Business update

Direct Line Group (the "Group") delivered a strong performance in the first nine months of 2017, growing total gross written premium 4.2% year on year, and continued to make progress towards its targets announced at the half year 2017.

In direct own brands, the Group maintained momentum growing in-force policies 5.1% since 30 September 2016, with sales through the Direct Line brand driving the growth.

Strong momentum in Motor

In Motor, own brands in-force policies increased by around 200,000 or 5.5% and premiums grew 10.0% compared to the third quarter of 2016. During the third quarter, trading overall continued to be strong and the Group maintained good retention rates on renewal business while there were some signs new business rate increases slowed in the market. On claims, damage severity remained at elevated levels, while frequency so far this year has been better than expected, although it is too early to call this a trend.

Keeping Home profitability on course

In-force policies in Home own brands increased by around 30,000 or 1.8% since 30 September 2016 and premiums increased by 1.2% compared to the third quarter of 2016. Rate increases, coupled with the underwriting and claims actions taken over the last six months to tackle escape of water claims inflation started to have a positive effect, while weather experience in the period was benign. The Group's partnership with Nationwide will end in December and the Group will stop earning premiums from this contract by the end of 2018.

Taking Rescue and Commercial brands forward

In Rescue, total in-force policies were broadly stable compared to 30 September 2016, as the growth in Green Flag was offset by a reduction in partner policies. In the third quarter, Green Flag launched a new advertising campaign to highlight its position as a challenger brand. In October, the Group agreed to renew its rescue services partnership with Royal Bank of Scotland for a further 5 years.

Within Commercial, Direct Line for Business continued to grow, with in-force policies up 7.9% since 30 September 2016 and premiums increasing by 11.2% compared to the third quarter of 2016. The performance of the Direct Line for Business new technology platform, launched in April 2017, has been encouraging and the Group is on track to launch its next product on the platform around the end of the year. In NIG, van insurance sales were strong, while the Group chose to give up some higher premium business which would have failed to achieve the Group's return hurdle.

Improving efficiency and investing in the future

The Group is investing in multiple initiatives and systems aimed at improving customer experience, supporting growth and increasing the efficiency of the business. This investment spans policy, pricing, payment and other related data and digital systems across the business, such as the successful launch of its eTrading platform for the Direct Line for Business unit in the first half of 2017. As previously indicated, the Group expects to incur capital expenditure of an average of £80m to £100m per annum in the period 2017 to 2019.

Whilst these initiatives are making progress, the Group has decided to rework some elements of the original capital expenditure already incurred, aimed at ensuring these initiatives achieve the targeted performance levels. The impact of this on intangible assets is being reviewed and this could lead to an impairment charge at year end somewhat higher than last year's level.

In terms of solvency capital, the balance sheet does not recognise intangible assets and any such impairment would have no material impact on the Group's capital position or policy.

Progress on the Group's initiatives is supporting its expectation for 2017 to deliver a business as usual expense ratio¹ lower than 2016 (24.0%).

Outlook

The strong performance in Motor for 2017 gives the Group confidence that even with the potential impairment it expects to deliver a combined operating ratio around the middle of the target range of 93% to 95%, assuming a normal level of claims from major weather events.

In line with the Group's previously stated targets, the full year business as usual expense ratio is expected to be lower than 2016 (24.0%) and the commission ratio is expected to be significantly lower. However, the reported expense ratio may be around or above the level in 2016, depending on the outcome of the impairment review.

The Group now expects to achieve a 2.5% investment income yield compared to its previous expectation of a 2.4% investment income yield and continues to expect a return on tangible equity ("RoTE") of at least 15%.

Beyond 2017, the Group reiterates its target of achieving a 93% to 95% combined operating ratio over the medium term, assuming a normal level of claims from major weather events, supported by reductions in its expense and commission ratios, and the Group reiterates its ongoing target of achieving at least a 15% RoTE.

Financial update

Total in-force policies have increased by 0.2% since 30 September 2016 driven by continued growth across Motor and Home's own brands, Green Flag direct and Direct Line for Business. The growth across own brands was partially offset by reductions across the Group's partnership arrangements.

Corporate information

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

The Annual Report & Accounts 2016 is available at: www.directlinegroup.com

Forward-looking statements disclaimer

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

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

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

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