RBS 2012 Annual Report Download - page 91

RBS GROUP 2012
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Direct Line Group continues to focus on reducing operational costs,
targeting the delivery of gross annual cost savings of £100 million in 2014
through overall improvements in operational efficiency including claims
handling, continued efforts to simplify internal structures and better
managing customer acquisition costs. Steps announced during the
second half of the year included measures to reduce costs in central
functions as well as the reduction of around 70 senior leadership roles
across the organisation.
Roll-out of a new e-trading platform in Commercial began in Q3 2012 and
was launched in January 2013. This new platform has been developed to
aid with internal cost efficiency and provide new routes to market as well
as to significantly improve the interface with brokers and customers.
International consolidated its direct market position in Italy and Germany
with a total of 1.5 million in-force policies at the end of 2012. Gross
written premium for 2012 was up 4% in local currency on 2011 and
followed a period of strong growth in 2010 and 2011.
Direct Line Group further improved its capital efficiency following a
number of initiatives including the consolidation of four underwriting
entities into one. The combined entity, U K Insurance Limited, received
inaugural credit ratings of ‘A’ from Standard and Poor’s and ‘A2’ from
Moody’s. Direct Line Group also issued £500 million of Tier 2 debt and
paid £1 billion of dividends to RBS Group.
Direct Line Group operates in an industry that is under a significant
amount of scrutiny and is preparing for substantial regulatory change.
Direct Line Group is actively engaging with major stakeholders
throughout the ongoing debates surrounding referral and legal fees, the
increase in whiplash claims and the implementation of the gender
directive in order to help deliver the best possible outcome for its
customers and shareholders.
Separation and divestment update
From 1 July 2012, Direct Line Group has operated on a substantially
standalone basis with independent corporate functions and governance
following the successful implementation of a comprehensive programme
of separation initiatives. During 2012, these included launching a new
corporate identity and the Direct Line Group Board became fully
compliant with the UK Corporate Governance Code following further non-
executive director appointments. New contracts of employment have
been agreed and issued to staff, independent HR systems have been
implemented and an arm’s length transitional services agreement has
been reached with RBS Group for residual services. In January 2013, it
was announced that Capgemini would design, deliver and operate Direct
Line Group’s IT infrastructure.
The Group sold the first tranche of ordinary shares representing 34.7% of
the share capital of Direct Line Group in October 2012 via an Initial Public
Offering. This is consistent with the Group’s plan to cede control of Direct
Line Group by the end of 2013 and a step toward complete disposal by
the end of 2014, as required by the European Commission.
In accordance with IFRS 5, Direct Line Group has been recognised as a
discontinued operation with consequent changes to the presentation of
comparative information. The assets and liabilities relating to Direct Line
Group are included in Disposal groups as of 31 December 2012. The
Group has written down its investment in Direct Line Group at 31
December 2012 to 216 pence per share, the market value on that date,
which resulted in a £394 million goodwill write-down.
A full year preliminary statement of results for Direct Line Insurance
Group plc is available on the company website. A full Annual Report and
Accounts will be available in March 2013.
2012 compared with 2011
Operating profit of £441 million was £13 million, or 3% lower than 2011
as an improved technical result was more than offset by £22 million lower
investment income.
Gross written premium of £3,966 million was 3% lower, driven by the
impact of de-risking in previous years and changes in the mix of the
portfolio in Motor together with competitive market conditions in Home.
International was also down reflecting adverse exchange rate
movements.
Total income of £3,474 million was £333 million, or 9% lower than prior
year due to flow through of lower written premiums, increased
commissions payable relating to business previously reported within Non-
Core, the cessation of Tesco Personal Finance tariff income and lower
supply chain income.
Net claims of £2,427 million were £345 million, or 12% lower than 2011
reflecting lower exposure, higher releases of reserves from prior years
and improved claims experience. The 2012 result includes approximately
£105 million of Home weather event claims, significantly more than
£20 million in 2011 under benign weather conditions.
Expenses of £849 million were broadly flat. Staff expenses were £50
million, or 17% higher partly reflecting the transfer of some head office
functions costs to Direct Line Group ahead of separation from RBS
Group, together with additional staff recruited to provide services
previously provided by RBS Group.
Investment income of £243 million was £22 million lower, primarily as a
result of £27 million financing costs relating to the Tier 2 debt issued in
April 2012 and lower reinvestment rates during 2012. This was mostly
offset by higher realised gains arising from portfolio management
initiatives, including those arising from business previously reported in
Non-Core.
Direct Line Group’s reported Return on Tangible Equity was 11.7% in
2012. On a pro forma basis, assuming the capital management initiatives
had taken place prior to the start of the year, the Return on Tangible
Equity would have been 13.2%.