financial Officer

Total tax contribution

The Group’s direct and indirect tax contribution to the UK Exchequer is significantly higher than the UK corporation tax

that the Group pays on its profits. The Group collects taxes relating to employees and customers on behalf of the UK

Exchequer and other national governments. It also incurs a significant amount of irrecoverable value added tax relating

to overheads and claims. Taxes borne and collected in other tax jurisdictions have not been included in this note as the

amounts are minimal in the context of the wider UK Group.

During 2020 the sum of taxes either paid or collected across the Group was £888.0 million. The composition of this

between the various taxes borne and collected by the Group is shown below.

At 31 December

2020

£m

Current-year corporation tax charge 95.2

Irrecoverable value added tax incurred on overheads 79.1

Irrecoverable value added tax embedded within claims spend 158.6

Employer’s national insurance contributions 39.8

Other taxes 9.1

Total taxes borne 381.8

At 31 December

2020

£m

Insurance premium tax 397.0

Value added tax 11.3

Employee’s pay as you earn and national insurance contributions 97.9

Total taxes collected 506.2

Corporation tax

Irrecoverable VAT

Employer’s NIC

Other taxes

9.1

39.8

237.7

95.2

Insurance premium tax

VAT

Employee’s PAYE and NIC

97.9

11.3

397.0

Total taxes borne by tax type (£m) Total taxes collected by tax type (£m)

£381.8m £506.2m

www.directlinegroup.co.uk 35

Operating review

Own brand in-force policies increased by 0.6%, with an overall

increase in in-force policies of 0.4% to 4.1 million.

Own brand gross written premium reduced by 1.5%, overall gross

written premium reduced by 2.1%.

Operating profit of £363.5 million was £60.9 million higher than prior

year due to lower claims frequency, mainly due to Covid-19

restrictions, partly offset by lower prior-year reserve releases.

In-force policies

(‘000s)

4,061

(2019: 4,043)

Gross written

premium

£1,616.9m

(2019: £1,651.6m)

Operating

profit

£363.5m

(2019: £302.6m)

Combined

operatingratio

87.7%

(2019: 94.8%)

Motor

Gross written premium by channel

Direct

Partnerships

Price comparison

websites

67.0%2.8%

30.2%

36 Direct Line Group Annual Report and Accounts 2020

Strategic Report

2020 2019

In-force policies (thousands) 4,061 4,043

Of which direct own brands 3,943 3,921

Gross written premium £1,616.9m £1,651.6m

Loss ratio 59.8% 69.3%

Commission ratio 3.2% 2.6%

Expense ratio 24.7% 22.9%

Combined operating ratio 87.7% 94.8%

Operating profit £363.5m £302.6m

Overview

In 2020, the motor market experienced disruption driven

by Covid-19 lockdowns, with reductions in claims frequency

and lower new business shopping. These trends were

reflected in lower average premiums.

Against this backdrop, the Group focused on providing

financial support to its customers experiencing financial

difficulties while maintaining a focus on underwriting

discipline and indemnity management in a highly

competitive market.

During the year, the Group continued to focus on technology

and business transformation. Despite the operational

challenges in moving to remote working, further progress

was made on the roll-out of the Group’s new motor

platform with roll-out completed for Privilege new

business and renewal customers inthe year and scheduled

to be started for Churchill PCW and new phone business in

Q1 2021. Motor improved its PCW competitiveness with the

launch of the Darwin brand on two more PCWs helping

drive strong growth during theyear. In addition, the Group

launched a new “Mileage Moneyback” proposition for Direct

Line Motor customers.

The Group’s in-house vehicle repair network continued

torepair customers’ vehicles and prioritised repairs for

NHSworkers.

The combination of market dynamics and strategic

progress resulted in a current-year attritional loss ratio of

66.6% (2019: 81.2%).

Performance

Motor in-force policies grew by 0.4% to 4.1 million with own

brand in-force policies up by 0.6% at 3.9 million. Strong

retention was partially offset by a slow down in the new

business market as new car sales fell and fewer new drivers

entered the market. The Group saw good growth in the

PCW channel as both Churchill and Darwin strengthened

their propositions.

Mileage refunds

For our customers who were experiencing immediate

financial difficulty due to the impact of Covid-19, we

implemented a range of support measures. We waived

cancellation fees and offered payment deferrals for

people who had lost their job or seen changes to their

employment. We recognised that the lockdown was

changing customers’ behaviour and invited every

customer to contact us if their annual mileage had

reduced, resulting in thousands of premium refunds

and waived administration fees. We also launched a

new Direct Line “Mileage MoneyBack” proposition

giving customers the flexibility to update their mileage

at the end of their policy and claim a refund on the

miles not driven when the policy comes up for renewal.

The Group offered premium refunds to all customers

where miles driven were expected to be lower than

anticipated at policy inception. Furthermore, the Group

launched a “Mileage MoneyBack” proposition for all Direct

Line customers such that customers would be able to

receive a refund at the end of the policy period where they

had driven less than expected. Gross written premium

reduced by 2.1% to £1,616.9 million, primarily due to lower

average premium.

Motor own brand average premium

reduced 2.0% during

2020 due predominantly to a 4.0% impact from reducing

risk mix following lower new car sales and fewer new

drivers entering the market. Motor risk-adjusted prices,

before taking account of lower claims frequency,

increased by 1.8%. Market premium deflation accelerated

through 2020 as claims frequency remained low.

The Motor result has been significantly affected by the

factors surrounding Covid-19, with the current-year

attritional loss ratio improving by 14.6 percentage points

to 66.6% (2019: 81.2%). The majority of this reduction

reflects lower levels of claims frequency as driving

patterns evolved through the year. A relatively normal first

quarter was followed by ahalving of claims frequency

during the second quarter with less significant but still

lower levels of claims frequency through the rest of the

year. While claims frequency was down as fewer miles

were driven, claims severity was higher than the Group’s

medium-term expectation of 3% to 5% inflation per

annum. Claims severity has been impacted by longer

repair times and consequent greater credit hire costs and

additional cleaning and by extending the scope of vehicle

replacement as part of the customer initiatives.

Although it is not possible to entirely adjust for all of

theabove factors, the Group believes that it made some

underlying progress in reducing the current-year loss ratio

during theyear.

In total, prior-year reserve releases were £79.9million

lower year on year at £100.6million. The 2019 prior-year

reserve releases included a strengthening of £15.9million

as a result of the change in the Ogden discount rate to

minus 0.25% from an assumed rate of 0%.

Overall Motor’s reported combined operating ratio

improved by 7.1 percentage points to 87.7% (2019: 94.8%).

The improvements in the current-year attritional loss ratio

were offset by a 0.6 percentage point increase in the

commission ratio, primarily due to increased volume

related commission payments to PCWs, a 1.8 percentage

point increase in the expense ratio and a 5.1 percentage

point reduction in prior-year reserve releases.

Note:

1. Average incepted written premium excluding IPT for Motor own

brands (covering 96.5% of Motor) for year end 31 December 2020.

www.directlinegroup.co.uk 37

Total in-force policies 1.7% higher at 2.6 million. Own brand policies

were 4.1% higher at 1.8 million principally due to strong growth in

thePCW channel where new business sales increased by over 30%.

Total gross written premium was 1.5% lower at £577.9 million.

Ownbrand gross written premium was 1.0% higher.

Total operating profit was £49.2 million lower than prior year due

to£27.0 million of major weather costs (2019: £3.0 million) alongside

areduction in prior-year reserve releases.

In-force policies

(‘000s)

2,638

(2019: 2,594)

Gross written

premium

£577.9m

(2019: £586.6m)

Operating

profit

£101.4m

(2019: £150.6m)

Combined

operatingratio

87.1%

(2019: 80.3%)

Home

Gross written premium by channel

Operating review continued

Direct

Price comparison

websites

Partnerships

56.2%

15.8%

28.0%

38 Direct Line Group Annual Report and Accounts 2020

Strategic Report

2020 2019

In-force policies (thousands) 2,638 2,594

Of which direct own brands 1,837 1,765

Gross written premium £577.9m £586.6m

Loss ratio 55.6% 46.8%

Commission ratio 8.1% 9.7%

Expense ratio 23.4% 23.8%

Combined operating ratio 87.1% 80.3%

Operating profit £101.4m £150.6m

Overview

In 2020 the home market continued to shift towards the

PCW channel and Covid-19 led to changes in claims mix

with fewer claims for escape of water and theft as more

people were at home.

The Home segment grew direct own brands policy count

due to strong PCW performance reflecting the Group’s

improved focus and capability in this channel. Direct Line

policies remained stable over the period. Partnership

policy count continued to reduce, partly due to the

continued run-off of some schemes whilst bank branch

sales reduced due to lower footfall.

Home continued to focus on its transformation with

theacquisition of Brolly, a small digital insurer. The team

behind Brolly joined the Group and will help fast track our

ability to deliver tailored products to the market. We also

agreed a two year extension with NatWest Group for

Home insurance.

Home operating profit of £101.4m was lower due to higher

weather-related claims costs, lower prior-year reserve

releases and lower investment return, partly offset by

favourable claims experience across other perils.

Peace of mind when it matters most

At the start of the year we supported customers

affected by Storms Ciara and Dennis, which saw the

Group provide in the region of £25 million in claims

payments so customers could get their lives back

ontrack.

At one point 6,500 customers got in touch to tell us

their homes had been damaged by Storm Ciara’s

100mph winds and torrential rain – over four times the

calls we had seen the previous week. Our Claims teams

coordinated our Group response, as well as colleagues

on the ground in our Direct Line Defenders and

Churchill branded vehicles who were there for our

customers when it mattered most, so they could give

them peace of mind that we were able to help at this

difficult time.

Performance

In-force policies for Home’s own brands increased by 4.1%

in 2020 to 1.8 million policies. Retention and new business

were strong with particular strength in PCW new business

which grew over 30%. This reflected the Group’s increased

focus on, and capability in, the PCW channel. Partnership

volumes reduced by 3.4%; Prudential and Sainsbury’s

partnerships are closed to new business and continued

torun off in line with expectations.

Gross written premium was 1.5% lower than 2019, primarily

due to the reduction in partnership volumes. Own brands

gross written premium increased by 1.0% as growth in

in-force policies was offset by lower average premium.

Home own brand average premium

reduced by 3.8%

primarily reflecting a change in mix towards lower risk and

consequently lower average premium policies in the PCW

channel. Risk-adjusted prices reduced by 1.2% reflecting

initiatives taken to reduce claims inflation and actions

taken to reduce the differential between new business

and renewal prices.

The current-year attritional loss ratio, excluding major

weather event claims, improved by 0.8 percentage points

to 52.7%. Home has experienced a change in mix towards

more accidental damage claims and fewer theft claims

during 2020 with continuing positive trends in escape of

water severity. Whilst the Covid-19 pandemic is believed

tohave contributed positively to these trends, the impact

is not significant.

The commission ratio of 8.1% was 1.6 percentage points

lower than 2019 due to lower profit share payments

topartners.

Home’s combined operating ratio increased by 6.8

percentage points to 87.1% (2019: 80.3%). This was driven

primarily by a 5.3 percentage point reduction in prior-year

releases and a 4.3 percentage point increase in major

weather costs partly offset by an improvement in the

current-year attritional loss ratio. Normalised for weather,

the combined operating ratio was 3.4% percentage points

higher than 2019 at 90.3%

(2019: 86.9%).

Notes:

1. Average incepted written premium excluding IPT for Home

own brands for year end 31 December 2020.

2. See glossary on pages 224 to 226 for definitions and appendix A

– Alternative performance measures on pages 227 to 230

for reconciliation.

www.directlinegroup.co.uk 39

The Group’s direct Rescue brand, Green Flag, grew in-force policies

by 4.8% and gross written premiums by 5.2% in the year.

Total in-force policies and gross written premium reduced by 3.7%

and 4.2% respectively, reflecting lower premium from Travel partly

offset by higher premium in Green Flag.

Operating profit of £6.8 million included £51.2 million

(2019: 45.2 million) profit for Rescue largely offset by loss of

£44.4 million (2019: £6.1 million loss) for Other Personal Lines.

In-force policies

(‘000s)

7,105

(2019: 7,377)

Gross written

premium

£417.8m

(2019: £436.0m)

Operating

profit

£6.8m

(2019: £39.1m)

Combined

operatingratio

102.0%

(2019: 95.4%)

Rescue and other

personal lines

Gross written premium by product

Operating review continued

39.9%

32.1%

17.4%

10.6%

Rescue

Travel

Pet

Other personal

lines

Meeting our customers’ travel needs

We have invested in and enhanced

our digital platform, which has

enabled us to deliver for our travel

customers. This year we significantly

accelerated our digital capabilities,

and quickly mobilised an online

claims process after the national

lockdown. This new online forms

and prioritisation process has

helped us handle claims up to five

times faster. The Travel team have

been exceptionally busy with travel

claims over the pandemic; during

this period, we received 87,500

Covid-19 related travel claims and

have brought home over 900

customers who were stranded

overseas. To cope with the

increased demand, we retrained

over 500 of our colleagues to

understand the changes in travel

guidance as thepandemic

progressed.

40 Direct Line Group Annual Report and Accounts 2020

Strategic Report

2020 2019

In-force policies (thousands) 7,105 7,377

Of which direct own brands 1,114 1,063

Gross written premium £417.8m £436.0m

Loss ratio 61.7% 66.9%

Commission ratio 16.4% 6.4%

Expense ratio 23.9% 22.1%

Combined operating ratio 102.0% 95.4%

Operating profit £6.8m £39.1m

Overview

Rescue and other personal lines consists of Rescue

products, including those sold through the Green Flag

brand, and other personal lines insurance, including

Travel, Pet and Creditor, which are sold through own

brands and partnership arrangements.

Green Flag’s ongoing transformation, positioning itself as

the challenger brand in the rescue market, continued in

2020 with the launch of a new claims system. Throughout

the pandemic in 2020 Green Flag offered free breakdown

cover to NHS workers and offered free vehicle health

checks to all its customers.

Green Flag’s in-force policy count continued to grow, and

in August it recorded its biggest sales month since 2012.

Policy count growth was slower overall as there were

fewer cars on the road and fewer miles driven due

tolockdown restrictions. The restrictions and changes to

customer behaviours also led to lower claims in the year

which contributed to an increase in Rescue operating

profit to £51.2 million.

Travel experienced elevated claims being registered in

2020, particularly during the first lockdown and

operational capacity was strengthened to support

customers. In addition, the Group has taken a cautious

stance in its approach to Travel claims reserving.

Overall Rescue and other personal lines made a small

operating profit of £6.8 million as the strong profit in

Rescue was largely offset by a loss of £44.4 million in other

personal lines due to Travel.

Transforming the way rescue service isdelivered

Being able to anticipate and adapt quickly is at the heart

of our strategy. This year, Green Flag expanded its service

to support the NHS during lockdown, whilst updating its

user-friendly “Green Flag Rescue Me” app which has

seen more customers interact digitally and receive

exceptional

service. It has coordinated 78,931 rescues and

seen a 30% increase in people accessing it during2020.

Part of the app’s success is based on the ability to

introduce enhancements quickly, giving the Green Flag

team greater agility to meet customer needs and service

more claims digitally.

Elsewhere, Green Flag continues to record digital

milestones by using advanced technology systems to

reduce our mileage by sending customers the right

resource first time. This leads to an efficient customer

service but also helps minimise our carbon emissions

inwhat is one of the most carbon intensive parts of our

operation. Similarly our “Phone Fix” initiative means we

arefixing approximately 6% of jobs over the phone with

customers, an increase of 3%, across all jobs, in “Phone

Fix” compared tothe previous year, resulting insaving

miles driven.

Note:

1. Trustpilot score of 4.4/5 (23/02/21).

Performance

The combined operating ratio for Rescue and other

personal lines increased by 6.6 percentage points to

102.0% (2019: 95.4%) due predominantly to Travel which

incurred increased claims handling costs supporting

customers throughout 2020 and higher commissions

topartners. The Group has taken a cautious stance in

itsreserving for travel claims.

Rescue in-force policies reduced by 1.4% to 3.4 million and

gross written premium reduced by 0.5% to £166.7 million.

Green Flag Rescue continued to grow its higher average

premium direct business during 2020, increasing in-force

policies by 4.8% to 1.1 million and gross written premium

by 5.2% to £83.1 million. Other Rescue lines, which include

the linked channel, where cover can be purchased with a

Group Motor policy, and Rescue partnerships, saw in-force

policies and gross written premium reduce by 4.2% and

5.5% respectively.

The combined operating ratio for Rescue of 76.5% was

5.0percentage points better than 2019’s ratio of 81.5%.

Lower claims frequency during Covid-19 lockdown

alongside lower claims costs due to fewer long-distance

recoveries, was partially offset by supplier network support

payments and free rescue given to NHS staff. Approximately

half of the improvement in the combined operating ratio

is expected to be one-off.

Other personal lines (comprising Travel, Pet, Creditor and

policies tailored to mid- to high-net worth customers)

in-force policies reduced by 5.7% to 3.7 million primarily

due to lower Travel, following the Group’s suspension of

sales in Q2 and Q3, as a result of the Covid-19 lockdown,

and continued reductions in packaged bank volumes.

Gross written premium for Other personal lines decreased

by 6.5% with reductions across all lines except Pet, where

premium levels were maintained.

Other personal lines combined operating ratio increased

by 14.4 percentage points to 118.5%. The increase is entirely

due to Travel where the Group has incurred increased

claims handling costs supporting customers throughout

2020, has taken a cautious stance in its reserving and has

incurred additional commission payments, particularly on

packaged bank account business.

www.directlinegroup.co.uk 41

Total gross written premium increased by 7.4% with direct own

brands increasing by 9.3%.

Strong performance in Direct Line for Business as it continued to

focus on micro business tailored propositions.

NIG and other gross written premium grew by 6.6%, benefiting from

improvements arising from the re-platforming of the products on its

award-winning electronic trading platform and improvements in Van

insurance pricing.

In-force policies

(‘000s)

811

(2019: 775)

Gross written

premium

£567.8m

(2019: £528.9m)

Operating

profit

£50.4m

(2019: £54.6m)

Combined

operatingratio

95.5%

(2019: 95.7%)

Commercial

Gross written premium by channel

Operating review continued

Direct

NIG & other

28.8%

71.2%

42 Direct Line Group Annual Report and Accounts 2020

Strategic Report

2020 2019

In-force policies (thousands) 811 775

Of which direct own brands 560 541

Gross written premium £567.8m £528.9m

Loss ratio 51.4% 52.7%

Commission ratio 18.7% 18.5%

Expense ratio 25.4% 24.5%

Combined operating ratio 95.5% 95.7%

Operating profit £50.4m £54.6m

Overview

In 2020 customers continued to seek cover in the direct

market that was flexibly tailored to their individual needs.

Against this backdrop, Commercial maintained

underwriting discipline and grew its policy count across

allproduct lines.

Direct Line for Business continued to grow policy count

through its ongoing focus on offering micro business

tailored propositions, with the launch of its Van insurance

product at the start of the year.

Commercial also grew policy count through more

competitive pricing in the traditional broker channel as

well as through the PCW channel via the Churchill brand,

following investment and focus on digital, pricing and

marketing of the brand.

Commercial’s current-year attritional loss ratio continued

toimprove. Higher weather event costs were offset by

fewer claims associated with the Covid-19 pandemic

andUK lockdowns and underlying claims benefits from

Commercial’s ongoing investment in pricing

andunderwriting.

NIG self-help online portal

The NIG Risk Assist tool was launched to help business

owners manage and respond to a broad range of risks

through a comprehensive range of easy-to-use

onlinetools.

The online portal offers a wide range of services, such

as: unlimited online access to health & safety and

HRprofessionals for support and guidance on specific

issues facing their businesses; unlimited phone

counselling and medical advice; a suite of online

eLearning courses to help train and develop staff;

assessments, guides and templates to keep up with

changing rules and regulations; business continuity

planning to keep our customers in business when

disaster strikes; and much more. The proposition was

launched during the Covid-19 pandemic and has since

been a valuable support for our customers.

Performance

Commercial in-force policies of 811,000 increased by 4.6%

compared with 2019, reflecting strong growth in both

Commercial direct own brands and NIG and other.

Commercial direct own brands grew in-force policies

by3.5% supported by the growth in Van for Direct Line,

where the product was added to the new Commercial

direct platform, and for Churchill where Van is sold

through the PCW channel. Gross written premium

increased by 9.3% to £163.3 million with increases across

allCommercial direct product lines.

NIG and other in-force policy numbers were 7.3% higher

and gross written premium grew by 6.6% to £404.5

million. This reflected growth across all categories as the

book continued to benefit from improvements arising

from the re-platforming of the products on its award-

winning electronic trading platform and improvements

inVan insurance pricing.

The current-year attritional loss ratio in Commercial

improved by 6.0 percentage points to 59.6%. This was

driven by improvements to underwriting through pricing

and risk selection as well as frequency benefits in motor

lines since the end of Q1. This was partially offset by

Covid-19 related business interruption claims at £6 million.

Prior-year reserve releases were £8.2 million lower at £56.8

million, primarily due to lower general liability reserve

releases on older accident years. 2019’s result included a

£1.0 million strengthening of prior-year reserves as a result

of the change in the Ogden discount rate to minus 0.25%

from an assumed rate of 0%.

The combined operating ratio for Commercial improved

slightly by 0.2 percentage points to 95.5% (2019: 95.7%) as

an improvement in the current-year attritional loss ratio of

6.0 percentage points was largely offset by an increase in

claims related to severe weather, a reduction in prior-year

reserve releases and an increase of 0.9 percentage points

on the expense ratio.

www.directlinegroup.co.uk 43

Sustainability

Building a sustainable future

Our approach to sustainability is based

ona simple premise: the role we play as

abusiness to support the stakeholders

weinteract with on a daily basis –

customers, shareholders, suppliers,

ourpeople, communities and the planet

– makes the Group stronger and can bring

future rewards.

We are transforming to maintain a

competitive edge, but doing it in a way

that is sustainable and mindful of our

impact on society and the environment.

Sustainability pillars

Customers People Society Planet Governance

Earn our customers’

trust by

demonstrating

how we are acting

in their best interests.

Encourage a culture

that celebrates

difference and

empowers people so

that they can thrive.

Use our expertise

toimprove outcomes

for society and

thecommunities

weserve.

Protect our business

from the impact of

climate change and

give back more to

the planet than we

take out.

Look to the long

term for our

stakeholders,

build a reputation

forhigh standards

ofbusiness conduct

and a sustainable

business.

Gaining confidence from 2020

We remained focused on our sustainability strategy

despite the disruption created by the Covid-19 pandemic.

Far from restricting the Group, it enhanced our response.

The way we supported customers in need, made remote

working effective, created flexible insurance products

andmade ourselves accountable for reducing carbon

emissions are all significant milestones. We also supported

partners in our supply chain when lockdown impacted

their operations.

2020 has opened up new possibilities, provided fresh

insight and given the business more confidence to drive

sustainable outcomes, many of which have the potential

to leave a lasting impact. More detail can be found in our

summary of activity for each of our sustainability pillars on

pages 48 to 61.

Our established five pillar sustainability strategy, underpinned by our vision and purpose, has given the Group

confidence when responding to the unforeseen circumstances of 2020. By aiming to be a force for good and giving

people peace of mind we have tried at all timesto deliver on our ambition of doing the right thingfor all of

ourstakeholders.

This year we published our first Sustainability Report

which you can view online at:

www.directlinegroup.co.uk/2020_Sustainability_Report

44 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Maximising our impact for all our stakeholders

In 2019, we conducted our first in-depth Materiality

Assessment. It has helped shape the Group’s sustainability

strategy as it prioritises what our stakeholders value,

alongside the impact on the business and how we can use

this insight to build a sustainable business for the future.

We asked a range of business and external stakeholders

toprioritise a range of sustainability issues against our

business priorities through a series of in-depth interviews

and surveys to create a business impact assessment of

risks, impacts and opportunities for the Group.

It means everything from delivering great service to

allcustomers, investing in our people so they are

supported, harnessing the latest data and technology

andensuring we manage our suppliers responsibly,

including prompt payment.

Building on the four priorities outlined opposite, in 2020

wechose to actively prioritise social mobility, as well

asdeveloping a diverse and inclusive workforce and

reducing our impact on climate change which our

stakeholders place in the high category. We did this

because each of these issues is an integral part of living

upto our vision of a world where insurance is personal,

inclusive and a force for good.

Priorities

Meeting customer needs each and every day

Investing in and supporting our great people

Realising the potential ofdata and technology

Understanding and managing the impact

ofclimatechange

Materiality matrix

Higher

Impact on our business

Higher

Lower

Importance to stakeholders

Building strong

Board governance

Investing

responsibly

Appropriate tax

strategy and

transparent

disclosure

Controlling

executive pay

Managing our

supply chain

responsibly

Communicating

clearly and openly

with customers

Delivering

great service

to all customers

Protecting

customers’ data

Harnessing data

& technology

Innovating

products & services

for sustainable

impact

Driving financial

inclusion

Contributing to

local economic

development

Increasing safety

on our roads

Improving social

mobility

Adapting to the

impacts of climate

change

Reducing our

impact on

climate change

Reducing waste

and optimising

resource use

Advancing the

low carbon

transition

Developing

a diverse

and inclusive

workforce

Upholding good

labour standards

Maximising

employee

engagement

Investing in training &

developing our people

Supporting

employee

wellbeing

Moderate

tracking

High

actively monitoring

Very high

need active

management

Our Sustainability

Pillars

Customers

People

Society

Planet

Governance

www.directlinegroup.co.uk 45

Sustainability continued

United Nations SDGs

In 2015 the United Nations launched 17 Sustainable Development Goals (“SDGs”) to help end poverty, fight inequality

andtackle climate change by 2030. Through our sustainability work, we believe we can contribute to seven of the Goals.

Detail Group activity Pillars

Sustainability

priorities

Good Health and

Well-being

Ensure healthy lives

and promote well-

being for all at all ages.

– Financial wellbeing

– Mental health first

aider network

– Supporting Mind

– Bereavement team

– Carbon offsetting

projects: clean water

in Kenya, clean

cookstoves in

Bangladesh

Quality Education

Ensure inclusive and

equitable quality

education and

promote lifelong

learning opportunities

for all.

– Apprenticeships

– Graduate

programme

– Continuous learning

– Donation to Teach

First

– Carbon offsetting

projects: clean water

in Kenya, clean

cookstoves in

Bangladesh,

rainforest protection

in Brazil

Gender Equality

Achieve gender

equality and empower

all women and girls.

– New diversity and

inclusion strategy

– Women in Finance

Charter

– Thrive network

– Bespoke talent

programmes

Affordable

and clean energy

Ensure access to

affordable, reliable,

sustainable and

modern energy for all.

– Carbon Offsetting

Project: clean

cookstoves in

Bangladesh

– Sourcing 100%

renewable energy

sources for our

operations

Decent Workand

Economic Growth

Promote sustained,

inclusive and

sustainable economic

growth, full and

productive

employment and

decent work for all.

– Continuous learning

– Social Mobility

Pledge

– Leadership targets

for BAME and Black

representation

– Carbon offsetting

projects: clean water

in Kenya, clean

cookstoves in

Bangladesh,

rainforest protection

in Brazil

Industry,

Innovation

and Infrastructure

Build resilient

infrastructure,

promote inclusive and

sustainable

industrialization and

foster innovation.

– Tech innovations at

accident repair

centres

– Encouraging electric

vehicle use

– Supporting the

adoption of

autonomous

vehicles

– Safe roads

– Carbon offsetting

project: clean water

in Kenya

Climate Action

Take urgent action to

combat climate

change and its

impacts.

– Commitment to

Science-Based

Targets

– Socially responsible

investing

– Carbon offsetting

projects: clean water

in Kenya, rainforest

protection in Brazil

Pe S

46 Direct Line Group Annual Report and Accounts 2020

Strategic Report

External memberships

and benchmarks

CDP: The Carbon Disclosure Project is a globally

recognised platform measuring reporting performance

and this year the Group maintained its ‘B’ rating based

on2019 activity.

Sustainalytics: In 2020 the Group was ranked as an

ESGleader out of all companies assessed in the property

and casualty insurance sector and maintained its top

tenposition in the broader insurance industry group of

261companies.

MSCI: The Group maintained its ‘A’ rating this year

highlighting our Board-level diversity, staff training and

development programmes and the strengthening of ESG

integration into our investment portfolio. The Group is also

in the top quartile for Corporate Governance and Human

Capital development.

RE100: We are in the process of applying for membership

of RE100, a global initiative dedicated to accelerating

aglobal shift in clean energy. Under this initiative,

wewillcontinue our objective of sourcing 100%

renewableelectricity.

PRI: The UN Principles for Responsible Investment,

launched in 2006, is a major collective initiative that seeks

to promote responsible investment among investors and

asset managers. We expect all of our external portfolio

managers to be signatories.

SBTi: The Science Based Targets Initiative helps

companies to determine emission reduction targets in

line with climate science. In 2020 we began the process

ofsetting new science-based reduction targets for our

Scope 1 and Scope 2 emissions and Scope 3 emissions

under our direct control. These targets will be submitted

for approval within the two-years’ time frame set by the

SBTi (August 2022).

Direct Line Group actively supports various initiatives related to climate change, ESG and sustainability.

Thesesupplement our identification and management of climate-related risks, and include:

www.directlinegroup.co.uk 47

Sustainability continued

We seek to understand customer needs,

providing real value across our brands and

products. It requires a deep appreciation

of customer expectations, a determination

to provide an exceptional insurance

experience and a consistent desire

toinnovate.

Our determination to deliver the best possible customer

value and experience drove our response to Covid-19.

Weare proud that our net promoter scores have yet

againdemonstrated the willingness of our customers

torecommend our Direct Line brand year on year.

Expectations

Manage and exceed

my expectations

Personalisation

Treat me like a real

person and not like

a process

Trust

Earn my trust

Ease

Make it as effortless

as possible for me

Fix-it

Identify the issue,

own it and fix it

Empathy

Understand me

and work hard to

build a relationship

Customer pillars

Customers

Earn our customers’ trust by

demonstrating how we are

acting in their best interests

Net promoter score

– Direct Line brand

145.6

155.0

158.0

0 50 100 150 200

2018

2019

2020

Our Covid-19 response for customers

Throughout 2020 we adapted quickly to the changing

world around us so that we could deliver more for

customers at speed, helping them navigate the disruption

to their lives. Some of the highlights included:

– free rescue cover, fast-track claims and free home

emergencies for our NHS customers;

– individualised support for customers in financial difficulty;

– over 450,000 customers benefiting from support

measures;

– our Travel team settled claims for over 26,000 customers

with payments for those who saw theirtravel plans

cancelled or curtailed due to Covid-19 disruption

andrepatriated over 900 customers stranded

abroad; and

– retrained over 500 people to support travel

customers to navigate the pandemic.

We know that communicating clearly and openly with

customers is important to our stakeholders and business.

This is why our Customer Experience Pillars continue to

guide the Group by using a clear framework with the aim

of delivering great customer service. These principles have

been invaluable this year when responding to the Covid-19

pandemic where we adapted to customer needs and

changing circumstances across the business.

Note:

1. Please see Net Promoter Score KPI on page 19 for

further information.

48 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Taking action on pricing

The insurance sector operates in a highly competitive

market which works well for most customers. We

support change to improve outcomes for long-standing

customers and that is why we welcome the FCA’s Market

Study on General Insurance Pricing Practices. These

reforms, that aim to equalise customer prices whether

they are renewing or looking for a new policy, should

reduce unnecessary turnover and deliver fairer prices

toall.

Not all insurance products are equal across the market,

with varying levels of cover and service. We offer a range

of propositions to protect our customers, underpinned

by a high-quality claims service for all customers to give

them peace of mind.

We want to earn our customers’ loyalty and give them

areason to stay with our brands by taking measures

such as:

– actively reviewing customers’ renewal price when they

reach their five-year anniversary with us, as a result of

which many of our customers have seen their

premiums frozen or discounted;

– introducing a facility to enable a customer to opt out of

automatic renewal through our web chat service; and

– investing in a major technology upgrade to help us

make it easier for our customers to manage their

protection, from the moment they think about buying

a policy, managing their cover 24/7, all the way

through to making a claim.

Making claims easy

When customers make a claim they want peace of mind

that it is being treated with due care, but we also know

that speed matters. Whether it is fixing cars in our

accident repair centres or assisting people who have

suffered flooding or had their homes hit by storm

damage, we want to help our customers get back

tonormal. This year our Travel customers’ plans were

turned upside down so we created a new claims

prioritisation process that has handled claims up to

fivetimes faster for thousands of our travel customers.

Digital developments have also enabled us to make the

claims process easier for customers who wish to claim

online. As a result:

– our new online travel platform gives our customers

theability to settle small value claims in four minutes

or less, without any human interaction at all; and

– customers seeking medical assistance abroad are

offered localised care as we can recommend the

nearest medical facility that can support them.

First end-to-end online Home claim

Our digital capability saw us deliver a first for the Group

in 2020 by delivering an end-to-end online claims

process for a Home customer – all registered, processed

and settled fully online. This is the next step in our digital

journey, giving customers the flexibility to handle their

insurance matters how they want.

Caring for customers in need

Losing a loved one is always difficult and taking care

offinancial matters is the last thing on people’s minds.

This is why we created a dedicated team with specialist

skills to help customers who want everything to be

made as simple as possible when they experience a

bereavement.

All queries are dealt with in one place by experienced

consultants trained to handle the sensitive nature of

these conversations. This helps to make a difficult task,

that nobody wants to face alone, just that little bit easier.

www.directlinegroup.co.uk 49

Sustainability continued

We aspire to create an environment where

everyone feels free to be themselves and

succeed in their careers. Our culture is

onewhere we strive to care about our

customers and one another. That’s what

our values are designed to achieve, and

they underpin who we are and what we

stand for.

Diversity and inclusion strategy

One of our values is “bring all of yourself to work” because

as well as simply being the right thing to do, focusing on

diversity and inclusion makes good business sense and

delivers better outcomes.

This year we completed a comprehensive diversity and

inclusion survey – to which nearly 6,500 of our people

responded. It’s shown us what we do well and where we

need to improve, highlighting a gap between the

experiences of different communities.

These findings have helped to inform a refreshed diversity

and inclusion strategy, with greater ambition and reach.

Supporting race equality

Alongside our survey, we completed an in-depth analysis

of our ethnicity data.

What we found:

– One in six or 17% of our colleagues is Black, Asian or

Minority Ethnic (“BAME”); Black colleagues make up 3%

of the total.

– BAME representation is concentrated in our lower and

middle grades and reduces with seniority.

– If you are Black, mixed ethnicity, or from one of the

smaller ethnic groups, it doesn’t feel as positive to work

for the Group as it does for other colleagues.

Our response:

We have signed Business in the Community’s Race

atWork charter and introduced new targets to hold

ourselves to account for improving Black, Asian and

Minority Ethnic representation in leadership roles by

theend of2022.

13%

Increasing BAME

representation

in leadership roles

from 10% to 13%

1.5%

Increasing Black

representation

in leadership roles from 0.5%

to 1.5%

Making progress

Supported by our employee networks, we have launched

an awareness and education programme to build

empathy and a greater understanding of issues. This

includes a reverse mentoring scheme to help our senior

leaders better appreciate the barriers and challenges

faced by certain communities.

We have introduced new principles for senior-level

recruitment to help protect from bias – including

anonymised CVs and diverse shortlisting, as well as

enhancing the mandatory training completed by

recruiting managers.

All our leaders are completing inclusive leadership training

and in 2021 we’re launching a diversity and inclusion

fluency programme to ensure all people managers

are equipped to have better conversations and support

their teams.

People

Encourage a culture that

celebrates difference and

empowers people so that

they can thrive

Our Covid-19 response for our people

The Group is nothing without its people. When lockdown

happened we quickly moved 9,000 people to home

working and supported our motor accident repair centres

with enhanced safety measures, offering maximum

flexibility to help our people manage home and work.

50 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Diversity Network Alliance (DNA)

We have a vibrant DNA community that works together

to promote and champion diversity and inclusion within

our business.

Our strands

– BAME (Black, Asian & Minority Ethnic)

– Belief

– Generations, families & carers

– LGBT+

– Neurodiversity & disability

– Social mobility

– Thrive (representing gender)

The strands are led by volunteers from across the Group

based in locations spanning the UK. They provide a

network for colleagues and allies, as well as guiding our

people policies and what we support externally.

Enabling gender equality

We are proud to be one of only a few companies in the

FTSE 250 with a female Chief Executive Officer and Chair.

We recognise that to enable women to fulfil their

potential, we need to offer them support throughout their

different career stages. Women have a different set of

barriers to men and these need to be navigated in a

different way.

In our 21 accident repair centres we want to encourage

women to think about careers in the bodyshop industry

through awareness of our engineering graduate

programme.

Women in Finance Charter

We are a signatory to the HM Treasury’s Women in

Finance Charter. At the end of 2020, 30% of our senior

leadership were women. We are determined to go further

and this year we took the decision to increase our target

from 30%to 35% female representation in our senior

leadership by the end of 2022 in order to maintain a keen

focus onprogression.

30%

female senior leadership

representation

40%

female Board

representation

Gender diversity of all employees

46.7%

53.3%

Female

Male

Excludes an estimated 0.5% colleagues who identify as non-binary,

gender-fluid or other gender due to data reporting constraints

Gender diversity of senior leadership

90 (2019: 90)

Female

Male

38 (2019: 41)

Gender diversity of senior leadership figures based on 2020

Women in Finance reporting

Ethnicity of all employees

77.8%

5.6%

Asian

Black

Minority Ethnic

White

Prefer not say

9.5%

2.8%

4.3%

Excludes 13% of colleagues who have not submitted an

option for ethnicity

For more information on leadership gender diversity

see page 92

Mental health

We strongly encourage our people to be open about

how they feel both in and out of work so we can best

support them. Our mental health programme includes

ensuring people managers receive specialist training

on dealing with mental health issues. Pre-lockdown

wehad a network of trained mental health first aiders

(MHFA) – one on each floor of each of our sites and

weare proud of how quickly our approach adapted

todeliver the same support remotely.

We are determined to raise the profile of mental health,

supporting everyone to be open about how they feel

inand out of work. Over the course of the pandemic

the Group ran frequent pulse surveys to assess the

sentiment and wellbeing of employees whilst many

were working remotely.

Supporting and developing our people

As we adjust to this new way of working remotely, we

remain committed to looking after our people. This

includes a programme where both financial and mental

wellbeing are top priorities.

Minimum salaries

Our success is down to the hard work and commitment

ofour people and we want to reward them for their

contribution. Whilst we look for ways to boost the reward

proposition for as many of our colleagues as possible, our

focus is to ensure that those in our lowest-paid roles

receive a meaningful pay increase. In March 2020, for the

third year running, we increased our minimum salaries for

full time colleagues working 37.5 hours from £19,000 to

£19,500 which is 19% higher than the Government’s

National Minimum Wage and 5% higher than the Living

Wage Foundation rate outside London, benefiting 5,200

ofour people.

Annual incentive plan

The annual incentive plan ensures there is a strong link

between pay and the Group’s performance on specific

metrics, such as our Customers’ Experience agenda which

focuses on making the customer’s journey as easy as

possible, and broadening our diversity impact to include

BAME and Black representation targets at senior

leadership positions.

Employee share incentive scheme

Despite the impact of Covid-19, we are continuing with our

commitment to award free shares. The Group awarded

eligible colleagues 180 shares which were worth £500 in

April 2020. For employees who have been with the Group

since our IPO in 2012, this was our fifth award of free

shares totalling 626 shares which were worth £1,997 at

31December 2020, plus dividends paid on those shares

which amount to a further £793.

Hampton Alexander Review

The Hampton Alexander Review set a target for FTSE 350

companies to have at least 33% representation of women

on their Board and in their Executive Committee and direct

reports by the end of 2020. We are pleased to have exceeded

this with 40% and 39.1% representation

, respectively.

Tech Talent Charter

As signatories to the Tech Talent Charter, we are committed

to gender diversity across our technology teams. We are

proud to have a 34% female tech team versus a UK average

of 19% and a signatory average of 25%.

Gender pay gap

Our gender pay gap continues to be low compared to the

broader financial services sector; we know there is more to

do. After three years of reporting we feel we understand

our gender pay gap well, with a large portion of this being

from the under-representation of women at more senior

levels across the Group.

This is why we have continued to invest in development

programmes for high-potential females to support them

in progressing into senior leadership roles. This helps our

women to think differently and start taking risks, put

themselves forward and make a plan to advance more

quickly through the organisation.

Flexibility

Additionally, our My Life policies, offered to all our people,

provide flexibility and support at work to do the things

that matter to people outside work. We believe it’s

important that everyone embraces flexibility because that’s

the only way we’ll ever achieve gender equality. Wehave

pushed this policy further over the last 12 months to ensure

those with caring or home-schooling responsibilities as a

result of Covid-19 are not disadvantaged.

Sustainability continued

Notes:

1. Board representation at 11 January 2021 and Executive Committee & direct report representation at 31 October 2020 as per Hampton-

Alexander data sourcing.

2. Source: https://www.techtalentcharter.co.uk/toolkit

52 Direct Line Group Annual Report and Accounts 2020

Strategic Report

New ways of working

Earlier this year we took the decision to radically

change the way we worked and transform our trading

and change areas into an agile business. Agile is a way

of working that began in the tech sector to improve the

speed that a product went from conception to market.

We decided that adopting agile values, principles, tools

and most importantly mindset would allow us to

deliver customer value faster. We chose to press ahead

with the transformation as the sudden change to our

work and home lives only served to emphasise why our

people needed to be empowered to self-organise and

create new ways of doing things providing solutions for

customers as quickly as possible. An immense amount

of work went into consultation with our Employee

Representative Body (“ERB”) and our people so that we

could create an agile model that’s true to the Group

and can take advantage of the investment we have

already made in our technology.

Talent pipeline

We have continued to invest in our graduate and

apprenticeship programme over the years and we

recognise they are key to driving our digital agenda

and building a ‘fit for the future’ organisation. To date,

we have recruited over 180 people into our graduate

programme and it is designed to develop the people

who will enable us to create an exciting future.

Ourapprenticeship scheme has won the Top 100

Apprenticeship employer three years running, which

reflects our standing in the market.

Employee Representative Body

We are proud to have an active and engaged ERB. They

help us share and discuss proposals and initiatives that

may affect our future and are consulted as part of any

future change programme. During the agile

transformation the ERB helped individuals understand

what the changes were, helped communicate the

views of colleagues and provided alternative proposals

and approaches.

Human rights

Happy people deliver better outcomes for our

customers and the business overall so we strive to

ensure that our employment practices and policies

exceed those in the Universal Declaration of Human

Rights. Whether that’s our wellbeing strategy which

supports mental, physical and financial health, or our

My Life policies which help our people balance work

and life priorities or our policy to pay more than the

Living Wage to all our people. We want to help our

people thrive in and outside of work.

www.directlinegroup.co.uk 53

How we choose to give back to our

communities and what to campaign on all

have a bearing on society and in turn how

we remain a force for good. The actions we

take are all focused on making a tangible

impact which leads to lasting change.

Our commitment to social mobility

Our diversity makes us stronger. We are a business

employing thousands of people throughout the UK who

all possess a variety of skills, experiences and, crucially,

bring different perspectives to our work.

We pride ourselves on a culture that celebrates difference

and authenticity, where colleagues can bring their whole

self to work.

Celebrating difference, however, is more than simply

catering for a multitude of voices. A person’s background

should never act as a barrier, but like other companies we

know that people still feel held back from making progress.

Society

Sustainability continued

The reasons can be complex and specific

foreach individual. That’s why we have a

renewed sense of purpose in supporting

people throughout their career. It’s not simply

about attracting people into the Direct Line

Group family, but also what happens once they

havejoined so that people can be helped to fulfil their

career potential.

That’s why “Getting In, Getting On, Getting Ahead” is how

we think about social mobility asaCompany – creating an

environment where people feel confident whatever their

start in life.

SoMo DNA strand

Our newly established Social Mobility Employee Network

– known across the business as “SoMo”– is a driving force

behind how we talk about the issue. What started as a

small group is now growing with over 100 active members.

SoMo seeks to raise awareness of social mobility issues,

establish role models to inspire others from similar

backgrounds, and encourage more open conversations

about social mobility in the workplace. It has provided an

open forum for people to speak about barriers and inspire

confidence, as well as driving some of the Group’s

outreach activity.

Our Covid-19 response for society

The Group wants to support communities throughout the

UK which is why we prioritised social mobility in 2020 and

established our Group Community Fund in response to

the Covid-19 pandemic, working to deliver £3.5 million

to250 charities, helping over 200,000 people.

Use our expertise to improve

outcomes for society and

thecommunities we serve

54 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Social Mobility Action Plan

SoMo group

With the support of our active Social Mobility Employee

Network, we have backed up our decision to sign the

Social Mobility Pledge by working towards creating our

own bespoke Social Mobility Action Plan. This plan

provides a candid assessment of our current approach

and how we can improve.

– We are exploring how to take advantage of remote

working so we can open up new recruitment areas,

starting with a pilot scheme of over 20 apprentice home

workers.

– We are reviewing our recruitment approach to target

social mobility ‘cold spots’ where our main offices are

based.

– We have surveyed colleagues to understand what our

social mobility make-up is across the business because

we know that with meaningful data our interventions

will have more impact.

Insight day

In 2020 we partnered with the

Social Mobility Business

Partnership to run our first work insight and skills day

forbright students from less advantaged backgrounds

togive them the opportunity to hear from companies

directly and learn what career opportunities are available.

Itwas a pleasure to support their future career aspirations

by explaining what life is like at the Group.

Auto-Raise

We’re delighted to have made a corporate

donation to Auto-Raise, a long-standing

charity partner that supports youngsters

who wish to enter the bodyshop industry and

receive relevant qualifications so they become

the vehicle repairers of the future.

Teach First

We’ve partnered with Teach First,

whorecruit, train and place teachers

inschools in some of the most

disadvantaged communities in England. Our funding

willsupport the training and development of 17 teachers

each year, who will go on to reach over 2,000 pupils.

Colleagues will also be hosting work experience

placements at our offices.

Achievement for All

Our Social Mobility DNA strand this

year used the Group’s Community

Fund to partner with Achievement for All which provide

wellbeing and education support for disadvantaged

young people to thrive emotionally, socially and

academically. Our partnership will focus on schools in

Walsall, Barnsley and Doncaster where our commitment

to social mobility is matched with tangible impact in

communities located near to some of our main office

sites, also offering the opportunity for colleagues to

become mentors.

Envision

This year we supported Envision, who are

long-term partners of our Bristol office to

provide the Community-Apprentice

Programme for school children. By setting

group tasks it aims to empower young

people through problem solving, building

confidence, as well as testing teamwork skills, all guided

by mentors from the Group. Through programmes such

as this it supports participants to gain knowledge about

what skills are required in the work place.

www.directlinegroup.co.uk 55

Sustainability continued

Our tax contribution

A key part of being a responsible corporate citizen is

ensuring that we comply with all applicable tax laws

andregulations and meet our responsibilities both as a

contributor of corporate taxes and as a collector of taxes

on behalf ofHMRC. In 2020 the Group’s total tax

contribution was £888.0 million which includes the

Group’s direct and indirect taxation. More information

canbe found in thetax contribution section on page 35.

Suppliers

The Group is a long-standing signatory of the Prompt

Payment Code. This year Green Flag supported our

independent network of 200 local rescue businesses

byoffering a number of them support payments which

contributed to the protection of over 4,000 key workers

when lockdown started. We take our commitment to

ensuring modern slavery is not present in our supply chain

seriously. The Modern Slavery Act 2015 is incorporated into

our risk profiling, with specific requirements incorporated

in our due diligence and assurance processes.

Society

£888.0m

total tax contribution

Our

customers

IPT £397.0m

Our suppliers VAT £11.3m

Our people PAYE NIC £97.9m

Our

operations

Other taxes

including

business

rates

£9.1m

Irrecoverable

VAT

£237.7m

Employer’s

NIC

£39.8m

Our profit Corporation

Tax

£95.2m

HM Treasury

Public services

Healthcare

Infrastructure

Welfare

Education

Defence

Group’s 2020 total tax contribution

Road safety campaigners

As one of the UK’s leading motor insurers we have a

long tradition of campaigning for improved road safety.

This year we worked with the Parliamentary Advisory

Council on Transport Safety (“PACTS”) to highlight

increased numbers of road deaths and serious injury

where people do not wear a seat belt. Our research

discovered that almost a third (31 per cent) of those

who died in vehicles on Britain’s roads in 2018 were not

wearing a seat belt and that 72 per cent of the British

public wanted the introduction of penalty points for

those caught not wearing a seat belt. We will continue

to campaign with PACTS to increase the penalty for

failing to wear a seat belt because it saves lives.

Note:

1. The Group’s total tax contribution in 2020, including direct and indirect tax contributions.

56 Direct Line Group Annual Report and Accounts 2020

Strategic Report

We immediately responded to the

Covid-19 crisis by establishing our very

own Community Fund targeting much

needed resource to charities and local

authorities where our main office sites

are based. It was a small way of providing

a helping hand to a variety of causes

throughout the UK.

Computers for kids

Following our immediate crisis

support to refuges, we funded

700laptops for KidsOut to

distribute tochildren in support

oftheir education. Since then

thefirst donation from our 2021

Community Fund has seen

£125,000 go towards the

DailyMail’s Computers for

Kidscampaign.

Phase 1:

£2 million of immediate support to

the most vulnerable, directly assisting

children and families in refuges,

parents needing baby packs, food

banks and community groups

Phase 2:

£500,000 for colleagues to nominate

180 local causes they cared

passionately about with

micro-donations

Phase 3:

£1 million directed towards recovery

efforts focused on four pressing

challenges: social mobility,

marginalised groups, food poverty

and public health

ABI Covid-19 Support Fund

We also donated £3.6 million to the

ABI’s Covid-19 Support Fund which

has supported hundreds of

charities across the UK.

£1m

directed towards

recovery efforts

£2m

of immediate

support to the

most vulnerable

£500k

180 charities

received donations

of up to £5,000

Our Community Fund

Giving back to our

communities

Colleagues have taken advantage

of our popular Community

Cashback initiative which awards

£250 to chosen charities.

Community Fund 2021

We know that Covid-19 will

continue to dominate our lives

throughout 2021 and we have

allocated £1.5 million to support

charities across the coming year.

www.directlinegroup.co.uk 57

Sustainability continued

Planet

Protect our business from the

impact of climate change and

give back more to the planet

than we take out.

The impact of climate change has far

reaching implications for economies

andsocieties around the world. We are

determined to contribute to a long-term

sustainable future and know that through

our actions as a business we can

contribute to climate risk mitigation

andhelp to accelerate the transition

toalow carbon future. There are three

stepsto our plan.

Step one:

Disclose to track progress

We have always challenged ourselves to reduce emissions

and energy consumption across the business through

greater transparency. We exceeded our 2020 targets set in

2017 against a 2013 baseline and now intend to hold

ourselves to account against a new 2019 baseline.

We comply with the applicable greenhouse gas reporting

requirements of the Large and Medium-sized Companies

and Groups (Accounts and Reports) Regulations 2008 and

apply the GHG Protocol Corporate Accounting and

Reporting Standard (revised edition) to calculate our

emissions, which includes emissions associated with

electricity consumption using both the Location-based

Scope 2 and Market-based Scope 2 calculation

methodologies. We monitor the intensity metric of

emissions per £ million of net earned premium as a

measure of how efficiently we provide our insurance

products (see page 61). We also engage with the Carbon

Disclosure Project (“CDP”) and recently maintained a ‘B’

rating based on 2019 activity.

We have always published our Scope 1 and 2 emissions,

but this year we wanted to go further by breaking down

our emissions across our offices and our accident repair

centres and by publishing our first TCFD report

(see page 62).

We also began the process of evaluating our Scope 3

emissions starting with those under our direct control

(such as waste disposal and business travel) and

purchased goods and services. Plans are underway to

evaluate the final part of our Scope 3 emissions, and our

investment portfolio in 2021.

Enabling and

encouraging

flexible working

Greenhouse gas emissions (tCO

13 14 15 16 17 18 19 20

29,909

27,308

22,611

19,315

17,398

16,669

16,328

12,137

45%

reduction in energy

consumption

compared to 2013

69%

reduction in CO

emissions (Scope 1 and 2)

compared to 2013

Energy consumption (kWh)

2020

Electricity 16,669,842

Gas 21,699,765

Total 38,369,607

58 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Step two:

Commit to tangible actions

We have committed to set Science-Based Targets for

Scope 1, 2 and 3 emissions within the two-years timeframe

set out by the SBTi. On Scope 1 and 2

emissions, we intend to set a target that

enables us to play our part in holding off

some of the worst climate impacts by

limiting the global temperature rise to no

more than 1.5°C above pre-industrial levels.

Aiming to be the most

energy efficient repair

network in the UK

100%

of office waste

diverted from

landfill

Help more and more

customers fix cars

over the phone

Step three:

Offset while we reduce

We know that it will take time to reduce our emissions so

in the meantime we have made a long-term commitment

to be a 100% carbon neutral business by offsetting Scope 1

and 2 emissions as well as the elements of our Scope 3

emissions which are under our direct control.

This year we achieved carbon neutrality by working with

ClimateCare who has over 22 years of experience in

project development, carbon asset development, and

delivery of corporate carbon programmes.

Over the next three years we are funding carbon offsetting

projects which will also deliver high social impact benefits

in three countries.

100%

carbon neutral

business in 2020

Notes:

1. See page 66 for more information on reduction targets.

All emission and energy use data reported are related to

UKoperations.

2. Scope 1 and 2 emissions are reported here on a like-for-like

basis against a 2013 baseline and exclude emissions from

additional vehicles used during repairs, courtesy car fuel usage

and from vehicles that are Company-funded. For our full Scope

1 and Scope 2 results inclusive of these emissions please see

page 61.

3. Total scope 1 and 2 emissions. The 2019 result of 16,328 tCO

differs from the reported result in the 2019 Annual Report and

Accounts of 13,932 tCO

e as it now includes the additional

emissions cited in footnote 2. The 2020 result is inclusive of

these emissions.

4. By offsetting Scope 1 and 2 emissions as well as the elements of

our Scope 3 emissions under our direct control.

www.directlinegroup.co.uk 59

Sustainability continued

Continuing to invest in energy reduction

measures

This year the Group continued to invest in energy

efficient measures with over £2 million invested in our

office estate including:

– New electric air conditioning systems in our Bromley

office enabling a reduction in gas usage and

bettermaintainability

– Installation of LED lighting and new power systems

in our Birmingham and Glasgow offices which could

lead to a 50% reduction in electricity use

This year the Group was also awarded the ISO 14001

accreditation by the Lloyds Register Quality Assurance

body for our office management – an internationally

agreed standard that helps organisations improve their

environmental performance.

We have also continued to invest in our auto services

sites catering for their individual energy efficiency needs:

– Installing a new air conditioning system in our

Peterborough site allowing for more accurate

temperature control, alongside a reduction in

electricity usage compared to conventional units

– Training technicians in new repair techniques which

reduce the need for repair materials and reliance on

paint spray booths

– New LED lighting in our Weybridge site enabling

energy savings of up to 60%, a reduction in

maintenance costs over a projected lifespan of

10 to 20 years

– Two new dual electric car charging points in our

Birmingham site preparing for the rise in electric

vehicle usage

Our investments: moving climate up the agenda

– 100% of our portfolio will be net carbon neutral

by2050

– Corporate bond portfolios are committed to a 50%

reduction in weighted average greenhouse gas

emission intensity by 2030

– A preference for companies with carbon reduction

targets approved by the Science Based Targets

initiative

– A preference for companies with at least a 2°C

carbonperformance alignment with the Transition

Pathway Initiative

– The exclusion of any companies with a carbon

transition score indicating assets could be

economically stranded

– The exclusion of any mining companies that

generate >5% of revenues from thermal coal

production and electricity generators that derive >5%

of revenues from thermal coal power generation

(unless, in either case, the company has an approved

Science Based Targets initiative plan)

– The exclusion of any companies that are developing

new thermal coal mines or coal burning power plants

– Ensuring all of our investment-grade corporate bond

portfolios maintain an average MSCI ESG rating of ‘A’

Our journey to net zero

Each year we will become less reliant on carbon offsetting

to achieve net zero. Through our “Greener, Cleaner Action

Plan” we aim to mitigate our impact on climate change:

– Offices: Reimagining the way we work by investing in

energy-efficient features, encouraging flexible working,

improving recycling rates, continuing to use 100%

renewable electricity and ensuring 100% of office waste

is diverted from landfill.

– Accident repair centres: Aiming to be the most

energy-efficient repair network in the UK by investing

inour estate and repair processes.

– Green Flag: Reducing mileage and supporting

sustainable transport through efficiency initiatives, such

as optimising our roadside fix rate to reduce our mileage

and tow fewer vehicles.

– Our supply chain: Extending our reach by calculating

and disclosing our Scope 3 purchased goods and

services emissions and exploring how we can work with

individual suppliers to drive lower emissions.

– Our customers: Supporting green choices by

conducting customer market research to explore

attitudes to insurance.

Our offsetting projects

Over the next three years, we will offset those emissions

we can’t yet avoid through projects that cut carbon

emissions whilst also delivering tangible benefits to local

communities and environments in three countries:

– Rainforest protection, Brazil: Our funding will support

efforts to prevent unplanned deforestation across

350,000 hectares of the Portel micro region, through

training and educating local communities in alternative

agroforestry methods. By opening up new economic

opportunities, the project is reducing slash and burn

agriculture, which has been one of the largest

contributors to deforestation. The project is also

providing access to official land titles for native families

and is protecting more than 30 vulnerable species.

– Water filters, Kenya: Our funding will support the

distribution of safe water filters for families. As well as

delivering health impacts, the project also reduces the

need for people to boil water to make it safe to drink,

which requires the burning of unsustainable energy

sources such as wood or charcoal. This reduced reliance

on fuel reduces family expenditure and reduces

pressure on forests, as well as cutting carbon emissions.

– Clean cookstoves, Bangladesh: Less than 20% of

Bangladeshi households have access to clean cooking,

instead using traditional “three-stone” fires, contributing

to approximately 49,000 premature deaths a year.

Ourfunding will support entrepreneurs to produce,

manufacture and distribute the “bondhu chula”, a clean

cookstove designed for an efficient burn to reduce

fueluse.

60 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Group emissions

Our 2020 progress against our new 2019 baseline represents our most transparent emission reporting to date. In 2020

we were able, for the first time, to break out our Scope 1 and Scope 2 emissions into separate performance figures across

our office sites and accident repair centres, and disclose a Scope 3 footprint with greater clarity of the activities under

our direct control. Emission results reported below are all related to UK operations.

Scope 1 2020 2019 baseline

Office sites 1,432 1,881

Auto services

6,819 7,838

Total (tCO

1,2

8,251 9,719

Scope 2 2020 2019 baseline

Location-based

Market-based

Location-based

Market-based

Office sites 2,176 0 4,516 0

Auto services 1,710 0 2,093 0

Total (tCO

3,886 6,609

Scope 3 emissions under

our direct control

2020 2019 baseline

Fuel and energy related activities 2,332 2,465

Waste generated in operations 413 1,245

Business travel – air travel 198 928

Business travel – hotelnight stays 75 469

Business travel – rail 63 410

Employee commuting

1,450 4,599

Upstream leased assets

1,6

63 193

Upstream transportation and distribution of

auctioned vehicles 625 912

Total (tCO

5,219 11,221

Direct Line Group carbon footprint

(operational control)

2020 2019 baseline

Office sites (Scope 1&2 tCO

e) 3,608 6,397

Auto services (Scope 1&2 tCO

e) 8,529 9,931

Total Scope 1&2 (tCO

e) 12,137 16,328

Total Scope 3 under our direct control (tCO

e) 5,219 11,221

Total (tCO

e) 17,356 27,549

In addition, we monitor the intensity metric of emissions per £ million annually of net earned premium. This is a

measure of how efficiently we provide our insurance products and allows us to compare our performance year-on-year

and against other insurance companies.

Intensity metric

Year Emissions per £ million of net earned premium

2020 4.1

2019 5.5

2018 5.4

2017 5.5

2016 6.4

2015 7.7

2014 9.1

2013 9.5

Notes:

1. The 2019 result differs from the Group’s TCFD 2020 report published in December 2020 as a result of a reclassification of 320 tCO

from upstream leased assets (Scope 3 under our direct control) to Scope 1 auto services.

2. The 2019 Scope 1 total of 9,719 CO

e differs from our previously reported figure of 7,365 CO

e in the 2019 Annual Report and Accounts

as it now includes emissions from additional vehicles used during repairs, courtesy car fuel usage and vehicles that are Company

funded, which had not previously been tracked. The 2020 result includes these emissions.

3. Figures for Scope 2 use standard location-based methodology. We follow GHG Protocol to disclose both location and market-based

figures; and as we have secured our energy from 100% renewable sources since 2014, our Scope 2 market-based results are nil.

4. The 2019 Scope 2 total of 6,609 CO

e differs from our previously reported figure of 6,567 CO

e in the 2019 Annual Report and Accounts

following recalculation.

5. Employee commuting is based on UK national averages, not actual individual methods of transport of Direct Line Group employees

commuting. This data is not currently tracked.

6. Upstream leased assets refer to leased office space locations where Direct Line Group does not directly control the energy provision as

it is included in the service agreement.

7. Prior to 2019, the emissions used in the calculation of the intensity metric excluded emissions from additional vehicles used during

repairs, courtesy car fuel usage and vehicles that are Company funded, as these were not previously tracked. The 2019 result has been

re-presented accordingly (reported as 4.7 in the 2019 Annual Report and Accounts). The 2020 result includes these emissions.

www.directlinegroup.co.uk 61

The Board sets and monitors the Group’s performance

against its risk strategy, risk appetite and risk framework

and has also established a risk management model that

separates responsibilities into ‘Three Lines of Defence’.

– The First Line of Defence is the Group’s management

roles with responsibility for owning and managing risks

to achieve business objectives on a day-to-day basis.

– The Second Line of Defence is the Risk Function which

is responsible for the design and implementation of the

Enterprise Risk Management Strategy and Framework,

and provides proportionate oversight of, and challenge

to, the business’s handling of risks, events and

management actions.

– The Third Line of Defence is Group Audit, providing an

independent and objective view of the adequacy and

effectiveness of the Group’s risk management,

governance and internal control framework. The Group

Audit Plan includes sustainability and climate change-

specific reviews.

Management’s role

There are three primary management roles designed

toassign responsibility for the delivery of the Group’s

assessment and management of climate-related issues:

– the CEO has overall responsibility for climate change

and environmental matters;

– the CRO is responsible for overseeing the management

of climate change-related financial risk and sponsors

the Planet pillar of the Group’s sustainability framework.

The CRO is also the senior manager with responsibility

for assessing and monitoring climate change-related

risk. In that capacity, the CRO oversees the work of the

Risk function in analysing and stress testing the

potential future impact of climate change on the

business. The results of these stress tests are submitted

to the Risk Management Committee, the Board Risk

Committee and the Board, including as part of the

ORSA; and

This year the Group published its first

comprehensive climate disclosure

reporting against the Task Force on

Climate-related Financial Disclosures

(“TCFD”) framework. TCFD has enhanced

our reporting and we are confident it will

continue to do so as we strengthen our

strategic response to one of the biggest

challenges facing the world today.

Asummary of the Group’s 2020 TCFD

Report follows.

Governance

The Group prides itself on good sustainability governance

underpinned by our Vision and Purpose and a clear

commitment from the top to align sustainability goals

andensure relevant accountability across the business.

The Sustainability Steering Group, led by our CEO, drives

the sustainability agenda through our sustainability pillars,

each of which is sponsored by a member of our senior

management team. Our five-pillar sustainability strategy,

endorsed by the Board, aims to foster the highest

standard of ESG practice and deliver long-term

sustainability for all of our stakeholders. The Planet pillar

takes the lead on climate-related issues and is sponsored

by our Chief Risk Officer (“CRO”).

Board and Committees

The potential impact of climate change on the business

(“inbound”), as well as the Group’s impact on the

environment (“outbound”), are issues that have grown

inimportance and sit firmly within the Group’s

governance approach.

The Board has oversight on two key aspects of the

Group’sapproach:

– the Board considers and approves the Group’s strategic

and financial plan (“the Plan”) annually and monitors

progress at each of its meetings during the year. In

approving the Plan, the Board reviews and approves

theGroup’s Own Risk and Solvency Assessment

(“ORSA”), which includes an analysis of the climate

change-related risks to the business; and

– the Board oversees the Group’s sustainability activity

through its Committees which scrutinise and provide

appropriate challenge on the Group’s five pillar

sustainability strategy. The Chair of each Committee

reports to the Board after each Committee meeting,

including on sustainability activities when relevant.

Task Force on Climate-related

Financial Disclosures

For access to the full report please go online at:

www.directlinegroup.co.uk/2020_TCFD_Report

Sustainability continued

62 Direct Line Group Annual Report and Accounts 2020

Strategic Report

– the Chief Financial Officer (“CFO”) is responsible for

setting the Group’s investment strategy and is advised

by the Investment Committee on the application of ESG

weightings, including those related to climate change,

to the relevant portfolios. The CFO is a member of the

Committee and the CEO, CRO and the Director of

Investment Management & Treasury are attendees.

In addition, the Climate Change Working Group has been

established to help assess the potential impacts of climate

change on the Group. Members of this working group

represent various teams from across the business with the

aim of ensuring risks are identified and managed effectively.

Strategy

Our strategy is to drive change across our underwriting

activity, our operations and our investments. The specific

impacts of climate change on our business are diverse,

and fall into three broad categories:

– Physical risks and opportunities resulting from the

physical effects of climate change such as weather-

related events. This is important to our business as it

includes the potential for increased insurance claims,

driven by both the frequency and severity of natural

catastrophes and other weather-related events in

theUK.

– Transition risks and opportunities arising from efforts

to mitigate climate change, which are driving the

transition to a lower-carbon economy. This is significant

as we navigate this transition, ensuring our insurance

products and operations continue to meet our

customers’ needs as a result of any changes in market

dynamics and customer behaviour, for example a shift

towards electric vehicle usage.

– Liability risks arising when parties who have suffered

losses from climate change seek to recover them

fromthose they believe may have been responsible. Thisis

important to our business, because this includes exposure

to liability risk through commercial liability insurance.

Increasing frequency and severity

ofnatural catastrophes and other

weather-related events in the UK.

Asa general insurer we have the

ability to re-price annually and

transfer risk through reinsurance

arrangements. This is likely to limit

insurance liability impact in the

shortterm.

Strategic and operational response to

the transition towards a lower-carbon

economy. This will include including

changes to risk nature, opportunities

and risks within our supply chain and

repair processes and changes to, and

opportunities in, our product

offerings.

The impacts of risks and

opportunities that need to be

considered over the longer term

include significant adjustments to

weather-related modelling, a shift

indynamics within the markets

weoperate in and continued efforts

towards net carbon neutrality in our

investment portfolio.

Short

(1 – 5 years)

Long

(10+ years)

Medium

(5 – 10 years)

Risk time horizons

We have defined the following time horizons for these

risks: Short (1-5 years), Medium (5-10 years), and Long (10+

years). In general, transition risks are likely to materialise

more rapidly than physical risks, which are likely to be

gradual and materialise in the longer term. The timing

ofliability risks is less certain due to the nature of

theexposure.

Stress test

We participated in the PRA’s 2019 insurance stress test

which considered the impact of climate change on

ourbusiness, based on three hypothetical climate

change scenarios.

– Scenario A, a rapid, disorderly transition to a low-

carbon economy.

– Scenario B, a slow, more orderly transition that keeps

global temperatures well within the Paris Agreement

target of 2°C of warming.

– Scenario C, a scenario with failed future

improvements in climate policy, reaching a

temperature increase in excess of 4°C (relative to

pre-industrial levels) by 2100 assuming no transition

and a continuation of current policy trends.

Whilst the transition scenarios saw material impacts on

the investment portfolio, the most notable impacts on

both investments and insurance liabilities arose from

the physical effects of no transition, that is no additional

actions beyond those already announced. Based on the

PRA specifications, Scenario C, in which physical risk

dominates, resulted in the most significant impact on

the Group but did not breach risk appetite despite not

allowing for reinsurance. This demonstrates the

resilience of the Group’s strategy to such a scenario.

Furthermore, the projected time frame (2100) for this

scenario is likely to allow the business to adapt.

Further disclosure on the outputs from the scenario

analysis can be found in our full TCFD 2020 report,

pages 11 to 13

www.directlinegroup.co.uk 63

Underwriting

Climate change is a key risk facing the insurance

industry. It has the potential to affect both the

frequency and severity of natural catastrophes

and other weather-related events in the UK

whichare key drivers in the Group’s solvency

capital requirements.

In our Motor business, the transition to electric-powered

vehicles could affect strategic and operational

considerations, including changes to the profile of

accidents and changes to the nature of risks, supply

chainand repair processes. Understanding this

transitionprovides an opportunity to ensure optimum

riskassessments influence pricing decisions and seek

toensure an efficient repair process in our accident

repaircentres.

Developing further insight into electric-powered vehicles

for pricing considerations, the nature of the risks involved,

developing efficient repair practices and strengthening

technical expertise in our accident repair centres are

therefore commercial opportunities. Failing to do this

could have an adverse impact on market share if the

Group fails to grasp the scale of the transition in the

medium term.

Climate change also creates the opportunity to enhance

our risk-modelling expertise that can strengthen our

pricing decisions. Remaining active participants in

developing solutions to influence the debate on weather-

related events gives the Group an opportunity to enhance

risk modelling and ensure commercial impacts are

understood, particularly how claims and fulfilment

operations function, for example flooding and resilient

repairs in our Home business. Changes in building codes

and standards could also impact the way the Group prices

property underwriting risk.

Consumers and existing customers could gravitate in

greater numbers to competitors as part of a desire for

environmentally friendly products. This is a risk and

opportunity in equal measure. Developing products that

could encourage a reduction in emissions would highlight

the Group’s capability to customers, opening up a

potential commercial opportunity, for example mileage

refund propositions for motor customers.

The Group is now conducting market research on

consumer attitudes to green products in the insurance

industry in order to give the Group greater insight into

their commercial viability.

Sustainability continued

Operations

Our operations are exposed to physical and

transition risks. Climate change could disrupt

ourdirect operations as it has the potential to

affect both the frequency and severity of natural

catastrophes and other weather-related events

inthe UK. We could also face increased operating

costs due to potential carbon cost increases and

regulatory requirements designed to limit carbon

emissions. In seeking to mitigate such potential

challenges the Group is setting reduction targets,

improving the way individual business areas

operate and the way we leverage our relationship

with suppliers.

A failure to set long-term emission reduction targets for

business operations could see energy consumption and

costs increase. Targets, however, allow the Group to focus

on energy reduction across its estate and be transparent

about progress achieved.

We continue to invest in energy-efficient features and

equipment across our office estate and accident repair

centres providing the opportunity to reduce energy costs,

which could otherwise increase. The Group is also

improving operational efficiencies in order to save energy

costs and mitigate environmental impact, for example, in

our roadside rescue and recovery business where we are

focused on lessening our impacts by reducing our mileage

through attendance efficiency. More information can be

found on page 20 of the Group’s 2020 TCFD Report.

Our responsibilities extend far beyond our direct

operations. Therefore, another key area of focus for us is

tocontinually enhance our understanding of the risks

andimpacts in our supply chain and continue to drive

improvements that are designed to minimise carbon

andwaste.

We recognise that total Scope 3 emissions could either

increase or reduce as a result of how we manage our

supply chain, particularly the goods and services we

purchase. Once approved, our new Science-Based Targets

will enable the Group to monitor its progress and the

effectiveness by reducing emissions in our supply chain.

We will use our established relationships and purchasing

power through procurement to mitigate our risks by

seeking to reduce the emissions in our supply chain,

whilewe support our supply chain partners to adapt to a

low-carbon world. Once approved, our new Science-Based

Targets will enable us to monitor our progress and the

effectiveness of this approach.

Strategic approach

Our strategy focuses on the Group’s

underwriting activity, our operations

andour investments where we assess

theinbound and outbound risks

andopportunities.

A full explanation of our strategic response can be found

in our 2020 TCFD Report

Note:

1. For access to the full report please go online at: www.directlinegroup.co.uk/2020_TCFD_Report

64 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Investments

In recent years we have started to integrate more

ESG considerations into our investment strategy,

recognising this is a long-term process which will

require assessment and challenge to inform future

decision making. We know that the impacts of

potential physical and transition risks arising in

the wider economy can have an impact on our

investment portfolio, through their influence on

the value of assets.

Our largest asset portfolios are focused on corporate

bonds, and in early 2019 we introduced a significant

newinitiative. The Group’s investment-grade portfolios,

representing the bulk of its fixed income investments,

now include a new investment objective: to achieve a

minimum MSCI ESG rating of ‘A’ for the portfolio.

Companies with higher ESG credentials have more

sustainable practices, so this new objective has enabled

usto better align our investment goals with our

environmental and social goals. We are proud to have

achieved the objective and, by the end of 2019, 100% of

theinvestment-grade corporate bond portfolios had an

average ESG rating of ‘A’.

We are also actively encouraging our investment

managers to invest in green bonds. Green bonds are

designated bonds intended to encourage sustainability

and to support climate-related or other environmental

projects. All our relevant bond mandate guidelines direct

the portfolio manager to purchase a green bond where

the risk/return characteristics are similar to those of a

non-green bond.

We hold an investment property portfolio, and all assets

inthis portfolio must have an Energy Performance

Certificate of ‘D’ or better, or a plan and funds in place

forachieving that level. This is one level above the

Government-mandated efficiency level of ‘E’. The property

portfolio also has a tailored set of 2022 ESG targets covering,

amongst other things, carbon, energy, water and waste.

Looking ahead, we intend to increase our efforts to

develop a more focused climate-related investment

approach with a long-term goal of ensuring our entire

investment portfolio is net carbon neutral by 2050.

Our first steps on this path relate to our corporate bonds

portfolio, the largest part of our investment portfolio.

Across these portfolios we have committed to a 50%

reduction in weighted-average GHG emissions intensity

by 2030, benchmarked against 2020 levels.

We recognise the importance of avoiding investing in

thecompanies least prepared for the transition to a

low-carbon economy due to the risk of stranded assets.

Inresponse, we are working to increase allocations to

those companies providing the solutions and those

demonstrating a serious intent to decarbonise.

We also know that to meet the aims of the Paris

Agreement, energy generation from fossil fuels will have

to be drastically reduced in the coming decade. From

2021, asset managers will not be authorised to buy bonds

in mining companies that generate more than 5% of

revenues from thermal coal production, and electricity

generators that derive more than 5% of revenues from

thermal coal power generation. To encourage positive

climate action, an exception will be made for companies

which have either made commitments for emission

reduction targets through the SBTi or assigned a ’2

degree’ or better Carbon Performance Alignment from

the Transition Pathway Initiative. We also plan to exclude

companies that are developing new thermal coal plants or

mines, in a time frame consistent with our application to

the global corporate renewable energy initiative, RE100.

We will review the above exclusions annually and may,

inthe future, divest completely from companies with any

involvement in coal or expand the list to include other

types of fossil fuels.

Alongside these actions against our investment-grade

bonds, we are committed to a wider framework which

encompasses all asset classes to deliver our net carbon

neutral long-term goal (see page 31 of the Group’s 2020

TCFD Report).

www.directlinegroup.co.uk 65

Risk management

The predominant direct physical drivers of risk to the Group’s

capital position are UK floods and major UK windstorms.

Whilst additional risks such as freezing weather and

subsidence are less material to capital requirements,

these are modelled within the Group’s Internal Economic

Capital Model and reviewed at least biennially.

The influence of climate change is difficult to isolate from

the complex oceanic and atmospheric processes driving

UK weather. The Group uses catastrophe models to

capture these factors, and in turn these models are

regularly reviewed against specific criteria including how

they have considered latest scientific thinking, to ensure

they appropriately capture the Group’s risk profile.

Responsibility for this work sits within the Capital

Modelling function.

Our most exposed policies renew annually and are priced

according to risk. Pricing algorithms use sophisticated

rating engines to account for recent trends and are

supplemented with views of catastrophic risk to seek

toensure sufficient pricing. These prices will evolve as

climate change influences manifest themselves through

changing loss patterns, and views of catastrophic risk

develop because of rising sea levels, changes in

precipitation rates and urban resilience.

Risk pricing models are built using historical data covering

a multi-decadal time period for perils most likely to

beinfluenced by climate change. This allows us to

understand and incorporate long-term signals and past

trends into our modelling.

These models benefit from considerable amounts of

internal and externally purchased data. External data

isreviewed and updated regularly, and we maintain

arelationship with data suppliers to understand the

methodologies and assumptions in their work.

Nevertheless, the underlying trends can be difficult to

measure as they emerge through infrequent one-off

catastrophe events and may have additional contributory

factors (for example, deforestation increasing the pace of

rainwater run-off upstream of a flood). Furthermore, future

trends are likely to differ from past projections. As such,

werecognise a range of uncertainty as to current and

future impacts.

Increases in frequency and severity of large catastrophe

weather events are mitigated by the Group’s use of

catastrophe excess of loss reinsurance. This reinsurance

covers property (Personal Lines and Commercial) and

Motor physical damage losses; in addition to significant

capital benefits, it transfers the volatility of low-frequency,

high-severity natural perils events away from the Group.

The reinsurance purchase decision is a combination of

catastrophe modelling, capital analysis, the Group’s risk

appetite, cost of cover and the overall income statement

impact. Cover is purchased with an upper limit equivalent

to a 200-year modelled loss and the retention will be

based upon the amount that the Group is willing to

sustain from such a loss. This cover has benefited from

twosubstantial improvements in recent years that provide

additional climate change mitigation against

multipleevents:

– an increase in the number of reinstatement provisions.

The reinsurance limit is purchased with a reinstatement

provision where, in the event of a catastrophe loss, the

limit of cover available is automatically reinstated to

provide cover for the next event loss. Up until recently

the cover was purchased with just a single

reinstatement provision across the whole programme

but this was increased to two in 2017 for a significant

proportion of the reinsurance. This has resulted in more

overall reinsurance cover being available for catastrophe

losses; and

– an extension to the ‘hours clause’. Catastrophe

reinsurance covers are generally subject to an hours

clause that defines a loss event by a number of hours.

Inpractice, the Group can accumulate all losses within

anumber of hours to determine the reinsurance event

for recovery purposes. In recent years, the amount of

time available has been extended which means that

theGroup can capture more claims and longer duration

events and have a greater level of protection for

theselosses.

In addition, we purchase risk covers to protect against

large individual commercial losses.

For a full summary of how the Group approaches Risk

management please go to page 24 of our full 2020

TCFDreport

Metrics and targets

We take our environmental impact responsibilities

seriously and recognise the value of target-setting and

reporting in driving our emission reductions. We comply

with the applicable greenhouse gas reporting

requirements of the Large and Medium-sized Companies

and Groups (Accounts and Reports) Regulations 2008 and

apply the GHG Protocol Corporate Accounting and

Reporting Standard (revised edition) to calculate our

emissions, which includes emissions associated with

electricity consumption using both the Scope 2 location-

based and Scope 2 market-based calculation

methodologies. This year we also began the process of

evaluating our Scope 3 emissions under our direct control

and plans are underway to evaluate the final part of our

Scope 3 emissions, and our investment portfolio in 2021.

Our 2020 emissions data can be found on page 61, which

reflects reduced energy usage in 2020 due to the impact

of Covid-19. This data includes our intensity metric of

emissions per £ million annually of net earned premium.

This is a measure of how efficiently we provide our insurance

products and allows us to compare our performance

year-on-year and against other insurance companies.

In addition, we have two Group-wide environmental

impact targets:

– a 57% reduction in emissions (Scope 1 and 2) on a

like-for-like basis by the end of 2020 against a 2013

baseline. We exceeded this target with a 69% reduction

in energy related emissions in 2020, which takes into

account the impact of Covid-19 where home working

and lockdown measures altered our energy usage.

Excluding the impact of Covid-19 we estimate energy

related emissions would have been approximately 63%

lower than 2013; and

– a 30% reduction in energy consumption on a like-for-like

basis by the end of 2020 against a 2013 baseline. This

year we again exceeded our target with a 45% reduction

in energy consumption, which takes into account the

impact of Covid-19 where the move to home working

reduced energy use across our estate. Excluding the

impact of Covid-19 we estimate that energy

consumption in 2020 would have been approximately

34% lower than 2013.

Sustainability continued

66 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Normalising by sales as the denominator allows the

investor to compare carbon efficiency of different sized

firms within the same industry and has become the

standard metric used in the investment industry. Our aim

in 2021 is to be able to report the weighted average carbon

intensity of our corporate bonds portfolio. Furthermore, in

order to improve monitoring, management and future

reporting in this area, we are working towards an

improved picture of the emissions intensity of other

significant portions of our investment portfolio, where

appropriate data and methodologies exist.

Looking forward, we are working with the Carbon Trust to

set Science-Based Targets across the full Scope 1, 2 and 3

of our operations. These targets will be submitted for

approval and subject to the two-year time frame set out

by the SBTi.

For a full breakdown of the Group’s overall emissions,

including our intensity metric and historical performance,

see page 61.

Future Group activity

The Group has now set itself new priorities against the TCFD recommendations.

TCFD recommendation Future Group activity

Governance

Describe the Board’s oversight of climate-related

risks and opportunities.

The Group plans to maintain strong Board oversight, ensuring

the Planet pillar, as part of its sustainability strategy, continues

to take a strategic lead. Setting the Board’s strategic debates in

a climate change context will be supported by periodic debates

on climate-related risks and opportunities, as well as inviting

thought leaders to engage with Board meetings.

Describe management’s role in assessing and

managing climate-related risks and opportunities.

Strategy

Describe the climate-related risks and

opportunities the organisation has identified over

the short, medium and long term.

The Group intends to conduct more analysis in order to present

more detailed impact assessments of climate-related risks

across different time horizons.

Describe the impact of climate-related risks and

opportunities on the organisation’s businesses,

strategy, and financial planning.

The Group intends to strengthen how it systematically considers

climate-related issues from a risk and opportunity perspective

across business areas, strategic decision making and financial

planning in order to be better able to describe impacts.

Describe the resilience of the organisation’s strategy,

taking into consideration different climate-related

scenarios, including a 2°C or lower scenario.

Quantifying the impact of climate-related scenarios, including

a 2°C or lower scenario, will strengthen the Group’s ability to

describe how resilient its strategy is, particularly placing

monetary values on climate-related impacts.

Risk management

Describe the organisation’s processes for

identifying and assessing climate-related risks.

The Group will continue its robust approach towards the

management of physical risk and intends examining in more

depth inbound and outbound impacts in order to be able to

better describe transition and liability risks. The ambition is for

risk management processes to support the Group in

conducting detailed analysis on each risk and applying

monetary values to support the Group’s overall strategy.

Describe the organisation’s processes for

managing climate-related risks.

Describe how processes for identifying, assessing,

and managing climate-related risks are integrated

into the organisation’s overall risk management.

Metrics and targets

Disclose the metrics used by the organisation to

assess climate-related risks and opportunities in

line with its strategy and risk management process.

The Group plans to work towards establishing Science-Based

Targets within the business to be approved by the SBTi which

will strengthen our disclosures across Scope 1, Scope 2 and total

Scope 3 GHG emissions.

Disclose Scope 1, Scope 2, and, if appropriate, Scope

3 GHG emissions, and the related risks.

Describe the targets used by the organisation to

manage climate-related risks and opportunities

and performance against targets.

Metric tonnes CO

e (CO

equivalent) GHG emissions

Million $ Sales

GHG emissions intensity =

Having met and exceeded these targets we will now

benchmark the Group’s environmental performance

against a 2019 baseline and will set Science-Based Targets

within the two-year timeframe set out by the SBTi.

We also have the following long-term goal for our

investments:

– ensuring our entire investment portfolio is net

carbonneutral by 2050 in line with the aims of the

Paris Agreement.

To support this aim we have now set an interim target of a

50% reduction in weighted average GHG emissions intensity

by 2030 within our corporate bonds portfolio, the largest

part of our investment portfolio. We will use GHG emissions

intensity

as the key metric of measurement as follows:

Note:

1. GHG emissions intensity is used to account for greenhouse gases other than just carbon dioxide which contribute to global warming

(such as methane and nitrous oxide). These other gases are converted into a CO

equivalent measure based on their warming potential.

www.directlinegroup.co.uk 67

Streamlined Energy and Carbon Reporting (SECR) regulations

The following table highlights where information can be found that supports the requirement to disclose how the

Group manages its energy consumption and carbon emissions.

Requirement Pages

Annual global GHG emissions (CO

– from activities for which the Company is responsible 61

– from buying electricity, heat, steam or cooling by the Group for its own use 61

Annual global energy consumption in kWh, being the aggregate of:

– energy consumed from activities for which the Company is responsible 58

– energy consumed resulting from buying electricity, heat, steam or cooling by the Group for its

ownuse

The proportion of GHG emissions and energy consumed relating to the UK and offshore area

59 and 61

Methodology used to calculate emissions and energy consumption 58

At least one intensity metric in relation to emissions 61

Description of energy efficiency actions taken 60

Note:

1. The offshore area is broadly defined as the sea adjacent to the UK, including the territorial sea, plus the sea in any designated area

under section 1(7) of the Continental Shelf Act 1964 and section 41 (3) of the Marine and Coastal Access Act 2009.

Non-financial information statement

This Non-financial information statement highlights information necessary for an understanding of the Company’s

development, performance, position and impact of its activity, information relating to environmental, employee, social,

respect for human rights, anti-corruption and anti-bribery matters.

Where possible, the following table states where additional information can be found that supports the requirements of

sections 414CA and 414CB of the Companies Act 2006.

Reporting requirement

Information necessary to understand our business and

its impact within the Annual Report & Accounts Pages

Environmental – Our sustainability pillars

– Sustainable Development Goals

– Greenhouse gas emissions

– Climate-related risks

– TCFD Report

44 to 61

58, 61

Employees – Covid-19 response and people

– Diversity and inclusion

– Hampton-Alexander Review

– Gender pay gap

– Performance and pay

50, 102

50 , 92, 107, 110, 125

52, 93, 108

10, 15, 52, 86, 110

Social and

community

matters

– Social Mobility Employee Network

– Prompt Payment Code

– Our Community Fund

54 to 55

56, 142

Human rights – Well-being strategy

– My Life policies

– Living wage

– Ethical Code for Suppliers

– Modern Slavery Statement

52 to 53

52, 53

52, 118

142

86, 109, 142

Anti-bribery

andcorruption

– Ethical matters

– Sustainability Committee report

– Code of Business Conduct

105, 110

109 to 110

77, 85, 88, 142

Innovation – New products, channels and propositions

– Digital customer journey

2 to 3, 12, 37

14, 16, 40, 43, 49

Business model – Strategic report 1 to 75

Principal risks

andimpact on

business activity

– Managing our risk

– Risk management

– Audit, risk and internal control

– Board Risk Committee report

69 to 75, 95 to 96, 104

172 to 185

95 to 96

102 to 105

Non-financial KPIs – Change delivery

– Workforce engagement

– Net promoter score

– Customer complaints

13 to 14

19, 117, 118

19, 48, 124

19, 124

Sustainability continuedSustainability continued

68 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Managing risk in line with our strategy

Our management team, with oversight from the Board

and Board Risk Committee, is responsible for developing

our strategy. Our strategic planning process aims to

ensure we have developed clear objectives and targets,

and identified the actions needed to deliver them,

including the management of risk.

A key aspect of any effective strategic planning process

isto understand and manage those risks appropriately.

Toachieve this, the Risk Function works closely with the

business to help it to identify and assess risks, which is

done through setting and achieving targets as well as

through its review and challenge of business plans in the

strategic planning process.

The Group’s risk strategy is aligned with the Group

strategy and supports business decision-making through

the proactive identification, assessment and management

of risks.

Our risk governance framework

The Risk Function continues to lead transformation and

cultural change to drive ownership of risks in the business,

recognising the Group’s changing risk profile and the

maturing control and governance environment.

To begin with, the focus was on establishing standards

and governance, articulating the Group’s risk appetite and

ensuring we had appropriate capability across its three

lines of defence. We now have an embedded Enterprise

Risk Management and Strategy Framework (“Risk

Management Framework”) with clear accountabilities

and risk ownership designed to ensure that we identify,

manage, mitigate and report on all key risks and controls

through the three lines of defence model:

First line: Management is responsible for embedding risk

management into business as usual and change

processes whilst creating transparent reporting of risks

and management actions.

Second line: The Risk Function is responsible for the

design and recommendation to the Board Risk

Committee of the Risk Management Framework, its

implementation across the Group and the provision of

proportionate oversight of risks, events and management

actions throughout the Group.

Third line: Group Audit is responsible and accountable

forproviding an independent and objective view of

theadequacy and effectiveness of the Group’s risk

management, governance and internal control framework.

See page 89 for governance structure

Our aim is to make risk management simple, well understood and embedded. We will

provide oversight which is pragmatic and commercial to help the business make good

risk-based decisions and to move quickly whilst understanding the risks.

Risk appetite

Our risk appetite statements are an expression of the level

of risk the Group is prepared to accept to achieve its

business objectives. The statements are used to drive

risk-aware decision-making by key business stakeholders.

Our risk appetite statements are documented in our

policies and include:

– monitoring whether the business remains within

risk appetite, among other information, using key

riskindicators;

– deriving the key risk indicators from the risk appetite

statements to drive and monitor risk-aware decision-

making; and

– both qualitative and quantitative risk statements which

are forward and backward-looking. We review our risk

appetite statements and key risk indicators annually.

Our Risk Management Framework

The Risk Management Framework document sets out,

ata high level, the Group’s approach to setting risk

strategy and managing risks to the strategic objectives

and day-to-day operations of the business.

Aligned to the three lines of defence model, not only does

the Risk Management Framework articulate the high-level

principles and practices needed to achieve appropriate

risk management standards, but it also demonstrates the

inter-relationships between components of the Risk

Management Framework.

Within this, the risk management process is a key element

in the development and on-going maintenance of an

accurate risk profile. The objective of the risk management

process is to identify, assess, manage, monitor and report

on the risks that the Group is exposed to. See page 66 for

specific information on how the business identifies and

assesses the risks associated with climate change.

Within the Risk Management Framework, policies address

specific risk areas and are aligned to the Group’s risk

appetite. Policies, where appropriate, are supported by

underlying minimum standards which interpret policies

into a set of risk and control requirements to be

implemented across the Group.

Risk management

www.directlinegroup.co.uk 69

Proactive risk management through Covid-19:

The Covid-19 pandemic created an unprecedented set

ofcircumstances in the UK, as the country moved to

national lockdowns. To minimise transmission of

theCovid-19 virus, people across the UK were asked

toremain at home, including working from home

wherepossible and restricting any travel.

Within the Group, Covid-19 presented a series of

challenges in seeking to protect its people, maintain

customer operations, and safeguard the business.

In responding to the pandemic, management

demonstrated strong proactive leadership, took

accountability and showed a clear understanding of risk

as they transitioned the business to a home working

model. We transitioned our people to working from

home prior to the national lockdown being called,

whilemaintaining service continuity for our customers.

Throughout the pandemic, the Risk Function worked

closely with business areas to perform key risk and

control assessments to inform this decision making;

including assessments of risks introduced through mass

homeworking, which enabled us to take mitigating

action where necessary. The results of this exercise

informed management of our critical supply chain.

Collaboration took place across the business to manage

other Group responses to the pandemic; such as, the

management of the surge in customer claims related

toTravel; the assessment of additional scenarios relating

to operational resilience; and documenting how impacts

of the pandemic may evolve, in order to identify and

mitigate risk.

Throughout this challenging period, business functions

have continued to work together proactively to ensure

that our customers receive appropriate levels of service

and support, whilst still delivering business performance.

Our risk culture

Our risk culture underpins our business and decision-

making, and helps us embed a robust approach to

managing risk. Our Risk Function drives ownership of

risksin the business and ensures that risk consideration

isintegral to all decision-making. It also provides expert

advice and guidance to business areas, whilst also

challenging the effectiveness of controls to manage

riskand compliance.

The Board is committed to promoting a culture of high

standards of corporate governance, business integrity,

ethics and professionalism in all our activities. An annual

assessment of risk behaviours and attitudes is undertaken

jointly by the Risk Function and Group Audit and

considers a range of factors influencing risk culture.

We also have an annual Risk Communications Plan which

features activity to reinforce the message that risk is

everyone’s responsibility. The Plan features staff awareness

campaigns, articles on the intranet and the imaginative

“Risk Heroes” campaign which enabled members of staff

to harness social media and mobile phone photograph

filters; and enabled Risk to engage with colleagues about

the importance of risk management in a unique and

conversational way.

Risk management continued

The Group recognises that its long-term sustainability

isdependent on having sufficient economic capital to

meet its liabilities as they fall due, thus protecting its

reputation and the integrity of its relationship with

policyholders and other stakeholders. As part of this,

itsappetite is for general insurance risk, focusing on

personal lines retail and small and medium-sized

enterprise insurance in the United Kingdom. The Group

has appetite for non-insurance risks, as appropriate,

toenable and assist it to undertake its primary activity

ofinsurance.

Three strategic risk objectives

1. Maintain capital adequacy

The Group seeks to hold capital

resources in the range of 140%-180%

of its solvency capital requirement.

2. Stable/efficient access to

funding and liquidity

The Group aims to meet both

planned and unexpected cash

outflow requirements, including

those requirements that arise

following a 1-in-200 year insurance,

market or credit risk event.

3. Maintain stakeholder

confidence

The Group has no appetite for

material risks resulting in

reputational damage, regulatory

orlegal censure, poor customer

outcomes, fines or prosecutions

andother types of non-budgeted

operational risk losses associated

with the Group’s conduct and

activities. The Group will maintain

arobust and proportionate internal

control environment.

Risk appetite statement

Overarching risk objective

70 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Principal risk Description Risk commentary

Insurance Risk

Strategic Alignment

Relative size of risk

Trend – increasing

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.

Key drivers of the outlook for insurance

risk across our business plan include

reserve, underwriting, distribution,

pricing and reinsurance risks. Issues

relating to Covid-19 have been a key

area of focus for the Group in 2020 and

the main driver of the increasing trend

in Insurance risk. Claims trends have

been significantly impacted particularly

during the lockdown period. This has

led to uncertainty in claims reserving

and pricing.

In 2021 and beyond, Covid-19, Brexit

and potential recession may have an

impact on claims inflation together

with market and customer behaviour.

We continue to monitor this closely.

In response to this uncertainty we have

used stress testing to understand

thepotential impacts of an economic

downturn on frequency and severity

ofclaims costs.

Finally, climate change presents a risk

of more frequent extreme events and

key risk indicators are being continually

enhanced to monitor related risks

across Home, Motor and Commercial.

Market Risk

Strategic Alignment

Relative size of risk

Trend – stable

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

and investments to changes in credit

spreads, and our exposure to losses as

aresult of changes in interest rate term

structure or volatility.

Concerns about the Covid-19 pandemic

and Brexit fallout could impact equity

and credit markets within the global

economy leading to credit spread

increases, foreign exchange rate

volatility, interest rate changes and

devaluation of UK property assets.

To address this, we have an investment

strategy which is approved by the

Board and includes limiting exposure

to individual asset classes and the

number of illiquid investments we hold.

We also use risk reduction techniques

such as hedging foreign currency

exposures with forward contracts.

Operational Risk

Strategic Alignment

Relative size of risk

Trend – decreasing

The risk of loss due to

inadequate or failed

internal processes or

systems, human error or

from external events.

The key risks within this

category are Cyber,

Technology &

Infrastructure, Operational

Resilience, Change, People,

Information Management,

Outsourcing, Partnerships

and Fraud.

Operational risks can arise within all

areas of the business and can manifest

themselves through inadequate or

failed internal processes or systems,

human error or from external events.

Our approach is to manage our

operational risks to proactively mitigate

potential customer harm, regulatory

orlegal censure, financial and

reputational impacts. The decreasing

trend in operational risk is driven

mainly by the good progress made

bythe business in delivering

technology improvements.

We have in place operational processes

and systems, including prevention

anddetection measures. These include

processes which seek to ensure we

canabsorb and/or adapt to internal

orexternal events that could impact

customer operations and the

widerbusiness.

With the majority of staff now working

from home, we continue to work to

improve the performance of our IT

systems, focusing on improving both

system stability and capability.

With significant strategic investment

we continue actively to strengthen our

change implementation controls to

further mitigate potential impacts from

risk events.

We continue to deliver sustainable

improvements to the overall security

control environment, designed to

enable us to respond to malicious and

unintended threats from both internal

and external entities. Processes are also

in place to automate controls to

enhance risk monitoring.

We operate a strong control

environment through the delivery of

the Procurement & Supply Chain target

operating model, which is focused on

delivering active monitoring and

management of key suppliers.

Our Risk Management Framework is

designed to enable us to capture risk

information in a complete and

consistent way, enabling proactive

trend analysis, root cause analysis and

read across to facilitate early warnings

and a ‘learning’ risk environment.

Market risk

Operational risk

Principal risks and uncertainties

We carefully assess the principal risks facing us. Principal risks are defined as having a

residual risk impact of £40 million or more on a 1-in-200 years basis, taking into account

customer, financial and reputational impacts.

Link to strategy

Be best at direct

Win on price comparison websites

Extend our reach

Be nimble and cost efficient

Have technical edge

Empower Great people

www.directlinegroup.co.uk 71

Risk management continued

Principal Risk Description Risk commentary

Regulatory &

Compliance Risk

Strategic Alignment

Relative size of Risk

Trend – stable

The risks leading to

reputational damage,

regulatory or legal censure,

fines or prosecutions

andother types of

non-budgeted operational

risk losses associated

withtheGroup’s conduct

andactivities.

We maintain a constructive and open

relationship with our regulators and

have a strong culture of delivering on

our commitments to our customers

(see pages 48 to 49).

Pricing practices within the general

insurance market is a key area of focus

for the FCA and for the Group. We

continue to devote a lot of attention

tothis area as we prepare for the

implementation of the FCA’s pricing

practices remedies, expected in

Q22021. Our existing conduct Risk

Management Framework is designed

to deliver fair outcomes to customers

and minimise our risk exposure. The

framework is supported by a set of

conduct pricing principles designed to

enable the fair pricing of business

across our book. We continue to

develop our approach to anticipate

regulatory developments and to ensure

that we can continue to provide good

outcomes for our customers. We carry

out planned risk-based monitoring of

customer processes as well as more

targeted thematic reviews to help

usmanage the risk of unfair

customeroutcomes.

We have maintained regular and

opendialogue with both the FCA and

PRA on our responses to Covid-19,

outlining actions taken with the aim

ofensuring that good customer

outcomes are achieved and that

theGroup remains financially

andoperationally resilient.

We have worked closely with UK

regulators on our Brexit preparations,

and with the Central Bank of Ireland

toestablish an Irish Branch in

preparation for the end of the Brexit

transition period.

Finally, we have put in place a strong

governance and accountability

framework as part of the Senior

Managers and Certification Regime,

and carry out an annual declaration

process to ensure the ongoing fitness

and propriety of the Group’s Senior

Managers and Certified Functions.

Credit Risk

Strategic Alignment

Relative size of risk

Trend – stable

The risk of loss resulting

from default in obligations

due from and/or changes

in thecredit standing of

issuers of securities,

counterparties or any

debtors to which the

Group is exposed.

To manage credit risk, we set credit

limits for each counterparty and

actively monitor credit exposures.

Inaddition, we only purchase

reinsurance from reinsurers with

atleast an A- rating and, for liabilities

witha relatively long period of time

tosettlement, this rating is at least A+.

Finally, we also have well defined

criteria to determine which customers

are offered and granted credit.

Strategic Risk

Strategic Alignment

Relative size of risk

Trend – stable

The risk of direct or indirect

adverse effects resulting

from strategies not being

optimally chosen,

implemented or adapted

to changing conditions.

Strategic risk is influenced by internal

and external developments such as

theCovid-19 pandemic, Brexit and

theFCA’s Pricing Practices Review.

Inaddition, the adoption of agile ways

of working is designed to allow the

business to more quickly identify and

react to risks to the implementation

ofthe Group’s strategic goals.

To manage our risks, we have taken

thefollowing steps:

– we agree, monitor and manage

performance against the Board-

approved plan and targets;

– the Board leads an annual strategy

and five-year planning process which

considers our performance,

competitor positioning and strategic

opportunities;

– as part of the timetable for the

Strategic Plan, the Risk Function

carries out a risk review of the Plan

which is documented in the Group’s

Own Risk and Solvency Assessment

and presented to the Board; and

– we identify and manage emerging

risks using established governance

processes and forums.

Credit

Link to strategy

Be best at direct

Win on price comparison websites

Extend our reach

Be nimble and cost efficient

Have technical edge

Empower Great people

72 Direct Line Group Annual Report and Accounts 2020

Strategic Report

UK recession and global financial

instability

The risk of a further UK-wide recession and global financial

instability is ongoing. The economic uncertainty is

expected to remain high throughout H1 2021, as a result

ofthe Covid-19 pandemic, and the Group continues to

monitor the worst-case impact.

As a result of the Covid-19 pandemic, the UK Government

has acted to support UK employees and prevent lasting

damage to the economy. However, the uncertainty

surrounding the pandemic makes the overall impact

andrecovery progress unclear.

The disruption to global trade and supply-chains caused

by the pandemic could increase the risk of inflation in

thelong-term.

For the Group, the investment portfolio is positioned

relatively defensively; however, if the UK recession were to

worsen significantly, additional steps could be taken such

as further shifting the portfolio towards ‘defensive’ sectors

or increasing more allocation to cash.

Globally, the economic shock caused by the Covid-19

pandemic initially resulted in credit spreads in Europe

andthe US moving to levels last seen in the 2008/09 credit

crisis, and equity markets posted extremely steep

percentage falls. Whilst markets have recovered to a

degree, there still remains uncertainty over the duration

and continued impact of the pandemic.

The Group portfolio contains a proportion of short-maturity

bonds which could be sold relatively quickly ifnecessary.

Recent stress and scenario testing has highlighted that the

largest impacts would be on the Group’s asset portfolio. The

Group believes that the risks from global financial instability

are being appropriately monitored.

Potential effects of Brexit

The Brexit transition period following the UK leaving the

EU ended at 11pm on 31 December 2020. A trade and

co-operation agreement had been agreed, tariffs on

goods entering the UK from the EU were avoided and the

more severe risks identified in connection with a so-called

‘no-deal’ Brexit have not materialised.

Key risks identified as potentially arising in the context of

disruption following the end of the transition period

included financial impacts (for example, if credit spreads

widened) and operational impacts (for example, if goods

were delayed at the EU/UK border). Other risks identified

included risks of changes to the value of sterling, inflation,

recession, recruitment and retention of people, impacts

on travel, and potential changes to tax and regulation.

Some of these risks could still occur to some degree and

we continue to monitor developments.

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. Accordingly, following approval from the

Central Bank of Ireland the Group established an Irish

branch in the Republic of Ireland with effect from the end

of the transition period.

Emerging risks

Emerging risks are defined in the Group as newly

developing risks that are often difficult to quantify but

may materially affect the Group. Emerging risks are

usually highly uncertain risks which are external to the

Group. The Group has in place an emerging risks process

which enables it to:

– have a proactive approach to emerging risk

management;

– identify, manage and monitor a broad range of potential

emerging risks; and

– mitigate the impact of emerging risks which could

impact the delivery of the Group’s Strategic Plan.

The Group records emerging risks within an Emerging

Risk Register. An update on emerging risk is presented to

the Board Risk Committee annually and is supplemented

by deep dives into selected emerging risks. During 2020,

the Group Risk function worked with first line of defence

subject matter experts to enhance the quality and detail

of emerging risk updates.

The Covid-19 pandemic was not included within the

Emerging Risk Register as an emerging risk, as it has

emerged and is impacting and is reflected in our current

Group risk profile. However, ‘Global Pandemic’ remains on

the Emerging Risk Watchlist for monitoring, which

focuses on the potential for a similar type of outbreak in

years to come. Many of the lessons from the Covid-19

situation can be applied to how the Group would respond

to another global pandemic.

The Covid-19 pandemic continues to challenge the way

the industry operates, both now and in the future. Second

line of defence and first line of defence subject matter

experts continue to monitor potential threats and

opportunities which may impact the Group and the wider

industry, as the ‘new normal’ becomes clearer.

The most notable emerging risks are outlined on the

following page.

www.directlinegroup.co.uk 73

Risk management continued

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 three

of these categories can manifest themselves through a

range of existing risks within the material risk register,

including insurance, market, operational, strategic and

reputational risks.

Following the issue of the PRA’s Supervisory Statement

SS3/19, the Group has appointed the CRO as the Senior

Management Function holder for Climate Change and put

an initial plan in place to address the expectations set out

in the supervisory statement.

The Group has updated risk policies and minimum

standards explicitly to reference the risks from climate

change, and we reviewed climate-related key

performance indicators for energy usage and emissions

across the business throughout H2 2020, to help inform

future climate-related financial disclosures.

The risks and impacts of climate change are wide ranging;

the Group is focusing increasingly on climate change,

withrelated risk management activity which includes

monitoring climate change through the emerging risk

process, forming a Climate Change Working Group and

continuing its journey to implement the recommendations

of the Financial Stability Board’s Taskforce on Climate-

related Financial Disclosures (“TCFD”).

As part of embedding the management of these climate-

related financial risks in 2021, the Group will take part in

the Bank of England’s Climate Biennial Exploratory

Scenarios exercise. This stress testing exercise aims to

understand the impact on the Group of future climate

scenarios incorporating physical and transition risks.

Ethical use of data

The Group identified the ‘failure to establish an ethical

wayto use data’ as an emerging risk in H2 2019, with

activity underway to mitigate against associated risks.

Theindustry and policymakers’ view of this risk is still

emerging, as legislation and regulation in this area is yet

to mature; however, it is a growing area of focus for the

Group’s regulators and for the Group itself.

A group of stakeholders including the Chief Data Officer

and the Privacy & Information Management team has

been established to provide visibility of the challenge

forthe Group, and a working group has been established

to gather external views and create visibility for the

required timelines, and to provide the focus required

tomove development of a data ethics framework at

anappropriate pace.

The Group has been outlining a proposed approach for

the management and governance of data ethics. Work

will continue in 2021 to confirm and embed the proposed

principles-based approach. In addition, we have

commenced work to determine how the Group could best

incorporate emerging data ethics considerations into

current customer conduct processes and forums.

In accordance with Provision 31 of the 2018 UK

Corporate Governance Code, the Directors have

assessed the prospects of the Group for a period

longer than the minimum 12 months required by the

going concern statement.

The Strategic report, on pages 1 to 75, sets out the

Group’s financial performance, business environment,

outlook and financial management strategies. It

covers how the Group measures its regulatory and

economic capital needs and deploys capital. You can

find discussion about the Group’s principal risks and

risk management on pages 69 to 74. Note 3 to the

consolidated financial statements starts on page 172

and sets out financial disclosures relating to the

Group’s principal risks. This covers insurance, market

and credit risk; and the Group’s approach to

monitoring, managing and mitigating exposures to

these risks.

Every year, the Board considers the Strategic Plan and

an Own Risk and Solvency Assessment (“ORSA”) for

the Group. The Plan makes certain assumptions in

respect of the competitive markets in which the

Group operates, and the delivery and implementation

of the new customer systems. Appropriate aspects of

the Strategic Plan are stress-tested to understand and

help set capital and other requirements.

When reviewing the Strategic Plan, the Board

considered the Group’s prospects over the period that

the plan covered and the conclusions of the ORSA,

based on the Group’s anticipated activities as set out

in the strategic plan. This review includes reviews of

solvency, liquidity, assessment of principal risks and

risk management over a three-year period from 2020

to 2022 with a further two years of indicative planning

from 2023 to 2024. The first year following approval of

the business plan has greater certainty, so it was used

to set detailed budgets across the Group. Outcomes

Viability statement

74 Direct Line Group Annual Report and Accounts 2020

Strategic Report

Penny James

Chief Executive Officer

5 March 2021

for the subsequent years in the plan are less certain.

However, the plan provides a robust planning tool for

strategic decisions. The Board recognises that, in a

strategic plan, uncertainty increases over time and,

therefore, future outcomes cannot be guaranteed or

accurately predicted.

The Board has assessed the principal risks of the

Group over the duration of the planning cycle. The

assessment included considering the possible

challenging market conditions due to the impact of

Covid-19 on the economy and customer behaviour,

the possible adverse implications of Brexit, the

implementation of the FCA’s Pricing Practices Review

and change risk. The 2020 Plan modelled a number of

different scenarios which were directly and indirectly

influenced by the Covid-19 pandemic. These included

delay to improvements in technological capability, the

impact of Covid-19 on claims frequency levels and the

impact of Brexit on the investment return. The key

judgements applied were in relation to the likely time

period of Covid-19 related restrictions, and the

subsequent impact on customer behaviour and the

economic recovery.

Covid-19 pandemic

– The Plan has been stress tested for the impact of a

deep UK recession triggered by the end of furlough

and extended lockdown throughout the first half of

2021. This is a severe but plausible scenario that we

have used to challenge our contingent

management actions.

Brexit

– Following the Brexit deal announced in December

2020 the likelihood and severity of impacts relating

to a disorderly Brexit have significantly reduced.

However, the Plan has been stress tested for the

potential impact of adverse consequences on

investment values.

FCA General Insurance Pricing Practices Review

(“PPR”)

– The FCA’s consultation period ended in January

2021 and the final report has not yet been published.

The Group’s Plan includes a scenario for the impact

of the PPR from 2022 onwards based upon the

differential between new business and renewal

prices. The Group considered a spectrum between

two potential outcomes. A series of management

actions have been identified to mitigate the impact

of this scenario.

In addition, the Group’s Risk Function has carried out

an assessment of the risks to the plan and the

dependencies for the success of the Strategic Plan.

This included running stress tests on the Plan to

consider the 1-in-8-years and 1-in-25-years loss

simulations based on the internal economic capital

model. In both cases, the Group remained within its

risk appetite range for its solvency capital ratio and

did not breach the Group’s solvency capital

requirement after contingent management actions in

any of the years covered by the plan (2020 to 2024).

A reverse stress test was also performed to identify

the most probable combination of stresses that would

result in capital loss and thus threaten the viability of

the Group, i.e. a reduction of own funds to below the

solvency capital requirement. The test combined a

number of independent events and concluded that

the Group’s solvency capital requirement would not

be breached after management actions.

Based on the results of these reviews, the Board has

areasonable expectation that the Company and the

Group can continue in operation, meet liabilities as

they fall due and provide the appropriate degree of

protection to those who are, or may become,

policyholders or claimants in the period to 31

December 2024.

Statement of the Directors in respect

of the Strategic report

The Board reviewed and approved the Strategic report

onpages 1 to 75 on 5 March 2021.

By order of the Board

www.directlinegroup.co.uk 75

Dear shareholders and other stakeholders,

On behalf of the Board, I am pleased to present the

Corporate Governance report for the year ended

31December 2020.

I have been very impressed by the way the Group has

responded to the challenge presented by Covid-19.

I am extremely proud of our people who have played

suchanimportant part in continuing to deliver much

needed services throughout the crisis. I am pleased to

report that our governance operated well in a different

working environment.

As Chair, it is my role to provide leadership of the Board

toensure that it operates effectively. In the light of the

impact of Covid-19 and the unprecedented level of

uncertainty for the business, the Board held a number of

unscheduled meetings to consider significant operational

matters, as well as to monitor the Group’s solvency

through a period of market volatility.

Your Board is committed to underpinning all of the

Group’s activities with the highest standards of corporate

governance. This section of our Annual Report & Accounts

explains how your Board seeks to ensure that we have

effective corporate governance in place to help support

the creation of long-term sustainable value for all our

shareholders and other stakeholders.

The Board endorses the UK Corporate Governance Code

2018 (the “Code”), which applied to our 2020 financial year,

and the related FRC Guidance on Board Effectiveness.

We seek to ensure that our governance framework

remains aligned with best practice, consistent with the

Code. Throughout the year ended 31 December 2020, the

Company complied with the Principles and Provisions set

out in the Code.

Sustainability is at the heart of how we think about our

business. We have always been conscious of our broader

role in society, giving something back to our local

communities and fostering social mobility. Further

information on our sustainable business model can be

found in the Strategic report.

Chair’s introduction

There is a duty, enshrined in the Companies Act 2006,

foryour Directors to act in the way each of us considers,

ingood faith, would be most likely to promote the success

of the Company for the benefit of its members as a whole,

having regard to various matters identified in the

legislation. In this Annual Report & Accounts, we have

detailed the stakeholders and issues which the Directors

considered when discharging this duty throughout the

year. Our formal statement in relation to Section 172(1) of

the Companies Act 2006 appears on page 10.

I would like to thank you for your support and look forward

to hearing your views as we prepare for our forthcoming

AGM on Thursday, 13 May 2021.

Purpose, culture and values

The Board recognises the importance of its role in setting

the tone of the Group’s culture, aligning it with our

purpose, values and strategy, and embedding it

throughout the Group. The Board aims to foster an open

and collaborative culture based on our vision and purpose,

supporting decisions that are best for our shareholders,

whilst having regard to the interests of our other

stakeholders. Our vision, purpose, values and Code of

Business Conduct are central to the Group’s culture.

Weencourage our people to be curious, to be aligned on

outcomes, to build trust, encourage simplicity, empower

their teams and continually test, learn and adapt.

Communication with our shareholders and other

stakeholders is extremely important to us. During 2020,

directors attended virtual meetings with major investors

to ensure their views were considered and our objectives

were understood. For the safety of our shareholders and

colleagues, we held a closed AGM in 2020 and encouraged

shareholders to submit questions in advance of the

meeting. In 2021, acknowledging that restrictions on

public gatherings may remain in place, we plan to enable

shareholders to participate in our AGM electronically.

Shareholders are encouraged to contact us by email

at[email protected].

Our Governance

Danuta Gray

Chair of the Board

76 Direct Line Group Annual Report and Accounts 2020

Succession planning and Board changes

There have been changes to our Board since last year’s

AGM. I succeeded Mike Biggs as Chair in August 2020

andAdrian Joseph OBE joined as an independent

Non-Executive Director in January 2021.

Jane Hanson has served as a Non-Executive Director for

over nine years and will step down from the Board at the

conclusion of the 2021 AGM.

The Board recognises the benefit of recruiting leaders

wholive the Group’s culture and values and represent

adiversity of gender, ethnicity, cognitive strengths

andsocio-economic, educational and professional

backgrounds. For a wider understanding of the skills and

experience of our Board, see pages 78 to 80 and pages 106

to 108.

The Nomination and Governance Committee continues

toreview succession plans both for the Board and at

executive level each year.

In early 2021, three levels of the emergency succession

plan were invoked to provide cover for Tim Harris’s leave

ofabsence while he cared for a member of his family

receiving medical treatment: Neil Manser stepped up as

Acting Chief Financial Officer; Jasvinder Gakhal as Acting

Chief Strategy Officer and Rebecca Clapham as Interim

Managing Director of Direct Line for Business.

Further information on our diversity policy, our approach

to succession planning and Board appointments can be

found in the Nomination and Governance Committee

report on pages 106 to 108.

Effectiveness and evaluation

As Chair, one of my principal objectives is to ensure that

the Board includes a body of Non-Executive Directors with

the skills and experience to be able to support and

challenge our Senior Management in developing and

executing an ambitious strategy for the benefit of our

shareholders and other stakeholders. In accordance with

the Code, we conduct evaluations of the effectiveness of

the Board and its Committees annually, including an

externally facilitated review every third year. The 2019

review was facilitated by Robert Goffee, Professor of

Organisational Behaviour at the London Business School,

who had no other connection with the Company or any

individual Director.

In 2020, having recently been appointed as Chair, I chose

to conduct the effectiveness review myself. Building on

themes identified by Professor Goffee, this year’s review

focused on the value capable of being added by

Non-Executive Directors from their experience, the

emphasis on strategic issues on the Board’s agenda, the

Board’s ability to challenge executive performance based

on the quality of information provided, and the external

sources of insight available.

As part of the annual evaluation process, all Non-Executive

Directors were assessed as being independent and able to

provide a valuable and effective contribution to the Board.

Suggestions for further improving effectiveness that were

raised during the review process have been taken into

consideration by the Board. Further details can be found

on page 94.

Remuneration

The Board has delegated responsibility to the Remuneration

Committee for the remuneration arrangements for

theChair, Executive Directors and Senior Management.

TheRemuneration Committee also reviews workforce

remuneration and related policies and the alignment

ofincentives and rewards with the Group’s culture.

The Group’s Remuneration Policy was approved at the

2020 AGM and the current Policy will remain in place for

afurther two years.

Further details on the work of the Remuneration

Committee can be found in the Directors’ remuneration

report which begins on page 113.

Annual General Meeting

Direct Line Insurance Group plc’s 2021 AGM will be held on

Thursday 13 May 2021 at 11.00 am. Full details including the

resolutions to be proposed to our shareholders can be

found in the Notice of AGM which will be made available

on our corporate website.

The outcome of the resolutions put to the AGM, including

poll results detailing votes for, against and withheld, will

be published on the London Stock Exchange’s and the

Company’s websites once the AGM has concluded.

Yours sincerely,

Danuta Gray

Chair of the Board

Our Code of Business Conduct

Your Board maintains strong relationships and

regularinteraction with our shareholders and

otherstakeholders. Their continued support

forourstrategic aims is important. Visit

www.directlinegroup.co.uk for more information.

UK Corporate Governance Code 2018

Board leadership and company purpose

Read more on pages 113 to 139

“The Board recognises the importance of its

role in setting the tone of the Group’s culture

and embedding it throughout the Group.”

For more on communication with major investors, see

page 88.

www.directlinegroup.co.uk 77

Governance

Danuta Gray

Chair of the Board

Appointed: February 2017

Biography

Danuta is Chair of the Nomination and

Governance Committee and was

appointed as Chair of the Board in August

2020. The Board benefits from her previous

experience as Chair, Chief Executive and

NED (including two positions as Chair of

Remuneration Committees), significant

experience in sales, marketing, customer

services and technology and in leading

andchanging large businesses.

Danuta was Chair of Telefónica in Ireland

until 2012, having previously been its Chief

Executive from 2001 to 2010. During her

nine-year tenure as Chief Executive, she

increased the customer base from just

under 1 million to over 1.7 million. Before

working at Telefónica, Danuta held various

senior positions within BT Group from 1984

to 2001. Until 2018, Danuta was a NED and

Chair of the Remuneration Committee at

both PageGroup plc and Old Mutual plc.

Current external appointments

–

Senior Independent Director of

Aldermore Group plc (standing down

March 2021)

– Non-Executive Chair of St Modwen

Properties plc

– Non-Executive member of the Ministry

of Defence Board

Penny James

Chief Executive Officer

Appointed: November 2017

Biography

Penny was CFO of Direct Line Group until

her appointment as CEO in May 2019.

TheBoard benefits from Penny’s deep

understanding of our sector as well as her

leadership skills, financial and risk expertise,

strategic thinking and cultural alignment.

As CEO, Penny is leading both the delivery

ofthe Group’s short-term strategic

imperatives, including technological

andbusiness transformation, and the

development of the next stage of our

strategy of targeting long-term sustainability.

Penny was previously Group Chief Risk

Officer and Executive Director at

Prudential, where she was responsible for

leading risk oversight globally. Before this,

she was Director of Group Finance at

Prudential. Penny was previously Group

CFO at Omega Insurance Holdings Limited

and CFO, UK General Insurance, at Zurich

Financial Services. She was a NED of

Admiral Group plc from 2015 to 2017. She is

an Associate of the Institute of Chartered

Accountants in England and Wales.

Current external appointments

–

Member of the Association of British

Insurers Board

– Deputy Chair of the FCA Practitioner

Panel

– Member of the Build Back Better

Business Council

Board of Directors

Tim Harris

Chief Financial Officer

Appointed: October 2019

Biography

The Board benefits from Tim’s many years

of experience as a finance director in the

insurance industry, his detailed knowledge

of capital markets and his track record of

successfully leading finance transformation

programmes.

Tim was Deputy Chief Executive and Group

Finance Director of the Royal London

Group until July 2019. He joined Royal

London as Group Finance Director in 2014

and was additionally appointed as Deputy

Chief Executive in 2018. Before joining

Royal London, Tim had been Group CFO

ofTorus Insurance, Deputy Group CFO

andChief Capital Officer of Aviva plc and

aPartner in the Global Capital Markets

practice of PricewaterhouseCoopers. Tim is

also a Fellow of the Institute of Chartered

Accountants in England and Wales and a

Chartered Insurance Practitioner.

In January 2021, we announced that Tim

would be taking a temporary leave of

absence. During the interim period, Neil

Manser is Acting Chief Financial Officer.

Current external appointments

–

Member of the Association of British

Insurers Board

– Chair of the Prudential Financial and

Taxation Committee of the Association

of British Insurers

– Member of the PRA Practitioner Panel

Audit Committee

Board Risk Committee

Sustainability Committee

Investment Committee

Nomination and Governance Committee

Remuneration Committee

Key for Committee membership

78 Direct Line Group Annual Report and Accounts 2020

Jane Hanson

Non-Executive Director

Appointed: December 2011

Biography

Jane Hanson is Chair of the Board Risk

Committee.

Jane has extensive experience of risk

management, corporate governance

andinternal control. She also has wide

experience of developing and monitoring

customer and conduct risk frameworks

and overseeing IT and transformation

programmes.

Jane spent her early career with KPMG,

working in the financial sector, becoming

responsible for delivering corporate

governance, internal audit and risk-

management services in the north of

England. Jane has also held a number of

executive roles, including Director of Audit,

and Risk and Governance Director at

Avivaplc. She is a Fellow of the Institute

ofChartered Accountants in England

andWales.

Jane has her own financial sector consulting

business and is also a magistrate.

Current external appointments

–

Non-Executive Director of William Hill plc

– Non-Executive Director of Rothesay Life plc

– Non-Executive Director of Welsh Water

– Honorary Treasurer of the Disasters

Emergency Committee

– Chair and Non-Executive Director of

Reclaim Fund Limited

Sebastian James

Non-Executive Director

Appointed: August 2014

Biography

Sebastian James is Chair of the

Sustainability Committee.

The Board benefits from Sebastian’s

extensive experience in retail and

consumer practice at large groups,

hisdetailed understanding of the UK’s

consumer markets, products and brands

aswell as his strategic and operational

experience running Dixons Carphone plc

and Boots.

Until 2018, Sebastian was Group Chief

Executive of Dixons Carphone plc, having

previously held the role of Group Chief

Executive of Dixons Retail plc from 2012.

Before this, he was CEO of Synergy

Insurance Services Limited, a private equity

backed insurance company, and was

previously Strategy Director at Mothercare

plc. Sebastian has a degree in law from the

University of Oxford and an MBA from

INSEAD. He began his career at The Boston

Consulting Group.

Current external appointments

–

Managing Director of Boots UK, subsidiary

of Walgreens Boots Alliance, Inc

– Senior Vice President of Walgreen Boots

Alliance, Inc

– Trustee of the Museum of Modern Art

Limited

Mark Gregory

Non-Executive Director

Appointed: March 2018

Biography

Mark Gregory is Chair of the Investment

Committee and interim Chair of the

Remuneration Committee.

The Board benefits from his previous

extensive experience and knowledge of the

financial services sector, particularly in life

and general insurance, gained through his

roles at Legal & General. Additionally, he

has a detailed understanding of the retail

sector and customer service.

Mark previously held the role of Group CFO

and Executive Director at Legal & General

until 2017, and was CEO of Merian Global

Investors from January 2019 to August 2020.

During his 19-year career at Legal &

General, he held a variety of senior roles

including CEO of the Savings business,

Managing Director of the With-Profits

business, and Resources and International

Director. Before joining Legal & General,

Mark held senior financial and business

development roles at ASDA and Kingfisher.

Mark is an Associate of the Institute of

Chartered Accountants in England

andWales.

Current external appointments

–

Chair of Remuneration Committee and

Non-Executive Director of Entain plc

Fiona McBain

Non-Executive Director

Appointed: September 2018

Biography

The Board benefits from Fiona’s profound

knowledge of the financial services

industry and her previous extensive

experience as both a business leader and

an auditor makes her well suited to her role

as a member of the Audit, Board Risk and

Investment Committees.

Fiona has over 30 years’ experience in retail

financial services, both in the industry and

as an auditor, in the UK and the USA. She is

an Associate Member of the Institute of

Chartered Accountants in England and

Wales, qualifying as an accountant early on

in her career at Arthur Young (now Ernst &

Young). Until January 2019, she was

Vice-Chair of Save the Children UK and a

Trustee Director of the Humanitarian

Leadership Academy. Previously, Fiona

served as CEO of Scottish Friendly Group

for 11 years, before which she was Scottish

Friendly Group’s Finance Director.

Current external appointments

–

Chair of Audit Committee and Non-

Executive Director of Dixons Carphone

plc

– Chair and Non-Executive Director of the

Scottish Mortgage Investment Trust plc

– Chair of Audit Committee and Non-

Executive Director of Monzo Bank

Limited

www.directlinegroup.co.uk 79

Governance

Board of Directors continued

Dr Richard Ward

Non-Executive Director and Senior

Independent Director

Appointed: January 2016

Biography

Richard’s previous experience as a Chief

Executive, a Non-Executive Director and a

Chair makes him well suited to the role of

Senior Independent Director of the

Company. The Board benefits from his

experience in the insurance industry

andhis insight into prudential regulation.

Richard was Chief Executive of Lloyd’s

ofLondon from 2006 to 2013. He was

Non-Executive Chair of Brit Syndicates

Limited and Executive Chair of

Cunningham Lindsey from 2014 to 2018.

Hewas a Non-Executive Director of

Partnership Assurance Group plc, now part

of Just Group plc, between 2013 and 2016.

Before becoming Chief Executive of Lloyd’s

of London, Richard was previously Chief

Executive, later Vice Chair, of the

International Petroleum Exchange,

rebranded ICE Futures. Before this, he held

a range of senior positions at British

Petroleum and was a research scientist for

the Science and Engineering Council.

Richard was also a Non-Executive Director

of London Clearing House, a member of

the PwC Advisory Board and a Board

member of the Geneva Association.

Current external appointments

–

Member of the Executive Committee

ofthe Ardonagh Group

Gregor Stewart

Non-Executive Director

Appointed: March 2018

Biography

Gregor Stewart is Chair of the Audit

Committee.

The Board benefits from his wide-ranging

experience of the financial services sector,

and in particular, significant experience

gained in the insurance and investment

management sectors. His career and

experiences at Ernst & Young and Lloyds,

inparticular, make him suitable to chair

the Audit Committee.

Gregor worked at Ernst & Young for 23

years, including 10 years as a partner in

thefinancial services practice. Following his

career at Ernst & Young, he was Finance

Director for the Insurance division at Lloyds

Banking Group plc, which included

Scottish Widows, from 2009 to 2012. Gregor

is a member of the Institute of Chartered

Accountants of Scotland.

Current external appointments

–

Chair and Non-Executive Director of

Alliance Trust plc

– Chair and Non-Executive Director of FNZ

(UK) Limited

– Non-Executive Director of FNZ Group

Audit Committee

Board Risk Committee

Sustainability Committee

Investment Committee

Nomination and Governance Committee

Remuneration Committee

Key for Committee membership

Adrian Joseph OBE

Non-Executive Director

Appointed: January 2021

Biography

Adrian Joseph joined BT Group in February

2020 as Managing Director, Group Data

and Artificial Intelligence. Prior to this he

was a senior Partner at Ernst & Young for

three years and the Head of the UK Data

and Analytics practice for Financial

Services. He joined Ernst & Young with

overten years’ cloud, digital, platform, data

science and analytics experience gained

insenior leadership roles at Google, and

afurther 15 years in industry and

consultancy. This included two years as the

main Board member responsible for Sales

and Marketing at Trafficmaster Plc.

Adrian was a Non-Executive Director at the

Home Office from 2016 to 2020, where he

sat on the Home Office Data Board and

advised on data science, digital

transformation, and diversity and inclusion.

From January 2012-2017, Adrian was Chair

of the Race Equality Board, the race

campaign of Business in the Community

charity. In 2014 he was appointed to the

main Board of Business in the Community

and he continues to serve as an Advisor.

Hewas awarded an OBE for services to

equality and diversity in business in the

2019 New Year’s honours list and was

announced as the most influential black,

Asian and minority ethnic technology

leader in the UK by the Financial Times and

Inclusive Boards in 2018.

Adrian’s expertise in data analytics, AI

andautomation, as well as his passionate

advocacy for diversity and inclusion, benefit

the Board as it oversees the execution of

astrategy of which these issues are a

fundamental part.

Current external appointments

–

Member of HM Government’s AI Council

80 Direct Line Group Annual Report and Accounts 2020

Executive Committee

Steve Maddock

Chief Operating Officer

Joined: 2010

Experience and qualifications

Steve joined the Group in 2010 and is Chief

Operating Officer.

Steve has nearly 30 years’ experience of

theinsurance industry. He is responsible

forleading the Group’s Claims, Information

Technology, Information Security,

Procurement and Business Services

functions.

Steve’s previous roles include Director

ofStrategic and Technical Claims at RSA,

Director of Claims and Customer Service

atCapita, and Director of Operations at

AMP. Steve is also Chair of the Motor

Insurers’ Bureau and a member of the

Association of British Insurers’ General

Insurance Committee.

Mark Evans

Managing Director, Marketing & Digital

Joined: 2012

Experience and qualifications

Mark joined Direct Line Group in 2012 and

is Managing Director of Marketing &

Digital. He is responsible for leading the

Group’s Marketing and Digital functions.

Before joining the Group, Mark held roles

atHSBC, 118 118 (now 118 118 Money) and

Mars Inc. He is Chair of the Advertising

Association’s Front Foot and a NED of

LearnEtAl, an EdTech digital learning

company. Mark is also co-founder of the

School of Marketing which encourages

more school children to consider a career

in Marketing.

Mark is a member of Save the Children’s

Digital Advisory Board and also a Fellow of

the Marketing Society.

Jonathan Greenwood

Managing Director, Commercial

Joined: 2000

Experience and qualifications

Jonathan joined the Group in 2000 and

isManaging Director, Commercial.

Jonathan has over 30 years’ experience of

the insurance industry. He is responsible

fordelivering the Commercial strategy,

developing customer propositions,

enhancing the Commercial brands and

delivering efficiencies within the

Commercial businesses.

Jonathan was previously Managing

Director of the Group’s Household and Life

businesses. He joined the Group as Product

and Pricing Director for UK Partnerships.

Before joining the Group, Jonathan held

roles at HBOS, MBNA and Pinnacle.

Penny James chairs the Executive Committee. In addition to Penny James and Tim Harris, the Committee

comprises the following:

Kate Syred

Managing Director of Household,

Partnerships AndData

Joined: 2000

Experience and qualifications

Kate joined Direct Line Group in 2000 and

is Managing Director of Household,

Partnerships & Data. Kate has over 20 years’

experience of the insurance industry. Kate

is responsible for delivering the strategy

and developing products for the Group’s

Home, Pet, Travel, Life and Private

Businesses as well as leading the

Partnerships division. She is Chair of the

Group’s Diversity Network Alliance.

Previously, Kate was Commercial &

Marketing Director for Privilege and

launched Direct Line for Business in 2007.

Before joining the Group, Kate held roles in

Calvin Klein Cosmetics, Moore Stephens –

Vladivostok and qualified as a Chartered

Accountant with the National Audit Office.

She is also an Associate of the Royal

College of Science.

Neil Manser

Chief Strategy Officer and

ActingChief Financial Officer

Joined: 2011

Experience and qualifications

Neil joined Direct Line Group in 2011 as

Director of Investor Relations and was

instrumental in the Group’s successful IPO

in 2012. He has worked in a number of roles

within the Group, in Finance including

Strategy and within the business, as

Managing Director of NIG. Neil was

appointed Deputy CFO in August 2018

before becoming Chief Strategy Officer

inMarch 2020. He is now responsible for

leading the Group’s corporate strategy.

On 11 January 2021, it was announced that

Neil would be Acting Chief Financial Officer

during Tim Harris’s leave of absence.

Neil has extensive industry and capital

markets experience prior to joining the

Group having previously worked at Brit

Insurance and as an equity analyst at

Merrill Lynch and Fox-Pitt, Kelton. He

qualified as a Chartered Accountant with

Ernst & Young and is an Associate of the

Institute of Chartered Accountants in

England and Wales.

Gus Park

Managing Director of Motor, Pricing

And Underwriting

Joined: 2011

Experience and qualifications

Gus joined Direct Line Group in 2011 and

isManaging Director of Motor, Pricing

&Underwriting. He is responsible for

leading the Group’s Personal Motor

business across all brands, as well as the

Pricing and Underwriting function across

all consumer products.

Gus joined the Direct Line Group as

Strategy Director before becoming

Commercial Director for the Group’s Motor

insurance business. Following this he was

Managing Director of Motor Insurance and

Business Development.

Gus has over 25 years’ experience in a wide

range of sectors and roles, having started

his career as a civil servant for the Home

Office. After this he moved into strategy

consulting for the Boston Consulting

Group, and then into retail banking for

Bradford & Bingley.

In February 2020, Gus became a

Non-Executive Director of Five AI Inc.

www.directlinegroup.co.uk 81

Governance

Vicky Wallis

Chief People Officer

Joined: 2020

Experience and qualifications

Vicky is Chief People Officer at Direct Line

Group and has a wealth of experience

inbuilding HR functions, developing

cultural frameworks and enhancing

peoplecapabilities.

Vicky joined the Group having worked

previously at Santander where she was the

HR Director for five years. Having operated

in international organisations with global

roles and projects in India, Romania, EMEA

and the US, Vicky has experience in finance,

retail and mobile telecommunications.

Vicky is accredited by the Chartered

Institute of Personnel Development

andholds a Master’s degree in

Organisational Leadership.

Humphrey Tomlinson

General Counsel

Joined: 2011

Experience and qualifications

Humphrey joined the Group in 2011 and

isGeneral Counsel.

Humphrey has over 30 years’ experience

asa solicitor. He is responsible for the

Group Legal function and oversees a range

of areas of legal advice and services. He has

been a Non-Executive Director of The

Floow Limited since July 2014.

Humphrey’s experience includes advising

on corporate and commercial matters,

steering corporate transactions in the UK

and internationally, managing legal risk

and dealing with corporate governance

issues. Before joining the Group, Humphrey

was Group Legal Director at RSA and prior

to that he was a corporate lawyer with the

City law firm, Ashurst Morris Crisp.

José Vazquez

Chief Risk Officer

Joined: 2012

Experience and qualifications

José joined the Group in 2012 and is Chief

Risk Officer.

José has over 25 years’ experience of the

insurance industry. He is responsible for the

Group’s Risk function and Compliance

function and is a Fellow of the Institute

ofActuaries.

José was previously Global Chief Risk

Officer and Group Chief Actuary at HSBC

Insurance. Before joining HSBC, José

worked for Zurich Insurance, first in its

London Market Operations, then as Chief

Actuary International Business Division

(Asia, Latin America and Africa) and lastly

as Chief Actuary in the UK.

Executive Committee continued

Jasvinder Gakhal

Acting Chief Strategy Officer

Joined: 2005

Jasvinder attends the Executive

Committee meetings in her capacity

asActing Chief Strategy Officer, and as

suchshe is leading the Group Strategy

andGroup Communications and

Sustainability functions.

Experience and qualifications

Jasvinder joined Direct Line Group in 2005.

In January 2021, it was announced that

Jasvinder would be Acting Chief Strategy

Officer whilst Neil Manser took on the role

of Acting Chief Financial Officer.

Before stepping into the Acting Chief

Strategy Officer role, she was Managing

Director of Direct Line for Business, leading

the growth of the direct Commercial

Insurance business.

Prior to this Jasvinder has held roles

leading the Pet Insurance portfolio, Head

ofDirect Line Home and across the

Partnerships business.

Before joining Direct Line Group, Jasvinder

was a maths teacher.

82 Direct Line Group Annual Report and Accounts 2020

Corporate governance report

Corporate Governance Statement

This Corporate Governance Statement explains

keyfeatures of Direct Line Insurance Group plc’s

(the “Company”) governance structure and how it

measures itself against the standards set out in the UK

Corporate Governance Code 2018 (the “Code”). The Code

set by the Financial Reporting Council (the “FRC”) applied

to the financial year ended 31 December 2020. For more

information about the Code, visit the FRC’s website at

www.frc.org.uk. This Corporate Governance Statement

fulfils the requirements of the FCA’s Disclosure Guidance

and Transparency Rule 7.2 (“DTR 7.2”). For full details refer

to the Directors’ report on pages 140 to 144.

Corporate governance report

This report explains the Board’s role and activities, and how corporate governance

operates throughout the Group.

Board leadership &

company purpose

– The Board

– Board activities

– The Board and culture

Division of

responsibilities

– Governance framework and

structure

– The structure of the Board, Board

Committees and executive

management

Composition,

succession &

evaluation

– Board composition

– Development, information,

support, induction, training

– Diversity and inclusion

– Board effectiveness

Audit, risk &

internal control

– Fair, balanced and

understandable assessment

– Risk management and internal

control systems

– Audit Committee report

– Board Risk Committee report

102

Remuneration

– Directors’ Remuneration Report 113

The Company complied with all of the principles and

provisions of the Code throughout the financial year

andup to the date of this Annual Report & Accounts.

Further details of how the Company applied the Code’s

principles and complied with its provisions can be found

in the following sections of the Annual Report & Accounts.

www.directlinegroup.co.uk 83

Governance

The Board

The Board receives regular updates on the views of the

Company’s shareholders from the Group’s brokers and

directly from institutional shareholder meetings with

senior executives and the Chair. The Board has regard

tothe interests of a range of stakeholders including

customers, employees and suppliers when agreeing

theGroup’s strategic and financial plans and in all other

decision-making. Illustrations of the breadth and depth

ofthe Board’s regard to stakeholders’ interests are

contained in the Sustainability section of the Annual

Report & Accounts on pages 44 to 68.

There is a Schedule of Matters Reserved for the Board,

which contains items reserved for the Board to consider

and approve, relating to strategy and management,

material contracts, financial reporting and controls,

internal controls and risk management, Board

membership and succession planning, corporate

governance, structure and capital, and delegation

ofauthority.

In addition to the Schedule of Matters Reserved for

theBoard, each Board Committee has written terms of

reference defining its role and responsibilities. The terms

of reference of the Board Committees can be found on

our corporate website. Further details regarding the role

and activities of the Board and its Committees can be

found below and in the Directors’ remuneration report

which begins on page 113.

The role of the Board

Pages 89 and 90 summarise the role of the Board, its

Committees and the responsibilities of the Chair, the

Senior Independent Director, the Non-Executive Directors,

the Executive Directors and the Executive Committee.

Whilst some of the key areas of the Board responsibility

are summarised in the following paragraphs, these are not

intended to be an exhaustive list.

Leadership

The Board is the main decision-making body of the

Company. It provides leadership within a framework

ofprudent and effective controls. The Board has clear

divisions of responsibility and seeks the long-term

sustainable success of the Group. Information on how

opportunities and risks to the future success of the

business have been considered and addressed, and about

the sustainability of the Company’s business model, is set

out in the Strategic report which begins on page 1.

Acting fairly between members and engagement

methods

The Board organises and directs the Group’s affairs in a

way that it believes will help the Group succeed for the

benefit of its members as a whole, whilst having regard

toits stakeholders generally.

The Group seeks to ensure that it acts fairly between all

members and considers all types of investors (including

our institutional investors and private shareholders)

whenmaking decisions that impact them.

Board leadership and company purpose

Corporate governance report continued

The Group ensures that it communicates the information

that its investors require, using: traditional methods,

suchas annual report & accounts, RNS newswires and

corporate and press releases; in person; and, (wherever

possible) by virtual means. In 2020, virtual engagement

included investor meetings attended by the Chair, CEO

and CFO and broker attendance at Board meetings.

Where appropriate, communication with investors is fed

back to the Board.

For more information on how shareholders will be able to

participate in the 2021 AGM see page 223 and for further

information on communication with major investors see

page 88. Additional information on how the Board has

regard for the Group’s wider stakeholders and other

relevant matters can be found on pages 86 to 87.

Operations

The Board is responsible for overseeing the

implementation of a robust control framework to allow

effective management of risk. The Board supervises the

Group’s operations, with a view to ensuring they are

effectively managed, that effective controls are in place,

and that risks are assessed and managed appropriately.

Financial performance

The Board sets the financial plans, annual budgets and

key performance indicators and monitors the Group’s

results against them. The Board is accountable to

investors for financial and operational performance.

Strategy

The Board oversees the development of the Group’s

strategy and monitors management’s performance and

progress against the strategic aims and objectives.

Vision and purpose

Our vision is to create a world where insurance is personal,

inclusive and a force for good. Our purpose is to help

people carry on with their lives, giving them peace of mind

now and in the future.

84 Direct Line Group Annual Report and Accounts 2020

Board meetings and activity in 2020

The activities undertaken by the Board in 2020 were intended to help promote the long-term success of the

Company. Scheduled Board meetings focused on four main themes, as detailed below:

Themes Description

Strategy and

execution

– Approving and overseeing the Group’s key strategic targets and monitoring the Group’s

performance against those targets;

– Reviewing customer experience and trends and monitoring the Group’s performance

against external brand metrics;

– Reviewing and approving key projects aimed at developing the business or rationalising

costs;

– Considering growth opportunities; and

– Reviewing the individual strategy of key business lines.

Strategic alignment

Financial

performance

and investor

relations

– Setting financial plans, annual budgets and key performance indicators and monitoring

theGroup’s results against them;

– Considering the Group’s reserving position, approving the Solvency II narrative reports and

approving financial results for publication;

– Approving reinsurance programmes and renewals;

– Approving the issuance of £260 million of Tier 2 debt in June 2020;

– Reviewing broker reports on the Group, alongside feedback from investor meetings; and

– In March 2020, the Board considered it prudent to cancel the share buyback programme

and, in April 2020, to cancel the 2019 final dividend as a result of the volatile conditions

arising from Covid-19. The Board subsequently declared a 2020 interim dividend of 7.4 pence

alongside a further special dividend of 14.4 pence to replace the cancelled 2019 final

dividend.

Strategic alignment

Risk

management,

regulatory and

other related

governance

– Reviewing and agreeing the Group’s policies;

– Setting risk appetites;

– Approving the Own Risk and Solvency Assessment (“ORSA”);

– Seeking to ensure that the Group complies with its regulatory obligations;

– Reviewing the Group’s solvency position and forecast;

– Reviewing the Group’s ESG initiatives; and

– Reviewing and approving the Group’s TCFD and Sustainability reports.

Strategic alignment

Board and

Board

Committee

governance

– Receiving reports from the Board’s Committees;

– Updating the Schedule of Matters Reserved for the Board;

– Updating terms of reference for the Board Committees;

– Receiving corporate governance updates;

– Overseeing Board and executive succession planning;

– Conducting the annual review of the Board and Board Committees’ effectiveness;

– Approving the Company’s Code of Business Conduct and conducting an annual review of

the Group’s governance framework; and

– In addition to routine business, the Board sets aside time each year outside the annual

Board calendar to hold a strategy day, giving the Directors the opportunity to focus solely on

strategic matters. In June 2020, the Board held a session to set and monitor progress against

the Group’s strategy and to discuss the Group’s long-term sustainability and its future

opportunities as well as the strategic implications of Covid-19.

Strategic alignment

Link to strategy

Be best at direct

Win on price comparison

websites

Extend our reach

Be nimble and cost efficient

Have technical edge

Empower great people

www.directlinegroup.co.uk 85

Governance

Corporate governance report continued

Board activity and stakeholder priorities

Our stakeholders are at the root of both our strategy and our values. By engaging with our stakeholders we are able

to understand who they are and what matters to them. This meant that the Group was able to react swiftly in

challenging circumstances in 2020 while still planning for the long-term sustainable success of the Company.

The Group’s Section 172(1) statement is part of the Chair’s statement in the Strategic report on page 10 and is

supported by the Group’s five-pillar sustainability strategy on pages 44 to 45 and the TCFD statement on

pages 62 to 63.

The table below provides an insight into decisions taken by the Board during 2020 which directly affect its

stakeholders. In all cases, the Board considers the likely consequences of any decision in the long term.

Stakeholder

Group Decision of the Board Considerations Further information

Customers,

suppliers

and other

business

relationships

b c

Customer metrics form part of Annual Incentive

Plantargets.

The Board approved the following:

– Code of Business Conduct;

– Group pricing approach and associated governance

and control framework;

– Prompt Payment Practice Report; and

– Covid-19 support measures for customers and

suppliers.

– Urgency of

settling claims

– Financial

difficulties of

customers

– Product offering

(range and price)

– Ease of

communication

– Customer service

– Prompt payment

– Supply chain

management

– Sustainability

– Customers

People

a b

People metrics form part of Annual Incentive Plan

targets and a people update is presented at each

Board meeting.

The Board approved the following:

– Covid-19 response to employees;

– Agile working transformation;

– Modern slavery statement;

– Code of Business Conduct;

– Whistleblowing procedures;

– Buy As You Earn Plan; and

– Free share award.

– Culture

– Employee

wellness

– Human rights

– Employee

satisfaction

– Employee

development

– Sustainability

– People

– Directors’

remuneration

report

Society

The Board gives its full support to the Force for Good

Initiative and the DLG Community Fund.

The Board approved the following:

– Code of Business Conduct;

– Modern slavery statement; and

– Board diversity statement.

– Responsible

investing

– Human rights

– The welfare of the

communities in

which we operate

– Sustainability

– Society

Planet

The Board actively supports initiatives to reduce the

Group’s impact on the environment and manage climate

change risks.

The Board approved the following:

– New measures for the investment portfolio to help

the Group to achieve net zero carbon emissions

by2050;

– Publication of commitments to setting Science-Based

Targets and becoming a 100% carbon-neutral business

from2020;

– Approval of climate change-related stress testing; and

– TCFD Report.

– ESG factors

– Climate change

– Emissions targets

– Environmental

practices

– Sustainability

– Planet

Investors

e f

d e

The Board considers feedback from investors

communicated directly and through its brokers.

The Board approved the following:

– The methods by which surplus capital should be

returned to shareholders;

– Termination of 2020 buyback programme and

cancellation of 2019 final dividend;

– Subsequent approval of the interim and special interim

dividend; and

– Annual Report & Accounts.

– Financial

performance

– Strategic delivery

– Capital returns

– FRC

recommendations

– Corporate

governance

report

86 Direct Line Group Annual Report and Accounts 2020

Board and Committee meetings

The Board and Board Committees held a number of scheduled meetings in 2020 at which senior executives, external

advisers and independent advisers were invited to attend and present on business developments and governance

matters. The Company Secretary attended all Board meetings and he, or his nominated deputy, attended all Board

Committee meetings.

The table below sets out attendance at the scheduled meetings in 2020

. Additional Board and Committee meetings

were convened during the year to discuss ad hoc business development, governance and regulatory matters and in

response to Covid-19.

Board

Audit

Committee

Board Risk

Committee

Sustainability

Committee

Investment

Committee

Nomination and

Governance

Committee

Remuneration

Committee

Chairs

Mike Biggs

6 of 6 – – – – 3 of 3 2 of 2

Danuta Gray 9 of 9 – – – – 4 of 4 3 of 3

Senior Independent

Director

Richard Ward 9 of 9 – 5 of 5 – – 4 of 4 –

Non-Executive Directors

Mark Gregory 9 of 9 5 of 5 – – 4 of 4 – 3 of 3

Jane Hanson 9 of 9 5 of 5 5 of 5 4 of 4 4 of 4 – –

Sebastian James 9 of 9 – – 4 of 4 – – 3 of 3

Fiona McBain 9 of 9 5 of 5 5 of 5 – – – –

Gregor Stewart 9 of 9 5 of 5 5 of 5 – – – –

Executive Directors

Penny James 9 of 9 – – 4 of 4 – – –

Tim Harris 9 of 9 – – – 4 of 4 – –

Executive Committee

Member

Simon Linares

1 of 1

Notes:

1. Attendance is expressed as the number of scheduled meetings attended out of the number of such meetings possible or applicable

for the Director to attend.

2. Formerly the Corporate Responsibility Committee.

3. Mike Biggs stepped down from the Board on 4 August 2020.

4. Simon Linares stepped down from the Sustainability Committee on 21 April 2020.

Link to S172(1) Companies Act 2006

the likely consequences of any decision in the long term

a b

the interests of the company’s employees

b c

the need to foster the company’s business relationships with suppliers, customers and others

the impact of the company’s operations on the community and the environment

d e

the desirability of the company maintaining a reputation for high standards of business conduct

e f

the need to act fairly between members of the company

www.directlinegroup.co.uk 87

Governance

The Board and culture

The Board is responsible for establishing the Company’s

purpose, values and strategy, promoting its culture,

overseeing its conduct and affairs, and for promoting the

success of the Company for the benefit of the members

and all the stakeholders.

The Board recognises that culture and capability are key

enablers for achieving the Group’s strategic objectives

and encourages an open and inclusive culture and an

environment in which people can be themselves.

During the year the Board championed the Group’s

culture through:

– Assessing and monitoring culture and satisfying itself

that the Group’s purpose, values and strategy are

aligned with its culture;

– Reviewing the Code of Business Conduct to ensure

that it reflects the Group’s purpose and sustainability

strategy;

– Reviewing means, for the workforce, to raise concerns

in confidence and, if they wish, anonymously

(“Whistleblowing”). Further details on the Group’s

Whistleblowing arrangements can be found on

page 105;

– Seeking feedback from our people through the

‘DiaLoGue Survey’, a tool to measure engagement,

which this year included questions on inclusivity

andculture;

– NEDs’ engagement with Employee Representative

Body (“ERB”) activities. The NEDs have an active

interest in the workings of the ERB and in the normal

course of business attend the meetings on a rotation

basis so all NEDs participate and engage with the

workforce. Whilst circumstances during the year have

made active participation difficult, our NEDs have been

kept fully informed by the Chief People Officer and

Chief Executive Officer, and the Chair has attended a

virtual ERB conference;

– Investing in and rewarding our workforce. During the

year, the Group further built on its commitment to

ensure that all of our people are rewarded fairly and

have an interest in the success of the Group.

See page 117 of the Remuneration Committee report

for more detail;

– Supporting the Strategic Leadership Development

Programme, the aim of which is to create a pipeline

ofdiverse talent for development into future senior

leaders;

– Enabling our employees to benefit from the Group’s

success. All eligible employees can participate in the

Group’s Buy As You Earn (“BAYE”) Plan which provides

a cost-effective way for all employees to acquire shares

in the Company; and

– Supporting management’s emphasis on employee

wellbeing, including mental health awareness and

financial wellbeing. For more information please see

the People section of the Sustainability Pillars on

page50.

Communication with major investors

The Group is committed to keeping investors informed

ofits strategy and progress and to ensuring appropriate

channels of communication are in place. We believe that

actively engaging with investors is fundamental to our

business. Having an active dialogue and ongoing

engagement is vital for keeping in touch with opinions

and provides the opportunity to address questions and

concerns. The Chief Executive Officer and Chief Financial

Officer frequently meet investors and the Board is also

kept up to date on investor views by the Group’s corporate

brokers who regularly attend Board meetings. The Chair

isalso available to, and has engaged with, institutional

shareholders. For more information on engagement with

investors, see page 86.

Despite the challenges that we saw with physical

meetings in 2020, the Chief Executive Officer and/or Chief

Financial Officer had the following direct engagements

with investors during 2020:

– attended 15 sell-side investor events;

– met 141 investors during 2020; and

– had 53 interactions with the top 25 largest investors.

Conflicts of interest

The Company’s Articles of Association allow the Board

toauthorise matters where there is, or may be, a conflict

between the Group’s interests and the direct or indirect

interests of a Director, or between a Director’s duties to

the Group and another person. This is in accordance with

the Companies Act 2006.

Each Director has a duty to avoid conflicts of interest. They

must declare any conflict of interest that could interfere

with their ability to act in the Group’s best interests. The

Board has authorised certain potential conflicts of interest

in this way including in relation to Directors’ external

directorships and their interests in securities of other

financial service institutions. Accordingly, the Board deals

with any actual conflict of interest or duty that might arise.

This usually would involve making sure a Director does not

participate in a relevant Board or Committee discussion

ordecision. To do this, the Company Secretary maintains

aregister of conflicts and any conflicts that the Board

hasauthorised. The Board reviews this register at each

scheduled Board meeting to ensure that each Director

applies independent judgement.

Corporate governance report continued

88 Direct Line Group Annual Report and Accounts 2020

Governance framework and structure

The Board oversees the system of governance in operation

throughout the Group. This includes a robust system

ofinternal controls and a sound Risk Management

Framework. The Board has established a risk

management model that separates the Group’s risk

management responsibilities into three lines of defence.

An explanation of these responsibilities can be found on

page 69.

The Group’s governance framework is detailed in the

Group’s High Level Control and System of Governance

Framework document. This document details how the

Group meets Solvency II and the Prudential Regulation

Authority (“PRA”) requirements to identify key functions

and to have and maintain a Responsibilities Map in

respect of the PRA and FCA’s Senior Managers and

Certification Regime requirements. The Board reviews this

document annually.

The core elements of the governance framework are the:

– Matters Reserved for the Board and the Board

Committees’ terms of reference;

– High Level Control and System of Governance

Framework document;

– Risk appetite statements, which are described on

page70;

– Enterprise Risk Management Strategy and Framework,

which is described on page 69;

– Group policies, which address specific risk areas, are

aligned to the Group’s risk appetite, and inform the

business how it needs to conduct its activities to remain

within risk appetite; and

– Minimum standards, which interpret the Group policies

into a set of requirements that can be implemented

throughout the Group.

The diagram below summarises the split of responsibilities for the different parts of the Group’s governance framework.

Matters Reserved

for the Board and

Board

Committees’

terms of

reference

High Level Control and System of

GovernanceFramework document

The Board approves

the High Level Control and

System of Governance

Framework, overarching risk

appetite statements and Group

policies following review by the

Board Risk Committee.

The Board Risk Committee

approves

the Risk Management Framework and

the policy risk appetite statements,

following review by the Risk

Management Committee

(a committee comprised of executives).

Policy owner approves

Minimum standards, subject

to non-objection from the Risk

Management Committee.

Enterprise Risk

Management Strategy

and Framework

Minimum standards

Policy risk appetite

statements

Group policies

Overarching risk appetite

statements

Division of responsibilities

www.directlinegroup.co.uk 89

Governance

Roles and responsibilities of the Board

Chair

– Guides, develops and leads the Board

– Plans and manages the Board’s business

– Oversees the governance framework

Senior Independent Director

– Acts as a sounding board for the Chair and an

intermediary for the other Directors when necessary

– Is available to shareholders if they have concerns

they cannot resolve through other channels

– Leads the Chair’s performance evaluation

Non-Executive Directors

– Challenge management in an objective and

constructive manner

– Use their wider business experience to help develop

the Group’s strategy

Executive Directors

– The CEO and CFO are members of the Board with

delegated responsibility for the day-to-day

operation of the Group and delivering its strategy

– The CEO delegates certain elements of her

authority to the Executive Committee members to

help ensure that senior executives are accountable

and responsible for managing their business and

functions

Board of Directors

Each Director brings different skills, experience and

knowledge to the Company, and the NEDs contribute

additional independent thought and judgement.

Depending on the business needs, the NEDs and the

Chair commit at least two days a month and two days a

week respectively to discharging their duties effectively in

accordance with their letters of appointment. Biographies

of the full Board can be found on pages 78 to80.

Board Committees

Full details of membership, responsibilities and activity of

each Committee throughout the year can be found on

pages 97 to 139.

Audit

Committee

Board Risk

Committee

Investment

Committee

Nomination

and Governance

Committee

Remuneration

Committee

Sustainability

Committee

The Executive Committee

The Executive Committee is the principal management

committee that helps the CEO manage the Group’s

operations. It helps the CEO:

– Set performance targets

– Implement Group strategy

– Monitor key objectives and commercial plans to help

achieve the Group’s targets

– Evaluate new business initiatives and opportunities

Biographies of the Executive Committee can be found on

pages 81 to 82.

Structure of the Board, Board Committees

andexecutive management

The following chart sets out the structure of the Board and

its Committees and highlights the responsibilities of the

Chair, the Senior Independent Director, the Non-Executive

Directors, the Executive Directors, the Company Secretary

and the Executive Committee. The role descriptions for

CEO and Chair are set out in writing and the profiles

clearly define their respective roles and responsibilities

and ensure that no one person has unlimited powers of

decision making.

The Board and Board Committees have unrestricted

access to management and external advisers to help

discharge their responsibilities. Each Committee plays a

vital role in helping the Board to operate efficiently and

consider matters appropriately.

Company Secretary

– Ensures the Directors receive accurate, timely and

clear information

– Alongside the Chair, oversees the governance

framework

The Board and Board Committees are satisfied that,

in2020, sufficient, reliable and timely information

wasreceived in order for them to perform their

responsibilitieseffectively.

The reports by each Board Committee are given in this

Annual Report & Accounts. The terms of reference for each

Committee can be found on the corporate website at:

www.directlinegroup.co.uk/en/who-we-are/governance/

board-committees.

Corporate governance report continued

Note:

1. Formerly the Corporate Responsibility Committee.

90 Direct Line Group Annual Report and Accounts 2020

Board composition

As at the date of this report, the Board comprised the

Chair, who had previously served as an independent

Non-Executive Director and was independent when

appointed as Chair; two Executive Directors; and seven

independent Non-Executive Directors, including the

Senior Independent Director. The current Directors served

throughout all of 2020, except for Adrian Joseph who

joined the Board as anindependent Non-Executive

Director on 1 January 2021. The Board has previously

announced that Jane Hanson will retire at the conclusion

of the AGM to be held in May 2021, having completed nine

years of service.

Mike Biggs, our previous Chairman, stepped down from

the Board on 4 August 2020.

Biographical details of the Directors of the Company as

atthe date of this report are set out on pages 78 to 80.

Board succession

The Nomination and Governance Committee continues

toreview succession plans both for the Board and at

executive level each year. Further information on our

diversity policy, our approach to succession planning and

Board appointments can be found in the Nomination

andGovernance Committee’s report on pages 106 to 108.

Chair succession

In March 2020, we announced that our former Chair, Mike

Biggs, had decided, after having served as Chair, to step

down from the Board later in the year.

As a first step in the process of searching for and selecting

a successor, Non-Executive members of the Board were

asked whether they might consider submitting

themselves as candidates. Danuta Gray was the only

existing member of the Board who wished to be

considered. Richard Ward, Senior Independent Director,

was asked to lead the selection process.

A Selection Board was constituted, consisting of all Board

members except Mike Biggs, the outgoing Chair, and

Danuta Gray, the internal candidate. The framework for

the thorough and rigorous selection process, and the

terms of reference for the Selection Board, were defined

with the assistance of the Company Secretary. The

Selection Board authorised Richard Ward and Penny

James to appoint an executive search firm to assist in

ensuring that a thorough review of both internal and

external candidates was carried out.

Following presentations by shortlisted firms, Russell

Reynolds, which is a signatory to the Voluntary Code

ofConduct for Executive Search Firms, and has no other

connection with the Company or any of its Directors, was

selected. Russell Reynolds’ team was led by Julia Budd

and Laura Sanderson.

In a series of interviews with Richard Ward and Russell

Reynolds, each member of the Selection Board indicated

the skills, experience and characteristics that they thought

would be important in a new Chair. Based on the criteria

defined as a result of consultation with Selection Board

members, Russell Reynolds proposed a list of eligible

external candidates, which the Selection Board refined

into a shortlist of candidates to be approached.

The Selection Board acknowledged from the outset that

Danuta Gray was an extremely strong, well-qualified and

highly regarded candidate. Following approaches to

external candidates, interviews by members of the

Selection Board and the resulting further refinement

ofthe shortlist, the Selection Board invited Danuta Gray

topresent her proposed approach to the role of Chair.

In March 2020, the Selection Board resolved unanimously

that Danuta was the preferred candidate, subject to

regulatory approval and to confirmation of the timing

ofsuccession. In May 2020, having obtained regulatory

approval for Danuta Gray’s proposed appointment, the

Board made its decision to appoint Danuta as Chair and

we announced that she would succeed Mike Biggs as

Chair with effect from 4 August 2020.

Board induction and training

All new Directors appointed to the Board undertake an

induction programme aimed at ensuring they develop

anunderstanding and awareness of our businesses,

people and processes, and of their roles and

responsibilities as Directors of the Company. The

programmes are tailored tosuit each Director and include

provision of relevant current and historical information

about the Company and the Group; visits to operations

around the Group; induction briefings from Group

functions; and one-to-one meetings with Board members,

Senior Management and the Company’s advisers.

The Board is committed to the training and development

of Directors to improve their knowledge about the

business and the regulatory environment in which it

operates. The Company Secretary is responsible for

helping the Chair identify and organise training for the

Directors which is tailored to individual needs.

The Company Secretary maintained the training agenda

for the Board and its Committees during the year. Training

topics during the year included the Senior Managers and

Certification Regime, the IT transformation programme,

data privacy, cyber and operational resilience and the

Internal Economic Capital Model.

In addition, a series of deep dives into the Group’s business

areas took place during the year to deepen each Director’s

knowledge of the business and provide oversight at Board

and Committee level.

NED Independence

On behalf of the Board, the Nomination and Governance

Committee assesses the NEDs’ independence, skills,

knowledge and experience annually. The Nomination and

Governance Committee concluded that every current

NED was independent, continued to contribute effectively,

and demonstrated they were committed to the role. Each

current Director will submit themselves for election or

re-election at the 2021 AGM, except for Jane Hanson, who

is retiring from the Board.

You can find out more about the activities of the

Nomination and Governance Committee’s work during

the year on pages 106 and 108.

Composition, succession & evaluation

www.directlinegroup.co.uk 91

Governance

Information and support

The Board accesses assistance and advice from the

Company Secretary. The Board may seek external

independent professional advice at the Company’s

expense, if required, to discharge its duties.

The Board’s approach to diversity and inclusion

The Board and executive management are dedicated

tobuilding a diverse and inclusive organisation, in which

everyone is treated fairly, irrespective of their racial or

ethnic origin, age, disability, gender, sexual orientation,

belief or religion, or educational or professional

background.

Supporting equality of opportunity and building a culture

that values difference has a strong correlation with our

values, both at Board level and within the wider workforce.

Board gender

Female

Male

(44%)

(56%)

Chair and NED tenure

22%

56%

22%

0-3 years

3-6 years

6-10 years

Board independence

Executive Director

Chair

Independent Non-Executive

Directors

22%

67%

11%

Executive Committee gender

Executive Committee and direct reports

Female

Male

(25%)

(75%)

Female

Male

(45.7%)

(54.3%)

The charts below provide an overview of the Board independence and tenure, along with a summary of the Board

and Executive Committee gender as at 31 December 2020.

Board and Senior Management

gender

Note:

1. Senior Management is defined as the Executive Committee and direct reports (excluding administrative and support staff)

as at 31 December 2020.

Corporate governance report continued

The Code encourages diversity of gender, social and ethnic

backgrounds, cognitive and personal strengths. The Board

understands that diversity includes but is not limited to

gender and aims to increase demographic and

philosophical differences at Board level and throughout

the Group. The Group has a Board-approved diversity

policy which is reviewed annually.

Whilst all appointments are based on merit and objective

criteria, we are proud to be able to demonstrate a Board

that not only boasts a female Chair and Chief Executive

Officer but also a broader range of diversity characteristics.

The Board advocates the importance of cultural and

ethnic diversity and aims to increase it at Board and

Executive Committee level, as well as across the Group.

Board composition

92 Direct Line Group Annual Report and Accounts 2020

The Board is pleased to have appointed Adrian Joseph as

a Non-Executive Director from 1 January 2021. Adrian has

deep experience of data strategy and artificial intelligence

and is a respected thought leader in diversity and inclusion.

Beyond the Board and into Executive Committee and the

wider workforce, we are pleased with the progress that

has been made in embedding principles and practices

topromote diversity and to champion the benefits of a

diverse and inclusive workforce.

The Board and Executive Committee continue to support

the Diversity Network Alliance which champions diversity

and inclusion within our organisation through strands

relating to gender, ethnicity, social mobility, disability and

neurodiversity, sexual orientation, generations, families

and carers and belief.

The Board has oversight of diversity and inclusion

initiatives carried out through the remit of the

Sustainability Committee. Further details on diversity

inclusion initiatives can be found in the Strategic report,

inthe Sustainability Committee report and in the

Nomination and Governance Committee report on pages

106 to 108.

Board skills, experience and knowledge

Our Nomination and Governance Committee has an

active and dynamic process of understanding and

identifying the skills, experience and knowledge of its

board members. The principles of the Code are embodied

in the Committee’s approach to board evaluation and

succession planning and the Chair of the Committee goes

through a continuous process of evaluating the skill and

experience required on the Board. The principles and

practices set by the Board and the progress made with

the diversity of the Board include:

1. Maintaining at least 33% female representation on

the Board

The Board aims to maintain female representation of at

least 33% and remains committed to seeking to improve

further its position on gender diversity when appropriate

opportunities arise. The Board will continue to appoint the

most appropriate candidates based on knowledge, skills,

experience and, where necessary, independence. As at the

date of this report (5 March 2021), female representation

on the Board was 40% which exceeds the target set in

Lord Davies’ Women on Boards Review Five Year

Summary to be achieved by 2020 and exceeds the

Hampton-Alexander Review’s recommendation for a

minimum of 33% of women’s representation on boards by

2020. The Group ranked 44th in the FTSE 250 for female

Board representation in the Hampton-Alexander review.

2. Engaging executive search firms who have signed

up to the Voluntary Code of Conduct for Executive

Search Firms on gender diversity and best practice

In its search for candidates, when using executive search

firms, the Board will only engage those who are

signatories to the Voluntary Code of Conduct for Executive

Search Firms as recommended by Lord Davies.

Executive Committee gender diversity

The Board remains committed to ensuring that high-

performing women from within the business and from a

variety of backgrounds, who have the requisite skills, are

given the opportunity to progress their career internally.

The Group is a signatory to the Women in Finance Charter

which aspires to see gender balance at all levels across

financial services firms. As at 31 December 2020, the Group

exceeded its target set the previous year of achieving at

least 33% female representation at senior leadership team

level, with 45.7% of Executive Committee and direct report

positions held by women. For a breakdown of the

Executive Committee, please see biographical details on

pages 81 to 82.

The Board continues to support Group-wide diversity

initiatives, including succession planning programmes,

tobroaden and strengthen female talent at middle

management level. For more information on the Group’s

diversity and inclusion strategy please see the People

section on page 50.

Board and Committee effectiveness review

three-year Board evaluation cycle

The Board conducts an annual review of the effectiveness

of the performance of the Board, its Committees, the Chair

and individual Directors with the input of an external

facilitator at least every third year. The effectiveness review

in 2020 was managed internally.

The Board recognises that a continuous and constructive

review of its performance is an important factor in

achieving its objectives and realising its full potential.

The 2020 evaluation focused on both the preservation of

the strengths identified in the 2019 and earlier evaluations

and on themes for sustaining effectiveness suggested by

Professor Goffee, including building Board cohesion,

making space for strategic discussion, and equipping the

Board to monitor the delivery of organisational

transformation and to balance challenge with support.

2019

External

2020

Internal

2021

Internal

Evaluation process

Step 1: with the assistance of the Company Secretary, the

Chair identified the effectiveness priorities for discussion.

Step 2: The Chair interviewed members of the Board and

Senior Management team.

Step 3: Reports were prepared for the Board and for each

Committee for discussion.

Step 4: An action plan was defined following discussion of

the reports.

Evaluation outcome

The Chair prepared a report for discussion by the Board

and each of the Board Committees.

In addition, the Senior Independent Director discussed the

Chair’s performance with the Non-Executive Directors

(except the Chair) to enable him to provide constructive

feedback. No Director was involved in the review of their

own performance.

The review concluded that, during the year, the Board, its

Committees and individual members of the Board had

performed effectively. Progress was found to have been

made on the actions suggested in the 2019 review, as

summarised in the table below. Suggestions for fine-

tuning the effectiveness of Committees, including

strengthening the membership of the Remuneration

Committee and clarifying the role and authority of the

Sustainability (formerly the Corporate Responsibility)

Committee, were addressed during the year.

www.directlinegroup.co.uk 93

Governance

The table below illustrates the areas of focus that resulted from the 2019 review and the actions taken in 2020 as a result.

Focus areas from the 2019 review Action taken during 2020

Build Board solidarity around key strategic

challenges facing the Group.

The Board has built on its cohesion by creating opportunities for

NEDs to add value based on their experience and by focusing on

strategy in post-Covid-19 markets, the impact of the FCA pricing

practices review, the pace of organisational and technological

change, the cost base, capital strategy and growth.

Make space for strategy The number and length of Board meetings have been increased to

allow time for deeper discussion of strategic topics including costs,

capital structure, growth, technology, digitalisation, the Agile

operating model, data strategy, ethics and governance, investment

in, and realising the benefits of, talent management, and succession

planning.

Refresh the Board The Board has focused on strengthening its experience and diversity

to enhance its ability to monitor the delivery and performance of

technological and other change. Criteria for new Non-Executive

Directors have reflected these priorities, resulting in the

appointment of Adrian Joseph OBE as a Non-Executive Director on

1January 2021.

The table below illustrates the areas of focus that resulted from the 2020 review and the actions that are proposed for 2021.

Focus areas from the 2020 review Proposed action for 2021

Use of Non-Executive Directors’ experience Opportunities for the Non-Executive Directors to interact directly

with the business in a remote working environment should continue

to be found until site visits can be reinstated.

The Board’s agenda and information flow The sequence of strategic topics on the Board’s agenda to be

aligned with the executive programme, taking the opportunity of

longer meetings, when necessary, to allow for deeper and more

regular strategic discussion. The early sharing of thinking on key

strategic topics should continue. Key topics for 2021 to include the

FCA’s pricing practices review, capital strategy, driving the benefits

of investment in data and technology and growth.

External expertise Regular broker updates to be obtained during a time of market

volatility and increased M&A activity, as well as from thought leaders

on future trends in the industry.

Corporate governance report continued

94 Direct Line Group Annual Report and Accounts 2020

An explanation of how the Board complies with the Code

in relation to audit, risk and internal control is set out

below, except for the following matters, which are covered

elsewhere in the Annual Report & Accounts:

– how the Board has assessed the Group’s longer-term

viability and the adoption of the Going Concern basis

inthe financial statements is on page 74 and page 143;

– The Board has delegated responsibility to the Audit

Committee to oversee the management of the

relationship with the Company’s External Auditor. You

can find details of the Audit Committee’s role, activities

and relationship with the External Auditor in the

Committee report which starts on page 97.

Responsibility for preparing the Annual Report

&Accounts

The Board’s objective is to give shareholders a fair,

balanced and understandable assessment of the Group’s

position and prospects and business model and strategy.

The Board is also responsible for maintaining adequate

accounting records and seeks to ensure compliance with

statutory and regulatory obligations.

You can find an explanation from the Directors about their

responsibility for preparing the financial statements in the

Statement of Directors’ responsibilities on page 143. The

Group’s External Auditor explains its responsibilities on

page 153.

The Directors confirm that they consider that the Annual

Report & Accounts, taken as a whole, are fair, balanced

and understandable and provide the information that

shareholders need to assess the Group’s position and

performance, business model and strategy. In arriving

atthis conclusion, the Board was supported by a number

ofprocesses, including the following:

– management drafted the Annual Report & Accounts

toensure consistency across sections, and a steering

group comprising a team of cross-functional Senior

Management provided overall governance and co-

ordination;

– a verification process, to ensure the content was

factually accurate;

– members of the Executive Committee reviewed drafts

of the Annual Report & Accounts;

– the Company’s Disclosure Committee reviewed an

advanced draft of the Annual Report & Accounts; and

– the Audit Committee reviewed the substantially final

draft of the Annual Report & Accounts, before

consideration by the Board.

Assessing emerging and principal risks

The Board determines the nature and extent of the risks

that it is willing to take to achieve its strategic objectives.

The Directors robustly assessed the emerging and

principal risks facing the Company, including risks that

would threaten its business model, future performance,

solvency or liquidity. You can find a description of these

risks, and their management or mitigation, on pages 71

to72.

This confirmation is based on the Board Risk Committee’s

review and challenge of the Group’s Material Risk

Assessment and the Board’s review and approval of the

Group’s risk appetite statements. The Risk Assessment

identifies risks quantified as having a residual risk impact

of £40 million or more based on a 1-in-200 years likelihood.

The quantifications are produced through stress and

scenario analysis, and the capital model. Each directorate’s

bottom-up risk identification and assessment

supplements the Material Risk Assessment. The Material

Risk Assessment also plays a key role in developing the

ORSA and assessing the Group’s strategic plan.

Risk management and internal control systems

The Board oversees the Group’s risk management and

internal control systems. It has complied with the Code

byestablishing a continuous process for identifying,

evaluating and managing emerging and principal risks

the Group faces.

The Board has established a management structure with

defined lines of responsibility and clear delegation of

authority. This control framework cascades through the

divisions and central functions, detailing clear

responsibilities to ensure the Group’s operations have

appropriate controls. This includes controls relating to the

financial reporting process.

The frameworks for risk management and internal control

were in place for the financial year under review and up to

the date of this report. They are regularly reviewed by the

Board and comply with the FCA’s updated guidance on

Risk Management, Internal Controls and Related Financial

and Business Reporting.

The Group operates a Three Lines of Defence model.

Youcan find out more about this in the Risk management

section on page 69.

The Board, with the assistance of the Board Risk

Committee and the Audit Committee as appropriate,

monitored the Company’s risk management and internal

control systems that have been in place throughout the

year under review, and reviewed their effectiveness. The

monitoring and review covered all material controls,

including financial, operational and compliance controls.

The Board and its Committees are overseeing the

programme of activity to upgrade and better integrate

the major IT systems within the Group’s technology

infrastructure, including focusing on developing future

capability for both customers and our people and

monitoring risks relating to IT systems’ stability, cyber

security and the internal control environment.

Audit, Risk & Internal Control

www.directlinegroup.co.uk 95

Governance

The Board was also supported in its review of the annual

Internal Risk and Control Assessment. This process

involved each function completing a self-assessment

ofitsrisks and key controls and an Executive Sponsor,

responsible for the function, attesting to the status of the

effectiveness of the risk management and internal control

systems. The Risk function reviewed and challenged these

findings and the Group Audit function provided an

independent assessment of the overall effectiveness of the

governance and risk and control framework of the Group.

The Group then combined the overall findings into a

Group-level assessment, which the CEO approved. The

process included reporting on the nature and

effectiveness of the controls, and other management

processes that manage these risks.

The Board Risk Committee regularly reviews: significant

risks and how they might affect the Group’s financial

position; comparisons to agreed risk appetites; and what

the Group does to manage risks outside its appetite.

The Group Audit function supports the Board by providing

an independent and objective assurance of the adequacy

and effectiveness of the Group’s controls. It brings a

systematic and disciplined approach to evaluating

andimproving the effectiveness of the Group’s risk

management, control and governance frameworks

andprocesses.

The Directors acknowledge that any internal control

system can manage, but not eliminate, the risk of not

achieving business objectives. It can only provide

reasonable, not absolute, assurance against material

misstatement or financial loss.

On behalf of the Board, the Audit Committee regularly

reviews the effectiveness of the Group’s internal control

systems. Its monitoring covers all material controls.

Principally, it reviews and challenges reports from

management, the Group Audit function and the External

Auditor. This enables it to consider how to manage or

mitigate risk in line with the Group’s risk strategy.

Remuneration

The Board is mindful at all times that remuneration

policies and practices must be designed to support

strategy and promote the long-term sustainable success

of the Group. It delegates responsibility to the

Remuneration Committee to ensure that there are formal

and transparent procedures for developing policy on

executive remuneration and determining Director and

Senior Management remuneration. The Remuneration

Policy was approved by the shareholders in the 2020 AGM

and was drafted to include provisions and principles in

theCode.

In his report on pages 113 to 139, the Remuneration

Committee Chair provides an overview of the Committee’s

work in setting an appropriate framework for

remuneration of the Executive Directors, Executive

Committee and other senior managers as well as the

wider workforce to ensure fair pay for all our colleagues.

For details on how the Company has applied Provision

40of the Code in determining Executive Director

remuneration policy and practices, see the summary on

page 121.

Corporate governance report continued

96 Direct Line Group Annual Report and Accounts 2020

Committee membership

– Gregor Stewart

Chair

– Mark Gregory

Independent Non-Executive Director

– Jane Hanson

Independent Non-Executive Director

– Fiona McBain

Independent Non-Executive Director

Committee meeting attendance can be found on

page87.

Key responsibilities

– Oversee the integrity of the Group’s financial

statements

– Oversee and challenge the effectiveness of the

Group’s systems of financial and other internal

controls, and financial and regulatory reporting

– Oversee the actuarial reserving process

– Oversee the work and effectiveness of the Group’s

internal and external auditors

– Oversee the Group’s financial and non-financial

disclosures, including any climate-related financial

disclosures

Audit Committee report

Gregor Stewart

Chair of the Audit Committee

Audit Committee

Report

Areas of focus in the reporting period

– Financial reporting: reviewed and challenged the key

accounting and actuarial estimates and judgements

made by management to support the financial

statements, and gave due consideration to the

increased level of uncertainty in respect of Covid-19, with

reference to the Financial Reporting Council’s guidance

issued on this matter.

– Subordinated Tier 2 Notes: oversaw certain matters in

relation to the issue of £260 million Subordinated Tier 2

Notes at a 4.0% coupon in June 2020.

– Actuarial and Finance Transformation: received updates

from management on: the progress of the

transformation programme, including oversight of the

budget; IFRS 17 accounting policies; and the general

ledger migration.

– TCFD Report: reviewed and challenged the Group’s

firstTask Force on Climate-related Financial

Disclosures Report.

– Insurance reserves: reviewed the Group’s insurance

reserves to obtain assurance that they remained

appropriate for discharging expected liabilities. In doing

so, the Committee challenged the actuarial best

estimate of technical provisions and the prudential

margin for IFRS 4 ‘Insurance Contracts’.

Committee skills and experience

In line with the UK Corporate Governance Code 2018

(the “Code”), all members of the Audit Committee are

independent and the Committee as a whole is deemed to

have competence relevant to the insurance and financial

services sectors in which the Group operates.

All Committee members are members of the Institute of

Chartered Accountants in England and Wales, with the

exception of the Chair, Gregor Stewart, who is a member

of the Institute of Chartered Accountants of Scotland.

www.directlinegroup.co.uk 97

Governance

Audit Committee report continued

Each member has recent and relevant financial experience

gained in a number of different financial services businesses

including insurance, enabling them tocontribute diverse

expertise to the Committee’s proceedings.

To keep their skills current and relevant, members of the

Committee received training during the period on matters

including IFRS 17, the Internal Economic Capital Model

and Solvency II technical provisions and have a schedule

of technical updates planned for 2021.

Main activities during the year

The agendas for the meetings taking place during the

year are agreed by the Chair of the Committee and detail

the matters to be discussed and considered at each

meeting. An analysis of the activity of the Committee

during the year identified that it had discussed all

intended matters during the year.

At each scheduled Committee meeting, the Committee

received reports on financial and non-financial reporting,

insurance reserves, internal controls and Group Audit.

Having reviewed the Committee’s terms of reference

during the year, the Committee has included the

additional responsibility of reviewing the Group’s Task

Force on Climate-related Financial Disclosures Report

(“TCFD Report”) on behalf of the Board on an annual basis.

Financial reporting

The Committee followed a review process before

recommending the Annual Report & Accounts and Half

Year report to the Board, which focused on the choice

andapplication of significant accounting policies,

emphasising those requiring a major element of

estimation or judgement. Further information on the

significant matters considered is provided in the table

onpage 99.

The Committee also considered: the Financial Reporting

Council’s guidance on the Strategic Report; the UK

Corporate Governance Code 2018; Section 172(1) of the

Companies Act 2006 (as previously defined); the

Companies (Directors’ Report) and Limited Liability

Partnerships (Energy and Carbon Report) Regulations

2018; the Financial Reporting Council’s 2020 year-end

letter to Audit Committee Chairs; and guidance issued

bythe Financial Reporting Council during the year on

Covid-19 disclosures.

Subordinated Tier 2 Notes

In order to strengthen the Group’s long-term finances

further, the Committee was asked to oversee certain

matters regarding the issue of £260 million Subordinated

Tier 2 Notes at a 4.0% coupon to be listed on the General

Exchange Market (GEM) of Euronext Dublin. The

Committee reviewed the approach to the production and

verification of the Listing Particulars and agreed that the

listing would improve the financial flexibility and liquidity

of the Group during the heightened uncertainty in the

macroeconomic environment.

For more information on the Subordinated Tier 2 Notes

see page 221.

Reserves

The Committee reviewed and challenged the key

assumptions and judgements, emerging trends,

movements and analysis of uncertainties underlying the

estimate of reserves. These assumptions and judgements

are informed by actuarial analysis, wider commercial and

risk management insights, and principles of consistency

from period to period. After reviewing the reserves, the

Committee recommended them to the Board.

The Committee also considered an appropriate balance

between internal and external actuarial review. An

external actuarial review of the material risk areas of the

insurance reserves was carried out for the Directors of the

Company by PricewaterhouseCoopers LLP (“PwC”). The

appointment of consultants to provide actuarial reviews

ofreserves is subject to approval by the Committee.

Actuarial and Finance Transformation

During the year, the Committee continued to receive

reports on progress against key milestones in the Actuarial

and Finance Transformation programme. Updates

included in respect of the migration of the general ledger,

which was completed successfully in May 2020, an

overview of the technology solution design for IFRS 17 and

progress on accounting policy choices. The Committee

also reviewed the findings of a third party assurance

review and approved the budget for the programme.

TCFD Report

The Group is aware that investors, regulators and other

stakeholders expect transparent and high quality

disclosure on matters relevant to climate change and

expect companies to provide details on their approach

tothe risks and opportunities associated with climate

change. At the end of 2020, the Group published its first

TCFD Report, which highlighted the Group’s response

tothe issues of climate change and how the TCFD

framework has been used to enhance the Group’s

reporting in this area. The Committee discussed how

production of the report had been integrated into the

existing financial reporting control framework, reviewed

the report on behalf of the Board and recommended its

approval to the Board. A summary of the TCFD report is

included in the Sustainability section which starts on

page 44, and this also includes a link to the full report

which can be found on the Group’s website.

Going concern and viability statement

The Committee also considered the going concern

assumptions and viability statement in the 2020 Annual

Report & Accounts, valuation of assets and impairment

reviews, non-recurring period-specific transactions and

clarity of disclosures. The Committee reviewed and

concluded that the Annual Report & Accounts taken as

awhole were fair, balanced and understandable and

provided sufficient information to enable the reader to

assess the Group’s position and performance, business

model and strategy.

When considering the 2020 Annual Report & Accounts,

the Committee focused on the significant judgements

and issues which could be material to the financial

statements. These included the matters set out in the

table on page 99 and also included a detailed review of

the impact of Covid-19, ensuring that the disclosure on

matters relevant to the financial statements was fair,

balanced and understandable in the context of the

Group’s operations.

The Committee challenged the estimates and

judgements being made and also discussed these matters

with the External Auditor.

For more information on the Viability statement see

page 74.

98 Direct Line Group Annual Report and Accounts 2020

Significant judgements and issues

Matter considered Description Action

Insurance

reserves

valuation

The Committee reviewed the level of insurance

reserves of the Group. Insurance reserves relate

to outstanding claims at the balance sheet date,

including claims incurred but not reported at

that date. By their nature, insurance reserves

require analysis of trends and risks and the

application of management judgement,

knowledge and experience. Further information

on reserves is provided on pages 30 to 32.

In 2020, the Committee reviewed and

challenged the level of insurance reserves

andmonitored developing trends that could

materially impact them. On an ongoing basis

it received updates from the Actuarial Director

on how estimates of reserves compared to

claims paid. The Committee also obtained

insight from an independent actuarial review

of the reserves.

Valuation of

investments not

held at fair value

and investment

property

The Committee considered reports on the

estimates and judgements applied to the

carrying value of the Group’s investments that

are not held at fair value and the basis for the

valuation. These assets are principally comprised

of infrastructure loans, commercial real estate

loans and private placement bonds held within

the investment portfolio. In addition the Group

also holds a portfolio of investment properties.

Information was provided to the Committee on a

regular basis to support the value recognised in

the accounts.

In 2020, the Committee considered major

accounting estimates and judgements in

respect of assets not held at fair value and

theinvestment property portfolio and was

satisfied with the carrying value of

investments and the basis for their valuation.

The Committee considered the impact of

Covid-19 on the investment property portfolio

and noted the year-end independent

valuation reflected factors in relation to the

impact of Covid-19 on certain sectors of the

portfolio, primarily in relation to the retail and

hospitality sectors.

Impact of

Covid-19 on

financial

statements

Accounting estimates and judgements made in

the Group’s financial statements are subject to

increased levels of uncertainty as a result of

Covid-19. The Committee referred to the

Financial Reporting Council’s guidance on this

matter, which encourages companies to explain

the significant estimates and judgements made

in accounting for the impact of Covid-19. As part

of its review, the Committee: evaluated the going

concern basis used to prepare the half-year 2020

and full-year 2020 results; reviewed the impact

on principal risks and uncertainties; and assessed

whether the pandemic could trigger an

impairment of assets.

The Committee reviewed and challenged the

reports presented by management and was

satisfied that the financial statements of the

Group presented the impact of Covid-19 in

sufficient detail to enable users to understand

the impact of the pandemic on the Group’s

position and financial performance.

Migration of

general ledger

system

In 2020, the Group migrated to a new general

ledger system. This involved a process of key risk

assessments and mitigation plans following a

decision to go live whilst most staff were working

remotely. Detailed plans covering areas such as

testing, dry runs, data migration, reconciliation

and business user training were managed and

implemented remotely and the migration was

successfully completed in May 2020.

The Committee received regular reports on

the general ledger migration, in particular

with reference to the overall progress of the

project and the migration of data from the

previous general ledger to the new ledger.

TheCommittee was satisfied that the data

migration had been performed in a controlled

manner and that appropriate reconciliations

had been performed to ensure the integrity of

the Group’s financial data.

www.directlinegroup.co.uk 99

Governance

Audit Committee report continued

Internal control and Group Audit

During the year, the Committee reviewed the adequacy

and effectiveness of the Group’s internal control systems.

The Group’s financial reporting control framework is part

of the wider internal controls system and addresses

financial reporting risks. The Board delegates supervision

of the framework to the Committee while the CFO is

responsible for the framework’s operation on a day-to-day

basis. During 2020, the Committee received regular

reports on any control deficiencies, compensating controls

and the mitigating actions taken by management.

The Committee is responsible for overseeing the work

ofGroup Audit and for ensuring industry best practice is

adopted appropriately.

In February, we welcomed Mark Stock to the Group who

was appointed as Group Head of Audit. The Group Head

ofAudit’s primary reporting line is to the Chair of the

Committee. The secondary reporting line, for day-to-day

administration, is to the CEO.

Group Audit has continued to build on the improvements

suggested in the 2018 PwC External Quality Assessment

as part of an ongoing Continuous Improvement Plan. In

line with recommendations from PwC, the Chair of the

Committee, along with the Group Head of Audit,

promoted the adoption of new tooling and training to

enhance the insight delivered by Group Audit function

reviews through the greater use of data analytics. PwC

was appointed this year by Group Audit to provide insight

and challenge to the function’s vision and strategy, as well

as taking on Quality Assurance activity. The Committee

approved the Group Audit Charter, which is reviewed

annually.

During the year, Group Audit provided the Committee

with independent and objective reports on the adequacy

and effectiveness of the Group’s governance, risk

management and internal controls. The Committee

approved Group Audit’s annual plan and received

quarterly reports detailing internal audit activity, key

findings, management responses, and proposed action

plans. Group Audit also monitored progress so as to be

able to confirm that the most significant actions were

completed. There were no significant failings or

weaknesses reported to the Committee in the year.

As a direct response to Covid-19, the Committee was asked

to approve the rescheduling of the internal audit plan.

TheCommittee assessed the resources available and

those required to complete the Group Audit Plan.

Following assessment by the Committee during the year,

it concluded that the Group Audit function was effective.

Additional information

The Committee has unrestricted access to management

and external advisers to help discharge its duties. It is

satisfied that in 2020 it received sufficient, reliable and

timely information to perform its responsibilities effectively.

During the reporting period, the Actuarial Director,

external actuarial advisers, External Auditor and Group

Head of Audit met privately with the Audit Committee,

inthe absence of management.

The Chair of the Committee also reported on matters

dealt with at each Committee meeting to the subsequent

Board meeting.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness

of the Committee was conducted as part of the wider

review of the Board and the Board Committees by the

Chair of the Board. The review found that the Committee

functions effectively and that issues are dealt with in a

thoughtful and rigorous manner.

The activity of the Committee was reviewed during the

year against the Committee’s terms of reference. The

Committee terms of reference can be found on the

corporate website: www.directlinegroup.co.uk/en/

who-we-are/governance/board-committees.

External audit

Deloitte LLP (“Deloitte”) has served as the Company’s

Auditor since 2000. Before listing in 2012, the Group was

audited by Deloitte as a division of RBS Group. The

Committee is responsible for overseeing the External

Auditor and agreeing the audit fee, as well as approving

the scope of the External Auditor’s annual plan.

The audit partner is Colin Rawlings, FCA, who was first

appointed for the 2016 audit. Following conclusion of the

2020 audit, Colin will have completed five years as lead

audit partner and, in compliance with the Group’s

minimum standard on independence of the External

Auditor, will complete his engagement with the Group.

During the year, the Committee confirmed the

appointment of a new partner proposed by Deloitte and

are satisfied that Adam Addis, ACA, can be appointed to

the audit for 2021.

External Auditor tenure

During the year, the Committee again discussed the

position on its external audit services contract and

examined a number of options regarding the timing of

tendering for the external audit, including the mandatory

rotation of the Group’s audit firm. This took into account

the reforms of the audit market by the Competition and

Markets Authority and the EU, under which Deloitte

cancontinue as the Company’s External Auditor until

31December 2023. As Deloitte was appointed as Auditor

to the Company in 2000 (when it was a subsidiary of The

Royal Bank of Scotland Group plc), under the transitional

provisions of the legislation, the firm may not re-engage

for the audit after 17 June 2023. The Committee

considered whether it was appropriate to tender the

external audit contract for the year ending 31 December

2021 and concluded it was not appropriate.

When considering the timing of the external audit tender,

the Committee took into account the Group’s ongoing

change programmes including the implementation of

anew general ledger system, the use of consultants

employed by auditing firms in connection with those

programmes, audit partner rotation, the impact of IFRS 17

and the best interests of all stakeholders including

potential investors and shareholders. The Committee

willreview the position on an annual basis, but currently

anticipates tendering the audit contract after the

implementation of IFRS 17 to ensure the broadest choice

of firms. The Committee also confirmed that it will

continue to comply with the regulations governing

auditor rotation.

There are no contractual obligations restricting the

Group’s choice of External Auditor.

100 Direct Line Group Annual Report and Accounts 2020

The Company has complied with the provisions of the

Statutory Audit Services for Large Companies Market

Investigation (Mandatory Use of Competitive Tender

Processes and Audit Committee Responsibilities)

Order2014.

Auditor independence and non-audit services

The Group has a minimum standard in relation to the

independence of the External Auditor. This establishes

parameters for preventing or mitigating anything that

compromises the External Auditor’s independence or

objectivity. The minimum standard includes a formal

process for the approval of certain non-audit-related

services by the External Auditor. The minimum standard

has been revised and updated in light of the Financial

Reporting Council’s review of its Ethical Standard for

Auditors which was published in December 2019.

During the year, the Committee reviewed the audit-

related services that could be provided by the External

Auditor. It was agreed that, in order to protect the

independence of the External Auditor, generally on an

ongoing basis, services should not be provided unless

there is a strong, clear and understandable business

reason. The Committee is satisfied that the Group has

adequate procedures to ensure that the External Auditor

is independent and objective.

During the year, the Committee approved fees of

£0.6 million to Deloitte for services unrelated to audit

work. The following is a breakdown of fees paid to

Deloitte for the year ended 31 December 2020.

Fees

£m

Proportion

Audit fees 2.1 72

Audit-related assurance services 0.2 7

Non-audit services 0.6 21

Total fees for audit and

otherservices 2.9 100

Audit-related assurance services were in respect of the

Group’s Solvency II reporting and the review of the Half

Year Report 2020 and non-audit services primarily related

to assurance activities on IT projects in relation to the

development of new systems where Deloitte was chosen

to provide the non-audit services because of its expertise

and insight in this area. The engagement with Deloitte for

this activity was compliant with the transitional rules of

the Financial Reporting Council’s revised Ethical Standard

and this engagement is now coming to an end. To guard

against any independence issues, appropriate safeguards

were discussed and agreed by the Committee and

Deloitte. In addition, Deloitte also undertook procedures

to support the Group’s issue of £260 million of Tier 2 debt

in May 2020. They were considered to be an appropriate

choice of service provider as their understanding of the

Group was deemed relevant for the service. The

Committee determined that the services provided would

not affect the independence of the External Auditor.

Further information in respect of audit fees paid to

Deloitte is disclosed in note 10 to the consolidated

financial statements.

Effectiveness of the external audit process and

re-appointing Deloitte as External Auditor

In 2020, the Committee assessed the External Auditor’s

effectiveness. This was in addition to regularly questioning

the External Auditor during its meetings. The Committee

assessed the External Auditor through:

i. a detailed questionnaire completed by key

stakeholders;

ii. discussing matters with the CFO;

iii. formally reviewing the External Auditor’s

independence;

iv. assessing the key risks identified by the External Auditor,

the quality controls put in place to deliver the audit and

whether the agreed audit plan was fulfilled; and

v. private meetings with the External Auditor in the

absence of management.

In addition, through regular interaction with the

ExternalAuditor, the Committee was satisfied that the

External Auditor continued to demonstrate professional

scepticism and challenged management’s assumptions.

The quality of the audit was assessed through review

and discussion of the External Auditor’s report to the

Committee at each meeting and from the challenges and

insights brought to significant areas of judgement in the

Group’s financial statements.

After taking into account all of the information available

and considering FRC Audit Quality: Practice aid for audit

committees, the Committee concluded that Deloitte had

performed its obligations effectively and appropriately as

External Auditor to the Group.

The Committee recommended to the Board that the

Group re-appoint Deloitte as External Auditor, to which

the Board agreed. A resolution regarding the

reappointment of Deloitte as auditor of the Group

will be put to shareholders at the 2021 AGM.

The Board reviewed and approved this report on

5 March 2021.

Gregor Stewart

Chair of the Audit Committee

www.directlinegroup.co.uk 101

Governance

Board Risk Committee report

Committee membership

– Jane Hanson

Chair

– Fiona McBain

Independent Non-Executive Director

– Gregor Stewart

Independent Non-Executive Director

– Dr Richard Ward

Senior Independent Director

Committee meeting attendance can be found on

page87.

Key responsibilities

– Provide oversight and advice to the Board in relation

to current and emerging risk exposures of the

Groupand the strategic approach to managing risk,

including determination of risk appetite and tolerance

– Promote a risk-aware culture within the Group

– Review the design and implementation of the

Enterprise Risk Management and Strategy

Framework, risk appetite and tolerances

Jane Hanson

Chair of the Board Risk Committee

Board Risk

Committee Report

Areas of focus in the reporting period

– Considered the Group’s approach to pricing practices,

aiming to ensure that they are delivering fair and

appropriate outcomes for its customers.

– Proactively monitored the impacts and risks of the

Covid-19 global pandemic.

– Oversaw change risk arising from the Group’s multi-year

transformation programmes.

– Reviewed and understood the Group’s climate-related

risks.

– Monitored the progress of the Group’s proactive

operational resilience programme.

Further detail on these areas can be found in the body of

the Committee report.

Covid-19

At the heart of the Group’s strategy is the vision to

become a force for good and so it has been a key focus

forthe Group to support its customers, people and wider

society through the Covid-19 pandemic. The Committee

was supportive of the Group’s move to homeworking to

protect the lives of its people and their families, to

maintain the Group’s ability to service its customers, to

safeguard its business for the longer term and to support

the Government in protecting the country. The Committee

took a proactive approach in monitoring the impacts and

risk of the Covid-19 pandemic.

The Committee received regular updates and challenged

management on the actions being taken across the

business to support customers during the pandemic with

a particular focus on factors such as public perception,

affordability and the importance of doing the right thing

for the Group’s financially distressed customers. The

Committee also closely monitored and challenged

management on the impact that Covid-19 was having

oncolleague morale and wellbeing, travel and business

interruption claims, the supply chain of goods, operational

resilience, the Group’s technology and business

transformation programme timelines, market risk,

solvency capital requirements and risk appetite range and

the Strategic Plan. Details of stress testing in relation to

Covid-19 can be found in the financial risk section of the

Committee report.

102 Direct Line Group Annual Report and Accounts 2020

The Committee held an ad hoc meeting and received

regular updates on cyber mitigation planning to manage

cyber risk appetite which was being monitored closely by

the Risk function. The Committee probed to ensure that

risks were being managed appropriately and

compensating controls and mitigating actions were in

place to manage the Group’s transition to homeworking

for all of its in-house and outsourced operations, including

in the UK and offshore in South Africa and India. The

Committee subsequently reviewed plans for the re-

opening of offices, gaining assurance from management

on their plans for the return of limited numbers of staff

and the measures taken to ensure social distancing

wasmaintained.

The Committee sought assurance and was satisfied with

the Risk function’s review of the governance of the key

Covid-19-related decisions made during the year and the

management actions recommended by Group Audit

following its consultative exercise of the lessons learnt

from the crisis management response to the initial phases

of Covid-19.

Customer and conduct

Customer and conduct risk has continued to be a

principal focus of the Committee in 2020. During the

period, the Committee devoted significant time to

considering, challenging and supporting management

onits approach to managing these risks and sought

assurance that fair pricing and outcomes were being

achieved for customers across all Direct Line Group

products. The Committee received reports and probed

management on the Group’s pricing strategy and

governance and control framework, the process taken to

review and manage conduct thresholds and margins and

pricing transparency, the methods used for pricing for

vulnerable customers, protected characteristics and the

approach to data ethics. In October 2020, the Committee

held a risk strategy session and discussed in detail the

Group’s use and governance of pricing factors, key

customer judgements being applied in pricing, customer

outcomes illustrating the effectiveness of the Group’s

pricing approach as well as initial thoughts on the FCA’s

General Insurance Pricing Practices Market Study and its

impact on the Group.

The Group has a management-level Customer Conduct

Committee, which reviews, challenges and oversees

customer and conduct matters for all of the Group’s

brands and channels with the aim of promoting

customers’ best interests and ensuring that the Group’s

business activities are consistent with the best interests

ofits customers. The Customer Conduct Committee’s

findings and any recommendations for improvement are

regularly reported both to the Board and the Committee.

Compliance and regulatory risk

As part of the Chief Risk Officer’s (“CRO”) report submitted

to each meeting, the Committee reviewed regular

updates on key ongoing regulatory developments and

interactions with the PRA and FCA. Areas on which the

Committee focused included pricing practices,

operational resilience, Brexit, the status of cyber risk and

travel and business interruption claims asa result of the

pandemic, the implementation of the Insurance

Distribution Directive to improve customer demands and

needs and the approach to assessing customer

affordability.

During the year, the Committee considered the Group’s

compliance with regulatory requirements including those

relating to conduct and financial crime. The Committee

approved the annual Compliance Plan setting out the

compliance activities to be undertaken in the coming year

with the objectives of ensuring compliance, maintaining

an open and co-operative relationship with regulators

andensuring the Board and colleagues understand their

regulatory responsibilities. The Committee reviewed and

challenged the outputs from conduct and compliance

assurance reviews, including in relation to Solvency II

compliance. The Committee received data privacy

updates and a report on the Group’s adherence to privacy

and data protection legislation during 2020, including

actions taken to respond to data information requests to

comply with the General Data Protection Regulation and

the Information Commissioner’s Office guidelines. The

Committee reviewed the actions being undertaken to

ensure compliance with the regulators’ Senior Managers

and Certification Regime, which included a

comprehensive review of the Group’s High Level Control

and System of Governance Framework and Management

Responsibilities Map.

During the period, the Group continued to work on its

proactive operational resilience programme aligned to

theexpectations set by the Bank of England, PRA and

FCA, aiming to address business process, organisational,

third-party and technological resilience as well as

prioritising the prevention of, and recovery from, financial

and other shocks to the business. Through receipt of

regular updates, the Committee challenged and

supported management on the key indicators and

management information which would be used to

provide the Board with oversight of the Group’s

operational resilience, the impact tolerances to be set

andthe suitable strategies, processes and systems for

identifying important business services.

Operational risk

The oversight of change risk was a central focus for the

Committee as the Group made good progress on its

strategic transformation, continuing major technical

deliveries in the remote working environment, whilst also

focusing on business transformation to take advantage of

the tools being built.

The Committee received updates at each of its meetings

on the developing, testing and implementation of releases

under the Group’s technological transformation

programmes, on interdependencies between programmes

and on the overall management of the Group’s change

portfolio, reviewing and challenging the operational and

financial risks and controls and the potential impact on

customers, people and the Group’s strategic and financial

plan. Each report was accompanied by an update from

the Risk function on its assurance activity, which included

reviewing and challenging programme plans, testing

methodology and performance, and reviewing

preparations for implementation. Reasonable assurance on

the Group’s technology re-platforming programme, “Best

for Customer”, was provided to the Committee by Deloitte,

who had been engaged to conduct a number of deep

divereviews of a range of programme stages and risks

focusing on planning methodology and approach, testing,

technical readiness for business volume increases and

programme closedown.

Board Risk

Committee Report

www.directlinegroup.co.uk 103

Governance

Board Risk Committee report continued

The Committee reviewed updates during the year on the

progress the Group had made to deliver stable desktop,

telephony and mainframe platforms. The Committee

challenged management on the lessons learned from

other firms’ IT migration programmes and sought

assurance that the Group had appropriate mitigating

controls and actions in place to prevent occurrence of

such issues which could have a detrimental impact on

theGroup and its customers.

The Committee received updates on the progress of

theGroup’s transformation of its operating model and

challenged how the risk framework had been adapted

toalign with the new model as well as on the mitigating

actions in place to address the key impact risks of

theprogramme.

Financial risk

As an insurance company, Direct Line Group understands

the importance of managing climate-related risk and

recognises that climate change could pose material

long-term financial impacts to the business. During the

year, the Committee received regular climate-related

updates as part of the CRO’s report and examined and

monitored management’s 2020 and 2021 plans to protect

the Group from climate-related financial risks and address

the PRA’s climate change expectations. The Committee

recognised the progress that had been made, including

the development of a governance framework and

workstreams to manage climate-related risks and the

publication of the TCFD Report in December 2020. As part

of a strategy session in October 2020, the Committee also

considered the potential financial risks and impacts from

climate change, including an external view on regulatory

expectations in the context of the sustainability agenda.

Further details on the risks due to climate change faced

by the Group can be found on pages 58 and 74.

At each meeting, the Committee monitored the Group’s

performance against its capital risk appetite through the

CRO’s report. Committee members considered financial

risks and assessed these risks against risk appetite.

Committee members also reviewed and challenged

theOwn Risk and Solvency Assessment (“ORSA”) process

and key content before the report wassubmitted for

approval to the Board. Committee challenges on elements

of the ORSA during the year included those in relation

tostress testing of the strategic plan, pricing and

underwriting risk, internal model validation activity and

the appropriateness of contingent management actions.

The Committee reviewed and challenged the stress and

scenario testing plan with a particular focus on certain

scenarios including in relation to the potential financial,

operational and reputational impacts of Covid-19, the

potential financial risks of climate change, the potential

impacts to the business following a rapid reduction of

motor in-force polices and premiums as well as the

impacts of a potential hard Brexit combined with

economic implications resulting from the end of the

furlough scheme and further lockdown periods in 2020

and 2021.

Throughout the year, the Committee received reports on

the internal model, including independent validation

results and the internal model owners’ report. This

outlined the scope of the capital model, key outputs, risk

drivers, significant parameters, expert judgements and

key assumptions. As a result of reviewing the internal

model owners’ report, the Committee challenged

management on its approach to diversification risk.

During the year, the Committee also scrutinised the

Group’s risk appetite guidance for affirmative and

non-affirmative cyber underwriting risks and challenged

the actions taken to mitigate such risks.

Risk monitoring and oversight

At each scheduled meeting, the Committee received a

report from the CRO which provided an overview and

assessment of the Group’s risk profile. It detailed the key

activities undertaken by the Risk function to further

embed risk management across the Group and, provided

outputs of regular risk monitoring and details of specific

risk issues, including in relation to Covid-19 and Brexit.

TheCommittee also received and discussed details of the

Group’s current and forward-looking solvency position.

The Committee received regular reports regarding the

three strategic risk appetite statements: maintain capital

adequacy; stable and efficient access to funding and

liquidity; and maintain stakeholder confidence. The

Committee monitored the Group’s exposure against these

risk appetite statements and the lower level risk appetite

statements, considered key risk indicators and assessed

the key drivers that affected status against risk appetite.

The Committee reviewed and questioned the justification

of the assessment of certain risks and the robustness of

management action plans to address areas close to or

outside of tolerance.

Risk management and controls

The Committee monitored the Group’s risk management

and internal control systems, and reviewed their

effectiveness. This covered all material risks, including

financial, operational and compliance. The Committee

reviewed the residual risk position and considered the

effectiveness of any associated mitigating actions and

compensating controls. The monitoring and review by

theCommittee involved examining an assessment of the

control environment and material controls at Group level,

based on divisional risk and control self-assessments.

These assessments had been subject to challenge by the

Risk and Group Audit functions.

Assessment of risk behaviours and attitudes

The Committee reviewed the annual Assessment of Risk

Behaviours and Attitudes undertaken jointly by the Risk and

Group Audit functions, which covered areas including tone

from the top, decision-making and the Risk Management

Framework as well as the Group’s response to Covid-19 and

the implementation of the Group’s new ways of working as

part of the business transformation programme. The

Committee discussed the outputs of theassessment, as well

as areas for further improvement, seeking to ensure the

appropriateness of the actions identified.

104 Direct Line Group Annual Report and Accounts 2020

Principal and emerging risks

The Committee assessed the principal risks facing the

Group, which are listed on pages 71 and 72, through

reviewing and challenging the matters listed in the

Group’s Material Risk Register in the context of the

Group’s risk appetite and through consideration of the risk

assessment contained in the CRO’s report received at

each scheduled meeting.

The Committee assessed the Group’s emerging risks.

Itchallenged the assumption that management had

identified all possible significant emerging risks during

theyear and the Risk function’s role in ensuring that such

risks were being monitored and managed appropriately.

The most notable emerging risks identified included

thoserelating to climate change and ethical use of data.

Further details regarding such risks can be found on

pages 71 to72.

Whistleblowing

As delegated by the Board, the Committee routinely

reviewed the arrangements by which employees may, in

confidence, raise concerns about possible improprieties

inmatters of financial reporting or other matters

(“whistleblowing”) during the year. The Committee also

reviewed reports relating to whistleblowing, including

anonymised, individual cases, to ensure arrangements

were in place for the proportionate and independent

investigation of such matters and for appropriate

follow-up action.

The Committee probed management and was satisfied

that the whistleblowing process met the necessary

standards and that it was adequately designed, operated

effectively and adhered to regulatory requirements. This

was supported by Group Audit’s review of the Group’s

whistleblowing arrangements during the year which

concluded that whistleblowing procedures and controls

were fit for purpose and operating effectively.

Financial Crime and anti-bribery and corruption

The Group has a fraud and financial crime policy, which

includes the requirement that all employees of the Group

comply with an anti-bribery and corruption minimum

standard. The aim of the standard is to ensure compliance

with applicable anti-bribery and corruption legislation

andregulation and that employees act responsibly

andethically at all times when conducting and

awardingbusiness.

The Committee considered the Group’s actions to prevent

financial crime through its review of the annual Financial

Crime Report. Annually, the Committee considers an

anti-bribery and corruption report, which includes a risk

assessment of the level of anti-bribery and corruption risk

to the Group. The Group’s annual anti-bribery and

corruption risk assessment was completed, noting that no

allegations or suspicions of bribery or corruption had been

identified or reported in 2020. Following review and

challenge, the Committee was satisfied that the Group’s

policies and procedures on anti-bribery and corruption

were fit for purpose and that anti-bribery and corruption

risks were managed appropriately.

Risk governance

During the reporting period, with the aim of balancing

efficiency and appropriate ownership and oversight, the

Committee reviewed the Group’s most significant policies.

The Committee reviewed and challenged each of these

policies as part of the Group’s Solvency II requirements

and recommended them for approval by the Board.

The Committee also considered the results of the annual

Group assessment of the effectiveness of the internal

controls environment undertaken by each business

division, as well as monitoring controls on an ongoing

basis. The Committee considered, challenged and

approved the annual risk operational plan and the

adequacy and objectivity of the Risk function’s resources.

The Committee has unrestricted access to management

and external advisers to help discharge its duties. It is

satisfied that in 2020 it received sufficient, reliable and

timely information to perform its responsibilities

effectively. In addition to monthly one-to-one meetings

with the Chair, the Chief Risk Officer also met privately

with the Committee without management being present.

The Chair also reported on matters dealt with at each

Committee meeting to the subsequent Board meeting.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness

of the Committee was conducted as part of the wider

review of the Board and the Board Committees by the

Chair of the Board. The review found that the Committee

functions effectively and that issues are dealt with

rigorously and in a considered manner.

The activity of the Committee was reviewed during the

year against the Committee’s terms of reference. The

Committee terms of reference can be found on the

corporate website: www.directlinegroup.co.uk/en/

who-we-are/governance/board-committees.

The Board reviewed and approved this report on

5 March 2021.

Jane Hanson

Chair of the Board Risk Committee

www.directlinegroup.co.uk 105

Governance

Committee membership

– Danuta Gray – appointed as Chair

26 October 2020

Chair

– Sebastian James – appointed 26 October 2020

Independent Non-Executive Director

– Dr Richard Ward

Independent Non-Executive Director

Committee meeting attendance can be found on

page87.

Key responsibilities

– Review Board composition

– Lead the process for Board appointments and make

recommendations to the Board

– Ensure orderly succession plans are in place for

theBoard

– Oversee executive succession planning at a high level

to ensure the development of a diverse Senior

Management talent pipeline

– Oversee and monitor the corporate governance

framework of the Group

– Monitor developments in governance and investor

ESGexpectations

Note:

1. Mike Biggs was a member of this Committee until he retired

from the Board on 4 August 2020.

Nomination and Governance Committee report

Danuta Gray

Chair of the Nomination and Governance Committee

Nomination and Governance

Committee Report

Areas of focus in the reporting period

– Reviewed the skills and experience of the Board with

regard to the oversight of the Group’s strategy and led

the search for a new Non-Executive Director, which

resulted in the appointment of Adrian Joseph on

1 January 2021.

– Monitored progress on executive succession planning,

both for members of the Executive Committee and for

new roles in the Agile operating model adopted by the

Group during the year.

Main activities during the year

Board and Senior Management succession

planning

The Committee regularly monitors the composition of

theBoard and its Committees to ensure that they have

asuitable balance of skills and experience to oversee and

challenge the delivery of the Group’s strategy and to

discharge the Committee’s responsibilities effectively.

The process adopted by the Board which culminated in

my selection as Mike Biggs’ successor as Chair of the

Board is described in detail in the Corporate Governance

report on page 91.

In October 2020, the Company announced my

appointment as Chair of the Nomination and Governance

Committee; Mark Gregory became Interim Chair of the

Remuneration Committee; and Sebastian James was

appointed as a member of the Nomination and

Governance Committee.

106 Direct Line Group Annual Report and Accounts 2020

New appointments

We engaged Heidrick and Struggles, which is a signatory

to the Voluntary Code of Conduct for executive search

firms, to assist in the search for a new independent NED

in2020. Heidrick and Struggles has no other connection

with the Company or any individual Director. Shortlisted

candidates were interviewed by members of the

Committee and the preferred candidate subsequently

met all other members of the Board.

Following the Committee’s recommendation, the Board

agreed, in December 2020, that Adrian Joseph OBE would

be appointed as an independent Non-Executive Director

with effect from 1 January 2021.

At the Committee’s recommendation, the Board also

agreed that, from 1 January 2021, Adrian would join

theSustainability Committee, Richard Ward would

become amember of the Remuneration Committee

andFiona McBain would become a member of the

Investment Committee.

Electing and re-electing Directors

Before recommending the proposed election or re-

election of Directors at the 2020 AGM, the Committee

reviewed the independence of the Non-Executive

Directors and concluded that all Non-Executive Directors

remained independent in judgement and character and

met the criteria for independence set out in the Code.

The then Chair, Mike Biggs, was independent at the time

of his appointment as Chair and was not involved in his

own review.

Special attention was paid to the Non-Executive Directors’

external responsibilities and it was concluded that all

Directors had sufficient time to dedicate to their

respective roles. TheBoard considered and approved Jane

Hanson’s new roles as a Non-Executive Director of Welsh

Water and Rothesay Life PLC, concluding that she would

continue to have sufficient time to devote to her role as a

Non-Executive Director of the Company. TheCommittee

recommended to the Board and shareholders that all

serving Directors be submitted for election or re-election

at the Company’s 2020 AGM.

With the exception of Jane Hanson, who will be stepping

down from the Board after having served as a Non-

Executive Director for over nine years, all current Directors

will submit themselves for election or re-election at the

Company’s 2021 AGM.

Diversity and inclusion

The Board believes that an effective Board with a broad

strategic perspective embraces a diversity of gender, race,

skills and experience, as well as of regional, socio-economic,

educational and professional backgrounds, amongst other

differences. The individual experience ofeach Director

isrecognised and forms a valuable part ofthe decision-

making process at Board level. The annual evaluation of

the Board considers its composition anddiversity.

In its search for candidates, the Board aims only to engage

with executive search firms which are signatories to the

Voluntary Code of Conduct for Executive Search Firms.

The Board’s diversity policy is available to view on the

Company’s website at www.directlinegroup.co.uk/en/

who-we-are/governance/other-policies. This policy, which

is annually reviewed and monitored by the Committee, is

presented to any executive search firm engaged to assist

with the selection and appointment process for Board

positions. The objective of the diversity policy is to seek to

ensure that individual differences, which contribute to the

success of the Company and represent the diversity of our

customers and colleagues, are reflected at Board level.

Further information on the Board diversity policy and the

Group’s diversity initiatives can be found in the Corporate

Governance report on page 92.

The Board supports the recommendations set out in

theParker Review and was delighted to welcome Adrian

Joseph as a member as of 1 January 2021. Adrian brings

awealth of experience in data strategy and analytics and

has a history of commitment to diversity and inclusion

initiatives. The Board looks forward to benefiting from

hisknowledge and experience, particularly in these fields,

which are central to its strategy.

Diverse pipeline

During the year, the Committee reviewed the Group’s

management succession planning and talent

development initiatives, with the objective of building

adiverse and inclusive talent pipeline and identifying

potential in the senior leadership population.

The Group has a detailed diversity and inclusion plan

which is supported by the Board and overseen by the

Sustainability Committee, and which includes the

objectives both of encouraging diversity in our succession

planning and of fostering a culture of growing inclusivity.

The Group also supports the empowerment of its senior

managers through its Emerge development programme.

The Committee recognises the importance of thorough

contingency planning and in January 2021, it reviewed

both emergency cover and longer-term succession

planning for all Executive Committee roles, along with

plans for developing senior leaders in new roles in the

Group’s Agile operating model.

www.directlinegroup.co.uk 107

Governance

Gender of Board and Senior Management

The Board supports the targets set in the Hampton-

Alexander Review. As at 31 December 2020, female

representation on the Board was 44.4%.

In August 2020, the Board was proud to mark a historic

moment when it became one of only four FTSE 250

companies with both a female CEO and female Chair.

The Board remains committed to progressing women

intosenior roles and aims to increase female

representation at executive level through associated

development programmes for high-potential females. As

at 31 December 2020, female representation at Executive

Committee level and their direct reports was 45.7%.

Board effectiveness review

In accordance with our three year cycle of Board

effectiveness evaluation, the review was facilitated

internally in 2020.

Further information on the evaluation process, including

the outcomes and actions proposed, can be found in the

Corporate Governance report on page 93.

Committee effectiveness review

During the year, I conducted an internal evaluation of the

effectiveness of the Committee as part of the wider review

of the Board and its Committees. The review found that

the Committee functions effectively and that issues are

dealt with in a thoughtful and rigorous manner.

The activity of the Committee was reviewed during the

year against the Committee’s terms of reference and

found that the Committee had discharged its

responsibilities effectively in 2020. The Committee’s terms

of reference can be found on the corporate website:

www.directlinegroup.co.uk/en/who-we-are/governance/

board-committees.

Corporate governance

The Committee monitors emerging governance matters,

compliance with the Corporate Governance Code and ESG

standard and subsidiary governance. It will continue to

monitor consultations, developments and reforms which

affect the Group’s corporate governance obligations.

The Board reviewed and approved this report on

5 March 2021.

Danuta Gray

Chair of the Nomination and Governance Committee

Nomination and Governance Committee report continued

108 Direct Line Group Annual Report and Accounts 2020

Sustainability Committee report

Committee membership

– Sebastian James

Chair

– Penny James

Chief Executive Officer

– Adrian Joseph – appointed 1 January 2021

Independent Non-Executive Director

– Jane Hanson

Independent Non-Executive Director

Committee meeting attendance can be found on

page87.

Key responsibilities

– Provide oversight and advice on how the Group

conducts its business in a responsible and

sustainable manner that reflects the Group’s vision

and purpose

– Monitor the progress of the Group’s initiatives under

its sustainability pillars

Sebastian James

Chair of the Sustainability Committee

Sustainability

Committee Report

Areas of focus in the reporting period

– Oversaw the Group’s efforts to be a force for good in

response to the Covid-19 pandemic.

– Monitored the Group’s sustainability activity through

regular updates on each of the five pillars of the

sustainability strategy.

– Challenged the robustness of management decision-

making relating to the five pillar sustainability strategy.

– Received updates on the development of the Group’s

first Sustainability Report.

– Reviewed ethical matters including the Group’s Modern

slavery statement.

– Agreed to expand its remit to ensure alignment with

the Group’s sustainability strategy; and vision to bea

force for good.

– Changed its name from Corporate Responsibility

Committee to Sustainability Committee.

Main activities during the year

Customers

During 2020, the Committee monitored steps taken to

earn customers’ trust by demonstrating how the Group

acts in their best interests. The Committee reviewed

management’s initiatives to support customers in the

light of the challenges presented by the Covid-19

pandemic including supporting our customers with roles

in the NHS by offering a fast track claims service, free

personal possession, home emergency and rescue cover.

The Committee was supportive of other initiatives to assist

customers in financial difficulty as a result of Covid-19 such

as providing “Mileage MoneyBack” refunds, offering to

waive cancellation fees, payment deferrals, and adding

flexibility to motor and rescue policies.

The Committee received updates on the work to

understand the reasons behind the marginalisation of

certain customer groups from various rights, opportunities

and resources that are normally available to others,

defined by management as social exclusion. The

Committee reviewed and challenged reasons proposed by

management as explanations for social inclusion which

www.directlinegroup.co.uk 109

Governance

included access, affordability and data availability. The

Committee acknowledged that action to reduce social

exclusion would be explored alongside the Group’s

response to the FCA’s Market Study on General Insurance

Pricing Practices.

People

The Committee considered management’s mission to

build a culture that celebrates difference and empowers

people so that they can thrive. The Committee and Board

regard diversity and inclusion as an integral aspect of

ensuring that people can thrive at the Group, and

theCommittee was pleased to receive updates on

management’s progress against its diversity and inclusion

priorities. The Group’s first diversity and inclusion survey

aswell as insights from the Group’s Diversity Network

Alliance were incorporated into a new diversity and

inclusion strategy, setting targets for progress.

The Committee received updates on measures to protect

people during Covid-19 including remote working

arrangements, safeguarding roles and remuneration,

andon efforts to support mental health and wellbeing.

The Committee noted the increased frequency of

engagement with employees through regular employee

pulse surveys and impactful internal communications

campaigns such as #WeCare.

The Committee was supportive of management’s

commitment to continue building a great place to work

despite the challenges of Covid-19 through the Agile

transformation programme. The Committee was pleased

to see management’s focus on empowering employees to

self-organise and provide solutions for customers as

quickly as possible and noted progress updates regarding

upskilling and the development of Agile behaviours.

Planet

During the year, the Committee oversaw management

actions towards protecting the business from the impact

of climate change and giving back to the planet more

than it takes out. The Committee monitored progress

against the Group’s climate targets for reducing energy

consumption and greenhouse gases and environmental

initiatives and was pleased to see that at Half Year the

Group had:

– exceeded its target to reduce Group-wide emissions on

a like-for-like basis by 2020 against a 2013 baseline by

57%; and

– met its target for a 30% like-for-like reduction in the

Group’s energy use by 2020 against a 2013 baseline.

The Committee also received updates on the Group’s work

to set science-based carbon targets for Scope 1 and 2

emissions, and Scope 3 emissions under the Group’s

control, and submit them in line with the Science-Based

Targets Initiative framework. More information regarding

the Group’s greenhouse gas emissions data can be found

on page 61 of the Strategic report.

The Committee considered the Group’s progress towards

achieving its carbon neutrality ambitions in 2020. The

Group agreed a three-year commitment with the Carbon

Trust to offset carbon emissions by investing in high

impact projects that both reduce carbon emissions and

support global communities.

Society

During 2020, the Committee monitored how the Group

used its expertise to improve outcomes for our society

andthe communities it served. The Committee received

updates on the Group’s Community Fund, created to

support communities during Covid-19 in areas where

Direct Line had a presence. The Committee was pleased

to see £3.5 million of assistance given to vulnerable

groups, small, local charities and charitable projects

supporting public policy areas.

The redevelopment of Shotgun, the Group’s initiative

aimed at reducing young driver accidents, continued

during 2020. Despite the delayed relaunch of Shotgun,

theCommittee noted management’s conviction in the

core aims of the mobile application to: reduce young

driver accidents; and have a positive influence on young

drivers’ behaviours on our roads.

Additional ethical matters

The Committee recognises that respecting human rights

is self-evidently the right thing to do and is committed

toensuring that the Group conducts its business in a

manner which is ethical and sustainable.

In December 2020, the Committee reviewed the Group’s

policy on compliance with the Modern Slavery Act 2015

and how third-party suppliers complied with the

Act’srequirements.

The Committee challenged the Procurement function and

concluded that processes and policies in connection with

the Modern Slavery Act were robust, effective in being

embedded in supply chain processes, and had

appropriately responded to unprecedented circumstances

presented by Covid-19.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness

of the Committee was conducted as part of the wider

review of the Board and the Board Committees by the

Chair of the Board. The review found that the Committee

functioned effectively and that the refreshed scope of the

Committee allowed sustainability issues to be addressed

creatively and thoughtfully. The Committee’s terms of

reference were reviewed during the year against the

activity of the Committee. At the time of reviewing the

Committee’s Terms of Reference, the Board agreed that

its name should be changed from the Corporate

Responsibility Committee to the Sustainability

Committee.

The Committee’s Terms of Reference can be found on the

corporate website:

www.directlinegroup.co.uk/en/who-we-are/governance/

board-committees.

The Board reviewed and approved this report on

5 March 2021.

Sebastian James

Chair of the Sustainability Committee

Sustainability Committee report continued

110 Direct Line Group Annual Report and Accounts 2020

Investment Committee report

Mark Gregory

Chair of the Investment Committee

Investment

Committee Report

Committee membership

– Mark Gregory

Committee Chair

– Jane Hanson

Independent Non-Executive Director

– Tim Harris

Chief Financial Officer

– Fiona McBain – appointed 1 January 2021

Independent Non-Executive Director

Committee meeting attendance can be found on

page87.

Key responsibilities

– Provide oversight of the Group’s investment strategy

– Oversee the management and performance of the

Group’s investment portfolio

Areas of focus in the reporting period

– Understood the potential risks and monitored the

financial consequences for investment assets from

theeconomic downturn driven by the Covid-19 global

pandemic.

– Considered how the investment portfolio started to

respond proactively to the global challenge to reduce

greenhouse gas emissions and support the transition

toa low carbon economy.

– Monitored developments and progress towards a trade

agreement between the EU and the United Kingdom

and any attendant impact on investment assets.

– Ensured investment activities continued always to

provide sufficient access to liquidity to meet a stress

insurance or market event.

– Monitored market developments in response to the

planned discontinuation of the London Inter-Bank

Offered Rate (“LIBOR”) after 2021 and the progress made

by the Group to ensure it is ready for the changes.

Main activities during the year

Covid-19

The April meeting, which took place against a background

of lockdowns around the world and fiscal and monetary

responses by governments and central banks being

implemented at pace, considered a comprehensive paper

confirming the levels of diversification within the asset

portfolios, the quality of assets held and exposures to

sectors most adversely affected by lockdowns and social

distancing. The paper detailed exposure to those assets

atthe lower end of the Company’s risk appetite and,

therefore, more susceptible to being downgraded outside

of risk appetite. At the same meeting the Committee

reviewed waivers agreed by management with asset

managers for fixed income holdings already outside risk

appetite, the waivers allowing the asset managers a

longer timeframe in which to consider when to dispose

ofsuch assets in view of improving market conditions.

TheCommittee received regular updates on the waiver

positions between scheduled meetings until all waivers

were closed later in the year.

www.directlinegroup.co.uk 111

Governance

In July, the Committee considered the findings and

recommendations resulting from a detailed review of the

investment property portfolio. The review examined the

business case for continuing to hold each property asset

in the portfolio against the medium-term changes

expected to impact the commercial property market as

aresult of the move to increased working from home

andonline shopping. At the meeting, the Committee also

sought assurances from the asset manager that tenants

were being offered flexibility, where necessary, regarding

finding mutual solutions for rent payments due in

situations where the tenant’s cash flows had deteriorated

markedly due to the pandemic.

The financial consequences of the pandemic on the

Company’s budgeted investment result and changes in

assets valuations were reported at each meeting.

Responsible investing – climate change

In 2020, the Committee approved new measures for

thecorporate bond portfolios (75% of the total investment

portfolio benchmark) to help achieve the Group’s

ambition to limit its impact on the climate and to achieve

net zero carbon emissions by 2050. In summary,

acommitment was given to set a target to reduce the

Green House Gas (“GHG”) Emissions Intensity

across the

relevant portfolios by 50% before the end of 2030

(benchmarked against the end of 2020 GHG emissions

intensity). In addition, the Committee agreed that asset

managers should be encouraged to allocate capital

increasingly towards companies demonstrating an intent

to decarbonise through the following guideline changes

and restrictions:

– A preference for companies with carbon reduction

targets approved by the Science-Based Targets

Initiative;

– A preference for companies with at least a 2°C carbon

performance alignment with the Transition Pathway

Initiative;

– The exclusion of any companies with a carbon transition

score indicating assets could be economically stranded;

– The exclusion of any mining companies that generate

>5% of revenues from thermal coal production and

electricity generators that derive >5% of revenues from

thermal coal power generation (unless, in either case,

the company has an approved Science-Based Targets

Initiative Plan); and

– The exclusion of any companies that are developing

new thermal coal mines or coal burning power plants.

The Committee will continue to monitor the results of

theresponsible investing framework in place and seek

updates on market developments and trends. The

Committee expects management to recommend further

adjustments to the framework over the next two to

threeyears.

The Committee recognised that it was important for the

Group to seek to comply with the recommendations

made by the Task Force on Climate-related Financial

Disclosures (“TCFD”) and to carry out climate change

scenario stress testing.

Further information about the Group’s approach to TCFD

can be found on pages 62 to 63.

Market developments

At each scheduled meeting, the Committee received

amarket update from the Director of Investment

Management and Treasury. The updates covered:

economic conditions in the UK, the US and the Eurozone;

market levels for key asset classes (notably credit); the

outlook for interest rates and inflation; and developing

issues viewed as appropriate to be brought to the

attention of the Committee. The Committee also

monitored the development of interest rate policies set

bythe Bank of England, the US Federal Reserve and the

European Central Bank and the impact of non-sterling

assets held on hedged yields.

Suitability of investment strategy

The annual studies examining stressed liquidity

requirements and asset and liability matching were

presented to the Committee during the year. Such work

informs strategic benchmark allocations and provides part

of the context for the addition of new asset classes or

disposing of a holding. During the year, the Committee

agreed amendments to the existing strategic benchmark

which entailed reductions in benchmark allocations to

assets supporting liquidity and infrastructure debt and net

increases in allocations to investment grade credit and

Commercial Real Estate (“CRE”) loans.

Monitoring investment activity and performance

The Committee received a comprehensive report at each

scheduled meeting covering: the financial results of

investment activity; aggregate portfolio positioning

against strategic benchmarks; performance of each

individual portfolio against benchmark; adherence to

operational controls; performance of suppliers; and

compliance with an agreed framework of risk limits.

During the year the Committee invited the managers

responsible for the investment property portfolio, the CRE

loans portfolio and the private placements portfolio to

present updates on their respective portfolios.

Committee evaluation

During the year, an internal evaluation of the effectiveness

of the Committee was conducted as part of the wider

review of the Board and the Board Committees by the

Chair of the Board. The review found that the Committee

functions effectively and that issues are dealt with in a

thoughtful and rigorous manner. The Committee’s terms

of reference can be found on the corporate website:

www.directlinegroup.co.uk/en/who-we-are/governance/

board-committees.

The Board reviewed and approved this report on

5 March 2021.

Mark Gregory

Chair of the Investment Committee

Note:

1. Greenhouse gas (GHG) emissions intensity = metric tonnes

e (CO

equivalent) GHG emissions/million $ sales

Investment Committee report continued

112 Direct Line Group Annual Report and Accounts 2020

Directors’ Remuneration report

Mark Gregory

Chair of the Remuneration Committee

Directors’

Remuneration Report

Dear Shareholders,

I am pleased to introduce my first Directors’

Remuneration Report (the “Report”) as Chair of the

Remuneration Committee (the “Committee”), for the 2020

financial year. I would like to thank Danuta Gray for her

stewardship of the Committee over the last few years and

congratulate her on being appointed as Chair of the Board.

The Committee is immensely proud of the ways in which

our people continued to provide exceptional service, value

and flexibility to our customers in 2020, aligning with our

desire to make insurance personal, inclusive and a force

for good. We offered extra value to all our customers and

further support to those in financial difficulty in response

to the unexpected impact of the Covid-19 pandemic. Many

measures were introduced across the business to achieve

this, including payment deferrals, waiving cancellation

fees, mileage refunds and free roadside assistance to

keyworkers.

During 2020, we have sought to balance the needs of our

different stakeholders, by caring for our people, looking

after our customers, protecting the business for the long

term, and supporting the national effort and our

localcommunities. After reinstating our ordinary dividend

assoon as possible in August (along with a 2020 special

dividend, reflecting a full catch-up of the cancelled 2019

final dividend) we have also delivered to our investors.

Wehad voluntarily withdrawn our ordinary dividend to

indicate restraint and consistency with the PRA when it

asked insurers to consider the protection of policyholders.

As a result of the Covid-19 pandemic, and delivering on our

desire to be a force for good, the Group also established

our first Community Fund which distributed £3.5 million

to250 charities supporting over 200,000 people, and we

have extended this by a further £1.5 million for 2021 to

serve our local communities. More information on these

initiatives can be found on page 57.

Committee membership

– Mark Gregory – appointed Chair

on 26 October 2020

Chair

– Danuta Gray

Chair of the Board

– Sebastian James

Independent Non-Executive Director

– Dr Richard Ward – appointed 1 January 2021

Senior Independent Director

Key responsibilities

– Determines the policy for rewarding Directors and

senior leadership for results that are generated within

the risk appetite set by the Board and oversees how

the Group implements its Remuneration Policy;

– Oversees the level and structure of remuneration

arrangements for senior executives, approves share

incentive plans, and recommends them to the Board

and shareholders; and

– Reviews workforce remuneration and related

policiesand the alignment of incentives and rewards

with culture.

Note:

1. Mark Gregory was appointed to the Committee on

29 May 2020 and as Chair on 26 October 2020. Mike Biggs

was a member of this Committee until he retired from the

Board on 4 August 2020.

www.directlinegroup.co.uk 113

Governance

Directors’ Remuneration report continued

Through the year and into 2021, the health, safety and

wellbeing of our people has never been more crucial.

Despite the challenges the pandemic has presented,

theGroup provided stability and security of pay for our

entire workforce. We did not seek or receive any

government support and did not furlough any colleagues.

Just before and as we moved into the initial lockdown in

March 2020, we moved 9,000 people to work from home

and continued to pay all of our employees their usual pay,

including fixed-term contractors, regardless of whether

they were fully or partially working, or temporarily not able

to work. The Group also initially suspended the structural

workforce changes, previously announced in February

2020, to provide further job security at this challenging

time. A gradual implementation of the planned structural

changes has now begun. There have been no

redundancies as a result of the impact of the Covid-19

pandemic. Furthermore, through a combination of

employee redeployments and alterations to the timing

ofplanned changes, fewer than anticipated exits have

occurred as part of the planned structural changes. Penny

James also voluntarily donated the value of her salary

increase from 1 April 2020 to FareShare, a charity that

redistributes surplus food to other charities that turn it

into meals for those in need. These measures demonstrate

our understanding that these are challenging times for

everyone and that we will continue to make the decisions

needed to protect the long-term interests of the Group

forthe good of all of our stakeholders.

Further details of decisions which the Committee has

made in respect of key components of executive

remuneration as a consequence of Covid-19 are

summarised on pages 115 and 116.

The Group has had a good year, in difficult circumstances,

demonstrating financial resilience and making significant

progress against our key strategic aims despite the

challenges we faced in 2020. Our objective is to turn

theGroup’s potential into growth through combining

ourcustomer-focused philosophy, strong brands and

technology transformation to become a simpler, leaner

and more agile organisation. Therefore, we are committed

to being a home for capable people who celebrate

difference and challenge the status quo to deliver to our

customers. We can only do this by empowering and

developing the best people.

We also know from regular engagement surveys that our

employees have remained exceptionally engaged during

the challenges that Covid-19 has brought in 2020.

With this in mind I am pleased to provide an overview

ofour work in relation to the remuneration of both the

Executive Directors and the wider workforce for the year

ended 31 December 2020.

The Committee’s objectives include:

– rewarding Directors for results that are generated

within the risk appetite set by the Board;

– setting an appropriate framework for remuneration for

the Executive Directors, Executive Committee and other

senior management with enough flexibility so that the

Group can attract and retain the best people for the

organisation; and

– having oversight of remuneration policies throughout

the Group and ensuring all our colleagues are paid fairly.

The Report is set out in the following sections:

Section Page

Chair’s statement 113 to 118

Remuneration at a glance – summarising

the remuneration arrangements for

Executive Directors 119

Annual Report on Remuneration –

detailing pay outcomes for 2020 and

covering how the Group will implement

remuneration in2021 120 to 135

Summary of the Policy approved at

the2020AGM 136 to 139

Remuneration Policy

In last year’s report, we presented an updated Directors’

Remuneration Policy (the “Policy”) to be submitted for

shareholder approval at the AGM on 14 May 2020. The

updated Policy included relatively minor changes to align

with regulatory and governance updates, such as the

introduction of a post-cessation shareholding

requirement, an increase in the shareholding requirement

for the CEO, and changes aimed at simplifying the

remuneration structure, such as adopting a straight-line

performance schedule for the Annual Incentive Plan

(“AIP”) between threshold and maximum (consistent with

the Long-Term Incentive Plan (“LTIP”)). The updated Policy

was approved by shareholders, with 97.55% of votes cast in

favour, and the Committee has implemented this Policy

during 2020. During the year, the Committee has taken

full account of the 2018 Corporate Governance Code

(the “Code”) in our discussions and remuneration practices.

The full Policy can be found on the Direct Line Group

website, under the ‘Results and Reports’ heading of

theInvestors page, and on pages 128 to 138 in the 2019

Directors’ Remuneration Report. In our Remuneration

ataglance section on page 119, we summarise the

performance outcomes against our remuneration

framework, in the context of how the Policy was applied

in2020.

114 Direct Line Group Annual Report and Accounts 2020

Covid-19 trigger factors

The Committee proactively considered the impact of Covid-19 throughout the year, beginning in late March when the

Committee established a set of principles to assess its decisions. These were developed with the key overarching aim

ofensuring that pay decisions for 2020 were set at a reasonable level and appropriate with reference to all our

stakeholders and the external economic backdrop. They were set, and continue to be referred to, as follows:

Principle Description Committee end of year assessment

Dividends and

shareholder

experience

The Committee would consider the extent

to which cash dividends have been paid

over 2020, and hence the alignment of pay

decisions with shareholder experience.

Following consultation with the PRA, the Group

re-started dividends following the HY2020 results

andalso paid a catch-up dividend in respect of the

cancelled 2019 final dividend. 2019 and 2020 pay

outcomes are therefore aligned with the experience

of our shareholders.

Regulatory

factors

The Committee would be mindful of

the PRA’s request that insurers consider

the need to protect policyholders and

“maintain safety and soundness” when

making decisions on variable

remuneration.

The Group consulted with the PRA before re-starting

dividends and concluded that the Group was

financially strong. Decisions on pay outcomes for

senior leadership and the wider workforce for 2020

reflect the Group’s performance.

Direct

government

support

The Committee would consider whether

the Company had used any direct

government support, such as the

Coronavirus Job Retention Scheme, VAT

deferral, or business interruption loans.

The Group has not sought or received any direct

government support during the year.

Wider

workforce

The Committee would consider whether

the Company has made (or intends to

make) any staff redundancies as a result

of Covid-19, or other impacts on the wider

workforce such as salary freezes, the

scaling back of salary increases or incentive

opportunity reductions. The Committee

would ensure that management are

treated consistently with the approach for

the general workforce.

No staff redundancies were made as a result of

Covid-19, and the Committee supported the Group’s

decision to delay planned redundancies as a result of

the restructuring programme to provide job security

for colleagues. The Committee noted that the number

of redundancies was reduced as a result of re-

deploying some employees.

Management outcomes are consistent with the wider

workforce – the AIP outcome is the same across the

Group and senior leadership salary increases are nil for

2021 (the wider workforce received increases of

between 1.5% to 2%).

Non-financial

impact

The Committee would consider any

adverse impact in respect of customer

experience, reputation or regulatory

relationship during 2020.

The Group has provided exceptional service to

customers during the year, as illustrated in the outturn

of the Customer element of the AIP. The Committee is

proud of the measures the Group took to support

customers and local communities.

Shareholder

expectations

The Committee would consider the

expectations of institutional shareholders

and proxy voting agencies.

The Committee carefully considered the expectations

of shareholders and proxy agencies in determining

2020 remuneration outcomes and is satisfied that the

decisions are consistent with these expectations.

www.directlinegroup.co.uk 115

Governance

Directors’ Remuneration report continued

2019 bonus (AIP)

To pay the bonus in the normal manner

with no adjustment.

The 2019 bonus reflected the Company’s good performance in a challenging year of

change, before the impact of Covid-19.

All eligible employees received their 2019 bonuses.

At the time that 2019 bonuses were paid, it was expected that the 2019 ordinary final

dividend would be paid in May 2020.

It was agreed in April 2020 that Executive Directors would not be considered for any

further bonuses until dividends for ordinary shareholders resumed (which was announced

in August).

The Company’s balance sheet and liquidity remain strong.

2020 salary rises

To increase the level of base salary of the

CEO in line with the average rise made to

all employees.

The CEO voluntarily donated the increase

to charity for the 2020 financial year.

The CFO did not receive an increase, due to

his joining date in the final quarter of 2019.

The Company made its commitment to all eligible employees to receive a salary increase

for the 2020 financial year, prior to the impact of Covid-19, and felt it was important to

meet this commitment to our hard working colleagues.

During the year, we have made a commitment not to furlough any employees as result of

Covid-19.

2020 bonus (AIP)

The Committee has used the performance

conditions and weightings agreed at the

start of the year.

However, in relation to the People metric,

the set of indicators was refined to refocus

on a few key indicators given the external

circumstances and wider impact of

Covid-19.

The Company committed publicly to the operation of a bonus plan for all eligible

employees for 2020. The Company performance conditions are the same for employees

and Executive Directors. A formulaic assessment of achievement against the financial and

strategic elements was carried out. Profit before tax performance was above the

maximum level set at the start of the financial year. However, the Committee recognises

that the pandemic has had both positive and negative results on our financial

performance. Examples include direct effects arising from reduced claims frequencies,

refunds as a result of offering customers the opportunity to adjust their policy terms as

well as the Group’s charitable donations and community actions. After rigorous debate,

the Committee determined that it was appropriate to apply a discretionary downward

adjustment of 10% to the financial outturn of the AIP to 90% of maximum. The overall AIP

outturn is 82% of maximum.

2017 LTIP vesting

The Committee approved the vesting of

the March and August 2017 LTIP awards

without adjustment during 2020.

The 2017 LTIP measured performance over three years (up to 31 December 2019 for RoTE,

and up to the vesting date for TSR).

The value of the shares on vesting reflected the share price experience of shareholders.

2020 LTIP grant

The Committee approved the grants

ofthe2020 LTIP awards on the normal

timetable and made no changes to the

performance conditions and targets

agreed with shareholders.

The Company followed its normal practice

of using the three-day average share price

immediately before the date of grant to

determine the number of shares awarded.

The LTIP performance conditions are based on the long-term RoTE and TSR and therefore

remain appropriate.

Despite the initial decline experienced in our share price in March 2020, similar to the

declines experienced across the market, overall the Company’s share price has been less

adversely affected by Covid-19 than that of many other companies and recovered well

during the year.

‘Windfall gains’ were considered before granting the March and August 2020 LTIPs. The

Committee also took the opportunity to agree and document certain circumstances that

might trigger the Committee to commence a ‘windfall gains’ review at vesting, including

reviewing share price analysis over time versus the sector and our peers.

The Committee will assess the value of the 2020 LTIP awards at vesting and will ensure

that the final outturns reflect all relevant factors, including consideration of any

‘windfall gains.’

Covid-19 impact on executive remuneration

The following table summarises the key components of executive remuneration and the decisions made

bytheCommittee:

Committee decision Rationale

116 Direct Line Group Annual Report and Accounts 2020

Wider workforce engagement and pay

considerations for 2020

The Committee has consistently considered wider

employee pay as context for the decisions it makes. Every

year we review and act on the outcome of our DiaLoGue

People Survey. The Chair of the Committee has attended

meetings of the Group’s Employee Representative Body

(“ERB”) since 2018, at appropriate times during the year.

However, given the unprecedented activity of the ERB

during 2020, it was not possible for the Remuneration

Committee Chair to attend directly, but I have been kept

abreast of matters by the Chief People Officer and Chief

Executive Officer throughout the year. Our existing

workforce engagement is strengthened through internal

social networking, “town halls” and other forums.

Tosupplement this, the Committee receives papers

setting out details of all-employee pay and workforce

policies across the Group at each meeting. We found that

this standing agenda item gave us further valuable insight

and context for framing executive pay and policies.

The Committee considers it important to monitor

andassess internal pay relativities and takes these

intoaccount when determining Executive Director

remuneration. Early adoption of the CEO pay ratio

disclosure in 2018 emphasised the Committee’s intention

to do so. Option A was adopted to report the employee

pay ratio last year to better reflect the diverse range of

jobroles across the business, (see page 129), and the

Committee continues to review the annual CEO pay

ratiodisclosures.

During 2020, the Group further built on its commitment

to ensure that all of our people are rewarded fairly and

have an interest in the success of the Group, with a

minimum salary increase of £500 in 2020, bringing the

minimum salary across the Group to £19,500 in the UK.

We are also pleased that, through our continued focus

onbuilding an inclusive organisation, we have maintained

our female representation in senior jobs in line with the

Women in Finance Charter target of 30% during 2019

and2020, and we will continue with the programmes

underway to further reduce our gender pay gap.

The Group’s Gender Pay Gap Report can be found at

www.directlinegroup.co.uk.

Performance and incentive outcomes

for2020

During 2020, the management team has worked

extremely hard to launch the refocused strategy and is

proud of the Group’s performance in the past year.

The Group delivered good results in a challenging market

with a strong capital position supported by our successful

customer-focused strategy and our investment in future

capabilities. This performance is reflected in the incentive

outcomes for our Executive Directors. No adjustments to

the performance targets set at the beginning of the year

were made as a result of Covid-19. When assessing the

formulaic outcome of the 2020 AIP, the Committee

agreed that a discretionary downward adjustment to the

financial metric was appropriate. Further details are set

out in the following section. No discretion was exercised

inrespect of LTIP awards vesting during the year, which

reflect the Group’s strong performance over the last

threeyears.

AIP

Financial resilience, whilst supporting our customers,

people and local communities during this extraordinary

period, has helped us to achieve strong underlying results

in 2020, exceeding the financial plan for the year. This has

led to a profit before tax of £451.4 million, which

formulaically results in a maximum performance outturn

for this element. However, the Committee recognises that

the Covid-19 pandemic has acted both positively and

negatively on our financial performance. Some of these

influences relate to macro market trends, whereas others

can be more directly linked to Covid-19 either as direct

effects (for example, reduced motor claims frequencies,

asa result of reduced travel during national lockdowns,

and reduced motor premiums due to refunds offered to

customers for reduced mileage expectations), or through

choices the Group has made to manage through the

pandemic (such as our charitable donations and

supporting colleagues working from home). Therefore,

after rigorous debate, the Committee determined that

itwas appropriate to apply a discretionary downward

adjustment of 10% to the financial outturn of the AIP

to90% of maximum.

The Committee is pleased to report this year that

performance across the Customer measures was

extraordinary and awarded a maximum outturn for this

element. The People measures were assessed as being

between target and maximum. Although management

has made significant progress on successfully landing

much of the major technology transformation elements

in2020, there has been slower than expected progress on

the cost reduction agenda on which the Shared objective

was measured. Therefore the Committee awarded an

outturn of 50% of maximum for this element. The overall

AIP outcome for the Executive Directors for 2020 (after the

application of downward discretion) was therefore 82% of

maximum. In line with the Policy, 40% of any AIP award

will be deferred for three years under the Deferred Annual

Incentive Plan (“DAIP”). Full details on the outcomes for

the year are included on pages 123 to126.

LTIP

The Group grants LTIP awards in two tranches each year.

RoTE performance (60% of the award) is measured over

three financial years. Relative TSR performance (40% of

the award) is measured over the three-year period from

the date of grant. All LTIP awards granted to Executive

Directors in August 2017 or later are subject to a two-year

holding period after vesting. The March 2017 and August

2017 LTIP awards (which vested during 2020) were

granted before the appointment of Penny James and Tim

Harris; however, the outcomes of these awards are

relevant to certain former Directors. The overall outcome

of the March 2017 and August 2017 LTIP awards was 70.8%

and 78.0% of maximum respectively. Performance under

each metric was as follows:

– As disclosed last year, average RoTE performance of

20.4% over 2017, 2018 and 2019 was above the maximum

target level of 18.0%, leading to a maximum payout

forthis element. In calculating the RoTE achievement,

thereported RoTE for 2018 was adjusted downwards

toexclude the favourable impact of the capital

management exercises executed in the 2017 financial

year on the outcome for these awards. Consistent with

the regulation, the value in respect of this element was

disclosed in last year’s Report.

www.directlinegroup.co.uk 117

Governance

Directors’ Remuneration report continued

– Relative TSR performance was above the threshold

performance level for both the March and August 2017

LTIP awards (based on performance over the three-year

period from the date of grant of each award), leading to

vesting of 26.9% and 45.1% of maximum respectively for

this element.

– Penny James joined the Group in November 2017 and

was granted an LTIP award at that time in respect of

2017. The RoTE performance was assessed over the

same three-year period as the March and August 2017

LTIP awards. Relative TSR performance was above

threshold (based on performance over the three-year

period from the date of grant), leading to vesting of

51.5% of maximum for this element. The overall outcome

for this award was therefore 80.6%.

The March and August 2018 LTIP awards are due to vest

in2021, subject to the Committee’s satisfaction that the

financial and risk underpins have been met at the end of

the vesting period. These awards were granted before Tim

Harris’s appointment, and have the following characteristics:

– Average RoTE performance of 20.7% over 2018, 2019 and

2020, is above the maximum target level of 20.5%, and

therefore this element will vest at the maximum level

(subject to the above underpins). In calculating the RoTE

achievement, the reported RoTE for 2018 was adjusted

downwards to exclude the favourable impact of the

capital management exercises executed in the 2017

financial year on the outcome for these awards.

– As performance under the relative TSR element is based

on the three-year period from the date of grant, the

outcomes in respect of this element are not yet known.

Consistent with the regulations, as the performance

period for the TSR elements of the 2018 LTIP is not yet

complete, the outcome will be reported separately next

year. Accordingly, we have included an estimated value

of the RoTE vesting outcomes for the 2018 LTIP awards,

plus the TSR vestings from the 2017 LTIP awards, in the

single figure remuneration table for 2020 for the

Executive Directors.

Committee decisions on outcomes

As mentioned, the Group has delivered a good performance

this year in extremely challenging circumstances and

theoverall outcomes for the annual bonus resulted in a

payout (after application of downward discretion) of

£1,166,296 for the CEO and £767,725 for the CFO, which

theCommittee believes is appropriate in the context of

the Group’s performance in 2020. The Committee believes

that the application of downward discretion to the profit

before tax outturn of the AIP was appropriate and balanced

in light of the positive and negative effects of Covid-19 on

our financial performance. This demonstrates that the

Policy (which provides the Committee with such discretionary

powers) operated as intended during the year.

The level of vesting of the LTIP awards made in 2017

wasconsidered appropriate in the light of the Group’s

performance over the three-year performance period,

andtherefore no discretion was exercised in relation to

these awards.

Approach to pay in 2021

No change to the overall approach to pay is anticipated

for2021. Neither the CEO nor CFO will be awarded a salary

increase, consistent with the approach we have taken

across our senior leadership population given the

challenging external economic climate. Salary increases

will be awarded for the wider workforce population, in

recognition of their hard work during this challenging

period. The wider workforce will receive increases of

between 1.5% and 2%.

No change will be made to the weightings of the metrics

under the AIP. The approach to assessment will focus on

performance measures agreed at the start of the year.

We are not proposing any changes to the performance

conditions for the 2021 awards under the LTIP. Likewise,

the target RoTE scale of 17.5% to 20.5% will remain at the

same level as in 2020 and reflects an appropriate

performance range in the context of the Group’s planned

underlying RoTE performance.

As part of the wider Committee oversight on all-employee

pay matters, the Committee can confirm that the Group

will maintain the minimum salary level across the Group,

that is 5% above the Living Wage Foundation rate outside

London, and 15% higher than the Government’s current

National Minimum Wage. We continue to want our

employees to have direct interest in the ownership of

theGroup. As such, the Committee approved a grant of

free shares (under the Company’s Share Incentive Plan) to

all employees in 2021 to recognise their invaluable

contribution to the business and the desire to strengthen

shareholder alignment across the Group. In addition, a

£400 one-off ‘thank you’ bonus will be awarded in April

2021 to everyone who is not usually eligible for a bonus as

part of their contract.

Committee performance

The Committee’s performance was assessed as part of the

annual Board evaluation. I am pleased to report that the

Committee is regarded as operating effectively and the

Board takes assurance from the quality of the

Committee’s work.

Your AGM vote

The Committee welcomes investor feedback on an

ongoing basis and this Report seeks to describe and

explain our remuneration decisions clearly. At this year’s

AGM you are being asked to vote on a resolution for the

Directors’ Remuneration Report. I hope that, having read

the information in this Report, and considering the

performance of the Group during 2020, you will vote

insupport of the Directors’ Remuneration Report at

theAGM.

Should you have any questions about my Committee’s

Report please email our AGM email address

[email protected] and I or one

of my colleagues at Direct Line Group will respond to you.

Yours sincerely,

MARK GREGORY

Chair of the Remuneration Committee

118 Direct Line Group Annual Report and Accounts 2020

Remuneration at a glance

Remuneration outcomes for 2020

Executive Directors’ total pay

Find out more on page 122

£0m 0.5m £1.0m 1.5m £3.5m2.0m 2.5m 3.0m

Penny James

(CEO)

Tim Harris

(CFO)

£3,188

Total pay (£’000)

£1,365

Base salary Pensions and beneﬁts Annual bonus LTIP

AIP achievement

This chart illustrates the actual amounts earned from the AIP and reflecting performance in 2020. 60% of the

amount is payable in March 2021 and 40% will be deferred into shares for three years.

Find out more on pages 123-126

£0m £0.2m £0.4m £0.6m

£1.6m

£0.8m £1m £1.2m £1.4m

Penny James

(CEO)

Tim Harris

(CFO)

Actual (£)

Maximum (% of salary)

144% 175%

£768k

£1,166k

Actual (% of salary)

LTIP

Shareholding at 31 December 2020

This chart illustrates the number of shares held at the

end of 2020 by the Executive Directors against the share

ownership guidelines of 250% of salary for the CEO and

200% of salary for the CFO.

Release of value under the LTIP

This chart illustrates the total value of the 2017 LTIP

awards that vested in 2020.

£0m £1.0m

£2.0m

Grant

Vesting

Reinvested dividends

Shares under award

Penny James (CEO)

Find out more on page 133

£3.5m

Penny James (CEO)

£0.5m£0m £1.0m £1.5m £2.0m £2.5m £3.0m

Tim Harris

(CFO)

Guideline2020

£3.5m

£0.5m£0m £1.0m £1.5m £2.0m £2.5m £3.0m

Find out more on page 127-128

www.directlinegroup.co.uk 119

Governance

Advisers to the Committee

The Committee consults with the Chief Executive Officer,

the Chief People Officer, and senior representatives of the

HR, Risk and Finance functions on matters relating to the

appropriateness of all remuneration elements for

Executive Directors and Executive Committee members.

The Chair of the Board, Chief Executive Officer and Chief

People Officer are not present when their remuneration

isdiscussed. The Committee works closely with the Chairs

of the Board Risk Committee and the Audit Committee,

including receiving input from those Chairs regarding

target-setting and payouts under incentive plans, and

whether it is appropriate to apply malus and/or clawback.

The Chair of the Board Risk Committee attended

Committee meetings on three occasions in 2020. The

Remuneration and Board Risk Committees can also hold

joint meetings to consider matters of common interest.

The Committee appointed PricewaterhouseCoopers LLP

(“PwC”) as its independent adviser from 1 January 2019

following a competitive tender process. PwC is a signatory

to the Remuneration Consultants Group’s Code of

Conduct.

During the year, PwC advised on market practice,

corporate governance and regulations, incentive plan

design and target-setting, recruitment, investor

engagement and other matters that the Committee was

considering. PwC supported the Group in several ways,

including the provision of IFRS 17, tax, technology

consulting and immigration services during 2020.

TheCommittee is satisfied that the advice PwC provided

was objective and independent.

PwC’s total fees for remuneration-related advice in 2020

were £78,500 excluding VAT. PwC charged its fees based

on its standard hourly rates for providing advice.

Allen & Overy LLP, one of the Group’s legal advisers, also

provided legal advice relating to the Group’s executive

remuneration arrangements. It also provided the Group

with other legal services.

Directors’ Remuneration report continued

Annual Report on Remuneration

Introduction

We have prepared this Report in accordance with the requirements of the Companies Act 2006 and the Large and

Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (the “Regulations”).

TheReport also meets the relevant requirements of the Listing Rules of the FCA and describes how the Board has

complied with the principles and provisions of the Corporate Governance Code relating to remuneration matters.

Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in this

report and stated to be audited. Unless otherwise stated, the information within the Report is unaudited.

Committee members and governance

The following list details members of the Committee during 2020. You can find information about each member’s

attendance at meetings on page 87. You can find their biographies on pages 78 to 80.

Committee Chair

Mark Gregory

Non-Executive Directors

Mike Biggs

Danuta Gray

Sebastian James

Notes:

1. Mark Gregory joined the Committee on 9 May 2019 and was appointed as Chair of the Committee with effect from 26 October 2020.

2. Mike Biggs stepped down as Chair of the Board with effect from 4 August 2020.

3. Danuta Gray succeeded Mike Biggs as Chair of the Board with effect from 4 August 2020.

4. Richard Ward joined the Committee with effect from 1 January 2021.

120 Direct Line Group Annual Report and Accounts 2020

Alignment to Provision 40 of the Corporate Governance Code

The following table summarises how the Remuneration Committee has addressed the factors set out in Provision 40 of the 2018 UK

Corporate Governance Code.

Clarity

Remuneration

arrangements should be

transparent and promote

effective engagement

withshareholders and

theworkforce.

– The remuneration arrangements for the Executive Directors are set out in a clear and simple way in

the Directors’ Remuneration Policy (“Policy”) and in the plan rules for each incentive plan.

– Guides are accessible explaining how each incentive plan operates via the employee portal to ensure

full understanding.

– The Committee is committed to transparent disclosure – full details of incentive targets and outcomes

are published in detail in the Annual Report on Remuneration each year.

– Queries on remuneration practices from shareholders or the workforce are welcomed by the

Committee throughout the year and encouraged at the AGM and at the Group’s regular Employee

Representative Body (“ERB”) meetings.

Simplicity

Remuneration structures

should avoid complexity

andtheir rationale and

operation should be easy

tounderstand.

– The Group’s remuneration arrangements are intentionally simple in nature and well understood.

Executive Directors (and senior leadership) receive fixed pay (salary, benefits, pension), and participate

in a single short-term incentive (the “AIP”) and a single long-term incentive (the “LTIP”).

– The Committee reviews the appropriateness of targets annually, being mindful of alignment with

strategy and keeping them simple.

Risk

Remuneration

arrangements should ensure

reputational and other risks

from excessive rewards, and

behavioural risks that can

arise from target-based

incentive plans, are

identified and mitigated.

– The ability to mitigate potential risk associated with remuneration is built into the Policy.

Examples include:

– the Committee’s discretionary powers to amend the formulaic outcome from incentive awards

(for example, where not consistent with performance);

– the inclusion of malus and clawback provisions under a wide range of potential scenarios; and

– in-employment and post-employment shareholding requirements.

– The Committee considers that the incentive arrangements do not encourage inappropriate risk-

taking, due to the Committee’s rigorous process for reviewing incentive outcomes, which includes

seeking the view of the Chair of the Board Risk Committee before making its final variable pay

determinations.

– The Committee also considers that the Policy provides wide-ranging flexibility to adjust payments

where outcomes are not considered to reflect underlying business performance and individual

contributions, or where behaviours are inconsistent with the risk appetite of the Group.

Predictability

The range of possible values

of rewards to individual

directors should be identified

and explained at the time of

approving the Policy.

– Full information on the potential values of the AIP and LTIP are provided, with strict maximum

opportunities and minimum, target and maximum performance scenarios provided when the Policy

was approved.

– An indication of the potential impact of a 50% share price appreciation on the value of LTIP awards is

also included.

Proportionality

The link between individual

awards, the delivery of

strategy and the long-term

performance of the Company

should be clear. Outcomes

should not reward poor

performance.

– Payments under variable incentive schemes require robust performance against challenging

conditions over the short and longer term. The Committee considers the formulaic outcome, as well

as other relevant factors, when making decisions on remuneration outcomes.

– Outcomes do not reward poor performance due to the Committee’s overriding discretion to depart

from formulaic outcomes which do not reflect underlying business performance.

– Performance conditions consist of both financial and non-financial metrics to support Group strategy,

including measures focused on delivering for our customers (for example, Net Promoter Score and

complaints), our people (diversity and engagement) and our shareholders (profit before tax and TSR).

Alignment to culture

Incentive schemes should

drive behaviours consistent

with company purpose,

values and strategy.

– The Committee oversees consistent workforce reward principles and is satisfied that these policies drive

the right behaviours and reinforce the Group’s values, which in turn promote an appropriate culture.

– Our values are reflected in the measures used in our incentive schemes. In particular, our incentive

arrangements link to the following values:

– Do the right thing – AIP and LTIP performance measures incentivise participants to choose the

right path for our customers, our people and shareholders by using measures which directly assess

outcomes for these stakeholders.

– Work together – the Shared element of the AIP requires our Executive Directors and senior

leadership to work together to deliver key results to our stakeholders.

– Take ownership – financial targets under the AIP are the same for all participants, regardless of

seniority, linking everyone’s individual contribution to AIP reward outcomes.

– The use of annual bonus deferral, LTIP holding periods and our shareholding requirements strengthen

the focus on our strategic aims, and ensure alignment with the interests and experiences of

shareholders, both during and after employment.

www.directlinegroup.co.uk 121

Governance

Implementing policy and pay outcomes relating to 2020 performance

Single figure table (Audited)

Salary

Benefits

Annual

bonus

Long-term

Incentives

4,5

Other

Pension

Fixed pay

andbenefits

sub-total

Variable

remuneration

sub-total Total

£’000

Penny James 2020 813 26 1,166 1,110 – 73 912 2,276 3,188

2019 755 35 1,005 871 – 107 897 1,876 2,773

Tim Harris 2020 535 14 768 – – 48 597 768 1,365

2019 134 3 178 – 198 12 149 376 525

Notes:

1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made.

2. Benefits – include a company car or allowance, private medical insurance, life assurance, income protection, health screening and

discounted insurance. The CEO uses a car service for travelling on journeys between home and office; the Group also pays for any

associated tax liability that arises on this benefit.

3. Annual bonus – includes amounts earned for performance during the year but deferred for three years under the DAIP. For more

information, see page 133. These deferred awards are normally subject to continuous employment. However, awards remain subject

to malus and clawback.

4. The 2019 LTIP figure for Penny James disclosed in the 2019 Report should have included the value of the RoTE element of her LTIP

award granted in November 2017, which was based on average RoTE over 2017, 2018 and 2019. As disclosed in last year’s Report, the

performance outcome for this element was 100% of maximum. The 2019 LTIP figure has been restated this year to include that value,

based on the share price at the date of vesting (28 November 2020) of £2.97. The 10-year CEO history and 2019 CEO pay ratios have

been updated accordingly.

5. The 2020 LTIP figure for Penny James reflects the relative TSR element of her November 2017 LTIP award and the RoTE element of her

2018 awards. The value is calculated based on the share price at date of vesting for the November 2017 LTIP award, of £2.97, and a

three-month average share price to 31 December 2020 of £2.91 for the 2018 awards. Further information on LTIP awards can be found

on pages 127-128.

6. The 2019 “Other” figure for Tim Harris relates to the amount in respect of his buyout awards, disclosed in the 2019 Report. The award is

not subject to any performance conditions, and the value of this award is based on a share price at the date of grant (1 October 2019)

of £2.99.

Each Executive Director has confirmed they have not received any other form of remuneration, other than that already

disclosed in the single figure table.

Directors’ Remuneration report continued

122 Direct Line Group Annual Report and Accounts 2020

Annual Incentive Plan outcomes for 2020 (Audited)

The chart illustrates the final assessment of the level of achievement under the AIP and total outcome approved by the

Committee.

40% of any AIP award is deferred into shares under the DAIP, vesting three years after grant.

Financial element (55% weighting)

The financial performance measure is profit before tax. The Committee established threshold and maximum

performance levels at the start of the year and did not adjust the targets during the year. In the table below, we have

disclosed the target set for profit before tax performance.

The approach taken to assessing financial performance against this measure was based on a straight-line outcome

between 10% for threshold performance and 100% for achievement of maximum performance.

A formulaic assessment of achievement against the financial and strategic elements was carried out. Whilst the

financial plan for the year did not reflect any impact of the Covid-19 pandemic, the Committee sought quantitative data

and qualitative information summarising losses and gains from the impacts of the pandemic. After a rigorous

assessment, the Committee agreed to make a discretionary downward adjustment of 10% against the financial target

component of the 2020 bonus. The outcome from 2020 performance against the financial measure was 90%, giving a

total of 50% out of 55% attributable to this element. A summary of the assessment is provided in the following table.

Measure Threshold 10% Maximum 100% 2020 Actual

Formulaic 2020

Achievement

Adjusted 2020

Achievement

Profit before tax £356m £428m £451m 100% 90%

Notes:

1. Formulaic outcome

2. Outcome including discretionary downward adjustment

Performance measure

and weighting

Performance

achievement 2020

Outcome 2020

Total

82%

55%

Financial

20%

Shared

10%

People

15%

Customer

Financial

90%

49.5%

Customer 15.0%

People 7.5%

Shared 10.0%

75%

100%

50%

Executive Director Achievement under the 2020 AIP

2020 AIP

payment

Penny James 82% of maximum £1,166,296

Tim Harris 82% of maximum £767,725

www.directlinegroup.co.uk 123

Governance

Customer element (15% weighting)

We put our customers at the heart of everything we do. Our long-term sustainability is driven by understanding

customers’ needs and acting in their best interests. As part of our customer strategy, and to ensure that the business

strives to achieve a sustained and competitive level of service, the Board sets challenging customer-centric KPIs.

These are intended to ensure that remuneration is aligned with and supports continuous improvement.

Throughout the changing world around us in 2020 we adapted quickly so that we could deliver more for our customers

at speed and help them navigate disruption in their lives. Our determination to deliver the best possible customer value

and experience drove our response to Covid-19. This drove best-ever and long-term improving performance in 2020. Our

brands performed well (mainly top quartile) across the majority of insurance customer experience benchmarking studies.

Having considered performance against targets and an assessment of the quality of performance achieved, the

Committee determined that a maximum outturn for the Customer measures was appropriate, giving a total of 15% out

of 15% attributable to this element. A detailed assessment of the Customer measures is set out below.

Measure Assessment

Net promoter score (“NPS”)

Improvement of customer

advocacy across the Group

– We are proud that our NPS scores have yet again demonstrated the willingness

of our customers to recommend our brands year on year, especially with Direct

Line.

– Our NPS scores measure the likelihood of our customers to recommend one of

our brands and showed strong year-on-year performance, exceeding target and

achieving top-quartile performance in a range of independent benchmarking

studies.

– Strong brand NPS scores on Direct Line and Churchill continue with motor claims

and renewals journeys showing particularly positive performance.

– Rescue claims NPS performance ended the year well ahead of target. Record

performance levels have been sustained across the year including during

summer holidays as ‘staycation boom’ put pressure on our recovery network and

migrating our systems to a new operating platform.

– We continued to enhance digital capabilities for customers needing to claim,

amend and renew policies to meet even more customer needs.

Complaints

Reduction in complaints volume

and process improvements

– The volume of complaints reduced significantly in 2020 to lowest ever levels.

However, focus on continual improvement and taking learnings from

dissatisfaction helped ensure that our customer outcomes continue to be

positive.

– A large spike of travel claims post ‘lockdown’ in Q2 led to significantly increased

workloads and to mitigate this with the minimum impact to our customers, large

numbers of staff were cross-trained to handle the increased volume of claims

customer queries.

MyCustomer

Transaction customer experience

performance measuring our

people/calls

– Over 1.2 million responses from customers across the Group have provided

feedback on the experience delivered by our people. 84% (Claims) and 90%

(Customer Operations) of customers rated our people as 9 or 10 out of 10.

– MyCustomer performance in Customer Operations and Claims Operations

achieved record levels during 2020 despite the challenges we faced in migrating

a workforce from office to home working in an extremely short period.

– Customers recognised the extraordinary levels of service provided and this was

frequently acknowledged with many comments referring to our peoples

excellence and the Group’s approach to adjusting products, processes and

pricing in this period.

Measure 2020 Achievement

Customer 100%

Directors’ Remuneration report continued

124 Direct Line Group Annual Report and Accounts 2020

People element (10% weighting)

For the People element of the AIP, the Board set a range of people measures specifically around leadership, diversity

andinclusion and employee engagement, reflecting the importance of these agendas to the success of the Group. Early

into H2, the set of indicators was refined to refocus on a few key measures given that leadership effectiveness and

engagement became most critical in our response to the Covid-19 pandemic. At year end, the Committee considered

that performance across these measures had continued to improve on an already strong H1 performance against

stretching targets. This was particularly laudable given the ongoing uncertainty caused by the pandemic, balanced with

the re-initiation of a number of transformation activities in line with our strategic objectives. The Committee judged the

performance against the People element to be above target, giving a total of 7.5% out of 10% attributable tothis

element. A detailed assessment of the People measures is set out below.

Measure Assessment

Leadership

effectiveness &

succession

Enable the

transformation of the

Group by bringing

about a shift in

leadership style.

Ensure there is good

succession cover and

that we are building

high-quality talent

pipelines of future

leaders

– To support our leadership community through the challenges of Covid-19, we invested in

improving their ability to lead a more dispersed, digital and agile organisation through

various leadership development initiatives including storytelling training, agile coaching and

developing and launching a new Leadership Discovery programme. This is a six-month

blended learning experience combining masterclasses, 360-degree insights and ongoing

peer coaching toaccelerate adoption of our behaviours.

– We have measured progress in leadership effectiveness by creating a leadership index that

was measured regularly throughout 2020 indicating the extent to which colleagues felt

positive about our leaders and the decisions they were making. This has shown that there is

ahigh level of trust in our leaders with 84% positivity at the end of 2020.

– To prepare future successors we made a number of internal talent moves in 2020 and

provided broadening experiences as well as promotional moves to some of those who

feature in our talent pools. The gender diversity of our succession pipeline is now extremely

strong, something we have improved again in 2020.

– Finally, we maintained our commitment to recruiting graduates into our future leaders’

programme and have continued to rotate those already on the programme to provide a

broad set of early-career experiences. We successfully recruited a further 12 graduates and 51

apprentices in 2020.

Diversity

Ensure the Group is a

diverse and inclusive

place to work where

differences are

respected, valued and

celebrated

– Since becoming a signatory to the Women in Finance Charter, we have recruited, developed

and promoted more women into senior roles. Women now account for 30% of our senior

leadership (2019: 31%, 2018: 28%, 2017: 25%, 2016: 22%) and we are looking forward to working

towards our next milestone of 35% female representation in our senior leadership by the end

of 2022. We have continued to invest in supporting the development of our female leaders

through external programmes and coaching mentoring support.

– We gathered deeper insights via an employee survey where around two thirds of our people

shared their perceptions and experiences on diversity and inclusion, which has informed an

updated strategy, with greater ambition and reach.

– We established BAME and Black representation targets within the organisation for the first

time and signed Business in the Community’s Race at Work charter to demonstrate our

commitment to race inclusion.

– Our #WeCare campaign celebrated the diversity of our people by sharing stories to build a

greater understanding of difference and reinforce a culture where our people can ‘bring all

of themselves to work’.

– We have strengthened senior leadership sponsorship for our Diversity Network Alliance,

which promotes, champions and supports diversity and inclusion within our business.

Engagement

Ensure we are fully

engaged with our

employees via the

DiaLoGue programme,

including throughout

the business

transformation

process, with leaders

setting the tone

demonstrating the

Group’s Values and

Behaviours in all

aspects of their role

– At the start of the pandemic we adopted lighter touch and more regular employee pulse

surveys in contrast to our usual bi-annual in-depth process. Short pulse surveys were initially

run on a weekly basis and as pandemic conditions gradually stabilised they extended to

fortnightly and eventually monthly frequency.

– Throughout the year, we continued to achieve high participation levels (64% average),

gathering a mix of quantitative and qualitative data across a range of topics including some

key themes like sentiment, mental health, leadership, engagement and productivity.

– Our ability to check in and monitor engagement, sentiment and wellbeing in a more

adaptive way was critical during 2020, allowing leaders to benefit from rapid access to results

and to design for relevant, targeted actions to address themes, share ideas or build solutions.

– In addition, we re-designed many of our Group-wide high-profile engagement activities such

as our coveted Chief Executive Awards programme to be delivered virtually. Our teams and

leaders have creatively risen to the challenge of keeping motivation, support and engagement

as high as possible through such a testing period.

– In 2020, our mid-year engagement score was 1% off our highest ever score at 80%, having

improved by 2pts from the preceding survey and 4pts year on year. However, towards the

end of 2020 as the new wave of lockdowns hit, this dipped by 6% to 74%. This is in line with

the shape other organisations are reporting. Although we are consistent with upper quartile

high-performing companies, we were slightly below the threshold target of maintaining

2019 engagement levels at 78%.

Measure 2020 Achievement

People 75%

www.directlinegroup.co.uk 125

Governance

Shared element (20% weighting)

For the Shared element of the AIP, the Board set a range of strategic measures specifically around technology and

business transformation and cost savings, with the aim of ensuring the Group has the capabilities and cost base

toensure its sustained success. The Committee considered the delivery of the major technology transformation

programmes, for which specific measures and milestones were set; and for the cost objective the Committee focused

on the progress to achieve a reduced cost base. The Committee therefore agreed an outturn of 50% for the Shared

measures, giving a total of 10% out of 20% attributable to this element. A detailed assessment of the technology

transformation and costs measures is set out below.

Measure Assessment

Technology transformation

Progress and delivery of several

technology investment

programmes on time and on

budget, to deliver new capability

benefits

– In the first half of the year, we transitioned to full-scale home working, whilst

carrying out major system changes. Where appropriate we deferred certain

elements of programmes, primarily to mitigate potential risks arising from

system stability and programme complexity, and to reprioritise resources to

Covid-19-related work. These actions have been well managed and controlled.

– Our major programmes successfully navigated the impacts of Covid-19 and

mitigated delays to the extent possible, delivering a significant amount of change

in a highly challenging environment.

– We launched a number of customer-facing systems, including:

– a Green Flag claims engine delivering significant uplift in platform flexibility and

customer service;

– retooling of NIG ‘complex’ business including improving pricing sophistication;

– the main product builds of the new Direct Line for Business platform, including

Tradesperson and Van and the full-cycle end-to-end delivery model established

for ongoing change;

– major Finance transformation which has moved core finance systems to the

cloud; and

– deployed a new telephony system and migrated our mainframe.

– Alongside launching new systems, we have made good progress on setting the

foundations for changes to come in 2021.

– We continued to make significant steps to put Churchill and Direct Line onto our

new motor system meeting key technical deployment milestones; whilst overall

operational deployment has been slower due to the build of additional scope and

impact of Covid-19 on delivery.

Costs

Development and execution of

activities to deliver a sustainably

lower cost base to support future

quality of earnings

– Despite a strategic ambition to progress towards our target of reducing

operating expenses, they increased during 2020 by £30.7 million to £724.4 million.

The increase in costs was entirely due to investment in initiatives to protect our

customers, people and society from the impact of Covid-19.

– In total these initiatives are estimated to have increased operating expenses by

£34 million and in some cases had the effect of delaying cost-saving programmes

which were planned for 2020. Adjusting for these initiatives, operating expenses

were broadly flat year on year.

– Despite the impact of Covid-19, we have made good progress in building the

capability to reduce our cost base in the future and have reiterated our 20%

expense ratio target in 2023.

Measure 2020 Achievement

Shared 50%

Directors’ Remuneration report continued

126 Direct Line Group Annual Report and Accounts 2020

LTIP outcomes for 2020 (Audited)

LTIP awards are granted in March and August of each year. Each grant is subject to the following performance conditions:

– RoTE (60% weighting) – performance is measured over three financial years starting from the 1 January preceding the

March and August grants; and

– relative TSR (40% weighting) – performance is measured over a three-year period from the date of grant.

2017 LTIP awards (vesting in 2020)

Awards under the LTIP granted in March, August and November 2017 vested during 2020. They were subject to relative

TSR performance over the three-year period from the date of grant, and RoTE performance in 2017, 2018 and 2019.

Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2019 (together

with the TSR elements from the 2016 awards) are included in the 2019 LTIP column of the single figure table. The

performance outcomes of these elements are included in the table below.

The 2020 single remuneration figure includes the value of the 2017 TSR elements (for which the performance period

ended in November 2020 for Penny James) and the awards vested shortly after. Details of the targets and performance

achieved are set out in the table below (with the March and August 2017 outcomes only relating to former Directors).

The Committee was satisfied that the financial and risk underpins were met at the end of the vesting period and

therefore the performance achieved against the targets and the vesting of the awards is as follows.

Award Performance measure Weighting

Threshold (20%

of maximum)

Maximum

(100% of

maximum) Actual performance Achievement Outcome

March 2017 RoTE

(2019 single figure)

60% 15.0% 18.0% 20.4% 100.0% 60.0%

Relative TSR

(2020 single figure)

40% Median Upper

quintile

Between median

and upper quintile

26.9% 10.8%

August 2017 RoTE

(2019 single figure)

60% 15.0% 18.0% 20.4% 100.0% 60.0%

Relative TSR

(2020 single figure)

40% Median Upper

quintile

Between median

and upper quintile

45.1% 18.0%

November 2017

(Penny James

only)

RoTE

(2019 single figure)

60% 15.0% 18.0% 20.4% 100.0% 60%

Relative TSR

(2020 single figure)

40% Median Upper

quintile

Between median

and upper quintile

51.5% 20.6%

2018 LTIP awards (vesting in 2021)

Awards under the LTIP granted in March and August 2018 will vest during 2021. They are subject to relative TSR

performance over the three-year vesting period, and RoTE performance in 2018, 2019 and 2020. The RoTE performance

period for these awards ended on 31 December 2020 and performance in respect of this element is set out in the table

below. Performance under the relative TSR measure will be assessed at the end of the vesting periods in March 2021 and

August 2021 respectively and will be disclosed in the 2021 Directors’ Remuneration Report. This is subject to the

Committee’s satisfaction that the financial and risk underpins have been met at the end of the vesting period.

Consistent with the Regulations, the expected RoTE vesting outcomes for the 2018 LTIP awards (together with the TSR

elements from the 2017 awards) are included in the 2020 single remuneration figures for the Executive Directors based

on the three-month average share price to 31 December 2020. As the awards were granted before Tim Harris joined the

Group, figures are for Penny James only. You can find details of this on page 122.

Award Performance measure Weighting

Threshold (20%

of maximum)

Maximum

(100% of

maximum) Actual performance Achievement Outcome

March 2018 RoTE

(2020 single figure)

60% 17.5% 20.5% 20.7% 100% 60%

Relative TSR

(2021 single figure)

40% Median Upper

quintile

Performance period not yet complete

August 2018 RoTE

(2020 single figure)

60% 17.5% 20.5% 20.7% 100% 60%

Relative TSR

(2021 single figure)

40% Median Upper

quintile

Performance period not yet complete

www.directlinegroup.co.uk 127

Governance

Summary of the 2020 LTIP single remuneration figure outcomes

Number of shares

awarded (inc. dividends)

subject to this

performance condition

Percentage vested by

reference to

performance

achieved

Number of

sharesvested

Total value

of shares (inc.

dividends) vested

£’000

March 2018

LTIP – RoTE

Penny James 136,943 100% 136,943 399

August 2018

LTIP – RoTE

Penny James 141,711 100% 141,711 412

November 2017

LTIP – TSR

Penny James 195,421 51.5% 100,642 299

Total single

figureLTIP

Penny James 1,110

Notes:

1. 2018 RoTE elements are based on the three-month average share price to 31 December 2020 of £2.91.

2. 2017 TSR element is based on share price on the date of vesting on 28 November 2020 of £2.97.

Using shares (Audited)

In receiving a share award, Executive Directors commit not to hedge their exposure to outstanding awards under these

plans or in respect of shares they are reporting to the Company within their ownership for the purposes of any share

ownership guidelines. They also agree not to pledge as collateral their participation under any of the plans or any shares

which they are required to hold in the Company for any purposes, including for share ownership guidelines. There have

been no changes to the share interests below since 31 December 2020.

At 31 December 2020

Share plan interests exercised during

the year to 31 December 2020

Share plan

awards subject

to performance

conditions

1,2,3

Share plan

awards subject

to continued

service

Share plan

interests vested

but unexercised

Shares held

outright

Number of

options exercised

Share price on

date of exercise

Penny James 1,430,485 350,847 393,773 665,464 – –

Tim Harris 741,647 87,927 – 5,785 5,388 3.24

Notes:

1. These awards take the form of nil-cost options over the Company’s shares. Awards accrue dividend entitlement from the grant date to

the date on which an award vests. Dividends added post-vesting are shown to 31 December 2020 but are not realised until exercise.

2. LTIP awards include an additional two-year holding period before awards may be released.

3. Unvested awards subject to performance conditions represent LTIP awards for which 60% is based on RoTE performance and 40% on

relative TSR performance. The exact targets for each award were disclosed in the relevant Annual Report on Remuneration.

4. Tim Harris exercised options on 4 August 2020.

The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares

Director

Shares held at

31/12/2020

Shares held at

31/12/2019

Mike Biggs

– –

Danuta Gray 10,000 10,000

Mark Gregory – –

Jane Hanson 11,083 11,083

Sebastian James 5,000 5,000

Fiona McBain – –

Gregor Stewart 2,925 2,925

Richard Ward – –

Notes:

1. This information includes holdings of any connected persons, as defined in section 253 of the Companies Act 2006.

2. Mike Biggs stepped down from the Board on 4 August 2020.

Directors’ Remuneration report continued

128 Direct Line Group Annual Report and Accounts 2020

Non-Executive Directors (Audited)

Fees were the only remuneration paid to Non-Executive Directors in 2019 and 2020. Non-Executive Directors may also

claim for reasonable travel and subsistence expenses, in accordance with the Group’s travel and expenses policy, and,

where these are classified as taxable by HMRC, they are shown under ‘Taxable benefits’ below. The Non-Executive

Directors receive no other benefits.

Director

Fees Taxable benefits

Total

2020

£’000

2019

£’000

2020

£’000

2019

£’000

2020

£’000

2019

£’000

Mike Biggs

235 400 1 5 236 405

Danuta Gray 209 110 – 7 209 117

Mark Gregory 109 101 – 0.1 109 101

Jane Hanson 120 120 3 11 123 131

Sebastian James 96 95 – – 96 95

Fiona McBain 95 83 3 16 98 99

Gregor Stewart 115 115 2 19 117 134

Richard Ward 120 120 0.1 0.1 120 120

Notes:

1. Non-Executive Directors are not eligible to participate in any of the Group’s bonus or share incentive schemes or to join any Group

pension scheme.

2. The values shown under ‘Taxable benefits’ above comprise the value of taxable travel and subsistence expenses reimbursed by the

Company (including any gross-up for tax and national insurance contributions due).

3. Mike Biggs stepped down from the Board on 4 August 2020, on which date Danuta Gray became Chair.

CEO pay ratio

In 2018, the Committee chose to adopt early the CEO pay ratio disclosure requirements. Since 2019, the Committee has

determined that the appropriate methodology to be used in future years is Option A, as the Committee believes this is

the most robust approach to use going forward.

The table below compares the 2020 single total figure of remuneration for the CEO with that of the Group employees

who are paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper quartile) of its

employee population. The 2019 figures are also shown for comparison purposes.

Year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio

2020 Option A 128:1 105:1 71:1

2019

Option A 123:1 101:1 67:1

Note:

1. As required by the regulations, the CEO single figure used to determine the 2019 pay ratios is based on the sum of the total single

figures of remuneration for Paul Geddes and Penny James, but with remuneration in respect of Penny’s service as CFO excluded.

The 2019 figures have been updated for Penny’s updated 2019 single figure value (see page 122 note 4).

The UK employees included are those employed on 31 December 2020 and remuneration figures are determined with

reference to the financial year ending on 31 December 2020.

Option A, as set out under the reporting regulations, was used to calculate remuneration for 2020 as we believe that

itisthe most robust methodology for calculating these figures. The value of each employee’s total pay and benefits

wascalculated using the single figure methodology consistent with the CEO. No elements of pay have been omitted.

Where required, remuneration was approximately adjusted to be full-time and full-year equivalent basis based on the

employee’s average full-time equivalent hours for the year and the proportion of the year they were employed.

Each employee’s pay and benefits were calculated using each element of the employee remuneration, on a full-time

equivalent basis. No adjustments (other than to achieve a full-time equivalent rate) were made and no components of

pay have been omitted.

25th percentile (P25) Median (P50) 75th percentile (P75)

Salary £21,487 £25,842 £39,325

Total pay and benefits £24,885 £30,401 £44,905

Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including

market practice, experience and performance in role. For reference, the CEO base salary median pay ratio is 33:1 (2019:

32.1). In reviewing the ratios the Committee also noted that the CEO’s remuneration package is weighted more heavily

towards variable pay (including the AIP and LTIP) than of the wider workforce due to the nature of the role, and this

means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of

incentive plans in each year.

As there was a change of CEO in 2019, the 2019 pay ratios were calculated based on a “hybrid” single figure of

remuneration for the two CEOs during the year, as required by the Regulations. This means that the 2019 and 2020

ratios are not directly comparable. Nevertheless, the small increase in the pay ratios from 2019 to 2020 is partly

attributable to the increase in the CEO’s AIP and LTIP outcomes for 2020. This increase is partially offset by an increase

in the total pay and benefits of employees, primarily as a result of the increase in the Group’s minimum salary level in

April2020 and broader annual salary increases, as well as an increase in bonus outcomes (consistent with the CEO’s

AIPoutcome).

www.directlinegroup.co.uk 129

Governance

The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our

customers. We are proud that the high number of consultants in our customer service centres are employed by the

Group (rather than being outsourced) and note that the impact of these lower-paid roles is reflected in the ratios above.

Further details on the differences between the remuneration of Executive Directors and the wider workforce are set out

on page 117. The Committee is satisfied that these policies drive the right behaviours and reinforces the Group’s values

which in turn drives the correct culture, and, for the reasons given above, it believes that the ratios are consistent with

the Group’s reward policies.

Percentage change in Executive Directors’ and Non-Executive Directors’ pay for 2019 to

2020

The table below shows the year-on-year percentage change in salary, taxable benefits and bonus (where applicable)

ofthe Executive Directors and Non-Executive Directors, compared to the average pay for all other employees.

Salary/Fees

Benefits

Bonus (including

deferredamount)

Executive Directors

Chief Executive Officer 7.6% (24.6)% 16.1%

Chief Finance Officer

0.0% 0.5% 7.9%

Non-Executive Directors

Mike Biggs 0.0% (82.3)% -%

Danuta Gray 90.1% (100.0)% - %

Mark Gregory 7.2% (100.0)% - %

Jane Hanson 0.0% (73.1)% - %

Sebastian James 1.0% 0.0% - %

Fiona McBain 14.6% (79.9)% - %

Gregor Stewart 0.0% (87.2)% - %

Richard Ward 0.0% (5.7)% - %

All employees (average) 3.5% (1.4)% 3.9%

Notes:

1. Based on the change in average pay for employees employed in the year ended 31 December 2020 and the year ended 31 December

2019. The CEO’s salary in 2019 reflected part year as CFO before promotion to CEO, therefore the increase appears larger. Actual pay

increase in 2020 was 2.1%. The increase to the CEO salary from 1 April 2020 was voluntarily paid to FareShare, a charity that

redistributes surplus food to other charities that turn it into meals for those in need.

2. For all employees, there were no changes in benefits provision between 2019 and 2020. For the CEO the decreased value of benefits

relate to the car service not used by the CEO for travelling on journeys between home and office since March, in respect of which

theGroup also pays for any associated tax liability that arises on this benefit. For Non-Executive Directors, benefits comprise taxable

travel and subsistence expenses reimbursed by the Company (including any gross-up for tax and national insurance contributions due).

3. For employees other than the CEO, this includes average amounts earned under the AIP, and other variable incentive schemes,

including monthly and quarterly incentive schemes operated in certain parts of the Group. Non-Executive Directors are not eligible

toparticipate in any of the Group’s bonus or incentive schemes.

4. The figure for the CFO is based on an annualised amount for 2019, as he joined in the final quarter of the year.

5. For Non-Executive Directors, increased fees relate to Board changes. The decreased value of benefits relates to a decrease in travel

expenses due to the Covid-19 pandemic.

Directors’ Remuneration report continued

130 Direct Line Group Annual Report and Accounts 2020

Chief Executive Officer’s pay between 2012 and 2020 and historical performance of TSR

The table below shows historical levels of the CEO’s pay between 2012 and 2020. It also shows vesting of annual and

long-term incentive pay awards as a percentage of the maximum available opportunity. This is presented against the

Company’s TSR since its shares began trading on the London Stock Exchange in October 2012, against the FTSE 350

Index (excluding Investment Trusts) over the same period. This peer group is the same used for measuring relative TSR

under the LTIP.

Total Shareholder Return

(%)

2012

2013

2014

2015 2016

2017 2018 2019

2019

3,4

2020

Paul Geddes Penny James

CEO single figure of

remuneration(£'000s) 1,908 2,536 5,356 4,795 4,071 4,039 3,250 774 2,773 3,188

Annual bonus payment

(%ofmaximum) 65% 63% 75% 83% 43% 88% 68% 76% 76% 82%

LTIP vesting (% of maximum)

30% 55% 88% 96% 86% 99% 71% 0% 100% 80%

Notes:

1. Based on actual vesting under the 2010, 2011 and 2012 RBS Group LTIP. The value included in the single figures in respect of these

awards is £205,000 in 2012, £728,000 in 2013 and £2,437,428 in 2014.

2. The 2016 single figure and annual bonus payment reflect an adjustment, made in 2019, to the original award of 20% of maximum

opportunity related to the Ogden discount rate change.

3. The 2019 single figure reflects part of the year for the outgoing CEO, Paul Geddes, and the entire year for the newly appointed CEO,

Penny James.

4. The 2019 single figure has been revised to reflect the actual vesting of the 2017 awards under the LTIP.

5. The 2020 single figure reflects the estimated vesting of the RoTE portion of the LTIP granted in March and August 2018. Any shares

under the LTIP granted in 2018 will not be delivered until the end of the applicable vesting periods in March and August 2021.

However, they have been included in the single figure, as the performance period in respect of the RoTE portion has now

beencompleted.

DLG

FTSE 350 (excluding Investment Trusts)

16 Oct

2012

31 Dec

2012

31 Dec

2013

31 Dec

2014

31 Dec

2015

31 Dec

2016

31 Dec

2018

31 Dec

2017

31 Dec

2020

31 Dec

2019

350

200

250

150

100

300

www.directlinegroup.co.uk 131

Governance

Payments to Past Directors (Audited)

March and August 2017 LTIP

The table below sets out the awards which vested during the year to John Reizenstein (former CFO), Paul Geddes

(former CEO) and Mike Holliday-Williams (former MD, Personal Lines), who exited the Group on 7 September 2018,

31 July 2019 and 30 September 2019 respectively:

Award Executive Director

Number of share

options awarded

(inc.dividends)

Vesting proportion

(inc. performance

andpro-rata)

Number of share

options vested

Total value of share

options (including

dividends) vested (£)

March 2017 John Reizenstein 167,925 35.7% 59,952 171,343

Paul Geddes 288,554 55.6% 160,439 458,535

Mike Holliday-Williams 196,416 59.3% 116,391 332,645

August 2017 John Reizenstein 148,752 29.4% 43,733 128,969

Paul Geddes 262,956 51.6% 135,567 399,787

Mike Holliday-Williams 180,197 55.4% 99,794 294,293

Notes:

1. Based on closing share price of £2.86 on the vesting date (27 March 2020).

2. Based on closing share price of £2.95 on the vesting date (29 August 2020). LTIP awards for Executive Directors are subject to an

additional two-year holding period following the three-year vesting period, during which time awards may not normally be exercised

or released.

The March 2017 LTIP award vested overall at 70.8%, with the RoTE element achieving 100%, and TSR at 26.9%. The August

2017 LTIP award vested at 78.0%, with the RoTE element achieving 100% and TSR at 45.1%. All former Directors confirmed

that they complied with the requirements of their individual exit agreements, which enabled the Committee to approve

the vesting of these awards.

March and August 2018 LTIP

The performance period in respect of the RoTE elements of these awards ended on 31 December 2020; however, the

performance periods in respect of the TSR elements of these awards end on 25 March 2021 and 27 August 2021 and the

awards will vest on these dates. The value of the 2018 LTIP awards vesting for Paul Geddes and Mike Holliday-Williams

will therefore be disclosed in the 2021 report.

No payments were made to any Director for loss of office during 2020.

Distribution statement

This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to

shareholders in 2019 and 2020.

Notes:

1. On 3 March 2020, the Group announced that the Board had approved a share buyback of up to £150 million. On 19 March 2020, the

Board cancelled that share buyback programme given the uncertainty in the capital markets at the time, driven by the rapidly

emerging Covid-19 pandemic.

2. Following the cancellation of the dividend as announced on 8 April 2020, the final dividend for 2019 was not paid. However, a special

interim dividend was subsequently paid in September 2020 reflecting a full catch-up of the cancelled 2019 final dividend.

3. The dividends paid information has been taken from note 14 to the consolidated financial statements. The overall expenditure on pay

has been taken from note 10 and therefore, consistent with market practice, it has not been calculated in a manner consistent with

the single figure in this report.

AGM voting outcomes

The table below shows the percentage of shareholders’ votes which were for or against, and the percentage of votes

withheld, relating to the resolutions to approve the 2019 Directors’ Remuneration Report and Remuneration Policy,

bothof which were put to shareholders at the 2020 AGM.

The resolutions approving the Directors’ Remuneration Report and Remuneration Policy were passed by 94.88% and

97.55% of the votes cast in favour of the resolutions, respectively.

Dividend (£m) Overall expenditure on pay (£m)

100.4

19 20

113.7290.4

195.5

% change

(26.8)%

Special

Ordinary

19 20

473.0

481.8

% change

1.9%

Directors’ Remuneration report continued

132 Direct Line Group Annual Report and Accounts 2020

For Against Number of

voteswithheld

(abstentions)

Percentage of

votes withheld

(abstentions)Number Percentage Number Percentage

Approval of Directors’ Remuneration

Report (2020 AGM) 1,023,165,733 94.88% 55,176,087 5.12% 63,462 –

Approval of Directors’ Remuneration

Policy (2020 AGM) 1,051,904,620 97.55% 26,440,027 2.45% 60,251 –

Shareholdings (Audited)

This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels:

Name Position

Share ownership guideline

(%of salary)

Value of shares held at

31December 2020

2,3

(%ofsalary)

Penny James Chief Executive Officer 250% 426%

Tim Harris Chief Financial Officer 200% 33%

Notes:

1. Executive Directors are expected to retain all the ‘after tax’ Ordinary Shares they obtain from any of the Company’s share incentive plans

until they achieve a shareholding level that is equal to 250% of base salary for the CEO and 200% of base salary for the CFO respectively.

2. For these purposes, holdings of Ordinary Shares will be treated as including all vested but unexercised awards, or awards unvested but

after the performance period in the holding period, valued on a basis that is net of applicable personal taxes payable on acquiring such

Ordinary Shares.

3. Shareholding as a percentage of salary has been calculated based on the 31 December 2020 share price of £3.19.

LTIP awards granted during 2020 (Audited)

The table below shows awards granted under the LTIP to Executive Directors in 2020 in the form of nil-cost options.

Director Position

Awards granted in 2020 under the LTIP

Award as % of salary Number of shares granted Face value of Awards (£)

Penny James Chief Executive Officer 200% 581,357 1,617,000

Tim Harris Chief Financial Officer 200% 384,941 1,070,000

Note:

1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62 in March

2020 and £2.96 in September 2020.

The performance conditions that apply to the LTIP awards granted in 2020 are set out below:

Performance Measure

Performance conditions for awards granted in 2020 under the LTIP

Proportion of award

Performance for

thresholdvesting (20%)

Performance for

maximumvesting

RoTE 60% 17.5% 20.5%

TSR 40% Median Upper quintile

The RoTE targets for awards granted in 2020, applying to 60% of the award, were an average annual RoTE of 17.5% for 20%

vesting and 20.5% for full vesting. A straight-line interpolation occurs from threshold to maximum performance.

The remaining 40% of each award is based on TSR performance against the FTSE 350 (excluding Investment Trusts),

forwhich there is a straight-line interpolation between threshold and maximum performance on a ranked basis.

The performance period for the awards granted on 27 March 2020 will end on 31 December 2022 for the RoTE element

and 26 March 2023 for the TSR element. The performance period for the awards granted on 1 September 2020 will also

end on 31 December 2022 for the RoTE element and 31 August 2023 for the TSR element.

DAIP awards granted during 2020 (Audited)

The table below shows the deferred share awards granted under the DAIP to Executive Directors on 27 March 2020 in

respect of the 2019 AIP. Awards will vest after three years, normally subject to continued service, and were granted in the

form of nil-cost options.

Director Position

Awards granted in 2020 under the DAIP

Value of deferred bonus (£) Number of shares granted

Penny James Chief Executive Officer 401,899 153,397

Tim Harris Chief Financial Officer 71,155 27,158

Note:

1. The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £2.62. In

accordance with the DAIP rules, dividends in respect of the deferred shares are reinvested in additional shares, which vest when the

deferred shares vest.

www.directlinegroup.co.uk 133

Governance

Dilution

The Company complies with the dilution levels that the Investment Association guidelines recommend. These levels are

10% in 10 years for all share plans and 5% in 10 years for discretionary plans. This is consistent with the rules of the

Company’s share plans.

Non-Executive Directors’ fees

The fees for the Chair and Non-Executive Directors for 2021 are set out below and were reviewed in 2020.

Position

Fees for 2021

£’000

Board Chair fee 350

Basic Non-Executive Director fee 75

Additional fees

Senior Independent Director fee 30

Chair of Audit, Board Risk and Remuneration Committees 30

Chair of Sustainability and Investment Committees 10

Member of Board Committee (Audit, Board Risk or Remuneration) 10

Member of Board Committee (Sustainability or Nomination) 5

No additional fees are paid for membership of the Investment Committee.

Service contracts

Subject to the discretion set out in the recruitment remuneration policy, it is the Group’s policy to set notice periods for

Executive Directors of no more than 12 months (by the Director or by the Company). The Executive Directors’ service

agreements summary is as follows:

Director

Effective date

of contract

Notice period

(by Director

or Company) Exit payment policy

Penny James 01-Nov-17 12 months Base salary, benefits and pension only for unexpired portion of

notice period to be paid in a lump sum or monthly instalments

in which case, instalments are subject to mitigation if an

alternative role is found.

Tim Harris 01-Oct-19 12 months Base salary, benefits and pension only for unexpired portion of

notice period to be paid in a lump sum or monthly instalments,

in which case, instalments are subject to mitigation if an

alternative role is found.

There are no further obligations which could give rise to a remuneration or loss of office payment other than those set

out in the Remuneration Policy table and the termination policy.

Directors’ Remuneration report continued

134 Direct Line Group Annual Report and Accounts 2020

Implementing the Policy in 2021

Key feature Implementation in 2021

Base salary

– Reviewed annually with any increases taking effect on

1 April

– The Committee considers a range of factors when

determining salaries, including pay increases

throughout the Group, individual performance and

market data

– The CEO’s salary remains appropriate (at £817,000)

– The CFO’s salary remains appropriate (at £535,000)

Pensions

– Pension contributions are paid only in respect of

basesalary

– The Executive Directors’ pension is set in line with the

pension level received by the majority of the employee

population

– CEO and CFO pension contribution remains at 9%

(in line with the workforce)

Annual Incentive Plan

– Maximum opportunity of 175% of salary for the CEO

and the CFO

– At least 50% of the AIP is based on financial measures.

The Committee considers various non-financial

performance measures such as strategic measures

– It bases its judgement for the payment outcome at the

end of the performance period on its assessment of

the level of performance achieved with reference to

performance targets agreed at the start of the year

– Any payment is subject to an additional gateway

assessment, including assessing risk factors

– Malus and clawback provisions apply

– No change to the maximum opportunity

– No change from the weightings or measures used

for2020

– There will be a straight-line vesting between AIP

threshold and maximum performance

– Financial measures (55%): Profit before tax

– Non-financial measures (45%): People, Customer

andShared

– The performance targets will be set following the usual

process, considering internal and consensus forecasts

and the key strategic priorities for the Group in 2021

– The performance targets are considered commercially

sensitive and will therefore be disclosed in next

year’sReport

Deferred Annual Incentive Plan

– 40% of the AIP is deferred into shares

– Typically vesting after three years, normally subject to

continued employment

– Malus and clawback provisions apply

– No further performance conditions apply

Long Term Incentive Plan

– Awards typically granted as nil-cost options

– Awards typically granted twice a year

– The LTIP allows for awards with a maximum value of

200% of base salary per financial year

– Performance is measured over three years

– Awards vest subject to financial underpin and

payment gateway

– Malus and clawback provisions apply

– Awards are subject to an additional two-year holding

period following the end of the three-year

performance period

– No change to the maximum annual award levels

– Nil-cost options will continue to be used for the grants

– The current 60% RoTE and 40% TSR mix will continue

to apply for 2021

– A RoTE target range of 17.5% (threshold) to 20.5%

(maximum) is required for the 2021 awards to vest

– Vesting at threshold is 20% and maximum is 100% with

straight-line vesting in between

– Relative TSR will be measured against the FTSE 350

(excluding investment trusts) peer group. Vesting for

median TSR performance (threshold) is 20% and for

upper quintile TSR performance (maximum) is 100%

with straight-line vesting in between these points

www.directlinegroup.co.uk 135

Governance

Directors’ Remuneration Policy

The following is a copy of the main table from the Policy approved by shareholders at the 2020 AGM. The full Policy

isavailable in the Directors’ Remuneration Report of the 2019 Annual Report and Accounts, which is available on the

Direct Line Group website under the ‘Results and reports’ heading in the Investors page. You can find further details

regarding the Policy’s operation for 2021 on page 135.

Policy table

Element and purpose in

supportingthe Group’s

strategicobjective Operation

Maximum opportunity Performance measures

Base salary

– This is the core element

of pay that reflects

theindividual’s role

and position within

theGroup

– Staying competitive in

the market allows us

toattract, retain and

motivate high-calibre

executives with the

skills to achieve our

keyaims while

managing costs

– Base salaries are typically reviewed annually and set in April of each year, although the

Committee may undertake an out-of-cycle review if it determines this to be appropriate

– When reviewing base salaries, the Committee typically takes the following into account:

– level of skill, experience and scope of responsibilities, individual and business

performance, economic climate, and market conditions;

– the appropriate benchmarking peer group(s) that reflects the Group’s size and industry

focus, the corresponding market pay range(s) and the relevant positioning within the

market pay range(s); and

– general base salary movements across the Group

– The Committee does not follow market data strictly. However, it uses it as a reference point

in considering, in its judgement, the appropriate salary level, while regarding other relevant

factors, including corporate and individual performance, and any changes in an individual’s

role and responsibilities

– The principles for setting base salary are like those applied to other employees in the Group.

However, the specific benchmarking groups used to review external market relativities may

differ across employee groups

– Base salary is typically paid monthly

– When determining salary increases, the Committee

will consider the factors outlined in this table

under‘Operation’

– Not applicable

Pension

– To remain competitive

within the marketplace

– To encourage

retirement planning

and retain flexibility

forindividuals

– Pension contributions are paid only in respect of base salary

– Executive Directors are eligible to participate in the defined contribution pension

arrangement or alternatively they may choose to receive a cash allowance in lieu of pension

– The Executive Directors’ pension will be set in line with the pension level received by the

majority of the employee population

– The maximum pension percentage contributions are

set at a level that is consistent with that applied to

the majority of employees

– Not applicable

Benefits

– A comprehensive

andflexible benefits

package is offered,

emphasising

individuals being

ableto choose

thecombination of

cash and benefits that

suitsthem

– Executive Directors receive a benefits package generally set by reference to market practice

in companies of a similar size and complexity. Benefits currently provided include a

Company car, use of a car or car allowance, private medical insurance, life insurance, health

screening, and income protection

– The Committee may periodically amend the benefits available to some or all employees.

The Executive Directors are eligible to receive such additional benefits as the Committee

considers appropriate having regard to market norms

– In line with our approach to all employees, certain Group products are offered to Executive

Directors at a discount

– Executive Directors are eligible to participate in any of the employee share plans operated

by the Company, in line with HMRC guidelines (where relevant) and on the same basis as

other eligible employees. Currently, this includes our HMRC-approved SIP, which has been

used to provide an award of free shares to all employees (including Executive Directors) and

permits employees to purchase shares with a corresponding matching award

– Where an Executive Director is required to relocate to perform their role, they may be

offered appropriate relocation benefits. The level of such benefits would be determined

based on the circumstances of the individual and typical market practice and be consistent

with the relocation arrangements available to the workforce generally. In normal

circumstances, relocation benefits will only be paid for a period of up to 12 months

– The costs of benefits provided may fluctuate from

year to year, even if the level of provision has

remained unchanged

– The Committee will monitor the costs in practice and

ensure the overall costs do not increase by more

than the Committee considers to be appropriate in

all the circumstances

– Additionally, the limit for any employee share plans

in which the Executive Directors participate will be

inline with the caps permitted by HMRC from time

to time

– The Executive Directors may be entitled to retain fees

received for any directorships held outside the Group

– Similarly, while not benefits in the normal usage of

that term, certain other items such as hospitality or

retirement gifts may also be provided

– Not applicable

Directors’ Remuneration report continued

136 Direct Line Group Annual Report and Accounts 2020