The Company has grown to become one of the UK’s largest and most profi table car insurance providers, with over 11% market share and market-leading fi nancial results.
Admiral Group’s strategy is simple: to continue to progress in the UK car insurance market whilst taking what we do well to new markets and products; keep doing what we’re doing and do it better year after year.
Strategic Report 06 Admiral’s Businesses 08 Admiral’s Operations 10 Chief Executive’s Statement 12 Business Model, Objectives and Strategy 14 Customers and Employees 16 Group Financial Review 20 UK Car Insurance Review 26 International Car Insurance Review 30 Price Comparison Review 33 Other Group Items 34 Principal Risks and Uncertainties
Corporate Governance 36 Chairman’s Introduction 38 Board of Directors 40 Governance Report 46 Report of The Audit Committee 50 Report of The Group Risk Committee 52 Report of The Nomination Committee 54 Report of The Remuneration Committee 55 Directors’ Remuneration Report 65 Directors’ Report
More: pages 12 to 13 31 The Customer, The Customer, The Customer 2 A GREAT Place to Work!
Group profit before tax up 7% at £370 million (2012: £345 million)
Final dividend of 50.6 pence per share bringing the 2013 total dividend to 99.5 pence per share up 10% (2012: 90.6 pence per share)
7,000 staff to receive Free Shares worth £3,000 in the employee share scheme
Corporate Responsibility People who like what they do, do it better, so we strive to ensure our staff enjoy coming to work. To view Admiral Group’s Corporate Responsibility (CR) Report, which includes an introduction from Chief Operating Offi cer, David Stevens, go to the Group’s corporate website.
With a 3% share of the UK private car insurance market, Admiral announces pre-tax profi ts of £57 million.
Admiral celebrates its 20th anniversary with 15 brands, 3.7 million customers and 7,000 employees.
So it was in 2013, with Group pre-tax profi ts up 7% at £370 million. Taken together with our capital-effi cient model this made possible full year dividends of 99.5 pence per share, 10% higher than last year. Whilst the level of dividend is something we reassess regularly, we continue to believe it is right for Admiral to retain the fl exibility derived from the distinction between a normal dividend based on a 45% pay-out ratio, this year amounting to 46.9 pence per share, and the special dividend we are able to afford because of our low capital model. In 2013 this special dividend again exceeded the normal dividend at 52.6 pence per share, representing our available surplus, after taking into account our required solvency, and a margin for contingencies.
Our Board We say goodbye at the forthcoming Annual General Meeting (AGM) to John Sussens, our Senior Independent Director (SID) and Chair of Remuneration, and Martin Jackson, our Chair of Risk. Both joined the Board in 2004 in anticipation of our fl otation and are, therefore, at the end of their nine year term, beyond which they are no longer regarded as independent under the UK Corporate Governance Code. Both will be much missed for their wise counsel, energy and commitment to our business, and their teamwork. I thank them on behalf of the Board and our shareholders for all they have contributed to Admiral. I am grateful to Colin Holmes for assuming the mantle of SID and to Annette Court for taking on the Chair of Remuneration.
Balancing endings with beginnings, I am delighted to welcome Jean Park to the Board. Following the AGM she will succeed Martin as Chair of Risk and will join the Remuneration Committee. Jean has extensive knowledge of risk governance and risk management frameworks in an insurance context having been, until June 2013, Group Chief Risk Offi cer for Phoenix Group, the UK’s largest specialist closed life and pension fund consolidator.
Insurance for UK Household, Commercial Vehicle insurance broking, and other central costs
Admiral is one of the largest and most profi table private car insurers in the UK
Launched in 1998, Gladiator is the Group’s Commercial Vehicle insurance broker, acting on behalf of several of the UK’s largest commercial vehicle insurers.
Staff: Location offi ces: Set up in 2008, ConTe is Admiral Group’s largest international operation. From offi ces in Rome ConTe sells car insurance across Italy.
Staff: Location offi ces: Launched in Richmond, Virginia, in 2009, Elephant Auto sells car insurance in the USA. Today it underwrites in Virginia, Maryland, Illinois and Texas.
comparenow.com is the most recent addition to Admiral Group. Launched in early 2013, comparenow.com will provide an online car insurance comparison service throughout the USA.
Admiral Solutions was set up in 2012 and is a contact centre in Delhi that supports the UK Car Insurance operation.
Staff: Location offi ces: Set up in 2010, LeLynx is Admiral Group’s French price comparison website. It features car, motorbike, health, home, pet, caravan and credit insurance, alongside an option to review fi nancial services providers and internet services.
2013 was the year of the baked potato. It was a good, solid year, something on the plate that is appreciated but doesn’t really grab the spotlight. This is a comfort food set of results.
As investors, I believe you all would like the answers to at least one of these three questions and possibly all three: Why do I believe that Admiral will be successful in the short term? In the medium term? In the long term?
Let me explain. Currently our bottom line is dominated by the results in UK Car Insurance. As has been well publicised, prices have fallen some 25% in the UK market in the last two years or so. This drop in prices has been in parallel with a drop in claims costs but few experts believe that they are in perfect sync. During 2013 the projected outcome for our claims reserves improved materially. As always we hold a signifi cant margin in booked reserves above these projected results and although we made large reserve releases during the year, this margin was bigger at the end of 2013 than at the start. Over time, if the claims situation does not show adverse patterns, these reserves will be released.
If the UK market doesn’t turn soon, some people might say it will hurt Admiral. That might be true. But it will hurt our competitors earlier and harder, as they are largely unable to match our combined ratio. A slower turn will only mean a sharper turn when the turn turns.
In the medium term, it’s about a turn in the UK cycle that will trigger price increases and provide an opportunity for growth
Admiral Group plc Annual Report and Accounts 2013Admiral Group plc Annual Report and Accounts 2013Admiral Group plc10 2013 was the year of the baked potato. It was a good, solid year, something on the plate that is appreciated but doesn’t really grab the spotlight. This is a comfort food set of results.
In the short term, it’s about reserve releases from the UK business. In the medium term, it’s about a turn in the UK cycle that will trigger price increases and provide an opportunity for growth. In the long term it’s about our non-UK businesses, Household Insurance and the future leaders of this organisation.
that I’d be the happiest guy in town. Why? Because it means that all any fi rm has left is its combined ratio, forcing a battle for survival of the fi ttest and we are, arguably, the fi ttest. Remember, the market average combined ratio is quite a bit above 100%. Our combined ratio is under 90%.
Success for the businesses themselves rests on a fundamental change in the delivery of insurance around the globe. The internet is an irresistible force and the world is changing from face-to-face and phone distribution to internet distribution (and in some places our Price Comparison businesses are helping to accelerate that change). The markets we’ve chosen to enter are all very large, agent-led markets. We like large markets because, well, because they’re large: billions and billions large. It means you can quietly take a dollop of market share and have a successful business. We also see that the big competitors in these markets often have channel confl ict problems, as it’s their agents who are covering their overheads and, in trying to switch to internet distribution, they face the problem of alienating these agents. They are also markets of legacy. Things are done very much the way they’ve been done over the last few decades. Our modus operandi of making many changes in a test and learn environment should allow us to capture advantage in these markets.
So the markets themselves are huge and interesting. But it’s the people running these businesses who, although not huge, are all interesting. Here’s a fact: the average age of the three Executive Directors in Admiral is 52.6. All of us are on the north side of 50 . The average age of the CEOs of the other seven businesses plus the fi ve key managers in the UK is 37.4. Nine of the 12 are still on the south side of 40 . There are certainly other talented people in the Group who will also be a big part of the future, some older, some younger, but these statistics are very clear and are meant to show you the depth and talent Admiral is cultivating. These younger managers have learned the business from the ground up. They are talented, intelligent and ambitious. Working with them makes me glad that I’m a shareholder and not a competitor!
But hold the bus. The future isn’t now. The future is the future. And there’s a lot of work to do between now and the future to make it successful. And I’m pleased to say that the aforementioned, well-wrinkled executives are still here, still ambitious and, hopefully, still talented and intelligent.
Our strategy, once again like a baked potato, is simple: to make measured progress in the UK Car Insurance market while taking what we know and do well, which is internet and telephone delivery of insurance, to create growing, profi table, sustainable businesses outside the UK and in UK Household Insurance.
Read more about our fi nancial performance: pages 16 to 19
Admiral has a simple philosophy when it comes to staff: if people like what they do, they’ll do it better. So we go out of our way to make this a GREAT place to work. There are four pillars to our culture: communication, equality, reward and fun. It is upon these pillars that the performance of our staff rests.
Very simply, if Admiral didn’t have any customers it wouldn’t need a Strategic Report. With that in mind it just stands to reason that everything we do every day revolves around attracting, keeping, satisfying and ensuring customers get value for money.
Admiral is focused on bottom line profi tability in the short, medium and long term. Things like size, growth and market share are by-products, not drivers, of decisions.
1 The Customer, The Customer The Customer 2 A GREAT Place to Work!
to own. In the core share scheme every member of staff gets the same number of shares, because every job at Admiral is important.
Give great customer service which leads to enhanced customer retention and the ability to sell other products and services to customers
The internet is an irresistible force. Young consumers in places like Austin, TX., Salamanca, Torino and Chartres are using the internet for virtually everything they do and eventually they will use it for buying car insurance. So, being in the right distribution channel for the future is the fi rst key for success. However, we believe further advantage can be attained through: Using advanced pricing techniques already established in the UK
Creating offi ce environments to help motivate staff combining the best of what’s been learned over time in the UK with local habits and traditions
Acting and reacting quickly to an ever-changing world. It’s important that these businesses act as speedboats in a world of super-tankers
Provide consumers with a valuable service that saves them time and, possibly, money. This service is not limited to car insurance comparison or even insurance comparison.
Admiral believes that having excess cash in a company can lead to poor decision-making. So we are committed to returning surplus capital to shareholders. We believe that keeping management hungry for cash keeps them focused on the most important aspects of the business. We do not starve our businesses but neither do we allow them the luxury of trying to decide what to do with excess capital.
The Group strives to design products that customers want and that represent value for money, aiming to offer excellent customer service at all times.
In 2013 Admiral implemented a new framework for the monitoring and reporting of conduct issues. The most meaningful metrics that are used to evaluate a department’s performance have been amalgamated, together with complaints data, to build a Conduct Risk Management Information (CRMI) Report. This replaces the Treating Customers Fairly (TCF) reporting.
The table below contains some of the measures of customer service from the CRMI Report: Conduct risk measure 2012 2013 Target
% of customers who would renew following a claim 90% 91% >85%
Admiral Group respects and values the individuality and diversity of every employee. The Group’s Equality, Diversity and Dignity at Work Policy ensures that every employee is treated equally and fairly and that all employees are aware of their obligations. The Group is fully committed to the health and safety and the human rights of its employees regardless of their background. In addition, the Group maintains a number of employee codes of conduct regarding appropriate ethical standards in the workplace.
Notes *1 Company Directors consist of the Board of Directors, as detailed on pages 38 to 39. *2 Other senior managers is as defi ned in the Companies Act 2006 (Strategic Report and
Directors’ Report) and include: persons responsible for planning, directing or controlling the activities of the Company, or a strategically signifi cant part of the Company, other than Company Directors. Any other Directors of undertakings included in the consolidated accounts that are not considered strategically signifi cant have not been included.
Environmental impact Admiral Group’s main environmental impact arises from the electricity it uses within its offi ces. Disclosure of the Group’s greenhouse gas emissions is included in the Directors’ Report, page 65, with more information available online in the Corporate Responsibility Report.
Admiral Group plc Annual Report and Accounts 201316 2013 WAS A GOOD YEAR FOR ADMIRAL
2013 was a good year for the Group with further increases in profi t, customer numbers and dividends. Our UK Car Insurance business remains the main source of profi ts but pleasing contributions have also been made by our Price Comparison businesses in the UK, Spain and France.
We have maintained our strong track record for increasing dividends and in total will pay over 99 pence per share (£272 million) back to shareholders for the 2013 year. This brings the total dividends returned to shareholders since listing to nearly £1.5 billion.
Group Results and Dividend > Admiral Group grew pre-tax profi ts in 2013 by 7% to £370.2 million (2012: £344.6 million)
Divisional Performance Highlights The Group’s UK Car Insurance business accounts for 84% of Group turnover (2012: 87%) and 82% of customers (2012: 85%). In 2013, in the face of very strong competition in the UK market, the business continued to focus on margin rather than growth and held the number of vehicles insured steady at just over three million. Supported by strong releases from prior year claims reserves on the back of continued positive development in projected claims costs, the combined ratio improved to 81.0% (2012: 89.1%) and profi t before tax was £393.9 million – up 6% on 2012’s result of £372.8 million.
Outside of the UK, Admiral’s International Car Insurance businesses continue to develop, with combined turnover rising 15% to £187.8 million (2012: £162.9 million) and customer numbers surpassing 515,000 – an increase of 18% on a year earlier. The combined loss from the operations was lower at £22.1 million (2012: £24.5 million), primarily due to improved claims experience.
Confused.com, the Group’s UK Price Comparison business, reported a pre-tax profi t of £21.7 million – over £3 million higher than 2012’s result. Outside the UK, Admiral’s other European Price Comparison businesses (Rastreator in Spain and LeLynx in France) made a combined profi t of £2.4 million (2012: loss of £0.2 million). During the year the Group invested £3.7 million in comparenow.com, a new car insurance comparison business being built in the USA.
Other Group key performance indicators include: > Group loss ratio 69.2% (2012: 79.2%) (an improved UK loss ratio resulting from higher reserve releases and an improved international loss ratio)
The key focus of the Group’s investment strategy is capital preservation, with additional priorities including low volatility of returns and high levels of liquidity. All objectives continue to be met.
Money market funds and short-dated debt securities 1,074.5 76.7 — 74.6 1,225.8
Money market funds and short-dated debt securities comprise the majority of the total; 77% at 31 December 2013, up from 67% at 31 December 2012.
Foreign currency translation impact (1.0) (2.7) (1.3) Net cash movement (22.1) (8.0) (28.7) Net increase in cash and financial investments 473.8 434.5 266.6
“ The Group continues to generate substantial amounts of cash, and its capital efficient business model enables the distribution of the majority of post-tax profits as dividends.”
Capital Structure and Financial Position Admiral’s capital-efficient and profitable business model led to return on capital employed of 58% (2012: 60%). A key feature of the business model is the extensive use of co- and reinsurance across the Group. During 2013 and in early 2014 Admiral announced extensions to its UK co- and reinsurance arrangements with capacity fully allocated until at least the end of 2016 and Munich Re committed to underwriting 40% until at least the end of 2018. Similar long term arrangements are in place in the Group’s international insurance operations and UK Household business.
The Group continues to manage its capital to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities comfortably meet regulatory capital requirements. Surplus capital within subsidiaries is paid up to the Group holding Company in the form of dividends on a regular basis. Capital continues to be held in equity form, with no debt.
“ During 2013 and in early 2014 Admiral announced extensions to its UK co- and reinsurance arrangements with capacity fully allocated until at least the end of 2016 and Munich Re committed to underwriting 40% until at least the end of 2018.”
UK Car Insurance Business > The Group’s core business is selling and underwriting private car insurance in the UK through four brands – Admiral, Bell, Diamond and elephant.co.uk > Policies are distributed through Price Comparison websites and direct channels (Admiral’s own websites and the telephone)
> Admiral accounts for around 11% of the UK private car insurance market in vehicle terms, insuring over three million cars at the end of 2013. Total UK premium in 2013 was £1.6 billion > Admiral’s main operations are in Cardiff, Swansea and Newport in South Wales; customers are also serviced from Halifax, Canada, and Bangalore and Delhi in India
The Customer, The Customer, The Customer > Admiral insures over three million
> Winner of Best Motor Insurance Provider in the 2013 Personal Finance Awards based on consumer votes, demonstrating that the Admiral brand is valued highly by consumers > Features of insurance and additional products and services are reviewed frequently to ensure that they meet customer needs and offer effective cover at a reasonable price > During 2013, Admiral reviewed its internal processes with a view to improving the customer experience. A revised framework was implemented for the monitoring and reporting of conduct issues, covering, amongst other things, call answer rates, complaint handling and product features > Admiral has a Customer Contact Strategy (CCS) team to further improve customer service. By improving customer communications and introducing new feedback channels like online polls and live chats, Admiral will track customer satisfaction throughout the different stages of their policy lifetime
> 2nd Best Big Company to Work For 2014, Sunday Times Best Companies to Work For > 2nd Best Large Workplace in the UK, Great Place to Work Institute > Admiral’s UK contact centre in Halifax, Nova Scotia, won 8th Best Workplace in Canada, Great Place to Work Institute
Profi t Focus > Profi t before tax increased 6% to £393.9 million (2012: £372.8 million) > Consistent outperformance compared to market in underwriting profi tability > Combined ratio improved in 2013 to > Profi t generated from other products and services of £173 million
Threatened with dramatic shrinkage, along with the redundancies and offi ce closures that go with it, many insurers at the end of the last decade waited far too long to raise prices in the face of record high combined ratios and then, with 40% plus price increases in 2010–11, increased them excessively. The subsequent overshoot on rates was then corrected in a stampede in the opposite direction, with new business rates down around 26% over the last two years.
Underwriting profit plus profit commission 108.8 172.8 233.4 Net other income 181.5 170.9 136.8
*2 Turnover (a non-GAAP measure) comprises total premiums written and Other revenue. Refer to note 12 for a reconciliation to financial statement line items.
Reported motor loss ratio*1 77.9% 76.4% 68.0% Reported motor expense ratio*2 14.0% 13.6% 15.0% Reported motor combined ratio 91.9% 90.0% 83.0% Written basis motor expense ratio 13.2% 13.0% 14.5% Reported total combined ratio*3 91.9% 89.1% 81.0% Claims reserve releases – original net share*4 £7.8m £16.3m £53.3m Claims reserve releases – commuted reinsurance*5 £2.5m £1.3m £40.9m Total claims reserve releases £10.3m £17.6m £94.2m Vehicles insured at year end 2.97m 3.02m 3.02m Other revenue per vehicle £84 £79 £67 *1 Motor loss ratio adjusted to exclude impact of reserve releases on commuted reinsurance contracts. Reconciliation in note 12b.
*2 Motor expense ratio is calculated by including claims handling expenses that are reported within claims costs. Reconciliation in note 12b.
*3 Reported total combined ratio includes additional products underwritten by Admiral. *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. *5 Commuted reinsurance shows releases on the proportion of the account that was originally ceded under quota share reinsurance contracts but has since been commuted and hence reported through underwriting and not profit commission.
The two principal advantages of the arrangements are: > Capital efficiency: the majority of the capital supporting the underwriting is held outside the Group. As Admiral is typically able to retain much of the profit generated via profit commission the return on Group capital is higher than in an insurance company with a standard business model > Risk mitigation: co- and reinsurers bear their proportional shares of claims expenses and hence provide protection should results worsen substantially
Great Lakes will underwrite 40% of the UK business until at least the end of 2018. Admiral has agreed to retain at least 25% for the duration, whilst the allocation of the balance is at Admiral’s discretion.
Admiral has options to commute quota share reinsurance contracts and typically does so after two or three years of an underwriting year’s development when there is a reasonably certain view on the year’s outcome. There is little or no impact on profit or the timing of profit recognition from commutation.
The European and USA arrangements are explained in the International Car Insurance section on pages 26 to 29 and the UK Household arrangements are explained in the Other Group Items section on page 33.
Profit Profit from UK Car Insurance increased 6% to £393.9 million (2012: £372.8 million). Profit from underwriting and profit commission increased 35% to £233.4 million (2012: £172.8 million) resulting largely from an improved combined ratio. The combined ratio improvement was largely due to higher reserve releases that resulted from positive claims development. The increase in profit from underwriting and profit commission was offset by a 20% reduction in net other income and instalment income to £160.5 million (2012: £200.0 million).
Turnover and Premiums UK turnover of £1,698.9 million decreased by 12% (2012: £1,936.2 million) primarily due to reductions in average premiums which led to an 11% reduction in total premiums written to £1,553.0 million (2012: £1,748.7 million). The closing vehicle count was stable at 3.02 million (2012: 3.02 million). Average written premium for the year was around £505, down 13% on 2012 (2012: £580). The reduction in average premium was largely a result of rate cuts of around 10% (year-on-year) on average across new business and renewal business combined with portfolio mix changes.
Excluding reserve releases, the loss ratio increased slightly to 81.2% (2012: 80.1%), largely due to the impact of falling premiums.
The projected ultimate combined ratio (ultimate loss ratio plus written expense ratio) for Admiral for the 2013 accident year is 85% compared to 84% for 2012, resulting from an increased expense ratio. The reported combined ratio for the whole UK market (excluding Admiral) for 2012, excluding reserve releases was 108%.
The £12 reduction in Other revenue per vehicle from full year 2012 to full year 2013 was due to changing accounting recognition and treatment (£6) and true economic changes (£6) as follows: Changing accounting recognition and treatment > Change to accounting recognition and treatment of Motor Legal Expenses Insurance (MLEI) and vehicle commission (£6), where profit has been reallocated from Other revenue to Underwriting
Underwriting Result and Profit Commission The UK Car Insurance motor combined ratio improved by around seven percentage points in 2013 as follows: UK Car Insurance motor combined ratio 2012 2013
The projected ultimate loss ratio for Admiral for the 2013 accident year is 71%, in line with 2012. During 2013, falling premiums were offset by a reduction in claims costs.
Contribution from additional products and fees 213.9 205.2 170.4 Contribution from additional products underwritten by Admiral*1 — 4.8 12.3
Admiral Law and BDE Law During H1 2013, Admiral entered into two joint ventures with law firms Lyons Davidson and Cordner Lewis to form Admiral Law and BDE Law. Both ventures were granted alternative business structure (ABS) licenses by the Solicitors’ Regulation Authority (SRA).
Bringing the provision of legal services into the Group will allow Admiral to administer a claim throughout the process and offer a materially better quality of service. New and proposed reforms to the handling of bodily injury claims mean that the businesses are not expected to make a material contribution to Group profits in the foreseeable future.
Instalment Income Instalment income is interest charged to customers paying for their insurance in instalments. During 2013 Admiral earned £23.7 million from instalment income, down 19% on the prior period (2012: £29.1 million). This reduced Admiral’s Other revenue per vehicle by around £2 compared to the end of 2012. Instalment charges are calculated as a percentage of premium and therefore a reduction in average premium leads to a reduction in instalment income.
Multinational Workplace in Europe, Great Place to Work Institute > Admiral Seguros (Balumba and Qualitas Auto) won 5th Best Workplace in Spain, Great Place to Work Institute > ConTe was named 11th Best Workplace in Italy, Great Place to Work Institute > Elephant Auto placed as 18th Best Large Employer in Virginia, USA, Best Companies Group
Risk Aversion > The Group utilises co- and reinsurance and typically retains the risk on around one third of premiums written > Admiral employs a test and learn approach to expansion taking small and inexpensive steps to test different approaches and identify the best way forward
Admiral Seguros has had a strong year of growth. Despite the diffi cult market conditions noted above we grew turnover by nearly 25%. During the year we successfully launched a new brand, Qualitas Auto, which grew quickly in awareness propelled by a TV campaign starring Pierce Brosnan. If economic conditions improve in Spain we would expect to see more serious growth from Admiral Seguros; however, we will be patient and not accelerate growth in diffi cult market conditions.
“ Admiral’s objective is to create profi table, sustainable and growing businesses. In 2012, Admiral’s international insurance businesses continued to grow, adding over 79,000 customers and ending the year 18% larger than in 2012.”
Although the diffi cult economic climate has resulted in a reduction in the total number of vehicles insured in Italy, it has perhaps also encouraged people to shop for their car insurance, (the percentage has almost tripled since our 2008 launch), supported by the abolition of automatic renewals. Distribution through the internet keeps growing steadily and price comparison websites, four of which are now advertising on TV, are becoming an integral part of the buying process.
USA – Kevin Chidwick CEO, Elephant Auto The US car insurance market is the largest in the world, representing 200 million vehicles and $170 billion of premium. Roughly a quarter of the USA market is direct, and this is growing, with record media spend encouraging consumers to shop around for their quotes. What is perhaps surprising is that European-style price comparison has not yet established in the USA, and in the meantime the direct writers are engaged in a fi erce media battle for customers.
France – Christophe Sanchez CEO, L’olivier Assurances The French motor market was one of the few European markets where premiums grew in 2013. Despite frequency improvements, the industry combined ratio increased by 4 percentage points to 105% on the back of increasing bodily injury claims costs. We expect this trend to continue increasing pressure on claims costs and on the market’s combined ratio in 2014. Customer switching is an accelerating trend with the expansion of the price comparison market and ongoing investment by LesFurets and Admiral’s LeLynx. Additionally, there are regulatory changes in discussion that will substantially simplify switching insurers for consumers.
Total premiums written 112.5 148.5 168.3 Net insurance premium revenue 27.2 43.3 54.1 Investment income 0.2 0.1 — Net insurance claims (28.3) (49.4) (49.1) Net insurance expenses (16.2) (27.4) (32.9)
Reported loss ratio 104% 114% 91% Reported expense ratio 60% 63% 61% Reported combined ratio*1 164% 177% 152% Reported combined ratio, net of Other revenue*2 134% 157% 141% Vehicles insured at period-end 306,000 436,000 515,300 *1 Reported combined ratio is calculated on Admiral’s net share of premiums and excludes Other revenue. *2 Reported combined ratio, net of Other revenue is calculated on Admiral’s net share of premiums and includes
International Car Insurance Financial Performance Admiral’s international insurance businesses (in aggregate and individually) continued to grow, adding over 79,000 customers and ending 2013 18% larger than a year earlier. Turnover grew 15% to £187.8 million (2012: £162.9 million). Vehicles and turnover from these businesses represent 14% and 9% of the Group totals respectively, up from 12% and 7% in 2012.
Improved prior year claims development in the more mature operations, led to a lower combined ratio, which decreased from 177% to 152%. This improvement in conjunction with higher net insurance premium revenue led to a lower loss, of £22.1 million in 2013, down from £24.5 million in 2012. The lower combined ratio was a result of a 23 percentage point improvement in the loss ratio to 91% (2012: 114%) whilst the expense ratio improved by 2 percentage points to 61% (2012: 63%). The expense ratio is high in comparison to Admiral’s UK business because all of the international operations need to grow to achieve economies of scale. In addition, there are market specific reasons why the expense ratios are higher, for example high acquisition costs in the USA.
As the Group’s international insurance operations grow, it is expected that they will make losses until appropriate scale has been achieved. The Group is satisfied with the progress each business continues to make towards the goal of becoming a sustainable, growing, profitable operation.
The Group’s largest international operation is ConTe in Italy which had 279,900 vehicles at the end of 2013, up 5% year-on-year. ConTe was launched in 2008 and has benefited from a period of generally favourable market conditions which has recently come to an end. ConTe is focused on improving underwriting margin and during 2013 ConTe’s claims experience was significantly better than in prior years.
The consolidated result of Admiral’s insurance operations in Spain, Italy and France was a loss of £11.7 million, the same as 2012. The combined ratio*1 improved to 138% from 155% primarily due to improved claims experience.
Confused.com had a good year in 2013, growing profi ts by 19% to £21.7 million. This profi t growth was down to the success of the “BRIAN the Robot” TV campaign, careful and effi cient use of advertising money and a myriad of operational improvements. Even though the competition has increased its advertising spend levels, Confused.com maintained market share. Beyond the comparison of car insurance Confused.com continues to extend its product line, fi nding success for example, with the comparison of life insurance and credit cards.
UK Price Comparison > Confused.com is predominantly an insurance and fi nancial services comparison website > Operating in the UK, the site allows consumers to compare a range of general insurance and fi nancial services products across price and policy benefi ts > Confused.com’s income is primarily generated from commissions paid by the product provider on the sale of an insurance policy or fi nancial product > Confused.com is one of the UK’s leading car and home insurance comparison websites
Price Comparison Strategy > Confused.com’s strategy is focused on car insurance comparison and is aimed at making Confused.com the most competitive car insurance price comparison website in the UK market
– comparenow.com in the USA (launched March 2013) offers comparison on motor insurance
> The Group disposed of its Italian operation (Chiarezza.it) in April 2012
Success in achieving the strategy for Price Comparison is measured against a large number of key performance indicators which are common across the UK and international businesses. These include market share, quote volumes, conversion rates, sales volumes, income per sale, revenue per customer and cost per sale. Much of this information is considered to be commercially sensitive and is therefore not disclosed in the Annual Report.
> 95% of customers would recommend Confused.com to a friend, according to research conducted by Confused.com on 1,335 respondents (September 2013 – January 2014)
A GREAT Place to Work! > Rastreator won 4th Best Small Workplace in Spain, Great Place to Work Institute
Risk Aversion > 25% of Rastreator and 32.2% of comparenow.com are owned by third parties, to share the risk of starting new operations > Admiral employs a test and learn approach to expansion taking small and inexpensive steps to test different approaches and identify the best way forward
Profi t Focus > Confused.com’s profi t before tax increased 19% to £21.7 million (2012: £18.2 million)
> Rastreator and LeLynx are both profi table, contributing £2.4 million to Group profi t
USA – Andrew Rose CEO, comparenow.com Typically, Americans are good shoppers for most things. However, up until now, they haven’t been particularly good shoppers for car insurance. comparenow.com is positioned to change that by bringing European-style price comparison to the world’s largest car insurance market. European-style price comparison means the customer can get a price on the website that will be honoured by the insurance company. Until the arrival of comparenow.com, this was not a feature of the USA car insurance market.
Confused.com profi t 16.1 18.2 21.7 International Price Comparison result*1 (5.6) (0.2) (1.3)
UK Price Comparison – Confused.com Confused.com produced an improved result, with revenue 6% higher at £87.7 million (2012: £82.7 million) and profi t up 19% to £21.7 million (2012: £18.2 million).
“ Admiral employs a test and learn approach to expansion, taking small and inexpensive steps to test different approaches and identify the best way forward.”
UK Household Insurance underwriting result — — (0.1) UK Commercial Vehicle operating profit 2.8 2.5 2.5 Group net interest income 2.9 1.9 1.9 Share scheme charges (18.6) (20.6) (22.5) Business development costs (0.8) (2.1) (0.3) Other central overhead (1.8) (3.4) (3.5)
UK Commercial Vehicle operating profit in the year remained in line with 2012 at £2.5 million, and customer numbers increased from 94,800 at the end of 2012 to 117,900 at the end of 2013.
Interest Income Interest income in 2013 was £1.9 million, in line with 2012.
Other Central Overhead Other central overheads include Group Directors’ remuneration and other Group central costs.
Admiral is exposed to reserving risk through its underwriting of motor insurance policies. Claims reserves in the financial statements may prove inadequate to cover the ultimate cost of open claims which are by nature uncertain.
Admiral holds a buffer in booked reserves to cover significant legislative changes impacting existing claims. Furthermore, Admiral continues to hold an additional buffer in its reserves in excess of the projected ultimate outcomes to cover other potential claim shocks.
Admiral mitigates the risk to its reinsurance arrangements by ensuring that it has a strongly-rated and diverse range of partners. Admiral has enjoyed a long term relationship with one of the world’s strongest reinsurers, Munich Re, which has supported Admiral since 2000.
Long term arrangements are also in place for international and household businesses.
Admiral continuously assesses the value to its customer of the products it offers, and makes changes to ensure the products continue to offer good value.
Higher claims costs and loss ratios, reducing profitability or resulting in underwriting losses.
The Group continues to work to establish similar expertise in its newer international businesses.
The table below sets out the principal risks which could have a material adverse affect on Admiral and have been identified through the risk management framework. The report on Corporate Governance on pages 50 to 51 describes the risk management framework in place throughout the Group.
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 above, but in addition: > Track record of innovation and ability to react quickly to market conditions and developments > Keen focus on maintaining a low-cost infrastructure and efficient acquisition costs
The Directors are mindful of management stretch and regularly assess the suitability of the management structure in place for Admiral’s international operations.
The management of Confused.com maintains a very keen awareness of the risks of continued competition.
Admiral only conducts business with reinsurers of appropriate financial strength. In addition, most reinsurance contracts are operated on a funds withheld basis, which substantially reduces credit risk, as Admiral holds the cash received as collateral.
With respect to investment counterparties, there are no specific concentrations of credit risk due to the structure of the liquidity funds which invest in a wide range of very short duration, high quality securities. Cash balances and deposits are placed only with highly rated credit institutions.
Admiral considers counterparty exposure frequently and in significant detail and has in place appropriate limits to mitigate exposure to individual investment counterparties.
People Risk – failure to recruit, develop and retain suitable talent. Further detail on how Admiral interacts with its employees is set out on page 15 and in the CR Report available online.
Dear Shareholder, On behalf of the Board I am pleased to present the Corporate Governance Report for the fi nancial year ended 31 December 2013. The Board remains committed to maintaining the highest standards of corporate governance. This Report sets out the Admiral framework of governance and the approach the Board has taken during 2013 to achieve the standards of good corporate governance for which it is accountable to the Group’s shareholders.
The year has seen considerable changes to narrative and remuneration reporting regulations and we have set out in the report how we have met the requirements of these new regulations. We also confi rm the Group’s compliance, during the year under review, with the principles and provisions set out in the UK Corporate Governance Code (the Code).
This Corporate Governance Report is structured in order to demonstrate to shareholders that the Board has complied during 2013 in all respects with each section of the Code: Leadership; Effectiveness; Accountability; and Relations with Shareholders. Remuneration is dealt with in the separate Directors’ Remuneration Report.
We believe that having a sound corporate governance framework enables effective and efficient decision making and ensures that there is the right balance of skills and experience to assess and manage the risks in the markets in which the Group operates and inherent in the Group’s activities.
Membership at 31 December 2013: > John Sussens (Chairman) > Roger Abravanel > Martin Jackson > Margaret Johnson
Membership at 31 December 2013: > Alastair Lyons (Chairman) > Colin Holmes > Lucy Kellaway
Non-Executive Chairman of Serco Group plc Non-Executive Chairman of the Towergate Insurance Group Group Deputy Chairman of Bovis Homes Group plc
In his executive career Alastair has been Chief Executive Offi cer (CEO) of the National Provident Institution and of the National & Provincial Building Society, Managing Director of the Insurance Division of Abbey National plc and Director of Corporate Projects at National Westminster Bank plc. He has held numerous non-executive roles, having most recently stepped down as Senior Independent Non-Executive Director at the Phoenix Group. He has also been a Non-Executive Director of both the Department for Transport (DfT) and the Department for Work and Pensions (DWP), as well as of its predecessor, the Department of Health and Social Security (DHSS).
David Stevens, CBE (51) Chief Operating Officer, appointed in October 1999
2 Kevin Chidwick (50) Chief Financial Officer, appointed in September 2006
Martin was Chairman of the Admiral Group Audit Committee from August 2004 until January 2012, when he became Chairman of the newly formed Group Risk Committee (GRC). Martin was the Group Finance Director of Friends Provident plc between 2001–2003 and Friends Provident Life Office between 1999–2001. Prior to this he was the Group Finance Director at London & Manchester Group plc from 1992, up to the date of its acquisition by Friends Provident Life Office. Martin is a Fellow of the Institute of Chartered Accountants.
8John Sussens (68) Senior Independent Non-Executive Director*1, appointed in August 2004
John was a Non-Executive Director of Cookson Group plc from 2004. He remained with Vesuvius post the Cookson split as Senior Independent Non-Executive Director and Chairman of the Remuneration Committee before retiring from the Vesuvius Board in June 2013. Prior to this he was the Group Managing Director of Misys plc between 1998 and 2004, having been on the Board of the Company since 1989. John has previously served as Manufacturing Director of JC Bamford Excavators Ltd, and as a Non-Executive Director of Chubb plc.
Non-Executive Director and Chairman of the Remuneration Committee of Bovis Homes Group plc
Colin was formerly a member of the Executive Committee of Tesco plc and during his 22 year career at Tesco he held a wide range of positions, including UK Finance Director and CEO of Tesco Express. Colin is a Chartered Management Accountant.
Non-Executive Director of Jardine Lloyd Thompson Group plc, Foxtons plc and Workshare
Changes to the Admiral Group Board in 2014 *1 John Sussens will retire as a Director immediately following Admiral Group’s 2014 AGM. *2 Martin Jackson will retire as a Director immediately following Admiral Group’s 2014 Annual General
Following the departure of Martin Jackson and John Sussens, the Board Committees will undergo the following compositional changes: > Colin Holmes will replace John Sussens as Senior Independent Director (SID)
> Annette Court will replace John Sussens in the role of Remuneration Committee Chairman > Jean Park will replace Martin Jackson as Group Risk Committee Chairman, in addition to joining the Remuneration Committee
Thank you “The Board would like to thank all of the staff and the management team at Admiral Group for everything they have done this year to help build such a successful and sustainably different business.”
The Board has adopted a formal schedule of matters reserved for the Board’s consideration. This is monitored by the Company Secretary and reviewed by the Board on an annual basis. Specific matters reserved to the Board include the approval of: > The Group’s long term objectives and corporate strategy > Operating and capital budgets, financial results, and any significant changes to accounting practices or policies > The Group’s capital structure > Results and financial reporting > The system of internal control and risk management > The Group’s overall risk appetite > Changes to the structure, size and composition of the Board, including new appointments > Succession plans for the Board and senior management > Dividend policy and proposals for dividend payments > Major acquisitions, disposals, and other transactions outside delegated limits > The annual review of its own performance and that of its Board Committees > The review of the Group’s overall corporate governance arrangements
Board Activity During 2013 At each scheduled meeting the Board receives updates from the Chief Executive, Chief Operating Officer and Chief Financial Officer on the financial and operational performance of the Group and any specific developments in their areas of the business for which they are directly responsible and of which the Board should be aware. Items that are considered on an annual basis are included in an annual schedule of rolling agenda items to ensure that they 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. Mindful of the need to ensure effective Director succession through senior managers below Board level having exposure to and gaining experience of the operation of the Board, the heads of the Group’s Italian and Spanish direct insurance businesses (respectively Milena Mondini and Cristina Nestares) and the Group’s Deputy Chief Financial Officer (Geraint Jones) are invited to attend every Board meeting and Board dinner.
In addition to the regular consideration of financial and operating performance and risk management and compliance, the Board received presentations on a variety of topics including updates from the management teams of each of the Group’s overseas businesses. Several external organisations were also invited to present their external perspectives on the Company’s activities in the context of the markets in which it operates.
Board Effectiveness Although now a Code requirement that FTSE 350 companies should carry out an externally facilitated evaluation of the Board at least every three years, the Group already had such a policy in place and having last carried out an external evaluation in 2010 the Group underwent an externally facilitated evaluation in 2013.
The questionnaire considered: > Board processes and their effectiveness > Time management of Board meetings > Board composition and dynamics > The effectiveness of the Board in considering the Group’s risk management framework and internal controls > Its strategic and operational oversight > Succession planning > Priorities for change > Board support > Content of discussion and focus at
Completion of the questionnaire by each Director and attendee was followed by one-to-one discussions with Karen where the Board’s role and structure, process, relationships, and any emerging issues and areas for improvement were discussed. The results of the evaluation were considered by Karen and the Chairman, with Karen presenting to the Board in January 2014 her external perspective on the Board’s strengths; future challenges; progress against recommendations made in the last review; and areas for improvement.
Overall the review found that the Board had mostly continued to work very effectively; that each Director contributes effectively and demonstrates full commitment to his/ her duties; that the Board was effectively chaired; and that good progress had been achieved in many of the areas identified for action in the last independent review at the end of 2010. In particular in the areas of succession planning; risk management with the establishment of a Group Risk Committee; increased Board exposure of senior managers from the UK business through attendance at dinners with Non-Executive Directors without Executive Directors being present and discussion at Board level of talent profiles of existing managers identified as having executive potential.
The particular themes and areas of focus identified during the 2013 review included: > Allow the new Chair of Risk to develop the appropriate strategy to achieve the requisite balance and focus between procedural and substantive aspects of risk and to create the most efficient and effective reporting materials > Create a clear structure in presenting materials that shows the original forecast, agreed approach and any assumptions made at the time and the bridge to the current position showing changes to current forecast and suggested approach > Create an action list and tracker of agreed recommendations in the Board pack and review at each meeting to ensure progress is made > The Board to set annually the key objectives of the Board > On an annual basis review the calendar and location of meetings to optimise balance > Invite external experts to present on customers, competitors, and/or social trends every one to two years to provoke thinking and debate in advance of likely changes in customer preferences and/or competitor practices
The Chief Executive to whom they report, appraises annually the performance of the individual Executive Directors. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Board led by the Senior Independent Director (SID). Following the latest review, the SID 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 continues to be effective and that he continues to demonstrate appropriate commitment to his role.
The Roles of the Chairman and Chief Executive The Board has approved a statement that sets out the clear division of responsibilities between the Chairman and the Chief Executive. The Chairman is primarily responsible for the leadership and workings of the Board, setting its agenda, and monitoring its effectiveness. The Chairman is not involved in the day-to-day management of the business. Save for matters reserved for decision by the Board, the Chief Executive, with the support of the other Executive Directors, is responsible for proposing the strategy to be adopted by the Group; running the business in accordance with the strategy agreed by the Board; and implementing specific Board decisions relating to the operation of the Group. The statements of division of responsibilities and matters reserved for decision by the Board are reviewed annually.
Board Balance and Independence The Board continues to give careful consideration to its structure and balance particularly given several Directors will reach nine years’ service in the next two to three years. In this context the Group is mindful of 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. 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.
As part of the ongoing review of the balance and composition of the Board and in the context of several of the Non-Executive Directors reaching their maximum term over the next two years, the Nomination Committee initiated the process of recruiting a Non-Executive Director with experience of managing risk in a financial services context and someone capable of taking over as Chair of the Group Risk Committee when Martin Jackson steps down from that role at the AGM in April 2014. Appointments to the Board are the responsibility of the Board as a whole, acting on the advice and recommendations of the Nomination Committee. Appointments are made on merit and against objective criteria, having due regard to the benefits of diversity, including gender. Following a formal, rigorous and transparent process implemented and led by the Nomination Committee the Board was delighted to appoint Jean Park as an independent Non-Executive Director with effect from 17 January 2014. Jean joined as a member of the Risk and Remuneration Committees on appointment and will be subject to election by shareholders at the forthcoming AGM.
Current length of service as Chairman or a Non-Executive Director at 31 December 2013
The Board, having given thorough consideration to the matter, considers eight of the Non-Executive Directors to be independent and is not aware of any relationships or circumstances which are likely to affect, or could appear to affect, the judgement of any of them. It is the view of the Board that the independent Non-Executive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making.
John Sussens is the Senior Independent Non-Executive Director (SID). He is available to shareholders if they have concerns that contact through the normal channels of Chairman, Chief Executive, or Chief Financial Officer has failed to resolve or for which such contact is inappropriate.
John Sussens and Martin Jackson, both having served for nine years as Non-Executive Directors, will be retiring from the Board at the forthcoming AGM in April 2014 and will not be submitting themselves for re-election by shareholders. Colin Holmes will become SID when John steps down at the AGM in April and it is anticipated that this will be a smooth transition given Colin’s knowledge and experience of the Group gained through his Board position and Chairmanship of the Audit Committee. From April, Annette Court will replace John as Chair of the Remuneration Committee and Jean Park will replace Martin Jackson as Chair of the Group Risk Committee.
Professional Development On appointment, Directors take part in a comprehensive induction programme whereby they receive financial and operational information about the Group; details concerning their responsibilities and duties; as well as an introduction to the Group’s governance, regulatory and control environment.
Engagement with Shareholders The Company attaches considerable importance to communications with shareholders and engages with them regularly. Open and frequent dialogue with investors enables them to understand fully the Group’s strategy, objectives and governance. The Investor Relations team has day-to-day primary responsibility for managing communications with institutional shareholders through a combination of briefings to analysts and institutional shareholders, both at the half-year and full year results. A number of analysts and investors visited the Group’s Cardiff
This is supplemented by feedback to the Board on meetings between management and investors. External analysts’ reports are circulated to all Directors by the Company Secretary. In addition, the Investor Relations team produces a quarterly Investor Relations Report that is circulated to the Board. 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.
Board Committees The Board has delegated authority to a number of permanent committees to deal with matters in accordance with written Terms of Reference. The principal committees of the Board – Audit, Remuneration, Risk and Nomination – all comply fully with the requirements of the Code.
“ All shareholders are invited to attend the Company’s Annual General Meeting (AGM). The Chairs of the Audit, Remuneration, Nomination and Group Risk Committees attend the AGM along with the other Directors and are available to answer shareholders’ questions on the activities of the committees they chair.”
Admiral Group plc Annual Report and Accounts 2013Admiral Group plc Annual Report and Accounts 2013Admiral Group plc
Dear Shareholder, I’m pleased to provide an update on the main activities of Admiral’s Audit Committee during 2013.
The Committee also considered, with management and the Group’s auditor, the matters raised in 2012 Annual Report and Accounts review letter received by the Group from the Financial Reporting Council (FRC). The Group was able to respond satisfactorily to each of the queries raised by the FRC, but as part of the review process agreed a revised disclosure on grossing up expenses within the income statement. Additionally, the Committee received presentations from the Group’s auditors on relevant accounting, regulatory and corporate governance changes, ensuring their impact had been fully considered by the Group.
I hope you fi nd the above summary, and the more detailed report, both useful and informative.
During the Year the Committee Reviewed the Following: > The Annual Report and interim results > Reports from the internal audit departments within the Group on the effectiveness of the Group’s risk management and internal control procedures, 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 its review of the Group’s systems and controls, and on its key accounting and audit issues and conclusions on the half and full year reporting > Reports from the Chair of the Group Risk Committee on the principal risks faced by the Group and the work undertaken by the Committee to ensure risk is appropriately managed > Presentations from independent actuaries to assist the Committee in concluding on the adequacy of the Group’s reserves > The Group’s Reserving Policy as drafted by management to develop a final version that was approved by the Board > Reports from the external auditor on its proposed audit scope, fees, audit findings, and auditor independence > Performance and effectiveness of the internal audit department including review of the results of the external effectiveness review of internal audit > All reports from internal audit including management responses to the conclusions set out in the reports > The recommendation to more formally describe the relationship between the Group Head of Internal Audit and the international subsidiaries > The effectiveness of the Group’s Whistleblowing Policy which sets out the arrangements for raising and handling allegations from whistleblowers > The effectiveness of the procedures for detecting fraud > The committee also had presentations and discussions on a range of important issues including the approach to reserving within the Group, a review of large claims and profit commission arrangements > The 2012 Annual Report and Accounts review letter from the FRC and considered, with external auditor, the response of management to the issues raised > Its own Terms of Reference > Its own effectiveness
Membership Membership of the Committee at the end of the year was: Colin Holmes (Chair), Margaret Johnson and Annette Court. Composition of the Committee is well balanced, with Committee members having a broad range of financial and business experience such that they are able to effectively analyse, challenge and debate the issues that fall within the Committee’s remit.
The Company Secretary acts as secretary to the Committee. The Committee meets at least four times per year and has an agenda linked to events in the Company’s financial calendar and other important issues that arise throughout the year which fall for consideration by the Committee under its remit.
The Committee is kept up to date with changes to accounting standards and relevant developments in financial reporting, company law, and the various regulatory frameworks through presentations from the Group’s external auditor, Deputy Chief Financial Officer and Company Secretary. In addition members attend relevant seminars and conferences provided by external bodies. The Terms of Reference of the Audit Committee include all the matters required under the Code.
Other individuals such as the Chief Financial Officer (and his Deputy), Chief Operating Officer, Chief Executive Officer, Chairman of the Board, the Heads of Risk, 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 external auditor was invited to attend all of the Committee’s meetings held in 2013, excepting those agenda items when its own performance was to be reviewed and provision of non-audit services discussed. In addition, a number of private meetings were held between members of the Committee and the auditor.
Profit Commission 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.
Co-insurance and Reinsurance The Group has in place a number of proportional risk sharing agreements, where insurers outside the Group underwrite a majority of the risk generated, either through co-insurance or reinsurance contracts. There is judgement involved in the assessment of whether significant risk has transferred which impacts on the appropriate accounting.
The Committee considered key accounting judgements as part of its review and approval of Group financial statements at interim and year-end meetings. The Committee received reporting from the Group Finance team that supported key accounting estimates and judgements and this formed the basis for the Committee’s discussion. Risk transfer was considered on a periodic basis or more frequently in the case of changes to contractual arrangements. In the light of the information received by the Committee, the Committee considered that the appropriate risk transfer had taken place.
Recognition of Intra-group Trading The Committee considered and reviewed the following unadjusted difference, reported by the external auditor, relating to intra-group trading which had not been eliminated on consolidation.
Management confirmed to the Committee that although the auditors continued to report an unadjusted difference in relation to intra-group trading between Admiral and Confused.com in the UK as a result of their inclusion on the insurance panel, management had opted not to make the elimination adjustments as the effect would be misleading on the key ratios used by the industry and also due to consistency with prior years. KPMG confirmed that although this was an unadjusted difference, it was both immaterial and consistent with prior years.
After reviewing the presentations and reports from management and consulting where necessary with the auditors, 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 is also satisfied that the significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised, challenged and are sufficiently robust.
Effectiveness of the External Audit Process 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 judgements. Following this review the Committee concluded that the auditor, KPMG Audit plc, remained independent and provided a service that was robust and fit for purpose.
Members of the Committee also receive all issued audit reports, enabling them to challenge the reports’ content and related recommendations. The Committee approves the internal audit programmes at the start of each calendar year whilst the effectiveness and workload of the internal audit functions and the adequacy of available resources are monitored throughout the year.
In accordance with agreed parameters, the overseas operations in Spain, Italy and the USA 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.
In December 2013 the Committee carried out a review of its effectiveness. The process was led by the Chair of the Committee, with support from the Company Secretary, and consisted of each Committee member completing a questionnaire in which they were asked to evaluate the performance of the Committee against set criteria that included time management and Committee composition; Committee processes and support; and priorities for change. The results of the evaluation were discussed at the Committee meeting in January 2014 and it was concluded that overall the Committee was operating effectively and within its remit. However, there were some areas that were identifi ed for improvement, including reducing the length of meetings to improve the effectiveness of the Committee, with greater focus on the main risks affecting the business and less time spent on operational detail, which will continue to be monitored by the Risk department.
Internal Control and Risk Management The Board is ultimately responsible for the Group’s system of internal control and, through the Audit Committee, has reviewed the effectiveness of these systems. The systems of internal control over business, operational, fi nancial, and compliance risks are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
Membership at the end of the year was: Annette Court, Martin Jackson (Chair), David Stevens and John Sussens.
Dear Shareholder, During the year the focus of the Committee remained on ensuring that the Group is able to operate within the Board’s approved strategy and stated risk appetite and that the Group’s risk management framework is appropriately structured and effectively implemented.
The Committee is pleased to welcome Jean Park who joined the Committee on appointment in January 2014. Jean brings a wealth of risk governance experience to the Committee gained during her time as Group Chief Risk Offi cer for Phoenix Group. Jean will take over from me as Chair of the Committee when I step down in April 2014. Mindful of the need to keep under review and strengthen where necessary the risk capability within the Group, James Armstrong has been appointed as Director of Risk. Given his experience in this area, I am sure that James will be a valuable addition to the risk team.
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. As described above, in order to ensure these responsibilities are properly discharged, the Board has delegated the task of supervision of risk management to the Group Risk Committee (GRC) and of internal control to the Audit Committee.
There are several key elements to the risk management environment throughout the Group. These include the setting of risk management strategy, risk appetite and risk policy by the GRC; dissemination of that policy by the Chief Executive; delivery of the policy by the UK Risk Management Committee and the Group’s other UK and overseas entities through the application of the Group’s systems of internal control and risk management; and the overall assurance provided to the Audit Committee by internal audit that the systems operate effectively. The Board recognises that the day-to-day responsibility for implementing these policies must lie with the senior management whose operational decisions must take into account risk and how this can be controlled effectively. The GRC reports on its activities to the Audit Committee in support of the overall assurance provided by the Audit Committee that the Group’s risk management and compliance systems operate effectively.
The Board confirms that there were no significant issues arising during the year under review. However, the Board continues to review the adequacy of the risk management and control framework. As the Group’s operations grow, the Board looks for opportunities to make improvements and add appropriate resources when necessary.
The membership of the Committee at the year end was Alastair Lyons (Chairman), Colin Holmes and Lucy Kellaway. The Company Secretary acts as secretary to the Committee. The Committee invites the Chief Executive to attend meetings when it deems appropriate. The Committee met on fi ve occasions during 2013.
a Non-Executive Director of Murray Income Trust plc and National House Building Council. There are a very limited number of individuals who have held the role of Chief Risk Officer of major insurance companies, hence the Nomination Committee took the opportunity of Jean’s retirement as CRO of the Phoenix Group to approach her to ascertain her interest in joining the Board of Admiral. Given her background, experience and competence, and the external references that were obtained, the Committee did not consider it either necessary or appropriate to undertake a full search led by an external recruitment consultancy.
The Committee remains satisfied that succession plans for Directors and senior management are in place to ensure the continued ability of the Group to implement strategy and compete effectively in the markets in which it operates.
Full details of the membership, responsibilities and activities of the Remuneration Committee can be found in the Directors’ Remuneration Report set out on pages 55 to 64.
“ The Group remains committed to providing equal opportunities, eliminating discrimination, and encouraging diversity amongst its workforce both in the UK and overseas.”
Dear Shareholder, I am pleased to introduce the Directors’ Remuneration Report (the Report) for the year ended 31 December 2013, which has been prepared by the Remuneration Committee (the Committee) and approved by the Board.
During the year ended 31 December 2013, the Committee met on six separate occasions. The key matters considered included: > Reviewing salary and fee proposals for the Executive Directors, the Chairman and senior management > Reviewing the appropriateness of the performance conditions for both the Discretionary Free Share Scheme (DFSS) and
Key Principles of Admiral Remuneration Arrangements The Group is committed to the primary objective of maximising shareholder value over time and ensuring that there is a strong link between performance and reward. This is reflected in the Group’s stated Remuneration Policy of paying competitive, performance-linked and shareholder-aligned remuneration packages comprising basic salaries coupled with participation in performance-based share schemes to generate competitive total reward packages for superior performance. The Board is satisfied that the adoption of this policy continues to meet the objectives of attracting and retaining Executives of the highest quality across the Group.
> Transparent – all aspects of the remuneration structure are clear to employees and openly communicated
Remuneration Policy Table This table describes the key components of the remuneration arrangements for Executive Directors for 2013 and beyond. No changes to the structure of remuneration are proposed for 2014.
Base Salary To attract and retain talent by setting base salaries at levels appropriate for the business
Henry Engelhardt and David Stevens have declined to be included in the plan.
The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances driven by factors outside the Company’s control (e.g. material increases in insurance premiums).
Discretionary Free Share Scheme (DFSS) To motivate and reward longer term performance, grow market share profitably, reduce staff attrition, and further strengthen the alignment of the interests of shareholders and staff
CFO award size for 2013: 52,250 shares, with a value on the date of award of £631,703.
Threshold performance will result in vesting of 10% of the maximum award.
The DFSS bonus amounted to 26%, 29% and 34% of salary in 2011, 2012 and 2013 respectively for the CFO.
Approved Free Share Incentive Plan (SIP) To encourage share ownership across all employees using HMRC approved schemes
All UK employees participate in the SIP (except Henry Engelhardt and David Stevens who have declined to participate). Grants are made twice a year based on the results of each half-year, and vest after three years subject to continued employment.
Notes to the Remuneration Policy Table Payments from Existing Awards Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the Remuneration Policy.
Selection of Performance Measures EPS v LIBOR has been selected as the performance measure for awards under the DFSS as the Committee feels it is a strong indicator of long term shareholder return. It is also transparent, visible and motivational to Executives.
Remuneration Policy for Other Employees The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the role size, experience required, individual performance and pay levels in comparable companies.
In general, the Remuneration Policy which applies to other Senior Executives is consistent with that for Executive Directors. Remuneration is typically linked to Company and individual performance in a way that reinforces shareholder value-creation.
All employees are eligible to participate in the SIP on the same terms.
Service Contracts and Leaver/Change of Control Provisions The Company’s policy is to limit termination payments on termination to pre-established contractual arrangements. In the event that the employment of an Executive Director is terminated, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the employee, as well as the rules of any incentive plans. Under normal circumstances, Executive Directors are entitled to receive termination payments in lieu of notice based on base salary and compensation for loss of benefits. The Company has the ability to pay such sums in instalments, requiring the Executive Director to mitigate loss over the relevant period. The notice period for all Executive Directors is one year.
There is no provision in the Executive Directors’ contracts for compensation to be payable on early termination of their contract over and above the notice period element. Executive Director service contracts are available to view at the Company’s registered office.
Normal vesting date Any outstanding award will be pro-rated for time and performance.
Manfred Aldag Indefinite n/a One month – automatically terminates should he cease employment with Munich Re
Martin Jackson 4 months 8 days 1 December 2013 One month
Pay-for-performance: Scenario Analysis 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. As such, there is no ‘threshold’ or ‘target’ performance defined for this element of pay. The figures shown in the chart below for the CFO’s DFSS bonus include the value of the actual DFSS bonus paid in 2013. Under all scenarios, potential reward opportunities are based on Admiral’s Remuneration Policy applied to salaries as at 31 December 2013. The ‘On target’ (threshold) column includes a 10% vesting for DFSS awards which would occur in the event that EPS growth over the performance period equates to LIBOR over the same period.
The charts above exclude the effect of any Company share price movement. For this reason, were the CFO’s DFSS shares to vest in full, his actual total remuneration may exceed the £ value shown in the chart above.
M axim um £1,246k £678k £615k £393k £393k £393k £372k £372k £372k
Approach to Recruitment Remuneration External Appointments In the case of appointing a new Executive Director, the Committee may make use of any of the existing components of remuneration, as follows: Component Approach Maximum annual grant value
Pension New appointees will be eligible to participate in the Personal Pension Plan with Group contributions in line with the existing policy.
DFSS bonus New appointees will be granted awards under the DFSS bonus scheme on the same terms as other Executives, as described in the policy table.
The Committee may also make an award in respect of a new appointment to “buy out” incentive arrangements forfeited on leaving a previous employer. In doing so, the Committee will consider relevant factors including any performance conditions attached to these awards and the likelihood of those conditions being met to ensure that the value of the buy-outs are no greater than the fair value of the awards they replace. The Committee may also avail itself of Listing Rule 9.4.2 R if appropriate in respect of buy-out incentive arrangements.
NED Recruitment In recruiting a new Non-Executive Director, the Committee will use the policy as set out in the table on pages 55 to 56. A base fee would be payable for Board membership, with additional fees payable for acting as Senior Independent Director or as Chairman or member of a Board Committee as appropriate.
Other Directorships Executive Directors are permitted to, although none currently do, accept appointments as non-executive directors of companies with prior approval of the Group Chairman. Approval will only be given where the appointment does not present a conflict of interest with the Group’s activities and the wider exposure gained will be beneficial to the development of the individual.
Remuneration Committee Membership in 2013 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 Chairman, the Executive Directors and the Company Secretary; reviewing the remuneration of senior management; and reviewing the composition of and awards made under the performance-related incentive schemes.
The Group Chairman and CEO are invited to meetings where the Committee considers it appropriate to obtain their advice on Group strategy and performance and senior Executive pay strategy. The members of the Committee do not have any personal financial interests (other than shareholdings), or any conflicts, that relate to the business of the Committee. The Committee members do not have any day-to-day involvement in the running of the Group.
The Committee undertakes due diligence periodically to ensure that Kepler remains independent of the Company and that the advice provided is impartial and objective. The Committee is satisfied that the advice provided by Kepler is independent.
Summary of Shareholder Voting at the 2013 AGM The table below shows the advisory vote on the Directors’ Remuneration Report at the 2013 AGM relating to the 2012 financial year.
5. DFSS: the value at vesting of shares vesting on performance over the three-year periods ending 31 December 2013 and 31 December 2012. For the 2013 calculation, given that vesting occurs in April 2014, after the Directors’ Remuneration Report is finalised, the figure is based upon the average share price in the last three months of the calendar year in question.
6. DFSS bonus: the value at grant of bonus equivalent to dividends that would have been payable during the year on all outstanding DFSS shares awarded but not yet vested.
Total Single Figure of Remuneration for Non-Executive Directors (audited) The table below sets out the total single figure remuneration received by each NED for the year to 31 December 2013 and the prior year.
Incentive Outcomes for Financial Year to 31 December 2013 DFSS Awards Vesting During the Year and in 2014 Awards were made under the DFSS to Kevin Chidwick in 2010 and 2011. Vesting was dependent on the Company’s EPS performance excess of a risk free return, defined as average three-month LIBOR, over a three-year period. 10% of shares vest for matching LIBOR; full vesting occurs for outperforming LIBOR by 10% p.a., with straight line vesting in between. No vesting occurs for EPS growth below LIBOR. The table below details the Company’s EPS performance against targets and vesting outcomes over the performance periods ended on 31 December 2012 and 31 December 2013.
Estimated value 1 Jan 2010 – 31 Dec 2012 48,010 161 points 102 points 59 points*3 100% 45,010 30 Apr 2013 £611,369*1 1 Jan 2011 – 31 Dec 2013 50,000 144 points 102 points 42 points 100% 50,000 30 Apr 2014 £623,500*2 *1 Calculated based on the share price at the vesting dates (April 2013: £12.76 and December 2013: £12.34).
*2 Calculated based on the average share price over the final three months of 2013 (£12.47).
In 2013, Kevin Chidwick received a DFSS bonus of £148,680 (2012: £122,612).
Scheme Interests Awarded in 2013 DFSS In October 2013, Kevin Chidwick was granted an award under the DFSS of 52,250 shares, with a value at the date of award of £631,703. The three-year period over which performance will be measured will be 1 January 2013 to 31 December 2015. The award is eligible to vest in its entirety on the third anniversary of the date of grant (i.e. October 2016), subject to performance. Henry Engelhardt and David Stevens again declined to be included given their significant shareholdings.
Awards made up to and including in 2013 vest based on EPS growth v LIBOR, as outlined on page 56.
SIP In March and September 2013, Kevin Chidwick was granted an award under the SIP of 112 and 116 shares, with a face value of £1,510 and £1,488 respectively. The shares will vest in March and September 2016 subject to continued employment only. Henry Engelhardt and David Stevens again declined to be included given their significant shareholdings.
Exit Payments and Payments to Past Directors No payments were made during the year.
Implementation of Remuneration Policy for 2014 Executive Directors Remuneration for the Executive Directors in 2014 will be determined in line with the current policy. The Committee approved the following base salaries for the Executive Directors in 2013: Director 2013 salary 2012 salary % change Effective date
Chairman and Non-Executive Directors With effect from 1 January 2014, the fee payable to the Chairman of the Board remains at £228,228 p.a. and the basic fee payable to each NED increased to £55,000 p.a. The fees payable for chairing the Audit, Risk, Remuneration and Nomination Committees are £20,000, £20,000, £5,000 and £5,000 p.a., respectively. The additional fee paid for being Senior Independent Director is £5,000 p.a. The fees payable for membership of the Audit and Group Risk Committees are £12,000 p.a. each.
With effect from the date of the AGM (9 April 2014), the additional fees payable for being Senior Independent Director and Chair of the Remuneration Committee will increase to £10,000 each. These increases reflect the additional time commitment now deemed necessary in undertaking these roles.
CEO CFO Other employees *1 Percentage change in salaries represents average salary increase in 2013 for a representative group of employees.
*2 In January 2013 Kevin Chidwick was provided with a cash reimbursement of £165,000 in relation to expenses incurred in his relocation to the USA (2012: £260,000).
*3 DFSS bonus change for Other employees represents the change in dividends paid, which is the driver of the level of bonus payable to holders of unvested DFSS shares.
Relative Importance of Spend on Pay The table below shows the percentage change in dividends and total employee remuneration spend from the financial year ended 31 December 2012 to the financial year ended 31 December 2013.
Pay for Performance The following graph sets out a comparison of Total Shareholder Return (TSR) for Admiral Group plc shares with that of the FTSE 100 Index, of which the Company is a constituent, over the five-year period to 31 December 2013. The Directors consider this to be the most appropriate index against which the Company should be compared. TSR is defined as the percentage change over the period, assuming reinvestment of income.
DFSS vesting outcome (% of maximum) 98% 100% 100% 100% 100% *1 This figure includes a reimbursement of £165,000 in January 2013 (2012: £260,000) for expenses incurred in respect of the CFO’s relocation.
Dilution The Company has controls in place to ensure that shares awarded under the schemes operated by the Company within any rolling 10 year period do not exceed 10% of the number of ordinary shares in the capital of the Company in issue at the time of each award.
As at 31 December 2013, the Directors have the following shareholdings: Director
John Sussens 80,000 *1 Total includes SIP shares both matured and awarded.
The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2013.
The Directors have declared a final dividend of £139.6 million, 50.6 pence per share, payable on 30 May 2014.
Contractual Arrangements The Group considers its co-insurance and reinsurance contracts, as described in the Strategic Report section on page 23, to be essential to the running of the Group’s business. No other contractual arrangements are considered to be essential.
Financial Instruments The objectives and policies for managing risks in relation to financial instruments held by the Group are set out in note 6 to the financial statements.
Directors and their Interests The present Directors of the Company are shown on pages 38 to 39 of this Report, whilst Directors’ interests in the share capital of the Company are set out in the Directors’ Remuneration Report on page 64.
Greenhouse Gas Emissions The annual level of greenhouse gas emissions, resulting from activities for which the Group is responsible, in 2013 was 8,163 CO2E, equivalent to 1.26 tonnes per average employee*1.
The data has been prepared with reference to the ‘WRI/WBCSD Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition)’ and in accordance with the guidance for corporate reporting issued by the Department for Environment, Food and Rural Affairs (Defra). Data was collected for the first three quarters of 2013 and extrapolated to calculate the full year emissions figure.
There are no material exclusions from this data. Exclusions included figures for gas and air conditioning because the information was not available from the managing agents of the Group’s multiple office locations. In addition two offices in France and one office in New Delhi have been excluded due to difficulties in obtaining complete and accurate data. These three offices together total less than 1.5% of Group headcount and are therefore considered immaterial.
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. *1 Average employee number excludes employees from three offices for which data could not be collected.
Share Capital, AGM and Related Matters Major Shareholders Other than as stated below, as far as the Company is aware, there are no persons with significant direct or indirect holdings in the Company. Information provided to the Company pursuant to the Financial Conduct Authority’s (FCA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the Company’s website.
At 31 January 2013, 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 %
The interests of Directors and officers and their connected persons in the issued share capital of the Company are given in the Remuneration Report.
At 31 December 2013, the Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital and shares issued during the year can be found in note 11d.
However, in accordance with the requirement under the UK Corporate Governance Code (the Code) for annual election of Directors all Directors will submit themselves for re-election at the Group’s Annual General Meeting on 9 April 2014.
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 International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
INDEPENDENT AUDITOR’S REPORT to the members of Admiral Group plc only
Opinions and Conclusions Arising from our Audit 1. Our Opinion on the Financial Statements is Unmodified We have audited the financial statements of Admiral Group plc for the year ended 31 December 2013 set out on pages 70 to 101. In our opinion: > The financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2013 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 as adopted by the European Union (IFRSs as adopted by the EU); > The parent company financial statements have been properly prepared in accordance with UK Accounting Standards; and > The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
2. Our Assessment of Risks of Material Misstatement In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows.
Insurance Liabilities Refer to pages 46 to 49 (Audit Committee statement), note 5 (accounting policy and financial disclosures).
The Risk – The provision for claims outstanding comprises the estimated cost of settling all claims incurred but unpaid at the balance sheet date, whether reported or not. This is a judgemental and complex area due to the inherent uncertainty of estimating claims not yet reported, future costs of settling claims, discount rates and whether customers will be awarded a lump sum claim or a periodic payment. The amounts involved are potentially significant and the application of accounting standards to determine the amount, if any, to be provided as a liability, is inherently subjective.
Our audit team included appropriately skilled actuarial specialists to support us in our challenge of the approach taken by the Group in calculating the liabilities. We have also considered the adequacy of the Group’s disclosures about the degree of estimation and sensitivity to key assumptions. The focus of our work is on the UK Motor portfolio.
Co-insurance and reinsurance Refer to pages 46 to 49 (Audit Committee statement), note 5 (accounting policy and financial disclosures).
3. Our Application of Materiality and an Overview of the Scope of our Audit The materiality for the Group financial statements as a whole was set at £18.5 million. This has been determined with reference to a benchmark of Group profit before taxation (of which it represents 5%) which we consider to be one of the principal considerations for members of the Company in assessing financial performance of the Group.
We agreed with the audit committee to report to it all material corrected misstatements and those uncorrected misstatements we identified through our audit with a value in excess of £0.9 million, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
The audits at key reporting components of the Group were all performed at local materiality levels which were set individually for each component and ranged from £300,000 to £16.5 million. The Group audit team performed the work over all significant components.
4. Our Opinion on Other Matters Prescribed by the Companies Act 2006 is Unmodified In our opinion: > The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006 > The information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements 5. We Have Nothing to Report in Respect of the Matters on Which we are Required to Report by Exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
Under the Listing Rules we are required to review: > The Directors’ statement, set out on page 67, in relation to going concern > The part of the Corporate Governance Statement on pages 36 to 67 relating to the Company’s compliance with the nine provisions of the 2010 UK Corporate Governance Code specified for our review
Operating expenses and share scheme charges recoverable from co- and reinsurers 8 215.8 208.0
Profit after tax attributable to: Equity holders of the parent 287.0 258.4
Dividends declared and paid (per share) 11 94.4p 81.6p * Refer to note 3, Notes to the Financial Statements, page 76
Other comprehensive income for the period, net of income tax (1.3) (2.7)
Total comprehensive income for the period attributable to: Equity holders of the parent 286.1 255.9
Change in trade and other receivables, including from policyholders 14.3 13.1
Change in trade and other payables, including tax and social security 8.0 149.9
Cash flows from operating activities, net of movements in investments 321.5 300.1
Cash flows from investing activities: Purchases of property, equipment and software (10.1) (10.9)
Cash flows from financing activities: Non-controlling interest capital contribution 6.4 4.6
Total comprehensive income for the period — — (2.5) 258.4 255.9 (0.2) 255.7
Deferred tax charge on share scheme credit — — — 1.5 1.5 — 1.5
Total transactions with equity-holders — — — (227.4) (227.4) 5.2 (222.2)
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2013 1. General Information and Basis of Preparation General Information Admiral Group plc is a Company incorporated in England and Wales. Its registered office is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares are listed on the London Stock Exchange.
Adoption of New and Revised Standards The Group has applied all adopted IFRS and interpretations endorsed by the EU at 31 December 2013, including all amendments to extant standards that are not effective until later accounting periods. This is inclusive of: > Presentation of Items of Other Comprehensive Income (OCI) As a result of the amendments to IAS 1, the Group has modified the presentation of items of OCI in its consolidated statement of changes in equity, to present separately items that would be reclassified to profit or loss from those that would never be. Comparative information has been represented accordingly.
> Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)
Further information regarding the Company’s business activities, together with the factors likely to affect its future development, performance and position, is set out in the Strategic Report on pages 6 to 35. Further information regarding the financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Strategic Report on pages 16 to 19. In addition notes 6 and 11 to the financial statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk.
2. Critical Accounting Judgements and Estimates Judgements In applying the Group’s accounting policies as described in the notes to the financial statements, management has primarily applied judgement in the 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.
2. Critical Accounting Judgements and Estimates continued Estimation Techniques Used in Calculation of Claims Provisions and Profit Commission continued The key area where these techniques are used relates to the ultimate cost of reported claims. A secondary area relates to the emergence of claims that occurred prior to the balance sheet date, but had not been reported at that date.
The sum of these provisions are compared with projected ultimate costs using a variety of different projection techniques (including incurred and paid chain ladder and an average cost of claim approach) to allow an actuarial assessment of their potential outcome. They include allowance for unreported claims.
4b. Segment Reporting The Group has four reportable segments, as described below. These segments represent the principal split of business that is regularly reported to the Group’s Board of Directors, which is considered to be the Group’s chief operating decision maker in line with IFRS 8, Operating Segments.
International Car Insurance The segment consists of the underwriting of car insurance and the generation of revenue from additional products and fees, from underwriting car insurance outside of the UK. It specifically covers the Group operations Admiral Seguros in Spain, ConTe in Italy, L’olivier Assurances in France and Elephant Auto in the USA. None of these operations are reportable on an individual basis, based on the threshold requirements in IFRS 8.
Price Comparison The segment relates to the Group’s price comparison websites; Confused.com in the UK, Rastreator in Spain, LeLynx in France and comparenow.com in the USA. Each of the Price Comparison businesses are operating in individual geographical segments but are grouped into one reporting segment as Rastreator, LeLynx and comparenow.com do not individually meet the threshold requirements in IFRS 8.
An analysis of the Group’s revenue and results for the year ended 31 December 2013, by reportable segment, are shown below. The accounting policies of the reportable segments are consistent with those presented in the notes to the financial statements for the Group.
Other central revenue and expenses, including share scheme charges (26.3) Interest income 1.9
Other segment items: *1 Turnover is a non-GAAP measure and consists of total premiums written (including co-insurers share) and Other revenue. Refer to note 12 for further information.
4. Group Consolidation and Operating Segments continued 4b. Segment Reporting continued Segment Revenues The UK and International Car Insurance reportable segments derive all insurance premium income from external policyholders. Revenue within these segments is not derived from an individual policyholder that represents 10% or more of the Group’s total revenue.
The total of Price Comparison revenues from transactions with other reportable segments is £10.8 million (2012: £13.0 million). These amounts have not been eliminated on consolidation as the Directors consider that not doing so results in a better overall presentation of the financial statements. The impact on the financial statements in the current and prior period is not material. There are no other transactions between reportable segments.
Revenues from external customers for products and services is consistent with the split of reportable segment revenues as shown on page 77.
Consolidated net assets 460.7 5. Premium, Claims and Profit Commissions 5a. Accounting Policies (i) Revenue – Premiums Premiums relating to insurance contracts are recognised as revenue proportionally over the period of cover. Premiums with an inception date after the end of the period are held in the statement of financial position as deferred revenue. Outstanding collections from policyholders are recognised within policyholder receivables.
Co-insurance The Group has entered into certain co-insurance contracts under which insurance risks are shared on a proportional basis, with the co-insurer taking a specific percentage of premium written and being responsible for the same proportion of each claim. As the contractual liability is several and not joint, neither the premiums nor claims relating to the co-insurance are included in the income statement. Under the terms of these agreements the co-insurers reimburse the Group for the same proportionate share of the costs of acquiring and administering the business.
5. Premium, Claims and Profit Commissions continued 5a. Accounting Policies continued (iii) Insurance Contracts and Reinsurance Assets continued Reinsurance Assets Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on the insurance contracts issued by the Group are classified as reinsurance contracts. A contract is only accounted for as a reinsurance contract where there is significant insurance risk transfer between the insured and the insurer.
The Group’s share of the car 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.
Reserving risk is the risk that value of insurance liabilities established is insufficient to cover the ultimate cost of claims incurred at the balance sheet date, whether reported or unreported. Other risks include inadequate pricing and reinsurance policies, and inappropriate claims management processes and controls.
The Board of Directors is responsible for the management of insurance risk, although as mentioned in note 6, it has delegated the task of supervising risk management to the Group Risk Committee.
The Group also has a Reserving Committee. This Committee, comprised senior managers within the finance, claims, pricing and actuarial functions, primarily recommends the approach for UK Car Insurance reserving but also reviews the systems and controls in place to allow accurate reserving and material reserving issues such as Periodic Payment Order (PPO) and claims inflation that represent the key uncertainties in the amount or timing of claims settlements.
Concentration of Insurance Risk 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 introduction of the international car insurance businesses in recent years and the launch of UK household business in 2012, will further contribute to the diversification of the Group’s insurance risk as these businesses grow.
5. Premium, Claims and Profit Commissions continued 5d. Reinsurance Assets and Insurance Contract Liabilities continued (iii) Analysis of Recognised Amounts continued The maturity profile of gross insurance liabilities at the end of 2013 is as follows: < 1 year £m £m > 3 years £m
The maturity profile of gross insurance liabilities at the end of 2012 was as follows: < 1 year £m £m > 3 years £m
(iv) Analysis of UK Claims Incurred The following tables illustrate the development of net UK Car Insurance claims incurred for the past four financial periods, including the impact of re-estimation of claims provisions at the end of each financial year. The first table shows actual net claims incurred, and the second shows the development of UK loss ratios. Figures are shown net of reinsurance and are on an underwriting year basis.
Claims handling costs and other amounts (5.7) (8.5) (11.9) (10.8) (9.5)
5. Premium, Claims and Profit Commissions continued 5d. Reinsurance Assets and Insurance Contract Liabilities continued (v) Analysis of Net Claims Reserve Releases (UK Business Only) The following table analyses the impact of movements in prior year claims provisions, in terms of their net value, and their impact on the reported loss ratio. This data is presented on an underwriting year basis.
Total net release as above 31.3 23.5 10.3 17.6 94.2 *1 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. £40.9 million of releases on commuted quota share contracts is split as follows: 2011: £19.8 million; 2010: £18.4 million; 2009 & prior: £2.7 million.
Net claims reserve at end of period*1 863.0 660.4 *1 The increase in net claims reserve from £660.4 million at 31 December 2012 to £863.0 million is partly as a result of the increase in the size of gross claims reserves but largely due to the impact of commutations of reinsurance contracts in the UK Car Insurance business.
(vii) Reconciliation of Movement in Net Unearned Premium Provision £m £m
6. Investments 6a. Accounting Policies (i) Investment Income Investment income from financial assets comprises interest income and net gains (both realised and unrealised) on financial assets classified as fair value through profit and loss and interest income on term deposits.
The Group’s deposits with credit institutions are classified as held to maturity investments, which is consistent with the intention for which they were purchased.
Interest received during the year was £1.9 million (2012: £1.9 million).
Total financial assets per consolidated statement of financial position 2,265.0 2,005.1
Short term debt securities have been reclassified to fair value through profit and loss at the start of the period to align with the treatment of the money market fund holdings.
The 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 2 valuation is used. The book value of term deposits is £288.4 million (2012: £375.8 million).
The maturity profile of financial assets and liabilities at 31 December 2013 is as follows: On demand £m
Investments held at fair value 1,104.8 301.3 — — Term deposits with credit institutions — 188.9 99.5 — Short term debt securities — 202.4 — — Receivables – amounts owed by policyholders — 368.1 — —
Total financial assets 1,104.8 1,060.7 99.5 — Trade and other receivables — 77.5 — — Cash and cash equivalents 187.9 — — —
Economic and financial market conditions have led the Directors to consider counterparty exposure more 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 2013 and historically, no material credit losses have been experienced by the Group.
To mitigate the risk arising from exposure to reinsurers (in the form of reinsurance recoveries and profit commissions), the Group only conducts business with companies of appropriate financial strength ratings. In addition, most reinsurance contracts are operated on a funds withheld basis, which substantially reduces credit risk, as the Group holds the cash received as collateral.
The Group’s maximum exposure to credit risk at 31 December 2013 is £2,644.8 million (2012: £2,415.1 million), being the carrying value of financial assets and cash, and the excess of reinsurance assets over amounts owed to reinsurers under funds withheld arrangements. The Group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2013 and 2012 is insignificant.
The Group is strongly cash-generative due to the large proportion of revenue arising from non-underwriting activity. Further, as noted above, a significant portion of insurance funds are invested in money market liquidity funds with same day liquidity, meaning that a large proportion of the Group cash and investments are immediately available.
In practice, the Group’s Directors expect actual cash flows to be consistent with this maturity profile except for amounts owed to co-insurers and reinsurers. Of the total amounts owed to co-insurers and reinsurers of £785.3 million (2012: £723.5 million), £629.3 million (2012: £609.6 million) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
The Group is exposed to foreign exchange risk through its operations overseas. Although the relative size of the International operations means that the risks are relatively small, increasingly volatile foreign exchange rates could result in larger potential gains or losses. Assets held to fund insurance liabilities are held in the currency of the liabilities; however, surplus assets held as regulatory capital in foreign currencies remain exposed.
The Group’s exposures to net assets held in euros and dollars at the balance sheet date were £7.1 million and £60.2 million respectively (2012: £13.3 million and £46.7 million).
Fair Value For cash at bank and cash deposits and other receivables, the fair value approximates to the book value due to their short maturity. For assets held at fair value through profit and loss, their value equates to level 1 (quoted prices in active markets) of the fair value hierarchy.
7b. Contribution from Additional Products and Fees and Other Revenue £m £m
8. Expenses 8a. Accounting Policies (i) Acquisition Costs and Operating Expenses Acquisition costs incurred in obtaining new and renewal business are charged to the income statement over the period in which those premiums are earned. All other operating expenses are charged to the income statement in the period that they are incurred.
(ii) Employee Benefits Pensions The Group contributes to defined contribution personal pension plans for its employees. The contributions payable to these schemes are charged in the accounting period to which they relate.
For equity settled schemes, the total charge expensed over the vesting period is determined by reference to the fair value of the free shares granted as determined at the grant date (excluding the impact of non-market vesting conditions). Non-market conditions such as profitability targets as well as staff attrition rates are included in assumptions over the number of free shares to vest under the applicable scheme.
Insurance contract expenses 289.0 (202.3) 86.7 Administration and other marketing costs (Other) 142.0 — 142.0 Share scheme charges 36.0 (13.5) 22.5
– Fees payable for the audit of the Company’s subsidiary accounts 0.3 0.2 0.3 0.2
Analysis of fees paid to the auditor for other services: Tax compliance services 0.1 — 0.1 —
8. Expenses continued 8c. Staff Costs and Other Expenses continued Gross and net expenses are before and after co- and reinsurance arrangements respectively.
Refer to the Corporate Governance Report for details of the Audit Committee’s policy on fees paid to the Company’s auditor for non-audit services. The ratio of non-audit fees to audit fees in 2013 was 108% (2012: 124%).
The share scheme charges reported above are net of the co- and reinsurers share of the cost and therefore differ from the gross charge reported in note 8c (2013: £36.0 million; 2012: £32.5 million) and the gross credit to reserves reported in the consolidated statement of changes in equity (2013: £25.7 million; 2012: £23.7 million).
(ii) The Discretionary Free Share Scheme (the “DFSS”) 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 2013 scheme is 2,344,321 (2012 scheme: 2,149,566).
8. Expenses continued 8f. Staff Share Schemes continued (ii) The Discretionary Free Share Scheme (the “DFSS”) continued The range of awards is as follows: > If the growth in EPS is less than the RFR, no awards vest > EPS growth is equal to RFR – 10% of maximum award vests > To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the three year period
Number of Free Share Awards Committed at 31 December 2013 Awards outstanding*1 Vesting date
During the year ended 31 December 2013, awards under the SIP H209 and H110 schemes and the DFSS 2010 scheme vested. The total number of awards vesting for each scheme is as follows.
Number of Free Share Awards Vesting During the Year Ended 31 December 2013 Original awards Awards vested
DFSS 2010 scheme 2nd award 121,051 70,973 9. Taxation 9a. Accounting Policy Income tax on the profit or loss for the periods presented comprises current and deferred tax.
(i) Current Tax Current tax is the expected tax payable on the taxable income for the period, using tax rates that have been enacted or substantively enacted by the balance sheet date, and includes any adjustment to tax payable in respect of previous periods.
(ii) Deferred Tax Deferred tax is provided in full using the balance sheet liability method, providing for temporary differences arising between the carrying amount of assets and liabilities for accounting purposes, and the amounts used for taxation purposes. It is calculated at the tax rates that have been enacted or substantially enacted by the balance sheet date, or that are expected to apply in the period when the liability is settled or the asset is realised.
Impact of change in UK tax rate on deferred tax balances 2.7 0.7
Total tax charge for the period as above 83.3 86.2 9c. Deferred Income Tax (Asset) Analysis of Deferred Tax (Asset)
10. Other Assets and Other Liabilities 10a. Accounting Policy (i) Property and Equipment, and Depreciation All property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight line method to write off the cost less residual values of the assets over their useful economic lives. These useful economic lives are as follows: Motor vehicles – four years
(iii) Leased Assets The rental costs relating to assets held under operating leases are charged to the income statement on a straight line basis over the life of the lease.
The goodwill held on the balance sheet at 31 December 2013 is allocated solely to the UK car insurance segment.
The recoverable amount is the greater of the fair value of the asset less costs to sell and the value in use of the CGU.
The value in use calculations use cash flow projections based on financial budgets approved by management covering a three year period. Cash flows beyond this period are considered, but not included in the calculation. The discount rate applied to the cash flow projections in the value in use calculations is 9.8% (2012: 9.0%), based on the Group’s weighted average cost of capital, which is in line with the market (source: Bloomberg).
10. Other Assets and Other Liabilities continued 10b. Property and Equipment
10. Other Assets and Other Liabilities continued 10d. Trade and Other Receivables £m £m
10g. Financial Commitments The Group was committed to total minimum obligations under operating leases on land and buildings as follows: £m £m
11. Share Capital 11a. Accounting Policies (i) Share Capital Shares are classified as equity when there is no obligation to transfer cash or other assets.
March 2012 (36.5 pence per share, paid June 2012) — 98.0
August 2013 (48.9 pence per share, paid October 2013) 132.7 —
Profit for the financial year after taxation attributable to equity shareholders 286.9 258.4
Issued, called up and fully paid 276,141,432 ordinary shares of 0.1 pence 0.3 —
During 2013 2,617,838 (2012: 2,797,519) new ordinary shares of 0.1 pence were issued to the trusts administering the Group’s share schemes.
917,838 (2012: 1,177,519) 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 2013 of 6,484,084 (31 December 2012: 5,566,246). These shares are entitled to receive dividends.
1,700,000 (2012: 1,620,000) were issued to the Admiral Group Employee Benefit Trust for the purposes of the Discretionary Free Share Scheme to give a closing number at 31 December 2013 of 11,061,948 (31 December 2012: 9,361,948). The Trustees have waived the right to dividend payments, other than to the extent of 0.001 pence per share, unless and to the extent otherwise directed by the Company from time to time.
For further information on how the Group conducts its business across the UK, Europe and the USA, 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 55 to 64.
12a. Reconciliation of Turnover to Reported Total Premiums Written and Other Revenue as per the Financial Statements £m £m
Total premiums written before co-insurance arrangements per note 5b of financial statements 1,737.6 1,897.2
Turnover as per note 4b of financial statements 2,030.2 2,215.1 *1 During 2012 Admiral ceased earning Other revenue from the sale of legal protection policies. At the same point, the Group began charging its panel of co- and reinsurers a vehicle commission. The substance of these changes meant that the total premiums written increased by the amount of revenue that was previously earned from the sale of legal protection policies. The vehicle commission included within Other revenue is therefore eliminated from the turnover measure to avoid double counting.
*2 Other reconciling items represent co-insurer and reinsurer shares of Other revenue in the Group’s International Car Insurance businesses.
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements: 1. Basis of Preparation The accounts have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board have reviewed the Company’s projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses. The Company has no debt.
As a result of this review the Directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis.
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the parent company is not presented. Under FRS 1 (Cash Flow Statements) the Company is exempt from having to present a cash flow statement on the grounds that its cash flows are included in the Group’s published Consolidated financial statements.
Refer to note 8 of the Consolidated financial statements for further details on share schemes.
Other investments are money market liquidity funds. Refer to note 6 of the Group financial statements details of the Group’s investments, including money market liquidity funds.
Share scheme charges — — 25.7 25.7 9. Share Capital Full details of the Company’s share capital is included in note 11 of the Consolidated financial statements.
Basis of Preparation The figures below are as stated in the Group financial statements preceding this financial summary and issued previously. Only selected lines from the income statement and balance sheet have been included.
The probability-weighted average of all future claims and cost scenarios calculated using historical data, actuarial methods and judgement.
Expense ratio The ratio can be calculated on an earned or written basis. Expressed as a percentage, of (i) net operating expenses, either divided by (ii) written or earned premiums, net of reinsurance.
Insurance market cycle The tendency for the insurance market to swing between highs and lows of profitability over time, with the potential to influence premium rates (also known as the “underwriting cycle”).
Premium A series of payments are made by the policyholder, typically monthly or annually, for part of or all of the duration of the contract. Written premium refers to the total amount the policyholder has contracted for, whereas earned premium refers to the recognition of this premium over the life of the contract.
Ultimate loss ratio The projected ratio for a particular accident year or underwriting year, often used in the calculation of underwriting profit and profit commission.
Actuarial Adviser Ernst & Young LLP 1 More London Place London SE1 2AF
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