Taxes are not allocated across the segments and, as with the corporate activities, are included in the reconciliation to the consolidated income statement and consolidated statement of financial position.
4. Group consolidation and operating segments continued An analysis of the Group’s revenue and results for the year ended 31 December 2019, by reportable segment, is shown below. The accounting policies of the reportable segments are materially consistent with those presented in the notes to the Financial Statements for the Group.
International Insurance £m Comparison £m Other £m Eliminations*2 £m Total £m
Other segment items: – Intangible and tangible asset additions 51.7 34.5 1.4 0.8 – 88.4 *1 Turnover is an Alternative Performance Measure presented before intra-group eliminations and consists of total premiums written (including co-insurers’ share) and Other revenue. Refer to the glossary and note 13 for further information.
*2 Eliminations are in respect of the intra-group trading between the Group’s comparison and UK and International insurance entities and intra-group interest.
Other segment items: – Intangible and tangible asset additions 43.0 29.8 2.0 2.2 – 77.0 *1 Turnover is an Alternative Performance Measure presented before intra-group eliminations and consists of total premiums written (including co-insurers’ share) and Other revenue. Refer to the glossary and note 13 for further information.
*2 Eliminations are in respect of the intra-group trading between the Group’s comparison and UK and International insurance entities.
International Insurance £m Comparison £m Other £m Eliminations £m Total £m
Premiums relating to insurance contracts are recognised as revenue, net of expected cancellations and insurance premium tax, proportionally over the period of cover. Premiums with an inception date after the end of the period are held in the statement of financial position as deferred revenue. Outstanding collections from policyholders related to unexpired risk are recognised within policyholder receivables. A corresponding unearned premium provision is recognised (see note 5a(iii)).
The proportion of premium receivable on in-force policies relating to unexpired risks is reported in insurance contract liabilities and reinsurance assets as the unearned premium provision – gross and reinsurers’ share respectively.
The Group’s primary business is the issuance of insurance contracts that transfer risk from policyholders to the Group and its coinsurance partners.
Reserving risk is mitigated through a series of processes and controls. The key processes are as follows: • Regular management and internal actuarial review of individual and aggregate case claim reserves, including regular reporting of management information and exception reporting of significant movements; • Regular management and internal actuarial review of large claims, including claims settled or potentially settled by PPOs for which the uncertainty is increased by factors such as the lifetime of the claimant and movements in the indexation for the cost of future care of the claimant; • Bi-annual external actuarial review of best estimate claims reserves using a variety of recognised actuarial techniques; • Internal actuarial analysis of reserve uncertainty through qualitative analysis, scenario testing and a range of stochastic reserving techniques; • Ad-hoc external reviews of reserving related processes and assumptions; • Use of a reserving methodology which informs management’s reserving decisions for the purposes of the Group’s Financial Statements. As described in note 3, critical accounting judgements and estimates, the methodology determines that reserves should be set above projected best estimate outcomes to allow for unforeseen adverse claims development.
As at 31 December 2019, the level of relative reserve margin is consistent with that at 31 December 2018, albeit remaining prudent when measured against the internal reserve risk distribution and other market benchmarks.
As noted above, the Group defines premium risk as the risk that claims cost on business written but not yet earned is higher than allowed for in the premiums charged to policyholders. This also includes catastrophe risk; the risk of incurring significant losses as a result of the occurrence of man-made catastrophe or natural weather events.
During 2019, following the announcement by the UK Government, the Ogden discount rate which is used in setting personal injury compensation, was changed to minus 0.25% from the existing minus 0.75% rate that had been in place since February 2017. The change came into effect on 5 August 2019 and the minus 0.25% rate is likely to remain in place for up to five years.
Impact of 1% deterioration in booked loss ratio (£m) (14.2) (15.9) (3.8) (2.0)
As above, the impact is stated net of reinsurance and includes the change in net insurance claims along with the associated profit commission movements that result from changes in loss ratios. The figures are stated net of tax at the current rate.
5. Premium, claims and profit commissions continued (iii) Analysis of recognised amounts £m £m
The maturity profile of gross insurance liabilities at the end of 2019 is as follows: < 1 year £m 1–3 years £m > 3 years £m
UK insurance gross claims incurred (360.3) (694.4) (789.2) (680.7) (634.5) (594.2) (858.8) (991.4) (1,153.5) (1,074.0)
International insurance net claims incurred (12.8) (28.3) (48.6) (49.1) (50.5) (51.6) (76.5) (94.2) (107.6) (135.9)
Financial year ended 31 December 2014 £m £m £m £m £m £m
Total gross release (International Insurance) 12.6 14.0 21.0 23.2 35.2 39.1
Total net release (UK Household Insurance) – – – 0.5 1.4 2.5
Total net release (International Insurance) 6.3 6.5 9.9 9.5 13.5 14.4
Analysis of net releases on UK Motor Insurance: – Net releases on Admiral net share (motor) 66.8 84.6 58.3 92.1 111.4 121.7
– Releases on commuted quota share reinsurance contracts 70.6 88.8 17.1 73.8 109.6 121.7
5. Premium, claims and profit commissions continued Admiral typically commutes quota share reinsurance contracts in its UK Car Insurance business 24 or 36 months following the start of the underwriting year. After commutation, any changes in claims costs on the commuted proportion of the business are reflected within claims costs and are separately analysed here. Releases on commuted quota share contracts are analysed by underwriting year as follows: Financial year ended 31 December £m £m £m £m £m
Total releases on commuted quota share reinsurance contracts 88.8 17.1 73.8 109.6 121.7
For the Group, these assets include government gilts and debt securities.
In addition, IFRS 9 allows an irrevocable election at initial recognition to designate equity investments at FVOCI that otherwise would be held at FVTPL, provided these are not held for trading. The Group has made this election for certain equity investments.
Movements in the carrying amount are taken through OCI, with the exception of recognition of impairment gains or losses, interest revenue and foreign exchange gains or losses which are recognised in profit or loss.
• Fair value through profit or loss (FVTPL) – assets which do not meet the criteria for amortised cost or FVOCI, or which are designated as FVTPL.
Investment return from financial assets comprises distributions as well as net realised and unrealised gains on financial assets classified as FVTPL, interest income and net realised gains, net of impairment losses, from financial assets classified as FVOCI, and interest income on holdings in deposits with credit institutions (held at amortised cost).
Finance costs from financial liabilities comprise interest expense on subordinated notes, loan backed securities, credit facilities and lease liabilities, calculated using the effective interest rate method. The effective interest rate method calculates the amortised cost of a financial asset or liability (or a group of financial assets or liabilities) and allocates the interest income or expense over the expected life of the asset or liability.
Total finance costs 12.6 11.3 *1 Interest paid during the year was £14.0 million (2018: £11.0 million).
Interest payable on lease liabilities represents the unwinding of the discount on lease liabilities under IFRS 16 and does not result in a cash payment. Further detail on the transition to IFRS 16 is included in note 2.
6. Investment Income and costs continued 6d. Financial assets and liabilities
The Group’s financial assets and liabilities can be analysed as follows: £m £m
Total financial liabilities 2,643.1 2,245.7 *1 Trade and other payables total balance of £1,975.9 million (2018: £1,801.5 million) above includes £1,472.1 million (2018: £1,349.6 million) in relation to tax and social security, deferred income and reinsurer balances that are outside the scope of IFRS 9.
The maturity profile of financial assets and liabilities under the scope of IFRS 4 and IFRS 9 at 31 December 2019 is as follows: On demand £m
Money market funds and derivative financial instruments – 1,145.1 1.0 14.0
Total financial liabilities – 1,858.7 101.9 358.7 *1 Of the £1,725.1 million held within trade and other payables, £1,442.1 million do not meet the definition of a financial liability under IFRS 9 but fall within the scope of IFRS 4 hence are included in the above maturity profile.
Total financial liabilities – 1,938.4 53.0 254.3 *1 Of the £1,801.5 million held within trade and other payables, £1,275.9 million do not meet the definition of a financial liability under IFRS 9 but fall within the scope of IFRS 4 hence are included in the above maturity profile.
Total £m *1 The majority (£234.4 million) of the unrated exposure stems from money market funds, which are rated AAA, but the underlying securities are not. These specific exposures are repurchase agreements. The remaining unrated exposure is a mixture of private debt (£77.2 million) and other holdings (£10.7 million).
Money market funds and derivative financial instruments are measured at FVTPL. The regulatory capital within the Group is used to invest in these instruments in addition to any surplus funds which may be held. Buying and selling activity occurs depending on timing of different cashflows.
Any assets downgraded below BBB are considered by the Group to have significantly increased in credit risk since inception, and therefore enter stage 2 under IFRS 9.
IFRS 13 requires assets and liabilities that are held at fair value to be classified according to a hierarchy which reflects the observability of significant market inputs, based on three levels.
The table below shows how the financial assets held at fair value have been measured using the fair value hierarchy: FVTPL £m
Deposits are held with well rated institutions; as such the approximate fair value is the book value of the investments as impairment of the capital is not expected.
6. Investment Income and costs continued 6f. Cash and cash equivalents £m £m
Total cash and cash equivalents 281.7 376.8 *1 £4.4 million of cash is ring-fenced via a bank guarantee. See note 11f for further details.
For cash at bank and cash deposits and other receivables, the fair value approximates to the book value due to their short maturity.
Insurance receivables are measured at amortised cost. Given the short-term duration of these assets no impairment provision has been recognised.
The amortised cost carrying amount of receivables is a reasonable approximation of fair value.
The notes are unsecured subordinated obligations of the Group and rank pari passu without any preference among themselves. In the event of a winding-up or bankruptcy, they are to be repaid only after the claims of all other creditors have been met.
There have been no defaults on any of the notes during the year. The Group has the option to defer interest payments on the notes but to date has not exercised this right.
The fair value of subordinated notes (level one valuation) at 31 December 2019 is £225.1 million (2018: £211.3 million).
The Group leases various properties, with rental contracts typically for fixed periods of five to 25 years, although these may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
Under IFRS 16, from 1 January 2019, for each lease a right-of-use asset and corresponding lease liability are recognised at the date at which the leased asset becomes available for use by the Group.
The lease liability is initially measured at the present value of remaining lease payments, which include the following: • fixed payments (including in-substance fixed payments), less any lease incentives receivable; • variable lease payments that are based on an index or a rate; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of a similar value in a similar economic environment, with similar terms and conditions. Generally, the Group uses its incremental borrowing rate as the discount rate.
Subsequently, lease payments are allocated to the lease liability, split between repayments of principal and interest. A finance cost is charged to the profit and loss so as to produce a constant period rate of interest on the remaining balance of the lease liability.
6i. Objectives, policies and procedures for managing financial assets and liabilities
The Group defines credit risk as the risk of loss if another party fails to perform its obligations. The key areas of exposure to credit risk for the Group result through its reinsurance programme, investments, bank deposits, loans and advances to customers and policyholder receivables.
Credit and counterparty risk is managed by the Group by investing in high quality money market funds and setting suitable parameters for asset managers to adhere to when purchasing debt securities. Cash balances and deposits are placed only with highly rated credit institutions. The detailed holdings are reviewed regularly by the Investment Committee.
All other assets are assessed as low credit risk under IFRS 9, with no significant amounts past due or impaired.
The Group’s maximum exposure to credit risk at 31 December 2019 is £4,913.3 million (2018: £4,507.4 million), being the carrying value of financial investments and cash, the carrying value of loans and advances to customers 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.
£13.8 million (2018: £9.2 million) was charged to the income statement in respect of movement on the ECL of loans and advances to customers. Further details are provided in note 7b.
The impact on equity of a 50 basis point increase in interest rates at the relevant valuation date, is as follows: £m £m
This results in a hedging reserve at 31 December 2019 (and at 31 December 2018) in relation to the interest rate swap.
The Group is exposed to GBP LIBOR within its hedge accounting relationships, with the hedged item including issued GBP LIBOR floating rate debt as disclosed below. In addition, the Group has a number of financial assets and liabilities with interest rates linked to GBP LIBOR that are not included in hedge accounting relationships. Similarly, there are exposures to non-GBP interest rates.
In response to the announcements, the Group has set up an Interbank Offered Rate (IBOR) transition project which includes input from a number of areas of the business including risk management, investments, legal, accounting and systems. The project is under the governance of the Investment Committee, and ultimately the Chief Financial Officer who is a member of the Board. The aim of the programme is to understand where IBOR exposures are within the business and prepare and deliver on an action plan to enable a smooth transition to alternative benchmark rates. The Group intends to have its transition and fall-back plans in place by the end of 2020.
For the Group’s loan backed securities and related interest rate swaps (which are bilateral agreements) the Group has started discussions with respective counterparties to amend the reference benchmark interest rate which will change to SONIA. The Group aims to finalise this amendment in the second half of 2020.
Pay sterling fixed, receive 1-month GBP LIBOR interest rate swap 2023 £146.3m Portfolio cash flow hedges of interest rate risk on GBP LIBOR
Pay sterling fixed, receive 1-month GBP LIBOR interest rate swap 2024 £274.7m Portfolio cash flow hedges of interest rate risk on GBP LIBOR
The Group will continue to apply the amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reforms with respect to the timing and the amount of the underlying cash flows that the Group is exposed to ends.
In practice, the Group’s Directors expect actual cash flows to be consistent with this maturity profile except for amounts owed to co-insurers and reinsurers. Of the total amounts owed to co-insurers and reinsurers of £1,442.1 million (2018: £1,275.9 million), £1,129.6 million (2018: £1,022.7 million) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
The loss before tax derived from business carried out in the US was £18.5 million (2018: £19.2 million). If the Sterling rates with US dollars had strengthened/weakened by 10%, the Group’s profit before tax for the year would increase/decrease by £1.8 million (2018: £1.8 million).
Loans and advances to customers relate to the Admiral Loans business, consisting of unsecured personal loans and car finance products.
Loans and advances to customers are measured at amortised cost. This is because assets are held in order to collect contractual cash flows and the contractual terms of the financial asset demand cash inflows which are solely payments of principal and interest on the principal amount outstanding.
Interest income received in relation to loans and advances to customers is calculated using the effective interest method which allocates interest, and direct and incremental fees and costs over the expected lives of the assets and liabilities. There has been no change in recognition of interest income from the comparative period.
Loans and advances to customers – gross carrying amount 479.1 310.4
Loans and advances to customers are comprised of the following: £m £m
The amortised cost of loans and advances to customers on a portfolio basis is considered a reasonable approximation of fair value.
The PD is applied to the EAD to calculate the expected loss. Where customers are up-to-date the EAD is effectively the sum of the future month-end balances, as such the PD is converted from an annual rate to a monthly rate before applying it to the EAD. The LGD is then applied to this loss to calculate the total expected loss including recoveries. A forward-looking provision is also calculated, as set out later in this note.
Loan assets are segmented into three stages of credit impairment: • Stage 1 – no significant increase in credit risk of the financial asset since inception; • Stage 2 – significant increase in credit risk of the financial asset since inception; and
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 stages 2 and 3, the allowance is calculated as the expected credit loss from events in the remaining lifetime of each asset.
The Group has deemed a SICR to have occurred where: • the loan is 1 to 3 loan payments in arrears; or
• the customer has a significant level of unsecured debt relative to the point of inception.
7. Loans and Advances to Customers continued Credit Impaired (Stage 3)
The Group does not rebut the presumption within IFRS 9 that default has occurred when an exposure is greater than 90 days past due, which is consistent with a customer being 4 or more payments in arrears. In addition, a loan is deemed to be credit impaired where: • there is an Individual Voluntary Arrangement (IVA) agreement confirmed or proposed; or
Under IFRS 9 the provision must reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. The means by which the Group has determined this is to run scenario analyses.
Economic scenarios are considered, including an upturn, a downturn and a severe downturn. A 50% weighting is applied to the base scenario and the remaining 50% distributed across the scenarios as shown below: • 25% Upturn
Management judgement has been used to define the weighting and severity of the different scenarios based on available data without undue cost or effort. The outcome from the scenarios have been contrasted to loss rates stemming from loans written over the last decade, including those from the most recent economic downturn (2007-2009).
Stage 1 assets represent 95% of the total loan assets; a 0.1% increase in the stage 1 PD, i.e. from 1.8% to 1.9%, would result in a £0.5 million (2%) increase in ECL.
The upturn scenario would reduce the ECL allowance by £1.2 million (-5.4%), the downturn would create an increase of £2.5 million (11.7%) and severe downturn by £30.0 million (138.0%).
*1 Other loss allowance covers losses due to a reduction in current or future vehicle value or costs associated with recovery and sale of vehicles.
*2 Credit grade is the internal credit banding given to a customer at origination. This is based on external credit rating information.
The following tables reconcile the opening and closing gross carrying amount and expected credit loss allowance.
Transfers from Stage 1 to Stage 2 (4.5) 4.5 – –
Transfers from Stage 1 to Stage 3 (8.2) – 8.2 –
Transfers from Stage 2 to Stage 1 2.4 (2.4) – –
Expected credit loss allowance as at 1 January 2019 4.4 1.4 4.1 9.9
Transfers from Stage 1 to Stage 2 (0.1) 0.2 – 0.1
Transfers from Stage 1 to Stage 3 (0.3) – 0.5 0.2
Transfers from Stage 2 to Stage 1 0.1 (0.2) – (0.1)
Transfers from Stage 3 to Stage 2 – – – –
Total interest expense*1 6.3 3.6 *1 Interest paid in total during the year was £6.3 million (2018: £3.1 million)
Revenue is credited to the income statement over the period matching the Group’s obligations to provide services. Where the Group has no remaining obligations, the revenue is recognised immediately. An allowance is made for expected cancellations where the customer may be entitled to a refund of amounts charged.
There has been no change in revenue recognition from the comparative period.
Comparison The performance obligation is the provision of insurance intermediary services, at which point the performance obligation is met. Revenue is therefore recognised at a point in time.
The performance obligation is the pursuit of the compensation from the other side’s insurer on behalf of the customer. Once the case is settled the performance obligation is fully satisfied. Revenue is therefore recognised over time using the expected value method. This method values revenue by multiplying hours incurred on open cases by a 12-month realisable rate. The realisable rate is a probability weighted transaction price based on settled cases. The expected value method therefore results in revenue recognised being constrained to that where there is a high probability of no significant reversal.
A contract asset is recognised equal to the work performed up to the balance sheet date but not yet billed. Refer to note 6g for further detail of this balance.
The Group’s profit commission revenue falling within the scope of IFRS 15, ‘Revenue from Contracts with Customers’ relates to a contractual arrangement between the Group’s insurance intermediary EUI Limited, and a third party (external to the Group) co-insurer (Great Lakes) underwriting a share of the UK Car Insurance business generated by EUI Limited.
The variable consideration, being the profit commission recognised in respect of each underwriting year at the end of each reporting period, is recognised at a point in time, and calculated based on a number of detailed inputs, the most material of which are as follows: • Premiums, defined as gross premiums ceded including any instalment income, less reinsurance premium (for excess of loss reinsurance); • Insurance expenses incurred; and
The key methods, inputs and assumptions used to estimate the variable consideration of profit commission are therefore in line with those used for the calculation of claims liabilities, as set out in note 3 to the Annual Report, with further detail also included in note 5. There are no further critical accounting estimates or judgements in relation to the recognition of profit commission.
In the following tables, other revenue is disaggregated by major products/service lines and timing of revenue recognition. The total revenue disclosed in the table of £584.8 million (2018: £542.4 million) represents total other revenue and profit commission and is disaggregated into the segments included in note 4.
Total other revenue and profit commission 407.6 22.5 152.2 2.5 584.8
Acquisition costs incurred in obtaining new and renewal business are charged to the income statement over the period in which those premiums are earned. All other operating expenses are charged to the income statement in the period that they are incurred.
As detailed in the Remuneration Committee Report, the key elements of employee remuneration are: • Base salaries and pension contributions; • Share based incentive plans; • A discretionary bonus, the ‘DFSS Bonus’, rather than an annual cash bonus, that is directly linked to the number of DFSS awards held and actual dividends paid out to shareholders.
Charges for the share based incentive plans (and related social security costs) and discretionary bonus are included within Share Scheme Charges. These charges are not shown as part of the result for each reportable segment, or within the expense ratio, due to them being materially comprised of an accounting charge in line with IFRS 2 Share based payments which does not result in a cash payment to employees but instead results in a dilution of shares.
The Group operates a number of equity and cash settled compensation schemes for its employees, the main ones being: • a Share Incentive Plan (‘SIP’), which is in place for all UK employees encouraging wide share ownership across our employees; and
For both schemes, employees must remain in employment three years after the award date (i.e. at the vesting date), otherwise the shares are forfeited.
For equity settled schemes, the charge, which reflects the fair value of the employee services received in exchange for the grant of the free shares, is recognised as an expense, with a corresponding increase in equity, as shown in the Consolidated Statement of Changes in Equity (2019: £58.8 million; 2018: £56.7 million).
For the SIP, the fair value of the shares awarded is the share price at the award date. Awards under the SIP are entitled to receive dividends, and hence no adjustment is made to this fair value.
The number of shares that have ultimately vested compared to those originally awarded is set out in note 9f(iii).
The financial impact as a result of any change in the assumptions is recognised through the Income Statement. Any significant changes in assumptions may therefore result in an increased/decreased charge in an accounting period as a result of this true-up of the expected cumulative charge required.
9. Expenses continued Social security costs on share based incentive plans
Social security costs are incurred by the Group in respect of the share based incentive plans, with the expense recognised over the vesting period for each share scheme. For the SIP, these costs are paid when the employees sell the shares after vesting (typically 3-5 years after the grant date). For the DFSS, the costs are paid immediately upon vesting.
Total expenses and share scheme charges 842.8 (418.8) 424.0 *1 Acquisition of insurance contracts expense excludes £19.4 million (2018: £19.3 million) of aggregator fees from other Group companies.
The £91.6 million (2018: £93.7 million) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Auditor’s remuneration (including VAT): – Fees payable for the audit of the Company’s annual accounts 0.1 – – –
£32,380 (2018: £1,800) was payable to the auditor for other services in the year.
Refer to the Corporate Governance Report for details of the Audit Committee’s policy on fees paid to the Company’s auditor for nonaudit services. Audit fees are 66% (2018: 53%) of total fees and 31% (2018: 47%) of total fees are for non-audit services, which are classed as audit related assurance services under the FRC rules on non-audit services.
IFRS 2 charge for equity settled share schemes 17.3 11.9 41.5 26.5 58.8 38.4
IFRS 2 charge for cash settled share schemes – – 1.9 1.0 1.9 1.0
Social security costs on IFRS 2 charge 1.6 1.2 7.1 4.8 8.7 6.0
Discretionary bonus on shares allocated but unvested – – 13.1 8.0 13.1 8.0
IFRS 2 charge for cash settled share schemes – – 0.6 0.3 0.6 0.3
Discretionary bonus on shares allocated but unvested – – 12.0 7.5 12.0 7.5
9. Expenses continued (i) The Approved Share Incentive Plan (the SIP)
Eligible UK based employees qualified for awards under the SIP based upon the performance of the Group in each half-year period. The maximum award for each year is £3,600 per employee and the maximum number of shares that can vest relating to the 2019 schemes is 1,113,496 (2018 schemes: 1,192,302; 2017 schemes: 1,067,291).
The maximum number of shares that can vest relating to the 2019 schemes is 2,637,196 (2018 scheme: 3,373,948; 2017 schemes: 3,205,449).
The vesting percentage for the 2016 DFSS scheme which vested during 2019 was 93.8% (2015 DFSS scheme: 87.1%).
*2 Shares are awarded in March and September of each year, and vest three years later.
(iv) Number of free share awards vesting during the year ended 31 December 2019
The difference between the original and vested awards reflects employee attrition (SIP schemes) and both employee attrition and the vesting outcomes based on performance conditions noted above (DFSS schemes).
The weighted average fair value of the shares granted in the year was £18.96 (2018: £17.65).
Income tax on the profit or loss for the periods presented comprises current and deferred tax.
The principal temporary differences arise from carried forward losses, depreciation of property and equipment and share scheme charges. The resulting deferred tax is charged or credited in the Income Statement, except in relation to share scheme charges where the amount of tax benefit credited to the Income Statement is limited to an equivalent credit calculated on the accounting charge. Any excess is recognised directly in equity.
10. Taxation continued Factors affecting the total tax charge are: £m £m
Corporation tax thereon at effective UK corporation tax rate of 19.0% (2018: 19.0%) 99.3 90.5
Impact of change in UK tax rate on deferred tax balances 0.3 0.5
Analysis of deferred tax asset/(liability): Tax treatment of share schemes £m
Tax treatment of share scheme charges through income or expense (2.2) – – – – (2.2)
Movement in fair value reserve – – – 0.7 – 0.7
Balance carried forward at 31 December 2018 7.2 (3.6) – (3.9) 0.5 0.2
Tax treatment of share scheme charges through income or expense (4.6) – – – – (4.6)
The average effective rate of tax for 2019 is 19.0% (2018: 19.0%). A further reduction to the main rate of corporation tax to 17% (effective from 1 April 2020) was enacted on 15 September 2016 but is expected to be reversed. This would reduce the Group’s future current tax charge accordingly.
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 Computer equipment – two to four years Office equipment – four years Furniture and fittings – four years Motor vehicles – four years Right-of-use assets – two – 20 years, aligned to lease agreement
In line with the adoption of IFRS 16, and as set out further in notes 2 and 6h to the Financial Statements, a right-of-use asset has been established in relation the Group’s lease arrangements.
The right-of-use asset is measured at cost, which comprises the following: • the amount of the initial measurement of lease liability (see notes 2 and 6h to the Financial Statements); • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs; and
The Group does not have any significant leases which qualify for the short-term leases or leases of low-value assets exemption.
Initial application of IFRS 16 – – – – 136.7 136.7
Foreign exchange and other movements*1 (0.2) (0.3) (0.2) (0.2) (2.3) (3.2)
Net book amount *1 Within foreign exchange and other movements for the ROU asset, £0.6 million relates to remeasurements of the ROU asset due to amendments to the payment terms of the leasing arrangement.
Goodwill relates to the acquisition of Group subsidiary EUI Limited (formerly Admiral Insurance Services Limited) in November 1999. As described in the accounting policies, the amortisation of this asset ceased on transition to IFRS on 1 January 2004. All annual impairment reviews since the transition date have indicated that the estimated recoverable value of the asset is greater than the carrying amount and therefore no impairment losses have been recognised. Refer to the accounting policy for goodwill for further information.
Of amounts owed to co-insurers and reinsurers (recognised under IFRS 4), £1,129.6 million (2018: £1,022.7 million) is held under funds withheld arrangements.
Total accruals and deferred income as above 228.6 231.3 11e. Leases
Information presented in this note is in accordance with IFRS 16. Comparative information presented for the year ended 31 December 2018 is in accordance with IAS 17.
Admiral Group plc hold various property under leasing arrangements that are now recognised as right-of-use assets and lease liabilities. A reconciliation to the prior year operating lease commitment can be found in note 2b. A maturity analysis of lease liabilities based on contractual undiscounted cashflows is set out below: £m £m
Amounts recognised in the Statement of Financial Position are as follows: £m
The Group has no significant financial commitments other than those accounted for as right-of-use assets and lease liabilities under IFRS 16.
The potential liability for the financial years currently subject to audit is approximately €5 million, and, as identified in note 6, a bank guarantee has been provided to the Spanish Tax Authority for this amount. If the exemption is also disallowed in respect of later years, the liability could increase to €19 million.
No provision has been made in these Financial Statements in relation to the matters noted above.
Basic Earnings per share is calculated by dividing profit or loss attributable to equity holders of the Group parent company, Admiral Group plc by the weighted average number of ordinary shares during the period.
Diluted Earnings per share is calculated by dividing profit or loss attributable to equity holders of the Group parent company by the weighted average number of ordinary shares outstanding, adjusted for the effects of all dilutive potential ordinary shares.
Profit for the financial year after taxation attributable to equity shareholders 432.4 395.1
883,592 (2018: 988,475) of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of this share scheme to give a closing number at 31 December 2019 of 11,628,981 (2018: 10,745,389). Of the shares issued, 4,389,821 remain in the Trust at 31 December 2019 (2018: 4,311,425). These shares are entitled to receive dividends.
2,300,000 (2018: 2,300,000) shares were issued to the Admiral Group Employee Benefit Trust for the purposes of the Discretionary Free Share Scheme resulting in cumulative shares issued to the Trust of 23,461,948 (2018: 21,161,948). Of the shares issued 5,823,675 remain in the Trust at 31 December 2019 (2018: 6,170,927) to be used for future vesting, the remaining issued shares having vested.
The Trustees have waived the right to dividend payments, other than to the extent of 0.001 pence per share, unless and to the extent otherwise directed by the Company from time to time.
The Group’s capital management policy defines the Board oversight, risk appetite and tier structure of the Group’s capital in addition to management actions that may be taken in respect of capital, such as dividend payments.
The Board has determined that it will hold capital as follows: • Sufficient Solvency II Own Funds to meet all of the Group’s Solvency II capital requirements (over a 1 year and ultimate time horizon).
• An additional contingency to cover unforeseen events and losses that could realistically arise. This risk appetite buffer is assessed via stress testing performed on an annual basis and is calibrated in relation to the one-year regulatory SCR.
As noted above, the Group’s regulatory capital position is calculated under the Solvency II Framework. The Solvency Capital Requirement is based on the Solvency II Standard Formula, with a capital-add-on to reflect limitations in the Standard Formula with respect to Admiral’s risk profile (predominately in respect of profit commission arrangements in co-and reinsurance agreements and risks relating to Periodic Payment Order (PPO) claims).
The Group manages the capital of its subsidiaries to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities meet regulatory requirements with an appropriate risk appetite buffer. Excess capital above these levels within subsidiaries is paid up to the Group holding company in the form of dividends on a regular basis.
Registered office: Floors 3 & 4 No. 3 Capital Quarter, Cardiff, CF10 4BZ
Registered office: 140 East Shore Drive, Suite 300, Glen Allen, VA 23059
Preminen MENA Price Comparison 15 (indirect) Internet-based Comparison Site * Exempt from audit under S479A of Companies Act 2006
Key management personnel received short-term employee benefits in the year of £1,957,868 (2018: £1,835,302), post-employment benefits of £18,946 (2018: £18,573) and share based payments of £938,258 (2018: £923,400). Key management personnel are able to obtain discounted motor insurance at the same rates as all other Group staff, typically at a reduction of 15%.
No events have occurred since the reporting date that materially impact these Financial Statements.
13. Reconciliations The following tables reconcile significant key performance indicators and non-GAAP measures included in the Strategic Report to items included in the Financial Statements.
13a. Reconciliation of turnover to reported gross premiums written and Other Revenue as per the Financial Statements £m £m
13. Reconciliations continued 13b. Reconciliation of claims incurred to reported loss ratios, excluding releases on commuted reinsurance
Prior year release/strengthening – net original share 121.7 2.5 – 124.2 14.4 – 14.4 138.6
Impact of weather events – – – – – – – –
Loss ratio – current period weather events – 11.2% – 0.7% – – – 0.5%
*1 The group reported loss ratio has been represented at FY 2019 to include the impact of weather events
*2 Other adjustments relate to additional products underwritten in the Group’s International Insurance businesses. The contribution from these products is reported as ancillary income and as such the amounts are excluded for the purpose of calculations of expense ratios.
13d. Reconciliation of statutory profit before tax to Group’s share of profit before tax £m 31 December £m
13e. Reconciliation of share scheme charges in Strategic Report to Consolidated Income Statement and Consolidated Statement of Changes in Equity £m £m
UK Insurance profit before tax – Strategic report 561.7 (3.0) (3.1) 555.6
Profit/(loss) before tax – Strategic Report and Statutory 8.7 (9.6) (0.9)
Profit/(loss) before tax – Strategic Report and Statutory 6.4 (7.5) (1.1)
Group’s share of profit before tax – Strategic Report 20.4 3.5 (4.3) (1.6) 18.0
Non-controlling interest share of profit/(loss) before tax – 1.0 (2.9) (1.4) (3.3)
Group’s share of profit before tax – Strategic Report 14.3 1.4 (6.9) 8.8
Deferred tax in relation to movement in fair value reserve (0.8) 0.4
Deferred tax charge in relation to movements in fair value reserve – – 0.4 – 0.4
Deferred tax on share scheme credit – – – 0.2 0.2
Total comprehensive income for the period – – 3.4 287.8 291.2
• These Financial Statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). The Financial Statements are prepared on the historical cost basis except for the revaluation of financial assets classified as fair value through the profit or loss or fair value through other comprehensive income.
There were no significant changes to accounting policies in the period.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Financial Statements.
In applying the Company’s accounting policies as described below, management consider there to be a key source of estimation uncertainty within the impairment testing of the Company’s investments in group undertakings. Management recognises the estimation involved in determining whether the carrying value of the investment may be supported by the recoverable amount calculation based on the ‘value in use’ of the asset (the net present value of future cash-flows arising from the asset).
In calculating the net present value of future cash-flows, Management has made assumptions over the timing and amount of underlying profit projections of the relevant undertakings, long term growth rates in those projections and the discount rate applied to these projections that is appropriate to reflect the market’s view of the risk of the relevant investment. Sensitivity of these assumptions is also considered in calculating the net present value and suitably incorporated in Management’s valuations. Sensitivity of the key estimates can be found within note 4.
accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. See note 4 to these Financial Statements for further detail.
In line with the above: • Gilts are measured at FVOCI. Unrealised changes in the fair value of these assets are recognised in Other Comprehensive Income (OCI).
• Investments measured at FVTPL are primarily money market funds. Interest income is recognised in the Income Statement.
2. Administrative expenses Included within administrative expenses are recharges of £3.1 million (2018: £2.5 million) relating to employees within the Group who perform services on behalf of the Company. No staff are directly employed by the Company.
Of the interest income of £5.4 million (2018: £4.9 million), £4.1 million (2018: £4.1 million) was recognised under the effective interest rate method.
• Further investment in Preminen Price Comparison Holdings Limited (£2.2 million).
An annual impairment review is performed over the carrying value of the investments in subsidiary undertakings, which involves comparing the carrying amount to the estimated recoverable amount. The recoverable amount is the greater of the fair value of the asset less costs to sell, and the value in use of the subsidiary, calculated using cash flow projections based on financial budgets approved by the Group Board.
In 2019 a non-cash impairment loss of £65.9 million has been recognised by the parent company in respect of its investment in the Group’s US insurance business Elephant Auto. The impairment charge is presented within the “Impairment losses” line of the Parent Company Income Statement and reduces the value of the investment to its recoverable amount, being its value in use, of £39.9 million.
The impairment charge arises following adverse claim development experienced in 2019, which has led to performance being behind both prior year and plan, as discussed in further detail in the Strategic Report.
As a result of the adverse performance against plan no longer supporting the use of management’s forecasts beyond five years, the period of management forecasts used for the impairment review has been reduced from the next ten to the next five years to 2024. A long term growth rate of 2.5% has been applied after 2024, and limited to 30 years. This reduction in management forecast period drives a significant reduction in the calculated value in use of the subsidiary.
In addition, the calculated value in use is based on a version of management’s forecast that is more cautious than the base case forecast against which the performance of the business is measured and reported internally.
The key assumptions used in the underlying forecast are the projected loss ratios, expense ratios, acquisition and retention rates of customers, and ancillary sales. During 2019 management has put in place a number of actions to address the adverse claims experience which are expected to result in improvements to loss ratios and the underlying performance of the business going forward.
The Board continues to support Compare.com in the achievement of its goals. However, given the challenging and still nascent US comparison market conditions there remains considerable uncertainty over the timing and level of the future profitability of the business.
Notes to the Parent Company Financial Statements continued For the year ended 31 December 2019 5. Financial assets and liabilities The Company’s financial instruments can be analysed as follows: £m £m
The amortised cost carrying amount of deposits and receivables is a reasonable approximation of fair value. The table below compares the carrying value of subordinated notes (as per the Statement of Financial Position) with the fair value of the subordinated notes using a level one valuation: Carrying amount £m
Tax treatment of share scheme charges through reserves (0.1) – – – – (0.1)
Balance carried forward at 31 December 2018 (0.2) – – 3.8 – 3.6
The UK corporation tax rate reduced from 20% to 19% on 1 April 2017. The average effective rate of tax for 2019 is 19% (2018: 19%). A further reduction to the main rate of corporation tax to 17% (effective from 1 April 2020) was substantially enacted on 15 September 2016, but is expected to reverse. This would reduce the Company’s future current tax charge accordingly.
Total trade and other payables 574.4 346.1 9. Share capital and reserves Capital within the Company is comprised of share capital and the share premium account, the fair value reserve (which reflects movements in the fair value of assets classified as FVOCI) and retained earnings.
Proposed March 2018 (58.0 pence per share, approved April 2018, paid June 2018) – 163.3
Declared August 2019 (63.0 pence per share, paid October 2019) 179.8 –
The dividends proposed in March (approved in April) represent the final dividends paid in respect of the 2017 and 2018 financial years. The dividends declared in August are interim distributions in respect of 2018 and 2019.
10. Guarantees During 2018, a Special Purpose Entity (SPE) was set up in order to secure additional funding for the Admiral Loans business. The Company acts as guarantor for certain operational performance conditions of its subsidiary, AFSL, as seller and servicer for the SPE, and indemnifies AFSL in respect of any amount that would have been payable by AFSL for non-compliance with such performance conditions.
12. Continued application of Financial Reporting Standard (FRS) 101 – Reduced Disclosure Framework Following the first time application of FRS 101 Reduced Disclosure Framework in 2015, the Board considers that it is in the best interests of the Group for Admiral Group plc to continue to apply the FRS 101 Reduced Disclosure Framework in future periods. A shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in Admiral Group plc may serve objections to the use of the disclosure exemptions on Admiral Group plc, in writing, to its registered office (Tŷ Admiral, David Street, Cardiff, CF10 2EH) no later than 30 June 2020.
Basis of preparation The figures below are as stated in the Group Financial Statements preceding this financial summary and issued previously. Only selected lines from the Income Statement and Statement of Financial Position have been included.
The table below defines and explains the primary APMs used in this report. Financial APMs are usually derived from financial statement items and are calculated using consistent accounting policies to those applied in the Financial Statements, unless otherwise stated. Non-financial KPIs incorporate information that cannot be derived from the Financial Statements but provide further insight into the performance and financial position of the Group.
APMs may not necessarily be defined in a consistent manner to similar APMs used by the Group’s competitors. They should be considered as a supplement rather than a substitute for GAAP measures.
Turnover Turnover is defined as total premiums written (as below), other revenue and income from Admiral Loans. It is reconciled to financial statement line items in note 13a to the Financial Statements.
This measure has been presented by the Group in every Annual Report since it became a listed Group in 2004. It reflects the total value of the revenue generated by the Group and analysis of this measure over time provides a clear indication of the size and growth of the Group.
The measure was developed as a result of the Group’s business model. The core UK Car insurance business has historically shared a significant proportion of the risks with Munich Re, a third party reinsurance Group, through a co-insurance arrangement, with the arrangement subsequently being replicated in some of the Group’s International insurance operations. Premiums and claims accruing to the external co-insurer are not reflected in the Group’s Income Statement and therefore presentation of this metric enables users of the Annual Report to see the scale of the Group’s insurance operations in a way not possible from taking the Income Statement in isolation.
Group’s share of profit before tax represents profit before tax, excluding the impact of non-controlling interests. It is reconciled to statutory profit before tax in note 13d to the Financial Statements.
For each insurance business an underwriting result is presented showing the segment result prior to the inclusion of profit commission, other income contribution and instalment income. It demonstrates the insurance result, i.e. premium revenue and investment income on insurance assets less claims incurred and insurance expenses.
Loss Ratio Reported loss ratios are expressed as a percentage of claims incurred divided by net earned premiums.
There are a number of instances within the Annual Report where adjustments are made to this calculation in order to more clearly present the underlying performance of the Group and operating segments within the Group. The calculations of these are presented within note 13c to the Financial Statements and explanation is as follows.
Return on Equity Return on equity is calculated as profit after tax for the period attributable to equity holders of the Group divided by the average total equity attributable to equity holders of the Group in the year. This average is determined by dividing the opening and closing positions for the year by two.
Additional Terminology There are many other terms used in this report that are specific to the Group or the markets in which it operates. These are defined as follows: Accident year The year in which an accident occurs, also referred to as the earned basis.
Commutation An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsurance contract.
Also referred to as net earned premium. The element of premium, less reinsurance premium, earned in the period.
Ultimate loss ratio A projected actuarial best estimate loss ratio for a particular accident year or underwriting year.
Underwriting year basis Also referred to as the written basis. Claims incurred are allocated to the calendar year in which the policy was underwritten. Underwriting year basis results are calculated on the whole account (including coinsurance and reinsurance shares) and include all premiums, claims, expenses incurred and other revenue (for example instalment income and commission income relating to the sale of products that are ancillary to the main insurance policy) relating to policies incepting in the relevant underwriting year.
Written/Earned basis A policy can be written in one calendar year but earned over a subsequent calendar year.