Corporate Governance 62 Introduction from the Chairman 64 Board of Directors 66 Governance Report 74 The Audit Committee 80 The Group Risk Committee 85 The Nomination and Governance Committee 88 The Remuneration Committee 90 Directors’ Remuneration Policy 100 Annual Report on Remuneration 108 Directors’ Report
Financial Statements 113 Independent Auditor’s Report 122 Consolidated Income Statement 123 Consolidated Statement of Comprehensive Income 124 Consolidated Statement of Financial Position 125 Consolidated Cash Flow Statement 126 Consolidated Statement of Changes in Equity 127 Notes to the Financial Statements 179 Parent Company Financial Statements 182 Notes to the Parent Company Financial Statements 189 Consolidated financial summary (unaudited)
01Admiral Group plc · Annual Report and Accounts 2018 *1 Alternative Performance Measures – refer to the Glossary for definition and explanation.
*3 The Group’s 2017 financial results were reported on an Ogden discount rate -0.75% basis. 2018 reported results reflect the impact of a change in assumption for the Ogden rate to 0%, with the equivalent results on a -0.75% (Pre-Ogden) basis also included above. Refer to Glossary for further information on the Ogden discount rate.
*4 2018 dividend includes an additional dividend of 11 pence per share relating to the increase in post-tax profits from the change in Ogden discount rate assumption.
Our focus on customer service, our distinctive culture and our contribution to the communities in which we operate remain at our heart. This has resulted again in a positive set of financial results in 2018.
Admiral is now 26 years old and over the years has become a much bigger and more diverse organisation through a strong track record of organic growth. We remain true to our values and approach which are as relevant now as they always have been. We have a straightforward and highly focused strategy where we continue to concentrate on our core market of UK insurance while taking what we know to overseas markets where we are now seeing some encouraging results. At the same time, we are exploring how we can make use of our core skills in other areas of insurance and in the personal loans and car finance markets in the UK.
Admiral Group has delivered another positive set of results in 2018: record turnover, profit, dividend, strong return on capital, strong solvency ratio and record customer numbers. Yet again our results have been impacted by Ogden (Personal Injury Discount Rate), this time in a positive way. Following Royal Assent of the Civil Liability Bill in the UK Parliament just before Christmas, the Group has applied a best estimate assumption for the Odgen rate at 0%, which has had a significant positive impact on our 2018 profits. Excluding this our profits would have been slightly up year on year.
The Group has continued to grow with turnover increasing by 11% to £3.28 billion. Customer numbers increased strongly by 14% to 6.5 million.
The Group’s share of pre-tax profit increased by 18% to £479.3 million, heavily impacted by the change in Ogden rate (assumed 0%). Earnings per share and return on equity increased by 17% to 137.1 pence (1% increase to 118.2 pence excluding Ogden impact) and one percentage point respectively. The Group’s solvency ratio remains robust at 194% from (205% in 2017).
Household insurance continues to grow but the result has been impacted by adverse weather and subsidence events resulting in a loss of £3.0 million for the year (profit of £4.1 million in 2017). Turnover is now £146.0 million and properties insured have increased by 31% to 0.87 million. Customers buy from us either using price comparison sites (which continue to grow significantly), or directly and, increasingly, using our MultiCover offering, building on the success of MultiCar.
Our Financial Services business continues to grow in both Personal Loans and Car Finance, with a loans balance at year end 2018 of £300 million. We continue with our test and learn approach. The early signs are positive; we see the potential to differentiate and expect this to be an increasingly significant part of our business in future.
As a result of Brexit, we have established an insurance company and an insurance intermediary business in Spain to support our European operations.
Our joint venture PC business, Preminen, continues to explore new opportunities with operations in Mexico, and more recently Turkey.
• Shareholder returns – we believe in returning excess capital to shareholders.
I have had the pleasure of visiting our operations in the UK, France, Italy, Spain and the US along with other Non Executive Directors (“NED’s”). I have also attended the annual Staff General Meeting (with approximately 6,000 people), our annual management off-site event and the Admiral Business Club. I continue to be inspired by the deep commitment of our people to our culture and serving our customers. In all of these the Admiral distinctive culture is in evidence; it really is different.
From the moment a new employee starts at Admiral, they understand our commitment to putting the customer at the heart of what we do – the customer, the customer, the customer. We do try to do the ‘right thing’ and to continue to make it easier to do business with us and be there at moments of need to provide excellent service.
The Board recognises the need for a strong corporate governance framework and supporting processes across the Group and believes that good governance, with tone set from the top, is a key factor in delivering sustainable business performance and creating value for all the Group’s stakeholders.
The Board and I feel that the Board has a good balance of experience, skills and knowledge to support and challenge the management team and it is supported by effective governance and control systems.
During 2018 we welcomed Andy Crossley (as reported last year), Mike Brierley and Karen Green. Andy and Mike became members of the Group Audit Committee. Andy was also appointed as a non-executive chairman of EUI Limited, the UK insurance intermediary; and Mike became the non-executive chairman of Admiral Financial Services Ltd (AFSL), the company in which Admiral’s loans business is written. Karen became chair of the Audit Committee effective 14 December 2018. They all bring substantial financial services experience. Owen Clarke took over the role as Senior Independent Director and Justine Roberts became a member of the Nomination and Governance committee, both effective end of 2018.
Customer, Customer, Customer… SIMPLY PUT, WITHOUT OUR CUSTOMERS WE WOULDN’T HAVE A BUSINESS, SO BELOW ARE A SELECTION OF HIGHLIGHTS FROM OUR CUSTOMERS FROM THE PAST YEAR.
We had some outstanding feedback from a car finance customer this year. She praised one of our agents, Gurdav, and wanted to express how patient and understanding he has been with her. She explained that she found it quite emotional having to apply for finance as she was getting rid of a car which she had an emotional attachment to as she lost her close friend and took the car over from her. She said that Gurdav listened to her patiently and even though the customer started crying, he cheered her up by stating what a good friend she is and that the new car can be in her friend’s memory. The customer will recommend Admiral to all her friends and was also delighted as we originally offered her a great rate on our finance product.
“People who like what they do, do it better”: this belief is integral to our culture. We have created an environment where Admiral employees look forward to coming to work and providing great service to customers. We encourage our people to get involved in innovation, proactively improving our processes, services and working environment. As responsible employers we aim to create an inclusive working environment and support our staff wherever possible.
In any organisation, clear communication is vital, and to ensure this we promote open-plan workplaces and constant communication and interaction across teams and departments: it’s little things like this can really help break down the barriers and encourage teamwork and a collaborative environment.
Customer, Customer, Customer… We value customers above anything else. We work hard so that our customers are able to get the most suitable products for their specific needs and can rely on us to be there for them when things go wrong.
of customers were happy with their service2 average call answer rate3 average waiting time for a Customer Services call 1 Average Reevoo score for 2018, based on 42,834 responses 2 Based on 17,755 responses 3 For UK-based Customer Services of customers would buy again1
Our people play an active role in deciding who we help and how – after all, who understands the needs of the community better than the people themselves? As a global business employing over 10,000 people, we feel even more so that it’s our responsibility to give something back to our local and global community; what’s more is that we feel proud to do so.
People really are at the heart of what we do, and if we can get involved, we’re glad to do so. Teams are encouraged to undertake community projects as part of their teambuilding activities and fun afternoons for example, the Recruitment team recently spent the day at a residential care home in Bridgend with an entertaining array of song and dance for residents, as well as helping out where possible.
C02e per employee reduction in waste sent to landfill since 2017
Newport and Swansea£400,000 to be spent by the new Ministry of Giving over the next 2 years
13Admiral Group plc · Annual Report and Accounts 2018 1. UK
Admiral Bell Diamond elephant.co.uk Confused.com Admiral Household Gladiator Admiral Law BDE Law Admiral Loans Admiral Van Admiral Travel 2. France
Admiral Loans and other costs (including share scheme changes, finance costs and business development costs; such as investments in Preminen’s ventures).
Confused.com, one of the UK’s leading price comparison websites, profitable operations in Spain and France, and a developing business in the US.
We go out of our way to make this a GREAT place to work and believe that if people like what they do, they’ll do it better. We have created an environment where Admiral employees look forward to coming to work and providing great service to customers.
We are committed to returning excess capital to shareholders. We believe that keeping management hungry for cash keeps them focused on the most important aspects of the business. We don’t starve our businesses, but neither do we allow them the luxury of excess capital.
Continue to take advantage of growth opportunities in UK Motor and Household.
Develop websites that allow consumers to compare a range of general insurance, financial services and other products.
Continue to provide a platform that attracts customers and improves the customer experience.
Pursue our path towards long term value creation in Europe and the US.
In the US, continue to drive towards a lower expense ratio and higher retention customers.
Develop Admiral Loans and offer UK customers better products and a better online buying experience.
“ Our strategy is simple: continue our profitable growth in the UK and take what we know and do well and do it elsewhere.” Henry Engelhardt, CBE – Admiral Co-Founder
I think a CEO statement should try and take the long view; try and help readers understand things happening during a year that are often trivial in terms of that year’s financials, but may be fundamental to the company’s long-term health and prosperity.
There’s been a lot going on in 2018 that qualifies as short-term financially trivial, but long-term potentially fundamental, so I can only give you a flavour and will do so by telling the tale of two cities, two Admiral cities: Madrid and Cardiff, and some of what happened in each during 2018.
Rastreator responded by literally demoting “approximate” prices and promoting accurate prices on the price page, in a transparent and customerfriendly way. The change, introduced late in 2018, saw customer satisfaction scores rise immediately and substantially. The P&L impact in 2018 was marginally negative, but the bold move holds out the long-term possibility of a step change in customer trust and ultimately in the speed of adoption of insurance price comparison in Spain.
It’s hard to choose what to highlight in Cardiff, the location of our headquarters and 4,000 of our almost 8,000 UK staff. The launch of travel insurance, the growth of Veygo, (our short-term insurance brand), the expansion of MultiCover, our car and home combined policy, were all options, but instead I choose “Ford” and “The Admiral Brand”.
Late in 2018 we signed our first material affinity partnership to provide Admiralserviced and underwritten car insurance under someone else’s brand name: Ford’s.
Why? Partly because 13.6% of UK motorists drive a Ford and, while big believers in the cost-efficiency of distribution via price comparison sites, we also value a degree of “distribution diversity”. Partly because we believe we can work with Ford Credit more broadly and creatively - to ensure better insurance and claim management outcomes for both Admiral and Ford customers.
The 2018 costs of securing the affinity partnership were in the hundreds of thousands and there will be an IT investment of around £1 million in 2019. Long-term return - a possibly fundamentally important and valuable strategic affinity partnership.
During the course of 2018, Admiral Group crossed the threshold of four million cars on cover in the UK, and more than five million cars, vans and houses on cover. The vast majority of these policies are, and will continue to be, under the Admiral brand.
Our continued investment in maintaining and building our brand in 2018 was around £10 million. Had we cut that spend, most of that £10 million would have fallen to the bottom line, given the lag between cutting spend and a brand withering away. But “Admiral”, one of the UK’s most recognised financial services brands, is an asset worth investing in for the long-term.
So that’s an Admiral 2018 take on a Tale of Two Cities; a tale of investment for the future in Cardiff and Madrid, and across the Group. Whether, in investment terms, 2018 proves to be “the best of times”, an “age of wisdom”, a “spring of hope”, (to quote, very selectively, from the justifiably more widely read original “Tale of Two Cities”), will only become fully apparent with the progress of time, but I’m fairly confident that many of this year’s investments will bear long-term fruit for our customers and shareholders. It’s certainly a far, far better thing to have made the investments than not to have made them.
New products include short term insurance and partnership with Ford 2019 focus Maintain our lead in cost efficiency, rigorous risk selection and effective claims management by continuing to identify improvements in our approach and operations
DEMONSTRATE ADMIRAL CAN BE A GREAT CAR INSURER BEYOND THE UK
Progress in 2018 European insurance first ever profit and growth to over 1 million customers
Elephant grew to over 200,000 vehicles in force 2019 focus Continue the overall long term strategy of building sustainable, profitable businesses
Elephant continues to focus on higher retaining customers and improved combined ratio
Launched Household insurance in France 2019 focus Grow the UK Household and Loans businesses with a focus on the long-term objective of developing sources of competitive advantage
Voted 10th Best Workplace in Europe 3rd best large employer for women in the UK
Over 250,000 online courses and almost 700 classroom training sessions completed by UK staff 2019 focus Continue to respond to staff feedback and continuously improve
Continue to develop our people by offering exciting new career opportunities
In the past I’ve outlined my priorities, which I indicated would be my priorities for a number of years to come. Here’s how we are doing...
“ Our people are shareholders in the business, and are highly motivated to improve processes, better serve customers, as well as maintain a culture of cost efficiency.”
Q What happened with UK motor market pricing in 2018 and what is the outlook for 2019 - do you expect a turn in the cycle?
A Cristina: The 2018 motor pricing outlook was influenced by uncertainty on the Civil Liability Bill as well as higher than expected claims inflation, particularly in the latter part of the year. The Civil Liability Bill gained Royal Assent in December 2018, providing increased certainty for a change in the Ogden rate during 2019.
QA& David Stevens which contributes to strong performance and a more rational approach. However, there is still a large degree of inefficiency in the market as a whole which allows for opportunity to disrupt and grow. Whilst our competitors grow, Admiral does not rest on our laurels – we are always challenging ourselves to find ways to improve, innovate and better serve our customers.
The Admiral MultiCover proposition allows customers to purchase multiple insurance products for their household in one go – this allows for a more seamless customer journey, and generally optimal price as they add more products. Hence, customers get a discount and want to stay with us for longer.
Q The internal model is taking longer than expected – can you provide an update on why and when you expect to finalise and move to your target Solvency 2 ratio?
A Geraint: One of the key objectives of using our own model is to calculate a capital requirement that better reflects Admiral’s risk profile than the standard model allows for. Thanks to the huge efforts of our team, we made good progress over the past year but we need to further enhance our application before formally submitting it to the regulator. The continued growth of the Group and additional complexity is also leading us to reconsider the model scope, potentially bringing more business beyond purely UK motor within it.
Therefore we won’t make a formal application in 2019 and will possibly not submit it in 2020. We will update further in due course when we have greater certainty around the timing.
Geraint Jones ratio. Early signs of this strategy are positive – persistency has improved by 24%, from 2017 to 2018 and the loss ratio in Texas is better than the market benchmark. In addition, the business has improved its digital capabilities allowing for increased self-service and an improved customer experience. This, together with a continued investment in growth to achieve the benefits of scale, has resulted in an improved expense ratio. So overall, I would say the business is making good progress towards sustainable scale which will be necessary to reach profitability.
Q How is the loans business doing? Why develop a Loans business, which seems so different to motor insurance?
A Geraint: The Loans market is large, with a £25 billion of new business per annum for personal lending alone and so I would be happy if we were able to successfully capture even a small proportion of this market. How will we compete? Well, we hope to transfer some of the competitive advantages we have built through motor insurance and adapt them to the lending business. These include our skill at risk selection, digital customer acquisition, excellent customer service and expense efficiency. In addition, we hope to take advantage of any overlap from our current customer base – a large proportion of personal loans are taken out to buy cars, and we believe there is also the opportunity to build a car finance business.
Admiral Loans continued to grow strongly in 2018, with loans balances increasing to £300 million from £66 million at the end of 2017. We maintain a prudent approach to growth and continue with a test and learn philosophy, growing where we see opportunity and slowing growth at less optimal times; we have moderated growth in the second half of 2018 in advance of Brexit. Early signs for the loans book are positive, but we continue to remain prudent in our approach as we build up experience.
Q Is Admiral able to continue to succeed in the core business without being distracted by diversification?
“ ConTe deserves a special mention, with a year full of celebration – its 10th birthday party, 3rd best place to work in Italy, and importantly a fifth year of profitability.”
Our financial result has, once again (see 2016’s Annual Report), been significantly impacted by a forthcoming change to the UK Personal Injury Discount Rate (the Ogden rate). To try and explain what’s happening behind the very positive headline numbers, I’d like to start my review by setting out some analysis of the underlying changes between 2018 and 2017.
Beyond Ogden, the main changes between 2017 and 18 were: • Underlying (i.e. pre-Ogden benefit) UK Motor profit was up 2% from 2017; due to a larger book and positive prior year claims development offset by higher current year loss and expense ratios; • Despite continuing to grow turnover and customer numbers (both up by more than 30%), the UK Household result was impacted (particularly in the first half) by severe weather (freeze and subsidence, costing around £11 million). The full year result was a loss of £3 million (H1 loss was £2 million, 2017 full year profit £4 million); • ConTe in Italy led the way to a highly pleasing close-to-break-even overall result for our International Insurance businesses – a significant £13 million or so improvement on the previous year. All businesses improved their results and there was continued strong growth; • Confused was the standout performer in Price Comparison, producing a profit more than 40% higher than 2017 (£14 million) and around 10% top line growth. The overall Price Comparison segment result was £9 million, £2 million up on last year (also read page 47 for information on the write down in the carrying value of compare.com); • Admiral Loans made a pre-tax loss of £12 million, in line with expectation (the loss mainly results from acquisition costs which are expensed immediately whilst revenue is recognised over the life of the loans) after a year of strong growth; and
The proposed full year dividend for 2018 is 126.0 pence per share – 11% higher than 2017’s payment. The increase is mainly because of the payout in respect of the Ogden profit benefit (around £31 million, 11 pence per share). The postdividend solvency ratio remains strong at 194%.
ConTe deserves a special mention, with a year full of celebration – its 10th birthday party, 3rd best place to work in Italy, and importantly a fifth year of profitability. The strongest driver of the result is positive loss ratio performance, both on the current and back years.
The ConTe team continues to work hard on all aspects of building a growing, sustainable, profitable business – improving the customer experience, reducing the expense ratio (it’s already in line with the market), refining antifraud capabilities, building brand awareness, and advancements in self-service and automation. ConTe’s 600,000th customer came on cover in late February 2019.
We previously communicated that we hoped to apply to the Group’s prudential regulator (the PRA) during 2019 for approval to use our own internal model to calculate the Group’s solvency capital requirement. Whilst we continue to work intensively on all aspects of the model and, thanks to the huge efforts of our team, made good progress over the past year, we need to further enhance our application before formally applying. The continued growth of the Group and additional complexity is also leading us to reconsider the model scope, potentially bringing more business beyond purely UK Motor within it. This means we will not submit the formal application in 2019 and will possibly not submit in 2020. Hence, the Group will remain on the standard formula plus capital add on basis for the immediate future.
Whilst disappointing to see a further delay, it’s clearly important to make sure our application is complete and we’d hope to be much clearer on the expected timeline by the end of the year.
I’d like to finish with Brexit (wouldn’t we all). In late 2017 we started restructuring our European businesses (three insurers, two price comparison websites) so they could continue to trade regardless of the politics and ultimate Brexit outcome. I’m glad we took that course and as of January 2019 all businesses are operating under European licenses and we were successfully able to negate any impact on our customers or staff.
Key highlights of the Group’s result in 2018 are as follows: • Continued strong growth in turnover (£3.28 billion, up 11% on 2017) and customer numbers (6.51 million, up 14% on 2017); • Group’s share of pre-tax profits of £479.3 million (2017: £405.4 million) and statutory profit before tax of £476.2 million (2017: £403.5 million). Both saw significant growth, primarily due to the impact of the change in Ogden discount rate assumption that leads to an increase in both underwriting profit and profit commission shown above; • Excluding the Ogden impact, the Group’s share of profit before tax increased by 2% to £413.3 million, with improved results from the UK Insurance, International Insurance and Price Comparison segments, offset by increased investment (due to growth) in Admiral Loans and higher central costs; • UK Insurance turnover and customers both increased by 9% and 13% respectively to £2.6 billion and 5.2 million (2017: £2.4 billion and 4.6 million). Excluding Ogden, there was a significant increase in instalment income driven by Admiral retaining the instalment income since 2017, previously proportionately shared with Munich Re as well as a general increase in instalment income revenue; • UK Household saw strong growth in turnover and customer numbers, though its result was impacted by weather events leading to a loss of £3.0 million (2017: £4.1 million profit); • Improvement in the International Insurance result, with a reduced loss of £1.1 million (2017: £14.3 million loss). European insurance businesses recorded an aggregate profit of £6.4 million (2017: £1.9 million loss); and
The Ogden discount rate is used for adjusting the value of lump sum personal injury compensation, according to the amount the victims of serious personal injury can expect to earn by investing it. The principle of the new legislation is one of fair compensation, and the changes will result in the rate being set with reference to ‘low risk’ rather than ‘very low risk’ investments, better reflecting the actual investment risk that claimants are prepared to take.
At the time of the announcement of the proposed legislation in 2017, the Lord Chancellor implied that the new system would result in a rate in the region of 0% to 1%.
The balance, along with the impact of business written but unearned at the balance sheet date will be recognised in the form of higher claims reserve releases and profit commission over the next two to three years.
The Group anticipates that when the UK market pricing adjusts the level of future premiums to reflect the higher Ogden rate, there will be no significant change to the Group’s future profitability.
• An additional dividend of 11 pence (£31 million) per share relating to the increase in post-tax profits from the change in Ogden discount rate assumption. The pay-out on the incremental post-tax profit is 88% and is lower than on the -0.75% basis, reflecting the capital implications of the change in discount rate assumption, primarily relating to increasing propensity for PPO claims.
The Group’s return on equity was broadly consistent with 2017 at 56% in 2018 (2017: 55%).
The Group’s co-insurance and reinsurance arrangements for the UK Car Insurance business are in place at least until the end of 2019. The Groups’ net retained share of that business is 22%. Munich Re will underwrite 40% of the business (through co-insurance and reinsurance arrangements) until at least the end of 2020.
Following this reorganisation, the Group has four underwriting entities; Admiral Insurance (Gibraltar) Limited (AIGL), Admiral Insurance Company Limited (AICL), Elephant Insurance Company LLC in the USA (EIC) and AECS as noted above.
The estimated and unaudited regulatory Solvency II position for the Group at the date of this report is as follows: GROUP CAPITAL POSITION (UNAUDITED)
Eligible Own Funds (pre 2018 final dividend) 1.26 2018 final dividend 0.19
The tax charge reported in the consolidated income statement is £85.7 million (2017: £71.9 million), equating to 18.0% of pre-tax profit (2017: 17.8%).
Money market funds and other fair value instruments 1,301.1 1,074.3 781.0
The underlying rate of return for the year (excluding accruals related to reinsurance contract funds withheld) on the Group’s cash and investments was 1.2% (2017: 1.3%).
• International Car Insurance – including L’olivier (France), Admiral Seguros (Spain), ConTe (Italy), Elephant (US)
“ Shortly after the end of the year we won the Home Insurance Provider of the Year at the Moneyfacts Consumer Awards, which was a great endorsement from our customers and reflects the fantastic culture that’s been a cornerstone of our business since we launched 26 years ago.”
The insurance sector isn’t quite consistent with everyone’s view of an exciting and fast paced life. Looking back and reflecting over 2018 makes me realise how many things have happened in a 12-month window, and the myriad of changes and improvements we’ve implemented over that time, I’d argue quite the reverse!
The market started the year positively, with growing confidence of seeing a favourable change in the Ogden rate leading to softening market prices in H1. However, continued inflation in damage claims and increased large bodily injury frequency has caused an increase in the loss ratio during the year. Our disciplined approach to underwriting meant that we therefore maintained our rates in the first half and increased prices more than our peers in H2, which meant that our growth rate slowed as the year progressed.
Key highlights for the UK insurance business for 2018 include: • Continued growth in customers and turnover in both Motor and Household with Admiral maintaining market rates in H1 and increasing rates more than the market in H2 for Motor and increasing rates for Household
• A 22% increase in UK Motor profit to £561.7 million (Ogden: -0.75%: 7% increase to £491.3 million) primarily as a result of increased reserve releases due to the change in the Ogden rate assumption, as well as growth in ancillary revenue and instalment income
• Small loss from recently launched Travel insurance product (£3.1 million)
*2 Underwriting profit excludes contribution from underwritten ancillaries (included in net other revenue).
*3 Net other revenue includes instalment income and contribution from underwritten ancillaries and is analysed later in the report. 2017 and 2016 have been represented on the same basis.
*4 Original net share shows reserve releases on the proportion of the portfolio that Admiral wrote on a net basis at the start of the underwriting year in question.
UK Motor profit increased by 22% during 2018 to £561.7 million (2017: £461.4 million) and vehicles insured increased by 9% to £4.32 million (2017: £3.96 million), whilst the reported combined ratio increased to 81.9% (2017: 80.3%). The results were impacted by a number of factors: • Net insurance premium revenue was 4% higher at £452.5 million mainly resulting from the larger portfolio; • Investment income was in line at £32.2 million; • The current period loss ratio was slightly worse at 88.1% (2017: 85.3%) due to increased frequency in large bodily injury and damage claim inflation in 2018, albeit positive loss ratio development for prior years. Admiral continues to reflect a cautious approach to setting reserves early in their development; • Continued positive development of prior year claims costs combined with the change in Ogden rate led to increased releases on original net share of reserves (£111.4 million, 25% of premium compared to £92.1 million, 21% of premium in 2017); • Releases on reserves originally reinsured but since commuted higher at £109.6 million (v £73.8 million 2017), impacted by the change in Ogden rate; • The growth in the vehicle base contributed to an increase in the underlying expense base. The change in the Group’s net retained share from 25% to 22% in 2017 meant that the prior year earned expense ratio (16.2%) benefitted from the reduction in administration cost in the period. Excluding the impact of this change, the earned ratio would be broadly flat with 2018 (18.4%); and
As noted above, in addition to the favourable impact arising from the change in Ogden rate assumption, the Group experienced continued positive development of claims costs on previous underwriting years and these factors led to another significant release of reserves in the financial statements in the period (£111.4 million on Admiral’s original net share, up from £92.1 million). The margin held in reserves remains prudent and significant though is slightly lower than the comparative period-end, reflecting the reduction in Management’s assessment of uncertainty around the reserves.
The table below shows the estimated sensitivity of profit before tax and solvency ratio to different Ogden rates. The profit impact presented is the estimated total impact of the change on the Group’s pre-tax profit on an ultimate basis. It should be noted that not all of the impact would necessarily be recognised immediately.
Decrease in Ogden discount rate of 50 basis points (to minus 0.5%) (94.2) -6%
*1 The impacts on profit before tax are stated net of co-insurance and reinsurance and include the impact on net insurance claims along with the associated profit commission movements that result from the change in the Ogden rate.
In 2018 profit commission of £95.0 million was recognised, up from £64.7 million the prior period. The increase in 2018 mainly arose due to improvements in booked loss ratios on prior years, which have also been impacted by the change in Ogden rate in 2018.
The Munich Re Group will underwrite 40% of the UK motor business until at least 2020, with future extension options available to Munich Re until 2022. 30% of this total is on a co-insurance basis, with the remaining 10% under a quota share reinsurance agreement from 2017 onwards.
The nature of the co-insurance proportion underwritten by Munich Re (via Great Lakes) is such that 30% of all motor premium and claims for the 2017 year accrue directly to Great Lakes and are not reflected in the Group’s financial statements. Similarly, Great Lakes reimburses the Group for its proportional share of expenses incurred in acquiring and administering this business.
The Group also purchases excess of loss reinsurance to provide protection against large claims and reviews this cover annually. For 2017 the Group increased its excess of loss cover as a result of the anticipated change in Ogden discount rate and the potential impact on large claims. For 2018, the Group has reduced this level of cover to be back in line with more recent levels. 2019’s cover will be similar to 2018.
Note 5c to the financial statements analyses profit commission income by underwriting year.
Admiral tends to commute its UK Car Insurance quota share reinsurance contracts for an underwriting year 24 months from inception, assuming there is sufficient confidence in the profitability of the business covered by the reinsurance contract.
In 2018 Admiral recognised reserve releases from commuted reinsurance contracts of £109.6 million (2017: £73.8 million). Excluding the accounting impact of commutations (refer to the glossary for further information), the releases relating to commuted reinsurance contracts were £141.5 million (2017: £97.5 million). The increase from 2017 is primarily due to more significant improvements in booked loss ratios on 2016 and prior underwriting years, in part due to the change in Ogden assumption.
UK Motor Insurance Other Revenue – analysis of contribution: Contribution from additional products & fees 206.5 187.3 183.3
Admiral generates Other Revenue from a portfolio of insurance products that complement the core car insurance product, and also fees generated over the life of the policy.
Overall contribution (Other Revenue net of costs plus instalment income) increased by 19% to £243.2 million (2017: £204.8 million). Whilst there were a number of smaller offsetting changes within the total, the main reasons for the increase were higher instalment income primarily due to changes in the arrangements with Munich Re in 2017 such that Admiral now retains all instalment income on the car insurance business compared to 60% previously, plus the growth in the size of the business.
Other revenue was equivalent to £67 per vehicle (gross of costs; 2017: £64), the increase being substantially due to the increase in instalment income noted above. Net Other Revenue (after deducting costs) per vehicle was £57 (2017: £54).
UK Household insurance (loss)/profit (3.0) 4.1 2.7 *1 Alternative Performance Measures – refer to the end of this report for definition and explanation.
UK Household insurance was launched in December 2012 under the Admiral brand.
The UK Household insurance business continued to grow strongly and increased the number of properties insured by 31% to 865,800 (2017: 659,800). Turnover increased by 36 % to £146.0 million (2017: £107.1 million). The 2018 result was a loss of £3.0 million (2017: profit of £4.1 million) following the weather and subsidence events that have impacted the UK Household market during the first and second halves of 2018 respectively. Adjusting for normal weather experience the result would have been a profit of £7.7 million. Market premiums increased as a result, and Admiral also increased premiums.
The volume of new business policies sold in the market continued to increase as more households changed insurer, and the share of these sales made via the price comparison channel also continued to increase. Admiral enjoyed strong customer retention and new business volumes and saw an increasing share of new business sales made either directly or via cross sell to existing Admiral customers within the Group’s MultiCover product offering.
The Group’s Household business is supported by long-term proportional reinsurance arrangements covering 70% of the risk. In addition, the Group has non-proportional reinsurance to cover the risk of catastrophes stemming from weather events.
The UK Insurance business operates predominantly under the regulation of the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA), and through a Gibraltar-based insurance company, under the Financial Services Commission (FSC) in that territory.
This year we ran our successful Innov8 programme for the third consecutive year. Innov8 is an intense 48-hour challenge involving small cross-functional teams working on generating creative and innovative solutions to challenges from across the business set by our senior management team. Final presentations are delivered to a judging panel made up of our senior management group including CEO David Stevens and UK CEO Cristina Nestares. Anyone in the business can apply to take part. An email is sent to all staff (and an Atlas News article) inviting interested staff to tell us what challenge they are interested in and, in no more than 100 words, what they think they can bring to the Innov8 programme.
Innov8 organisers David and Sophie said, “Innov8 2018 was a fantastic success, the competition went smoothly, and we had great buy-in from senior management. We were incredibly impressed at how teams of Admiral employees who may never have met came together and produced brilliant ideas and polished pitches in just two days.”
We continued to enhance our capabilities in both risk selection and claims handling.
Investments in people, technology and data support our strategy of building a long-term sustainable loss ratio advantage.
What´s next? Well, for 2019 both loss ratio and acquisition remain areas of focus. We will also be increasing investment in technology to become even more agile in servicing the needs of our customers.
The main goal in continental Europe remains to continue to grow efficiently in markets where acquisition costs are materially higher than the UK and the direct channel still represents a very minor share of the market.
Improving our customer experience has been the “leitmotif” of the year – from a smoother sales journey with more customer friendly forms and accurate pricing, to new self-service features and faster customer service enabled by a higher degree of automation of internal processes. EUIGS, our IT service arm in Spain, played a prominent role in strengthening our systems and technology for a more efficient scalable business.
ConTe closed 2018 with a profit for the fifth year in a row, whilst also achieving significant growth of the customer base of 17% year-on-year.
The market wasn’t particularly favourable, even though prices started to slightly increase in the second half of the year, pushing more customers to shop online. Despite this context, ConTe was able to grow by leveraging on its competitiveness and on improvements in the digital journey.
ConTe has consolidated its position in the Italian Market by leading the competition on price comparison sites in terms of times top position, strengthening brand awareness through a continuous presence on TV and football sponsorship, and increasing customer satisfaction scores.
This was also a good year for the key ratios of the P&L: loss ratios continued to improve consistently across all underwriting years and the expense ratio hit the market average thanks to efficiencies gained through investments in digital and automation.
Finally, our people and culture continue to make the difference. ConTe has been awarded for the third year in a row as one of the best large companies to work for!
Despite a sluggish aggregator market, L’olivier managed to keep growing at a strong pace with more than 35% increase in turnover and closing the year with 174,000 customers.
This was possible thanks to strong improvements both in new business conversion and in persistency. Close to 40% of the French population now recognise our brand. This, coupled with several operational optimisations, helped us to increase our market share.
In 2018 Elephant shifted our book towards higher tiered customers, delivering stronger growth, persistency, and operational efficiency.
In 2019 we will continue to invest in our digital transformation. We are also planning some new customer acquisition initiatives to strengthen our brand awareness and grow our base of higher retention customers. Ultimately these initiatives are critical to building a growing, profitable, sustainable company centred around our customers.
*4 Combined ratio, net of Other Revenue is calculated on Admiral’s net share of premiums and includes Other Revenue. Including the impact of reinsurer caps the reported combined ratio, net of Other Revenue would be 2018: 102%; 2017: 112%; 2016: 122%.
Admiral operates four insurance businesses outside the UK: in Spain (Admiral Seguros), Italy (ConTe), the US (Elephant Auto) and France (L’olivier – assurance auto).
• Continued investment in people, technology and customer experience in all operations.
The combined expense ratio improved to 40% (2017: 45%) as all businesses grew and continued to pursue operational efficiencies. The expense ratio continues to appear high in comparison to Admiral’s UK business because of high acquisition costs as the businesses grow and also the continued need to build scale. ConTe expense ratio reached the Italian market level in 2018.
In 2018 Admiral retained 35% (Italy), 30% (France and Spain) and 33% (USA) of the underwriting risk respectively. The arrangements for 2019 will remain the same.
Admiral’s European insurance operations are now primarily regulated by the Spanish regulator, the Dirección General de Seguros y Fondos de Pensiones (DGSFP). This shift is a result of restructuring ahead of Brexit. More information on company changes due to Brexit can be found on page 49.
The Group’s US insurer, Elephant Insurance Company, is regulated by the Virginia State Corporation Commission’s Bureau of Insurance.
Global During 2018, we continued to deliver on our ambition of playing relevant and leading roles in our services comparison markets where barriers to entry are low, but barriers to success are high.
We believe that our world requires disruption to improve customer experience and we have proven this in Spain, where by putting the customer first, we succeeded in getting more reliable and accurate prices from insurers in 2018. This is already having a positive impact on conversion rates and gives us optimism for the future. In Confused in the UK, we continued to focus on our priorities and invested in developing attractive new offers for customers.
In emerging markets, we continue our path of organic expansion and we welcome Tamoniki.com, as the newest member of the family in Turkey. Rastreator.mx in Mexico is seeing the first positive signs of growth.
We prefer to call ourselves ‘Customer Portals’ rather than Price Comparison, as the future requires us to not only compare prices, but also to give advice on the individual fit between consumer and service/product. We expect insights based on data analysis and AI will enable us to achieve this, but this is only one of the many opportunities that 2019 offers to our growing family.
In 2018, Confused.com continued to evolve its driver centric strategy, with a focus on leading drivers from confusion to clarity, and helping people navigate the noise, clutter and confusion when it comes to the hundreds of insurers fighting for their attention.
Confused.com responded to all of these challenges, growing revenue by 10% and profit by 42% year on year, whilst continuing to invest in technology and people. 2018 profit margin also improved to 15% (2017: 12%) as we focused on more effective marketing in response to market conditions and implemented improvements for customers. In 2018, we also achieved the milestone of £1 billion revenue since we launched in 2002, a fantastic achievement for everybody who has been a part of the Confused.com story.
45Admiral Group plc · Annual Report and Accounts 2018 2018 was not the year we expected. Most carriers achieved rate adequacy in late 2017 and came into 2018 in growth mode.
That was good for us in terms of carrier additions to our panel (including Esurance, Travelers, USAA) as well as rates returned to customers (our highest national average ever). It also meant, however, an upward movement in our acquisition costs as those same carriers sought growth. That resulted in lower revenue and quote volumes in 2018 and pressure on marketing spend.
This pressure meant an ever-vigilant focus on cost management as well as the exploration of new acquisition channels. Several nice partnerships have developed with a strong pipeline established for 2019.
Our 2019 priorities remain similar to 2018: grow our absolute volumes while continuing to pursue overall profitability. Consumers can save billions and we are determined to help them realise how easy it can be!
2018 was a mixed year for Rastreator. Challenging market conditions and investment in new products resulted in flat revenue and a decrease in profit. This, as well as several regulatory changes including IDD, Brexit and GDPR did not stop us from concentrating on moving towards an improved customer proposition through our price accuracy strategy.
For 2019 we are focusing in setting up our own call centre to get deeper into the contracting process of the customer and being able to close sales by ourselves (mortgages, loans and insurance policies). This will allow us to give a complete and better experience to our customers.
To make this happen, we have a strong, ambitious and committed team that truly believe in this growing future for Rastreator!
I am delighted and optimistic about the future of LeLynx and look forward to 2019 in my new role as CEO. Lots to do. And a great team to do this with.
The key features of the Price Comparison result are: • A loss of £6.9 million (2017: £7.1 million) at compare.com in the US, (Admiral Group share). Statutory loss before tax remained constant at £10.0 million. The results reflect a reduction in sales volumes due to increased market competition and pressure on acquisition costs; • In the UK, Confused.com saw market share increases in Motor and Home Insurance price comparison and efficient media spending led to an increased profit of £14.3 million (2017: £10.1 million); • The European price comparison businesses reported a reduced profit of £1.4 million (2017: £4.1 million) reflecting investment in a more diversified product range as well as a more competitive market environment, including a new entrant spending on marketing in France; and
During 2018 compare.com received investments totalling $30 million, $25 million in an agreement with former Admiral Group CEO Henry Engelhardt and his wife, Diane, and separately, $10 million by way of a convertible loan from Admiral Group, of which $5 million was drawn down in the year. Henry has subsequently joined the Board of compare.com.
In 2018, a non-cash impairment charge of £32.9 million was recognised by the parent company in respect of its investment in compare.com. This followed the regular review of the carrying values of subsidiary companies and review of the long-term strategy of compare.com, and reflects challenging conditions for nascent price comparison market in the US. Given the challenging market conditions there remains considerable uncertainty over the timing and level of the future profitability of the business. The impairment charge is recognised in the income statement of the parent company and has no impact on the Group’s consolidated profit for the period or the Group’s 2018 regulatory capital position.
Business development costs include costs associated with potential new ventures, including the investment in Preminen's ventures related to the price comparison businesses in Mexico
Admiral Loans launched in 2017, and currently distributes unsecured personal loans and car finance products through price comparison websites and also direct to consumers via the Admiral website.
The Group employs a prudent test and learn approach regarding growth in customers and loan advances, consistent with other new business launches. Initial results are encouraging, and the business has grown significantly since launch, with loan balances increasing to £300 million in 2018 (2017: £66 million). The Group continues to expect the business to make losses in its early phase as a result of the upfront accounting for acquisition costs as opposed to interest income earned on loans which is spread over the life of the loans. Admiral is encouraged with the performance of the business and the credit quality of the loans portfolio.
Admiral Loans also adopted the new IFRS9 accounting standard as at 1 January 2018 which has accelerated the recognition of expected losses on loans advanced to customers.
Admiral has adopted a prudent approach in relation to Brexit, designed to mitigate the risks to our European businesses of a potential “hard Brexit”, which could have prevented those operations from continuing to trade due to reliance on passporting rights.
The businesses that potentially would have been impacted, being the European insurers and European price comparison businesses, have been restructured so as to fully mitigate a “no deal” outcome. This has been achieved for the European insurers through Admiral receiving approval for an application to establish insurance and intermediary companies in Spain, such that from 1 January 2019, all of the Group’s European insurance business is underwritten by a regulated entity in Spain, Admiral Europe Compania Seguros (AECS). All existing liabilities and contracts relating to these businesses have been transferred through portfolio transfer processes, also effective from 1 January 2019.
Also as part of the ORSA process, a specific economic stress test scenario which captures the potential outcomes from a ‘no deal’ Brexit has been applied to the Admiral Loans business in order to assess the potential impact. The stress results in an increase in the loss provision that would be required as a result of the deterioration in economic environment. As for the UK insurance business, the Group is comfortable that it is able to manage the potential outcomes based on the results of the stress test and relevant management actions.
• Modest potential operational difficulties relating to the provision of ‘green cards’ to customers wishing to drive in Europe. A full communications plan has been developed for customers wishing to drive their vehicles in Europe after 29 March 2019.
Our Managers’ Awards were first awarded in 1993. There are now 20 awards in total, which are named after executives and senior managers reflecting the skills and qualities that particular manager values, such as the Louisa Scadden “Don’t Just Sit There” award or the Stuart Clarke “Details Make a Difference” award. Each manager chooses the recipient of his or her award and consequently, the awards carry a great deal of prestige. Each recipient receives a plaque to keep and his or her name is added to a company plaque for each award, which are then displayed in reception in all our sites so everyone can see them. There are no rules with the awards, so if someone only works part time, they have just as much a chance as a full-time employee to win one.
Year in Pictures Strategic Report 1. Staff at Rastreator, our Spanish price comparison website, at the 2018 Great Place to Work awards ceremony – winning!
2. Our fantastic Inspire choir turning it up to 11 at our annual Staff General Meeting.
5. Our Swansea supporting Matt’s Café - a Swansea business that takes food waste destined for landfill to feed people who need it, on a pay-as-you-feel basis.
In relation to Brexit risks, Admiral executed a part VII transfer of European policies to its new entity based in Spain, AECS. This action mitigated the risk of not being able to write business in its European businesses post 29 March 2019. Other risks, referred to in the viability section of the report (see page 84), that have been considered include operational risks such as green cards and vehicle parts inflation. Admiral also considered the potential financial risks arising from an economic downturn on its business. Please refer to page 49 for further detail. During 2018 Admiral ran a number of economic scenarios with particular focus on its new lending business, AFSL.
Best estimate reserves are estimated both internally and externally by independent actuaries.
The Group is exposed to the risk that claims cost on future business is higher than allowed for in the premiums charged to customers.
As well as UK Motor, long term arrangements are also in place for UK Household and International businesses.
The level of this revenue could diminish due to regulatory or legal changes, customer behaviour, strategic reasons or market forces.
Admiral’s focus remains on the wide range of factors that contribute to Admiral’s combined ratio outperformance of the UK market. Some are set out earlier in the Strategic Report, but in addition: • Track record of innovation and ability to react quickly to market conditions and developments; and
Growth in business plans exceed the scale of infrastructure of the operation.
Admiral continues to invest in opportunities to diversify its distribution channels, in particular through the partnership with Ford.
Concentrations of credit risk are managed by investing in liquidity funds which invest in a wide range of short duration, high quality securities. Cash balances and deposits are placed only with highly rated credit institutions. Some long term investments are held in Government bonds to further mitigate the exposure to credit risk.
Exposure to regulatory intervention, censure and/or enforcement action through fines and other sanctions.
The Group has relatively low exposure to net assets and liabilities in currencies other than pound sterling.
Operational risk arises within all areas of the business. The principal categories of operational risk for Admiral are: • People
Succession planning is based on targeted recruitment, identifying potential leaders through internal development, talent management and retention processes.
Emerging risks are defined as trends or events that are considered to have a potentially significant impact to the Group, with a high degree of uncertainty around the likelihood of occurrence, severity or timescales. Emerging risks are classified into the following segments (a) legal and regulatory, capturing relevant legislations and regulations, (b) socio-political and economic, (c) environmental and (d) technology related.
We are always looking for ways to develop and improve as a business, and when it comes to being a responsible business, things are no different.
Communication with customers is important, and we offer a range of communication channels so that wherever they are, whenever they need to get in touch, they can do so easily.
Our UK CEO, Cristina Nestares, also collates monthly feedback for customerfacing staff who receive the highest feedback ratings for providing a superior customer experience. She selects a Customer Champion, awarding them with a prize and explaining how their approach to customer service is so special. This ‘Customer Commentary’ is communicated across the business to congratulate the Customer Champion as well as enlighten and inspire other employees to make a difference to the way they service customers.
As insurers, we are exposed to the financial impact of climate change and the resultant extreme weather. One such way for us is when selecting new premises; we consider proximity to public transport hubs, bicycle storage and changing facilities for staff, and the building’s overall, independently verifiable, green credentials to reduce overall emissions.
We have our own in-house “Green Team” dedicated to environmental initiatives and developing innovative approaches to reducing our environmental footprint.
Our amicable and open work culture is crucial to making our employees feel at home and part of the business, and we encourage flexibility and openness across all levels and departments. In this year’s Great Place to work survey 95% our workers said they felt this was a friendly place to work.
Our Community We actively involve ourselves in supporting our local community through a variety of projects and initiatives, ranging from financial and material donations, to volunteering time and expertise.
A good example of this community outreach is our Recruitment department, who work with local schools, job centres, and universities to offer regular CV-writing classes, interview workshops, and talks. Many of our employees are involved in charity work both through and independent of the business, but we support wherever and however we can.
Greenhouse gas emissions, waste creation, and energy consumption all go hand in hand. As individuals and organisations, we must aim to reverse our negative effects on the planet, the land, the sea, the air. Overall, we aim to play a responsible role as a business and encourage all our staff to do the same. More specifically we approach each area in the following ways: GREENHOUSE GASES
Due to the size and spread of the Group, we approach energy consumption reporting by splitting our UK sites from our overseas sites. Since 2015 all electricity that we have purchased in the UK is from 100% green sources, and in 2019 we will look to continue this with a new supplier. Additionally, our Cardiff and Newport offices are rated BREEAM Excellent for exceeding sustainability benchmarks above regulatory requirements. For our international offices, we work closely with our landlords to reduce the environmental impacts of our business, but accurate figures are very difficult to ascertain. Since 2015 we have participated in Earth Hour, extinguishing all non-essential lighting for 1 hour across all of our sites. This joint international effort illustrates to our staff and to our community how simple, small, individual initiatives can yield enormous results when scaled-up.
Most of our UK and European sites have regular yoga classes and groups on-site, whilst running clubs are also popular. Discounted access, and sometime free day pass allocations to local gyms are also offered across all our UK sites.
61Admiral Group plc · Annual Report and Accounts 2018 10,000th Employee In April, we welcomed our 10,000th employee. Mostofa was our 10,000th worldwide recruit. He joined the Claims department in Cardiff, having worked in the restaurant business for the past 18 years. Our Recruitment team surprised Mostofa in his department to present him with a special 10,000th employee award and doughnuts to share with his new team.
This year we signed the Women in Finance Charter, underlining our support to HM Treasury’s objective of increasing the representation of women in senior managerial roles in financial services. Further, we are also signatories of the Insurance Inclusion Pledge, setting out our commitment to improving the workplace experience of our employees.
We encourage our staff to do the right thing by providing a safe platform and process to do so. It is always acceptable to raise concerns even if it is later found to be a mistake; we prefer our staff to be vigilant.
We inform employees of two different ways to report any suspected wrongdoing – internally (through designated HR channels) and externally (through the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), or the independent charity, Public Concern at Work) – with the reassurance that they will be taken seriously. This policy is a core part of initial training delivered during induction and is repeated regularly throughout the year. Currently there is a 98.5% completion rate for the internal e-course.
Our in-house training department, the Admiral Academy, has been steadily growing to meet the demands of our expanding workforce, with thousands of hours of classroom-based classes delivered each year. On top of this, they produce a number of industry-specific e-learning course to ensure knowledge and understanding throughout the workforce. Our Introduction to GDPR, Anti-Bribery and Corruption, and Whistleblowing courses have seen 94%, 96%, and 99% completion rates, respectively.
of staff feel they are offered training or development to further themselves professionally.
“ During the year, the Board reflected on the importance of the Group’s culture and held a specific Board session in January 2018 on the trends and observations coming out of the participation by employees across the Group in the Best Place to Work Survey.”
I am pleased to present the Group’s Corporate Governance Report for 2018 which sets out the Admiral framework of governance and the approach the Board has taken during 2018 to promote the standards of good corporate governance that are rightly expected by our stakeholders.
The revised UK Corporate Governance Code issued in July 2018, which applies to the Group with effect from 1 January 2019, contains significant amendments to the previous version issued in 2016. As a result, the Board has set spent time reviewing how the updated provisions will be implemented and what amendments will be required to enhance our current reporting and processes. We are already well placed to comply with the changes contained in the new Code, however, we will report against the principles and provisions in the new Code in more detail in our 2019 Annual Report and Accounts.
During the year, the Board reflected on the importance of the Group’s culture and held a specific Board session in January 2018 on the trends and observations coming out of the participation by employees across the Group in the Best Place to Work Survey. Admiral has a strong and unique culture – a key differentiator from our competitors. This will continue to be a focus of the Board and, consequently, we will allocate Board time to the assessment and monitoring of the Group’s culture to ensure that it remains aligned with the Group’s purpose and values.
This Corporate Governance Report is structured in order to demonstrate to shareholders and other stakeholders how the Board has sought during the year to comply with each section of the Code - Leadership; Effectiveness; Accountability; and Relations with Shareholders. Remuneration is dealt with in the separate Remuneration Report and details of the Group’s Corporate Social Responsibility (CSR) reporting can be found at pages 58 to 61.
Originally appointed to the Board in 2012, subsequently appointed to Chairman role in 2017
Mike has 35 years’ experience in Chief Financial Officer (CFO) roles within the financial services industry. Most recently Mike was CFO of Metro Bank PLC between 2009 and 2018, helping lead the business from start-up to a profitable FTSE250 Bank. He spent seven years at Capital One Europe as CFO Europe, CFO UK and Chief Risk Officer Europe. He has also worked as CFO for Royal Trust Bank, Financial Controller at Industrial Bank of Japan, CFO of Gentra Limited and Director, Business Risk at Barclaycard. Mike is a Fellow of the Institute of Chartered Accountants in England and Wales.
Justine founded Mumsnet in 2000 and is responsible for creation, strategic direction and overall management. In May 2011, Justine founded Gransnet, a sister site to Mumsnet, for the over-50s. Before that Justine was a freelance football and cricket journalist for the Times and Daily Telegraph, after working for Deutsche Bank, managing the South African equity operation in US.
The Board is the principal decisionmaking forum for the Group providing entrepreneurial leadership, both directly and through its Committees, and delegating authority to the Executive team. The Board is responsible for organising and directing the affairs of the Group in a manner that is most likely to promote its success for the benefit of its members as a whole. The Board is accountable to stakeholders for setting and achieving the Group’s strategic objectives; for the creation and delivery of strong sustainable financial and operational performance; for ensuring that in carrying out its duties the Group’s legal and regulatory obligations are being met; and for ensuring that it operates within appropriately established risk parameters.
The Group’s UK regulated entities are responsible to the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) for ensuring compliance with the Group’s UK regulatory obligations and that dealings with the FCA and PRA are handled in a constructive, co-operative and transparent manner. Similar provisions apply in respect of the Group’s international businesses with regard to the relevant regulatory authorities in those overseas jurisdictions in which the Group also operates.
In addition to standing items considered at each Board meeting, such as updates on the Group’s preparations for Brexit, the main items considered by the Board during the year included: ongoing reviews of the Group’s UK car insurance business, presentations from the Group’s overseas insurance and price comparison businesses, presentations from the Group’s loans and household business, updates on succession planning and the review of governance arrangements. The Board also received updates on data and analytics, information security, diversity and understanding the views of customers.
– Further consideration of customer insight and customer journey; – Implementation of the recommendations of the external governance review at Group and subsidiary level and requirements of the new Corporate Governance Code; – Focus on the next generation of talent across the Group to ensure there is a diverse pipeline of talent available for succession planning for senior roles; COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE
• Provision C.3.1 – (regarding having at least three independent non-executive directors serving on the Audit Committee) Penny James, who served as an independent non-executive member of the Audit Committee, stepped down as a Nonexecutive director on 8 September 2017, following a change in her Executive role. From this date up to the appointment of Andy Crossley as an independent non-executive member of the Board and Audit Committee on 27 February 2018, following regulatory approval, the Audit Committee only had two independent non-executive members and did not meet the Code requirements to have at least three independent non-executive members. The Group fully complied with this requirement apart from this period from 8 September 2017 to 27 February 2018 and held four meetings during the period, three of which Andy Crossley attended in 2018.
– Ensure that the Group’s technology and digital capabilities are appropriate as the Group looks to explore opportunities beyond car insurance; – Focus on enhancing the Group’s Cyber and Information Security procedures; and
– Continue to devote Board time to consideration of the views of the Group’s key stakeholders in implementing the Group’s strategy and ensure there is regular engagement through appropriate channels.
At each scheduled meeting the Board receives updates from the Chief Executive and Chief Financial Officer as to the financial and operational performance of the Group and any specific developments in the areas of the business for which they are directly responsible and of which the Board should be aware. In addition, there is an update provided at each Board on the matters discussed and considered at each of the Group’s principal subsidiary Board meetings. An annual schedule of agenda items is reviewed and updated at each meeting to ensure that items are considered at the appropriate point in the financial and regulatory cycle. Meetings are structured so as to allow for consideration and debate of all matters. The head of the Group’s European insurance businesses and the CEO of UK Insurance (respectively Milena Mondini de Focatiis and Cristina Nestares) together with the Chief Risk Officer (James Armstrong) are invited to attend every Board meeting and regular Board dinners. This has proved an effective means of ensuring that senior managers below Board level have exposure to and gain experience of the operation of the Board.
In addition to her visits to the Group’s UK operations, the Chairman has sought to visit each of the Group’s overseas operations this year and Non-Executive Directors are invited to join either her or the Chief Executive on one or more of their overseas visits each year. The NonExecutive Directors and the Chairman met during the year without the Executive Directors being present. Non-Executive Directors also attended briefing sessions in Cardiff on different aspects of the Group’s UK business. In order to increase their understanding of the depth and breadth of management across the Group below Board level, the Non-Executive Directors and the Chairman also attended a dinner with members of the Group’s senior management team without the Executive Directors being present. When management teams present to the Board on their operations they are also invited to join the Board for dinner which gives the opportunity for informal interaction between Directors and management.
Directors are expected to attend all meetings of the Board and the Committees on which they serve and to devote sufficient time to the Group to perform their duties. Where Directors are unable to attend meetings they receive papers for that meeting giving them the opportunity to raise any issues with the Chairman in advance of the meeting. The number of scheduled Board meetings and Committee meetings, of which they are a member, attended by each Director during 2018 is provided in the table below. In addition to the seven scheduled Board meetings held during the year, there was an additional Board meeting held in June 2018 that was called at short notice and was attended by all Board members. Similarly, the nine Audit Committee meetings, set out in the table below, includes two additional Audit Committee meetings that were called at short notice and held in February and August 2018.
*2 David Stevens was unable to attend the Group Risk Committee meeting on 16 January 2018 due to his attendance as Group CEO at an internal meeting that could not be rescheduled, David Stevens stepped down as a member of the Group Risk Committee with effect from 29 March 2018 but continues to attend periodically and did so for one of the three remaining meetings in 2018.
*3 Manning Rountree was unable to attend the Group Risk Committee meeting on 15 November 2018 due to a pre-existing business commitment that unfortunately could not be rescheduled to accommodate this Group Risk Committee meeting.
*4 Andy Crossley joined the Group Board and the Audit Committee on 27 February 2018.
*6 Karen Green was appointed on 14 December 2018 and did not formally attend any meetings prior to this.
All the Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for advising the Board, through the Chairman, on governance matters. The Company Secretary provides updates to the Board on regulatory and corporate governance issues, new legislation, and Directors’
• Board dynamics and the interaction between the Chairman, Non-Executive Directors and management; • Time management of Board meetings; • The effectiveness of the Board in considering the Group’s risk management framework and internal controls; • The Board’s strategic and operational oversight; • Succession planning including the oversight of the Group’s processes for managing, developing and retaining talent; • Management of Group subsidiaries; • Focus of Board meetings; and
Key recommendations identified in the review to enhance the Board’s effectiveness included: • Having more regular sessions for the Board to consider and review customer insight and customer experience; • Ensuring that there was appropriate time on the Board agenda to understand the views and requirements of key stakeholders, including: major investors, employees and customers; • Focusing on the technological issues facing the company; • Continuing to ensure that Board papers are succinct and of the appropriate length so that Board time is focused on effectively challenging and debating the key issues for discussion and approval; and
• Continued oversight of the implementation of the recommendations in the governance review and changes required under the new Code.
Overall the review found that the Board continued to work effectively and that each Director demonstrates full commitment to his/her duties and contributes in an open and transparent way, enabling a detailed level of debate and discussion around material matters affecting the Group.
considered and discussed with the Chairman the comments and feedback that had been received from the Directors as part of the Chairman’s evaluation questionnaire and was able to confirm that the performance of the Chairman is effective and that she demonstrates appropriate commitment to her role.
• Leads the induction and development plans for new and existing Board members.
• Works with the Chairman and other Directors/shareholders to resolve significant issues where necessary.
In the context of recent and forthcoming Board changes, careful consideration continues to be given to the composition and balance of the Board. As a result, the Group continues to monitor the need to refresh Board and Committee membership in an orderly manner so as to maintain the continuity of Board process and the strength of personal interaction which underlies the effectiveness of the Board as a team. Following recent appointments, the Board remains satisfied that it has the appropriate balance of skills, experience, independence and knowledge of the Group to enable it and its Committees to discharge their duties and responsibilities effectively, as required by the Code. In addition, the Directors are aware of their legal duties to act in a way they consider, in good faith, will be most likely to promote the success of the Company for its shareholders, as well as considering the interests of other stakeholders.
The Board currently comprises ten Directors, the Chairman (who was independent on appointment), two Executive Directors, and seven independent Non-Executive Directors. As can be seen from the Directors’ biographies on pages 64 to 65, the Directors have a broad range of skills and experience and can bring independent judgement to bear on issues of strategy, performance, risk management, resources and standards of conduct which are integral to the success of the Group.
Appointments to the Board are the responsibility of the Board as a whole, acting on the advice and recommendations of the Nomination and Governance Committee. The Nomination and Governance Committee seeks to balance the retirement and recruitment of Non-Executive Directors ahead of their replacement so as to avoid dislocation of Board process by losing experience and skills. Appointments are made on merit and against objective criteria, having due regard to the benefits of diversity, including gender, with a view to ensuring the Board has the appropriate mix of personality, skills, and experience. During the year under review, following a formal, rigorous and transparent process led by the Nomination and Governance Committee and supported by external search consultants, the Board was pleased to appoint as independent Non-Executive Directors: Andy Crossley with effect from 27 February 2018; Mike Brierley with effect from 5 October 2018 and Karen Green with effect from 14 December 2018 both having attended relevant meetings as guests during the year. All of them will be subject to election by shareholders at the forthcoming AGM in accordance with the Group’s Articles.
This induction is supplemented by visits to the Group’s head office in Cardiff and certain overseas offices, and meetings with members of the senior management team and their departments. Development and training of Directors is an ongoing process. Throughout their period in office the Directors are regularly updated on the Group’s business; legal matters concerning their role and duties; the competitive environments in which the Group operates; and any other significant changes affecting the Group and the industry of which it is a part.
This is supplemented by feedback to the Board on meetings between Management and investors. In addition, the Investor Relations team presented an update to the Board in June 2018 which considered the Group’s share price performance in the context of the market in which the Group operates, including regulatory changes, and provided further analysis on particular areas where communication to investors could perhaps be enhanced. The Investor Relations team also regularly produces an Investor Relations Report that is circulated to the Board for their consideration which provides an update on Investor Relations activity in the previous quarter. The Report contains an analysis of share price performance; a summary of analyst reports received during the month and of meetings that have been held with investors and analysts; together with details of any significant changes to the shareholders’ register.
The regular channels of communication with both the FCA and PRA that existed throughout the year were supplemented by the FCA and PRA being invited to attend Board meetings in 2018. The FCA attended the Board in January 2018 and the PRA the Board in August 2018. Both sessions were valuable in giving the Board an opportunity to hear directly the views of both regulators and to understand, and challenge them on, the rationale for their decisions to the extent that they impact the Group.
Mindful of the changes required under the new Code for increased engagement with the workforce, the Group has relaunched its existing Staff Forum which will be called the Employee Consultation Group (ECG). The ECG will consist of elected representatives from across the Group. The Chair is an employee and a staff representative and will attend two Group Board meetings per year. Non-Executive Directors will also be invited to attend each ECG meeting. The purpose of the ECG will be as a forum for staff consultation, gathering staff opinion and fostering a safe environment in which to generate and explore ideas. It is intended that the ECG will be an informal channel that will enable staff to share ideas and concerns with senior management and the Board on a regular basis.
In compliance with the requirements of the Companies Act 2006 regarding Directors’ duties in relation to conflicts of interest, the Group’s Articles of Association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits as it thinks fit. The Company has put in place a Conflicts of Interest Policy to deal with conflicts of interest and this was reviewed and approved by the Board in June 2018. The Policy sets out the process and procedure by which the Board manages potential conflicts of interest that may arise at Board level and within Board Committees, and within the Group’s Subsidiary Boards. Following this review, the Board concluded that the process continued to operate effectively. In addition, each Board member is asked to complete, annually, a conflicts of interest questionnaire that sets out any situation in which they, or their connected persons have, or could have, a direct or indirect interest that could conflict with the interests of the Company. Any current directorships that they, or their connected persons hold, any advisory roles or trusteeships held, together with any companies in which they hold more than 1% of the issued share capital are also disclosed.
I am pleased to set out in this report an update on the main activities of the Audit Committee in 2018, which were conducted under the Chairmanship of my predecessor until mid-December, and hence for the majority of the period under review.
During the year the key areas of focus of the Committee have been to provide support to the Board in its oversight of financial reporting and the control environment across the Group. The setting of insurance claims reserves to ensure consistency with the Group’s agreed reserving methodology is a key accounting judgement in the Group’s financial statements, and the Committee continues to place considerable focus on this subject. The analysis of outstanding claims by Management was reviewed alongside that of the Groups independent actuaries and external auditor. The continued uncertainty around the Ogden discount rate was kept under review by the Committee, along with the potential impact of legislative changes to the way in which the rate is set in the future; the Committee received regular updates on the progression of the Civil Liability Bill and the likely timing of any subsequent change to the Ogden discount rate.
The Committee also spent time considering the results of Management’s impairment testing of the Group’s investment in its US subsidiaries, in particular the appropriateness of the underlying assumptions and forecasts used, and the stresses applied to the forecasts.
The Committee had regular updates, including a separate session, on the impact of the introduction of the new IFRS 17: Insurance Contracts accounting standard to ensure that the Group was well prepared and understood the implications for the Group of its introduction in January 2019. The introduction of IFRS 17 has since been deferred to January 2022. The Committee also spent time considering the impact of IFRS 16 leases and the changes to the new UK Corporate Governance Code as they applied to the activities of the Committee.
The Committee also considered and reviewed the Group’s whistleblowing policy and the instances of whistleblowing that had been raised across the Group during the year.
In addition, the Committee continued to monitor the appropriateness of the Group’s system of risk management and internal control, including the implementation of the Group’s Minimum Control Standards’ Framework. This was introduced in 2017 to provide for a consistent approach to the control frameworks deployed across the Group as its non-UK motor operations have continued to develop. The Committee maintained a close focus on the UK Motor business and also reviewed overseas subsidiaries and the Group’s Loans business.
Other individuals such as the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Heads of Compliance and Internal Audit, and representatives of different parts of the Group may be invited to attend all or part of any meeting as and when appropriate. The Chair of the Audit Committee meets privately with the Head of Internal Audit on a regular basis. The external auditor was invited to attend all of the Committee’s meetings held in 2018, excepting those agenda items when its own performance/ appointment was to be reviewed and provision of non-audit services discussed. In addition, a private meeting was held between members of the Committee and the auditor. The Chair also had several private meetings with the auditor during the year.
The Audit Committee’s primary responsibilities are to: • Monitor the integrity of the Group’s financial statements and any formal announcement relating to the Group’s financial performance, reviewing any significant financial reporting judgements which they contain; • Keep under review the effectiveness of the Company’s internal financial controls, internal control and risk management systems; • Review the Group’s procedures for handling allegations from whistleblowers and for detecting fraud; • Monitor and assess the role and effectiveness of the Group’s Internal Audit functions in the context of the Group’s overall internal control and risk management systems; • Consider and make recommendations to the Board, to be put to shareholders for their approval at the AGM, in relation to the appointment, reappointment and removal of the Group’s external auditor; • Review the external auditor’s independence and objectivity and the effectiveness of the audit process; and
• Review the policy on the engagement of the external auditor to provide nonaudit services, considering the relevant regulatory guidance regarding the provision of non-audit services by the external auditor.
The agenda for the meetings taking place during the year are agreed by the Committee Chair and detail the matters to be discussed and considered at each meeting. The agenda are updated regularly to allow for new items to be included.
During the year the Committee reviewed the following: • The Annual Report and interim results, including key accounting judgements and disclosures; • The Group Solvency and Financial Condition Report; • Reports from the Internal Audit departments within the Group on the effectiveness of the Group’s risk management and internal control procedures, approval of the 2019 Audit Plans, details of key audit findings, and actions taken by Management to manage and reduce the impact of the risks identified; • Reports from the external auditor on the principal findings from their review of the Group’s systems and controls, and on their key accounting and audit issues and conclusions on the half and full year reporting; • A report from the Chair of the Group Risk Committee on the principal risks faced by the Group and the work undertaken by the Group Risk Committee to ensure risk is appropriately managed;
SIGNIFICANT ISSUES CONSIDERED BY THE COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS
The Committee held separate meetings with the Group’s external actuaries, Lane Clarke and Peacock (LCP) at which there was challenge and debate on the best estimates developed by the external actuaries. At these meetings
Management provided further information on the reserving levels proposed and were challenged by the Committee as to their adequacy and level of inherent prudence.
Whilst acknowledging that the setting of reserves for claims which will settle in the future, is a complex and judgmental area and having had the opportunity at the separate meetings referred to above to consider and question the recommended best estimates, the Committee is satisfied that an appropriate process has been followed and that there has been sufficient scrutiny, challenge and debate to give confidence that the reserving levels set provide an appropriate margin above best estimates, noting the continued high level of prudence that remains within the reserves.
The impairment reflected the reduction of the previous carrying amount of £66 million of the Group’s investment to its recoverable amount, being its value in use. The Committee reviewed and challenged the cash-flows supporting the value in use calculations, including the underlying financial forecasts supporting the cash- flows and the stresses applied to Compare. com’s long term plan, which were revised following a review in the second half of 2018. Key assumptions within the financial forecasts and cash-flows were challenged, including the discount rate and currency rates applied to the cash-flows. The Committee also heard from its auditor on the results of its audit tests performed on the impairment analysis.
The Committee was comfortable that Management performed a thorough and robust process in line with the relevant accounting standard and agreed with the proposed reduction in carrying value of the investment.
The Committee considered the impact on profit commission income of future changes in claims reserves as the recognition of this income is dependent on the loss ratio booked in the financial statements and cash receivable is dependent on actuarial projections of ultimate loss ratios. The Committee remained satisfied that profit commission was correctly accounted for by the Group and was in accordance with the contractual arrangements that were in place.
The Audit Committee considered the auditor’s overall findings on this area which indicated that it considered the profit commission recognised was appropriate in the context of the financial statements as a whole.
After reviewing the presentations and reports from Management and consulting where necessary with the auditor, the Committee is satisfied that the financial statements appropriately address the critical judgements and key estimates (both in respect to the amounts reported and the disclosures).
The Committee will continue to monitor regulatory developments in this area to ensure that its policy on non-audit fees adheres to current guidance and best practice.
The Committee undertakes an annual review to assess the independence and objectivity of the external auditor and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements, the progress achieved against the agreed audit plan, and the competence with which the auditor handled the key accounting and audit judgments. Following this review the Committee concluded that the auditor, Deloitte LLP, remained independent and provided a service that was robust and fit for purpose.
During 2018, the Committee reviewed and approved the audit fee proposal for the 2018 year-end Group audit. The agreed fee for the audit and other assurance-related services for 2018 is £869,000. This compares to a fee agreed for 2017 of £490,000.
During the year, the Committee reviewed the arrangements with the current external auditor and considered whether it was appropriate to initiate a tender process in order that the current arrangements could be reviewed against those offered by other audit firms in the market. The Committee concluded that it would initiate a tender process in 2020 for an appointment (or reappointment) to be made with effect from 2021, coinciding with the rotation of the current audit partner. However, the Committee will keep under review the results of the various reviews and consultations on the audit services market and may reconsider the tender timetable and process if appropriate. As the Committee has primary responsibility for conducting the tender process and making recommendations to the Board, regarding the appointment, reappointment and removal of the external auditor, the Committee will lead the proposed tender process. The Committee intends to engage with the Group’s major shareholders to get their views on the firms that will be invited to participate in the tender and the timetable that has been agreed for the tender process.
Except for two additional Audit Committee meetings that were called at short notice and held in February and August 2018, the Group Head of Internal Audit attended all Audit Committee meetings and provided a range of presentations and papers to the Committee, through which the Committee monitors the effectiveness of the Group’s internal controls. The Committee reviewed and approved the Group Internal Audit Terms of Reference which set out the role; objectives; reporting lines and accountability; authority; independence; and objectivity of the Internal Audit function. The role and competence of each Internal Audit function across the Group was also assessed and considered by the Committee. The Group Head of Internal Audit continues to have responsibility to ensure the quality of the Internal Audit activities in the Group’s overseas locations.
In accordance with agreed parameters, the overseas operations in Spain, Italy and the US have their own locally-based internal auditors, who report to their respective country heads. All reports are evaluated by the Group Head of Internal Audit to ensure the quality and effectiveness of the reported findings. In addition, the UK Internal Audit department carries out high level governance reviews of all foreign operations, assessing the internal control frameworks and system of risk management. The overseas internal auditors attend Committee meetings periodically and the Committee received an update from the internal auditor of the Group’s insurance business in Italy on the activities of the audit function and the audit reports and recommendations that had been issued. The CEO from the Group’s loans business also attended a Committee meeting to provide an update on the interaction with Group Internal Audit and the key findings and recommendations from audits completed on the loans business.
The Group implemented the enhanced project governance framework, enabling the Committee to focus on the projects which are material to the Group. The Committee oversaw the key developments to major projects, with regular updates provided throughout the year. Several reviews were actioned as requested by the Committee. In particular, the Group IT strategy and IT security programmes have been regularly reviewed and challenged throughout 2018, as well as the work to ensure the Group was compliant for the GDPR go-live date in May. The Committee also devoted time to the work on Brexit which resulted in the successful establishment of two new legal entities, ensuring the European business continues to be written within the Group.
Partial Internal Model. The Committee continues to engage with the relevant regulators as a key demonstration of the Group’s ongoing use of the model and in preparation for the formal IMAP application.
The Group continues to maintain a regulatory capital add-on to cover risks not captured within the standard formula. The Group also continues to make use of Undertaking Specific Parameters (USP’s) and the Volatility Adjustment (VA) across its entities, where appropriate. The Committee has also reviewed the Group’s proposed dividend level, capital plan and capital buffer in line with the capital policy. The review considered a number of scenarios including the ongoing uncertainty associated with the Ogden rate.
The Committee challenged and reviewed the setting of and outputs from the regular stress and scenario testing and reverse stress testing. The output was incorporated into the Own Risk and Solvency Assessment (‘ORSA’) report for 2018, which the Committee also reviewed and recommended to the Board for approval.
The development and growth of the Loans business continues to be monitored by the Committee, with a focus on the strategic options to fund the growing business in 2018 and beyond.
Considered the adequacy of risk mitigation measures and contingency plans including a review of the Group’s reinsurance provisions
Received regular updates in relation to key programmes of work including IT
Recieved an additional, out of cuycle, short ORSA report as part of a review into the risks associated with Loans business
Through stress and scenario testing and reverse stress testing, considered in-depth analysis of a number of the Group’s most significant risk areas, including the potential risks arising from Brexit
Received updates on the impact of a number of notifiable risk events throughout 2018
Received regular updates in relation to ongoing and potential legal and regulatory changes, including the Civil Liability Bill and the potential change to the Ogden discount rate
Membership at the end of the year was: Annette Court, Jean Park (Chair) and Manning Rountree. The Company Secretary acts as Secretary to the Committee.
The work of the Committee is supported by more detailed work undertaken by executive Risk Management Committees in each of the Group’s operational entities. At each meeting, the Risk Management Committees consider significant movements in the operation’s risk profile, any risks that have arisen and any emerging risks. Risk Management Committees also assess and monitor any regulatory issues, ensuring that their resolution and the action taken are appropriately recorded. The Risk Management
The Board is ultimately responsible for the Group’s system of risk management and internal control and, through the Audit Committee, has reviewed the effectiveness of this system.
The system of risk management and internal control over insurance, operational, market, credit and group risks is designed to manage rather than eliminate the risk of failure to achieve business objectives and breaches of risk appetites and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board meets at least seven times a year to
83Admiral Group plc · Annual Report and Accounts 2018 discuss the direction of the company and provide oversight of the Group’s risk management and internal control systems. The role and responsibilities of the Board are documented within their Terms of Reference and these are reviewed annually.
A key element of the control system is that the Board meets regularly with a formal schedule of matters reserved to it for decision and has put in place an organisational structure with clearly defined lines of responsibility including those matters reserved for its subsidiary boards.
The Group has a ‘three lines of defence’ approach to Internal Control, including those controls that relate to the financial reporting process. The Board recognises that the day-to- day responsibility for implementing policies lies with the senior management, the ‘first line of defence’, whose operational decisions must take into account risk and how this can be controlled effectively.
The Chief Risk Officer has responsibility for ensuring that managers are aware of their risk management obligations, providing them with support and advice, and ensuring that risk management strategies are properly communicated. Reports are produced showing the most significant risks identified and the controls in place. Internal Audit uses the risk registers to plan and inform their programme of audits around the most significant risks to the Group to ensure that the prescribed controls are in place and are operating effectively.
The ‘third line of defence’ describes the independent assurance provided by the Audit Committee and the Group
The Audit Committee’s ability to provide the appropriate assurance to the Board depends on the provision of periodic and independent confirmation, primarily by Internal Audit, that the controls established by Management are operating effectively and where necessary provides a high-level challenge to the steps being taken by the GRC to implement the risk management strategy.
In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospect of the Company over a longer period than the 12 months required by the ‘Going Concern’ provision. The Board reviews five year financial projections twice each year and approves a one year financial budget for the forthcoming twelve months. They conducted this review for a period of three years to July 2021. An ‘Own Risk and Solvency Assessment’ (ORSA) process is undertaken annually, which sets out a detailed consideration of the main risks facing the Group over a three-year time horizon and also considers current and projected levels of solvency and liquidity over the period. The ORSA is the main source of evidence used by the Board to assess viability, given the additional uncertainty inherent in projecting beyond a three year period, and as such the assessment of viability has been performed over a three year period.
The principal risks and uncertainties faced by the Group are set out on pages 52 to 57 and note 7h to the financial statements sets out the Group’s objectives, policies and procedures for managing financial assets and liabilities.
The Nomination and Governance Committee Statement from Annette Court, Chairman of the Nomination and Governance Committee
“ Implementation of the recommendations contained in the external review of the Group’s governance arrangements remained a key area of focus for the Committee during the year.”
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 process for the appointment of new Directors to the Board embracing 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.
Following the appointment of Andy Crossley in February 2018 and in line with the Group’s policy of recruiting well ahead of impending retirements to maintain consistency of Board dynamics, the Committee developed appropriate specifications for two new NonExecutive Director roles and identified the required skills and experience required. The Board initiated a search for two new Non-Executive Directors in 2018. The firm engaged external recruitment consultants, Russell Reynolds Associates (RRA), to lead the recruitment process for Karen and Mike. RRA has no connection to the Group.
Mike Brierley has 35 years’ experience in Chief Financial Officer (CFO) roles within the financial services industry. Most recently Mike was CFO of Metro Bank plc between 2009 and 2018, helping lead the business from start-up to a profitable FTSE 250 bank. He has been a director of Barclaycard responsible for business risk and, between 1999 and 2006, held a variety of roles with Capital One Bank (Europe) plc including CFO Europe, CFO UK and Managing Vice President and Chief Enterprise Risk Officer Europe. Mike is a Fellow of The Institute of Chartered Accountants in England and Wales (FCA).
In addition, in 2018 the Group signed up to the Women in Finance Charter which is a government initiative to see gender balance at all levels across financial services firms and encourages participating firms to support the progression of women into senior roles in the sector by focusing on the executive pipeline and the mid-tier level of management. The Group is committed to meeting the target of 40% women in the Senior Executive team by December 2023.
Our continued sponsorship of Pride Cymru, South Wales’ biggest celebration of LGBT+ equality and diversity, illustrates our celebration of the LGBT+ community and our recognition of the contribution they have made to Admiral. We have sponsored Pride Cymru in some way since 2004 and we have participated in the annual Pride march for the last three years.
Many of our staff attend this event and memories and photos from the event are shared in Column, our monthly newsletter and on Atlas, inspiring our staff to take pride in diversity. In 2018 over 30 staff, plus families and friends, represented Admiral in the parade before the event and our choir and an Admiral staff member’s band performed on the stage.
Rhys, from our training department regularly attends the event. Here is what he had to say, “I love that the company I work for sponsors Pride Cymru and I’m really proud that we celebrate sexual diversity.” And a member of staff who represented Admiral at this year’s parade said,
“I loved walking with my friends from my Admiral family and I was very proud to carry the Admiral banner. It was good to support such a fantastic cause”.
2018 has been a positive year for Admiral Group. Earnings per share in the year were 137.1 pence (2017: 117.2 pence) and return on equity was 56% (2017: 55%). Total dividends for the financial year (including the proposed final dividend of 66.0 pence per share) will be 126.0 pence per share.
Admiral has a remuneration structure which reinforces our unique culture and creates strong alignment with our shareholders: • Base salaries are targeted at the lower end of our peer group, and executives are encouraged to build up significant shareholdings in the Group to maximise shareholder alignment.
• We do not pay annual cash bonuses and instead have in place a bonus structure (the ‘DFSS Bonus’) that is directly linked to the number of DFSS awards held and actual dividends paid out to shareholders.
Our remuneration structure is aligned to our philosophy around the efficient use of capital and distribution of profit. It focuses heavily on reinforcing ‘collective’ performance through the use of the DFSS and DFSS bonus, but also reflects individual and business unit performance through the allocation of awards and the application of adjustments to their vesting.
We were pleased to note that the majority of our shareholders approved both resolutions with a 99% vote for the Remuneration Policy and 90% vote for the Annual Report on Remuneration. The approved Remuneration Policy came into effect from the date of the AGM. In line with this policy, the Committee made the following decisions: • Geraint Jones received his award of 5,000 salary shares, equivalent to £98,225. In line with policy, these shares will vest after three years subject to continued employment. An additional two-year holding period will apply and malus and clawback provisions will apply during the vesting and holding periods. Further details on these shares can be found on page 91;
• In September 2018, Geraint Jones was also granted an award under the DFSS of 50,000 shares, equivalent to £1,020,000 or 416% of salary. This award will vest on three-year EPS growth vs. LIBOR, TSR vs. FTSE 350 (excluding investment companies) and ROE. David Stevens again declined to be included given his significant shareholding. Further details on this award can be found on page 101; • Based on performance to 31 December 2018, 87.6% of the DFSS award granted in 2016 will vest. The EPS condition was partially achieved, vesting at 75.5% of this element and the ROE condition was also partially achieved, vesting at 87.5% of this element. The TSR condition fully vested at 100% of the element. This means that Geraint Jones will receive 43,800 vested DFSS shares. The Committee reviewed this vesting outcome and concluded that it was appropriate. The Committee made no adjustment for the EPS enhancement during the period from the partial reversal of the provisioning for the Ogden rate change two years ago as this approach is consistent with that taken previously by the Committee for the vesting of the 2014 DFSS awards where no adjustment was made to neutralise the substantial negative impact on 2016 EPS from the initial provision for the Ogden rate change; • Last year, we stated that the DFSS bonus for the CFO would include a +/- 20% adjustment based on performance against a set of risk metrics. The Committee invested considerable time in reviewing appropriate measures and targets for determining any adjustments, which would also apply for the wider senior management population in 2019, and the Committee concluded that the adjustment would be first introduced for the 2019 DFSS bonus. This decision was taken as the risk metrics were still being developed in 2018 and consistency with the wider senior management population was preferred; and
• Agreed the basis for linking the CEO’s remuneration to gender-diversity targets.
The Committee strongly believes that the Remuneration Policy and structure remains fit for purpose, aligning executives to the collective culture at Admiral and to shareholders’ interests.
This Remuneration Report has been prepared according to the requirements of the Companies Act 2006 (the Act), Regulation 11 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and other relevant requirements of the FCA Listing Rules. In addition, the Board has applied the principles of good corporate governance set out in the UK Corporate Governance Code (the Code) and has considered the guidelines issued by its leading shareholders and bodies such as ISS, the Investment Association, and the Pensions and Lifetime Savings Association. The Committee has decided to implement early the changes to Schedule 8 on UK remuneration reporting requirements which is required from FY2019 and includes both the disclosure of discretion used by the Remuneration Committee in the Annual Statement and CEO pay ratios.
The Committee reviews the remuneration framework and packages of the Executive Directors and the most senior managers and recognises the need to ensure that the Remuneration Policy is firmly linked to the Group’s strategy, including its risk management approach. In setting the Policy and making remuneration decisions, the Committee takes into account pay and conditions elsewhere in the Group. The main principles underlying the Remuneration Policy are: • Competitive total package – the Group aims to deliver total remuneration packages that are market-competitive, taking into account the role, job size, responsibility, and the individual’s performance and effectiveness. Prevailing market and economic conditions and developments in governance are also considered, as are general salary levels throughout the organisation; • Significantly share-based – our base salaries are targeted towards the lower end of market, but are combined with meaningful annual share awards that vest on long-term performance to ensure strong alignment with shareholders and the long-term interests of the Group. Executives are also encouraged to build up significant shareholdings in the Group to maximise shareholder alignment; • Long-term perspective – a significant part of senior executives’ remuneration is based on the achievement of stretching performance targets that support the delivery of the Group’s strategy and shareholder value. The extended performance and vesting horizons promote a long-term perspective that is appropriate to the insurance sector; • Effective risk management – incentives are designed to ensure they do not encourage excessive risk-taking. They are aligned with the delivery of positive customer outcomes and reinforce the Group’s risk policy; • Open and honest culture – the Group has a strong culture of focussing on collective success, whilst still recognising individual contribution to the Group’s performance, and this is reflected in our remuneration structure across the business; and
Salary levels/increases take account of: • Scope and responsibility of the position.
The CFO receives an annual award of ‘salary’ shares in addition to his cash salary. The salary share award vests after three years subject to continued employment, and an additional two-year holding period applies, during which time shares may not be sold, save to meet income tax, NI or other regulatory obligations. Malus and clawback provisions apply during the vesting and holding periods. The salary share award is not included in base salary when calculating the CFO’s pension benefit.
Any salary increases are applied in line with the outcome of the review.
This is available to all employees following completion of their probationary period.
To motivate and reward longer term performance, aid long term retention of key executive talent, use capital efficiently, grow profits sustainably and further strengthen the alignment of the interests of shareholders and staff.
Vesting of DFSS awards is subject to the Group’s performance over a three-year performance period. The performance measures may include EPS, ROE and relative TSR, or other measures selected by the Committee, as appropriate. Measures will typically be weighted equally unless the Committee determines otherwise to reflect strategic priorities. Details of the measures, weightings and performance targets used for specific DFSS grants are included in the relevant year’s Annual Report on Remuneration.
The DFSS bonus is subject to malus and clawback provisions, i.e. forfeiture or reduction of unvested awards and recovery of vested awards needs to be awards. Events which may lead to the malus and clawback are set out in the Group’s Malus and Clawback Framework and include material financial misstatement, responsibility for conduct which results in significant losses, material failure of risk management and misconduct.
Guideline to be met within five years of the later of the introduction of the guidelines and an Executive Director’s appointment.
Performance targets are set taking into account broker forecasts for Admiral and its insurance peers, the Company’s strategic priorities and the economic environment in which the Company operates. The Committee believes that the performance targets set are stretching and motivational, and that maximum outcomes are available only for outstanding performance.
All holders of DFSS awards receive the DFSS bonus. Most overseas employees receive an equivalent award to the UK SIP awards which comes within the DFSS scheme and these awards have no performance measures attached.
All UK employees are eligible to participate in the SIP on the same terms.
When considering termination payments, the Committee reviews all potential incentive outcomes to ensure they are fair to both shareholders and participants. The table below summarises how the awards under the DFSS and DFSS bonus scheme are typically treated in specific circumstances, with the final treatment remaining subject to the Committee’s discretion: Plan Scenario Treatment of awards Timing of vesting
Change of control. Any unvested award will be pro-rated for time with reference to the proportion of the vesting period remaining at change of control, and extent to which the Committee determines that the performance conditions have been met or are likely to be met at the point of change of control, unless the Committee determines otherwise.
1. Note: the good leaver provisions for the salary shares disclosed in the 2017 Policy Report had a typographical error which mistakenly referred to ‘performance’ being assessed on leaving; as such shares have no performance conditions attached such wording has been removed from the table for clarity.
Andy Crossley 3 years 27 February 2018 27 February 2018 One month
Jean Park 3 years 17 January 2014 17 January 2017 One month
Justine Roberts 3 years 17 June 2016 17 June 2016 One month
Details of the Policy on NED fees are set out in the table below: Purpose and link to strategy Operation Opportunity and performance metrics
The maximum aggregate annual fee for NEDs is capped at the limit provided for in the Company’s Articles of Association.
The value of DFSS awards is calculated based on the average share price in the last three months of 2018 (£20.07) and the number of DFSS shares awarded in 2018 (50,000 shares) and salary shares expected to be awarded in 2019 (5,000 shares).
The following charts provide an estimate of the potential future reward opportunities for the Executive Directors, and the potential split between the different elements of pay under three different performance scenarios: ‘Minimum’, ‘On-target’ and ‘Maximum’.
As described above, Admiral’s DFSS bonus is directly aligned with dividends received by our shareholders, with a final adjustment for risk. Whilst the CFO’s final DFSS bonus outcome may be adjusted upwards or downwards for risk by up to 20% in any given year, it is anticipated that the average adjustment over the long term will be close to 0%. The figures shown in the chart below for the CFO’s DFSS bonus therefore include the value of the actual DFSS bonus paid in 2018 as an illustration of the value he might receive. Under all scenarios, potential reward opportunities are based on the Remuneration Policy, applied to salaries as at 1 January 2019.
The Committee considers the pay and employment conditions elsewhere in the Group when determining remuneration for Executive Directors.
The Committee regularly reviews the Remuneration Policy and structure in the context of Solvency II remuneration guidance. The Chief Risk Officer periodically attends Committee meetings as part of this process and provides support to the Committee in understanding any risk-related implications of remuneration decisions. Whilst the Remuneration Policy includes several features which help ensure compliance with current regulatory guidance, the Committee reserves the discretion to adjust the Remuneration Policy, and its execution, to take into account any developments in such regulatory guidance.
The Board sets the Group’s Remuneration Policy and, through the authority delegated to it by the Board, the Committee is responsible for making recommendations to the Board on the structure and implementation of the Remuneration Policy across the Group with consideration to the prevailing economic climate within the economies in which the Group operates. Its remit includes recommending the remuneration of the Group Board Chairman, the Executive Directors and the Company Secretary; approving the remuneration of senior management; and reviewing the composition of and awards made under the performance-related incentive schemes.
During the year, in order to enable the Committee to reach informed decisions on Executive remuneration, advice on market data and trends was obtained from independent consultants, Mercer Kepler. Mercer Kepler reports directly to the Committee Chairman, and is a signatory to and abides by the Code of Conduct for Remuneration Consultants (which can be found at www. remunerationconsultantsgroup.com). Other than advice on remuneration, no other services were provided by Mercer Kepler to the Company. The fees paid to Mercer Kepler in respect of work carried out in 2018 (based on time and materials) totalled £54,956 excluding expenses and VAT.
For Against Total votes cast Abstentions 2018 Remuneration Policy Total number of votes 214,282,051 2,306,994 216,589,045 136,242
2017 Annual Report on Remuneration Total number of votes 190,878,704 20,357,584 211,236,288 5,479,236
Executive Director 1. Base salary 2. Benefits 3. Pension 4. SIP 5. DFSS 6. DFSS bonus Total remuneration *1 David Stevens does not participate in any incentive plan given his significant shareholdings.
The figures have been calculated as follows: 1. Base salary/fee: amount earned for the year. For Geraint Jones, this also includes 2,500 salary shares awarded on 9 March 2018, and 2,500 awarded on 24 August 2018. These have been valued using closing share price at date of grant of £18.70 and £20.59 respectively.
2. Benefits: the taxable value of annual benefits received in the year.
5. DFSS: the value at vesting of shares vesting on performance over the three-year periods ending 31 December 2018 and 31 December 2017. For the 2018 figures, given that vesting occurs after the 2018 Directors’ Remuneration Report is finalised, the figures are based on the average share price in the last three months of 2018 (£20.07). The 2017 figures have been trued up based on the actual share price on vest (£20.80). For 2018, an unfavourable movement of £31,552 is included in the DFSS value, attributable to a reduction in the share price over the vesting period. For 2017, £220,300 of the DFSS value is attributable to share price appreciation over the vesting period.
6. DFSS bonus: the bonus equivalent to dividends that were paid during the year on all outstanding DFSS shares awarded but not yet vested.
2. Jean Park’s fees for 2017 and 2018 include additional fees relating to her position as Chair of the Group Risk Committee and is in recognition of the increased time commitment required of her as a consequence of Solvency II regulations and the Internal Model Application Process. The 2017 fees also include an amount relating to this role for 2016, which was paid during 2017.
4. Michael Brierley was appointed to the Board on 5 October 2018 and his fee includes fees paid for Board and Committee attendance prior to his formal appointment.
6. Penny James retired from the Board with effect from 8 September 2017.
In September 2016, Geraint Jones was granted an award under the DFSS of 50,000 shares with a value at the date of award of £1,039,500 (based on a grant date share price of £20.79), equivalent to 495% of salary at date of grant.
Median Upper quartile 25% for median, with straight line relationship to 100% for upper quartile 74th percentile 100%
In line with the Remuneration Policy, the Group paid a bonus to all holders of DFSS shares in 2018, which was equivalent to the dividend payable on all outstanding DFSS shares awarded but not yet vested. The Committee continues to believe that having a bonus equivalent to the dividend flow received by investors further aligns the incentive structure with shareholders. The 2018 Remuneration Policy was updated to include a +/- 20% adjustment to the DFSS Bonus based on performance of a set of risk metrics. The Committee invested considerable time in reviewing appropriate measures and targets for determining any adjustments which would also apply for the wider senior management population in 2019, and the Committee concluded that the adjustment would be first introduced for the 2019 DFSS bonus. This decision was taken as the risk metrics were still being developed during 2018 and consistency with the wider senior management population was preferred.
In 2018, Geraint Jones received a DFSS bonus of £180,000 (2017: £153,525). David Stevens did not receive a DFSS bonus as he does not participate in the DFSS.
In September 2018, Geraint Jones was granted an award under the DFSS of 50,000 shares with a value at the date of award of £1,020,000 (based on share price of £20.40), equivalent to 416% of base salary. The three-year period over which performance will be measured is 1 January 2018 to 31 December 2020. The award is eligible to vest on the third anniversary of the date of grant (i.e. September 2021), subject to performance and to continued employment. Vested awards will be subject to an additional two-year post-vest holding period. David Stevens again declined to be included given his significant shareholding.
10% for achieving threshold with straight line relationship to 100% for maximum performance
DFSS awards are subject to clawback and malus provisions, i.e. forfeiture or reduction of unvested awards and recovery of vested awards. Events which may lead to the application of malus or clawback are set out in the Group’s Malus and Clawback Framework and include material financial misstatement, responsibility for conduct which results in significant losses, material failure of risk management and misconduct.
In March and August 2018, Geraint Jones was granted awards under the SIP of 96 shares with a face value of £1,795, and 87 shares with a face value of £1,791 respectively. The shares will vest on 9 March 2020 and 24 August 2020 respectively subject to continued employment only. David Stevens again declined to be included given his significant shareholding.
No exit payments were made to an Executive Director during the year.
No payments were made to a past Director during the year.
Fees for the Board Chairman and other Non-Executive Directors were last reviewed in January 2019, with increases effective from 1 January 2019. The fees are as follows: 2019 fee (p.a.) 2018 fee (p.a.)
Additional fee for being Senior Independent Director £11,025 £11,025 1. The 2019 fee for the Board Chairman increased by 2.5% from £307,500 to £315,187 (inclusive of committee membership or committee chair fees) and comprises a cash fee of £220,631 and a share fee of £94,556 with which the Chairman is required under a Share Agreement entered into with the Group to use the net proceeds in two equal instalments to purchase Group shares after the Group’s Full Year Results and Half Year Results are announced each year.
2. The fee payable to Jean Park, Chair of the Group Risk Committee, includes an additional fee of £20,000 per annum, with effect from 1 January 2017 until 31 December 2018, in recognition of the increased time commitment required of her as a consequence of the Solvency II regulations and Internal Model Application Process.
3. The fee payable to Jean Park with effect from 1 January 2019 will include an additional fee of £20,000 per annum in continued recognition of the continued increased time commitment required as a consequence of the Solvency II regulations and Internal Model Application Process.
The Lower Quartile and Median employees were not in receipt of DFSS Bonus and/or DFSS vesting in the year.
The legislation provides three options to calculate the pay ratio; Option “A”, which involves calculating the actual full time equivalent (FTE) remuneration for all relevant employees for the fiscal year in question, has been used for the calculation above, consistent with the Government’s and investor bodies’ preferred approach. The employee data has been reviewed and we are satisfied that it fairly reflects pay at the relevant quartiles. No adjustments have been applied in determining the employee pay levels which are set out below.
1. The single figure of remuneration for the CEO and CFO includes actual salary and pension costs paid during 2018, in line with The Companies (Miscellaneous Reporting) regulations 2018. For other employees, salary and pension costs are included on an FTE basis, in line with the legislation. While the basis of calculation differs between CEO/CFO and other employees, management considers this a fair comparison of remuneration.
The table below shows the percentage change in dividends and total employee remuneration spend from the financial year ended 31 December 2017 to the financial year ended 31 December 2018.
The Directors are proposing a final dividend for the year ended 31 December 2018 of 66 pence per share bringing the total dividend for 2018 to 126 pence per share (2017: 114 pence per share).
The following graph sets out a comparison of Total Shareholder Return (TSR) for Admiral Group plc shares with that of the FTSE 100 and FTSE 350 indices, of which the Company is a constituent, over the ten-year period to 31 December 2018. The Directors consider these to be the most appropriate indices against which the Company should be compared. TSR is defined as the percentage change over the period, assuming reinvestment of income.
(% of maximum) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
DFSS vesting outcome 1. Henry Engelhardt stepped down from the Board on 13 May 2016. His 2016 remuneration includes salary and benefits in respect of his service as CEO.
Dec 08 Dec 10 Dec 12 Dec 15Dec 09 Dec 11 Dec 14Dec 13 Dec 16 Dec 17 Dec 18
The Company has adopted Executive Director shareholding guidelines whereby all Executive Directors are required to acquire and retain a beneficial shareholding in the Company equal to at least 300% of base salary (excluding salary shares, where applicable), which can be built up over a period of five years from the later of the introduction of the guidelines and the individual’s date of appointment. All Executive Directors currently hold shares in excess of the guideline.
Value at 31 Dec 2018 or maturity (£) Date of award Final vesting/ maturity date 1. Value at maturity.
2. The vesting percentage for performance-related awards made in 2014 was 74.2%. The award made to Geraint Jones in September 2015 was 100% performance-related, which resulted in the lapsing of 12,850 shares. The value at maturity relates only to shares vested.
The closing price of Admiral shares on 31 December 2018 was £20.47 per share.
Directors’ Report The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2018.
The profit for the year, after tax but before dividends, amounted to £390.5 million (2017: £331.6 million).
The Directors have proposed a final dividend of £188 million (66 pence per share) payable on 31 May 2019.
The Group’s Bribery policy strictly prohibits the solicitation or the acceptance of any bribe, whether cash or inducement, to or from any person or company, wherever they are situated and whether they are a public official or body or private person or company, by any individual employee, Board member, agent or other person or body on the Group’s behalf.
The Group will support any employee who is disabled or has a life-threatening illness and help them to contribute to the Group as long as their health allows.
*2 Other senior managers is as defined in the Companies Act 2006 (Strategic Report and Directors’ Report) and includes persons responsible for planning, directing or controlling the activities of the Company, or a strategically significant part of the Company, other than Company Directors. Any other Directors of undertakings included in the consolidated accounts that are not considered strategically significant have not been included.
The annual level of greenhouse gas emissions, resulting from activities for which the Group is responsible, was 3,926 CO2e (2017: 3,642 CO2e), equivalent to 0.39 tonnes (2017: 0.42 tonnes) per employee*3. In accordance with GHG Protocol Scope 2 guidance released 20 January 2015, Admiral is exempt from reporting greenhouse gas emissions from electricity supply to the three largest UK offices which meets the GHG Protocol Corporate Standard. Note that L’olivier in France and, Elephant, in the USA, have been unable to provide data for 2018 data and are excluded from the results in this and future reports until they are able to do so. LeLynx in France is also excluded but is immaterial to the overall view due to its size.
Detailed information on the Group’s environmental performance and the methodology for the measurement of greenhouse gas emissions is available on the corporate website, www.admiralgroup.co.uk.
*3 Average employee number excludes employees from offices for which data could not be collected.
At 31 January 2019, the Company had received notifications in accordance with the FCA’s DTRs of the following notifiable interests in the voting rights in the Company’s issued share capital: Number of shares %
Where not provided previously in this Directors’ Report, the following provides the additional information required for shareholders as a result of the implementation of the Takeovers Directive into UK law.
The Company has not purchased any of its own shares during the period.
There are a number of agreements that alter or terminate upon a change of control of the Company following a takeover bid, such as commercial contracts. None are considered to be significant in terms of their impact on the business of the Group as a whole except for the long term co-insurance agreement in place with Munich Re. Details relating to the Group’s co-insurance and reinsurance agreements with Munich Re agreement are contained in the Strategic Report.
The Company’s Articles of Association (the Articles) give the Directors power to appoint and replace Directors. Under the Terms of Reference of the Nomination and Governance Committee, any appointment must be recommended by the Nomination and Governance Committee for approval by the Board of Directors. At the Group’s AGM on 26 April 2018, new Articles of Association were approved by shareholders which provide that all Directors will retire and offer themselves for re-election at each AGM, in accordance with the UK Corporate Governance Code and the Company’s current practice. Therefore, all Directors will be submitting themselves for re-election by shareholders at the forthcoming AGM.
Directors’ and Officers’ insurance cover is in place for all Directors to provide cover against certain acts or omissions on behalf of the Company. A Deed Poll of Indemnity was executed in October 2015, indemnifying each of the Directors, and Company Secretary, in relation to certain losses and liabilities that they might incur in the course of acting as Directors of the Company. The Deed Poll of Indemnity is categorised as qualifying third party indemnity provisions as defined by section 234 of the Companies Act 2006 and remains in force for all past and present Directors of the Company.
Admiral is subject to the UK Corporate Governance Code (the Code), published by the Financial Reporting Council (FRC) in April 2016 and available on their website, www. frc.org.uk. The Company’s Annual Report and Accounts, taken as a whole, addresses the requirements of the 2016 Code.
During the year to 31 December 2018, the Company has in all respects complied with the provisions of the 2016 Code except with regard to non-compliance with the provisions as set out in the Corporate Governance Report at page 66.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRS’s as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards, including FRS 101 Reduced Disclosure Framework.
• for the parent company financial statements, state whether applicable UK Accounting Standards, including FRS 101 Reduced Disclosure Framework, have been followed, subject to any material departures disclosed and explained in the parent company financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors confirm that to the best of their knowledge: • the financial statements, prepared in accordance with the applicable set of accounting standards, 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; and
In our opinion: • the financial statements of Admiral 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 2018 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • 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 reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted by the European Union. 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).
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. We confirm that the nonaudit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company.
Key audit matters The key audit matters that we identified in the current year were: • Valuation of gross insurance claims reserves; and • Revenue recognition - profit commission income.
Materiality The materiality that we used for the group financial statements was £20.7 million, which was determined with reference to profit before tax.
Further specific audit procedures were completed in respect of eight further components which, although not financially significant, did present some specific audit risks which needed to be addressed.
The components within the scope of our audit procedures account for 96% of the group’s profits and losses before tax, 95% of revenue and 94% of the group’s net assets.
Whilst the Spanish underwriting division is not considered significant to the group as a whole in 2018, it does represent a significant portion of the group’s European underwriting activity and therefore we have determined that treating it in this way is the most appropriate approach.
AFSL includes the group’s loans portfolio, which has grown to a size that we consider to represent a significant component of the group in 2018.
We considered as part of our risk assessment the nature of the group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the directors’ assessment of the group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the directors’ plans for future actions in relation to their going concern assessment.
We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
Independent Auditor’s Report continued to the Members of Admiral Group Plc
The group’s gross insurance claims reserves total £2,740 million (2017 year-end: £2,403 million). The judgements which are made by management in determining the total valuation of claims reserves are by far the most significant, in terms of their impact on the group’s financial position. Setting these claims reserves is an inherently subjective exercise and small changes in underlying assumptions such as average frequency or average severity may have a material impact on the overall year end result reported. We therefore consider that this account balance contains potential fraud risks.
Specifically, our significant areas of focus are management’s assumptions underpinning the modelled frequency and severity of large bodily injury claims arising in the UK Car Insurance business. These particular claims result in higher individual claims reserves and are more judgmental, in terms of the development of the ultimate losses, due to the longer-term nature of the group’s exposure (compared to property damage claims).
In line with the group’s accounting policy, management adds a margin to the actuarial best estimate to arrive at the booked gross claims reserves. This margin reflects the inherent uncertainty in estimating the ultimate losses on claims, over and above that which can be projected actuarially based on underlying claims development data. This is a significant area of management judgement and, therefore, a focus of our audit. Specifically, the consistency of the level of prudence within the margin for the UK Car Insurance reserves, related to large bodily injury claims, is our key area of focus in respect of the margins included.
The uncertainty associated with future changes in the Ogden discount rate is a key area of judgement and effects both the derivation of the best estimate assumptions and the margin required to achieve the desired level of confidence in the booked reserves. The impact of royal assent to the Civil Liability Bill on the estimate of future rate changes is specifically considered in responding to the areas of focus set out above.
We undertook a graphical analysis of incurred development patterns to assess and challenge management’s severity assumptions. We benchmarked the average cost per claim assumptions against available third party industry data in the context of this incurred development analysis. We gave specific consideration to the Ogden discount rate assumption selected by management, inspected the evidence to support a change in assumption for 2018 and benchmarked the selected rate against that selected by a range of industry peers.
We challenged management’s qualitative and quantitative justifications for the margin held over the actuarial best estimate reserves through review of management’s accounting judgement papers and claims distribution model. We analysed the consistency of prudence within the booked margin against previous reporting periods in the context of the underlying uncertainty in incurred claims development and challenged management’s justification for the booked position.
Key observations Based on the procedures described above, we consider that the booked reserves remain appropriate and in line with the group’s prudent accounting policy.
In our view, the UK car insurance profit commission income earned by the group, which, on a consolidated basis, consists of amounts due from the group’s co-insurer of £95.1 million (2017: £64.7 million), represents a revenue class for which there is an incentive to fraudulently overstate the amounts recorded. Accordingly, we have determined that the accuracy of profit commission income due from the group’s co-insurance arrangement includes elements which constitute a significant risk of material misstatement for the group financial statements and therefore identified this as a key audit matter.
Refer to page 77 in the audit committee report where this is included as a significant issue, and note 3 and note 5c in the financial statements which refer to this matter.
We have inspected the applicable co-insurance contracts to evaluate the form and content of management’s calculation and performed a substantive analytical review to respond to the key audit matter. We developed an independent expectation of the commission income, based upon our understanding of the contracts and using the loss ratios audited as part of our insurance reserves testing. We compared our expectation to the amount recorded by management in the context of an appropriate threshold of variance.
The actual profit recorded for the year is greater than the profit before tax prior to the release of reserves resulting from the change in Ogden rate assumption, as set out on page 24.
In 2017, we identified seven of these as significant reporting components. The changes in component scoping since 2017 are in classifying the group’s underwriting division in Spain and the group’s subsidiary Admiral Financial Services Limited as significant reporting components.
Each of these components was subjected to a full-scope audit for group reporting purposes, completed to individual component materiality levels which ranged from £0.3 million to £14.1 million (2017: £0.76 million to £13.2 million) dependent upon the relative significance of each individual component.
For the remaining components, which were not subject to audit or specified audit procedures, we performed analysis at an aggregated group level to re-assess our evaluation that there were no significant risks of material misstatement presented by any of these components. The components within the scope of our audit procedures account for 96% of the group’s profits and losses before tax, 95% of revenue and 94% of the group’s net assets (2017: 93% of profits and losses before tax, 90% of revenue and 90% of net assets).
Full audit scope 86% Full audit scope 93% Full audit scope 81% Specified audit procedures 9% Specified audit procedures 3% Specified audit procedures 13% Review at group level 5% Review at group level 4% Review at group level 6%
Profit before tax coverage is stated in absolute terms – i.e. based on contribution to group profit less group loss.
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
In addition to the above, our procedures to respond to risks identified included the following: • reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and regulations discussed above; • enquiring of management, the audit committee and 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; • reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC, the Financial Conduct Authority and the Prudential Regulation Authority; and
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; • 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
Consistency of the audit report with the additional report to the audit committee
Other comprehensive income for the period, net of income tax (21.4) 0.3
Total comprehensive income for the period attributable to: Equity holders of the parent 373.7 334.8
Consolidated statement of comprehensive income For the year ended 31 December 2018
Total equity attributable to equity holders of the parent 758.3 646.1
Cash flows from operating activities, before movements in investments 488.5 617.6
Cash flows from operating activities, net of movements in investments 239.7 388.2
Consolidated cash flow statement For the year ended 31 December 2018
Profit/(loss) for the period – – – – – 334.2 334.2 (2.6) 331.6
Movements in fair value reserve – – 12.4 – – – 12.4 – 12.4
Deferred tax charge in relation to movement in fair value reserve – – (4.1) – – – (4.1) – (4.1)
Total comprehensive income for the period – – 8.3 – (7.7) 334.2 334.8 (2.9) 331.9
Share scheme credit – – – – – 37.9 37.9 – 37.9
Total transactions with equity holders – – – – – (259.6) (259.6) 1.8 (257.8)
Profit/(loss) for the period – – – – – 395.1 395.1 (4.6) 390.5
Deferred tax charge in relation to movement in fair value reserve – – 0.7 – – – 0.7 – 0.7
Share scheme credit – – – – – 56.7 56.7 – 56.7
Deferred tax credit on share scheme credit – – – – – 3.3 3.3 – 3.3
127Admiral Group plc · Annual Report and Accounts 2018 1. GENERAL INFORMATION
Admiral Group plc is a company incorporated in England and Wales. Its registered office is at Tŷ Admiral, David Street, Cardiff, CF10 2EH and its shares are listed on the London Stock Exchange.
As permitted by the transitional provisions of IFRS 9 the Group elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition would be recognised in the opening retained earnings and other reserves of the current period.
A reconciliation of the opening retained earnings and fair value reserve under IAS 39 and IFRS 9 is provided below: Note
Recognition of expected credit losses under IFRS 9 for financial assets at FVOCI, net of tax 7c 0.4
Notes to the Financial Statements For the year ended 31 December 2018
Adoption of new and revised standards continued b) Classification and measurement of financial instruments
IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the previous IAS 39 categories of held-tomaturity, loans and receivables and available-for-sale.
Cash and cash equivalents Loans and receivables (Amortised cost) 326.8 Amortised cost 326.8
Trade and other receivables Loans and receivables (Amortised cost) 202.1 Amortised cost 202.1
Insurance receivables Loans and receivables (Amortised cost) 737.6 Amortised cost 737.6
It can be seen from the above that there is no difference in the carrying amount of financial instruments under IAS 39 and IFRS 9. The classification of all financial assets has also remained consistent other than equity investments which have been elected to be treated as FVOCI as permitted under IFRS 9. The basis for the classification of the financial assets is set out in note 7c. There is no material impact to the income statement as a result.
IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model. Under IFRS 9, credit losses are recognised earlier than under IAS 39. For an explanation of how the Group applies the impairment requirements of IFRS 9, see note 7.
During the year the Group has applied IFRS 15 Revenue from Contracts with Customers with a date of initial application of 1 January 2018. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Group has opted to apply the modified retrospective approach to transition that is permitted under IFRS 16. Impact assessments performed during 2018 conclude that: • Property leases represent the most significant class of lease held by the Group that will be impacted by the new standard.
• The presentation of the Consolidated statement of financial position will be significantly impacted, with material lease liabilities and ‘Right of Use’ assets being included for the first time. The total lease liability is expected to be in the region of £140 million to £160 million, with a corresponding ‘Right of Use’ asset.
• Amendments to IAS 1 and IAS 7 “Definition of Material”.
• The risks on the Group’s risk register that could be a threat to the Group’s business model and capital adequacy.
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, 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 control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.
The Group has securitised certain loans and advances to customers by the transfer of the loans to a special purpose entity (“SPE”) controlled by the Group. The securitisation enables a subsequent issuance of debt by the SPE to investors who gain the security of the underlying assets as collateral. The SPE is fully consolidated into the Group financial statements under IFRS 10, as the Group controls the entity in line with the above definition.
In applying the Group’s accounting policies as described in the notes to the financial statements, management has primarily applied judgement in the following areas: • Classification of the Group’s contracts with reinsurers as reinsurance contracts: A contract is required to transfer significant insurance risk in order to be classified as such. Management reviews all terms and conditions of each such contract, and if necessary obtains the opinion of an independent expert at the negotiation stage in order to be able to make this judgement. All reinsurance contracts (both excess of loss and quota share contracts) held by the Group have been assessed and it has been concluded that all contracts transfer significant insurance risk and have therefore been classified and accounted for as reinsurance contracts within these financial statements.
• Consolidation of the Group’s special purpose entity (“SPE”): During the year the Group set up an SPE in relation to the Admiral Loans business, whereby the Group has securitised certain loans by the transfer of the loans to the SPE. The securitisation enables a subsequent issue of debt by the SPE to investors who gain the security of the underlying assets as collateral.
The SPE has therefore been fully consolidated into the Group’s financial statements.
There are two further significant accounting estimates within the financial statements that also require management to apply judgement: • Calculation of insurance claims reserves: The Group’s reserving policy requires management to set insurance claims reserves for the purpose of the financial statements, above the projected best estimate outcome, to allow for unforeseen adverse claims development. Management applies judgement in determining where, above the projected best estimate outcome the insurance claims reserves should sit, in line with the Group’s reserving methodology. Refer to the section on estimation techniques below, and the analysis of Insurance risk in note 5 to the financial statements for further detail on the development of the Group’s reserving methodology applied during the period and the calculation of the projected best estimate outcome.
The Group’s reserving policy requires management to reserve above the projected best estimate, or ultimate, outcome, to allow for unforeseen adverse claims development. There are two key areas of estimation uncertainty: the actuarial best estimate and the margin held above this best estimate.
The Group’s independent actuarial advisors project the best estimate claims reserves using a variety of different recognised actuarial projection techniques (for example incurred and paid chain ladder and an average cost of claim approach) to allow an actuarial assessment of their potential outcome. This includes allowance for unreported claims.
The Group’s reserving methodology which determines the basis for setting this reserve estimate has been developed and enhanced in the period in line with new information that has become available in relation to both the projected best estimate reserve and the reserve uncertainty through the Group’s development of its internal capital model.
• Results of stress testing of key assumptions underpinning key actuarial assumptions within best estimate reserves.
The Company controls 100% of the voting share capital of all its principal subsidiaries, except Admiral Law Limited, BDE Law Limited, Inspop USA LLC, the indirect holding in comparenow.com Insurance Agency LLC, Rastreator.com Limited, the indirect holding in Comparaseguros Correduría de Seguros, S.L., Sociedad Unipersonal, Preminen Price Comparison Holdings Limited and the indirect holding in Preminen Dragon Price Comparison Limited.
The SPE is fully consolidated into the Group financial statements under IFRS 10, whereby the Group has control over the SPE.
• All resulting exchange differences are recognised in other comprehensive income and in a separate component of equity except to the extent that the translation differences are attributable to non-controlling interests.
The total of Price Comparison revenues from transactions with other reportable segments is £19.3 million (2017: £19.8 million) which has been eliminated on consolidation. There are no other transactions between reportable segments.
Loans and advances to customers – – – 300.2 – 300.2
Eliminations represent inter-segment funding and balances included in insurance and other receivables.
The segment assets and liabilities at 31 December 2017 are as follows: As at 31 December 2017
On the commutation of reinsurance contracts, the reinsurer is discharged from all obligations relating to the contract. Reinsurance assets and liabilities relating to the commuted contracts are settled in the period in which the commutation agreement is signed.
The Group’s share of its insurance business was underwritten by Admiral Insurance (Gibraltar) Limited, Admiral Insurance Company Limited and Elephant Insurance Company. All contracts are short term in duration, lasting for 10 or 12 months.
Insurance risk involves uncertainty over the occurrence, amount or timing of claims arising on insurance contracts issued. It is primarily comprised of Reserve risk; the risk that the value of insurance liabilities established is insufficient to cover the ultimate cost of claims incurred at the balance sheet date, and premium risk; the risk that the claims experience on business written but not earned is higher than allowed for in the premiums charged to policyholders.
The Board of Directors is responsible for the management of insurance risk, although as mentioned in note 7, it has delegated the detailed oversight of risk management to the Group Risk Committee.
• 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 noted above, the Group shares a significant amount of the insurance business generated with external underwriters. As well as these proportional arrangements, excess of loss reinsurance programmes are also purchased to protect the Group against very large individual claims and catastrophe losses.
The Group mitigates these risks by ensuring that it has a diverse range of financially secure reinsurance partners, including a long-term relationship with Munich Re and a number of other very large reinsurers.
The Directors do not believe there are significant concentrations of insurance risk. This is because, although the Group has historically written only one significant line of UK insurance business, the risks are spread across a large number of people and a wide regional base. The international car insurance and UK household businesses further contribute to the diversification of the Group’s insurance risk.
As noted above, the gross and reinsurers’ share of UK motor insurance liabilities in these financial statements are prepared on the basis of an Ogden discount rate of 0% (2017: minus 0.75%).
On 7 September 2017, the Lord Chancellor announced draft legislation to change the way in which the Ogden discount rate is set, with initial indications being that the new discount rate could be set between 0% and 1%. Royal assent was received in December 2018, with the new discount rate expected to be set during 2019.
The sensitivity of a change in this assumption by 50 basis points (both an increase and decrease) is shown in the table below. This is disclosed as Management consider it to be the most material assumption in the projection of the best estimate reserve outcomes. The impact presented is the total impact of the change on the Group’s pre-tax profit on an ultimate basis. It should be noted that not all of the ultimate impact would necessarily be recognised immediately.
Impact of increase in assumed Ogden discount rate of 50 basis points (to 0.5%) (2017: 0% compared to minus 0.75%) 76.2 85.6
Total insurance liabilities – net 1,852.9 1,676.3 *1 Gross claims outstanding at 31 December 2018 is presented before the deduction of salvage and subrogation recoveries totalling £56.4 million (2017: £42.7 million).
The maturity profile of gross insurance liabilities at the end of 2018 is as follows: < 1 year £m 1–3 years £m > 3 years £m
The maturity profile of gross insurance liabilities at the end of 2017 was as follows: < 1 year £m 1–3 years £m > 3 years £m
UK insurance gross claims incurred (239.3) (360.3) (694.4) (789.2) (680.8) (634.5) (594.2) (858.8) (991.5) (1,153.5)
Total gross release (UK Motor Insurance) 148.1 197.7 135.7 214.0 270.5
Total gross release (UK Household Insurance) – – – 1.6 4.6
– Releases on commuted quota share reinsurance contracts 70.6 88.8 17.1 73.8 109.6
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 70.6 88.8 17.1 73.8 109.6
Net realised gains: Realised gains on sale of gilt assets – 5.4
Based on these factors, a financial asset is classified into one of the following categories: • Amortised cost – assets which are held in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows which are solely payments of principal and interest (SPPI) on the principal amount outstanding, where the asset is not designated as FVTPL.
The carrying amount is adjusted by the expected credit loss allowance. Interest income from these assets is included in ‘Interest return’ using the effective interest rate method. For the Group these include deposits with credit institutions, cash and cash equivalents, insurance receivables, trade and other receivables and loans and advances to customers.
A gain or loss on a debt instrument measured at FVTPL which is not part of a hedging relationship is recognised in profit or loss and presented within ‘Investment return’ in the period in which it arises.
IFRS 9 outlines an expected credit loss (ECL) model for impairments, which replaces the incurred loss model under IAS 39. Under IFRS 9 an expected credit loss should be calculated for all assets measured at amortised cost, as well as debt instruments measured at FVOCI.
Subsequent measurement of financial liabilities is at amortised cost using the effective interest method. Movements in the amortised cost are recognised through the income statement.
149Admiral Group plc · Annual Report and Accounts 2018 7b. Financial assets and liabilities
The maturity profile of financial assets and liabilities at 31 December 2018 is as follows: On demand £m
At initial recognition, the Group measures financial investments at fair value plus or minus, in the case of financial instruments not measured at fair value through profit and loss, directly attributable transaction costs. Transaction costs of financial instruments measured at fair value through profit and loss are expensed to the income statement when incurred.
Money market funds and derivative financial instruments are measured at FVTPL. These assets used to invest regulatory capital within the Group, and surplus liquidity which may be held. Buying and selling activity depending on timing of different cashflows.
Private Equity investments have been designated as being reported through FVOCI. These investments are long term, strategic investments. Dividends are recognised in the Income Statement whilst a change in fair values will be reflected in OCI. Given the immaterial amount (£7.8 million) of these investments, detailed levelling disclosures have not been provided.
All financial assets held at FVOCI and 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 credit ratings of the entities, and externally available credit loss ratios.
On transition from IAS39 to IFRS 9 an impairment provision of £0.4 million was recognised on these assets. This increased to £0.5 million at 31 December 2018. Given there is no material change in the credit quality or type of financial assets in the year, and the movement in provision is immaterial, no further disclosure has been made.
Deposits are held with well rated institutions; as such no impairment provision is required.
Deposits are held with well rated institutions; as such the approximate fair value is the book value of the investment as impairment of the capital is not expected. There is no quoted market for these holdings and as such a level two valuation is used. The book value of these deposits is £100.0 million (2017: £130.0 million).
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term deposits with original maturities of three months or less. All cash and cash equivalents are measured at amortised cost.
153Admiral Group plc · Annual Report and Accounts 2018 7e Loans and advances to customers £m £m
Loans and advances to customers relate to the Admiral loans business. This includes unsecured personal loans and car finance products.
The three stages of the model are defined as follows: • 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
A significant increase in credit risk is deemed to have occurred where: • The loan is 1 to 3 loan payments in arrears; or
• Two or more payments are overdue elsewhere, other than within the Admiral loans business.
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 to this is to run scenario analysis.
Management judgement has been used to define the weighting and severity of the different scenarios, based on available data without undue cost or effort. A downturn has been calibrated to be consistent with a return to losses from loans written in 2007 and 2009, the most recent economic downturn. The 2007/09 period is considered to be a significant economic global event. The upturn is consistent with a consumer behaviour from loans written in 2013, when credit providers tightened significantly on their lending criteria. These scenarios are reviewed on a semi-annual basis, and the assumptions and weighting reviewed based on additional information available at the time of review.
The Group is exposed to credit risk from the Admiral loans business, which has continued to expand during 2018.
All probability of defaults include forward looking information. The average probability of default in relation to the assets in Stage 1 is 1.8% based on defaults within 12 months of the reporting date. On entering Stage 2 the average PD increases to 5.2% reflecting losses over the life of the asset. The average PD for all assets in Stage 2 is 25.1%. Assets in Stage 3 are deemed to be in default.
The following tables shown reconciliations from the opening to the closing balance of the gross carrying value and loss allowance.
Gross carrying amount as at 1 January 2018 64.5 2.8 0.2 – 67.5
Transfers from Stage 1 to Stage 2 (2.2) 2.2 – – –
Transfers from Stage 1 to Stage 3 (1.8) – 1.8 – –
Gross carrying amount as at 31 December 2018 296.9 8.9 4.6 – 310.4
Expected credit loss allowance as at 1 January 2018 0.6 0.5 0.2 – 1.3
Transfers from Stage 3 to Stage 1 – – – – –
Transfers from Stage 3 to Stage 2 – – – – –
Expected credit loss allowance as at 31 December 2018 4.4 1.4 4.1 – 9.9
Total insurance and other receivables 1,082.0 939.7 *1 Insurance receivables at 31 December 2018 includes £59.3 million in respect of salvage and subrogation recoveries (2017: £42.7 million).
The level of provision is immaterial. There was no change to the provision at 1 January 2018 on transition from IAS39 to IFRS 9.
The Group holds a revolving credit facility of £200 million which expires in December 2020. As at 31 December 2018, £71.5 million (2017: £20 million) was drawn under this agreement as shown within other borrowings in the table above.
In addition, during 2018 an asset backed senior loan note facility of £300 million was established in relation to the Admiral loans business. As at the year end, £168.3 million of this facility had been utilised.
The Directors consider counterparty exposure frequently and in significant detail. The Directors consider that the policies and procedures in place to manage credit exposure continue to be appropriate for the Group’s risk appetite and, during 2018 and historically, no material credit losses have been experienced by the Group.
The Group’s maximum exposure to credit risk at 31 December 2018 is £4,507.4 million (2017: £3,723.8 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.
£9.2 million (2017: £1.0 million) was charged to the income statement in respect of loans and advances to customers. Further details are provided in note 7e above.
There were no further significant financial assets that were past due at the close of either 2018 or 2017.
As noted above, the Group primarily invests the following asset types: • Investment funds and cash plus liquidity funds, which in turn invest in a mixture of short dated fixed and variable rate securities, such as cash deposits, certificates of deposits, floating rate notes and other commercial paper.
This results in a hedging reserve at 31 December 2018 in relation to the interest rate swap.
Due to the immateriality of the transaction and balance, no further disclosure is made.
The Group also holds a financial liability in the form of £200 million of subordinated notes with a ten year maturity and fixed rate coupon of 5.5%. This liability is valued at amortised cost and therefore neither the carrying value of the deposits, nor the interest payable, will be impacted by fluctuations in interest rates.
Liquidity risk is defined as the risk that the Group does not have sufficient, available financial resources to enable it to meet its obligations as they fall due, or can only secure them at excessive cost.
The subordinated notes have a ten year maturity whereas all trade and other payables will mature within three to six months of the balance sheet date. (Refer to the maturity profile at the start of this note for further detail.)
In practice, the Group’s Directors expect actual cash flows to be consistent with this maturity profile except for amounts owed to coinsurers and reinsurers. Of the total amounts owed to co-insurers and reinsurers of £1,275.9 million (2017: £1,157.5 million), £1,022.7 million (2017: £938.4 million) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
Foreign exchange risk arises from unfavourable movements in foreign exchange rates that could adversely impact the valuation of overseas assets and liabilities.
The Group’s exposure to net assets and profits in currencies other than the reporting currency is immaterial other than for US dollars and Euros. The Group’s exposure to net assets held in dollars at the balance sheet date was £60.7 million (2017: £55.1 million) ); the exposure to net assets held in Euros was £69.3 million (2017: nil).
The loss before tax derived from business carried out in the US was £19.2 million (2017: £23.4 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 (2017: £2.2 million).
The profit before tax derived from business carried out in Euros was £5.2 million (2017: loss before tax of £0.7 million). If the Sterling rates with euros had strengthened/weakened by 10%, the Group’s profit before tax for the year would increase/decrease by £0.4 million (2017: £0.1 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 the amount charged.
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.
Products and services Nature, timing of satisfaction of performance obligations and significant payment terms
Profit commission revenue is calculated as a proportion of the ultimate profitability of individual underwriting years. Uncertainty over the ultimate profitability of an underwriting year results in the recognition of profit commission revenue being constrained through the use of margin for uncertainty within the calculation of underwriting year profit. This ensures that at any point in time, in line with the requirements of IFRS 15, there is a high probability that there will be no significant reversal of revenue in any financial period. Further detail on the recognition of profit commission is included in note 5.
Administration fees The performance obligation is the change requested being made to the underlying policy, at which point the performance obligation is met.
161Admiral Group plc · Annual Report and Accounts 2018 8b. Disaggregation of revenue
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 £542.4 million (2017: £466.9 million) represents total other revenue and profit commission and is disaggregated into the segments included in note 4.
Total other revenue and profit commission 316.8 16.7 123.8 9.6 466.9
Instalment income and profit commission from reinsurers is not within the scope of IFRS 15 Revenue from Contracts with Customers due to the nature of the income.
The following table provides information about receivables and contract assets from contracts with customers.
The contract asset relates to the Group’s right to consideration for work undertaken in the Law Companies on behalf of clients which is ongoing or where the final fee has not yet been billed. The contract asset is transferred to trade receivables once the fee has been billed.
Significant changes in the contract asset balance during the period are as follows: Contract asset balance £m
Total expenses and share scheme charges 753.5 (386.6) 366.9 *1 Acquisition of insurance contracts expense excludes £19.3 million (2017: £19.8 million) of aggregator fees from other Group companies.
The £93.7 million (2017: £79.0 million) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Analysis of other administration and other marketing costs: 31 December £m 31 December £m
Operating lease rentals: Auditor’s remuneration (including VAT): – Fees payable for the audit of the Company’s annual accounts – – – –
165Admiral Group plc · Annual Report and Accounts 2018 9d. Staff numbers (including Directors)
Analysis of share scheme costs (per the Consolidated Income Statement): Total £m
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. The awards are made with reference to the Group’s performance against prior year profit before tax. Employees must remain in employment for the holding period (three years from the date of award) otherwise the shares are forfeited.
The fair value of shares awarded is the share price at the date of award. Awards under the SIP are entitled to receive dividends, and, hence, no adjustment has been made to this fair value.
Under the DFSS, details of which are contained in the remuneration policy section of the Directors’ Remuneration Report, individuals receive an award of free shares at no charge. Staff must remain in employment until the vesting date in order to receive shares. The maximum number of shares that can vest relating to the 2018 scheme is 3,353,076 (2017 scheme: 3,205,433).
Awards under the DFSS are not eligible for dividends (although a discretionary bonus is currently paid equivalent to the dividend that would have been paid on the respective shareholding) and hence the fair value of free shares to be awarded under this scheme has been revised downwards (from the share price at the date on which awards were made) to take account of these distributions.
During the year ended 31 December 2018, awards under the SIP H115 and H215 schemes and the DFSS 2015 schemes vested. The total number of awards vesting for each scheme is as follows.
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 vesting percentages for the 2015 DFSS scheme was 87.1%.
Impact of change in UK tax rate on deferred tax balances 0.5 0.3
The outstanding corporation tax payable as at 31 December 2018 was £49.3 million (2017: £23.8 million).
Balance brought forward at 1 January 2017 5.7 (2.4) 4.9 (0.5) 0.7 8.4
Tax treatment of share scheme charges through reserves 3.3 – – – – 3.3
The deferred tax asset in relation to carried forward losses has been reduced to £nil following the impairment of Admiral Group’s investment in Compare.
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
All business combinations are accounted for using the acquisition method. Goodwill has been recognised in acquisitions of subsidiaries, and represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
The goodwill held on the balance sheet at 31 December 2018 is allocated solely to the UK Car Insurance segment.
171Admiral Group plc · Annual Report and Accounts 2018 11c. Intangible Assets
At 31 December 2018, there was £nil (2017: £nil) obligations in respect of finance leases.
The Group was committed to total minimum obligations under operating leases on land and buildings as follows: £m £m
Rastreator.com Limited, the Group’s Spanish Price comparison business, is currently undergoing a tax audit in respect of the 2013 and 2014 financial years. The Spanish Tax Authority is disputing the VAT exemption relating to insurance intermediary services which Rastreator.com has applied to its supplies.
Profit for the financial year after taxation attributable to equity shareholders 395.1 334.2
The difference between the basic and diluted number of shares at the end of 2018 (being 648,598; 2017: 586,753) relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note 9 for further detail.
During 2018 3,288,475 (2017: 2,861,992) new ordinary shares of 0.1 pence were issued to the trusts administering the Group’s share schemes.
988,475 (2017: 811,992) 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 2018 of 10,745,389 (31 December 2017: 9,756,914). These shares are entitled to receive dividends.
The Parent Company’s subsidiaries are as follows: Subsidiary Class of shares held
Comparaseguros Correduría de Seguros, S.L., Sociedad Unipersonal Ordinary 75 (indirect) Insurance Intermediary
Registered office: 140 East Shore Drive, Suite 300, Glen Allen, VA 23059 compare.com Insurance Agency LLC Ordinary 59.25 (indirect)
Registered office: Varsovia, 36, 5th floor, office 501, Colonia Juárez, Cuauhtemoc, Ciudad de Mexico
Registered office: Room 1806, 15th Floor, Block 16. No.39 East 3rd Ring Middle Road, Chaoyang District, Beijing
Seren One Limited n/a 0 Special purpose entity * Exempt from audit under S479A of Companies Act 2006.
For further information on how the Group conducts its business across the UK, Europe and the US, refer to the Strategic Report.
The Board considers that only the Executive Directors of Admiral Group plc are key management personnel. Aggregate compensation for the Executive Directors is disclosed in the Directors’ Remuneration Report on pages 98 to 107.
As a result of the Group’s preparations for Brexit, on 1 January 2019, as outlined in the Strategic Report, the assets and liabilities of Admiral Seguros, ConTe and L’Olivier were transferred to a new European intermediary, AIS, and European underwriter, AECS, from EUI Limited and Admiral Insurance Company Limited and Admiral Insurance (Gibraltar) Limited respectively. The operations of the businesses have not been impacted and there is no material impact on the Group’s reported results either in 2018, or as a result of the transition in 2019.
The following tables reconcile significant key performance indicators and non-GAAP measures included in the Strategic Report to items included in the financial statements.
Prior year release/strengthening – commuted share 109.6 – – 109.6 – – – 109.6
Impact of reinsurer caps – – – – 4.5 – 4.5 4.5
Impact of subsidence (Home) – (2.5) – (2.5) – – – (2.5)
Loss ratio – current period weather events – 11.2% – – – – – –
Loss ratio – current period subsidence events – 7.9% – – – – – –
Impact of weather events (Home) – – – – – – – –
Loss ratio – current period attritional 85.3% 75.6% – 82.5% 84.2% – – 82.7%
Impact of reinsurer caps – – – – 0.2 – 0.2 0.2
Impact of reinsurer caps – – – – (3.7) – (3.7) (3.7)
*1 The intra-group expenses elimination amount relates to aggregator fees charged by the Group’s price comparison entities to other Group companies.
Deferred tax in relation to movement in fair value reserve 0.4 (4.2)
Notes to the Parent Company Financial Statements For the year ended 31 December 2018 1. ACCOUNTING POLICIES
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.
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the annual financial statements.
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.
The Company operates a number of share schemes for its employees. For equity settled schemes commencing 1 January 2004 and after, the fair value of the employee services received in exchange for the grant of free shares under the schemes is recognised as an increase in equity in the Company.
Deferred tax assets are recognised to the extent that they are regarded as recoverable. They are regarded as recoverable to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be sufficient taxable profits from which the future reversal of the underlying timing differences can be deducted.
Based on these factors, the Company classifies its financial assets into one of the three categories below: • Amortised cost: assets held for collection of contractual cash flows where the cash flows represent solely payments of principal and interest, that are not designated as FVTPL.
The Company’s financial liabilities comprise subordinated notes which are held at amortised cost using the effective interest method.
Included within administrative expenses are re-charges of £2.5 million (2017: £1.6 million) relating to employees within the Group who perform services on behalf of the Company. No staff are directly employed by the Company.
A full list of the Company’s subsidiaries is disclosed in note 12 of the consolidated financial statements.
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 management.
The impairment charge arises following the review of the carrying value of the Group’s subsidiaries and compare.com’s long term strategy, combined with additional investments received during 2018 totalling $30 million, $25 million in an agreement with former Admiral Group CEO Henry Engelhardt and his wife Diane and separately, $5 million by way of a convertible loan instrument from Admiral Group (out of a total available facility of $10 million).
The key assumptions used in the underlying forecasts and sensitivity analysis are those regarding revenue per sale, conversion rates and revenue generated through partnerships. The estimates are based on past practice and the experience of management, and the long term strategy as approved by the Board.
Sensitivity: Impact on recoverable amount of a: 1% decrease in terminal growth rate £m 1% increase in pre-tax discount rate £m 5% decrease in year 5 profit £m
Corporation tax thereon at effective UK corporation tax rate of 19% (2017: 19.25%) 39.5 51.2
Tax treatment of share scheme charges through reserves – – – – – –
Tax treatment of share scheme charges through reserves (0.1) – – – (0.1)
The deferred tax asset at 31 December 2018 has been calculated based on the rate at which each timing difference is most likely to reverse.
Total trade and other payables 346.1 189.4 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 available for sale, as reclassified in the period) and retained earnings.
August 2018 (60.0 pence per share, paid October 2018) 169.4 –
12. CONTINUED APPLICATION OF FINANCIAL REPORTING STANDARD (FRS) 101 – REDUCED DISCLOSURE FRAMEWORK
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 balance sheet have been included.
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.
Total Premiums Written Total premiums written are the total forecast premiums, net of forecast cancellations written in the underwriting year within the Group, including co-insurance. It is reconciled to financial statement line items in note 13a to the financial statements.
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.
Group loss ratios: Group loss ratios are reported on a consistent basis as the UK and international ratios noted above. Adjustments are made to i) exclude the impact of reserve releases on commuted reinsurance contracts, ii) exclude claims handling costs that are reported within claims costs in the income statement, iii) exclude the claims element of the impact of international reinsurer caps and iv) exclude the claims impact of extreme weather and subsidence on UK Household.
International insurance expense ratio: As for the UK motor loss ratio, the international insurance expense ratios presented exclude the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) exclude the expense element of the impact of reinsurer caps as inclusion of the impact of the capping of reinsurer expenses would distort the underlying performance of the business and ii) include intra-group aggregator fees charged by the overseas price comparison businesses to the international insurance businesses.
Group expense ratios: Group expense ratios are reported on a consistent basis as the UK and international ratios noted above. Adjustments are made to i) include claims handling costs that are reported within claims costs in the income statement, ii) include intra-group aggregator fees charged by the Group’s price comparison businesses to the Group’s insurance businesses and iii) exclude the expense element of the impact of international reinsurer caps..
Combined Ratio Reported combined ratios are the sum of the loss and expense ratios as defined above. Explanation of these figures is noted above and reconciliation of the calculations are provided in notes 13b and 13c.
This measure has been presented by the Group in every Annual Report since it became a listed Group in 2004. It reflects the size of the Group’s customer base and analysis of this measure over time provides a clear indication of the growth. It is also a useful indicator of the growing significance to the Group of the different lines of business and geographic regions.
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.
Ogden discount rate The discount rate used in calculation of personal injury claims settlements. The rate is set by the Lord Chancellor.
A compensation award as part of a claims settlement that involves making a series of annual payments to a claimant over their remaining life to cover the costs of the care they will require.
An entity that is created to accomplish a narrow and well defined objective. There are specific restrictions or limits around ongoing activities. The Group uses an SPE set up under a securitisation programme.
Final 2018 dividend 9 May 2019 – Ex dividend date 10 May 2019 – Record date 31 May 2019 – Payment date