Direct Line Regulatory News (DLG)

Direct Line Insurance Group plc

Half Year Report 2018

1 August 2018

Successful H1 2018: strategic progress on track

Paul Geddes, CEO of Direct Line Group, commented

"This is a good set of results - growing our own brand policies and profits (normalised for weather) in a competitive, albeit to date, rational market - again showing the strength of our business model. We have also made progress on our strategic initiatives which we believe will improve our competitiveness in each of our channels and we are focused on improving our efficiency. This strategic agenda, combined with our disciplined value over volume focus, gives us the confidence in our outlook, for us to reiterate our financial targets.

"As you will have seen from our announcement today, I will step down as Chief Executive Officer in the summer of 2019. I have been privileged to lead the Group over a long period of transformation. As I approach my tenth anniversary, it is right to put a successor in place to lead the company in the years ahead. In the meantime, we have a very busy and exciting agenda, which I look forward to delivering."

Results summary

H1

 2018

£m

 H1

20171

£m

Change

Gross written premium

1,610.3

1,694.2

(5.0%)

Excluding Nationwide and Sainsbury's2

1,604.6

1,596.6

0.5%

Of which direct own brands

1,099.0

1,063.9

3.3%

Operating profit

303.1

359.7

(15.7%)

Commission ratio3

6.5%

8.9%

(2.4pts)

Expense ratio3

24.4%

24.9%

(0.5pts)

Combined operating ratio3

93.0%

88.6%

4.4pts

Profit before tax

293.8

341.4

(13.9%)

Return on tangible equity annualised4

21.8%

26.6%

(4.8pts)

Dividend per share - interim (pence)5

7.0

6.8

2.9%

30 Jun2018

31 Dec2017

Change

Solvency capital ratio post-dividend - estimated6

169%

165%

4pts

Highlights

· Direct own brand premiums up 3.3% driven primarily by continued growth in Motor, also up 3.3% compared to H1 2017. Total Group premiums excluding Nationwide and Sainsbury's grew 0.5% despite reductions in Motor premium rates.

· Normalised for weather, operating profit was up slightly; H1 2017 also included £49 million of benefit from revised Ogden reserve releases. The headline decline in operating profit of £56.6 million compared to the prior year is driven by higher weather-related claims (H1 2018: £75.0 million, H1 2017: £9.0 million).

· Expense ratio down 0.5 percentage points as costs remained broadly stable. Commission ratio lower as the Group's business mix continued to shift towards direct own brands.

· Continued positive progress with strategic initiatives including the launch of two further Direct Line differentiating propositions, signing of a new Motor partnership deal and, in July, reaching over 500 trades on the Direct Line for Business platform. Programme to deliver latest generation systems benefiting both business and customers on track.

· Interim dividend of 7.0 pence, in line with the Group's policy which aims to grow the dividend in line with business growth.

· Reiteration of the current financial targets for 2018 and over the medium term: of achieving a combined operating ratio in the range of 93% to 95% adjusted for normal weather and assuming no further change to the Ogden discount rate, supported by reductions in expense and commission ratios. For 2018, the Group expects total investment return in the region of £150 million.

Notes:

1. Results for the period ended 30 June 2018 are based on total Group operations including restructuring and Run-off. Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within Motor segment.

2. Nationwide and Sainsbury's exited Home partnerships.

3. 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 for definitions.

4. See glossary for definitions and appendix A - Alternative performance measures for reconciliation to financial statement line items.

5. The Group's dividend policy states its expectation 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.

6. Estimates based on the Group's solvency II partial internal model.

Forward-looking statements disclaimer

Certain information contained in this document, including any information as to the Group's strategy, plans or future financial or operating performance, constitutes "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "aims", "ambition", "anticipates", "aspire", "believes", "continue", "could", "estimates", "expects", "guidance", "intends", "may", "mission", "outlook", "over the medium term", "plans", "predicts", "projects", "propositions", "seeks", "should", "strategy", "targets" or "will" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things: the Group's results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets and guidance which are contained in this document specifically with respect to the return on tangible equity, solvency capital ratio, the Group's combined operating ratio, prior-year reserve releases, cost reduction, reductions in expense and commission ratios, investment income yield, net realised and unrealised gains and risk appetite range. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future or are beyond the Group's control.

Forward-looking statements are not guarantees of future performance. The Group's actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document, for example directly or indirectly as a result of, but not limited to, UK domestic and global economic business conditions, the outcome of the negotiations relating to the UK's withdrawal from the European Union, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements or the Ogden discount rate), the impact of competition, currency changes, inflation and deflation, the timing impact and other uncertainties of future acquisitions, disposals, joint ventures or combinations within relevant industries, as well as the impact of tax and other legislation and other regulation in the jurisdictions in which the Group and its affiliates operate. In addition, even if the Group's actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.

The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document should be construed as a profit forecast.

Neither the content of Direct Line Group's website nor the content of any other website accessible from hyperlinks on the Group's website is incorporated into, or forms part of, this document.

Financial summary

H12018£m

H120171£m

Change

Total Group

In-force policies (thousands)

15,326

15,811

(3.1%)

Of which direct own brands (thousands)

7,018

6,742

4.1%

Gross written premium

1,610.3

1,694.2

(5.0%)

Of which direct own brands

1,099.0

1,063.9

3.3%

Net earned premium

1,559.6

1,547.5

0.8%

Underwriting profit

108.6

177.1

(38.7%)

Instalment and other operating income

99.1

89.6

10.6%

Investment return

95.4

93.0

2.6%

Operating profit

303.1

359.7

(15.7%)

Finance costs

(9.3)

(18.3)

49.2%

Profit before tax

293.8

341.4

(13.9%)

Tax

(55.0)

(65.9)

16.5%

Profit after tax

238.8

275.5

(13.3%)

Key metrics - total Group

Current-year attitional loss ratio2

70.5%

68.8%

1.7pts

Loss ratio2

62.1%

54.8%

7.3pts

Commission ratio2

6.5%

8.9%

(2.4pts)

Expense ratio2

24.4%

24.9%

(0.5pts)

Combined operating ratio2

93.0%

88.6%

4.4pts

Return on tangible equity annualised3

21.8%

26.6%

(4.8pts)

Investment income yield annualised3

2.5%

2.5%

-

Net investment income yield annualised3

2.0%

2.2%

(0.2pts)

Investment return yield annualised3

2.9%

2.8%

0.1pts

Basic earnings per share (pence)

16.9

20.2

(16.3%)

Diluted earnings per share (pence)

16.7

20.0

(16.5%)

Return on equity annualised

17.7%

21.3%

(3.6pts)

Dividend per share

- interim (pence)

7.0

6.8

2.9%

30 Jun2018

31 Dec2017

Change

Net asset value per share (pence)

181.7

198.9

(8.6%)

Tangible net asset value per share (pence)

145.1

164.4

(11.7%)

Solvency capital ratio post-dividend

169%

165%

4pts

Notes:

1. Results for the period ended 30 June 2018 are based on total Group operations including restructuring and Run-off. Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within Motor segment.

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.

3. See glossary for definitions and appendix A - Alternative performance measures for reconciliation to financial statement line items.

Business update

Overview

Direct Line Group (the "Group") had a successful H1 2018, delivering a strong result and making progress against its key priorities. The Group grew direct own brands, with in-force policies up 4.1% to 7.0 million (H1 2017: 6.7 million) and gross written premiums up 3.3% to £1,099.0 million (H1 2017: £1,063.9 million). Total gross written premiums were £1,610.3 million (H1 2017: £1,694.2 million). The Group delivered a combined operating ratio ("COR") of 93.0% (H1 2017: 88.6%) which, when normalised for major weather events, was approximately 91.0% (H1 2017: approximately 90.5%). The Group also continued to make progress against its financial targets of reducing commission and expense1 ratios: down 2.4 percentage points and 0.5 percentage points respectively. These improvements helped the Group deliver a return on tangible equity ("RoTE") of 21.8%. The solvency capital ratio was 169% after dividend, demonstrating the strong capital generation of the business.

The Group's operating profit was £56.6 million lower at £303.1 million (H1 2017: £359.7 million), although when normalised for large weather-related claims (H1 2018: £75 million, H1 2017: £9 million), operating profit was slightly up; H1 2017 also included £49 million of benefit from revised Ogden reserve releases.

The Group remained focused on improving its efficiency by investing in its future capabilities, making good progress in its IT systems development and winning the UK partnership with Volkswagen Insurance Service (Great Britain) Limited. The Direct Line brand launched two new propositions in the first half of 2018, adding further value to customers and helping to give Direct Line a distinctive edge in competitive markets, while in July Direct Line for Business ("DL4B") undertook the largest of its product releases, over 500 trades, and alongside these launched a national marketing campaign.

Motor

The Motor division grew in-force polices 2.1% in the year to 4.0 million and premiums grew 1.9% to £839.8 million. This growth was across both direct and price comparison website ("PCWs") channels. Direct Line continued to differentiate its customer offering, launching a new proposition in the first quarter: a "Fair claim commitment" which protects customers from losing their no claims discount for a range of common non-fault claims.

In the market, premium rates continued to fall quarter-on-quarter, adjusting rationally to the Government's proposals to revise the process for setting the Ogden discount rate and benign claims experience in 2017. The Group saw claims inflation return to more normal levels in the first half of 2018 and is mindful of the delay to the Government's whiplash proposals which are now expected to take effect in April 2020, 12 months later than previously indicated. The Group will continue to prioritise its target loss ratios over volume.

Motor current-year attritional loss ratio improved to 78.5% (H1 2017: 81.7%) as the Group earned through the strong margins achieved on business written in 2017, although higher reinsurance costs in 2018 (+16%) and premium deflation means margins on policies written in 2018 are likely to return to levels similar to those achieved in 2016. Prior-year releases were £46.5 million lower year-on-year, as H1 2017 benefited from £49 million of releases relating to the Group's Ogden provision.

Home

The Home division in-force policies fell 10.9% as a result of the Nationwide exit while direct own brands grew 1.3% due to modest growth in both PCW and direct channels. Direct own brand premiums grew 0.6% compared to the prior year while overall Home premiums fell 25.1% as expected, primarily as a result of the Nationwide and Sainsbury's exit.

Underwriting performance was impacted by higher weather losses of £65 million (H1 2017: £9.0 million), mainly as a result of the freeze losses in Q1 2018. This was partially offset by higher prior-year reserve releases of £24.7 million (H1 2017: £16.8 million), as 2017 saw lower releases due to escape of water ("EoW") inflation. Management actions taken throughout 2017 on pricing, claims and underwriting helped return EoW inflation to more normal levels in 2018.

The change in distribution of Home's insurance business from partners to PCWs continued in 2018. The Group remained competitive across all channels and successfully grew its PCWs policies in 2018, helping to support the strong profitability of the category.

As with Motor, the Group's focus on being a great retailer was demonstrated again with the launch of a further Direct Line Home proposition in 2018 with 'Fast Response'; this proposition sees the Group agreeing a plan of action within 24 hours in the event of major water damage. A proposition such as this continues to differentiate Direct Line from its peers and gives customers a strong reason to look beyond PCWs. The Group's investment in its digital capabilities has strengthened its partnership capabilities and H1 2018 saw growth again in its partnership with RBS and NatWest.

Commercial

The Commercial business grew in-force policies 4.3% to 730,000 with DL4B up 7.3% to 485,000 driving the growth. Commercial premiums were up 0.6% to £269.9 million, as the growth in DL4B up 6.5%, was offset by a 1.2% reduction in NIG. Commercial business profitability was broadly in-line with H1 2017, with operating profit of £29.1 million (H1 2017: £30.2 million). Weather claims in H1 2018 were £10 million (H1 2017: £nil) compared to full year normal expectations of £20 million.

In July, DL4B continued to deliver against its plan of adding trades to its new commercial platform, with the launch of office, professionals and retail segments. This took DL4B up to 75% of its targeted trades enabling it to launch its first broad marketing campaign in July 2018, in line with its target timeline.

Rescue and other personal lines

Rescue and other personal lines in-force policies fell by 3.0% to 7.6 million but the product mix continued to improve. The Rescue business is made up of three distribution channels: the Group's direct brand (Green Flag), sales from the Group's insurance brands (linked) and partnerships. Green Flag grew in-force policies by 11.5% to 846,000. In addition, Green Flag sales continued to shift towards higher premium products, resulting in 13.3% premium growth overall. However, rescue partnership premiums decreased by 34.0% following the sale of fewer packaged products and a small partnership exit.

In the Rescue category, Green Flag is positioned as the market disruptor and is seeking to challenge the rescue market. Green Flag followed up on its provocative advertising campaign in the second half of 2017 with a new launch in H1 2018, where it continued to highlight the value of Green Flag policies compared to its main competitors.

Investments

Assets under management decreased to £6,283.5 million (FY 2017: £6,709.3 million), reflecting the regular and special dividend payments in the first half and the continued run-off of the back book of reserves offset in part by business growth.

Total investment return was £95.4 million (H1 2017: £93.0 million), giving annualised investment return yield of 2.9% (H1 2017: 2.8%). Gains were higher in H1 2018 as property revaluations continued to be favourable (H1 2018: £12.1 million, H1 2017: £9.9 million) and the Group realised gains of £18.4 million (H1 2017: £14.5 million). However, for 2018, the Group expects total investment return in the region of £150 million after taking into account hedging costs and lower assets under management.

Total unrealised gains, net of tax, on available-for-sale ("AFS") investments reduced by £72.5 million in the period to £7.7 million (FY 2017: £80.2 million) as a result of widening credit spreads, higher interest rates and realisation of gains.

Data and technology

The Group continues to focus on data and technology as a key enabler. This includes developing future capability and managing risks associated with IT systems' stability and cyber security. As announced in the Full Year 2017 Preliminary results, the Group has plans for a phased programme of build, testing and roll out of activities in 2018, 2019 and beyond in Personal Lines and Commercial and is making progress against these plans. The Group expects to incur capital expenditure on average of around £80 million to £100 million per annum over the period 2017 to 2019.

Dividends and capital management

The Group's capital requirements remained broadly flat. This, coupled with the Group's strong capital generation, resulted in solvency capital ratio at H1 2018 of 176% before dividend.

The Group's tangible net asset value was lower at £1,982.1 million (FY 2017: £2,244 .0 million) due to payment of the final and special dividends in H1 2018 (£399.7 million) and lower revaluation reserves for AFS investments partially offset by 2018 retained earnings.

The Board has proposed an interim dividend of 7.0 pence, (2017: 6.8 pence) taking the solvency capital ratio at H1 2018 to 169% post-dividend.

In normal circumstances, the Group expects to operate around the middle of its solvency capital ratio risk appetite range of 140% to 180%. The Board will normally only review the potential for any further special distribution once a year with the full year results, taking into consideration the Group's solvency position, financial outlook and strategic opportunities.

Outlook

For 2018 and over the medium term, the Group targets achieving a 93% to 95% COR assuming a normal annual level of claims from major weather events and no further change to the Ogden discount rate, supported by reductions in its expense and commission ratios; and reiterates its ongoing target of achieving at least a 15% return on tangible equity.

For 2018, the Group expects total investment return in the region of £150.0 million.

Finance review

Performance

Operating profit - total Group

H12018£m

H12017£m

Underwriting profit

108.6

177.1

Instalment and other operating income

99.1

89.6

Investment return

95.4

93.0

Total operating profit

303.1

359.7

Operating profit decreased by 15.7% to £303.1million (H1 2017: £359.7 million) mainly due to a reduction in the underwriting profit partly offset by an increase in instalment and other operating income. Normalised for weather, operating profit was slightly up.

Underwriting profit decreased to £108.6 million (H1 2017: £177.1 million) predominantly due to £75 million of weather claims mainly associated with the major freeze in Q1 2018 (H1 2017: £9 million weather-related claims) and the non-repeat of £49 million of Ogden related prior-year reserve releases in 2017. Excluding the weather-related claims, 2018 underwriting profit remained broadly stable and benefited from a current-year loss ratio improvement in Motor, as well as lower expense and commission ratios compared to H1 2017. Prior-year reserve releases in total were £19.5 million lower at £206.5 million (H1 2017: £226.0 million).

Instalment and other operating income increased to £99.1 million (H1 2017: £89.6 million) and included a £9.6 million gain on sale of the asset held for sale property in Bristol.

Investment return improved to £95.4 million (H1 2017: £93.0 million) primarily due to an increase in net realised and unrealised gains.

Total in-force policies reduced to 15.3 million (30 June 2017: 15.8 million). This reduction was primarily due to lower partner volumes in Home with the exit from the Nationwide and Sainsbury's partnerships and reductions in Rescue and other personal lines, while continued in-force policy growth in Motor and Home's own brands, Green Flag direct and Commercial partly offset the reduction.

Gross written premium of £1,610.3 million (30 June 2017: £1,694.2 million) decreased 5.0% due to the reduction in Home partnerships partly offset by an increase in Motor own brand premiums.

Gross written premium - total Group

Q22018£m

Q22017£m

H12018£m

H12017£m

Own brands

419.2

412.7

807.3

781.2

Partnerships

16.6

19.0

32.5

43.2

Motor total

435.8

431.7

839.8

824.4

Own brands

98.5

97.6

194.4

193.2

Partnerships (excluding Nationwide and Sainsbury's)

45.9

49.5

90.6

97.3

Partnerships (Nationwide and Sainsbury's)

3.1

46.2

5.7

97.6

Home total

147.5

193.3

290.7

388.1

Rescue

42.4

42.9

80.1

83.6

Other personal lines

63.8

66.2

129.8

129.7

Rescue and other personal lines

106.2

109.1

209.9

213.3

Of which Green Flag direct

18.0

15.4

33.3

29.4

Direct Line for Business

32.9

31.5

64.0

60.1

NIG

118.0

118.3

205.9

208.3

Commercial

150.9

149.8

269.9

268.4

Total gross written premium

840.4

883.9

1,610.3

1,694.2

Of which direct own brands

568.6

557.2

1,099.0

1,063.9

Motor

In-force policies increased 2.1% to 4.0 million policies, compared with the first half of 2017. Motor's own brands grew by 3.5% over the same period despite lower levels of shopping in the market due to lower premiums. This growth was underpinned by the strength of the direct channel's customer retention. The growth in in-force policies slowed in the second quarter of 2018 compared to the first quarter as pricing pressure increased. As a result Motor average written premium1 increased by just 0.7% in H1 2018 compared with the first half of 2017, and risk-adjusted prices increased 2.9%. Motor gross written premium increased by 1.9% in comparison to the first half of 2017, while own brands premiums increased by 3.3% over the same period.

The Motor premium environment has responded rationally to a number of significant changes to claims experience and outlook since the start of 2017. In February 2017, the Ministry of Justice reduced the discount rate used to calculate large bodily injury claims to minus 0.75% from 2.5% before announcing in September 2017 that it intended to adjust the process which could result in the discount rate increasing to between 0% and 1%. Throughout 2017, claims frequency was also significantly below our long-term expectation of 3% to 5%. In the first half of 2018, claims inflation returned to long-term trend levels, while the Ministry of Justice announced a 12 month delay to the implementation of the whiplash reforms to April 2020. The Group continues to assume claims inflation over the long-term of 3% to 5% per annum. The Group will continue to prioritise its target loss ratios over volume.

Home

In-force policies for Home's own brands increased by 1.3% to 1.8 million policies, compared with the first half of 2017, while partnership volumes reduced by 25.0% predominantly due to the exit from the Nationwide and Sainsbury's partnerships. New business volumes declined as shopping levels slowed, compared to the high levels triggered in 2017, following new rules requiring last year's premium to be included on renewal documents. Retention in Home own brands, however, continued to be strong. Gross written premium was 25.1% lower than the first half of 2017, predominantly due to the reduction in partners, partly offset by a small increase of 0.6% in own brands.

Home own brands average written premium2 remained broadly flat compared with the first half of 2017 with risk mix substantially offsetting a 4.7% price increase as the Group grew particularly strongly in the PCW channel, where premiums are typically lower than in the direct channel. Claims inflation, excluding the impact of major weather events, was more settled and continued to converge during the first half of the year towards the Group's long-term expectation of 3% to 5%.

Rescue and other personal lines

Rescue and other personal lines in-force policies reduced 3.0% compared with the first half of 2017, primarily resulting from a reduction in partner volumes, while Green Flag direct increased by 11.5% compared to first half of 2017 to 846,000 policies. Gross written premium for Rescue and other personal lines decreased by 1.6% compared with the first half of 2017, mainly due to the reduction in partner volumes partly offset by strong growth in Green Flag direct which increased by 13.3% to £33.3 million.

Commercial

Commercial in-force policies increased 4.3% to 730,000 compared with the first half of 2017, reflecting strong growth in Direct Line for Business which was up 7.3% to 485,000, partly offset by NIG. Commercial gross written premium increased 0.6%, compared with the first half of 2017, reflecting continued strong growth in Direct Line for Business, with NIG and other premiums slightly lower as the Group continued to seek to price for risk and improved profitability.

Underwriting profit and combined operating ratio - total Group

H12018

H112017

Underwriting profit (£ million)

108.6

177.1

Loss ratio

62.1%

54.8%

Commission ratio

6.5%

8.9%

Expense ratio

24.4%

24.9%

COR

93.0%

88.6%

Note:

The Group achieved a combined operating ratio, normalised for weather of approximately 91.0% (H1 2017: approximately 90.5%).

Loss ratio analysis by division - total Group

Notes

Motor£m

Home£m

Rescue and otherpersonal lines£m

Commercial1 £m

TotalGroup£m

For the period ended 30 June 2018

Net earned premium

4

765.8

354.6

205.5

233.7

1,559.6

Net insurance claims

4

463.6

229.4

144.7

130.9

968.6

Prior-year reserve releases

21

137.7

24.7

5.7

38.4

206.5

Major weather events

n/a

(65.0)

n/a

(10.0)

(75.0)

Attritional net insurance claims

601.3

189.1

150.4

159.3

1,100.1

Loss ratio - current-year attritional

78.5%

53.3%

73.2%

68.2%

70.5%

Loss ratio - prior-year reserve releases

(18.0%)

(7.0%)

(2.8%)

(16.5%)

(13.2%)

Loss ratio - major weather events1

n/a

18.4%

n/a

4.3%

4.8%

Loss ratio - reported

4

60.5%

64.7%

70.4%

56.0%

62.1%

Commission ratio

4

1.8%

10.7%

4.2%

17.5%

6.5%

Expense ratio

4

24.4%

25.2%

23.7%

24.2%

24.4%

COR

4

86.7%

100.6%

98.3%

97.7%

93.0%

For the period ended 30 June 20172

Net earned premium

4

707.8

397.0

209.0

233.7

1,547.5

Net insurance claims

4

393.9

190.7

135.7

127.1

847.4

Prior-year reserve release / (strengthening)

21

184.2

16.8

(2.1)

27.1

226.0

Major weather events

n/a

(9.0)

n/a

n/a

(9.0)

Attritional net insurance claims

578.1

198.5

133.6

154.2

1,064.4

Loss ratio - current-year attritional

81.7%

50.0%

63.9%

66.0%

68.8%

Loss ratio - prior-year reserve releases

(26.0%)

(4.3%)

1.0%

(11.6%)

(14.6%)

Loss ratio - major weather events1

n/a

2.3%

n/a

n/a

0.6%

Loss ratio - reported

4

55.7%

48.0%

64.9%

54.4%

54.8%

Commission ratio

4

2.6%

17.0%

5.0%

17.9%

8.9%

Expense ratio

4

26.1%

23.8%

23.9%

23.8%

24.9%

COR

4

84.4%

88.8%

93.8%

96.1%

88.6%

Notes:

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

2. Results for the period ended 30 June 2018 are based on total Group operations including restructuring and Run-off. Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within Motor segment.

The movement in the current-year attritional loss ratio is an indicator of underlying accident year performance as it excludes prior-year reserve movements and claims costs from major weather events. The Group's current-year attritional loss ratio of 70.5% increased by 1.7 percentage points, compared to the same period in 2017. While the Nationwide exit is creating some impact on different lines of the income statement, overall the Group continued to make progress on growing its current year profitability.

Prior-year reserve releases continued to be significant at £206.5 million (H1 2017: £226.0 million) and were equivalent to 13.2% of net earned premium (H1 2017: 14.6%). Reserve releases were lower in H1 2018, as H1 2017 included a £49 million one-off reserve release. Assuming current claims trends continue, prior-year reserve releases are expected to reduce in future years, although they are expected to remain a significant contribution to profits.

Motor

The COR for the Motor division was 86.7% (H1 2017: 84.4%), an increase of 2.3 percentage points, as a result of a higher loss ratio due to lower prior-year reserve releases, with H1 2017 including a £49 million release after a detailed review of the Group's Ogden provision within case reserves. This was partially offset by a current-year loss ratio improvement.

The current-year attritional loss ratio improved by 3.2 percentage points to 78.5%, primarily as a result of a favourable 2017 Motor margin contribution and volume growth earning through. In the second half of the year the Group expects the loss ratio to return to higher levels as the higher reinsurance costs and lower premiums begin to earn through. Both the expense and commission ratios improved compared to the first half of 2017.

Home

In Home, the COR increased by 11.8 percentage points to 100.6% (H1 2017: 88.8%) with higher loss and expense ratios, in part offset by an improving commission ratio. Normalised for weather the COR was approximately 91% (H1 2017: approximately 93%), approximately 2 percentage points lower. The loss ratio was higher by 16.7 percentage points at 64.7% compared to H1 2017 primarily as a result of the major freeze event in Q1 2018. The impact of the major weather events in H1 2018 is approximately £65 million (H1 2017: £9 million), resulting in the annual weather claims budget being utilised in H1 2018.

The current-year attritional loss ratio, excluding major weather event claims, increased by 3.3 percentage points to 53.3%, reflecting changes in business mix, offset to some extent by lower commission.

The commission ratio of 10.7% was 6.3 percentage points lower than the first half of 2017, reflective of lower profit commission payments to partners resulting from the impact of elevated claims experience and changes to partner arrangements.

Rescue and other personal lines

The COR for Rescue and other personal lines increased by 4.5 percentage points to 98.3% (H1 2017: 93.8%), principally due to an increase in the loss ratio due mainly to higher weather-related losses, partnerships and timing of reserve reviews. The higher loss ratio was partially offset by lower expense and commission ratios. The COR for Rescue was 85.8% (H1 2017: 82.8%).

Commercial

The COR for Commercial increased by 1.6 percentage points to 97.7% (H1 2017: 96.1%), primarily due to a 1.6 percentage points increase in the loss ratio as a result of the Q1 2018 major weather events and a higher current-year loss ratio, partly offset by a higher contribution of prior-year reserve releases.

The current-year attritional loss ratio increased by 2.2 percentage points to 68.2% when compared to the favourable H1 2017 ratio (H1 2017: 66.0%). When compared to full year 2017, the H1 2018 current year attritional loss ratio was broadly stable. The higher loss and expense ratios were partly offset by a lower commission ratio. The impact of the weather events in H1 2018 was approximately £10 million.

Total costs - total Group

Notes

H12018£m

H112017£m

Staff costs

207.5

206.7

Other operating expenses

158.3

165.0

Marketing

10

65.9

59.0

Amortisation and impairment of other intangible assets

10

24.4

26.7

Depreciation

10

16.2

14.1

Total costs

472.3

471.5

Operating expenses

10

381.2

384.9

Claims handling expenses

8

91.1

86.6

Total costs

472.3

471.5

Total costs increased by £0.8 million to £472.3 million (H1 2017: £471.5 million) and operating expenses were lower by £3.7 million at £381.2 million (H1 2017: £384.9 million) resulting in an expense ratio of 24.4% (H1 2017: 24.9%). Total costs remained broadly stable with an increase in marketing spend to drive brand awareness offsetting reductions in other operating expenses. The Group continued to invest in its significant IT programme and operational efficiency improvements while supporting business growth and investment in future capability.

Instalment and other operating income - total Group

Note

H12018£m

H12017£m

Instalment income

59.1

55.8

Other operating income:

Vehicle replacement referral income

7

8.4

8.3

Revenue from vehicle recovery and repair services

7

5.8

9.8

Legal services income

7

5.8

5.6

Other income

7

20.0

10.1

Other operating income

7

40.0

33.8

Total instalment and other operating income

99.1

89.6

Instalment and other operating income increased by £9.5 million, with increased instalment payments of £3.3 million due to higher Motor gross written premium; a £9.9 million increase in other income primarily, relating to a one-off gain on disposal of the Bristol property of £9.6 million; partly offset by a £4.0 million decrease in revenue from recovery and repair services which included a refinement in the basis of allocation in H2 2017.

Investment return - total Group

Note

H12018£m

H120171£m

Investment income

79.6

82.8

Hedging to a sterling floating rate basis

(14.7)

(10.8)

Net investment income

64.9

72.0

Net realised and unrealised gains excluding hedging

30.5

21.0

Total investment return

6

95.4

93.0

Investment yields - total Group

H12018

H12017

Investment income yield1

2.5%

2.5%

Net investment income yield1

2.0%

2.2%

Investment return yield1

2.9%

2.8%

Total investment return increased to £95.4 million (H1 2017: £93.0 million) due to higher unrealised property gains and realised gains from debt securities offset by lower investment income and higher hedging costs.

Net realised and unrealised gains were higher at £30.5 million (H1 2017: £21.0 million) primarily due to higher unrealised property gains and higher H1 2018 realised gains from debt securities. The Group has sought to lock in realised gains, given the rising yield environment and its impact on the AFS reserve.

The investment income yield for H1 2018 remained stable at 2.5% (H1 2017: 2.5%).

The net investment income yield was lower at 2.0% (H1 2017: 2.2%) as a result of US dollar hedging costs impacting the yield.

Investment holdings - total Group

At

30 Jun2018£m

31 Dec2017£m

Investment-grade credit1

3,873.6

3,893.1

High yield

398.9

388.6

Investment-grade private placements

102.3

103.6

Credit

4,374.8

4,385.3

Sovereign

165.8

224.8

Total debt securities

4,540.6

4,610.1

Infrastructure debt

301.0

316.4

Commercial real estate loans

183.3

169.0

Cash and cash equivalents2

937.2

1,304.5

Investment property

321.4

309.3

Total investment holdings

6,283.5

6,709.3

2. Net of bank overdrafts: includes cash at bank and in hand and money market funds with no notice period for withdrawal.

At 30 June 2018, total investment holdings of £6,283.5 million were 6.3% lower than at the start of the year primarily reflecting the cash paid to settle the 2017 final and special dividends paid in May 2018. Total debt securities were £4,540.6 million (31 December 2017: £4,610.1 million), of which 4.9% were rated as 'AAA' and a further 61.0% were rated as 'AA' or 'A'. The average duration at 30 June 2018 of total debt securities was 2.5 years (31 December 2017: 2.3 years).

At 30 June 2018, total unrealised gains, net of tax, on AFS investments were £7.7 million (31 December 2017: £80.2 million).

Reconciliation of operating profit

H12018£m

H112017£m

Motor

238.0

239.4

Home

21.1

67.5

Rescue and other personal lines

14.9

22.6

Commercial

29.1

30.2

Operating profit

303.1

359.7

Finance costs

(9.3)

(18.3)

Profit before tax

293.8

341.4

Tax

(55.0)

(65.9)

Profit after tax

238.8

275.5

Note:

1. Results for the period ended 30 June 2018 are based on total Group operations including restructuring and Run-off. Comparative data has been re-presented accordingly to include restructuring costs and Run-off profits within Motor segment.

Operating profit by segment

All divisions were profitable in H1 2018 with Motor and Commercial remaining broadly in line with H1 2017. Home reported reduced operating profits primarily due to the weather freeze event in Q1 2018, while Rescue and other personal lines also reported lower profits. Rescue operating profit of £19.2 million (H1 2017: £21.7 million) is included in the Rescue and other personal lines result.

Finance costs

Finance costs reduced to £9.3 million (H1 2017: £18.3million) due to the repurchase of £250 million nominal value of the subordinated dated notes in December 2017.

Taxation

The effective tax rate in H1 2018 was 18.7% (H1 2017: 19.3%), which was lower than the standard UK corporation tax rate of 19.0% (H1 2017: 19.25%), driven primarily by relief for the Tier 1 notes coupon payment offset by disallowable expenses.

Profit for the period and return on tangible equity1

Profit for the period of £238.8 million (H1 2017: £275.5 million) reflected a reduction in operating profit predominantly within the Home segment as a result of the major weather events, offset by lower finance costs and a reduced tax charge.

Return on tangible equity decreased to 21.8% (H1 2017: 26.6%) due to an annualised profit after tax of £461.0 million (H1 2017: £551.0 million) and a reduction in the average shareholders' tangible equity.

Earnings per share

Basic earnings per share decreased by 16.3% to 16.9 pence (H1 2017: 20.2 pence). Adjusted diluted earnings per share decreased by 16.5% to 16.7 pence (H1 2017: 20.0 pence) mainly reflecting a decrease in profit after tax.

Dividend

The Board has resolved to pay an interim dividend for the Company for 2018 of £96.2 million in aggregate, representing 7.0 pence per share (30 June 2017: 6.8 pence).

The interim dividend will be paid on 7 September 2018 to shareholders on the register on 10 August 2018. The ex-dividend date will be 9 August 2018.

The net assets at 30 June 2018 decreased to £2,482.1million (31 December 2017: £2,715.1 million) and tangible net assets decreased to £1,982.1 million (31 December 2017: £2,244.0 million). These decreases mainly reflect the payment of the 2017 final and special dividends, a reduction in the AFS reserves due to rising market yields, partially offset by the 2018 retained profit.

Note:

1. See glossary for definitions and appendix A - Alternative performance measures for reconciliation to financial statement line items.

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 claims handling provision. 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.

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 made in 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 paid to the claimant and, in the cases where this includes an element of indemnity for recurring costs such as loss of earnings or ongoing medical care, settlement calculations have reference to a standardised Ogden annuity factor at a discount rate of minus 0.75% in 2018 (2017: minus 0.75%). This is normally referred to as the Ogden discount rate.

Other estimates are also required for case management expenses, loss of pension, court protection fees, alterations to accommodation and transportation fees. In 2017, the Lord Chancellor changed the Ogden discount rate from 2.5% to minus 0.75% based on a 3-year average of yields on index-linked Government securities. The Government are currently reviewing the Ogden discount rate again based on 'low risk' investments rather than 'very low risk' investments, however, there is considerable uncertainty over whether, when and how a change might be made.

The Group continues to exercise judgement around the Ogden discount rate used in its reserves allowing for the possibility for it to change in the future. It considers the uncertainties around the legal framework and its implementation risks to the future rate as being significant but broadly balanced and therefore provisions at the current rate of minus 0.75%. An allowance for further movements in the Ogden discount rate is made within the Group's solvency II balance sheet and capital requirement. Details of the IFRS sensitivity analysis to the assumed Ogden discount rate are shown overleaf. However, it should be noted that the Government is considering not only the appropriate level for the rate but also the methodology of how it is applied, so any sensitivity has considerable limitations and uncertainty.

The Group's prior-year reserve releases were £206.5 million (H1 2017: £226.0 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 for future accident years conservatively. Over time, the proportion of the Group's underwriting profit attributable to the current-year is expected to increase. This includes targeted improvements in the expense and commission ratios. Assuming current claims trends continue, the contribution from prior-year reserve releases will reduce over time, although it is expected to remain significant.

Claims reserves net of reinsurance

At

30 Jun2018£m

31 Dec12017£m

Motor

2,042.4

2,187.3

Home

334.0

293.3

Rescue and other personal lines

94.6

85.6

Commercial

574.4

578.3

Total Group

3,045.4

3,144.5

Sensitivity analysis - the discount rate used in relation to periodic payment orders ("PPOs") and changes in assumed Ogden discount rate

The table below provides a sensitivity analysis of the potential impact of a change in a single factor with all other assumptions left unchanged. Other potential risks beyond the ones described could have an additional financial impact on the Group.

Increase / (decrease) in profit before tax and equity3,4

30 Jun2018£m

31 Dec2017£m

PPOs1

Impact of an increase in the discount rate used in the calculation of present values of 100 basis points

54.6

54.6

Impact of a decrease in the discount rate used in the calculation of present values of 100 basis points

(75.1)

(75.1)

Ogden discount rate2

Impact of the Group reserving at a discount rate of 0% compared to minus 0.75%

54.1

68.4

Impact of the Group reserving at a discount rate of minus 1.5% compared to minus 0.75%

(82.1)

(102.9)

Notes:

1. The PPO sensitivities are updated annually due to their long term nature. These 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 0.0%. The PPO sensitivity has been calculated on the direct impact on the change in the real discount rate with all factors remaining unchanged.

2. Ogden discount rate sensitivity has been calculated on the direct impact of a permanent change in the discount rate 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 to ensure that reserves are appropriate for current and potential future developments.

3. These sensitivities exclude the impact of taxation.

4. These sensitivities reflect one-off impacts at 30 June and should not be interpreted as predictions.

The Ogden discount rate sensitivity above is calculated on the basis of a permanent change in the rate on the actuarial best estimate reserves as at 30 June 2018. It does not take into account a change in the Ogden discount rate setting regime, nor any second order impacts such as those on the Group's PPO assumptions or reinsurance bad debt assumptions. The reduction in sensitivity to a change in the Ogden discount rate since 31 December 2017 reflects the overall reduction in bodily injury exposures. This is due to continued positive prior-year development of claims reserves for large bodily injury claims, particularly for accident years where the reinsurance retention level was higher than the current level of £1 million.

Capital management

Capital management 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 requirements ("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.

Solvency II

The Group is regulated under solvency II requirements by the Prudential Regulation Authority ("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 30 June 2018.

Sensitivity analysis

The following table shows the Group's estimated solvency capital ratio sensitivities based on the assessed impact of scenarios as at 30 June 2018.

Impact on solvency capital ratio

Scenario

30 Jun2018

31 Dec2017

Motor bodily injury deterioration equivalent to accident years 2008 and 2009

(7pts)

(7pts)

One-off catastrophe loss equivalent to the1990 storm

(9pts)

(9pts)

One-off catastrophe loss based on extensive flooding of the River Thames

(9pts)

(9pts)

Change in reserving basis for PPOs to use a real discount rate of minus 1%1

(10pts)

(13pts)

100bps increase in credit spreads2

(11pts)

(11pts)

100bps decrease in interest rates with no change in the PPO real discount rate

(2pts)

(3pts)

Note:

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 EIOPA discount rate curve.

2. These sensitivities only include the assessed impact of the above scenarios in relation to AFS investments.

Capital surplus

At 30 June 2018, the Group held a solvency II capital surplus of approximately £0.98 billion above its regulatory capital requirements and was equivalent to an estimated solvency capital ratio of 169%, post-dividend.

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

At

30 Jun2018

31 Dec20171

Solvency capital requirement (£ billion)

1.41

1.39

Capital surplus above solvency capital requirement (£ billion)

0.98

0.91

Solvency capital ratio post-dividend

169%

165%

The following table splits the Group's own funds by tier on a solvency II basis.

At

30 Jun2018£bn

31 Dec20171£bn

Tier 1 capital before foreseeable dividends

1.83

2.04

Foreseeable dividends

(0.10)

(0.39)

Tier 1 capital - unrestricted

1.73

1.65

Tier 1 capital - restricted

0.35

0.35

Tier 1 capital

2.08

2.00

Tier 2 capital - subordinated debt

0.26

0.26

Tier 3 capital - deferred tax

0.05

0.04

Total own funds

2.39

2.30

Tier 1 capital after foreseeable dividends represents 87% of own funds and 147% of the estimated SCR. Tier 2 capital relates solely to the Group's £0.26 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 it is less than 15%. Therefore, the Group currently has no ineligible capital. The requirement that Tier 1 restricted capital should not exceed 20% of total Tier 1 capital, when satisfying the requirement that eligible Tier 1 items should be at least 50% of SCR, is not applicable to the Group.

The interim dividend will be payable from surplus capital generated from continuing operations of the Group.

Reconciliation of IFRS shareholders' equity to solvency II own funds

At

30 Jun2018£bn

31 Dec20171£bn

Total shareholders' equity

2.48

2.72

Goodwill and intangible assets

(0.50)

(0.47)

Change in valuation of technical provisions

(0.06)

(0.13)

Other asset and liability adjustments

(0.09)

(0.08)

Foreseeable dividends

(0.10)

(0.39)

Tier 1 capital - unrestricted

1.73

1.65

Tier 1 capital - restricted

0.35

0.35

Tier 1 capital

2.08

2.00

Tier 2 capital - subordinated debt

0.26

0.26

Tier 3 capital - deferred tax

0.05

0.04

Total own funds

2.39

2.30

Note

1. The 2017 comparative period has been updated to reflect the amounts in the Solvency and Financial Condition Report for the year ended 31 December 2017, published on 2 May 2018.

Movement in capital surplus

H1

2018£bn

FY

20171£bn

Capital surplus at 1 January

0.91

0.91

Capital generation excluding market movements

0.31

0.54

Market movements

(0.06)

-

Capital generation

0.25

0.54

Change in solvency capital requirement

(0.02)

0.01

Surplus generation

0.23

0.55

Capital expenditure

(0.06)

(0.10)

Management capital action

-

0.03

Capital distribution - ordinary dividends2

(0.10)

(0.28)

Capital distribution - special dividends2

-

(0.20)

Net surplus movement

0.07

-

Capital surplus at 30 June 2018 / 31 December 2017

0.98

0.91

Notes:

1. The 2017 comparative period has been updated to reflect the amounts in the Solvency and Financial Condition Report for the year ended 31 December 2017, published on 2 May 2018.

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.

During H1 2018, the Group's own funds increased from £2.30 billion to £2.39 billion. The Group generated £0.25 billion of solvency II capital offset by £0.06 billion of capital expenditure and capital distribution of £0.10 billion for the 2018 interim dividend.

Leverage

The Group's financial leverage increased 1.3 percentage points, but remained conservative at 19.7% (2017: 18.4%). The increase was primarily due to the reduction in shareholders' equity. While the Tier 1 notes issued during 2017 are presented as equity in the balance sheet, the Group considers this to be part of its total leverage.

At

30 Jun2018£bn

31 Dec2017£bn

Shareholders' equity

2,482.1

2,715.1

Tier 1 notes

346.5

346.5

Financial debt - subordinated debt

260.9

264.7

Total capital employed

3,089.5

3,326.3

Financial-leverage ratio1

19.7%

18.4%

Credit ratings

Standard & Poor's and Moody's Investors Service provide insurance financial-strength ratings for U K Insurance Limited, the Group's principal underwriter. U K Insurance Limited is currently rated 'A' (strong) with a stable outlook by Standard & Poor's, and 'A2' (good) with a positive outlook by Moody's.

Regulatory update

The Group has continued to operate within a highly dynamic and evolving regulatory landscape, particularly in the UK motor insurance market where there are a number of reviews and initiatives, including those that have been announced by the UK Government, the Financial Conduct Authority ("FCA") and the PRA. The Group still awaits the passing of the Civil Liability Bill through Parliament which will bring in new measures to reform the soft-tissue whiplash injury compensation system and introduce a new framework for setting the Personal Injury Discount rate.

In 2018 the FCA's focus has been on Brexit and pricing practices. The PRA's focus has been on the pillars of its financial risk framework, namely reserving, pricing, reinsurance and investments. The Group is exposed to the risk of changes to regulatory rules, policy or interpretation, and to supervisory expectations or approach, by regulators or other bodies or authorities; and of changes to law, tax, monetary or fiscal policies or their interpretation by Government or Government authorities, any of which may have adverse operational and financial impacts.

The Group will continue to support proportionate reforms which result in a level playing field across the industry.

Principal risks and uncertainties

The Group carries out a robust assessment of the principal risks facing it in the current and future financial years. Principal risks are defined as having a residual risk impact of £40 million or more on profit before tax or net asset value on a 1-in-200 years basis, accounting for customer, financial and reputational impacts. The Group considers that the risk profile remains broadly unchanged over the last six months, since the profile disclosed in the Annual Report and Accounts 2017 risk management section, pages 22 to 25 and financial statements, pages 127 to 138.

Principal risks

Insurance risk

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. Insurance risk includes reserve, underwriting, distribution, pricing and reinsurance risks.

Market risk

The risk of loss resulting from fluctuations in the level and volatility of market prices of assets, liabilities and financial instruments. Market risk includes spread, interest rate and property risks.

Credit risk

The risk of loss resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which the Group is exposed. Credit risk includes concentration and counterparty default risks.

Operational risk

The risk of loss due to inadequate or failed internal processes, people, systems or from external events. Operational risk includes information security, IT resilience and business resilience, partnerships, change, supplier management and outsourcing, financial reporting, model and technology and infrastructure risks.

Regulatory and conduct risk

The risks arising out of changes to laws, regulatory rules, policy or interpretation, or to supervisory expectations or approach, that have an adverse operational and financial impact as a result of reputational damage, regulatory or legal censure, fines or prosecutions, and any other type of non-budgeted operational risk losses, associated with the Group's conduct and activities. Regulatory and conduct risk includes compliance risk.

Strategic risk

The risk of direct or indirect adverse impact on the earnings, capital, or value of the Group's business resulting from the strategies not being optimally chosen, implemented or adapted to changing conditions. Strategic risk includes strategy formulation and implementation risks.

Emerging risks

The Group's definition of emerging risks is new or developing risks which are often difficult to quantify; they are also highly uncertain and are external to the Group. Emerging risks are identified by management and are recorded within an Emerging Risk Register. Emerging risks are reported to the Board Risk Committee for review and challenge. The Group's emerging risks processes aim to:

·

identify emerging risks on a timely basis;

·

manage emerging risks proactively;

·

mitigate the impact of emerging risks which could affect the delivery of the strategic plan; and

·

reduce the uncertainty and volatility of the Group's results.

The Group considers its main emerging risks to be:

Technological change in driving habits reduces consumer need for motor insurance

New car technologies, such as crash-prevention technologies and driverless cars, could significantly affect the size and nature of the insurance market and the role of insurers. In addition to the Group's partnership with the Government on automated Driving systems (MOVE_UK), the Group continues to build strong collaborative relationships, including with key manufacturers of driverless cars.

New market entrants and changes in consumer expectations could result in significant changes to the structure of the general insurance market and require the Group to update its business model. The Group's strategy, aligned to its mission to make insurance much easier and better value for its customers, is positioned to take advantage of changes in technology and customer behaviours, and to build the Group's partnership capabilities.

The UK could enter a prolonged period of reduced growth due to the exit from the European Union, potentially reducing insurance sales and the value of the Group's investment portfolio. Whilst the Group's operations are based mainly in the UK, the Group continues to monitor implications surrounding Brexit negotiations, including: changes to the value of sterling which impact claims and non-claims supplier costs; inflation; recruitment and retention of people; potential changes to direct and indirect tax; and the regulatory impact on the Group's capital position.

Climate change could increase the frequency of severe weather events in the UK and, in particular, flooding claims costs. The Group continues to monitor changes in claims experience and considers weather trends as part of its pricing and underwriting approach.

Notes

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Gross earned premium

5

1,665.4

1,645.0

3,339.7

Reinsurance premium

5

(105.8)

(97.5)

(204.7)

Net earned premium

5

1,559.6

1,547.5

3,135.0

Investment return

6

95.4

93.0

175.4

Instalment income

59.1

55.8

116.4

Other operating income

7

40.0

33.8

62.9

Total income

1,754.1

1,730.1

3,489.7

Insurance claims

8

(1,005.0)

(768.2)

(1,571.1)

Insurance claims recoverable from / (payable to) reinsurers

8

36.4

(79.2)

(183.1)

Net insurance claims

8

(968.6)

(847.4)

(1,754.2)

Commission expenses

9

(101.2)

(138.1)

(286.4)

Operating expenses

10

(381.2)

(384.9)

(806.3)

Total expenses

(482.4)

(523.0)

(1,092.7)

Operating profit

303.1

359.7

642.8

Finance costs

11

(9.3)

(18.3)

(103.8)

Profit before tax

293.8

341.4

539.0

Tax charge

12

(55.0)

(65.9)

(105.0)

Profit for the period attributable to owners of the Company

238.8

275.5

434.0

Earnings per share:

Basic (pence)

14

16.9

20.2

31.8

Diluted (pence)

14

16.7

20.0

31.5

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Profit for the period

238.8

275.5

434.0

Other comprehensive loss

Items that will not be reclassified subsequently to the income statement:

Actuarial gain on defined benefit pension scheme

-

-

2.1

Tax relating to item that will not be reclassified

-

-

(0.4)

-

-

1.7

Items that may be reclassified subsequently to the income statement:

Cash flow hedges

(0.5)

(0.4)

(1.1)

Fair value (loss) / gains on AFS investments

(69.0)

8.0

8.8

Less: realised net gains on AFS investments included in income statement

(18.4)

(14.8)

(23.2)

Tax relating to items that may be reclassified

14.9

1.2

2.5

(73.0)

(6.0)

(13.0)

Other comprehensive loss for the period net of tax

(73.0)

(6.0)

(11.3)

Total comprehensive income for the period attributable to owners of the Company

165.8

269.5

422.7

Notes

30 Jun2018£m

31 Dec2017£m(audited)

Assets

Goodwill and other intangible assets

500.0

471.1

Property, plant and equipment

164.1

174.4

Investment property

321.4

309.3

Reinsurance assets

16

1,191.2

1,178.5

Current tax assets

-

0.1

Deferred acquisition costs

177.6

185.4

Insurance and other receivables

944.3

981.2

Prepayments, accrued income and other assets

130.5

146.2

Derivative financial instruments

87.3

84.4

Retirement benefit asset

14.4

14.4

Financial investments

17

4,996.5

5,040.4

Cash and cash equivalents

18

1,000.5

1,358.6

Assets held for sale

-

4.2

Total assets

9,527.8

9,948.2

Equity

Shareholders' equity

2,482.1

2,715.1

Tier 1 notes

19

346.5

346.5

Total equity

2,828.6

3,061.6

Liabilities

Subordinated liabilities

20

260.9

264.7

Insurance liabilities

21

4,152.0

4,225.7

Unearned premium reserve

1,545.2

1,600.3

Borrowings

18

63.3

54.1

Derivative financial instruments

46.1

12.0

Trade and other payables, including insurance payables

569.7

658.0

Deferred tax liabilities

17.7

31.1

Current tax liabilities

44.3

40.7

Total liabilities

6,699.2

6,886.6

Total equity and liabilities

9,527.8

9,948.2

Share capital£m

Employee trustshares£m

Capital reserves £m

AFS revaluation reserve £m

Foreign exchange translation reserve £m

Retained earnings£m

Shareholders' equity£m

Tier 1notes(note 19)£m

Total equity£m

Balance at 1 January 2017 (audited)

150.0

(34.3)

1,450.0

92.1

1.4

862.3

2,521.5

-

2,521.5

Profit for the year

-

-

-

-

-

434.0

434.0

-

434.0

Other comprehensive (loss) / profit

-

-

-

(11.9)

(1.1)

1.7

(11.3)

-

(11.3)

Dividends paid

-

-

-

-

-

(225.3)

(225.3)

-

(225.3)

Shares acquired by employee trusts

-

(19.6)

-

-

-

-

(19.6)

-

(19.6)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

14.8

14.8

-

14.8

Shares distributed by employee trusts

-

19.8

-

-

-

(19.8)

-

-

-

Tax on share-based payments

-

-

-

-

-

1.0

1.0

-

1.0

Issue of Tier 1 notes

-

-

-

-

-

-

-

346.5

346.5

Balance at 31 December 2017 (audited)

150.0

(34.1)

1,450.0

80.2

0.3

1,068.7

2,715.1

346.5

3,061.6

Profit for the year

-

-

-

-

-

238.8

238.8

-

238.8

Other comprehensive loss

-

-

-

(72.5)

(0.5)

-

(73.0)

-

(73.0)

Dividends and appropriations paid

-

-

-

-

-

(399.7)

(399.7)

-

(399.7)

Shares acquired by employee trusts

-

(11.3)

-

-

-

-

(11.3)

-

(11.3)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

11.8

11.8

-

11.8

Shares distributed by employee trusts

-

13.8

-

-

-

(13.8)

-

-

-

Tax on share-based payments

-

-

-

-

-

0.4

0.4

-

0.4

Balance at 30 June 2018

150.0

(31.6)

1,450.0

7.7

(0.2)

906.2

2,482.1

346.5

2,828.6

Balance at 1 January 2017 (audited)

150.0

(34.3)

1,450.0

92.1

1.4

862.3

2,521.5

-

2,521.5

Profit for the year

-

-

-

-

-

275.5

275.5

-

275.5

Other comprehensive loss

-

-

-

(5.6)

(0.4)

-

(6.0)

-

(6.0)

Dividends paid

-

-

-

-

-

(132.4)

(132.4)

-

(132.4)

Shares acquired by employee trusts

-

(10.5)

-

-

-

-

(10.5)

-

(10.5)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

6.3

6.3

-

6.3

Shares distributed by employee trusts

-

12.9

-

-

-

(12.9)

-

-

-

Tax on share-based payments

-

-

-

-

-

0.1

0.1

-

0.1

Balance at 30 June 2017

150.0

(31.9)

1,450.0

86.5

1.0

998.9

2,654.5

-

2,654.5

Notes

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Net cash (used in) / generated from operating activities before investment of insurance assets

(26.8)

27.3

204.0

Cash generated from investment of insurance assets

125.6

109.6

341.9

Net cash generated from operating activities

98.8

136.9

545.9

Cash flows from investing activities

Purchases of property, plant and equipment

(6.1)

(3.8)

(22.4)

Purchases of intangible assets

(53.4)

(35.2)

(73.2)

Proceeds on disposals of property, plant and equipment

-

-

0.3

Proceeds on disposal of assets held for sale

13.8

-

-

Net cash used in investing activities

(45.7)

(39.0)

(95.3)

Cash flows from financing activities

Net proceeds from issue of Tier 1 notes

19

-

-

346.5

Repayment of subordinated liabilities

-

-

(326.8)

Dividends and appropriations paid

13

(399.7)

(132.4)

(225.3)

Finance costs

(9.4)

(18.6)

(31.7)

Purchase of employee trust shares

(11.3)

(10.5)

(19.6)

Net cash used in financing activities

(420.4)

(161.5)

(256.9)

Net (decrease) / increase in cash and cash equivalents

(367.3)

(63.6)

193.7

Cash and cash equivalents at the beginning of the year

18

1,304.5

1,110.8

1,110.8

Cash and cash equivalents at the end of the year

18

937.2

1,047.2

1,304.5

Corporate information

Direct Line Insurance Group plc is a public limited company registered in England and Wales (company number 02280426). The address of the registered office is Churchill Court, Westmoreland Road, Bromley BR1 1DP, England.

1. General information

The financial information for the year ended 31 December 2017 and included in the condensed consolidated financial statements does not constitute statutory accounts as defined in S434 of the Companies Act 2006, but has been abridged from the statutory accounts for that year which have been delivered to the Registrar of Companies. The independent auditor's report on the Group accounts for the year ended 31 December 2017 is unqualified, does not draw attention to any matters by way of emphasis and does not include a statement under S498(2) of (3) of the Companies Act 2006.

2. Accounting policies

Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union.

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' for the first time during 2018 which has had no significant impact on the condensed consolidated financial statements. The Group has also adopted a number of new amendments to International Financial Reporting Standards and International Accounting Standards that became effective for the Group for the first time during 2018. However, these have had no impact on the condensed consolidated financial statements.

Going concern

The Directors, having assessed the principal risks of the Group over the full duration of the planning cycle, consider it appropriate to adopt the going concern basis in preparing the interim consolidated financial statements.

Accounting policies and accounting developments

The Group has elected to apply the exemption within IFRS 4 'Insurance Contracts' that allows insurers to defer the application of IFRS 9 'Financial Instruments: Recognition and Measurement' for the period commencing I January 2018 to the period commencing 1 January 2021 and will therefore continue applying IAS 39 'Financial Instruments: Recognition and Measurement' to its financial assets and financial liabilities during the period of the exemption. This is a change in accounting policy to those applied in the Group's latest annual audited financial statements when the application of IAS 39 was mandatory. In accordance with the requirements of IFRS 4 the Group made an assessment of its liabilities arising from contracts within the scope of IFRS 4 as at 31 December 2015 and determined that they were more than 90% of the total carrying amounts of all its liabilities. The Group will continue to apply the temporary exemption until 1 January 2021 unless there is a change in the Group's activities and they are no longer predominantly connected with insurance activities.

With the exception of the accounting policy change explained above the Group's other accounting policies, presentation and methods of computation that are followed in the condensed consolidated financial statements are the same as applied in the Group's latest annual audited financial statements.

The Group will adopt IFRS 16 'Leases' from 1 January 2019 on a fully retrospective basis. The Group continues to assess the impact of the prior year adjustment on transition and does not expect the impact on operating expenses or finance costs to be material.

3. Critical accounting estimates and judgements

Full details of critical accounting estimates and judgements used in applying the Group's accounting policies are outlined on pages 125 to 126 of the Annual Reports & Accounts 2017. There have been no significant changes to the principles or assumptions of these critical accounting estimates and judgements during the period.

Motor£m

Home£m

Rescue andother personal lines£m

Commercial£m

TotalGroup£m

Gross written premium

839.8

290.7

209.9

269.9

1,610.3

Gross earned premium

835.0

370.7

206.4

253.3

1,665.4

Reinsurance premium

(69.2)

(16.1)

(0.9)

(19.6)

(105.8)

Net earned premium

765.8

354.6

205.5

233.7

1,559.6

Investment return

65.4

9.7

3.2

17.1

95.4

Instalment income

44.0

10.9

1.1

3.1

59.1

Other operating income

26.8

2.6

7.1

3.5

40.0

Total income

902.0

377.8

216.9

257.4

1,754.1

Insurance claims

(496.2)

(230.1)

(144.6)

(134.1)

(1,005.0)

Insurance claims recoverable from / (payable to) reinsurers

32.6

0.7

(0.1)

3.2

36.4

Net insurance claims

(463.6)

(229.4)

(144.7)

(130.9)

(968.6)

Commission expenses

(13.6)

(38.1)

(8.7)

(40.8)

(101.2)

Operating expenses

(186.8)

(89.2)

(48.6)

(56.6)

(381.2)

Total expenses

(200.4)

(127.3)

(57.3)

(97.4)

(482.4)

Operating profit

238.0

21.1

14.9

29.1

303.1

Finance costs

(9.3)

Profit before tax

293.8

Underwriting profit / (loss)

101.8

(2.1)

3.5

5.4

108.6

Loss ratio

60.5%

64.7%

70.4%

56.0%

62.1%

Commission ratio

1.8%

10.7%

4.2%

17.5%

6.5%

Expense ratio

24.4%

25.2%

23.7%

24.2%

24.4%

COR

86.7%

100.6%

98.3%

97.7%

93.0%

Note:

1. Results for the six months ended 30 June 2018 are based on total Group operations including restructuring and Run-off.

Motor1,2£m

Home£m

Rescue and otherpersonal lines£m

Commercial£m

TotalGroup2£m

Gross written premium

824.4

388.1

213.3

268.4

1,694.2

Gross earned premium

773.5

409.1

209.8

252.6

1,645.0

Reinsurance premium

(65.7)

(12.1)

(0.8)

(18.9)

(97.5)

Net earned premium

707.8

397.0

209.0

233.7

1,547.5

Investment return

62.6

11.2

2.4

16.8

93.0

Instalment income

40.5

11.4

1.0

2.9

55.8

Other operating income

25.7

0.4

6.3

1.4

33.8

Total income

836.6

420.0

218.7

254.8

1,730.1

Insurance claims

(307.7)

(191.1)

(136.2)

(133.2)

(768.2)

Insurance claims (payable to) / recoverable from reinsurers

(86.2)

0.4

0.5

6.1

(79.2)

Net insurance claims

(393.9)

(190.7)

(135.7)

(127.1)

(847.4)

Commission expenses

(18.3)

(67.4)

(10.5)

(41.9)

(138.1)

Operating expenses

(185.0)

(94.4)

(49.9)

(55.6)

(384.9)

Total expenses

(203.3)

(161.8)

(60.4)

(97.5)

(523.0)

Operating profit

239.4

67.5

22.6

30.2

359.7

Finance costs

(18.3)

Profit before tax

341.4

Underwriting profit

110.6

44.5

12.9

9.1

177.1

Loss ratio

55.7%

48.0%

64.9%

54.4%

54.8%

Commission ratio

2.6%

17.0%

5.0%

17.9%

8.9%

Expense ratio

26.1%

23.8%

23.9%

23.8%

24.9%

COR

84.4%

88.8%

93.8%

96.1%

88.6%

Note:

1. Motor segment for the six months ended 30 June 2017 include Run-off and restructuring. These results were total income £0.4 million, net insurance claims £9.6 million and restructuring costs £4.5 million.

2. Comparative ratios for Motor segment, prior to the re-presentation of Run-off and restructuring, are shown below:

Motor

Total

 Ongoing

Loss ratio

57.0%

55.4%

Commission ratio

2.6%

8.9%

Expense ratio

25.5%

24.6%

COR

85.1%

88.9%

Motor1,2£m

Home£m

Rescueand otherpersonal lines£m

Commercial£m

TotalGroup2£m

Gross written premium

1,670.4

799.1

421.1

501.5

3,392.1

Gross earned premium

1,603.0

819.4

419.2

498.1

3,339.7

Reinsurance premium

(132.4)

(28.9)

(1.6)

(41.8)

(204.7)

Net earned premium

1,470.6

790.5

417.6

456.3

3,135.0

Investment return

117.9

21.1

4.6

31.8

175.4

Instalment income

85.3

23.1

2.1

5.9

116.4

Other operating income

43.0

0.9

12.9

6.1

62.9

Total income

1,716.8

835.6

437.2

500.1

3,489.7

Insurance claims

(717.1)

(403.3)

(273.8)

(176.9)

(1,571.1)

Insurance claims (payable to) / recoverable from reinsurers

(135.8)

2.8

0.5

(50.6)

(183.1)

Net insurance claims

(852.9)

(400.5)

(273.3)

(227.5)

(1,754.2)

Commission expenses

(36.7)

(139.7)

(22.9)

(87.1)

(286.4)

Operating expenses

(430.8)

(166.6)

(97.4)

(111.5)

(806.3)

Total expenses

(467.5)

(306.3)

(120.3)

(198.6)

(1,092.7)

Operating profit

396.4

128.8

43.6

74.0

642.8

Finance costs

(103.8)

Profit before tax

539.0

Underwriting profit

150.2

83.7

24.0

30.2

288.1

Loss ratio

58.0%

50.6%

65.4%

49.9%

56.0%

Commission ratio

2.5%

17.7%

5.5%

19.1%

9.1%

Expense ratio

29.3%

21.1%

23.4%

24.4%

25.7%

COR

89.8%

89.4%

94.3%

93.4%

90.8%

Note:

1. Motor segment for the period ended 31 December 2017 include Run-off and restructuring. These results were total income £0.7 million, net insurance claims £43.1 million and restructuring costs £11.9 million.

2. Comparative ratios for Motor segment, prior to the re-presentation of Run-off and restructuring, are shown below:

Motor

Total

Ongoing

Loss ratio

60.9%

57.4%

Commission ratio

2.5%

9.1%

Expense ratio

28.5%

25.3%

COR

91.9%

91.8%

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Gross earned premium:

Gross written premium

1,610.3

1,694.2

3,392.1

Movement in unearned premium reserve

55.1

(49.2)

(52.4)

1,665.4

1,645.0

3,339.7

Reinsurance premium:

Premium payable

(93.1)

(81.6)

(208.4)

Movement in reinsurance unearned premium reserve

(12.7)

(15.9)

3.7

(105.8)

(97.5)

(204.7)

Total

1,559.6

1,547.5

3,135.0

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Investment income:

Interest income from debt securities

62.7

68.0

137.5

Cash and cash equivalent interest income

3.0

1.7

3.0

Interest income from infrastructure debt

3.3

3.6

6.8

Interest income from commercial real estate loans

2.7

1.1

3.6

Interest income

71.7

74.4

150.9

Rental income from investment property

7.9

8.4

16.2

79.6

82.8

167.1

Net realised gains / (losses):

AFS debt securities

18.4

14.8

23.2

Derivatives

23.7

109.3

175.0

Investment property

-

(0.3)

1.6

42.1

123.8

199.8

Net unrealised (losses) / gains:

Impairment of loans and receivables

-

(3.4)

(9.5)

Derivatives

(38.4)

(120.1)

(202.0)

Investment property

12.1

9.9

20.0

(26.3)

(113.6)

(191.5)

Total

95.4

93.0

175.4

Realised

Unrealised

Realised

Unrealised

6 months2018£m

6 months2018£m

6 months2017£m

6 months2017£m

Derivative gains / (losses):

Foreign exchange forward contracts1

(3.6)

(58.7)

41.8

54.6

Associated foreign exchange risk

36.2

11.3

61.5

(166.6)

Net gains / (losses) on foreign exchange forward contracts

32.6

(47.4)

103.3

(112.0)

Interest rate swaps1

6.3

32.3

9.4

(18.4)

Associated interest rate risk on hedged items

(15.2)

(23.3)

(3.4)

10.3

Net (losses) / gains on interest rate derivatives

(8.9)

9.0

6.0

(8.1)

Total

23.7

(38.4)

109.3

(120.1)

Note:

1. Foreign exchange forward contracts are at fair value through the income statement and interest rate swaps are designated as hedging instruments.

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Vehicle replacement referral income

8.4

8.3

16.9

Revenue from vehicle recovery and repair services

5.8

9.8

11.3

Legal services income

5.8

5.6

11.0

Other income1,2

20.0

10.1

23.7

Total

40.0

33.8

62.9

Notes:

1. Other income includes salvage income and fee income from insurance intermediary services.

2. Other income includes a £9.6 million gain on the sale of a property in Bristol.

Gross

Reinsurance

Net

Gross

Reinsurance

Net

6 months2018£m

6 months2018£m

6 months2018£m

6 months2017£m

6 months2017£m

6 months2017£m

Current accident year claims paid

503.8

(0.1)

503.7

452.4

(0.1)

452.3

Prior accident year claims paid

574.9

(10.9)

564.0

573.4

(5.7)

567.7

Movement in insurance liabilities

(73.7)

(25.4)

(99.1)

(257.6)

85.0

(172.6)

Total

1,005.0

(36.4)

968.6

768.2

79.2

847.4

Gross

Reinsurance

Net

Full year2017£m(audited)

Full year2017£m(audited)

Full year2017£m(audited)

Current accident year claims paid

1,165.0

(0.2)

1,164.8

Prior accident year claims paid

847.0

(13.8)

833.2

Movement in insurance liabilities

(440.9)

197.1

(243.8)

Total

1,571.1

183.1

1,754.2

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Claims handling expenses included in net insurance claims

91.1

86.6

174.8

Note:

1. Results for the period ended 30 June 2018 are based on total Group operations including Run-off. Comparative data has been re-presented accordingly.

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Commission expenses

97.7

117.1

225.4

Expenses incurred under profit participations

3.5

21.0

61.0

Total

101.2

138.1

286.4

6 months2018£m

6 months2017£m

Full year2017£m(audited)

Staff costs1

137.0

136.1

280.1

Other operating expenses1,2

137.7

149.0

273.6

Marketing

65.9

59.0

113.7

Amortisation and impairment of other intangible assets

24.4

26.7

111.0

Depreciation

16.2

14.1

27.9

Total

381.2