Focused for

the future

Annual

Report and

Accounts

2023

Contents

Strategic Report

Focused on performance 2

Focused on customers 4

Focused on retail personal and commercial insurance 6

Chair’s statement 8

Welcoming our new CEO, Adam Winslow 9

CEO review 12

Outgoing Acting CEO review 14

Section 172(1) statement 17

Business model 18

Market Overview 20

Strategy 22

Our key performance indicators 24

CFO review 26

Operating review 40

Non-financial and sustainability information statement 49

Building a sustainable future 50

Task Force on Climate-related Financial Disclosures 70

Risk management 86

Viability statement 93

Governance

Chair’s introduction 95

Board of Directors 97

Corporate Governance 102

Committee reports 117

Directors’ Remuneration report 131

Directors’ report 157

Financial Statements

Contents 161

Independent Auditor’s Report 162

Consolidated Financial Statements 174

Notes to the Consolidated Financial Statements 179

Parent Company Financial Statements 253

Notes to the Parent Company Financial Statements 255

Other information

Shareholder information 259

Glossary and Appendices 261

Forward-looking statement 276

Contact Information 277

Our vision is to create a world where insurance is

personal, inclusive and a force for good. Our purpose

isto help people carry on with their lives, giving them

peace of mind now and in the future.

Our mission is to be brilliant for customers every day.

This year the Group has taken decisive action to restore our capital resilience, to improve Motor performance and

tomaintain the performance of our non-Motor businesses. Following the challenging trading environment in 2022,

theseactions have been designed to put the Group back on a more stable footing.

Looking ahead, we believe that our customer focus, strong brands and claims expertise can drive long-term value

forcustomers and shareholders.

To read more about our strategy, see pages 22 to 23.

1Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Focused on

performance

Direct Line Group is

oneofthe UK’s leading

insurancecompanies.

Through our well-known brands including Direct Line,

Churchill, Privilege, Darwin, and Green Flag we offer a wide

range of general insurance products across motor, home,

commercial, travel, pet and rescue, both direct to customers

and through price comparison websites (“PCWs”).

In 2023, we sold our brokered commercial business,

prioritisedactions to improve margins in Motor, while also

continuing to maintain performance in our other businesses.

We are confident that the Group has the foundations

forimproved performance going forward.

Progress in all segments

Sale of brokered commercial business

During the year, we sold our brokered commercial

insurance business for an attractive valuation which

strengthened the Group both strategically and financially,

as well as significantly improving our solvency ratio.

For more information, please read page 16.

Improving Motor margins

As a result of significant pricing and underwriting actions,

inthe second half of the year we were underwriting

profitably consistent with a 10% net insurance margin.

For more information, please read page 15.

Resilient performance from other businesses

Our Home, Commercial direct, Rescue and other businesses

have delivered a good performance with an improved

ongoing net insurance margin.

For more information, please read page 15.

2 Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3Direct Line Group Annual Report and Accounts 2023

Focused on

customers

Our mission is to be brilliant

for customers every day.

It’sthe driving force behind

everything we do.

We know the importance of providing an exceptional

insurance service and aim to deliver great outcomes

forourcustomers.

Over 2023, we have undertaken extensive work across

theorganisation to further focus on how we meet our

customers’ insurance needs, whether it’s from the point of

sale through to resolving claims, we want to make it simple

for our customers and be there for them when they need

us,with the products that meet their needs both now

andinthefuture.

Adapting to customer needs

Direct Line Essentials

We launched a new Direct Line Essentials product this year,

expanding our product range to meet the needs of more

Motor customers.

Read more on pages 15 to 16.

6 Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

7Direct Line Group Annual Report and Accounts 2023

Dear Shareholders,

2023 has been a challenging year for the Group, but a year

inwhich I believe we have delivered on some important

commitments to put the Group on a more stable footing.

We have restored capital resilience and have continued to

adjust our Motor insurance premiums to mitigate the effect

ofclaims inflation, with the result that we are now writing

Motorbusiness profitably. Our non-motor businesses

performed well in 2023.

The sale of our brokered commercial business to RSA

InsuranceLimited represents a significant milestone for the

Group. Itreflects our intention to leverage the full potential

ofour personal lines and commercial direct businesses in

whichwehave well-recognised brands and serve over nine

millioncustomers.

Danuta Gray

Chair of the Board

Chair’s

statement

We have entered 2024 with a more

resilient business, well positioned to

achieve our mission of being brilliant

forcustomers every day.

8 Direct Line Group Annual Report and Accounts 2023

Dividend and capital management

Following a challenging 2022, we took decisive action in 2023 to

restore the capital resilience of our business. In January, we

entered into a three-year quota share reinsurance programme

and, in September, agreed the sale of the Group’s commercial

brokered business. We exit 2023 with a strong solvency position

above our agreed risk appetite.

The Board is acutely aware of the importance of dividends to

our shareholders. At the time of our interim results in

September we announced our aim to restart dividends subject

to two conditions: the recovery of our solvency ratio to the

upper end of our risk appetite range; and a return to organic

capital generation in Motor.

We have made good progress towards meeting these

conditions with a pre-dividend solvency ratio of 201% as at the

end of 2023 and increasing confidence in the profitability of the

Motor business we have written in the second half of 2023.

Reflecting their increased confidence, the Board is, therefore,

recommending a final dividend of 4.0 pence per share for 2023.

We will continue to keep this under active review throughout

2024 and provide an update at the interim results.

I acknowledge that our shareholders would like us to resume

the payment of dividends as soon as possible, but equally that

they would like us to prioritise the strengthening of the

business for long-term stability.

Board and leadership

In early 2023 Penny James stepped down from the Board as

CEO and Jon Greenwood agreed to serve as Acting Chief

Executive Officer whilst we conducted a search for a permanent

successor.

We were delighted to announce, in August 2023, that Adam

Winslow would be joining us as our new Chief Executive Officer.

He joined the Group on 1 March and his appointment to the

Board will take effect on 21 March 2024. Adam brings with him

a wealth of experience gained from a successful career in the

insurance industry, most recently leading Aviva’s UK and

Ireland general insurance business. Adam is committed to

delivering for customers, creating value for our shareholders

and is a passionate and energetic leader who shares the

Group’s values and will lead the continued transformation of

the business.

Jon Greenwood will step down into a senior executive role

following a handover to Adam. I would like to thank Jon for his

hard work and commitment through 2023, during which he led

the organisation in taking the critical action to restore its capital

resilience and profitability.

During the year we welcomed Mark Lewis and David Neave to

the Board as independent Non-Executive Directors. Mark, a

former Chief Executive of MoneySupermarket.com Group, is

contributing his deep understanding of the regulated

aggregator marketplaces in which our brands operate, as well

as his experience of digital marketing strategy and improving

multi-channel customer experience in retail and financial

services. David, whose executive career spanned General and

Life Insurance, broking and the legal and technology sectors, is

contributing his deep understanding of general insurance to

the Board’s oversight of our core businesses.

Welcoming our new

CEO, AdamWinslow

In August 2023, we were delighted to announce that Adam Winslow

was to be appointed as Chief Executive Officer of the Group, subject

to regulatory approval.

The Board conducted an extensive search and Adam stood out for

hisstrategic understanding of the sector, outstanding track record

ofleading high performing businesses and his focus on driving

operational excellence to consistently meet customer needs.

Adam has deep expertise in the UK general insurance market and

significant leadership experience, spanning two decades across

personal and commercial lines insurance and, throughout his career,

his commitment to delivering for customers has been a clear focus,

as has his energy and passion as a leader.

Adam Winslow, Chief Executive Officer designate, commented:

“Direct Line Group is one of the UK’s leading insurers with some

ofthe most recognisable brands in the retail and commercial market.

It’s a privilege to be invited to lead the Group into the future,

particularly given its rich heritage and passion for serving its

millionsof customers.

“The UK insurance industry is dynamic and always evolving.

Delivering great customer service relies on strong strategic vision

and the operational capability to execute quickly across a variety

ofdistribution channels. I’m looking forward to working with my

newcolleagues who share my determination for driving growth,

delivering for customers and creating long-term shareholder value.”

Adam became the Chief Executive Officer on 1 March 2024 and will

join the Board on 21 March 2024.

9Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

At the end of 2023, Sebastian James stepped down as an

independent Non-Executive Director, having served for over

nine years. I would like to thank Sebastian for his energetic

support of the Group and the Board, as well his leadership of

the Sustainability Committee and his contribution to the work

of the Board’s other Committees.

On 20 March 2024, the Board approved the appointment of

Carol Hagh as an independent Non-Executive Director with

effect from 1 April 2024. Carol’s career has encompassed

financial services consultancy, insurance marketing strategy,

customer strategy and executive search. She is a former

Headof Spencer Stuart LLP’s UK Insurance practice and is an

independent Non-Executive Director of Chesnara plc. Carol

willcontribute her deep experience of customer-orientated

business transformation, as well as her passion for diversity

andinclusion.

Customers

During 2023, we have continued working hard to meet our

customers’ needs and to improve our customer outcomes-

focused culture to serve them best in the future. We welcomed

over 700,000 new customers under our ten-year partnership

with Motability. This is a significant commercial partnership

forthe Group and enables us to leverage our repair and

customer service capabilities, delivering significant scale benefits.

In addition, the Group, launched our Direct Line Essentials

Motor product, which offers customers a basic comprehensive

product at enhanced value for money during the cost-of-living

crisis, and completed the acquisition of By Miles, whose

technology enables a pay-as-you-drive product to be offered

tocustomers (see pages 41, 52 and 53 respectively.)

2023 also saw the FCA’s Consumer Duty regulation coming

intoeffect. The Board has been closely engaged in overseeing

work to ensure that the Group was ready, with support from

the Consumer Duty Champion, Tracy Corrigan. We continue

tomonitor initiatives aimed at ensuring the regulation is

embedded into the culture of the organisation and that we

deliver good outcomes and fair value for customers.

Chair’s statement continued

10 Direct Line Group Annual Report and Accounts 2023

However, I must also acknowledge areas in which we did not

perform as well as we would have liked for customers. During

the year we announced that, following extensive consultation

with the FCA, we would be undertaking two past business

reviews relating to motor total loss payments and the

implementation of the pricing practices regulation. Where

things have gone wrong, we are committed to putting them

right. We have worked hard to rectify the unintentional errors

that occurred and ensure any lessons learned are embedded

into control and process improvements. In total, we have

provided for the cost of the total remediation of £150 million,

which we consider to be final.

Culture

During the year, the Board intensified its oversight of culture,

ensuring actions were taken to enable Direct Line to become

atruly high performing and customer-centric organisation

witha deeply ingrained awareness of the benefits of excellent

risk management. This work included the delivery of a new

performance management framework for our people;

augmentation of operational measures to provide improved

insights into culture change; and enhancements to our risk

framework and controls and the tools we use to assess them.

We have also developed new metrics to obtain insights into the

drivers of customer outcomes and have augmented the role

ofthe Customer and Sustainability Committee, which will meet

more frequently to oversee the embedding of the Consumer

Duty and how we deliver for our customers. More information

on this work can be found on pages 54, 106 and 127.

People

Areas on which the Board focused in 2023 included driving

high performance across all levels of the business and

reviewing the Group’s current leadership capability to ensure

itmeets the requirements of the future. In addition to assessing

our current skills, we have actively recruited for future skills

needs as well as implementing a more comprehensive talent

assessment and development for our leadership group

population, in partnership with Korn Ferry. This work

commenced in Q4 2023, with all senior leaders immediately

below Executive Committee level invited to take part in an

Executive Leadership Assessment, the outputs of which will

provide valuable insights and inform our group leadership

development approach, aligned to a new leadership model

in2024. In addition to this, the new performance framework

launched in 2023 is intended to equip and encourage our

people leaders to improve the quality of their development

andcareers conversations with colleagues.

Recognising that economic conditions remain challenging

forour people, we awarded a 5% pay increase to all colleagues,

excluding senior management, from January 2023 and made

acost-of-living payment to colleagues on lower rates of pay.

Our company values were refreshed and simplified in 2023

toguide the way we work together to perform as a business

anddeliver for our customers. I was delighted that the Group

wasranked in the Inclusive Top 50 UK Employers List for

thethird year running.

Planet

In 2022 we became one of the early personal lines general

insurers in the UK to have Science-Based Targets approved

bythe Science Based Targets initiative, a key step in the journey

towards our ambition of becoming a Net Zero business by

2050. During 2023, the Board oversaw the work and initiatives

needed to help us make significant progress against these

targets which we are reporting on for the first time. Initiatives

included implementing the use of hydrogenated vegetable oil

in our recovery vehicles at 95% of our Auto Services sites and

providing clear mandates to our investment portfolio managers

to reduce the impact of our investment portfolio. For more

information, please see pages 61 to 65, 78 and 79.

Conclusion

As a result of the action we have taken during the year,

Ibelievewe have entered 2024 with a more resilient business,

well-positioned to achieve our mission of being brilliant for

customers every day. I know that our people have worked

incredibly hard in a very challenging year and I would like

totake this opportunity to thank them for their continued

dedication and support. I would also like to acknowledge the

intensive work done by the Board in 2023 and to thank my

fellow Directors for redoubling their efforts in supporting the

business. I believe, under the leadership of our new CEO, Adam,

we are poised to realise the full potential of our technological

investments and fantastic brands and to deliver good

outcomes for all our stakeholders.

Danuta Gray

Chair of the Board

2023

We have continued working hard to meet our customers’ needs

andtoimprove our customer outcomes-focused culture to serve

thembest in the future.

2024

We have entered 2024 with a more resilient business, well-positioned

to achieve our mission of being brilliant for customers every day.

11Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

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%

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

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

ExecutiveOfficer

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

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

with the launch of our new Motor Claims Hub, a fully integrated

claims journey. We’re initially offering customers the ability to

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

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

Section 172(1) statement

The Board of Direct Line Insurance Group plc (“Direct Line”) confirms that during the year under review, it has acted in the way

it considers would be most likely to promote the long-term success of the Company for the benefit of its members as a

whole, whilst having regard to the matters set out in Section 172(1)(a)-(f) of the Companies Act 2006 (“Section 172(1)”).

Purpose and Vision

The matters set out in Section 172(1) underpin Direct Line’s purpose and vision and form the foundation for the Board’s

considerations and decision making. Our purpose – to help people carry on with their lives, giving them peace of mind now

and in the future – is centred on customers and their long-term interests. Our vision – to create a world where insurance is

personal, inclusive and a force for good – reflects our desire to do business in a way that benefits all stakeholders, the

environment and wider society.

Stakeholders

Information on Direct Line’s key stakeholders is set out in the Sustainability section of the Strategic report on the following

pages: Customers, pages 51 to 53; People, pages 54 to 57; Society, pages 58 to 60; and the Planet, pages 61 to 65.

Engagement

The Board recognises that our stakeholders have diverse and sometimes competing interests that need to be finely balanced,

and that these interests need to be heard and understood in order for them to be effectively reflected in decision making.

Information about how the Board has engaged with stakeholders during the year and outcomes of that engagement can be

found on page 107 in the table titled “How the Board engages with stakeholders”.

Board decisions and oversight

Examples of how stakeholder engagement and Section 172(1) matters have influenced Board discussion and decision

making during the year can be found in the table titled “Consideration of Section 172(1) factors by the Board” on pages 105

to 106 The table covers a number of key topics including: Consumer Duty implementation; the cost of living crisis; and the

sale of the brokered commercial insurance business. The metrics and processes which the Board looks at to ensure that

business practices and behaviours reflect the Company’s culture, purpose and values, including the impact of decisions on

key stakeholders, are set out on page 109. Information about Board oversight of environmental matters can be found on

pages 70 to 71 in the TCFD Report.

The table below sets out where key disclosures in respect of each of the Section 172(1) matters can be found.

Section 172(1) factor Relevant disclosures

the likely consequences of any

decision in the long-term

Mission, vision, purpose and strategic objectives (page 22)

Consideration of Section 172(1) factors by the Board (pages 105 to 106)

the interests of the Company’s

employees

Key performance indicators – Colleague engagement scores (page 25)

Outcome of employee engagement (pages 108 to 109)

Diversity and Inclusion (pages 112 to 113)

How the Board engages with stakeholders (pages 107 to 108)

Employee Representative Body (page 109)

the need to foster the

Company’s business

relationships with suppliers,

customers and others

Key performance indicators – NPS and customer complaints metrics (pages 53 and 25)

Customer support (pages 51 to 53)

Supply Chain (page 63)

How the Board engages with stakeholders (pages 107 to 108)

the impact of the Company’s

operations on the community

and the environment

Community Fund 2023 (page 58)

Science-Based Targets (page 62)

External ratings, memberships and benchmarks (page 69)

TCFD disclosures (pages 70 to 85)

How the Board engages with stakeholders (pages 107 to 108)

Customer and Sustainability Committee report (pages 127 to 128)

the desirability of the Company

maintaining a reputation for

high standards of business

conduct

Our values (page 22)

The role of the Board in the Company’s culture (page 103)

Internal controls (pages 115 to 116)

the need to act fairly between

members of the Company

Capital management (page 32)

How the Board engages with stakeholders (pages 107 to 108)

Shareholder voting rights (page 158)

Annual General Meeting (page 259)

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 17

17Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Business model

We give our customers a choice of brands and channels

We know how to build brand

value and have some of

themost well-known brands

intheUK

Our brands are available direct,

and through price comparison

websites (“PCW”)

We also partner with other

well-known brands

We cover a wide range of customer needs across

personal and small commercial lines

Motor Home Van Landlord

Travel

Rescue Pet Tradesperson Business

18 Direct Line Group Annual Report and Accounts 2023

Diversified model

Our diversified model enables us to generate

premiums from a range of brands and products

across retail personal and small commercial lines.

Accident repair centres

We own 23 accident repair centres, the largest

network of any insurer, delivering lower repair

costs and providing data-led insights, enabling

us to react to emerging trends and helping

inform our pricing.

Claims management

We have a deep specialism in claims handling

and leveraged our claims management

capabilities to win the partnership withMotability.

Balanced investment portfolio

The premiums we collect from customers are

invested in a diversified investment portfolio

designed to meet our long-term claims

commitments whilst also generating investment

returns. We seek to align our investment

strategy with our sustainability strategy.

Cost control

We’re focused on improving efficiency

throughgreater use of digital processes

acrossthe business.

Capital management

We aim to manage capital efficiently

andgenerate long-term sustainable

returnsforshareholders, while balancing

operational,regulatory, rating agency,

andpolicyholder requirements.

This is how we create value

We are a fully focused retail personal and small commercial

insurer withfundamental strengths

1. In-force policies as at31 December2023excluding brokered commercial business and run-off partnerships.

Commercial direct

6.8%

Pet

1.2%

Other personal lines

1.0%

Over 9.4m

policies

Motor

44.1%

Home

26.0%

Rescue

20.9%

19Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Market Overview

Financial Conduct Authority Consumer Duty

The FCA’s Consumer Duty came into effect on 31 July 2023 and

introduced higher expectations for the standard of care that

financial service firms should provide to customers, as well as

introducing a more outcomes-focused approach.

The Group welcomes the FCA’s Consumer Duty, which aligns

with our purpose to help people carry on with their lives, giving

them peace of mind now and in the future. As part of the

implementation of Consumer Duty, we reviewed all our critical

customer journeys, enhanced our methodology to put testing

customer understanding at the heart of our thinking and

embedded predicting customer harm in our ways of developing

journeys and customer experience. Our new Riverbank House

office in London, which was opened in August 2023, includes

apurpose-built user experience testing facility where we can

meet with customers to test new experiences and place

customers at the heart of any changes we make.

Climate change

A focus on climate remains, with particular emphasis placed

onhow firms are assessing and managing longer-term

climate-related risks. Increased importance is also being given

to the communication of plans that companies have in place to

support the transition to a low-carbon economy. This includes

the actions that are being taken to progress against emission

reduction targets and net zero aims. Furthermore, we continue

to expect an increase in regulatory focus on how firms are

managing climate-related financial risks, as well as how this is

reported, supported by developments in reporting frameworks

and disclosure requirements.

The Group continues to respond to climate change, and

wetake our responsibilities seriously in our assessment of

climate-related risks to our business. Our disclosure against

therecommendations of the Task Force on Climate-related

Financial Disclosures (“TCFD”) (see pages 70 to 85) sets outour

strategic response to climate change and reflects continued

action to further develop our understanding andmanagement

of the associated risks and opportunities. The disclosure reports

on the progress we have made in the year against our carbon

emissions reduction targets, which were approved by the

Science Based Targets initiative (“SBTi”)in2022.

Motor premium and claims inflation

The UK motor market continued to be affected by challenging

conditions, driven by the impact of elevated inflation.

Premium inflation was significant in the year, as the market

reacted to heightened claims inflation. The proportion of new

motor insurance policies in the market rose, as consumers

responded to a rise in premiums with increased shopping,

resulting in a reduction in market retention rates.

Claims inflation remained elevated in 2023, albeit lower than

the levels seen in 2022. In the second half of the year, several

inflationary pressures began to moderate, which included the

stabilisation of used car prices. Repair cost inflation remained

elevated in the market, driven by higher labour costs.

Car usage was higher in the year with miles driven returning

closer to pre-pandemic levels, leading to the market

experiencing an increase in underlying claims frequency.

The Group responded with significant pricing action, as well as

targeted action on its underwriting portfolio. We also continued

to expand our repair network capabilities to repair vehicles as

efficiently and economically as possible. See pages 40 to 41 for

more information.

Home premium and claims inflation

The UK household market experienced strong premium inflation

in 2023 driven by claims inflation, which included pressures

from the severe freeze event in December 2022, andhigher

reinsurance pricing. These trends saw the volume ofconsumers

shopping in the market increase.

The market experienced a number of weather events in the

year, particularly in the fourth quarter, in which there was a

high frequency of named weather events. Despite this, the

impact of these events was smaller when compared to those

experienced in 2022, partly due to the mitigating effect of

reinsurance provided by Flood Re.

The Group focused on maintaining margins throughout the

year, in line with market wide premium inflation, whilst growing

its share of new business through the PCW channel. See pages

42 to 43 for more information.

Consumer trends

During 2023, the market focused on offering consumers access

to a greater range of cover options during a period of high

premium inflation and the cost of living crisis, which continues

to see customers remaining price sensitive.

Elsewhere, consumers are placing increased importance

onmulti-channel, self-serve and digital journeys. In addition,

thefuture of the electric vehicle landscape continues to see

products and propositions evolve in the market.

In response to these trends, we have delivered greater product

choice to customers, continued to make it easier for customers

to engage with us through digital journeys and expanded our

repair capacity and capabilities.

The Group welcomes the FCA’s

Consumer Duty, which aligns with our

purpose to help people carry on with

their lives, giving them peace of mind

now and in the future.

20 Direct Line Group Annual Report and Accounts 2023

In June 2023, the International Sustainability Standards Board

(“ISSB”) issued its Sustainability Disclosure Standards, IFRS S1

and S2. The Standards are currently subject to UK endorsement,

which is expected later in 2024. The TCFD’s monitoring

responsibilities will be transferred to the ISSB from 2024.

TheGroup welcomes the ISSB’s new Sustainability Disclosure

Standards and appreciates the value the Standards will have

inevolving the global baseline for climate-related reporting.

Solvency II reforms

In June 2023, HM Treasury published two draft statutory

instruments allowing it to implement reform to the calculation

of the risk margin, ahead of other proposed reforms to Solvency

II in the UK. The revised calculation reduces the amount of risk

margin that insurers must hold and applies to both general

insurance business and long-term life insurance business,

which includes Periodic Payment Orders (“PPOs”).

In December 2023, these regulations were laid before

parliament and came into force on 31 December 2023.

In line with the Government’s legislative plans, the remainder

ofthe regime reforms are expected later in 2024.

The Group continues to respond

toclimate change, and we take

ourresponsibilities seriously in our

assessment of climate-related risks

toour business.

21Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Strategy

Our mission is to bebrilliant

forcustomers every day

Our vision is to create aworld where

insurance is personal, inclusive and

aforce for good

Our purpose is to help people carry

onwiththeir lives, giving them peace

ofmind now and inthe future

Our values

Our values shape the Group’s strong and positive culture. They set the expectations for how we want our people to deliver

intheir role. Colleagues use these shared values as a set of guiding principles to help them to work together effectively,

makegood decisions, and deliver for our customers.

Win together

Nobody has all the answers. Think, act and win as one

team to deliver great outcomes for our customers each

and every day. Draw upon diverse skills and perspectives,

testing and iterating as you go. Collaborate, communicate

and be inclusive.

Be yourself

We want the real, whole you and value diverse

perspectives, ideas and opinions. So feel confident and

empowered. Believe in yourself as much as we do.

Beyou,have fun, and make this a great place to be.

Own it

Make it happen. Spot the opportunities, take the initiative

and be accountable. Be brave, innovative and embrace

new challenges, doing what’s right not what’s easy.

Keepit simple and take risks in a positive way.

Developnew skills, own your own career path and push

your talent to the limit.

Speak up

We need different perspectives, so your input matters.

Ask questions, make suggestions, raise concerns but be

respectful and make the space to listen to others.

Faceinto difficult conversations so we continue to

evolveand improve.

22 Direct Line Group Annual Report and Accounts 2023

Our core strengths and capabilities drive our strategy

Our sustainability pillars

We believe that by working sustainably we can create value for all our stakeholders. Our five pillar Sustainability Strategy

supports our vision of creating a world where insurance is personal, inclusive and a force for good.

Innovating for

success

Efficient

cost base

Customer

focus

Claims

expertise

Pricing

sophistication

Data,

technology

and agile

ways of

working

Growth opportunities

We look to innovate for futuresuccess, be

itdeveloping new products, services and

digital tools, tounderstanding the latest car

tech ortackling climate change.

Core strengths

We have powerful, trusted brands

withunique propositions and high

customerretention.

We provide customers with a

claimsexperience that combinesleading

capabilities andrepair expertise which uses

our network of 23 accident repair centres,

the largest network of any UK insurer.

Enhanced capability

We are delivering easy digital-first journeys

so if customers want the simplicity of

managing their insurance online, they can.

Ifthey prefer the phone, we’re thereforthem.

We can price at speed and with greater

accuracy thanks to the combination of our

historical data and new pricing systems.

Customers People Society Planet Governance

23Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Net insurance margin - ongoing

operations

("NIM") (%)

Definition

A measure of financial year underwriting

profitability. A positive NIM indicates

profitable underwriting. The NIM is

calculated by dividing the net insurance

service result by net insurance revenue.

Aim

We aim to produce a profitable insurance

service result and the Group has an ambition

over time to generate a NIM of above 10%,

normalised for weather.

For additional performance information see

page 28

Remuneration

We base part of the Annual Incentive Plan

(“AIP”) awards on operating profit. The NIM is

closely linked to this.

For additional performance information see

pages 132 and 140

Operating loss per share - ongoing

operations

(pence)

Definition

This is calculated by dividing the earnings

attributable to shareholders less coupon

payments in respect of Tier 1 notes and

restructuring and one-off costs by the

weighted average number of Ordinary

Shares in issue.

Aim

We have not set a target. However, our aim is

to grow operating earnings per share.

For additional performance information see

page 31

Remuneration

We based the 2023 Long-term Incentive Plan

("LTIP") partly on operating earnings per

share.

For additional performance information see

page 143

Operating return on tangible

equity ("Operating RoTE")

(%)

Definition

The return generated on the capital that

shareholders have in the business. This is

calculated by dividing adjusted operating

earnings by average tangible equity.

Aim

We do not set a target. However our aim is to

grow operating RoTE.

For additional performance information see

page 31

Remuneration

We base the LTIP awards partly on adjusted

RoTE over a three-year performance period.

For additional performance information see

pages 132 and 143

(Loss)/profit before tax (£m)

Definition

A measure of overall profitability of the

Group, including the insurance service result,

investment return, net insurance finance

result and other operating income, expenses

and finance costs.

Aim

Profit before tax includes income and

expenses that are outside of management

control, although it does aim to operate

profitably.

For additional performance information see

page 27

Remuneration

We base part of the AIP awards on operating

profit. Profit before tax is closely linked to this.

For additional performance information see

pages 132 and 140

Notes:

1. See glossary on pages 261 to 264 and Appendix A – Alternative performance measures on pages 265 to 266 for reconciliation tofinancial statement

line items.

Our key performance

indicators

24 Direct Line Group Annual Report and Accounts 2023

(2.7)

(12.8)

22 23

(2.7)%

(14.9)%

22 23

(0.9)%

(8.3)%

22 23

(301.8)

277.4

22 23

24 Direct Line Group Annual Report and Accounts 2023

Changes to our KPIs in 2023

Our metrics are reviewed annually and updated as appropriate

to ensure they remain an effective measure of delivery against

our objectives. For 2023, the review of these metrics resulted in

the following changes:

Following adoption of IFRSs 17 and 9, the Group no longer

uses combined operating ratio to measure underwriting

profitability and has, instead, adopted net insurance margin as

it more closely resembles how the Group runs the business.

KPIs that have been impacted by the Group's adoption of

IFRSs 17 and 9 have been restated for 2022. Earlier periods

have not been recalculated and have not been reported.

Comparative numbers will in due course be built back up to

disclose five years of data.

In previous years the Group used earnings per share as one of its

KPIs. As LTIP awards granted by the Group during 2023 included

an operating earnings per share performance measure the KPI

was updated to reflect the relationship to remuneration.

Net promoter score continues to be a key measure of

performance and is disclosed on page 53.

Solvency capital ratio

1,2,3

(%)

Definition

A risk-based measure expressing the

level of capital resources held as a

percentage of the level of capital that

is required under Solvency II.

Aim

Under normal circumstances, the

Group aims to maintain a solvency

capital ratio around the middle of the

risk appetite range of 140% to 180%.

For additional performance information

see page 32

Remuneration

Solvency capital ratio within our risk

appetite is an indicator of capital

strength, which is one of the gateways

for the AIP awards and an underpin

for LTIP awards.

For additional performance information

see page 132

Colleague engagement

(%)

Definition

Engagement is the degree in which

our colleagues use their cognitive,

emotional, and behavioural energies

to help the Group achieve our

company goals. We partner with Viva

Glint to regularly monitor engagement

levels across the Group.

Aim

To make the Group best for our

customers and best for our colleagues.

We gauge employee engagement

through our colleague opinion surveys

and we aim for high colleague

engagement scores each year.

Remuneration

The AIP awards include a weighting to

a balance of employee metrics,

including engagement.

For additional performance information

see pages 132 and 141

Customer complaints

(%)

Definition

The number of complaints we

received during the year as a

proportion of the average number of

in-force policies.

Aim

This measure indicates where our

customer service has not met

expectations to the extent that the

customer has initiated a complaint.

We aim to improve this over time.

Remuneration

The AIP awards include a weighting to

a balance of customer metrics,

including complaints.

For additional performance information

see page 132 and 141

Operational emissions

(tCO

Definition

Operational emissions are defined as

the Scope 1 and 2 emissions across

our buildings and accident repair

centres.

Aim

We aim to reduce Scope 1 and 2

emissions by 46% by 2030 from a 2019

base year.

For additional performance information

see pages 62 and 64

Remuneration

From 2022, the LTIP awards have an

emissions performance condition

which includes a targeted reduction in

emissions and temperature score.

For additional performance information

see page 143

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

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

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

4. The methodology for determining colleague engagement changed in 2022 as a result of a change of survey provider. Engagement scores for the

years 2018 to 2021 are presented on a consistent basis. The 2022 score was assessed against a benchmark score of 75% and is not directly

comparable to the scores in 2021 and prior years.

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

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 25

14,533

11,697

10,187

8,982

6,999

7,924

7,811

7,032

6,529

4,500

6,609

3,886

3,155

2,453

2,499

19 20 21 22 23

72 72

19 20 21 22 23

0.63

0.51

0.46

0.61

0.88

19 20 21 22 23

189%

191%

176%

147%

197%

19 20 21 22 23

Scope 1

Scope 2

25Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Neil Manser

Chief Financial Officer

CFO

review

The Group’s solvency capital

ratio at the end of 2023

improved to 201%, following

significant management action

and benefiting from the sale of

the Group's brokered

commercial business.

Financial Summary

– Stable policy count overall as the introduction of over 700,000

new Motability customers offset lower policies elsewhere

primarily in Motor and associated Rescue.

– Gross written premium and associated fees increased by

27.1% during 2023, with 46.2% growth in the second half.

– Net insurance margin of minus 8.3% was impacted by the

continued earn through of Motor policies written during 2022

and first half of 2023. Outside of Motor, the Group delivered a

good result and a net insurance margin of 12.2%.

– In Motor, premium rate increases contributed to a 5.8

percentage point improvement in the current year net

insurance claims ratio in the second half of 2023. Motor

policies written since August estimated to be in line with the

Group’s ambition of a net insurance margin of above 10%.

– Operating loss from ongoing operations of £189.5 million in

2023, compared to a loss of £6.4 million in 2022, with the

adverse movement in the net insurance margin partially offset

by an increase in investment income. The proceeds of 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.

– The Group’s solvency capital ratio at the end of 2023

improved to 201%, following significant management action

and benefiting from the sale of the brokered commercial

business. A dividend of 4.0 pence per share is proposed, with

the solvency capital ratio, post-dividend, equal to 197%.

26 Direct Line Group Annual Report and Accounts 2023

Group financial performance

2023

2022 Change

Ongoing operations

In-force policies

(thousands)

9,442

9,397 0.5%

FY 2023

FY 2022 Change

Notes

£m

£m (restated

) £m

Ongoing operations

Gross written premium and associated fees

3,106.0

2,443.6

27.1%

Net insurance revenue

2,547.5

2,481.8

2.6%

Insurance service result

(211.8)

(23.5)

(188.3)

Net insurance margin

(8.3%)

(0.9%) (7.4pts)

Combined operating ratio

108.3%

100.9% (7.4pts)

Net insurance claims ratio

81.8%

74.9% (6.9pts)

Net acquisition ratio

6.8%

7.0% 0.2pts

Net expense ratio

19.7%

19.0% (0.7pts)

Normalised net insurance margin

(9.6%)

1.7% (11.3pts)

Investment income

141.8

94.1

50.7%

Unwind of discounting of claims

(118.7)

(50.4)

(68.3)

Other operating income and expenses before restructuring and one-off costs

(0.8)

(26.6)

97.0%

Operating loss - ongoing operations¹ ⁴

(189.5)

(6.4)

(183.1)

Of which:

Current-year operating (loss)/profit

(43.8)

(41.8)

(2.0)

Prior-year reserve development

(145.7)

35.4

(181.1)

FV gains/(losses)

124.4

(342.5)

136.3%

Effect of change in yield curve

(25.5)

60.7

(142.0%)

Restructuring and one-offcosts

(59.5)

(45.3)

(31.3%)

Brokered commercial business

27.6

62.9

(56.1%)

Run-off partnerships

(29.5)

(10.8)

(18.7)

Other finance costs

(14.5)

(20.4)

28.9%

Gain on disposal of business

443.9

—

0.0%

Profit/(loss) before tax

277.4

(301.8) 579.2

Tax (charge)/credit

(54.5)

69.9

(124.4)

Profit/(loss) for the year attributable to the owners of the Company

222.9

(231.9)

454.8

KPIs

Operating return on tangible equity

(14.9%)

(2.7%) (12.2pts)

Basic earnings/(loss) per share (pence) 10

15.9

(19.1) 35.0

Diluted earnings/(loss) per share (pence) 10

15.7

(19.1) 34.8

Operating loss per share (pence)

(12.8)

(2.7) (10.1)

Return on equity annualised

10.6%

(11.6%) 22.2pts

Investments metrics

Investment income yield

3.5%

2.1% 1.4pts

2023

2022 Change

Capital and returns metrics

Dividend per share – total ordinary (pence)

4.0

7.6 (47.4%)

Net asset value per share (pence) 11

158.6

142.1 11.6%

Tangible net asset value per share(pence)

95.5

78.8 21.2%

Solvency capital ratio - post dividend

197%

147% 50pts

Notes:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative Performance Measures

on pages 265 to 268 for reconciliation to financial statement line items.

2. In-force policies as at 31 December 2022 have been restated to remove 14,500 Commercial policies that were previously included in the reported

amounts in error.

3. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

4. See glossary on pages 261 to 264 for definitions and appendix A – Alternative Performance Measures on pages 265 to 268 for reconciliation to

financial statement line items

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

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 27

27Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Group financial performance

Ongoing operations

31 Dec

2023

30 Sep

2023

30 Jun

2023

31 Mar

2023

31 Dec

2022

In-force policies (thousands)

2,3

9,442

9,518 9,071 9,228 9,397

FY 2023

FY 2022 Change

£m

restated

Gross written premium and associated fees

2,4

3,106.0

2,443.6 27.1%

Insurance service result

Motor

(331.6)

(70.7)

(369.0%)

Home

50.2

(3.5)

1534.3%

Rescue and other personal lines - ongoing operations

42.0

55.7

(24.6%)

Commercial

27.6

(5.0)

652.0%

Insurance service result - total ongoing operations

(211.8)

(23.5)

(801.3%)

Net investment income

141.8

94.1

50.7%

Unwind of discounting of claims

(118.7)

(50.4)

(135.5%)

Other operating income and expenses before restructuring and one-off costs

(0.8)

(26.6) 97.0%

Operating (loss)/profit - ongoing operations

(189.5)

(6.4)

(2860.9%)

Net insurance margin

(8.3%)

(0.9%) (7.4pts)

Net insurance claims ratio

81.8%

74.9% (6.9pts)

Current-year attritional net insurance claims ratio

75.1%

71.3% (3.8pts)

Prior-year reserves development ratio

5.7%

(1.4%) (7.1pts)

Major weather events ratio

1.0%

5.0% 4.0pts

Net acquisition ratio

6.8%

7.0% 0.2pts

Net expense ratio

19.7%

19.0% (0.7pts)

Normalised net insurance margin

(9.6%)

1.7% (11.3pts)

IFRS17 and description of operating (loss)/profit

This is the first set of annual results that the Group is reporting

under IFRS 17, the new insurance accounting standard for

insurance contracts. Although the new standard does not

change the economics of the Group, it does introduce new

disclosure headings and some changes in timing of recognition.

For example, insurance claims are now all discounted to reflect

the time value of money.

The table above sets out the Group’s operating loss for ongoing

operations. Significant items excluded from operating loss for

ongoing operations include the results from certain partnerships

that are now in run-off, the results from the brokered

commercial business, the sale of which we announced in

September, fair value movements on investments and the effect

of changes of discount rates on brought forward claims reserves.

These items are discussed later in this report.

2023 performance

Overall, gross written premium grew by 27.1% in 2023 however,

operating profit was adversely affected by the earn through of

below target margin Motor policies that were written in 2022

and the first half of 2023, alongside remediation provisions

arising from past business reviews. Outside of Motor, results in

Home, Rescue and Commercial were good and benefited from

relatively benign weather conditions. Net investment income

improved due to the effect of higher interest rates and this was

largely offset by an increase in the unwinding of previous

periods discounting. Overall operating loss for ongoing

operations was £190 million, split between an operating loss of

£319.6 million in Motor and an operating profit of £130.1 million

outside of Motor.

In-force policies and gross written premium and

associated fees

1,2

In-force policies from ongoing operations were 9.4 million at the

end of December, in line with the end of 2022 as the

introduction of over 700,000 new Motability customers offset a

reduction in the number of own brand policies. Own brand

policy reductions were largest in Motor, where we strongly

increased premiums to achieve target margins. This also led to a

reduction in linked Rescue policies.

Gross written premium and associated fees from ongoing

operations grew by 27.1% to £3,106.0 million predominantly

due to premium rate increases and the contribution from the

Motability partnership delivering strong growth of 42.9% in

Motor, 10.1% in Commercial and 6.4% in Home, offset by a small

decline in Rescue and other personal lines.

Total Group in-force policies were 12.0 million which was in line

with 2022, and gross written premium and associated fees was

£3,921.9 million compared with £3,098.4 million in 2022.

Insurance service result

In 2023, the Group's net insurance margin was minus 8.3%

(2022: minus 0.9%) and normalised for weather, it was minus

9.6% (2022: 1.7%). This represents an insurance service result

from ongoing operations of a loss of £211.8million (2022:

£226.6million) , compared with a loss of £23.5 million in 2022.

CFO review continued

28 Direct Line Group Annual Report and Accounts 2023

Ongoing operations (£m) 2023

2022 Variance

Insurance service

result (211.8)

(23.5) (188.3)

Of which:

Motor - current year

(193.2)

(75.0) (118.2)

Motor - prior year

(138.4)

4.3 (142.7)

Home

50.2

(3.5) 53.7

Rescue and other

personal lines

42.0

55.7 (13.7)

Commercial

27.6

(5.0) 32.6

This £188.3 million deterioration in the ongoing operations

insurance service result was predominantly driven by Motor,

with prior year strengthening alongside an adverse movement

in current year reflecting the earn through of lower margin

business. This was partially offset by more benign weather

conditions helping deliver a £53.7 million improvement in

Home’s profitability, alongside a recovery in the Commercial

result.

We are currently conducting two past business reviews and

approximately £104 million was recognised for these in 2023.

Excluding these provisions, the net insurance margin would

have been 4.1 percentage points better.

Impact of past business reviews on reported net insurance margin

Ongoing operations Motor Home

2023

2022

2023

2022

2023

2022

Total loss £m 78 28 78 28 — —

Pricing practices £m 26 18 14 13 12 5

Total remediation provisions £m 104 46 92 41 12 5

Reported net insurance margin

(8.3) %

(0.9) %

(21.1) %

(4.8) %

10.0 %

(0.8) %

Remediation impact (pts) 4.1 pts 1.8 pts 5.9 pts 2.8 pts 2.1 pts 1.1 pts

Adjusted net insurance margin

(4.2) %

0.9 %

(15.2) %

(2.0) %

12.1 %

0.3 %

The insurance service result for Motor was a £331.6million loss

(2022: £70.7million loss) with a 15.9pts increase in the Motor net

insurance claims ratio. This reflected the earn through of below

target margin business written during 2022 and in the first half

of 2023, alongside adverse experience on prior-year reserves.

Performance improved in the second half of 2023, with the net

current year claims ratio 5.8 percentage points better than the

first half of 2023 as higher premiums from rate increases started

to earn through, together with a more stable claims

environment.

Outside of Motor, our other ongoing business areas delivered a

good set of results, with a cumulative insurance service result of

£119.8million across Home, Rescue and other personal lines

and Commercial (2022: £47.2million) and a net insurance

margin of 12.2% (2022: 4.7%).

Overall, the Group delivered a net insurance claims ratio from

ongoing operations of 81.8% (2022: 74.9%).

The current year attritional claims ratio increased by 3.8pts to

75.1% primarily driven by a 6.8pts increase in Motor. Outside of

Motor, Home and Rescue and other personal lines saw modest

increases in their current year attritional claims ratios, offset by a

significant improvement in Commercial.

Weather-related claims for ongoing operations in the year were

£27million, less than our 2023 assumption for ongoing

operations of £59million and £122million lower than prior year.

Our 2024 weather-related claims assumption for Home and

Commercial combined is £62million.

Prior-year reserve movements were impacted by a

£138.4million reserve strengthening in Motor which included a

£78million increase in the cost for the remediation from the

total loss past business review. This delivered a deterioration in

the prior-year reserve movement from ongoing operations from

a release of £35.4 million in 2022 to a strengthening of

£146million in 2023. Outside of Motor, Home saw a £8.9 million

release, but this was offset by a strengthening within the

Commercial Van product. As previously set out, the opportunity

for prior-year reserve releases in the short term remains low.

The net acquisition ratio from ongoing operations decreased by

0.2pts to 6.8%, as a reduction in marketing costs was only

partially offset by an increase in commissions. The expense ratio

from ongoing operations increased by 0.7pts to 19.7% primarily

due to higher amortisation and depreciation costs as well as

underlying inflation in IT and other costs. Staff costs increased by

less than wage inflation.

In 2024 we expect the expense ratio for ongoing operations will

be broadly stable.

Expenses in insurance service result

FY 2023

FY 2022

(restated)³

£m

Commission expenses

(111.1)

(95.9)

Marketing

(62.7)

(77.9)

Acquisition expenses (173.8)

(173.8)

Staff costs

(194.6)

(188.6)

IT and other operating expenses

6,7

(102.9)

(85.6)

Insurance levies

(81.2)

(83.0)

Depreciation, amortisation and

impairment of intangible and fixed

assets

(123.4)

(114.9)

Operating expenses (502.1)

(472.1)

Total expenses - ongoing

operations (675.9)

(645.9)

Total expenses - run-off

partnerships

(24.5)

(23.2)

Total expenses (907.9)

(871.0)

Net acquisition ratio

- ongoing

operations

6.8%

7.0%

Net acquisition ratio

- total Group

9.3%

9.7%

Net expense ratio

- ongoing

operations

19.7%

19.0%

Net expense ratio

- total Group 19.7%

18.7%

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 29

29Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Investment result and unwind of discount rate

Net investment income increased to £141.8 million (2022: £94.1

million) primarily driven by yield improvements in variable rate

asset classes benefiting from a rising interest rate environment.

This represents an investment income yield of 3.5%. Based on

current yields, we estimate an investment income yield of

around 3.8% for 2024 and 3.9% for 2025.

FY 2023

FY 2022

£m

restated

Investment income

149.1

101.9

Investment fees

(7.3)

(7.8)

Net investment income 141.8

94.1

Insurance and reinsurance finance

expenses - unwind of discounting

of claims

(118.7)

(50.4)

Finance income and expenses in

operating profit 23.1

43.7

FY 2023

FY 2022

Investment income yield (total

Group)

3.5%

2.1%

The increase in investment income was offset by an increase in

the unwind of the discounting of claims. The unwinding of prior-

period discounting in 2024 is expected to be similar to 2023.

Reconciliation of operating (loss)/profit to basic

earnings/(loss) per share

FY 2023

FY 2022

£m

Note restated

Motor

(319.6)

(64.8)

Home

52.4

0.9

Rescue and other personal lines -

ongoing operations¹

48.0

60.1

Commercial

29.7

(2.6)

Operating loss - ongoing

operations¹ (189.5)

(6.4)

Operating profit - brokered

commercial business¹

27.6

62.9

Operating loss - run-off

partnerships¹

(29.5)

(10.8)

Operating (loss)/profit - total

Group (191.4)

45.7

Restructuring and one-off costs

(59.5)

(45.3)

Net fair value gains/(losses)

124.4

(342.5)

Net insurance finance income -

effect of change in yield curve

(25.5)

60.7

Other finance costs

(14.5)

(20.4)

Gain on disposal of business 9

443.9

—

Tax (charge)/credit

(54.5)

69.9

Profit/(loss) for the year

attributable to the owners of

the Company 222.9

(231.9)

Basic earnings/(loss) per share

(pence)

15.9

(19.1)

Operating return on tangible

equity annualised

(14.9%)

(2.7%)

Ongoing operations and run-off segments

The Group has excluded the results of the brokered commercial

business and three run-off partnerships from its ongoing results.

Results relating to ongoing operations are clearly referenced.

Note 4 (Segmental analysis) has also been amended to reflect

the change. The insurance service result including run-off

segments was a loss of £251.4 million (2022: £14.3 million profit).

Brokered commercial business

The Group has excluded the results of the brokered commercial

business from its ongoing results and has restated all relevant

comparatives across this review. We agreed the transfer of the

Group’s brokered commercial lines insurance business and

associated partnerships to Royal and Sun Alliance Insurance

Limited with effect from 1 October 2023 through a combination

of quota share reinsurance and a form of renewal rights transfer.

As a result, the economic effect of the brokered commercial

insurance business moved to Royal and Sun Alliance Insurance

Limited and the back book of policies has remained with the

Group. The operating profit relating to the brokered commercial

business in 2023 was £27.6 million (2022: £62.9 million). The

formal separation and operational transfers are expected to start

in the second quarter of 2024, with subsequent transfers of

outstanding elements of the overall brokered commercial

insurance business to follow.

Run off partnerships

These partnerships are in Travel and Rescue and have either

been exited or termination has been initiated. This will reduce

the Group’s exposure to low margin packaged bank accounts so

it can redeploy capital to segments with higher return

opportunities. The two Travel partnerships were with NatWest

Group and Nationwide Building Society and expire in 2024. The

Rescue partnership was with NatWest Group and expired in

December 2022. The operating loss relating to run off

partnerships in 2023 was £29.5 million (2022: £10.8 million loss).

Net fair value gains/(losses)

Net fair value gains in the period were £124.4 million, a

significant improvement on 2022 reflecting the tightening of

credit spreads and interest rate movements. Fair value gains on

debt securities, derivatives and investment property was £125.0

million (2022: £341.9 million loss).

Net insurance finance income

The net insurance finance expenses reflects the effect of

changes in the yield curve and the ASHE index on the

discounting of previously recognised PPO claims.

Restructuring and one-off costs

The Group incurred £59.5 million of restructuring and one-off

costs in 2023, which were predominantly driven by work carried

out in relation to the Group’s two past business reviews, cost

efficiency initiatives and impairments.

Gain on disposal of brokered commercial business

In 2023 the Group announced the sale of its brokered

commercial business for a consideration of £520 million, which

was received by the Group in October. After deducting £76.1

million for transaction costs, disposal of assets, and asset

impairment, this resulted in a gain on disposal of £443.9 million.

Other finance costs

Other finance costs fell to £14.5 million (2022: £20.4 million)

primarily as a result of the redemption of the Group's £250

million 9.25% Tier 2 subordinated notes on 27 April 2022.

CFO review continued

30 Direct Line Group Annual Report and Accounts 2023

Effective corporation tax rate

The Effective Tax Rate ("ETR") for 2023 was 19.6% (2022: 23.2%),

which was lower than the standard UK corporation tax rate of

23.5% (2022: 19.0%). This was driven primarily by the offset of

capital losses brought forward, which had not previously been

recognised in deferred tax, together with tax relief for coupon

payments on the Group's Tier 1 notes, which are accounted for

as a distribution, partly offset by disallowable expenses and the

tax effect of a property revaluation.

Due to the offset of capital losses against the capital gain arising

on the sale of the brokered commercial business in 2023, the

ETR is lower than the restated ETR for 2022, which reflected the

rate differential between the in-force corporation tax rate for

2022 of 19% and future enacted tax rates (25% from 1 April

2023) on tax adjustments arising on transition from IFRS 4 to

IFRS17 and IFRS9 to be relieved in subsequent periods at higher

standard tax rates.

Operating return on tangible equity

1,5

The operating return on tangible equity decreased by 12.2pts to

minus 14.9% (2022: minus 2.7%) due primarily to the decrease

in the Group's operating profit from ongoing operations.

Earnings/(loss) per share

The basic earnings per share for period was 15.9 pence (2022:

loss of 19.1 pence). Diluted earnings per share were also 15.7

pence (2022: loss of 19.1 pence), mainly reflecting an increase in

the Group's post tax loss for the calculation of earnings per share

in 2023. Operating loss per share was 12.8 pence (2022: loss of

2.7 pence).

The financial performance of the Group is discussed in detail on

pages 28 to 32. The calculation of earnings/(loss) per share is

presented in note 13 on page 220. The calculation of operating

earnings/(loss) per share is presented on page 268.

Notes:

1. Ongoing operations – See glossary on pages 261 to 264 for definitions

and appendix A – Alternative Performance Measures on pages 265 to

266 for reconciliation to financial statement line items.

2. See appendix B for additional data on in-force policies and gross

written premium and associated fees.

3. In-force policies as at 31 December 2022 and 31 March 2023 have

been restated to remove 14,500 and 19,700 Commercial policies

respectively that were previously included in the reported amounts in

error.

4. Prior period comparatives have been restated on transition to IFRS 17

'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1

and 40 for further details.

5. See glossary on pages 261 to 264 for definitions and appendix A –

Alternative performance measures on pages 265 to 266 for

reconciliation to financial statement line items.

6. Staff costs and other operating expenses attributable to claims

handling activities are allocated to the cost of insurance claims.

7. IT and other operating expenses include professional fees and

property costs.

8. Includes right-of-use ("ROU") assets and property, plant and

equipment. For the year ended 31December 2023, there were no

impairment charges which relate solely to own occupied freehold

property (2022: no impairments).

Cash flow

2023

2022

£m

Note

restated

Net cash generated from

operating activities

404.9

800.2

Of which:

Operating cash flows

before movements in

working capital

(284.6)

26.7

Movements in working

capital

416.6

49.6

Tax paid

(30.9)

(44.5)

Cash generated from

investment of insurance

assets

304.4

768.1

Net cash generated from/

(used in) investing activities

398.3

(100.8)

Net cash used in financing

activities

(51.8)

(657.5)

Net increase in cash and

cash equivalents

751.4

41.9

Cash and cash equivalents at

the beginning of the year

938.4

896.5

Cash and cash equivalents

at the end of the period

1,689.8

938.4

Note:

1. Prior period comparatives have been restated on transition to IFRS 17

'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1

and

40 for further details.

The Group’s cash and cash equivalents increased by £751.4

million during the year (2022: £41.9 million increase) to £1,689.8

million.

The Group had an operating cash outflow before movements in

working capital of £284.6 million (2022: inflow £26.7 million), a

reduction of £311.3 million due to an increase in non-cash

movements. After taking into account movements in working

capital, the Group's cash inflow was £100.5 million (2022:

outflow £32.1 million), an increase of £68.4 million. The Group

has considerable assets under management, the cash

generated from these assets decreased by £463.7 million to

£304.4 million as proceeds from the disposal and maturity of

debt securities held at fair value through profit or loss ("FVTPL")

exceeded purchases. Net cash generated from operating

activities was £404.9 million (2022: £800.2 million).

Net cash generated from investing activities of £398.3 million

primarily reflected net proceeds from the sale of the brokered

commercial business of £469.7 million, offset with the Group's

continuing investment in its major IT programmes (2023: £124.1

million, 2022: £108.4 million).

Net cash used in financing activities of £51.8 million included

£16.6 million in Tier 1 capital coupon payments and £nil in

dividends in the year (2022: £314.5 million in dividends and Tier

1 capital coupon payments), £nil in share buybacks (2022: £50.1

million) and £10.8 million (2022: £8.9 million) lease principal

payments. Also included in 2022 was the redemption of the

remaining £250.0 million Tier 2 subordinated debt issued in

2012.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 31

31Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

The £404.9 million the Group generated from operating

activities and £398.3 million generated from investing activities

more than offset net cash used in financing activities and

resulted in a net increase in cash and cash equivalents of £751.4

million (2022: £41.9 million increase) to £1,689.8 million (2022:

£938.4 million). The sale of the Groups brokered commercial

business contributed £469.7 million to the net increase in cash

and cash equivalents. The levels of cash and other highly liquid

sources of funding that the Group holds to cover its claims

obligations are continually monitored with the objective of

ensuring that the levels remain within the Group’s risk appetite.

Balance sheet management

Capital management and dividend policy

The Group's capital management and dividend policy is as

follows:

"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 intends toreturn any surplus to

shareholders. In normal circumstances, the Board expects that a

solvency capital ratio around the middle of its risk appetite

range of 140% to 180% of the Group’s solvency capital

requirement ("SCR") would be appropriate and it will therefore

take thisinto account when considering the potential for special

distributions.

"In the normal course of events the Board will consider whether

or not it is appropriate to distribute any surplus capital to

shareholders once a year, alongside the full yearresults.

"The Group expects that one third of the annual dividend will

generally be paid in the third quarter as an interim dividend,

and two thirds will be paid as a final dividend in the second

quarter of the following year. The Board may revise the dividend

policy from time to time. The Company may consider a special

dividend and/or a repurchase of its own shares to distribute

surplus capital to shareholders."

The Board 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.

The final dividend is to be recommended to the shareholders at

the annual general meeting scheduled for 8May 2024 and paid

on 17May 2024 to shareholders on the register on 5April 2024.

The ex-dividend date will be 4April 2024.

Capital Returns (£million)

128.6

595.2

401.3

149.1

52.0

98.6

299.7 301.3

99.0

195.5

30.0

100.0

50.1

2019 2020 2021 2022 2023

Ordinary dividends

Special dividends

Buyback programmes

Capital analysis

The Group is regulated under Solvency II requirements by the

PRA on both a Group basis and for the Group’s principal

underwriter, U K Insurance Limited. In its results, the Group has

estimated its Solvency II own funds, SCR and solvency capital

ratio as at 31December 2023.

Capital position

At 31December 2023, the Group held a Solvency II capital

surplus of £1.10 billion above its regulatory capital requirements,

which was equivalent to an estimated solvency capital ratio of

197%

At 31 December

2023

2022

Solvency capital requirement (£

billion)

1.13

1.21

Capital surplus above solvency

capital requirement (£ billion)

1.10

0.57

Solvency capital ratio post-

dividends

197%

147%

CFO review continued

32 Direct Line Group Annual Report and Accounts 2023

Movement in capital surplus (£bn)

0.57

0.56

0.06

0.08

(0.15)

(0.05)

1.10

Capital surplus at 1

January

Capital generated/

(used) excluding

market movements

Market movements Change in solvency

capital requirement

Capital expenditure Final dividend Capital surplus at 31

December

Movement in capital surplus

2023

2022

£bn

Capital surplus at 1 January 0.57

1.03

Capital generated/(used) excluding

market movements

0.56

(0.06)

Market movements

0.06

(0.12)

Capital generated/(used) 0.62

(0.18)

Change in solvency capital

requirement

0.08

0.14

Surplus generated/(used) 0.70

(0.04)

Capital expenditure

(0.15)

(0.12)

Repayment of subordinated Tier 2

notes

—

(0.25)

Interim dividend

—

(0.10)

Final dividend

(0.05)

—

Removal of second tranche of

share buyback

—

0.05

Decrease in ineligible Tier 3 capital

0.03

—

Net surplus movement 0.53

(0.46)

Capital surplus at 31 December 1.10

0.57

Note:

1. At 31December 2023, no ineligible Tier 3 capital arose as the Group's

available Tier 3 capital was under the amount permitted under the

Solvency II regulations (15% of the Group’s SCR). At 31December

2022, ineligible Tier 3 capital arose as the Group's Tier 3 capital was

above the amount permitted under the Solvency II regulations.

During 2023, the Group generated £0.62 billion of Solvency II

capital after market movements, supported by the proceeds of

the sale of the Group's brokered commercial business. After

capital expenditure of £0.15 billion the net surplus for the year

increased by £0.53 billion.

Change in solvency capital requirement

2023

£bn

Solvency capital requirement at 1 January

1.21

Model and parameter changes

0.07

Exposure changes

(0.03)

Adjustments relating to the sale of the brokered

commercial insurance business

(0.12)

Solvency capital requirement at 31 December 1.13

During 2023, the Group’s SCR reduced by £0.08 billion to £1.13

billion. primarily due to the sale of the Group’s brokered

commercial business, partially offset by higher reserve risk.

Scenario and sensitivity analysis

The following table shows the impact on the Group’s estimated

solvency capital ratio in the event of the following scenarios as at

31December 2023. The impacts on the Group’s solvency capital

ratio arise from movements in both the Group’s SCR and

ownfunds.

Impact on solvency capital ratio

At 31 December

2023

2022

Deterioration of small bodily injury

motor claims equivalent to that

experienced in 2008/09

(5pts)

One-off catastrophe loss equivalent

to the 1990 storm "Daria"

(9pts)

(10pts)

One-off catastrophe loss based on

extensive flooding of the River

Thames

(7pts)

(10pts)

Increase in Solvency II inflation

assumption for PPOs by 100 basis

points

(15pts)

(10pts)

100bps increase in credit spreads

(5pts)

100bps decrease in interest rates

with no change in the PPO

discount rate

([6pts)

(2pt)

Notes:

1. Sensitivities are calculated on the assumption that full tax benefits can be realised.

2. The periodic payment order ("

PPO") inflation assumption used is an actuarial judgement which is based on a range of factors including the

economic outlook for wage inflation relative to the PRA discount rate curve excluding any change in discount rate. Scenario updated to the latest

PPO inflation assumptions with discount rates held constant.

3. Includes only the impact on assets held at FVTPL (excludes assets held at amortised cost) and assumes no change to theSCR.

4. Scenario updated to latest PPO inflation assumptions and to include change in expected investment return on cash holdings. The 2022 sensitivity

has been restated on a like for like basis.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 33

33Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Own funds

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

on a Solvency II basis.

2023

2022

At 31 December

£bn

Tier 1 capital – unrestricted

1.59

1.07

Tier 1 capital – restricted

0.32

Less reclassified restricted Tier 1 debt¹

—

(0.05)

Eligible Tier 1 capital

1.91

1.34

Tier 1 debt and Tier 2 subordinated

debt¹

0.22

0.26

Tier 3 capital – deferred tax

0.10

0.21

Ineligible Tier 3 capital²

—

(0.03)

Total eligible own funds

2.23

1.78

Notes:

1. As at 31December 2023, none (31December 2022: £51million) of

the Group's restricted Tier 1 capital was reclassified as Tier 2 due to

Solvency II tiering restrictions.

2. At 31December 2023, no ineligible Tier 3 capital arose as the Group's

available Tier 3 capital was under the amount permitted under the

Solvency II regulations (15% of the Group’s SCR). At 31December

2022, ineligible Tier 3 capital arose as the Group's Tier 3 capital was

above the amount permitted under the Solvency II regulations.

During 2023, the Group’s eligible own funds increased from

£1.78 billion to £2.23 billion. Eligible Tier 1 capital after

foreseeable distributions represents 86% of own funds and

169% of the estimated SCR. Tier 2 capital relates to the Group’s

£0.22 billion subordinated debt with no ineligible Tier 1 capital.

The maximum amount of Restricted Tier 1 capital permitted as

a proportion of total Tier 1 capital under the Solvency II

regulations is 20%. Restricted Tier 1 capital relates solely to the

Tier 1 notes issued in 2017.

The amount of Tier 2 and Tier 3 capital permitted under the

Solvency II regulations is 50% of the Group’s SCR and the

amount of Tier 3 alone is 15% of the Group's SCR. The Group has

no ineligible Tier 3 own funds.

Reconciliation of IFRS shareholders’ equity to Solvency

II eligible own funds

At 31 December

2023

2022

£bn

Total shareholders’ equity

2.06

1.93

Goodwill and intangible assets

(0.82)

Change in valuation of technical

provisions

0.43

—

Other asset and liability

adjustments

(0.03)

(0.04)

Foreseeable dividend

(0.05)

—

Tier 1 capital – unrestricted 1.59

1.07

Tier 1 capital – restricted

0.32

Less reclassified restricted Tier 1 debt¹

—

(0.05)

Eligible Tier 1 capital 1.91

1.34

Tier 2 capital – reclassified

restricted Tier 1 debt and Tier 2

subordinated debt¹

0.22

0.26

Tier 3 capital – deferred tax

0.10

0.21

Ineligible Tier 3 capital²

—

(0.03)

Total eligible own funds 2.23

1.78

Notes:

1. As at 31December 2023, none (31December 2022: £51million) of

the Group's restricted Tier 1 capital was reclassified as Tier 2 due to

Solvency II tiering restrictions.

2. At 31December 2023, no ineligible Tier 3 capital arose as the Group's

available Tier 3 capital was under the amount permitted under the

Solvency II regulations (15% of the Group’s SCR). At 31December

2022, ineligible Tier 3 capital arose as the Group's Tier 3 capital was

above the amount permitted under the Solvency II regulations.

Reconciliation of IFRS shareholders’ equity to Solvency II eligible own funds (£bn)

2.06

1.59

0.82

0.43

0.03 0.32

0.22

0.10

Total shareholders’

equity

Goodwill and intangible

assets

Change in valuation of

technical provisions

Other asset and liability

adjustments

Foreseeable dividend Total own funds

Tier 1 capital unrestricted

Tier 1 capital restricted

Tier 1 debt and Tier 2

Tier 3 capital – deferred tax

CFO review continued

34 Direct Line Group Annual Report and Accounts 2023

2.23

0.05

34 Direct Line Group Annual Report and Accounts 2023

Investment portfolio

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

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

– to match PPOs and non-PPOs liabilities in an optimal manner; and

– to deliver a suitable risk-adjusted investment return commensurate with our risk appetite.

The current strategic asset allocation is being reviewed given the changed macro-economic environment and resulting shifts in

investment risk and return opportunities.

Asset and liability management

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

Liabilities Assets Characteristics

More than 10 years, for example PPOs

Property and infrastructure debt

Inflation linked or floating

Short and medium term - all other claims Investment-grade credit Fixed - key rate duration matched

Tier 1 equity Investment-grade credit Fixed

Tier 2 sub-debt

Commercial real estate loans and cash

Floating

Tier 2 sub-debt fixed

Investment-grade credit and cash

Fixed or floating

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

cash and government debt securities

Fixed or floating

Asset allocation and benchmarks - U K Insurance Limited

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

Benchmark

Holding

Actual

Holding

Benchmark

Holding

Actual

Holding

2023 2023

2022 2022

Investment-grade credit

60.0 % 43.8 %

66.0 % 49.5 %

High yield

6.0 % 5.4 %

6.0 % 5.8 %

Investment-grade private placements

0.0 % 1.4 %

3.0 % 2.1 %

Credit 66.0 % 50.6 %

75.0 % 57.4 %

Sovereign

10.0 % 13.0 %

3.0 % 10.7 %

Total debt securities 76.0 % 63.6 %

78.0 % 68.1 %

Infrastructure debt

4.0 % 4.1 %

4.0 % 5.0 %

Commercial real estate loans

6.5 % 2.8 %

6.5 % 4.2 %

Other loans

0.0 % 0.1 %

0.0 % 0.0 %

Cash and cash equivalents

8.0 % 24.1 %

6.0 % 16.9 %

Investment property

5.5 % 5.3 %

5.5 % 5.8 %

Total investment holdings 100.0 % 100.0 %

100.0 % 100.0 %

With a focus during the year being on resilience of the capital position of the Group, assets under management has been overweight

cash and underweight credit versus its benchmark holdings. During this time, a strategic asset allocation exercise was undertaken

which resulted in several benchmark allocation changes being implemented effective in Q4 2023. These included a 7% increase in

sovereign holdings and a 2% increase in cash and cash equivalents, offset by a reduction in investment grade credit and private

placement bonds, thus reducing expected volatility and value at risk in the portfolio.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 35

35Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Investment holdings and yields

2023

2022 (restated)¹

Allocation Income Yield

(£m) (£m) (%)

Investment-grade credit

2,288.1 51.1 2.2 %

2,360.0 59.1 1.9 %

High yield

281.2 16.5 5.9 %

278.8 14.9 4.8 %

Investment-grade private placements

70.6 2.8 3.3 %

97.2 2.7 2.9 %

Credit 2,639.9 70.4 0.0 %

2,736.0 76.7 2.2 %

Sovereign

681.2 8.5 1.4 %

510.3 2.0 0.7 %

Total debt securities 3,321.1 78.9 0.0 %

3,246.3 78.7 2.2 %

Infrastructure debt

214.2 14.8 6.6 %

236.8 7.9 3.2 %

Commercial real estate loans

145.9 12.9 7.5 %

198.9 8.8 4.4 %

Other loans

3.1 — 0.4 %

1.6 — 0.4 %

Cash and cash equivalents

1,689.8 65.2 5.5 %

938.4 13.9 1.5 %

Investment property

277.1 16.1 5.8 %

278.5 15.6 5.3 %

Equity investments

19.7 — 0.0 %

14.4 — 0.0 %

Total Group 5,670.9 187.9 3.5 %

4,914.9 124.9 2.3 %

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 21 for

further details.

2. Asset allocation at 31December 2023 includes investment portfolio derivatives, which have a mark-to-market asset value of £12.4 million which is

split as assets of £12.0 million included in investment grade credit and of £0.4 million included in sovereign debt (31December 2022: mark-to-

market asset value of £2.5 million and £0.9 million liability respectively). This excludes non-investment derivatives that have been used to hedge

operational cash flows.

3. Net of bank overdrafts: includes cash at bank and in hand and money market funds.

4. £241.8 million (2022: £nil) of this balance is invested within money market funds under the 100% quota share reinsurance treaty for the brokered

commercial business, which is operated on a funds withheld basis. This entitles the reinsurer to the investment return earned on underlying

collateral assets held in money market funds. The Group has appointed a custodian for the asset while retaining ownership of the funds withheld

assets collateral.

5. Equity investments consist of quoted shares and insurtech-focused equity funds. The insurtech-focused equity funds are valued based on external

valuation reports received from a third-party fund manager.

At 31December 2023, total investment holdings of £5,670.9

million were 15.4% higher than at the start of the year, reflecting

fair value movements in fixed rate debt securities and the net

sale proceeds from the disposal of the Group's brokered

commercial business. Total debt securities were £3,321.1 million

(31December 2022: £3,246.3 million), of which 2.6% were rated

as ‘AAA’ and a further 61.5% were rated as ‘AA’ or ‘A’. The

average duration at 31December 2023 of total debt securities

was 2.1 years (31December 2022: 2.3 years).

At 31December 2023, total unrealised losses on investments

held at FVTPL were £136.5million (31December 2022:

£282.1million unrealised losses).

FY 2023

FY 2022

£m

Note

restated

Investment income

149.1

101.9

Investment fees

(7.3)

(7.8)

Net investment income in

operating profit 141.8

94.1

Net investment income -

brokered commercial

business

35.2

20.4

Net investment income -

exited partnerships

1.6

0.9

Net investment income

178.6

115.4

Net FV gains/(losses)

124.4

(342.5)

Total investment income

recognised through the

statement of profit or loss

303.0

(227.1)

Net investment income increased to £141.8 million (2022: £94.1

million) primarily driven by yield improvements in variable rate

asset classes benefiting from a rising interest rate environment.

Fair value gains were £124.4 million, versus losses in 2022 (£342.5

million), with a tightening of credit spreads and interest rates

accounting for the majority of the movement. Fair value

adjustments to commercial property valuations resulted in a

£1.4 million write-down during 2023.

Net asset value

2023

2022

£m

Note

restated

Net assets

2,058.2

1,845.3

Goodwill and other

intangible assets 14

(818.6)

(822.2)

Tangible net assets

1,239.6

1,023.1

Closing number of Ordinary

Shares (millions) 14

1,297.7

1,298.2

Net asset value per share

(pence) 14

158.6

142.1

Tangible net asset value per

share (pence) 14

95.5

78.8

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17

'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1

and 21 for further details.

2. See glossary on pages 78 to 80 for definitions and appendix A –

Alternative Performance Measures on pages 84 to 87 for reconciliation

to financial statement line items.

CFO review continued

36 Direct Line Group Annual Report and Accounts 2023

Net assets at 31December 2023 increased by £212.9 million to

£2,058.2 million (31December 2022: £1,845.3 million)

andtangible net assets decreased to £1,239.6 million

(31December 2022: £1,023.1 million).

Leverage

The Group’s financial leverage remained steady at 22.7% (2022:

24.7%).

2023

2022

£m

restated

Shareholders’ equity

2,058.2

1,845.3

Tier 1 notes

346.5

Financial debt – subordinated debt

258.8

258.6

Total capital employed 2,663.5

2,450.4

Financial leverage ratio

22.7%

24.7%

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17

'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1

and 21 for further details.

2. Total IFRS financial debt and Tier 1 notes as a percentage of total IFRS

capital employed.

Credit ratings

Moody’s Investors Service provides insurance financial-strength

ratings for U K Insurance Limited, our principal underwriter.

Moody’s rate U K Insurance Limited as ‘A2’ for insurance

financial strength (strong) with a stable outlook.

Reserving

We make provision for the full cost of outstanding claims from

the general insurance business at the statement of financial

position date, including claims estimated to have been incurred

but not yet reported at that date and associated claims

handling costs. We consider 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.

We seek to adopt a prudent approach to assessing liabilities. The

liability for incurred claims ("LIC") reserves are the combination

of best estimate of liabilities ("BEL") and a risk adjustment, which

is set around the 75th percentile and provides a prudence

margin on top of the BEL. The BEL is set on a discounted basis

and includes an allowance for events not in data ("ENIDs"), set

by reference to various actuarial scenario assessments. ENIDs

also consider other short- and long-term risks not reflected in

the actuarial inputs, as well as the actuarial function’s view on

the uncertainties in relation to the BEL.

The most common method of settling bodily injury claims is by

a lump sum. When this includes an element of indemnity for

recurring costs, such as loss of earnings or ongoing medical care,

the settlement calculations apply the statutory discount rate

(known as the Ogden discount rate) to reflect the fact that

payment is made on a one-off basis rather than periodically over

time. The current Ogden discount rate is minus 0.25% for

England and Wales, with the equivalents being minus 0.75% in

Scotland, and minus 1.5% in Northern Ireland.

We reserve our large bodily injury claims at the relevant discount

rate for each jurisdiction, with the overwhelming majority of

cases now reserved at minus 0.25% as most will be settled

under the law of England and Wales. The Ogden discount rate

will be reviewed again at the latest in 2024 and the Group has

booked a probability weighted allowance for a discount rate

change within its best estimate of liabilities. Since 2021, we have

reduced the level of Motor reinsurance purchased, resulting in

higher net reserves for accident years 2021 to 2023.

If the claimant prefers, large bodily injury claims can be settled

using a PPO. This is an alternative way to provide an indemnity

for recurring costs, making regular payments, usually for the rest

of the claimant’s life. These claims are reserved for using an

internal discount rate, which is progressively unwound over

time. As it is likely to take time to establish whether a claimant

will prefer a PPO or a lump sum, until a settlement method is

agreed we make assumptions about the likelihood that

claimants will opt for a PPO. This is known as the PPO

propensity.

At 31 December 2023, the real discount rate for PPOs is 0.7%

(2022: 0.6%, restated for IFRS 17), the combination of cash flow

weighted inflation and discounting of 3.9% (2022: 4.2%, restated

for IFRS 17), which allows for higher short-term inflation before

reverting to a long term trend of 3.5%, and a yield curve based

discount rate of 4.6% (2022: 4.8%, restated for IFRS 17).

Higher claims inflation remains a risk, given the continuing high

level of consumer prices and wage inflation. In 2022, consumer

prices inflation was at its highest level for the past decade and is

not expected to normalise until at least 2024. Upwards pressure

is likely to remain on wages, with potential implications for the

cost of care. Global supply chain issues remain problematic,

resulting in a risk of price increases for products and

components in short supply. A range of general and specific

scenarios for excess inflation has been considered in the

reserving process.

Prior-year reserve development at year end 2023 was £149.0

million (2022: £97.8 million release), driven by strengthening in

Motor, of which £78 million related to the Motor total loss past

business review remediation. Looking forward, the opportunity

for prior-year reserve releases in the short term remains low

given the inflationary backdrop.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 37

37Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Net liability for incurred claims

31 Dec 2023 31 Dec 2023

31 Dec 2023

31 Dec 2022 31 Dec 2022

31 Dec 2022

Estimate of

present value

cash flows

Risk

adjustment

Total

Estimate of

present value

cash flows

Risk

adjustment

Total

£m £m

£m

£m £m

£m

Motor 1,634.9 79.9

1,714.8

1,393.0 72.7

1,465.7

Home 352.5 16.1

368.6

386.9 19.5

406.4

RoPL

1,2

65.7 2.4

68.1

75.4 3.0

78.4

Commercial 129.0 6.2

135.2

102.2 6.3

108.5

Total ongoing operations

2,182.1 104.6

2,286.7

1,957.5 101.5

2,059.0

Brokered commercial business 354.7 18.5

373.2

415.4 20.8

436.2

Run-off partnerships 72.8 2.2

75.0

55.1 1.3

56.4

Total

2,609.6 125.3

2,734.9

2,428.0 123.6

2,551.6

Note:

1. Ongoing operations – See glossary on pages 78 to 80 for definitions and appendix A – Alternative Performance Measures on pages 84 to 87 for

reconciliation to financial statement line items.

Sensitivity analysis – changes in: the discount rate used in relation to PPOs and other claims, the assumed Ogden

discount rate and claims inflation

The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the internal discount rate

used for PPOs and other claims, the Ogden discount rate or claims inflation) with all other assumptions left unchanged.

Otherpotential risks beyond the ones described could have additional financial impacts.

Increase/(decrease) in profit before tax

and equity gross of reinsurance1,2

Increase/(decrease) in profit before tax

and equity net of reinsurance1,2

2023

2022

2023

2022

At 31 December

£m

Discount curve - PPOs

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

present values of 100 basis points

95.0

87.1

39.0

35.2

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

present values of 100 basis points

(127.8)

(113.7)

(52.1)

(45.4)

Discount curve - other claims

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

present values of 100 basis points

55.9

39.7

37.2

27.1

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

present values of 100 basis points

(58.6)

(41.4)

(38.9)

(28.2)

Ogden discount rate

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

minus 0.25% (2022: 0.75% compared to minus 0.25%)

105.1

85.7

48.1

24.8

Impact of the Group reserving at a discount rate of minus 1.25%

compared to minus 0.25% (2022: minus 1.25% compared to minus

0.25%)

(220.6)

(180.4)

(97.0)

(48.2)

Claims inflation

Impact of a decrease in claims inflation by 200 basis points for two

consecutive years

112.8

96.9

71.7

64.5

Impact of an increase in claims inflation by 200 basis points for two

consecutive years

(114.6)

(98.3)

(72.8)

(65.4)

Risk adjustment

Impact of a risk adjustment at the 70th percentile compared to the

booked risk adjustment at the 75th percentile

73.1

74.1

36.6

33.7

Impact of a risk adjustment at the 80th percentile compared to the

booked risk adjustment at the 75th percentile

(84.5)

(87.5)

(42.9)

(38.6)

Notes:

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

2. These sensitivities reflect one-off impacts at the statement of financial position date and should not be interpreted as predictions.

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

assumed level of 0.6% for reserving. The PPO sensitivity has been calculated on the direct impact of the change in the real internal discount rate

with all other factors remaining unchanged.

4. The sensitivities relating to an increase or decrease in the yield curve used to discount all reserves excluding PPOs illustrate a movement in the time

value of money from the assumed level at the statement of financial position dates. The sensitivity has been calculated on the direct impact of the

change in the discount curve with all other factors remaining unchanged.

5. Ogden discount rate sensitivity has been calculated on the direct impact of a permanent change in the discount rate in England and Wales with all

other factors remaining unchanged. The Group will consider the statutory discount rate when setting the reserves but not necessarily provide on this

basis. This is intended to ensure that reserves are appropriate for current and potential future developments.

6. The risk adjustment sensitivities are with respect to the discounted net risk adjustment at the statement of financial position dates.

CFO review continued

38 Direct Line Group Annual Report and Accounts 2023

The PPO sensitivity above is calculated on the basis of a change

in the internal discount rate used for the actuarial best estimate

reserves as at 31December 2023. It does not take into account

any second order impacts such as changes in PPO propensity or

reinsurance bad debt assumptions.

Reinsurance

The objectives of the Group’s reinsurance strategy are to reduce

the volatility of earnings, facilitate effective capital management,

and transfer risk outside the Group’s risk appetite. This is

achieved by transferring risk exposure through various

reinsurance programmes:

– Catastrophe reinsurance to protect against an accumulation

of claims arising from a natural perils event. The retained

deductible is £100 million and cover is placed annually on 1

January up to a modelled 1-in-200 year loss event of £1,000

million.

– Motor reinsurance to protect against a single claim or an

accumulation of large claims, which renews on 1 January. The

retained deductible is set at an indexed level of £5 million per

claim, with unlimited protection above £10 million subject to

an additional aggregate retention of £37.5 million.

– Motor excess of loss reinsurance has been purchased and

incepted on 1 September 2023 for Motability Operations. The

retained deductible is set at an indexed level of £5 million per

claim up to an unlimited amount. Motability policies are 80%

quota share reinsured.

– Following the Group's sale of its brokered commercial

business to RSA Insurance Limited, quota share reinsurance

between the two parties incepted on 1 October 2023, on an

earned basis, covering 100% of all premiums earned and

claims incurred after this date. Commercial property risk

reinsurance was not renewed following the sale of the Group's

brokered commercial business.

– Whole account (excluding Motability) structured quota share

reinsurance with a 10% cessation, ceded on a funds-withheld

basis with a three-year term that incepted on 1 January 2023..

Tax management

The Board recognises that the Group has an important

responsibility to manage its tax position effectively. The Board

has delegated day-to-day management of taxes to the Chief

Financial Officer and oversight is provided by the Audit

Committee.

These arrangements are intended to ensure that the Group:

complies with applicable laws and regulations; meets its

obligations as a contributor and a collector of taxes on behalf of

the tax authorities; and manages its tax affairs efficiently,

claiming reliefs and other incentives where appropriate.

Tax authorities

The Group has open and co-operative relationships with the tax

authorities with which it deals in the countries where the Group

operates, namely the UK, the Republic of Ireland, South Africa

and India.

Tax policy and governance

The Group’s tax policy has been reviewed and approved by the

Audit Committee. The Group Tax function supports the Chief

Financial Officer in ensuring the policy is adhered to at an

operational level.

For more information please see our published Group Tax policy

on the Group’s website at:

www.directlinegroup.co.uk/en/sustainability/reports-policies-

and-statements.html

Total tax contribution

The Group’s direct and indirect tax contribution to the UK

Exchequer is significantly higher than the UK corporation tax

that the Group would ordinarily pay on its profits. The Group

collects taxes relating to employees and customers on behalf of

the UK Exchequer and other national governments. It also

incurs a significant amount of irrecoverable value added tax

relating to overheads and claims. Taxes borne and collected in

other tax jurisdictions have not been included in this note as the

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

During 2023, the sum of taxes either paid or collected across the

Group was £936.8 million. The composition of this between the

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

Total taxes borne

2023

At 31 December

£m

Current-year Corporation Tax charge

24.3

Irrecoverable Value Added Tax incurred on

overheads

89.6

Irrecoverable Value Added Tax embedded

within claims spend

214.4

Employers' National Insurance contributions

44.7

Other taxes

5.2

Total 378.2

Total taxes collected

2023

At 31 December

£m

Insurance Premium Tax

439.1

Value Added Tax

17.0

Employees' Pay As You Earn and National

Insurance contributions

102.5

Total 558.6

Neil Manser

Chief Financial Officer

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 39

39Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Motor

Performance summary

—

In-force policies grew by 9.0% as our

partnership with Motability began in

September 2023. Direct own brand policy

count reduced by 10.2%.

—

Gross written premium grew by 42.9%.

—

Operating loss of £319.6 million reflects the

earn through of below target margin

business written in 2022 and the first half of

2023.

Financial summary

2023

2022

£m

In-force policies (thousands)

4,181

3,836

Of which:

Direct own brands

3,373

3,756

Partnerships

808

Gross written premium

2,047.8

1,432.7

Of which:

Direct own brands

1,575.7

1,398.5

Partnerships

472.1

34.2

Operating loss

(319.6)

(64.8)

Loss before other finance costs (274.4)

(252.3)

Net insurance margin

(21.1%)

(4.8%)

Net insurance claims ratio

95.5%

79.6%

Current-year attritional net

insurance claims ratio

86.7%

79.9%

Prior-year reserves development

ratio

8.8%

(0.3%)

Net acquisition ratio

5.7%

5.6%

Net expense ratio

19.9%

19.6%

Gross written premium by

channel

38 %

Direct

39 %

Price comparison websites

23 %

Partnerships

Notes:

1. Direct own brands include in-force policies under the Direct Line, Churchill, Darwin, Privilege and By Miles brands.

2. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

3. See glossary on pages 261 to 264 for definitions and appendix A – Alternative Performance Measures on pages 265 to 268 for reconciliation to

financial statement line items.

Operating review

40 Direct Line Group Annual Report and Accounts 2023

Motability: Welcoming over

700,000 customers

We welcomed over 700,000 new customers

through our Motability partnership in

September 2023 after nearly two years of

preparation. Forecast to deliver around £800

million of gross written premium annually, it

is a great strategic partnership but also

brings significant other benefits including

ongoing repair insights gathered from

working on their fleet of modern vehicles

and the opportunity to learn from a new

team of colleagues skilled in supporting

vulnerable customers.

The Motor result was adversely affected by the earn through of

below target margin policies which were written in 2022 and

the first half of 2023. The Group has taken significant pricing and

underwriting actions and therefore believes it has been

underwriting consistent with a net insurance margin of above

10% for the majority of the second half of 2023.

In-force policies and gross written premium and

associated fees

In response to market wide claims inflation, the motor market

experienced significant price inflation during 2023. Market

average premiums increased by around 25%

which led to an

increase in customer shopping and a reduction in market

retention rates. The Group applied significant rate increases

across its own brand portfolio during the year which delivered

an increase in own brand average premiums of 28%

The Group's actions to improve profitability led to an increase in

direct own brand gross written premium and associated fees of

12.7% compared with 2022 despite in-force policies reducing by

10.2% over the period. Policy count loss was greatest in Q3 as

rate increases worked through and decelerated during Q4, as

new business competitiveness and retention rates improved.

Following the commencement of the partnership with

Motability, total Motor gross written premium and associated

fees grew by 42.9% compared with 2022 and in-force policies

grew by 9.0% over the period.

Underwriting

Market wide claims inflation remained a feature during 2023

although trends stabilised in the second half of the year. In the

first half our view of 2022 severity inflation deteriorated, due to

repair inflation and high levels of total losses arising from

industry repair backlogs.

Notes:

1. Source: ABI motor premium tracker as at Q4 2023.

2. Average premium and rate figures quoted relate to Motor direct own

brands excluding the By Miles brand.

In the second half, we reduced repair times across the network

and used car prices began to deflate whereas inflation persisted

in the cost of parts and labour rates. These trends resulted in

attritional claims severity inflation of around 9% in 2023, in line

with our expectation of high single digits. Outside of damage, in

2023 we experienced a higher number of large bodily injury

claims

Prior year reserves were strengthened by £138 million in 2023

primarily reflecting a combination of increased damage costs

from industry backlogs in the first half of the year and costs

associated with the remediation for the Motor total loss past

business review.

In 2024 we expect attritional inflation to remain in high single

digits.

Net insurance margin and loss

These factors delivered a higher net insurance claims ratio in

2023, with an increase of 15.9pts compared with 2022. However,

the significant pricing actions taken throughout the year began

to come through in improved margins in the second half of

2023, and together with the new Motability partnership,

delivered a 5.8 percentage point improvement in the current

year net insurance claims ratio compared with the first half of

2023.

Overall, the net insurance margin was minus 21.1% and the

operating loss was £319.6 million in 2023.

Loss before other finance costs

Loss before other finance costs increased from a loss of £252.3

million in 2022 to a loss of £274.4 million in 2023 due to the

factors described above.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 41

41Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Home

Performance summary

—

Total in-force policies 2.3% lower at 2.4 million.

Direct own brand policies were 1.5% lower at

1.7 million.

—

Total gross written premium grew 6.4% to

£551.5 million. Direct own brand gross

written premium grew 7.2% to £408.8

million.

—

Operating profit increased to £52.4 million,

primarily due to more benign weather in

2023.

Financial summary

2023

2022

£m

In-force policies (thousands)

2,444

2,501

Of which:

Direct own brands

1,706

1,732

Partnerships

738

769

Gross written premium

551.5

518.1

Of which:

Direct own brands

408.8

381.5

Partnerships

142.7

136.6

Operating profit

52.4

0.9

Profit/(loss) before other

finance costs 71.7

(30.7)

Net insurance margin

10.0%

(0.8%)

Net insurance claims ratio

62.3%

76.8%

Current-year attritional net

insurance claims ratio

59.2%

57.7%

Prior-year reserves development

ratio

(1.8%)

(3.2%)

Major weather events ratio

4.9%

22.3%

Net acquisition ratio

8.4%

6.3%

Net expense ratio

19.3%

17.7%

Normalised net insurance

margin

4.2%

11.0%

Gross written premium by

channel

28 %

Direct

60 %

Price comparison websites

12 %

Partnerships

Notes:

1. Direct own brands include in-force policies under the Direct Line, Churchill and Privilege brands.

2. See glossary on pages 261 to 264 for definitions and appendix A – Alternative Performance Measures on pages 265 to 268 for reconciliation to

financial statement line items.

Operating review continued

42 Direct Line Group Annual Report and Accounts 2023

Supporting customers during the

storms

We know extreme weather events are often

when our customers need our support the

most. In 2023 we introduced SMS

messaging to make customers in vulnerable

areas aware of approaching high-risk

weather conditions and providing a link to

enable them to register claims online where

appropriate. To help ensure people could

of colleagues available to take customer

calls and delivered assistance on the ground

with our Direct Line and Churchill vehicles

visiting affected areas to help policyholders

who were vulnerable or had damage to their

homes.

Home continued to trade well in 2023, with growth in premium

written and a low level of weather-related claims.

In-force policies and gross written premium and

associated fees

Following challenging market conditions during 2022, the

home market experienced increased pricing in 2023 with an

estimated increase in market prices of 41%. This reflected

increases in reinsurance costs alongside the inflationary

pressures on escape of water claims from the severe freeze

event in December 2022. These trends led to increased

shopping in the market and enabled the Group to deliver a 42%

increase in new business sales. The Group increased prices

during 2023 to reflect our view of claims inflation and increased

reinsurance costs, which resulted in average premium in direct

own brands increasing by 12%. Retention remained strong

across the period.

Overall gross written premium and associated fees increased by

6.4% compared to 2022, or 7.7% when adjusted to remove the

impact of remediation. In-force policies reduced by 2.3% during

the year, however own brands returned to growth in the fourth

quarter.

Underwriting

Underlying claims trends for 2023 remained elevated, albeit in

line with our expectations of mid- single digits. We experienced

an increase in escape of water severity for claims received late in

2022 around the time of the December freeze event, which

reduced prior-year reserve releases compared to 2022.

Despite a high frequency of named weather events in the year,

weather-related claims at £25 million (2022: £119 million) were

below our assumptions for the year demonstrating good

underwriting management of flood exposure. The full year 2024

weather event claims assumption is £54 million and the impact

of freeze and flood events in early 2024 is estimated at £22

million.

Net insurance margin and profit

These factors combined led to a 14.5pts improvement in the

claims ratio to 62.3%, with lower weather claims more than

offsetting the impact of reduced prior-year reserve releases.

Normalised for the impact of weather and excluding prior-year

reserve movements, the attritional claims ratio increased by 1.5

percentage points between 2022 and 2023, due to the impact

of elevated inflation and 2022 benefiting from the earn through

of premiums written prior to the introduction of the FCA's PPR

regulations.

The net insurance margin was 10.0% with operating profit of

£52.4million. Excluding the impact of remediation, the net

insurance margin was 12.1% ,and 6.3% when normalised for

weather and remediation.

The planned rollout of our new Home platform in 2024 is

intended to enable longer-term trading and product

development opportunities.

Profit/(loss) before other finance costs

Profit/(loss) before other finance costs increased from a loss of

£30.7million to profit of £71.7million due to the factors

described above alongside higher net investment income.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 43

43Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Rescue and

other personal

lines

Performance summary

—

Rescue in-force policies reduced by 10.1% and

gross written premium and associated fees

fell by 3.0%.

—

Rescue operating profit of £47.6 million and

net insurance margin of 29.0%.

—

Operating profit of £0.4 million in other

personal lines.

Financial summary

Ongoing operations

2023

2022

£m

In-force policies (thousands)

2,172

2,424

Of which:

Rescue – ongoing operations

1,965

2,185

Of which Green Flag direct

1,048

1,106

Pet

112

128

Other personal lines – ongoing

operations

111

Gross written premium and

associated fees

265.7

273.9

Of which:

Rescue – ongoing operations

137.3

143.7

Of which Green Flag Direct

85.1

88.2

Pet

66.5

70.8

Other personal lines – ongoing

operations

61.9

59.4

Operating profit

48.0

60.1

Profit before other finance costs

53.8

52.7

Net insurance margin

15.6%

19.8%

Net insurance claims ratio

57.0%

52.3%

Current-year attritional net

insurance claims ratio

56.6%

53.9%

Prior-year reserves development

ratio

0.4%

(1.6%)

Net acquisition ratio

4.6%

7.9%

Net expense ratio

22.8%

20.0%

Gross written premium and

associated fees by product

52 %

Rescue

25 %

Pet

23 %

Other personal lines

Notes:

1. Ongoing operations – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures on pages 265 to 268 for

reconciliation to financial statement line items.

2. See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures on pages 265 to 268 for reconciliation to

financial statement line items.

Operating review continued

44 Direct Line Group Annual Report and Accounts 2023

Green Flag: delivering customer

satisfaction

Green Flag was once again ranked as one of

the top 20 brands for customer service in

the UK, in the Institute of Customer Service

Customer Satisfaction Index, reflecting how

the brand continues to develop and

enhance its offer to meet the evolving needs

of the modern motorist. We rolled out a new

fleet of branded patrol vehicles in 2023 and

focused on broadening the availability of

roadside products, such as batteries and

tyres, to help get customers moving more

quickly.

Overall Rescue and other personal lines delivered strong

margins with a net insurance margin of 15.6%, providing £48.0

million diversified operating profit for the Group. Gross written

premium was broadly flat during the year, with modest

reductions in Rescue and Pet, partially offset by growth in our

medium to high net worth business, UK Select. Operating profit

of £48.0 million was lower than the prior year primarily due to

higher claims costs and prior year strengthening in other

personal lines.

Rescue

Rescue’s gross written premium from ongoing operations was

4.5% lower in 2023 with in-force policies reducing by 10.1%. The

largest fall was in Linked where Rescue is sold alongside a Motor

policy.

Rescue experienced increases in claims frequency and modest

claims inflation which was mitigated by self-help actions taken

across its managed network. Green Flag increased its prices

towards the end of 2023 which delivered additional premium

with minimal impact on sales or retention.

Overall, Rescue's ongoing operations delivered operating profit

of £47.6 million in 2023 (2022: £53.7 million), with an attractive

net insurance margin of 29.0%. A fleet of Green Flag branded

patrol vehicles is being rolled out following a successful pilot.

This aims to help mitigate the impact of claims inflation and

offer new revenue opportunities through vehicle related sales at

the roadside.

Other personal lines

Other personal lines is made up of Pet, Travel, Creditor and

Select, our insurance targeted at mid- to high-net worth

customers. Pet is the largest product within Other personal lines.

Pet gross written premiums fell 1.4% as in-force policies

reduced by 14.4%. Overall Other personal lines made an

operating profit of £0.4 million in 2023.

Profit before other finance costs

Profit before other finance costs increased by £1.1 million to

£53.8 million due the factors set out above.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 45

45Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Commercial

Performance summary

—

In force policies grew by 1.4%.

—

Gross written premiums grew by 10.1%.

—

Operating profit increased to £29.7 million

with a net insurance margin of 13.1%.

Financial summary

2023

2022

£m

In-force policies

(thousands)

645

636

Gross written premium

241.0

218.9

Operating profit/(loss)

29.7

(2.6)

Profit/(loss) before other finance

costs 34.4

(10.1)

Net insurance margin

13.1%

(2.7%)

Net insurance claims ratio

57.9%

66.9%

Current-year attritional net

insurance claims ratio

49.8%

69.3%

Prior-year reserves development

ratio

7.1%

(5.0%)

Major weather events ratio

1.0%

2.6%

Net acquisition ratio

14.1%

19.0%

Net expense ratio

14.9%

16.8%

Normalised net insurance

margin

11.4%

(2.4%)

Gross written premium by

channel

82%

Direct

18%

Indirect

Notes:

1. Commercial includes in-force policies for Direct Line for Business and Churchill brands.

2. See glossary on pages 261 to 264 for definitions and appendix A – Alternative Performance Measures on pages 265 to 268 for reconciliation to

financial statement line items.

Operating review continued

46 Direct Line Group Annual Report and Accounts 2023

Assisting landlords in an

emergency

An increasing number of landlords are

choosing to insure with us. Among the

products we offer is Landlord Emergency

cover, a callout service within four hours for

a number of insured emergencies, including

failure of electricity or heating. This year we

have reduced average wait times for those

using this service, to ensure tenants are

supported when they need emergency

assistance.

Following the sale announced in 2023, the brokered

commercial business is reported as being in run-off. Results for

prior periods have been restated.

Commercial continued to trade well in 2023, maintaining its

premium growth whilst delivering strong margins. Commercial

sells SME cover under the Direct Line for business and Churchill

brands, both direct to customer and through price comparison

websites. Landlord insurance is the largest product by premium

followed by Van.

In-force policies and gross written premium and

associated fees

Through a combination of both policy count growth and

premium rate increases, Commercial delivered policy growth of

1.4% and gross written premium growth of 10.1% during 2023.

Both Direct Line and Churchill delivered strong premium

growth across all products in 2023, Direct Line grew policy count

by 1.3% and premiums by 7.0% while Churchill delivered 23.7%

premium growth and policy count was stable.

In Landlord, whilst new business volumes were lower than 2022,

it was a positive market backdrop, against which the Group was

able to expand its footprint in multi property policies, delivering

gross written premium growth of 14.5% and policy count

growth of 3.4%.

In Van, in response to elevated inflation, average premiums

increased across the market during 2023, driving an increase in

new business sales and reductions in market retention rates. The

Group focused on maintaining margins, with significant rate

increases delivering gross written premium growth of 5.1%,

alongside a reduction in policy count of 6.0%.

Underwriting

Commercial's claims ratio improved by 9.0pts to 57.9% during

2023. Alongside relatively benign weather conditions, the focus

on maintaining margins more than offset a £15 million prior

year reserve strengthen, predominantly driven by the impact of

elevated claims inflation in Van.

Net insurance margin and profit/(loss)

Overall, these factors combined led to a net insurance margin of

13.1% (2022 minus 2.7%) with operating profit of £29.7 million.

Normalised for weather the net insurance margin was 11.4%.

Profit/(loss) before other finance costs

Profit/(loss) before other finance costs increased from a loss of

£10.1 million to profit of £34.4 million due to the factors

described above alongside higher net investment income.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 47

47Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Brokered

commercial

business and

run-off

partnerships

The Group's ongoing operations result

excludes the results of the brokered

commercial business, that it sold to RSA

Insurance Limited in 2023, and the Rescue

and other personal lines partnerships that

the Group first excluded from its 2022

results. Run-off partnerships comprises

personal Rescue and Travel packed bank

account business.

Brokered commercial business

2023

2022

£m

In-force policies (thousands)

286

277

Gross written premium and

associated fees

665.8

530.4

Operating profit 27.6

62.9

Net insurance margin

3.1%

10.6%

Net insurance claims ratio

49.4%

45.5%

Net acquisition ratio

26.6%

26.4%

Net expense ratio

20.9%

17.5%

On 6 September 2023 we announced the sale of our brokered

commercial business and we are presenting the results for this

business as a separate segment.

The transaction involved the sale of the Group’s brokered

commercial business and associated partnerships through a

combination of reinsurance and a form of renewal rights

transfer. As a result, with effect from 1 October 2023 (the risk

transfer date), new business moved to RSA. The Group retains

the back book of policies and will manage these policies until

they run off. The formal separation and operational transfers are

expected to start in the first quarter of 2024, with subsequent

transfers of outstanding elements of the overall brokered

commercial insurance business to follow.

2023 results

Gross written premium and associated fees were £665.8 million

(2022: £530.4 million). The operating profit relating to the

brokered commercial business was £27.6 million (2022: £62.9

million).

Note:

1. See glossary on pages 261 to 264 and Appendix A – Alternative

performance measures on pages 265 to 268 for reconciliation

tofinancial statement line items.

Run-off partners

2023

2022

£m

In-force policies (thousands)

2,224

2,188

Gross written premium and

associated fees

150.1

124.4

Operating loss (29.5)

(10.8)

Net insurance margin

(19.6%)

(8.7%)

Net insurance claims ratio

102.9%

89.7%

Net acquisition ratio

1.5%

1.8%

Net expense ratio

15.2%

17.2%

In our FY 2022 results we disclosed that we planned to reduce

our exposure to packaged bank accounts where they do not

meet target levels of return and are no longer required for

operational scale, in order to improve our capital efficiency, and

we are presenting the results for this business as a separate

segment.

Rescue packaged accounts

Our contract with NatWest Group ended in December 2022 and

was fully run off by the end of 2023. This partnership

represented around 1.1 million in-force policies.

Travel packaged accounts

Our partnerships with NatWest Group and Nationwide Building

Society are due to expire in 2024. Together, these travel

partnerships represent around 2.2 million in-force policies.

On 31 January 2024 our contract with NatWest ended and all

business was transferred to the new provider. The Nationwide

contract will end on 30 April 2024 although policy upgrades will

continue to be underwritten by the Group until 30 April 2025.

2023 results

Gross written premium and associated fees were £150.1million

(2022: £124.4million). The operating loss relating to run-off

partnerships in 2023 was £29.5million (2022: £10.8million).

Operating review continued

48 Direct Line Group Annual Report and Accounts 2023

This non-financial and sustainability information statement highlights information necessary for an understanding of the Company’s development,

performance, position and impact of its activity, information relating to environmental, employee, social, respect for human rights, anti-corruption

and anti-bribery matters.

Where possible, the following table states where additional information can be found that supports the requirements of sections 414CA and 414CB

of the Companies Act 2006.

Reporting

Requirement Annual Report Page

Relevant policies, statements and codes available

at directlinegroup.co.uk

Environment Sustainability 50 to 69 Environment Statement

Task Force on Climate-related Financial

Disclosures

70 to 85

Streamlined Energy and Carbon Reporting 85

Anti-bribery and anti-

corruption

Financial crime and anti-bribery and corruption 124 Prevention of Financial Crime Policy

Code of Business Conduct

Ethical Code for Suppliers 67 Ethical Code for Suppliers

Whistleblowing Policy

Employees People 54 to 57 Flexible Working Policy

Health & Safety Policy

Business model Brilliant for customers every day 4 & 51 to 53 Prompt Payment Code

Strategy 22 to 23 Responsible Investment Policy

Business model 18 to 19 Underwriting Standards

Operating review 40 to 48 Tax Policy

Social and

community matters

Market overview 20 to 21 Board Diversity Policy

Society 58 to 60 Data Privacy Policy

Community fund 58 to 60 Corporate Website Privacy Notice

Human rights Human rights and modern slavery 67 & 128 Human Rights, Diversity and Inclusion Policy

Modern Slavery Statement

KPIs Our key performance indicators 24 to 25

Risk

management

Risk management 86 to 92

Principal risks and uncertainties 88 to 90

Emerging risks 91 to 92

The table below has been produced to comply with the requirements of section 414CB of the Companies Act 2006, as amended by the Companies

(Strategic Report) (Climate-related Financial Disclosures) Regulations 2022. The information listed is incorporated by cross-reference.

Reporting requirement Page Further information

(a) a description of the company's governance arrangements in relation to assessing and

managing climate-related risks and opportunities

70 to 71 Refer to Governance

(b) a description of how the company identifies, assesses, and manages climate-related risks

and opportunities

80 to 81

70 to 85

Refer to Risk Management

Refer to Management's role

Additional information available

throughout TCFD report

risks are integrated into the company’s overall risk management process

80 to 81 Refer to Risk Management

(d) a description of:

– (i) the principal climate-related risks and opportunities arising in connection with the

company’s operations; and

– (ii) the time periods by reference to which those risks and opportunities are assessed

77 Refer to table within Our

strategic response

(e) a description of the actual and potential impacts of the principal climate-related risks and

opportunities on the company’s business model and strategy

77 to 81 Refer to Our strategic response

(f) an analysis of the resilience of the company’s business model and strategy, taking into

account consideration of different climate-related scenarios

73 to 76 Refer to Scenario analysis

(g) a description of the targets used by the company to manage climate-related risks and to

realise climate-related opportunities and of performance against those targets

78, 79, 83, 84

and 85

Refer to Science-Based Targets

(h) the key performance indicators used to assess progress against targets used to manage

climate-related risks and realise climate-related opportunities and a description of the

calculations on which those key performance indicators are based

81 to 85 Refer to Metrics and Targets

Strategic Report / Governance / Financial statements

Non-financial and sustainability

information statement

Direct Line Group Annual Report and Accounts 2023 49

49Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Our vision

To create a world where insurance

is personal, inclusive and a force for good

Customers People Society Planet Governance

Earn our

customers’trust

bydemonstrating

how we are acting

intheir interests

Encourage a culture

that celebrates

difference and

empowers people

sothat they

canthrive

Use our expertise

toimprove outcomes

for society and

thecommunities

weserve

Protect our business

from the impact

ofclimate change

and give back more

to the planet than

wetake out

Look to the long term

for our stakeholders,

build a reputation for

high standards of

business conduct

anddevelop a

sustainable business

2023 actions

– Rolled out enhanced

vulnerable customer

training

– Refreshed how we

review customer

conduct

– Enhanced our

customer experience

design process

– Launched a new

performance

framework

– Set new gender

andethnic

diversitytargets

– Rolled out

Community Fund

outreach programme

– Launched new

partnership with

UKYouth

– Developed our

climate-related risk

management

roadmap

– Rolled out our supply

chain sustainability

programme

– Conducted new

materiality research

and analysis

– Reviewed Board

Committees’ Terms

ofReference for

sustainability and

climate

Near-term priorities

– Evolve and enhance

our digital servicing

options for

customers

– Review and update

our electric vehicle

strategy

– Develop and

embednew learning

opportunities

– Define our approach

to culture, leadership

and future prospects

– Review our

approach,

programmes

andpartnerships

– Integrate our

community

approach to build

future talent

pipelines

– Review and align

with new SBTi

standard for

financial institutions

– Build out our climate

transition plan

– Complete materiality

analysis and use

findings to update

our strategy

– Enhance overall

governance of

sustainability and

climate across

thebusiness

Our five-pillar sustainability strategy was developed and has evolved to support our vision of creating a world where

insurance is personal, inclusive and a force for good.

Each pillar is defined through an overarching ambition that together drive us to deliver a positive impact for our

stakeholders and strengthen our own business by taking action on priority environmental, social and governance issues.

Over the last year, we have progressed all areas of our strategy, from cost of living support for our customers and tools to

drive a high performance and inclusive culture for our people, to new social mobility partnerships and programmes in our

local communities and the continued decarbonisation of our business as we report performance against our Science-Based

Targets for the first time.

Building a sustainable

future

50 Direct Line Group Annual Report and Accounts 2023

Our mission is to be brilliant

for customers every day,

andwe want to be known for

excellence through all stages

of the customer journey.

We are focused on meeting the needs

of all our customers, aiming to provide

them with the products they want,

while delivering an exceptional service.

Over the year, we’ve continued to

enhance our customer approach

following the introduction of the

Consumer Duty, recognising ongoing

cost of living challenges, launched our

Direct Line Essentials product and

improved our capability to provide

easy digital-first journeys.

The Consumer Duty

In July 2023, Consumer Duty came into effect, introducing

significant new Financial Conduct Authority (“FCA”) rules

onconsumer protection for all financial services firms.

To support and strengthen our approach to be brilliant for

customers every day, we:

– provided Consumer Duty training to all colleagues, including

those interacting with customers every day.

– completed a review of our key customer journeys and

processes, making numerous improvements to help and

support our customers.

– engaged with key suppliers, producing a supplier-specific

guidance pack to help them understand the expectations

around customer outcomes and how we will support them

to achieve this.

– launched a customer closeness programme for our Senior

Leadership community to go ‘back to the floor’ and walk in

our customers’ shoes.

– introduced new product forums with specific accountability

for reviewing customer outcomes and reporting against the

four main outcomes of the Consumer Duty.

Customers

“The Group has come together around

Consumer Duty to put the customer

at the heart of everything we do.”

Lorraine Price, Head of Product

LifecycleManagement

51Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Supporting our customers

Direct Line Essentials and cost of living support

Building on the success of last year’s Churchill Essentials

product, we launched our Direct Line Essentials product this

year for our Motor customers, expanding our product range

and giving those who need it greater choice during a time

when many are facing cost of living challenges. The Direct Line

Essentials product is available for customers looking for an

entry-level comprehensive car insurance policy.

In addition to this, we continue to assist those facing financial

difficulty, asking customers to discuss with us their needs

sowecan look to offer the most appropriate support

whichmay include reviewing levels of cover or considering

alternativeproducts.

Enhancing our vulnerable customer approach

We continued to build on our vulnerable customer training

programme and during 2023 over 4,000 of our employees

received enhanced refresher training. In addition, further

reference tools were introduced to enable employees

to support vulnerable customers and those experiencing

financial difficulty.

To improve customer communications, we also continued

our partnership with Plain Numbers, an organisation which

aims to change the way numbers are presented to improve

comprehension, by training more colleagues as practitioners

this year. We were pleased to be recognised for our efforts,

receiving accreditation and becoming one of just ten

organisations to achieve this accolade.

Additionally, we have worked with the disability charity,

Scope, to review our websites and make changes to the way

we present information to improve accessibility and partnered

with And or If Ltd, a specialist agency who find creative

ways to present customer communications to refresh our

policy documents.

Focused on customer needs

Motability onboarding

We welcomed over 700,000 new customers as part of our

partnership with Motability Operations in September last year

which will help us to gain further insight into their fleet of

modern vehicles. The more insight we have the better able we

are to fix customers’ cars so customers will benefit.

Planning for this partnership over the last few years, we have

worked on mapping out customer journeys and built new

technology platforms and data flows. Since the integration,

ourteams have handled over 110,000 calls from customers,

replied to around 39,000 web chats and registered around

80,000 claims.

Darwin milestone

Our Darwin motor brand continues to grow since its launch

in 2019 and reached the significant milestone of welcoming

its 250,000

customer this year. Utilising new technology

andmachine learning models to offer competitive prices to

customers on Price Comparison Websites (“PCWs”), Darwin

isone of the highest-rated motor insurance brands in the

UKon Trustpilot.

Customer user research suite

To enhance our understanding of customer wants and

needs, we’ve opened a new user research suite in our

Riverbank House office in London, providing a relaxed

and informal space where we can gain customer

feedback for future products and teams can test many

experiences from digital journeys, websites, apps, to

our latest marketing campaign and more.

Making electric easy

Our electric vehicle (“EV”) strategy is focused on providing

comprehensive EV insurance combined with additional

non-insurance benefits with the overall aim of supporting our

customers to make sustainable choices by making the switch

to electric easy.

We carefully consider our EV insurance products to reflect the

specific needs of EV owners, giving our customers and those

considering purchasing an EV for the first time peace of mind.

For example, our policies include battery cover, home charger

and cable cover, specialist EV repairs completed by qualified

EVtechnicians and liability cover to others if they’re injured

bycables which are attached to an EV.

During 2023, we have also continued to enhance our added-

value proposition through the Direct Line electric vehicle

bundle that we first introduced in 2021 in partnership with

Zoom EV to provide essential, non-insurance services to

customers to help them run their EV. This is offered for free to

new and existing Direct Line motor insurance customers and

includes benefits such as access to discounted public charging,

discounts off home charging devices, EV home energy benefits,

community charging, discounted parking, and access to a

dedicated EV expert helpline – with the services provided by

established operators in the market.

The proposition has proved popular with our EV customers; to

date, 45% have activated their bundle with over 70% of these

engaging and interacting with atleast one of our end service

providers. In 2024, we will continue to expand on the benefits

and partnerships available, offering accessible solutions for our

customers to the commonly cited barriers to EV ownership.

52 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

156

158

142

115

155

Net Promoter Score – Direct Line brand

Launch of Caha! app

This year, after undertaking extensive consumer

research to find out the biggest issues for motorists

welaunched a new app, Caha! to bring together all

aspects of car management and ownership on one

platform. Aiming to meet more customer needs, the

app allows users to find parking spots, fuel stations,

aswell as holding any car-related documents such as

insurance policies, V5 documents and MOT certificates.

Motor Claims Hub

Knowing that many of our customers prefer to register their

claims online, we have focused on enhancing our capability

toprovide end-to-end digital claims journeys, launching a

newMotor Claims Hub in 2023. The Hub gives our Churchill

customers the opportunity to report both third-party and single

vehicle claims, allowing them the flexibility to inform us of an

accident at any time of day from their phone, tablet or laptop,

all while getting real-time claim decisions. Future plans for the

Hub include extending this capability to Motability, Direct Line

and Privilege customers, as well as introducing additional

features for customers to conveniently track their claims online.

Recognition

Brand awards

– Direct Line and Churchill received Which? Recommended

Supplier Status, recognised for outstanding cover and

services for Jan – Dec 2023.

– Green Flag was again ranked as the top rescue service

provider by the UK Institute of Customer Service in 2023.

– Darwin is one of the highest-rated mainstream motor

insurers in the UK with 80% of the 20,000 reviews rating

thebrand five stars.

Net Promoter Score (“NPS”)

Our aim is always to deliver good customer outcomes and

maintain a strong NPS. In 2023 we experienced a decrease

inour Direct Line NPS which was driven mainly by rising

premium prices in a challenging economic environment and

claims delays impacted by supply chain challenges. These

challenges have had an impact across our industry. We have

taken action to mitigate these challenges and continue to be

fully focused on delivering good customer outcomes in 2024.

Behind the scenes, we continue to build our own capabilities

and expertise to support the growth and development of our

EV strategy. This includes the training and recruitment of

EV-accredited technicians in our accident repair centres

(withover 170 across our sites and a minimum of two on each

site), developing strategic supply chain partnerships to support

EV repairs, maintaining a presence at key industry events to

facilitate collaboration and partnership, as well as building

internal awareness around all things EV and supporting our

employees to make the transition.

During 2024, our EV strategy team will be reviewing and

updating our approach to ensure it remains fit for purpose

and continues to reflect the needs of our customers in this

crucial stage of the EV transition.

Delivering digital-first journeys

By Miles acquisition

Enhancing our capability to provide easy digital-first journeys

for our customers, we acquired By Miles, a managing general

agent, which has sold over 100,000 policies since its launch in

2018 and has around 50,000 customers. By Miles proprietary

cloud-based platform allows customers to pay only for the

miles they drive, which members can manage through a

smartphone app.

53Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Focused on performance

Our new performance framework means all colleagues can be

clear on what high-performance looks like, what they need to

deliver and how to deliver it by demonstrating our core values.

We have applied a strong diversity and inclusion lens to our

approach – helping to protect against bias. This has provided

colleagues with clarity, fairness and transparency to help

themsucceed, progress and take ownership of creating

theirown future.

Focused on Values

This year we have evolved our Values to represent the best of

the Group, and to guide the way we work together to perform

as a business and deliver for our customers. Our Values help us

make good decisions, support each other in the right way and

draw on diverse perspectives.

In November we recognised and celebrated those colleagues

who had gone above and beyond in exemplifying our Group

Values with our new Group Annual Awards.

More information on our Group Values can be found on page22.

Building skills and capabilities

At the Group we’re serious about ensuring our colleagues are

equipped not just for the job they are doing today but also

theskillsets they and the business will need in the future.

Highlights of learning and development in 2023 were:

– LinkedIn Learning: We partnered with LinkedIn Learning

toconnect colleagues with learning opportunities, helping

them to develop critical skills and grow their careers.

Sinceitslaunch in July, over 2,100 hours of learning have

beenconsumed.

– Ignite Programmes: Launched in 2022 we continue to evolve

our programmes to develop the future skills needed to serve

our increasingly tech-savvy customers. 394 colleagues are

currently on a diverse range of apprenticeships, with 33%

focused on vehicle repairs and 43% on data and technology.

At Direct Line Group

we’reateam of talented

individuals all working

together to be brilliant for

customers every day.

In 2023 we have been focused on

putting in place the enabling blocks

tosupport and encourage colleagues

tobuild on their skills, capabilities

andexperience to do the best work

oftheircareer and make their full

contribution to embedding a high-

performanceculture.

People

Win together Be yourself

Own it

Speak up

“It’s fantastic to have 400 colleagues

on Ignite apprenticeships and we

are really proud of the 44 who

successfully completed their

qualification in 2023.”

Stephanie Bishop, Emerging Careers Lead

54 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

Riverbank House – a great place to work

for all our people

In August we opened Riverbank House – our new, fit

for purpose and accessible by design office in London.

It provides the environment we need for how we work

now with lots of spaces for collaboration, creativity

andinteraction. The new location is in easy reach

bymultiple public transport routes, broadening the

geographical area from which to attract top talent.

Working with external specialists and with extensive

input from our Diversity Network Alliance employee

networks, the building has been designed to meet the

needs of our colleagues. Spaces include: a quiet room,

multi-faith prayer room, nursing room and gender

neutral toilet and shower facilities, alongside gender

specific facilities. Office features include lighting and

temperature controls, accessible fixtures and fittings,

tactile and braille signage, with assistive hearing

technology available. This inclusivity and accessibility

lens was also applied to our new Motability office in

Liverpool, creating a bright, modern and accessible

space where colleagues can work at their best.

will be £23,400 from 1 April 2024, for a 37.5hr working week,

(excluding apprentices in DLG Auto Services who receive

different rates of pay).

A diverse and inclusive business

We know that to succeed as a high performing business we

need our workforce to be truly representative of our customers

and society. Diverse perspectives, ideas and opinions lead to

more insight, innovation and better decision making. And we

know that being diverse is not enough, we also need to be

inclusive, so everyone feels free to be themselves and succeed

in their careers.

We’ve received some great external recognition; the Group has

featured on the Top 50 UK Inclusive Employer’s List for the last

three years running and we have been placed in the Social

Mobility Index for the first time this year. However, we’ve

continued to build on the strong foundations we have in place,

addressing under-representation at the senior levels of our

business, whilstfocusing on improving inclusion through key

programmes of work. We are:

– holding Senior Leadership to account for the delivery of

representation targets, with progress towards these new

targets being a factor of consideration within the annual

bonus outcome discussions.

– using inclusive hiring principles, which include the use

of language decoders for job adverts, diverse shortlisting

standards, anonymised CVs and panel-based interviewing.

– starting to build a stronger pipeline of diverse talent,

especially in areas where we need skills for the future.

Thisiscomplemented by additional interventions such

aswork experience, mentoring and skills building

programmes that target these communities for our Ignite

apprenticeship initiatives.

– learning from our Diversity Network Alliance (“DNA”) which

comprises of seven employee networks which are a key driver

of diversity and inclusion across our business. They focus on

the following areas: Belief, Life (families and carers), LGBTQ+,

Neurodiversity and Disability, REACH (race, ethnicity and

cultural heritage), Social Mobility and Thrive (gender).

Increasing diverse representation in Senior

Leadership

Increasing the diversity of Senior Leadership is a continuing

focus for the Group, in particular the representation of women

and ethnic minority and Black colleagues. Our progress is

ongoing, but we are proud of the progress we have made.

Thisyear we have been investing in coaching and targeted

development programmes for our high potential women,

ethnic minority and Black talent to support their progression

into senior roles.

During 2023, we evolved our Senior Leadership diversity

representation targets in order to better align with the

approach taken by the FTSE Women Leaders Review, Women

in Finance review and Parker Review. Whereas previously we

set senior level diversity representation targets (including our

2023 targets) based on our internal role grading structure,

going forward we define Senior Leadership in this context as

the Executive Committee and their direct reports, excluding

direct reports in support or administrative roles.

With this refined definition, we have challenged ourselves

bysetting longer-term stretching targets to hold us to account

for delivering change.

Rewarding colleagues

In January 2023 all colleagues (excluding Executive Directors

and senior management) received a 5% pay rise, this was

threemonths earlier than usual in recognition of cost of living

pressures. This meant our minimum salary rose to £21,840 p.a.

(based on a 37.5hr working week). This was set at 2.8% above

the Living Wage Foundation’s National Real Living Wage

(assetin September 2022 for roles outside of London) and

wasalso 7.5% above the Government’s statutory National

LivingWage (effective 1 April 2023 for those aged 23 and over).

To provide additional support for colleagues on lower salaries,

inFebruary 2023 a one-off cost-of-living payment of £1,000 was

announced for colleagues earning less than £40,000.

In March 2024, we announced that all eligible employees

(excluding Executive Directors and senior management)

willreceive a salary increase of 5% effective from 1 April 2024.

We remain firm to our commitment to lift the pay of our lowest

earners and also announced that all colleagues will meet the

Living Wage Foundation’s National Real Living Wage (as set

inNovember 2023) from 1 April 2024. This means that some

employees will see their salary rise by around 7% on a full-time

basis (for a 37.5hr working week), and the DLG minimum salary

55Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Notes:

1. 2023 figures refer to definition of Senior Leadership as Executive

Committee and direct reports, excluding direct reports in support

oradministrative roles. 2021 and 2022 figures refer to a previous

definition, used for 2023 annual targets, whereby senior roles are

based on our internal role grading structure, which covered a larger

population including ExCo-2.

Gender diversity of our Board

As of 31 December 2023

Gender diversity of all employees

As of 31 December 2023

25.0%

Women (3)

75.0% Men (9)

45.1%

Women (4,530)

54.9% Men (5,520)

Excludes an estimated 0.4% of colleagues who identify

asnon-binary, gender-fluid or other gender due to data

reporting constraints

Ethnicity of all employees

As of 31 December 2023

Gender diversity of Senior Leadership

As of 31 December 2023

Gender diversity of Senior Leadership defined as Executive

Committee and direct reports, excluding those in support or

administrative roles

For more information on leadership gender diversity,

including gender diversity of the Board seepages 101

and112to 113.

31.3%

Women (15)

68.7% Men (33)

11.2% Asian (1,122)

2.9% Black (287)

1.8% Mixed (178)

1.7% Other (174)

72.1% White (7,248)

6.1% Prefer not say (613)

4.2% Not speciﬁed (428)

29.3%

42.9%

37.8%

31.3%

25.0%

ExCo-1

ExCo

Board

ExCo-2

Senior

Leadership

Ethnic minority representation in

Senior Leadership

Black representation in Senior Leadership

11.7%

12.1%

12.5%

2021

2022

2023

0.8%

1.5%

0.0%

2021

2022

2023

Senior Leadership ethnic minority and Black

representation

Although we missed our senior role ethnic minority and Black

representation 2023 annual targets (being 14.2% and 2.6%

respectively), we recognise that progress is not always linear,

and our representation remains strong compared to industry

peers. We are strengthening our Senior Leadership succession

pool by investing in developing ethnic minority successors

through engaging with external programmes such as Solaris

and Involve Emerging Leaders.

We have set new targets to achieve 16% ethnic minority and

4%Black representation in Senior Leadership roles by the

endof 2027.

Senior Leadership female representation

Despite our long-term focus on investing in women, we missed

our 2023 annual target of 42.8% of women in senior roles (set

with a definition based on our internal role grading structure,

which covered a larger population including ExCo-2).

Looking to the future, we have set a new stretching target of

40% female representation in Senior Leadership by the end of

2027 (based on the new definition outlined above). At the end

of 2023, women made up:

56 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

Notes:

1. The gender pay gap shows the difference in average pay between women and men. This is different to equal pay, which is women and men

receiving the same pay for work of equal value. Our reporting is based on a snapshot date of 5 April 2023.

2. The ethnicity pay gap shows the difference in average pay between ethnic minorities, Asian, Black, Mixed, Other and White colleagues.

Thisisdifferent to equal pay that is ethnic minority and White colleagues receiving the same pay for work of equal value. Our reporting is based

ona snapshot date of 5 April 2023 and 91% of colleagues that have shared their ethnicity with us, this is an increase of 4% compared to last year.

Gender pay gap

Last year our mean gap widened by 1.8 percentage points

andour median gap by 3.1 percentage points. Our pay gap

continues to be low compared with the broader financial

services sector, but we want to see that gap close. We are

comfortable that we do not pay people differently because of

their gender and believe that the way to reduce the gap in the

medium- to long-term is to continue with our work to address

the disproportionate representation of women at certain levels

and in certain areas of our business. For example, a particular

driver of the pay gap movement we have seen is a market-

driven movement in salaries in our accident repair centres,

which is an area heavily resourced by men.

Our 2023 gender pay gap showed:

Pay gap

Mean Median

2023 21.1% 23.4%

2022 19.3% 20.3%

2021 16.1% 14.2%

Bonus gap

Mean Median

2023 53.8% 43.8%

2022 46.7% 45.4%

2021 45.9% 34.0%

% of employees receiving bonus

Men Women

2023 84.2% 87.3%

2022 83.1% 82.6%

2021 72.7% 60.6%

Ethnicity pay gap

This is the third year that we are voluntarily disclosing our

ethnicity pay gap. This year, aligned with new government

guidance, we have changed the way we report this data to

focus on more disaggregated ethnic minority groups.

As with the gender pay gap, we are comfortable that we do not

pay people differently because of their ethnicity and believe

that the way to reduce the gap in the medium- to long-term

isto continue with our work to address the disproportionate

representation of ethnic minority and black colleagues at

certain levels and in certain areas of our business. Our

disclosure rate has increased since last year. We are proud that

91% of colleagues are disclosing this information. However,

changes in disclosure rate could change our gap, so as we

continue to encourage colleagues to share their ethnicity with

us, the numbers we report in the future may change.

It is important to note that when pay gap data is based on a

smaller number of individuals, it can vary significantly over time

due to colleagues’ changes during the year. Our pay gap for all

ethnic minorities remains low and has narrowed in 2023.

Ethnicity pay gap

2023 2022

Mean Median Mean Median

Ethnic minority (overall) 1.0% 12.7% 3.1% 9.7%

Asian -2.7% 14.1% 1.1% 16.1%

Black 12.2% 17.8% 11.8% 11.0%

Mixed 3.2% 8.2% 1.0% 4.9%

Other 2.9% -0.2% 2.9% 6.1%

Ethnicity bonus gap

2023 2022

Mean Median Mean Median

Ethnic minority (overall) 28.7% 20.4% 40.9% 19.1%

Asian 29.2% 20.5% 33.6% 17.8%

Black 40.6% 24.5% 59.7% 26.4%

Mixed 22.3% 15.3% 45.1% 22.5%

Other 16.9% 10.1% 45.6% 8.3%

% of employees receiving bonus:

2023 2022

White 88.0% 84.6%

Ethnic minority (overall) 78.5% 74.6%

Asian 77.7% 71.5%

Black 74.1% 67.6%

Mixed 78.6% 77.0%

Other 89.6% 91.2%

57Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Society

Sustainability continued

Building on the success of our

Community Fund programme

tohelp equip students with key

career skills, we launched the

second phase of activity in 2023

supporting social mobility by

focusing on breaking down

barriers further and engaging

with harder to reach groups.

Progressing towards our ambition

to build a more inclusive and

equitable Britain, we developed

our approach to include youth

centre engagement, business

simulations and outreach with

special educational needs and

disability (“SEND”) students.

“It was a privilege to show

neurodiverse students how maths

anddata is used within insurance.”

Fiifi Arthur, Data Scientist

Insurance business simulations

Youth centre engagement

Working with SEND students

Introducing immersive experiences with a competition element where

students can learn about different insurance roles and skills.

Partnering with UK Youth, colleagues are visiting youth centres

toengage with young people who face more complex barriers

toaccessing the workplace.

Working closely with special

education providers, Majorie

McClure and TheCourtyard

schools, to create tailored

programmes to help students

gain insight into Insurance

and a professional work

environment.

58 Direct Line Group Annual Report and Accounts 2023

We were delighted to be recognised for our efforts to

support social mobility, ranking on the Social Mobility

Foundation’s Employer Index for the first time.

Wewere assessed on various criteria for our work

across the organisation including our recruitment

approach, internal progression opportunities, our

engagement with young people via the Community

Fund and more.

Looking ahead to 2024, we want to build on the

foundations we have created by connecting students

with potential job opportunities to broaden access to

careers in financial services.

From 2022-2023

600+

colleague volunteers

Work experience

Mentoring

Insight events

Providing in-person and virtual opportunities for students

withafocus on employability and careers skills.

Supporting young people on a one-to-one basis with career options,

raising aspirations, and helping to build professional networks.

Running insight events that enable students to develop networking

skills and learn about different career pathways in insurance.

2,200+

total volunteering hours

75%

of colleagues feel that

wedoagood job of

supportingcommunities

9,700

young people’s employability

positivelyimpacted

84%

were eligible for free

schoolmeals

83%

were from an ethnic

minoritybackground

59Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Aligned with our vision to bea force for good, we aim to have

apositive impact on the communities we serve and society

asawhole.

We know that our stakeholders want usto contribute positively

and we are working towards this ambition with ourcharity

support, volunteering and Community Fund activity.

In 2023, we kicked off the second phase of our Community

Fund, focused on outreach and enhancing our approach to

working with young people who face more complex barriers

toemployment as we aim to broaden access to careers in

financial services. This included the launch of a new partnership

with UK Youth to complement our existing partnerships.

Further information on our Community Fund activity can be

found on pages 58 to 59. In 2024, we will focus on creating

further synergies between our Community Fund outreach

programmes and our emerging careers strategy to generate

talent pipelines for critical business areas.

We were additionally delighted to rank on the Social Mobility

Employer Index for the first time in 2023, recognised for

variousinitiatives across the organisation as well as our

Community Fund.

Charity support

We have also continued to help those in need by providing

donations to various charitable causes in the UK, as well as

several humanitarian appeals globally during 2023, including:

– Sponsoring the NSPCC’s Great Chefs dinner, which raised

close to £300,000 to help vulnerable children around the UK.

– £100,000 going out to local causes from our colleague-led

Community and Social Committees (“CASCs”).

– £90,000 distributed from our Diversity Network Alliance

toavariety of organisations supporting their aims.

– £70,000 to various humanitarian and Disasters Emergency

Committee campaigns across the world.

Volunteering

A key part of our social sustainability strategy, that supports our

Community Fund outreach and our ambition to have a positive

impact on the communities we serve, involves employee

volunteering through our One Day programme. In 2023,

hundreds of colleagues took part in various volunteering

activities ranging from mentoring young people to hands-on

projects improving spaces in our local communities and we

look forward to continuing to drive engagement in 2024 with

the launch of a new volunteering platform.

Our 2023 tax

contribution

In accordance with

applicable tax laws and

regulations and our

responsibilities both as a

contributor of corporate

taxes and as a collector of

taxes on behalf of HMRC,

in 2023 the Group’s net

tax contribution was

£936.8 million, which

includes the Group’s

direct and indirect

taxation.

Our

customers

IPT £439.1m

Our suppliers VAT £17.0m

Our people PAYE NIC £102.5m

Our

operations

Other taxes

including

business rates

£5.2m

Irrecoverable VAT £304.0m

Employers NIC £44.7m

Our

performance

Corporation Tax £24.3m

HM Treasury

£936.8m

Net tax contribution

Society

– Public services

– Healthcare

– Infrastructure

– Welfare

– Education

– Defence

Note:

1. The Group’s total tax contribution in 2023, including direct and indirect tax contributions.

60 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

Planet

Aligned with our mission to protect our business from the

impact of climate change and give more back to the planet

than we take out, our climate strategy is summarised in the

diagram below.

This is supported by our Science-Based Targets (“SBTs”) and

ourclimate-related risk management roadmap, against which

we continued to make progress in 2023. For more information,

please see our progress against our SBTs on page 62 and

inourunderstanding and management of climate-related

risksand opportunities in our climate-related disclosures

onpages70 to 85.

We are focused on playing

our part in accelerating the

transition to a low-carbon

future, while supporting

ourcustomers to make

sustainable choices.

Note:

1. Targets were set against a 2019 baseline and are expected to be updated and expanded according to new SBTi sector guidance, due in 2024.

Our vision

To create a world where insurance

is personal, inclusive and a force for good

Our climate ambition

To become a Net Zero business across all scopes by 2050

Having had our Science-Based Targets approved by the Science Based Targets initiative in November 2022,

wearetaking a strategic and rounded approach to developing a transition plan to meet our targets and manage

ourclimate-related risks and opportunities.

Our 5 near-term Science-Based Targets

to support our ambition

Our commitments to deliver against our ambition and targets

Operational emissions

(Scope 1 and 2)

1. Reduce emissions 46%

across our office estate

and accident repair

centres by 2030

Investment portfolio

(Scope 3): Corporate

bonds

2. Align our scope 1 and 2

portfolio temperature

rating to 2.08°C by 2027

Investment portfolio

(Scope 3): Corporate

bonds

3. Align our scope 1, 2

and 3 portfolio

temperature rating to

2.31°C by 2027

Investment portfolio

(Scope 3): Commercial

property

4. Reduce emissions

from our commercial

property portfolio by

58% per square metre

by 2030

Investment portfolio

(Scope 3): Real estate

loans

5. Reduce emissions

from our real estate

loans portfolio by 58%

per square metre

by2030

Plan and implement

– Tangible actions to reduce emissions

across our office estate and auto

services sites.

– Strategies and new products and

services to support our customers in

the transition such as our EV strategy.

– Strategies to tilt our investments

towards companies taking action to

reduce emissions.

Engage and influence

– Our supply chain through our supply

chain sustainability programme that

encourages and supports suppliers

toreduce their emissions.

– Our external investment partners

toalign their strategies with

ourcommitments.

– Our people through our internal

sustainability networks and

education programmes.

– Our sector through our involvement

with the ABI and its working groups.

Govern and manage

– Our climate-related risks and

opportunities through our climate-

related risk management roadmap.

– Our underwriting footprint

byunderstanding our

underwritingemissions.

– Our SBTs through annual external

assurance and future alignment to

updated guidance and standards.

– The integration of oversight

responsibilities for climate across

ourBoard Committees.

Strategic management actions

Electric vehicles Supply chain Flood resilience Underwriting footprint

61Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Science-Based Targets

In November 2022, we had our SBTs validated by the Science Based Targets initiative (“SBTi”). Current guidance from SBTi has

enabled us to set near-term targets for our operational emissions (Scope 1 and 2) and emissions associated with our investments,

which are estimated to represent 70% of our Scope 3 emissions. This is our first year of reporting against three of our five targets

with our 2023 performance summarised below. We are due to report against our commercial property and real estate loans targets

for the first time in 2024. While we wait for finalised sector guidance from SBTi in 2024, we have also set an internal target to reduce

our supply chain emissions through to 2030.

Covering

Operational footprint

Our buildings and garage network

Including our 23 auto services sites

and 13 offices.

In 2023 we further reduced these emissions by

31%

compared to 2022 as we continue to make

progress in downsizing and investing in our

office estate, electrifying our auto services sites

and using alternative fuels in our recovery trucks.

Overall we have now reduced our Scope 1 and 2

emissions by 43%

against our 2019 baseline

meaning we are on track to deliver our 2030

target of a 46% reduction. Our work will continue

this year and beyond as we look to renegotiate

our renewable energy contracts, continue

theelectrification of our auto services sites

andexplore fossil fuel alternatives for our

recoverytrucks.

2023 performance Progress against targets

2000

4000

6000

8000

10000

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

Operational emissions (Scope 1 and 2)

Result Target

Commercial property

4. Reduce commercial property

emissions by 58% per square metre

by 2030 compared to the 2019

baseline.

Investment portfolio consisting of prime UK

commercial properties.

2023 performance will be reported with a

one-year lag in the 2024 Annual Report and

Accounts.

Real estate loans

5. Reduce real estate loans

emissions by 58% per square metre

by 2030 compared to the 2019

baseline.

Investment portfolio consisting of short-dated

loans backed by UK commercial properties.

2023 performance will be reported with a

one-year lag in the 2024 Annual Report and

Accounts.

Operational emissions (Scope 1 and 2)

Targets

1. Reduce emissions by 46% across

our offices and accident repair

centres by 2030 against the

2019baseline.

Our performance in 2023 shows we were

successful in reducing the temperature rating

ofthis portfolio to 2.02°C for Scope 1 and 2

against our 2019 baseline of 2.44°C (Target 2)

andto 2.31°C for Scope 1, 2 and 3 (Target 3)

against our 2019 baseline of 2.8°C. This means

wehave hit our 2027 targets early, something

wehave achieved through working with our

investment managers and providing them

withclear mandates.

Reductions have been largely driven by an

increasing number of investee companies

achieving lower temperature ratings by setting

ambitious greenhouse gas reduction targets

including SBTs. This has helped to lower the

aggregate portfolio temperature score. To a

lesser extent, reducing exposure to US dollar

denominated corporate bonds (as part of the

Group-wide capital de-risking exercise in

summer 2022) has helped as firms in the dollar

universe have been relatively slower to set

targets for emissions reduction than in Europe.

Although the weight to US dollar debt will

likelyincrease in 2024, we do not expect the

temperature score to materially rise as managers

are expected to largely target bondsissued from

companies with stronger climate credentials.

Covering

Corporate bonds

The largest asset class in our

investment portfolio and typically

short-duration holdings.

Targets

2. Align our Scope 1 and 2 corporate

bonds portfolio temperature rating

to 2.08°C by 2027 from 2.44°C

in2019.

3. Align our Scope 1, 2 and 3

portfolio temperature rating to

2.31°C by 2027 from 2.8°C in 2019.

Corporate bonds

Scope 1 and 2 temperature rating

202720262025202420232019

Result Target

202720262025202420232019

Corporate bonds

Scope 1, 2 and 3 temperature rating

Result Target

Investments (Scope 3)

1. We are required to use Scope 1 and Scope 2 market-based emissions for SBTi operational target-setting and reporting. When including

Scope 2 location-based emissions this reduction is equivalent to a 22% reduction when compared to 2022 and a 52% reduction overall.

62 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

“It’s been great switching our paint

booths from gas to electric, helping

to reduce our footprint.”

Elliott Henry-Hughes | Technical

Engineering Graduate 2022

Our investments

All external investment managers are signatories of the United

Nations Principles for Responsible Investment (“UN PRI”), which

ensures that Environmental, Social, and Governance (“ESG”)

criteria are integrated into the investment process.

For investment-grade corporate bond portfolios, as an added

measure, we require that managers maintain an average MSCI

ESG rating equivalent to or higher than that of the ESG-

weighted reference index each portfolio is managed against.

We have set ourselves the target of achieving Net Zero

emissions from the investment portfolio by 2050 as part of our

alignment with the Race to Zero campaign on climate change.

In addition to our SBTs, we are keeping our target of reducing

the greenhouse gas (“GHG”) emissions intensity of our

corporate bond portfolio by 50% by 2030 versus a 2020 baseline

as a backward looking indicator, to ensure emissions are

reducingat the required pace over time to achieve our

longer-term Net Zero goal.

We also require the below exclusions and preferences:

– The exclusion of any companies with a low MSCI low-carbon

transition score, indicating assets could be economically

stranded.

– The exclusion of companies involved in thermal coal activity,

either mining or power generation, at greater than 5%

ofrevenues.

– Preference for investments in green bonds where the risk

return characteristics are similar to conventional bonds.

Energy efficiency measures

In 2023, we made progress in reducing our footprint, investing

in energy efficient measures to help us work towards meeting

our SBTs. Compared to last year, we have:

– expanded the use of hydrogenated vegetable oil (“HVO”)

inour repair centres as an alternative fuel for our recovery

trucks. This initiative has now been implemented at 95%

ofour auto services sites, resulting in an estimated saving

of2,025 tCO

e in 2023;

– removed gas from all paint spray booths in one of our

autoservices sites, providing an estimated saving of 277

tCO

e per year;

– completed the installation of LED lights across all 23 auto

services sites; and

– been awarded a silver SKA rating for the fit out of our

newRiverbank House office. An SKA rating is a recognised

means ofassessing the refurbishment of existing buildings

toensurethe retrofit is carried out in an environmentally

considerate way.

Supply chain sustainability programme

We continue to make headway with our supply chain

sustainability programme, liaising with and influencing

suppliers so we can make the transition to a pathway

consistent with a 1.5°C scenario. We have now engaged with

our managed supply chain, of which 20% have signed up to

SBTi targets or an equivalent, and have updated our processes

to ensure we are continuously engaging with our key suppliers

to understand their plans to reduce emissions and set targets.

During the year, we also worked on reviewing our sourcing

processes, communicating to our key managed suppliers our

intention to increase the weighting on sustainability questions

from 5% to 10% for contracts over £1 million from January 2024.

While we work towards our internal emissions reduction target,

we also look forward to the final publication of the Financial

Institutions Net-Zero Standard from the SBTi, which

isexpectedin 2024.

Group emissions

We believe accurate measurement and transparency can guide

the business in making targeted interventions as partofour

carbon reduction strategy. During the year we implemented

anumber of test and learn activities, and continue to innovate

and explore a range of solutions such asthe electrification

ofthepaint spray booths at our auto services sites.

We have provided a comparison of emissions data for Scope 1, 2

and 3 which includes our Investment emissions for the first

time. We are reporting on the temperature rating of our

corporate bonds and private placements for 2023. Due to the

practicalities of obtaining data from our external asset

managers ahead of the release of the Group’s annual reporting,

emissions for commercial property and real estate loans will be

reported with a one-year time lag. This approach was agreed

with the SBTi when our targets were approved in 2022.

100% of the emissions reported in the table on page 64 relate

toour operations, all of which are based in the UK. The data is

reported in compliance with the Streamlined Energy and

Carbon Reporting (“SECR”) requirement to disclose annual

global GHG emissions.

Definitions

Scope 1: This covers direct emissions from owned or controlled

sources. For example, our office sites throughout the UK using

gas boilers, the paint booths in our auto services sites currently

relying on gas powered processes, and our fleet vehicles.

Scope 2: These are indirect emissions. Theyare emissions

associated with the production and transmission of energy we

eventually use as a company across our office and auto services

sites. For example, the production of the electricity we buy to

heat and cool our buildings generates emissions.

Scope 3: These are indirect emissions that occur in our

investments and the value chain to support our company

operations. For example, employeecommuting, activities

related tothe disposal of waste, and the goods andservices we

purchase to fulfil customer claims as part of our supply chain.

Note:

1. Data is reported in compliance with the SECR requirements

(see page 85).

63Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Group greenhouse gas emissions reporting

Scope 1 2023 2022 2021 2019 (Baseline)

Office sites 671 1,023 1,220 1,418

DLG Auto Services

3,829 5,506 5,812 6,506

Total (tCO

4,500

6,529 7,032 7,924

Scope 2

Location-

based

Market-

based

Location-

based

Market-

based

Location-

based

Market-

based

Location-

based

Market-

based

Office sites 642 33 1,089 0 1,372 0 4,516 0

DLG Auto Services 1,824 0 1,364 0 1,783 0 2,093 0

Total (tCO

e) 2,499 2,453 3,155 6,609

Total Scope 1 and 2 (tCO

6,999 8,982 10,187 14,533

Of which: Office sites (tCO

e) 1,346 2,112 2,592 5,934

Of which: DLG Auto Services (tCO

5,653 6,870 7,595 8,599

Scope 3

Purchased goods and services

242,364 244,316 268,696 294,080

Fuel and energy-related activities (not included

inScope 1 and 2) 1,354 1,518 2,586 2,459

Upstream transportation and distribution 1,641 1,890 655 4,173

Waste generated in operations 1,762 2,523 1,990 3,358

Business travel 1,287 475 91 1,807

Employee commuting

7,100 7,227 5,962 3,176

Of which: homeworking emissions

5,256 5,583 5,501 –

Upstream leased assets

131 189 110 514

Downstream leased assets

1,7

2,878 1,552 964 1,658

Total Scope 1, 2 and 3 excluding investments

(tCO

e) 265,516 268,672 291,241 325,758

Investments

8,9,10

Corporate bonds and private placements

Scope (1 and 2) 2.02ºC 2.44°C

Corporate bonds and private placements

Scope (1, 2 and 3) 2.31ºC 2.80°C

Real estate investments (tCO

e) – 4,630 5,197

Real estate investments – intensity (kCO

e/m

) – 54 67

Real Estate Loans (tCO

e) – 10,011 13,769

Real Estate Loans – intensity (kCO

e/m

) – 72 81

Intensity metrics

Scope 1 and 2 emissions (tCO

e) per £ million

ofnet insurance revenue

2.2 2.9

Scope 1 and 2 emissions (tCO

e) per average

number of employees for the year 0.7 0.9 1.0 1.3

Notes:

1. The 2019 reported Scope 1 emissions baseline differs from our previously reported baseline following a review of courtesy car fuel, by Accenture. As a result, 1,658 tCO

hasbeen reclassed from Scope 1 emissions to downstream leased assets (Scope 3, Category 13), which represents the emissions from any additional fuel used by customers

in courtesy cars. An additional 183 tCO

e has been included within Scope 1 emissions to account for the initial on-site refuelling of courtesy cars.

2. Figures for Scope 2 use standard location-based methodology. We follow the GHG Protocol to disclose both location and market-based figures; and as we have secured

ourenergy from 100% renewable sources since 2014, our Scope 2 market-based results are nil prior to 2023. From 2023, emissions from electric and plug-in hybrid vehicles

inthe company car fleet have been reported within Scope 2 market-based for the first time. Prior period data for these emissions is not available.

3. In accordance with the GHG Protocol under which we report, the following are excluded from the total: operational control activities already detailed under Scope 3

emissions; cash payments to customers or other insurance companies/legal firms as compensation; intragroup transfers between our operating companies for financial

accounting purposes as the actual purchase of goods and services to our third-party suppliers is already captured; and reinsurance costs to third-party reinsurers as this

isafinancing transaction.

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

5. Homeworking emissions are reported under the employee category in line with the GHG Protocol.

6. Upstream leased assets refer to (1) leased office space locations where Direct Line Group does not directly control the energy provision (2) auto services pods in retail car park

locations.

7. Downstream leased assets includes DLG Auto Services courtesy cars emissions as referenced in footnote 1.

8. The investment portfolio emissions are being reported for the first time where available. The corporate bonds emissions and corresponding temperature ratings relate

to2023 performance. Due to the practicalities of obtaining data from our external asset managers ahead of the release of the Group’s annual reporting, emissions for

commercial property and real estate loans will be reported with a one-year time lag. This approach was agreed with the SBTi when these targets were approved in 2022.

9. Investment emissions for the corporate bonds portfolio are expressed as temperature scores (

C). The temperature scores have been generated using the Carbon Disclosure

Project temperature rating tool.

10. Investment emissions for the commercial property and real estate loans portfolio are emissions-based expressed as emissions intensity per m

of floor area (kCO

e/m

Theunderlying emissions are calculated in accordance with Partnership for Carbon Accounting Financials for accounting and reporting emissions generated from

investment activities.

11. Following adoption of IFRS 17, the Group restated its 2022 results. As such, we now calculate this intensity metric using net insurance revenue (previously calculated using

net earned premium) and the 2022 metric has been re-presented accordingly. Analysis for periods prior to 2022 is not available. For historic reporting, see previous

publications, including page 70 of the 2022 Annual Report and Accounts.

64 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

Reporting methodology

We apply the relevant greenhouse gas reporting requirements

contained within Schedule 7, Part 7 of the Large and

Medium-sized Companies and Groups (Accounts and Reports)

Regulations 2008 (as amended) and apply the GHG Protocol

Corporate Accounting and Reporting Standard (revised edition)

to calculate our emissions, which includes emissions associated

with electricity consumption. We use the operational control

method to define the boundary for consolidating GHG emissions.

Our carbon emissions are calculated by an external third

partyand reviewed internally. The calculation method used

forour 2023 emissions reporting remains consistent with

priorperiods and with the reporting standards stated above.

For the year ended 31 December 2023, Accenture provided

limited assurance for Scope 1, 2 and partial Scope 3 emissions

reporting. Thisverification exercise was performed to the ISO

14064-3 standard.

Scope 3 emissions

The GHG Protocol defines Scope 3 emissions as all other

indirect emissions that occur in a company’s value chain.

Theseinclude Scope 3, Category 1: Purchased Goods and

Services (or ‘supply chain’) and Scope 3, Category 15:

Investments (or ‘financed emissions’).

In estimating the emissions from our supply chain, we use the

GHG Protocol’s spend-based approach. This involves using

supplier spend data and multiplying these values by a relevant

emissions factor to estimate the amount of emissions

associated with purchased goods or services.

We have applied the Partnership for Carbon Accounting

Financials (“PCAF”) methodology to calculate emissions

associated with our investment activities, in line with industry

best practice. We have included our corporate bonds,

commercial property and real estate loans within our financed

emissions calculations.

Our Net Zero ambition

We aim to become a Net Zero business across all scopes by

2050, with external near-term targets and plans that cover our

operational emissions (Scope 1 and 2) and our investments.

Atpresent, we have not set an external target for our supply

chain emissions while we await the publication of the Financial

Institutions Net-Zero Standard from the SBTi, which is expected

in 2024. We expect this new standard to enable us to set targets

that are consistent with our ambition of achieving Net Zero

across all scopes by 2050. For more information on our supply

chain sustainability programme, please see page 63.

Energy consumption (kWh)

1,2

2023 2022

Electricity 11,906,788 12,686,882

Gas 19,779,732 21,485,898

Total 31,686,520 34,172,780

Our approach to offsetting

Our primary focus is on reducing absolute emissions as quickly

as possible in line with our Science-Based Targets and we

recognise that using carbon credits to offset residual emissions

in reaching Net Zero is a last resort. As we decarbonise our

business, we currently choose to support projects that help

tooffset our remaining Scope 1 and 2 emissions.

Working with Climate Impact Partners, an organisation that

develops and delivers high quality carbon financed projects,

wesupported a new afforestation initiative in Uruguay

fromNovember 2023. We have selected this project as it is

averified carbon removal project to offset our Scope 1 and 2

emissions for the next 3 years. Our support contributes to the

reforestation ofland where eucalyptus plantations have been

established, helping to develop a sustainable approach to

woodproduction, provide employment opportunities for the

local community and enhance biodiversity and carbon

sequestration opportunities.

Biodiversity

Globally, nature is declining at an unprecedented rate and the

UK is one of the most nature-depleted countries in the world.

This degradation affects society as a whole and while our

sectormay not have the same degree of direct impacts and

dependencies on biodiversity as some others, it is a crisis that

demands the attention of all businesses. We also recognise

thatconserving and restoring nature, and the biodiversity it

contains, is essential for limiting emissions and adapting to

climate impacts.

We are a supporter of the Get Nature Positive movement, a

UKinitiative founded by the Council for Sustainable Business

and supported by Defra, which seeks to build momentum on

nature and biodiversity. In 2023, we continued to fund a tree

planting project on a flood prevention scheme in Yorkshire,

replacing the trees we removed when home insurance

policyholders make subsidence claims. Working in partnership

with nature recovery charity Heal, we also provided a loan to

acquire a 460 acre site in Bruton, Somerset where rewilding is

in progress and wildlife is flourishing.

The publication of the Taskforce on Nature-related Financial

Disclosures (“TNFD”) final framework on nature-related risk

management and disclosure in September 2023 provides

welcome guidance for businesses to report and act on evolving

nature-related dependencies, impacts, risks and opportunities.

We will continue to review our practices and approach against

these new standards.

Notes:

1. 100% of GHG emissions and energy consumption reported relates to operations, all of which are based in the UK.

2. Data is reported in compliance with the Streamlined Energy and Carbon Reporting (“SECR”) requirements (see page 85).

65Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Good governance is the

foundation of our approach

to sustainability and our

ability to operate ethically

and responsibly.

This starts with a clear commitment

from the Board to align sustainability

goals across the Group, supported by

our Committee structure including the

work of our dedicated Customer and

Sustainability Committee, whose role it

is to challenge and scrutinise the

Group’s approach and performance in

the pursuit of our goals.

While we report on our approach and progress in our priority

governance-related issues in this section, the corporate

governance section incorporates information on the role

andactivities of the Board and our Committees in relation

tosustainability in 2023, including:

– Board leadership and company purpose (page 102)

– The role of the Board in the Company’s culture (page 103)

– How the Board engages with stakeholders (pages 107 to 108)

– Colleague engagement (pages 108 to 109)

– The Board’s approach to inclusion and diversity (page 112)

– The Customer and Sustainability Committee (pages 127 to128)

– Responsible investment (page 130)

For further information on how we’re embedding sustainability

considerations into Senior Management performance and long-term

incentive plans, please see page 141 and 143 of the remuneration report.

Business ethics

We are committed to the highest possible standards of

professional and ethical conduct across the Group as a

prerequisite to building a sustainable business for the future

that serves all our stakeholders. Our Code of Conduct sets out

the ethical standards that are required of all those working for

or on behalf of our business – our people, contractors and

partners – in relation to areas including discrimination,

harassment or bullying, treating customers and suppliers fairly,

diversity and inclusion, fair competition and contributing to

society and the environment.

This is underpinned by a comprehensive policy framework,

each of which outlines our commitments and expectations

ofour people and partners in relation to specific areas.

All of our Group policies and statements including our Code of

Business Conduct, Ethical Code for Suppliers, Prevention of Financial

Crime and Whistleblowing policies, and our latest modern slavery

statement can be found at www.directlinegroup.co.uk

Anti-bribery, anti-corruption and financial

crimeprevention

We are committed to the detection, prevention and reporting

of financial crime which includes:

– bribery and corruption;

– money laundering;

– terrorist financing;

– fraud; and

– sanctions.

Our approach is based on maintaining robust systems and

controls with clearly defined policies and minimum standards

to promote compliance with all applicable legislation, as well

asregulation and industry-approved guidance. These are

regularly reviewed to ensure they remain fit for purpose and

align to the Group risk framework which includes a robust

financial crime governance framework and internal reporting

and escalation channels.

Mandatory financial crime awareness training (which covers

anti-money laundering, counter-terrorist financing, financial

sanctions, fraud and the prevention of the facilitation of tax

evasion) is undertaken by all employees at induction and

annually thereafter, including an assessment element that

must be passed. In 2023, 96% of our employees completed

ourannual programme of mandatory financial crime

awareness training.

In addition, mandatory anti-bribery and whistleblowing training

is undertaken by all employees at induction and annually

thereafter, again including an assessment element that must

be passed. In 2023, 97% of our employees completed our

annual programme of mandatory anti-bribery training.

Governance

66 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

These and other related policies are supported by our

whistleblowing policy and approach which sets out the controls

within which the Group promotes a culture of openness and

creates a positive working environment in which anyone can

raise any concerns without fear of reprisals. All employees and

contractors can raise concerns via their people manager or

utilise the services provided by an independent third party

thatprovides a free, confidential 24/7 telephone helpline and

web-based service for disclosures to be made.

Responsible procurement

As a financial services business, many of our social and

environmental impacts manifest through the operations

andactivities of our suppliers. Our relationships with and the

performance of our suppliers is therefore critical to our business

and our ability to operate sustainably, responsibly, and ethically.

As such, our aim is always to maximise supply chain

opportunities by proactively seeking and building strong,

value-focused relationships with our suppliers.

Our approach to working with our suppliers is underpinned

byour Ethical Code for Suppliers which outlines both our

commitments to our suppliers and our expectations of

suppliers including areas such as human rights and labour

standards, people and society, environment, and governance.

This Code was refreshed in 2022 and rolled out to all managed

suppliers in Q1 2023. All suppliers that we work with are

required to confirm that they agree to this Code and we

encourage them to ensure their own upstream supply chain

adheres to the spirit of our business principles.

We maintain a centralised procurement and supply chain

function that operates the processes designed to ensure we

select and manage our suppliers appropriately to support

thegiven service provision and potential risk exposure

toourbusiness. These processes, which include supplier

segmentation based on multiple factors including risk

exposures, due diligence on new suppliers, on-boarding,

ongoing management and assurance, are reviewed and

refreshed on an annual basis to ensure they remain relevant

and aligned with the potential exposures faced by the business.

When selecting new suppliers, our sourcing teams conduct an

open and transparent sourcing and assessment process during

which potential suppliers are assessed against a wide range of

criteria including commitment to and practices relating to the

wider ESG agenda such as reducing environmental impacts,

with a sustainability score being applied during the sourcing

process. Through ongoing monitoring of our supply chain we

are able to assess their contribution to our scope 3 emissions

and work with them on initiatives that will support the delivery

of our strategic objectives.

For more information on our supply chain sustainability

programme, please see page 63.

Human rights and modern slavery

Although as a general insurer, we may be seen as within a lower

risk industry, we recognise the importance of understanding

and managing the areas within our supply chain that can be

more vulnerable to potential human rights risks. Our Ethical

Code for Suppliers expects our suppliers to adhere to:

a. The core International Labour Organisation (“ILO”)

standards which ban the use of child labour and forced

compulsory or bonded labour.

b. The non-core ILO standards which include statements that

workers should have safe and hygienic working conditions,

a living wage should be paid, working hours are not to be

excessive, and abuse and intimidation are prohibited.

In addition, we expect our suppliers to comply with the UK

Modern Slavery Act (2015) and provide assurances of

compliance through a published statement which outlines the

steps that are being taken to support the Act, where applicable.

The processes we follow across our procurement and supply

chain function are key to supporting our adherence to the Act,

with modern slavery considerations fully integrated across our

sourcing process, ongoing assurance activity and mandatory

annual training. In 2023, this training was enhanced through

the trialling of a government-sponsored module.

Prompt Payment Code

We have always had a strong commitment to engage with

andtreat our partners in the right way being longstanding

signatories to the Prompt Payment Code, a voluntary code

ofpractice for businesses to ensure payments are made

tosuppliers on time. In 2023, for the second year in a row,

wewere awarded a Fast Payer Accreditation Award by

GoodBusiness Pays acknowledging our role in supporting

oursuppliers in this way.

67Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Data ethics

Consumers are becoming more aware of their data rights and

the industry is gathering more data than ever before as it

increasingly explores more sophisticated processing

capabilities, such as artificial intelligence (“AI”) and machine

learning. Against this backdrop, we have continued to embed

ethical considerations as a foundation of our approach to the

use of data so we can both protect our customers and use

more advanced technology to drive better customer outcomes.

We have established and embedded a holistic data ethics

framework to enable ethical data-driven decision-making

across the business and drive a culture of transparency,

accountability and data literacy. At the heart of the framework

are eight principles which act as guardrails to ensure that we

meet the core tenets of fairness, transparency, accountability

and lawfulness:

1. Respect the person behind the data.

2. Ethics will be designed into data processes and solutions

from the outset.

3. Understand and document the purpose for any data

collected, used and/or shared.

4. Comply with applicable laws and regulations in connection

with data, its collection and use.

5. Understand limitations and quality of the data we use and

how this may impact the decisions we make.

6. Actively pursue a fair, explainable and transparent approach

to algorithmic and statistical decision-making.

7. Ensure accountability and appropriate governance for any

automated decision process.

8. Provide appropriate guidance and training to support and

encourage responsible data use.

Data privacy and security

We have implemented and maintain an extensive privacy and

security framework to effectively manage privacy and security

risks and to meet our responsibilities under the UK’s General

Data Protection Regulation (“UK GDPR”) and the Data

Protection Act 2018. All business areas within the Group and our

subsidiaries are required to meet the standards set out in the

framework and are required to evidence compliance with UK

GDPR obligations, including implementing privacy by design,

fulfilling data subjects rights and reporting and resolving

potential incidents.

Our cyber security programme is led by the Chief Information

Security Officer who has responsibility for cyber security, first

line technology risk and operational resilience. We employ

sophisticated tools designed to protect information and

prevent data breaches and routinely perform self-assessments

against regulatory frameworks such as the NIST (National

Institute of Standards and Technology) cyber security framework.

Our internal controls are validated through the useof security

monitoring and rigorous internal audits, with external

independent audits conducted at least once every twoyears.

All staff, including temporary staff and contractors, are

providedwith training on their data protection and security

responsibilities as part of our annual programme of

mandatorytraining.

“We know how important it is to

support our suppliers, playing our

role in being a responsible corporate

citizen and it’s fantastic to be

recognised with the fast payer

accreditation award.”

Darren Braham,

Results Production Analyst

68 Direct Line Group Annual Report and Accounts 2023

Sustainability continued

External ratings,

memberships and

benchmarks

We actively support a variety of membership organisations, and disclose information to ratings and benchmarking authorities,

as well as receive ESG performance ratings.

MSCI

In 2023, we received a rating of AAA (on a scale of AAA-CCC) in the MSCI ESG

Ratings assessment

Sustainalytics

As of October 2023, we received an ESG Risk Rating of 23.2 and were assessed

bySustainalytics to be at a medium level of risk

1,2

Ecovadis

We were awarded a silver medal in 2023

Carbon Disclosure Project

We were awarded a C score in 2023

Science Based Targets initiative

In 2023, we made progress in working towards our Science-Based Targets,

afterhaving our targets approved in November 2022

Race to Zero

As part of our Race to Zero pledge, we have signed the Business Ambition

for 1.5°C

Get Nature Positive

We are a supporter of the Get Nature Positive campaign, focused on restoring

nature and biodiversity

Inclusive top 50 employers

We ranked 17

on the Inclusive Top 50 UK Employers List 2022/23

Social Mobility Pledge

We support the Social Mobility Pledge and have focused on helping students

with their careers through our Community Fund

Women in Finance

We are a signatory to HM Treasury’s Women in Finance Charter

Race at Work Charter

We support the Race at Work Charter to take positive action towards supporting

ethnic minority representation and inclusion

The Faith & Belief Forum

We are a signatory of the Charter for Faith & Belief Inclusion which aims to help

create understanding between people of different faiths and beliefs and a

society which is fair to people of all backgrounds – religious and non-religious

Notes:

1. Assessed to be at a medium level of risk of experiencing material financial impacts from ESG factors.

(www.sustainalytics.com). Such information and data are proprietary of Sustainalytics and/or its third-party suppliers (Third Party Data)

andareprovided for informational purposes only. They do not constitute an endorsement of any product or project, nor an investment

adviceandare not warranted to be complete, timely, accurate or suitable for a particular purpose. Their use is subject to conditions

availableathttps://www.sustainalytics.com/legal-disclaimers

69Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Task Force on

Climate-related

Financial Disclosures

Governance

Our approach

The Group’s approach to the governance of its sustainability

strategy is underpinned by our Vision and Purpose (see page

22) and a clear commitment from the Board and senior

management to align sustainability goals with the Group’s

strategy, and to encourage accountability across the business.

Our five-pillar sustainability strategy, endorsed by the Board,

aims to foster the highest standard of Environmental, Social

and Governance practice and deliver long-term sustainability

for all our stakeholders. The Planet pillar takes the lead on

climate-related issues.

Boards and Committees

The potential and actual impact of climate change on the

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

environment (“outbound”), are issues requiring robust

governance to empower business areas in the management

ofclimate-related risks and opportunities.

It starts with the Group’s Board, which seeks to underpin all

ofthe Group’s activities with the highest standards of corporate

governance. The Board has oversight on two keyaspects of

theGroup’s approach:

– Each year, the Board assesses the strategic plan (the “Plan”)

in conjunction with the Group’s Own Risk and Solvency

Assessment (“ORSA”), which considers material risks to the

Plan, including climate change-related risks.

– The Board oversees the Group’s sustainability activity

throughits Committees, which scrutinise and provide

appropriate challenge on the Group’s five pillar sustainability

strategy,including the establishment and monitoring of

Science-Based Targets and the Group’s development of

aclimate-related risk management roadmap (see page 71).

TheChairofeach Committee reports to the Board after

eachCommittee meeting.

Committees

– The Audit Committee meets a minimum of four times a

yearand is responsible for overseeing the Group’s financial

statements and non-financial disclosures, including

climate-related financial disclosures.

– The Board Risk Committee oversees all aspects of financial,

regulatory and operational risk, including the risk to the

Group from climate change. It meets a minimum of four

times a year and receives reports on stress testing of

long-term climate change scenarios, discusses strategies

formanaging the associated risks and receives updates

onemerging risks throughout the year, with deep dives

asappropriate. During the year, the Committee played a

keyrole in monitoring the Group’s climate-related risk

management roadmap and identifying areas of opportunity

for improvement.

– The Investment Committee meets a minimum of three

timesa year and considers the strategy for incorporating

ESGfactors into the Group’s investment management,

which has seen our credit portfolios tilted to issuers

withhigher sustainability weightings. In 2023, additional

items relating to climate and sustainability oversight were

introduced into the Committee’s Terms of Reference.

Introduction

The Group’s 2023 disclosure against the recommendations

ofthe Task Force on Climate-related Financial Disclosures

(“TCFD”) reflects continued action to further develop our

understanding and management of climate-related risks

andopportunities. Our report also provides an update on

theprogress we are making towards our Science-Based

Targetsand includes the steps we have taken in the year

tofurther assess and develop our disclosures against the

TCFD’srecommendations.

The Group, as at the time of publication, has complied

withthe requirements of Listing Rule 9.8.6R by including

climate-related financial disclosures consistent with 9 of the

11 TCFD Recommendations and Recommended Disclosures

for all sectors (‘Section C Guidance for All Sectors’), including

the supplemental guidance for insurance companies

(‘Section D Supplemental Guidance for the Financial Sector’)

within the 2021 TCFD Annex. The Group has reported

against all 11 recommended disclosures and believes its

disclosure against 9 of the 11 recommendations meets

theobjectives of the TCFD framework, with further detail

regarding the two remaining recommendations

explainedbelow.

For Metrics and Targets disclosure recommendations (a)

and (b), which includes sector-specific guidance for

insurance companies, we continue to work towards

developing our disclosure against the relevant components

of these two recommendations, as outlined below.

Metrics and Targets disclosure recommendation (a):

– to provide additional metrics, including cross-industry

metrics, within our disclosure to support measurement

and management of transition risks and opportunities;

and

– to describe the extent to which our insurance

underwriting activities, where relevant, are aligned with

awell below 2°C scenario.

Metrics and Targets disclosure recommendation (b):

– to disclose, where data and methodologies allow, the

weighted average carbon intensity or GHG emissions

associated with commercial property and specialty lines

of business.

In the year, we have assessed the actions required to

improve the level of disclosure across these areas in future

reporting. On page 83, we set out the details of this

assessment and the activities undertaken, with further plans

in place across 2024.

Companies (Strategic Report) (Climate-related

Financial Disclosures) Regulations 2022

The climate-related financial disclosures made by the

Group, within the following pages, comply with the

requirements of the Companies Act 2006 as amended by

the Companies (Strategic Report) (Climate-related Financial

Disclosures) Regulations 2022. The Non-Financial and

Sustainability Information Statement, on page 49, outlines

where disclosure against each of these requirements

canbefound.

70 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures

The CESG consists of members representing various teams

from across the organisation and includes members of the

Executive Committee. It assesses the potential impacts of

climate change on the business, along with the business’

impact on the environment, with the aim of ensuring risks

areidentified in a timely manner and managed effectively.

TheCESG also oversees input to the Group’s business

development and strategic processes to make sure climate

isgiven appropriate consideration in long term strategy and

planning. This includes the ongoing identification and oversight

of climate-related opportunities. For example, progress against

our electric vehicle strategy, and the opportunities considered as

part of our Auto Services Sustainability Programme, are regular

agenda items. More information on the key performance

indicators used to assess, monitor and manage climate-related

risks and opportunities can be found on pages81 to 85.

The CESG monitors progress against the Group’s climate-

related risk management roadmap. The roadmap, also

overseen by the Customer and Sustainability Committee and

Board Risk Committee, sets out a range of actions, planned

across a number of years, to further integrate climate risk

management across the business and to build additional

capabilities in areas such as climate risk modelling and

scenarioanalysis.

The Steering Group’s responsibilities further include:

– monitoring, and driving performance against, the Group’s

Science-Based Targets, in support of our Net Zero aims;

– considering the risk management challenges presented to

the business by climate change, including financial risk

related to underwriting and investments; and

– overseeing the Group’s disclosure of climate within the

context of broader ESG and financial disclosures.

The CESG will provide oversight on the Group’s implementation

of the International Sustainability Standards Board’s (“ISSB”)

Sustainability Disclosure Standards, IFRS S1 and S2. Issued

inJune 2023, the Standards are currently subject to UK

endorsement, which is expected later in 2024.

Further information relating to the processes by which management

areinformed about climate-related issues can be found on page 80.

Group Audit

Group Audit provides an independent and objective viewof the

adequacy and effectiveness of the Group’s risk management,

governance and internal control framework. In the year, Group

Audit were represented at the CESG.

Strategy

The effects associated with climate change are far reaching and

have the potential to cause significant economic and societal

impact. We know that through the actions we take as a

business we can contribute to a more sustainable future and as

an insurer with over 9.4 million in-force policies

, we recognise

our role in supporting – and accelerating – the transition to a

low-carbon economy.

Our strategy focuses on mitigating against, and adapting to,

climate change. This involves driving change across our

underwriting activities, our operations and our investments,

and includes the actions we are taking to progress against our

Science-Based Targets and Net Zero ambitions.

The following pages examine this strategy alongside the actual

and potential impacts of climate change on the Group, in line

with the TCFD recommendations, and outline how we continue

to develop our approach to climate-related risks and

opportunities across the business.

– The Nomination and Governance Committee meetsa

minimum of two times a year, monitoring the Board’s

overallstructure, size, composition and balance ofskills.

ThisCommittee is also responsible for monitoring the

Group’s observance of corporate governance best practice.

– The Customer and Sustainability Committee scrutinises

progress against the sustainability strategy to ensure that

wecontinue to make progress under our Customer, People,

Society, Planet and Governance pillars. The Committee meets

a minimum of four times a year. During 2023, it has reviewed

progress against the Group’s Science-Based Targets,

approved by the Science Based Targets initiative (“SBTi”)

in2022; and reviewed performance and approach on key

stakeholder matters, including the PRA’s expectations

regarding climate risk. It continues to monitor the Group’s

progress towards its Net Zero aims.

– The Remuneration Committee meets a minimum of four

times a year and considers how executive remuneration

canbe used to drive progress on climate-related matters.

Anemissions metric has been applied to long-term incentive

plan (“LTIP”) awards made since 2022 and makes up a 10%

weighting of the total award made under the LTIP.

Theemissions performance condition includes a targeted

reduction in emissions and temperature score and is based

on the Science-Based Targets that were approved by the

SBTi in 2022.

More information on the structure of the Board and Board Committees

can be found within the Corporate Governance report on page 111.

Management’s role

There are three primary management roles designed to assign

responsibility for the delivery of the Group’s assessment and

management of climate-related matters:

– the Chief Executive Officer (“CEO”) has overall responsibility

for climate change and environmental matters;

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

overseeing the implementation of the Group’s investment

strategy and is advised by the Investment Committee on the

application of ESG weightings, including those related to

climate change, to the relevant portfolios. The CFO is a

member of the Investment Committee and the Director of

Investment and Capital Management is a regular attendee;

and

– in the year, the Chief Risk Officer (“CRO”) was responsible for

overseeing the identification, assessment and management

of climate change-related risk. The CRO role also has

responsibility for assessing and monitoring climate-related

financial risk. In that capacity, the role oversees the work of

the Risk Function which analyses the potential future impact

of climate change on the business. The results of these

analyses are submitted to the Risk Management Committee,

the Board Risk Committee and the Board, including as part

of the ORSA. In addition, a CRO report is submitted to every

meeting of the Board Risk Committee and to the Board

meetings held throughout the year.

Further information relating to our climate risk identification process can

found on page 80.

To support the Customer and Sustainability Committee’s

oversight, and in recognition of the Group’s increased focus on

climate-related activity, the Group has an established Climate

Executive Steering Group (“CESG” or the “Steering Group”),

which reports into theCustomer and Sustainability Committee,

and meets a minimum of six times a year.

Note:

1. Ongoing operations – see glossary on page 263.

71Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Climate change risks and opportunities

The potential impacts of climate change on organisations are

classified into the following three categories by the TCFD:

– physical risks – resulting from the physical effects of climate

change;

– transition risks – resulting from the transition to a lower-

carbon economy; and

– opportunities – arising from efforts to mitigate and adapt to

climate change.

We also recognise that litigation risk, which includes risks

arising when parties who have suffered losses from climate

change seek to recover them from those they believe may have

been responsible, could also cause adverse impact. This could

include direct climate-related litigation against the Group or

insurance risk arising from the underwriting of liability products.

The Group considers the risks associated with this to be low due

to low exposure in high-risk industry sectors. Following the sale

of the brokered commercial business we expect our exposure

to liability insurance risk to reduce further as this business runs

off over time.

Materiality

A greater level of estimation and assumption is required when

assessing materiality in the context of climate change and this,

combined with the longer term and forward-looking nature of

climate-related risks and opportunities, makes the assessment

inherently uncertain. As a result, we have chosen not to quantify

a materiality threshold for the purposes of our climate-related

financial disclosures.

Our approach to determine where information is material is

supported by quantitative assessment, such as the findings of

our scenario analysis activities where we consider the potential

financial impact of climate change over the longer term. Our

approach means we disclose relevant information that focuses

on the areas of our business that could be most affected by

climate change, which we identify as our underwriting

activities, our operations and our approach to investments.

Thekey physical and transition risks and opportunities that

could impact these areas are outlined on page 77.

We will continue to review emerging best practice associated

with assessing climate-related materiality and we expect this

toevolve over time. More information on our current approach

to measuring the impact of climate-related risk, and the

integration of climate change into the Group’s overall risk

management processes, can be found below and on page 80.

Defining the short, medium and long-term

timehorizons

When defining the time horizons, the useful life of assets

wasconsidered. However, the Group’s assets are primarily

depreciated or amortised over a period of up to 10 years.

Assuch, from a climate-related risk perspective, this falls into

our short-term time horizon and therefore climate-related

riskis not a significant input into determining asset useful

economiclives.

The time horizons over which specific climate-related issues

willmanifest themselves vary significantly. However, in general,

transition risks are likely to materialise more rapidly than

physical risks, which are likely to be gradual and materialise

over the longer term. The timing of climate-related litigation

risk is less certain due to the nature of the exposure.

The key physical and transition risks and opportunities that

could significantly impact the Group, as well as the time

horizons over which they could manifest, is available further

into our disclosure on pages 77 to 80.

Financial planning, performance and position

Without appropriate management, the risks posed by

climatechange could adversely impact the Group’s financial

performance and financial position.

To help quantify the potential impact of climate change we:

– perform scenario analysis, which enhances our

understanding of the financial risks associated with the

longer-term impacts of climate change and provides an

indication of strategic resilience (see pages 73 to 76);

– undertake climate risk modelling to assess the most

predominant physical drivers of risk in our property insurance

products, enabling us to evaluate the potential impact to the

Group’s capital position (see page 81); and

– integrate climate risk into the Group’s overall approach

toriskmanagement. This includes measuring the relative

significance of climate-related risks to other risks in the Group

Risk Taxonomy (see page 80).

Financial planning

We acknowledge that limitations exist in aligning

climatechange and financial planning. A key issue relates to

the modelling of the impact of climate change, which typically

extends out to thirty or more years, a significantly longer period

than our current financial plan.

Although limitations and uncertainties associated with the

longer-term impacts of climate change exist, we continue to

embed climate-related considerations into our planning.

Thisincludes within the Group’s Plan, which reflects the

strategic planning that is ongoing across the business and

covers any climate-related initiatives that are embedded within.

Theseinclude:

– the actions we are taking to progress against our Science-

Based Targets and Net Zero ambitions, such as the initiatives

we are implementing to reduce the carbon footprint of our

accident repair centres and the associated costs. More

information on theseinitiatives can be found on pages 78

and 79;

– the use of reinsurance in our property insurance business,

acknowledging that the cost to obtain catastrophe

reinsurance could be impacted by an increase in the

frequency and severity of major weather events; and

– the development of propositions and channel expertise

tosupport the transition to a low carbon economy, such as

our electric vehicle offer.

Short 1 – 10 years

Medium

10 – 30 years

Long

30 years +

As in previous years, our approach to defining the time

horizonsassociated with climate-related risks and opportunities

is to align closely with the scenarios considered in the Group’s

quantitative analysis of climate-related risk, which typically

considers scenarios that span thirty years or longer

(seepage73).

72 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

We also monitor losses from major weather events, which

include inland and coastal flooding, storm surge, freeze events

and subsidence. We use sophisticated modelling techniques to

estimate the expected losses from major weather events in our

property book to set an annual expectation for major weather-

related claims. The impact of major weather relative to this

annual expectation for 2023 can be found within Metrics and

Targets on page 82.

Financial performance and position

In preparing the financial statements, the Group has assessed

the impact of climate change. While the risks associated

withclimate change remain uncertain looking forwards, the

impact of major weather events is reflected in the Group’s

historical performance and position as at 31 December 2023.

The potential impact of climate change on insurance risk is also

discussed in further detail within note 3 to the consolidated

financial statements (see page 196).

Areas of physical and transition risks the Group could be

exposed to are outlined in the table on page 77. The financial

impact of these risks can, if realised, be grouped broadly into

the following:

– Adverse impacts to revenue and market share due to a failure

to understand, and adapt to, the scale of change in market

demand for products and services due to climate-related

policy, technology and consumer preference.

– Increased climate-related operating costs and capital

expenditure due to the investments we make to progress

against our emission reduction targets, or higher operating

costs due to carbon cost increases or regulatory

requirements designed to limit carbon emissions.

– Changes in the value of our financial investments due to

theinfluence of physical and transition risk impacting the

wider economy.

– An increase in the frequency and severity of natural

catastrophes and other weather-related events adversely

impacting insurance liabilities.

We also recognise that our access to capital can be materially

affected by factors including, but not limited to, financial

performance and investment decisions, which have their own

associated climate-related risks. In addition, our performance is

assessed externally by ESG rating agencies, to which investors and

other stakeholders are giving increasing prominence. Adverse

impacts to our debt rating could negatively affect cost and access

to sources of debt finance and subsequent interestrates.

In our approach to acquisitions and divestments, any climate-

related risks and opportunities are expected to form part of our

usual due diligence process.

Scenario analysis

Our most comprehensive climate scenario analysis activity took

place during 2021, followed by a smaller round of analysis in

early 2022.

During 2023, we updated the physical risk section of the

underwriting liabilities element of the original analysis to

account for portfolio and modelling changes. The findings from

the updated analysis can be found on pages 75 and 76.

The analyses were designed to enhance our management of

climate-related financial risk and the scenarios used expanded

on the Network for Greening the Financial System’s (“NGFS”)

Net Zero 2050, Delayed Transition andCurrent Policies

scenarios by including additional risk transmission channels

and adding additional variables.

The exercise considered the financial impacts from these three

distinct climate scenarios at a ten- and thirty-year time horizon,

capturing a range of different combinations of transition and

physical risks. Two of the scenarios represent routes to net zero

greenhouse gas emissions andprimarily explore transition risk

from climate change:

– Early Action The transition to a net zero emissions economy

started in 2021, so carbon taxes and other policies intensify

relatively gradually over the scenario horizon. Global carbon

dioxide emissions are reduced tonet zero by around 2050.

Global warming is limited to 1.8°C by the end of the scenario

(relative to pre-industrial levels). Some sectors are more

adversely affected by the transition than others, but the

overall impact on GDP growth is muted, particularly in the

latter half of the scenario, once a significant portion of the

required transition has occurred and the productivity benefits

of green technology begin to be realised.

– Late Action The implementation of policy to drive transition

is delayed until 2031 and is then more sudden and

substantial. Global warming is limited to 1.8°C by the end

ofthe scenario (relative to pre-industrial levels). The more

compressed nature of the transition results in material

short-term macroeconomic disruption, which is particularly

concentrated in carbon-intensive sectors. Output contracts

sharply in the UK and international economies. The rapid

sectoral adjustment associated with the sharp fall in GDP

reduces employment and leads to some assets being

stranded, with knock-on consequences for demand

andspending. Risk premiums rise across multiple assets.

Animportant indicator of the level of transition risks

inthesescenarios is the carbon price, reflecting that

policymakers can induce the transition by increasing the

implicit cost of emissions.

The third scenario primarily explores physical risks from climate

change in the event that there are no new climate policies

introduced beyond those already implemented:

– No Additional Action The absence of transition policies leads

to a growing concentration of greenhouse gas emissions in

the atmosphere and, as a result, global temperature levels

continue to increase, reaching 3.3°C relative to pre-industrial

levels by the end of the scenario. This leads to chronic

changes in precipitation, ecosystems and sea level. UK

andglobal GDP growth is permanently lower and

macroeconomic uncertainty increases.

The scenario specification builds upon a subset of the NGFS

climate scenarios. NGFS climate scenarios aim to provide

centralbanks and supervisors with a common starting point

foranalysing climate risks under different future pathways.

Theyare produced in partnership with leading climate scientists,

leveraging climate-economy models that have been widely used

to inform policymakers, and have been used in key reports.

For each of the three scenarios, variable paths were provided for

the underlying physical and transition risks and for mapping

these risks onto macroeconomic and financial variables:

– Physical and transition risks: pathways for climate variables to

represent the impact of climate risks andopportunities at the

global and regional level.

– Macroeconomic and financial market conditions: impact of

climate-related risks and opportunities at a global level, and

at the level of key countries, regions, and sectors – reflecting

the impacts of physical and transition variables in each

scenario. Financial market conditions reflect the direct

financial market consequences of the paths of the

macroeconomic variables.

73Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Our 2021 analysis focused on changes in invested assets

andinsurance liabilities, and the variables provided formed the

basis for the modelling. The stress assumed aninstantaneous

shock, effectively bringing forward thefuture climatic

environment to today’s balance sheet, with no allowance

forchanges in future premiums, asset allocation, expenses,

reinsurance programmes and other future changes in

businessmodels.

The original analysis was applied to the Group’s Solvency II

balance sheet as at 31 December 2020 and assumed

fixedbalance sheets, premiums, exposures and

reinsurancearrangements.

As the scenario impacts for investments have not been

updated from the original analysis, any impact comparisons

between investments and liabilities outlined in the following

section are based on the analysis undertaken in 2021.

Summary of results – 2021 analysis

The main results of the comprehensive climate scenario

analysis from 2021 are included below for illustrative purposes.

Whilst the Group’s business and risk profile have changed

sincethis exercise has been undertaken, the overall high-level

conclusions outlined below remain relevant. In terms of the

investment portfolio, updated modelling of climate impacts

commenced in Q4 2023 with this work expected to continue

throughout 2024 (see page 80). For the underwriting liabilities,

the results of an updated exercise undertaken in 2023 are

outlined on pages 75 and 76.

The results from our 2021 analysis show the most material

impact on the Group’s Solvency II own funds arises in the

NoAdditional Action Year 30 scenario, in which transition risk

on the investment portfolio dominates the overall impact.

These large impacts reflect the cumulative downward trend in

asset values, with no stabilisation effects observed (unlike the

other two scenarios) as extreme weather events increase

infrequency and intensity, and continue to affect economic

growth beyond the thirty-year horizon considered by

theanalysis.

The No Additional Action Year 30 scenario also shows the

largest increases in insurance liabilities, in absolute terms,

which is consistent with estimated increases in Gross Average

Annual Losses (“AAL”) of around 150% for inland flooding and

around 390% for coastal flooding. This could result in a material

increase in weather load, reinsurance costs and capital load.

While the short-term nature of the business, the ability

tore-price annually and the risk mitigation provided by

reinsurance arrangements are likely to limit the impact on

general insurance liabilities, the modelling has illustrated that

the increased physical effects of climate change could

potentially result in some risks and perils becoming either

uninsurable or unaffordable.

Relative Impact – No Additional Action to Early Action

The following graph illustrates the potential adverse impact

tothe Group’s Solvency II balance sheet value of investment

assets and insurance liabilities at Year 30 under the Early Action,

Late Action and No Additional Action scenarios, based on the

original analysis.

The most adverse financial impact was from the No Additional

Action scenario, which is set at 100% in the graph. When

compared to the total impact under the NoAdditional Action

scenario, the impact of the Late Action scenario was around

54% of the value and the impact under the Early Action

scenario was around 39% of the value.

Figure 1: Year 30 impacts of scenarios relative to the largest No Additional

Action scenario

In the Late Action scenario, the delay in policy implementation

to transition to a low-carbon economy means there are no

transition impacts over the initial ten-year time horizon.

However, accelerated transition from 2031 results in greater

impacts versus the Early Action scenario over the thirty-year

time horizon. Whilst both ofthese transition scenarios saw

material impacts on theinvestment portfolio, the most

significant impacts on both investments and insurance

liabilities arose from the physical risk effects of no transition in

the No Additional Action scenario (where no additional actions

are taken beyond those already announced).

At the thirty-year time horizon, financial impacts in the

NoAdditional Action scenario are nearly double those in the

Late Action scenario, and physical risks also drove the largest

impact on investment results in absolute terms. However, these

impacts do not take into account the Group’s long-term

commitments within its investment strategy, which includes

the ambition of holding a net zero emissions investment

portfolio by 2050 (see pages 79 to 80 and 84 to 85).

All three scenarios would lead to a breach in risk appetite,

and the No Additional Action Year 30 scenario would also lead

to a breach in SCR based on the Solvency II balance sheet as at

year-end 2020. However, a set of clearly defined management

actions could be deployed in each scenario to address the risks

and allow the business to recover to above risk appetite

(seepage 75).

Comparison of impact – insurance liabilities

andinvestments

The following graph shows the potential adverse impact on

theSolvency II balance sheet value of investment assets

andinsurance liabilities under the Early Action, Late Action

and No Additional Action scenarios at Year 10 and Year 30,

based on the original analysis.

The graph outlines how the impact for each scenario

(setat100%) is split between the impact on investments

andinsurance liabilities to illustrate their relative materiality.

Forexample, in the No Additional Action Year 10 scenario,

impacts are split broadly evenly, while in the corresponding

Year 30 scenario, the impact on investments dominates.

Early

Action

Year 30

Late

Action

Year 30

Additional

Action

Year 30

100

Transition scenarios

74 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

Figure 2: Share of impact – insurance liabilities and investments

Except in the Late Action Year 10 scenario, where there is

notransition risk due to the assumed delay, in all scenarios

theimpact on investments is more material than on

insuranceliabilities.

Additionally, insurance liabilities were considered gross of

reinsurance and, in practice, factors such as the short-term

nature of the business, the ability to re-price annually and the

risk mitigation provided by reinsurance arrangements is likely

to limit the impact on general insurance liabilities further.

Management actions

Undertaking this analysis provided us with a framework to

identify and assess the climate-related transition and physical

risks that the business could be exposed to.

Taking into account the level of impacts that we have observed

as part of this climate-related modelling, we identified a

number of management actions that would be effective to

mitigate these risks and respond to newopportunities.

Our Management Action Framework consists of three broad

categories based on the purpose and nature of theaction:

– Contingent Management Actions – These follow

theGroup’s existing Contingent Management Actions

framework and would be deployed to mitigate the scenario

impacts, assuming these arise as instantaneous shocks on

the balance-sheet; potential action could include restricting

capital distributions, for example.

– Pre-emptive Management Actions – These have been

developed assuming that the business can observe the

scenarios unfolding in real time and begin to adapt the

business model in response to these emerging impacts; they

cover areas such as repricing, de-risking ofinvestments and

reinsurance.

– Strategic Management Actions – These actions are aligned

to the Group’s ongoing strategic activity as part of our

contribution to the transition to a lower-carbon economy.

They include: taking action to progress against our Net Zero

ambitions and Science-Based Targets; understanding how

we can support in improving the flood resilience of UK

properties in flood-prone areas; and evaluating the impact

of climate change on our underwriting footprint. Progress

against these actions is overseen by the Climate Executive

Steering Group.

CBES second round

In early 2022, we participated in the second round of the Bank

of England’s CBES exercise. The initial CBES exercise, that took

place in 2021, was designed to test the resilience of the UK

financial system to physical and transition risk from climate

change to assist banks and insurers in enhancing their

management of climate-related financial risk.

For general insurers the second round focused on

management responses to the CBES scenarios and resulting

challenges to the business models. More specifically, it probed

how responses would change if losses were higher; encouraged

additional thinking about dependencies and actions required

by the Government and other associated stakeholders; and

further explored opportunities in the climate scenarios.

In response, the Group concluded that the climate-related

management actions identified in the initial analysis would

remain appropriate. However, the pre-emptive management

actions of repricing and reinsurance would be accelerated after

considering a scenario under which physical losses from

climate change were materially higher.

The second round of analysis was based on the modelling

outputs from the initial exercise, as in the short term re-running

the CBES scenarios is unlikely to produce materially

differentresults.

2023 physical risk modelling

In 2023, we updated the physical risk section of the

underwriting liabilities element of the original analysis to

account for portfolio and modelling changes. In the updated

analysis, the original temperature scenarios were applied

to the Group’s Solvency II balance sheet exposure, as at

the end of Q2 2023.

As part of the updated exercise, we took steps to improve our

model to enhance our view of risk. This included applying an

adjustment for storm surge to account for more accurate flood

defence data and the data used in the analysis was enriched

toincorporate the floor level of each insured property.

The updated analysis also took into account the sale of the

brokered commercial business, to reflect a view of exposure

that was representative of the ongoing Group.

The following graph presents a view of the potential adverse

impact to insurance liabilities at Year 30 under the Early Action,

Late Action and No Additional Action scenarios, based on the

updated 2023 analysis. The graph illustrates the contribution

ofeach peril to the change in total impact (set at 100%), for

example in the No Additional Action scenario around 70% of

the change in total impact is driven by inland flooding.

Early

Action

Year 10

Early

Action

Year 30

Late

Action

Year 10

Late

Action

Year 30

Additional

Action

Year 10

Additional

Action

Year 30

100

Investments

Insurance liabilities

75Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Figure 3: Split of physical risk impacts on insurance liabilities by peril

Figure 3 shows that, on a gross basis, the physical risk to

insurance liabilities across all three scenarios was largely driven

by inland flooding and subsidence. Windstorm was assessed

tohave a small positive benefit over all scenarios as a result

ofchanging atmospheric conditions driven by complex

interactions of a number of variables, ultimately caused by

rising temperatures.

Applying the original climate scenarios to the Q2 2023 portfolio

showed that the risk related to inland flooding and coastal

flooding has significantly decreased compared to the Q4 2020

portfolio across all scenarios, which may indicate greater

climate resilience. For example, under the Year 30 No Additional

Action scenario, the reduction in AAL for inland flooding and

coastal flooding was approximately 20% and 60%, respectively,

when compared to the original analysis. This favourable change

can be attributed to modelling improvements, as discussed

above, as well as portfolio changes including increased ceding

to Flood Re, and other underwriting actions. The results

continue to show that AAL for flooding perils accelerate after

the Flood Re scheme ends in 2039.

Risk for subsidence and windstorm is broadly unchanged from

the original analysis, although due to the significant reduction

in AAL from coastal flooding, the proportion of impact from

subsidence was greater across the scenarios, when compared

to the original analysis.

The findings continue to highlight the importance of the

Group’s existing Management Action Framework (page 75),

which includes a range of actions that could mitigate against

the risks identified through our climate-related modelling.

Theupdated analysis supports future developments in our

physical risk modelling of insurance liabilities, as we evolve

ourunderstanding of the physical risks associated with the

longer-term impacts of climate change.

Reverse stress test – electric vehicle adoption

In 2023, we conducted a reverse stress test to establish whether

the long-term future for motor insurance, specifically, the

adoption of electric vehicles, poses a threat to the viability of

ourcurrent business model. While not commonly covered by

transition risk scenarios, changes in consumer behaviour form a

significant part of the transition to a net zero emissions economy.

Changes in the motor market linked to the rate of electric

vehicle adoption could include: change in ownership models,

such as the use of subscription services and shifting trends

from car ownership to car usership; disruptors entering the

market; and reductions in accident frequencies which could

reduce the size of the personal lines motor market premium

pool. Supported by changes in technology and policy, such as

Government plans to end the sale of new petrol and diesel

carsin the UK by 2035, the speed of this transition to electric

continues to increase.

The reverse stress test considered a range of variables across

three potential outcome ranges (Base, Best and Worst case)

and three time periods (2025, 2030 and 2040) to reflect the

highdegree of uncertainty associated with these risks.

Ingeneral, as transition risks are likely to materialise more

rapidly than physical risks, the time periods examined in this

exercise form part of our short- and medium-term time

horizons, as defined on page 72.

The Best case assumed a slow pace of EV adoption and less

movement from ownership to usership, meaning the size of

thepersonal lines market share remains stable. This case also

assumed the Group’s market share, from both electric and

internal combustion engine vehicles, increases and there is a

small impact from disruptors entering the market. The Worst

case scenario considered all of those elements moving in the

oppositedirection.

The analysis considered the following variables across the time

periods and scenarios:

– the Group’s share of the electric vehicle market;

– the impact of disruptors on market share;

– the impact to the size of the personal lines market that a

move from vehicle ownership to usership could have; and

– the rate of electric adoption.

The findings showed that in the short term, to 2025, there

areonly minor differences between the scenario impacts,

withmore significant movements unfolding over a longer

timeframe. Over the longer term, the results varied

considerably across the different scenarios and included

possible adverse impacts to the Group’s business model or

market share. Conversely, at the favourable end of the range,

the findings represented a possible growth opportunity. The

analysis also identified that the outcomes are sensitive to

assumptions which are largely outside of the Group’s control,

such as the rate of adoption of electric vehicles in the UK, which

is supported by changes in technology and policy designed to

limit carbon emissions.

The analysis supports our assessment of transition risk and

highlighted the importance of enhancing capabilities,

particularly around the Group’s ability to identify and respond

to the emerging electric vehicle and mobility landscape. More

information on how we are evolving our strategic response to

the adoption of electric vehicles can be found on page 78.

Future developments

Going forward, we will continue to work towards developing

scenarios specific to our own risk profile that focus on the most

material aspects of our business and explore the sensitivity of

potential impacts to key uncertainties. These actions form part

of our climate-related risk management roadmap and will

enable the Group to make use of scenario-testing output more

effectively to further inform our strategic approach to

mitigating climate-related impacts.

During the year, we acquired climate scenario modelling

capability to support the future assessment of climate change

impact on the investment portfolio and this capability will

continue to be embedded throughout 2024. See page 80.

-20

-10

-20

-10

Early Action/Late

Action Year 30

No Additional

Action Year 30

Inland Flooding

Coastal Flooding

Windstorm

Subsidence

76 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

Our strategic response

Developing our understanding and management of climate-related risks, whilst seeking out opportunities that may arise from

efforts to mitigate and adapt to climate change, are important aspects for maintaining the longer-term resilience of our strategy.

Our approach focuses on driving change across key areas of our business: our underwriting activities; our operations; and our

approach to investments. The actions we are taking across these areas are considered in turn on pages 78 to 80.

In the following table, we outline the key physical and transition risks and opportunities that could significantly impact these areas

and include the time horizons over which we believe these could become manifest. Additional focus on the operating segments

that could be most affected by climate change can be found on page 78. More information on how we define the time horizons

can be found on page 72.

Category Description Examples of potential impact on the Group

Time

horizon

Key area

ofimpact

Physical risks Acute – event

driven risks such as

flooding and storm

surge.

Chronic – longer-

term shifts in

climate patterns,

such as a continued

rise in average

temperatures,

changes in, and

extreme variability

of, precipitation and

weather patterns

and risingsea levels.

An increase in the frequency and severity of natural catastrophes

and other weather-related events could adversely impact

insurance liabilities, particularly those from our property

insurance products.

S M

M L

Disruption to our direct operations, which could includedamage

to our estate, impacting our ability toserve customers.

S M

M L

Chronic risks could lead to significant changes in our

underwriting criteria to maintain risk appetite, and/or higher

costs to obtain catastrophe reinsurance to protect us against an

accumulation of claims arising from a natural perils event.

S M

M L

Reduced returns from investments in companies whose

operations are impacted by physical climate risks, and realasset

investments directly impacted byphysical climate risks.

S M

M L

U I

Transition risks Risks arising from

the transition to a

lower-carbon

economy.

These are

categorised by

theTCFD as:

– policy and

legalrisks;

– technology risks;

– market risks; and

– reputational risks.

A failure to understand the scale of change in market demand

for products and services due to climate-related policy,

technology and consumer preference could impact revenue

and market share. This could include risks from the transition to

electric-powered vehicles, for example.

S M

Costs associated with the transition to a lower-carbon economy

may increase over time and the adoption of new lower emission

technologies may be unsuccessful.

S M

Insufficient progress against our net zero ambitionscould cause

stakeholder concern andreputational damage.

S M

M L

U I

Reduced returns from investments in high carbon intensity

companies that are not taking action to transition to a low

carbon economy, and real asset investments that are not

compatible with the transitionto a low carbon economy.

S M

M L

U I

Opportunities Efforts to mitigate

and adapt to

climate change

canalso produce

commercial

opportunities.

Thesecould

allowusto help

accelerate the

transition and

continue

contributing to

asustainable

economy.

Accelerating the speed of transition to a lower-carbon economy

by, for example, supporting the move to greener transport

solutions, particularly electric-powered cars, allows us to develop

new insights and capabilities to help us build insurance

solutions that best meet our customers’ evolving needs.

S M

Investment in energy-efficient features and equipment across

our office estate and accident repair centres could save on

energy consumption and operating costs, reduce our footprint

and improve operational andresourceefficiencies.

S M

M L

Potentially enhance risk-adjusted returns from our investments

by aligning the investment portfolio with the transition to a low

carbon economy whilst also enhancing our reputation as a

responsible investor. Ensuring the investment portfolio is

resilient against thephysical effects of climate change.

S M

M L

U I

Key

Short-term (1 – 10 years)

S M

Medium-term (10 – 30 years)

M L

Long-term (30 years +)

Underwriting

U I

Investments

Operations

77Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Underwriting

Property

The physical risks from climate change are most likely to

manifest themselves as an insurance risk on our property

insurance products, where we protect millions of our

customers’ properties against devastating weather events,

such as flooding and windstorms.

These natural catastrophes, and other weather-related events

in the UK, are key drivers in the Group’s solvency capital

requirements and we recognise that climate change could

cause the frequency and severity of these events to increase.

The short-term nature of the business we underwrite, the ability

to re-price annually, and the risk mitigation provided by

reinsurance arrangements are all important factors in how we

manage our exposure. In addition, we further limit our exposure

by making extensive use of Flood Re to cede high flood risk

residential properties.

However, in general, the physical risks from climate change are

likely to intensify over the longer-term. To assess the effects of

this, we perform scenario analysis to measure the potential

impact of climate change on our insurance liabilities over a

thirty-year period. This analysis helps us to quantify the financial

implications of physical risk under different possible future

climate scenarios, with the outputs providing an indication of

the Group’s resilience.

The analysis provides a framework to understand and assess

the potential future risks associated with climate change in

greater detail and the findings aid our strategic planning. This

has included the development of our Strategic Management

Actions (see page 75), which span across business areas and

include action on:

– engaging with policymakers on the importance of

flooddefences in the UK to protect properties located

inflood-prone areas;

– exploring how we can help shape the thinking around

resilient repairs of properties affected by flooding; and

– further evaluating the impact of climate change on

ourunderwriting footprint and risk appetite.

The analysis further supported us in developing our contingent

and pre-emptive management actions, which could be

deployed to mitigate against the risks identified. These cover

areas such as pricing, de-risking of investments and

reinsurance (see page 75).

Findings from our scenario analysis activities can be found on

pages 73 to 76.

Motor

As one of the largest personal motor insurers in the UK, the

moveto electric-powered vehicles is particularly pertinent and,

supported by changes in technology and policy, the speed of

transition to electric continues to increase. Whilst this presents

new challenges, we also recognise this as an opportunity to

support the move to a lower-carbon economy, through the

insurance products we offer.

In response, we have already expanded our propositions to

support our Motor customers whoare making the switch to

electric, and we have established a dedicated Electric Vehicle

Distribution and Strategy team, focused on evolving the

Group’s strategic response to the electric shift.

Actions we have taken include:

– developing an electric vehicle package, offered to all new

andrenewing Direct Line Motor customers, which provides

access to electric vehicle essentials, discounted access to

public and community charging, discounted home charger

installation and insurance that covers batteries and

chargingcables;

– entering into new strategic partnerships which can help

grow our data, such as with Motability Operations from

September 2023, where we expect the number of electric

vehicles weinsure to increase over the course of the

partnership; and

– building further capabilities in our accident repair centres,

where an increasing number of our technicians are now

accredited in repairing electric vehicles, supporting the

development of insight into the future of vehicle technology

and repair.

During the year, we also performed a reverse stress test to

assess how the adoption of electric vehicles could impact the

Group’s business model, which considered a range of variables

across three time periods and scenarios. More information can

be found on page 76.

Operations

Operating in a sustainable way not only supports the planet

butis also a part of how we can mitigate against the potential

climate risks that could cause disruption to our operations.

We have a history of taking action to reduce the environmental

impact of our business. This has included investing in our estate

to integrate new energy-efficient features and equipment,

launching a carbon reduction strategy in our network of

accident repair centres and since 2014, purchasing the

electricity for all our offices and accident repair centres from

renewable sources.

Science-Based Targets

Our aim is to become a Net Zero business by 2050

and this covers our direct operations. To make

progress against this, we set Science-Based

Targetswhich were approved by the SBTi in 2022.

These targets, aligned to a 1.5°C pathway, mean

wehave ambitious carbon reduction plans which

support our journey towards Net Zero.

One of these targets covers the emissions generated

from our direct operations, where we are aiming for

a 46% reduction in absolute Scope 1 and 2 emissions

from our office estate and accident repair centres

by2030, from a 2019 baseline. Reporting against

thistarget can be found within Metrics and Targets

onpage 83.

More information on the plans to progress against

ourtargets and ambitions can be found within the

Sustainability section on pages61 and 62.

Operational emissions

The steps we have taken in recent years mean we understand

where the most carbon-intensive areas of our operations are,

allowing us to prioritise carbon reduction activity across these

areas in support of our targets. Our 23 accident repair centres

remain a key area of focus and we continue to embed a range

78 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

supply chain. Itis also exposed to transition risks, where

companies thatwe are invested in are not adapting their

strategy to a low-carbon future. However, the transition

toalow-carbon economy also creates significant

investmentopportunities.

We have the long-term goal of our entire investment portfolio

being net zero emissions by 2050 and in support of our aims

wecontinue to implement key climate initiatives into our

investment strategy. During 2023, we:

– began work towards meeting our approved Science-Based

Targets for GHG emissions reduction for in scope asset classes;

– remained a signatory to the CDP’s science-based targets

campaign; a collective engagement campaign supported

byover 350 financial institutions and multinationals which

encourages high emitters to set science-based emissions

reduction targets; and

– continued to reduce the carbon intensity of our corporate

bond portfolio in line with our aim of a 50% reduction by 2030

from a 2020 base year.

The actions detailed above form part of the ongoing

development of the wider ESG framework underpinning

investments. In terms of holding investments in other

companies, those with higher reported ESG credentials have

more sustainable practices which better align to our investment,

environmental and social goals. As such, a requirement of all

investment-grade corporate bond portfolios is that each portfolio

must maintain an MSCI ESG rating at least as high as the

corresponding ESG weighted reference index or benchmark.

Looking through the climate lens, we also have in place the

following current initiatives:

– Thermal coal screen whereby we restrict investment in firms

generating more than 5% of revenues from either thermal

coal mining or thermal coal power production unless the

company is taking positive climate action

– We actively encourage our investment managers to invest in

green bonds. Green bonds are designated bonds intended to

encourage sustainability and to support climate-related or

other environmental projects. All our relevant corporate bond

mandate guidelines now direct the portfolio manager to

purchase a green bond where the risk return characteristics

are similar to those of a comparable non-green bond.

Science-Based Targets

In support of our long-term goal of ensuring our

entire investment portfolio is net zero emissions

by2050, in line with the aims of the Race to Zero

campaign, we set four science-based GHG emission

reduction targets in our investment portfolio.

Approved by the SBTi in 2022, the targets cover

corporate bonds, commercial property and real

estate loans which, as at the end of 2023, covered

65% of AUM.

More information on the targets, and our 2023 reporting

against them, can be found within Metrics and Targets on

pages 84 and 85 and on pages 61 and 62.

Note:

1. Companies taking positive climate action are defined as those that are committed to setting Science-Based Targets or have a 2°C or better carbon

performance alignment from the transition pathway initiative.

of solutions as part our carbon reduction strategy, with this

work being led by colleagues in the Auto Services Sustainability

Programme. In the year, we have:

– expanded the use of hydrogenated vegetable oil in our

accident repair centres as an alternative fuel for our recovery

trucks. This initiative has now been implemented at 95% of

our repair centres, resulting in an estimated 2,025 tCO

saved in2023;

– delivered the removal of gas from all of the paint spray

booths at one of our sites, providing an estimated saving of

277 tCO

e in the year. We continue to use this experience to

explore expanding the move from gas powered paint booths

to electric in more of our repair centres; and

– completed the installation of LED lighting at all 23 accident

repair centres.

Elsewhere, in 2023, we reduced our office footprint when

moving our head office from Bromley to a newer and smaller

Central London property, Riverbank House, where we obtained

an SKA Silver Rating for the fitting out of the office space.

AnSKA Rating is a recognised means of assessing the

refurbishment of existing buildings to ensure the retrofit is

carried out in an environmentally considerate way.

Emissions reporting

We calculate and report our GHG emissions annually and

ourmost recent carbon emissions reporting can be found on

page 64. Further disclosure on the progress we have made in

reducing our operational footprint to date can be found within

Metrics and Targets on pages 83 and 84.

Carbon offsetting

Our aim is to become less reliant on carbon offsetting and,

although our journey to net zero emissions continues to gain

momentum, we acknowledge that it will take time to facilitate

the transition. For this reason, we offset our remaining Scope 1

and 2 emissions. Further information on the offsetting projects

we pledge support to can be found on page 65.

Supply chain

Through our Supply Chain Sustainability Programme, we are

engaging with suppliers to encourage them to sign up to SBTi

targets or an equivalent, so we can make the transition to a

pathway consistent with a 1.5°C scenario. During the year, this

work also included reviewing the weighting of sustainability

factors in our sourcing processes.

Further information on the activities undertaken in the year

aspart of our Supply Chain Sustainability Programme can be

found on page 63 and the GHG emissions from our supply

chain are reported on page 64.

Investments

In recent years, we have begun integrating more ESG

considerations into our investment strategy, recognising this

isa long-term process which will require assessment and

challenge to inform future decision making.

We know that the impacts of potential physical and transition

climate-related risks arising in the wider economy will have an

impact on our investment portfolio, through their influence on

the value of assets. For example, our portfolio is exposed to

physical risks through our investment in companies that are

exposed to disruption from adverse weather events across their

79Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Scenario analysis

During the year, we acquired climate scenario

modelling capability to support our assessment of

the impact climate change could have on the

investment portfolio.

This will enable us to measure and quantify the

potential financial impact of climate-related physical

and transition risk on our investments, whilst also

providing a better understanding of the

opportunities that may arise from the transition to a

lower-carbon economy. The modelling uses different

possible future climate scenarios, including those

issued by the Network for Greening the Financial

System and the Intergovernmental Panel on

Climate Change.

This capability will continue to be embedded

throughout 2024.

– Within our investment property portfolio all assets must have

an Energy Performance Certificate of ‘D’ or better, or a plan

and funds in place to achieve that level. The property portfolio

also has a tailored set of ESG targets covering areas such as

carbon, energy, water and waste.

Using our influence

We are committed to using our influence to drive wider

change. For example, all of our investment managers are

signed up to the UN Principles for Responsible Investment.

Wealso talk regularly to our external asset managers to

understand (and where necessary, challenge) how they are

using their global presence, size and leverage to engage and

encourage corporations to tackle climate change. This year

wehave also signed up to the CDP’s science-based targets

collective engagement campaign which encourages high

emitters to set science-based emissions reduction targets.

Risk Management

Enterprise Risk Management Strategy

andFramework

The Enterprise Risk Management Strategy and Framework

(“ERMF”) sets out, at a high level, the Group’s approach to

setting risk strategy and managing risks to the strategic

objectives and day-to-day operations of the business, including

climate change. The ERMF is supported by the Internal Control

Framework (“ICF”) which sets out the key elements, roles and

responsibilities of the Group’s system of internal control.

Furtherinformation can be found in the Risk management

section of the Strategic report on pages 86 and 87.

Risk taxonomy

The effects of climate change are wide-ranging, affecting many

risks across the risk universe. To allow for better recognition of

internal and external drivers of climate-related risk and to

provide a focal point for the reporting of risks relating to climate

change, the Strategic Risk category includes Climate Risk

within Environmental, Social and Governance Risk.

Risk impact

The impacts of all risks, events and action plans are rated using

the Impact Classification Matrix which facilitates a consistent

approach to the sizing and categorisation of risk across the

Group by using Financial, Regulatory, Customer, Reputation,

Operational disruptions and Economic, Social and Governance

factors (including Climate Change) inputs. This includes those

risks relating to climate change, including climate-related

litigation risks, and allows the Group to determine the relative

significance of climate-related risks in relation to other risks.

Climate-related risk identification process

Annual risk identification process

Each year, the business is required to review all current and

developing risks which could impact on the achievement of

strategic objectives. This process includes assessing risk drivers,

at a Group level, such as those due to climate change, and their

potential impact and likelihood of risk crystallisation on both

aninherent and residual basis, in addition to identifying the

position which aligns with risk appetite.

We also use a variety of indicators across our product segments

to assess, monitor and manage climate-related risks. A number

of these key metrics can be found on pages 81 to 85.

Regulatory monitoring

The Group monitors and reviews relevant outputs from the

FCA, the PRA, and His Majesty’s Treasury (“HMT”), to consider

existing and emerging regulatory requirements.

During 2023, this included reviewing:

– HMT’s update to the Green Finance Strategy for the UK to

become the world’s first Net Zero Aligned Financial Centre;

– the Bank of England’s report on climate-related risks and the

regulatory capital frameworks; and

– the FCA’s discussion paper on Finance for positive

sustainablechange.

We continue to monitor future developments. Reviews are

summarised and distributed to relevant stakeholders, and,

where necessary, responses are coordinated and overseen

bySecond Line of Defence subject matter experts.

Emerging risk process

In addition to the annual risk review process, the Group has

inplace an emerging risks process which facilitates the

identification, management and monitoring of new or

developing risks which are difficult to quantify or are highly

uncertain. The Group records emerging risks within an

Emerging Risk Register. Updates on emerging risk and the

actions being taken to address them are presented to the Risk

Management Committee and the Board Risk Committee

regularly, supplemented by deep dives on selected emerging

risks. In 2023, a deep dive was conducted on the transition to

electric vehicles (see page 76). Each emerging risk is owned by

an Executive sponsor to help ensure alignment of how it is

managed to the strategic objectives and priorities; as well as a

senior business leader who is responsible for day-to-day

management of the risk.

Climate change, including climate-related physical and

transition risk, is one of the Group’s most prominent emerging

risks, with regular oversight provided by the Climate Executive

Steering Group, consisting of First Line of Defence subject

matter experts from around the business where the impact of

climate change is the highest, in addition to Second Line of

Defence subject matter experts who provide oversight and

challenge of risk management activity relating to this.

80 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

Metrics and Targets

We use a variety of key performance indicators across the different lines of our business to assess, monitor and manage climate-

related risks and opportunities. In the table below, we summarise the key metrics used across the three areas of activity, as

identified earlier in our disclosure: our underwriting activities; our operations; and our approach to investments. Further detail on

these, and our targets, can be found within the pages that follow.

Area Metric Description Category Page

Underwriting Total weather-

related loss impact

Track actual performance against our an annual expectations

formajor weather-related claims and monitor the impact of

claims associated with severe weather on the Group’s net

insurance margin.

Physical risk 82

Flooding Monitor our market share for risks to be deemed in the high- or

very high-risk segments and track the volume and proportion

ofpolicies we are ceding to Flood Re.

Physical risk 83

Subsidence Monitor our subsidence market share by geo risk classification. Physical risk 83

Electric vehicles Monitor the number and proportion of electric vehicle policies

weunderwrite and track the number of new electric vehicles

registered in the UK.

Transition risk and

opportunities

Operations Operational

emissions

Calculate and report our operational emissions (Scope 1 and 2),

tomonitor progress towards our science-based operational

emissions target.

Physical risk and

transition risk

62, 64,

83, 84

Measuring progress

within our repair

centres

Quarterly oversight of:

– GHG emissions and gas consumption metrics associated with

vehicle repair;

– the delivery of carbon reduction plans; and

– opportunities for innovating and using new solutions within

repair centres, in support of plans and targets.

Transition risks

and opportunities

Investments Investment portfolio

emissions

Measure and report the temperature score of our corporate

bondportfolio, and GHG emissions from commercial property

and real estate loans, to track progress against our science-based

investment targets to ensure we are delivering against our aims.

Physical risk and

transition risk

62, 64,

84, 85

Both physical and transition risks could manifest themselves

through a range of existing financial and non-financial risks,

including insurance, market, operational and strategic risks.

Formore information on emerging risk and climate change

seepage 92.

Climate risk modelling

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

capital position are major UK floods and windstorms and these

are modelled together with less material perils such as freeze

and subsidence within the Group’s Internal Economic Capital

Model and reviewed at least biennially.

The influence of climate change is difficult to isolate from the

complex oceanic and atmospheric processes driving UK

weather. The Group uses catastrophe models to capture these

factors, and in turn these models are regularly reviewed against

specific criteria including how they have considered latest

scientific thinking, to ensure they appropriately capture the

Group’s risk profile. Responsibility for this work sits within the

Capital Management function.

The majority of our policies renew annually and are priced

according to risk. Pricing algorithms use sophisticated rating

engines to account for recent trends and are supplemented

with views of catastrophic risk to seek to ensure sufficient

pricing. These prices will evolve as climate change influences

manifest themselves through changing loss patterns, and views

of catastrophic risk develop because of rising sea levels,

changes in precipitation rates and urban resilience.

Risk pricing models are built using historical data covering

amulti-decadal time period for perils most likely to be

influenced by climate change. This allows us to understand

andincorporate long-term signals and past trends into our

modelling. These models benefit from considerable amounts

ofinternal and externally purchased data. External data

isreviewed and updated regularly, and we maintain a

relationship with data suppliers to understand the

methodologies and assumptions in their work. Nevertheless,

the underlying trends can be difficult to measure as they

emerge through infrequent one-off catastrophe events and

may have additional contributory factors (for example,

deforestation increasing the pace of rainwater run-off upstream

of a flood). Furthermore, future trends are likely to differ from

past projections. As such, we recognise a range of uncertainty

as to current and futureimpacts.

Increases in frequency and severity of large catastrophe weather

events are mitigated by the Group’s use of catastrophe excess of

loss reinsurance. This reinsurance covers property (Personal Lines

and Commercial Direct) and Motor physical damage losses; in

addition to significant capital benefits, it transfers the volatility of

low-frequency, high-severity natural peril events away from the

Group. The reinsurance purchase decision is a combination of

catastrophe modelling, capital analysis, the Group’s risk appetite,

cost of cover and the overall income statement impact. Cover is

typically purchased with an upper limit equivalent to a 200-year

modelled loss and the retention will be based upon the amount

that the Group is willing to sustain from such a loss. In addition,

we make extensive use of Flood Re to cede high flood risk

residential properties.

81Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

The Group has disclosed a number of metrics consistent with

the cross-industry categories recommended by the TCFD.

These include:

– GHG emissions: our Scope 1, 2 and 3 emissions and emissions

intensity metric reporting can be found on page 64.

– Remuneration: our LTIP awards have an emissions

performance condition which covers the targeted reductions

in emissions and temperature scores that form part of our

Science-Based Targets. More information can be found in the

Directors’ Remuneration Report on page 143.

– Physical risks: the results of our scenario analysis activities,

which assesses the potential impact of climate-related

physical risk on the value of insurance liabilities, can be found

on pages 73 to 76. Analysis of the actual impact of severe

weather claims can be found in the underwriting section,

below.

– Transition risks: the results of our scenario analysis activities,

which assesses the potential impact of climate-related

transition risk on the value of investment assets, can be found

on pages 73 to 76.

Our aim is to explore further how we incorporate additional

cross-industry metrics, including those to enhance the

measurement and management of transition risks and

opportunities, in future reporting.

Underwriting

Weather-related loss impact

The predominant direct physical drivers of catastrophe

weatherrisk from a capital perspective are major UK floods

andwindstorms. The last peak of windstorm activity was in the

late 1980s and early 1990s; the last decade being particularly

benign in comparison. By contrast, flood has seen more

elevatedactivity.

Catastrophe reinsurance is purchased annually to protect

against event losses greater than £100 million (see page 39).

Use of the Flood Re scheme mitigates against the highest

individual residential flood risks.

The cost of claims relating to major weather can found within

the management view statement of profit or loss (see

page270).

Severe weather claims

(actual % of expected loss)

The Group uses sophisticated modelling techniques to estimate

the expected losses from severe weather events and uses these

to set an annual expectation for major weather-related claims.

100

150

200

250

2013 2014 2015 2016 2017 2018 2019 2021 2022 20232020

Actual weather

Expected

The previous graph shows the impact of severe weather claims

relative to this annual expectation. In 2023, claims associated

with severe weather were below our 2023 severe weather

assumption, which is set at 100% in the graph.

As shown in the graph, the trends are reflective of relatively

benign activity, although there is significant variability.

In 2022, claims from weather-related events were more than

double our annual assumption following three significant

storms in Q1, a rise in subsidence claims from extremely

hightemperatures in the summer and the December freeze

event.The 2018 peak was driven by the ‘Beast from the East’

freezeevent and the 2015 peak was a result of a number of

weatherevents in December, which caused severe flooding

acrosstheUK.

Impact of severe weather on net insurance

margin

1,2

(pt)

Both these graphs reflect the number of major weather events

in the year that the Group responded to. The frequency and

severity of extreme weather events could be affected by climate

change, which in turn will affect our view of risk, how we price

severe weather risk, and the type and level of reinsurance we

purchase to protect our balance sheet.

Home

Key risk indicators are produced by the underwriting function

and reviewed quarterly through relevant business forums.

The key climate change-related activities are flood, subsidence

and other weather incidents. For flood and subsidence perils,

we monitor the Group’s market share for risks deemed to be

in the high- or very high-risk segments. We also monitor and

review the proportion of policies ceded to Flood Re. Each peril

is monitored against set tolerances, with movements in amber

or red ratings generating investigation and action as required.

2022 2023

-4

-3

-2

-1

Severe weather impacts

Expected

Notes:

1. Data used within this analysis is for ongoing operations (see glossary

onpage 263).

2. Following adoption of IFRS 17, the Group restated its 2022 results and

the2022 analysis within this graph has been represented accordingly.

The Group has moved to net insurance margin as a key performance

indicator, replacing the previously used combined operating ratio,

whichis reflected in this analysis of severe weather impact. Analysis for

periods prior to 2022 is not available. For historic reporting, see previous

publications, including page 83 of the 2022 Annual Report and Accounts.

82 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

planned include reviewing issued guidance related to

measuring and reporting underwriting emissions, in order

tofurther inform the Group’s approach.

The weighted average carbon intensity or GHG emissions

associated with commercial property and specialty lines

ofbusiness, where data and methodologiesallow

Following the sale of our brokered commercial business

earlierin the year, we expect our underwriting exposure to

commercial property lines to significantly reduce as this

business runs off over time.

We continue to remain active in the direct small business

commercial insurance market, which includes providing

insurance for small commercial properties, however, we view

our exposure to carbon intensive sectors through these

underwriting activities to be low, due to the type and size

ofthebusinesses we insure.

Whilst we will continue to review emerging best practice,

atpresent, we do not believe available methodologies have

sufficient maturity to meaningfully measure the weighted

average carbon intensity or GHG emissions associated with

small business commercial property lines. For example, current

frameworks recommend collecting emissions data from

companies’ own disclosures or official filings, or use of physical

or economic activity data, to determine emissions associated

with commercial lines portfolios. Such recommendations are

not currently pragmatic for insurers with commercial small

business customers, such as the Group.

The Group does not underwrite any specialty lines of business.

Operational

We calculate and report our operational GHG emissions

annually. Our most recent reporting can be found on page 64

where we continue to break out our Scope 1 and Scope 2

emissions into separate performance figures across our office

sites and accident repair centres. We also disclose our Scope 3

footprint, which includes emissions from our supply chain.

Science-Based Targets

In support of our net zero ambitions, we have set five

Science-Based Targets, in line with a 1.5°C pathway, focused on

the most carbon intensive areas of our business, one of which

covers our operational emissions. These targets were approved

by the SBTi in 2022.

Scope Target 2023 update

Operational We target

reducing absolute

Scope 1 and 2 GHG

emissions by 46%

by 2030 from

a2019 base year.

As at the end

of2023, absolute

Scope 1 and 2 GHG

emissions reduced

by 43%

, from

a2019 base year.

Our 2023 reporting shows a 43%

reduction in Scope 1 and 2

emissions, when compared to the 2019 baseline. This reflects

the actions we have taken in recent years, which has included

reducing our office footprint, investing in our estate to integrate

new energy-efficient features and equipment and the carbon

reduction initiatives we are implementing across our network

of accident repair centres.

More information on our Science-Based Targets, including the

actions we have taken in the year against them and our future

priorities, can be found on pages 61 and 62.

We maintain a view of trends and look to take action where

atrend is likely to result in a breach of tolerance.

Flooding

Governments have been working with insurers since 2000

tohelp make flood risk insurance more affordable and in 2016

Flood Re was introduced. Every insurer that offers home

insurance in the UK, the Group included, must pay into the

Flood Re scheme and this levy is used to cover the flood risks

inhome insurance policies.

To ensure the Group and its customers benefit from the levy

and guard against the highest of flood risks, wemonitor the

volume and proportion of policies we are ceding to Flood Re.

Properties are eligible to be ceded to Flood Re when they meet

certain criteria. Since early 2019, the cost to cede policies to

Flood Re has dropped, driving an increase in ceded volumes.

Subsidence

We monitor exposure to this physical risk via our subsidence

market share by geo risk classification. This risk classification

aims to give a market view of geographic risk, within the UK,

ofhaving a subsidence claim. This enables us to understand the

proportion of subsidence risk that we write compared to our

estimate ofthe total in the market.

Motor

The Group’s motor market is diversified throughout the UK,

andalthough weather-related factors will influence claims

frequency it is a relatively small influence compared with other

factors, such as used car prices. As such we do not currently

consider there to be any valuable climate-related physical risk

indicators that can be tracked for this portfolio.

In order to track the transition towards electric vehicles we

monitor both the number and proportion of policies we

underwrite for these types of vehicles as well as the number

ofelectric vehicles and alternatively fuelled vehicles registered

in the UK. This supports us in estimating our market share

andhelps inform our electric vehicle strategy.

Progress against the supplemental guidance for

insurance companies

The Group believes that its disclosure against certain

components of the sector-specific guidance, within Metrics

andTargets recommendations (a) and (b), does not meet the

objectives of the TCFD.

Below, we outline the activities we have undertaken during the

year to improve our disclosure against these areas in future

reporting, as well as the activities planned for 2024.

The extent to which insurance underwriting activities,

whererelevant, are aligned with awell below 2.0°Cscenario

The Group recognises that measuring underwriting emissions

remains a developing area, with the frameworks and

methodologies to support insurers in calculating these

emissions continuing to evolve. An area of limitation that is

particularly pertinent to personal lines and small commercial

business insurers is the practicalities of obtaining data with

sufficient accuracy and reliability to determine the emissions

associated with these portfolios.

During the year, the Group has embedded plans to further

assess its disclosures relating to underwriting emissions, through

the development of a climate-related risk management

roadmap (see page 71). In 2024, the actions that are currently

Note:

1. We are required to use Scope 1 and Scope 2 market-based emissions for SBTi operational target setting and reporting. When including Scope 2

location-based emissions this reduction is equivalent to a52%reduction.

83Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Investments

In 2018, the SBTi launched a project to help financial institutions

align their lending and investment portfolios with the

ambitions of the Race to Zero campaign. The project audience

includes universal banks, pension funds, insurance companies

and public financial institutions.

Science-Based Targets

Our long-term goal is for our entire investment portfolio to be

net zero emissions by 2050, in line with the aims of the Race to

Zero campaign. To support this, we have set Science-Based

Targets for our investment portfolio covering corporate bonds,

commercial property and real estate loans, these were

approved by the SBTi in 2022.

As at the end of 2023 our investment portfolio targets covered

65% of AUM.

Asset Class Target 2023 update

Corporate

Bonds

Align the Scope 1

and 2 portfolio

temperature score

by invested value

from 2.44°C in 2019

to 2.08°C by 2027.

As at the end of

2023, the Scope 1

and 2 portfolio

temperature score

by invested value

was 2.02°C.

Align the Scope 1, 2

and 3 portfolio

temperature score

by invested value

from 2.80°C in 2019

to 2.31°C by 2027.

As at the end of

2023, the Scope 1, 2

and 3 portfolio

temperature score

by invested value

was 2.31°C.

Commercial

Property

Reduce GHG

emissions by 58%

per square metre

by 2030 from a

2019 base year.

Agreed first

reporting in 2024

Real Estate

Loans

Reduce GHG

emissions by 58%

per square metre

by 2030 from a

2019 base year.

Agreed first

reporting in 2024

Further details on the emissions from our investments are

reported on page 64.

Operational emissions performance

With hybrid working well embedded across the business, large

numbers of our people continue to work from home regularly.

In recognition of this we have again calculated and reported

homeworking emissions under the Scope 3 ‘Employee

Commuting’ category (see page 64).

Overall, when compared to 2022, our Scope 1 and 2 GHG

emissions decreased to 6,999 tCO

e. In the year, our office

footprint reduced following the move of our head office from

Bromley to a newer and smaller Central London property,

contributing to lower Scope 1 and 2 emissions from our

officeestate.

Within our repair centres, we continued to see a reduction in

Scope 1 emissions through the use of hydrogenated vegetable

oil as an alternative fuel for our recovery trucks, with this

initiative now implemented at 95% of our Auto Services sites

(see page 79). These reductions were partly offset by an increase

in Scope 2 emissions from our repair centres as we continue

toswitch to electric from gas to power spray paint booths,

where possible.

Auto Services Sustainability Programme

Our Auto Services Sustainability Governance Forum, held

quarterly, is responsible for the oversight, accountability and

coordination of all activity that forms part of the Auto Services

Sustainability Programme. The Forum oversees progress

against the activities to deliver towards the carbon reduction

strategy within our accident repair centres and tracks key

Programme milestones.

This includes monitoring the delivery and performance against

GHG emissions reduction targets, where metrics, such as gas

consumption and emissions associated with vehicle repair, are

tracked. The Forum also assesses the risks that could impact

the delivery or prioritisation of planned activity, coordinating

the actions required to mitigate against these. It also considers

metrics relating to opportunities from innovating and using

new solutions in support of plans and targets, such as assessing

the feasibility and benefits of adopting new lower emission

technologies or equipment in repair centre sites.

Supply chain

While we wait for the publication of the Science-Based Net

Zero Targets for Financial Institutions from the SBTi, which is

expected in 2024, we have chosen to set an internal emissions

reduction target for our supply chain. This target forms part

ofour Supply Chain Sustainability Programme, where we

continue to encourage our largest emitting direct suppliers

tosign up to SBTi targets or an equivalent (see page 63).

Note:

1. Due to the practicalities of obtaining data from our external asset managers ahead of the release of the Group’s annual reporting, progress against

our commercial property and real estate loan targets is reported with a one-year time lag. This approach was agreed with the SBTi when these

targets were approved in 2022.

84 Direct Line Group Annual Report and Accounts 2023

Task Force on Climate-related Financial Disclosures continued

The temperature score for corporate bonds is the implied level

of warming above pre-industrial levels to which our portfolio

isaligned based on the CDP’s temperature rating data set.

Foran individual company the temperature rating is the level

ofwarming to which a company’s publicly stated emission

reduction targets align. The targets are set on a linear pathway

for the portfolio to reach 1.5°C by 2040 as is required by the SBTi.

We aim to achieve our corporate bond target by directing

investment to companies with lower temperature scores

asthese are the ones taking most serious action to reduce

emissions. We will also expect our external investment

managers to engage with portfolio companies to encourage

them to act by setting robust emissions reduction targets.

Wealso continue to target an interim 50% reduction in

weighted average carbon intensity by 2030 from a 2020 base

year for corporate bonds in order to ensure emissions are

reducing overtime.

Streamlined Energy and Carbon Reporting (SECR) regulations

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

how the Group manages its energy consumption and carbon emissions.

Requirement

Pages

Annual global GHG emissions (CO

e):

– from activities for which the Company is responsible 64

– from buying electricity, heat, steam or cooling by the Group for its own use 64

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

– energy consumed from activities for which the Company is responsible 65

– energy consumed resulting from buying electricity, heat, steam or cooling

by the Group foritsownuse

The proportion of GHG emissions and energy consumed relating

to the UK and offshorearea

1,2

63, 65

Methodology used to calculate emissions and energy consumption 65

At least one intensity metric in relation to emissions 64

Description of energy efficiency actions taken 63

Notes:

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

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

2. 100% of the Group’s GHG emissions and energy consumption reported relates to operations, all of which are based in the UK.

Carbon intensity is the GHG emissions intensity per $1 million

ofsales. Normalising by sales allows the investor to compare

carbon efficiency of different-sized firms within the same

industry and has become a standard metric usedin the

investment industry.

For commercial property and real estate loans, targets were set

using the SBTi sectoral decarbonisation approach for real estate

which uses the IEA ETP 2017 Beyond 2°C scenario. Emissions for

real estate relate to the energy use of buildings which is largely

emissions from electricity and heating use. Work towards our

real estate targets will require improving the energy efficiency

of buildings, engaging with tenants to share energy use

dataand encouraging them to settheirown emissions

reduction targets.

More information on our Science-Based Targets, including the

actions we have taken in the year against them and our future

priorities, can be found on pages 61 and 62.

85Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Our aim is to make risk management simple, effective, well understood and deeply

embedded. The Risk Function will provide oversight which is pro-active,

proportionate and commercial to help the business make informed risk-based

decisions and to move quickly whilst understanding the risks.

Managing risk in line with our strategy

Our management team, with oversight from the Board, and

Board Risk Committee, is responsible for developing our

strategy. Our strategic planning process aims to ensure we have

developed clear objectives and targets, and identified the

actions needed to deliver them, including the management of

risks arising from the strategic plan.

A key aspect of any effective strategic planning process is to

understand and manage those risks appropriately. To achieve

this, the Risk Function works closely with the rest of the business

to help it to identify and assess risks, which is done through

setting and achieving targets as well as through its review and

challenge of business plans in the strategic planning process.

The Group’s risk strategy is aligned with the Group strategy and

supports business decision-making through the proactive

identification, assessment and management of risks.

Our risk governance framework

The Risk Function continues to lead significant cultural change

to drive ownership of risks across the Group. The Group has a

strong risk culture, and a mature and embedded Enterprise Risk

Management Framework (“Risk Management Framework”)

with clear accountabilities and risk ownership designed to

ensure that we identify, manage, mitigate and report on all key

risks and controls through the three lines of defence model:

First line: Management is responsible for embedding risk

management into business as usual and change processes

whilst creating transparent reporting of risks and management

actions.

Second line: The Risk Function is responsible for the design and

recommendation to the Board Risk Committee of the risk

management framework, its implementation across the Group

and the provision of proportionate oversight of risks, events and

management actions throughout the Group.

Third line: Group Audit is responsible and accountable for

providing an independent and objective view of the adequacy

and effectiveness of the Group’s risk management, governance

and internal control framework.

See page 110 for governance structure.

Risk appetite

Our risk appetite statements define the opportunities and

associated level of risk the Group is prepared to accept to

achieve its business objectives. The statements are used to drive

risk-aware decision making by key business stakeholders.

Our risk appetite statements are documented in our Policies

and include:

– monitoring whether the business remains within risk appetite,

among other information, using key risk indicators;

– deriving the key risk indicators from the risk appetite

statements to drive and monitor risk-aware decision-making;

and

– both qualitative and quantitative risk statements which are

forward- and backward-looking. We review our risk appetite

statements and key risk indicators annually.

Overarching risk objective

The Group recognises that its long-term sustainability is

dependent on having sufficient economic capital to

meet its liabilities as they fall due, thus protecting its

reputation and the integrity of its relationship with

policyholders and other stakeholders. As part of this, its

appetite is for general insurance risk, focusing on

personal lines retail and small and medium-sized

enterprise insurance in the United Kingdom. The Group

has appetite for non-insurance risks, as appropriate, to

enable and assist it to undertake its primary activity of

insurance.

Three strategic risk objectives

1. Maintain capital adequacy

The Group seeks to hold capital resources in the range

of 140% to 180% of the partial internal model solvency

capital requirement.

2. Stable/efficient access to funding and

liquidity

The Group aims to meet both planned and

unexpected cash outflow requirements, including

those requirements that arise following a 1-in-200 year

insurance, market or credit risk event.

3. Maintain stakeholder confidence

The Group has no appetite for material risks resulting in

reputational damage, regulatory or legal censure, poor

customer outcomes, fines or prosecutions and other

types of non-budgeted operational risk losses

associated with the Group’s conduct and activities. The

Group’s objective is to maintain a robust and

proportionate internal control environment.

Risk management

86 Direct Line Group Annual Report and Accounts 2023

Our Risk Management Framework

The Risk Management Framework sets out, at a high level, the

Group’s approach to setting risk strategy, and managing risks to

the strategic objectives and day-to-day operations of the

business. The Risk Management Framework is designed to

manage the Group’s risk proactively and to enable dynamic risk-

based decision making.

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

Risk Management Framework articulate the high-level

principles and practices needed to achieve appropriate risk

management standards, but it also demonstrates the inter-

relationships between components of the Risk Management

Framework.

Within this, the risk management process is a key element in

the development and on-going maintenance of an accurate risk

profile. The objective of the risk management process is to

identify, assess, manage, monitor and report on the risks that the

Group is exposed to. See pages 80 and 81 for specific

information on how the business identifies and assesses the

risks associated with climate change.

Within the Risk Management Framework, Policies address

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

Policies, where appropriate, are supported by underlying

Minimum Standards which interpret Policies into a set of risk

and control requirements to be implemented across the Group.

Our risk culture

Our risk culture underpins our business and decision-making

and helps us maintain a robust and disciplined approach to

managing risk. Our Risk Function drives ownership of risks in the

business, ensures that risk consideration is integral to decision-

making and that activities within the business are aligned with

the Risk Management Framework. Risk also provides expert

advice and guidance to business areas, including challenging

the effectiveness of controls to manage risk and compliance, to

support the business in demonstrating the right mindset to

achieve its strategic objectives. The Board is committed to

promoting a culture of high standards of corporate governance,

business integrity, ethics and professionalism in all our activities.

The Risk Function continues to work collaboratively across the

Group to engender a positive risk culture, in particular

developing a consistent approach to assessing and reporting on

risk culture maturity, to ensure risk is fully integrated within the

Group’s wider cultural ambitions and aligned on values and

behaviours that we expect our people to demonstrate.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 87

“What the Group is

trying to achieve

as a Company”

“The risks (and

opportunities) the

Group’s Objectives

expose it to”

“The Backstop

to protect

customers if

the Group

gets it wrong”

“How the Group manages those risks (and opportunities)”

Strategic

Objectives

Vision &

Business

model

Capital

Inherent Risk

Residual Risk

The Group Enterprise Risk Management Framework

(ERMF)

Insurance

Market

Credit

Liquidity

Operational

Conduct

Regulatory

Strategic

Group

Insurance

Market

Credit

Liquidity

Operational

Conduct

Regulatory

Strategic

Group

Line of Defence 2

Line of Defence 3

Line of Defence

» Risk Policies &

Minimum Standards

» Risk appetites

» Impact Classification

Matrix

» Risk & Control

Assessment

» Monitoring &

Reporting

» Governance

» Business Processes

» Risk & Compliance

Function

» Board Risk

Committee (BRC)

» Risk Management

Committee (RMC)

» Other Risk

Committees

» Group Audit

Function

» Audit Committee

Control Activities

(Internal controls, Key Controls, Testing)

Internal Control Standards

(Structures, Policies, Standards, Role &

Responsibilities)

Control Environment

(Tone, Integrity, Values, Risk Culture, RiskMaturity)

Internal Control Framework (ICF)

87Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

We carefully assess the principal risks facing us. Principal risks are defined as having a residual risk impact of £30 million or more,

taking into account customer, financial and reputational impacts. During 2023 the Group revised its financial materiality threshold

down from £40 million to £30 million. This was driven by wanting to bring the materiality closer to that of the audit materiality, along

with a desire to consider a wider range of quantitative (such as Solvency) and qualitative factors to ensure the level of materiality

does not fluctuate significantly year on year.

Our principal risks are under continuous review and assessment and, with the introductions of the FCA’s PPR regulations and

Consumer Duty, Conduct Risk is now deemed a principal risk to the Group.

Principal risk Description Risk commentary

Insurance Risk

Relative size of risk

Trend – stable

The risk arising from

insurance

obligations, in

relation to the perils

covered and the

processes used in

the conduct of

business. It takes

account of the

uncertainty related

to the Group’s

existing insurance

and reinsurance

obligations as well

as to new business

expected to be

written. It includes

the risk of loss, or of

adverse change in

the value of

insurance liabilities

resulting from:

– fluctuations in the

timing, frequency

and severity of

insured events,

and in the timing

and amount of

claim

settlements; and

– significant

uncertainty of

pricing and

provisioning

assumptions

related to

extreme or

exceptional

events (for

example

catastrophe risk).

Key drivers of the outlook for insurance risk

across our business plan include reserve,

underwriting, distribution, pricing and

reinsurance risks. Issues relating to claims

inflation, the cost of living crisis, the impact of the

FCA's PPR regulations, and the global political

situation compounding supply/demand issues

which arose following Covid-19 and Brexit have

been key areas of focus for the Group in 2023.

Claims trends have been significantly impacted

by persistent claims inflation, particularly in the

motor market, leading to uncertainty in claims

reserving and pricing in 2023 and beyond.

However, our reserving processes reflect

improved insight in claims experience and

inflation trends resulting from extensive work

undertaken across the business over the past

year. In addition, the Group has begun its pricing

and underwriting transformation journey aimed

at delivering best market practice in our Motor

business.

Key risk themes relating to this category include

the macroeconomic environment, motor

profitability, organisational resilience and agility,

and sales risk post implementation of the FCA

PPR regulations.

We have used scenario testing to understand the

potential financial impacts of these risks and

continue to monitor them closely.

Finally, climate change presents a risk of more

frequent extreme events and we are looking to

enhance key risk indicators to monitor related

risks across Home and Commercial. The Group

manages its current exposure to weather events

through the use of reinsurance and our

participation in the Flood Re initiative.

Market Risk

Relative size of risk

Trend – stable

The risk of loss

resulting from

fluctuations in the

level and in the

volatility of market

prices of assets,

liabilities and

financial instruments.

Key drivers of market risk are the sensitivity of the

values of our assets and investments to changes

in credit spreads, our exposure to losses as a

result of changes in interest rate term structure

or volatility, and the key risk theme of the impact

from the macroeconomic environment.

Market risk remains at a heightened but stable

level over the term of the Group's Financial Plan

(the "Plan"). In the United Kingdom inflation has

been coming down from the high levels in 2022

and interest rates have reached their peak in Q4

2023. The sustained high interest rates,

continued economic uncertainty and low

productivity levels are likely to lead to minimal

economic growth. Recession in the United

Kingdom would be likely to add to market

volatility.

Concerns about recession risk, escalation of

geopolitical tensions and fiscal policy concerns

could affect equity and credit markets within the

global economy leading to credit spread

increases, foreign exchange rate volatility, and

interest rate changes.

To seek to address this, we have an investment

strategy which is approved by the Board and

includes limiting exposure to individual asset

classes and the amount of illiquid investments we

hold. We also use risk reduction techniques such

as hedging foreign currency exposures with

forward contracts, interest rate swaps to hedge

interest rate risks and de-risking the investment

portfolio during volatile periods.

Principal risks and

uncertainties

88 Direct Line Group Annual Report and Accounts 2023

Principal risk Description Risk commentary

Operational Risk

Relative size of risk

Trend – stable

The risk of loss due

to inadequate or

failed internal

processes or systems,

human error or from

external events.

Key risks relating to this category include

Technology and Infrastructure, Change,

Cyber, Supply Chain & Outsourcing and

People & Culture.

The trend in operational risk is driven by

ongoing risk exposure as the Group

continues to implement and embed

changes in its technology systems, data

flows, pricing models, and processes,

whilst operating within a volatile external

environment.

Our approach is to manage our

operational risks proactively, to mitigate

potential customer harm, regulatory or

legal censure, and financial

or reputational impacts. The Group is also

undertaking various initiatives to reduce

its operational risk through the

strengthening of the control

environment.

The Group’s exposure to technology risk

is materially impacted by the need to

enhance digital capabilities, simplify our

technology estate and mitigate IT

resilience risk.

The Group is well placed to respond to

new regulations and develops

technology with a resilience by design

approach. Continuous monitoring and

maintenance of the currency and

technology estate, along with disaster

recovery testing, mitigates the likelihood

of system failures. The Group maintains

and tests critical end-to-end business

and continuity plans in the event of a

material system outage.

We have continued in the journey to improve change

portfolio management and change initiative delivery,

with the object of ensuring that change delivery is

delivered to achieve the intended outcomes and benefits

for customers and shareholders within risk appetite.

Notably, we continue plans to modernise our IT

infrastructure and technology estate for increased

performance and stability, so that our customers can have

a better sales and servicing experience through the

improved target operating models (people, processes,

technology, and data flows).

The risks arising from cyber security failures that impact

the confidentiality, integrity and availability of our data

continue to increase and evolve as threat actors enhance

their practices. Our Chief Information Security Officer is

responsible for ensuring robust cyber security policies and

controls are in place and operate effectively to protect

customer and Group data.

Headwinds relating to the macroeconomic and operating

environment have led to increased risk exposure in

respect of third parties and outsourcing arrangements.

Initiatives have been established to enhance the Group’s

third party supplier risk and control environment in

response to the increased risk exposure and to ensure risk

is managed within Group appetite.

Finally, the Group continues to focus on improving

organisational culture. Culture remains a core focus and

forms part of the Group’s 2024 plans of activity and work

is progressing to implement required frameworks,

capabilities, tools, and governance to deliver against

desired cultural outcomes.

Conduct Risk

Relative size of risk

Trend – stable

The risk of failing to

put the customer at

the heart of our

business, failing to

deliver on our

commitments and/

or failing to ensure

that fairness is a

natural outcome of

what we do and how

we do it.

The FCA placed two regulatory

requirements on Direct Line Group in

2023. In June 2023, the Group was

required to carry out a past business

review of Motor total loss claims settled

between 1 September 2017 and 17

August 2022 to identify policyholders

who received unfair settlements and

provide them with appropriate redress.

In September 2023, the Group was

required to carry out a past business

review of renewal prices charged since 1

January 2022 to identify any that did not

comply with the rules relating to use of

tenure and provide policyholders with

appropriate redress. The Group is running

remediation programmes for affected

customers.

The introduction of Consumer Duty represents a

significant shift in the FCA’s expectations of firms and

applies to all of the Group’s regulated products.

A comprehensive implementation plan has been put in

place to address the requirements arising from the new

Duty, which has been approved by the Board.

Finally, the Group is aware of the impact of the rising cost

of living on our customers and we are taking measures to

help support customers during this period, including the

launch of Direct Line Essentials to adapt to changing

customer needs.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 89

89Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Principal risk Description Risk commentary

Regulatory

Compliance Risk

Relative size of risk

Trend – increasing

The risk of

reputational

damage, regulatory

or legal censure,

fines or prosecutions

and other types of

losses arising from

non-compliance

with regulations

and legislation.

The outlook for regulatory compliance

risk is increasing as financial institutions

embed multiple regulatory changes,

alongside a challenging external

environment referred to in strategic risk

and insurance risk.

Further, regulators are increasingly

expecting financial institutions to play a

broader role in resolving societal issues,

such as income inequality, climate

change, and diversity and inclusion;

creating challenges for insurers to

balance commercial and societal

outcomes in decision-making, as they

seek to meet the needs of different

stakeholders.

We have maintained an ongoing dialogue with our

regulators, and we have continued to engage with the

regulators and HM Treasury regarding the future

regulatory framework within the UK.

We remain focused on key areas of regulatory attention,

including embedding the FCA’s PPR regulations and

Consumer Duty, and regulatory requirements under the

Green Finance Strategy, climate-related risks and the

regulatory capital frameworks, and finance for positive

sustainable change.

We have also continued our focus upon operational

resilience in accordance with the increased regulatory

requirements.

Finally, we have a governance and accountability

framework in place as part of the Senior Managers and

Certification Regime, and carry out an annual declaration

process to ensure the ongoing fitness and propriety of the

Group’s Senior Managers and Certified Functions.

Credit Risk

Relative size of risk

Trend – stable

The risk of loss

resulting from

default in obligations

due from, and/or

changes in the credit

standing of, issuers of

securities,

counterparties or any

debtors to which the

Group is exposed.

The outlook for credit risk is stable. The

Group monitors its key counterparties,

namely the security of the issuers within

its investment portfolio, and its

reinsurance exposures are mainly held

with reinsurers with high credit ratings.

To manage credit risk, we set credit limits

for each material counterparty and

actively monitor credit exposures, whilst

also considering new future exposures.

In addition, we only enter material reinsurance contracts

with reinsurers with at least an A- rating and, for liabilities

with a relatively long period of time to settlement, the

majority of reinsurance is arranged with reinsurers with a

rating of A+ or above and a maximum of 10% of reinsurers

rated between A- and A+.

Finally, we also have well defined criteria to determine

which customers and brokers are offered and granted

credit.

Strategic Risk

Relative size of risk

Trend – stable

The risk of direct or

indirect adverse

effects resulting from

strategies not being

optimally chosen,

implemented or

adapted to changing

conditions.

Strategic risk is influenced by internal

and external developments, including

the potential impacts of: cost of living;

persistently high inflation; an increased

level of regulatory concern and focus

including Consumer Duty, the potential

for new and ongoing geopolitical

conflicts and climate-related financial

risks impacting the Group’s strategic

position. These factors are driving a high

level of uncertainty in the market and

subsequent impact on consumer

behaviour and engagement models and

will continue to challenge the delivery of

the Group’s Plan, although the Group has

put itself in a stronger capital position

following the sale of the brokered

commercial business.

The Group is in a place of transitional leadership, with an

outgoing Acting CEO having only recently handed over to

the new permanent CEO who joined at the beginning of

March 2024. This has impacted the Group’s ability to

reformulate the longer strategy, which is being offset

through preparatory work, progression of no-regret

actions, and continuation of our existing strategy.

Principal risks and uncertainties continued

90 Direct Line Group Annual Report and Accounts 2023

Effects of macroeconomic and trading

environments on the Group

The UK is facing into a cost of living crisis and a UK recession,

driven by the challenging macroeconomic environment. This, in

conjunction with a challenging trading environment, could lead

to or exacerbate existing risks for the Group and we remain

alert to possible developments across our risk universe.

Emerging risks

Emerging risks are defined by the Group as newly developing or

changing threats or opportunities, external to the Group, that

are subject to a high degree of uncertainty but have the

potential to materially impact the Group.

The Group has in place an emerging risks process designed to

enable it to:

– have a proactive approach to emerging risk management;

– identify, manage and monitor a broad range of

potential emerging risks; and

– mitigate the impact of emerging risks which could impact

the delivery of the Plan.

The Group records emerging risks within an Emerging Risk

Risk Committee annually and is supplemented by deep dives

on selected emerging risks.

The most notable emerging risk themes currently being

monitored via the emerging risks process are outlined below.

Emerging Risk Radar

The Group’s Emerging Risk Radar classifies each risk by its theme, proximity (time), velocity (speed of development) and likely impact

(on strategic objectives). This allows for active monitoring and prioritisation of management actions. The radar is used for illustrative

purposes only.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 91

Risk

Proximity

10+ years

5-10 years

3-5 years

0-3 years

Impact

Material

Significant

Medium

Rapid

Moderate

Slow

Velocity

91Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Transition to a low carbon economy, including

climate change

The Group recognises that transition to a low-carbon economy,

including climate change, potentially poses material long-term

financial risks to the business and is receiving increased scrutiny

from investors and regulators. Climate change risk can be

divided into physical and transition risks. Both of these

categories can manifest themselves through a range of existing

financial and non-financial risks, including insurance, market,

operational, strategic and reputational risks. The Group is also

aware of the liability risks due to climate change when parties

who have suffered loss or damage from physical or transition

risk factors seek to recover losses from those they hold

responsible.

During 2023, the Group has continued to embed further

controls, targets and reporting around climate change, overseen

by its Climate Executive Steering Group. The Group’s Risk

Taxonomy has also been expanded to include additional

reference to climate related risks.

We continue to monitor these risks closely and to develop our

climate change modelling capability. Further details on our risk

management approach to climate change are included on

pages 80 to 81, within the Task Force on Climate-related

Financial Disclosures (“TCFD”) report.

Changing customer needs

As consumers face intense pressure on their finances and time,

coupled with generational changes, this is expected to generate

a rapid structural shift in customer demand, requiring the Group

to innovate and adapt its product offerings in order to remain

relevant.

In 2023, the Group has implemented and embedded the

Consumer Duty principles, along with continuing to review and

understand customers' needs.

Keeping up with digital advancements

Developments in technology and changes in market, regulatory

and consumer trends are creating opportunities for new

entrants to profitably exploit new distribution channels, business

models and niches. Failure to keep up with such developments

could lead the Group to fall behind.

To mitigate this, we are delivering multiple programmes to

provide the Group with the capabilities to enable our offerings

to compete with new entrants, for example: InsureTech.

Geopolitical tension

Due to heightened global tensions, there is a risk that measures

are implemented by governments that decrease political

stability, erode countries’ relationships and contribute to

increasing protectionism. This could lead to multiple impacts

including on investment performance and supply chains. The

Group conducts ongoing analysis to monitor exposure to the

developing geopolitical environment (for example, the Middle

East, Russia/Ukraine and China/Taiwan), while maintaining a

close eye on the political risk landscape.

Automotive technology

New car technologies, such as autonomous vehicles and

hydrogen power, are in development which, once on UK roads,

are expected to be transformative. Traditional motor policies

may no longer serve the needs of customers, requiring changes

to the Group’s pricing models and policy wordings to remain

relevant. The repair networks’ capabilities will also need to be

upgraded to serve this demand effectively. The Group will focus

on launching new products that will better serve customer

needs in the future while engaging with regulators to help

shape policies and understand potential impacts for the Group.

Data ethics

Consumers are becoming more aware of their data rights and

regulators more interested in how firms use customer data. The

industry is also gathering more data than ever before and

increasingly exploring more sophisticated processing

capabilities, such as artificial intelligence (“AI”) and machine-

learning. These trends together could lead to data being used in

ways that customers or regulators find unacceptable, or which

result in unfair customer outcomes.

The Group has embedded a Data Ethics Framework and Data

Ethics principles which are now well established and have been

tested via the Data Ethics committee.

Principal risks and uncertainties continued

92 Direct Line Group Annual Report and Accounts 2023

In accordance with Provision 31 of the 2018 UK Corporate

Governance Code, the Directors have assessed the prospects of

the Group for a period longer than the minimum 12 months

required by the going concern statement. The Strategic report,

on pages 1 to 94, sets out the Group’s financial performance,

business environment, outlook and financial management

strategies. It covers how the Group measures its regulatory and

economic capital needs and deploys capital. You can find

discussion about the Group’s principal risks and risk

management on pages 88 to 90. Note 3 to the consolidated

financial statements starts on page 194 and sets out financial

disclosures relating to the Group’s principal risks. This covers

insurance, market and credit risk, and the Group’s approach to

monitoring, managing and mitigating exposures to these risks.

Every year, the Board considers the strategic plan (“the Plan”) for

the Group. The Plan makes certain assumptions in respect of the

competitive markets in which the Group operates. By its nature,

a strategic plan comprises a series of underlying assumptions

which can be uncertain in nature and rely on judgement. Each

year, the Group’s Risk Function assesses the Plan and provides a

report to the Board which supports the Board in concluding on

the Group’s viability.

When reviewing the Plan, the Board considered the Group’s

prospects over the period that the Plan covered and the

conclusions of the Risk Function’s review, based on the Group’s

anticipated activities as set out in the Plan. The Board has

assessed the principal risks of the Group over the duration of the

planning cycle. All of the Group’s principal risks, as outlined on

pages 88 to 90, were reviewed as part of the Risk Function

review of the Plan, and the outlook of those risks over the period

covered by the Plan was taken into account (i.e. whether the

outlook for each risk was increasing, broadly static or decreasing

over the period of the Plan). In addition, the Risk Function’s

review defined a set of key risk themes, known as top risks,

grouped around the themes of financial resilience, operational

resilience and future strategic fit in the context of the Plan. The

Plan did not introduce any new material risks other than those

already contained within the Group’s Material Risk Register.

Whilst outcomes for the later years in the Plan are less certain,

the Plan provides a robust planning tool for strategic decisions.

The Board recognises that, in a strategic plan, uncertainty

increases over time and, therefore, future outcomes cannot be

guaranteed or accurately predicted. As the Plan is used for

planning over a timeframe of four years, to 31 December 2027,

this has been selected as the most suitable period for the Board

to review the Group’s viability.

The Group's Risk Function has carried out an assessment of the

risks to the the Plan and the dependencies for the success of the

Plan. This included running adverse scenarios on the Plan to

consider the downside risks to the Plan and subsequent impact

on forecast profit. The key scenarios applied to the Plan were in

relation to the impact of adverse claims inflation, failure to

achieve motor pricing initiative benefits, delay to delivery of

expense reductions and a fall in asset values. The key

judgements and assumptions applied in these scenarios were as

follows:

– Adverse claims inflation: the Group’s Plan includes a scenario

for inflation being higher than expected, leading to claims

costs increasing by 3% to 6% with the Group and market

response delayed by six months.

– Failure to achieve motor pricing initiative benefits: planned

benefits from future motor pricing initiatives are not achieved.

– Delay to delivering expense reductions: there is a delay of 12

months in delivering planned expense reductions.

– Fall in asset values: an increase in credit spreads of 75 basis

points, with a partial recovery of 25 basis points over 2025.

It is unlikely that all risks would materialise at the same time.

None of the scenarios individually were concluded to present a

threat to the Group’s expected viability across the duration of

the Plan.

The CFO review describes the Group’s capital management

strategy, including the capital actions taken in the last 12

months designed to ensure the continued strength of the

balance sheet, and sets out management actions that the

Group continues to pursue to improve capital strength. The

Group’s financial position is also covered in that section,

including a commentary on cash and investment levels,

reserves, currency management, insurance liability

management, liquidity and borrowings.

The Risk Function has also carried out an assessment of the risks

to the Group's capital position over 2024 and 2025. Two specific

macroeconomic combination stresses, a moderate and a severe,

have been updated to include not only a review of Group

financials but also a review of assumptions to reflect the latest

internal and external environment and trends. The stresses have

been run to assess the possible impact on own funds in the

period to 31 December 2024 and 31 December 2025. The

stresses are updated and repeated regularly. The

macroeconomic assumptions for key parameters such as

Consumer Price index, GDP and bank base rate for the

moderate scenario reflect the adverse end of the Bank of

England November Monetary Policy Committee forecast range.

The severe scenario adopts the key parameters from the 2022

Bank of England Banking Stress Test, which is described as

“severe but plausible”, updated for changes in the

macroeconomic environment.

Strategic Report / Governance / Financial statements

Viability statement

Direct Line Group Annual Report and Accounts 2023 93

93Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

In the moderate and severe scenarios, it was concluded that the

Company's solvency capital requirement would not be

breached.

Additionally, the Risk Function conducted a reverse stress test to

establish whether the long-term future for motor insurance,

specifically, the adoption of electric vehicles, poses a threat to

the viability of the Company’s current business model. The

findings showed that over the duration of the planning cycle,

the scenarios considered did not present a risk to the viability of

the business model.

Further information in relation to the sensitivity of key factors on

the Group’s financial position are included in the CFO review.

This sets out the impact on profit before tax of an increase and a

decrease in claims inflation of 200 basis points for two

consecutive years. The market risk note in the consolidated

financial statements sets out the impact on profit before tax of a

100 basis points increase in spreads on financial investments

and the impact of a 100 basis points increase in interest rates on

financial investments and derivatives.

Transition to low carbon economy including

climate change

In 2023, while the stress and scenario tests that were initially

performed in 2021 were not revisited, the Risk Function

updated the physical risk section of the underwriting liabilities

element of the original analysis to account for portfolio and

modelling changes. As part of the updated exercise, we took

steps to improve our model to enhance our view of risk. The

updated analysis also took into account the sale of the Group’s

Brokered Commercial Insurance Business, to reflect a view of

exposure that was representative of the ongoing Group. The

tests are discussed in more detail on pages 75 and 76. In

addition, in 2023, we conducted a reverse stress test to establish

whether the long-term future for motor insurance, specifically,

the adoption of electric vehicles, poses a threat to the viability of

our current business model. This is discussed in more detail on

page 76.

The overall conclusion of these tests was that there could be

breaches in the Group’s risk appetite in the long term, however

a combination of contingent, pre-emptive and strategic

management actions could be deployed to address the risks

and allow the business to recover to above risk appetite.

Furthermore, the Group’s response to climate change underpins

its sustainability strategy, and having set out its Science-Based

Targets in 2022, the Group remains committed to reducing its

carbon footprint.

Based on the results of these reviews, the Board has a

reasonable expectation that the Company and the Group can

continue in operation, meet liabilities as they fall due and

provide the appropriate degree of protection to those who are,

or may become, policyholders or claimants in the period to 31

December 2027.

Statement of the Directors

in respect of the Strategic report

The Board reviewed and approved the Strategic report onpages

1 to 94 on 21 March 2024.

By order of the Board

Neil Manser

Chief Financial Officer

21 March 2024

Viability statement continued

94 Direct Line Group Annual Report and Accounts 2023

Dear Shareholders,

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

Governance report for the year ended 31 December 2023.

Thisreport sets out how we have applied the principles of the

UK Corporate Governance Code (the “Code”) throughout the

year. It provides information on the activity of the Board and

progress we have made in strengthening our corporate

governance practices.

Board developments and effectiveness

As I set out in my statement on page 8, 2023 has seen some

significant developments in respect of the Board. Following

acomprehensive search process for a new CEO, Adam Winslow

was identified as the preferred candidate and his appointment

was announced in August 2023. He joined the Group on

1 March 2024 and his appointment to the Board is to take

effecton 21 March 2024. Adam joins us from Aviva where

heledAviva’s UK and Ireland general insurance business,

developing a clear strategy for both personal and commercial

lines which has delivered market share expansion and improved

profitability. More information about the Nomination and

Governance Committee’s selection process can be found

onpage 125.

Jon Greenwood, who has been serving as our Acting CEO, will

smooth the transition following Adam’s appointment to the

Board by completing a handover and then returning to a senior

executive role. Again, I would like to thank Jon for all his efforts

in leading the Company over the past year.

Danuta Gray

Chair of the Board

Chair’s

Introduction

I believe we have entered 2024 with a

more resilient business, well-positioned

to achieve our mission of being brilliant

for customers every day.

95Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Our review of the Board’s balance of experience and skills

during the year led to a search for a Non-Executive Director

with a strong general insurance background and culminated

inthe appointment of David Neave in October 2023. David has

previously held chairmanships, directorships and advisory roles

in a number of insurance, InsurTech, consultancy and legal

businesses including, in his executive career, serving as Chief

Executive of General Insurance for Co-operative Insurance.

A further search was carried out during the year to identify

aNon-Executive Director whose experience would further

strengthen the Board’s expertise in general insurance and

customer service transformation, as well as contributing to the

Board’s diversity. This search resulted in the decision to appoint

Carol Hagh, who will join the Board as a Non-Executive Director

on 1 April 2024. Further information about Carol’s career and

experience can be found in my Chair’s Statement on page 10.

This year, we carried out an internal Board performance

evaluation with assistance from Promontory Financial Group,

who provided an independent perspective to help the Board

toassess its effectiveness and define an action plan. Themes

emerging from the 2023 review included Board and executive

succession planning, management skills and capabilities,

culture, communication, meetings and materials. Information

about the evaluation process and outcomes can be found

onpage 114.

Diversity

Changes to the Board in 2023 caused the proportion of women

on the Board to fall below the FCA’s diversity target of 40% (see

page 101). Board diversity, including gender diversity, is a key

consideration in the Nomination and Governance Committee’s

succession planning. We have made some progress towards

addressing the Board’s gender balance by appointing a new

female Non-Executive Director and will continue to focus on

diversity as we consider Board succession planning in 2024.

Increasing the diversity of senior leadership is an ongoing

target for the Group and we have continued our work on

improving the representation of women, ethnic minority and

Black colleagues. In 2023 we invested in coaching and targeted

development programmes for our high potential women, ethnic

minority and Black talent, to support their progression into

senior roles. During the year, we set ourselves ambitious new

targets to continue to improve diversity in senior leadership.

Our internal targets are now aligned with the definitions

ofsenior leadership used by the FTSE Women Leaders Review

and Parker Review. We are aiming, by the end of 2027, to

increase representation at senior management level of women

to 40%, ethnic minority talent to 16% and Black talent to 4%.

The Group has been included in the Top 50 UK Inclusive

Employers List for three years running and has been placed in

the Social Mobility Index for the first time this year. We continue

to build on the strong foundations we have in place, addressing

under-representation at senior levels in the business, whilst

focusing on improving inclusion through key work programmes.

Stakeholder engagement

During a year of sustained economic pressure on all our

stakeholders, including colleagues and customers, we have

continued the vital work of listening to our stakeholders to

ensure that their priorities are considered in our decision-making

and that we hear how, as a business, we can best support them.

The tables on pages 106 and 107 set out how we have engaged

with our various stakeholders and how this engagement has

fed into Board discussion and decision-making.

Audit and internal control

2023 will be the Group’s first full year reporting under the new

insurance accounting standard IFRS 17 and our Audit

Committee has overseen this transition, as well as the handover

of the external audit by Deloitte to KPMG. KPMG will assume

the role as auditor for the financial year ending 31 December

2024, subject to shareholder approval at our 2024 AGM. More

information on the work of the Audit Committee can be found

on pages 117 to 121.

During the year, our Board Risk Committee has overseen a

Group-wide controls improvement programme which has

helped the Group in its aim to bring our oversight, monitoring

and control environment into line with industry best practice

and to enhance the resilience of our control framework. In

addition, the Audit Committee has overseen a Control and

Oversight Remediation Programme within Finance, the aim of

which is to enhance the financial reporting control

environment across the Group. More information on this work

can be found on pages 122 to 124.

Remuneration

The Group’s remuneration policy was last approved by

shareholders at the 2023 AGM. During the year, the

Remuneration Committee implemented changes to

performance measures in respect of the LTIP and AIP in line

with investors’ preference for emphasis to be placed on cost

management. See page 132 for more information.

In terms of remuneration outcomes for the year, whilst the

Group has made good progress in restoring its capital

resilience, and although there has been positive progress

against some of the strategic metrics, particularly in relation to

the People measure, in terms of remuneration outcomes for

the year, the Committee concluded it appropriate to recognise

the actions the management team has taken during the year,

particularly the good progress made by taking decisive action

to restore our capital resilience, improve performance in Motor

insurance and maintain the performance of our non-Motor

businesses, as well as robust performance in the people

element of the AIP. The Committee concluded that an

outcome of 15% of maximum AIP opportunity is appropriate in

this context.

AGM

Our 2024 AGM will be held on 8 May 2023 at 10.30 a.m. Full

details, including the resolutions to be proposed to our

shareholders, can be found in the Notice of AGM, which will be

made available on our corporate website. The outcome of the

resolutions put to the AGM, including poll results detailing votes

for, against and withheld, will be published on the London

Stock Exchange’s and the Company’s websites once the AGM

has concluded.

Yours sincerely,

Danuta Gray

Chair of the Board

96 Direct Line Group Annual Report and Accounts 2023

Chair’s introduction continued

Board of Directors

Committees

– Nomination and Governance

Committee (Chair)

– Remuneration Committee

Appointed

– Independent Non-Executive Director

in February 2017

– Chair of the Board since August 2020

Key Skills and Experience:

– Extensive experience leading and

transforming large, consumer focused

businesses.

– Deep understanding of governance

and remuneration requirements

affecting listed companies gained

from previous Chair roles.

– Expertise in sales, marketing, and

technology.

Danuta was Chair of Telefónica in

Ireland until 2012. She was Chief

Executive between 2001 and 2010, during

which time Telefónica’s customer base

increased to 1.7 million from just under

1 million. Between 1984 and 2001, Danuta

held a variety of senior positions within

the BT Group. Elsewhere, Danuta has

acted as Senior Independent Director of

the Aldermore Group; Non-Executive

Chair of St Modwen Properties; Non-

Executive member of the Ministry of

Defence Board, NED and Chair of the

Remuneration Committee at both Page

Group plc and Old Mutual plc; and was

Non-Executive Chair of the Board of

Perth Topco Limited and North Tech.

External Appointments

– Non-Executive Director, Chair of the

Remuneration Committee and

member of the Nomination

Committee of Burberry Group plc.

– Non-Executive Director and Chair-

elect of Croda International plc.

– Trustee Director of The Resolution

Foundation.

Committees

– None

Appointed

– Acting CEO in January 2023

and member of the Board

since August 2023

Key Skills and Experience

– Deep knowledge of the insurance

sector and Commercial function.

– Strong leadership skills with a focus on

capital resilience and own brands

performance.

– Positive mindset with proven track

record in efficiency delivery.

Jon joined the Group in 2000 as Product

and Pricing Director for UK Partnerships

and has over 30 years’ experience in the

insurance industry.

In 2022, he was appointed the Group’s

first Chief Commercial Officer and as

acting CEO, he has played a key strategic

role in driving the sale of NIG and the

brokered commercial business in 2023.

Before joining the Group, Jon held roles

at HBOS, MBNA and Pinnacle.

External Appointments

– None.

Committees

– Investment Committee

Appointed

– May 2021

Key Skills and Experience

– Responsibility for overall direction on

all financial matters and oversight of

investment management and treasury

function.

– Extensive corporate finance and

capital markets knowledge.

– Deep understanding of the operation

of strategy and culture in the

insurance industry.

Neil has held several roles in Finance and

Strategy since joining the Group in 2011,

including Director of Investor Relations,

Managing Director of NIG and Chief

Strategy Officer. He was instrumental

in the Group’s successful IPO in 2012.

He brings extensive industry and capital

markets experience to the Board. Prior to

joining the Group, Neil held roles at Brit

Insurance, Merrill Lynch and Fox-Pitt,

Kelton. He is an Associate of the Institute

of Chartered Accountants in England

and Wales.

External Appointments

– None.

Neil Manser

Chief Financial Officer

Jon Greenwood

Outgoing acting CEO and

Chief Commercial Officer

Danuta Gray

Chair of the Board

97Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Committees

– Customer and Sustainability

Committee (Chair)

– Nomination and Governance

Committee

– Remuneration Committee

Appointed

– November 2021

Key Skills and Experience

– Track record of driving digital growth.

– Experience in digital transformation

with a focus on data, culture and

customer.

– Expertise in ESG issues and

communications with multiple

stakeholders.

Tracy’s professional background spans

financial journalism, digital media and

corporate strategy in the media industry.

Most recently Tracy was Dow Jones’

ChiefStrategy Officer where she was

responsible for global strategy, customer

insight and commercial policy, and had

oversight of the digital transformation of

the business. Earlier in her career, Tracy

was Editor-in-Chief of The Wall Street

Journal Europe and Digital Editor of

TheWall Street Journal. She also held

various positions, including Editor of FT.

com and Editor of the Lex Column,

attheFinancial Times.

External Appointments

– Non-Executive Director and member

of the Remuneration Committee of

Barclays Bank UK plc.

– Chair of the Sustainability Committee

and Non-Executive Director and

member of the Audit and Nomination

Committees of Domino’s Pizza

Groupplc.

– Non-Executive Director and member

of the Nominations Committee of

TheScott Trust and Chair of The Scott

Trust Endowment Limited.

Committees

– Board Risk Committee (Chair)

– Audit Committee

– Investment Committee

– Nomination and Governance

Committee

– Remuneration Committee

Appointed

– March 2018

Key Skills and Experience:

– Extensive experience in both general

and life insurance.

– Deep understanding of capital

markets.

– Strategically orientated with a detailed

understanding of the retail sector.

Mark was CEO of Merian Global Investors

from January 2019 to August 2020. He

previously held the role of Group CFO

and Executive Director at Legal &

General until 2017. Mark acted in a variety

of senior roles in his 19-year career at

Legal & General, including CEO of the

Savings business, Managing Director of

the With-Profits business, and Resources

and International Director. Earlier in his

career, Mark held senior financial and

business development roles at ASDA and

Kingfisher. Mark is an Associate of the

Institute of Chartered Accountants in

England & Wales.

External Appointments

– Non-Executive Director and member

of the Audit and Risk Committees

ofPhoenix Group Holdings plc.

Committees

– Customer and Sustainability

Committee

– Nomination and Governance

Committee

Appointed

– January 2021

Key Skills and Experience

– Leading expertise in digital, data

science and analytics.

– Track record of using data and AI to

drive business transformation.

– Recognised Diversity and Inclusion

leader and a passionate advocate on

this topic.

Adrian is the former Managing Director,

Group Data and Artificial Intelligence at

BT Group and a former member of HM

Government’s AI Council. He has

significant industry and consultancy

experience and has held senior roles at

EY and Google. Between 2016 and 2020,

Adrian was a NED at the Home Office

where he sat on the Data Board advising

on data science, digital transformation,

and diversity and inclusion. A former

Chair of the Race Equality Board, Adrian

was appointed to the main Board of

Business in the Community in 2014 and

continues to act as an adviser to them. In

2018, he was announced as the most

influential Black, Asian and minority

ethnic technology leader in the UK by

the Financial Times and Inclusive Boards.

Adrian has been awarded an OBE for

services to equality and diversity in

business.

External Appointments

– None.

Tracy Corrigan

Independent

Non-Executive Director

Mark Gregory

Independent

Non-Executive Director

Adrian Joseph OBE

Independent

Non-Executive Director

98 Direct Line Group Annual Report and Accounts 2023

Board of directors continued

Key for Committee membership

Audit Committee

Board Risk Committee

Investment Committee

Nomination and

Governance Committee

Remuneration Committee

Customer and Sustainability

Committee

Committee chair

Committees

– Customer and Sustainability

Committee

– Nomination and Governance

Committee

– Remuneration Committee

Appointed

– March 2023

Key Skills and Experience

– Strong track record of delivering digital

transformation and growth.

– Highly experienced in customer-

focused and regulated business

environments with a focus on strategy

and innovation.

– Expertise in price comparison

websites.

Mark’s career has spanned financial

services, retail, e-commerce,

management consultancy and

advertising. Most recently, he was Chief

Executive of the MoneySupermarket

Group, overseeing a period of revenue

and profit growth for the UK listed price

comparison business. Mark’s previous

roles include the Retail and Online

Director for John Lewis and the

Managing Director of eBay UK.

External Appointments

– Non-Executive Director and member

of the Audit, Remuneration, Risk and

Responsible Banking Committees of

Santander UK plc.

– Non-Executive Director of Hammer

PW Topco Limited.

Committees

– Investment Committee (Chair)

– Audit Committee

– Board Risk Committee

– Nomination and Governance

Committee

Appointed

– September 2018

Key Skills and Experience

– Deep understanding of the

development of corporate

and digital strategy.

– International experience with

broad perspective of business

and capital markets.

– Expertise in digital transformation,

customer analytics and stakeholder

communications.

Fiona’s experience in retail financial

services, both in the industry and as an

auditor, was gained in the UK and the

USA. Fiona qualified as an accountant

early in her career at Arthur Young

(now EY). Until January 2019, she was

Vice-Chair of Save the Children UK and

a Trustee Director of the Humanitarian

Leadership Academy. Previously, Fiona

served as CEO of Scottish Friendly Group

for 11 years, before which she was Scottish

Friendly Group’s Finance Director.

Between February 2009 and June 2023

she served as Chair and Non-Executive

Director of the Scottish Mortgage

Investment Trust plc. Fiona is a Fellow

of the Institute of Chartered Accountants

in England & Wales.

External Appointments

– Chair of the Audit Committee and

Non-Executive Director of Currys plc.

– Senior Independent Director, Chair of

the Audit Committee and Non-

Executive Director of Monzo Bank

Limited.

Committees

– Audit Committee

– Board Risk Committee

– Nomination and Governance

Committee

Appointed

– October 2023

Key Skills and Experience

– Deep understanding of general and

life insurance markets.

– Extensive experience in senior

management and non-executive roles.

– Proven record of delivering general

insurance business modernisation.

David is a Chartered Insurer and former

Chief Executive of General Insurance for

Co-operative Insurance. Following his

executive career, spanning over twenty

years in senior management roles in

general insurance, David has held

chairmanships, non-executive

directorships and advisory roles in a

number of insurance, InsurTech,

consultancy and legal businesses,

including Slater and Gordon UK Limited,

The Solicitors Indemnity Fund, Liverpool

Victoria Friendly Society, LV General

Insurance Limited and Accenture UK

Limited.

External Appointments

– Chair of the Advisory Board of the

Common Automotive Platform

Standard.

Mark Lewis

Independent Non-

Executive Director

Fiona McBain

Independent

Non-Executive Director

David Neave

Independent

Non-Executive Director

99Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Committees

– Audit Committee (Chair)

– Board Risk Committee

– Nomination and Governance

Committee

Appointed

– March 2018

Key Skills and Experience

– Strong audit background having

worked as a partner in Ernst & Young’s

Financial Services practice.

– Extensive experience in the insurance

and investment management

industry.

– Deep knowledge and understanding

of financial services regulation and

practice.

Gregor worked at Ernst & Young for 23

years, 10 of which were as partner in the

financial services practice. Between 2009

and 2012, he was Finance Director for the

insurance division of Lloyd’s Banking

Group plc which included Scottish

Widows. Gregor previously served as

Chair and Non-Executive Director of

Alliance Trust plc and FNZ (UK) Limited.

Gregor is a Member of the Institute of

Chartered Accountants of Scotland.

External Appointments

– Deputy Chair, Chair of the Risk

Committee and Non-Executive

Director of FNZ Group.

Committees

– Remuneration Committee (Chair)

– Board Risk Committee

– Nomination and Governance

Committee

Appointed

– January 2016

Key Skills and Experience

– Highly experienced financial services

professional with expertise in dealing

with complex stakeholder groups.

– Extensive knowledge of the insurance

industry with deep insight into

prudential regulation.

– Background of delivering business

transformation and change in

challenging circumstances.

Richard was previously Executive Chair

of Ardonagh Specialty, Chief Executive

of Lloyd’s of London, and CEO of the

International Petroleum Exchange. He

also held the roles of Non-Executive

Chair at Brit Syndicates Limited and

Executive Chair of Cunningham Lindsey.

Richard also held NED roles at the

Partnership Assurance Group plc and

the London Clearing House. Earlier in his

career he held a range of senior positions

at British Petroleum and was a research

scientist for the Science and Engineering

Council. Richard has also been a

member of the PwC Advisory Board, the

PRA Practitioner Panel and the Geneva

Association.

External Appointments

– Non-Executive Chair of CFC

Group Limited.

– Non-Executive Chair of Mrald Limited.

Gregor Stewart

Independent

Non-Executive Director

Dr. Richard Ward

Senior Independent

Director

Key for Committee membership

Audit Committee

Board Risk Committee

Investment Committee

Nomination and

Governance Committee

Remuneration Committee

Customer and Sustainability

Committee

Committee chair

100 Direct Line Group Annual Report and Accounts 2023

Board of directors continued

Board independence

8% Chair (1)

17% Executive Directors (2)

75% Independent Non-Executive Directors (9)

Chair and NED tenure

44.5% 0-3 Years (4)

44.5% 4-6 Years (4)

11% 7-9 Years (1)

Board gender

25% Women (3)

75% Men (9)

Notes:

1. As at 31 December 2023. Following Sebastian James’ retirement from the Board, Board independence is 9% Chair (1), 18% Executive

Directors (2) and 73% Independent Non-Executive Directors (8).

2. As at 31 December 2023. Following Sebastian James’ retirement from the Board, the Board gender is split 38% Women (3) and 72% Men (8).

3. As at 31 December 2023.

4. Senior Management in this context is defined as theExecutive Committee, Company Secretary and direct reports (where direct reports are

members of the Group’s Enterprise Leadership Network) as at 31 December 2023.

Gender diversity of Senior Management

Gender diversity of our Executive Committee

31.3% Women (15)

68.7% Men (33)

43% Women (3)

57% Men (4)

101Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Corporate Governance

The Company complied with the principles and

provisions of the Code throughout the financial year

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

Board leadership and

companypurpose

Pages

– The role of the Board

– The role of the Board in the Company’s

culture

– Board activity and meeting attendance

– Consideration of section 172(1) factors

– How the Board engages with stakeholders

102

Division of responsibilities

– Governance framework and structure

– Structure of the Board, Board Committees

and executive management

– Roles and responsibilities of the Board

110

Composition, succession

andevaluation

– Board composition

– Induction, training and support

– Board’s approach to diversity, inclusion

andsuccession planning

– Board and Committee effectiveness review

112

Audit, risk and internal control

– Preparation of the Annual Report

andAccounts

– Assessing emerging and principal risks

– Risk management and internal

controlsystems

– Audit Committee report

– Board Risk Committee report

115

Remuneration

– Directors’ Remuneration report 131

This report explains the Board’s

role and activities, and how

corporate governance operates

throughout the Group.

Corporate Governance Statement

This Corporate Governance Statement explains key features of

Direct Line Insurance Group plc’s (the “Company”) governance

structure and how it measures itself against the standards set

out in the UK Corporate Governance Code 2018 (the “Code”).

The Code, set by the Financial Reporting Council (the “FRC”),

applied to the financial year ended 31 December 2023.

For more information about the Code, visit the FRC’s website

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

fulfilsthe requirements of the FCA’s Disclosure Guidance and

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

Directors’ report on pages 157 to 160.

Board leadership and company purpose

The role of the Board

The Board seeks to promote the long-term sustainable

successof the Company for the benefit of its shareholders

andstakeholders, establishes the Company’s purpose, values,

culture, and strategy, while contributing to wider society.

TheBoard aims to create shared vision for the organisation

androle-models the values and standards that are expected

from all of our people. The Board and its Committees are

comprised of individuals with an appropriate mix of skills,

industry experience and knowledge.

This is supported by a formal Schedule of Matters Reserved

forthe Board, which contains items that are reserved for the

Board’s consideration and approval. These matters relate to

strategy and management, material contracts, financial

reporting and controls, internal controls and risk management,

Board membership and succession planning, corporate

governance, structure and capital, and delegation of authority.

The matters reserved for the Board are kept under review to

ensure they remain appropriate. Throughout 2023, the Board

acted in accordance with the Schedule of Matters Reserved

forthe Board.

The Board discharges some of its responsibilities through

itsCommittees, each of which expands the work of the

Boardand enables deeper focus on particular areas. Each

BoardCommittee has written Terms of Reference defining its

roleand responsibilities. The Terms of Reference of the Board

Committees can be found on our corporate website.

Further details regarding the role, responsibilities and activities

of the Board and its Committees can be found below and in

theDirectors’ Remuneration report which begins on page 131.

Whilst some of the key areas of the Board’s responsibility are

summarised in the following paragraphs, these are not

intended to be an exhaustive list.

Leadership

The Board provides leadership within a framework of

prudentand effective controls. The Board has clear divisions

ofresponsibility and seeks the long-term sustainable success

ofthe Group. Information on how opportunities and risks

tothefuture success of the business have been considered

andaddressed, and about the sustainability of the Company’s

business model, is set out in the Strategic report which

beginson page 22.

Operations

The Board oversees the implementation of a robust control

framework to allow effective management of risk. The Board

supervises the Group’s operations, with a view to ensuring they

are effectively managed, that effective controls are in place,

andthat risks are assessed and managed appropriately.

Financial performance

The Board sets the financial plans, annual budgets and key

performance indicators and monitors the Group’s results

against them.

102 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

The role of the Board in the

Company’s culture

Our Mission:

To be brilliant for customers every day.

Our Vision:

To create a world where insurance is personal, inclusive

and a force for good.

Our Purpose:

To help people carry on with their lives, givingthem

peace now and in the future.

Our culture informs the way we work, the way we interact

withstakeholders and how we provide value for our customers

and underpins our mission, vision and purpose.

The Board recognises that evolving and enhancing the Group’s

culture is critical to its future success in a rapidly changing

world. Therefore during 2023, the Board oversaw a dedicated

programme to review the Group’s culture and bring together

various activities in the Group aimed at instilling a customer

focused, high performance and risk-positive culture.

The ‘Tone from the Top’

The Board and the Executive Committee participated in a

series of interviews which helped identify the positive elements

of the Group’s culture they felt should be protected, as well as

areas that could be dialled up.

Following this, the Group established a Culture Steering

Committee, to meet on a quarterly basis to co-ordinate and

lead activity on culture. The Steering Committee is made up of

key individuals from across the business who influence culture,

including the Chief People Officer and representatives from

Business Change, Human Resources, the Conduct Centre

ofExcellence, Trading, Customer Sales and Service, Corporate

Communications, Risk and Compliance.

Cultural messaging

The Group has reviewed and enhanced the way it

communicates on culture internally with a view to ensuring

thetone from the top is cascaded clearly and effectively by

using consistent messaging.

Monitoring culture

A dashboard has been developed to help the Board monitor

culture that includes key metrics in respect of: Customer

(forexample; NPS and complaints); People (e.g. performance

management; grievances; diversity; hiring trends; and

engagement); and Risk (e.g. colleague compliance training

completion levels; completion of internal audit actions; and

speaking up and whistleblowing reports. The dashboard will

beregularly reviewed by the Board.

The Future

Looking ahead in to 2024, we aim to continue evolving our

culture by focusing on:

– Performance

The Group aims to improve individual and team performance

through embedding the high-performance framework.

Peoplemanagers will be upskilled in the key behavioural

traits andcapabilities of giving and receiving feedback,

coaching others,aligned to themes of positive risk

management andconsumer outcomes.

– Leadership

We will drive improved leadership capability and evidence

this through leadership assessments, performance

assessments, and the strength of succession planning.

– Customer

The Group will continue to embed Consumer Duty

requirements throughout the organisation.

– Governance and Risk

Improved governance across the organisation will be

intended to lead to quick and clear decision-making, allowing

us to resolve issues at pace when they are identified. Our Risk

maturity will be improved and measured by the Risk and

Controls Self-Assessment (“RCSA”). More information on the

RCSA can be found on page 122 and 123.

Strategy

The Board oversees the development of the Group’s strategy,

the sustainability of the business model and considers how

theGroup’s governance supports the delivery of strategy.

The Board monitors management’s performance and progress

against the Group’s strategic aims and objectives.

Further details of how the Company applied the Code’s

principles and complied with its provisions can be found

inthefollowing sections of the Annual Report and Accounts:

103Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Board meetings and activity in 2023

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

Themes Description

Strategy and execution • Approving and overseeing the Group’s key strategic targets and monitoring the Group’s

performance against those targets;

• reviewing customer experience and trends and monitoring the Group’s performance

against external brand metrics;

• reviewing and approving key projects aimed at developing the business or rationalising

costs;

• considering growth opportunities; and

• reviewing the individual strategy of key business lines.

Strategic alignment

a b c

d e

a b c

d e

a b c

d e

a b c

d e

a b c

d e

Financial performance and

investor relations

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

• the Group’s results against them;

• considering the Group’s reserving position, approving the Solvency II narrative reports

• and approving financial results for publication;

• approving reinsurance programmes and renewals;

• reviewing broker reports on the Group, alongside feedback from investor meetings; and

• considering the appropriateness or otherwise of possible surplus capital distributions.

Strategic alignment

a b c

d e

a b c

d e

a b c

d e

Risk management,

regulatory and other

related governance

• Reviewing and agreeing the Group’s policies;

• setting risk appetite;

• approving the Own Risk and Solvency Assessment (“ORSA”);

• seeking to ensure that the Group complies with its regulatory obligations;

• reviewing the Group’s solvency position and forecast;

• overseeing the Control and Oversight Remediation Programme;

• reviewing the Group’s ESG initiatives;

• reviewing and approving the Group’s Task Force on Climate-related Financial Disclosures

(“TCFD”); and

• reviewing and approving the Group’s Consumer Duty implementation programme.

Strategic alignment

a b c

d e

a b c

d e

a b c

d e

a b c

d e

Board and Board

Committee governance

• Receiving reports from the Board’s Committees;

• updating the Schedule of Matters Reserved for the Board;

• updating terms of reference for the Board’s Committees;

• receiving corporate governance updates;

• overseeing Board and executive succession planning;

• conducting the annual review of the Board and Board Committees’ performance and

• conducting an annual review of the Group’s governance framework.

Strategic alignment

a b c

d e

a b c

d e

Board and Committee meeting attendance

The Board and its Committees held a number of scheduled meetings in 2023, which senior executives, external advisers and

independent advisers were invited to attend and to present on business developments and governance matters. The Company

Secretary attended all Board meetings and he, or his nominated deputy, attended all Board Committeemeetings.

The table overleaf sets out attendance at the scheduled meetings in 2023. Attendance is expressed as the number of scheduled

meetings attended out of the number of such meetings possible or applicable for the Director to attend. In circumstances where

aDirector is unable to attend a meeting, the Director receives papers in advance and has the opportunity to raise issues and give

comments to the Chair in advance of the meeting.

Additional Board and Committee meetings were convened during the year to discuss current issues, ad hoc business

development, governance and regulatory matters.

In addition to its scheduled Board meetings, the Board

heldanumber of ad hoc meetings to deal with urgent

orarisingmatters.

In June 2023, the Board held a strategy day to set and monitor

progress against the Group’s strategy and to discuss the

Group’s future opportunities.

Link to core strengths and capabilities driving our strategy

a b c

d e

Innovating for success

a b c

d e

Customer focus

a b c

d e

Claims expertise

a b c

d e

Pricing sophistication

a b c

d e

Efficient cost base

104 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

Board

Audit

Committee

Board Risk

Committee

Customer

and

Sustainability

Committee

Investment

Committee

Nomination and

Governance

Committee

Remuneration

Committee

Chair

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

Senior Independent Director

Richard Ward 9 of 9 – 5 of 5 – – 3 of 3 4 of 4

Non-Executive Directors

Tracy Corrigan 9 of 9 – – 4 of 4 – – 4 of 4

Mark Gregory 9 of 9 7 of 7 5 of 5 – 4 of 4 – 4 of 4

Sebastian James 9 of 9 – – 4 of 4 – 3 of 3 4 of 4

Adrian Joseph OBE

8 of 9 – – 2 of 4 – – –

Mark Lewis

7 of 7 – – 3 of 3 – – 2 of 2

Fiona McBain 9 of 9 7 of 7 5 of 5 – 4 of 4 – –

David Neave

2 of 2 – – – – – –

Gregor Stewart 9 of 9 7 of 7 5 of 5 – – – –

Executive Directors

Jon Greenwood

3 of 3

Neil Manser 9 of 9 – – – 4 of 4 – –

Former Executive Directors

Penny James

2 of 2 – – – – – –

Notes:

1. Adrian Joseph was unable to attend meetings due to conflicting commitments.

2. Mark Lewis was appointed to the Board, the Remuneration Committee and the Customer and Sustainability Committee on 30 March 2023.

3. David Neave was appointed to the Board on 19 October 2023.

4. Jon Greenwood was appointed to the Board on 31 August 2023

5. Penny James resigned as CEO on 27 January 2023.

Section 172(1)

The Directors must act in a way they consider, in good faith, would be most likely to promote the success of the Company

for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

the likely consequences of any decision in the long term;

a b

the interests of the company’s employees;

the need to foster the company’s business relationships with suppliers, customers and others;

the impact of the company’s operations on the community and the environment;

d e

the desirability of the company maintaining a reputation for high standards of business conduct; and

the need to act fairly between members of the company.

Consideration of section 172(1) factors by the Board

The Group’s section 172(1) statement can be found in the Strategic report on page 17.

The table below sets out how factors under section 172(1) of the Companies Act 2006 and engagement with stakeholders have

fedinto Board discussion and decision making on key topics. More information about Board engagement with stakeholders can

befound in the table on page 106 and 107.

105Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Topic Section 172(1) considerations Outcomes

Return of capital

toshareholders

The Board

considered the

distribution of

surplus capital to

shareholders

during the year.

Considered the Group’s capital

position, taking into

consideration regulatory and

policy holder requirements and

the long-term investment needs

of the business.

In January 2023, the Board took the decision not to

recommend a final dividend for 2022. In September 2023 the

Group announced that no interim dividend was proposed for

the half year 2023.

The Board set two conditions under which dividends would

be restarted – the first being a return to capital coverage at

the upper end of the agreed range and secondly a return to

organic capital generation in Motor. The Board took the view

that these conditions had been met and recommended a

final dividend for 2023 of 4.0 pence per share. For more

information on the Board’s recommendation of a final

dividend, please see the Chair’s statement on page 8.

Considered 2023 results and

trading performance in Motor.

Considered the macro-economic

environment.

Consumer Duty

implementation

The Board

considered the

implementation

of the FCA’s new

Consumer Duty

rules, which

came into effect

in July 2023.

d e

Considered how the Group could

embrace and embed Consumer

Duty requirements to ensure

good outcomes and fair value

forcustomers.

The Board oversaw the implementation of its Consumer

Duty framework ahead of the 31 July 2023 implementation

date. Progress against the approved Consumer Duty

implementation plan was closely monitored.

Pre-implementation, the Group engaged with a wide range

of suppliers to set expectations on consumer duty. In cases

where suppliers could materially affect customer outcomes,

the Group engaged with them on the required changes to

customer journeys. Suppliers were also issued questionnaires

on their approach to consumer duty.

Resource risk was monitored throughout the

implementation period and was mitigated through the

addition of key supporting resources and subject matter

expertise in various workstreams.

There is continued oversight of the embedding of Consumer

Duty across the Group, the implementation of a customer

conduct culture framework and the transition of Consumer

Duty into business as usual activity while ensuring that the

Group is resourced to an appropriate level to prioritise the

right customers at the right time.

Considered how suppliers could

support implementation where

they may have a material impact

on customer outcomes.

a b

Considered the resources

needed to ensure successful

implementation and to ensure

that customers are prioritised

appropriately.

Cost of living

crisis

The Board

considered how

to respond to the

continuing strain

on real

disposable

incomes.

a b

Considered feedback received

viathe ERB about how the cost

ofliving crisis was affecting

colleagues, the benefits of

financial wellbeing, and what

could be done to support

our people.

During the year, we introduced initiatives focused on

supporting colleagues’ financial well-being, including a free

mortgage advisory service, a platform which enables debt to

be re-paid through salary and providing access to shopping

discounts. See page 133 for more information on these

measures.

Following the success of the Churchill Essentials product, we

launched the Direct Line Essentials product (see page 52 for

more information.)

Considered how to adapt the

Group’s motor products to

provide customers with the

choice of a stripped-back

insurance policy.

Sale of brokered

commercial

insurance

business

The Board

considered the

future of the

brokered

commercial

insurance

business.

Considered future strategy of the

Company and ambition to focus

on retail personal and direct

small business commercial lines

insurance customers.

The sale of the brokered commercial insurance business to RSA

was agreed. Its specialist trading model operated in a different

part of the UK insurance market to that of the rest of the Group

and this, combined with the operational turnaround of the

brokered commercial insurance business, meant that the

Board considered it to be the right strategic decision to

facilitate a sale and crystallise the value that had been created.

The sale increased the Group’s solvency by approximately

45percentage points.

A key consideration in the transaction was to maintain service

delivery for brokered commercial insurance customers. It was

considered that the sale to RSA would allow continued support

and service delivery to brokered commercial insurance

customers, due to their position as a multinational general

insurer providing a range of personal, commercial and specialty

insurance solutions through a wide network of brokers, third

party partners and directly to customers.

Considered the need to restore

the resilience of the Group’s

capital position and to drive the

long-term value potential for

both customers and shareholders.

Considered the interests of

commercial customers and

ofcolleagues who would be

transferred as a result of a sale and

the buyer’s reputation in respect

of customers and as an employer.

106 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

How the Board engages with stakeholders

The table below sets out how the Board has engaged with various stakeholders or received information about engagement

withstakeholders throughout the year.

Our Shareholders

The Investor Relations team runs a comprehensive programme of engagement covering a broad range of the Company’s

shareholders and debt investors, which includes meetings with the Chair and Executive Directors, presentations and conference

calls to discuss performance and strategy.

The Remuneration Committee Chair engages with shareholders on remuneration-related matters (see page 132 of the Directors’

Remuneration report for more information).

The AGM provides both institutional and retail shareholders with the opportunity to ask the Board questions either live

orbysubmitting questions in advance.

Our People

Executive Directors host interactive sessions with colleagues throughout the year to receive feedback and answer questions.

These sessions are held in various formats, e.g. town halls and live Q&A sessions, in order to encourage maximum participation

fromcolleagues, allowing them to have a more informal discussion with senior managers.

During the year, Non-Executive Directors visited the Group’s operations in Birmingham, Bristol, Glasgow, Doncaster, Leeds,

Manchester and Bristol. All of the visits included informal Q&A sessions with colleagues.

In addition, the Chair of the Board delivered keynote talks at the Chief Risk Officer’s ‘The Future of Risk and Compliance

Conference’, and at an afternoon session of the Group’s ‘Young Professionals Conference’.

We have several methods by which the Board engages with our people as stakeholders. The employee voice from each of the

below forums is fed back to the Board on a regular basis:

Employee Representative Body (“ERB”)

The ERB meets on a quarterly basis and comprises colleagues from across the business areas and locations. Meetings are generally

attended by the Group’s leadership, including the Acting CEO and one or two Non-Executive Directors, to discuss issues and

proposals which have (or may have) an impact on our people. Attendance and information on the work of the ERB during the year

can be found on page 108 and 109.

Motability

In September 2023, the Group welcomed 585 Motability colleagues to the business. People in this area are represented by the

union Unite. The business leads meet fortnightly with representatives of Unite to discuss transitional activity and other issues.

The Group is intent on building and maintaining a positive relationship with Unite based on transparency and trust throughout

theduration of the Motability partnership.

DiaLoGue

The Board receives regular updates on people matters from the Chief People Officer and reviews the results and key outcomes of

the Group’s colleague engagement survey, ‘DiaLoGue’, through which all colleagues are surveyed three times a year.

Findings provide both a snapshot and trends not only of all-colleague opinion but also findings for specific teams, allowing

solutions to be tailored to specific needs. Response to these surveys has consistently been high (over 80%).

Diversity Network Alliance (“DNA”)

There are seven employee networks, each of which are key drivers of diversity and inclusion across the business. They focus on the

following areas: Belief, Life (families and carers), LGBTQ+, Neurodiversity & Disability, REACH (Race, Ethnicity and Cultural Heritage),

SocialMobility and Thrive (gender). During the year, the Chair of the Board gave an interview on the “Social Mobility Podcast by Making

the Leap” hosted by Tunde Banjoko OBE, CEO of Making the Leap, which was facilitated through the Group’s Social Mobility Strand.

107Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Colleague Engagement

The Group has an established Employee Representative Body, meetings of which are attended by elected representatives from

thedifferent areas of the business and by the Acting CEO, the Chief People Officer and members of the senior leadership team,

todiscuss issues and proposals which have, or may have, an impact on colleagues. Non-Executive Directors also attended meetings

on a rotational basis (during the year, four different Non-Executive Directors attended ERB meetings). Output from the meetings

attended by Directors is reported to the fullBoard so they can consider relevant colleague views in their decision making.

The Board considers that this arrangement fulfils the recommendation under Provision 5 of the Code to provide a mechanism for

engaging with the workforce, being an enhanced version of the “formal workforce advisory panel” method referred to in Provision

5. The Board considers this arrangement to be highly effective as it provides a formal framework through which a wide variety

ofviews can be represented and provides colleagues the opportunity to express these views directly to both Executive and

Non-Executive Directors. It also means Director attendance can be tailored so that colleagues can engage with the most

appropriate Board member on a particular topic. For example, during the year, the Chair of the Remuneration Committee

attended the meeting at which workforce pay was discussed, and the Chair of the Board attended the meeting at which effect

ofthe Consumer Duty regulations were discussed.

Information about Board representation at ERB meetings can be found in the table below.

Meeting March June September December

Board Representation Jon Greenwood

(Acting CEO)

Vicky Wallis

(Chief People Officer)

Tracy Corrigan

(Non-Executive Director)

Jon Greenwood

(Acting CEO)

Danuta Gray

(Chair of the Board)

Vicky Wallis

(Chief People Officer)

Neil Manser (CFO)

Mark Lewis

(Non-Executive

Director)

Vicky Wallis

(Chief People Officer)

Jon Greenwood

(Acting CEO)

Dr. Richard Ward

(Non-Executive

Director)

Vicky Wallis

(Chief People Officer)

Our Customers

The Board closely monitors customer conduct and satisfaction. It considers a Customer Outcomes report at each of its scheduled

meetings, which includes data in respect of a number of customer experience metrics including Net Promoter Scores and

customer complaints data relating to sales, service and claims. It also reviews data in respect of digital serviceinteractions.

During the year, the Board received detailed updates on the impact of various key strategic matters on customers, including the

implementation of the new Consumer Duty Regulation. Tracy Corrigan, Non-Executive Director, is the Consumer Duty Champion

and acts as the voice of the customer in the boardroom.

The Group has invested in market-leading research capabilities, including an advanced customer engagement suite in our

corporate headquarters at Riverbank House. During the year, the Board and members of the Executive Committee met one

ofourvisually impaired customers to test the online journey to purchase a policy. This highlighted the challenges faced by visually

impaired customers and the ways they could be supported by simplifying online journeys and, in turn, how these journeys can

besimplified for all of our customers.

The Board seeks to utilise a breadth of methods through which to engage with customers: through complaints procedures,

customer facing teams, Q&A sessions and via ERB feedback from frontline teams.

Our Suppliers

The Board receives regular updates from management on key issues with suppliers. During the year, the Acting CEO met with

anumber of key technology suppliers, partners and external consultants.

The Board reviewed and approved the Group’s Ethical Code for Suppliers and Modern Slavery Statement. The Code states that the

Company encourages and welcomes feedback from suppliers on the Group as a customer and on how policies andprocedures

can be improved. This feedback can be given as part of regular review meetings with management.

The Group is a long-standing signatory of the Prompt Payment Code. Key performance indicators in respect of prompt payment

are reported internally, and there are mechanisms in place for any significant issues regarding prompt payment tobe escalated

tothe Board.

Our Planet and Our Society

The Customer and Sustainability Committee is a key vehicle through which the Board receives updates on engagement with key

community and environmental stakeholders. More information on the work of the Customer and Sustainability Committee can be

found on pages 127 and 128.

108 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

Examples of engagement with the ERB having resulted in business action include:

Issue Discussed Outcomes

Developing a

high-performing

culture

We discussed the new high-

performing culture with the ERB.

This was an iterative process

offeedback and update during

which the ERB challenged

thebusiness on new

performanceobjectives.

Objectives have been set to reflect the most important priorities

for us as a business and have been developed to help all of our

colleagues understand how they contribute. Performance

against these objectives will form part of individual performance

ratings. People leaders have been given training on how to

apply these performance objectives in year-end reviews.

Our Values The ERB was consulted

onarefreshed set of values:

WinTogether, Be Yourself,

SpeakUp and Own It.

(More information on our values

can be found on page 54.)

With ERB support, our values have evolved to represent the best

of the Group, and to guide the way we work together to perform

as a business and deliver for our customers. Our values help us

make good decisions, support each other in the right way and

draw on diverse perspectives.

We use our values to assess ‘how’ our colleagues deliver,

alongside ‘what’ they deliver, when considering individual and

team performance across the Group..

DiaLoGue

DiaLoGue is our employee engagement tool that we use to survey our colleagues three times a year. In 2023, we also used

DiaLoGue to carry out a ‘pulse’ survey to understand how our people were feeling during a challenging year. Examples of outcomes

resulting from DiaLoGue feedback include:

Issue Raised Outcome

The Future Colleagues sought clarity on their

objectives and how they support

the Group’s wider strategy.

In 2023 we put standardised objectives, which are aligned to

our strategy, in place for all colleagues (including the Executive

Committee and Enterprise Leadership Network) to support the

understanding of the link between individual objectives and

the Group’s overall strategy.

Leadership Colleagues sought enhanced

communications from leadership,

alongside a clear set of priorities

for the future.

We have reviewed the approach to and impact of internal

communications and have delivered a set of focused priorities.

In addition, we are developing a model to understand our

leadership strengths and to identify opportunities for

improvement.

109Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Division of responsibilities

Governance framework and structure

The Board oversees the system of governance in operation

throughout the Group. This includes an effective Enterprise

RiskManagement Framework and system of internal control.

The Board has established a risk management model that

separates the Group’s risk management responsibilities into

three lines of defence. An explanation ofthese responsibilities

can be found on page 86.

The Group’s governance framework is detailed in the Group’s

Systems of Governance document. This document also details

how the Group meets Solvency II and the Prudential Regulation

Authority (“PRA”) requirements to identify keyfunctions, and to

have and maintain a Responsibilities Map in respect of the PRA

and FCA’s Senior Managers and Certification Regime

requirements. The Board reviews this documentannually.

The core elements of the governance framework are the:

– Matters Reserved for the Board and the Board Committees’

Terms of Reference;

– Systems of Governance document;

– Risk appetite statements, which are described on page 86;

– Enterprise Risk Management Strategy & Framework and

Internal Control Framework, which is described on page 87;

– Group policies, which address specific risk areas, are aligned

to the Group’s risk appetite, and inform the business on how

it needs to conduct its activities to remain within risk

appetite; and

Minimum Control standards, which interpret the Group’s

policies into a set of requirements that can be implemented

throughout the Group.

The diagram below summarises the split of responsibilities

forthe different parts of the Group’s governance framework.

Matters Reserved

for the Board

andBoard

Committees’

Terms of

Reference

The Systems of Governance Framework document

The Board approves

The Systems of Governance

Framework, overarching risk

appetite statements and Group

policies, following review by

theBoard Risk Committee.

Matters Reserved for the Board

andBoard Committees’ Terms

ofReference.

Minimum Control Standard

Policy owner approves

Minimum standards, subject to

non-objection from the Risk

Management Committee.

The Board Risk Committee

approves

The Risk Management Framework

and the policy risk appetite

statements, following review by

theRisk Management Committee

(a committee comprised

ofexecutives).

Enterprise

Risk

Management

Strategy and

Framework

Internal

Control

Framework

Policy risk

appetite

statements

Overarching

risk appetite

statements

Minimum Control standards

ERMF policies

110 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

Structure of the Board, Board Committees and executive management

The following chart sets out the structure of the Board and its Committees and highlights the responsibilities of the Chair, the

Senior Independent Director, the Non-Executive Directors, the Executive Directors, the Company Secretary and the Executive

Committee. The role descriptions for the CEO and Chair are set out in writing; the profiles clearly define their respective roles

andresponsibilities, and ensurethat no one person has unlimited powers of decisionmaking.

The Board and Board Committees have unrestricted access to management and external advisers to help discharge their

responsibilities. Each Committee plays a vital role in helping the Board to operate efficiently and consider matters appropriately.

The Board and Board Committees are satisfied that, in 2023, sufficient, reliable and timely information was received in order

forthem to perform their responsibilities effectively.

The reports by each Board Committee are given in this Annual Report and Accounts. The Terms of Reference for each Committee

can be found on the corporate website at: www.directlinegroup.co.uk/en/who-we-are/leadership/board-committees

Roles and responsibilities of the Board

Board of Directors

Each Director brings different skills, experience and

knowledge to the Company, and the NEDs contribute

additional independent thought and judgement.

Depending on the business needs, the NEDs and the

Chaircommit at least two days a month and two days

aweek respectively to discharging their duties effectively

inaccordance with their letters of appointment.

As at 31 December 2023, the Board comprised the Chair,

eight independent NEDs, and two executive Directors

(theCFO and the Acting CEO). Biographies of the full Board

can be found on pages 97to100.

Board Committees

Full details of membership, responsibilities and activity

ofeach Committee throughout the year can be found

onpages 117 to 135.

Audit

Committee

Investment

Committee

Remuneration

Committee

Board Risk

Committee

Nomination and

Governance Committee

Customer and

Sustainability

Committee

Senior Independent Director

– Acts as a sounding board for the Chair and an

intermediary for the other Directors when necessary.

– Is available to shareholders if they have concerns that

cannot be resolved through other channels.

– Leads the Chair’s performance evaluation.

Non-Executive Directors

– Challenge management in an objective and

constructivemanner.

– Use their wider business experience to help develop

theGroup’s strategy.

Executive Directors

– The Acting CEO and CFO are members of the Board,

withdelegated responsibility for the day-to-day operation

of the Group and delivering its strategy.

– The Acting CEO delegates certain elements of their

authority to the Executive Committee members to

helpensure that senior executives are accountable

andresponsible for managing their business areas

andfunctions.

Company Secretary

– Ensures the Directors receive accurate, timely and clear

information.

– Assists the Chair in overseeing the Group’s corporate

governance arrangements.

Chair

– Guides, develops and leads the Board.

– Plans and manages the Board’s business.

– Oversees the Group’s governance framework.

The Executive Committee

The Executive Committee is the principal management

committee that helps the Acting CEO manage the Group’s

operations and supports the Acting CEO in:

– Setting performance targets;

– Implementing Group strategy;

– Monitoring key objectives and commercial plans to help

achieve the Group’s targets; and

– Evaluating new business initiatives and opportunities.

111Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Board composition

As at the date of this report, the Board comprised the Chair,

who had previously served as an independent Non-Executive

Director and was independent when appointed as Chair; one

Executive Director; and eight independent Non-Executive

Directors, including the Senior Independent Director.

Following the departure of Penny James on 27 January 2023,

Jon Greenwood served as Acting CEO throughout 2023 and

was appointed to the Board as an Executive Director on

31 August 2023 following regulatory approval.

Biographical details of the Directors of the Company as at the

date of this report are set out on pages 97 to 100. Details of

Directors who have served throughout the yearcan be found

inthe Directors’ Report on page 157.

Board succession

The Nomination and Governance Committee continues to

review succession plans both for the Board and at executive

level each year. Further information on our approach to

succession planning and Board appointments can be found

inthe Nomination and Governance Committee’s report

onpages 125 to 126.

Board induction and training

All new Directors appointed to the Board undertake an

induction programme aimed at ensuring they develop an

understanding and awareness of our businesses, people and

processes, and of their roles and responsibilities as Directors

ofthe Company. The programmes are tailored to suit each

Director and include provision of relevant current and historical

information about the Company and the Group; visits to

operations around the Group; induction briefings from Group

functions; one-to-one meetings with Board members, Senior

Management and the Company’s advisers; and engagement

with the Group’s ERB.

The Board is committed to the training and development

ofDirectors to improve their knowledge of the business and

theregulatory environment in which it operates. The Company

Secretary is responsible for helping the Chair identify and

organise training for the Directors which is tailored to

individualneeds.

The Company Secretary maintained the training agenda for

theBoard and its Committees during the year. During the year,

the Board received technical briefings on the Internal Economic

Capital Model. In addition, the Board attended a ‘Technology

Boardwalk’ that focused on the role that technology plays

delivering great customer experiences.. Thiswas brought to life

by listening to, watching and analysing our actual customers

inthe Group’s customer experience labs and through smaller

session where the Board could engage with customers

abouttheir experiences.

Non-Executive Director (“NED”) Independence

On behalf of the Board, the Nomination and Governance

Committee assesses the NEDs’ independence, skills, knowledge

and experience annually. The Nomination andGovernance

Committee concluded that every current NED was independent,

continued to contribute effectively, and demonstrated they

were committed to the role. Each current Director will submit

themselves for election or re-election at the 2024 AGM.

Youcanfind out more about the activities of the Nomination

and Governance Committee’s work during the year on pages

125 and 126.

External directorships

The Board keeps Directors’ external commitments under

continual review to ensure they continue to have sufficient time

to dedicate to the Group. During the year, the Board reviewed

and approved in advance, Danuta Gray’s appointment as a

Independent Non-Executive and Chair Designate of Croda

International plc. The Board was satisfied that, in taking on this

role, Danuta would continue to have sufficient time to dedicate

to her role on the Board.

Information and support

The Board accesses assistance and advice from the Company

Secretary. The Board, and each member of the Board, may seek

external independent professional advice at the Company’s

expense, if required, to discharge its duties.

Board’s approach to inclusion and diversity

The Company reports that as at 31 December 2023 the Board

was partly compliant with the new Listing Rule targets,

meeting the target for at least one senior Board position to be

held by a woman and for at least one Board member to be

from a minority ethnic background (which is also consistent

with the Parker Review recommendations). However, for the

majority of the year it did not meet the target for at least 40%

ofthe Board to be women.

The Board recognises that there is more work to do in this area,

and it aims to meet the targets set out by the Listing Rules,

noting the challenges associated with achieving this. Diversity,

including gender diversity, is a key consideration in succession

planning, though as the skills and experience of the Board are

refreshed over time, the gender balance will be dependent

onthe availability of the best candidates for Board vacancies.

In 2023 the Group set ambitious new targets to continue to

improve diversity in senior leadership. Our targets are aligned

with the definitions of senior leadership used by the FTSE

Women Leaders Review, Women in Finance review and Parker

Review. We are aiming to increase representation of women

to40%, ethnic minority talent to 16%, and Black talent to 4%

atsenior leadership levels (defined as Executive Committee

anddirect reports, excluding direct reports in support

oradministrative roles).

Current

representation

(end Oct 2023)

Targeted

representation

(end 2027)

Women 31% 40%

Ethnic minority 13% 16%

Black 0% 4%

112 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

The tables below set out data about the sex and ethnicity of the Board and senior management as at 31 December 2023,

intheformat prescribed by the Listing Rules.

Number of

Board

members

Percentage

of the

Board

Number of

senior positions

on the Board

(CEO, CFO, SID

and Chair)

Number in

executive

management

Percentage of

executive

management

Men 9 75% 3 6 60%

Women 3 25% 1 4 40%

Not specified/prefer not

tosay

– – – – –

Note:

1. Executive management is the Executive Committee and Company Secretary.

Number of

Board

members

Percentage

of the

Board

Number of

senior positions

on the Board

(CEO, CFO, SID

and Chair)

Number in

executive

management

Percentage of

executive

management

White British or other

White (including

minority-white groups)

11 91.7% 4 7 70%

Mixed/Multiple Ethnic

Groups

1 8.3% – – –

Asian/Asian British – – – 2 20%

Black/African/Caribbean/

Black British

– – – – –

Other ethnic group,

including Arab

– – – – –

Not specified/prefer not

to say

– – – 1 10%

Note:

1. Executive management is the Executive Committee and Company Secretary.

The Group recognises the importance of understanding diverse representation and the monitoring of differential outcomes.

Itcollects diversity representation information on the basis of self-reporting across the categories of sex, gender identity, ethnicity,

religion, sexual orientation, disability and socio-economic background, collected using our HR Information Systems as part of the

onboarding process.

113Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Board and Committee effectiveness review:

three-year Board evaluation cycle

The Board conducts an annual review of the effectiveness

oftheperformance of the Board, its Committees, the Chair

andindividual Directors, with the input of an external facilitator

at least every third year. In 2023, the performance review was

carried out in-house with the assistance of Promontory

Financial Group (“Promontory”), which has no other connection

with the Company or any Director. The Board recognises that

acontinuous and constructive review of its performance is

acritical factor in achieving the Group’s objectives, realising

potential and promoting the long-term sustainable success

ofthe Company.

Promontory mapped themes identified during both the

previous Board performance review and at a follow-up

workshop with the Non-Executive Directors which they

facilitated in June 2023. They conducted one-to-one interviews

with Board members and senior managers who were regular

attendees of Board and Committee meetings, and reviewed

samples of meeting agendas and papers. Promontory’s

findings and recommendations were considered by the Board

and its Committees in early 2024.

Evaluation process

Step 1

The thematic priorities for the review were

established by Promontory indiscussion with

the Chair and the CompanySecretary.

Step 2

Promontory interviewed members of the

Boardand senior managers about Board and

Committee performance and the Group’s current

and target culture, and reviewed sample agendas

and papers.

Step 3

A report, covering Board and Committee

performance, was prepared and presented by

Promontory and discussed at the Board’s January

2024 meeting.

Step 4

An action plan was defined, based on the

recommendations in Promontory’s report.

2023 evaluation outcome

The results of the review were presented to the Board and

itsCommittees in January 2024 and the recommendations

form the basis of an action plan for 2024 as summarised in the

tableon page 115, along with an update on the action plan that

resulted from the 2022 review. Themes emerging from the

2023review included Board and executive succession planning,

management skills and capabilities, culture, communication,

meetings and materials. Separately, the Senior Independent

Director discussed the Chair’s performance with the

Non-Executive Directors (except the Chair) and provided

constructive feedback to the Chair. No Director was involved

inthe review of theirownperformance.

Senior management succession planning

The Board recognises that in order to maintain and improve

ondiversity levels, it must ensure that senior management

succession planning is focused on promoting diverse leadership,

and that workforce diversity is achieved at all levels in order to

secure a diverse pipeline of talent.

The 2023 Annual Incentive Plan includes targets for Executive

Directors, the Executive Committee and senior management

inrespect of improving the gender and ethnic diversity of the

workforce in the context of leadership succession planning

(more information on this can be found on pages 55 and

56andon 141.

Board appointments and Diversity Policy

The Board has in place a Diversity Policy which sets out

thekeyprinciples to be followed in respect of the Board

appointment process. More information on this can be found

inthe Nomination and Governance Committee report on

pages125and 126.

Workforce diversity and inclusion

The Board encourages and supports equity, diversity and

inclusion in the workplace and is committed to building an

inclusive culture. It continues to support Group-wide diversity

and inclusion activities and initiatives, many of which are

outlined on pages 112 to 114. This includes the work of the

Company’s Diversity Network Alliance (“DNA”) which champions

diversity and inclusion in the Group through its ‘DNA strands’:

Race, Ethnicity and Cultural Heritage (‘REACH’); Belief; LGBT+;

Life (working families and carers); Neurodiversity and Disability;

Social Mobility; and Thrive (gender). Moreinformation about

thework of the DNA during the year can be found on page 55

of the Strategic report.

Board skills, experience and knowledge

The Nomination and Governance Committee assesses and

monitors the skills, experience and knowledge of Board

members with the aim of equipping the Board to challenge

and support the executive team effectively, taking into

consideration the Group’s evolving strategy.

114 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

2023 focus areas and proposed action for 2024

Strategic direction

The Board intends to rebalance its support for, and challenge of, senior management. It will engage with Adam

Winslow, the new Chief Executive, on setting the priorities for the Group’s strategy in 2024 and beyond, including

forbrand and commercial strategy, driving the business benefits of investment in technology and responding to

customers’ changing needs.

Investment in leadership

The Board will oversee the continuing action plan to strengthen management technical and leadership capability,

working with the new CEO on the Group’s target operating model, clarifying roles and responsibilities and

drivingaccountability.

Refreshing culture

The Board will continue to oversee work on stimulating a high-performance, customer outcomes-focused and

risk-positive culture, including investing in risk management and compliance culture and capability, further enhancing

the insights from cultural metrics developed in 2023.

Audit, Risk & Internal Control

An explanation of how the Board complies with the Code in

relation to audit, risk and internal control is set outbelow,

except for the following matters, which are covered elsewhere

in the Annual Report and Accounts:

– how the Board has assessed the Group’s longer-term viability

and the adoption of the going concern basis inthe financial

statements is on page 93 and page 159; and

– the Board’s delegated responsibility to the Audit Committee

to oversee the management of the relationship with the

Company’s External Auditor.

You can find details of the Audit Committee’s role, activities and

relationship with the External Auditor in the Audit Committee

report which starts on page 117 .

Responsibility for preparing the Annual Report

and Accounts

The Board’s objective is to give shareholders a fair, balanced

and understandable assessment of the Group’s position,

performance, business model and strategy. The Board is also

responsible for maintaining adequate accounting records,

andseeks to ensure compliance with statutory and

regulatoryobligations.

You can find an explanation from the Directors about their

responsibility for preparing the financial statements in the

Statement of Directors’ responsibilities on page 160. The Group’s

External Auditor explains its responsibilities on page 171.

The Directors confirm that they consider that the

AnnualReport and Accounts, taken as a whole, are fair,

balanced and understandable, and provide the information

that shareholders need to assess the Group’s position,

performance, business model and strategy. In arriving at this

conclusion, the Board was supported by a number ofprocesses,

including the following:

– management drafted the Annual Report and Accounts to

ensure consistency across sections, and a steering group

comprising a team of cross-functional senior management

provided overall governance and co-ordination;

– a verification process, to ensure the content was

factuallyaccurate;

– members of the Executive Committee reviewed drafts

oftheAnnual Report and Accounts;

– the Company’s Disclosure Committee reviewed an advanced

draft of the Annual Report and Accounts; and

– the Audit Committee reviewed the substantially final draft

ofthe Annual Report and Accounts, before consideration

bythe Board.

Assessing emerging and principal risks

The Board determines the nature and extent of the risks that it

is willing to take to achieve its strategic objectives. The Directors

robustly assessed the emerging and principal risks facing the

Company, including risks that would threaten its business

model, future performance, solvency or liquidity. You can find

adescription of these risks, and their management or

mitigation, on pages 88 to 92.

2022 focus areas and action taken during 2023

Reflecting on 2022 challenges

The Non-Executive Directors arranged a discussion in June 2023, which was facilitated by Promontory, to reflect on the

lessons learned from navigating the challenges and volatility of 2022. The Board and its Committees have, during 2023,

overseen a number of action plans, the objectives of which included improving the Group’s control framework and

increasing the depth of management’s technical and leadership capability.

Improving Board information

Some progress has been made in supplying summary key performance indicators to the Board by business category

ina more succinct and insightful format. This is work-in-progress and further reviews of Board and Committee materials,

and training for the authors and executive sponsors of papers, are planned in 2024.

Succession planning

The search for a new Chief Executive resulted in the selection of Adam Winslow, which was announced on 30 August

2023. Two new Non-Executive Directors joined the Board in 2023, Mark Lewis in March and David Neave in October,

andan additional search has led to the appointment of Carol Hagh with effect from 1 April 2024. A review of executive

succession planning during the year led to a number of searches at senior level, which are expected to be concluded

inearly 2024. There has been a particular focus on recruiting additional technical and leadership capability in the Pricing

& Underwriting and Actuarial functions.

115Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

During the year, the Group enhanced its control environment

across a number of key areas including pricing and underwriting,

compliance with pricing practices regulation, financial reporting,

change management, and risk management in the first line.

These enhancements are part of an objective to strengthen the

Group’s overall risk and control environment. Further work is to

be undertaken in 2024 to formalised newly introduced controls,

complete the programme of control remediation, and ensure

that the process of risk and control assessment is updated to

fully support and embed these enhancements.

To support and accelerate this work, the Board commissioned

aGroup-wide controls improvement programme in 2023.

Thiswas overseen by the Board Risk Committee. In addition,

the Audit Committee has overseen a Control and Oversight

Remediation Programme within Finance, the aim of which is

toenhance the financial reporting control environment across

the Group. Significant progress has been made under both

initiatives resulting in an improving control environment, with

work continuing into 2024. More information in respect of both

initiatives can be found in the respective Audit Committee and

Board Risk Committee reports.

The Group Audit function supports the Board by providing

independent and objective assurance on the adequacy and

effectiveness of the Group’s controls. It brings a systematic

anddisciplined approach to evaluating and improving the

effectiveness of the Group’s risk management, control and

governance frameworks and processes. Group Audit’s 2023

annual assessment of the risk management, governance and

control environment did not identify any matters that conflict

with the 2023 IRCA Statement.

On behalf of the Board, the Board Risk Committee reviewed

the 2023 IRCA Statement and was satisfied with the conclusion

that the Group’s risk management systems, including its

internal control systems, were adequate for managing all

material risks. The Board Risk Committee also regularly reviews

significant risks and how they might affect the Group’s financial

position, comparisons to agreed risk appetites, and what the

Group does to manage risks outside its appetite.

The Board confirms that there is an ongoing process for

assessing the Company’s risk management and internal

control systems and identifying, evaluating and managing

thesignificant risks faced by the Group, which has been in

place throughout the period and up to the date of this report.

The Board takes the view that, on the basis of the 2023 IRCA

assessment carried out, it would be reasonable to conclude that

the Group’s risk management and internal control systems are

effective. The Directors acknowledge that any internal control

system can manage, but not eliminate, the risk of not achieving

business objectives. It can only provide reasonable, not absolute,

assurance against material misstatement or financial loss.

Remuneration

The Board is mindful at all times that remuneration policies and

practices must be designed to support strategy and promote

the long-term sustainable success of the Group. It delegates

responsibility to the Remuneration Committee to ensure that

there are formal and transparent procedures for developing

policy on Executive remuneration and determining Director

and senior management remuneration.

In his report on pages 131 to 135, the Remuneration Committee

Chair provides an overview of the Committee’s work in setting

an appropriate framework for remuneration of the Executive

Directors, Executive Committee and other senior managers, as

well as the wider workforce, to ensure fair pay for all our colleagues.

For details on how the Company has applied Provision 40 ofthe

Code in determining Executive Director remuneration policy

and practices, see the summary on page 138.

This determination is based on the Board Risk Committee’s

review and challenge of the Group’s Material Risk Assessment,

and the Board’s review and approval of the Group’s risk

appetite statements. The Risk Assessment identifies risks

quantified as having a residual risk impact of £30 million or

greater. The quantifications are produced through stress and

scenario analysis, and our capital model. Each directorate’s

bottom-up risk identification and assessment supplements the

Material Risk Assessment. The Material Risk Assessment also

plays a key role in developing the ORSA and assessing the

Group’s strategic plan.

Risk management and internal control systems

The Board, with the assistance of the Board Risk Committee

and the Audit Committee, and support from the Risk and Group

Audit functions as appropriate, monitored the Company’s risk

management and internal control systems that have been in

place throughout the year under review, and reviewed their

effectiveness. The monitoring and review covered all material

controls, including financial, operational and compliance controls.

The Risk function annually produces an Internal Risk and

Control Assessment (“IRCA”) Statement to support the Board in

monitoring the effectiveness of the Group’s risk management

and internal control systems. Under the IRCA process, each

function completes a self-assessment of its risks and key

controls and an Executive Sponsor, responsible for the function,

attests to the status of the effectiveness of the risk management

and internal control systems. This is supported by control

testing in the first line of defence. The Risk function reviews

andchallenges these findings and the Group Audit function

provides an independent assessment of the overall effectiveness

of the governance and risk and control framework of the Group.

The overall findings are combined into a Group-level assessment

and reported to the Board Risk Committee.

The 2023 IRCA process did not identify any material financial,

operating, or compliance control deficiencies during the year

ended 31 December 2023, nor any material control deficiencies

that remained unresolved at the balance sheet date.

The IRCA specifically assessed the potential control

implicationsof risk events which occurred in recent years but

have further crystallised in 2023, including material customer

redress provisions, and weaknesses in the Motor account

tradingperformance.

The Group incurred material customer redress provisions

of£104m in 2023 in respect of its past business reviews relating

torenewal pricing under the rules in ICOBS 6B and claims

under motor insurance policies where the vehicle was deemed

uneconomical to repair (“Motor Total Loss Claims”). The IRCA

identified that these events were, in part, caused by deficiencies

in the Group’s operational and compliance controls in prior

years. The underlying root causes of these control deficiencies

have since been remediated, such that they did not represent

an unresolved material control failure as at the balance

sheetdate.

In addition, the Group’s 2023 trading performance has been

adversely impacted by the earning of premiums priced during

the exceptional inflationary UK motor claims environment

in2022. The IRCA reported that the adequacy of the Group’s

pricing response at that time may have been impacted by

shortcomings in the resilience of its pricing and underwriting

control environment when operating in those stressed

circumstances. The Group has taken a number of corrective

actions in 2023 to reduce the impact of this on its ongoing

commercial performance.

116 Direct Line Group Annual Report and Accounts 2023

Corporate Governance continued

Gregor Stewart

Chair

Committee membership

– Gregor Stewart

Chair and Independent Non-Executive Director

– Mark Gregory

Independent Non-Executive Director

– Fiona McBain

Independent Non-Executive Director

– David Neave

Independent Non-Executive Director

Key responsibilities

– Oversee the integrity of the Group’s

financial statements.

– Oversee and challenge the effectiveness of the

Group’s systems of financial internal controls and

regulatory reporting.

– Oversee Group Audit's annual assessment of the

Group's risk management, control and governance

frameworks and processes.

– Oversee the actuarial reserving process.

– Oversee the work and effectiveness of the Group’s

internal and external auditors.

– Oversee the Group’s financial and non-financial

disclosures, including climate-related financial

disclosures.

Areas of focus in the reporting period

– Financial reporting: reviewed and challenged the key

accounting estimates and judgements made by

management to support the financial statements.

– Insurance reserves: reviewed the Group’s insurance

reserves to obtain assurance that they remained

appropriate for discharging expected liabilities.

– Reviewed IFRS 17 implementation.

– External Audit: oversaw the transition from Deloitte

LLP to KPMG LLP.

– Oversaw the CFO Control and Oversight Remediation

Programme.

– Reviewed and challenged Group Audit's annual

assessment of the Group's risk management, control

and governance framework and processes.

– Oversaw the independent External Quality

Assessment of the Group Audit function.

Committee skills and experience

In line with the UK Corporate Governance Code (the “Code”), all

members of the Audit Committee are independent, and the

Committee as a whole is deemed to have competence

relevant to the insurance and financial services sectors in

which the Group operates.

The Committee Chair is a member of the Institute of Chartered

Accountants of Scotland. Fiona McBain and Mark Gregory are

members of the Institute of Chartered Accountants in England

and Wales. David Neave brings to the Committee 40 years of

experience in senior general insurance positions including

claims and underwriting.

Each member has recent and relevant financial experience

gained in a number of different financial services businesses,

including insurance, enabling them to contribute diverse

expertise to the Committee’s proceedings.

Main activities during the year

At each of its scheduled meetings, the Committee received

reports on financial reporting, insurance reserves, internal

controls and Group Audit.

Financial reporting

The Committee followed a review process before recommending

the Annual Report and Accounts and Half Year report to the

Board, and focused on the choice and application of significant

accounting policies, emphasising those requiring a major element

of estimation or judgement. Further information on the significant

matters considered is provided in the table on page 118.

In addition, the Committee reviewed papers prepared by

management on the use of alternative performance measures

in the financial statements. The Audit Committee had previously

noted that on transition to IFRS 17, the Group intended to

replace the previously reported alternative performance

measure, the combined operating ratio, with a new metric, the

net insurance margin. The net insurance margin expresses the

insurance service result under IFRS 17 as a percentage of

insurance revenue and measures financial year underwriting

profitability. The Committee was satisfied that an explanation of

both the alternative performance measure, and why it was used,

was clearly communicated to users of the financial statements.

Furthermore, the Committee considered the estimates and

judgements used to prepare the Group’s capital position under

Solvency II, including focusing on the level of technical

provisions held. Specific matters considered included

judgements made in respect of events not in data, and the risk

margin. The Committee reviewed the Group’s Solvency and

Financial Condition report on behalf of the Board before

submission to the PRA, and concluded that the processes to

produce and review this report had operated satisfactorily.

IFRS 17 and IFRS 9 implementation

During the year, the Committee reviewed and challenged

disclosures in respect of the Company’s first reporting under IFRS 17

and IFRS 9, which included 2022 restatements. It considered

challenge from the External Auditor on topics in IFRS 17 including:

the illiquidity premium to be used to discount insurance liabilities;

the application of the premium allocation approach and the

eligibility testing undertaken; the onerous contracts assessment; the

treatment of extreme events not in data; and reclassification of line

items on the Statement of Financial Position.

Note:

1. Appointed to the Committee with effect from 6 December 2023.

Audit Committee report

Direct Line Group Annual Report and Accounts 2023 117

117Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Significant judgements and issues

Matter considered

Description Action

Insurance liabilities

valuation

The Committee reviewed

the level of insurance

liabilities of the Group.

Insurance liabilities include

the liability for remaining

coverage and the liability for

incurred claims at the

statement of financial

position date. By its nature,

the liability for incurred

claims requires analysis of

trends and risks, and the

application of management

judgement, knowledge and

experience. The

measurement of the liability

for remaining coverage is

less judgemental than the

liability for incurred claims

and is recognised on a

similar basis to the Group's

previous accounting

treatment of the unearned

premium reserve under

IFRS 4. Further information

on insurance liabilities is

provided on pages 37 to 38.

In 2023, the Committee reviewed and challenged the

approach, methodology and key assumptions used by

management in setting the liability for incurred claims and

monitored developing trends that could have a material

impact on them. On an ongoing basis, it received updates

from the Actuarial Director on how actual claims experience

compared to expectations. Particular points of discussion in

2023 were the developing trends in personal lines Motor,

covering large and small bodily injury claims experience in

addition to damage claims. This included a focus on

recoveries for non-fault claims, where the adequacy of the

provision was challenged to protect against the risk of fewer

recoveries than estimated. The Committee also considered

the more wide-ranging impacts of the ongoing uncertainty

caused by the current macro-economic environment. The

Committee discussed the judgements that underpinned the

year end liabilities, including those based on current and

prior-year development and settlement patterns. Consistent

with the continued uncertainty in an inflationary

environment, the Committee reviewed analysis of the

matters that significantly impacted the booked reserves,

alongside supporting data and diagnostics, and the potential

range of outcomes. The Committee discussed the approach

to identifying and recognising those events which were not

yet reflected in data and reviewed and challenged the

provisions proposed by management. In addition, the

Committee was provided with the Group's response to the

Dear Chief Actuary letter from the PRA, which highlighted

the risks of inflation for general insurers and made

recommendations on certain actions to address those risks.

The Committee obtained insight and reviewed results from

an independent actuarial review of material elements of

insurance liabilities. Where there was divergence between

the independent actuarial review and that of management,

the Committee challenged the reasons for the divergence.

The Committee also considered the adequacy of remediation

costs recognised for past business reviews covering Motor

total loss and the pricing of Motor and Home policies

following the implementation of the FCA's PPR reforms. The

Committee was satisfied that management had exercised

appropriate control and judgement in estimating insurance

liabilities.

Valuation of

investments not held

at fair value and

investment property

The Committee considered

reports on the estimates

and judgements applied to

the carrying value of the

Group’s investments that

are not held at fair value,

and the basis for the

valuation. These assets

principally comprise

infrastructure loans,

commercial real estate

loans and private

placement bonds held

within the investment

portfolio. The Group also

holds a portfolio of

investment properties.

Information was provided to

the Committee on a regular

basis to support the value

recognised in the accounts.

In 2023, the Committee considered material accounting

estimates and judgements in respect of assets not held at fair

value, and the investment property portfolio, and was

satisfied with the carrying value of investments and the basis

for their valuation. The Committee noted that a write down

was proposed in the investment portfolio in relation to one of

the Group’s commercial real estate loans. The Committee

considered the impact of the continuing challenging macro-

economic environment on the investment property portfolio

and noted the year end independent valuation resulted in a

small decline overall in the portfolio value. The Committee

concluded that the carrying values in the accounts were

reasonably stated.

Audit Committee report continued

118 Direct Line Group Annual Report and Accounts 2023

Insurance contract liabilities - liability for incurred

claims

The Committee reviewed and challenged the key assumptions

and judgements, emerging trends, movements, and analysis of

uncertainties underlying the reserving estimates made for the

liability for incurred claims. These assumptions and judgements

were informed by actuarial analysis, wider commercial and risk

management insights, and principles of consistency from period

to period. Inflation risks were discussed throughout the year,

taking account of care costs, cost of materials and general

labour inflation affecting different lines of business. The Actuarial

Director presented scenario analyses for various inflationary

drivers, supporting the booking of the liability for incurred

claims. After its review, the Committee recommended the

liability for incurred claims to the Board.

The Committee also commissioned an external independent

actuarial review of material risk areas of insurance liabilities,

carried out for the Committee by PricewaterhouseCoopers LLP

(“PwC”).

Task Force on Climate-related Financial

Disclosures report

The Committee reviewed the financial disclosures in the Task

Force on Climate-related Financial Disclosures report on behalf

of the Board as part of its review of the Annual Report and

Accounts. The TCFD report can be found on page 70.

Going concern, viability and fair, balanced

and understandable

The Committee considered the going concern assumptions and

viability statement in the 2023 Annual Report and Accounts,

valuation of assets and impairment reviews, non-recurring

period-specific transactions and clarity of disclosures. The

Committee reviewed and concluded that the Annual Report

and Accounts taken as a whole were fair, balanced and

understandable and provided sufficient information to enable

the reader to assess the Group’s position, performance, business

model and strategy.

When considering the 2023 Annual Report and Accounts, the

Committee considered the significant judgements and issues

which could be material to the financial statements. These

included the matters set out in the table on page 118. The

Committee challenged the estimates and judgements being

made and also discussed these matters with the External

Auditor.

For more information on the viability statement see page 93.

Internal control

During the year, the Committee continued to monitor and

review the adequacy and effectiveness of the controls that

underpin the Group’s financial reporting control framework,

which forms part of the Group’s wider internal controls system.

The Board delegates supervision of the framework to the

Committee, while the CFO is responsible for the framework’s

operation on a day-to-day basis. During 2023, there were no

material control deficiencies reported to the Committee.

In the 2022 Annual Report, the Committee reported that whilst

there were no material control deficiencies reported to it during

2022, there had been an increase in the number of non-material

control deficiencies identified during that year and therefore

took an action to work alongside the Board Risk Committee to

oversee a programme of improvements to the Group’s financial

reporting control environment.

In this regard, the Audit Committee has overseen the CFO

Control and Oversight Remediation Programme (the

"Programme"), the aim of which is to enhance the financial

reporting control environment across the Group. During the

year, the Programme, which is led by the CFO Control Steering

Group and chaired by the CFO, reported back to the Committee

on a monthly basis, as well as at scheduled meetings, on its

progress. Targeted remediation activities relating to

improvement in the financial reporting processes were

completed. The Programme will continue in 2024 to ensure that

progress made in 2023 is maintained into 2024 to further

embed the continuous improvement of the control

environment of the Group’s financial reporting framework.

The Committee reviewed and challenged Group Audit's annual

assessment of the Group's risk management, control and

governance frameworks and processes. The Committee also

reviewed Group Audit's opinion on the overall effectiveness of

the Group's internal control framework. This concluded that

important elements of the formal framework required further

improvement, but that, taken as a whole, the framework was

adequate, such that no material control failures had occurred in

the current year.

The Committee also considered management’s processes and

controls for identifying and responding to the risk of fraud. The

Committee noted that there were no fraud-related events or

actions to suggest that fraud might have a material impact on

the financial statements.

The Committee monitored management’s responses to the

control insights and observations raised by the External Auditor

in its annual management letter during the year, and was

satisfied that management was taking appropriate and timely

action to resolve the issues raised.

Group Audit

The Committee is responsible for overseeing the work of Group

Audit and for ensuring industry best practice is adopted

appropriately. The Group Head of Audit’s primary reporting line

is to the Chair of the Committee. The secondary reporting line,

for day-to-day administration, is to the CEO.

During the year, the Committee oversaw the independent

External Quality Assessment ("EQA") of the Group Audit

function. This rated Group Audit 'generally conformant' with

professional standards, with some improvements

recommended against relevant Internal Audit professional

standards. The Committee oversaw the development of the

action plan to address the findings from the EQA and is

receiving quarterly progress updates. Group Audit’s performance

partner PwC continued to provide independent quality

assurance activity alongside the EQA with results reported to

the Committee.

During the year, Group Audit provided the Committee with

independent and objective reports on the adequacy and

effectiveness of the Group’s governance, risk management and

internal controls. Group Audit completed a number of reviews

of major programmes during the year. The Committee

approved Group Audit’s plan on a quarterly basis, and

confirmed the audit plan coverage on an annual basis. The

Committee received quarterly reports detailing internal audit

activity, key findings, management responses, and proposed

action plans. There were no material deficiencies reported to the

Committee in the year.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 119

119Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Following the independent EQA and assessment by the

Committee during the year, it was concluded that the Group

Audit function was effective. The Committee approved the

Group Audit Charter, which is reviewed annually.

Additional information

The Committee has unrestricted access to management and

external advisers to help discharge its duties. It is satisfied that in

2023 it received sufficient, reliable and timely information to

perform its responsibilities effectively.

During the reporting period, the External Auditor and Head of

Group Audit met privately with the Audit Committee, in the

absence of management. The Chair of the Committee reported

on matters dealt with at each Committee meeting to the

subsequent scheduled Board meeting.

During the year, the FRC carried out a limited scope review of

the Group's Half Year report to 30 June 2023 as part of its

thematic review of IFRS 17, covering interim disclosures in the

first year of application. No substantive questions or queries

were raised as a result of the review. It is noted that the FRC's

review was limited to considering compliance with reporting

requirements, did not provide assurance that the report was

correct in all material respects, and it is not the FRC's role to

verify the information provided.

External Audit

Deloitte LLP (“Deloitte”) has served as the Company’s Auditor

since 2000. Andrew Holland, FCA, was the lead audit partner for

the Company’s 2023 audit. As Deloitte was appointed as Auditor

to the Company in 2000 (when it was a subsidiary of The Royal

Bank of Scotland Group plc), under the transitional provisions of

the relevant legislation, Deloitte could only continue as the

Company's External Auditor until 31 December 2023. As noted

below, a competitive tender process was undertaken in 2022 to

appoint a new External Auditor.

The Committee is responsible for overseeing the work of the

External Auditor and agreeing the audit fee, as well as approving

the scope of the External Auditor’s annual plan.

External Audit transition

During 2022, the Committee oversaw a competitive tender

process to select a new auditor to be appointed for the financial

year ending 31 December 2024. As announced on 10 October

2022, the Board approved the appointment of KPMG LLP

(“KPMG”) as the Company’s auditor for the financial year ending

31 December 2024, subject to shareholder approval at the

Company’s 2024 AGM.

During the year the Committee has been engaged in overseeing

planning and arrangements for the transition from Deloitte to

KPMG. The lead Audit Partner from KPMG, James Anderson,

attended a number of meetings of the Committee to report on

progress against the transition plan. Transitional activities have

included: reviewing Deloitte’s files; shadowing Deloitte on the

2023 audit; visiting the Company’s outsourced finance resources

in India and meeting with management. The Committee

reviewed KPMG’s independence, noting that they have been

considered independent in line with all regulatory and

professional requirements since June 2023.

The Company has complied with the provisions of the Statutory

Audit Services for Large Companies Market Investigation

(Mandatory Use of Competitive Tender Processes and Audit

Committee Responsibilities) Order 2014.

Auditor independence

The Group has in place a minimum standard in relation to the

independence of the External Auditor, which is compliant with

the Financial Reporting Council’s review of its Ethical Standard

for Auditors. This establishes parameters for preventing or

mitigating anything that compromises the External Auditor’s

independence or objectivity. The minimum standard includes:

– a formal process for the pre-approval of certain non-audit

services by the External Auditor;

– a requirement that any non-audit services are

reviewed annually;

– restrictions on employees of the auditor working for the

Group and vice-versa; and

– a requirement that key audit partners are rotated at least

every 5 years.

The Committee reviews the standard annually.

The Committee’s Terms of Reference require that the Committee

meet at least once annually with the External Auditor in the

absence of management.

In addition, the Committee reviews confirmation from Deloitte

that in its professional opinion, it is independent within the

meaning of regulatory and professional requirements.

Therefore, the Committee is satisfied that the Group has

adequate procedures to ensure that the External Auditor is

independent and objective and that these procedures operated

effectively during the year.

Non-Audit Fees

During the year, the Committee approved fees in respect of

Deloitte providing reporting accountant services in respect of

the sale of the brokered commercial business. The Company's

policy for non-audit services is compliant with the FRC’s ‘Revised

Ethical Standard 2019’. In line with regulation, the Group is

required to cap the level of non-audit fees paid to its external

auditor at 70% of the average audit fees paid in the previous

three consecutive financial years.

The following is a breakdown of fees paid to Deloitte for the year

ended 31December 2023 (excluding VAT).

Fees

£m

Proportion

Audit fees 3.8 63 %

Audit-related assurance services 0.6 10 %

Non-audit services 1.6 27 %

Total fees for audit and other services 6.0 100 %

Audit-related assurance services were in respect of the Group’s

Solvency II reporting, the review of the Half Year report 2023, for

which the Company’s External Auditor must be used and for

assurance services in respect of the Claims Liability Act. Non-

audit fees charged by Deloitte for their services as reporting

accountants as explained above, were within the cap of 70% of

the last three average annual audit fees. An additional non-audit

service has been provided in 2024 for fees of £0.4m for reporting

accountant services. Further information in respect of audit fees

paid to Deloitte is disclosed in note 7 to the consolidated

financial statements.

Audit Committee report continued

120 Direct Line Group Annual Report and Accounts 2023

Effectiveness of the external audit process

In 2023, the Committee conducted its annual review of the

External Auditor’s effectiveness. The Committee assessed the

External Auditor through:

i. a detailed questionnaire completed by key stakeholders;

ii. discussing matters with the CFO;

iii. formally reviewing the External Auditor’s independence;

iv. assessing the key risks identified by the External Auditor, the

quality controls put in place to deliver the audit and whether

the agreed audit plan was fulfilled; and

v. private meetings with the External Auditor in the absence of

management.

In addition, through regular interaction with the External

Auditor, the Committee was satisfied that the External Auditor

continued to demonstrate professional scepticism and

challenged management’s assumptions.

The quality of the audit was assessed through review and

discussion of the External Auditor’s report to the Committee at

each meeting, and from the challenges and insights brought to

significant areas of judgement in the Group’s financial

statements.

After taking into account all of the information available and

considering FRC Audit Quality: Practice aid for audit

committees, the Committee concluded that Deloitte had

performed its obligations effectively and appropriately as

External Auditor to the Group.

The Committee also considered the publication by the FRC in

July 2023 of the results of its Annual Quality Review and its

thematic findings for 2021/2022. The FRC reviewed Deloitte’s

audit of the Group’s financial statements for the year ended

31 December 2022 for the 2022/23 review cycle. No significant

recommendations were made by the FRC for further

improvement and a number of areas of good practice were

highlighted.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness of the

Committee was carried out with assistance from Promontory as

part of the wider review of the performance of the Board and

the Board Committees. The review found that the Committee's

skills and experience were appropriate, that its papers, whilst

technical in natures, were accessible, that the Committee's

interaction with the Board and other Committees was

constructive and that its level of challenge was effective,

reflecting current priorities. The review noted that the

Committee had increased the frequency of its meetings to

oversee current issues. Further information on the Board

effectiveness review can be found on pages 114 to 115.

In addition, the Committee’s terms of reference were reviewed

against the activity of the Committee during the year. The terms

of reference were found to be suitable, comprehensive and of

appropriate scope. The Committee’s terms of reference can be

found on the corporate website: www.directlinegroup.co.uk/en/

who-we-are/leadership/board-committees

The Board reviewed and approved this report on 21 March 2024.

Gregor Stewart

Chair of the Audit Committee and Independent Non-

Executive Director

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 121

121Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Mark Gregory

Chair

Committee membership

– Mark Gregory

Chair and Independent Non-Executive Director

– Fiona McBain

Independent Non-Executive Director

– David Neave

Independent Non-Executive Director

– Gregor Stewart

Independent Non-Executive Director

– Dr. Richard Ward

Senior Independent Director

Key responsibilities

– Provide oversight and advice to the Board in relation

to current and emerging risk exposures of the Group

and the strategic approach to managing

risk, including determination of risk appetite.

– Promote a risk-aware culture within the Group.

– Review the design and implementation of the

Enterprise Risk Management and Strategy

Framework, risk appetite and tolerances.

Areas of focus in the reporting period

– Monitored and reviewed the Group’s top risks across

its financial, operational and organisational resilience

pillars.

– Regularly assessed the Group’s emerging risks,

including monitoring of the geopolitical landscape

and its impacts on the Group.

– Oversaw and challenged progress and delivery of the

FCA’s Consumer Duty implementation programme,

followed by continued oversight post-

implementation.

– Oversaw the Controls and Risk and Control Self-

Assessment ("RCSA") Project ("CRP"), a Company-

wide controls improvement programme aiming to

set a new activity and assurance standard.

– Received regular updates on the Pricing Practices

Regulation and Motor Total Loss past business

reviews.

Further detail on these areas can be found in the body

of the Committee report.

Chief Risk Officer’s report

At each scheduled meeting, the Committee received a report

from the Chief Risk Officer (“CRO”) which outlined the

challenges and risks being faced across the Group’s financial,

operational and organisational resilience pillars. The CRO’s

report provided an overview and status of the top and principal

risks against the Group’s appetite, as well as: key activities

undertaken by the Risk function to further embed risk

management across the Group; outputs of regular risk

monitoring activities; and details of any current and specific

financial, non-financial or regulatory and compliance risk

matters. Alongside the CRO's report, the Committee regularly

assessed the Group’s emerging risks. It challenged management

on the identification of all possible significant emerging risks

during the year and on the Risk function’s role in ensuring that

such emerging risks were being monitored and managed

appropriately. The most notable emerging risks identified

included those relating to geopolitical tension, disruptor

emerging risk, data ethics, digital disruption, the transition to a

low carbon economy, changing customer needs, cyber threats

and the transition to Electric Vehicle ("EVs"). In addition, the

Committee reviewed the plan of risk assurance activities to be

undertaken for each quarter and the year ahead to support the

Group's key strategic objectives and to ensure adherence to

prevailing legal and regulatory requirements, as well as the

Group’s enterprise and risk management framework.

Focused business and risk reviews

Set out below are some of the areas of focus and key reviews

that the Committee carried out during the reporting period, to

examine the risk profile of the business, and to challenge the

robustness of frameworks in place to manage key risk exposures

as well as regulatory requirements and expectations:

– oversaw and challenged progress and delivery of the

Consumer Duty implementation programme;

– reviewed customer and conduct risk matters with a view to

ensuring that fair pricing and outcomes were being achieved

for customers across all Direct Line Group products, including

review of the Group’s pricing strategy and the pricing

governance and control framework;

– reviewed the Group’s operational resilience self-assessment,

including important business services and associated impact

tolerances;

– reviewed the effectiveness of the Group’s risk management

and internal control systems and environment, including

material financial, operational and compliance risks, the

Group’s residual risk position, associated mitigating actions

and compensating controls. This included oversight of the

Group’s CRP;

– reviewed the Group’s adherence to privacy and data

protection legislation; and

– reviewed the stability, security and capability of the Group’s IT

systems.

Note:

1. Appointed to this Committee with effect from 6 December 2023.

Board Risk Committee

report

122 Direct Line Group Annual Report and Accounts 2023

Risk appetite

The Committee undertakes an annual review of the Group’s risk

appetite framework, which includes the overarching risk

appetite and policy risk appetite statements. It monitors the

Group’s exposure against these statements, considers key risk

indicators and assesses the key drivers that affect status against

risk appetite. At each scheduled meeting, the Committee also

monitors the Group’s performance against its capital risk

appetite through the CRO’s report. In line with regulatory

requirements, the Committee scrutinises and approves the

Group’s overall affirmative and non-affirmative cyber insurance

underwriting strategy, associated risk appetite statements and

relevant management information.

Committee members also reviewed and challenged the Own

Risk Self-Assessment ("ORSA") process and key content before

submission to the Board for approval. Committee challenges on

elements of the ORSA during the year included: the effect of

profit warnings issued by the Group in January 2023 which

required an updated ORSA to be developed and whether

internal and external stress factors in the document were

sufficiently stringent. In addition, the Committee monitored and

challenged the stress and scenario testing plan and outputs. The

Committee also reviewed the potential Contingent

Management Actions for management to consider taking in

times of stress to restore the Group’s capital strength to within

an acceptable risk appetite range.

Compliance and regulatory risk

During the year, the Committee received regular reports on the

progress of the Group’s Consumer Duty implementation plan.

This included the Group’s interpretation of and planned

compliance with the new Consumer Duty regulations. The

Committee challenged the progress towards implementation

and sought assurance that management had the appropriate

resources to meet the implementation deadline of 31 July 2023,

that robust and reasonable interpretations of Consumer Duty

requirements had been developed, and that associated risks

had been managed appropriately.

The Committee received regular reports on phase two of the

programme, which focused on embedding Consumer Duty

across the Group, delivering improvements, implementation of a

new customer conduct culture framework, and transitioning

Consumer Duty into business as usual.

The Committee also reviewed and challenged regular updates

in respect of Pricing Practices Regulation and Motor Total Loss

past business reviews.

Internal control

In the 2022 Annual Report, the Board Risk Committee reported

that whilst the IRCA process in respect of 2022 had not

identified any material financial, operating or compliance

control deficiencies, it did identify areas where further

enhancements could be made to the Group's risk and control

environment. During 2023, the Group took a number of steps to

improve its overall risk and control environment across key areas

such as pricing, finance, change management, culture and first

line risk management.

To accelerate these enhancements, during 2023 the Board Risk

Committee oversaw a Group-wide control improvement

programme aiming to improve the Group's risk management,

oversight and monitoring capability. This programme is

currently in progress and will continue into 2024. Key elements

of this programme include:

– the introduction of new risk policies and standards;

– the launch of an enhanced quarterly RCSA process;

– an assessment of the design of the Group’s critical processes

and controls, supported by external subject matter experts;

– strengthening the ownership of risk and control across the

first line;

– improving the documentation of risk and control through

new risk and control matrices and control libraries; and

– the replacement of the Group's risk management system.

This work is supported by further activity across the Group,

overseen by the Board and its relevant Committees, designed to

carry out control remediation, improve risk culture, and develop

the required capability across the first line of defence.

The Committee received updates on the control improvement

programme at each of its scheduled meetings, where it

monitored and challenged progress and supported work to

enhance the Group’s controls environment. This programme will

continue into 2024 as the underlying improvements in risk and

control are further formalised and embedded across the Group.

In response to the Group undertaking a business review relating

to pricing during the year, the Committee also oversaw a review

of the Group’s pricing control activity with a view to making

improvements in control documentation, testing and

monitoring. A suite of new controls designed to improve the

pricing control environment was implemented to target the

root cause of the issues identified and these controls are to be

further formalised and embedded in 2024.

Climate change

The Committee regularly received updates on climate change.

In particular, the Committee reviewed the climate-related risk

management roadmap that was in place and considered the

plan to take the Group to a position whereby it could

demonstrate credible progress towards Net-Zero. The key areas

were the time horizon, scenario modelling, integrating climate

into the risk framework and reporting on it in the ORSA, and

incorporating Net Zero modelling into the plan. The Group’s Net

Zero targets have been accepted by the Science Based Targets

initiative.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 123

123Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Internal capital model

The Committee regularly reviewed and challenged reports on

the Group’s partial internal economic capital model for

determining regulatory capital requirements during the year,

including key assumptions, methodologies and areas of expert

judgement used within the model, activities undertaken to

validate model outputs, model changes and future

management actions.

Whistleblowing

As delegated by the Board, the Committee routinely reviewed

the arrangements by which employees may, in confidence, raise

concerns about possible improprieties in matters of financial

reporting or other matters ("whistleblowing") during the year.

The Committee Chair oversees the independence, autonomy

and effectiveness of the Group’s policies and procedures on

whistleblowing, including the procedures for protection from

detrimental treatment for staff who raise concerns. During the

year, the Committee reviewed reports relating to

whistleblowing, including anonymised, individual cases, to

ensure arrangements were in place for the proportionate

and independent investigation of such matters and for

appropriate follow-up action. The Committee challenged

management and was satisfied that the whistleblowing process

met the necessary standards and that it was adequately

designed, operated effectively and adhered to regulatory

requirements.

Financial crime and anti-bribery and corruption

The Group has a fraud and financial crime policy, which includes

the requirement that all employees of the Group comply with

an anti-bribery and corruption minimum standard. The aim of

the standard is to ensure compliance with applicable anti-

bribery and corruption legislation and regulation and to ensure

that employees act responsibly and ethically at all times when

conducting business.

The Committee considered the Group’s actions to prevent

financial crime through its review of the annual financial crime

report and recognised the additional monitoring controls that

had been implemented to manage remote working fraud risk.

Annually, the Committee considers an anti-bribery and

corruption report, which includes a risk assessment of the level

of anti-bribery and corruption risk to the Group. Following

review and challenge, the Committee was satisfied that the

Group’s policies and procedures on anti-bribery and corruption

were fit for purpose and that anti-bribery and corruption risks

were managed appropriately.

The conflict between Russia and Ukraine has seen continued

sanctions against the Russian regime. The Group continues to

monitor the sanctions situation and screen against the most up-

to-date key sanctions lists on a daily basis in order to mitigate

this risk.

Risk governance

During the reporting period, the Committee received assurance

from management on the process for review of the Group’s

policies and reviewed material changes to the Group’s most

significant policies. The Committee reviewed and challenged

each of these policies and recommended them for approval by

the Board as appropriate.

The Committee has unrestricted access to management and

external advisers to help discharge its duties. It is satisfied that in

2023 it received sufficient, reliable and timely information to

perform its responsibilities effectively. In addition to one-to-one

meetings with the Chair, the CRO also met with the Committee

in the absence of the Executive Directors. The Chair reported on

matters dealt with at each Committee meeting to the

subsequent scheduled Board meeting.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness of the

Committee was carried out with assistance from Promontory as

part of the wider review of the performance of the Board and

the Board Committees. The review found that the skills and

experience of the Committee were appropriate, that its

interaction with the Board and other Committees was

constructive and that its level of challenge was effective,

reflecting current priorities. The Committee recommended that

some training be provided to improve the impact and

succinctness of some of its papers. Further information on the

Board effectiveness review can be found on pages 114 to 115.

In addition, the Committee’s Terms of Reference were reviewed

against the activity of the Committee during the year. The Terms

of Reference were found to be suitable, comprehensive and of

appropriate scope.

The Committee’s Terms of Reference can be found on the

corporate website:

www.directlinegroup.co.uk/en/who-we-are/leadership/board-

committees

The Board reviewed and approved this report on 21 March 2024.

Mark Gregory

Chair of the Board Risk Committee and Independent Non-

Executive Director

Board Risk Committee report continued

124 Direct Line Group Annual Report and Accounts 2023

Danuta Gray

Chair

Committee membership

– Danuta Gray

Chair and Independent Non-Executive Director

– Tracy Corrigan

Independent Non-Executive Director

– Mark Gregory

Independent Non-Executive Director

– Sebastian James

Independent Non-Executive Director

– Adrian Joseph

Independent Non-Executive Director

– Mark Lewis

Independent Non-Executive Director

– Fiona McBain

Independent Non-Executive Director

– David Neave

Independent Non-Executive Director

– Gregor Stewart

Independent Non-Executive Director

– Dr Richard Ward

Senior Independent Non-Executive Director

Key responsibilities

– Review the composition of the Board and its

Committees.

– Lead the process for Board appointments and make

recommendations to the Board.

– Oversee executive succession planning at a high level

to ensure the development of a diverse senior

management talent pipeline.

– Set diversity objectives and strategies.

– Oversee and monitor the corporate governance

framework of the Group.

– Monitor developments in governance and investor

ESG expectations.

Areas of focus in the reporting period

– Led the search for the new Chief Executive Officer.

– Led the searches for new Non-Executive Directors.

– Recommended appointments to the Board and to

the Board’s Committees.

Main activities during the year

Board and senior management succession planning

The Committee continuously keeps the composition of the

Board under review, with the objective of preserving and

refreshing the Board’s collective experience, expertise and

diversity to enable it to oversee the execution of the Group’s

long-term strategy effectively.

During the year, the Committee led the search for a new

permanent Chief Executive Officer ("CEO"), working closely with

the Board on specifying the skills and experience needed by a

CEO to shape the Group’s strategy and lead the business. The

international search firm Spencer Stuart (a signatory to the

voluntary code of conduct for executive search firms, which has

no other connection to the Company or any individual director)

was engaged to assist with the search. Shortlisted candidates

were interviewed by members of the Committee and other

Non-Executive Directors, resulting in the selection of Adam

Winslow as the preferred candidate. We announced on

30 August 2023 that Adam would join the Group as its new

CEO, subject to regulatory approval. We announced on

27 January 2023 that Jon Greenwood had been appointed

as Acting CEO and, on 31 August 2023, that, the relevant

regulatory approvals having been obtained, he had been

appointed to the Board as a Director.

The Committee also led searches for new Non-Executive

Directors during the year with the assistance of Teneo, the

global executive search and advisory firm (and a signatory to the

voluntary code of conduct for executive search firms, which has

no other connection to the Company or any individual director).

Shortlisted candidates were interviewed by members of the

Committee and the Board and David Neave, having been

selected as the preferred candidate, was appointed to the Board

as a Non-Executive Director with effect from 19 October 2023.

The searches started in 2023 have also resulted in the selection

of Carol Hagh, whose appointment to the Board will take effect

on 1 April 2024. More information about the expertise that Carol

will contribute to the Board is set out in the Chair's statement on

page 10.

Composition of Board Committees

During the year, the Committee considered the effect of

changes in the Board’s composition on the skills and experience

available to the other Committees of the Board and

recommended that Mark Lewis be appointed as a member of

the Remuneration and Customer and Sustainability

Committees and that David Neave be appointed as a member

of the Audit and Board Risk Committees. The Committee also

recommended that all Non-Executive Directors should become

members of the Nomination and Governance Committee with

effect from 1 January 2024 or, if later, with effect from their date

of appointment to the Board.

Electing and re-electing Directors

Before recommending the proposed election or re-election of

Directors at the 2023 AGM, the Committee reviewed the

independence of the Non-Executive Directors and concluded

that all Non-Executive Directors remained independent in

judgement and character and met the criteria for

independence set out in the UK Corporate Governance Code.

The Chair of the Board was independent on appointment.

Notes:

1. Tracy Corrigan, Mark Gregory, Adrian Joseph, Mark Lewis, Fiona

McBain, David Neave and Gregor Stewart were appointed to the

Committee with effect from 1 January 2024

2. Sebastian James stepped down as a Director on 31 December 2023..

Nomination and Governance

Committee report

Direct Line Group Annual Report and Accounts 2023 125

125Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

The Committee also carefully considered Directors’ external

responsibilities and concluded that all Directors had sufficient

time to dedicate to their respective roles.

All current Directors will submit themselves for election or re-

election at the Company’s 2024 AGM.

Diversity and inclusion

The Committee believes that diversity of gender, ethnicity, skills

and experience, as well as cognitive, regional, socio-economic,

educational and professional diversity, equips the Board better

to take a broad strategic perspective and the management

team better to lead a diverse workforce and serve a diverse

customer base.

The Board has in place a Diversity Policy, the objective of which

is to seek to ensure that individual differences, which contribute

to the success of the Company and represent the diversity of our

customers and colleagues, are reflected at Board level. The

policy states that appointments should embrace diversity of

gender, ethnicity, skills, experience and cognitive diversity, as

well as socio-economic, educational and professional

background, among other differences. The policy underpins

appointments that are made to both the Board and its

Committees.

The Board Diversity Policy is monitored and reviewed annually

by the Nomination and Governance Committee and made

available to any executive search firm engaged to assist with the

selection and appointment process for Board positions.

The Board Diversity Policy is available to view on the Company’s

website at www.directlinegroup.co.uk/en/sustainability/reports-

policies-and-statements.

Further information on the Board’s approach to diversity can be

found in the Corporate Governance report on pages 112 to 113

which includes progress against key external targets.

The Committee also oversees the promotion of diversity at

senior management level and Group-wide. During the year, it

has kept the Group’s diverse talent pipeline under review, noting

its focus on inclusivity and equality of opportunity, as well as on

prioritising future skills needed by the business, and the progress

made towards gender targets among senior management

positions. More information on senior management diversity can

found on page 113.

Corporate governance

The Committee monitors arrangements made by the Company

and its subsidiaries to comply with the UK Corporate

Governance Code and other relevant governance standards. It

also considers emerging governance matters, observance of ESG

standards and developments, and reforms which may affect the

Group’s adherence to corporate governance best practice.

The Chair reported on matters dealt with at each Committee

meeting to the subsequent scheduled Board meeting.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness of the

Committee was carried out with assistance from Promontory

Financial Group as part of the wider review of the performance

of the Board and its Committees. The review found that the

Committee challenged matters within its remit effectively,

having regard to wider strategic priorities, and that the materials

available to it were satisfactory. The Committee considered that

its effectiveness would be enhanced by the appointment of all

Non-Executive Directors as members of the Committee, which

it recommended to the Board and which took effect from

1 January 2024.. Further information about the Board

effectiveness review can be found on pages 114 to 115.

The Committee also reviewed its activity against its Terms of

Reference and determined that its Terms of Reference

remained comprehensive and of appropriate scope.

The Committee’s Terms of Reference can be found on the

corporate website: www.directlinegroup.co.uk/en/who-we-are/

leadership/board-committees.

The Board reviewed and approved this report on 21 March 2024.

Danuta Gray

Chair of the Nomination and Governance Committee

Nomination and Governance Committee report continued

126 Direct Line Group Annual Report and Accounts 2023

Tracy Corrigan

Chair

Committee membership

– Tracy Corrigan

Chair and Independent Non-Executive Director

– Adrian Joseph OBE

Independent Non-Executive Director

– Mark Lewis

Independent Non-Executive Director

Key responsibilities

– Provide oversight of and advice to the Group on

conducting its business in a responsible and

sustainable manner.

– Monitor the progress of the Group under its five

sustainability pillars.

Areas of focus in the reporting period

– Monitored the Group’s activity under the five pillars of

the Group’s sustainability strategy.

– Oversaw the Group’s involvement in environmental

initiatives, tracking progress against the Group’s

Science-Based Targets.

– Considered decision making on ethical matters,

including the Group’s Modern Slavery Statement.

– Reviewed performance and approach on key

stakeholder matters, including the refresh of the

Group's sustainability materiality matrix.

– Reviewed the Group’s people plans, including targets

aimed at improving gender and ethnic diversity at all

levels of the business and developing a culture of

inclusivity.

– Reviewed the Committee’s remit to ensure all

sustainability matters received appropriate review

and challenge at Board and management level.

Main activities during the year

On 31 December 2023, Seb James stepped down as Chair of

this Committee. I would like to thank Seb for his energetic

stewardship of the Committee for the past seven years.

I was delighted to be appointed as Seb's successor and took the

Chair of this Committee from 1 March 2024.

Customer

During the year, the Committee oversaw management’s work to

drive positive customer outcomes and to align business

practices with the Group’s purpose of helping people carry on

with their lives, giving them peace of mind now and in the

future.

The Committee reviewed the business’ implementation of a

new ‘Group Customer Day’ as part of work to deepen Group-

wide understanding of customer outcomes, feedback and

metrics.

As part of the Group's Consumer Duty implementation, the

Committee received presentations on how the business was

evaluating, developing and testing its products and customers’

understanding of them, and how the business was further

adapting its communications to meet the needs of vulnerable

customers. The Committee welcomed steps taken by the Group

to support customers affected by the cost-of-living crisis.

The Committee challenged the business's arrangements for

embedding a customer outcomes-focused culture and

encouraged the continuing improvement of metrics used to

understand customers' priorities.

Planet

At the beginning of the year, the Committee considered the

results of a sustainability benchmarking exercise and supported

management’s strategic approach to climate change risk.

Emphasis was placed on the importance of delivering the

Group’s carbon emissions reduction plan whilst managing the

potential risk to the business of climate change.

In the second half of the year, the Group commenced work to

deliver against the climate-related risk management roadmap

that it had submitted to the PRA in July 2023. Management was

challenged to refine the business’ sustainability materiality

matrix and the underlying ESG issues identified as most relevant

to the Group and its stakeholders.

Progress on delivery of the Group’s five Science-Based Targets

(“SBTs”) was reviewed throughout the year and the Committee

strongly supported engagement with smaller suppliers in order

to support their journey towards decarbonisation.

Notes

1. Sebastian James chaired this Committee until he stepped down from

the Board on 31 December 2023.

2. Tracy Corrigan was appointed as Chair of this Committee with effect

from 1 March 2024.

3. Mark Lewis was appointed as a member of this Committee

on 30 March 2023.

Customer and Sustainability

Committee report

Direct Line Group Annual Report and Accounts 2023 127

127Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

People

Over the course of 2023, the Committee reviewed the business’s

initiatives to promote a culture that helps people thrive through

celebrating difference.

The Committee oversaw the introduction of a new four-point

performance framework along with new Group values. For more

information on our refreshed values, please see page 22.

The Committee received reports on the all-employee ‘DiaLoGue’

engagement surveys and carefully monitored any trends in the

feedback received, including responses to employee pay

arrangements, provision of a targeted one-off cost-of-living

payment, as well as general levels of engagement.

The Committee supported management’s work to improve

diverse recruitment at all levels of the business, including the

continuing development of a healthy talent pipeline and the

establishment of targeted mentoring, coaching and leadership

development for colleagues from minority groups.

Society

Throughout the year, the Committee oversaw the business’s

work to use its expertise to improve outcomes for society and

the communities that the Group serves.

The Committee noted that, since its launch in May 2023, the

Group's Community Fund outreach programme had engaged

with 9,700 young people. The programme was facilitated by 600

Group colleagues, including the Chair of the Board of Directors,

who collectively contributed 2,200 volunteering hours. Events

held included business simulation events for students from

lower socio-economic backgrounds, and work experience and

mentoring opportunities for students with special educational

needs and disabilities.

During the year, new partnerships were established with UK

Youth and St Mary Magdalene Academy: The Courtyard school,

and the business continued to work with existing partners

Envision and Springpod.

In 2023, the Committee welcomed news that the Group had

entered the Social Mobility Foundation Top 75 Employer Index

for the first time.

Modern Slavery Statement

In February 2023, the Committee reviewed the Group’s policy on

compliance with the Modern Slavery Act 2015 (the “MSA”) and

how third-party suppliers complied with the Act’s requirements.

The Committee reviewed the Procurement function’s activity in

relation to the MSA and concluded that processes and policies

in connection with the MSA were robust, effectively embedded

in supply chain processes, and reflected the Procurement

function’s updated sustainability processes.

The Modern Slavery Statement is available to view on the

corporate website:

https://www.directlinegroup.co.uk/en/sustainability/reports-

policies-and-statements

Governance

The Board is committed to ensuring that ethical and sustainable

business practice is embedded throughout the business, and to

both reviewing and challenging management’s approach to

delivering outcomes in line with the Group’s vision and purpose.

During the year, the Chair of the Customer and Sustainability

Committee reported on matters dealt with at each Committee

meeting to the subsequent scheduled Board meeting, whilst

the Board, recognising the growing strategic significance of

sustainability matters, received additional, dedicated reports on

the Group’s approach to Customer, People and Culture.

Remit of the Committee

The Committee reviewed its responsibilities in late 2023 and

recommended that it increase its oversight of customer

outcomes, conduct and experience. With that objective, the

Committee decided to meet more frequently to be able to

dedicate the time thought appropriate to monitor and

challenge customer metrics, and to debate the standard to

which the Group aims to work in supporting its customers. To

reflect its increased focus on customer-related matters, the

Committee has changed its name to the Customer and

Sustainability Committee.

Committee effectiveness review

During the year, an internal evaluation of the effectiveness of the

Committee was conducted with assistance from Promontory, as

part of the wider review of the performance of the Board and its

Committees. The review found that the skills and capacity of the

Committee, and the materials available to it, were appropriate

to enable it to provide an effective level of challenge. Further

information on the Board effectiveness review can be found on

pages 114 to 115.

In addition, the Committee’s Terms of Reference were reviewed

against the activity of the Committee during the year. The Terms

of Reference were found to be suitable, comprehensive and of

appropriate scope.

The Committee’s Terms of Reference can be found on the

corporate website:

www.directlinegroup.co.uk/en/who-we-are/leadership/board-

committees

The Board reviewed and approved this report on 21 March 2024.

Tracy Corrigan

Chair of the Customer and Sustainability Committee and

Independent Non-Executive Director

Customer and Sustainability Committee report continued

128 Direct Line Group Annual Report and Accounts 2023

Fiona McBain

Chair

Committee membership

– Fiona McBain

Chair and Independent Non-Executive Director

– Mark Gregory

Independent Non-Executive Director

– Neil Manser

Chief Financial Officer

Key responsibilities

– Provide oversight of the Group’s investment strategy.

– Oversee the management and performance of the

Group’s investment portfolio.

Areas of focus in the reporting period

– Monitored closely the changes in valuations and

resilience of the Group’s investment assets.

– Oversaw the refresh of the target Strategic Asset

Allocation, including approval of plans for phased

implementation and review of recommendations

across asset classes.

– Ensured the investment portfolio held appropriately

matched assets and liabilities and remained within

agreed aggregate risk and exposure limits.

– Ensured the investment portfolio maintained

sufficient liquidity to meet a stress insurance or

financial market event in a 1 in 200-year insurance,

market, or credit risk event.

– Received progress updates on the calibration of

Science-Based Targets (“SBTs”) for each asset class in

scope within the investment portfolio.

Oversight of market developments

During the year, the Committee considered trends in economic

growth, employment figures, credit spreads, inflation and

interest rates, stresses in the banking sector, and wider

geopolitical contexts and took these into account when

providing oversight of, and challenge to, the Group’s investment

strategy.

At each scheduled meeting, the Committee received reports on

key financial market developments from the Director of

Investments and Capital Management.

Monitoring investment activity and performance

Throughout the year, the Committee carefully reviewed the

performance of the Group’s investments. It received a

presentation from the external managers of its commercial

property portfolio, CBRE, and discussed areas in which there

might be further opportunities for investment in line with the

Group's risk appetite. Management shared recommendations

for the Group's in-house portfolios, which were reviewed and

challenged by the Committee to ensure the investment strategy

remained appropriate and well-positioned in an uncertain

macro-economic context.

Reviewing investment strategy and liquidity

Early in 2023, the Committee conducted its annual review of the

business’s asset liability management, which was undertaken to

ensure that the Group’s asset and liability matching, along with

stressed liquidity requirements, remained appropriate. Noting

feedback from the Financial Risk function, and due to the

relatively small changes in the nature of the liabilities in the past

twelve months, the Committee supported management’s

recommendation that no adjustments were required.

The Committee agreed a slight adjustment of the Group’s

liquidity requirements, striking a balance between the business’s

performance and the Group’s ability to access sufficient liquidity

if it were to meet a 1 in 200-year stress risk event.

During the year, the Committee oversaw a Strategic Asset

Allocation (“SAA”) exercise which had been carried out by

external consultants Willis Towers Watson (“WTW”). The exercise

was undertaken in order to identify an SAA with improved

expected return compared to the Group’s existing portfolio and

reduced expected volatility and value-at-risk. Following review

and challenge, the Committee approved the staggered

implementation of a provisional target SAA, which

management had adapted from the original WTW

recommendation. The Financial Risk function was engaged

throughout the process and made recommendations for risk

mitigation, which were supported by the Committee. Following

input from the Committee, the first stages of the target SAA

refresh were actioned, including work to rebalance the core and

specialist fixed interest portfolios.

Investment Committee

report

Direct Line Group Annual Report and Accounts 2023 129

129Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Oversight of responsible investment

In 2023, the Group finalised its selection of a climate scenario

modelling provider and updated its responsible investment

framework. The latter included: a climate framework for

corporate bonds; setting of SBTs for emissions reduction for

commercial real estate (“CRE”) and CRE loans; use of ESG-

weighted indices; and screening for controversial weapons and

issuers deemed in violation of the UN Global Compact

principles.

Governance

The Chair reported on matters dealt with at each Committee

meeting to the subsequent scheduled Board meeting.

Committee effectiveness review

During the year, an internal evaluation of the performance of the

Committee was conducted with assistance from Promontory, as

part of the wider review of the performance of the Board and its

Committees. The review found that the Committee had the

appropriate skills and experience to enable it to challenge

effectively, that it provided effective updates to the Board and

that it received satisfactory and timely papers. Further

information on the Board effectiveness review can be found on

pages 114 to 115.

In addition, the Committee’s Terms of Reference were reviewed

against the activity of the Committee during the year. The Terms

of Reference were found to be suitable, comprehensive and of

appropriate scope. Updates were made regarding the

Committee’s oversight of climate and sustainability.

The Committee’s Terms of Reference can be found on the

corporate website:

www.directlinegroup.co.uk/en/who-we-are/leadership/board-

committees

The Board reviewed and approved this report on 21 March 2024.

Fiona McBain

Chair of the Investment Committee and Independent Non-

Executive Director

Investment Committee report continued

130 Direct Line Group Annual Report and Accounts 2023

Dr Richard Ward

Chair of the Remuneration

Committee

Committee membership

– Dr Richard Ward

Chair and Senior Independent Director

– Tracy Corrigan

Independent Non-Executive Director

– Danuta Gray

Chair of the Board

– Mark Gregory

Independent Non-Executive Director

– Sebastian James

Independent Non-Executive Director

– Mark Lewis

Independent Non-Executive Director

Key responsibilities

– Determine the policy for rewarding Directors and senior

leadership for results that are generated within the risk

appetite set by the Board and oversee how the Group

implements its Remuneration Policy.

– Oversee the level and structure of remuneration

arrangements for senior executives, approve share

incentive plans, and recommend them to the Board and

shareholders.

– Review workforce remuneration and related policies and

the alignment of incentives and rewards with culture,

ensuring all our colleagues are paid fairly.

Areas of focus in the reporting period

– Jon Greenwood was appointed Acting CEO on 27

January 2023 and the Committee carefully considered

the appropriate remuneration package for this role,

taking into account its interim nature.

– The Committee also considered the remuneration

arrangements for the departing CEO, Penny James, in

accordance with the Directors’ Remuneration Policy and

incentive plan rules, contractual obligations and

shareholder expectations.

– The process for the recruitment of a new CEO was

completed during the year, with Adam Winslow taking

up the position on 1 March 2024. The Committee

carefully considered the appropriate remuneration

package to attract and motivate Adam.

– The Committee (and Board) continued to be updated on

wider workforce actions in the context of the higher cost

of living environment, including employee feedback,

voluntary turnover and salary increase decisions.

Dear Shareholders,

On behalf of the Remuneration Committee ("the Committee"), I

am pleased to introduce the Directors’ Remuneration Report for

the 2023 financial year.

During 2023, Direct Line Group has taken decisive action to

restore our capital resilience, improve performance in Motor

insurance and maintain the performance of our non-Motor

businesses. The Group has been put back on a stable footing,

after a volatile trading environment in 2022, with heightened

inflation and severe weather events. The performance of Home,

Rescue and Commercial Direct has been good, broadly in line

with our expectations, and we have taken significant actions to

improve margin in Motor.

During the year, we sold our brokered commercial insurance

business for an attractive valuation which strengthened the

Group both from a strategic and capital perspective, in

particular improving our solvency ratio. Our Home, Commercial

Direct, Rescue and other businesses have delivered a good

performance with an improved ongoing net insurance margin.

These factors have continued to impact remuneration

outcomes for the 2023 financial year, and the Committee

carefully considered a range of factors when making

remuneration decisions in respect of 2023 performance. In

doing so we were also cognisant of the challenges faced by our

people in the context of the continuing cost of living crisis and

the actions the Group has taken to best support them through

this period. Further details are set out later in this letter.

The Report is set out in the following sections:

Section Page

Chair’s statement 131 to 135

Remuneration at a glance – summarising the

remuneration arrangements for Executive

Directors 136

Annual Report on Remuneration – detailing pay

outcomes for 2023 and covering how the Group

will implement the Policy for 2024 137 to 152

Summary of the Policy approved at the 2023

AGM 153 to 156

Notes:

1. Sebastian James stepped down from the Board on 31 December

2023.

2. Mark Lewis was appointed to this Committee on 30 March 2023.

Directors’ Remuneration

report

Direct Line Group Annual Report and Accounts 2023 131

131Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Performance and incentive outcomes for 2023

During 2023, we continued to balance the needs of our

stakeholders, supporting our people through a cost of living

crisis, whilst looking after our customers and protecting the

business for the long term. We addressed our three key

priorities; to restore our capital resilience, improve our

performance in Motor, and have resilient trading across our

other business.

Significant underwriting and pricing actions have been taken to

improve our written margins, which in the second half of the

year were consistent with a 10% net insurance margin. The

nature of financial reporting for an insurance business means

that 2023 earnings do not fully reflect the profit on business

written during the year (particularly in the second half of the

year), and significant underwriting and pricing actions have

been taken to improve our written margins, which, we believe

for the majority of the second half of the year were consistent

with our ambition of a net insurance margin above 10%. The

performance outcomes of the Annual Incentive Plan ("AIP") and

Long-term incentive Plan ("LTIP") awards reflect these factors

and challenges, and are set out below.

AIP

Financial performance in 2023 was heavily influenced by the

external environment, but we took strategic action to rebuild

our capital position as outlined above. Motor continued to be

affected by high claims inflation, which remained ahead of our

expectations for the first half of the year. Although underwriting

and pricing actions during the second half of the year have

improved the net insurance margin position, this is not yet fully

reflected in our reported financial performance. As a result, there

was an operating loss of £189.5m (excluding restructuring and

one-off costs), which was below the threshold level for this

element of the AIP (55% weighting).

In last year's report we explained our intention to base 45% of

the AIP on an assessment against a set of Group Objectives and

Key Results related to 2023 underwriting performance as well as

delivering a great customer experience and supporting great

people. During engagement with shareholders in early 2023,

investors set out a clear preference that cost management

should be an additional area of focus. As a result, the Committee

resolved shortly after the finalisation of the 2022 Annual Report

that the appropriate performance measures for the 2023 AIP

were cost management and underwriting performance (25%

weighting), customer (10% weighting) and people (10%

weighting).

To assess the delivery of improved underwriting performance,

the Committee considered how we have made progress on our

cost agenda via operating expenses, as well as progress in

current year Motor margin and the scored loss ratio for Home.

The Committee awarded 10% (out of 25%) for this element.

Performance in respect of the People element was robust, with

delivery of industry-recognised training programmes to address

skills gaps in particular areas and good inclusion and

engagement scores. The Committee awarded 5% (out of 10%)

for this element. There was limited progress against Customer

metrics, which resulted in this element not meeting threshold

performance.

The Committee considered the appropriateness of the AIP

outcome for Executive Directors at length, noting that financial

performance has been challenging. However, the Committee

believes it is also important to appropriately recognise the

actions the management team has taken during the year, in

particular the actions in relation to improving Motor

performance and rebuilding the capital position, neither of

which are wholly reflected in our operating profit result. The

Committee also noted that no AIP awards were made to any

staff in respect of 2022.

The Committee concluded that an outcome of 15% of

maximum appropriately balances the factors outlined above. In

line with the Policy, 40% of any AIP for the Executive Directors

will be deferred for three years under the Deferred Annual

Incentive Plan ("DAIP").

The overall AIP outcome for the Executive Directors for 2023

as therefore 15% of maximum, which resulted in a payout of

£176,756 for the Acting CEO (relating to the period as an

Executive Director) and £138,229 for the CFO, which the

Committee believes is appropriate in the context of the Group's

performance in 2023. In line with the Policy, 40% of any AIP

award will be deferred for three years under the DAIP.

Full details on the outcomes for the year are included on pages

140 to 141.

LTIP

In accordance with the remuneration reporting regulations, the

reported figures in the single figure table for 2023 include the

RoTE element of the 2021 LTIP awards and the TSR element of

the 2020 LTIP awards. The Group granted LTIP awards in two

tranches in 2020 and 2021.

– RoTE (2021 LTIP): Average RoTE for the three year

performance period ending 31 December 2023 was 0.9%.

This is below the threshold target level of 17.5%, and therefore

this element will lapse in full.

– Relative TSR (2020 LTIP): The performance of this element

(three year performance period from grant to vesting date

ending on 26 March and 31 August, respectively) was below

the threshold performance level (median) for both awards,

and therefore these elements lapsed in full.

This means that the overall outcome of the March and August

2020 LTIP awards, which vested in 2023 were both 0% of

maximum (including the RoTE outcomes disclosed last year).

The relative TSR elements of the 2021 LTIP, and therefore the

overall outcome of the March and August 2021 LTIP awards

(including the RoTE outcomes as above) will be disclosed in

next year’s report once the performance period is complete.

No discretion was exercised in respect of LTIP awards vesting

during the year, which reflects the trading performance over the

last three years.

Directors' Remuneration report continued

132 Direct Line Group Annual Report and Accounts 2023

Committee decisions on remuneration outcomes

The overall AIP outcome recognising the impact on the Group’s

financial performance during the year were considered

appropriate and therefore no discretion to adjust the outcome

was exercised.

The 0% vesting outcomes for the 2020 LTIP awards were

considered appropriate in the light of the Group’s performance

over the three-year performance period, and therefore no

discretion to adjust the outcome was exercised in relation to

these awards.

Although the RoTE element of the 2021 LTIP awards will lapse,

the extent that the TSR elements vest will be considered by the

Committee in March and August 2024 (as the TSR performance

period continues until the vesting date).

Taking the points above into account, the Committee believes

the Policy has delivered an appropriate quantum of reward for

the corporate performance achieved. The Committee was

therefore satisfied that the Group’s Remuneration Policy has

operated as intended.

Wider workforce pay considerations and engagement

for 2023

The Committee considers wider employee pay as context for

the decisions it makes and this has been particularly important

this year in light of the continuing cost of living pressures. The

Committee was acutely cognisant of the wider macroeconomic

environment throughout the year, in particular the impact that

sustained higher inflation and energy bills have had on our

people.

As part of the wider Committee oversight on all-employee pay

matters, the Committee is pleased to confirm that the Group

will apply an increase to the Group's minimum salary of 7.1%

from 1 April 2024, to align with the Living Wage Foundation's

Real Living Wage. This will result in the Group-wide minimum

salary increasing to £23,400 on a full-time basis (for 37.5hr

working week).

For employees who earn above the minimum salary, all eligible

employees (excluding Executive Directors and the Executive

Committee and Senior Leadership) will receive a salary increase

of 5% effective 1 April 2024. In addition, the Committee was

supportive of management's recommendation to extend the

eligibility of an annual variable pay scheme to all our colleagues

who do not currently participate in a variable pay scheme.

The Group has also continued to support colleagues by:

– continuing to provide a facility for employees to access part of

their monthly salary in advance of the normal payroll date;

– refreshing the Group’s employee discount platform

and signposting to relevant offers; and

– providing support and options to seek support for colleagues

facing financial hardship.

The Chair of the Committee has attended at least one meeting

of the Group’s Employee Representative Body (“ERB”) each year

since 2018. I attended the ERB meeting in December 2023,

where I listened to concerns from the ERB members regarding

the impact of the cost of living crisis and their insights regarding

hybrid working. I had the opportunity to explain how, when

making decisions about executive remuneration, the

Remuneration Committee balance the needs of shareholders

and employees, particularly the pressure on our lowest paid

workers.

The Chief People Officer and Acting Chief Executive Officer

provided further workforce reward updates to the Committee

throughout the year as part of a standing agenda item at our

Committee meetings. Further details can be found on page 137.

This year, updates included information on the Group’s gender

and ethnicity pay gaps and cost of living support outlined above,

as well as how reward mechanisms have been reviewed to

ensure alignment with Group's customer focussed priorities in

the context of Consumer Duty requirements and best practice.

The Committee considers it important to monitor and assess

internal pay relativities, including the CEO pay ratio disclosures,

and takes these into account in its decision making. For

example, the Committee scrutinises the reasons for movements

in the CEO pay ratio year-on-year and considers the impact of

salary increases on the total remuneration package of our

Executive Directors and Executive Committee in the context of

appropriate external remuneration benchmarking data.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 133

133Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Directors’ Remuneration Policy (the “Policy”)

In line with the usual triennial Policy approval timescales, a new

Policy was approved by shareholders at the AGM in May 2023.

Considering shareholder support for the pre-existing

arrangements and recognising the economic uncertainty,

inflationary challenges and complexities associated with the

Insurance industry transition to IFRS 17, the Committee

concluded that the existing Policy remained appropriate at the

current time and therefore largely rolled-forward our existing

Policy for approval at the 2023 AGM.

The Policy was approved by shareholders, with over 98%

support. A summary of the Policy is set out on pages 153 to 156.

The Committee retains the ability to keep the Policy under

review in light of the Group's evolving strategy and under the

leadership of a new CEO.

Executive Director changes

As explained in last year's report, Penny James agreed with the

Board to step down as Chief Executive Officer and as a Director

on 27 January 2023. Penny's employment ceased on 28

February 2023 and further details are provided on page 149.

As announced on 30 August 2023, Adam Winslow was

appointed as Chief Executive Officer effective from 1 March

2024 and to the Board on 21 March 2024. In setting Adam's

remuneration, the Committee considered his wealth of

experience in general insurance, market data in respect of

FTSE51-150 companies and other FTSE350 insurers, the

previous CEO's remuneration package, our Directors'

Remuneration Policy and the pay and conditions of the wider

workforce. Taking these factors into account, Adam's salary was

set at £820,000, broadly in line with the previous CEO, and he

will not be eligible for a salary increase in 2024.

In accordance with the Directors' Remuneration Policy, he will

receive pension contributions (or cash in lieu) in line with the

wider workforce (9% of salary) and his variable remuneration

opportunities (AIP and LTIP) are in line with the current

Directors' Remuneration Policy. Adam will also receive buyout

awards to compensate him for awards forfeited from his

previous employer in connection with his appointment at DLG.

Further details are set out on page 149.

Jon Greenwood (previously Chief Commercial Officer) served as

Acting Chief Executive Officer from 27 January 2023 until

March 2024. As explained in last year's report, Jon's salary was

set at £725,000 with pension and variable remuneration

opportunities in line with the Directors' Remuneration Policy.

Following the appointment of Adam Winslow, Jon has returned

to a non-Board role - as a continuing employee he remains

eligible for 2024 AIP and LTIP awards, and his unvested DAIP

and LTIP awards will continue as normal.

Directors' Remuneration report continued

134 Direct Line Group Annual Report and Accounts 2023

Executive Director remuneration for 2024

The Committee carefully considered salary increases for

the Executive Directors (and Executive Committee) for 2024,

taking into account the wider workforce level (of 5%) and

shareholder expectations. The Committee determined that Neil

Manser should receive an increase of 3% (below the wider

workforce level) effective from 1 April 2024. Jon Greenwood will

not receive an increase prior to returning to a non-Board role. As

outlined above, Adam Winslow will not receive a salary increase

during 2024.

Following Adam Winslow's appointment as CEO, it is expected

that a business wide review will take place to confirm the

Group's strategic priorities. The Committee is of the view that, in

order to ensure long term remuneration is linked to KPIs, it will

be appropriate to set the 2024 LTIP targets once this review is

complete (and no later than 6 months after the grant date). The

targets applicable to these awards will be disclosed in due

course.

The Committee has carefully considered the appropriate

performance measures for the 2024 AIP. Operating Profit will

remain the key financial measure (55% weighting), reflecting

the strategic focus on net insurance margin and pricing. A 20%

weighting will also be attributed to delivering against key

strategic measures in 2024. The remainder of the 2024 AIP will

be based on performance against our customer experience

dashboard (15% weighting) and progress on people and culture

initiatives (10% weighting).

Committee performance

During the year, an evaluation of the effectiveness of the

Committee was facilitated by Independent Audit, as part of

their wider review of the Board’s effectiveness. The review found

that Committee members bring a good mix of skills and styles

to meetings and that the Committee benefits from a well-

established agenda and good support from the business.

Further information about the Board effectiveness review can be

found on pages 114 to 115.

In addition, the Committee’s terms of reference were reviewed

against the activity of the Committee during the year. The terms

of reference were found to be suitable, comprehensive and of

appropriate scope.

The Committee’s terms of reference can be found on the

corporate website: www.directlinegroup.co.uk/en/who-we-are/

leadership/board-committees

Your AGM vote

The Committee welcomes investor feedback on an ongoing

basis and this report seeks to describe and explain our

remuneration decisions clearly. I hope that having read the

information in this report, you will vote in support of the

Remuneration Report resolution at the upcoming AGM.

Should you have any questions about the Committee’s Report

please email our AGM email address

shareholderenquiries@directlinegroup.co.uk and I or one of my

colleagues at Direct Line Group will respond to you.

Yours sincerely,

Dr Richard Ward

Chair of the Remuneration Committee and Senior

Independent Director

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 135

135Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Remuneration outcomes for 2023

Total pay (£’000)

£1,031

£715

Jon Greenwood

(Acting CEO)

2023

Neil Manser

(CFO)

2023

£0 £100 £200 £300 £400 £500 £600 £700 £800 £900 £1,000 £1,100

Base salary

Pensions and benefits

Annual bonus

Find out more on page 139

Note:

1. Jon Greenwood was appointed as Acting CEO effective 27 January 2023. His remuneration has been pro-rated accordingly for this period.

AIP achievement

This chart illustrates the actual amounts earned from the AIP reflecting performance in 2023. 60% of the amount is payable in

April 2024 and 40% will be deferred into shares for three years.

Jon Greenwood

(Acting CEO)

Neil Manser

(CFO)

—% 20% 40%

60%

80% 100%

120%

Actual (% of salary)

Maximum (% of salary)

…

Actual (£)

Find out more on page 140 to 141.

Directors' Remuneration report continued

Remuneration at a glance

136 Direct Line Group Annual Report and Accounts 2023

£138k

£177k

175%

26%

£0 £200 £400 £600 £800 £1,000 £1,200

136 Direct Line Group Annual Report and Accounts 2023

Annual Report on Remuneration

Introduction

We have prepared this Report in accordance with the

requirements of the Companies Act 2006 and the Large and

Medium-sized Companies and Groups (Accounts and Reports)

Regulations 2008 (as amended) (the “Regulations”). The Report

also meets the relevant requirements of the Listing Rules of the

FCA and describes how the Board has complied with the

principles and provisions of the Corporate Governance Code

relating to remuneration matters. Remuneration tables subject

to audit in accordance with the relevant statutory requirements

are contained in this report and stated to be audited. Unless

otherwise stated, the information within the Report is

unaudited.

Committee members and governance

The following list details members of the Committee during

2023. You can find information about each member’s

attendance at meetings on page 105. You can find their

biographies on pages 97-100.

Committee Chair

Dr Richard Ward

Non-Executive Directors

Danuta Gray

Tracy Corrigan

Mark Gregory

Sebastian James (to 31 December 2023)

Mark Lewis (from 30 March 2023)

Advisers to the Committee

The Committee consults with the Acting Chief Executive Officer,

the Chief Financial Officer, the Chief People Officer, and senior

representatives of the HR, Risk and Finance functions on

matters relating to the appropriateness of all remuneration

elements for Executive Directors and Executive Committee

members. The Chair of the Board, Acting CEO, CFO and CPO are

not present when their remuneration is discussed. The

Committee works closely with the Chair of the Audit Committee

and the Board Risk Committee Chair is a member of the

Remuneration Committee. Input was received regarding target-

setting and payouts under incentive plans, and whether it is

appropriate to apply malus and/or clawback. The Remuneration

and Board Risk Committees can also hold joint meetings to

consider matters of common interest.

The Committee appointed PricewaterhouseCoopers LLP (“PwC”)

as its independent adviser from 1 January 2019 following a

competitive tender process.

During the year, PwC advised on market practice, corporate

governance and regulations, incentive plan design and target-

setting, recruitment, and other matters that the Committee was

considering. PwC supported the Group in several ways,

including the provision of internal audit, risk and controls, tax

and actuarial services during 2023. PwC is a member of the

Remuneration Consultants Group and a signatory to its Code of

Conduct and the Committee is therefore satisfied that the

advice PwC provided was objective and independent from the

Group and its Directors.

PwC’s total fees for remuneration-related advice in 2023 were

£163,250 excluding VAT. PwC charged its fees on a time and

expenses basis.

Wider workforce engagement and pay considerations

for 2023

The Committee carefully and regularly considers wider

employee pay as context for the decisions it makes.

The Group’s ERB is a valued forum for having a two-way

dialogue on many important matters. Since 2018 the

Committee Chair has attended meetings as appropriate. The

Committee Chair attended an ERB meeting in December 2023

where there was a Q&A session covering topics such as

affordability and maintaining competitiveness of pay. Feedback

was shared about how people are adapting to different working

patterns and how some are continuing to experience cost of

living challenges. The leadership reflected on this in considering

the approach to the 2024 pay review.

The outcome of our DiaLoGue People Survey is an important

factor for the Committee to reflect on and it has been kept

abreast of matters by the Chief People Officer and Acting Chief

Executive Officer throughout the year. Our existing workforce

engagement is strengthened through “town halls” and other

forums. To supplement this, the Committee receives papers

setting out details of all-employee pay and workforce policies

across the Group at each meeting. For 2023 this included

information on aligning with Consumer Duty, the Motability

partnership, our gender and ethnicity pay gap, updates on

supporting colleagues with cost of living and the approach to

2024 salary increases for the wider workforce. This standing

agenda item provides valuable insight and context for framing

executive pay and policies.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 137

137Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Alignment to Provision 40 of the Corporate Governance Code

The following table summarises how the Remuneration Committee has addressed the factors set out in Provision 40 of the 2018 UK

Corporate Governance Code.

Clarity

Remuneration

arrangements should be

transparent and promote

effective engagement with

shareholders and

the workforce.

– The remuneration arrangements for the Executive Directors are set out in a clear and simple way in the Directors’

Remuneration Policy and in the plan rules for each incentive plan. Guides are accessible explaining how each

incentive plan operates via an employee portal to ensure full understanding and demonstrates a commitment to

transparency.

– Queries on remuneration practices from shareholders or the workforce are welcomed by the Committee throughout

the year and encouraged at the AGM and at the Group’s regular ERB meetings, which the Chair of the Remuneration

Committee attended in December 2023. Further details are set out on pages 133 and 137.

– We are committed to transparent communication with all our stakeholders, including shareholders. For example, in

conversations in early 2023, investors expressed a preference that cost management should be reflected in the AIP,

and the Committee therefore resolved that the 2023 AIP would include this metric, alongside underwriting

performance, people and customer elements.

Simplicity

Remuneration structures

should avoid complexity

and their rationale and

operation should be easy to

understand.

– The Group’s remuneration arrangements are intentionally simple and well understood. Executive Directors (and

Senior Leadership) receive fixed pay (salary, benefits, pension), and participate in a single short-term incentive (the

AIP) and a single long-term incentive (the LTIP).

– The decision, for 2023 onwards to adopt a single annual grant of LTIP, rather than the previous approach to split into

two grants, has been well received and simplified the framework further.

– The Committee reviews the appropriateness of targets annually, being mindful of alignment with strategy.

Risk

Remuneration

arrangements should

ensure reputational and

other risks from excessive

rewards, and behavioural

risks that can arise from

target-based incentive

plans, are identified and

mitigated.

– The ability to mitigate potential risks is within the Policy. Examples include:

– the Committee’s discretionary powers to amend the formulaic outcome from incentive awards (for example, where

not consistent with performance);

– the inclusion of malus and clawback provisions under a wide range of potential scenarios; and

– in-employment and post-employment shareholding requirements.

– The Committee considers that the incentive arrangements do not encourage inappropriate risk-taking, due to the

Committee’s rigorous process for reviewing incentive outcomes, which includes seeking the view of the Chair of the

Board Risk Committee before making its final variable pay determinations.

– The Committee also considers that the Policy provides wide-ranging flexibility to adjust payments where outcomes

are not considered to reflect underlying business performance and individual contributions, or where behaviours are

inconsistent with the risk appetite of the Group.

Predictability

The range of possible values

of rewards to individual

directors should be

identified and explained at

the time of approving the

Policy.

– At the time of approving the Policy, full information on the potential values of the AIP and LTIP are provided, with

strict maximum opportunities and minimum, target and maximum performance scenarios. An indication of the

potential impact of a 50% share price appreciation on the value of LTIP awards was also included.

– The 2023 AIP and LTIP award opportunities were in line with the maximum opportunity in the Policy.

Proportionality

The link between individual

awards, the delivery of

strategy and the long-term

performance of the

Company should be clear.

Outcomes should not

reward poor performance.

– Payments under variable incentive schemes require robust performance against challenging conditions over the

short and longer term. For example, for 2023, 55% of the AIP was based on operating profit in addition to cost and

underwriting performance (25% of the AIP), and there was an equal focus between RoTE and EPS in the LTIP (both

measures being Key Performance Indicators for the Group).

– The Committee considers the formulaic outcome, as well as other relevant factors, when making decisions on

remuneration outcomes.

– Outcomes do not reward poor performance due to the Committee’s overriding discretion to depart from formulaic

outcomes which do not reflect underlying business performance.

Alignment to culture

Incentive schemes should

drive behaviours consistent

with company purpose,

values, and strategy.

– The Committee oversees consistent workforce reward principles and is satisfied that these policies drive the right

behaviours and reinforce the Group’s values, which in turn promote an appropriate culture.

– Our new values are reflected in the measures used in our incentive schemes. Our incentive arrangements link to them

in the following ways:

– Win together – the strategic element of the AIP requires our Executive Directors and senior leadership to work

together to deliver key results to our stakeholders. For example, our AIP measures include measures linked to our

customer and people performance, whilst our AIP and LTIP measures include financial metrics which measure the

short-term and long-term performance of the business including earnings and returns measures.

– Own it – financial targets under the AIP are the same for all eligible participants, regardless of seniority, linking

everyone’s individual contribution to AIP reward outcomes.

– The use of annual bonus deferral, LTIP holding periods and our shareholding requirements strengthen the focus on

our strategic aims and ensure alignment with the interests and experiences of shareholders, both during and after

employment.

Directors' Remuneration report continued

138 Direct Line Group Annual Report and Accounts 2023

Implementing Policy and pay outcomes relating to 2023 performance

Single figure table (Audited)

£’000 Salary

Benefits

Annual

bonus

Long-term

Incentives

All-

employee

share plans

Pension

contributions

and cash

allowance in

lieu of

pension

Fixed pay

and benefits

sub-total

Variable

remuneration

sub-total Total

Jon Greenwood

2023 668 125 177 0 1 60 854 177 1,031

2022 - - - - - - - - -

Neil Manser 2023 527 2 138 0 1 47 577 138 715

2022 515 2 0 0 1 46 564 0 564

Penny James

2023 57 1 0 0 - 5 63 0 63

2022 817 49 0 0 - 74 940 0 940

Notes:

1. Salary – the Company operates a flexible benefits policy, and salary is reported before any personal elections are made.

2. Benefits – include a company car or allowance, private medical insurance, life assurance, income protection, health screening and discounted

insurance. The former CEO used a car service for travelling on journeys between home and office; the Group also paid for any associated tax liability

on this benefit. To reflect the interim nature of the role, the Acting CEO received reimbursement of reasonable travel and accommodation expenses

between his home in the North of England and the Group's London office; the Group also paid for any associated tax liability on this benefit. The

total cost to provide this travel and accommodation benefit was £88,897.63. The Acting CEO also received an allowance of £25,000 per annum

(payable monthly, £23,205.19 received in respect of 2023) to reflect the significant disturbance to Jon and his family as a result of spending the

majority of his time in London.

3. Annual bonus – includes amounts earned for performance during the year but deferred for three years under the DAIP. For more information, see

pages 140 to 141. These deferred awards are normally subject to continuous employment. Awards remain subject to malus and clawback.

4. Jon Greenwood was appointed as Acting CEO effective 27 January 2023. His remuneration has been pro-rated accordingly for this period.

5. Penny James stepped down from the Board on 27 January 2023. Her remuneration has been pro-rated for this period accordingly. Details of Penny's

exit arrangements can be found on page 149.

Each Executive Director has confirmed they have not received any other form of remuneration, other than that already disclosed in

the single figure table.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 139

139Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Annual Incentive Plan outcomes for 2023 (Audited)

The chart illustrates the final assessment, performance measures and weightings under the AIP.

Performance measures and weighting

55%

Operating profit

10%

Customer

10%

People

25%

Underwriting performance and cost

Performance achievement 2023 Outcome 2023

15%

Total

Operating profit

Underwriting performance and cost

10%

Customer

People

Executive Director Achievement under the 2023 AIP 2023 AIP payment

Jon Greenwood 15% £176,756

Neil Manser 15% £138,229

Operating profit (55% weighting)

The primary financial performance measure for 2023 was operating profit for ongoing operations. The Committee established

threshold and maximum performance levels at the start of the year considering internal budgets and analysts’ consensus forecasts

and did not adjust the targets during the year.

The approach taken to assessing financial performance against this measure was based on a straight-line outcome between 10% for

threshold performance and 100% for achievement of maximum performance.

The table below sets out the threshold and maximum performance targets for the year, and the actual performance achieved.

Measure Threshold 10% Maximum 100% 2023 Actual 2023 Achievement

Operating Profit £168.7m £253.1m (£189.5m) nil

Notes:

1. The AIP for Jon Greenwood is pro-rated to reflect the period from 27 January 2023, being the date he was appointed Acting CEO.

2. 40% of any AIP award is deferred into shares under the DAIP, vesting three years after grant.

3. Note that the operating profit target was originally set on an IFRS 4 basis (on a Group basis, rather than an ongoing operations basis, as targets were

set prior to the sale of the Commercial business), before being rebased to IFRS 17 per the targets disclosed in the table above - for transparency, the

original targets as set on an IFRS 4 basis were:

a. Threshold: £201.8m

b. Maximum: £302.8m

A straight-line interpolation occurs from threshold to maximum performance.

Directors' Remuneration report continued

140 Direct Line Group Annual Report and Accounts 2023

40%

50%

140 Direct Line Group Annual Report and Accounts 2023

Underwriting

performance and

Cost

(25% weighting)

Improve our

competitiveness to

deliver better value and

experience for

customers by reducing

operating expenses

Improving Motor margins

– In Motor during 2023 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.

Sustaining Home underwriting

– Over the course of 2023 Home has traded the market well, delivering written margins ahead of

budget, maintaining a strong retention and exiting the year with an improved in-force policy count

trajectory.

Cost

– Adjusting for the impact of changes to perimeter, e.g. Motability, controllable spend was reduced

broadly in line with a specific stretch in the budget.

– Overall costs increased by less than the rate of inflation.

2023 Achievement: 40% (10% out of 25%)

Customer

(10% weighting)

To better align focus of

our leadership teams on

delivery of customer

experience

– Across the business we have been embedding delivery of our Consumer Duty obligations to ensure

good customer outcomes and meet our mission to be brilliant for customers every day. A

comprehensive implementation plan addressed the requirements arising from the new Duty, which

has been approved by the Board.

– Over 2023, we undertook extensive work across the organisation to further focus on how we meet our

customers' insurance needs. Although good performance was delivered against some of the stretching

customer targets (including Net Promoter Scores) set as part of the 2023 AIP, particularly in the Rescue

part of the business, performance against other metrics (such as complaints) and in other areas of the

business were below the threshold level set by the Committee at the start of the year.

– The Committee recognised that these outcomes were impacted by lower levels of capacity across the

motor repair industry, higher inflation (which has led to higher premium prices) and higher resulting

call volumes (leading to longer wait times). However, the Committee concluded that the overall

performance did not warrant any payout in respect of this element of the AIP.

2023 Achievement: 0%

People

(10% weighting)

A range of indicators

around diversity and

inclusion, employee

engagement and

closing the skills gap,

reflecting the

importance of these

agendas to the success

of the Group

– 2023 diversity targets, aiming to improve gender and ethnic diversity at senior levels were not met, but

it is recognised that progress is not always linear, particularly given that Group’s representation remains

strong compared to the wider market.

– We did well to buck the trend on UK employee satisfaction, and maintained employee satisfaction

levels despite not only facing the same external challenges as the rest of the UK, but a complex

internal landscape.

– On building our entry level talent pipeline, during the year programmes continued to evolve to develop

the future skills needed to serve our increasingly tech-savvy customers. 394 colleagues are currently on

a diverse range of apprenticeships, with 33% focused on vehicle repairs and 43% on data and

technology. Intake to our Ignite/apprenticeship schemes landed above the target range numbers.

– In addition, nearly half of our people manager population have attended high performance upskilling

in 2023 and people manager calibration toolkits were widely used to support on the job learning when

completing end of year performance calibration.

– 2023 Achievement: 50% (5% out of 10%)

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 141

141Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

LTIP outcomes for 2023 (Audited)

2020 LTIP awards (vesting in 2023)

Awards under the LTIP granted in March and September 2020 vested during 2023. They were subject to relative TSR performance

over the three-year period from the date of grant, and RoTE performance in 2020, 2021 and 2022.

Consistent with the Regulations, the expected RoTE vesting outcomes for the year ended 31 December 2022 (together with the TSR

elements from the 2019 awards) are included in the 2022 LTIP column of the single figure table because the performance period for

these elements ended in 2022. The performance outcomes of these elements are included in the table below.

The TSR elements of the 2020 awards (and the RoTE elements of the 2021 awards – see below) are included in the 2023 single

remuneration figure because the performance period for those elements ended in 2023. Details of the targets and performance

achieved are set out in the table below.

The performance achieved against the targets was as follows:

Award Performance measure Weighting

Threshold

(20% of

maximum)

Maximum

(100% of

maximum) Actual performance Achievement Outcome

March 2020

RoTE

(2022 single figure)

60% 17.5% 20.5% 14.2% 0.0% 0.0%

Relative TSR

(2023 single figure)

40% Median Upper quintile Below median 0.0% 0.0%

August 2020

RoTE

(2022 single figure)

60% 17.5% 20.5% 14.2% 0.0% 0.0%

Relative TSR

(2023 single figure)

40% Median Upper quintile Below median 0.0% 0.0%

2021 LTIP awards (vesting in 2024)

Awards under the LTIP granted in March and August 2021 are subject to relative TSR performance over the three-year vesting period,

and RoTE performance in 2021, 2022 and 2023. The RoTE performance period for these awards ended on 31 December 2023 and

performance in respect of this element is set out in the table below. Performance under the relative TSR measure will be assessed at

the end of the vesting periods in March 2024 and August 2024 respectively and will be disclosed in the 2023 Directors’

Remuneration Report. Vesting is subject to the Committee’s satisfaction that the financial and risk underpins have been met at the

end of the vesting period.

Consistent with the Regulations, the expected RoTE vesting outcomes for the 2021 LTIP awards (together with the TSR elements

from the 2020 awards above) are included in the 2023 single remuneration figures. You can find details of this on page 139.

Award Performance measure Weighting

Threshold

(20% of

maximum)

Maximum

(100% of

maximum) Actual performance Achievement Outcome

March 2021

RoTE

(2023 single figure)

60% 17.5% 20.5% 0.9% 0.0% 0.0%

Relative TSR

(2024 single figure)

40% Median Upper quintile Performance period not yet complete

August 2021

RoTE

(2023 single figure)

60% 17.5% 20.5% 0.9% 0.0% 0.0%

Relative TSR

(2024 single figure)

40% Median Upper quintile Performance period not yet complete

Directors' Remuneration report continued

142 Direct Line Group Annual Report and Accounts 2023

LTIP awards granted during 2023 (Audited)

The table below shows awards granted under the LTIP to Executive Directors in 2023 in the form of nil-cost options. As outlined in

last year's report, to simplify the remuneration structure, we have now transitioned to a single LTIP grant for participants each year

(previously granted 50% in March and 50% in August). Prior to granting the awards, the Committee considered the decline in the

share price since the grant of the 2022 LTIP awards. However the Committee determined that it would not be appropriate to make

an adjustment at the time of grant given the recent volatility in the share price at the time, and will instead review whether there has

been a "windfall gain" at the time of vesting (to the extent that the performance conditions have been met).

Awards granted in 2023 under the LTIP

Director Position Award as % of salary Number of shares granted Face value of awards (£)

Jon Greenwood Acting Chief Executive Officer

200% 1,058,394 1,450,000

Neil Manser

Chief Financial Officer

200% 751,824 1,030,000

Note:

1. The number of shares awarded was based on the average share price in the three-day period prior to grant on 30 March 2023, which was £1.37.

The performance conditions that apply to the LTIP awards granted in 2023 are set out below:

Performance conditions for awards granted in 2023 under the LTIP

Performance Measure Proportion of award

Performance for threshold

vesting (20%)

Performance for

maximum vesting

RoTE (average over three years) 30% 15.0% 22.0%

TSR (vs FTSE 51-150 (excluding Investment Trusts)) 30% Median Upper quintile

Cumulative operating earnings per share 30% 46.6p 63.1p

Emissions 10% 1 out of 3 targets are met All 3 targets are met

Notes:

1. Emissions targets are:

a. Operational Scope 1 and 2: Reduce Scope 1 emissions by 36% by 2025 versus the 2019 baseline.

b. Corporate bonds (Scope 1 and 2): Reduce Scope 1 + 2 portfolio temperature score by invested value within corporate bonds portfolio from 2.44°C

in 2019 to 2.23°C in 2025.

c. Corporate bonds (Scope 1, 2 and 3): Reduce Scope 1 + 2 + 3 portfolio temperature score by invested value within corporate bonds portfolio from

2.80°C in 2019 to 2.51°C in 2025.

2. Note that the RoTE and cumulative operating earnings per share targets were originally set on an IFRS 4 basis, before being rebased to IFRS 17 per

the targets disclosed in the table above. After careful analysis and consideration, the Committee determined that no change was required for the

RoTE targets but the cumulative operating EPS targets were adjusted on a neutral basis to offset the impact of the adoption of IFRS 17 - for

transparency, the original targets as set on an IFRS 4 basis were:

a. Threshold: 56.2p

b. Maximum: 76p

A straight-line interpolation occurs from threshold to maximum performance.

The performance period for the awards granted on 30 March 2023 will end on 31 December 2025 for the RoTE, EPS and Emission

elements, and 29 March 2026 for the TSR element.

Direct Line Group 2012 Share Incentive Plan (“SIP”) (Audited)

During 2023, all employees, including Executive Directors, were eligible to invest from £10 to £150 a month from their pre-tax pay

into the scheme, and receive one matching share for every two shares they purchased in the form of a conditional share award. The

matching shares vest after 3 years subject to continued employment and continuing to hold the purchased shares. This table details

the number of shares held by Jon Greenwood and Neil Manser under the SIP.

Matching shares

granted during

the year

Matching shares

cancelled during

the year

Value of matching

shares granted (£)

Total number of

matching shares at

31 December 2023

Jon Greenwood 539 — 901 1,225

Neil Manser 539 — 901 1,225

Notes:

1. The total market value of matching shares granted at the time of each award. Purchase of the matching shares takes place within 30 days of the

contributions being deducted from salary.

2. Matching shares which are subject to forfeiture.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 143

143Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Directors’ Share interests (Audited)

Executive Directors commit not to hedge their exposure to outstanding awards under these plans or in respect of shares they are

reporting to the Company within their ownership for the purposes of any share ownership guidelines. They also agree not to pledge

as collateral their participation under any of the plans or any shares which they are required to hold in the Company for any

purposes, including for share ownership guidelines. The table below sets out details of the Executive Directors’ share interests

exercised whilst serving as a Director in the year to 31 December 2023.

At 31 December 2023

Share plan interests exercised

whilst serving as a Director during

the year to 31 December 2023

Share plan

awards subject

to performance

conditions

1,2,3

Share plan

awards subject

to continued

service

Share plan

awards vested

but unexercised

Shares held

outright

Number of

options

exercised

Share price on

date of exercise

5,6

Jon Greenwood

1,516,703 140,926 — 120,121 92,440 1.38

1,548 1.66

83,915 1.66

Neil Manser

1,416,577 142,085 — 329,494 53,289 1.38

Penny James

— 322,790 556,618 1,361,226

Notes:

1. These awards take the form of nil-cost options over the Company’s shares. Such awards accrue dividend entitlement from the grant date to the date

on which an award vests, or the end of the applicable holding period. Dividends added post-vesting are shown to 31 December 2023 but are not

realised until exercise.

2. LTIP awards granted to Executive Directors include an additional two-year holding period before awards may be released.

3. Unvested awards subject to performance conditions represent LTIP awards.

4. The number includes beneficial share interests acquired under the SIP. At 21 March 2024, the number of shares beneficially held by Jon Greenwood

has increased to 120,391, and the number of shares held by Neil Manser has increased to 329,764.

5. Jon Greenwood exercised options on 28 March and 26 May 2023.

6. Neil Manser exercised options on 28 March 2023.

7. The above share plan interests for Penny James are as at 27 January 2023 being the date she stepped down from the Board.

The table below shows the Non-Executive Directors’ beneficial interests in the Company’s shares

Director

Shares held at

31/12/2023

Shares held at

31/12/2022

Danuta Gray

26,500

Tracy Corrigan

—

Mark Gregory

—

Sebastian James

5,000

Adrian Joseph

—

Mark Lewis

—

Fiona McBain

—

David Neave

—

Gregor Stewart

2,925

Richard Ward

—

Note:

1. This information includes holdings of any connected persons, as defined in section 253 of the Companies Act 2006.

2. There were no changes to the above between 31 December 2023 and 21 March 2024.

Directors' Remuneration report continued

144 Direct Line Group Annual Report and Accounts 2023

Non-Executive Directors (Audited)

Non-Executive Directors receive a basic fee plus additional fees for specific Board responsibilities. The Chair of the Board receives a

single fee. Non-Executive Directors may also claim for reasonable travel and subsistence expenses, in accordance with the Group’s

travel and expenses policy, and, where these are classified as taxable by HMRC, they are shown under ‘Taxable benefits’ below. The

Non-Executive Directors receive no other benefits.

Fees Taxable benefits

2,3

Total

Director

2023

£’000

2022

£’000

2023

£’000

2022

£’000

2023

£’000

2022

£’000

Danuta Gray

350

360

356

Tracy Corrigan

—

Mark Gregory

130

129

—

130

129

Sebastian James

105

104

—

105

104

Adrian Joseph

—

Mark Lewis

—

Fiona McBain

110

109

124

120

David Neave

—

Gregor Stewart

115

137

127

Richard Ward

150

—

150

Notes:

1. Non-Executive Directors are not eligible to participate in any of the Group’s bonus or share incentive schemes or to join any Group pension scheme.

2. The values shown under ‘Taxable benefits’ above comprise the value of taxable travel and subsistence expenses reimbursed by the Company

(including any gross-up for tax and national insurance contributions due).

3. The value of benefits for Tracy Corrigan, Mark Gregory, Sebastian James, Adrian Joseph and Richard Ward in 2023, and for Richard Ward in 2022,

were all less than £500. The values have been rounded to 0 for consistency in the table above.

4. Mark Lewis joined the Board on 30 March 2023. David Neave joined the Board on 19 October 2023.

Shareholdings (Audited)

This table sets out the Executive Directors’ share ownership guidelines and actual share ownership levels:

Director Position

Share ownership guideline

(% of salary)

Value of shares held at

31 December 2023

2,3

(% of salary)

Jon Greenwood Acting Chief Executive Officer 250% 51%

Neil Manser Chief Finance Officer 200% 142%

Notes:

1. Executive Directors are normally expected to retain all the ‘after tax’ Ordinary Shares they obtain from any of the Company’s share incentive plans

until they achieve a shareholding level that is equal to 250% of base salary for the CEO and 200% of base salary for the CFO respectively. In light of

the interim nature of the role, the Committee did not expect the Acting CEO to meet the share ownership guideline.

2. For these purposes, holdings of Ordinary Shares will be treated as including unvested DAIP awards, all vested but unexercised awards, or awards

unvested but after the performance period and in the holding period. Holdings of Ordinary Shares are valued on a basis that is net of applicable

personal taxes payable on acquiring such Ordinary Shares.

3. Shareholding as a percentage of salary has been calculated based on the 29 December 2023 share price of £1.82.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 145

145Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

CEO pay ratio

The table below compares the single total figure of remuneration for the CEO since 2019 with that of the Group employees who are

paid at the 25th percentile (lower quartile), 50th percentile (median) and 75th percentile (upper quartile) of its employee population.

Director Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio

2023

Option A 36:1 27:1 19:1

2022 Option A 35:1 27:1 18:1

2021 Option A 122:1 95:1 65:1

2020 Option A 132:1 108:1 73:1

2019

Option A 123:1 101:1 67:1

Notes:

1. As required by the regulations, the CEO single figure used to determine the 2023 pay ratios is based on the sum of the total single figures

of remuneration for Penny James and Jon Greenwood (as Acting CEO).

2. As required by the regulations, the CEO single figure used to determine the 2019 pay ratios is based on the sum of the total single figures

of remuneration for Paul Geddes and Penny James, but with remuneration in respect of Penny James’ service as CFO excluded.

The UK employees included are those employed on 31 December 2023 and remuneration figures are determined with reference to

the financial year ending on 31 December 2023 (consistent with the approach taken in previous years).

Option A, as set out under the reporting regulations, was used to calculate remuneration for 2023 as we continue to believe that that

is the most robust methodology for calculating these figures. The value of each employee's total pay and benefits was calculated

using the single figure methodology consistent with the CEO. No elements of pay have been omitted. Where required, remuneration

was approximately adjusted to be full-time and full-year equivalent basis based on the employee's average full-time equivalent

hours for the year and the proportion of the year they were employed. No other adjustments were made.

The table below sets out the salary and total pay and benefits of the employee at the lower quartile, median and upper quartile for

the 2023 financial year:

Director 25th percentile (P25) Median (P50) 75th percentile (P75)

Salary £24,786 £29,836 £48,616

Total pay and benefits £30,466 £39,900 £58,726

Base salaries of all employees, including our Executive Directors, are set with reference to a range of factors including market

practice, experience and performance in role. In reviewing the ratios, the Committee also noted that the CEO’s remuneration

package is weighted more heavily towards variable pay (including the AIP and LTIP) than the wider workforce due to the nature of

the role, and this means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of

incentive plans in each year.

The 2023 ratios are broadly in line with 2022 levels. Although there has been an increase in the (combined) CEO total single figure

remuneration (driven by a higher benefits value for the Acting CEO and non-zero AIP outturn for 2023, partially offset by a lower base

salary for the Acting CEO), there has been a broadly consistent proportionate increase in total pay and benefits for quartile

employees (primarily due to a combination of salary increases and increased bonus outturns). As a result, there have been only small

changes to the 2023 pay ratios compared to 2022. In September 2023, over 500 employees joined the Group through our Motability

partnership, but this has not significantly impacted the pay ratios for 2023.

The Group’s employees are fundamental to the Group’s strategy and to ensuring a high level of service to our customers. We are

proud that the high number of consultants in our customer service centres are employed by the Group (rather than being

outsourced) and note that the impact of these lower paid roles is reflected in the ratios above. Further details on the remuneration of

Executive Directors and the wider workforce are set out on page 137. The Committee notes that the pay ratios for 2023 reflect the

nature of the CEO’s package being more heavily weighted towards variable pay compared to more junior colleagues, consistent with

our reward policies, such that the 2023 (and 2022) ratios are lower than previous years reflecting the incentive scheme performance

outturns. Furthermore, the Committee is satisfied that these policies drive the right behaviours and reinforces the Group’s values

which in turn drives the correct culture, and for the reasons outlined above, believes that the ratios are consistent with the Group’s

reward policies.

Directors' Remuneration report continued

146 Direct Line Group Annual Report and Accounts 2023

Percentage change in Executive Directors’ and Non-Executive Directors’ pay for 2020 to 2023

The table below shows the year-on-year percentage change in salary, taxable benefits, and bonus (where applicable) of the Executive

Directors and Non-Executive Directors, compared to the average pay for all other employees.

Director

Salary/Fees

Benefits

Bonus

(including deferred amount)

2023

2022 2021 2020

2023

2022 2021 2020

2023

2022 2021 2020

Executive Directors

Jon Greenwood

—

— — —

—

— — —

—

— — —

Penny James

0% 1% 8%

(16%)

38% 37% (25%)

—

(100%) 3% 16%

Neil Manser

0% — —

4% — —

—

(100%) — —

Non-Executive Directors

4,5,6

Danuta Gray

0% 67% 90%

56%

— 0% (100%)

—

— — —

Tracy Corrigan

18% — —

— n/a n/a

—

— — —

Mark Gregory

3% 15% 7%

0% 0% (100%)

—

— — —

Sebastian James

4% 4% 1%

0% 0% 0%

—

— — —

Adrian Joseph

0% — —

— — —

—

— — —

Mark Lewis

—

— — —

—

— — —

—

— — —

Fiona McBain

7% 7% 15%

26%

— (100%) (80%)

—

— — —

David Neave

—

— — —

—

— — —

—

— — —

Gregor Stewart

0% 0% 0%

92%

— (100%) (87%)

—

— — —

Richard Ward

5% 19% 0%

(4%)

105% 193% (6%)

—

— — —

All employees (average)

Average employee

8.6%

6% 3% 4%

57% (19%) (1%)

34%

(41%) 9% 4%

Notes:

1. Based on the change in average pay for employees employed in the year ended 31 December 2023 and the year ended 31 December 2022. Jon

Greenwood joined the Board in 2023 and therefore there is no comparison to prior year. Non-Executive Director fee levels were unchanged between

2022 and 2023.

2. For all employees, there were no changes in benefits provision between 2022 and 2023. For Non-Executive Directors, benefits comprise taxable

travel and subsistence expenses reimbursed by the Company (including any gross-up for tax and national insurance contributions due).

3. This includes average amounts earned under the AIP, and other variable incentive schemes, including monthly incentive schemes operated in

certain parts of the Group. Jon Greenwood and Neil Manser received bonuses related to 2023 performance, however it is not possible to display as a

percentage increase due to their nil bonus in 2022. Non-Executive Directors are not eligible to participate in any of the Group’s bonus or incentive

schemes.

4. Jon Greenwood, Mark Lewis and David Neave joined the Board during 2023.

5. Mark Lewis, David Neave, Adrian Joseph, Sebastian James, Mark Gregory and Tracy Corrigan had expenses in 2023, however it is not possible to

display as a percentage increase due to their nil expenses in 2022. See page 145 for further information.

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Direct Line Group Annual Report and Accounts 2023 147

147Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Chief Executive Officer’s pay between 2014 and 2023 and historical performance of TSR

The table below shows historical levels of the CEO’s pay between 2014 and 2023. It also shows vesting of annual and long-term

incentive pay awards as a percentage of the maximum available opportunity. The graph reflects the TSR for the Company and the

FTSE 350 index (excluding Investment Trusts) on a cumulative basis over the period from 31 December 2013 to 31 December 2023,

as the Company is a constituent of this index.

Total Shareholder Return (%)

31 Dec 2013

31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 31 Dec 2019 31 Dec 2020 31 Dec 2021 31 Dec 2022 31 Dec 2023

100

150

200

250

DLG

FTSE 350 (excluding Investment Trusts)

Director

2014¹ 2015 2016² 2017 2018 2019³ 2019³ 2020 2021 2022 2023

2023

Paul Geddes Penny James

Jonathan

Greenwood

CEO single figure of

remuneration(£’000s) 5,356 4,795 4,071 4,039 3,250 774 2,773 3,286 3,137 940 63 1,031

Annual bonus payment

(%ofmaximum) 75% 83% 43% 88% 68% 76% 76% 82% 84% 0% n/a 15%

LTIP vesting

(% of maximum)

88% 96% 86% 99% 71% 0% 100% 80% 75% 0% n/a 0%

Notes:

1. Based on actual vesting under the 2010, 2011 and 2012 RBS Group LTIP. The value included in the single figures in respect of these awards is

£2,437,428 in 2014.

2. The 2016 single figure and annual bonus payment reflect an adjustment, made in 2019, to the original award of 20% of maximum opportunity

related to the Ogden discount rate change.

3. The 2019 single figure reflects part of the year for the outgoing CEO, Paul Geddes, and the entire year for the newly appointed CEO, Penny James.

4. The 2023 single figure reflects part of the year for the outgoing CEO, Penny James, and part of the year for the Acting CEO, Jon Greenwood.

Directors' Remuneration report continued

148 Direct Line Group Annual Report and Accounts 2023

Payments for loss of office (Audited)

Penny James

As announced on 27 January 2023, the Board and Penny James mutually agreed that she would step down as Chief Executive

Officer and an Executive Director with immediate effect. She supported the Board with a handover to the Acting CEO and her

employment then ceased on 28 February 2023. During this period, she continued to receive her contractual salary, pension and

benefits as normal.

After this date, Penny continued to receive an amount equivalent to salary, pension and benefits in monthly instalments in lieu of the

remainder of her contractual 12 notice period (which would have run to 26 January 2024).

The table below sets out the total value of the amounts paid (or which are due to be paid) to Penny in relation to her departure, as

outlined above:

Salary (£’000) Benefits (£’000) Pension (£’000) Total (£’000)

Total pay and benefits 817 14 74 905

Penny also received £73,250 in respect of legal fees and outplacement support in connection with the termination of her

employment.

In respect of variable remuneration:

– No payments were made under the 2022 AIP and Penny was not eligible for an award under the 2023 AIP.

– All outstanding unvested LTIP awards lapsed at the point of cessation of employment (that is: awards granted in 2020, 2021 and

2022).

– Penny retained her unvested awards under the DAIP. The awards will continue to vest on the third anniversaries of award and

remain subject to the scheme rules, including malus and clawback provisions.

– Penny also retained LTIP awards which had vested but were in the two year post-vesting holding period. The holding period will

continue to apply and awards remain subject to the scheme rules, including malus and clawback provisions.

In accordance with the Policy, Penny is required to maintain a shareholding of 250% of salary for a period of two years from the date

of cessation of her employment, with the number of shares being held in order to comply with these requirements fixed as at the

date of termination of her employment at 28 February 2023.

New Executive Director

Adam Winslow

Adam Winslow was appointed as Chief Executive Officer effective from 1 March 2024 and will be appointed to the Board on 21

March 2024.

In setting Adam’s remuneration, the Committee considered his wealth of experience in general insurance, market data in respect of

FTSE 51-150 companies and other FTSE 350 insurers, the previous CEO’s remuneration package, our Directors’ Remuneration Policy

and the pay and conditions of the wider workforce. Taking these factors into account, Adam’s salary was set at £820,000, broadly in

line with the previous CEO. Adam will not be eligible for a salary increase during 2024.

Pension and variable remuneration opportunities have been set in line with the Directors’ Remuneration Policy.

The Committee also approved buyout awards to compensate him for awards forfeited from his previous employer in connection

with his appointment as follows:

– 2023 annual bonus (Maximum: £975,000): To mirror the original award as far as possible, the final value will be determined based

on the published Aviva Group CEO 2023 annual bonus outcome (i.e. based solely on Aviva Group performance) prior to any

personal performance adjustment. The Remuneration Committee will then consider the performance of the business unit which

Adam led, based on published information and may adjust the outcome noted above upwards or downwards accordingly. The

award will be delivered 50% in cash and 50% in shares (which vest annually over 3 years) to mirror the original terms.

– Deferred bonus in respect of 2021 and 2022 (Estimate: approximately£760,000): Granted on a like-for-like basis with the original

awards (which vest annually over a 3 year period from grant).

– Unvested share awards subject to performance conditions (Maximum: approximately £4.25 million, estimated performance:

approximately £3.8 million): Value based on a performance assessment of the unvested awards, to be granted on a like-for-like

basis with the original awards. For the 2021 LTIP, the buyout award will be based on the performance outcome disclosed in the

2023 Aviva Directors’ Remuneration Report. For the 2022 and 2023 LTIP awards, the buyout awards will be based on the expected

performance out turn at the date of his appointment.

Values are based on the Aviva share price and estimated performance outcomes at the time of preparation of this report, and are

therefore subject to change based on movements in the Aviva share price and/or final performance out turns. Final values will be

disclosed in next year’s Directors’ Remuneration Report.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 149

149Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Distribution statement

This chart shows the overall pay expenditure across all Group employees compared with the total dividend value paid to

shareholders in 2022 and 2023.

Dividend (£m)

297.9

2023

2022

% change

(100.0)%

Ordinary

Overall expenditure

on pay (£m)

511.7

470.2

2023 2022

% change

8.8%

Note:

1. The dividends paid information has been taken from note 14 to the Consolidated financial statements. The overall expenditure on pay has been taken

from note 7 and therefore, consistent with market practice, it has not been calculated in a manner consistent with the single figure in this report.

AGM voting outcomes

The table below shows the percentage of shareholders’ votes which were for or against, and the percentage of votes withheld,

relating to the resolutions to approve the 2022 Directors’ Remuneration Report (which was put to shareholders at the 2023 AGM)

and the Policy (which was put to shareholders at the 2023 AGM).

For Against

Number of

votes withheld

(abstentions)Number Percentage Number Percentage

Approval of Directors’ Remuneration Policy (2023 AGM) 1,030,959,263 98.1% 19,918,567 1.9% 1,356,094

Approval of Directors’ Remuneration Report (2023 AGM) 1,028,748,967 97.9% 22,163,847 2.1% 1,321,110

Dilution

The Company complies with the dilution levels that the Investment Association guidelines recommend. These levels are 10% in 10

years for all share plans and 5% in 10 years for discretionary plans. This is consistent with the rules of the Company’s share plans.

Directors' Remuneration report continued

150 Direct Line Group Annual Report and Accounts 2023

Implementing the Policy in 2024

Base salary

Key features

– Reviewed annually with any increases taking effect on 1

April

– The Committee considers a range of factors when

determining salaries, including pay increases throughout

the Group, individual performance, and market data

Implementation in 2024

– The Acting CEO’s salary remains unchanged at £725,000

– The incoming CEO's salary will be set at £820,000

– 3% increase for the CFO to £546,364

Pensions

Key features

– Pension contributions are paid only in respect

of base salary

– The Executive Directors’ pension is set in line with the

pension level received by the employee population

Implementation in 2024

– Pension contributions remain at 9% (in line with the

workforce)

Annual Incentive Plan

Key features

– Maximum opportunity of 175% of salary for the CEO and

the CFO

– At least 50% of the AIP is based on financial measures. The

Committee considers various non-financial performance

measures such as strategic measures for the remainder

– The outcome is assessed at the end of the performance

period with reference to targets agreed at the start of the

year

– Any payment is subject to an additional gateway

assessment, including assessing risk factors

– Malus and clawback provisions apply

Implementation in 2024

– No change to the maximum opportunity

– There will be a straight-line vesting between AIP threshold

and maximum performance

– Operating Profit (55% weighting)

– Strategic measures (20% weighting)

– Customer (15% weighting)

– People (10% weighting)

– The performance targets are considered commercially

sensitive and will therefore be disclosed in next

year’s

Report

Deferred Annual Incentive Plan

Key features

– 40% of the AIP is deferred into shares

– Typically vesting after three years, normally subject to

continued employment

– Malus and clawback provisions apply

Implementation in 2024

– No further performance conditions apply

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Direct Line Group Annual Report and Accounts 2023 151

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Strategic Report / Governance / Financial statements

Implementing the Policy in 2024 continued

Long-Term Incentive Plan

Key features

– Awards typically granted as nil-cost options

– Awards granted once per year

– The LTIP allows for awards with a maximum value of 200%

of base salary per financial year

– Performance is measured over three years

– Awards vest subject to financial underpin and payment

gateway

– Malus and clawback provisions apply

– Awards are subject to an additional two-year holding

period following the end of the three-year performance

period

Implementation in 2024

– No change to the maximum annual award levels

– Will be granted once per year

– Nil-cost options will continue to be used for the grants

– Following Adam Winslow's appointment as CEO, it is

expected that a business wide review will take place to

confirm the Group's updated strategic priorities. The

Committee is of the view that, in order to ensure long term

remuneration is linked to KPIs, it will be appropriate to set

the 2024 LTIP targets once this review is complete (and no

later than 6 months after the grant date). The targets

applicable to these awards will be disclosed in due course.

Non-Executive Directors’ fees

The fees for the Chair and Non-Executive Directors for 2024 are set out below (unchanged from 2023).

Position

Fees for 2024

£’000

Board Chair fee 350

Basic Non-Executive Director fee 75

Additional fees

Senior Independent Director fee 30

Chair of Audit, Board Risk and Remuneration Committees 30

Chair of Sustainability and Investment Committees 15

Member of Board Committee (Audit, Board Risk or Remuneration) 10

Member of Board Committee (Sustainability, Investment or Nomination) 5

Directors' Remuneration report continued

152 Direct Line Group Annual Report and Accounts 2023

Directors’ Remuneration Policy

The following is a copy of the main table from the Policy approved by shareholders at the 2023 AGM on 9 May 2023. The full Policy is

available in the Directors' Remuneration report of the 2022 Annual Report and Accounts, which is available on the Direct Line Group

website, under the 'Results and Reports' heading in the Investors page. You can find further details regarding the Policy's operation

for 2024 on pages 151 and 152.

Policy table

Base salary

– This is the core element of

pay that reflects the

individual’s role and

position within the Group

– Staying competitive in the

market allows us to attract,

retain and motivate high-

calibre executives with the

skills to achieve our key

aims while managing costs

Operation

– Base salaries are typically reviewed annually and set in April of each year, although the

Committee may undertake an out-of-cycle review if it determines this to be appropriate

– When reviewing base salaries, the Committee typically takes the following into account:

– general base salary movements across the Group;

– level of skill, experience and scope of responsibilities, individual and business

performance, economic climate, and market conditions; and

– the appropriate benchmarking peer group(s) that reflects the Group’s size and industry

focus, the corresponding market pay range(s) and the relevant positioning within the

market pay range(s)

– The Committee does not follow market data in isolation, and instead uses it as a reference

point when considering, in its judgement, the appropriate salary level, while regarding

other relevant factors, including corporate and individual performance, and any changes

to an individual’s role and responsibilities

– The principles for setting base salary are like those applied to other employees in the

Group. However, the specific benchmarking groups used to review external market

relativities may differ across employee groups

– Base salary is typically paid monthly

Maximum opportunity

– When determining salary increases, the Committee will consider the factors outlined in

this table under ‘Operation’

Performance measures

– Not applicable

Pension

– To remain competitive

within the marketplace

– To encourage retirement

planning and retain

flexibility for individuals

Operation

– Pension contributions are paid only in respect of base salary

– Executive Directors are eligible to participate in the defined contribution pension

arrangement or alternatively they may choose to receive a cash allowance in lieu

of pension

– The Executive Directors’ pension will be set in line with the pension level for the wider

workforce

Maximum opportunity

– The maximum pension percentage contributions are set at the wider workforce level

(currently 9% of salary)

Performance measures

– Not applicable

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153Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Policy table continued

Benefits

– A comprehensive and

flexible benefits package is

offered, emphasising

individuals being able to

choose the combination of

cash and benefits

that suits them

Operation

– Executive Directors receive a benefits package generally set by reference to market

practice in companies of a similar size and complexity. Benefits currently provided include

a Company car, use of a car or car allowance, private medical insurance, life insurance,

health screening, and income protection

– The Executive Directors are eligible to receive such additional benefits as the Committee

considers appropriate having regard to market norms

– In line with our approach to all employees, certain Group products are offered to Executive

Directors at a discount

– Executive Directors are eligible to participate in any of the employee share plans operated

by the Company, in line with HMRC guidelines (where relevant) and on the same basis as

other eligible employees. Currently, this includes our HMRC-approved SIP, which has been

used to provide an award of free shares to all employees (including Executive Directors)

and permits employees to purchase shares with a corresponding matching award

– Where an Executive Director is required to relocate to perform their role, they may be

offered appropriate relocation benefits. The level of such benefits would be determined

based on the circumstances of the individual and typical market practice and be

consistent with the relocation arrangements available to the workforce generally. In

normal circumstances, relocation benefits will only be paid for a period of up to 12

months

Maximum opportunity

– The costs of benefits provided may fluctuate from year to year, even if the level of provision

has remained unchanged

– Additionally, the limit for any employee share plans in which the Executive Directors

participate will be in line with the caps permitted by HMRC from time to time

– The Executive Directors may be entitled to retain fees received for any directorships held

outside the Group

– Similarly, while not benefits in the normal usage of that term, certain other items such as

hospitality or retirement gifts may also be provided

Performance measures

– Not applicable

Directors' Remuneration report continued

154 Direct Line Group Annual Report and Accounts 2023

Element and purpose in supporting the Group’s strategic objective

AIP

– To motivate executives and

incentivise delivery of

performance over a one-

year operating cycle and

enable a stronger focus

and alignment with the

short to medium-term

elements of our strategic

aims

– Deferral delivers further

alignment with

shareholders and aids

retention of key executive

talent

Operation

– The AIP is measured based on performance over the financial year against performance

targets which the Committee considers to be appropriate

– At least 40% of the AIP is deferred into shares (typically in the form of nil-cost options or

conditional share awards) under the DAIP

– This typically vests three years after grant (with deferred awards also capable of being

settled in cash at the discretion of the Committee, for example, when it gives rise to legal

difficulties to settle in shares). The remainder of the award is paid in cash following the

year-end

– The Committee will keep the percentage deferred and terms of deferral under review. This

will ensure levels are in line with regulatory requirements and best practice and may be

changed in future years but will not, in the Committee’s view, be changed to be less

onerous overall

– Dividends will accrue during the deferral period

– Malus and clawback provisions apply to the cash and deferred elements of the AIP. These

are explained in the notes to the Policy table

Maximum opportunity

– The maximum bonus opportunity under the AIP is 175% of base salary per year

– The current maximum bonus opportunity applying for each individual Executive Director

is shown in the statement of implementation of Policy

– Threshold and maximum bonus levels for Executive Directors are set by considering

annual bonus practice throughout the organisation and referring to practice at other

insurance and general market comparators

– Outcomes for performance between threshold and maximum will be determined on a

straight-line basis

– No more than 10% of the bonus is paid for threshold performance

– However, the Committee retains flexibility to amend the pay-out level at different levels of

performance for future bonus cycles. This is based on its assessment of the level of stretch

inherent in the set targets, and the Committee will disclose any such determinations

appropriately

Performance measures

– Performance measures for the AIP may be financial and non-financial (Group, divisional,

business line or individual)

– Each year, at least 50% of the AIP is based on financial measures. The remainder of the AIP

may be based on a combination of, for example, strategic, operational, ESG, shared or

individual performance measures

– The Committee sets targets at the beginning of each financial year

– Before any payment can be made, the Committee will perform an additional gateway

assessment (including in respect of any risk concerns). This will determine whether the

amount of any bonus is appropriate in view of facts or circumstances which the

Committee considers relevant. This assessment may result in moderating (positively or

negatively) each AIP performance measure, subject to the individual maximum bonus

levels

– The AIP remains a discretionary arrangement. In line with the Code requirements, the

Committee maintains discretion to override formulaic outcomes where those outcomes

are not reflective of the overall Group performance. DAIP awards vest subject to continued

employment only

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 155

155Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Element and purpose in supporting the Group’s strategic objective continued

LTIP

– Aligning executives’

interests with those of

shareholders to motivate

and incentivise delivering

sustained business

performance over the long

term

– To aid retaining key

executive talent long term

and deliver market

competitive remuneration

Operation

– Awards will typically be made in the form of nil-cost options or conditional share awards,

which vest to the extent performance conditions are satisfied over a period of at least

three years. Under the Plan rules, awards may also be settled in cash at the discretion of

the Committee. This may be appropriate, for example, if legal difficulties arise with settling

in shares

– Vested options will remain exercisable for up to the tenth anniversary of grant

– Malus and clawback provisions apply to the LTIP. These are explained in the notes to the

Policy table

– Executive Directors will be subject to an additional two-year holding period following the

vesting period, during which time awards may not normally be exercised or released

– During the vesting period and additional holding period (during which time awards

cannot be exercised) the awards will continue to accrue dividends. Following the holding

period, awards will cease to accrue dividends if not exercised

Maximum opportunity

– The maximum LTIP award in normal circumstances is 200% of salary

– Awards of up to 300% of base salary are permitted in exceptional circumstances, for

example relating to recruiting or retaining an employee, as determined by the Committee

Performance measures

– The Committee will determine the performance conditions for each award made under

the LTIP, measuring performance over a period of at least three years with no provision to

retest

– Performance is measured against targets set at the beginning of the performance period,

which may be set by referring to the time of grant or financial year

– Awards vest based on performance against financial and/or such other measures (including

share return), as set by the Committee, to be aligned with the Group’s long-term strategic

objectives. The Committee may alter the precise measures used for future awards

– Not less than 50% of the award shall be subject to one or more financial measures

– Awards will be subject to a payment gateway, such that the Committee must be satisfied

that there are no material risk failings, reputational concerns or regulatory issues

– 20% of the award vests for threshold performance, with 100% vesting for maximum

performance

– The Committee reserves the right in respect of future awards to lengthen (but not reduce)

any performance period and/or amend the terms of any holding period; however, there is

no intention to reduce the length of the holding period

– In line with the Code requirements, the Committee maintains discretion to override

formulaic outcomes where those outcomes are not reflective o

f the overall Group

performance

Share ownership

guidelines

– To align the interests of

Executive Directors with

those of shareholders

Operation

– Executive Directors are expected to retain all the ordinary shares vesting under any of the

Company’s share incentive plans, after any disposals for paying applicable taxes, until they

have achieved the required shareholding level; unless earlier sale, in exceptional

circumstances, is permitted by the Chair of the Board

– Shares considered will include those held by the director and their connected persons,

vested awards subject to holding requirements and unvested awards not subject to

performance conditions (on a net of tax basis). Executive Directors are also expected to

retain their in-employment shareholding requirement (or actual shareholding, if lower)

post their employment for a period of two years

– In exceptional circumstances, earlier sale is permitted subject to the Chair’s discretion

Maximum opportunity

– 250% of salary for the CEO and 200% for the CFO

– The Committee reserves the discretion to amend these levels in future years

Performance measures

– Not applicable

Directors' Remuneration report continued

156 Direct Line Group Annual Report and Accounts 2023

The Board of Directors present their report for the financial year

ended 31December 2023 as required by the Companies Act

2006.

The Board would like to draw your attention to the forward-

looking statements disclaimer which can be found on page 276.

Directors’ report disclosures

The Board takes the view that some of the matters required to

be disclosed in the Directors’ report are of strategic importance

and these are, therefore, included in the Company’s Strategic

report which is on pages 1 to 94 as permitted by the

Companies Act 2006. These matters, and all matters referenced

in the table below, are incorporated into this Directors’ report:

Subject Pages

Use of financial instruments 30, 35, 36

Important events since the financial year end 8 to 16

Likely future developments in the business 16

Employee engagement

25, 54 to 57,

104 to 109, 140

Engagement with suppliers, customers and other

business relationships 51 to 53, 107

Research and development 19, 51

Greenhouse gas emissions, energy consumption and

energy-efficient action 63 to 65

Branches outside the UK 256

Disclosure of information required by

Disclosure Guidance and Transparency Rule 7.2

The FCA’s Disclosure Guidance and Transparency Rule 7.2

requires a Corporate Governance statement in the Directors’

report to include certain information. You can find information

that fulfils the Corporate Governance statement’s requirements

in this Directors’ report, the Corporate Governance report, the

Committee reports and the Directors’ Remuneration report, all

of which are incorporated into the Directors’ report by reference.

Disclosure of information under Listing Rule

9.8.4C

In accordance with Listing Rule 9.8.4C, the table below sets out

the location of the information required to be disclosed under

LR 9.8.4R, where applicable:

Subject Pages

Interest capitalised by the Group Not applicable

Unaudited financial information Note 3.5

Details of long-term incentive schemes 141 to 142

Directors’ waivers of emoluments Not applicable

Directors’ waivers of future emoluments Not applicable

Non pro-rata allotments for cash (issuer) Not applicable

Non pro-rata allotments for cash (major subsidiaries) Not applicable

Listed company is a subsidiary of another company Not applicable

Contracts of significance involving a Director Not applicable

Contracts of significance involving a

controlling shareholder Not applicable

Details of shareholder dividend waivers 158

Controlling shareholder agreements Not applicable

Dividends

As explained in the Chair's statement on page 8, the Board is

recommending a dividend for 2023. More information on

dividends and capital management can be found in the CFO

review on page 32.

Directors

The names of all current Directors and their biographies are set

out on pages 97 to 100. Information about Adam Winslow, who

joined the Group as CEO on 1 March 2024, can be found in the

Chair's statement on page 9.

All Directors will retire and those wishing to continue to serve

will be submitted for election or re-election at the 2024 AGM.

This is in accordance with the UK Corporate Governance Code

and the Articles of Association of the Company, which govern

appointing and replacing Directors.

The Directors listed on pages 97 to 100 were the Directors of

the Company throughout the year under review. In addition,

Sebastian James served from the start of the year to

31 December 2023 when he retired from the Board.

The Company’s Articles of Association set out the Directors’

powers. You can view these on the Company’s website at

www.directlinegroup.co.uk. The Directors’ powers are also

subject to relevant legislation and, in certain circumstances,

including in relation to the issuing or buying back of shares,

authority from the Company’s shareholders. You can find details

of the Directors’ remuneration, service contracts, employment

contracts and interests in the shares of the Company in the

Directors’ Remuneration report on pages 131 to 156.

The Articles of Association of the Company permit it

to indemnify the Company’s officers, and officers of any

associated company, against liabilities arising from conducting

Company business, to the extent permitted by law. As such, the

Company has executed deeds of indemnity for each Director’s

benefit, regarding liabilities that may attach to them in their

capacity as Directors of the Company or associated companies.

These indemnities are qualifying third-party indemnities as

defined by section 234 of the Companies Act 2006. No amount

was paid under any of these indemnities during the year. The

Company maintains directors’ and officers’ liability insurance.

This provides appropriate cover for legal actions brought against

its Directors. The Company has also provided the Directors of

DLG Pension Trustee Limited with qualifying pension scheme

indemnities. This is in accordance with section 235 of the

Companies Act 2006. During 2023, DLG Pension Trustee

Limited acted as trustee for two of the Company’s occupational

pension schemes.

Secretary

Roger Clifton is the Company Secretary of Direct Line Insurance

Group plc and can be contacted at the Company’s Registered

Office, details of which are on page 277.

Directors’ report

Direct Line Group Annual Report and Accounts 2023 157

157Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Share capital

The Company has a premium listing on the London Stock

Exchange. As at 31December 2023, the Company’s share

capital comprised 1,311,388,157 fully paid Ordinary Shares of

pence each.

At the Company’s 2023 AGM, the Directors were authorised to:

– allot shares in the Company or grant rights to subscribe for or

convert any security into shares, up to an aggregate nominal

amount of £47,686,842, and to allot further shares up to an

aggregate nominal amount of £98,373,684 for the purpose of

a rights issue;

– allot shares having a nominal amount not exceeding in

aggregate £14,306,052 for cash, without offering the shares

first to existing shareholders in proportion to their holdings;

– allot additional shares having a nominal amount not

exceeding in aggregate £14,306,052 for the purposes

of financing a transaction which the Board of the Company

determines

to be an acquisition or other capital investment,

without offering the shares first to existing shareholders in

proportion to their holdings;

– make market purchases of up to 131,138,815 shares in the

Company, representing 10% of the Company’s issued share

capital at the time; and

– allot shares (with the disapplication of pre-emption rights) up

to an aggregate nominal amount of £23,250,000 in relation to

the issue of Restricted Tier 1 (“RT1”) Instruments.

To date, the Directors have not used these authorities granted in

2023. At the 2024 AGM, shareholders will be asked to renew

these authorities. The Company has not held any shares in

treasury during the period under review. You can find out more

about the Company’s share capital and shares under option as

at 31December 2023 in notes 27 and 31 of the consolidated

financial statements.

Under the Company’s Share Incentive Plan, Trustees hold shares

on behalf of employee participants. The Trustees will only vote

on those shares, and receive dividends that a participant

beneficially owns, in accordance with the participant’s wishes.

An Employee Benefit Trust also operates which has discretion

to vote on any shares it holds as it sees fit, except any shares

participants own beneficially, in which case the Trustee will only

vote on such shares as per a participant’s instructions.

The Trustee of the Employee Benefit Trust has waived its right

to dividends on all shares within the Trust. You can find out

more about the number of shares held by the employee share

plan trusts in note 31 on page 241. The Company is not aware

of any other dividend waivers or voting restrictions in place.

Shareholder voting rights and restrictions

on transfer of shares

All the Company’s issued Ordinary Shares rank equally in all

respects. The Company’s Articles of Association set out the rights

and obligations attaching to the Company’s Ordinary Shares.

Employees of the Company and Directors must comply with

the UK Market Abuse Regulation and the Company’s share

dealing rules. These rules restrict particular employees’ and

Directors’ ability to deal in the Company’s shares at certain

times, and require the employee or Director to obtain

permission to deal before doing so. Some of the Company’s

employee share plans also include restrictions on transferring

shares while the shares are held within the plans.

Each general meeting notice will specify a time, not more t

han 48

hours before the time fixed for the meeting (which may exclude

non-working days), for determining a shareholder’s entitlement to

attend and vote at the meeting. To be valid, all proxy

appointments must be filed at least 48 hours (which may exclude

non-working days) before the time of the general meeting.

Where the Company has issued a notice under section 793 of

the Companies Act 2006, and the person interested in the

relevant shares has been in default of the notice for at least 14

days, they shall not be entitled to attend or vote at any general

meeting until the default has been corrected or the shares sold.

There is no arrangement or understanding with any

shareholder, customer or supplier, or any other external party,

which provides the right to appoint a Director or a member of

the Executive Committee, or any other special rights regarding

control of the Company.

Articles of Association

Unless expressly specified to the contrary in the Articles of

Association, the Articles may only be amended by a special

resolution of the Company’s shareholders at a general meeting.

Significant agreements affected by a change

of control

A number of agreements may take effect, alter or terminate

upon a change of control of the Company. None of these

agreements is considered significant in terms of its impact on

the Group’s business as a whole. All the Company’s employee

share incentive plans contain provisions relating to a change of

control. Outstanding awards would typically vest and become

exercisable. This is subject to satisfying any performance

conditions, and normally with an additional time-based pro-

rata reduction where performance conditions apply, and with

approval from the Remuneration Committee.

Substantial shareholdings

The table below shows the holdings of the major shareholders

in the Company’s ordinary issued share capital, as at

31December 2023 and as at 18 March 2024, as notified in

accordance with the provisions of Chapter 5 of the FCA’s

Disclosure Guidance and Transparency Rules. It should be

noted that these holdings may have changed since the

Company was notified. However, notification of any change is

not required until the next notifiable threshold is crossed.

Information provided by the Company pursuant to the FCA’s

Disclosure Guidance and Transparency Rules is publicly

available via the regulatory information services and on the

Company’s website.

Directors' report continued

158 Direct Line Group Annual Report and Accounts 2023

Subject

31 December

2023

18 March

2024

Nature of

Holding

abrdn plc 4.57 % 4.57 % Indirect

Ameriprise Financial Inc 5.06 % 5.06 % Indirect

APG Asset Management N.V. 2.99 % 2.99 % Direct

Ariel Investments 4.90 % 4.90 % Direct/

Indirect

Artemis Investment

Management LLP

4.82 % 4.82 % Indirect

BlackRock Inc Below 5% Below 5% Indirect

FIL Limited 5.12 % 5.12 % Indirect

FMR LLC 7.11 % 7.11 % Indirect

Majedie Asset Management

Limited

4.99 % 4.99 % Indirect

Norges Bank 3.99 % 2.94 % Direct

Schroders plc 5.67 % 5.67 % Indirect

T.Rowe Price Associates, Inc. 4.68 % 4.68 % indirect

Political donations

The Group made no political donations during the year (2022: £nil).

Disabled and neuro-divergent colleagues

The Group is committed to supporting those who are neuro-

divergent or have a disability and recognises the benefits that

diversity of thought or body brings to an organisation.

For recruitment purposes, we adjust and enhance our application

and selection process, and guide and provide additional training

for interviewers where necessary. We reasonably adjust colleagues’

working environments and equipment, and roles and role

requirements (including for colleagues who become disabled

during their time working in the Group). We also seek to ensure

that everyone can access the same opportunities.

The Neuro-Diversity & Disability strand of our Diversity Network

Alliance (“DNA”) works to celebrate and support those who are

neuro-divergent or disabled with the aim of ensuring that all

our colleagues feel understood, fully appreciated, and

empowered to be their best selves. More information about the

work of the DNA strand can be found on page 55 of the

Strategic report.

Going concern

The Directors believe that the Group has sufficient financial

resources to meet its financial needs, including managing a

mature portfolio of insurance risk. The Directors believe the

Group is well positioned to manage its business risks

successfully in the current economic climate. The Chief

Financial Officer Review describes the Group's capital

management strategy, including the capital actions taken in

the last 12 months to ensure the continued strength of the

balance sheet and sets out management actions that the

Group continues to pursue to rebuild balance sheet resilience.

The Group's financial position is also covered in that section,

including a commentary on cash and investment levels,

reserves, currency management, insurance liability

management, liquidity and borrowings. The financial

disclosures relating to the Group's principal risks are set out in

note 3. This covers insurance, market, credit, liquidity and

operational risk; and the Group's approach to monitoring,

managing and mitigating exposures to these risks.

The Directors have assessed the principal risks of the Group over

the duration of the planning cycle, which runs until 2027, with

the first year following approval of the Strategic Plan ("the

Plan"), being 2024, having greater certainty and hence used to

set detailed budgets. The Group's Risk Function has carried out

an assessment of the risks to the Plan and the dependencies for

the success of the Plan. This included running adverse scenarios

on the Plan to consider the downside risks to the Plan and

subsequent impact on forecast profit. The key scenarios applied

to the Plan were in relation to the impact of adverse claims

inflation, failure to achieve motor pricing initiative benefits,

delay to delivery of expense reductions and a fall in asset values.

The key judgements and assumptions applied in these

scenarios were as follows:

– Adverse claims inflation: the Plan includes a scenario for

inflation being higher than expected, leading to claims costs

increasing by 3-6% with the Group and market response

delayed by six months.

– Failure to achieve motor pricing initiative benefits: planned

benefits from future motor pricing initiatives are not achieved.

– Delay to delivering expense reductions: there is a delay of 12

months in delivering planned expense reductions.

– Fall in asset values: an increase in credit spreads of 75 basis

points, with a partial recovery of 25 basis points over 2025.

It is unlikely that all risks would materialise at the same time.

None of the scenarios individually were concluded to present a

threat to the Group’s expected viability across the duration of

the Plan.

The Risk Function has also carried out an assessment of the risks

to the Group's and Company's capital position over 2024 and

2025. Two specific macroeconomic combination stresses, a

moderate and a severe, have been updated to include not only

a review of Group financials but also a review of assumptions to

reflect the latest internal and external environment and trends.

The stresses have been run to assess the possible impact on

own funds in the period to 31 December 2024 and 31

December 2025. The stresses are updated and repeated

regularly. The macroeconomic assumptions for key parameters

such as Consumer Price index, GDP and bank base rate for the

moderate scenario reflect the adverse end of the Bank of

England November Monetary Policy Committee forecast range.

The severe scenario adopts the key parameters from the 2022

Bank of England Banking Stress Test, which is described as

“severe but plausible”, updated for changes in the

macroeconomic environment.

In the moderate and severe scenarios, it was concluded that the

Company's solvency capital requirement would not be

breached.

Additionally, the Risk Function conducted a Reverse Stress Test

("RST") to establish whether the long-term future for motor

insurance, specifically, the adoption of EVs, poses a threat to the

viability of the Company’s current business model. The findings

showed that over the duration of the planning cycle the

scenarios considered did not present a risk to the viability of the

business model.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 159

159Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Further information in relation to the sensitivity of key factors on

the Group’s financial position are included in the financial

statements. The insurance risk note (note 3.3.1) sets out the

impact on profit before tax of an increase and a decrease in

claims inflation of 100 basis points for two consecutive years. The

market risk note (note 3.3.2) sets out the impact on profit before

tax and equity of a 100 basis points increase in spreads on

financial investments and the impact of a 100 basis points

increase in interest rates on financial investments and derivatives.

Therefore, having made due enquiries, the Directors believe

they can reasonably expect that the Group has adequate

resources to continue in operational existence for at least 12

months from 21 March 2024 (the date of approval of the

condensed consolidated financial statements). Accordingly, the

Directors have adopted the going concern basis in preparing

the condensed consolidated financial statements.

Disclosing information to the Auditor

Each Director at the date of approving these Annual Report and

Accounts confirms that: as far as they are aware, there is no

relevant audit information of which Deloitte, the Company’s

External Auditor, is unaware; and they have taken all the steps

that they ought to have taken as a Director to make themselves

aware of any relevant audit information, and to establish that

Deloitte is aware of that information. This confirmation is given

and should be interpreted in accordance with the provisions of

section 418 of the Companies Act 2006.

Auditor

Deloitte will retire as auditor from the conclusion of the 2024

AGM in line with mandatory rotation requirements. As

announced on 10 October 2022, following a competitive tender

process led by the Audit Committee, the Board approved the

appointment of KPMG LLP as auditor of the Company for the

financial year ending 31 December 2024, subject to approval

by shareholders at the Company’s 2024 AGM. Therefore, a

resolution to appoint KPMG will be proposed at the

forthcoming 2024 AGM. You can find more information about

the change of auditor in the Audit Committee report on page

117.

Conflicts of interest

Each Director has a duty to avoid conflicts of interest and must

declare any conflict of interest that could interfere with their

ability to act in the Group’s best interests. In accordance with

the Companies Act 2006, the Company’s Articles of Association

allow the Board to authorise matters where there is, or may be,

a conflict between the Group’s interests and the direct or

indirect interests of a Director, or between a Director’s duties to

the Group and another person. As a matter of course, the Board

authorises certain potential conflicts of interest in this way,

including Directors’ external directorships and their interests in

securities of other financial service institutions. The Company

Secretary maintains a register of potential conflicts which the

Board reviews at each scheduled Board meeting.

Directors’ responsibility statement

The Directors are responsible for preparing the Annual Report

and financial statements in accordance with applicable law and

regulations.

Company law requires the Directors to prepare such financial

statements for each financial year in accordance with UK-

adopted international accounting standards.

The Directors have elected to prepare the Parent Company

financial statements in accordance with FRS 101 'Reduced

Disclosure Framework'. Under company law, the Directors must

not approve the accounts unless they are satisfied that they give

a true and fair view of the Company’s state of affairs and profit or

loss for that period.

In preparing these financial statements, IAS 1 requires that

Directors: properly select and apply accounting policies; present

information, including accounting policies, in a manner that

provides relevant, reliable, comparable and understandable

information; provide additional disclosures when compliance

with the specific requirements in IFRS is insufficient to enable

users to understand the impact of particular transactions, other

events and conditions on the entity’s financial position and

financial performance, and to assess the Company’s ability to

continue as a going concern.

The Directors are responsible for keeping adequate accounting

records that: are sufficient to show and explain the Company’s

transactions and disclose, with reasonable accuracy, the

Company’s financial position at any time; and enable them to

ensure the financial statements comply with the Companies

Act 2006. Additionally, the Directors are responsible for

safeguarding the Company’s assets and, hence, taking

reasonable steps to prevent and detect fraud and other

irregularities. The Directors are responsible for maintaining and

ensuring the integrity of the corporate and financial information

included on the Company’s website at:

www.directlinegroup.co.uk.

Legislation in the UK governing preparing and disseminating

financial statements may differ from legislation in other

jurisdictions.

Each of the Directors in office as at the date of this report,

whose names and functions are listed on pages 97 to 100

confirms that, to the best of their knowledge:

– the financial statements, prepared in accordance with IFRS,

give a true and fair view of the assets, liabilities, financial

position, and profit or loss of the Company, and the

undertakings included in the consolidation taken as a whole;

– the Strategic report (on pages 1to 94) and Directors’ report

(on pages 158 to 160) include a fair review of: (i) the business’s

development and performance; and (ii) the position of the

Company and the undertakings included in the consolidation

taken as a whole, together with a description of the principal

risks and uncertainties they face; and

– the Annual Report and the financial statements, taken as a

whole, are fair, balanced and understandable, and provide

the information necessary for shareholders to assess the

Company’s position, performance, business model and

strategy.

This report was approved by the Board on 21 March 2024 and

signed on its behalf by:

Roger C. Clifton

Company Secretary

Registered address: Churchill Court, Westmoreland Road,

Bromley, BR1 1DP

Registered number: 02280426

Directors' report continued

160 Direct Line Group Annual Report and Accounts 2023

Financial Statements

Independent Auditor's Report 162

Consolidated Financial Statements

Consolidated Statement of Profit or Loss 174

Consolidated Statement of Comprehensive Income 175

Consolidated Statement of Financial Position 176

Consolidated Statement of Changes in Equity 177

Consolidated Cash Flow Statement 178

Notes to the Consolidated Financial Statements

1. Accounting policies 179

2. Critical accounting judgements and key sources of

estimation uncertainty

190

3. Risk management 194

4. Segmental analysis 210

5. Insurance service result 213

6. Investment return and net insurance financial

result

214

7. Other operating expenses 215

8. Other finance costs 216

9. Gain on disposal of business 216

10. Tax charge/(credit) 218

11. Current and deferred tax 219

12. Dividends and appropriations 219

13. Earnings/(loss) per share 220

14. Net asset value per share and return on equity 220

15. Goodwill and other intangible assets 221

16. Property, plant and equipment 223

17. Right-of-use assets 223

18. Investment property 224

19. Subsidiaries 224

20. Insurance contract assets and liabilities - gross and

reinsurance

225

21. Prepayments, accrued income and other assets 234

22. Derivative financial instruments 235

23. Retirement benefit obligations 235

24. Financial investments 238

25. Cash and cash equivalents and borrowings 239

26. Assets held for sale 239

27. Share capital 240

28. Other reserves 240

29. Tier 1 notes 240

30. Subordinated liabilities 240

31. Share-based payments 241

32. Provisions 242

33. Trade and other payables 242

34. Notes to the consolidated cash flow statement 243

35. Commitments and contingent liabilities 244

36. Leases 244

37. Fair value 246

38. Acquisitions 248

39. Related parties 249

40. First time adoption of new accounting standards 250

Parent Company Financial Statements

Parent Company Statement of Financial Position

253

Parent Company Statement of Comprehensive Income

254

Parent Company Statement of Changes in Equity 254

Notes to the Parent Company Financial

Statements

1. Accounting policies 255

2. Investment in subsidiary undertakings 255

3. Other receivables 257

4. Current and deferred tax 257

5. Derivative financial instruments 257

6. Cash and cash equivalents 257

7. Share capital, capital reserves and distributable

reserves

257

8. Tier 1 notes 257

9. Subordinated liabilities 258

10. Borrowings 258

11. Dividends 258

12. Share-based payments 258

13. Risk management 258

14. Employees, Directors and key management

remuneration

258

Strategic Report / Governance / Financial statements

Contents

Direct Line Group Annual Report and Accounts 2023 161

161Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Report on the audit of the financial statements

1. Opinion

In our opinion:

– the financial statements of Direct Line Insurance Group plc (the "Parent Company") and its subsidiaries (the "Group") give a true

and fair view of the state of the group’s and of the Parent Company’s affairs as at 31December 2023 and of the Group’s profit for

the year then ended;

– the Group financial statements have been properly prepared in accordance with United Kingdom adopted international

accounting standards and International Financial Reporting Standards ("IFRSs") as issued by the International Accounting

Standards Board ("IASB");

– the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted

Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and

– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements which comprise:

– the Consolidated Statement of Profit or Loss;

– the Consolidated and Parent Company Statement of Comprehensive Income;

– the Consolidated and Parent Company Statement of Financial Position;

– the Consolidated and Parent Company Statement of Changes in Equity;

– the Consolidated Cash Flow Statement; and

– the related notes 1 to 40 of the consolidated financial statements and related notes 1 to 14 on the Parent Company financial

statements excluding the capital adequacy disclosures in note 3.5 calculated in accordance with the Solvency II regime that are

marked as unaudited.

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law, and

United Kingdom adopted international accounting standards and IFRSs as issued by the IASB. The financial reporting framework

that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom

Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting

Practice).

2. Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our

responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements

section of our report.

We are independent of the group and the Parent Company in accordance with the ethical requirements that are relevant to our

audit of the financial statements in the UK, including the Financial Reporting Council’s (the "FRC’s") Ethical Standard as applied to

listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The fees

for the non-audit services provided to the Group and Parent Company for the year are disclosed in note 7 to the financial statements.

We confirm that we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the Group or the Parent

Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independent Auditor's Report to the shareholders of Direct Line

Insurance Group plc

162 Direct Line Group Annual Report and Accounts 2023

3. Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:

– Valuation of insurance contract liabilities:

1) The frequency, severity and inflationary assumptions for bodily injury claims;

2) Periodic payment orders ("PPOs") inflation and discount rates; and

3) Third party recoveries on accidental damage claims.

– Valuation of illiquid investments:

1) Commercial real estate loans, infrastructure debt and private placement bonds; and

2) Investment property.

– Transition to IFRS 17.

– Past business reviews provisions.

Within this report, key audit matters are identified as follows:

Newly identified;

Increased level of risk;

Similar level of risk; and

Decreased level of risk.

Materiality

The materiality that we used for the Group financial statements was £24 million, which approximates to 1.0%

of shareholders' equity.

Scoping

Our Group audit scoping included three entities being subject to a full scope audit and a further one entity

being subject to an audit of specified account balances. These four entities represent the principal business

units and account for 96% of the Group’s shareholders’ equity, 100% of the Group’s insurance revenue and

100% of the Group’s insurance contract liabilities.

Significant

changes in our

approach

During the year we have made the following changes to our audit approach:

a. We updated our key audit matters on the valuation of insurance contract liabilities to include third

party recoveries on accidental damage claims;

b. We identified a new key audit matter on the transition to IFRS 17. Our key audit matter last year

covered the disclosure of the impact of IFRS 17; and

c. We identified a new key audit matter on the past business reviews provisions.

4. Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the

preparation of the financial statements is appropriate.

Our evaluation of the directors’ assessment of the Group’s and Parent Company’s ability to continue to adopt the going concern

basis of accounting included:

– We obtained an understanding of the internal controls relating to management’s going concern assessment process;

– We assessed the impact of emerging issues and the current macroeconomic environment on the future capital position of the

Group;

– We assessed management’s strategic plan and challenged management’s underlying business plans and forecasts to support key

forward-looking assumptions such as the Group’s growth and discount rates given our understanding of the Group and its

industry. This included assessing the impact of the sale of the brokered commercial business, the liquidity forecast, the 3-year

structured 10% quota share arrangement and the partnership with Motability; and

– We evaluated management’s stress test, independently performing sensitivity analysis to assess the impact of various scenarios on

the Group’s solvency headroom.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,

individually or collectively, may cast significant doubt on the Group's and Parent Company’s ability to continue as a going concern for

a period of at least twelve months from when the financial statements are authorised for issue.

In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or

draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it

appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of

this report.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 163

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Strategic Report / Governance / Financial statements

5. Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial

statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to

fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of

resources in the audit and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,

and we do not provide a separate opinion on these matters.

5.1 Valuation of insurance contract liabilities

Refer to page 118 (Audit Committee report), pages 183 to 185 (Accounting policies - note 1.5), page 190 (Critical accounting

judgements and key sources of estimation uncertainty – note 2.1) and pages 225 to 234 (Notes to the consolidated financial

statements – note 20).

The Group’s gross insurance contract liabilities total £5.2 billion (2022 restated: £4.6 billion) and represent the single largest liability

on the balance sheet. Valuation of these liabilities requires management to select methods and assumptions that are subject to high

levels of estimation uncertainty. Consequently, small changes in these methods or assumptions can materially impact the valuation

of these liabilities. We have identified the following three key areas of focus for our audit given their significance to the Group’s result

and the high level of estimation uncertainty. We have also identified these as potential fraud risk areas.

5.1.1 The frequency, severity and inflationary assumptions for bodily injury claims

Key audit matter description

The frequency and severity of bodily injury claims have a significant impact on the valuation of the insurance contract liabilities and

the setting of these assumptions is driven by a variety of factors. These factors include the completeness and accuracy of source data,

the transparency of any changes in the reporting of bodily injury claims, actuarial assumptions being consistent with emerging data,

changing legislation, market factors and the Group’s reserving model and policy. As a result of these factors, there is a significant level

of judgement and estimation uncertainty in the valuation of these claims, which increases the susceptibility of the balance to

material misstatement due to error or fraud.

Furthermore, reduced traffic volumes throughout accident years 2020 and 2021 and a return to normality during 2022 and 2023

increases inherent uncertainty underlying the estimation of the ultimate number of non-large bodily injury claims in the most recent

cohorts of data. This uncertainty is amplified given the long-tailed nature of bodily injury claims. Additionally, the whiplash reform in

May 2021 has impacted the frequency and severity mix of bodily injury claims and there continues to be inherent uncertainty.

Moreover, we have identified that inflationary assumptions have a significant impact on the valuation of bodily injury insurance

contract liabilities and there is a significant level of estimation uncertainty inherent with these assumptions in light of the

macroeconomic environment.

How the scope of our audit responded to the key audit matter

We gained a detailed understanding of the end-to-end claims and reserving process and obtained an understanding of relevant

controls.

To gain assurance over the completeness and accuracy of source data used in the Group’s actuarial calculations and by our in-house

actuarial specialists in performing our work, we tested the data reconciliation controls and re-performed reconciliations on the

actuarial data back to the financial ledger and source systems.

Having done this, we worked with our actuarial specialists to:

– Inspect and challenge the reserving process for bodily injury claims by assessing relevant documentation and enquiring with the

Actuarial Director and his team;

– Inspect and challenge the Group’s documented methodology and key assumptions, with particular reference to inflationary

impacts. This included:

a. Using our in-house reserving software to help us challenge any emerging claims trends;

b. Conducting sensitivity testing on the methodology and assumptions used in the current year selections and challenging

changes from the prior year;

c. Comparing the Group’s cost per claim and frequency diagnostics to market benchmarks and independent reserve review

results;

– Enquire with the Actuarial Director and his team to inspect and challenge the Events Not in Data reserves ("ENIDs"), assessing

whether the approach in setting the ENIDs are reasonable given economic and non-economic events. This includes leveraging

third party economic studies to challenge the appropriateness of management’s adverse scenarios;

– Assess and challenge the reasonableness of the risk adjustment included in the calculation to account for non-financial risks

associated with claims by inspecting methodology and validation documentation; and

– Perform a ‘stand back’ test to challenge the reasonableness of the overall insurance contract liability estimate, in light of the level

of uncertainties that existed at the reporting date.

Key observations

We concluded that the frequency, severity and inflationary assumptions used in the calculation of the bodily injury claims reserves

are reasonable.

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Insurance Group plc continued

164 Direct Line Group Annual Report and Accounts 2023

5.1.2. Periodical payment orders, inflation and discount rates

Key audit matter description

The Group is required to settle a proportion of large bodily injury claims as PPOs rather than lump sum payments. The valuation of

PPOs has a material impact on the financial statements, with liabilities totalling £655.1 million (2022 restated: £643.2 million) on a

discounted gross basis as detailed in note 20.

Given the ongoing uncertainty in the UK’s inflation environment and investment markets, the selection of the inflation and discount

rate assumptions is highly judgemental. The PPOs are sensitive to the economic assumptions selected and, for 31 December 2023,

the Group valued PPOs using an inflation rate curve linked to the consumer price index (2022: inflation rate curve linked to the PRA

published risk free rate). Additionally, the Group include an illiquidity premium in the discount rate. These assumptions represent a

key source of estimation uncertainty for the Group, which increases the susceptibility of the balance to material misstatement due to

error or fraud.

How the scope of our audit responded to the key audit matter

We gained a detailed understanding of management’s process for setting these assumptions and obtained an understanding of the

relevant controls on the setting of the inflation and discount rates, specifically the challenge and approval of these assumptions by

the Reserving Committee.

We worked with our actuarial specialists to:

– Inspect and challenge management’s PPO inflation assumption by evaluating relevant documentation, enquiring with the

Actuarial Director and his team;

– Inspect and evaluate management’s sensitivity testing on the PPO inflation assumption, requesting additional sensitivity testing

from management where needed; and

– Inspect and challenge management’s methodology and rationale for deriving the discount rate by benchmarking against external

sources and comparing with market economic data.

In addition, we worked with our valuations specialist to inspect and challenge the methodology and reasonableness of the illiquidity

premium.

Key observations

We determined that the inflation and discount rate assumptions used in the calculation of the PPO claims reserve are reasonable.

5.1.3 Third party recoveries on accidental damage claims

Key audit matter description

In 2022, the number of accidental damage paid recoveries for accident years 2020 to 2022 were significantly lower than prior years.

This trend has continued in 2023 resulting in accidental damage recoveries not yet received from third parties by the end of

December 2023 increasing significantly. This results in the overall accidental damage reserves being highly sensitive to the recovery

rate assumptions used to estimate the reserves. These assumptions represent a key source of estimation uncertainty for the Group,

which increases the susceptibility of the balance to material misstatement due to error or fraud.

How the scope of our audit responded to the key audit matter

We gained an understanding of management’s process and relevant controls for setting these assumptions. We tested a sample of

the third-party recoveries on accidental damage claims reported but not yet paid at the end of 2022 and 2023 to identify whether

the amount recognised had been fully recovered by tracing the amount to the bank statement. If the amount had not been

recovered, or had been partially recovered, we evaluated the reason for partial or non-receipt.

We worked with our actuarial specialists to:

– Assess the findings from the sample testing performed to consider the impact on the liability for incurred claims, including

whether the findings are an indication of management bias, and challenge management where applicable.

– Inspect and challenge the reserving process undertaken for accidental damage recoveries claims by reviewing relevant

documentation, benchmarking, and enquiring with the Actuarial Director and his team; and

– Inspect and challenge management’s methodology, key assumptions, and their underlying rationale adopted.

Key observations

We concluded that the assumptions applied to estimate the third party recoveries on accidental damage claims are reasonable.

5.2 Valuation of illiquid investments

Refer to page 118 (Audit Committee report), page 187 (Accounting policies - notes 1.12 and 1.13), page 193 (Critical accounting

judgements and key sources of estimation uncertainty – notes 2.3 and 2.4) and pages 224 and 238 (Notes to the consolidated

financial statements – notes 18 and 24).

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5. Key audit matters continued

5.2.1 Commercial real estate loans, infrastructure debt and private placement bonds

Key audit matter description

Commercial real estate loans, infrastructure debt and private placement bonds are held at amortised cost on the balance sheet and

represent a higher credit risk relative to the majority of the Group’s investment portfolio. As detailed in disclosure note 24, the total

value at 31 December 2023 is £430.7 million (2022 restated: £532.9 million).

In 2023, the Group transitioned to IFRS 9 Financial Instruments, which replaced the existing standard for financial instruments, IAS

39 Financial Instruments: Recognition and Measurement. The Group continues to recognise and measure these instruments at

amortised cost, and these instruments continue to require the recognition of an impairment when an incurred loss event arises.

Significant management judgement is required in determining if an incurred loss event has occurred and, in the instance an event

has occurred, there is significant estimation uncertainty in determining the impairment charge.

There is a continuing risk of default or delinquency on these less liquid assets owing to high and sustained levels of uncertainty in the

UK economy from increasing inflation rates and the cost-of-living crisis.

How the scope of our audit responded to the key audit matter

We obtained an understanding of the valuation and impairment processes of illiquid investments and tested the relevant controls.

We attended the year end impairment review meeting to observe the operation of this key management review control.

In addition, we performed the following procedures:

– Tested a sample of interest payments to bank during and after the year to test for default or delinquency in interest payments;

– Used market indices to identify commercial real estate loans at risk and inspected the tenancy breakdowns for potential risks of

unit closure given the current economic issues facing the UK;

– Challenged management on loans of interest where indicators could point to issuer financial difficulty and obtained evidence to

assess whether management’s conclusion was reasonable; and

– Engaged our complex pricing specialists to determine an independent fair value of these assets to identify any significant

decreases in value below amortised cost.

Key observations

We considered the valuation of commercial real estate loans, infrastructure debt and private placement bonds to be reasonable.

5.2.2 Investment property

Key audit matter description

The investment properties held by the Group comprise of retail, retail warehouse, supermarkets, industrials, hotels and alternative

properties. As noted in disclosure note 18, the total value at 31 December 2023 is £277.1 million (2022: £278.5 million).

Given the continued UK macroeconomic environment uncertainty from inflationary pressures and increased interest rates affecting

the cost of debt, the methodology and assumptions used for valuing the investment property portfolio involves significant

judgement, including the use of external valuation experts.

Valuation methodology for investment properties is subjective in nature and involves various key assumptions. The use of different

valuation methodology and assumptions could produce significantly different estimates of fair value. With the volatility in the UK

financial market, the property valuers can attach less weight to previous market evidence in determining a fair value. This leads to

greater levels of estimation uncertainty in determining the valuation.

How the scope of our audit responded to the key audit matter

We obtained an understanding of, and tested, the relevant control related to the annual meeting with management’s external

valuation expert when management review and challenge the assumptions and methodologies used in determining the fair value.

– Worked with our real estate specialists to challenge the estimated rental value, yield and capitalisation rate assumptions and

methodologies;

– Assessed the competence, capability and objectivity of management’s expert;

– Tested the completeness and accuracy of the data inputs used in the valuation process performed by management and their

external valuer; and

– Tested the data inputs used in the valuation model for investment properties, by agreeing occupation rates, unit sizes and

contracted rent to the underlying signed agreements and property reports. We then re-performed the calculation of the yields

applied using this data.

Key observations

We considered the methodology and assumptions used for valuing the investment property portfolio to be reasonable.

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Insurance Group plc continued

166 Direct Line Group Annual Report and Accounts 2023

5.3 Transition to IFRS 17

Refer to page 117 (Audit Committee report), pages 180 to 182 (Accounting policies – note 1.1), pages 190 to 193 (Critical accounting

judgements and key sources of estimation uncertainty – note 2.1) and pages 225 to 234 and 250 to 252 (Notes to the consolidated

financial statements – notes 20 and 40).

Key audit matter description

On 1 January 2023, the Group has adopted IFRS 17 Insurance Contracts, which replaced the existing standard, IFRS 4 Insurance

Contracts.

IFRS 17 introduces pervasive changes to the measurement, presentation and disclosure of insurance contracts and related account

balances. The standard is complex and has required significant judgement and interpretation in its application. To meet the

requirements of the new standard, the Group has made significant changes to systems, processes and controls.

IFRS 17 has been applied fully retrospectively as at 1 January 2022 to each group of insurance contracts. As a result, comparative

information has been restated within the financial statements. The net impact on the opening balance sheet equity at 1 January

2022 was a reduction of £96.1 million.

The transition to IFRS 17 is considered a key audit matter due to the pervasive accounting impact and the significant judgements

made by management in its application. This has had a corresponding impact on audit effort. Key sources of estimation uncertainty

and accounting judgements, as identified in note 2, include:

– Level of aggregation;

– Premium Allocation Approach ("PAA") eligibility;

– Estimates of future cash flows;

– Risk adjustment;

– Discount rates;

– Onerous contracts; and

– General insurance: Liability for incurred claims and amounts recoverable from reinsurance contracts held.

How the scope of our audit responded to the key audit matter

We performed the following audit procedures for the purposes of understanding and challenging key judgements and assumptions:

– Assessed management's accounting policy and methodology papers for compliance with the standard, involving relevant IFRS 17

specialists where required;

– Gained a detailed understanding of the relevant controls implemented for both the restated balances and business processes

impacted by the transition to IFRS 17 in 2023;

– Substantively tested through a combination of test of details and/or substantive analytical procedures, the restated comparative

figures under IFRS 17;

– Inspected contract terms and management information to assess the application of level of aggregation requirements to the

insurance contracts issued and reinsurance contracts held by the Group;

– For those contracts not automatically eligible for PAA, including the Motability insurance contract, we worked with our actuarial

specialists to challenge management’s PAA eligibility testing and conclusions;

– Involved our actuarial specialists in performing procedures to challenge the Group’s IFRS 17 calculation models, including those

related to the estimate of the fulfilment cashflows, the risk adjustment and discounting;

– Engaged financial instrument specialists to challenge the determination of the illiquidity premia applied to short and long tail

insurance liabilities;

– Gained an understanding of management’s onerous contracts facts and circumstances assessment and performed procedures to

test the input data used and the mathematical accuracy of the results reached; and

– Challenged the disclosures and presentation within the financial statement against the requirements of IFRS 17.

Key observations

We considered the IFRS 17 accounting policies and methodologies adopted to be reasonable and in compliance with the standard.

5.4 Past business reviews provisions

Refer to page 16 (Outgoing acting CEO review), page 29 (CFO review), page 118 (Audit Committee report) and pages 190 to 193

(Critical accounting judgements and key sources of estimation uncertainty – note 2.1).

Key audit matter description

Provisions for the Group’s best estimate of anticipated customer redress payments and operational costs from past business reviews

are material and have been the subject of significant audit effort, including the involvement of a regulatory specialist partner, and are

therefore considered a key audit matter.

The past business review provisions at 31 December 2023 total £130.2 million (2022: £45.9 million).

The past business reviews cover motor total loss claims, which covers claims settled between 1 September 2017 and 17 August

2022, and the pricing of motor and home policies following the implementation of the FCA’s Pricing Practices Review ("PPR") reform

from 1 January 2022 and have been subject to third party investigations.

The measurement of these provisions requires several assumptions with a significant degree of management judgement. Key

assumptions include the expected volume of impacted customers and related redress costs. As a result, the estimates and

judgements applied in setting these provisions are a source of key estimation uncertainty.

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5. Key audit matters continued

How the scope of our audit responded to the key audit matter

We performed the following procedures:

– Gained an understanding of management's process for setting these provisions;

– Performed a sample test on the redress amounts by tracing to underlying case files, customer communications and bank

statements where an amount had been paid;

– Performed an assessment of whether the methodology and approach to redress was consistent with third party investigation

reports;

– Assessed the competence, capability and objectivity of the third party experts;

– Met with the FCA to understand the regulatory context of the investigations;

– Involved a regulatory specialist partner, who supported the audit team in providing challenge on assumptions and judgements in

inspecting the third party investigation reports;

– Assessed each provision for contradictory evidence and management bias; and

– Challenged the disclosures and presentation of the provisions within the financial statement using relevant disclosure checklist

tools.

Key observations

We concluded that the provisions are reasonable.

6. Our application of materiality

6.1 Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic

decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of

our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements Parent Company financial statements

Materiality

£24.0 million (2022: £24.0 million) £21.6 million (2022: £21.6 million)

Basis for

determining

materiality

The materiality approximates 1.0% (2022: 1.0%) of

shareholders’ equity.

The materiality approximates 0.7% (2022: 1.0%)

of shareholders’ equity and is capped at 90%

(2022: 90%) of Group materiality.

Rationale

for the

benchmark

applied

We determined that the critical benchmark for the Group

was shareholders’ equity given the focus on distributable

reserves and future dividend payment capacity.

We also considered this measure alongside insurance

revenue, with our materiality equating to 0.7% (2022: 0.7%)

of insurance revenue.

We determined that the critical benchmark for

the Parent Company was shareholders’ equity.

This is because the Parent Company is not a

trading entity but rather received dividend

income from its subsidiaries.

When determining materiality for the Parent

Company, we also considered the

appropriateness of this materiality for the

consolidation of this set of financial statements

to the Group’s results.

Group materiality is used for setting audit scope and the assessment of uncorrected misstatements. Materiality is set for each

significant component in line with the component’s proportion of the chosen benchmark. This is capped at the lower of 90% of

Group materiality and the component materiality determined for a standalone audit. The main UK insurance trading entity, U K

Insurance Limited, which makes up 100% of Group insurance revenue and 100% of Group insurance contract liabilities, is scoped to

a component materiality of £21.6 million (2022: £21.6 million). Component materiality for other entities within the scope of our

Group audit ranged from £0.8 million to £21.6 million (2022: £0.7 million to £21.6 million).

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168 Direct Line Group Annual Report and Accounts 2023

Group materiality £24m

Component materiality range

£0.8m to £21.6m

Audit Committee reporting

threshold £1.2m

Shareholders’ equity

Group materiality

£2,442m

£24m

168 Direct Line Group Annual Report and Accounts 2023

6.2 Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and

undetected misstatements exceed the materiality for the financial statements as a whole.

Group financial statements Parent Company financial statements

Performance

materiality

65% (2022: 67.5%) of Group materiality 65% (2022: 67.5%) of Parent Company materiality

Basis and

rationale for

determining

performance

materiality

In determining performance materiality, we considered the following factors:

– The impact of the economic and past business reviews on the Group; and

– Our risk assessment, including our assessment of the Group’s overall control environment.

6.3 Error reporting threshold

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.2 million (2022:

£1.2 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report

to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

7. An overview of the scope of our audit

7.1 Identification and scoping of components

The scope of our Group audit was determined by obtaining an understanding of the Group and its environment, including Group

wide controls and assessing the risks of material misstatement at Group level.

This resulted in three entities (Direct Line Insurance Group plc, U K Insurance Limited and DL Insurance Services Limited) being

subject to a full scope audit and a further one (Churchill Insurance Company Limited) was subject to an audit of specified account

balances where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of

the Group’s operations. All entities within scope of the Group audit are based in the UK.

These four entities represent the principal trading and service operations of the Group and account for 96% (2022: 97%) of the

Group’s shareholders’ equity and 100% (2022: 100%) of the Group’s insurance revenue and 100% of insurance contract liabilities

(2022: 100%). They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material

misstatement identified above.

Insurance Revenue

100%

Full audit scope

Insurance Contract Liabilities

100%

Full audit scope

Shareholders' equity

96%

Full audit scope

Review at Group level

At the Group level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that

there were no significant risks of material misstatement of the aggregated financial information of the remaining components not

subject to audit or audit of specified account balances.

The Group audit team directly performed the audit work for all of the entities identified above, including the Parent Company.

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7. An overview of the scope of our audit continued

7.1 Identification and scoping of components continued

7.2 Our consideration of the control environment

IT Controls

In planning our 2023 audit, we identified 19 (2022: 19) systems that were material to the Group’s financial reporting processes. These

systems handled data relating to premiums, claims, expenses and payroll and we intended to rely on the IT and business controls

associated with these systems. Our IT specialists tested the IT controls associated with these systems, and the supporting

infrastructures and wider general IT control environment. We were able to rely on the IT controls associated with 17 (2022: 17)

systems, with one (2022: one) system in the process of establishing controls and one (2022: one) system having controls that did not

operate for the whole period.

Business Process and Financial Reporting controls

In planning our 2023 audit, we identified 21 business processes (2022: 21) that were material to the Group’s financial reporting

process. These processes covered the Group’s material transactions and account balances including the premiums, claims,

reinsurance, expenses, payroll, investments and intangibles processes and part of the reserving process relating to reconciliation of

data. Of these, we intended to rely on the business controls associated with 19 (2022: 19) of these processes. Further, we changed our

control rotation strategy, and tested all relevant controls in significant business processes, except payroll, for operating effectiveness.

Having completed our testing of the relevant controls of business controls associated with these processes, we concluded that we

were able to rely on the business controls associated with 19 (2022: 12) processes as planned.

In response to deficiencies identified as part of the 2022 audit, we performed enhanced procedures in the current period on the

business processes impacted. We tested the design, implementation and operating effectiveness over the remediated controls on

which we planned to rely and which management implemented in response to the deficiencies raised.

7.3 Our consideration of climate-related risks

We have gained an understanding of management’s processes to address climate-related risks, including the Climate Executive

Steering Group and Group sustainability framework. Management has performed a risk assessment for climate-related risks, further

details are disclosed in the strategic report on pages 70 to 85. Based on the risk assessment, management has concluded that the

impact of climate-related risks is not material to the financial statements in the short term, as disclosed in note 3 to the financial

statements. We have performed a risk assessment of the financial impact of climate risks, with support from a climate change risk

disclosure specialist, on the financial statements and concluded the risks of material misstatement due to climate risk factors are

remote. In doing so we considered the estimates and judgements applied to the financial statements and how climate risks impact

their valuation.

We have read the climate-related financial disclosures (including climate risks) within the Planet section of the Annual Report, taking

into consideration the TCFD recommended disclosures and UK Companies (Strategic Report) (Climate-related Financial Disclosure)

Regulations 2022, and consider the disclosures to be consistent with our understanding of the business and the financial

statements.

8. Other information

The other information comprises the information included in the annual report, other than the financial statements and our

auditor’s report thereon. The directors are responsible for the other information contained within the annual report.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in

our report, we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent

with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise

to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there

is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

9. Responsibilities of Directors

As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial

statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is

necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent Company’s ability to

continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of

accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no

realistic alternative but to do so.

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170 Direct Line Group Annual Report and Accounts 2023

10. Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a

high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material

misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial

statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:

www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

11. Extent to which the audit was considered capable of detecting irregularities, including fraud

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our

responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our

procedures are capable of detecting irregularities, including fraud is detailed below.

11.1 Identifying and assessing potential risks related to irregularities

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws

and regulations, we considered the following:

– the nature of the industry and sector, control environment and business performance including the design of the Group’s

remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;

– the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was tabled at the audit

committee on 1 November 2023;

– results of our enquiries of management, internal audit, the directors and the audit committee about their own identification and

assessment of the risks of irregularities, including those that are specific to the Group’s sector;

– any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to:

– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-

compliance;

– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;

– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;

– the matters discussed among the audit engagement team and relevant internal specialists, including actuarial, tax, real estate,

valuations, pensions, IT, fraud, regulatory and industry specialists regarding how and where fraud might occur in the financial

statements and any potential indicators of fraud.

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and

identified the greatest potential for fraud in the following area: valuation of insurance contract liabilities. In common with all audits

under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on provisions of

those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial

statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax

legislation.

11.1 Identifying and assessing potential risks related to irregularities continued

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but

compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty. These included the

Group’s operating licence, regulatory solvency requirements such as those under the relevant Solvency II requirements and those

required by the PRA, FCA and environmental regulations.

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11. Extent to which the audit was considered capable of detecting irregularities, including fraud

continued

11.2 Audit response to risks identified

As a result of performing the above, we identified the valuation of insurance contract liabilities as a key audit matter related to the

potential risk of fraud and the past business reviews provisions as a key audit matter related to the potential risk of non-compliance

with laws and regulations. The key audit matters section of our report explains the matter in more detail and also describes the

specific procedures we performed in response to that key audit matter.

In addition, our procedures to respond to risks identified included the following:

– reviewing the financial statement disclosures and testing supporting documentation to assess compliance with provisions of

relevant laws and regulations described as having a direct effect on the financial statements;

– enquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims;

– performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material

misstatement due to fraud;

– enhancing our stand-back assessments for accounting judgements, increasing and broadening the scope of our fraud inquiries;

– reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence

with the PRA and FCA;

– meeting directly with the PRA and FCA and engaging a regulatory specialist to support our performance of audit procedures

around regulatory compliance; and

– in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other

adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and

evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members

including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations

throughout the audit.

Report on other legal and regulatory requirements

12. Opinions on other matters prescribed by the Companies Act 2006

In our opinion, the part of the directors' remuneration report to be audited has been properly prepared in accordance with the

Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

– the information given in the strategic report and the directors' report for the financial year for which the financial statements are

prepared is consistent with the financial statements; and

– the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the

course of the audit, we have not identified any material misstatements in the strategic report or the directors' report.

13. Corporate governance statement

The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the

Corporate Governance Statement relating to the Group's compliance with the provisions of the UK Corporate Governance Code

specified for our review.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate

Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

– the directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material

uncertainties identified set out on pages 159 and 160;

– the directors' explanation as to its assessment of the Group's prospects, the period this assessment covers and why the period is

appropriate set out on pages 93 and 94;

– the directors' statement on fair, balanced and understandable set out on page 115;

– the board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 115;

– the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out

on page 194; and

– the section describing the work of the Audit Committee set out on page 117.

Independent Auditor's Report to the shareholders of Direct Line

Insurance Group plc continued

172 Direct Line Group Annual Report and Accounts 2023

14. Matters on which we are required to report by exception

14.1 Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

– we have not received all the information and explanations we require for our audit; or

– adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been

received from branches not visited by us; or

– the Parent Company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

14.2 Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have

not been made or the part of the Directors' remuneration report to be audited is not in agreement with the accounting records and

returns.

We have nothing to report in respect of these matters.

15. Other matters which we are required to address

15.1 Auditor tenure

Following the recommendation of the audit committee of Royal Bank of Scotland Group Plc ("RBSG"), which at the time owned

Direct Line Insurance Group plc, we were appointed by the Board of Directors of RBSG on 21 March 2000 to audit the financial

statements for the year ending 31 December 2000 and subsequent financial periods. The period of total uninterrupted engagement

including previous renewals and reappointments of the firm is 24 years, covering the years ending 31 December 2000 to 31

December 2023. There is mandatory rotation of the audit of the financial statements for the year ending 31 December 2024, and

therefore we will cease to be auditor of the Group.

15.2 Consistency of the audit report with the additional reports to the Audit Committee

Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with

ISAs (UK).

16. Use of our report

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act

2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to

state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume

responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the

opinions we have formed.

As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.15R – DTR 4.1.18R, these

financial statements form part of the Electronic Format Annual Financial Report filed on the National Storage Mechanism of the FCA

in accordance with DTR 4.1.15R – DTR 4.1.18R. This auditor’s report provides no assurance over whether the Electronic Format

Annual Financial Report has been prepared in compliance with DTR 4.1.15R – DTR 4.1.18R.

Andrew Holland, FCA

Senior statutory auditor

For and on behalf of Deloitte LLP

Statutory auditor

London, United Kingdom

21 March 2024

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 173

173Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

		2023	2022
		£m	£m
	Notes		restated
Insurance revenue	5	3,601.7	3,229.1
Insurance service expenses	5	(3,806.3)	(3,145.5)
Allocation of reinsurance premiums paid	5	(470.2)	(165.7)
Amounts recoverable from reinsurance contracts held	5	423.4	96.4
Insurance service result	5	(251.4)	14.3
Total interest income calculated using effective interest rate method	6	171.8	109.3
Other interest and similar income	6	16.1	15.6
Investment fees	6	(9.3)	(9.5)
Investment income	6	178.6	115.4
Total net fair value gains/(losses) on financial assets held at fair value through profit or loss:	6	127.0	(302.8)
Net fair value losses on investment property	6	(1.9)	(39.1)
Net credit impairment losses on financial investments	6	(0.7)	(0.6)
Investment return	6	303.0	(227.1)
Net finance (expenses)/income from insurance contracts issued	6	(193.8)	102.4
Net finance income/(expenses) from reinsurance contracts held	6	28.0	(101.5)
Investment return and net insurance finance result	6	137.2	(226.2)
Other operating income		21.8	8.3
Other operating expenses	7	(59.6)	(77.8)
Other finance costs	8	(14.5)	(20.4)
Gain on disposal of business	9	443.9	—
Profit/(loss) before tax		277.4	(301.8)
Tax (charge)/credit²	10	(54.5)	69.9
Profit/(loss) for the year attributable to the owners of the Company		222.9	(231.9)
Earnings/(loss) per share:
Basic (pence)	13	15.9	(19.1)
Diluted (pence)	13	15.7	(19.1)

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. Tax on gain on disposal of business is included in this figure.

The attached notes on pages 179 to 252 form an integral part of these consolidated financial statements.

Consolidated Statement of Profit or Loss

For the year ended 31December 2023

174 Direct Line Group Annual Report and Accounts 2023

		2023	2022
		£m	£m
	Notes		restated
Profit/(loss) for the year attributable to the owners of the Company		222.9	(231.9)
Other comprehensive income/(loss)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gain/(loss) on defined benefit pension scheme	23	0.1	(9.8)
Fair value gain/(loss) on equity investments measured at FVOCI	6	3.3	(0.6)
Realised loss on equity investments measured at FVOCI	6	(0.6)	—
Tax relating to items that will not be reclassified	11	—	2.5
		2.8	(7.9)
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges		(0.2)	0.3
		(0.2)	0.3
Other comprehensive income/(loss) for the year net of tax		2.6	(7.6)
Total comprehensive income/(loss) for the year attributable to the owners of the Company		225.5	(239.5)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

The attached notes on pages 179 to 252 form an integral part of these consolidated financial statements.

Strategic Report / Governance / Financial statements

Consolidated Statement of Comprehensive Income

For the year ended 31December 2023

Direct Line Group Annual Report and Accounts 2023 175

175Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

		As at 31 December		As at 1 January
		2023	2022	2022
		£m	£m	£m
	Notes		restated	restated
Assets
Goodwill and other intangible assets	15	818.6	822.2	822.5
Property, plant and equipment	16	91.6	83.7	113.8
Right-of-use assets	17	96.1	73.0	76.1
Investment property	18	277.1	278.5	317.0
Insurance contract assets	20	5.4	17.3	—
Reinsurance contract assets	20	1,346.0	1,074.9	1,181.7
Deferred tax assets	11	56.5	89.0	29.4
Current tax assets		82.8	71.9	14.4
Other receivables		35.2	34.5	28.4
Prepayments, accrued income and other assets	21	101.5	104.9	124.2
Derivative financial instruments	22	27.4	31.3	35.9
Retirement benefit asset	23	1.3	1.6	12.1
Financial investments	24	3,691.6	3,696.4	4,630.3
Cash and cash equivalents	25	1,772.2	1,003.6	955.7
Assets held for sale	26	13.9	40.9	41.2
Total assets		8,417.2	7,423.7	8,382.7
Equity
Shareholders' equity		2,058.2	1,845.3	2,450.6
Tier 1 notes	29	346.5	346.5	346.5
Total equity		2,404.7	2,191.8	2,797.1
Liabilities
Subordinated liabilities	30	258.8	258.6	513.6
Insurance contract liabilities	20	5,238.8	4,625.8	4,725.6
Reinsurance contract liabilities	20	116.6	13.9	3.6
Borrowings	25	82.4	65.2	59.2
Derivative financial instruments	22	15.4	29.6	19.5
Provisions	32	30.8	10.2	48.1
Trade and other payables	33	163.6	147.0	131.8
Lease liabilities	36	106.1	81.6	84.2
Total liabilities		6,012.5	5,231.9	5,585.6
Total equity and liabilities		8,417.2	7,423.7	8,382.7

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

The attached notes on pages 179 to 252 form an integral part of these consolidated financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2024.

They were signed on its behalf by:

NEIL MANSER

CHIEF FINANCIAL OFFICER

Registration No. 02280426

Consolidated Statement of Financial Position

As at 31December 2023

176 Direct Line Group Annual Report and Accounts 2023

					Equity	Foreign
	Share		Capital	AFS	investments	exchange			Tier 1
	capital	Employee	reserves	revaluation	revaluation	translation	Retained	Shareholders'	notes	Total
	(note 27)	trust shares	(note 28)	reserve 2	reserve	reserve	earnings	equity	(note 29)	equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2022	145.2	(41.4)	1,454.8	7.5	1.5	(0.3)	982.9	2,550.2	346.5	2,896.7
First application of IFRS 17	—	—	—	—	—	—	(96.1)	(96.1)	—	(96.1)
First application of IFRS 9	—	—	—	(7.5)	—	—	4.0	(3.5)	—	(3.5)
Balance at 1 January 2022 (restated¹)	145.2	(41.4)	1,454.8	—	1.5	(0.3)	890.8	2,450.6	346.5	2,797.1
Loss for the year	—	—	—	—	—	—	(231.9)	(231.9)	—	(231.9)
Other comprehensive (loss)/income	—	—	—	—	(0.6)	0.3	(7.3)	(7.6)	—	(7.6)
Total comprehensive (loss)/income
for the year (restated¹)	—	—	—	—	(0.6)	0.3	(239.2)	(239.5)	—	(239.5)
Dividends and appropriations paid
(note 12)	—	—	—	—	—	—	(314.5)	(314.5)	—	(314.5)
Shares acquired by employee trusts	—	(11.0)	—	—	—	—	—	(11.0)	—	(11.0)
Shares cancelled following buyback
(note 27)	(2.1)	—	2.1	—	—	—	(50.1)	(50.1)	—	(50.1)
Credit to equity for equity-settled
share-based payments	—	—	—	—	—	—	9.6	9.6	—	9.6
Shares distributed by employee
trusts	—	13.4	—	—	—	—	(13.4)	—	—	—
Tax on share-based payments	—	—	—	—	—	—	0.2	0.2	—	0.2
Total transactions with equity holders	(2.1)	2.4	2.1	—	—	—	(368.2)	(365.8)	—	(365.8)
Balance at 31 December 2022
(restated¹)	143.1	(39.0)	1,456.9	—	0.9	—	283.4	1,845.3	346.5	2,191.8
Profit for the year	—	—	—	—	—	—	222.9	222.9	—	222.9
Other comprehensive income/(loss)	—	—	—	—	2.7	(0.2)	0.1	2.6	—	2.6
Total comprehensive income/(loss)
for the year	—	—	—	—	2.7	(0.2)	223.0	225.5	—	225.5
Dividends and appropriations paid
(note 12)	—	—	—	—	—	—	(16.6)	(16.6)	—	(16.6)
Shares acquired by employee trusts	—	(10.2)	—	—	—	—	—	(10.2)	—	(10.2)
Credit to equity for equity-settled
share-based payments	—	—	—	—	—	—	13.9	13.9	—	13.9
Shares distributed by employee
trusts	—	19.3	—	—	—	—	(19.3)	—	—	—
Tax on share-based payments	—	—	—	—	—	—	0.3	0.3	—	0.3
Total transactions with equity holders	—	9.1	—	—	—	—	(21.7)	(12.6)	—	(12.6)
Balance at 31 December 2023	143.1	(29.9)	1,456.9	—	3.6	(0.2)	484.7	2,058.2	346.5	2,404.7

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. The available-for-sale ("AFS") revaluation reserve recorded fair value movements on financial assets categorised as AFS under IAS 39 'Financial

Instruments: Recognition and Measurement' which has since been superseded by IFRS 9 (see notes 1.1b and 40).

The attached notes on pages 179 to 252 form an integral part of these consolidated financial statements.

Strategic Report / Governance / Financial statements

Consolidated Statement of Changes in Equity

For the year ended 31December 2023

Direct Line Group Annual Report and Accounts 2023 177

177Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

		2023	2022
		£m	£m
	Notes		restated
Net cash generated from operating activities before investment of insurance assets	34	100.5	32.1
Cash generated from investment of insurance assets	34	304.4	768.1
Net cash generated from operating activities		404.9	800.2
Cash flows from/(used) in investing activities
Investment in other intangible assets	15	(124.1)	(108.4)
Purchases of property, plant and equipment	16	(18.9)	(11.7)
Proceeds on disposals of assets held for sale		21.9	19.3
Proceeds from disposal of business	9	520.0	—
Net cash outflow from acquisition of businesses	38	(0.6)	—
Net cash generated from/(used in) investing activities		398.3	(100.8)
Cash flows used in financing activities
Dividends and appropriations paid	12	(16.6)	(314.5)
Repayment of subordinated liabilities	34	—	(250.0)
Other finance costs (including lease interest)		(14.2)	(23.0)
Principal element of lease payments		(10.8)	(8.9)
Purchase of employee trust shares		(10.2)	(11.0)
Share buyback	27	—	(50.1)
Net cash used in financing activities		(51.8)	(657.5)
Net increase in cash and cash equivalents		751.4	41.9
Cash and cash equivalents at the beginning of the year	25	938.4	896.5
Cash and cash equivalents at the end of the period	25	1,689.8	938.4

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

The attached notes on pages 179 to 252 form an integral part of these consolidated financial statements.

Consolidated Cash Flow Statement

For the year ended 31December 2023

178 Direct Line Group Annual Report and Accounts 2023

Corporate information

Direct Line Insurance Group plc (the "Group") 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.

The principal activity of the Group is the provision of general

insurance.

1. Accounting policies

Basis of preparation

As required by the Companies Act 2006, the Group's

consolidated financial statements are prepared in accordance

with United Kingdom adopted international accounting

standards and International Financial Reporting Standards

("IFRSs") as issued by the International Accounting Standards

Board ("IASB"). The Group has elected to prepare its parent

company financial statements in accordance with FRS 101

'Reduced Disclosure Framework'.

The consolidated financial statements are prepared on the

historical cost basis except for (i) insurance and reinsurance

contract assets and liabilities which are measured at their

fulfilment value in accordance with IFRS 17; (ii) debt and equity

investments held at either fair value through profit or loss

("FVTPL") or fair value through other comprehensive income

("FVOCI"); and (iii) financial assets; investment property and

derivative financial instruments, which are measured at fair

value (fair value is defined in note 37).

Where necessary, adjustments have been made to the financial

statements of subsidiaries to bring the accounting policies used

into line with those used by the Group. The policies set out

below have been applied consistently throughout the years

ended 31 December 2023 and 31 December 2022 to items

considered material to the consolidated financial statements.

The accounting policies are consistent with those set out in the

Group's 2022 annual financial statements, with the exception of

new accounting standards which were effective for periods

beginning on or after 1 January 2023. The nature and effect of

these changes are disclosed in note 2 and 40.

The Company's financial statements and the Group's

consolidated financial statements are presented in sterling,

which is the functional currency of the Company and the Group .

Going concern

The Directors believe that the Group has sufficient financial

resources to meet its financial needs, including managing a

mature portfolio of insurance risk. The Directors believe the

Group is well positioned to manage its business risks

successfully in the current economic climate. The Chief Financial

Officer Review describes the Group's capital management

strategy, including the capital actions taken in the last 12

months to ensure the continued strength of the balance sheet

and sets out management actions that the Group continues to

pursue to rebuild balance sheet resilience. The Group's financial

position is also covered in that section, including a commentary

on cash and investment levels, reserves, currency management,

insurance liability management, liquidity and borrowings. The

financial disclosures relating to the Group's principal risks are set

out in note 3. This covers insurance, market, credit, liquidity and

operational risk; and the Group's approach to monitoring,

managing and mitigating exposures to these risks.

The Directors have assessed the principal risks of the Group over

the duration of the planning cycle, which runs until 2027, with

the first year following approval of the Strategic Plan ("the Plan"),

being 2024, having greater certainty and hence used to set

detailed budgets. The Group's Risk Function has carried out an

assessment of the risks to the Plan and the dependencies for

the success of the Plan. This included running adverse scenarios

on the Plan to consider the downside risks to the Plan and

subsequent impact on forecast profit. The key scenarios applied

to the Plan were in relation to the impact of adverse claims

inflation, failure to achieve motor pricing initiative benefits, delay

to delivery of expense reductions and a fall in asset values. The

key judgements and assumptions applied in these scenarios

were as follows:

– Adverse claims inflation: the Plan includes a scenario for

inflation being higher than expected, leading to claims costs

increasing by 3-6% with the Group and market response

delayed by six months.

– Failure to achieve motor pricing initiative benefits: planned

benefits from future motor pricing initiatives are not achieved.

– Delay to delivering expense reductions: there is a delay of 12

months in delivering planned expense reductions.

– Fall in asset values: an increase in credit spreads of 75 basis

points, with a partial recovery of 25 basis points over 2025.

It is unlikely that all risks would materialise at the same time.

None of the scenarios individually were concluded to present a

threat to the Group’s expected viability across the duration of

the Plan.

The Risk Function has also carried out an assessment of the risks

to the Group's and Company's capital position over 2024 and

2025. Two specific macroeconomic combination stresses, a

moderate and a severe, have been updated to include not only

a review of Group financials but also a review of assumptions to

reflect the latest internal and external environment and trends.

The stresses have been run to assess the possible impact on own

funds in the period to 31 December 2024 and 31 December

2025. The stresses are updated and repeated regularly. The

macroeconomic assumptions for key parameters such as

Consumer Price Index, GDP and Bank base rate for the

moderate scenario reflect the adverse end of the Bank of

England November Monetary Policy Committee forecast range.

The severe scenario adopts the key parameters from the 2022

Bank of England Banking Stress Test, which is described as

“severe but plausible”, updated for changes in the

macroeconomic environment, including the recession in the

United Kingdom.

In the moderate and severe scenarios, it was concluded that the

Company's solvency capital requirement would not be

breached.

Additionally, the Risk Function conducted a reverse stress test to

establish whether the long-term future for motor insurance,

specifically, the adoption of electric vehicles, poses a threat to

the viability of the Company’s current business model. The

findings showed that over the duration of the planning cycle the

scenarios considered did not present a risk to the viability of the

business model.

Further information in relation to the sensitivity of key factors on

the Group’s financial position are included in the financial

statements. The insurance risk note (note 3.3.1) sets out the

impact on profit before tax of an increase and a decrease in

claims inflation of 200 basis points for two consecutive years.

The market risk note (note 3.3.2) sets out the impact on profit

before tax and equity of a 100 basis points increase in spreads

on financial investments and the impact of a 100 basis points

increase in interest rates on financial investments and

derivatives.

Strategic Report / Governance / Financial statements

Notes to the Consolidated Financial Statements

Direct Line Group Annual Report and Accounts 2023 179

179Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

1. Accounting policies continued

Going concern continued

Therefore, having made due enquiries, the Directors believe they

can reasonably expect that the Group has adequate resources

to continue in operational existence for at least 12 months from

21 March 2024 (the date of approval of the consolidated

financial statements). Accordingly, the Directors have adopted

the going concern basis in preparing the consolidated financial

statements.

1.1 Adoption of new and revised standards

The Group has adopted the following new amendments to

IFRSs and International Accounting Standards ("IASs") that

became mandatorily effective for the Group for the first time

during 2023 which are material to the Group.

The Group has adopted the requirements of IFRS 17 'Insurance

Contracts' and IFRS 9 'Financial Instruments' from 1 January

2023 on a fully retrospective basis in these financial statements

for the first time. The impact of adoption of the standards and

key changes are discussed below:

– transition approaches used and their impact;

– new accounting policies related to IFRS 17 and IFRS 9; and

– significant accounting judgements and sources of estimation

uncertainty.

1.1 (a) Adoption of IFRS 17: transition approach and

impact

The Group has adopted IFRS 17 from 1 January 2023, and chose

to restate 2022 comparatives. IFRS 17 does not impact the

fundamental economics of the Group's business, financial

strength, claims paying ability, or dividend capacity. Thus, there

is no change to the Group's business operations. IFRS 17 results

in a significant change in the accounting, presentation, and

disclosures of the Group's financial results. The key changes are

summarised below.

The insurance service result has reflected discounting for claims

in the period and reclassification of certain expenses from

attributable to non-attributable expenses, in line with the

requirements of the standard. This has resulted in non-

attributable expenses being recognised outside of the insurance

service result.

Under IFRS 17, the Group has taken the option to expense

insurance acquisition cash flows when they are incurred. Under

IFRS 4, such acquisition costs were recognised and presented

separately as ‘deferred acquisition costs’.

The Group uses the Premium Allocation Approach ("PAA") to

simplify the measurement of groups of insurance contracts and

reinsurance contracts provided that relevant PAA eligibility

criteria are met.

The carrying amount of a group of insurance contracts issued is

the sum of liability for remaining coverage ("LFRC") and liability

for incurred claims ("LIC"). In measuring LFRC, the PAA aligns

closely with the Group's previous accounting approach under

IFRS 4. However, IFRS 17 incorporates several key changes

compared to IFRS 4 in the measurement of the LIC. Previously,

only PPO reserves were discounted to present value, reflecting

the time value of money. Since transition to IFRS 17 all claims

reserves are discounted to their present value. Additionally, an

explicit risk adjustment ("RA") is included in the calculation to

account for non-financial risks associated with claims. The

Group has chosen to take the full effect of the time value of

money and changes in the time value of money and financial

risk to the consolidated statement of profit or loss.

The key changes noted below are those that are significant on

transition to IFRS 17.

Disclosures are more detailed and granular:

– The presentation of the primary statements has changed

including the introduction of new required line items. New

requirements include insurance revenue, insurance service

expenses, allocation of reinsurance premium paid and

amount recoverable from reinsurance contracts held. The

presentation provides analysis of the various components

related to insurance activities. As a result, the consolidated

statement of profit or loss no longer includes the presentation

of gross and net written premium.

– New accounting policies as a result of transition to IFRS 17

and related accounting treatments are summarised in note 1.

– Significant judgements, and changes in those judgements,

and critical estimates when applying the standard are

summarised in note 2.1.

– Other disaggregated qualitative and quantitative information

as required by IFRS 17 (for example. reconciliation of

insurance contract liabilities for movement in liability for

remaining coverage and liability for incurred claims) is

provided in the notes to the financial statements (see note

20).

The fully retrospective approach was applied to the insurance

contracts and reinsurance contracts in force at the transition

date 1 January 2022. The application of the transition approach

involved:

– comprehensive review, identification, and measurement of

groups of insurance contracts and reinsurance contracts. The

assessment was conducted as if the requirements of IFRS 17

were always in effect. As a result, any balances that would not

have existed under the constant application of IFRS 17 have

been removed. The approach ensures compliance with the

retrospective application of IFRS 17, bringing the Group's

financial reporting in line with the principles of the standard;

and

– PAA eligibility assessment was carried out for insurance and

reinsurance contracts in the 2021 and prior unexpired groups,

specifically those with coverage periods exceeding 12

months. The assessment confirmed that these contracts

satisfied the criteria for PAA eligibility.

On the transition date, 1 January 2022, the Group has

determined the quantitative impact in the following key areas.

Equity: net shareholders equity decreased by £96.1 million,

primarily as a result of the policy choice to expense acquisition

costs. This was partially offset by the inclusion of discounting in

the LIC.

Net insurance contract liabilities: decreased primarily due to the

introduction of discounting, for non-PPO claims reserves,

partially offset by the reclassification of balances, such as IPT

payable, from trade and other payables into net insurance

contract liabilities.

Deferred tax asset: on transition, the effect of the above changes

created a deferred tax asset of £29.2 million.

The reconciliation of opening to closing equity under IFRS 17

and the resulting impact on key financial statement line items is

disclosed in note 40.1 .

Notes to the Consolidated Financial Statements continued

180 Direct Line Group Annual Report and Accounts 2023

1.1 (b) Adoption of IFRS 9: transition approach and

impact

The Group has adopted IFRS 9 retrospectively from 1 January

2023 and chose to restate comparatives for 2022.

The adoption of IFRS 9 has resulted in changes to the Group's

accounting policies for recognition, classification and

measurement of financial assets and financial liabilities and

introduces new rules for hedge accounting and a new

impairment model for financial assets, which requires a

calculation for an expected credit loss ("ECL") for financial assets

held at amortised cost.

On the transition date, 1 January 2022, the net impact

recognised in equity was a decrease of £3.5 million, driven

primarily by the recognition of the ECL under IFRS 9 for financial

instruments carried at amortised cost, with further details

included in notes 24, 40.1, 40.2

and 40.3.

Classification and measurement of financial

instruments

The Group's debt instruments of £4,084.6 million that were

classified as available-for-sale ("AFS") under IAS 39 ‘Financial

Instruments: Recognition and Measurement’ as at 1 January

2022 (the opening date of the comparative period) satisfy the

conditions for classification as ‘held to collect and sell’ under

IFRS 9 to be measured at FVOCI. However, the Group has

applied the IFRS 9 option to designate debt instruments,

backing its insurance contracts as FVTPL, to reduce the

accounting mismatch caused by the change in the discount

rates on the value of insurance contracts that are reflected in the

consolidated statement of profit or loss. The AFS reserve of £7.5

million was transferred to retained earnings on 1 January 2022.

There are no other reclassifications as a result of applying IFRS 9

as:

– assets previously classified as held-to-maturity ("HTM") and

loans and receivables satisfy the IFRS 9 condition to be

classified as ‘held-to-collect’. These assets are measured at

amortised cost as they are debt instruments with contractual

terms that give rise on specified dates to cash flows that are

solely payments of principal and interest on the principal

amount outstanding and sales are infrequent or insignificant;

– derivatives continue to be measured at FVTPL;

– equity investments will continue to be valued at either FVOCI

when designated as such at initial recognition or FVTPL; and

– financial liabilities continue to be measured at amortised cost,

except for derivative financial liabilities, which are held at fair

value.

The following table shows the differences in the carrying

amounts of financial instruments from their previous

measurement category under IAS 39 to the measurement

categories on transition to IFRS 9 on 1 January 2022.

	IAS 39		IFRS 9
		Carrying		Carrying
		amount		amount
	Measurement category	£m	Measurement category	£m
Financial assets
Debt securities	Available-for-sale	4,084.6	Fair value through profit or loss	4,084.6
Debt securities	Held-to-maturity	91.2	Amortised cost	90.0
Loans and receivables	Amortised cost	451.6	Amortised cost	449.2
Equity investments	Available-for-sale	6.2	Fair value through other	6.2
			comprehensive income
Equity investments	Fair value through profit or loss	0.8	Fair value through profit or loss	0.8
Derivative financial	Fair value through profit or loss	35.9	Fair value through profit or loss	35.9
instruments
Cash and cash equivalents	Amortised cost	955.7	Amortised cost	955.7
Financial liabilities
Borrowings	Amortised cost	59.2	Amortised cost	59.2
Derivative financial	Fair value through profit or loss	19.5	Fair value through profit or loss	19.5
instruments
Trade and other payables	Amortised cost	131.8	Amortised cost	131.8
Subordinated liabilities	Amortised cost	513.6	Amortised cost	513.6

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 181

181Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

1. Accounting policies continued

1.1 Adoption of new and revised standards continued

Expected credit losses

The IFRS 9 impairment model requires the recognition of

impairment provisions based on expected credit losses rather

than incurred credit losses as was the case under IAS 39. The

Group has established a default probability model for its

financial investments and debt securities held at amortised cost.

Impairment for the remaining assets is measured using the

simplified approach based on a probability matrix that

incorporates all available information relevant to the assessment

of credit risk, including information about past events, current

conditions and reasonable and supportable forecasts of

economic conditions at the reporting date. The forward-looking

aspect of IFRS 9 requires judgement as to how changes in

economic factors affect ECLs.

The adoption of IFRS 9 has resulted in an ECL, inclusive of the

effect of tax, of £3.5 million at 1 January 2022 .

1.1 (c) Estimated impact of the transition to IFRS 17 and

IFRS 9 disclosed in the 2022 Annual Report and

Accounts (the "Report")

Following the publication of the 2022 Report, and as disclosed

in the 2023 Half Year Report, the Group has reassessed its

reserving methodology for events not in data ("ENIDs"). To

ensure consistency in the recognition of ENIDs between

Solvency II and IFRS17, the Group has taken the decision to

align the IFRS17 ENIDs methodology with that used in Solvency

II. This change in methodology has further reduced the Group's

total equity of £2,896.7 million on the opening consolidated

statement of financial position as at 1 January 2022 by £39.4

million to £2,797.1 million from the estimated financial impact

of adoption of IFRS 17 and IFRS 9 of £60.2 million disclosed in

the 2022 Annual report.

1.1 (d) Other accounting standards and amendments

adopted during 2023

The Group has adopted the following new amendments to

IFRSs and IASs that became mandatorily effective for the Group

for the first time during 2023. None of these changes have a

material impact on the Group.

In February 2021 the IASB issued ‘Definition of Accounting

Estimates (Amendments to IAS 8)’ which introduces a new

definition of ‘accounting estimates’. The amendments are

designed to clarify the distinction between changes in

accounting estimates and changes in accounting policies and

the correction of errors.

Also, in February 2021 the IASB issued ‘Disclosure of Accounting

policies (Amendments to IAS 1 and IFRS Practice Statement 2)’

to help entities to provide accounting policy disclosures that are

more useful by:

– replacing the requirement for entities to disclose their

‘significant’ accounting policies with a requirement to disclose

their ‘material’ accounting policies; and

– adding guidance on how entities apply the concept of

‘materiality’ in making decisions about accounting policy

disclosures.

In May 2021 the IASB issued ‘Deferred Tax related to Assets and

Liabilities arising from a single Transaction (Amendments to IAS

12)’ which narrows the scope of the initial recognition exception

under IAS 12 ‘Income Taxes’ so that it no longer applies to

transactions that give rise to equal taxable and deductible

temporary differences. The amendments also clarify where

payments that settle a liability are deductible for tax purposes.

In May 2023 the IASB issued amendments to IAS 12 ‘Income

Taxes’ which gives companies temporary relief from accounting

for deferred taxes arising from the Organisation for Economic

Co-operation and Development’s (OECD) international tax

reform.

1.2 Basis of consolidation

The consolidated financial statements incorporate the financial

statements of the Company and the entities that are controlled

by the Group at 31 December 2023 and 31 December 2022.

Control exists when the Group is exposed, or has rights, to

variable returns from its involvement with the entity and has the

ability to affect those returns through its power over the entity.

In assessing whether the Group controls another entity, the

existence and effect of the potential voting rights that are

currently exercisable or convertible are considered.

A subsidiary acquired is included in the consolidated financial

statements from the date it is controlled by the Group until the

date the Group ceases to control it. On acquisition of a

subsidiary, its identifiable assets, liabilities and contingent

liabilities are included in the consolidated financial statements

at fair value.

The Group accounts for the disposal of subsidiary undertakings

or a disposal group when it ceases to exert control.

A gain or loss is measured as the difference between the fair

value of consideration received or receivable and the value of

the assets and liabilities de-recognised, which relate to

businesses disposed of. The gain or loss is recognised on the

effective date of the completion of the disposal.

All intercompany transactions, balances, income and expenses

between Group entities are eliminated on consolidation.

1.3 Foreign currencies

Group entities record transactions in the currency of the primary

economic environment in which they operate (their functional

currency), translated at the foreign exchange rate ruling at the

date of the transaction.

Monetary assets and liabilities denominated in foreign

currencies are translated into the relevant functional currency at

the foreign exchange rates ruling at the statement of financial

position date. Foreign exchange differences arising on the

settlement of foreign currency transactions and from the

translation of monetary assets and liabilities are reported in the

statement of profit or loss.

Non-monetary items denominated in foreign currencies that are

stated at fair value are translated into the relevant functional

currency at the foreign exchange rates ruling at the dates the

values are determined. Translation differences arising on non-

monetary items measured at fair value are recognised in the

statement of profit or loss except for differences arising on

equity investments held at fair value through other

comprehensive income ("FVOCI"), which are recognised in other

comprehensive income.

Assets and liabilities of foreign operations, including goodwill

and fair value adjustments arising on acquisition, are translated

into sterling at the foreign exchange rates ruling at the

statement of financial position date. Income and expenses of

foreign operations are translated into sterling at average

exchange rates unless these do not approximate the foreign

exchange rates ruling at the dates of the transactions. Foreign

exchange differences arising on the translation of a foreign

operation are recognised in the consolidated statement of other

comprehensive income. The amount accumulated in equity is

reclassified from equity to the consolidated statement of profit

or loss on disposal or partial disposal of a foreign operation .

Notes to the Consolidated Financial Statements continued

182 Direct Line Group Annual Report and Accounts 2023

1.4 Contract classification

Insurance contracts are those contracts where the Group (the

insurer) has accepted significant insurance risk from another

party (the policyholder) by agreeing to compensate the

policyholder if a specified uncertain future event (the insured

event) adversely affects the policyholder.

Once a contract has been classified as an insurance contract, it

remains an insurance contract for the remainder of its lifetime,

even if the insurance risk reduces significantly during this period,

unless all rights and obligations are extinguished or it is

derecognised as a result of a contract modification.

1.5 Insurance contracts

Insurance and reinsurance contracts classification

Contract classification, as disclosed in policy note 1.4 above,

remains unchanged on adoption of IFRS 17. The Group issues

short-term motor, home, rescue, pet, travel and commercial

insurance contracts in the normal course of business, under

which it accepts significant insurance risk from its policyholders.

The Group has reinsurance treaties and other reinsurance

contracts that transfer significant insurance risk. The Group

cedes insurance risk by reinsurance in the normal course of

business.

Insurance contracts accounting treatment

(i) Separating components from insurance and reinsurance

contracts

The Group assesses its insurance contracts to determine

whether they contain distinct components which must be

accounted for under another IFRS instead of under IFRS 17.

After separating any distinct components, the Group applies

IFRS 17 to all remaining components of the (host) insurance

contract. Currently, the Group's contracts do not include any

distinct components that require separation.

(ii) Level of aggregation

Insurance contracts are aggregated into groups for

management purposes. The level of aggregation for the Group is

determined firstly by dividing the business written into

portfolios. Portfolios comprise groups of contracts with similar

risks which are managed together. Portfolios are further divided

based on expected profitability at inception into three

categories:

i. onerous contracts, if any;

ii. contracts with no significant risk of becoming onerous; and

iii. the remainder group of contracts in the portfolio.

A group of insurance contracts is considered to be onerous at

initial recognition if the fulfilment cashflows allocated to that

group of contracts in total are a net outflow. This occurs if the

present value of expected claims, attributable expenses and risk

adjustment exceeds the premium. As all inwards contracts are

measured under the PAA model, due to the short-term nature

of the contracts, the Group takes the standard’s default

assumption that no groups are onerous unless facts and

circumstances indicate otherwise. The grouping of insurance

contracts is determined at initial recognition and is not

subsequently reassessed.

Portfolios of reinsurance contracts held are assessed for

aggregation separately from portfolios of insurance contracts

issued. Applying the grouping requirements to reinsurance

contracts held, the Group aggregates reinsurance contracts held

based on the criteria of similar risks which are managed

together. The reinsurance contract held portfolios are further

divided within a calendar year into three groups that comprise:

i. contracts for which there is a net gain at initial recognition, if

any;

ii. contracts for which, at initial recognition, there is no

significant possibility of a net gain arising subsequently; and

iii. remaining contracts in the portfolio.

(iii) Recognition

The Group recognises groups of insurance contracts it issues

from the earliest of the following:

– the beginning of the coverage period of the group of

contracts;

– the date when the first payment from a policyholder in the

group is due or when the first payment is received if there is

no due date; or

– for a group of onerous contracts, when facts and

circumstances indicate that the group is onerous.

The Group recognises a group of reinsurance contracts held it

has entered into from the earlier of the following:

– the beginning of the coverage period of the group of

reinsurance contracts held. However, the Group delays the

recognition of a group of reinsurance contracts held that

provide proportionate coverage until the date any underlying

insurance contract is initially recognised, if that date is later

than the beginning of the coverage period of the group of

reinsurance contracts held; and

– the date the Group recognises an onerous group of

underlying insurance contracts if the Group entered into the

related reinsurance contract held at or before that date.

(iv) Contract boundary

The Group includes in the measurement of a group of insurance

contracts all the future cash flows within the boundary of each

contract in the group. Cash flows are within the boundary of an

insurance contract if they arise from substantive rights and

obligations that exist during the reporting period in which the

Group can compel the policyholder to pay the premiums, or in

which the Group has a substantive obligation to provide the

policyholder with insurance contract services.

A liability or asset relating to expected premiums or claims

outside the boundary of the insurance contract is not

recognised. Such amounts relate to future insurance contracts.

The contract boundary is reassessed at each reporting date to

include the effect of changes in circumstances on the Group's

substantive rights and obligations and therefore may change

over time.

The contract boundary for a reinsurance contract is dependent

on the terms and conditions of the reinsurance contract and

therefore may not necessarily be the same as for the underlying

insurance contracts. For groups of reinsurance contracts held,

cash flows are within the contract boundary if they arise from

substantive rights and obligations of the Group that exist during

the reporting period in which the Group is compelled to pay

amounts to the reinsurer or in which the Group has a

substantive right to receive insurance contract services from the

reinsurer.

The Group’s reinsurance contracts (both quota share and Motor

excess of loss) include contracts with a coverage period greater

than one year. However, there is no material difference in the

measurement of the asset for remaining coverage between the

PAA and the general model, therefore these qualify for the PAA .

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 183

183Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

1. Accounting policies continued

1.5 Insurance contracts continued

(v) Measurement – Premium Allocation Approach

The Group applies the PAA to all the insurance contracts that it

issues and expects to apply it to reinsurance contracts that it

holds, as:

– the coverage period of each contract in the group is one year

or less, including insurance contract services arising from all

premiums within the contract boundary; or

– for groups of insurance and reinsurance contracts longer than

one year, the Group has modelled possible future scenarios to

test the measurement of the liability for remaining coverage

for the group containing those contracts under the PAA does

not differ materially from the measurement that would be

produced by applying the General Measurement Model.

Where contracts and groups of contracts are deemed to be

immaterial additional PAA testing is not performed and

accordingly contracts are measured under the PAA

measurement model.

Insurance contracts – initial measurement

The Group applies the PAA to simplify the measurement of

insurance contracts. When measuring liabilities for remaining

coverage, the PAA is broadly similar to the Group's previous

accounting treatment under IFRS 4. However, when measuring

liabilities for incurred claims, the Group applies discounting and

includes an explicit risk adjustment for non-financial risk.

The Group does not adjust the liability for remaining coverage

for insurance contracts issued for the effect of the time value of

money, because insurance premiums are due within one year of

the coverage period.

For a group of contracts that is not onerous at initial recognition,

the Group measures the liability for remaining coverage as:

– the premiums, if any, received at initial recognition; plus

– any other asset or liability previously recognised for cash flows

related to the group of contracts that the Group pays or

receives before the group of insurance contracts is recognised.

Where facts and circumstances indicate that contracts are

onerous at initial recognition, the Group performs additional

analysis to determine if a net outflow is expected from the

contract. Such onerous contracts are separately grouped from

other contracts and the Group recognises a loss in profit or loss

for the net outflow, resulting in the carrying amount of the

liability for the group being equal to the fulfilment cash flows. A

loss component is established by the Group for the liability for

remaining coverage for any such onerous group depicting the

losses recognised.

Reinsurance contracts held – initial measurement

The Group measures its reinsurance assets for a group of

reinsurance contracts that it holds on the same basis as

insurance contracts that it issues. However, they are adapted to

reflect the features of reinsurance contracts held that differ from

insurance contracts issued, for example the generation of

expenses or reduction in expenses rather than revenue.

Where the Group recognises a loss on initial recognition of an

onerous group of underlying insurance contracts or when

further onerous underlying insurance contracts are added to a

group, the Group establishes a loss-recovery component of the

asset for remaining coverage for a group of reinsurance

contracts held depicting the recovery of losses.

Insurance contracts – subsequent measurement

The Group measures the carrying amount of the liability for

remaining coverage at the end of each reporting period as:

– the liability for remaining coverage at the beginning of the

period; plus

– premiums received in the period; minus

– the amount recognised as insurance revenue for the services

provided in the period.

The Group estimates the liability for incurred claims as the

fulfilment cash flows related to incurred claims. The fulfilment

cash flows incorporate, in an unbiased way, all reasonable and

supportable information available without undue cost or effort

about the amount, timing and uncertainty of those future cash

flows; they reflect current estimates from the perspective of the

Group and include an explicit adjustment for non-financial risk

(the risk adjustment). The Group adjusts the future cash flows for

the time value of money and the effect of financial risk for the

measurement of liability for incurred claims, including those

that are expected to be paid within one year of being incurred.

The Group has chosen to take the effect of the time value of

money and changes in the time value of money and financial

risk to the statement of profit or loss (see insurance finance

income and expense below).

Reinsurance contracts held – subsequent measurement

The subsequent measurement of reinsurance contracts held

follows the same principles as those for insurance contracts

issued and has been adapted to reflect the specific features of

reinsurance contract held. The Group adjusts the asset for

incurred recoveries (on underlying incurred claims) for the effect

of changes in the default risk of the reinsurer with the

corresponding change being reflected in the insurance service

result (amounts recovered from reinsurance contracts held). The

risk adjustment for non-financial risk is the amount of risk being

transferred by the Group to the reinsurer.

Insurance acquisition cash flows for insurance contracts

issued

The Group has taken the option to expense insurance

acquisition cash flows as they are incurred. This includes for a

small number of contracts where the coverage period exceeds a

period of twelve months (see above) and there are no material

amounts of acquisition costs relating to these contracts. This

policy differs to the Group's previous policy of deferring

acquisition costs over a twelve month period.

Insurance contracts – modification and derecognition

The Group derecognises insurance contracts when:

– the rights and obligations relating to the contract are

extinguished (i.e. discharged, cancelled or expired); or

– the contract is modified such that the modification results in

a change in the measurement model or the applicable

standard for measuring a component of the contract,

substantially changes the contract boundary, or requires the

modified contract to be included in a different group. In such

cases, the Group derecognises the initial contract and

recognises the modified contract as a new contract.

When a modification is not treated as a derecognition, the

Group recognises amounts paid or received for the modification

of the contract as an adjustment to the estimate of fulfilment

cash flows.

(vi) Presentation

The Group presents separately, in the consolidated statement of

financial position, the carrying amount of portfolios of insurance

contracts issued that are assets, portfolios of insurance contracts

issued that are liabilities, portfolios of reinsurance contracts held

that are assets and portfolios of reinsurance contracts held that

are liabilities.

Notes to the Consolidated Financial Statements continued

184 Direct Line Group Annual Report and Accounts 2023

The Group separately presents income or expenses from

reinsurance contracts held from the expenses or income from

insurance contracts issued.

Insurance revenue

The insurance revenue for the period is the amount of expected

premium receipts allocated to the period. The Group allocates

the expected premium receipts and instalment income (being

the additional fees payable by a policyholder associated with

paying for an insurance contract over 12 months that are

considered non-distinct from the underlying insurance policy) to

each period of insurance contract services on the basis of the

passage of time.

Cash flows associated with arrangement fee and administrative

fee income are included within the insurance revenue cash

flows as they are considered non-distinct from the underlying

insurance policy. Arrangement services are provided at a point

in time as the benefits from obtaining the insurance policy

occur at a specific time. The customer benefits from

administration services throughout the policy period; as the

Group performs its obligation on an as-needed basis, the

allocated element of administration services is spread evenly

over the term of the policy.

Insurance service expenses

Insurance service expenses include the following:

– incurred claims; and

– other incurred directly attributable expenses, such as

marketing and acquisition costs.

Other expenses not included above are included in other

operating expenses in the consolidated statement of profit or

loss.

Vehicle replacement referral fees, salvage income and legal

services fees are rolled up and offset against the claim cost at

the Group level.

Insurance finance income and expense

Insurance finance income and expenses comprise the change in

the carrying amount of the group of insurance contracts in

respect of incurred claims arising from:

– the effect of the time value of money and changes in the time

value of money. This mainly comprises interest accreted on

the LIC; and

– the effect of financial risk and changes in financial risk. This

mainly includes the effect of changes in interest rates (i.e

discount rates) and the inflation assumptions for PPOs (which

are predominantly inflated with respect to the ASHE 6115

index).

The Group does not disaggregate finance income and expenses

because the related financial assets are managed on a fair value

basis and measured at FVTPL

Net income or expense from reinsurance contracts

held

The Group presents separately on the face of the consolidated

statement of profit or loss the amounts expected to be

recovered from reinsurers, and an allocation of the reinsurance

premiums paid. The Group treats reinsurance cash flows that

are contingent on claims on the underlying contracts as part of

the claims that are expected to be reimbursed under the

reinsurance contract held and treats amounts not dependent

on the underlying claims, such as ceding commissions, as a

reduction in the premiums paid to the reinsurer.

Presentation of reinsurance contract with ‘funds

withheld’ arrangement

The Group has quota share reinsurance contracts that have

funds withheld features, whereby the quota share proportion of

reinsurance premiums and related recoveries are retained by

the Group and will be settled on a net basis at commutation.

Under this arrangement, no assets are transferred to the

reinsurer at the inception of the contract. Instead, the asset is

deposited within a segregated funds withheld account that is

maintained by the Group with a third-party custodian. Cash

withheld under funds withheld arrangements are presented in

cash and cash equivalents within the statement of financial

position.

The funds withheld account balance is adjusted at the agreed

commutation date, with any shortfall or surplus resulting from

reinsurance premium compared to reinsurance recoveries

necessitating an adjustment to funds withheld. The funds

withheld account is measured by reference to the fulfilment

cash flows (of the reinsurance contract held) that, according to

the contractual terms, give rise to the funds withheld feature.

Until it is settled in cash, the funds withheld liability is included

within reinsurance contract assets or liabilities.

Whilst the funds withheld arrangement operates on a net

settlement basis, the Group’s policy is to present the reinsurance

results on a gross basis in the consolidated statement of profit or

loss, as outlined above.

1.6 Revenue recognition - non-insurance

Investment return

Interest income on financial assets is determined using the

effective interest rate method. The effective interest rate

method is a way of calculating the amortised cost of a financial

asset (or group of financial assets) and of allocating the interest

income over the expected life of the asset.

Rental income from investment property is recognised in the

statement of profit or loss on a straight-line basis over the period

of the contract.

Dividend income is recognised when the right to receive

payment is established.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 185

185Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

1. Accounting policies continued

1.6 Revenue recognition - non-insurance continued

Other income

Revenue from vehicle recovery and repair services (accounted

for in accordance with IFRS 15 'Revenue from Contracts with

Customers')

The Group's income also comprises vehicle repair services

provided to other third-party customers. Income in respect of

repairs to vehicles is recognised upon completion of the repair

obligations. The price is determined using market rates for the

services and materials used after discounts have been deducted

where applicable.

Revenue from any goods provided is accounted for at the point

of sale.

1.7 Restructuring and one-off costs

Restructuring costs are costs incurred in respect of those

business activities which have a material effect on the nature

and focus of the Group's operations. One-off costs are costs that

are non-recurring in nature.

1.8 Goodwill and other intangible assets

Acquired goodwill, being the excess of the cost of an acquisition

over the Group's interest in the net fair value of the identifiable

assets, liabilities and contingent liabilities of the subsidiary

acquired, is initially recognised at cost and subsequently at cost

less any accumulated impairment losses. Goodwill arising on

the acquisition of subsidiaries is included in the statement of

financial position category "goodwill and other intangible

assets". The gain or loss on the disposal of a subsidiary includes

the carrying value of any related goodwill.

Intangible assets that are acquired by the Group are stated at

cost less accumulated amortisation and impairment losses.

Amortisation is charged to the statement of profit or loss over

the assets' economic lives using methods that best reflect the

pattern of economic benefits and is included in operating

expenses. The estimated useful economic lives for software

development costs are up to 10 years.

Expenditure on internally generated goodwill and indirect

advertising costs is written off as incurred. Direct costs relating to

the development of internal-use computer software and

associated business processes are capitalised once technical

feasibility and economic viability have been established. These

costs include payroll costs, the costs of materials and services

and directly attributable overheads. Capitalisation of costs

ceases when the software is capable of operating as intended.

During and after development, accumulated costs are reviewed

for impairment against the projected benefits that the software

is expected to generate. Costs incurred prior to the

establishment of technical feasibility and economic viability are

expensed as incurred, as are all training costs and general

overheads.

1.9 Property, plant and equipment

Items of property, plant and equipment (except investment

property – see note 1.12) are stated at cost less accumulated

depreciation and impairment losses. Where an item of property,

plant and equipment comprises major components having

different useful lives, they are accounted for separately.

Depreciation is charged to the statement of profit or loss on a

straight-line basis so as to write off the depreciable amount of

property, plant and equipment over their estimated useful lives.

The depreciable amount is the cost of an asset less its residual

value. Land is not depreciated. The estimated useful lives are as

follows:

Freehold and leasehold

buildings

50 years or the period

of the lease if shorter

Other equipment, including

computer equipment,

vehicles and property

adaptation costs

2 to 15 years

The gain or loss arising from the derecognition of an item of

property, plant and equipment is determined as the difference

between the disposal proceeds, if any, and the carrying amount

of the item.

1.10 Right-of-use assets ("ROU") and lease liabilities

Where the Group is a lessee

At inception, the Group assesses whether a contract contains a

lease arrangement, which involves assessing whether it obtains

substantially all the economic benefits from the use of a specific

asset, and it has the right to direct the use of that asset. The

Group recognises a ROU asset and a lease liability at the

commencement of the lease (when the underlying asset is

available for use), except for short-term leases of 12 months or

less and low-value leases which are expensed on a straight-line

basis in the statement of profit or loss. The ROU asset is initially

measured based on the present value of the lease payments,

plus initial direct costs less any incentives received. Lease

payments include fixed payments and variable payments.

Variable payments relate to contractual rent increases linked to

inflation indices. The ROU asset is depreciated over the lease

term, or its economic useful life if shorter, and is subject to

impairment testing if there is an indicator of impairment. When

leases contain an extension or purchase option which is

reasonably expected to be exercised this is included in the

measurement of the lease.

In calculating the present value of lease payments, the Group

uses the incremental borrowing rate at the lease

commencement date unless the interest rate implicit in the

lease is readily determinable. The incremental borrowing rate is

determined based on available risk-free market yield-to-

maturity pricing linked to the lease amount and term, and

includes a credit spread. The lease liability is subsequently

measured at amortised cost using the effective interest rate

method and remeasured, with a corresponding adjustment to

the ROU asset, when there is a change in future lease payments,

terms or reassessment of options.

The Group's property leases mainly relate to office space and

vehicle repair centres. Leases in respect of motor vehicles relate

to recovery and replacement vehicles, and management cars.

The Group also leases certain IT equipment which is not a

significant portion of the total leased asset portfolio.

Where the Group is a lessor

Leases where a significant proportion of the risks and rewards of

ownership is retained by the lessor are classified as operating

leases. Lease income from operating leases is recognised in the

statement of profit or loss on a straight-line basis over the lease

term.

Where assets are subject to finance leases, the present value of

the lease payments, together with any unguaranteed residual

value, is recognised as a receivable.

Notes to the Consolidated Financial Statements continued

186 Direct Line Group Annual Report and Accounts 2023

1.11 Impairment of intangible assets, goodwill and

property, plant and equipment

At each reporting date, the Group assesses whether there is any

indication that its intangible assets, goodwill, property, plant and

equipment or ROU assets are impaired. If any such indication

exists, the Group estimates the recoverable amount of the asset

and the impairment loss, if any. Goodwill is tested for

impairment annually or more frequently, if events or changes in

circumstances indicate that it might be impaired. If an asset

does not generate cash flows that are independent of those of

other assets or groups of assets, the recoverable amount is

determined for the cash-generating unit ("CGU") to which the

asset belongs. The recoverable amount of an asset is the higher

of its fair value less costs to sell and its value-in-use.

Value-in-use is the present value of future cash flows from the

asset or CGU, discounted at a rate that reflects market interest

rates, adjusted for risks specific to the asset or CGU that have not

been reflected in the estimation of future cash flows.

If the recoverable amount of an intangible or a tangible asset is

less than its carrying value, an impairment loss is recognised

immediately in the statement of profit or loss and the carrying

value of the asset is reduced by the amount of the impairment

loss.

A reversal of an impairment loss on intangible assets, property,

plant and equipment or ROU assets is recognised as it arises

provided the increased carrying value does not exceed the

carrying amount that would have been determined had no

impairment loss been recognised. Impairment losses on

goodwill are not reversed.

1.12 Investment property

Investment property comprises freehold and leasehold

properties that are held to earn rentals or for capital

appreciation or both. Investment property is not depreciated

but is stated at fair value based on valuations completed

quarterly by independent registered valuers, who hold

recognised and relevant professional qualifications and have

recent experience in the location and category of the

investment property being valued, and in accordance with

guidance issued by the Royal Institution of Chartered Surveyors.

Fair value is based on current prices for similar properties

adjusted for the specific characteristics of each property. Any

gain or loss arising from a change in fair value is recognised in

the statement of profit or loss.

Investment property is derecognised when it has been either

disposed of or permanently withdrawn from use and no future

economic benefit is expected from disposal. Any gains or losses

on the retirement or disposal of investment property are

recognised in the statement of profit or loss in the year of

retirement or disposal.

1.13 Financial instruments

Financial assets and liabilities

Financial assets and financial liabilities are recognised in the

statement of financial position when the Group becomes a

party to the contractual provisions of the instrument.

On initial recognition, financial assets are measured at fair value

net of transaction costs. Subsequently they are measured at

amortised cost, FVOCI or FVTPL, depending on the Group's

business model for managing the financial assets and whether

the cash flows represent solely payments of principal and

interest. The Group assesses its business models at a portfolio

level based on its objectives for the relevant portfolio, how the

performance of the portfolio is managed and reported, and the

frequency of asset sales. The Group reclassifies financial assets

when and only when its business model for managing those

assets changes.

Financial instruments measured at amortised cost

Financial assets that are held to collect contractual cash flows

where those cash flows represent solely payments of principal

and interest are measured at amortised cost. Interest income is

accounted for using the effective interest method. Such assets

held by the Group include some of the Group's debt security

portfolio, loans and receivables, trade and other receivables, and

cash and cash equivalents.

Financial liabilities are measured at amortised cost, except for

derivative financial liabilities, which are held at fair value.

Financial assets measured at fair value through other

comprehensive income

Financial assets that are held to collect contractual cash flows

and for subsequent sale, where the assets’ cash flows represent

solely payments of principal and interest, are recognised in the

statement of financial position at their fair value, inclusive of

transaction costs.

The Group elects at initial recognition to account for equity

instruments at FVOCI. For these investments, dividends are

recognised in the statement of profit or loss but fair value gains

and losses are not subsequently reclassified to the statement of

profit or loss following derecognition of the investment. The

Group's has one equity investment which is measured at fair

value through other comprehensive income, being an

investment in unlisted insurtech-focused equity funds.

If the Group assesses the need to recognise a loss allowance on

a financial asset carried at fair value through other

comprehensive income, the loss allowance is recognised in

other comprehensive income; however, the recognition of a loss

allowance does not impact the carrying value of the asset on the

statement of financial position. Cumulative gains and losses on

equity instruments at fair value through other comprehensive

income are not recycled to the statement of profit or loss.

Financial instruments measured at fair value through

profit or loss

Financial assets are classified as FVTPL where they do not meet

the criteria to be measured at amortised cost or FVOCI or where

they are designated at FVTPL to reduce an accounting

mismatch. The Group has elected to account for its debt

securities, backing its insurance contracts as FVTPL to reduce

the accounting mismatch caused by fluctuations in values of

underlying insurance contracts due to changes in discount rates.

Derivatives are initially recognised at fair value on the date on

which a derivative contract is entered into and are subsequently

valued at fair value at each statement of financial position date.

Financial assets measured at FVTPL are recognised in the

statement of financial position at their fair value. Fair value gains

and losses together with interest coupons and dividend income

are recognised in the statement of profit or loss within the

investment return in the period in which they occur.

Financial liabilities are measured at FVTPL where they are

trading liabilities such as derivative financial instruments.

Financial liabilities measured at FVTPL are recognised in the

statement of financial position at their fair value. Fair value gains

and losses are recognised in the statement of profit or loss in the

period in which they occur.

The fair values of assets and liabilities traded in active markets

are based on current bid and offer prices respectively. If the

market is not active the Group establishes a fair value by using

valuation techniques.

187Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

1. Accounting policies continued

1.13 Financial instruments continued

Impairment of financial assets

The ECL model is used to calculate impairment to be

recognised for all financial assets measured at amortised cost

and FVOCI. The general approach, which utilises the three-stage

model, is used for financial investment and debt securities,

whilst impairment for the remaining assets is measured using

the simplified approach.

The assessment of credit risk and the estimation of an ECL are

unbiased, probability-weighted and incorporate all available

information relevant to the assessment, including information

about past events, current conditions and reasonable and

supportable forecasts of economic conditions at the reporting

date. The forward-looking aspect of IFRS 9 requires judgement

as to how changes in economic factors affect ECLs.

The ECL three-stage model is based on forward looking

information regarding changes in credit quality since inception.

The three stages of ECL are defined and assessed as follows:

Stage 1 - no significant increase in credit risk since inception;

Stage 2 - significant increase in credit risk since inception;

Stage 3 - asset is impaired.

For assets in stage 1, the allowance is calculated as the expected

credit losses from events within 12 months after the reporting

date. For assets in stage 2 and 3, the allowance is calculated as

the expected credit loss from events in the remaining lifetime of

each asset.

The loss allowance reduces the carrying value of the financial

asset and is reassessed at each reporting date. ECL impairment

charges are recognised in the statement of profit or loss within

the investment return.

Note 3.3.3 explains how the Group assesses whether the credit

risk of a financial asset has increased since initial recognition

and the approach to estimating ECLs.

Derivatives and hedging

Derivative financial instruments are recognised initially at fair

value on the date the derivative contract is entered into, and

subsequently remeasured to their fair value at the end of each

reporting period. Derivative fair values are determined from

quoted prices in active markets where available. Where there is

no active market for an instrument, fair value is derived from

prices for the derivative's components using appropriate pricing

or valuation models. Gains and losses arising from changes in

the fair value of a derivative are recognised as they arise in the

statement of profit or loss unless the derivative is the hedging

instrument in a qualifying hedge.

The Group enters into a small number of immaterial cash flow

hedges and applies the hedge accounting requirements of IFRS

9. Hedge accounting relationships are formally documented at

inception. The documentation includes the Group’s risk

management objective and strategy for undertaking the hedge,

identifies the hedged item and the hedging instrument, the

nature of the risk that is being hedged, and the way in which

the Group will assess whether the hedging relationship meets

the hedge effectiveness requirements (including identifying

potential sources of hedge ineffectiveness).

In a cash flow hedge, the effective portion of the gain or loss on

the economic hedging instrument is recognised in other

comprehensive income. Any ineffective portion is recognised in

the statement of profit or loss.

Derecognition of financial assets

A financial asset is derecognised when the contractual rights to

receive the cash flows from that asset have expired or when the

Group has transferred its rights to receive cash flows from the

asset and either the Group has transferred substantially all the

risks and rewards of ownership of the asset or the Group has

neither transferred nor retained substantially all the risks and

rewards of ownership and the Group has not retained control .

1.14 Cash and cash equivalents and borrowings

Cash and cash equivalents comprise cash in hand and demand

deposits with banks together with short-term highly liquid

investments that are readily convertible to known amounts of

cash and subject to insignificant risk of change in value.

Borrowings, comprising bank overdrafts, are measured at

amortised cost using the effective interest rate method and are

part of the Group's cash management approach and are

repayable on demand.

1.15 Assets and liabilities held for sale

Non-current assets, including investment property, are classified

as held for sale if their carrying amount will be recovered

principally through a sale transaction rather than through

continuing use and a sale is considered highly probable.

Investment property is measured at fair value less costs to sell.

Other non-current assets are measured at the lower of their

carrying amount and fair value less costs to sell.

An impairment loss is recognised in the statement of profit or

loss for any initial or subsequent write down of the asset to fair

value less costs to sell. A gain is recognised for any subsequent

increase in fair value less costs to sell of an asset but not in

excess of any cumulative impairment loss previously recognised.

A gain or loss not previously recognised by the date of the sale is

recognised at the date of derecognition.

Non-current assets classified as held for sale are presented

separately from the other assets in the statement of financial

position and are not depreciated or amortised.

1.16 Financial liabilities

Financial liabilities are initially recognised at fair value net of

transaction costs incurred. Other than derivatives which are

recognised and measured at fair value, all other financial

liabilities are subsequently measured at amortised cost using

the effective interest rate method.

A financial liability is derecognised when the obligation under

the liability is discharged, cancelled or expires.

1.17 Subordinated liabilities

Subordinated liabilities comprise subordinated guaranteed

dated notes which are initially measured at fair value net of

transaction costs incurred. Subsequently, subordinated liabilities

are measured at amortised cost using the effective interest rate

method.

1.18 Provisions

The Group recognises a provision for a present legal or

constructive obligation from a past event when it is more likely

than not that it will be required to transfer economic benefits to

settle the obligation and the amount can be reliably estimated.

When the Group has an onerous contract outside of the scope

of IFRS 17, it recognises the present obligation under the

contract as a provision. A contract is onerous when the

unavoidable costs of meeting the contractual obligations

exceed the expected future economic benefit.

Notes to the Consolidated Financial Statements continued

188 Direct Line Group Annual Report and Accounts 2023

Restructuring provisions are made, including redundancy costs,

when the Group has a constructive obligation to restructure. An

obligation exists when the Group has a detailed formal plan and

has communicated the plan to those affected.

1.19 Short-term employee benefits

Liabilities recognised in respect of staff bonuses and rewards are

measured at the undiscounted amount of benefits expected to

be paid in exchange for the related service.

1.20 Pensions and other post-retirement benefits

The Group provides post-retirement benefits in the form of

pensions and healthcare plans to eligible employees.

Contributions to the Group's defined contribution pension

scheme are recognised in the statement of profit or loss when

payable.

The Group's defined benefit pension scheme, as described in

note 23, was closed in 2003. Scheme liabilities are measured on

an actuarial basis, using the projected unit credit method, and

discounted at a rate that reflects the current rate of return on a

high-quality corporate bond of equivalent term and currency to

the scheme liabilities.

Scheme assets are measured at their fair value. Any surplus or

deficit of scheme assets over liabilities is recognised in the

statement of financial position as an asset (surplus) or liability

(deficit). The past service costs, together with the net interest on

the net pension liability or asset, are charged or credited to

operating expenses. Actuarial gains and losses are recognised in

full in the period in which they occur outside the statement of

profit or loss and presented in other comprehensive income

under "Items that will not be reclassified subsequently to the

statement of profit or loss".

Insurance assets resulting from a bulk annuity insurance policy

‘buy-in’ transaction result in the insurance asset exactly

matching the pension liability. A ‘buy-in’ is not a settlement and

the liability is not derecognised as the Group retains ultimate

responsibility for funding the plan.

1.21 Taxation

The tax charge or credit represents the proportion of the tax

payable and receivable arising in the current year only.

The current tax charge is based on the taxable profits for the

year as determined in accordance with the relevant tax

legislation, after any adjustments in respect of prior years.

Taxable profit differs from net profit as reported in the

statement of profit or loss because it excludes items of income

or expense that are taxable or deductible in other years and it

further excludes items that are never taxable or deductible.

Provision for taxation is calculated using tax rates that have

been enacted, or substantively enacted, by the statement of

financial position date and is allocated over profits before

taxation or amounts charged or credited to components of

other comprehensive income or equity, as appropriate.

Deferred taxation is accounted for in full using the statement of

financial position liability method on all temporary differences

between the carrying amount of an asset or liability for

accounting purposes and its carrying amount for tax purposes.

Deferred tax liabilities are generally recognised for all taxable

temporary timing differences and deferred tax assets are

recognised to the extent that it is probable that taxable profits

will be available against which deductible temporary differences

can be utilised.

Deferred tax assets are reviewed at each statement of financial

position date and reduced to the extent that it is probable that

they will not be recovered.

Deferred tax assets and liabilities are calculated at the tax rates

expected to apply when the assets are realised or liabilities are

settled based on laws and rates that have been enacted or

substantively enacted at the statement of financial position

date. Deferred tax is charged or credited in the statement of

profit or loss, except when it relates to items charged or credited

to other comprehensive income or equity, in which case the

deferred tax is also dealt with in other comprehensive income or

directly in equity.

Deferred tax assets and liabilities are offset when there is a

legally enforceable right to set off current tax assets against

current tax liabilities and when they relate to income taxes

levied by the same taxation authority and the Group intends to

settle its current assets and liabilities on a net basis.

1.22 Share-based payment

The Group operates a number of share-based compensation

plans under which it awards Ordinary Shares and share options

to its employees. Such awards are generally subject to vesting

conditions that can alter the amount of cash or shares to which

an employee is entitled.

Vesting conditions include service conditions (requiring the

employee to complete a specified period of service) and

performance conditions (requiring the Group to meet specified

performance targets).

The fair value of options granted is estimated using valuation

techniques which incorporate exercise price, term, risk-free

interest rates, the current share price and its expected volatility.

The cost of employee services received in exchange for an

award of shares or share options granted is measured by

reference to the fair value of the shares or share options on the

date the award is granted and takes into account non-vesting

conditions and market performance conditions (conditions

related to the market price of the Company's Ordinary Shares).

The cost is expensed on a straight-line basis over the vesting

period (the period during which all the specified vesting

conditions must be satisfied) with a corresponding increase in

equity in an equity-settled award. The cost is adjusted for vesting

conditions (other than market performance conditions) so as to

reflect the number of shares or share options that actually vest.

The cancellation of an award through failure to meet non-

vesting conditions triggers an immediate expense for any

unrecognised element of the cost of an award.

1.23 Capital instruments

The Group classifies a financial instrument that it issues as a

financial liability or an equity instrument in accordance with the

substance of the contractual arrangement. An instrument is

classified as a liability if it is a contractual obligation to deliver

cash or another financial asset, or to exchange financial assets or

financial liabilities on potentially unfavourable terms, or as

equity if it evidences a residual interest in the assets of the

Group after the deduction of liabilities.

The Tier 1 notes are classified as equity as they have a perpetual

maturity and the Group has full discretion over interest

payments, including ability to defer or cancel interest payments

indefinitely.

The consideration for any Ordinary Share of the Company

purchased by the Group for the benefit of the employee trusts is

deducted from equity.

1.24 Dividends

Interim dividends on Ordinary Shares are recognised in equity in

the period in which they are paid. Final dividends on Ordinary

Shares are recognised when they have been approved at the

AGM.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 189

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Strategic Report / Governance / Financial statements

1. Accounting policies continued

1.25 Accounting developments

Amendments to IAS 12 – Income Taxes: ‘International Tax

Reform — Pillar Two Model Rules

During the year the UK Government enacted legislation to apply

a global minimum tax rate of 15% to multinational businesses

headquartered in the UK, as well as a new domestic UK

minimum tax rate of 15%, in line with the Model Rules agreed

by the Organisation for Economic Co-operation and

Development ("OECD"). These rules will be effective for the

Group’s financial year beginning 1 January 2024. The Group has

performed an assessment of its potential exposure to Pillar Two

income taxes based upon the most recent information available

regarding the financial performance of its constituent entities.

Based on that assessment, the Pillar Two effective tax rate in the

UK is expected to be above 15% and management is not

currently aware of any circumstances under which this might

change. Operations in other jurisdictions are de minimis.

Therefore, the Group does not expect a potential exposure to

Pillar Two top up taxes.

Other accounting developments

New IFRS standards and amendments that are issued, adopted

by the UK, but are not effective until 1 January 2024 reporting

period and have not been early adopted by the Group are

disclosed below. The Group intends to adopt these standards, if

applicable, when they become effective.

In January 2020, the IASB issued ‘Classification of Liabilities as

Current or Non-current (Amendments to IAS 1)’ which clarifies

the requirements for classifying liabilities as current or non-

current. More specifically these amendments:

– specify that an entity’s right to defer settlement must exist at

the end of the reporting period;

– clarify that classification is unaffected by management’s

intentions or expectations about whether the entity will

exercise its right to defer settlement of a liability;

– clarify how lending conditions affect classification; and

– clarify requirements for classifying liabilities an entity will or

may settle by issuing its own equity instruments.

On 22 September 2022, the IASB issued ‘Lease Liability in a Sale

and Leaseback (Amendments to IFRS 16)’, which adds

subsequent measurement requirements for sale and leaseback

transactions.

On 25 May 2023, the IASB issued ‘Supplier Finance

Arrangements (Amendments to IAS 7 and IFRS 7)’ to add

disclosure requirements, and ‘signposts’ within existing

disclosure requirements, that ask entities to provide qualitative

and quantitative information about supplier finance

arrangements.

The following amendments are effective from 1 January 2025

but have not yet adopted by the UK.

The IASB issued amendments ‘Lack of Exchangeability

(Amendments to IAS 21 The Effect of Changes in Foreign

Exchange Rates’) that provide guidance to specify when a

currency is exchangeable and how to determine the exchange

rate when it is not.

2. Critical accounting judgements and key sources of estimation uncertainty

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation

of its financial information. The Group's principal accounting policies are set out on pages 179 to 190. Company law and IFRSs

require the Directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently

and make judgements and estimates that are reasonable.

The critical accounting judgements and key sources of estimation uncertainty in applying the Group's accounting policies have been

updated following adoption of IFRS 17 and IFRS 9, with the exception of fair value of investment properties, which remains a source

of estimation uncertainty and is not affected by the transition to IFRS 17 and IFRS 9.

In the absence of an applicable standard or interpretation, IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'

requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the

requirements and guidance in IFRS dealing with similar and related issues and the IASB's Framework for the Preparation and

Presentation of Financial Statements. The judgements and assumptions involved in the Group's accounting policies that are

considered by the Board to be the most important and material to the portrayal of its financial condition are discussed below.

2.1 IFRS 17: Insurance and reinsurance contracts

Level of aggregation

Accounting judgement

The Group defines a portfolio as insurance contracts subject to similar risks and managed together. Contracts within the same

product line are expected to be in the same portfolio as they have similar risks and are managed together. The assessment of which

risks are similar and how contracts are managed requires the exercise of judgement. The general principles for defining the portfolio

of insurance contracts for level of aggregation are equally applicable to reinsurance contracts held.

The Group manages insurance contracts issued by product. Contracts within each product are grouped together into different sub-

groups for IFRS 17 reporting and disclosure purposes based on the criteria of similar risks which are managed together, the nature of

product and profitability. Accordingly, insurance contacts are aggregated into groups for measurement purposes. All inwards

contracts are measured under the PAA model and take the standard’s default assumption that no groups are onerous unless facts

and circumstances indicate otherwise. The Group aggregates portfolios of reinsurance contracts held issued by product which is

consistent with how the reinsurance contract held portfolio is assessed and managed together operationally at product level.

Notes to the Consolidated Financial Statements continued

190 Direct Line Group Annual Report and Accounts 2023

PAA eligibility

Accounting judgement

IFRS 17 states that entities may adopt the PAA measurement model if at the inception of the group of contracts, the entity

reasonably expects that such simplification would produce a measurement of the liability for remaining coverage (LFRC) for the

group that would not differ materially from the one that would be produced, or if the coverage period of each contract in the group

is one year or less. All insurance contracts issued by the Group, including the Motability contract that incepted in September 2023,

are assessed for eligibility with the PAA measurement model on initial recognition, using the Group's PAA eligibility framework.

Where insurance and reinsurance contracts do not automatically qualify for measurement using the PAA, the Group exercises

accounting judgement in determining whether the LFRC produced under PAA measurement are sufficiently close to those

produced under General Measurement Model (GMM) conditions so as to meet the requirements of the accounting standard for

measurement using the simplified approach. Materiality is a key consideration in the quantitative assessment of results, and

qualitative factors about the nature of the contracts including the timing and size of cash flows are considered when forming

conclusions on PAA applicability.

Estimates of future cash flows

Source of estimation uncertainty

In estimating future cash flows, the Group will incorporate, in an unbiased way, all reasonable and supportable information that is

available without undue cost or effort at the reporting date. This information includes both internal and external historical data

about claims and other experience, updated to reflect current expectations of future events. The estimates of future cash flows will

reflect the Group's view of current conditions at the reporting date, ensuring the estimates of any relevant market variables are

consistent with observable market prices. However, these cash flows are inherently uncertain in size, timing and are based on

probability-weighted average expectations. The Group applies the PAA to simplify the measurement of insurance contracts. When

measuring liabilities for remaining coverage, the PAA is broadly similar to the Group’s previous accounting treatment under IFRS 4.

Risk adjustment

Accounting judgement

A risk adjustment for non-financial risk is determined to reflect the compensation that the Group would require for bearing non-

financial risk and its degree of risk aversion. It is determined at Group level and allocated to groups of contracts based on the size of

their reserves. More recent accident periods tend to be less developed with generally larger reserves than older contract periods, so

that a higher proportion of the overall risk adjustment is allocated to these more uncertain groups of contracts. The risk adjustment

for non-financial risk is determined using a confidence level technique. The risk adjustment is applied to the liability for incurred

claims but not to the liability for remaining coverage.

The Group estimates the probability distribution of the expected present value of the future cash flows from the contracts at each

reporting date and calculates the risk adjustment for non-financial risk as the excess of the value at risk at the target confidence level

over the expected present value of the future cash flows allowing for the associated risks over all future years. The target confidence

level is the 75th percentile for the liability for incurred claims. The risk adjustment is derived using the reserve risk distribution

calculated in the internal economic capital model and consequently, is subject to model and parameter uncertainty. A sensitivity

which demonstrates the impact of the confidence level being at the 80th percentile on profit before tax is included in the Chief

Financial Officer Review in the Reserving section. Group diversification benefit is not considered at the individual insurance

undertaking entity level but is considered in determining the confidence level at a consolidated level for disclosure purposes.

Discount rates

Accounting judgement

IFRS 17 requires entities to determine discount rates using either the ‘bottom up’ or ‘top down’ approach. The ‘top down’ approach

involves using discount rate curves derived from a portfolio of reference assets adjusted to remove all characteristics of the assets

that are not present in insurance contracts, but not requiring to eliminate the illiquidity premium. The Group selected to apply the

‘bottom up’ approach which requires the use of risk-free rate curves and adding the illiquidity premium. The standard does not

specify how to derive the illiquidity premium.

The Group determines the risk-free discount rate using the Solvency II risk-free rates sourced from the Bank of England. For cash

flows that are not in respect of PPOs, a small illiquidity premium is added to the risk-free rate, reflecting the short settlement tail. For

PPOs, to reflect the different liquidity characteristics of the cash flows, the risk-free yield curves are adjusted by a generally higher

illiquidity premium. The illiquidity premium is determined by using a fundamental spread approach by deducting the risk-free rate

and credit risk premium from corresponding corporate bond reference portfolios. For non-PPOs, the reference portfolio is A-rated

bonds with terms of 1 to 3 years and for PPOs, the reference portfolio is BBB-rated bonds with a remaining term of 15 or more years.

Judgement is applied when determining the illiquidity premium with respect to allowances for past and future trends, considering

changes in the economic environment.

Yield curves used to discount PPO and Non-PPO cash flows

Spot rate	1 year	3 year	15 year
PPOs	6.1 %	5.1 %	4.8 %
Non-PPOs	4.9 %	3.9 %	3.6 %

The impact of a 100bps change in the discount rate is shown in the Chief Financial Officer Review, in the Reserving section.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 191

191Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

2. Critical accounting judgements and key sources of estimation uncertainty continued

2.1 IFRS 17: Insurance and reinsurance contracts continued

Onerous contracts

Source of estimation uncertainty

In utilising the PAA measurement model approach, the Group assumes that no material contracts are onerous at initial recognition

unless facts and circumstances indicate otherwise. If at any time during the coverage period the facts and circumstances indicate

that a group of insurance contracts is onerous, the Group establishes a loss component as the excess of the fulfilment cash flows that

relate to the remaining coverage of the group over the carrying amount of the liability for remaining coverage of the group as

determined above. Accordingly, by the end of the coverage period of the group of contracts the loss component will be zero. Where

the Group recognises a loss on initial recognition of an onerous group of underlying insurance contracts, or when further onerous

underlying insurance contracts are added to a group, and the Group has a corresponding reinsurance contract held, the Group

establishes a loss-recovery component of the asset for remaining coverage for a group of reinsurance contracts held depicting the

expected recovery of the losses.

General insurance: Liability for Incurred Claims and amounts recoverable from reinsurance contracts held

Accounting judgement

We seek to adopt a prudent approach to assessing liabilities. The Liability for Incurred Claims (“LIC”) reserves are the combination of

best estimate of liabilities (“BEL”) and a risk adjustment, which is set around the 75th percentile and provides a prudence margin on

top of the BEL. The BEL is set on a discounted basis and includes an allowance for events not in data ("ENIDs"), set by reference to

various actuarial scenario assessments. ENIDs also consider other short and long-term risks not reflected in the actuarial inputs, as

well as the actuarial function’s view on the uncertainties in relation to the BEL.

Source of estimation uncertainty

The Group makes provision for the full cost of outstanding claims from its general insurance business at the statement of financial

position date, including claims estimated to have been incurred but not yet reported at that date and associated claims handling

costs. Outstanding claims provisions net of related reinsurance recoveries at 31 December 2023 amounted to £2,734.9 million (2022:

£2,551.6 million).

Claims reserves are assessed separately for large and attritional claims, typically using standard actuarial methods of projection. Key

sources of estimation uncertainty include those arising from the selection of specific methods as well as assumptions for claims

frequency and severity through the review of historical claims and emerging trends. The Group seeks to adopt a conservative

approach to assessing claims liabilities.

The corresponding amount recoverable from reinsurance contracts held is calculated on an equivalent basis, with similar estimation

uncertainty, as discussed in note 1.5. A credit exposure exists with respect to reinsurance contracts held, to the extent that any

reinsurer is unable to meet its obligations.

The most common method of settling bodily injury claims is by a lump sum. When this includes an element of indemnity for

recurring costs, such as loss of earnings or ongoing medical care, the settlement calculations apply the statutory discount rate

(known as the Ogden discount rate) to reflect the fact that payment is made on a one-off basis rather than periodically over time.

The current Ogden discount rate is minus 0.25% for England and Wales, with the equivalents being minus 0.75% in Scotland, and

minus 1.5% in Northern Ireland.

The Group reserves its large bodily injury claims at the relevant discount rate for each jurisdiction, with the overwhelming majority

now case reserved at minus 0.25% as most will be settled under the law of England and Wales. The Ogden discount rate will be

reviewed again in 2024 and the Group has booked a probability weighted allowance for a discount rate change within its best

estimate liabilities. Since 2021, we have reduced the level of Motor reinsurance purchased, resulting in higher net reserves for

accident years 2021 to 2023.The impact of a potential change in the Ogden discount rate is shown in note 3.3.1.

If the claimant prefers, large bodily injury claims can be settled using a Periodic Payment Order (“PPO”). This is an alternative way to

provide an indemnity for recurring costs, making regular payments, usually for the rest of the claimant’s life. These claims are

reserved for using an internal discount rate, which is progressively unwound over time. As it is likely to take time to establish whether

a claimant will prefer a PPO or a lump sum, until a settlement method is agreed we make assumptions about the likelihood that

claimants will opt for a PPO. This is known as the PPO propensity.

At 31 December 2023, the real discount rate for PPOs is 0.7% (2022: 0.6%, restated for IFRS 17), the combination of cash flow

weighted inflation and discounting of 3.9% (2022: 4.2%, restated for IFRS 17), which allows for higher short-term inflation before

reverting to a long term trend of 3.5%, and a yield curve based discount rate of 4.6% (2022: 4.8%, restated for IFRS 17).

The table in note 20.6 to the financial statements provides an analysis of outstanding PPO claims provisions on a discounted and an

undiscounted basis at 31 December 2023 and 31 December 2022 and further details on sources of estimation uncertainty. Details of

sensitivity analysis to the discount rate applied to PPO claims are shown in note 3.3.1.

Higher claims inflation remains a risk, given the continuing high level of consumer prices and wage inflation. In 2022, the consumer

prices inflation was at its highest level for the past decade and is not expected to normalise until 2024. Pressure is likely to remain

strong on wages, with potential implications for the cost of care. Global supply chain issues remain problematic, resulting in a risk of

price increases for products and components in short supply. A range of general and specific scenarios for excess inflation have been

considered in the reserving process. The Group has observed a slow-down in the processing of recoveries and liabilities with third

party insurers which increases the estimation risk of these amounts. A range of data types and methods are used with historical

comparators to assess the underlying position separate from the timing effects to mitigate the uncertainty and the Group has

booked an additional provision to protect against the risk of less recoveries than estimated within the actuarial best estimate. There

is also uncertainty regarding the remediation cost for Motor total loss claims on past business and following a detailed review, the

Notes to the Consolidated Financial Statements continued

192 Direct Line Group Annual Report and Accounts 2023

Group has strengthened its provision for this risk at the year end.

Motor accidental damage recovery reserves, which form part of the wider motor accidental damage reserves, are subject to

estimation uncertainty, and as such are subject to regular review and assessment. To support the accurate estimation of such

recoveries, the Claims Function performs regular assessment of recovery trends, including assessment by counterparty and year of

loss, as well as executing period audits on a sample basis of recoveries. In addition, the Reserving function perform periodic ‘deep

dive’ reviews of recoverable amounts to ensure the ongoing adequacy of the reserve.

Changes in the climate can impact both frequency and severity of losses, particularly for windstorm and flood events. This is taken

into account in the planning process, pricing and through our capital model; the impact on reserves is only seen when major loss

events occur.

Changes in claims frequency present greater uncertainty when calculating the LFRC, whereas uncertainty over the level of claims

severity has a greater impact on both the LFRC and LIC reserves. Claims severity risk is particularly acute with respect to care costs for

large bodily injury claims as well as input costs and replacement costs for damage claims. The sensitivity analysis in note 3.3.1 looks

at a 200 basis point change in the claims inflation assumed in the actuarial best estimate over the next two years, which continues to

remain relevant and is within the Group's booked reserves. The risk of material adjustments to the Group's estimates which could

affect the carrying value in 2023 is highest in relation to long tail classes where inflation has been less evident to date. The Group

therefore reserves for the risk of excess inflation on these classes within its ENID position.

The Group provides a best estimate for remediation cost, including the operational costs of performing such reviews, relating to

Motor total loss claims settled between 1 September 2017 and 17 August 2022, and the pricing of Motor and Home policies

following the implementation of the FCA’s PPR reform from 1 January 2022. Management exercise judgement in assessing which

customers should be remediated and apply estimation techniques in deriving the remediation amounts. The value of the past

business review provisions at 31 December 2023 totals £130.2 million (2022: £45.9 million).

2.2 IFRS 9: Financial instruments

Classification of financial instruments

Accounting judgement

The Group exercises judgement in assessing the business model within which the assets are held and whether the contractual terms

of the assets are solely payments of principal and interest on the principal amount outstanding. The Group assesses its business

models at a portfolio level based on its objectives for the relevant portfolio, how the performance of the portfolio is managed and

reported, and the frequency of asset sales and has concluded on the classification category of each portfolio of financial instrument

in accordance with IFRS 9.

2.3 Fair value of investment properties

Sources of estimation uncertainty

The Group holds a portfolio of investment properties, with a fair value at 31 December 2023 of £277.1 million (2022: £278.5 million).

Where quoted market prices are not available, valuation techniques are used to value these properties. The fair value was

determined using a methodology based on recent market transactions for similar properties, which have been adjusted for the

specific characteristics of each property within the portfolio. The valuation in the financial statements is based on valuations by

independent registered valuers and the techniques used include some unobservable inputs. The valuations used for investment

properties are classified in the level 3 category of the fair value hierarchy (see note 37).

Any significant risk of a material adjustment to the carrying amount of the investment property portfolio within the next financial

year will be dependent on a number of factors including the developments in the economic outlook which could result in volatility

in market prices, rental yields or occupancy rates. Sensitivity analysis for the investment property portfolio has been independently

calculated by the Group's registered valuers by flexing inputs of internal models to a reasonable alternative yield to ascertain the

impact on property valuations (see note 18). There are no significant sources of estimation uncertainty in relation to climate-related

matters in valuing the investment property portfolio.

2.4 Impairment provisions – financial assets

Accounting judgement

The measurement of the ECL allowance under IFRS 9 for financial assets measured at amortised cost and FVOCI requires significant

judgements and assumption in particular, for the estimation of the amount and timing of future cash flows when determining

impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by the outcome of modelled

ECL scenarios, and the relevant inputs used.

The Group has a portfolio of financial investments measured at amortised cost, primarily comprising infrastructure debt and

commercial real estate loans (total 31 December 2023: £363.2 million; 31 December 2022: £437.3 million). During the year the effect

of changes in assessing the ECL relating to financial investments amounted to £0.9 million (2022: £0.9 million).

The Group has a small portfolio of debt securities measured at amortised cost (31 December 2023: £70.6 million; 31 December 2022:

£97.2 million). During the year the effect of changes in assessing the ECL on these securities amounted to £0.2 million (2022:

£0.2million).

Refer to analysis in note 3.3.3 and note 24 to the financial statements for further details on the Group’s ECL methodology applied in

the period.

Other than in relation to the implementation of IFRS 17 and IFRS 9, there have been no significant changes in the basis upon which

judgement and estimates have been determined, compared to that applied as at 31 December 2022.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 193

193Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3. Risk management

3.1 Enterprise Risk Management Strategy and Framework

The Enterprise Risk Management Strategy and Framework sets out, at a high level, the Group's approach and processes for

managing risks. Further information can be found in the Risk management section of the Strategic report on page 86.

3.2 Risk and capital management modelling

The Board has ultimate responsibility for ensuring that the Group has sufficient funds to meet its liabilities as they fall due. The Group

carries out detailed modelling of its assets, liabilities and the key risks to which these are exposed. This modelling includes the

Group's own assessment of its solvency capital requirement ("SCR"), using its partial internal model approved by the PRA in 2016. The

SCR quantifies the insurance, market, credit, operational and liquidity risks that the regulated entities are undertaking.

The Board is closely involved in the SCR process and reviews, challenges and approves its assumptions and results.

3.3 Principal risks from insurance activities and use of financial instruments

The Risk management section of the Strategic report also sets out all the risks assessed by the Group as principal risks. Detailed

below is the Group's risk exposure arising from its insurance activities and use of financial instruments specifically in respect of

insurance risk, market risk, credit risk, operational risk and liquidity risk.

The global geopolitical situation, including the ongoing war between Russia and Ukraine affected Europe’s energy supply with

inflation rate highs at the start of 2023, with rates reducing somewhat over the year. Interest rates reached their peak in Q3 2023. The

global economic environment including the UK remains uncertain, driven by slow growth prospects with GDP growth remaining flat

as increases in borrowing costs weigh on investment and consumption. The risk of a recession in the UK is still present and a

persistent cost of living crisis would be heightened by further interest rate increases to ensure that the Government's 2% inflation

target is met by the second quarter of 2025, has not been ruled out by the Bank of England, which would be expected to adversely

impact both customers and businesses.

The Group's Investment and Treasury function continues to assess the impact of these adverse economic conditions on its

investment portfolio holdings as part of its ongoing investment management oversight.

The implications of these risks are referred to in the Risk management section of the Strategic report on page 86.

Claims inflation

The Group's reserves and claims from underwritten policies are exposed to the risk of changes in claims development patterns

arising from inflation. Uncertainty in claims reserves and underwriting risk has significantly increased due to the increase in future

inflation volatility and its outlook, and the additional uncertainty when forecasting its impact on claims reserves.

The insurance sectors that the Group operates in are particularly affected by inflation and its impact on the costs of car parts, used

car prices, services and care worker labour, and construction materials. This, in addition to the supply chain dislocation has led to

materially increased claim severity on motor damage and home and commercial property claims, with a longer term risk of care

worker inflation increasing motor large bodily injury claims. Details of the Group's sensitivity to claims inflation is included in note

3.3.1.

Climate change

The Group recognises that climate change potentially poses material long-term financial risks to the business and is receiving

increased scrutiny from regulators and investors. Details on our risk management approach to climate change are included on pages

70 to 85, within the Task Force on Climate-related Financial Disclosures (“TCFD”) report.

3.3.1 Insurance risk

The Group is exposed to insurance risk as a primary consequence of its business. Key insurance risks focus on 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.

The Group is mainly exposed to the following insurance risks:

Reserve risk

Reserve risk relates to both premium and claims. This is the risk of understatement or overstatement of reserves arising from:

– the uncertain nature of claims, in particular large bodily injury claims;

– unexpected future impact of socio-economic trends or regulatory changes, for example changes to the Ogden discount rate;

– data issues and changes to the claims reporting process;

– operational failures;

– failure to recognise claims trends in the market including a slow-down in the processing of recoveries and liabilities with third

party insurers which increases the estimation risk of these amounts; and

– changes in underwriting and business written so that past trends are not necessarily a predictor of the future.

Understatement of reserves may result in not being able to pay claims when they fall due. Alternatively, overstatement of reserves

can lead to a surplus of funds being retained resulting in opportunity cost; for example, lost investment return or insufficient resource

to pursue strategic projects and develop the business.

Notes to the Consolidated Financial Statements continued

194 Direct Line Group Annual Report and Accounts 2023

Reserve risk is managed through a range of processes and controls:

– regular reviews of the claims and premiums, in line with IFRS 17 requirements for the main classes of business by the internal

actuarial team;

– the use of external actuaries to review periodically the actuarial best estimate reserves produced internally, either through peer

review or through provision of independent reserve estimates;

– accompanying all reserve reviews with actuarial assessment of the uncertainties through a variety of techniques including

bootstrapping and scenario analysis;

– use of reinsurance programmes, through Motor, liability, property catastrophe and travel, which are renewable annually;

– oversight of the reserving process by relevant senior management and the Board;

– regular reconciliation of the data used in the actuarial reviews against general ledger data and reconciliation of the claims data

history against the equivalent data from prior reviews; and

– regular assessment of the uncertainty in the reserves to help the Board set management best estimate reserves.

The Group's reserves are subject to the risk of retrospective changes in judicial conditions such as changes in the Ogden discount

rate. Detailed information on the Ogden discount rate is provided in note 20.6.

Uncertainty in claims reserves estimation is larger for claims such as PPOs for which annually indexed payments are made, typically

over the lifetime of the injured party. Under IFRS 17 all claims reserves are held on a discounted basis and so are sensitive to changes

in the discount rate, however this sensitivity tends to be more significant to the Group's PPO reserves given their longer duration.

The table below provides a sensitivity analysis of the potential net impact of a change in a single factor (the discount curve used for

PPOs and other claims, Ogden discount rate, claims inflation or risk adjustment) with all other assumptions left unchanged. Other

potential risks beyond the ones described could have additional financial impacts on the Group.

		Increase/(decrease) in profit		Increase/(decrease) in profit
		before tax and equity gross of		before tax and equity net of
	reinsurance		reinsurance
	2023	2022	2023	2022
At 31 December	£m	£m	£m	£m
Discount curve - PPOs
Impact of an increase in the discount rate used in the calculation of present
values of 100 basis points	95.0	87.1	39.0	35.2
Impact of a decrease in the discount rate used in the calculation of present
values of 100 basis points	(127.8)	(113.7)	(52.1)	(45.4)
Discount curve - other claims
Impact of an increase in the discount rate used in the calculation of present
values of 100 basis points	55.9	39.7	37.2	27.1
Impact of a decrease in the discount rate used in the calculation of present
values of 100 basis points	(58.6)	(41.4)	(38.9)	(28.2)
Ogden discount rate
Impact of the Group reserving at a discount rate of 0.75% compared to minus 0.25% (2022: 0.75% compared to minus 0.25%)	105.1	85.7	48.1	24.8
Impact of the Group reserving at a discount rate of minus 1.25% compared
to minus 0.25% (2022: minus 1.25% compared to minus 0.25%)	(220.6)	(180.4)	(97.0)	(48.2)
Claims inflation
Impact of a decrease in claims inflation by 200 basis points for two
consecutive years	112.8	96.9	71.7	64.5
Impact of an increase in claims inflation by 200 basis points for two
consecutive years	(114.6)	(98.3)	(72.8)	(65.4)
Risk adjustment
Impact of a risk adjustment at the 70th percentile compared to the booked
risk adjustment at the 75th percentile	73.1	74.1	36.6	33.7
Impact of a risk adjustment at the 80th percentile compared to the booked
risk adjustment at the 75th percentile	(84.5)	(87.5)	(42.9)	(38.6)

1,2

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 195

195Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.1 Insurance risk continued

Notes:

1. These sensitivities exclude the impact of taxation.

2. These sensitivities reflect one-off impacts at the statement of financial position date and should not be interpreted as predictions.

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

the assumed level of 0.7% for reserving. The PPO sensitivity has been calculated on the direct impact of the change in the real internal discount

rate with all other factors remaining unchanged.

4. The sensitivities relating to an increase or decrease in the yield curve used to discount all reserves excluding PPOs illustrate a movement in the

time value of money from the assumed level at the statement of financial position dates. The sensitivity has been calculated on the direct impact

of the change in the discount curve with all other factors remaining unchanged.

5. Ogden discount rate sensitivity has been calculated on the direct impact of a permanent change in the discount rate in England and Wales with

all other factors remaining unchanged. The Group will consider the statutory discount rate when setting the reserves but not necessarily provide

on this basis. This is intended to ensure that reserves are appropriate for current and potential future developments.

6. The risk adjustment sensitivities are with respect to the discounted net risk adjustment at the statement of financial position dates.

The PPO sensitivity above is calculated on the basis of a change in the internal discount rate used for the actuarial best estimate

reserves as at 31 December 2023. It does not take into account any second order impacts such as changes in PPO propensity or

reinsurance bad debt assumptions.

There is the risk that claims are reserved or paid inappropriately, including the timing of such activity. However, there are claims

management controls in place to mitigate this risk, as outlined below:

– claims are managed utilising a range of IT system-driven controls coupled with manual processes outlined in detailed policies

and procedures to ensure claims are handled in an appropriate, timely and accurate manner;

– each member of staff has a specified handling authority, with controls preventing them handling or paying claims outside their

authority, as well as controls to mitigate the risk of paying invalid claims. In addition, there are various outsourced claims handling

arrangements, all of which are monitored closely by management, with similar principles applying in terms of the controls and

procedures;

– loss adjusters are used in certain circumstances to handle claims to conclusion. This involves liaison with the policyholder, third

parties, suppliers and the Claims Function;

– specialist bodily injury claims teams are responsible for handling these types of losses, with the nature of handling dependent on

the level and type of claim. Claims exceeding a certain threshold are referred to the technical and large loss teams who also deal

with all other claim types above defined limits or within specific criteria; and

– a process is in place to deal with major weather and other catastrophic events, known as the 'Surge Demand Plan'. A surge is the

collective name given to an incident which significantly increases the volume of claims reported to the Group's Claims Function.

The plan covers surge demand triggers, stages of incident, operational impact, communication and management information

monitoring of the plan.

Underwriting risk

This is the risk that future claims experience on business written is materially different from the results expected, resulting in current-

year losses. The Group predominantly underwrites personal lines insurance including motor, residential property, roadside assistance,

creditor, travel and pet business. In Q3, under our new partnership, the Group began underwriting vehicle insurance for over 700

thousand members of the Motability scheme which is designed to enable disabled people, their families and their carers to lease a

new car, scooter or powered wheelchair, using their disability benefit. The Group also underwrites commercial risks primarily for low-

to-medium risk trades within the small and medium-sized enterprises market. Contracts are typically issued on an annual basis

which means that the Group's liability usually extends for a 12-month period, after which the Group is entitled to decline to renew or

can revise renewal terms by amending the premium or other policy terms and conditions such as the excess as appropriate.

The Solvency II definition of underwriting risk includes catastrophe risk and the risk of loss, or of adverse change in the value of the

insurance liabilities resulting from significant uncertainty of pricing, underwriting and provisioning assumptions related to extreme or

exceptional circumstances.

The key risks relating to climate change today are UK floods and major UK windstorms. The Group recognises that climate change

may impact its business over the longer term. In particular, there is a risk that climate change affects the frequency and severity of

extreme weather events (physical risk), which will change the Group's view of underwriting risk, reinsurance and pricing. The Group

will continue to develop its risk management systems and monitoring tools over 2024, and accelerate the pre-emptive management

actions of repricing and reinsurance as well as the strategic management actions relating to flood resilience and underwriting

footprint following the second round of the Climate Biennial Exploratory Scenario ("CBES") analysis in early 2022. Low-frequency,

high-severity weather losses are mitigated to a significant degree by the catastrophe reinsurance programme, the ceding of Home

high flood risks to Flood Re, and the commercial direct underwriting strategy which reduces high flood risk exposure. The Group

expects these specific risks to materialise in the medium to longer term (see page 72 for definition). Furthermore, there is a risk that

the Group's insurance products will not meet its customers' needs as a result of changes in market dynamics and customer

behaviour in relation to climate change, for example a rapid shift towards electric vehicle usage. The Group anticipates that its

continued strategic and operational response to the transition to a lower-carbon economy will support mitigation of these risks and

the associated impacts in the long term .

Notes to the Consolidated Financial Statements continued

196 Direct Line Group Annual Report and Accounts 2023

When underwriting policies, the Group is subject to concentration risk in a variety of forms, including:

– geographic concentration risk – the Group's business is almost wholly written in the UK general insurance market. The Group

purchases a catastrophe reinsurance programme to protect against a modelled 1-in-200 year windstorm/storm surge and flood

losses. The programme which ran from 1 July 2022 to 30 June 2023 was renewed on the 1 July for six months to 31 December

2023. It had a retention of £150 million per weather event and an upper limit of £1,400 million. Subsequently, it will be renewed

annually on 1 January and will cover a 12 month period. The 2024 programme has a retention of £100 million per event with an

upper limit, including retention, of £1,000 million. The size of the programme has reduced as a result of the sale of the Group's

brokered commercial business, and subsequent quota share arrangements, announced in September 2023; and

– product concentration risk – the Group offers a diversified portfolio of products and a variety of brands sold through a range of

distribution channels to its customers.

It is important to note that none of these risk categories are independent of the others and that giving due consideration to the

relationship between these risks is an important aspect of the effective management of insurance risk.

Distribution risk

This is the risk of a material reduction in profit compared to plan due to the Group not writing its planned policy volumes in each

segment.

Pricing risk

This is the risk of economic loss arising from business being incorrectly priced or inappropriately underwritten.

Reinsurance risk

This is the risk of inappropriate selection and/or placement of reinsurance arrangements, with either individual or multiple reinsurers,

which renders the transfer of insurance risk to the reinsurer(s) inappropriate and/or ineffective.

Other risks include:

– reinsurance concentration risk – the concentration of credit exposure to any given counterparty;

– reinsurance capacity being reduced and/or withdrawn;

– underwriting risk appetite and reinsurance contract terms not being aligned;

– reinsurance contract terms being inappropriate or ineffective resulting in classes or types of business not being appropriately

reinsured;

– non-adherence to the reinsurance policy terms and conditions, in terms of both policy management and claims not being

handled within the reinsurance contract terms and conditions, or paid on an ex-gratia basis, resulting in reinsurance recoveries

not being made in full;

– inappropriate or inaccurate management information and/or modelling being used to determine the value for money and

purchasing of reinsurance (including aggregate modelling); and

– changes in the external legal, regulatory, social or economic environment (including changes resulting from climate change)

altering the definition and application of reinsurance policy wordings or the effectiveness or value for money of reinsurance.

The Group uses reinsurance to:

– protect the underwriting result against low-frequency, high-severity losses through the transfer of catastrophe claims volatility to

reinsurers;

– protect the underwriting result against unforeseen volumes of, or adverse trends in, large individual claims in order to reduce

volatility, control the Group's capital requirements and improve stability of earnings; and/or

– transfer risk that is not within the Group's current risk appetite.

3.3.2 Market risk

Market risk is the risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and

financial instruments.

The Group is mainly exposed to the following market risk factors:

– spread risk;

– interest rate risk;

– property risk; and

– currency risk.

The Group has policies and limits approved by the Investment Committee for managing the market risk exposure. These set out the

principles that the Group should adhere to for managing market risk and establishing the maximum limits the Group is willing to

accept having considered strategy, risk appetite and capital resources.

The Group monitors its market risk exposure on a daily basis and, has established an aggregate exposure limit consistent with its risk

objective to maintain capital adequacy. Interdependencies across risk types have also been considered within the aggregate

exposure limit. The allocation of the Group's investments across asset classes has been approved by the Investment Committee. The

Committee also determines policy and controls, covering such areas as risk, liquidity and performance. The Investment Committee

meets at least three times a year to evaluate risk exposure, the current strategy, associated policies and investment guidelines and to

consider investment recommendations submitted to it. Oversight of the implementation of decisions taken by the Investment

Committee is via the first and second lines of defence.

In light of the global economic uncertainty, during the first three quarters of 2023, maturities from the in-house short and

intermediate sterling credit portfolios had not been reinvested up to October, significantly increasing cash reserves and liquidity.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 197

197Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.2 Market risk continued

During Q2 2023 the Group undertook a Strategic Asset Allocation exercise in relation its investment portfolio. The proposals from the

strategic allocation exercise were reviewed by the Investment Committee and its recommendations are in the process of being

approved by the Investment Committee on a phased basis. Following their approval, the first changes to the investment portfolio

began to be implemented in Q4 2023. This involved increasing proportions invested in UK gilts and US credit holdings. Further

changes are anticipated to be brought to the Investment Committee for approval during 2024. The net proceeds from the sale of

the brokered commercial business have provided additional funds available for investment.

The investment management objectives are to:

– maintain the safety of the portfolio's principal both in economic terms and from a capital, accounting and reporting perspective;

– maintain sufficient liquidity to provide cash requirements for operations, including in the event of a catastrophe; and

– maximise the portfolio's total return within the constraints of the other objectives and the limits defined by the investment

guidelines and capital allocation.

The Investment Committee has agreed long-term targets for the investment portfolio in relation to supporting the Group's objectives

on climate change. These are: ensuring the Group's entire investment portfolio is net zero emissions by 2050 in line with the aims of

the Race to Zero campaign; and an interim target of a 50% reduction in weighted average greenhouse gas emissions intensity by

2030 within the Group's corporate bonds portfolio, the largest part of its investment portfolio, compared to a 2020 baseline. See

pages 79 to 80 for more information on investment portfolio targets, exclusions and preferences and pages 61 to 62 for the Group's

approved Science-Based Targets.

The Group has a property portfolio and an infrastructure debt portfolio to generate a real return which, from an asset and liability

matching perspective, is used to offset the liability arising from longer duration PPOs,

When setting the strategic asset allocation, the Group is subject to concentration risk in a variety of forms including:

– large exposures to individual assets (either bond issuers or deposit-taking institutions); and

– large exposures to different assets where movements in values and ratings are closely correlated.

Concentration risk on investments arises through excessive exposure to particular industry sectors, groups of business undertakings

or similar activities. The Group may suffer significant losses in its investment portfolio as a result of over-exposure to particular sectors

engaged in similar activities or having similar economic features that would cause their ability to meet contractual obligations to be

similarly affected by changes in economic, political or other conditions.

Notes to the Consolidated Financial Statements continued

198 Direct Line Group Annual Report and Accounts 2023

The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and infrastructure

debt are all within the UK):

		Local			Debt securities
	Corporate	government	Sovereign	Supranational	total
At 31 December 2023	£m	£m	£m	£m	£m
Australia	119.8	—	—	—	119.8
Austria	3.1	—	—	—	3.1
Belgium	39.3	—	—	—	39.3
Canada	48.2	—	—	—	48.2
China	0.6	—	—	—	0.6
Denmark	18.2	—	—	—	18.2
Finland	8.9	—	—	—	8.9
France	229.3	—	—	—	229.3
Germany	140.8	—	—	—	140.8
Hong Kong	0.8	—	—	—	0.8
Italy	17.4	—	—	—	17.4
Japan	20.8	—	—	—	20.8
Luxembourg	4.8	—	—	—	4.8
Mexico	7.1	—	—	—	7.1
Netherlands	105.4	—	—	—	105.4
Norway	0.5	0.9	—	—	1.4
Portugal	6.5	—	—	—	6.5
South Africa	6.4	—	—	—	6.4
Spain	66.0	—	—	—	66.0
Sweden	23.4	—	—	—	23.4
Switzerland	55.0	—	—	—	55.0
United Kingdom	745.4	—	657.1	—	1,402.5
USA	933.7	—	23.7	—	957.4
Supranational	—	—	—	25.6	25.6
Total	2,601.4	0.9	680.8	25.6	3,308.7

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Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.2 Market risk continued

The table below analyses the distribution of debt securities by geographical area (commercial real estate loans and infrastructure

debt are all within the UK):

		Local			Debt securities
	Corporate	government	Sovereign	Supranational	total
At 31 December 2022 (restated¹)	£m	£m	£m	£m	£m
Australia	116.0	—	—	—	116.0
Austria	4.3	—	—	—	4.3
Belgium	31.6	—	—	—	31.6
Canada	59.8	—	—	—	59.8
Cayman Islands	3.7	—	—	—	3.7
China	0.6	—	—	—	0.6
Czech Republic	0.7	—	—	—	0.7
Denmark	17.9	—	—	—	17.9
Finland	7.7	—	—	—	7.7
France	237.0	5.9	—	—	242.9
Germany	175.7	—	—	—	175.7
Hong Kong	9.3	—	—	—	9.3
Ireland	1.4	—	—	—	1.4
Italy	16.1	—	—	—	16.1
Japan	18.8	—	—	—	18.8
Luxembourg	2.6	—	—	—	2.6
Mexico	7.0	—	—	—	7.0
Netherlands	100.0	—	—	—	100.0
New Zealand	10.0	—	—	—	10.0
Norway	17.7	—	—	—	17.7
Portugal	6.7	—	—	—	6.7
South Africa	6.0	—	—	—	6.0
Spain	56.5	—	—	—	56.5
Sweden	23.9	—	—	—	23.9
Switzerland	50.0	—	—	—	50.0
United Arab Emirates	3.5	—	—	—	3.5
United Kingdom	821.0	—	480.3	—	1,301.3
USA	895.5	—	31.0	—	926.5
Zambia	1.3	—	—	—	1.3
Supranational	—	—	—	25.2	25.2
Total	2,702.3	5.9	511.3	25.2	3,244.7

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

Notes to the Consolidated Financial Statements continued

200 Direct Line Group Annual Report and Accounts 2023

The table below analyses the distribution of debt securities by industry sector classifications:

	2023		2022
At 31 December	£m	%	£m	%
Basic materials	43.0	1%	48.9	2%
Communications	135.7	4%	131.1	4%
Consumer, cyclical	244.2	7%	274.7	8%
Consumer, non-cyclical	216.2	7%	223.0	7%
Diversified	16.9	1%	14.3	0%
Energy	81.6	3%	81.2	3%
Financial	1,424.5	43%	1,452.6	45%
Industrial	145.8	4%	158.5	5%
Sovereign, supranational and local government	707.3	21%	542.3	16%
Technology	65.6	2%	50.2	2%
Transport	12.8	0%	12.7	0%
Utilities	215.1	7%	255.2	8%
Total	3,308.7	100%	3,244.7	100%

The table below analyses the distribution of infrastructure debt by industry sector classifications:

	2023		2022
At 31 December	£m	%	£m	%
Social, of which:
Education	93.0	44%	105.2	44%
Health	60.5	28%	63.8	27%
Other	43.9	20%	47.4	20%
Transport	16.8	8%	20.4	9%
Total	214.2	100%	236.8	100%

The Group uses its partial internal model to determine its regulatory capital requirements and monitors its market risk exposure

based on a 99.5% value-at-risk measure. The Group also applies market risk stress and scenario testing for the economic impact of

specific severe market conditions. The results of this analysis are used to enhance the understanding of market risk. The market risk

minimum standard explicitly prohibits the use of derivatives for speculative or gearing purposes. However, the Group is able to and

does use derivatives for hedging its currency risk and interest rate risk exposures.

Spread risk

This is the risk of loss from the sensitivity of the value of assets and investments to changes in the level or in the volatility of credit

spreads over the risk-free interest rate term structure. The level of spread is the difference between the risk-free rate and actual rate

paid on the asset, with larger spreads being associated with higher-risk assets. The Group is exposed to spread risk through its asset

portfolio, most notably through its investment in corporate bonds.

Net interest rate risk

This is the risk of loss from changes in the term structure of interest rates or interest rate volatility which impact assets and liabilities.

The Group's interest rate risk arises mainly from its debt, floating interest rate investments and assets and liabilities exposed to fixed

interest rates.

The Group has subordinated Tier 2 notes with fixed coupon rates with a nominal value of £260 million that were issued on 5 June

2020 and perpetual Tier 1 notes with fixed coupon rates with a nominal value of £350 million that were issued on 7 December 2017.

The Group also invests in floating rate debt securities, whose investment income is influenced by the movement of the short-term

interest rate. A movement of the short-term interest rate will affect the expected return on these investments.

The market value of the Group's financial investments with fixed coupons is affected by the movement of interest rates. For the

majority of investments in US dollar and Euro debt securities, the Group hedges its exposure to US dollar and Euro interest rate risk

using swaps, excluding £307.4 million of US dollar short-duration, high-yield bonds (2022: £286.8 million), £137.3 million of US dollar

subordinated financial debt and £118.1 million of Euro subordinated financial debt (2022: £134.4 million and £93.6 million,

respectively).

The Group is exposed to the following interest rate benchmarks within its hedging relationships: GBP SONIA, USD SOFR and

EURIBOR. The hedged items include holdings of US dollar and Euro denominated fixed rate debt securities.

IBOR reform

During the year ended 31 December 2021, the Group transitioned to alternative benchmark rates for most of its relevant financial

instruments, implementing the relevant risk-free rate benchmarks and other relevant agreements.

As at 31 December 2023, the Group has determined it has no remaining exposures (2022: nominal exposure of £238.2 million) from

financial instruments subject to IBOR reform. Where legal documentation has not been completed, in the immediate future

reference of rates will be linked to synthetic GBP LIBOR.

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Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.2 Market risk continued

Property risk

This is the risk of loss arising from sensitivity of assets and financial investments to the level or volatility of market prices, rental yields,

or occupancy rates of properties. At 31 December 2023, the value of these property investments was £277.1 million (2022: £278.5

million). The property investments are located in the UK.

Currency risk

This is the risk of loss from changes in the level or volatility of currency exchange rates. Exposure to currency risk is generated by the

Group's investments in US dollar and Euro denominated debt bonds.

The Group maintains exposure to US dollar securities through £763.1 million (2022: £751.0 million) of investments in US dollar bonds

and Euro securities through £219.1 million (2022: £165.4 million) of Euro bonds. The foreign currency exposure of these investments

is hedged by foreign currency forward contracts, maintaining a minimal unhedged currency exposure on these portfolios, as well as

a low basis risk on the hedging contracts.

A limited exposure to currency risk also arises through the Group's insurance and other contractual liabilities. Currency risk is not

material at Group level.

Use of derivatives

The Group uses derivatives to hedge against interest rate and currency risk.

The tables below analyse the maturity of the Group's derivative assets and liabilities:

	Notional
	amounts		Maturity and fair value
		Less than 1
		year	1 – 5 years	Over 5 years	Total
At 31 December 2023	£m	£m	£m	£m	£m
Derivative assets
At fair value through profit or loss
Foreign exchange contracts (forwards)	1,568.7	27.1	—	—	27.1
Interest rate swaps	49.2	0.1	0.2	—	0.3
Total	1,617.9	27.2	0.2	—	27.4

	Notional
	amounts		Maturity and fair value
		Less than 1
		year	1 – 5 years	Over 5 years	Total
At 31 December 2023	£m	£m	£m	£m	£m
Derivative liabilities
At fair value through profit or loss
Foreign exchange contracts (forwards)	908.4	8.2	—	—	8.2
Interest rate swaps	252.8	—	1.7	5.2	6.9
Designated as hedging instruments
Foreign exchange contracts (forwards)	14.2	0.3	—	—	0.3
Total	1,175.4	8.5	1.7	5.2	15.4

Notes to the Consolidated Financial Statements continued

202 Direct Line Group Annual Report and Accounts 2023

	Notional
	amounts		Maturity and fair value
		Less than 1
		year	1 – 5 years	Over 5 years	Total
At 31 December 2022	£m	£m	£m	£m	£m
Derivative assets
At fair value through profit or loss
Foreign exchange contracts (forwards)	1,014.4	24.2	—	—	24.2
Interest rate swaps	240.4	6.0	0.5	0.5	7.0
Designated as hedging instruments
Foreign exchange contracts (forwards)	3.4	0.1	—	—	0.1
Total	1,258.2	30.3	0.5	0.5	31.3

	Notional
	amounts		Maturity and fair value
		Less than 1
		year	1 – 5 years	Over 5 years	Total
At 31 December 2022	£m	£m	£m	£m	£m
Derivative liabilities
At fair value through profit or loss
Foreign exchange contracts (forwards)	1,190.4	28.4	—	—	28.4
Interest rate swaps	107.6	—	0.2	1.0	1.2
Total	1,298.0	28.4	0.2	1.0	29.6

Sensitivity analysis

The table below provides a sensitivity analysis of the impact on financial investments and derivatives of a change in a single factor

that is reasonably possible, with all other assumptions left unchanged. Other potential risks beyond the ones described in the table

could have an additional financial impact on the Group.

		Increase/(decrease) in profit
		before tax 1 at 31 December
	2023	2022
	£m	£m
Spread
Impact of a 100 basis points increase in spreads on financial investments 2		(82.3)
	(72.1)
Interest rate
Impact of a 100 basis points increase in interest rates on financial investments and derivatives 2,3		(64.7)
	(62.2)
Investment property
Impact of a 15% decrease in property markets	(41.6)	(41.8)

Notes:

1. These sensitivities exclude the impact of taxation and have not considered the impact of the general market changes on the value of the Group's

insurance liabilities. They reflect one-off impacts at 31 December and should not be interpreted as predictions.

2. The impact on profit or loss does not reflect any fair value movement in infrastructure debt, commercial real estate loans and private placement

debt securities that would not be recorded in the financial statements under IFRS 9 as they are classified as loans and receivables and private

placement respectively, which are carried at amortised cost. It is estimated that a fair value reduction in these asset categories resulting from a 100

basis points increase in spreads would have been £11.7 million (2022: £13.5 million) and a 100 basis points increase in interest rates would have

been £2.8 million (2022: £3.7 million).

3. The sensitivities set out above reflect one-off impacts at 31 December, with the exception of the statement of profit or loss interest rate sensitivity on

financial investments and derivatives, which projects a movement in a full year's interest charge as a result of the increase in the interest rate applied

to these assets or liabilities on those positions held at 31 December.

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Direct Line Group Annual Report and Accounts 2023 203

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Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.2 Market risk continued

The Group has a number of open interest rate and foreign exchange derivative positions. Collateral management arrangements are

in place for significant counterparty exposures. At 31 December 2023, the Group has pledged £16.6 million in cash (2022:

£19.2 million) to cover initial margins and out-of-the-money derivative positions. At 31 December 2023, counterparties have pledged

£12.8 million in cash (2022: £7.1 million in cash) to the Group to cover in-the-money derivative positions.

The terms and conditions of collateral pledged for both assets and liabilities are market-standard. When securities are pledged they

are required to be readily convertible to cash, and as such no policy has been established for the disposal of assets not readily

convertible into cash.

3.3.3 Credit risk

This is the risk of loss resulting from defaults in obligations due and/or changes in credit standing of either issuers of securities,

counterparties or any debtors to which the Group is exposed. The Group's credit risk policy sets out the assessment and

determination of what constitutes credit risk for the Group. The Group is mainly exposed to counterparty default risk.

Counterparty default risk

This is the risk of loss from unexpected default or deterioration in the credit standing of the counterparties and debtors of Group

undertakings. This risk is monitored by two forums: the Investment Risk Forum monitors credit spreads as indicators of potential

losses on investments incurred but not yet realised; the Credit Risk Forum monitors reinsurance and corporate insurance

counterparty default risk. The main responsibility of these forums is to ensure that all material aspects of counterparty default risk

within the Group are identified, monitored and measured.

An account is deemed to have defaulted when the Group considers that a customer is in significant financial difficulty or that the

customer meets certain quantitative and qualitative criteria regarding their ability to make contractual payments when due. This

includes instances where the customer makes a declaration of significant financial difficulty, or the account has been transferred to

recoveries and the relationship is terminated.

The main sources of counterparty default risk for the Group are:

– investments – this arises from the investment of funds in a range of investment vehicles permitted by the investment policy;

– reinsurance recoveries – this represents amounts receivable from the reinsurer to cover claims paid to policyholders. PPOs have the

potential to increase the ultimate value of a claim and, by their very nature, to increase significantly the length of time to reach

final payment. This can increase reinsurance counterparty default risk in terms of both amount and longevity;

– commercial credit – this arises as brokers collect premiums on behalf of the Group; and

– consumer credit – exposure from offering monthly instalments on annual insurance contracts.

The Group cedes insurance risk to reinsurers but, in return, assumes counterparty default risk against recoveries as it remains liable

for claims payments to policyholders in case of reinsurer default. The financial security of the Group's panel of reinsurers is therefore

important and both the quality and amount of the assumed counterparty default risk are subject to an approval process whereby

reinsurance is only purchased from reinsurers that hold a credit rating of at least A– for short tail reinsurance and the majority of long

tail reinsurance to be purchased from reinsurers rated A+ or above with a maximum of 10% of the risk to be placed with reinsurers

with a rating between A- and A+ at the time cover is purchased. The reinsurance and credit manager monitors the credit rating of

the Group's current and potential reinsurance counterparties on a regular basis. The Group aims to deal with a diverse range of

reinsurers on its contracts to mitigate the credit and/or non-payment risks associated with its reinsurance exposures.

The following tables analyse the carrying value of the Group's financial, insurance and reinsurance contracts assets that bear

counterparty default risk between those assets that have not been impaired by age in relation to due date and those that have been

impaired.

The Group's maximum exposure to credit risk is represented by the carrying value of financial investments , cash and cash

equivalent, the carrying value of loans and advances and the excess of reinsurance assets over amounts owed to reinsurers under

funds withheld arrangements which are settled on a net basis. In addition, the Group operates 100% quota share reinsurance treaty

on its brokered commercial business which was sold to RSA Insurance Limited on a funds withheld basis, which substantially

reduces credit risk, as the Group retains the cash received from policyholders. The Group does not use credit derivatives or similar

instruments to mitigate exposure.

All financial investments held at amortised cost have been assessed for impairment using the expected credit loss model under IFRS

9. The assessment has been made based on the externally available credit ratings of the entities.

Infrastructure debt and commercial real estate loans are held with well rated institutions and are held at book value, with

impairment calculated in a similar manner to debt securities. All assets which require a calculation of impairment, are considered

based on an external credit rating agency or an assessment from external asset managers. The credit rating of all assets is regularly

monitored. As at the year-end reporting date, the vast majority of financial assets are of investment grade and considered low risk

under IFRS 9. These therefore remain within stage 1 and a 12-month expected loss is used to calculate the impairment provision

required. Any assets downgraded to below BBB or any sub BBB asset that is downgraded by 1 full credit rating, are considered by

the Group to have significantly increased in credit risk, and therefore are stage 2 or stage 3 under IFRS 9.

Notes to the Consolidated Financial Statements continued

204 Direct Line Group Annual Report and Accounts 2023

				Carrying value
				in the
	Neither past			statement of
	due nor	Past due 1 – 90	Past due more	financial
	impaired	days	than 90 days	position
At 31 December 2023	£m	£m	£m	£m
Reinsurance contract assets	1,340.4	5.5	0.1	1,346.0
Other receivables	32.9	2.0	0.3	35.2
Derivative financial instruments	27.4	—	—	27.4
Debt securities	3,308.7	—	—	3,308.7
Infrastructure debt	214.2	—	—	214.2
Commercial real estate loans	145.9	—	—	145.9
Cash and cash equivalents	1,772.2	—	—	1,772.2
Other loans	3.1	—	—	3.1
Total	6,844.8	7.5	0.4	6,852.7

				Carrying value
				in the
	Neither past			statement of
	due nor	Past due 1 – 90	Past due more	financial
	impaired	days	than 90 days	position
At 31 December 2022	£m	£m	£m	£m
Reinsurance contract assets	1,065.2	9.6	0.1	1,074.9
Other receivables	33.7	0.6	0.2	34.5
Derivative financial instruments	31.3	—	—	31.3
Debt securities	3,244.7	—	—	3,244.7
Infrastructure debt	236.8	—	—	236.8
Commercial real estate loans	198.9	—	—	198.9
Cash and cash equivalents	1,003.6	—	—	1,003.6
Other loans	1.6	—	—	1.6
Total	5,815.8	10.2	0.3	5,826.3

Note:

1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.

Within the analysis of debt securities above are bank debt securities at 31 December 2023 of £973.7 million (2022: £961.2 million)

that can be further analysed as: secured £11.1 million (2022: £11.2 million); unsecured £770.6 million (2022: £795.3 million); and

subordinated £192.0 million (2022: £154.7 million).

The Group's maximum exposure to credit risk from Insurance contract assets is £5.4 million (2022: £17.3 million).

The tables below analyse the credit quality of debt securities that are neither past due nor impaired:

	AAA	AA+ to AA-	A+ to A-	BBB+ to BBB-	BB+ and below	Not rated	Total
At 31 December 2023	£m	£m	£m	£m	£m	£m	£m
Corporate	56.8	152.7	1,201.6	899.6	289.2	1.5	2,601.4
Supranational	25.6	—	—	—	—	—	25.6
Local government	0.9	—	—	—	—	—	0.9
Sovereign	4.7	676.1	—	—	—	—	680.8
Total	88.0	828.8	1,201.6	899.6	289.2	1.5	3,308.7

	AAA	AA+ to AA-	A+ to A-	BBB+ to BBB-	BB+ and below	Not rated	Total
At 31 December 2022	£m	£m	£m	£m	£m	£m	£m
Corporate	67.7	158.1	1,268.4	919.8	286.6	1.7	2,702.3
Supranational	25.2	—	—	—	—	—	25.2
Local government	—	5.9	—	—	—	—	5.9
Sovereign	31.0	480.3	—	—	—	—	511.3
Total	123.9	644.3	1,268.4	919.8	286.6	1.7	3,244.7

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205Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.3 Credit risk continued

The tables below analyse the credit quality of financial and insurance assets that are neither past due nor impaired (excluding debt

securities analysed above). The tables include reinsurance exposure, after provision. The Group's approach to reinsurance

counterparty default risk is detailed on page 204.

	AAA	AA+ to AA-	A+ to A-	BBB+ to BBB-	BB+ and below	Not rated	Total
At 31 December 2023	£m	£m	£m	£m	£m	£m	£m
Reinsurance contract assets	—	290.5	1,047.5	2.4	—	—	1,340.4
Other receivables	0.4	1.7	4.8	0.3	—	25.7	32.9
Derivative financial instruments	—	26.4	0.4	0.6	—	—	27.4
Infrastructure debt	—	—	34.5	179.7	—	—	214.2
Commercial estate loans	12.1	47.9	51.6	28.6	5.7	—	145.9
Cash and cash equivalents	1,624.2	14.0	133.0	0.9	—	0.1	1,772.2
Other loans	—	—	—	—	—	3.1	3.1
Total	1,636.7	380.5	1,271.8	212.5	5.7	28.9	3,536.1

	AAA	AA+ to AA-	A+ to A-	BBB+ to BBB-	BB+ and below	Not rated	Total
At 31 December 2022	£m	£m	£m	£m	£m	£m	£m
Reinsurance contract assets	—	440.7	622.2	0.9	—	1.4	1,065.2
Other receivables	—	0.1	0.3	—	—	33.3	33.7
Derivative financial instruments	—	7.9	23.4	—	—	—	31.3
Infrastructure debt	—	—	38.2	191.8	6.8	—	236.8
Commercial estate loans	15.7	64.1	88.1	24.0	7.0	—	198.9
Cash and cash equivalents	878.8	7.8	116.1	0.9	—	—	1,003.6
Other loans	—	—	—	—	—	1.6	1.6
Total	894.5	520.6	888.3	217.6	13.8	36.3	2,571.1

Note:

1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.

Debt instruments measured at amortised cost.

The table below shows the credit quality and the maximum exposure to credit risk per the Group's internal credit rating model. The

amounts presented are gross of ECL allowances:

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
	£m	£m	£m	£m	£m	£m
AA+ to AA-	11.5	—	11.5	11.5	—	11.5
A+ to A-	16.0	—	16.0	42.8	—	42.8
BBB+ to BBB-	33.8	—	33.8	33.8	—	33.8
BB+ and below	—	10.1	10.1	—	10.1	10.1
Total	61.3	10.1	71.4	88.1	10.1	98.2

Notes to the Consolidated Financial Statements continued

206 Direct Line Group Annual Report and Accounts 2023

Loans and receivables measured at amortised cost:

The table below shows the credit quality and the maximum exposure to credit risk per the Group’s internal credit rating model. The

amounts presented are gross of ECL allowances:

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
	£m	£m	£m	£m	£m	£m
AAA	12.1	—	12.1	15.7	—	15.7
AA+ to AA-	47.9	—	47.9	64.1	—	64.1
A+ to A-	86.2	—	86.2	126.4	—	126.4
BBB+ to BBB-	209.4	—	209.4	217.1	—	217.1
BB+ and below	—	28.9	28.9	—	35.9	35.9
Not rated	—	3.4	3.4	—	1.9	1.9
Total	355.6	32.3	387.9	423.3	37.8	461.1

The Group’s Investment and Treasury team prepares internal ratings for instruments held in which its counterparties are rated using

internal grades (AAA to BB+ and below). The ratings are determined incorporating both qualitative and quantitative information that

builds on information from credit agencies, supplemented with information specific to the counterparty and other external

information that could affect the counterparty’s behaviour. These information sources are first used to determine whether an

instrument has had a significant increase in credit risk.

The tables below analyse the change in the carrying amount and loss allowance of debt securities measured at amortised cost and

the corresponding ECL.

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
Carrying amount	£m	£m	£m	£m	£m	£m
Amortised cost as at 1 January	88.1	10.1	98.2	81.1	10.1	91.2
New assets originated or purchased	—	—	—	7.0	—	7.0
Assets derecognised or matured	(26.8)	—	(26.8)	—	—	—
Amortised cost as at 31 December	61.3	10.1	71.4	88.1	10.1	98.2

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
Loss allowance	£m	£m	£m	£m	£m	£m
Loss allowance as at 1 January	(0.4)	(0.6)	(1.0)	(0.5)	(0.7)	(1.2)
Effect of changes in assessed ECL	0.1	0.1	0.2	0.1	0.1	0.2
Loss allowance as at 31 December	(0.3)	(0.5)	(0.8)	(0.4)	(0.6)	(1.0)

The tables below analyse the change in the carrying amount and loss allowance of loans and receivables measured at amortised

cost and the corresponding ECL.

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
Carrying amount	£m	£m	£m	£m	£m	£m
Amortised cost as at 1 January	423.3	37.8	461.1	435.8	35.9	471.7
New assets originated or purchased	—	1.5	1.5	40.8	1.9	42.7
Assets derecognised or matured	(75.5)	—	(75.5)	(56.1)	—	(56.1)
Accrued interest capitalised	0.8	—	0.8	2.8	—	2.8
Transfer to 12 month ECL	7.0	(7.0)	—	—	—	—
Amortised cost as at 31 December	355.6	32.3	387.9	423.3	37.8	461.1

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207Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.3 Credit risk continued

		2023			2022
	12 month	Lifetime		12 month	Lifetime
	expected	expected	Total	expected	expected	Total
	credit loss	credit loss		credit loss	credit loss
Loss allowance	£m	£m	£m	£m	£m	£m
Loss allowance as at 1 January	(1.5)	(22.3)	(23.8)	(2.2)	(20.7)	(22.9)
Transfer to lifetime ECL	(0.1)	0.1	—	—	—	—
Effect of changes in assessed ECL	0.5	(1.4)	(0.9)	0.7	(1.6)	(0.9)
Loss allowance as at 31 December	(1.1)	(23.6)	(24.7)	(1.5)	(22.3)	(23.8)

3.3.4 Operational risk

This is the risk of loss due to inadequate or failed internal processes, people, systems, or from external events. Material sources of

operational risk for the Group include:

Change risk

This is the risk of failing to manage the Group's business change portfolio resulting in conflicting priorities and failure to deliver

strategic outcomes to time, cost or quality.

Technology and infrastructure risk

This is the risk that the IT infrastructure is insufficient to deliver the Group's strategy.

Supplier management and outsourcing risk

This is the risk of failing to implement a robust framework for the sourcing, appointment and ongoing contract management of

third-party suppliers, outsourced service providers and intra-group relationships. This includes both domestic and offshore

outsourcing activities.

Cyber risk

This is the risk of loss or corruption to Group or customer data, intellectual property or failure of business-critical systems resulting in

reputational damage, regulatory censure, supervision, fines and/or loss of competitive advantage.

Partnership contractual obligations

This is the risk of contractual obligations not being delivered for business partners resulting in damaged reputation, the loss of

contract at renewal, significant liability payments and/or the early termination of a partnership scheme.

The Group has in place agreed policies and standards to establish and monitor key controls relating to operational risk.

Risk concentrations and management

The Group is subject to concentration in its operational risks through, for example, its IT systems and change programmes; which

include the risk of loss in a number of scenarios such as system outages and data security breaches. Technology remains at the heart

of the Group operations and focus is on upgrading Group IT systems and capabilities, aimed at expanding the Group's digital

offerings, capitalising on the Group's data, improving customer experience and overall increasing operational efficiency.

The Group proactively manages its operational risks to mitigate potential customer harm, regulatory or legal censure, financial and

reputational impacts. The Group has in place operational processes and systems, including prevention and detection measures.

These include processes which seek to ensure the Group can absorb and/or adapt to internal or external events that could impact

customer operations and the wider business, as well as to learn from these situations to improve the Group's overall risk and control

systems moving forward.

The Group's risk management framework is designed to enable it to capture risk information in a complete and consistent way,

enabling proactive trend analysis, root cause analysis and read across to facilitate early warnings and a ‘learning’ risk environment.

3.3.5 Liquidity risk

This is the risk of being unable to access cash from the sale of investments or other assets in order to settle financial obligations as

they fall due.

The measurement and management of the Group's liquidity risk is undertaken within the limits and other policy parameters of the

Group's liquidity risk appetite and is detailed in the liquidity risk minimum standard. As part of this process, the Investment and

Treasury team is required to put in place a liquidity plan which must consider expected and stressed scenarios for cash inflows and

outflows that is reviewed at least annually by the Investment Committee. Compliance is monitored in respect of both the minimum

standard and the regulatory requirements of the PRA.

Notes to the Consolidated Financial Statements continued

208 Direct Line Group Annual Report and Accounts 2023

The following table analyses the carrying value of financial investments and cash and cash equivalents, by contractual maturity,

which can fund the repayment of liabilities as they crystallise.

	Within				Over
	1 year	1 – 3 years	3 – 5 years	5 – 10 years	10 years	Total
At 31 December 2023	£m	£m	£m	£m	£m	£m
Debt securities	566.1	1,542.0	598.2	503.6	98.8	3,308.7
Infrastructure debt	20.4	32.8	41.2	81.8	38.0	214.2
Commercial real estate loans	46.5	55.5	43.9	—	—	145.9
Cash and cash equivalents	1,772.2	—	—	—	—
						1,772.2
Other loans	—	0.4	2.7	—	—	3.1
Total	2,405.2	1,630.7	686.0	585.4	136.8	5,444.1

	Within				Over
	1 year	1 – 3 years	3 – 5 years	5 – 10 years	10 years	Total
At 31 December 2022	£m	£m	£m	£m	£m	£m
Debt securities	798.6	979.0	807.3	530.9	128.9	3,244.7
Infrastructure debt	18.9	34.8	41.2	91.2	50.7	236.8
Commercial real estate loans	55.9	63.3	79.7	—	—	198.9
Cash and cash equivalents	1,003.6	—	—	—	—	1,003.6
Other loans	—	—	1.6	—	—	1.6
Total	1,877.0	1,077.1	929.8	622.1	179.6	4,685.6

Note:

1. This represents money market funds with no notice period for withdrawal and cash at bank and in hand.

The following table analyses the undiscounted cash flows of insurance liabilities based on the future cash flows expected to be paid

out in the periods presented, and financial and other liabilities by maturity dates.

	Less than 1
	year	1 – 3 years	3 – 5 years	5 – 10 years	Over 10 years	Total	Carrying value
At 31 December 2023	£m	£m	£m	£m	£m	£m	£m
Subordinated liabilities	10.4	20.8	20.8	296.4	—	348.4	258.8
Insurance contract liabilities	2,050.0	1,365.1	781.0	564.4	602.7	5,363.2	3,874.0
Borrowings	82.4	—	—	—	—	82.4	82.4
Lease liabilities	12.7	22.3	23.0	51.4	27.3	136.7	106.1
Provisions	30.3	0.4	0.1	—	—	30.8	30.8
Trade and other payables	157.4	6.1	0.1	—	—	163.6	163.6
Total	2,343.2	1,414.7	825.0	912.2	630.0	6,125.1	4,515.7

	Less than 1
	year	1 – 3 years	3 – 5 years	5 – 10 years	Over 10 years	Total	Carrying value
At 31 December 2022	£m	£m	£m	£m	£m	£m	£m
Subordinated liabilities	10.4	20.8	20.8	306.8	—	358.8	258.6
Insurance contract liabilities	1,460.7	902.0	474.7	371.2	1,498.3	4,706.9	3,394.3
Borrowings	65.2	—	—	—	—	65.2	65.2
Lease liabilities	10.9	17.6	14.3	32.2	27.8	102.8	81.6
Provisions	9.6	0.5	0.1	—	—	10.2	10.2
Trade and other payables	140.7	6.1	0.2	—	—	147.0	147.0
Total	1,697.5	947.0	510.1	710.2	1,526.1	5,390.9	3,956.9

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Strategic Report / Governance / Financial statements

3. Risk management continued

3.3.5 Liquidity risk continued

The following table analyses the undiscounted cash flows of derivative financial instruments, by contractual maturity.

	Within 1 year	1 – 3 years	3 – 5 years	5 – 10 years	Total	Carrying value
At 31 December 2023	£m	£m	£m	£m	£m	£m
Derivative assets	27.6	(0.1)	(0.1)	—	27.4	27.4
Derivative liabilities	(14.4)	(1.0)	—	—	(15.4)	(15.4)
Total	13.2	(1.1)	(0.1)	—	12.0	12.0

	Within 1 year	1 – 3 years	3 – 5 years	5 – 10 years	Total	Carrying value
At 31 December 2022	£m	£m	£m	£m	£m	£m
Derivative assets	31.7	—	(0.1)	—	31.6	31.3
Derivative liabilities	(29.6)	—	—	—	(29.6)	(29.6)
Total	2.1	—	(0.1)	—	2.0	1.7

3.4 Capital management

At 31 December 2023, the Group's capital position was comprised of shareholders' equity of £2,058.2 million (31 December 2022:

£1,845.3 million) and Tier 1 notes of £346.5 million (31 December 2022: £346.5 million). In addition, the Group's consolidated statement

of financial position also included £258.8 million of subordinated loan capital (31 December 2022: £258.6 million) which is classified as

Tier 2 for Solvency II purposes.

The Group manages capital in accordance with the Group's capital management minimum standard, the aims of which are to

manage capital efficiently and generate long-term sustainable value for shareholders, while balancing operational, regulatory, credit

rating agency and policyholder requirements. The Group seeks to hold capital resources such that, in normal circumstances, the

solvency capital ratio is around the middle of the target range of 140% to 180%. At 31 December 2023, the Group's solvency capital

ratio was 197% (31 December 2022: 147%)

The Group's regulatory capital position is assessed against the Solvency II framework. From 1 July 2016, the Group gained approval to

assess its SCR using a partial internal model, including a full internal model for the U K Insurance Limited underwriting entity. The

model is calibrated to a 99.5% confidence interval and considers business written to date and one year of future written business

over a one-year time horizon, in line with Solvency II requirements.

During the year, the Group and its regulated entities complied with all external capital requirements.

3.5 Capital adequacy (unaudited)

Using the Group's partial internal model, there is a capital surplus of approximately £1.10 billion above an estimated SCR of £1.13

billion as at 31 December 2023 (31 December 2022: £0.57 billion and £1.21 billion respectively). The Group's capital requirements

and solvency position are produced and presented to the Board on a regular basis.

4. Segmental analysis

The Chief Operating decision makers, being the Acting Chief Executive Officer and the Chief Financial Officer, regularly review the

operating results at the segmental level as described below and disclosed in the tables in this note to assess performance and make

decisions about allocation of resources.

Motor

This segment consists of personal motor insurance together with the associated legal protection cover. The Group sells motor

insurance direct to customers through its own brands Direct Line, Churchill, Privilege and Darwin, and through partnership brands

such as vehicle manufacturers and through price comparison websites ("PCWs").

Home

This segment consists of home insurance together with associated legal protection cover. The Group sells home insurance products

through its brands Direct Line, Churchill and Privilege, and its partnership brands (Royal Bank of Scotland and NatWest), as well as

through PCWs.

Rescue and other personal lines

This segment consists of rescue products which are sold direct through the Group's own brand, Green Flag, and other personal lines

insurance, including travel, pet and creditor sold through its own brands Direct Line, Churchill and Privilege, and through partnership

brands and through PCWs.

Commercial

This segment consists of commercial insurance for small and micro-sized enterprises sold direct through the Group's brands Direct

Line for Business and Churchill. Both brands sell products directly to customers and Churchill also sells products through PCWs.

Notes to the Consolidated Financial Statements continued

210

Direct Line Group Annual Report and Accounts 2023

210 Direct Line Group Annual Report and Accounts 2023

Brokered commercial business and run-off

partnerships

On 6 September 2023 the Group announced the sale of its brokered commercial insurance business to Royal & Sun Alliance

Insurance Limited. Under the terms of the agreement, the Group has retained the back book of the business written and earned

prior to 1 October 2023 (the "Risk Transfer Date"). Business written subsequent to the Risk Transfer Date is subject to a quota share

arrangement between the two companies. Over time the two companies intend to enter into discussions regarding the potential

transfer of the back book of policies written prior to the Risk Transfer Date.

The Group has exited, or is seeking to exit, three partnerships which will reduce its exposure to low margin packaged bank accounts

so it can redeploy capital to higher return segments. The run-off partnerships relate to a Rescue partnership with NatWest Group

that expired in December 2022 and Travel partnerships with NatWest Group and Nationwide Building Society which expire in 2024,

where the Group has indicated that it will not be seeking to renew.

The Group has aggregated and excluded the results of the brokered commercial business and run-off partnerships from its ongoing

results and has restated all relevant comparatives across the report. Results relating to ongoing operations will be clearly labelled.

The segmental analysis has been amended to reflect the changes. The profit/(loss) before restructuring and one-off costs relating to

the brokered commercial business and run-off partnerships in 2023 was £50.0 million profit and £28.0 million loss (2022: £17.9

million profit and £13.6 million loss respectively).

Inter-segmental transactions

No inter-segment transactions occurred in the year ended 31 December 2023 (2022: £nil). If any transaction were to occur, transfer

prices between operating segments would be set on an arm's-length basis in a manner similar to transactions with third parties.

Segment income, expenses and results will include those transfers between business segments which will then be eliminated on

consolidation.

For each operating segment, there are no individual policyholders or customers that represent 10% or more of the Group's total

revenue.

The table below analyses the Group's revenue and results by reportable segment for the year ended 31 December 2023.

1,2

					Total Group -	Brokered		Restructuring
					ongoing	commercial	Run-off	and one-off	Total
	Motor	Home	RoPL	Commercial	1	business	partnerships	costs
					operations				Group
	£m	£m	£m	£m	£m	£m	£m		£m
Insurance revenue	1,805.4	539.7	272.9	234.9	2,852.9	600.8	148.0	—	3,601.7
Insurance service expenses	(2,145.2)	(477.4)	(229.5)	(187.4)	(3,039.5)	(564.3)	(177.7)	(24.8)	(3,806.3)
Allocation of reinsurance premiums paid	(240.5)	(36.1)	(3.7)	(25.1)	(305.4)	(163.4)	(1.4)	—	(470.2)
Amounts recoverable from reinsurers	248.7	24.0	2.3	5.2	280.2	140.8	2.4	—	423.4
Insurance service result	(331.6)	50.2	42.0	27.6	(211.8)	13.9	(28.7)	(24.8)	(251.4)
Investment return	179.3	39.2	10.7	11.8	241.0	59.0	3.0	—	303.0
Net finance expenses from insurance
contracts issued	(146.2)	(15.9)	(1.5)	(6.8)	(170.4)	(21.9)	(1.5)	—	(193.8)
Net finance (expenses)/income from reinsurance contracts held	25.5	0.9	0.1	1.0	27.5	0.4	0.1	—	28.0
Investment return and net insurance
finance result	58.6	24.2	9.3	6.0	98.1	37.5	1.6	—	137.2
Other operating income	4.2	0.4	15.3	1.5	21.4	0.4	—	—	21.8
Other operating expenses	(5.6)	(3.1)	(12.8)	(0.7)	(22.2)	(1.8)	(0.9)	(34.7)	(59.6)
(Loss)/earnings before other finance costs	(274.4)	71.7	53.8	34.4	(114.5)	50.0	(28.0)	(59.5)	(152.0)
Gain on disposal									443.9
Other finance costs									(14.5)
Profit before tax									277.4

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211Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

4. Segmental analysis continued

The table below analyses the Group's assets and liabilities by reportable segment at 31 December 2023

1,2

					Total Group -	Brokered
					ongoing	commercial	Run-off	Total
	Motor	Home	RoPL	Commercial	1	business	partnerships
					operations			Group
	£m	£m	£m	£m	£m	£m	£m	£m
Goodwill	134.0	45.8	28.7	—	208.5	—	—	208.5
Assets held for sale	8.7	1.6	0.4	0.7	11.4	2.3	0.2	13.9
Other segment assets	4,356.6	783.1	230.6	324.9	5,695.2	1,059.6	88.6	6,843.4
Reinsurance contract assets	1,076.4	36.6	3.6	23.0	1,139.6	203.6	2.8	1,346.0
Insurance contract assets	—	—	—	—	—	—	5.4	5.4
Reinsurance contract liabilities	(16.9)	(4.7)	(1.5)	(3.4)	(26.5)	(89.6)	(0.5)	(116.6)
Insurance contract liabilities	(3,305.9)	(583.1)	(155.9)	(250.1)	(4,295.0)	(866.0)	(77.8)	(5,238.8)
Other segment liabilities	(415.1)	(73.2)	(19.6)	(31.4)	(539.3)	(108.7)	(9.1)	(657.1)
Segment net assets	1,837.8	206.1	86.3	63.7	2,193.9	201.2	9.6	2,404.7

Notes:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

2. See glossary on page 263 for definitions. The Group incurred £59.5 million of restructuring and one-off costs in 2023, which were predominantly

driven by work carried out in relation to the Group’s two past business reviews, cost efficiency initiatives and impairments.

3. This segmental analysis is prepared using a combination of asset and liability balances directly attributable to each operating segment and an

apportionment of assets and liabilities managed at a Group-wide level. This does not represent the Group's view of the capital requirements for its

operating segments.

The table below analyses the Group's restated revenue and results by reportable segment for the year ended 31 December 2022.

1,2

					Total Group -	Brokered		Restructuring
					ongoing	commercial	Run-off	and one-off	Total
	Motor	Home	RoPL	Commercial	1	business	partnerships	costs
					operations				Group
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Insurance revenue	1,555.3	560.7	282.1	211.8	2,609.9	496.4	122.8	—	3,229.1
Insurance service expenses	(1,636.2)	(540.8)	(223.4)	(192.9)	(2,593.3)	(419.5)	(132.7)	—	(3,145.5)
Allocation of reinsurance premiums paid	(77.2)	(26.5)	(2.3)	(22.1)	(128.1)	(36.9)	(0.7)	—	(165.7)
Amounts recoverable from/(payable to)
reinsurers	87.4	3.1	(0.7)	(1.8)	88.0	8.4	—	—	96.4
Insurance service result	(70.7)	(3.5)	55.7	(5.0)	(23.5)	48.4	(10.6)	—	14.3
Investment return	(140.3)	(29.8)	(7.1)	(8.1)	(185.3)	(39.6)	(2.2)	—	(227.1)
Net finance income/(expenses) from insurance contracts issued	81.8	5.0	1.2	3.4	91.4	11.1	(0.1)	—	102.4
Net finance expenses from reinsurance
contracts held	(94.8)	(0.4)	—	(1.2)	(96.4)	(5.1)	—	—	(101.5)
Investment return and net insurance
finance result	(153.3)	(25.2)	(5.9)	(5.9)	(190.3)	(33.6)	(2.3)	—	(226.2)
Other operating income	(6.4)	0.5	11.4	1.6	7.1	1.2	—	—	8.3
Other operating expenses	(21.9)	(2.5)	(8.5)	(0.8)	(33.7)	1.9	(0.7)	(45.3)	(77.8)
(Loss)/earnings before other finance costs	(252.3)	(30.7)	52.7	(10.1)	(240.4)	17.9	(13.6)	(45.3)	(281.4)
Other finance costs									(20.4)
Loss before tax									(301.8)

Notes to the Consolidated Financial Statements continued

212

Direct Line Group Annual Report and Accounts 2023

212 Direct Line Group Annual Report and Accounts 2023

The table below analyses the Group's restated assets and liabilities by reportable segment at 31 December 2022

1,2

					Total Group -	Brokered
					ongoing	commercial	Run-off	Total
	Motor	Home	RoPL	Commercial	1	business	partnerships
					operations			Group
	£m	£m	£m	£m	£m	£m	£m	£m
Goodwill	130.4	45.8	28.7	—	204.9	10.1	—	215.0
Assets held for sale	25.4	5.0	1.5	1.9	33.8	6.8	0.3	40.9
Other segment assets	3,818.4	736.1	246.1	287.2	5,087.8	939.3	48.5	6,075.6
Reinsurance contract assets	956.1	19.1	1.4	20.0	996.6	78.0	0.3	1,074.9
Insurance contract assets	—	—	—	—	—	—	17.3	17.3
Reinsurance contract liabilities	—	(5.2)	(1.2)	(2.6)	(9.0)	(4.5)	(0.4)	(13.9)
Insurance contract liabilities	(2,860.2)	(567.0)	(171.5)	(214.9)	(3,813.6)	(755.5)	(56.7)	(4,625.8)
Other segment liabilities	(367.5)	(72.9)	(22.0)	(27.6)	(490.0)	(97.1)	(5.1)	(592.2)
Segment net assets	1,702.6	160.9	83.0	64.0	2,010.5	177.1	4.2	2,191.8

Notes:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

2. See glossary on page 263 for definitions.

3. This segmental analysis is prepared using a combination of asset and liability balances directly attributable to each operating segment and an

apportionment of assets and liabilities managed at a Group-wide level. This does not represent the Group's view of the capital requirements for its

operating segments.

5. Insurance service result

	2023	2022
	£m	£m
		restated
Insurance revenue	3,601.7	3,229.1
Insurance service expenses
Incurred claims and other claims expenses	(2,860.3)	(2,435.3)
Past service – incurred claims	(80.9)	118.0
Other directly attributable expenses	(907.9)	(871.0)
Other directly attributable claims income	42.8	42.8
Total insurance service expenses	(3,806.3)	(3,145.5)
Expenses from reinsurance contracts held
Reinsurance premium paid	(613.0)	(141.6)
Movement in asset for remaining coverage	142.8	(24.1)
Allocation of reinsurance premiums paid	(470.2)	(165.7)
Insurance claims recoverable from reinsurance contracts held
Claims recovered	495.7	92.2
Past service – claim recoveries	(63.1)	12.6
Other directly attributable expenses	(3.4)	—
Effect of non-performance risk of reinsurers	(5.8)	(8.4)
Total amounts recoverable from reinsurance contracts held	423.4	96.4
Total insurance service result	(251.4)	14.3

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. This includes vehicle replacement referral fees, salvage income and legal services fees which have been assessed as part of the IFRS 17 contract

boundary.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 213

213Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

6. Investment return and net insurance financial result

	2023	2022
	£m	£m
		restated
Amounts recognised in profit or loss
Interest income calculated using effective interest rate method:
Debt securities	78.9	78.7
Cash and cash equivalents	65.2	13.9
Infrastructure debt	14.8	7.9
Commercial real estate loans	12.9	8.8
Total interest income calculated using effective interest rate method	171.8	109.3
Rental income from investment property	16.1	15.6
Other interest and similar income	16.1	15.6
Investment income	187.9	124.9
Investment fees	(9.3)	(9.5)
Net investment income	178.6	115.4
Net fair value gains/(losses) on financial assets held at fair value through profit or loss:
Debt securities	134.1	(370.7)
Derivatives	(6.4)	69.5
Equity investments	(0.7)	(1.6)
Total net fair value gains/(losses) on financial assets held at fair value through profit or loss:	127.0	(302.8)
Net fair value losses on investment property	(1.9)	(39.1)
Net credit impairment losses on financial investments	(0.7)	(0.6)
Investment return	303.0	(227.1)
Insurance finance (expense)/income from insurance contracts issued:
Interest accreted to insurance contracts using current financial assumptions	(193.8)	102.4
Reinsurance finance income/(expense) from reinsurance contracts issued:
Interest accreted to reinsurance contracts using current financial assumptions	28.0	(101.5)
Insurance and reinsurance finance (expenses)/income	(165.8)	0.9
Total investment return, insurance and reinsurance finance income/(expenses)	137.2	(226.2)
Amounts recognised in other comprehensive income
Net fair value gains/(losses) on equity investments measured at fair value through other comprehensive income	2.7	(0.6)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details .

Notes to the Consolidated Financial Statements continued

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214 Direct Line Group Annual Report and Accounts 2023

The table below analyses the realised and unrealised gains and losses on derivative instruments included in investment return.

	2023	2022
	£m	£m
		restated
(Losses)/gains on hedging instruments:
Foreign exchange forward contracts 2	43.0	(184.1)
Associated foreign exchange risk	(48.5)	184.7
Net (losses)/gains on foreign exchange contracts	(5.5)	0.6
Interest rate swaps:
(Losses)/gains on interest rate swaps²	(0.9)	68.9
Total (losses)/gains on hedging instruments	(6.4)	69.5

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. Foreign exchange forward contracts and interest rate swaps are measured at fair value through the statement of profit or loss, other than a small

number of immaterial cash flow hedges.

The Group holds fixed rate USD and EUR denominated bonds whose fair value is exposed to movements in interest rates. In order to

economically hedge the interest rate risk of these bonds the Group enters into interest rate swaps, paying a fixed rate and receiving a

floating rate.

7. Other operating expenses

	2023	2022
	£m	£m
		restated
Non-directly attributable IT and other operating expenses	33.4	42.2
Non-directly attributable staff expenses	15.7	10.5
Impairment of intangible and fixed assets	10.5	25.1
Total other operating expenses	59.6	77.8

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

The table below analyses the number of people employed by the Group's operations.

	At 31 December		Average for the year
	2023	2022	2023	2022
Insurance operations	7,015	6,523	6,743	6,828
Repair centre operations	1,715	1,508	1,620	1,433
Support	1,401	1,356	1,321	1,407
Total	10,131	9,387	9,684	9,668

The aggregate remuneration of those employed by the Group's operations comprised:

	2023	2022
	£m	£m
Wages and salaries	421.4	391.6
Social security costs	47.7	43.9
Pension costs	28.7	26.5
Share-based payments	13.9	8.2
Total	511.7	470.2

Of the total aggregate remuneration, £15.7 million relates to other operating expenses with the remainder included within the

Insurance service result as part of other directly attributable expenses, see note 5 for further details.

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Strategic Report / Governance / Financial statements

7. Other operating expenses continued

The table below analyses Auditor's remuneration in respect of the Group's operations.

	2023	2022
	£m	£m
Fees payable for the audit of:
The Company's annual accounts	0.5	0.4
The Company's subsidiaries	3.3	2.6
Total audit fees	3.8	3.0
Audit-related assurance services	0.4	0.2
Other assurance services	0.2	—
Non-audit services	1.6	—
Total	6.0	3.2

Notes:

1. Total audit fees, excluding VAT.

2. An additional non-audit service has been provided in 2024 for fees of £0.4 million for reporting accountant services.

Aggregate Directors' emoluments

The table below analyses the total amount of Directors' remuneration in accordance with Schedule 5 to the Accounting Regulations.

	2023	2022
	£m	£m
Salaries, fees, bonuses and benefits in kind	3.7	2.6
Gains on exercise of share options	0.3	1.8
Total	4.0	4.4

Further information about the remuneration of individual Directors is provided in the Directors' Remuneration Report.

At 31 December 2023, no Directors (2022: no Directors) had retirement benefits accruing under the defined contribution pension

scheme in respect of qualifying service. During the year ended 31 December 2023, one Director exercised share options (2022: two

Directors).

8. Other finance costs

	2023	2022
	£m	£m
		restated
Interest expense on subordinated liabilities	10.5	17.8
Net interest received on interest rate swap	—	(2.2)
Unrealised losses on interest rate swap	—	2.4
Amortisation of arrangement costs, discount on issue and fair value hedging adjustment of subordinated liabilities	0.2	(0.8)
Interest expense on lease liabilities	3.8	3.1
Other interest expense	—	0.1
Total	14.5	20.4

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

Notes to the Consolidated Financial Statements continued

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216 Direct Line Group Annual Report and Accounts 2023

9. Gain on disposal of business

On 6 September 2023, the Group announced that it had entered into an agreement with Royal & Sun Alliance Insurance Limited

(“RSA”), a wholly-owned subsidiary of Intact Financial Corporation, to dispose of its brokered commercial business. The disposal was

structured through several agreements, including:

– A business transfer agreement, which related to the transfer of the new business franchise and certain operations, brands,

employees, contractors, data, third party contracts and premises, with the operational transfer targeted to occur in Q2 2024.

Certain aspects of the overall business transfer are expected to take place following the initial operational transfer, whereupon RSA

will start to write relevant business. On completion of the transaction on 26 October 2023 when the cash consideration was

received, the Group lost control of the net assets in relation to the brokered commercial business and as a result, these net assets

have been de-recognised in the consolidated statement of financial position and the gain on disposal recognised in the

consolidated statement of profit or loss.

– A quota share arrangement relating to the reinsurance of new and certain existing brokered commercial business with effect from

1 October 2023, the risk transfer date, which transferred the economics of the business from this date. The arrangement included

business written but not yet earned prior to the risk transfer date and new policies from the risk transfer date until the date of

operational transfer. If approved by the Court, and in due course, a subsequent insurance business transfer scheme to transfer

these policies to RSA will take place under Part VII of the Financial Services and Markets Act 2000.

– Certain administration and transitional services arrangements to be entered into in connection with operational transfer, including

the servicing of policies during the transition.

The Group has retained the back book in relation to business written and earned before 1 October 2023.

On 19 October 2023, the Group's shareholders approved the sale transaction. The cash consideration of £520 million was received on

26 October 2023,

There is potential for further consideration of up to £30 million contingent upon certain earn-out provisions relating to the financial

performance of the business. At 31 December 2023, the fair value of the contingent consideration was determined to be nil due to

inherent uncertainty at this point on how the disposed business will perform until the conclusion of the earn out period.

A pre-tax gain on disposal of £443.9 million, net of transaction costs, has been recognised in the consolidated statement of profit or

loss.

The operations of the brokered commercial business have not been classified as discontinued operations since they do not represent

a separate major line of business or geographical operations.

The proceeds from the transaction will be used to enhance the capital strength of the Group and for general corporate purposes.

	2023
	£m
Cash consideration	520.0
Less: Net assets disposed of	(6.3)
Transaction cost	(50.3)
Assets written-off and impaired as part of disposal	(19.5)
Gain on disposal – pre-tax impact	443.9

The table below summarises the statement of financial position of brokered commercial business as at date of disposal:

	2023
	£m
Assets
Intangible assets	6.9
Property, plant & equipment	0.5
Right of use assets	0.6
Prepayments, accrued income and other assets	0.2
Total assets	8.2
Liabilities
Trade and other payables	(0.1)
Provisions	(0.8)
Lease liabilities	(1.0)
Total liabilities	(1.9)
Net assets disposed of	6.3

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Strategic Report / Governance / Financial statements

10. Tax charge/(credit)

	2023	2022
	£m	£m
		restated
Current taxation:
Charge/(credit) for the year	24.3	(9.8)
Over-provision in respect of prior period	(2.6)	(3.0)
	21.7	(12.8)
Deferred taxation (note 13):
Charge/(credit) for the year	29.5	(61.0)
Under-provision for the year-provision in respect of prior year	3.3	3.9
	32.8	(57.1)
Current taxation	21.7	(12.8)
Deferred taxation (note 11)	32.8	(57.1)
Tax charge/(credit) for the year	54.5	(69.9)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

The following table analyses the difference between the actual income tax (credit)/charge and the expected income tax (credit)/

charge computed by applying the standard rate of corporation tax of 23.5%

(2022: 19.0%).

	2023	2022
	£m	£m
		restated
Profit/(loss) for the year	277.4	(301.8)
Expected tax charge/(credit)	65.2	(57.3)
Effects of:
Previously unrecognised capital losses now offset against capital gains	(12.4)	—
Disallowable expenses	3.7	3.4
Non-taxable items	(0.1)	(0.3)
Movement in deferred tax asset/liability not recognised	(0.1)	—
Higher tax rates on overseas earnings	—	0.1
Effect of change in corporation taxation rate		(15.2)
	0.2
Under-provision in respect of prior year	0.7	0.9
Revaluation of property	1.2	1.7
Deductible Tier 1 notes coupon payment in equity	(3.9)	(3.2)
Tax charge/(credit) for the year	54.5	(69.9)
Effective income tax rate	19.6%	23.2%

Notes:

1. In the Finance Act 2021, the UK Government enacted, on 10 June 2021, an increase in the UK corporation tax rate from 19% to 25% effective from 1

April 2023. As a consequence the closing deferred tax assets and liabilities have been recognised at the tax rates expected to apply when the

temporary differences reverse. The impact of these changes on the tax (credit)/charge for the year is set out in the table above.

2. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

Notes to the Consolidated Financial Statements continued

218

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218 Direct Line Group Annual Report and Accounts 2023

11. Current and deferred tax

The aggregate current and deferred tax relating to items that are credited to equity is £0.3 million (2022: £0.2 million).

The table below analyses the major deferred tax assets and liabilities recognised by the Group and movements thereon.

	Provisions and		Depreciation		Transitional	Transitional
	other	Retirement	in excess of	Share-	adjustments	adjustments
	temporary	benefit	capital	based	on adoption	on adoption
	differences	obligations	allowances	payments	of IFRS 9	of IFRS 17	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2022 (restated¹)	6.0	(3.1)	(4.7)	3.5	(1.7)	29.4	29.4
(Charge)/credit to the statement of profit or loss	(1.4)	0.2	(4.3)	(1.7)	67.1	(2.8)	57.1
Credit to other comprehensive income	—	2.5	—	—	—	—	2.5
Credit direct to equity	—	—	—	—	—	—	—
At 31 December 2022¹	4.6	(0.4)	(9.0)	1.8	65.4	26.6	89.0
(Charge)/credit to the statement of profit or loss	(2.9)	0.1	2.0	0.9	(6.3)	(26.6)	(32.8)
Credit direct to equity	—	—	—	0.3	—	—	0.3
At 31 December 2023	1.7	(0.3)	(7.0)	3.0	59.1	—	56.5

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

A deferred tax asset of £59.1 million (2022: £65.4 million) relates to future tax relief on adoption of IFRS 9 which is spread evenly over

10 years from 1 January 2023. A deferred tax asset of £Nil (2022: £26.6 million) relates to tax relief on adoption of IFRS17 which is

applicable in 2023. Other deferred tax assets will be recovered over a period of 1 to 12 years.

As at 31 December 2023, the Group has an unrecognised deferred tax asset of £0.1 million (2022: £13.0 million) in relation to capital

losses, of which £Nil (2022 £11.8 million) relates to realised losses and £0.1 million (2022 £1.2 million) related to unrealised losses.

Deferred tax assets have been recognised in respect of IFRS 9 transitional tax adjustments and all other temporary differences

because it is probable that these assets will be recovered, with the exception of unrecognised capital losses, where recovery is

uncertain as it is dependent on realising future capital gains. The deferred tax asset in respect of IFRS 9 transitional tax adjustments

is relieved for tax over 10 years from the adoption of IFRS 9 on 1 January 2023. Other deferred tax assets will be recovered over a

period of one to 12 years.

Recovery of deferred tax assets is dependent on future taxable profits, which are expected to arise in future years without the

combination of factors that led to the trading losses for 2023 and 2022, and without the one off gain on disposal of the brokered

commercial business in 2023. Probability of recovery has been assessed based on the group’s forecasts for the next four years which

anticipate a return to profitability, and it is assumed that sufficient profits will continue to be realised in subsequent years for offset of

the remaining future tax deductions.

12. Dividends and appropriations

	2023	Full year 2022
	£m	£m
Amounts recognised as distributions to equity holders in the period:
2022 interim dividend of 7.6 pence per share paid on 9 September 2022	—	99.0
2021 final dividend of 15.1 pence per share paid on 17 May 2022	—	198.9
	—	297.9
Coupon payments in respect of Tier 1 notes		16.6
	16.6
	16.6	314.5
Proposed dividends:
2023 final dividend of 4 pence per share	52.5	—

Note:

1. Coupon payments on the Tier 1 notes issued in December 2017 are treated as an appropriation of retained profits and, accordingly, are accounted

for when paid.

The proposed final dividend for 2023 has not been included as a liability in these financial statements.

The trustees of the employee share trusts waived their entitlement to dividends on shares held to meet obligations arising on the

Long-Term Incentive Plan, Deferred Annual Incentive Plan and Restricted Share Plan awards, which reduced the total dividends paid

for the year ended 31 December 2022 by £2.0 million. No dividends were paid or proposed during the year ended 31 December

2023.

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Strategic Report / Governance / Financial statements

13. Earnings/(loss) per share

Earnings per share is calculated by dividing earnings attributable to the owners of the Company less coupon payments in respect of

Tier 1 notes by the weighted average number of Ordinary Shares during the year.

Basic

Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Company less coupon payments in

respect of Tier 1 notes by the weighted average number of Ordinary Shares during the period, excluding Ordinary Shares held as

employee trust shares.

Diluted

Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Company less coupon payments

in respect of Tier 1 notes by the weighted average number of Ordinary Shares during the period, excluding Ordinary Shares held as

employee trust shares, adjusted for the dilutive potential Ordinary Shares. The Company has share options and contingently issuable

shares as categories of dilutive potential Ordinary Shares. All awards are to be satisfied using market-purchased shares.

	2023	2022
	£m	£m
		restated
Earnings/(loss) attributable to the owners of the Company	222.9	(231.9)
Coupon payments in respect of Tier 1 notes	(16.6)	(16.6)
Profit/(loss) for the calculation of earnings per share	206.3	(248.5)
Weighted average number of Ordinary Shares in issue for the purpose of basic earnings per share
(millions)	1,299.0	1,304.3
Effect of dilutive potential of share options and contingently issuable shares (millions) 2		—
	17.3
Weighted average number of Ordinary Shares for the purpose of diluted earnings per share (millions)	1,316.3	1,304.3
Basic earnings/(loss) per share (pence)	15.9	(19.1)
Diluted earnings/(loss) per share (pence)	15.7	(19.1)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. As at 31 December 2022, 15.0 million share options and contingently issuable shares are not included in the calculation of diluted earnings per

share because they are antidilutive. These options could potentially dilute basic earnings per share in the future.

During 2022 the Group repurchased 19,324,855 Ordinary Shares for an aggregate consideration of £50.1 million.

The shares were subsequently cancelled giving rise to a capital redemption reserve of an equivalent amount to their nominal value

as required by the Companies Act 2006.

14. Net asset value per share and return on equity

Net asset value per share is calculated as total shareholders' equity (which excludes Tier 1 notes) divided by the number of Ordinary

Shares at the end of the period excluding shares held by employee share trusts.

Tangible net asset value per share is calculated as total shareholders' equity less goodwill and other intangible assets divided by the

number of Ordinary Shares at the end of the period, excluding shares held by employee share trusts.

The table below analyses net asset and tangible net asset value per share:

	2023	2022
	£m	£m
		restated
Net assets	2,058.2	1,845.3
Goodwill and other intangible assets		(822.2)
	(818.6)
Tangible net assets	1,239.6	1,023.1
Number of Ordinary Shares (millions)	1,311.4	1,311.4
Shares held by employee trusts (millions)	(13.7)	(13.2)
Closing number of Ordinary Shares (millions)	1,297.7	1,298.2
Net asset value per share (pence)	158.6	142.1
Tangible net asset value per share (pence)	95.5	78.8

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. Goodwill has arisen on acquisition by the Group of subsidiary companies and on acquisition of new accident repair centres. Intangible assets

primarily comprise software development costs:

Notes to the Consolidated Financial Statements continued

220

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220 Direct Line Group Annual Report and Accounts 2023

Return on equity

The table below details the calculation of return on equity:

	2023	2022
	£m	£m
		restated
Earnings/(losses) attributable to the owners of the Company	222.9	(231.9)
Coupon payments in respect of Tier 1 notes	(16.6)	(16.6)
Profit/(loss) for the calculation of return on equity	206.3	(248.5)
Opening shareholders' equity	1,845.3	2,450.6
Closing shareholders' equity	2,058.2	1,845.3
Average shareholders' equity	1,951.8	2,148.0
Return on equity	10.6%	(11.6%)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

15. Goodwill and other intangible assets

		Other
		intangible
	Goodwill	assets	Total
	£m	£m	£m
Cost
At 1 January 2022	215.0	1,182.1	1,397.1
Acquisitions and additions	—	108.4	108.4
Disposals and write-off	—	(71.7)	(71.7)
At 31 December 2022	215.0	1,218.8	1,433.8
Acquisitions and additions	3.6	124.1	127.7
Disposals and write-off	(10.1)	(14.1)	(24.2)
At 31 December 2023	208.5	1,328.8	1,537.3
Accumulated amortisation and impairment
At 1 January 2022	—	574.6	574.6
Amortisation charge for the year	—	92.7	92.7
Disposals and write-off	—	(71.7)	(71.7)
Impairment losses	—	16.0	16.0
At 31 December 2022	—	611.6	611.6
Amortisation charge for the year	—	100.6	100.6
Disposals and write-off	—	(8.1)	(8.1)
Impairment losses	—	14.6	14.6
At 31 December 2023	—	718.7	718.7
Carrying amount
At 31 December 2023	208.5	610.1	818.6
At 31 December 2022	215.0	607.2	822.2

Notes:

1. Disposals and write-off of goodwill arose from the sale of the brokered commercial business . The sale of the brokered commercial business is

detailed further in note 9. Disposals and write-off of other intangible assets include fully amortised intangible assets no longer utilised by the Group

in its operating activities.

2. Impairment losses relate to capitalised software development costs for ongoing IT projects primarily relating to development of new systems, and

intangible assets no longer utilised by the Group in its operating activities following the sale of the brokered commercial business. Of this amount,

£5.4 million (2022: £16.0 million) is included within Other operating expenses and £9.2 million (2022: £nil) is included within Gain on disposal of

business.

Included within other intangible assets are assets still under development of £100.8 million (2022: £95.1 million). The increase of £5.7

million is primarily due to the building of a new Home platform and development of new capabilities for the Group's Motor platform.

The assets still under development at 31 December 2023 relate mainly to finance and core technology projects which are expected

to be ready for use in 2024. These assets are tested for impairment during the Group's annual impairment review at each reporting

date.

Other intangible assets relate mainly to internally generated software. For year ended 31 December 2023, other intangible assets

additions, which are internally generated, are £122.8 million (2022: £106.1 million).

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Strategic Report / Governance / Financial statements

15. Goodwill and other intangible assets continued

Goodwill arose on the acquisition of U K Insurance Limited (£141.0 million), Churchill Insurance Company Limited (£70.0 million) and

accident repair networks (£4.0 million) and is allocated to reportable segments. The addition to goodwill in the year ended

31 December 2023 of £3.6 million arose from the purchase of By Miles Group Limited ("By Miles") and the purchase of the business

and assets of a vehicle repair centre to further expand the Group's wholly owned DLG Auto Services network. The acquisitions are

further detailed in note 38.

Goodwill is allocated to cash generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs

that are expected to benefit from the business combination in which the goodwill arose. The units are identified at the lowest level

at which goodwill is monitored for internal management purposes, being the reportable segments (Note 4).

The Group's testing for impairment of goodwill and intangible assets includes the comparison of the recoverable amount of each

CGU to which goodwill and other intangible assets have been allocated with its carrying value and is updated annually for goodwill,

at each reporting date for other intangibles, and whenever there are indications of impairment.

A segment-level summary of the goodwill allocation is presented below:

	2023	2022
	£m	£m
Motor	134.0	130.4
Home	45.8	45.8
Rescue and other personal lines	28.7	28.7
Commercial	—	10.1
Total	208.5	215.0

There is no goodwill impairment for the year ended 31 December 2023 (2022: £nil).

Goodwill is tested for impairment by comparing the carrying value of the CGU to which the goodwill relates to the recoverable value

of that CGU. The recoverable amount is the value in use of the CGU unless otherwise stated.

Value in use is calculated as the discounted value of expected future profits of each business, using the Group's strategic plan

covering a five year period. The long-term growth rates have been based on gross domestic product rates adjusted for inflation. The

risk discount rates incorporate observable market long-term government bond yields and average industry betas adjusted for an

appropriate risk premium based on independent analysis.

Key assumptions used in the value in use calculation are presented below:

	Assumptions 2023		Assumptions 2022
	Terminal	Pre-tax	Terminal	Pre-tax
	growth rate	discount rate	growth rate	discount rate
Segment	%	%	%	%
Motor	1.5	11.3	1.5	11.4
Home	1.5	11.3	1.5	11.4
Rescue and other personal lines	1.5	11.3	1.5	11.4
Commercial	—	—	1.5	11.4

Management considers that no reasonably possible changes to the key assumptions would reduce a CGU’s headroom to £nil.

Sensitivity information on the key assumptions have been presented below, as management consider it to be helpful for users:

			Change to key assumptions needed to reduce headroom to nil
		Reduction to
	Headroom	future profits in	Reduction in	Increase in pre-
	under key	the Groups	terminal	tax discount
	assumptions	strategic plan 2	growth rate	rate
Segment	£m	%	% (abs)	% (abs)
Motor	1,333.0	41.5	12.2	6.2
Home	307.8	58.8	35.1	12.0
Rescue and other personal lines	508.6	83.6	n/a	34.1

1. No change in this metric could reduce the headroom to nil.

2. In the equivalent disclosure included within the 2022 annual report and accounts, the 'discount in forecast pre-tax profits' sensitivity metric

incorrectly referenced a 1% movement, rather than the 10% sensitivity scenario reflected in the figures in the table.

Notes to the Consolidated Financial Statements continued

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222 Direct Line Group Annual Report and Accounts 2023

16. Property, plant and equipment

	Land and	Other
	buildings	equipment	Total
	£m	£m	£m
Cost
At 1 January 2022	56.7	185.3	242.0
Additions	—	11.7	11.7
Disposals	—	(7.0)	(7.0)
Assets held for sale	(19.8)	(15.8)	(35.6)
At 31 December 2022	36.9	174.2	211.1
Acquisition of subsidiary	—	2.7	2.7
Additions	—	18.9	18.9
Disposals	—	(8.8)	(8.8)
At 31 December 2023	36.9	187.0	223.9
Accumulated depreciation and impairment
At 1 January 2022	4.4	123.8	128.2
Depreciation charge for the year	0.8	11.6	12.4
Disposals	—	(5.5)	(5.5)
Assets held for sale	(0.6)	(7.1)	(7.7)
At 31 December 2022	4.6	122.8	127.4
Depreciation charge for the year	0.5	10.5	11.0
Disposals	—	(6.1)	(6.1)
At 31 December 2023	5.1	127.2	132.3
Carrying amount
At 31 December 2023	31.8	59.8	91.6
At 31 December 2022	32.3	51.4	83.7

The Group is satisfied that the aggregate fair value of property, plant and equipment is not less than its carrying value.

17. Right-of-use assets

	Property	Motor vehicles	IT equipment	Total
	£m	£m	£m	£m
Cost
At 1 January 2022	116.6	10.9	1.2	128.7
Additions	4.4	2.4	—	6.8
Disposals	—	(3.7)	(1.2)	(4.9)
At 31 December 2022	121.0	9.6	—	130.6
Additions	30.9	5.5	—	36.4
Disposals	(6.9)	(5.0)	—	(11.9)
At 31 December 2023	145.0	10.1	—	155.1
Accumulated depreciation and impairment
At 1 January 2022	44.2	7.4	1.0	52.6
Depreciation charge for the year	7.1	2.6	0.2	9.9
Disposals	—	(3.7)	(1.2)	(4.9)
At 31 December 2022	51.3	6.3	—	57.6
Depreciation charge for the year	9.1	2.8	—	11.9
Disposals	(5.8)	(4.7)	—	(10.5)
At 31 December 2023	54.6	4.4	—	59.0
Carrying amount
At 31 December 2023	90.4	5.7	—	96.1
At 31 December 2022	69.7	3.3	—	73.0

The average contract duration at inception for Property is 20 years, and for Motor vehicles is three years. The maturity analysis of lease

liabilities is presented in note 36.

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Strategic Report / Governance / Financial statements

18. Investment property

		Retail				Alternative
	Retail	warehouse	Supermarkets	Industrials	Hotels	sector	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2022	26.6	22.7	56.9	134.2	58.4	18.2	317.0
Capitalised expenditure	0.3	0.2	—	0.1	—	—	0.6
Fair value adjustments	(1.6)	(1.6)	(5.8)	(22.3)	(8.1)	0.3	(39.1)
At 31 December 2022¹	25.3	21.3	51.1	112.0	50.3	18.5	278.5
Capitalised expenditure	0.1	—	—	0.4	—	—	0.5
Fair value adjustments	(1.0)	(0.5)	(4.0)	3.3	0.2	0.1	(1.9)
At 31 December 2023¹	24.4	20.8	47.1	115.7	50.5	18.6	277.1

Note:

1. The cost included in the carrying value at 31 December 2023 is £217.0 million (2022: £216.4 million).

The investment properties are measured at fair value derived from valuation work carried out at the statement of financial position

date by independent property valuers. The valuation conforms to international valuation standards. The fair value was determined

using a methodology based on recent market transactions for similar properties, which have been adjusted for the specific

characteristics of each property within the portfolio. This approach to valuation is consistent with the methodology used in the year

ended 31 December 2022.

Lease agreements with tenants are drawn up in line with local practice and the Group has no exposure to leases that include

contingent rents.

The following tables provide a sensitivity analysis for +/- 5 basis points and +/- 50 basis points movement in tenants' rental income

and impact on property valuation in sterling:

2023

				Baseline as at
				31 December
		-50bp	-5bp	2023	+5bp	+50bp
Equivalent yield	%	5.31	5.81	5.87	5.92	6.42
Value	£m	253.5	274.6	277.1	279.8	305.7

2022

				Baseline as at
				31 December
		-50bp	-5bp	2022	+5bp	+50bp
Equivalent yield	%	4.98	5.47	5.53	5.58	6.07
Value	£m	253.5	275.4	278.5	280.9	308.1

19. Subsidiaries

The principal subsidiary undertakings of the Group, over which it exercises 100% voting power, are shown below. Their capital

consists of Ordinary Shares which are unlisted. All subsidiaries (a full list of which is included in note 2 of the Parent Company's

financial statements) are included in the Group's consolidated financial statements.

	Company
	registration	Place of incorporation
Name of subsidiary	number	and operation	Principal activity
DL Insurance Services Limited	03001989	United Kingdom	Management services
U K Insurance Limited	01179980	United Kingdom	General insurance

The Group acquired four subsidiary entities in 2023. These were: By Miles Group Limited, By Miles Limited, By Miles Payment Services

Limited and By Miles Technology Services Limited. It did not dispose of any subsidiaries in the year ended 31 December 2023

(31 December 2022: 10-15 Livery Street was dissolved on 29 December 2022).

Notes to the Consolidated Financial Statements continued

224

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224 Direct Line Group Annual Report and Accounts 2023

20. Insurance contract assets and liabilities - gross and reinsurance

Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See

notes 1 and 40 for further details.

20.1 Insurance and reinsurance contract assets and liabilities by segment

						Brokered
						commercial
					Total Group -	business and
					ongoing	run-off
	Motor	Home	RoPL	Commercial	1	partnerships
					operations		Total Group
	£m	£m	£m	£m	£m	£m	£m
2023
Insurance contract assets	—	—	—	—	—	5.4	5.4
Insurance contract liabilities	(3,305.9)	(583.1)	(155.9)	(250.1)	(4,295.0)	(943.8)	(5,238.8)
Net insurance contract liabilities	(3,305.9)	(583.1)	(155.9)	(250.1)	(4,295.0)	(938.4)	(5,233.4)
Reinsurance contract assets	1,076.4	36.6	3.6	23.0	1,139.6	206.4	1,346.0
Reinsurance contract liabilities	(16.9)	(4.7)	(1.5)	(3.4)	(26.5)	(90.1)	(116.6)
Net reinsurance contract assets	1,059.5	31.9	2.1	19.6	1,113.1	116.3	1,229.4
2022
Insurance contract assets	—	—	—	—	—	17.3	17.3
Insurance contract liabilities	(2,860.2)	(567.0)	(171.5)	(214.9)	(3,813.6)	(812.2)	(4,625.8)
Net insurance contract liabilities	(2,860.2)	(567.0)	(171.5)	(214.9)	(3,813.6)	(794.9)	(4,608.5)
Reinsurance contract assets	956.1	19.1	1.4	20.0	996.6	78.3	1,074.9
Reinsurance contract liabilities	—	(5.2)	(1.2)	(2.6)	(9.0)	(4.9)	(13.9)
Net reinsurance contract assets	956.1	13.9	0.2	17.4	987.6	73.4	1,061.0

						Brokered
						commercial
					Total Group -	business and
					ongoing	run-off
	Motor	Home	RoPL	Commercial	1	partnerships
					operations		Total Group
	£m	£m	£m	£m	£m	£m	£m
2023
Insurance contracts assets/(liabilities)
Remaining coverage	(514.7)	(177.9)	(84.2)	(91.9)	(868.7)	(283.8)	(1,152.5)
Excluding loss component	(514.7)	(177.9)	(84.2)	(91.9)	(868.7)	(283.8)	(1,152.5)
Loss component	—	—	—	—	—	—	—
Incurred claims	(2,791.2)	(405.2)	(71.7)	(158.2)	(3,426.3)	(654.6)	(4,080.9)
Estimate of present value cash flows	(2,647.6)	(385.3)	(68.8)	(150.0)	(3,251.7)	(622.3)	(3,874.0)
Risk adjustment	(143.6)	(19.9)	(2.9)	(8.2)	(174.6)	(32.3)	(206.9)
Total insurance contracts assets/(liabilities)	(3,305.9)	(583.1)	(155.9)	(250.1)	(4,295.0)	(938.4)	(5,233.4)
2022
Insurance contracts assets/(liabilities)
Remaining coverage	(451.7)	(141.5)	(91.7)	(86.4)	(771.3)	(224.0)	(995.3)
Excluding loss component	(451.7)	(141.5)	(91.7)	(86.4)	(771.3)	(224.0)	(995.3)
Loss component	—	—	—	—	—	—	—
Incurred claims	(2,408.5)	(425.5)	(79.8)	(128.5)	(3,042.3)	(570.9)	(3,613.2)
Estimate of present value cash flows	(2,259.6)	(400.4)	(76.0)	(119.4)	(2,855.4)	(538.9)	(3,394.3)
Risk adjustment	(148.9)	(25.1)	(3.8)	(9.1)	(186.9)	(32.0)	(218.9)
Total insurance contracts assets/(liabilities)	(2,860.2)	(567.0)	(171.5)	(214.9)	(3,813.6)	(794.9)	(4,608.5)

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20. Insurance contract assets and liabilities - gross and reinsurance continued

						Brokered
						commercial
					Total Group -	business and
					ongoing	run-off
	Motor	Home	RoPL	Commercial	1	partnerships
					operations		Total Group
	£m	£m	£m	£m	£m	£m	£m
2023
Reinsurance contracts assets/(liabilities)
Remaining coverage	(16.9)	(4.7)	(1.5)	(3.4)	(26.5)	(90.1)	(116.6)
Excluding loss recovery component	(16.9)	(4.7)	(1.5)	(3.4)	(26.5)	(90.1)	(116.6)
Loss recovery component	—	—	—	—	—	—	—
Incurred claims	1,076.4	36.6	3.6	23.0	1,139.6	206.4	1,346.0
Estimate of present value cash flows	1,012.7	32.8	3.1	21.0	1,069.6	194.8	1,264.4
Risk adjustment	63.7	3.8	0.5	2.0	70.0	11.6	81.6
Total reinsurance contracts assets/(liabilities)	1,059.5	31.9	2.1	19.6	1,113.1	116.3	1,229.4
2022
Reinsurance contracts assets/(liabilities)
Remaining coverage	13.3	(5.2)	(1.2)	(2.6)	4.3	(4.9)	(0.6)
Excluding loss recovery component	13.3	(5.2)	(1.2)	(2.6)	4.3	(4.9)	(0.6)
Loss recovery component	—	—	—	—	—	—	—
Incurred claims	942.8	19.1	1.4	20.0	983.3	78.3	1,061.6
Estimate of present value cash flows	866.6	13.5	0.6	17.2	897.9	68.4	966.3
Risk adjustment	76.2	5.6	0.8	2.8	85.4	9.9	95.3
Total reinsurance contracts assets/(liabilities)	956.1	13.9	0.2	17.4	987.6	73.4	1,061.0

Note:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 263 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

Notes to the Consolidated Financial Statements continued

226

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226 Direct Line Group Annual Report and Accounts 2023

20.2.1 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for incurred claims – total Group

			Insurance contracts issued - liability for			Reinsurance contracts held - amounts
			incurred claims			recovered on incurred claims	Net
		Risk			Risk
	Estimate of	adjustment		Estimate of	adjustment
	present value	for non-		present value	for non-
	cash flows	financial risk	Total	cash flows	financial risk	Total	Total
	£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1
January 2022	—	—	—	1,043.8	99.7	1,143.5	1,143.5
Insurance/reinsurance contract liabilities as at 1 January 2022	(3,470.8)	(221.3)	(3,692.1)	—	—	—	(3,692.1)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022	(3,470.8)	(221.3)	(3,692.1)	1,043.8	99.7	1,143.5	(2,548.6)
Insurance service expenses:
Incurred claims/claims recovered and other attributable expenses	(2,369.9)	(65.4)	(2,435.3)	75.6	16.6	92.2	(2,343.1)
Past service – incurred claims	50.2	67.8	118.0	33.6	(21.0)	12.6	130.6
Effect of non-performance risk of reinsurers				(8.4)		(8.4)	(8.4)
Insurance service result	(2,319.7)	2.4	(2,317.3)	100.8	(4.4)	96.4	(2,220.9)
Insurance/reinsurance finance expenses/
income	102.4		102.4	(101.5)		(101.5)	0.9
Total amounts recognised in comprehensive income	(2,217.3)	2.4	(2,214.9)	(0.7)	(4.4)	(5.1)	(2,220.0)
Cash flows:
Claims and other expenses paid/recovered	2,293.8		2,293.8	(76.8)		(76.8)	2,217.0
Total cash flows	2,293.8		2,293.8	(76.8)		(76.8)	2,217.0
Insurance/reinsurance contract assets as at 31 December 2022	—	—	—	966.3	95.3	1,061.6	1,061.6
Insurance/reinsurance contract liabilities as at 31 December 2022	(3,394.3)	(218.9)	(3,613.2)	—	—	—	(3,613.2)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022	(3,394.3)	(218.9)	(3,613.2)	966.3	95.3	1,061.6	(2,551.6)
Insurance service expenses:
Incurred claims/claims recovered and other attributable expenses	(2,787.8)	(72.5)	(2,860.3)	464.6	27.7	492.3	(2,368.0)
Past service – incurred claims	(165.4)	84.5	(80.9)	(21.7)	(41.4)	(63.1)	(144.0)
Effect of non-performance risk of reinsurers				(5.8)		(5.8)	(5.8)
Insurance service result	(2,953.2)	12.0	(2,941.2)	437.1	(13.7)	423.4	(2,517.8)
Insurance/reinsurance finance expenses/
income	(193.8)		(193.8)	28.0		28.0	(165.8)
Total amounts recognised in comprehensive income	(3,147.0)	12.0	(3,135.0)	465.1	(13.7)	451.4	(2,683.6)
Cash flows:
Claims and other expenses paid/recovered	2,667.3		2,667.3	(167.0)		(167.0)	2,500.3
Total cash flows	2,667.3		2,667.3	(167.0)		(167.0)	2,500.3
Insurance/reinsurance contract assets as at 31 December 2023	—	—	—	1,264.4	81.6	1,346.0	1,346.0
Insurance/reinsurance contract liabilities as at 31 December 2023	(3,874.0)	(206.9)	(4,080.9)	—	—	—	(4,080.9)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023	(3,874.0)	(206.9)	(4,080.9)	1,264.4	81.6	1,346.0	(2,734.9)

Note:

1- The amounts recognised in Insurance service result for the year of £2,941.2 million (2022: £2,317.3 million) does not include other directly attributable

expenses of £907.9 million (2022: £871.0 million) and other directly attributable claims income of £42.8 million (2022: £42.8 million) as these are not

recognised within liabilities for incurred claims. Please see note 5.

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Strategic Report / Governance / Financial statements

20. Insurance contract assets and liabilities - gross and reinsurance continued

20.2.2 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for remaining coverage – total Group

		Insurance contracts issued - liability for			Reinsurance contracts held - asset for
		remaining coverage			remaining coverage			Net
		Excluding			Excluding
		loss	Loss		loss recovery	Loss recovery
		component	component	Total	component	component	Total	Total
		£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1 January 2022		—	—	—	38.2	—	38.2	38.2
Insurance/reinsurance contract liabilities as at 1 January 2022		(1,033.4)	—	(1,033.4)	(3.6)	—	(3.6)	(1,037.0)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022		(1,033.4)	—	(1,033.4)	34.6	—	34.6	(998.8)
Insurance revenue/reinsurance expenses		3,229.1		3,229.1	(165.7)		(165.7)	3,063.4
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		3,229.1	—	3,229.1	(165.7)	—	(165.7)	3,063.4
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		3,229.1	—	3,229.1	(165.7)	—	(165.7)	3,063.4
Cash flows:
Premium received/paid		(3,191.0)		(3,191.0)	130.5		130.5	(3,060.5)
Total cash flows		(3,191.0)		(3,191.0)	130.5		130.5	(3,060.5)
Insurance/reinsurance contract assets as at 31 December 2022		17.3	—	17.3	13.3	—	13.3	30.6
Insurance/reinsurance contract liabilities as at 31 December 2022		(1,012.6)	—	(1,012.6)	(13.9)	—	(13.9)	(1,026.5)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022		(995.3)	—	(995.3)	(0.6)	—	(0.6)	(995.9)
Insurance revenue/reinsurance expenses		3,601.7		3,601.7	(470.2)		(470.2)	3,131.5
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		3,601.7	—	3,601.7	(470.2)	—	(470.2)	3,131.5
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		3,601.7	—	3,601.7	(470.2)	—	(470.2)	3,131.5
Cash flows:
Premium received/paid		(3,758.9)		(3,758.9)	354.2		354.2	(3,404.7)
Total cash flows		(3,758.9)		(3,758.9)	354.2		354.2	(3,404.7)
Insurance/reinsurance contract assets as at 31 December 2023		5.4	—	5.4	—	—	—	5.4
Insurance/reinsurance contract liabilities as at 31 December 2023		(1,157.9)	—	(1,157.9)	(116.6)	—	(116.6)	(1,274.5)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023		(1,152.5)	—	(1,152.5)	(116.6)	—	(116.6)	(1,269.1)

Notes to the Consolidated Financial Statements continued

228

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20.3.1 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for incurred claims – ongoing operations

				Insurance contracts issued - liability for			Reinsurance contracts held - amounts
				incurred claims			recovered on incurred claims	Net
			Risk			Risk
		Estimate of	adjustment		Estimate of	adjustment
		present value	for non-		present value	for non-
		cash flows	financial risk	Total	cash flows	financial risk	Total	Total
		£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1 January 2022		—	—	—	959.2	89.1	1,048.3	1,048.3
Insurance/reinsurance contract liabilities as at 1 January 2022		(2,855.8)	(187.4)	(3,043.2)	—	—	—	(3,043.2)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022		(2,855.8)	(187.4)	(3,043.2)	959.2	89.1	1,048.3	(1,994.9)
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses	(1,988.7)	(52.6)	(2,041.3)	68.1	13.7	81.8	(1,959.5)
Past service – incurred claims		(1.8)	53.1	51.3	31.2	(17.4)	13.8	65.1
Effect of non-performance risk of reinsurers					(7.6)		(7.6)	(7.6)
Insurance service result		(1,990.5)	0.5	(1,990.0)	91.7	(3.7)	88.0	(1,902.0)
Insurance/reinsurance finance expenses/
income		91.4		91.4	(96.4)		(96.4)	(5.0)
Total amounts recognised in comprehensive income		(1,899.1)	0.5	(1,898.6)	(4.7)	(3.7)	(8.4)	(1,907.0)
Cash flows:
Claims and other expenses paid/recovered		1,899.5		1,899.5	(56.6)		(56.6)	1,842.9
Total cash flows		1,899.5		1,899.5	(56.6)		(56.6)	1,842.9
Insurance/reinsurance contract assets as at 31 December 2022		—	—	—	897.9	85.4	983.3	983.3
Insurance/reinsurance contract liabilities as at 31 December 2022		(2,855.4)	(186.9)	(3,042.3)	—	—	—	(3,042.3)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022		(2,855.4)	(186.9)	(3,042.3)	897.9	85.4	983.3	(2,059.0)
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses	(2,280.2)	(57.1)	(2,337.3)	330.9	20.7	351.6	(1,985.7)
Past service – incurred claims		(163.2)	69.4	(93.8)	(29.4)	(36.1)	(65.5)	(159.3)
Effect of non-performance risk of reinsurers					(5.8)		(5.8)	(5.8)
Insurance service result		(2,443.4)	12.3	(2,431.1)	295.7	(15.4)	280.3	(2,150.8)
Insurance/reinsurance finance expenses/
income		(170.4)		(170.4)	27.5		27.5	(142.9)
Total amounts recognised in comprehensive income		(2,613.8)	12.3	(2,601.5)	323.2	(15.4)	307.8	(2,293.7)
Cash flows:
Claims and other expenses paid/recovered		2,217.5		2,217.5	(151.5)		(151.5)	2,066.0
Total cash flows		2,217.5		2,217.5	(151.5)		(151.5)	2,066.0
Insurance/reinsurance contract assets as at 31 December 2023		—	—	—	1,069.6	70.0	1,139.6	1,139.6
Insurance/reinsurance contract liabilities as at 31 December 2023		(3,251.7)	(174.6)	(3,426.3)	—	—	—	(3,426.3)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023		(3,251.7)	(174.6)	(3,426.3)	1,069.6	70.0	1,139.6	(2,286.7)

Note:

1- The amounts recognised in Insurance service result do not include other directly attributable expenses and other directly attributable claims income,

as these are not recognised within liabilities for incurred claims.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 229

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Strategic Report / Governance / Financial statements

20. Insurance contract assets and liabilities - gross and reinsurance continued

20.3.2 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for remaining coverage – ongoing operations

		Insurance contracts issued - liability for			Reinsurance contracts held - asset for
		remaining coverage			remaining coverage			Net
		Excluding			Excluding
		loss	Loss		loss recovery	Loss recovery
		component	component	Total	component	component	Total	Total
		£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1 January 2022		—	—	—	38.2	—	38.2	38.2
Insurance/reinsurance contract liabilities as at 1 January 2022		(762.1)	—	(762.1)	(3.4)	—	(3.4)	(765.5)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022		(762.1)	—	(762.1)	34.8	—	34.8	(727.3)
Insurance revenue/reinsurance expenses		2,609.9		2,609.9	(128.1)		(128.1)	2,481.8
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		2,609.9	—	2,609.9	(128.1)	—	(128.1)	2,481.8
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		2,609.9	—	2,609.9	(128.1)	—	(128.1)	2,481.8
Cash flows:
Premium received/paid		(2,619.1)		(2,619.1)	97.6		97.6	(2,521.5)
Total cash flows		(2,619.1)		(2,619.1)	97.6		97.6	(2,521.5)
Insurance/reinsurance contract assets as at 31 December 2022		—	—	—	13.3	—	13.3	13.3
Insurance/reinsurance contract liabilities as at 31 December 2022		(771.3)	—	(771.3)	(9.0)	—	(9.0)	(780.3)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022		(771.3)	—	(771.3)	4.3	—	4.3	(767.0)
Insurance revenue/reinsurance expenses		2,852.9		2,852.9	(305.4)		(305.4)	2,547.5
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		2,852.9	—	2,852.9	(305.4)	—	(305.4)	2,547.5
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		2,852.9	—	2,852.9	(305.4)	—	(305.4)	2,547.5
Cash flows:
Premium received/paid		(2,950.3)		(2,950.3)	274.6		274.6	(2,675.7)
Total cash flows		(2,950.3)		(2,950.3)	274.6		274.6	(2,675.7)
Insurance/reinsurance contract assets as at 31 December 2023		—	—	—	—	—	—	—
Insurance/reinsurance contract liabilities as at 31 December 2023		(868.7)	—	(868.7)	(26.5)	—	(26.5)	(895.2)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023		(868.7)	—	(868.7)	(26.5)	—	(26.5)	(895.2)

Notes to the Consolidated Financial Statements continued

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20.4.1 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for incurred claims – brokered commercial business and run-off partnerships

		Insurance contracts issued - liability for				Reinsurance contracts held - amounts
		incurred claims				recovered on incurred claims		Net
			Risk			Risk
		Estimate of	adjustment		Estimate of	adjustment
		present value	for non-		present value	for non-
		cash flows	financial risk	Total	cash flows	financial risk	Total	Total
		£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1 January 2022		—	—	—	84.5	10.6	95.1	95.1
Insurance/reinsurance contract liabilities as at 1 January 2022		(615.0)	(33.9)	(648.9)	—	—	—	(648.9)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022		(615.0)	(33.9)	(648.9)	84.5	10.6	95.1	(553.8)
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses	(381.2)	(12.8)	(394.0)	7.5	2.9	10.4	(383.6)
Past service – incurred claims		51.9	14.7	66.6	2.3	(3.6)	(1.3)	65.3
Effect of non-performance risk of reinsurers					(0.7)		(0.7)	(0.7)
Insurance service result		(329.3)	1.9	(327.4)	9.1	(0.7)	8.4	(319.0)
Insurance/reinsurance finance expenses/
income		11.0		11.0	(5.1)		(5.1)	5.9
Total amounts recognised in comprehensive income		(318.3)	1.9	(316.4)	4.0	(0.7)	3.3	(313.1)
Cash flows:
Claims and other expenses paid/recovered		394.4		394.4	(20.1)		(20.1)	374.3
Total cash flows		394.4		394.4	(20.1)		(20.1)	374.3
Insurance/reinsurance contract assets as at 31 December 2022		—	—	—	68.4	9.9	78.3	78.3
Insurance/reinsurance contract liabilities as at 31 December 2022		(538.9)	(32.0)	(570.9)	—	—	—	(570.9)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022		(538.9)	(32.0)	(570.9)	68.4	9.9	78.3	(492.6)
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses	(507.6)	(15.4)	(523.0)	133.8	7.1	140.9	(382.1)
Past service – incurred claims		(2.2)	15.1	12.9	7.7	(5.4)	2.3	15.2
Effect of non-performance risk of reinsurers					—		—	—
Insurance service result		(509.8)	(0.3)	(510.1)	141.5	1.7	143.2	(366.9)
Insurance/reinsurance finance expenses/
income		(23.4)		(23.4)	0.5		0.5	(22.9)
Total amounts recognised in comprehensive income		(533.2)	(0.3)	(533.5)	142.0	1.7	143.7	(389.8)
Cash flows:
Claims and other expenses paid/recovered		449.8		449.8	(15.6)		(15.6)	434.2
Total cash flows		449.8		449.8	(15.6)		(15.6)	434.2
Insurance/reinsurance contract assets as at 31 December 2023		—	—	—	194.8	11.6	206.4	206.4
Insurance/reinsurance contract liabilities as at 31 December 2023		(622.3)	(32.3)	(654.6)	—	—	—	(654.6)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023		(622.3)	(32.3)	(654.6)	194.8	11.6	206.4	(448.2)

Note:

1- The amounts recognised in Insurance service result do not include other directly attributable expenses and other directly attributable claims income,

as these amounts are not recognised within liabilities for incurred claims.

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Strategic Report / Governance / Financial statements

20. Insurance contract assets and liabilities - gross and reinsurance continued

20.4.2 Roll-forward of net asset or liability for insurance contracts issued and reinsurance contracts held showing

the liability for remaining coverage – brokered commercial business and run-off partnerships

		Insurance contracts issued - liability for			Reinsurance contracts held - asset for
		remaining coverage			remaining coverage			Net
		Excluding			Excluding
		loss	Loss		loss recovery	Loss recovery
		component	component	Total	component	component	Total	Total
		£m	£m	£m	£m	£m	£m	£m
Insurance/reinsurance contract assets as at 1 January 2022		—	—	—	—	—	—	—
Insurance/reinsurance contract liabilities as at 1 January 2022		(271.2)	—	(271.2)	(0.2)	—	(0.2)	(271.4)
Net insurance/reinsurance contract
liabilities/assets as at 1 January 2022		(271.2)	—	(271.2)	(0.2)	—	(0.2)	(271.4)
Insurance revenue/reinsurance expenses		619.2		619.2	(37.6)		(37.6)	581.6
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		619.2	—	619.2	(37.6)	—	(37.6)	581.6
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		619.2	—	619.2	(37.6)	—	(37.6)	581.6
Cash flows:
Premium received/paid		(572.0)		(572.0)	32.9		32.9	(539.1)
Total cash flows		(572.0)		(572.0)	32.9		32.9	(539.1)
Insurance/reinsurance contract assets as at 31 December 2022		17.3	—	17.3	—	—	—	17.3
Insurance/reinsurance contract liabilities as at 31 December 2022		(241.3)	—	(241.3)	(4.9)	—	(4.9)	(246.2)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2022		(224.0)	—	(224.0)	(4.9)	—	(4.9)	(228.9)
Insurance revenue/reinsurance expenses		748.8		748.8	(164.8)		(164.8)	584.0
Insurance service expenses:
Incurred claims/claims recovered and other attributable	expenses		—	—		—	—	—
Losses/ loss recovery and reversal of losses
from onerous contracts			—	—		—	—	—
Insurance service result		748.8	—	748.8	(164.8)	—	(164.8)	584.0
Insurance/reinsurance finance expenses/
income			—	—		—	—	—
Total amounts recognised in comprehensive income		748.8	—	748.8	(164.8)	—	(164.8)	584.0
Cash flows:
Premium received/paid		(808.6)		(808.6)	79.6		79.6	(729.0)
Total cash flows		(808.6)		(808.6)	79.6		79.6	(729.0)
Insurance/reinsurance contract assets as at 31 December 2023		5.4	—	5.4	—	—	—	5.4
Insurance/reinsurance contract liabilities as at 31 December 2023		(289.2)	—	(289.2)	(90.1)	—	(90.1)	(379.3)
Net insurance/reinsurance contract
liabilities/assets as at 31 December 2023		(283.8)	—	(283.8)	(90.1)	—	(90.1)	(373.9)

Notes to the Consolidated Financial Statements continued

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20.5 Insurance and reinsurance contract assets and liabilities - claims development tables

Gross insurance liabilities

	2015	2016	2017	2018	2019	2020	2021	2022	2023	Total
Accident year	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Estimate of ultimate gross claims
costs:
At end of accident year	2,135.9	2,169.8	2,226.8	2,337.6	2,085.7	1,786.5	1,912.8	2,283.2	2,755.0
One year later	(57.4)	(95.8)	(142.6)	(129.6)	(72.0)	(79.4)	(5.7)	132.9
Two years later	(131.5)	(63.9)	(108.8)	(48.7)	(43.5)	(13.8)	(34.7)
Three years later	(58.5)	(89.5)	(38.0)	(6.0)	3.7	35.9
Four years later	(28.7)	(42.9)	(20.4)	25.5	14.1
Five years later	(21.9)	(13.5)	1.5	23.8
Six years later	1.0	(12.0)	21.6
Seven years later	22.4	9.2
Eight years later	(18.2)
Current estimate of cumulative
claims	1,843.1	1,861.4	1,940.1	2,202.6	1,988.0	1,729.2	1,872.4	2,416.1	2,755.0
Cumulative payments to date	(1,741.1)	(1,797.4)	(1,850.1)	(1,993.2)	(1,759.5)	(1,414.3)	(1,474.8)	(1,806.2)	(1,336.4)
Gross liability recognised in the statement of financial position	102.0	64.0	90.0	209.4	228.5	314.9	397.6	609.9	1,418.6	3,434.9
2014 and prior										1,761.6
Claims handling provision										109.6
Adjustment for non-financial risk										289.3
Effect of discounting										(1,571.6)
Other LIC										57.1
Total										4,080.9

Net insurance contract liabilities

	2015	2016	2017	2018	2019	2020	2021	2022	2023	Total
Accident year	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Estimate of ultimate net claims
costs:
At end of accident year	1,920.1	1,934.4	2,012.0	2,141.0	1,922.8	1,623.6	1,758.1	2,184.2	2,241.9
One year later	(79.5)	(31.4)	(95.9)	(82.2)	(37.2)	(54.0)	2.4	168.1
Two years later	(63.4)	(47.2)	(61.4)	(20.7)	(40.7)	(39.2)	(13.0)
Three years later	(29.4)	(43.4)	(17.7)	(24.0)	(4.5)	50.0
Four years later	(21.8)	(15.2)	(27.5)	7.3	11.6
Five years later	(22.8)	(10.1)	(9.4)	24.1
Six years later	(1.8)	(11.6)	9.5
Seven years later	1.3	(3.8)
Eight years later	(3.6)
Current estimate of cumulative
claims	1,699.1	1,771.7	1,809.6	2,045.5	1,852.0	1,580.4	1,747.5	2,352.3	2,241.9
Cumulative payments to date	(1,671.0)	(1,746.7)	(1,765.8)	(1,945.6)	(1,718.7)	(1,375.2)	(1,442.8)	(1,804.9)	(1,088.6)
Gross liability recognised in the statement of financial position	28.1	25.0	43.8	99.9	133.3	205.2	304.7	547.4	1,153.3	2,540.7
2014 and prior										919.5
Claims handling provision										91.4
Adjustment for non-financial risk										158.7
Effect of discounting										(800.7)
Other LIC										(174.7)
Total										2,734.9

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Strategic Report / Governance / Financial statements

20. Insurance contract assets and liabilities - gross and reinsurance continued

20.6 Analysis of outstanding PPO claims provisions on a discounted and an undiscounted basis

The Group settles some large bodily injury claims as PPOs rather than lump sum payments.

The table below analyses the outstanding PPO claims provisions on a discounted and an undiscounted basis at 31 December 2023

and 31 December 2022. These represent the total cost of PPOs rather than any costs in excess of purely Ogden-based settlements.

	Discounted	Undiscounted	Discounted	Undiscounted
	2023	2023	2022	2022
At 31 December	£m	£m	£m	£m
Gross claims
Approved PPO claims provisions	542.6	1,603.4	518.7	1,394.0
Anticipated PPOs	112.5	300.7	124.5	328.2
Total	655.1	1,904.1	643.2	1,722.2
Reinsurance
Approved PPO claims provisions	(300.1)	(905.2)	(290.5)	(795.3)
Anticipated PPOs	(79.7)	(228.8)	(84.7)	(242.9)
Total	(379.8)	(1,134.0)	(375.2)	(1,038.2)
Net of reinsurance
Approved PPO claims provisions	242.5	698.2	228.2	598.7
Anticipated PPOs	32.8	71.9	39.8	85.3
Total	275.3	770.1	268.0	684.0

The provisions for PPOs have been categorised as either claims which have already been determined by the courts as PPOs

(approved PPO claims provisions) or those expected to settle as PPOs in the future (anticipated PPOs). The Group has estimated the

likelihood of large bodily injury claims settling as PPOs. The anticipated PPOs in the table above are based on historically observed

propensities adjusted for the assumed Ogden discount rate.

In the majority of cases, the inflation agreed in the settlement is the Annual Survey of Hours and Earnings SOC 6115 inflation

published by the Office for National Statistics, for which the long-term cashflow-weighted average rate is assumed to be 3.9% (2022:

4.2%). The Group has estimated a cashflow-weighted average rate of interest used for the calculation of present values as 4.6% (2022:

4.8%, which results in a real discount rate of 0.7% (2022: 0.6%). The Group will continue to review the inflation and discount rates

used to calculate these insurance reserves.

21. Prepayments, accrued income and other assets

	2023	2022
	£m	£m
		restated
Prepayments	73.8	83.5
Accrued income from contracts with customers and other assets	27.7	21.4
Total	101.5	104.9

Note:

1. Prior period comparatives have been restated on transition to IFRS 9 'Financial Instruments'. See notes 1 and 40 for further details.

Notes to the Consolidated Financial Statements continued

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22. Derivative financial instruments

	2023	2022
	£m	£m
Derivative assets
At fair value through profit or loss:
Foreign exchange contracts (forwards)	27.1	24.2
Interest rate swaps	0.3	7.0
Designated as hedging instruments:
Foreign exchange contracts (forwards)	—	0.1
Total	27.4	31.3
Derivative liabilities
At fair value through profit or loss:
Foreign exchange contracts (forwards)	8.2	28.4
Interest rate swaps	6.9	1.2
Designated as hedging instruments:
Foreign exchange contracts (forwards)		—
	0.3
Total	15.4	29.6

Note:

1. Foreign exchange contracts (forwards) are designated as cash flow hedges in relation to supplier payments.

23. Retirement benefit obligations

Defined contribution scheme

The pension charge in respect of the defined contribution scheme for the year ended 31 December 2023 was £28.7 million (2022:

£26.5 million).

Defined benefit scheme

The Group's defined benefit pension scheme was closed in 2003, although the Group remains the sponsoring employer for

obligations to current and deferred pensioners based on qualifying years' service and final salaries. The defined benefit scheme is

legally separated from the Group with a trustee who is required by law to act in the interests of the scheme and of all the relevant

stakeholders. The trustee of the pension scheme is responsible for the investment policy with regard to the assets of the scheme.

In October 2022, the trustee completed a £53.9 million bulk annuity insurance buy-in transaction whereby the assets of the pension

scheme were replaced with an insurance asset. The policy purchased is designed to provide cash flows that exactly match the value

and timing of the benefits to the defined benefit scheme’s members, so removing the risks impacting funding levels such as

changes in interest rates and inflation expectations or the performance of the previously invested assets for the members covered by

the policy. The non-insured assets are now primarily intended to cover the costs of meeting any additional liability for members of

the defined contribution section who have a defined benefit underpin that exceeds the value of the defined contribution funds as

well as being available to meet expenses.

The weighted average duration of the defined benefit obligations at 31 December 2023 is 16 years (2022: 17 years) using accounting

assumptions.

The table below sets out the principal assumptions used in determining the defined benefit scheme obligations:

	2023	2022
	%	%
Rate of increase in pension payment	2.5	2.5
Rate of increase in deferred pensions	2.5	2.6
Discount rate	4.5	4.8
Inflation rate	3.1	3.3

No assumption has been made for salary growth as there are no obligations in the scheme that are linked to future increases in

salaries.

Post-retirement mortality assumptions

	2023	2022
Life expectancy at age 60 now:
Males	87.0	87.2
Females	89.0	89.2
Life expectancy at age 60 in 20 years' time:
Males	88.9	89.2
Females	90.8	91.0

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Strategic Report / Governance / Financial statements

23. Retirement benefit obligations

The table below analyses the fair value of the scheme assets by type of asset.

	2023	2022
	£m	£m
Insurance policies 1	51.8	48.8
Index-linked bonds	0.5	0.3
Government bonds	0.3	0.5
Liquidity fund	—	0.1
Defined contribution section funds	1.4	1.7
Other	1.7	2.0
Total	55.7	53.4

Notes:

1. Insurance policies are valued at the present value of the related obligations.

2. The liquidity fund is an investment in an open-ended fund incorporated in the Republic of Ireland which targeted capital stability and income in the

UK. It is invested in short-term fixed income and variable rate securities (such as treasury bills) listed or traded on one or more recognised exchanges.

3. The defined contribution section funds relate to members in that section who have a defined benefit underpin that exceeds the value of the defined

contribution funds. The investments are largely in a diversified growth fund. The corresponding liability is included in the defined benefit scheme

obligation (see the movement in net pension surplus table on page 236).

The majority of debt instruments held directly or through the liquidity fund have quoted prices in active markets.

Movement in net pension surplus

		Present value of
	Fair value of	defined benefit
	defined benefit	scheme	Net pension
	scheme assets	obligations	surplus
	£m	£m	£m
At 1 January 2022	108.2	(96.1)	12.1
Statement of profit or loss:
Net interest income/(cost)¹	2.1	(1.9)	0.2
Administration costs	(0.9)	—	(0.9)
Statement of comprehensive income:
Remeasurement losses
Return on plan assets excluding amounts included in the net interest on the defined benefit asset	(53.3)	—	(53.3)
Actuarial gains on defined benefit scheme
Experience gains	—	0.3	0.3
Gains from change in demographic assumptions	—	0.5	0.5
Gains from change in financial assumptions	—	42.7	42.7
Benefits paid	(2.7)	2.7	—
At 31 December 2022	53.4	(51.8)	1.6
Statement of profit or loss:
Net interest income/(cost)¹	2.5	(2.4)	0.1
Administration costs	(0.5)	—	(0.5)
Statement of comprehensive income:
Remeasurement gains
Return on plan assets excluding amounts included in the net interest on the defined benefit asset	2.7	—	2.7
Actuarial losses on defined benefit scheme
Experience losses	—	(1.3)	(1.3)
Gains from change in demographic assumptions	—	0.4	0.4
Losses from change in financial assumptions	—	(1.7)	(1.7)
Benefits paid	(2.4)	2.4	—
At 31 December 2023	55.7	(54.4)	1.3

Note:

1. The net interest income/(cost) in the statement of profit or loss has been included under other operating expenses .

Notes to the Consolidated Financial Statements continued

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The table below details the history of the scheme for the current and prior years:

	2023	2022	2021	2020	2019
	£m	£m	£m	£m	£m
Present value of defined benefit scheme obligations	(54.4)	(51.8)	(96.1)	(98.7)	(90.3)
Fair value of defined benefit scheme assets	55.7	53.4	108.2	107.7	100.0
Net pension surplus	1.3	1.6	12.1	9.0	9.7
Experience (losses)/gains on scheme liabilities	(1.3)	0.3	(5.8)	2.4	0.4
Return on plan assets excluding amounts included in the net
interest on the defined benefit asset	2.7	(53.3)	2.2	9.0	4.4

Sensitivity analysis

The sensitivity analysis has been calculated by valuing the pension scheme liabilities using the amended assumptions shown in the

table below and keeping the remaining assumptions the same as disclosed in the table above, except in the case of the inflation

sensitivity where other assumptions that depend on assumed inflation have also been amended correspondingly. The pension cost

has been determined allowing for the estimated impact on the scheme's assets. Following the purchase of the insurance policy to

cover the benefits of the defined benefit section members, the scheme’s asset and liabilities move by the same amount in respect of

these members, hence has no impact on pension cost. The selection of these movements to illustrate the sensitivity of the defined

benefit obligation to key assumptions should be viewed as illustrative, rather than providing a view on the likely size of any change.

		Impact on present value
		of defined benefit
		scheme obligations
	2023	2022
	£m	£m
Discount rate
1.0% increase in discount rate (2022: 1.0% increase in discount rate)	(7.4)	(7.3)
1.0% decrease in discount rate (2022: 1.0% decrease in discount rate)	8.7	8.7
Inflation rate
1.0% increase in inflation rate (2022: 1.0% increase in inflation rate)	2.7	2.8
1.0% decrease in inflation rate (2022: 1.0% decrease in inflation rate)	(2.7)	(2.6)
Life expectancy
1-year increase in life expectancy	2.4	2.6
1-year decrease in life expectancy	(2.4)	(2.6)

The most recent funding valuation of the Group's defined benefit scheme was carried out as at 1 October 2023. This showed an

excess of assets over liabilities. The Group agreed with the trustee to make contributions of up to £1.5 million per annum in 2023 and

2024, in the event that a deficit subsequently emerges on the anniversary of the funding valuation date.

At the date of signing these financial statements, no contributions are expected to be payable in 2024 (2023: £nil).

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Strategic Report / Governance / Financial statements

24. Financial investments

	2023	2022
	£m	£m
		restated
Debt securities measured at fair value through the profit or loss
Corporate	2,530.8	2,605.1
Supranational	25.6	25.2
Local government	0.9	5.9
Sovereign	680.8	511.3
Total	3,238.1	3,147.5
Debt securities measured at amortised cost
Corporate	70.6	97.2
Total	70.6	97.2
Total debt securities	3,308.7	3,244.7
Of which:
Fixed interest rate	3,307.5	3,231.1
Floating interest rate	1.2	13.6
Loans and receivables measured at amortised cost
Infrastructure debt	214.2	236.8
Commercial real estate loans	145.9	198.9
Other loans	3.1	1.6
Total loans and receivables	363.2	437.3
Unquoted equity investments measured at fair value through other comprehensive income 3,4	18.9	13.3
Unquoted equity investments measured at fair value through the profit or loss	0.7	0.8
Quoted equity investments measured at fair value through the profit or loss		0.3
	0.1
Total	3,691.6	3,696.4

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. The Group swaps a fixed interest rate for a floating rate of interest on its US dollar and Euro corporate debt securities by entering into interest rate

derivatives. The hedged amount at 31 December 2023 was £419.4 million (2022: £401.8 million).

3. Equity investments consist of quoted shares and insurtech-focused equity funds. The insurtech-focused equity funds are valued based on external

valuation reports received from a third-party fund manager.

4. On initial recognition the Group made an irrevocable election to classify some equity investments as FVOCI given the instruments are strategic in

nature, and are not held for trading.

Amounts arising from expected credit loss: financial investments measured at amortised cost

The table below shows the gross carrying value of financial investments in stages 1 – 3:

	Gross carrying		Carrying	Carrying	Carrying
	amount	ECL allowance	amount	amount	amount
	2023	2023	2023	31 Dec 2022	1 Jan 2022
	£m	£m	£m	£m	£m
Stage 1	416.8	(1.3)	415.5	509.6	514.3
Stage 2	13.6	(1.0)	12.6	17.9	15.6
Stage 3	28.9	(23.2)	5.7	7.0	8.8
Total	459.3	(25.5)	433.8	534.5	538.7

Notes to the Consolidated Financial Statements continued

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238 Direct Line Group Annual Report and Accounts 2023

The following table shows the Group's updated expected credit loss allowances for financial investments measured at amortised

cost should there be a three-notch downgrade. This reflects an immediate downgrade on the issuers current credit ratings. The key

driver of such a scenario could be a change in the economic outlook which could impact the portfolio as a whole, or a response to

an unexpected negative event, for a specific company or industry.

		3 notch		3 notch
		immediate		immediate
	ECL	downgrade	ECL	downgrade
	2023	2023	2022	2022
	£m	£m	£m	£m
Infrastructure debt	(16.6)	(19.2)	(17.0)	(20.6)
Commercial real estate loans	(7.7)	(10.5)	(6.5)	(10.2)
Debt securities held at amortised cost	(0.8)	(2.7)	(1.0)	(3.6)
Other loans	(0.4)	(0.4)	(0.3)	(0.3)
Total	(25.5)	(32.8)	(24.8)	(34.7)

25. Cash and cash equivalents and borrowings

	2023	2022
	£m	£m
Short term deposits with credit institutions¹	1,624.2	878.8
Cash at bank and in hand	148.0	124.8
Cash and cash equivalents	1,772.2	1,003.6
Bank overdrafts	(82.4)	(65.2)
Cash and cash equivalents and borrowings	1,689.8	938.4

Notes:

1. This represents money market funds.

2. Bank overdrafts represent short-term timing differences between transactions posted in the records of the Group and transactions flowing through

the accounts at the bank.

3. Cash and bank overdrafts total is included for the purposes of the consolidated cash flow statement.

The effective interest rate on short-term deposits with credit institutions for the year ended 31 December 2023 was 4.57% (2022:

1.46%) and average maturity was 10 days (2022: 10 days).

Of the total amount of short-term deposits with credit institutions of £1,624.2 million (2022: £878.8 million), £241.8 million (2022: £nil)

is invested within money market funds under the 100% quota share reinsurance treaty for the brokered commercial business, which

is operated on a funds withheld basis. This entitles the reinsurer to the investment return earned on underlying collateral assets held

in money market funds. The Group has appointed a custodian for the asset while retaining ownership of the funds withheld assets

collateral.

26. Assets held for sale

	2023	2022
	£m	£m
Property, plant and equipment	13.9	37.0
Investment property	—	3.9
Total assets held for sale	13.9	40.9

The Group has been able to reduce the number of office sites it needs by changing the way it uses its premises so that they support

collaboration, training and teamwork rather than being an everyday place of work for most people.

Assets held for sale at 31 December 2023 relate to an office site in Leeds (including retail space within the property) that is no longer

required. At 31 December 2022, assets held for sale also included an office site and retail space in Bromley and an office site in

Ipswich that were subsequently sold during 2023.

A net impairment loss of £5.1 million (2022: £8.9 million) is included within operating expenses (as part of restructuring and one-off

costs) for the write down of the carrying value of these properties to their held for sale values.

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Strategic Report / Governance / Financial statements

27. Share capital

Issued and fully paid: equity shares

			2023			2022
				Transfer to			Transfer to
				capital			capital
		Number of		redemption	Number of		redemption
				3			reserve
		shares	Share capital	reserve	shares	Share capital
Ordinary Shares of 10 10 /	pence each
11		millions	£m	£m	millions	£m	£m
At 1 January		1,311.4	143.1	6.9	1,330.7	145.2	4.8
Shares cancelled following buyback 2		—	—	—	(19.3)	(2.1)	2.1
At 31 December		1,311.4	143.1	6.9	1,311.4	143.1	6.9

Notes:

1. The shares have full voting, dividend and capital distribution rights (including on wind-up) attached to them; these do not confer any rights of

redemption.

2. During 2022, the Group repurchased 19,324,855 Ordinary Shares for an aggregate consideration of £50.1 million.

3. Shares bought back were subsequently cancelled giving rise to a capital redemption reserve of an equivalent amount to their nominal value as

required by the Companies Act 2006.

Additional information including the number of shares authorised for issue is available in the Directors' Report which starts on page

158.

Employee trust shares

The Group satisfies share-based payments under the Group's share plans primarily through shares purchased in the market and held

by employee share trusts.

At 31 December 2023, 13,688,971 Ordinary Shares (2022: 13,214,811 Ordinary Shares) were owned by the employee share trusts at a

cost of £29.9 million (2022: £39.0 million). These Ordinary Shares are carried at cost and at 31 December 2023 had a market value of

£24.9 million (2022: £29.2 million).

28. Other reserves

Capital reserves

	2023	2022
	£m	£m
Capital contribution reserve	100.0	100.0
Capital redemption reserve		1,356.9
	1,356.9
Total	1,456.9	1,456.9

Notes:

1. Arose on the cancellation of a debt payable to a shareholder.

2. £1,350.0 million arose on the reduction of nominal value of each share in issue with a corresponding transfer to capital redemption reserve. No

further additions were made in 2023, (2022: additions of £2.1 million when shares repurchased through buyback were cancelled).

29. Tier 1 notes

	2023	2022
	£m	£m
Tier 1 notes	346.5	346.5

On 7 December 2017, the Group issued £350 million of fixed rate perpetual Tier 1 notes with a coupon rate of 4.75% per annum.

The Group has an optional redemption date of 7 December 2027. If the notes are not repaid on that date, a fixed rate of interest per

annum will be reset. The notes are direct, unsecured and subordinated obligations of the issuer ranking pari passu and without any

preference amongst themselves.

The Tier 1 notes are treated as a separate category within equity and the coupon payments are recognised outside of the profit after

tax result and directly in shareholders' equity.

The Group has the option to cancel the coupon payment. Cancellation becomes mandatory if the Solvency condition

is not met at

the time of, or following, coupon payment; there is non-compliance with the SCR or the minimum capital requirement; the Group

has insufficient distributable reserves; or the relevant regulator requires the coupon payment to be cancelled.

Note:

1. All payments shall be conditional upon the Group being solvent at the time of payment and immediately after payment. The issuer will be solvent if

(i) it is able to pay its debts owed to senior creditors as they fall due and (ii) its assets exceed its liabilities.

30. Subordinated liabilities

	2023	2022
	£m	£m
Subordinated Tier 2 notes	258.8	258.6

On 5 June 2020, the Group issued subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date of 5 June 2032

and may be redeemed at the option of the Group commencing on 5 December 2031 until the maturity date.

Notes to the Consolidated Financial Statements continued

240

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240 Direct Line Group Annual Report and Accounts 2023

The notes are unsecured and subordinated obligations of the Group and rank pari passu and without any preference among

themselves. In the event of a winding-up or of bankruptcy, they are to be repaid only after the claims of all other senior creditors have

been met and will rank at least pari passu with the claims of holders of other Tier 2 capital.

The Group has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised this right.

31. Share-based payments

The Group operates equity-settled, share-based compensation plans in the form of a Long-Term Incentive Plan ("LTIP"), a Restricted

Shares Plan, a Deferred Annual Incentive Plan ("DAIP") and Direct Line Group Share Incentive Plans, including both the Free Share

awards and a Buy-As-You-Earn Plan, details of which are set out below. All awards are to be satisfied using market-purchased shares.

Long-Term Incentive Plan

Executive Directors and certain members of senior management are eligible to participate in the LTIP with awards granted in the

form of nil-cost options. Under the plan, the shares vest at the end of a three-year period dependent upon continued employment

by the Group and also the Group achieving predefined performance conditions associated with total shareholder return ("TSR"),

return on tangible equity ("RoTE"), from 2022 emissions and from 2023 operating earnings per share ("Operating EPS"). The

Executive Directors are subject to an additional two-year holding period following the three-year vesting period.

An award was made in the year ended 31 December 2023 of 8.0 million Ordinary Shares with an estimated fair value of £10.9 million

at the 2023 grant date (2022: 4.5 million Ordinary Shares with an estimated fair value of £10.7 million).

The estimated fair value of the LTIP share awards with market-based performance conditions was calculated using a Monte Carlo

simulation model.

The table below details the inputs into the model:

	2023	2022
Weighted average assumptions during the year:
Share price (pence)	139	243
Exercise price (pence)	0	0
Volatility of share price	32%	29%
Average comparator volatility	35%	41%
Expected life	3 years	3 years
Risk-free rate	3.54 %	2.09%

Expected volatility was determined by considering the actual volatility of the Group's share price since its initial public offering and

that of a group of listed UK insurance companies.

Plan participants are entitled to receive additional shares in respect of dividends paid to shareholders over the vesting period.

Therefore, no deduction has been made from the fair value of awards in respect of dividends.

Expected life was based on the contractual life of the awards and adjusted based on management's best estimate, for the effects of

exercise restrictions and behavioural considerations.

Restricted Shares Plan

The purpose of the Restricted Shares Plan is to facilitate the wider participation in Group share-based awards of eligible employees.

These awards can be granted in the form of a nil-cost option at any time during the year, generally have no performance criteria, and

vest over periods ranging up to seven years from the date of the grant, subject to continued employment. During the year awards

were made of 7.8 million Ordinary Shares (2022: 1.0 million Ordinary Shares) with an estimated fair value of £11.6 million (2022:

£2.6 million) using the market value at the date of grant.

Deferred Annual Incentive Plan

To incentivise delivery of performance over a one-year operating cycle, Executive Directors and certain members of senior

management are eligible for awards under the Annual Incentive Plan ("AIP"), of which at least 40% is granted in the form of a nil-cost

option under the DAIP with the remainder being settled in cash following year end. During the year no awards were made (2022:

1.6 million Ordinary Shares). The 2022 award had a fair value of £4.2 million using the market value at the date of grant.

The awards outstanding at 31 December 2023 have no performance criteria attached; there is a requirement that the employee

remains in employment with the Group for three years from the date of grant.

Direct Line Group Share Incentive Plans: Free Share awards

No free share awards have been granted to eligible employees since 2021.

Direct Line Group Share Incentive Plans: Buy-As-You-Earn Plan

The Buy-As-You-Earn Plan entitles employees to purchase shares from pre-tax pay for between £10 and £150 per month and receive

one matching share for every two shares purchased at nil-cost.

In the year ended 31 December 2023, matching share awards were granted of 1.0 million Ordinary Shares (2022: 0.7 million Ordinary

Shares) with an estimated fair value of £1.7 million (2022: £1.7 million). The fair value of each matching share award is estimated

using the market value at the date of grant.

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Strategic Report / Governance / Financial statements

31. Share-based payments continued

Under the plan, the shares vest at the end of a three-year period dependent upon continued employment with the Group together

with continued ownership of the associated purchased shares up to the point of vesting.

Movement in total share awards

		Number of share awards
	2023	2022
	millions	millions
At 1 January	28.7	28.4
Granted during the year¹	16.8	9.8
Forfeited during the year	(8.1)	(4.3)
Exercised during the year	(3.4)	(5.2)
At 31 December	34.0	28.7
Exercisable at 31 December	3.8	2.2

Note:

1. In accordance with the rules of the LTIP, Restricted Shares Plan and DAIP, additional awards of 3.3 million shares were granted during the year

ended 31 December 2023 (2022: 2.0 million) in respect of the equivalent dividend.

In respect of the outstanding options at 31 December 2023, the weighted average remaining contractual life is 1.50 years (2022: 1.56

years). No share awards expired during the year (2022: nil).

The weighted average share price for awards exercised during the year ended 31 December 2023 was £1.63 (2022: £2.41).

The Group recognised total expenses in the year ended 31 December 2023 of £13.9 million (2022: £8.2 million) relating to equity-

settled share-based compensation plans.

Further information on share-based payments, in respect of Executive Directors, is provided in the Directors' Remuneration Report.

32. Provisions

Movement in provisions during the year

	Restructuring	Other	Total
	£m	£m	£m
At 1 January 2023 (restated)¹	8.7	1.5	10.2
Additional provision	29.7	0.3	30.0
Utilisation of provision	(7.0)	—	(7.0)
Released to the statement of profit or loss	(1.9)	(0.5)	(2.4)
At 31 December 2023	29.5	1.3	30.8

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. Other includes a number of individually immaterial provisions.

Of the above, no amount is due to be settled outside of 12 months (2022: £Nil).

Restructuring includes a number of restructuring programmes within the Group, including office site closures and staff restructuring

along with an impairment charge. There are no material uncertainties in timings, amounts or assumptions used.

33. Trade and other payables

	2023	2022
	£m	£m
		restated
Accruals	141.6	132.4
Trade creditors	2.2	2.2
Other taxes	12.3	7.9
Other creditors	1.1	1.2
Deferred income	6.4	3.3
Total	163.6	147.0

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

Notes to the Consolidated Financial Statements continued

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242 Direct Line Group Annual Report and Accounts 2023

34. Notes to the consolidated cash flow statement

		2023	2022
		£m	£m
	Notes		restated
Profit/(loss) for the year		222.9	(231.9)
Adjustments for:
Net Investment return excluding investment fees	6	(312.3)	217.6
Finance costs	8	14.5	20.4
Net defined benefit pension scheme expense	23	0.4	0.7
Equity-settled share-based payment charge		13.9	8.2
Tax charge/(credit)	10	54.5	(69.9)
Depreciation and amortisation charge		123.5	115.0
Impairment of intangible assets	15	5.4	16.0
Impairment provision movements on non-performance reinsurance contracts		52.4	37.4
Impairment on assets held for sale	26	5.1	8.9
Loss on disposal of property, plant and equipment and ROU assets		4.1	1.5
Transaction costs paid on disposal of business		(25.1)	—
Profit on disposal of business	9	(443.9)	—
Operating cash flows before movements in working capital		(284.6)	123.9
Movements in working capital:
Net (increase)/decrease in reinsurance contract assets		(323.5)	69.3
Net (increase)/decrease in insurance contract assets		11.9	(17.4)
Net increase/(decrease) in reinsurance contract liabilities		102.7	10.3
Net decrease in other receivables		(0.6)	(6.2)
Net decrease in accrued income and other assets		3.2	19.3
Net increase/(decrease) in trade and other payables		9.9	(23.1)
Net increase/(decrease) in insurance contract liabilities		613.0	(99.8)
Cash generated from operations		132.0	76.3
Taxes paid		(30.9)	(44.5)
Cash flow hedges		(0.6)	0.3
Net cash generated from operating activities before investment of insurance assets		100.5	32.1
Interest received		176.7	133.0
Rental income received from investment property	6	16.1	15.6
Purchase of investment property	18	(0.6)	(0.6)
Proceeds on disposal/maturity of financial investments measured through profit or loss		1,062.4	1,696.2
Proceeds from maturity of debt securities measured at amortised cost		26.5	—
Advances made for commercial real estate loans		(5.4)	(40.8)
Repayments of infrastructure debt and commercial real estate loans		81.8	57.2
Purchases of debt securities measured at amortised cost		—	(7.0)
Purchase of equity investments		(3.0)	(7.7)
Purchase of financial investments measured at fair value through profit or loss		(1,049.0)	(1,075.9)
Advances for other loans		(1.1)	(1.9)
Cash generated from investment of insurance assets		304.4	768.1

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

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Strategic Report / Governance / Financial statements

34. Notes to the consolidated cash flow statement continued

The table below details changes in liabilities arising from the Group's financing activities:

	Leases		Subordinated liabilities
	2023	2022	2023	2022
	£m	£m	£m	£m
At 1 January	81.6	84.2	258.6	513.6
Repayment of subordinated liabilities 1	—	—	—	(250.0)
Interest paid on subordinated liabilities	—	—	(10.4)	(22.0)
Lease repayments	(14.6)	(12.0)	—	—
Financing cash flows	(14.6)	(12.0)	(10.4)	(272.0)
Additions from acquisition of business	0.8	—	—	—
Additions/disposals of leases	34.5	6.3	—	—
Interest on lease liabilities	3.8	3.1	—	—
Amortisation of arrangement costs and discount on issue of subordinated	—	—	0.2	0.3
liabilities
Amortisation of fair value hedging	—	—	—	(1.1)
Accrued interest expense on subordinated liabilities	—	—	10.4	17.8
Other changes	39.1	9.4	10.6	17.0
At 31 December	106.1	81.6	258.8	258.6

Note:

1. As described in note 30, the Group repaid in full the £250 million 9.25% subordinated Tier 2 notes due 2042 on 27 April 2022 when it had its first

option to repay. The interest rate swap hedging these notes expired on the same date. Associated transaction costs were £0.1 million.

35. Commitments and contingent liabilities

The Group did not have any material commitments and contingent liabilities at 31 December 2023 (2022: none).

36. Leases

Operating lease commitments where the Group is the lessor

The following table analyses future aggregate minimum lease payments receivable under non-cancellable operating leases in

respect of property leased to third-party tenants:

	2023	2022
	£m	£m
Within one year	14.8	13.8
Between 1 and 2 years	13.8	12.6
Between 2 and 3 years	12.9	11.1
Between 3 and 4 years	11.0	10.4
Between 4 and 5 years	9.1	8.8
Later than 5 years	66.8	59.8
Total	128.4	116.5

1,2

Notes:

1. In the table above, the amounts disclosed for year ended 31 December 2023 exclude total future aggregate minimum lease payments receivable of

£0.1 million which relate to leases to third-party tenants on properties the Group has classified as assets held for sale.

2. At year ended 31 December 2023: £126.5 million of the total operating lease commitments where the Group is the lessor relates to the lease of

investment properties detailed in note 18 (2022: £114.2 million).

The investment properties held by the Group consist of 18 in total, all based in the UK with exposure predominantly to the South of

England operating in the following sectors; retail, retail warehouse, supermarkets, industrial, hotels and alternative sectors.

The investment properties are leased to tenants under operating leases with rental income for the majority paid a quarter in advance

with an average unexpired lease to expiry (including break clauses and tenants currently in rent free periods) of 9.8 years (2022: 10.5

years). 49% (2022: 49%) of rental income is RPI/index linked.

Where considered necessary to reduce credit risk, the Group may obtain guarantees from parent companies for the term of the

lease.

Notes to the Consolidated Financial Statements continued

244

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244 Direct Line Group Annual Report and Accounts 2023

Other lease disclosures

At 31 December 2023 the Group had no commitments to property leases not yet commenced (2022: total future cash outflows of

£29.0 million).

The following table analyses the amounts that have been included in the consolidated statement of profit or loss for leases:

	31 Dec 2023	31 Dec 2022
	£m	£m
Depreciation of ROU assets	11.9	9.9
Gain on modification of leases	—	—
Loss/(gain) on disposal of leases	1.4	(0.5)
Interest on lease liabilities	3.8	3.1
Short-term leases	2.2	1.6
Low-value leases	1.4	1.4
Impairment on ROU assets	—	—
Income from subleasing ROU assets	—	—
Total	20.7	15.5

Notes:

1. Total cash outflows in respect of leases was £18.2 million (2022: £15.0 million) which includes amounts expensed for short-term leases and leases of

low-value assets.

2. At years ended 31 December 2023 and 31 December 2022, expenses relating to short-term leases and leases of low-value assets were not included

in the measurement of lease liabilities as they were not considered significant.

Lease commitments where the Group is the lessee

Lease liabilities total £106.1 million (2022: £81.6 million). Future contractual aggregate minimum lease payments are as follows:

	2023	2022
	£m	£m
Within one year	12.7	10.9
In the second to fifth year inclusive	45.3	31.9
After five years	78.7	60.0
Sub total	136.7	102.8
Less effect of discounting and unearned interest	(30.6)	(21.2)
Total	106.1	81.6

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in

the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability

is reassessed.

The lease agreements do not impose any covenants other than the security interest in the leased assets that are held by the lessor.

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Strategic Report / Governance / Financial statements

37. Fair value

Fair value hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation

technique. There were no changes in valuation techniques during the year.

For disclosure purposes, fair value measurements are classified as level 1, 2 or 3 based on the degree to which fair value is observable:

– Level 1 financial assets are measured in whole or in part by reference to published quotes in an active market. In an active market

quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory

agency and those prices represent actual and regularly occurring market transactions on an arm's-length basis.

– Level 2 financial assets and liabilities are measured using a valuation technique based on assumptions that are supported by

prices from observable current market transactions. These include debt securities held at FVTPL for which pricing is obtained via

pricing services, but where prices have not been determined in an active market, or financial assets with fair values based on

broker quotes or assets that are valued using the Group's own models whereby the majority of assumptions are market-

observable. Derivatives are valued using broker quotes or appropriate valuation models. Model inputs include a range of factors

which are deemed to be observable, including current market and contractual prices for underlying instruments, period to

maturity, correlations, yield curves and volatility of underlying instruments. Level 2 also includes quoted equity investments that

the Group holds for which prices are available however, the market transactions upon which those prices are based are not

considered to be regularly occurring.

– Level 3 fair value measurements used for investment properties, debt securities measured at amortised cost, infrastructure debt,

commercial real estate loans, unquoted equity investments and other loans are those derived from a valuation technique that

includes inputs for the asset that are unobservable. Debt securities measured at amortised cost are private placed securities which

do not trade on active markets, these are valued using discounted cash flow models designed to appropriately reflect the credit

and illiquidity of these instruments. The key unobservable input elements from the discount rate used across private debt

securities is the credit spread which is based on the credit quality of the assets and the illiquidity premium. Infrastructure debt and

commercial real estate are loans which do not trade on active markets. Valuations are derived from external asset managers’

credit assessment and pricing models. These aim to take into account movements in broader credit spreads and are aligned to

varying degrees with external credit rating equivalents. Unlisted equity investments are comprised of: investments in private equity

funds, which are valued at the proportion of the Group’s holding of the net asset value reported by the investment vehicle and are

based on several unobservable inputs including market multiples and cash flow forecasts; and unquoted equity shares in a

strategic investment.

Comparison of carrying value to fair value of financial instruments and assets where fair value is disclosed

	Carrying value	Level 1	Level 2	Level 3	Fair value
At 31 December 2023	£m	£m	£m	£m	£m
Assets held at fair value through profit or loss:
Investment property	277.1	—	—	277.1	277.1
Derivative assets	27.4	—	27.4	—	27.4
Debt securities	3,238.1	680.8	2,555.8	1.5	3,238.1
Listed equity investments	0.1	—	0.1	—	0.1
Unlisted equity investments	0.7	—	—	0.7	0.7
Assets held at fair value through other comprehensive income:
Equity investments	18.9	—	—	18.9	18.9
Assets held at amortised cost:
Debt securities	70.6	—	16.2	49.4	65.6
Infrastructure debt	214.2	—	—	213.9	213.9
Commercial real estate loans	145.9	—	—	145.4	145.4
Other loans	3.1	—	—	3.1	3.1
Total	3,996.1	680.8	2,599.5	710.0	3,990.3
Liabilities held at fair value through profit or loss:
Derivative liabilities	15.4	—	15.4	—	15.4
Other financial liabilities:
Subordinated liabilities	258.8	—	212.8	—	212.8
Total	274.2	—	228.2	—	228.2

Notes to the Consolidated Financial Statements continued

246

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246 Direct Line Group Annual Report and Accounts 2023

	Carrying value	Level 1	Level 2	Level 3	Fair value
At 31 December 2022 (restated¹)	£m	£m	£m	£m	£m
Assets held at fair value through profit or loss:
Investment property	278.5	—	—	278.5	278.5
Derivative assets	31.3	—	31.3	—	31.3
Debt securities	3,147.5	511.3	2,636.2	—	3,147.5
Listed equity investments	0.3	—	0.3	—	0.3
Unlisted equity investments	0.8	—	—	0.8	0.8
Assets held at fair value through other comprehensive income:
Equity investments	13.3	—	—	13.3	13.3
Assets held at amortised cost:
Debt securities	97.2	—	28.6	61.0	89.6
Infrastructure debt	236.8	—	—	235.7	235.7
Commercial real estate loans	198.9	—	—	198.1	198.1
Other loans	1.6	—	—	1.9	1.9
Total	4,006.2	511.3	2,696.4	789.3	3,997.0
Liabilities held at fair value through profit or loss:
Derivative liabilities	29.6	—	29.6	—	29.6
Other financial liabilities:
Subordinated liabilities	258.6	—	204.9	—	204.9
Total	288.2	—	234.5	—	234.5

Note:

1. Prior period comparatives have been restated on transition to IFRS 9 'Financial Instruments'. See notes 1 and 40 for further details.

Differences arise between carrying value and fair value where the measurement basis of the asset or liability is not fair value (for

example; assets and liabilities carried at amortised cost). Fair values of the following assets and liabilities approximate their carrying

values:

– cash and cash equivalents;

– borrowings; and

– trade and other payables.

The movements in assets held at fair value and classified as level 3 in the fair value hierarchy relate to investment property and

unquoted equity investments. Investment property is analysed in note 18 along with further details on the Group's valuation

approach. A summary of realised and unrealised gains or losses in relation to investment property at fair value are presented in note 6.

There were no changes in the categorisation of assets between levels 1, 2 and 3 for assets and liabilities held by the Group since

31 December 2022.

The table below shows the unobservable inputs used by the Group in the fair value measurement of its investment property:

	Fair value		Valuation	Unobservable	Range
	£m		technique	input	(weighted average)
	2023	2022			2023	2022
				Equivalent yield	4.50% – 7.96%	4.23% – 7.61%
Investment property	277.1¹	278.5¹	Income	(note 18)	(average 5.77%)	(average 5.62%)
			capitalisation	Estimated rental value	£7.00 – £35.00	£6.50 – £32.92
				per square foot	(average £16.38)	(average £13.59)

Note:

1. The methodology of valuation reflects commercial property held within U K Insurance Limited.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 247

247Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

The table below analyses the movement in assets carried at fair value classified as level 3 in the fair value hierarchy:

		Unquoted	Unquoted
		equity	equity
	Investment	investments	investments
	property	held at FVOCI	held at FVTPL
	£m	£m	£m
At 1 January 2023 (restated¹)	278.5	13.3	0.8
Additions	0.5	3.0	—
(Reduction)/increase in fair value in the period	(1.9)	3.3	(0.1)
Disposals	—	(0.6)	—
Foreign exchange movement	—	(0.1)	—
At 31 December 2023	277.1	18.9	0.7

Note:

1. Opening balances have been restated on transition to IFRS 9 'Financial Instruments'. See notes 1 and 40 for further details.

38. Acquisitions

By Miles Group Limited

On 24 April 2023 the Group acquired 100% of the share capital of By Miles Group Limited (“By Miles”) for a nominal consideration.

Details of the business combination are as follows:

	21 April 2023
	£m
Amount settled in cash	—
Recognised amounts of identifiable net assets:
Intangible assets	0.6
Property, plant and equipment	1.9
Cash and cash equivalents	1.1
Trade and other receivables	0.5
Trade and other payables	(1.6)
Borrowings	(5.2)
Net identifiable assets and liabilities	(2.7)
Goodwill	2.7

By Miles is a Managing General Agent and provider of real-time pay-by-mile insurance policies. The amount settled in cash was £1.

Acquisition-related expenses of £0.4 million have been recognised in the consolidated statement of profit or loss.

Goodwill recognised on the acquisition relates to expected growth, synergies and the value of the By Miles proposition which cannot

be separately recognised as an intangible asset. The goodwill has been allocated to the Motor segment. None of the goodwill is

expected to be deductible for tax purposes.

The fair value of trade and other receivables acquired is equal to the gross contractual amount receivable of £0.5m.

By Miles has contributed £4.7 million to the Group’s other operating income and a loss of £3.2 million to the Group’s consolidated

profit before tax from the acquisition date to 31 December 2023. Had the acquisition occurred on 1 January 2023, By Miles would

have contributed £5.7 million to the Group’s other operating income and a loss of £6.2 million to profit before tax. Amounts have

been calculated using consistent accounting policies to those used by the Group.

Notes to the Consolidated Financial Statements continued

248

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248 Direct Line Group Annual Report and Accounts 2023

Vehicle repair workshop

On 1 April 2023, the Group acquired the business and assets of a vehicle repair centre to further expand the Group's wholly owned

DLG Auto Services network. Details of the business combination are as follows:

	1 April 2023
	£m
Amount settled in cash	1.7
Recognised amounts of identifiable net assets:
ROU assets	0.8
Property, plant and equipment	0.8
Lease liabilities	(0.8)
Net identifiable assets and liabilities	0.8
Goodwill	0.9

Goodwill represents the value attributed to the business by the Group as part of its ongoing strategy of developing its repair network.

The Group measured the acquired lease liabilities and matching ROU assets using the present value of the remaining lease

payments at the date of acquisition.

No disclosure has been made for revenue and profit before tax generated as the Group does not manage its business at this level.

39. Related parties

Transactions between the Group's subsidiary undertakings, which are related parties, have been eliminated on consolidation and

accordingly are not disclosed.

Subject to the preceding sentence, there were no sales or purchases of products and services to or from related parties in the year

ended 31 December 2023 (2022: £nil).

Compensation of key management

	2023	2022
	£m	£m
Termination benefits	1.0	—
Short-term employee benefits	6.6	7.6
Post-employment benefits	0.2	0.2
Share-based payments	2.5	3.5
Total	9.3	11.3

For the purposes of IAS 24 'Related party disclosures', key management personnel comprise the Directors and Non-Executive

Directors and the members of the Executive Committee.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 249

249Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

40.1 First time adoption of new accounting standards

The Group assessed its business model for managing the financial assets held by the Group and classified its financial assets into the

appropriate IFRS 9 categories. The impact of the reclassification was as follows:

Financial asset		Measurement category	IAS 39		Remeasurement		IFRS 9
	IAS 39	IFRS 9		ECL	Other
			1 January 2022				1 January 2022
			£m		£m	£m	£m
							restated 1
Debt securities measured at		Fair value through
FVTPL	Available-for-sale	profit or loss	4,084.6		—	—	4,084.6
Debt securities measured at amortised cost	Held-to-maturity	Amortised cost	91.2		(1.2)	—	90.0
	Fair value through	Fair value through
Equity Investments	OCI	OCI	6.2		—	—	6.2
	Fair value through	Fair value through
Equity Investments	profit or loss	profit or loss	0.8		—	—	0.8
Infrastructure debt	Amortised cost	Amortised cost	250.8		(1.8)	—	249.0
Commercial real estate loans	Amortised cost	Amortised cost	200.8		(0.6)	—	200.2
Other loans²	Amortised cost	Amortised cost	—		(0.5)	—	(0.5)
Cash and cash equivalents	Amortised cost	Amortised cost	955.7		—	—	955.7
Derivative financial	Fair value through	Fair value through
instruments	profit or loss	profit or loss	35.9		—	—	35.9

Notes:

1. Prior period comparatives have been restated on transition to IFRS 9 'Financial Instruments'. See note 1 for further details.

2. Relates to a loan contract agreed with the nature recovery charity, Heal, where the first draw down of the facility was not made until August 2022.

The Group has determined that the application of IFRS 9’s impairment requirements at 1 January 2022 results in additional

allowance for impairment as follows:

	£m
Loss allowance as at 31 December 2021 under IAS 39	20.1
Additional impairment recognised at 1 January 2022 on:
Debt securities measured at amortised cost	1.2
Infrastructure debt	1.8
Commercial real estate loans	0.6
Other loans	0.5
Loss allowance at 1 January 2022 under IFRS 9	24.2

40.2 First time adoption of new accounting standards

Impact on the consolidated statement of comprehensive income for the period ended 31 December 2022.

		First-time	First-time
	31 December	adoption	adoption	31 December
	2022	of IFRS 9	of IFRS 17	2022
	£m	£m	£m	£m
				restated
(Loss)/profit for the year attributable to the owners of the Company	(39.5)	(202.0)	9.6	(231.9)
Other comprehensive (loss)/income for the year for the period net of tax	(210.8)	203.2	—	(7.6)
Total comprehensive (loss)/income for the year for the period attributable to the owners of the Company	(250.3)	1.2	9.6	(239.5)
(Loss)/earnings per share
Basic (loss)/earnings per share (pence)	(4.3)	(15.5)	0.7	(19.1)
Diluted (loss)/earnings per share (pence)	(4.3)	(15.5)	0.7	(19.1)

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See note 1 for

further details.

Notes to the Consolidated Financial Statements continued

250

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250 Direct Line Group Annual Report and Accounts 2023

40.3 First time adoption of new accounting standards

Impact on the consolidated statement of financial position as at 1 January 2022.

		First-time
		adoption
	1 January 2022	of IFRS 9		First-time adoption of IFRS 17	1 January 2022
			Presentation	Measurement
			changes	changes
	£m	£m	£m	£m	£m
					restated 1
Assets
Goodwill and other intangible assets	822.5	—	—	—	822.5
Property, plant and equipment	113.8	—	—	—	113.8
Right-of-use assets	76.1	—	—	—	76.1
Investment property	317.0	—	—	—	317.0
Reinsurance contract assets	1,211.8	—	(4.4)	(25.7)	1,181.7
Deferred acquisition costs	186.6	—	—	(186.6)	—
Deferred tax assets	—	0.2	—	29.2	29.4
Current tax assets	14.4	—	—	—	14.4
Other receivables	762.8	—	(734.4)	—	28.4
Prepayments, accrued income and other assets	125.1	(0.9)	—	—	124.2
Derivative financial instruments	35.9	—	—	—	35.9
Retirement benefit asset	12.1	—	—	—	12.1
Financial investments	4,633.6	(3.3)	—	—	4,630.3
Cash and cash equivalents	955.7	—	—	—	955.7
Assets held for sale	41.2	—	—	—	41.2
Total assets	9,308.6	(4.0)	(738.8)	(183.1)	8,382.7
Equity
Shareholders' equity	2,550.2	(3.5)	—	(96.1)	2,450.6
Tier 1 notes	346.5	—	—	—	346.5
Total equity	2,896.7	(3.5)	—	(96.1)	2,797.1
Liabilities
Subordinated liabilities	513.6		—	—	513.6
Insurance contract liabilities		—	(365.0)	1,410.1
	3,680.5				4,725.6
Reinsurance contract liabilities 3	—	—	—	3.6	3.6
Unearned premium reserve	1,500.7	—	—	(1,500.7)	—
Borrowings	59.2	—	—	—	59.2
Derivative financial instruments	19.5	—	—	—	19.5
Provisions		—	(48.3)	—
	96.4				48.1
Trade and other payables	457.3	—	(325.5)	—	131.8
Lease liabilities	84.2	—	—	—	84.2
Deferred tax liabilities	0.5	(0.5)	—	—	—
Total liabilities	6,411.9	(0.5)	(738.8)	(87.0)	5,585.6
Total equity and liabilities	9,308.6	(4.0)	(738.8)	(183.1)	8,382.7

2,3

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See note 1 for

further details.

2. Following publication of the Group's H1 2023 Interim Report, the Group has reclassified some elements of the following balances into insurance

contract liabilities and reinsurance contract assets: Other receivables (£176.7 million asset in the interim report), provisions (£96.4 million liability in

the interim report) and trade and other payables (£133.9 million liability in the interim report). The balance reported in the interim report for

insurance contract liabilities was £4,669.7 million and reinsurance contract assets was £946.6 million.

3. Since the publication of the H1 2023 Interim Report, £3.6 million has been reclassified between reinsurance contract assets and reinsurance

contract liabilities

The quantitative impact on the consolidated statement of financial position of the first-time adoption of IFRS 9 and 17 on the

transition date is explained in note 1.1 of these financial statements.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 251

251Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

40.4 First time adoption of new accounting standards

Impact on the consolidated cash flow statement for the year ended 31 December 2022.

		First-time	First-time
	31 December	adoption	adoption	31 December
	2022	of IFRS 9	of IFRS 17	2022
	£m	£m	£m	£m
				restated 1
Net cash generated from operating activities	800.2	—	—	800.2
Net cash used in investing activities	(100.8)	—	—	(100.8)
Net cash used in financing activities	(657.5)	—	—	(657.5)
Net increase in cash and cash equivalents	41.9	—	—	41.9
Cash and cash equivalents at the beginning of the year	896.5	—	—	896.5
Cash and cash equivalents at the end of the period	938.4	—	—	938.4

Note:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See note 1 for

further details.

Notes to the Consolidated Financial Statements continued

252

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252 Direct Line Group Annual Report and Accounts 2023

2023

2022

Notes

£m

Assets

Investment in subsidiary undertakings 2

3,445.2

3,332.6

Other receivables 3

23.4

26.8

Current tax assets 4

14.1

6.8

Derivative financial instruments 5

0.3

0.1

Cash and cash equivalents 6

118.8

112.3

Total assets 3,601.8

3,478.6

Equity

Shareholders' equity

2,693.6

2,695.7

Tier 1 notes 8

346.5

Total equity 3,040.1

3,042.2

Liabilities

Subordinated liabilities 9

258.8

258.6

Borrowings 10

301.7

176.8

Derivative financial instruments 5

0.3

0.1

Deferred tax liabilities 4

0.9

Total liabilities 561.7

436.4

Total equity and liabilities 3,601.8

3,478.6

The attached notes on pages 255 to 258 form an integral part of these separate financial statements.

The profit for the year net of tax was £21.2 million (2022: £126.2 million).

The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2024.

They were signed on its behalf by:

NEIL MANSER

CHIEF FINANCIAL OFFICER

Direct Line Insurance Group plc

Registration No. 02280426

Parent Company Statement of Financial Position

As at 31December 2023

Direct Line Group Annual Report and Accounts 2023 253

253Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

2023

2022

£m

Profit for the year attributable to the owners of the Company 21.2

126.2

Other comprehensive gain

Items that may be reclassified subsequently to the statement of profit or loss:

Gain on fair value through other comprehensive income investments

—

0.1

Other comprehensive gain for the year net of tax —

0.1

Total comprehensive income for the year attributable to the owners of the Company 21.2

126.3

Parent Company Statement of Changes in Equity

For the year ended 31December 2023

capital

(note 7)

Capital

reserves

(note 7)

Share-

based

payment

reserve

Fair value

through other

comprehensive

income

revaluation

reserve

Retained

earnings

Shareholders

equity

Tier 1 notes

(note 9) Total equity

£m £m £m £m £m £m £m £m

Balance at 1 January 2022

145.2 1,454.8 5.0 (0.1) 1,333.0 2,937.9 346.5 3,284.4

Profit for the year — — — — 126.2 126.2 — 126.2

Other comprehensive income — — — 0.1 — 0.1 — 0.1

Total comprehensive income for the

year

— — — 0.1 126.2 126.3 — 126.3

Dividends and appropriations paid

(note 11) — — — — (314.5) (314.5) — (314.5)

Shares cancelled following

buyback (2.1) 2.1 — — (50.1) (50.1) — (50.1)

Credit to equity for equity-settled

share-based payments — — 9.5 — — 9.5 — 9.5

Shares distributed by employee

trusts — — (13.4) — — (13.4) — (13.4)

Total transactions with equity

holders

(2.1) 2.1 (3.9) — (364.6) (368.5) — (368.5)

Balance at 31 December 2022

143.1 1,456.9 1.1 — 1,094.6 2,695.7 346.5 3,042.2

Profit for the year

— — — — 21.2 21.2 — 21.2

Total comprehensive income for the

year — — — — 21.2 21.2 — 21.2

Dividends and appropriations paid

(note 11)

— — — — (16.6) (16.6) — (16.6)

Credit to equity for equity-settled

share-based payments

— — 12.6 — — 12.6 — 12.6

Shares distributed by employee

trusts

— — (19.3) — — (19.3) — (19.3)

Total transactions with equity

holders — — (6.7) — (16.6) (23.3) — (23.3)

Balance at 31 December 2023 143.1 1,456.9 (5.6) — 1,099.2 2,693.6 346.5 3,040.1

The attached notes on pages 255 to 258 form an integral part of these separate financial statements.

Parent Company Statement of Comprehensive Income

For the year ended 31December 2023

254

Direct Line Group Annual Report and Accounts 2023

254 Direct Line Group Annual Report and Accounts 2023

1. Accounting policies

1.1 Basis of preparation

Direct Line Insurance Group plc, registered in England and Wales (company number 02280426), is the ultimate parent company of

the Group. The principal activity of the Company is managing its investments in subsidiaries, providing loans to those subsidiaries,

raising funds for the Group and the receipt and payment of dividends.

The address of the Company's registered office is Churchill Court, Westmoreland Road, Bromley, BR1 1DP.

The Company's financial statements are prepared on the historical cost basis except for derivative financial instruments, which are

measured at fair value.

In accordance with the exemption permitted under section 408 of the Companies Act 2006, the Company's statement of profit or

loss and related notes have not been presented in these separate financial statements.

The Company's financial statements are prepared in accordance with FRS 101 'Reduced Disclosure Framework'.

The Company has taken advantage of the following FRS 101 disclosure exemptions:

– FRS 101.8 (d): the requirements of IFRS 7 'Financial Instruments: Disclosures' to make disclosures about financial instruments;

– FRS 101.8 (e): the disclosure requirements of IFRS 13 'Fair Value Measurement';

– FRS 101.8 (g): the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 111, and 134 to 136 of IAS 1 ‘Presentation of

Financial Statements’ to produce a cash flow statement and to make an explicit and unreserved statement of compliance with

IFRSs, additional comparative information and capital management information;

– FRS 101.8 (h): the requirements of IAS 7 'Statements of Cash Flows' to produce a cash flow statement and related notes;

– FRS 101.8 (i): the requirements of paragraphs 30 and 31 of IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'

to include a list of new IFRSs that have been issued but that have yet to be applied; and

– FRS 101.8 (k): the requirements of IAS 24 'Related Party Disclosures' to disclose related party transactions entered into between

two or more members of a group, provided that any subsidiary which is party to a transaction is wholly owned by such a member.

Adoption of new and revised standards

Full details of the new and revised standards adopted by the Company are set out in note 1.1 to the consolidated financial

statements.

1.2 Investment in subsidiaries

Investment in subsidiaries is stated at cost less any impairment.

2. Investment in subsidiary undertakings

2023

2022

£m

At 1 January 3,332.6

3,322.9

Additional investment in subsidiary undertakings

112.6

9.7

At 31 December 3,445.2

3,332.6

The subsidiary undertakings of the Company are set out in the table below. Their capital consists of Ordinary Shares which are

unlisted. In all cases, the Company owns 100% of the Ordinary Shares, either directly or through its ownership of other subsidiaries,

and exercises full control over their decision making.

Notes to the Parent Company Financial Statements

Direct Line Group Annual Report and Accounts 2023 255

255Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

2. Investment in subsidiary undertakings continued

Name of subsidiary

Company

registration

number

Place of incorporation

and operation Principal activity

Directly held by the Company:

Direct Line Group Limited

02811437 United Kingdom Intermediate holding company

DL Insurance Services Limited

03001989 United Kingdom Management services

Finsure Premium Finance Limited

01670887 United Kingdom Non-trading company

Inter Group Insurance Services Limited

02762848 United Kingdom Dormant

UK Assistance Accident Repair Centres Limited

02568507 United Kingdom Motor vehicle repair services

UK Assistance Limited

02857232 United Kingdom Dormant

U K Insurance Business Solutions Limited

05196274 United Kingdom Insurance intermediary services

U K Insurance Limited

2,3

01179980 United Kingdom General insurance

Indirectly held by the Company:

Brolly UK Technology Limited

10134039 United Kingdom Dormant

By Miles Group Ltd

12270837 United Kingdom Intermediate holding company

By Miles Ltd

09498559 United Kingdom Business support services

By Miles Payments Services Ltd

12190473 United Kingdom Business support services

By Miles Technology Services Ltd

12189384 United Kingdom Software development

Churchill Insurance Company Limited

02258947 United Kingdom General insurance

Direct Line Insurance Limited

01810801 United Kingdom Dormant

DL Support Services India Private Limited

See

footnote 4

India Support and operational services

DLG Legal Services Limited

08302561 United Kingdom Legal services

DLG Pension Trustee Limited

08911044 United Kingdom Dormant

Farmweb Limited

03207393 United Kingdom Dormant

Green Flag Group Limited

02622895 United Kingdom Intermediate holding company

Green Flag Holdings Limited

03577191 United Kingdom Intermediate holding company

Green Flag Limited

01003081 United Kingdom Breakdown recovery services

Intergroup Assistance Services Limited

03315786 United Kingdom Dormant

National Breakdown Recovery Club Limited

02479300 United Kingdom Dormant

Nationwide Breakdown Recovery Services Limited

01316805 United Kingdom Dormant

The National Insurance and Guarantee Corporation Limited

00042133 United Kingdom Dormant

UKI Life Assurance Services Limited

03034263 United Kingdom Dormant

Notes:

1. Registered office at: Churchill Court, Westmoreland Road, Bromley, BR1 1DP.

2. Registered office at: The Wharf, Neville Street, Leeds, LS1 4AZ.

3. U K Insurance Limited has a branch in the Republic of South Africa and a branch in the Republic of Ireland.

4. Registered office at: Max House, Level 5, Okhla Industrial Area Phase-3, New Delhi, 110020, India. Company registration number:

U74140DL2014FTC265567.

5. These entities have not been audited, in accordance with the exemptions available for dormant entities under section 480 of the Companies Act

2006.

At 31December 2023, the carrying amount of the Company’s net assets of £3,040.1 million (2022 £3,042.2 million) exceeded the

Group’s market capitalisation of £2,386.1 million (2022: £2,902.1million). The Group has performed an impairment test in line with

the requirements of IAS 36 ‘Impairment of Assets’ and concluded that no impairments were required to any of the Company’s

investments in its subsidiaries.

The recoverable amounts of each investment were based on the higher of the value-in-use test, using the strategic plan, and the fair

value which was deemed to be equal to the subsidiaries’ net asset values. For each investment in subsidiary the recoverable amount

was greater than the carrying value of the cost of investment resulting in no impairment required for the year ended 31December

2023 (2022: £nil).

Notes to the Parent Company Financial Statements continued

256

Direct Line Group Annual Report and Accounts 2023

256 Direct Line Group Annual Report and Accounts 2023

3. Other receivables

2023

2022

£m

Loans to subsidiary undertakings

16.9

21.1

Trade receivables due from subsidiary undertakings

6.0

5.4

Other debtors

0.5

0.3

Total² 23.4

26.8

Notes:

1. All loans are neither past due nor impaired.

2. All other receivables are classified as current.

4. Current and deferred tax

2023

2022

£m

Per statement of financial position:

Current tax assets 14.1

6.8

Deferred tax liabilities (0.9)

(0.9)

The deferred tax liability is in respect of temporary differences in Tier 1 notes.

5. Derivative financial instruments

Notional

amount Fair value

Notional

amount Fair value

2023 2023

2022 2022

£m £m

Derivative assets

Designated as hedging instruments:

Foreign exchange contracts (forwards)

14.5 0.3

3.4 0.1

Total 14.5 0.3

3.4 0.1

Derivative liabilities

Designated as hedging instruments:

Foreign exchange contracts (forwards)

14.5 0.3

3.4 0.1

Total 14.5 0.3

3.4 0.1

Notes:

1. The derivative assets and liabilities are both classified as level 2 within the Group's fair value hierarchy set out in note 37 of the consolidated financial

statements.

2. The foreign exchange cash flow hedges have been entered into on behalf of the Group's subsidiary companies.

6. Cash and cash equivalents

2023

2022

£m

Cash at bank and in hand

0.3

—

Short-term deposits with credit institutions

118.5

112.3

Total 118.8

112.3

Note:

1. This represents money market funds.

7. Share capital, capital reserves and distributable reserves

Full details of the share capital and capital reserves of the Company are set out in notes 27 and 28 to the consolidated financial

statements.

Of the Company's total equity, £1,099.2 million (2022: £1,094.6 million), being the total of its retained earnings, is considered to be

distributable reserves.

8. Tier 1 notes

Full details of the Tier 1 notes of the Company are set out in note 29 to the consolidated financial statements.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 257

257Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

9. Subordinated liabilities

2023

2022

£m

Subordinated Tier 2 notes 258.8

258.6

On 5 June 2020, the Company issued subordinated Tier 2 notes at a fixed rate of 4.0%. The notes have a redemption date of 5 June

2032 and may be redeemed at the option of the Company commencing on 5 December 2031 until the maturity date.

The notes are unsecured, and subordinated obligations of the Company and rank pari passu and without any preference among

themselves. In the event of a winding-up or of bankruptcy they are to be repaid only after the claims of all other senior creditors have

been met and will rank at least pari passu with the claims of holders of other Tier 2 capital.

The Company has the option, in certain circumstances, to defer interest payments on the notes but to date has not exercised this

right. The aggregate fair value of subordinated guaranteed dated notes at 31December 2023 was £212.8 million (2022: £204.9

million).

10. Borrowings

2023

2022

£m

Loans from fellow subsidiaries within the Group

301.7

176.8

Note:

1. Included in the above is a loan of £93.1million (2022: £69.2million) from UK Assistance Accident Repair Centres Limited. All loans from fellow Group

subsidiaries are repayable by 31 December 2024.

11. Dividends

Full details of the dividends paid and proposed by the Company are set out in note 12 to the consolidated financial statements.

12. Share-based payments

Full details of share-based compensation plans are provided in note 31 to the consolidated financial statements.

13. Risk management

The risks faced by the Company, arising from its investment in subsidiaries, are considered to be the same as those in the operations

of the Group. Details of the key risks and the steps taken to manage them are disclosed in note 3 to the consolidated financial

statements. The Company also holds, on behalf of its subsidiaries, designated hedging instruments which relate to foreign currency

supplier payments.

14. Employees, Directors and key management remuneration

The Company has no employees. The Directors and key management of the Group and the Company are the same. The aggregate

emoluments of the Directors are set out in note 7 to the consolidated financial statements, the compensation for key management

is set out in note 39 to the consolidated financial statements and the remuneration and pension benefits payable in respect of the

highest-paid Director are included in the Directors' Remuneration Report in the Governance section of the Annual Report and

Accounts.

Notes to the Parent Company Financial Statements continued

258

Direct Line Group Annual Report and Accounts 2023

258 Direct Line Group Annual Report and Accounts 2023

Financial calendar

2024

Date Event

21 March 2024

Preliminary Results 2023

announcement

08 May Annual General Meeting

4 September Half-year report 2024

5 November

Trading update for the third quarter of

2024

Annual General Meeting

The 2024 AGM will be held at Riverbank House, 2 Swan Lane,

London, EC4R 3AD on Wednesday 8May 2024, starting at

11:00 am. All shareholders will receive a separate notice

convening the AGM. This will explain the resolutions to be put to

the meeting.

The Articles of Association of the Company and the letters of

appointment of the Executive Directors, the Chair and the Non-

Executive Directors are available for inspection at the Company's

registered office and at the offices of Allen & Overy LLP.

Market

The Company has a premium listing on the UK Listing

Authority's Official List. The Company's Ordinary Shares (EPIC:

DLG) are admitted to trading on the London Stock Exchange.

Share ownership

Share capital

You can find details of the Company's share capital in note 27 to

the consolidated financial statements.

Dividends

The Company pays its dividends in sterling to shareholders

registered on its register of members at the relevant record date.

Shareholders can arrange to receive their cash dividend

payments in a bank or building society account by completing a

dividend mandate form. This is available from the Company's

registrar, Computershare Investor Services Plc ("Registrar"), in

the UK. You can find the Registrar's contact details on page 277.

Alternatively, shareholders can access their shareholdings online

and download a dividend mandate form from the Investor

Centre. You can find details of this below.

Note:

1. These dates are subject to change.

Dividend Reinvestment Plan

The Company offers a Dividend Reinvestment Plan. This enables

shareholders to use their cash dividends to buy the Company's

Ordinary Shares in the market. You can find more details on the

Company's website.

Shareholder enquiries

Shareholders with queries about anything relating to their

shares can contact our Registrar.

Shareholders should notify the Registrar of any change in

shareholding details, such as their address, as soon as possible.

Shareholders can access their current shareholding details

online at www.investorcentre.co.uk/directline. Investor Centre is

a free-to-use, secure, self-service website that enables

shareholders to manage their holdings online. The website

allows shareholders to:

– check their holdings;

– update their records, including address and direct credit

details;

– access all their securities in one portfolio by setting up a

personal account;

– vote online; and

– register to receive electronic shareholder communications.

To access information, the website requires shareholders to

quote their shareholder reference number. Shareholders can

find this number on their share certificates.

Corporate website

The Group's corporate website is www.directlinegroup.co.uk. It

contains useful information for the Company's investors and

shareholders. For example, it includes press releases, details of

forthcoming events, essential shareholder information, a

dividend history, a financial calendar, and details of the

Company's AGM. You can also subscribe to email news alerts.

Shareholder warning

Fraudsters use persuasive and high-pressure tactics to lure

investors into scams. They may offer to sell shares that prove to

be worthless or non-existent, or they can offer to buy shares at

an inflated price in return for you paying upfront. They promise

high profits. However, if you buy or sell shares in this way, you

will probably lose your money.

Shareholder information

Direct Line Group Annual Report and Accounts 2023 259

259Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

How to avoid share fraud

– Remember that FCA-authorised firms are unlikely to contact

you unexpectedly offering to buy or sell shares.

– Do not converse with them. Note the name of the person and

firm contacting you, then end the call.

– To see if the person and firm contacting you are authorised by

the FCA, check the Financial Services Register at

www.fca.org.uk/register.

– Beware of fraudsters claiming to be from an authorised firm;

copying its website; or giving you false contact details.

– If you want to phone the caller back, use the firm's contact

details listed on the Financial Services Register at

www.fca.org.uk/register.

– If the firm does not have contact details on the Register or

they tell you the details are out of date, call the FCA on 0800

111 6768.

– Search the list of unauthorised firms to avoid at

www.fca.org.uk/consumers/unauthorised-firms-individuals.

– Remember that if you buy or sell shares from an unauthorised

firm, you cannot access the Financial Ombudsman Service or

Financial Services Compensation Scheme.

– Get independent financial and professional advice before

handing over any money.

– If it sounds too good to be true, it probably is.

Report a scam

If fraudsters approach you, tell the FCA using the share fraud

reporting form at www.fca.org.uk/consumers/report-scam-

unauthorised-firm. You can also find out more about investment

scams on the same web page.

You can call the FCA Consumer Helpline on 0800 111 6768.

If you have already paid money to share fraudsters, call Action

Fraud on 0300 123 2040.

Tips on protecting your shares

– Keep all your certificates in a safe place. Alternatively, consider

holding your shares in the UK's electronic registration and

settlement system for equity, called CREST, or via a nominee;

– Keep correspondence from the Registrar that shows your

shareholder reference number in a safe place, and shred

unwanted correspondence;

– Inform the Registrar as soon as you change your address;

– If you receive a letter from the Registrar regarding a changeof

address and you have not recently moved, contact them

immediately;

– Find out when your dividends are paid and contact the

Registrar if you do not receive them;

– Consider having your dividends paid direct into your bank

account. You will need to complete a dividend mandate form

and send it to the Registrar. This reduces the risk of cheques

being stolen or lost in the post;

– If you change your bank account, inform the Registrar of your

new account details immediately;

– If you are buying or selling shares, only deal with brokers

registered in the UK or in your country of residence; and

– Be aware that the Company will never call you concerning

investments.

Electronic communications and voting

The Group produces various communications. Shareholders can

view these online, download them, or receive paper copies by

contacting the Registrar.

Shareholders, who register their email address with our

Registrar, or at the Investor Centre, can receive emails with news

on events, such as the AGM. They can also receive shareholder

communications electronically, such as the Annual Report and

Accounts and Notice of Meeting.

Dealing facilities

Shareholders who wish to buy, sell or transfer their shares may

do so through a stockbroker or a high street bank; or through

the Registrar's share-dealing facility.

You can call or email the Registrar regarding its share-dealing

facility using this contact information:

– For telephone sales, call +44 (0)370 703 0084 between 8.00

am and 6.00 pm, Monday to Friday, excluding public holidays,

and

– For internet sales, go to www.investorcentre.co.uk/directline.

You will need your shareholder reference number, as shown

on your share certificate, or your welcome letter from the

Chair.

Dividend tax allowance

The dividend tax-free allowance is £1,000 across an individual's

entire share portfolio for the tax year 2022 to 2023 and will

reduce to £500 for the tax years 2024 to 2025 and beyond.

Above these amounts, individuals will pay tax on their dividend

income. The rate of this tax depends on their income tax

bracket and personal circumstances. The Company will

continue providing registered shareholders with a confirmation

of the dividends paid. Shareholders should include this with any

other dividend income they receive when calculating and

reporting total dividend income received to HMRC. The

shareholder is responsible for including all dividend income

when calculating tax requirements. If you have any tax queries,

please contact your financial adviser.

Shareholder information continued

260

Direct Line Group Annual Report and Accounts 2023

260 Direct Line Group Annual Report and Accounts 2023

Actuarial best estimate

("ABE")

The probability-weighted average of all future claims and cost scenarios. It is calculated using

historical data, actuarial methods and judgement. A best estimate of reserves will therefore

normally include no margin for optimism or, conversely, caution.

Acquisition costs

Costs that arise from activities of selling, underwriting and starting a group of contracts that are

directly attributable to the portfolio of contracts to which the group belongs.

Annual Incentive Plan

("AIP")

This incentivises the performance of Executive Directors and employees over a one-year operating

cycle. It focuses on the short- to medium-term elements of the Group's strategic aims.

Assets under management

("AUM")

This represents all assets managed or administered by or on behalf of the Group, including those

assets managed by third parties.

Association of British

Insurers ("ABI")

The trade body that represents the insurance and long-term savings industry in the UK.

ASHE index

The Annual Survey of Hours and Earnings ("ASHE") provides information about the levels,

distribution and make-up of earnings and paid hours worked for employees in all industries and

occupations. The ASHE tables contain estimates of earnings for employees by sex and full-time or

part-time status.

Bootstrapping

A statistical sampling technique used to estimate reserve variability around the Actuarial Best

Estimate. Results produced from bootstrapping historical data are used to set and inform the level

of margin incorporated in the Management Best Estimate ("MBE").

Brokered commercial

business ("NIG")

The brokered commercial insurance business of U K Insurance Limited which it was announced

on 6 September 2023 was being sold to Royal & Sun Alliance Insurance Limited. The Group has

retained the back book of the business written and earned prior to 1 October 2023 (the "Risk

Transfer Date"). Business written and earned on and subsequent to the Risk Transfer Date will be

subject to a quota share arrangement between the two companies. Over time the two Companies

intend to enter into discussions regarding the potential transfer of the back book of policies

written prior to the Risk Transfer Date.

The term brokered commercial business does not meet the criteria of a discontinued operation as

defined under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' and has not

been accounted for as such.

Buy-As-You-Earn Plan

The HM Revenue & Customs approved Buy-As-You-Earn Share Incentive Plan gives all employees

the opportunity to become shareholders in the Company.

Capital

The funds invested in the Group, including funds invested by shareholders and Tier 1 notes. In

addition, the subordinated liabilities in the Group's statement of financial position is classified as

Tier 2 capital for Solvency II purposes.

Carbon/operational

emissions:

Scope 1

Scope 2

Scope 3

Scope 1 – covers direct emissions from owned or controlled sources, including fuels used in office

buildings, accident repair centres and owned vehicles.

Scope 2 – covers indirect emissions from the generation of purchased electricity, steam, heating

and cooling for office buildings and accident repair centres.

Scope 3 – includes all other indirect emissions that occur in the Group's value chain,such as from

purchased goods and services.

Claims frequency

The number of claims divided by the number of policies per year.

Clawback

The Group's ability to claim repayment of paid amounts both cash and equity-settled share-based

payments.

Combined operating

ratio

The sum of the net insurance claims, net acquisition and net expense ratios. The ratio measures

the amount of claims costs, acquisition and operating expenses, compared to net insurance

revenue. A ratio of less than 100% indicates profitable underwriting. The ratio and the

comparative are calculated on an IFRS 17 basis and is not comparable to combined operating

ratios that were calculated on an IFRS 4 basis published previously. (See page 265 alternative

performance measures.)

Current-year attritional

net insurance claims ratio

The net insurance claims ratio for the current accident year, excluding the movement of claims

reserves relating to previous accident years and claims relating to major weather events. (See page

265 alternative performance measures.)

Deferred Annual

Incentive Plan ("DAIP")

For Executive Directors and certain members of senior management, at least 40% of the AIP

award is deferred into shares typically vesting three years after grant. The remainder of the award

is paid in cash following year end.

Employee Representative

Body ("ERB")

The forum that represents all employees, including when there is a legal requirement to consult

employees.

Effect of change in yield

curve

Reflects the effect of changes in discounting, due to movements in the PRA risk-free yield curve

and ASHE index, on claims previously recognised.

Events not in data ("ENIDs")

Events not in data allow for short- and long-term risks not reflected in other actuarial inputs,

including uncertainties in relation to the actuarial best estimate.

Term Definition and explanation

Glossary and Appendices

Direct Line Group Annual Report and Accounts 2023 261

261Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Fair value through profit or

loss ("FVTPL")

A financial asset or liability where at each statement of financial position date the asset or liability

is remeasured to fair value and any movement in that fair value is taken directly to the statement

of profit or loss.

Fair value gains/(losses)

Includes fair value gains/(losses) on financial assets held at FVTPL, fair value gains/(losses) on

investment property and net expected credit losses on financial investments. (See note 6

Investment return and net insurance financial result.)

Financial leverage ratio

Tier 1 notes and financial debt (subordinated Tier 2 notes) as a percentage of total capital

employed.

Financial Reporting

Council

The UK's regulator for the accounting, audit and actuarial professions, promoting transparency

and integrity in business.

Gross written premium and

associated fees

The total premiums from insurance contracts that were incepted during the period including the

impact of a contractual change to Green Flag premium such that a portion of income that was

previously included in GWP is now included in service fee income. GWP is included for the

Motability contract for the following six months at the commencement of each six month pricing

period.

Incremental borrowing

rate ("IBR")

The rate of interest that a lessee would have to pay to borrow, over a similar term and security, the

funds necessary to obtain an asset of a similar value to the ROU asset in a similar economic

environment.

In-force policies

The number of policies on a given date that are active and against which the Group will pay,

following a valid insurance claim.

Investment income

yield

The income, net of fees, earned from the investment portfolio, recognised through the statement

of profit or loss during the period (excluding unrealised and realised gains and losses, impairments

and fair value adjustments) divided by the average AUM. The average AUM derives from the

period’s opening and closing balances for the total Group. (See page 265 alternative performance

measures.)

Investment return

Total investment income recognised through the statement of profit or loss, earned from the

investment portfolio, including investment fees, unrealised and realised gains and losses,

impairments and fair value adjustments.

Investment return

yield

The investment return divided by the average AUM. The average AUM derives from the period’s

opening and closing balances. (See page 265 alternative performance measures.)

Long-Term Incentive

Plan ("LTIP")

Awards made as nil-cost options or conditional share awards, which vest to the extent that

performance conditions are satisfied after a period of at least three years.

Malus

An arrangement that permits unvested remuneration awards to be forfeited, when the Company

considers it appropriate.

Minimum capital

requirement ("MCR")

The minimum amount of capital that an insurer needs to hold to cover its risks under the Solvency

II regulatory framework. If an insurer's capital falls below the MCR then authorisation will be

withdrawn by the regulator unless the insurer is able to meet the MCR within a short period of

time.

Net acquisition cost ratio

The ratio of acquisition costs divided by net insurance contract revenue (See page 265 alternative

performance measures.)

Net asset value

The difference between the Group's total assets and total liabilities, calculated by subtracting total

liabilities (including Tier 1 notes) from total assets.

Net expense ratio

The ratio of operating expenses divided by net insurance contract revenue (See page 265

alternative performance measures.)

Net insurance claims ratio

The ratio of net insurance contract claims divided by net insurance contract revenue (See page

265 alternative performance measures.)

Net insurance margin

("NIM")

The ratio of insurance service result divided by net insurance contract revenues. The normalised

net insurance margin adjusts net insurance claims and acquisition costs for weather and changes

to the Ogden discount rate, when relevant. (See page 265 alternative performance measures.)

Net insurance revenue

The total insurance contract revenue (consisting of gross written premium and associated fees,

instalment income and movement in liability for remaining coverage) less expenses from

reinsurance contracts held (consisting of reinsurance premium paid and movement in asset for

remaining coverage).

Net promoter score

("NPS")

This is an index that measures the willingness of customers to recommend products or services to

others. It is used to gauge customers' overall experience with a product or service, and customers'

loyalty to a brand.

Ogden discount rate

The discount rate set by the Lord Chancellor and used by courts to calculate lump sum awards in

bodily injury cases.

Term Definition and explanation

Glossary and Appendices continued

262

Direct Line Group Annual Report and Accounts 2023

262 Direct Line Group Annual Report and Accounts 2023

Ongoing operations

The Group's ongoing operations include Motor, Home, Rescue and other personal lines and

Commercial segments and excludes the brokered commercial business and run-off partnerships

segments. Please also refer to brokered commercial business and run-off partnerships.

The use of the term ongoing operations is not considered equivalent to continuing operations as

defined under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' as brokered

commercial business and run-off partnerships do not meet the criteria of discontinued operations

and have not been accounted for as such. (See page 265 alternative performance measures.)

Operating earnings/(loss)

per share

The earnings attributable to the owners of the Company. The Group's profits, which include

brokered commercial business and run-off partnerships, other finance costs & tax after deduction

of the Tier 1 coupon payment allocated to each Ordinary Share of the Company, but excludes

restructuring and one-off costs divided by the weighted average of Ordinary Shares outstanding in

the relevant financial year, excluding Ordinary Shares held by as employee trust shares, adjusted

for the dilutive potential Ordinary Shares.

Operating profit

The pre-tax profit that the Group's activities generate, including insurance and investment activity,

but excluding FV gains/(losses), change in yield curve, other finance costs, restructuring and one-

off costs and gains on the disposal of business. Normalised operating profit is operating profit

adjusted for weather and any changes to the Ogden discount rate. Current-year normalised

operating profit is calculated using the normalised operating profit adjusted for prior-year reserve

movements. (See pages 265 to 268 alternative performance measures.)

Operating return on

tangible equity ("RoTE")

This is adjusted operating profit from ongoing operations divided by the Group’s average

shareholders’ equity less goodwill and other intangible assets. Operating profit after tax is adjusted

to include other finance costs and the Tier 1 coupon payments. It is stated after charging tax using

the UK standard rate of 23.5% (2022: 19%). (See page 266 - Alternative Performance Measures.)

Other finance costs

The cost of servicing the Group's external borrowings and including the interest on right-of-use

assets.

Other operating expenses

These are the expenses relating to business activities excluding restructuring and one-off costs

and those included within the insurance service result. (See page 274.)

Own Risk and Solvency

Assessment ("ORSA")

A forward-looking assessment of the Group's risks and associated capital requirements, over the

business planning period.

Periodical payment order

("PPO")

These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle certain

large personal injury claims. They generally provide a lump-sum award plus inflation-linked annual

payments to claimants who require long-term care.

Prudential Regulation

Authority ("PRA")

The PRA is a part of the Bank of England. It is responsible for regulating and supervising insurers

and financial institutions in the UK.

PRA risk-free yield curve

Schedules of risk-free interest rates in a number of currencies produced by the Bank of England.

These rates are used to calculate the present value of the expected future costs of honouring

insurance companies' obligations to policyholders.

Restructuring and one-off

costs

Restructuring costs are costs incurred in respect of those business activities which have a material

effect on the nature and focus of the Group's operations. One-off costs are costs that are non-

recurring in nature.

RoPL

Rescue and other personal lines.

Return on equity

This is calculated by dividing the (loss)/profit attributable to the owners of the Company after

deduction of the Tier 1 coupon payments by average shareholders' equity for the period.

Run-off partnerships

The Group has exited, or has initiated termination of, three partnerships which will reduce its

exposure to low margin packaged bank accounts so it may redeploy capital to higher return

segments. The run-off partnerships relate to a Rescue partnership with NatWest Group that

expired in December 2022 and Travel partnerships with NatWest Group and Nationwide Building

Society which expire in 2024, where the Group has indicated to the partner that it will not be

seeking to renew.

The term run-off partnerships does not meet the criteria of a discontinued operation as defined

under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' and has not been

accounted for as such.

Science-Based Targets

("SBT")

Science-Based Targets are a set of goals developed by a business to provide it with a clear route to

reduce greenhouse gas emissions. An emissions reduction target is defined as "science-based" if it

is developed in line with the scale of reductions required to curb a global temperature rise to well

below 2°C above pre-industrial levels and ideally to limit to a 1.5°C rise.

Solvency capital ratio

The ratio of Solvency II own funds to the solvency capital requirement.

Solvency capital

requirement ("SCR")

The SCR is the amount of capital the regulator requires an insurer to hold to meet the

requirements under the Solvency II regulatory framework. The Group uses a partial internal model

to determine the SCR.

Term Definition and explanation

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 263

263Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Tangible equity

This shows the equity excluding Tier 1 notes and intangible assets (for comparability with

companies which have not acquired businesses or capitalised intangible assets). (See page 266

alternative performance measures.)

Tangible net assets per

This shows the amount of tangible equity allocated to each ordinary share (for comparability with

companies which have not acquired businesses or capitalised intangible assets). (See page 266

alternative performance measures.)

Task Force on Climate-

related Financial Disclosure

("TCFD")

Established by the Financial Stability Board, the TCFD developed a set of disclosure

recommendations on the risks and opportunities presented by climate change. The TCFD aims to

improve and increase climate-related disclosure by organisations and promotes the provision of

clear, comprehensive and high-quality information.

Total Shareholder

Return ("TSR")

Compares share price movement with reinvested dividends as a percentage of the

share price.

Unwind of discounting of

claims

Comprises insurance finance income and expenses arising from the release of the effect of

discounting as projected cashflows move one period closer. The discount unwind is calculated

every quarter on opening reserves.

Term Definition and explanation

Glossary and Appendices continued

264

Direct Line Group Annual Report and Accounts 2023

264 Direct Line Group Annual Report and Accounts 2023

Appendix A – Alternative performance measures (unaudited)

The Group has identified Alternative Performance Measures ("APMs") in accordance with the European Securities and Markets

Authority's published Guidelines. The Group uses APMs to improve comparability of information between reporting periods and

reporting segments, by adjusting for either uncontrollable or one-off costs which impact the IFRS measures, to aid the user of the

annual report and accounts in understanding the activity taking place across the Group. These APMs are contained within the main

narrative sections of this document, outside the financial statements and notes, and may not necessarily have standardised

meanings for ease of comparability across peer organisations.

Further information is presented below, defined in the glossary on pages 261 to 264 and reconciled to the most directly reconcilable

line items in the financial statements and notes. Note 4 on page 210 of the consolidated financial statements presents a

reconciliation of the Group's business activities on a segmental basis to the consolidated statement of profit or loss. All note

references in the table below are to the notes to the consolidated financial statements on pages 179 to 252.

Combined

operating ratio

Insurance

service result

Combined operating ratio is defined in

the glossary on page 261 and

reconciled in appendix B on page 269.

This is a measure of underwriting profitability and

excludes non-insurance income, whereby a ratio of

less than 100% represents an underwriting profit

and a ratio of more than 100% represents an

underwriting loss.

Current-year

attritional

insurance claims

ratio

Net insurance

claims

Current-year attritional loss ratio is

defined in the glossary on page 261

and is reconciled to the loss ratio

(discussed below) on page 269.

Expresses claims performance in the current

accident year in relation to net insurance revenue.

Gross written

premium and

associated fees

Insurance

revenue

Gross written premium and associate

fees is defined in the glossary on page

262 and reconciled appendix B on

page 269.

The IFRS 17 profit or loss account disclosures reflect

revenue earned from service provided, compared to

a premium written basis under IFRS 4. The Group

will continue to provide detail on trading volumes

on a written basis as an alternative performance

measure.

Investment

income yield

Investment

income

Investment income yield is defined in

the glossary on page 262 and is

reconciled on page 267.

Expresses a relationship between the investment

income and the associated opening and closing

assets adjusted for portfolio hedging instruments.

Investment

return yield

Investment

return

Investment return yield is defined in

the glossary on page 262 and is

reconciled on page 267.

Expresses a relationship between the investment

return and the associated opening and closing

assets adjusted for portfolio hedging instruments.

Net acquisition

ratio

Other directly

attributable

expenses

Net acquisition ratio is defined in the

glossary on page 262 and is reconciled

in appendix B on page 269.

Expresses acquisition costs in relation to net

insurance contract revenue.

Net expense ratio Other directly

attributable

expenses

Net expense ratio is defined in the

glossary on page 262 and is reconciled

in appendix B on page 269.

Expresses underwriting and policy expenses in

relation to net insurance revenue. Note that

restructuring and one-off costs are not considered

as underwriting costs and are not included in

expense ratio calculations.

Net insurance

claims ratio

Net insurance

claims

Net insurance claims ratio is defined in

the glossary on page 262 and is

reconciled in appendix B on page 269.

Expresses claims performance in relation to net

insurance revenue.

Net insurance

margin ("NIM")

Insurance

service result

Net insurance margin is defined in the

glossary on page 262 and is reconciled

on page 267.

This is a measure of underwriting profitability and

excludes non-insurance income. A ratio greater

than 0% represents an underwriting profit and a

ratio of less than 0% represents an underwriting

loss.

Normalised net

insurance margin

Insurance

service result

Normalised net insurance margin is

defined in the glossary on page 262

and reconciled on page 268.

This is a measure of underwriting profitability

excluding the variances of actual weather from our

assumptions and Ogden discount rate changes

(when relevant). It also excludes non insurance

income. A ratio greater than 0% represents an

underwriting profit and a ratio of less than 0%

represents an underwriting loss.

Group APM

Closest equivalent

IFRS measure Definition and/or reconciliation Rationale for APM

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 265

265Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Ongoing

operations (see

also brokered

commercial

business and run-

off partnerships)

Multiple -

rationale for

APM

Ongoing operations, brokered

commercial business and run-off

partnerships are defined in the glossary

on pages 263 and 264 and reconciled

in appendix B on page 269.

As noted in the Acting CEO and CFO reviews, the

Group has announced the sale of its brokered

commercial business and exited or has initiated

termination of three low margin partnerships in

order to be able to deploy its capital where it may

obtain higher returns and has excluded these

businesses from its ongoing results to give the

reader a clearer view of the Group's ongoing

activities and activities that it is seeking to exit from.

Operating

earnings/(loss)

per share

Diluted

earnings per

Operating earnings/(loss) per share is

defined in the glossary on page 263

and reconciled on page 267.

This is a measure of profitability. A three-year

cumulative operating earnings per share (the sum

of the amounts for the three years starting with the

year that the award is made) is used in long-term

incentive plan ("LTIP") calculations.

Operating profit Profit before

tax

Operating profit is defined in the

glossary on page 263 and reconciled in

note 4 on page 211.

This shows the underlying performance (before tax

and excluding finance costs and restructuring and

one-off costs) of the business activities.

Operating return

on tangible

equity

Return on

equity

Operating return on tangible equity is

defined in the glossary on page 263

and is reconciled on page 267.

This shows performance against a measure of

equity that is more easily comparable to that of

other companies.

Other operating

expenses

Other directly

attributable

expenses

Other operating expenses is defined in

the glossary on page 263 and

reconciled in Appendix B on page 269.

This shows the expenses relating to business

activities excluding restructuring and one-off costs

and those included within the insurance service

result.

Tangible equity Equity Tangible equity is defined in the

glossary on page 264 and is reconciled

in note 14 on page 220.

This shows the equity excluding Tier 1 notes and

intangible assets for comparability with companies

which have not acquired businesses or capitalised

intangible assets.

Tangible net

asset value per

Net asset value

per share

Tangible net asset value per share is

defined in the glossary on page 264

and reconciled in note 14 on page 220.

This shows the equity excluding Tier 1 notes and

intangible assets per share for comparability with

companies which have not acquired businesses or

capitalised intangible assets.

Group APM

Closest equivalent

IFRS measure Definition and/or reconciliation Rationale for APM

Glossary and Appendices continued

266

Direct Line Group Annual Report and Accounts 2023

266 Direct Line Group Annual Report and Accounts 2023

Investment income and return yields

FY 2023

FY 2022

Notes

£m

restated

Investment income 6

187.9

124.9

Investment fees 6

(9.3)

(9.5)

Realised and unrealised gains/(losses) 6

124.4

(342.5)

Total investment return 6

303.0

(227.1)

Opening investment property

278.5

317.0

Opening financial investments

3,696.4

4,630.3

Opening cash and cash equivalents

1,003.6

955.7

Opening borrowings

(65.2)

(59.2)

Opening derivatives asset

1.6

14.3

Opening investment holdings

4,914.9

5,858.1

Closing investment property

277.1

278.5

Closing financial investments 28

3,691.6

3,696.4

Closing cash and cash equivalents⁴ 29

1,530.4

1,003.6

Closing borrowings 29

(82.4)

(65.2)

Closing derivatives asset

12.4

1.6

Closing investment holdings

5,429.1

4,914.9

Average investment holdings

5,172.0

5,386.5

Investment income yield

3.5%

2.1%

Investment return yield

5.9%

(4.2%)

Notes:

1. See glossary on page 262 for definitions.

2. See notes to the consolidated financial statements.

3. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

4. Excludes cash withheld under funds withheld arrangement, see note 1.5.

5. See page 36 (Investment holdings).

6. Mean average of opening and closing balances.

Operating return on tangible equity

2023

2022

£m

restated

Operating loss - ongoing operations

(189.5)

(6.4)

Other finance costs

(14.5)

(20.4)

Coupon payments in respect of Tier 1 notes

(16.6)

Adjusted operating loss - ongoing operations before tax

(220.6)

(43.4)

Tax credit (2023 UK standard tax rate of 23.5%, 2022 UK standard tax rate of 19.0%)

51.8

8.2

Adjusted operating loss - ongoing operations after tax

(168.8)

(35.2)

Opening shareholders' equity

1,845.3

2,450.6

Opening goodwill and other intangible assets

(822.2)

(822.5)

Opening shareholders' tangible equity

1,023.1

1,628.1

Closing shareholders' equity

2,058.2

1,845.3

Closing goodwill and other intangible assets

(818.6)

(822.2)

Closing shareholders' tangible equity

1,239.6

1,023.1

Average shareholders' tangible equity

1,131.4

1,325.6

Operating return on tangible equity (14.9%)

(2.7%)

Notes:

1. See glossary on page 263 for definitions.

2. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

3. Mean average of opening and closing balances.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 267

267Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Operating earnings/(loss) per share

2023

2022

£m

Operating loss - ongoing operations

(189.5)

(6.4)

Other finance costs

(14.5)

(20.4)

Coupon payments in respect of Tier 1 notes

(16.6)

Adjusted operating loss - ongoing operations before tax (220.6)

(43.4)

Tax credit (2023 UK standard tax rate of 23.5%, 2022 UK standard tax rate of 19.0%)

51.8

8.2

Adjusted loss for the year attributable to the owners of the Company (168.8)

(35.2)

Weighted average total shares (number of Ordinary Shares (millions))

1,311.4

1,317.3

Weighted average of Share Trust owned shares (millions)

(12.4)

(13.0)

Weighted average number of Ordinary Shares in issue (millions) 1,299.0

1,304.3

Effect of dilutive potential of share options and contingently issuable shares (millions)

17.3

—

Weighted average number of Ordinary Shares for the purpose of operating earnings per share

(millions)

1,316.3

1,304.3

Operating loss per share (12.8)

(2.7)

Note:

1. See glossary on page 263 for definitions.

Insurance and reinsurance finance expenses

2023

2022

£m

Insurance finance expense from insurance contracts issued:

Unwind of discounting of claims

(189.8)

(87.2)

Of which:

Ongoing operations in operating profit

(163.8)

(75.8)

Brokered commercial business

(24.4)

(11.0)

Run-off partnerships

(1.6)

(0.4)

Effect of change in yield curve

(4.0)

189.6

Insurance finance expense from insurance contracts issued (193.8)

102.4

Reinsurance finance expense from insurance contracts issued:

Unwind of discounting of claims

49.5

27.4

Of which:

Ongoing operations in operating profit

45.1

25.4

Brokered commercial business

4.3

2.0

Run-off partnerships

0.1

—

Effect of change in yield curve

(21.5)

(128.9)

Reinsurance finance expense from insurance contracts issued 28.0

(101.5)

Net insurance finance expense:

Unwind of discounting of claims

(140.3)

(59.8)

Of which:

Ongoing operations in operating profit

(118.7)

(50.4)

Brokered commercial business

(20.1)

(9.0)

Run-off partnerships

(1.5)

(0.4)

Effect of change in yield curve

(25.5)

60.7

Net insurance finance expense (165.8)

0.9

Glossary and Appendices continued

268

Direct Line Group Annual Report and Accounts 2023

268 Direct Line Group Annual Report and Accounts 2023

Appendix B - Management view statements of profit or loss, claims development tables, expenses,

average premiums, gross written premium and associated fees and in-force policies (unaudited)

Management view statement of profit or loss – year ended 31 December 2023

The table below analyses the Group’s management view results by reportable segment for the year ended 31December 2023.

Motor Home RoPL¹ ² Commercial

Total Group -

ongoing

operations

Brokered

commercial

business

Run-off

partnerships¹

Total Group

Notes £m £m £m £m

£m

£m £m

£m

Gross written premium and associated

fees

2,047.8 551.5 265.7 241.0

3,106.0

665.8 150.1

3,921.9

Instalment income

66.1 16.0 2.5 6.3

90.9

1.9 —

92.8

Movement in liability for remaining

coverage

(308.5) (27.8) 4.7 (12.4)

(344.0)

(66.9) (2.1)

(413.0)

Insurance revenue

5 1,805.4 539.7 272.9 234.9

2,852.9

600.8 148.0

3,601.7

Expenses from reinsurance contracts

held

5 (240.5) (36.1) (3.7) (25.1)

(305.4)

(163.4) (1.4)

(470.2)

Net insurance revenue

1,564.9 503.6 269.2 209.8

2,547.5

437.4 146.6

3,131.5

Incurred claims - including losses from

onerous contracts and other directly

attributable claims income

(1,743.5) (337.7) (155.7) (126.7)

(2,363.6)

(356.8) (153.2)

(2,873.6)

Amounts recoverable from reinsurers 5 248.7 24.0 2.3 5.2

280.2

140.8 2.4

423.4

Net insurance claims

(1,494.8) (313.7) (153.4) (121.5)

(2,083.4)

(216.0) (150.8)

(2,450.2)

Of which:

Prior-year reserves development (138.4) 8.9 (1.2) (15.0)

(145.7)

32.2 (10.6)

(124.1)

Acquisition costs (89.6) (42.3) (12.4) (29.5)

(173.8)

(116.3) (2.2)

(292.3)

Operating expenses (312.1) (97.4) (61.4) (31.2)

(502.1)

(91.2) (22.3)

(615.6)

Other directly attributable expenses

5 (401.7) (139.7) (73.8) (60.7)

(675.9)

(207.5) (24.5)

(907.9)

Insurance service result

5 (331.6) 50.2 42.0 27.6

(211.8)

13.9 (28.7)

(226.6)

Investment income 6 107.7 21.2 5.9 7.0

141.8

35.2 1.6

178.6

Unwind of discounting of claims

6 (94.3) (16.3) (2.4) (5.7)

(118.7)

(20.1) (1.5)

(140.3)

Other operating income and expenses (1.4) (2.7) 2.5 0.8

(0.8)

(1.4) (0.9)

(3.1)

Operating (loss)/profit

(319.6) 52.4 48.0 29.7

(189.5)

27.6 (29.5)

(191.4)

Fair Value gains

124.4

Effect of change in yield curve

(25.5)

Restructuring and one-off costs

(59.5)

Other finance costs 8

(14.5)

Gain on disposal of business

443.9

Profit before tax

277.4

Key performance indicators – year ended 31 December 2023

Motor Home RoPL¹ ² Commercial

Total Group -

ongoing

operations Total Group

Net insurance margin ("NIM")² (21.1%) 10.0% 15.6% 13.1% (8.3%) (7.2%)

Combined operating ratio² 121.1% 90.0% 84.4% 86.9%

108.3% 107.2%

Net expense ratio² 19.9% 19.3% 22.8% 14.9%

19.7% 19.7%

Net acquisition costs ratio² 5.7% 8.4% 4.6% 14.1%

6.8% 9.3%

Net insurance claims ratio² 95.5% 62.3% 57.0% 57.9%

81.8% 78.2%

– current-year attritional² 86.7% 59.2% 56.6% 49.8%

75.1% 73.3%

– prior-year reserves development 8.8% (1.8%) 0.4% 7.1%

5.7% 4.0%

– major weather events N/A 4.9% N/A 1.0%

1.0% 0.9%

Effect of weather

Net insurance claims ratio² N/A (5.8%) N/A (1.7%)

(1.3%) (1.6%)

Net acquisition ratio² N/A 0.0% N/A 0.0%

0.0% 0.0%

Net insurance margin normalised for

weather²

N/A 4.2% N/A 11.4% (9.6%) (8.8%)

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 269

269Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Management view statement of profit or loss – year ended 31 December 2023 continued

Additional data to support key performance indicators – year ended 31 December 2023

Motor Home RoPL¹ ² Commercial

Total Group -

ongoing

operations Total Group

£m £m £m £m

£m £m

Net insurance claims (1,494.8) (313.7) (153.4) (121.5) (2,083.4) (2,450.2)

Attritional net insurance claims (1,356.4) (297.9) (152.2) (104.5)

(1,911.0) (2,297.9)

Prior-year reserves development (138.4) 8.9 (1.2) (15.0)

(145.7) (124.1)

Major weather events N/A (24.7) N/A (2.0)

(26.7) (28.2)

Normalised operating profit

– year ended 31 December 2023

Total Group -

ongoing

operations

£m

Operating loss

(189.5)

Effect of:

Ogden discount rate

—

Normalised weather - claims

(32.7)

Normalised weather - profit share

—

Normalised operating loss (222.2)

Prior-year adjustments

Prior-year reserves development

(145.7)

Ogden discount rate

—

Prior-year normalised operating loss (145.7)

Current-year normalised operating loss (76.5)

Current-year normalised operating loss ratio 34%

Notes:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

2. See glossary on page 261 for definition and appendix A – Alternative performance measures on page 267 for reconciliation to financial statement

line items.

Glossary and Appendices continued

270

Direct Line Group Annual Report and Accounts 2023

270 Direct Line Group Annual Report and Accounts 2023

Management view statement of profit or loss – year ended 31 December 2022

The table below analyses the Group’s management view results by reportable segment for the year ended 31December 2022

(restated

Notes Motor Home RoPL

¹ ²

Commercial

Total Group -

ongoing

operations

Brokered

commercial

business

Run-off

partnerships¹ Total Group

£m £m £m £m £m £m £m £m

Gross written premium and associated

fees

1,432.7 518.1 273.9 218.9 2,443.6 530.4 124.4 3,098.4

Instalment income 65.5 16.9 2.8 5.9 91.1 1.6 — 92.7

Movement in liability for remaining

coverage

57.1 25.7 5.4 (13.0) 75.2 (35.6) (1.6) 38.0

Insurance revenue

5 1,555.3 560.7 282.1 211.8 2,609.9 496.4 122.8 3,229.1

Expenses from reinsurance contracts

held

5 (77.2) (26.5) (2.3) (22.1) (128.1) (36.9) (0.7) (165.7)

Net insurance revenue

1,478.1 534.2 279.8 189.7 2,481.8 459.5 122.1 3,063.4

Incurred claims - including losses from

onerous contracts and other directly

attributable claims income

(1,263.7) (413.1) (145.5) (125.1) (1,947.4) (217.6) (109.5) (2,274.5)

Amounts recoverable from/(payable to)

reinsurers

5 87.4 3.1 (0.7) (1.8) 88.0 8.4 — 96.4

Net insurance claims

(1,176.3) (410.0) (146.2) (126.9) (1,859.4) (209.2) (109.5) (2,178.1)

Of which:

Prior-year reserves development 4.3 17.0 4.6 9.5 35.4 38.6 23.8 97.8

Acquisition costs (82.4) (33.4) (22.0) (36.0) (173.8) (121.5) (2.2) (297.5)

Operating expenses (290.1) (94.3) (55.9) (31.8) (472.1) (80.4) (21.0) (573.5)

Other directly attributable expenses

5 (372.5) (127.7) (77.9) (67.8) (645.9) (201.9) (23.2) (871.0)

Insurance service result

5 (70.7) (3.5) 55.7 (5.0) (23.5) 48.4 (10.6) 14.3

Investment income 6 72.7 13.8 3.5 4.1 94.1 20.4 0.9 115.4

Unwind of discounting of claims

6 (38.5) (7.4) (2.0) (2.5) (50.4) (9.0) (0.4) (59.8)

Other operating income and expenses (28.3) (2.0) 2.9 0.8 (26.6) 3.1 (0.7) (24.2)

Operating (loss)/profit

(64.8) 0.9 60.1 (2.6) (6.4) 62.9 (10.8) 45.7

Net fair value losses³

6 (342.5)

Effect of change in yield curve 60.7

Restructuring and one-off costs

6 (45.3)

Other finance costs 8 (20.4)

Loss before tax

(301.8)

Key performance indicators – year ended 31 December 2022

Motor Home RoPL

² ³

Commercial

Total Group -

ongoing

operations

Total Group

Net insurance margin ("NIM")³

(4.8%) (0.8%) 19.8% (2.7%) (0.9%) 0.5%

Combined operating ratio³ 104.8% 100.8% 80.2% 102.7%

100.9% 99.5%

Net expense ratio³ 19.6% 17.7% 20.0% 16.8%

19.0% 18.7%

Net acquisition costs ratio³

5.6% 6.3% 7.9% 19.0%

7.0% 9.7%

Net insurance claims ratio³

79.6% 76.8% 52.3% 66.9%

74.9% 71.1%

– current-year attritional³

79.9% 57.7% 53.9% 69.3% 71.3% 69.4%

– prior-year reserves development

(0.3%) (3.2%) (1.6%) (5.0%) (1.4%) (3.2%)

– major weather events

N/A 22.3% N/A 2.6% 5.0% 4.9%

Effect of weather

Net insurance claims ratio³ N/A 12.6% N/A 0.3% 2.8% 2.5%

Net acquisition ratio³ N/A (0.8%) N/A 0.0% (0.2%) (0.1%)

Net insurance margin normalised for

weather³

N/A 11.0% N/A (2.4%) 1.7% 2.9%

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 271

271Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Management view statement of profit or loss – year ended 31 December 2022 continued

Additional data to support key performance indicators – year ended 31 December 2022

Motor Home RoPL

² ³

Commercial

Total Group -

ongoing

operations

Total Group

£m £m £m £m £m £m

Net insurance claims

(1,176.3) (410.0) (146.2) (126.9) (1,859.4) (2,178.1)

Attritional net insurance claims

(1,180.6) (307.9) (150.8) (131.4)

(1,770.7) (2,125.4)

Prior-year reserves development 4.3 17.0 4.6 9.5

35.4 97.8

Major weather events

N/A (119.1) N/A (5.0)

(124.1) (150.5)

Normalised operating profit

– year ended 31 December 2022

Total Group -

ongoing

operations

£m

Operating loss (6.4)

Effect of:

Ogden discount rate —

Normalised weather - claims 68.0

Normalised weather - profit share (4.3)

Normalised operating profit

57.3

Prior-year adjustments

Prior-year reserves development 35.4

Ogden discount rate —

Prior-year normalised operating profit

35.4

Current-year normalised operating profit

21.9

Current-year normalised operating profit ratio

38%

Notes:

1. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

2. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

3. See glossary on page 261 for definition and appendix A – Alternative performance measures on page 267 for reconciliation to financial statement

line items.

Glossary and Appendices continued

272

Direct Line Group Annual Report and Accounts 2023

272 Direct Line Group Annual Report and Accounts 2023

Insurance and reinsurance contract assets and liabilities - claims development tables (discounted PPO basis)

The claims development tables disclosed in note 20.5 have been represented on an undiscounted PPO basis, this is more in line with

how the Group manages its insurance and reinsurance contract assets and liabilities.

Gross insurance liabilities

Accident year

2015 2016 2017 2018 2019 2020 2021 2022 2023 Total

£m £m £m £m £m £m £m £m £m £m

Estimate of ultimate gross claims

costs:

At end of accident year

2,066.5 2,124.8 2,178.0 2,280.7 2,059.9 1,767.3 1,905.5 2,252.1 2,721.5

One year later (35.1) (78.5) (118.2) (92.3) (57.3) (66.4) (11.1) 157.9

Two years later (113.2) (52.7) (93.7) (38.8) (37.5) (28.7) (29.9)

Three years later (57.2) (80.4) (32.1) (3.4) (8.1) 36.7

Four years later (20.5) (39.8) (18.2) 4.1 15.0

Five years later (16.5) (12.0) (1.2) 20.9

Six years later 5.3 (18.6) 11.0

Seven years later (5.9) 8.6

Eight years later (16.5)

Current estimate of cumulative

claims

1,806.9 1,851.4 1,925.6 2,171.2 1,972.0 1,708.9 1,864.5 2,410.0 2,721.5

Cumulative payments to date

(1,740.9) (1,797.3) (1,849.9) (1,993.3) (1,759.5) (1,414.3) (1,474.9) (1,806.2) (1,336.4)

Gross liability recognised in the

statement of financial position

66.0 54.1 75.7 177.9 212.5 294.6 389.6 603.8 1,385.1 3,259.3

2014 and prior

688.2

Claims handling provision

109.6

Adjustment for non-financial risk

289.3

Effect of discounting

(322.6)

Other Liabilities for Incurred Claims

57.1

Total 4,080.9

Net insurance contract liabilities

Accident year

2015 2016 2017 2018 2019 2020 2021 2022 2023 Total

£m £m £m £m £m £m £m £m £m £m

Estimate of ultimate net claims

costs:

At end of accident year

1,912.3 1,931.8 2,009.2 2,137.8 1,921.4 1,622.7 1,761.1 2,180.7 2,237.7

One year later (75.5) (30.3) (95.1) (80.1) (36.3) (49.2) (1.5) 170.4

Two years later (61.9) (46.7) (60.2) (20.0) (36.9) (42.6) (12.6)

Three years later (29.2) (42.9) (17.2) (18.2) (7.7) 48.3

Four years later (21.0) (14.8) (26.8) 3.5 9.9

Five years later (22.0) (8.0) (10.2) 20.9

Six years later 5.0 (13.2) 7.9

Seven years later (5.2) (4.9)

Eight years later (7.4)

Current estimate of cumulative

claims

1,695.1 1,771.0 1,807.6 2,043.9 1,850.4 1,579.2 1,747.0 2,351.1 2,237.7

Cumulative payments to date

(1,671.1) (1,746.8) (1,765.8) (1,945.7) (1,718.7) (1,375.2) (1,442.9) (1,804.8) (1,088.6)

Gross liability recognised in the

statement of financial position

24.0 24.2 41.8 98.2 131.7 204.0 304.1 546.3 1,149.1 2,523.4

2014 and prior

442.0

Claims handling provision

91.4

Adjustment for non-financial risk

158.7

Effect of discounting

(305.9)

Other Liabilities for incurred claims

(174.7)

Total 2,734.9

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 273

273Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Operating expenses - ongoing operations

FY 2023 FY 2022 (restated)

Insurance

service result

Other

expenses

(note 7)

Total expenses

Insurance

service result

Other

expenses

(note 7)

Total expenses

£m £m £m

Commission expenses

(111.1) N/A (111.1)

(95.9) N/A (95.9)

Marketing

(62.7) N/A (62.7)

(77.9) N/A (77.9)

Acquisition expenses (173.8) N/A (173.8)

(173.8) N/A (173.8)

Staff costs

(194.6) (5.9) (200.5)

(188.6) (6.3) (194.9)

IT and other operating expenses

3,4

(102.9) (15.1) (118.0)

(85.6) (26.6) (112.2)

Insurance levies

(81.2) N/A (81.2)

(83.0) N/A (83.0)

Depreciation, amortisation and impairment of

intangible and fixed assets

(123.4) (1.2) (124.6)

(114.9) (0.8) (115.7)

Operating expenses

(502.1) (22.2) (524.3)

(472.1) (33.7) (505.8)

Total expenses - ongoing operations

(675.9) (22.2) (698.1)

(645.9) (33.7) (679.6)

Total expenses - brokered commercial insurance

(207.5) (1.8) (209.3)

(201.9) 1.9 (200.0)

Total expenses - run-off partnerships

(24.5) (0.9) (25.4)

(23.2) (0.7) (23.9)

Restructuring and one off costs

N/A N/A (59.5)

N/A N/A (45.3)

Total expenses

(907.9) (24.9) (992.3)

(871.0) (32.5) (948.8)

Net acquisition ratio

- ongoing operations

6.8%

7.0%

Net acquisition ratio

- total Group

9.3%

9.7%

Net expense ratio

- ongoing operations

19.7%

19.0%

Net expense ratio

- total Group

19.7%

18.7%

Notes:

1. Ongoing operations and run-off partnerships – See glossary on pages 261 to 264 for definitions and appendix A – Alternative performance measures

on pages 265 to 268 for reconciliation to financial statement line items.

2. Prior period comparatives have been restated on transition to IFRS 17 'Insurance Contracts' and IFRS 9 'Financial Instruments'. See notes 1 and 40 for

further details.

3. Staff costs and other operating expenses attributable to claims handling activities are allocated to the cost of insurance claims.

4. IT and other operating expenses include professional fees and property costs.

5. Includes right-of-use assets and property, plant and equipment. For the year ended 31December 2023, there were no impairment charges which

relate solely to own occupied freehold property (2022: no impairments).

6. See glossary on page 261 for definition and appendix A – Alternative performance measures on page 267 for reconciliation to financial statement

line items.

Motor and Home average premium (£)

FY 2023

FY 2022

Q42023

Q3 2023 Q2 2023 Q1 2023 Q42022

New business

551

486

594

588 532 478 474

Renewal

441

333

513

480

412

373

362

Motor direct own brands¹

470

368

537

507

445

401

392

New business

206

209

212

214 204 188 201

Renewal

249

217

259

257 249 230 226

Home direct own brands

242

216

249

250

243

224

223

Note:

1. Excluding the By Miles brand.

Glossary and Appendices continued

274

Direct Line Group Annual Report and Accounts 2023

274 Direct Line Group Annual Report and Accounts 2023

Gross written premium and associated fees

FY 2023

FY 2022

£m

Direct own brands

1,575.7

1,398.5

Partnerships

472.1

34.2

Motor 2,047.8

1,432.7

Direct own brands

408.8

381.5

Partnerships

142.7

136.6

Home 551.5

518.1

Rescue - ongoing operations

137.3

143.7

Pet

66.5

70.8

Other personal lines - ongoing operations

61.9

59.4

Rescue and other personal lines - ongoing operations 265.7

273.9

Of which: Green Flag direct

85.1

88.2

Commercial direct own brands 241.0

218.9

Total gross written premium and associated fees - ongoing operations 3,106.0

2,443.6

Brokered commercial insurance

665.8

530.4

Run-off partnerships

150.1

124.4

Total gross written premium and associated fees 3,921.9

3,098.4

Note:

1. See glossary on page 261 for definition and appendix A – Alternative performance measures on page 267 for reconciliation to financial statement

line items.

In-force policies (thousands)

31 Dec

2023

31 Dec

2022

Direct own brands1

3,373

3,756

Partnerships2,3

808

Motor 4,181

3,836

Direct own brands1

1,706

1,732

Partnerships

738

769

Home 2,444

2,501

Rescue - ongoing4

1,965

2,185

Pet

112

128

Other personal lines - ongoing operations4

111

Rescue and other personal lines - ongoing operations4 2,172

2,424

Of which: Green Flag Direct

1,048

1,106

Commercial direct own brands1,4,5 645

636

Total in-force policies - ongoing operations4 9,442

9,397

Brokered commercial insurance

286

277

Run-off partnerships4

2,224

2,188

Total in-force policies5 11,952

11,862

Notes:

1. Motor partnerships includes the Motability partnership, which has an initial term of 7 months from 1 September 2023. Subsequently, Motability

premiums are repriced twice a year on 1 April and 1 October with gross written premium recognised twice a year on the same dates. As the

Motability contract is a fleet contract, Motability customer numbers are used to allow a more representative presentation of the Group's in-force

policies.

2. Ongoing operations – the Group's ongoing operations result exclude the results of the brokered commercial insurance business, that the Group in

2023 entered into an agreement to sell, and the Rescue and other personal lines partnerships that the Group first excluded from its 2022 results.

Relevant prior-year data has been restated accordingly. See glossary on pages 261 to 263 for definitions and appendix A – Alternative performance

measures on pages 265 to 268 for reconciliation to financial statement line items.

3. In-force policies as at 31 December 2022 have been restated to remove 14,500 direct own brand policies that were previously erroneously included

in the reported amounts.

Strategic Report / Governance / Financial statements

Direct Line Group Annual Report and Accounts 2023 275

275Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

This Annual Report & Accounts has been prepared for, and only

for, the members of the Company as a body, and no other

persons. The Company, its Directors, employees, agents or

advisers do not accept responsibility to any other person to

whom this document is shown, or into whose hands it may

come, and any such responsibility or liability is expressly

disclaimed.

Certain information contained in this document, including any

information as to the Group’s strategy, plans or future financial

or operating performance, constitutes “forward-looking

statements”. These forward-looking statements may be

identified by the use of forward-looking terminology, including

the terms “aims”, “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”, "vision", “will” or "would" 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 may appear in several places

throughout this document and include statements regarding

intentions, beliefs or current expectations, including of the

Directors, concerning, among other things: the Group’s results of

operations, statement of financial position, financial condition,

prospects, growth, net insurance margin, insurance service

result, strategies, the industry in which the Group operates and

the Group's approach to climate-related matters. Examples of

forward-looking statements include financial targets which are

contained in this document with respect to return on tangible

equity, solvency capital ratio, net insurance margin, combined

operating ratio, percentage targets for current-year contribution

to operating profit, prior-year reserve releases, cost reductions,

reduction in net expense ratio, investment income yield, net

realised and unrealised gains, capital expenditure and risk

appetite range; and targets, goals and plans relating to climate

and the Group's approach and strategy in connection with

climate-related risks and opportunities. 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 and/or are beyond the

Group’s control and/or they rely on assumptions that may or

may not transpire to be correct. Forward-looking statements are

not guaranteeing 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:

– United Kingdom ("UK") domestic and global economic

business conditions;

– the direct and indirect impacts and implications of the

coronavirus Covid-19 pandemic on the economy, nationally

and internationally, on the Group, its operations and

prospects, and on the Group’s customers and their behaviours

and expectations;

– the Trade and Cooperation Agreement between the UK and

the European Union ("EU") regarding the terms of the trading

relationships between the UK and the EU and its

implementation, and any subsequent trading and other

relationship arrangements between the UK and the EU and

their implementation;

– the terms of trading and other relationships between the UK

and other countries following Brexit;

– the impact of the FCA's PPR regulations and Consumer Duty

regulations and of responses by insurers, customers and other

third parties and of interpretations of such rules by any

relevant regulatory authority;

– market-related risks such as fluctuations in interest rates,

exchange rates and credit spreads, including those created or

exacerbated by the war in Ukraine following the Russian

invasion and/or the conflict in the Middle East involving Israel

and Gaza;

– the policies and actions and/or new principles, rules and/or

regulations, of regulatory authorities and bodies, and of

changes to, or changes to interpretations of, principles, rules

and/or regulations (including changes made directly or

indirectly as a result of Brexit or related to capital and solvency

requirements or related to the Ogden discount rates or made

in response to the Covid-19 pandemic and its impact on the

economy and customers) and of changes to law and/or

understandings of law and/or legal interpretation following

the decisions and judgements of courts;

– the impact of competition, currency changes, inflation and

deflation;

– the timing, impact and other uncertainties of future

acquisitions, disposals, partnership arrangements, joint

ventures or combinations within relevant industries; and

– the impact of tax and other legislation and other regulation

and of regulator expectations, requirements, interventions,

enforcements, fines and requirements and of court,

arbitration, regulatory or ombudsman decisions, judgements

and awards (including in any of the foregoing in connection

with the Covid-19 pandemic) 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 obligation or undertaking to update or

revise publicly any forward-looking statements, whether

because of new information, future events or otherwise, unless

required to do so by applicable law or regulation. Nothing in this

document constitutes or 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.

Forward-looking Statement

276

Direct Line Group Annual Report and Accounts 2023

276 Direct Line Group Annual Report and Accounts 2023

Registered office

Direct Line Insurance Group plc

Churchill Court

Westmoreland Road

Bromley

BR1 1DP

Registered in England and Wales No. 02280426

Company Secretary: Roger C Clifton

Website: www.directlinegroup.co.uk

Registrars

Computershare Investor Services Plc

The Pavilions

Bridgwater Road

Bristol

BS99 6ZZ

Shareholder helpline: +44 (0)370 873 5880

Shareholder fax: +44 (0)370 703 6101

Website: www.computershare.com

Investor Centre

To find out more about Investor Centre, go to

www.investorcentre.co.uk/directline

Auditor

Deloitte LLP

1 New Street Square

London

EC4A 3HQ

Telephone: +44 (0)20 7936 3000

Website: www.deloitte.com

Legal advisers

Allen & Overy LLP

One Bishops Square

London

E1 6AD

Telephone: +44 (0)20 3088 0000

Website: www.allenovery.com

Slaughter and May

One Bunhill Row

London

EC1Y 8YY

Telephone: +44 (0) 20 7600 1200

Website: www.slaughterandmay.com

Principal banker

NatWest Group plc

250 Bishopsgate

London

EC2M 4AA

Telephone: +44 (0)20 7833 2121

Website: www.natwestgroup.com

Corporate brokers

Goldman Sachs International

Plumtree Court

25 Shoe Lane

London

EC4A 4AU

Telephone: +44 (0)20 7774 1000

Website: www.goldmansachs.com

Morgan Stanley & Co. International plc

25 Cabot Square

Canary Wharf

London

E14 4QA

Telephone: +44 (0)20 7425 8000

Website: www.morganstanley.com

RBC Europe Ltd (trading as "RBC Capital Markets")

100 Bishopsgate

London

EC2N 4AA

Telephone: +44 (0)20 7653 4000

Website: www.rbccm.com

Strategic Report / Governance / Financial statements

Contact Information

Direct Line Group Annual Report and Accounts 2023 277

277Direct Line Group Annual Report and Accounts 2023

Strategic Report / Governance / Financial statements

Registered in England & Wales No. 02280426

Registered Office:

Churchill Court

Westmoreland Road

Bromley

BR1 1DP