Adam Winslow
Chief Executive Officer
CEO review
With the right strategy in place and
determined actions, I am confident
we can deliver a net insurance
margin of 13%
1
in 2026.
Note
1. Normalised for weather.
I joined Direct Line Group because I believe there is an
opportunity to improve performance and nothing has changed
that view since arriving. Direct Line Group has strong
foundations, with a leading personal lines customer franchise,
scaled market positions and some of the most recognisable
brands in the market across a complementary and diverse
portfolio.
The last few years have been challenging and the Group has not
always delivered best value for its shareholders. We need to
significantly improve our performance and I joined both to
acknowledge these challenges and seek to solve them.
I believe we have a strong platform to build from. The Group has
some of the most recognisable brands in the market, over 9
million customers and a diverse portfolio of assets. In addition,
the management actions taken during 2023 have been the
right ones. We believe that Motor has turned a corner, and with
business outside Motor performing well during 2023, we expect
overall performance to improve in 2024.
We have one clear agenda, an unrelenting focus on driving
shareholder value by serving our customers well. We believe that
through a combination of quick wins, alongside medium-term
strategic opportunities, we can deliver a net insurance margin of
13% in 2026.
I have transformed legacy businesses before and understand
what it takes to win in general insurance. There are immediate
actions we can take in 2024 to address some of the gaps and
deliver quick wins.
12 Direct Line Group Annual Report and Accounts 2023
12 Direct Line Group Annual Report and Accounts 2023
Reduce our cost base
There is a substantial opportunity to reduce our total cost base
and significantly improve operational efficiency through
reducing operational complexity and technology costs,
including through increasing our use of digital channels for
customers. We will focus change spend on the areas that drive
most financial benefit and tighten discretionary spend.
Our marketing spend can be reduced further and we will build
out customer self-service options by leveraging investments the
Group has already made, for example the digital Motor claims
hub and the Caha! App that we launched in 2023. Across all
these levers, we have identified a series of initiatives that are
expected to deliver significant cost savings by the end of 2025.
The run-rate annualised cost savings have been considered in the
context of a total addressable cost base of £849 million in 2023.
Approximately 54% of these savings are expected to come
from technology and digitalisation initiatives and 46% from
removing complexity across the Group. The savings will mainly
be realised by:
– driving greater digital adoption and increasing automation,
mainly across Claims, Sales and Services, as well as reducing
third party technology spend, simplifying and modernising IT
infrastructure; and
– simplifying operational complexity, right-sizing support
functions and reducing change initiatives across the Group.
We expect to incur non-recurring costs of up to £165 million in
total by 2025 to implement these savings and to help fund
further opportunities towards our ambition to deliver greater
savings beyond 2025. A significant amount of these costs is
already assumed within the Group’s ongoing capital
expenditure expectations for 2024 and 2025. No dis-benefits are
expected to arise from the programme.
In realising these cost savings by the end of 2025 on a run-rate
annualised basis the Group is expected to deliver an expense
ratio that is more in line with its comparable peer group.
Improve claims performance
The Group has strong foundations in claims, having one of the
largest insurer-owned garage networks across the UK and a
strong track record on counter fraud, but our competitors in
recent years have caught up. We need to capture the benefits
from our structural advantage by repairing more cars at lower
cost through our owned network where we consistently deliver
superior customer service. We are about to launch a claims
transformation, which will initially focus on optimising our
garage network and building on counter fraud efforts.
In 2024, we have identified immediate actions to drive value.
These include adapting processes in order to leverage the DLG
Auto Services advantage, increasing the speed and effectiveness of
recoveries and introducing enhanced technology at policy stage
to further reduce fraud.
Optimise pricing capability
A full transformation of our Motor pricing capabilities is already
underway. There is more to do. In 2023, we upgraded our core
pricing models and launched new products. While our
capabilities have improved versus peers, there is further to go
and in 2024 we will build on our efforts by developing the next
generation of technical pricing models and enrich these models
with more internal and external data sources while enhancing
fraud protection and simplifying our Motor pricing algorithms.
Broaden market coverage
Direct Line and Churchill are two of the strongest and best
known brands in the market and we need to utilise our brand
portfolio to its full potential. We plan to increase our Motor PCW
quotability to historical levels of over 70% in 2024 and create a
clear segmentation strategy and value proposition across our
different brands. As part of this work, we are evaluating whether
we put Direct Line on PCWs and that decision will be shared at
the Capital Markets Day in July.
Financial impact of transformation programme
We see immediate opportunities for improved performance, we
plan this to be achieved primarily through:
– Tight management of the cost base through targeting
discretionary spend and increasing usage of customer self-
serve functionality.
– Improving claims performance by building on existing counter
fraud efforts and optimising third party claims capture.
– Optimising our pricing by developing the next generation of
pricing models, enriching data sources and simplifying pricing
algorithms.
– Increasing market coverage by developing a clearer brand
value proposition and improving PCW quotability.
Furthermore, we see greater potential benefits as we move into
2025 and 2026. We have set a target to deliver significant cost
savings on an annualised run-rate basis by the end of 2025 and
together with benefits from other areas of our transformation
programme, we are targeting a net insurance margin,
normalised for weather, of 13% in 2026.
Strategic review
Alongside the actions highlighted above, I am completing a
comprehensive strategic review during the first half of 2024. I
will report back to shareholders in July when I will set out our
plans and update on our progress.
Capital and dividends
The Group ended 2023 with a strong capital position and a
solvency capital ratio of 201% before our proposed dividend,
above its risk appetite range.
The Board is proposing a dividend in respect of 2023 of 4.0 pence
per share (£52 million) reflecting the Group’s strong capital
position following the sale of the brokered commercial business
and good performance in Home, Commercial and Rescue. While
the Board is confident in the actions taken in Motor, it recognises
that the period over which to judge the sustainability of Motor’s
capital generation has been short and consequently this dividend
should not be regarded as a resumption of regular dividends. The
Board will update on any changes to its dividend policy, alongside
the conditions it has previously set to consider restarting regular
dividends, in July to coincide with its planned strategy update.
Outlook
We have taken the right actions during 2023 to improve written
margins in Motor and expect this to improve Motor
performance in 2024.
The Group believes there is significant opportunity to create
further value and is targeting a net insurance margin,
normalised for weather, of 13% in 2026.
Adam Winslow
Chief Executive Officer
Strategic Report / Governance / Financial statements
Direct Line Group Annual Report and Accounts 2023 13
13Direct Line Group Annual Report and Accounts 2023
Strategic Report / Governance / Financial statements
Jon Greenwood
Acting Chief
ExecutiveOfficer
Outgoing
Acting CEO
review
I am confident that the actions we
have taken this year will strengthen
the business and leave us well
placed to improve earnings going
forward. As I hand over to our new
CEO, Adam Winslow, I know that
we are in good hands and well
equipped to build on the changes
we have made.
After a challenging period, the Group has now turned a corner.
We have delivered against our three key objectives, having
improved our Motor margins, maintained the good
performance of our other businesses and restored the resilience
of our balance sheet.
First, in Motor we have taken significant pricing and
underwriting action, prioritising margin improvement over
volume. We believe that for the majority of the second half of
2023 we have been underwriting profitably, consistent with our
ambition of a net insurance margin of above 10%.
Encouragingly, we began to see the signs of an improvement in
our current year net insurance claims ratio in the second half of
2023.
Secondly, our other businesses delivered a good performance
with an overall net insurance margin of 12.2% and operating
profit of £130 million. This shows the benefits of the strong
positions the Group holds in Home, Rescue and Commercial
Direct.
Finally, the sale of the Group's brokered commercial business
has restored the resilience of the Group’s balance sheet,
crystallising an attractive valuation whilst also focusing the
Group’s strategy on retail personal and small business insurance.
With a solvency capital ratio post-dividend of 197% at year-end,
above the top end of the Group’s risk appetite range of 140% to
180%, we exit the year in a strong capital position.
14 Direct Line Group Annual Report and Accounts 2023
14 Direct Line Group Annual Report and Accounts 2023
Whilst these priorities have been the key focus for the Group
during 2023, we have also commenced our partnership with
Motability, bringing further scale to our operations, and
continued to deliver other improvements across the business. In
2023 we expanded our accident repair network, launched the
Green Flag patrol service and four new Motor products, and
continued to make it easier for customers to engage with us
through digital journeys.
Overall, whilst it will take time for the actions we have taken to
fully come through in our reported figures, I am confident the
Group has taken the right actions and together with the new
operational improvement plan, can improve performance going
forward.
2023 results
The 2023 results do not reflect the profitability of the business
we believe is being written by the Group today. Whilst we have
taken action to return Motor to underwriting profitability, the
Group’s financial result in 2023 reflects the below target margin
business written in Motor during 2022 and the first half of 2023.
This resulted in an operating loss of £319.6 million in Motor,
which more than offset a good performance across the rest of
the Group where operating profit was £130.1 million.
Overall, this delivered an ongoing operating loss of £189.5
million, compared to a £6.4 million loss in 2022. The net gain
from the sale of the Group’s brokered commercial business
contributed to a profit before tax of £277.4 million, up from a
loss before tax of £301.8 million in 2022.
Improved our written margins in Motor
We have taken a range of actions in Motor to improve our
performance and increase our written margins back to target
levels. These actions have delivered a material increase in our
average premiums, mitigating the impacts of elevated inflation
while also reducing our risk exposure.
There are four key areas we have focused on.
1. Pricing – we have applied significant rate increases in 2023
and improved renewal discounting controls, which have
delivered a 37% increase in our average written premiums in
Q4 2023 compared with the same period in 2022. Average
earned premiums increased by 15% between the first and
second half of 2023. Pricing ahead of claims inflation has
enabled us to improve written profitability and it is
encouraging to see these pricing actions begin to benefit our
earned margins.
2. Underwriting and claims – we have made good progress
across a range of actions on our underwriting footprint. We
made considerable improvements to our pricing and trading
capabilities, tightened our fraud controls and took targeted
actions on underperforming segments. We launched a new
retail price optimisation model in the price comparison
website ("PCW") channel and, in claims, we continued to
expand our own vehicle repair network, having acquired our
23rd DLG Auto Services centre.
3. Product – in order to meet the needs of a broader set of
customers, we launched Direct Line Essentials this year, which
has driven an increase in conversion. Darwin, which launched
in 2019, passed the 250,000 policy milestone in 2023 and
rolled out two new products, Darwin Gold and Darwin
Platinum.
4. Team – we have brought in experience from across the
market into our pricing and underwriting teams, through
several key hires in leadership positions.
As a result of these actions, we believe we have been writing
business consistent with a net insurance margin in line with our
ambition for the majority of the second half of 2023. Whilst it
will take time for these actions to fully earn through into
reported numbers, we are encouraged by our performance in
the second half of 2023 where we have seen the current year
claims ratio in Motor improve by around 6 percentage points
compared with the first half of 2023.
Motor current-year attritional net insurance claims
ratio
H1 H2
Full year
2023 89.8 % 84.0 % 86.7 %
2022 75.6 % 84.3 % 79.9 %
Commenced new Motability partnership
After nearly two years of preparation, we welcomed over
700,000 Motability customers at the start of September. The
partnership is forecast to deliver over £800 million of gross
premium annually and allows for six-monthly repricing to
mitigate the risk of claims inflation, whilst being capital light as
it is 80% reinsured
This is an important commercial partnership for the Group and
demonstrates how we can utilise our claims operations as a
wider service proposition. The fleet of modern vehicles provides
significant scale benefits as well as repair insight across our
claims network. We are also pleased to have welcomed a large
team of specialist call handlers to support Motability's
customers.
This partnership is expected to deliver good margins for the
Group.
Non-Motor businesses delivered resilient
performance
Outside of Motor, the Group delivered an ongoing net insurance
margin of 12.2% whilst delivering gross written premium and
associated fees growth of 4.7%.
Resilient performance in Home
In Home, our focus was on maintaining margins and we
achieved this whilst also growing share of new business in the
PCW channel. Following a challenging market backdrop in
2022, the market applied considerable rate increases in 2023
and this helped improve our competitiveness, driving 42%
growth in new business sales while retention remained strong.
Overall we delivered 6.4% gross written premium growth in
2023 and a net insurance margin of 10.0%. There were several
named weather events across the year and our Home claims
team helped over 3,000 customers. Despite the high frequency
of events, our estimate for event weather of £25 million is below
our 2023 assumption for normal event weather of £54 million.
Continued growth in Commercial Direct
Separate from the brokered commercial business, the sale of
which we announced in September, Commercial Direct sells
SME cover under the Direct Line for Business and Churchill
brands, both direct to customer and through PCWs. Landlord
insurance is the largest product by premium and policy count,
followed by Van. Commercial continued to perform strongly,
with premium growth of 10.1% and continued strong margins.
Strategic Report / Governance / Financial statements
Direct Line Group Annual Report and Accounts 2023 15
15Direct Line Group Annual Report and Accounts 2023
Strategic Report / Governance / Financial statements
Gross written premium growth was achieved across all product
lines, while policy count growth in Direct Line Landlord and SME
was offset by reductions in Van, where we continued to increase
prices in response to high claims inflation.
The largest growth area was Landlord, which accounts for
around half of Direct Line branded Commercial premiums due
to our differentiated rent guarantee proposition. We now
provide landlord cover for an estimated 370,000 properties
across the UK. Our Churchill brand continued to grow in the
PCW channel, delivering 48% gross written premium growth
over the last three years.
The net insurance margin was 13.1% during 2023 (2022: minus
2.7%), with strong margins in Direct Line Landlord and benign
weather conditions more than offsetting the impact of
heightened inflation within Van.
These Commercial results exclude the brokered commercial
business that was sold in the second half of 2023 and is now
reported outside of ongoing operations.
Strong margins in Rescue and other personal
lines
Rescue and other personal lines continued to deliver strong
margins with a net insurance margin of 15.6% and £48.0 million
of operating profit.
In Green Flag, we focused on improving pricing and customer
journeys which delivered higher average premiums with
minimal impact on sales and retention. We also expanded our
Green Flag patrol service across the North of the UK, attending
to over 7,000 rescues. The patrol service of 20 vans is helping
customers get back on the road faster, including through the
sale of tyres and batteries at the roadside, and has delivered
strong Net Promoter Scores, which is why we have an ambition
to get to 130 vehicles. Green Flag was once again ranked as the
top rescue provider in the UK by the UK Institute of Customer
Service.
Across our other personal lines products, good results in Travel
and Pet offset weather-related losses in our mid- to high-net
worth business, UK Select.
Expanding our products and servicing options for
our customers
We have also continued to focus on providing customers with
greater choice of products and channels to interact with us.
In Motor, we have expanded our Motor product options.
Alongside our two new Essentials products we further
expanded our own brand portfolio through the acquisition of By
Miles, a digitally native insurer, that offers 'pay as you drive'
insurance. This not only increases choice for customers, it
provides the Group with new data and digital capabilities
including direct integration with newer vehicles.
Furthermore, we are creating easy, digital first journeys to enable
customers to interact with us seamlessly from sales through to
claims. In 2020 we first offered customers a simple way to
register motor claims online and in 2023 we took a step forward
with the launch of our new Motor Claims Hub, a fully integrated
claims journey. We’re initially offering customers the ability to
register a single vehicle or third party claim online and we plan
to extend this service to include online repair booking and claim
tracking.
Past business reviews
As previously announced, we are conducting two unconnected
past business reviews: the first regarding Motor total loss claims
and the second about the implementation of the FCA's Pricing
Practices Review ("PPR") regulations. These reviews are
progressing well and we aim to complete both reviews in mid
2024. Following extensive review and consultation with the FCA,
we have provided for the cost of the total remediation of £150
million, which we consider to be final. A breakdown is set out in
the CFO review.
In response to these reviews we have carried out extensive read
across activity and have taken steps to improve the control
environment.
Sale of Brokered Commercial business
In September we announced the sale of the brokered
commercial insurance business. The sale crystallised an
attractive valuation for a business we have turned around over
the last ten years, but one that ultimately had a different trading
model and operates in a different part of the UK insurance
market to the rest of the Group.
Following the sale, our strategy is focused on retail personal lines
and small business commercial customers. The proceeds from
the sale and the release of capital increased the Group’s
solvency capital ratio by 46 percentage points.
A positive start to 2024 trading
Trading has been positive in the first two months of the year
with premium growth across all segments. Motor premiums
grew by 21.4%, with a modest reduction in policy count. In
Home, own brand policy count growth was offset by lower
partnership policies, with premiums increasing 14.2% year on
year. There were some weather event claims in the early stages
of the year, with a current estimate of £22 million in Home
compared to a full year assumption of £54 million.
Gross written premium
and associated fees In-force policies
Feb YTD
£m
Variance to
PY
%
29 Feb
2024
'000s
Change to
Dec 2023
Motor 262.8 21.4 % 4,113 (1.6 %)
Home 93.3 14.2 % 2,445 0.0 %
Rescue and other
personal lines 40.3 0.5 % 2,110 (2.9 %)
Of which: Rescue 19.8 2.8 % 1,924 (2.0 %)
Commercial 47.0 19.1 % 645 0.0 %
Total ongoing 443.4 17.4 % 9,313 (1.4 %)
Jon Greenwood
Outgoing Acting Chief Executive Officer
Outgoing Acting CEO review continued
16 Direct Line Group Annual Report and Accounts 2023
16 Direct Line Group Annual Report and Accounts 2023
