@ UK profits in the future are likely to be far more cyclically influenced than before
Aligned interests Admiral staff across all locations are awarded a stake in the Group shortly after they join.
We attempt to soften the profit impact of the cycle by raising rates earlier than our competitors in bad times and ceasing to raise them earlier in the good times.
What are you most likely to be caught doing outside of work?
Solvency II will bring numerous changes to the Group, from the way capital requirements are calculated to our structure of risk management and the way Admiral’s results and business are reported to regulators and to the public. Despite this, I don’t see Admiral’s cautious approach to reserving changing under the new regime.
@ Admiral Group’s share of Price Comparison profit totalled £3.6 million (2013: £21.1 million) reflecting the investment in compare.com.
The Group’s results are presented in three segments – UK Car Insurance, International Car Insurance and Price Comparison. Other Group Items are summarised in a fourth section.
After over two years of almost unprecedented premium deflation, premiums across the car insurance market stabilised in the second half of 2014, and even began to drift up. This is partly simply a normal, cyclical point of inflection, and partly a response to the return to ‘business as usual’ in terms of claims inflation, following the largely one-off benefits in 2013 of changes in the rules around small bodily injury claims. This probably means that the point of lowest profitability was around the end of 2014 (in terms of ultimate profitability of newly written business, though not necessarily in terms of currently reported profitability).
@ Risk mitigation: co- and reinsurers bear their proportional shares of claims expenses and hence provide protection should results worsen substantially.
@ Admiral Seguros voted 8th Best Company to Work for in Spain, awarded by Great Place to Work.
The consolidated result of Admiral’s insurance operations in Spain, Italy and France was a loss of £10.4 million (2013: £11.7 million). The combined ratio*1 improved to 136% from 138% primarily due to improved claims experience.
Regulatory environment Admiral’s European insurance operations are generally subject to the same regulation as the UK Car Insurance business, details of which are summarised on page 27, but also comply with local requirements as appropriate.
As a result of this highly competitive environment, Confused had a challenging year in 2014 and reported a reduced profit of £16 million. This reduction in profit is driven by the limited growth in the market and the impact of changes made by Google to its natural search algorithms impacting Confused’s search engine optimisation (SEO) position early in the year, but also reflects our relative media spend and advertising effectiveness.
Taking what we do well, overseas 32 ANNUAL REPORT AND ACCOUNTS 2014 WWW.ADMIRALGROUP.CO.UK
@ Compare.com has more than 40 auto insurance companies, including eight of the top 20, under contract.
This might arise due to very large or catastrophic man-made or natural individual or multiple claims.
There are a number of aspects which contribute to Admiral’s strong UK underwriting results, including: @ Experienced and focused senior management and teams in key business areas including pricing and claims management.
The table below sets out the principal risks Admiral has identified through its Enterprise Risk Management Framework (ERMF) as having the potential for a material adverse affect on Admiral’s profitability and solvency. The report on Corporate Governance on pages 44 to 48 describes the ERMF in place throughout the Group.
Conduct risk Failure of products, processes or service to meet customer and regulator expectations and failure to address customer complaints promptly or appropriately. Further detail on how Admiral interacts with its customers is set out on page 12 and in the Corporate Social Responsibility (CSR) Report available online.
@ Sponsorship programme designed to give staff benefits and develop pride in brand(s).
A Fellow of the Institute of Chartered Accountants, he was awarded a CBE in the 2001 Birthday Honours for services to social security.
Roger Abravanel will not be seeking re-election at the forthcoming AGM and will step down from the Board on 29 April 2015.
Deferred tax assets The Group’s two US operations – Elephant Auto and compare.com, are both loss-making, reflecting the stage of development of each business. The Committee discussed the potential deferred tax assets (DTA) recommended by management in relation to the accumulated losses carried forward at the balance sheet date for both operations. The Committee concluded that the proposed assets were consistent with the accounting standard.
The Committee also considered the implications of both the forthcoming tender of the External Audit and the potential adoption by the UK of EU legislation that prohibits auditors from carrying out certain non-audit services including tax and other consultancy. The Committee will continue to track developments to ensure the Group will be able to comply with future legislation and guidance in this area.
Committee effectiveness review As part of the Committee’s detailed annual review of its performance and processes, each Committee member completed a comprehensive questionnaire designed to provide objective assessment of the Committee’s performance, including its effectiveness in monitoring Internal and External Audit. The Committee discussed the results of the review and it was concluded that the Committee and the audit process were effective; that the Committee had full access to all the information it required; that the Committee had appropriate Terms of Reference; and that it was adequately discharging its responsibilities.
@ Reviewing compliance with Group policies, including the established Reserving Policy and process.
Duties and responsibilities The Committee leads the process for making appointments to the Board or where the appointee is likely to become a Board member. The Committee ensures there is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board through a full evaluation of the skills, knowledge and experience required of Directors. The Committee also ensures plans are in place for orderly succession for appointments to the Board and reviews the succession plans for other senior management positions. Responsibility for making senior management appointments rests with the Chief Executive.
A number of changes are proposed to the DFSS to ensure that senior managers remain motivated and are appropriately rewarded.” Annette Court Chairman of the Remuneration Committee
Remuneration policy table This table describes the key components of the remuneration arrangements for Executive Directors for 2015 and beyond.
Maximum opportunity: £2 million. For awards above £1 million a maximum of 600% of base salary applies.
All UK employees participate in the SIP (except Henry Engelhardt and David Stevens, who have declined to participate). Grants are made twice a year based on the results of each half year and vest after three years subject to continued employment.
Details of the policy on NED fees are set out in the table below: Purpose and link to strategy Operation Opportunity and performance metrics
Threshold (10% vests) Growth in line with LIBOR over 3 years
Exit payments and payments to past Directors No payments were made during the year. Unvested DFSS shares awarded to Kevin Chidwick during the period he was CFO remain subject to 100% performance.
@ Inclusion of 100% performance related awards for approximately 20 of the Group’s most senior managers.
At 31 December 2014, the Company's issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital and shares issued during the year can be found in note 11d.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period.
@ The risk – The provision for claims outstanding comprises the estimated cost of settling all claims incurred but unpaid at the balance sheet date, whether reported or not. This is a judgemental and complex area due to the inherent uncertainty of estimating claims not yet reported, future costs of settling claims, discount rates and whether customers will be awarded a lump sum claim or a periodic payment. The amounts involved are potentially significant and the application of accounting standards to determine the amount, if any, to be provided as a liability, is inherently subjective. One of the most significant uncertainties relates to the reserve held for large bodily injury claims and actual and potential Periodic Payment Order settlements (PPOs). The UK motor portfolio presents the biggest risk of material misstatement.
We have also considered the adequacy of the Group’s disclosures about the margin held above the actuarial best estimate, and the degree of estimation and sensitivity to key assumptions.
Salim Tharani (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 3 Assembly Square Britannia Quay Cardiff CF10 4AX
Operating expenses and share scheme charges recoverable from co- and reinsurers 8 231.6 215.8
Further information regarding the Company’s business activities, together with the factors likely to affect its future development, performance and position, is set out in the Strategic Report on pages 6 to 39. Further information regarding the financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Strategic Report on pages 18 to 21. In addition notes 6 and 11 to the financial statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 5. Premium, claims and profit commissions continued 5d. Reinsurance assets and insurance contract liabilities continued (ii) Sensitivity of recognised amounts to changes in assumptions The following table sets out the impact on equity and profit or loss at 31 December 2014 that would result from a 1% movement in the UK loss ratios used for each underwriting year for which material amounts remain outstanding.
The maturity profile of gross insurance liabilities at the end of 2013 was as follows: < 1 year £m 1–3 years £m > 3 years £m
6. Investments continued 6d. Financial assets and liabilities continued Objectives, policies and procedures for managing financial assets and liabilities The Group’s activities expose it primarily to financial risks of credit risk, interest rate risk, liquidity risk and foreign exchange risk. The Board of Directors has delegated the task of supervising risk management and internal control to the Group Risk Committee. There is also an Investment Committee that makes recommendations to the Board on the Group’s investment strategy.
The Group’s maximum exposure to credit risk at 31 December 2014 is £3,047.4 million (2013: £2,644.8 million), being the carrying value of financial assets and cash, and the excess of reinsurance assets over amounts owed to reinsurers under funds withheld arrangements. The Group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2014 and 2013 is insignificant.
The Group is strongly cash-generative due to the large proportion of revenue arising from non-underwriting activity. Further, as noted above, a significant portion of insurance funds are invested in money market liquidity funds with same day liquidity, meaning that a large proportion of the Group cash and investments is immediately available.
7. Other Revenue continued 7b. Contribution from additional products and fees and Other Revenue £m £m
Tax treatment of share scheme charges through income or expense 1.8 — — — 1.8
10. Other assets and other liabilities 10a. Accounting policy (i) Property and equipment, and depreciation All property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight line method to write off the cost less residual values of the assets over their useful economic lives. These useful economic lives are as follows: Improvements to short leasehold buildings – four to ten years
March 2014 (50.6 pence per share, paid May 2014) 138.3 —
Issued, called up and fully paid 278,689,742 ordinary shares of 0.1 pence 0.3 —
Add back reserve releases on commuted reinsurance 70.6 70.6 40.9 40.9
The adoption of new accounting standards during the year has not had a material impact on either the current year or comparative figures.