The UK and International 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 Comparison revenues from transactions with other reportable segments is £19.4 million (2018: £19.3 million) which has been eliminated on consolidation. There are no other transactions between reportable segments.
Revenues from external customers for products and services are consistent with the split of reportable segment revenues.
4. Group consolidation and operating segments continued Information about geographical locations
All material revenues from external customers, and net assets attributed to a foreign country, are shown within the International Insurance reportable segment shown on the previous pages. The revenue and results of the international Comparison businesses, Rastreator, LeLynx, Compare.com and the Preminen entities are not yet material enough to be presented as a separate segment.
The identifiable segment assets and liabilities at 31 December 2019 are as follows: As at 31 December 2019
There is an asymmetrical allocation of assets and income to the reportable segments, in that the interest earned on cash and cash equivalent assets deployed in the UK Insurance, Comparison and International Insurance segments is not allocated in arriving at segment profits. This is consistent with regular reporting to the Board of Directors.
Eliminations represent inter-segment funding, balances included in insurance and other receivables and deemed loan receivables in respect of securitised loan receivables.
The segment assets and liabilities at 31 December 2018 are as follows: As at 31 December 2018
Under some of the co-insurance and reinsurance contracts under which motor premiums are shared or ceded, profit commission may be earned on a particular year of account, which is usually subject to performance criteria such as loss ratios and expense ratios. The commission is dependent on the ultimate outcome of any year, with revenue being recognised when loss and expense ratios used in the preparation of the Financial Statements move below a contractual threshold.
Profit commission receivable from reinsurance contracts is accounted for in line with IFRS 4, whereas profit commission receivable from co-insurance contracts is in line with IFRS 15. Further detail of the policy under IFRS 15 is set out in note 8.
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. The co-insurer therefore takes direct insurance risk from the policyholder and is subsequently directly responsible to the claimant for its proportion of the claim. As the contractual liability is several and not joint, neither the premiums nor claims relating to the coinsurance 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.
Net insurance premium revenue 709.4 671.8 *1 Alternative Performance Measures – refer to the end of the report for definition and explanation, and to note 13a for reconciliation to Group gross premiums written.
No profit commission has yet been recognised on the 2018 – 2019 underwriting years as the combined ratios calculated from the financial statement loss ratios on these years sit above the threshold for profit commission recognition.
(i) Objectives, policies and procedures for the management of insurance risk
As previously disclosed, Admiral’s reserving policy (both within the claims function and in the Financial Statements) is initially to reserve conservatively, above internal and independent projections of actuarial best estimates. This is designed to create a margin held in reserves to allow for unforeseen adverse development in open claims and typically results in Admiral making above industry average reserve releases. Admiral’s booked claims reserves continue to include a significant margin above projected best estimates of ultimate claims costs.
Key processes and controls operating to mitigate premium risk are as follows: • Experienced and focused senior management and teams in relevant business areas including pricing and claims management; • A data-driven and analytical approach to regular monitoring of claims and underwriting performance; and
The Directors do not believe there are significant concentrations of insurance risk. This is because, although the Group has historically written only one significant line of UK insurance business, the risks are spread across a large number of people and a wide regional base. The International Insurance, UK Household, UK Travel and UK Van businesses further contribute to the diversification of the Group’s insurance risk.
The minus 0.25% rate is 25 basis points lower than the assumed rate of 0% that was used in setting best estimate claims reserves at 31 December 2018. Given the stated timeframes for the update of the rate, sensitivities to the Ogden discount rate assumption are not presented.
The following table sets out the impact on equity and post-tax profit or loss at 31 December 2019 that would result from a 1%, 3% and 5% deterioration and improvement in the UK Car insurance loss ratios used for each underwriting year for which material amounts remain outstanding.
Impact of 3% deterioration in booked loss ratio (£m) (42.4) (47.6) (11.3) (5.9)
Impact of 1% improvement in booked loss ratio (£m) 14.2 15.3 9.5 2.0
Impact of 3% improvement in booked loss ratio (£m) 42.6 46.3 33.7 5.9
The maturity profile of gross insurance liabilities at the end of 2018 was as follows: < 1 year £m 1–3 years £m > 3 years £m
International insurance gross claims incurred (31.8) (65.6) (112.2) (120.8) (131.5) (146.9) (217.8) (278.2) (321.3) (429.6)
Financial year ended 31 December £m £m £m £m £m £m £m £m £m £m
UK insurance net claims incurred (184.1) (323.6) (344.3) (242.3) (192.8) (161.0) (306.7) (239.2) (229.6) (202.9)
Total gross release (UK Motor Insurance) 148.1 197.7 135.7 214.0 270.5 335.6
Total gross release (UK Household Insurance) – – – 1.6 4.6 8.3
Total net release as above 137.4 173.4 75.4 165.9 221.0 243.4
Unearned premium provision at end of period 995.9 (663.4) 332.5 6. Investment Income and costs 6a. Accounting policies
The classification and subsequent measurement of the financial asset under IFRS 9 depends on: (a) the Group’s business model for managing the financial assets; and
Based on these factors, the financial asset is classified into one of the following categories: • Amortised cost – assets which are held in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows which are solely payments of principal and interest on the principal amount outstanding (SPPI), where the asset is not designated as FVTPL.
For the Group, these include deposits with credit institutions, cash and cash equivalents, insurance receivables, trade and other receivables and loans and advances to customers.
The interest income generated from these assets is included in ‘Investment return’ with the exception of loans and advances to customer, where the interest receivable is recognised in ‘Interest income’.
Impairment is recognised on these assets using the expected credit loss model.
6. Investment Income and costs continued For the Group these assets include investment liquidity funds investing in short duration assets and derivative financial instruments.
The expected credit loss model is used to calculate any impairment to be recognised for all assets measured at amortised cost, as well as financial investments measured at FVOCI. The general approach, which utilises the three-stage model, is used for Loans and advances to customers (see note 7) whilst impairment for the remaining assets is measured using the simplified approach.
Total investment and interest income*2 35.3 36.0 *1 Interest received during the year was £11.6 million (2018: £8.0 million).
*2 Total investment return excludes £2.8 million of intra-group interest (2018: £0.7 million).
*3 Realised gains/losses on sales of debt securities classified as FVOCI are immaterial.
Finance costs represent interest payable on the £200.0 million (2018: £200.0 million) subordinated notes and other financial liabilities.
*2 Lease liabilities of £149.2 million were recognised on transition on 1 January 2019. The movement to the balance presented of £137.1 million reflects cash payments in the period offset by the lease interest expense recognised in the income statement.
6. Investment Income and costs continued The maturity profile of financial assets and liabilities under the scope of IFRS 4 and IFRS 9 at 31 December 2018 was as follows: On demand £m
Money market funds and derivative financial instruments – 1,296.9 2.1 2.1
At initial recognition, the Group measures financial investments at fair value plus or minus, in the case of financial instruments not measured at fair value through profit and loss, directly attributable transaction costs. Transaction costs of financial instruments measured at fair value through profit and loss are expensed to the profit and loss when incurred.
Debt securities are measured at FVOCI and as such fall under the scope of the ECL model. These assets are held to match policyholder liabilities or interest on debt liabilities. If sold before maturity, gains or losses on these assets impact the Income Statement.
Private Equity investments have been designated as being reported through FVOCI due to these being long term, strategic investments. Dividends are recognised in the Income Statement whilst a change in fair values will be reflected in OCI. Given the immaterial amount (£7.5 million) of these investments, detailed levelling disclosures have not been provided.
All financial investments held at FVOCI and at amortised cost have been assessed for impairment using the expected credit loss model under IFRS 9. The assessment has been made based on the credit ratings of the entities and externally available credit loss ratios.
The fair value of the gilts and debt securities is calculated with reference to quoted market valuations and as such take into account future expected credit losses. As a result, no impairment provision is required against the book value. The calculated impairment loss within the fair value is recognised through the Income Statement whilst fair value movements are recognised in OCI. Deposits are held with well rated institutions and are held at book value, with impairment calculated in a similar manner to debt securities.
All assets that are purchased, which require a calculation of impairment, are considered of investment grade or above (i.e. BBB rated or higher), as defined by an external credit rating agency or an assessment from Admiral’s external asset managers. The credit rating of all assets is regularly monitored. As at the year-end reporting date, the vast majority of financial assets are of investment grade and considered low risk under IFRS 9. These therefore remain within stage 1 and a 12 month expected loss is used to calculate the impairment provision required.
An assessment has been completed for impairment purposes. The credit rating of all assets is regularly monitored. As at the year-end reporting date all financial assets are of investment grade or above (i.e. BBB rated or higher) and considered low risk under IFRS 9. These therefore remain within stage 1 and a 12 month expected loss is used to calculate the impairment provision required. Given the short-term duration and low risk of these assets, no impairment provision has been recognised.
Total insurance and other receivables 1,227.7 1,082.0 *1 Insurance receivables at 31 December 2019 include £71.7 million in respect of salvage and subrogation recoveries (2018: £59.3 million).
Classification. Trade and other receivables are measured at amortised cost, being made up of multiple types of receivable balances.
Impairment. Where a provision is required for these receivables, it is calculated in line with the simplified method for trade receivables per IFRS 9, whereby lifetime expected credit losses are recognised irrelevant of the credit risk. In this case, the provision is based on a combination of: (i) aged debtor analysis; (ii) historic experience of write-offs for each receivable; (iii) any specific indicators of credit deterioration observed; and
The following table provides information about receivables and contract assets from contracts with customers. Both balances are included in Trade and other receivables.
The contract asset relates to the Group’s right to consideration for work undertaken in the law companies on behalf of clients which is ongoing or where the final fee has not yet been billed. The contract asset is transferred to trade receivables once the fee has been billed.
The amount of revenue recognised in 2019 from performance obligations satisfied (or partially satisfied) in previous periods is £nil (2018: £nil).
Financial liabilities are inclusive of £200.0 million subordinated notes issued on 25 July 2014 at a fixed rate of 5.5% with a redemption date of 25 July 2024.
The Group holds a credit facility of £20.0 million which expires in September 2020. £20.0 million was drawn under this agreement as at 31 December 2019. The group also hold a revolving credit facility of £200.0 million which expires in December 2020. As at 31 December 2019, £nil was drawn down on this facility (2018: £71.5 million). Amounts drawn under their respective agreements are shown within other borrowings in the table above.
During 2018 an asset backed senior loan note facility of £300.0 million was established in relation to the Admiral Loans business, which increased to £400.0 million during 2019 (see note 3 for details of the accounting treatment of this SPE). As at the year end, £304.5 million (2018: £168.3 million) of this facility had been utilised.
Under IAS 17, all Group leases were classified as operating leases. Operating lease payments, including the effects of any lease incentives, were recognised in the income statement on a straight-line basis over the lease term.
The Group’s activities expose it primarily to financial risks of credit risk, interest rate risk, liquidity risk and foreign exchange risk. The Board of Directors has delegated the task of supervising risk management and internal control to the Group Risk Committee. There is also an Investment Committee that makes recommendations to the Group and subsidiary Boards on investment strategy.
As noted above, the Group primarily invests in the following asset types: • Investment funds and cash plus liquidity funds, which in turn invest in a mixture of short-dated fixed and variable rate securities, such as cash deposits, certificates of deposits, floating rate notes and other commercial paper; Notes to the Financial Statements continued For the year ended 31 December 2019
• Deposits with well rated institutions are short in duration (one to five years). These are classified as held at amortised cost. Therefore neither the carrying value of the asset, nor the interest return will be impacted by fluctuations in interest rates; • Debt securities are held within two segregated mandates. The guidelines of the investments retain a similar credit quality of the investment funds (all holdings are investment grade). The duration of the securities is relatively short (c. three years) and similar to the duration of the on book claims liabilities (the average duration is three years); and
The amount of bad debt expense relating to policyholder debt charged to the income statement in 2019 and 2018 is insignificant.
There were no further significant financial assets that were past due at the close of either 2019 or 2018.
The Group considers interest rate risk to be the risk that unfavourable movements in interest rates could adversely impact on the capital values of financial assets and liabilities.
The Group’s loan portfolio is made up of fixed rate loans which are funded at a floating variable rate. The Group has an interest rate swap arrangement, the risk management objective of which is to eliminate the majority of the interest rate risk from the loans portfolio. This relates to the difference between the fixed rate on loans written and the floating variable rate on funding.
Hedge accounting is applied when the criteria specified in IFRS 9 (including amendments, as set out above) are met. In line with IFRS 9, the gain or loss on the hedged position as at the balance sheet date is recognised through Other Comprehensive Income.
The Group is closely monitoring the market and the output from the various industry working groups managing the transition to new benchmark interest rates.
For the Group’s RCF and other debt linked to GBP LIBOR and reinsurance funds withheld balances, the Group will begin a dialogue in 2020 to propose amendments to the fall-back provisions to move from GBP LIBOR to SONIA.
Below are details of the hedging instruments and hedged items in scope of the IFRS 9 amendments due to benchmark interest rate reform, by hedge type. The terms of the hedged items listed match those of the corresponding hedging instruments.
The Group also holds a financial liability in the form of £200.0 million of subordinated notes with a ten-year maturity and fixed rate coupon of 5.5%. This liability is valued at amortised cost and therefore neither the carrying value of the deposits, nor the interest payable, will be impacted by fluctuations in interest rates.
The profit before tax derived from business carried out in Euros was €11.9 million (2018: profit before tax of €5.4 million). If the Sterling rates with Euros had strengthened/weakened by 10%, the Group’s profit before tax for the year would increase/decrease by £1.0 million (2018: £0.4 million).
Included within loans and advances to customers are personal contract purchase (PCP) and hire purchase (HP) arrangements which are classified as finance leases under IFRS 16. A receivable equal to the net investment in the lease has been recognised. The net investment is equal to the gross investment in the lease discounted at the rate implicit in the lease. The impairment requirements of IAS 36 have been applied to the finance leases held.
Lease interest income is recognised within interest income in the income statement over the term of the lease using the effective interest method.
The expected credit loss model is a three-stage model based on forward looking information regarding changes in the credit quality since origination. Credit risk is measured using a probability of default, exposure at default and loss given default defined as follows: • Probability of Default (PD): The likelihood of an account defaulting; calibrated through analysis of historic customer behaviour. Where customers have already met the definition of default this is 100%. For customers that are not in default the PD is determined through analysis of historic data at a credit grade level.
• Loss Given Default (LGD): The amount of the asset not recovered following a borrower’s default, determined through analysis of historic recovery performance.
As explained above, stage 1 assets have an ECL allowing for losses in the next twelve months, stage 2 or 3 assets have an ECL allowing for losses over the remaining lifetime of the contract. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not prescribe a definition of significant increase in credit risk (SICR) but does include a rebuttable presumption that this does occur for loan assets which are 30 days past due (which the Group does not rebut).
• the loan has been in arrears with Admiral Loans in the last six months; or
The key economic driver of the losses from the scenarios is the likelihood of a customer entering hardship through unemployment. Several customer demographics including age, income and debt levels are considered with a sensitivity to the specific scenarios considered. For each individual customer, the sensitivities from each demographic are combined to determine an overall sensitivity.
The key areas of estimation uncertainty identified, as per note 3 to the Financial Statements, are in the PD and the forward looking scenarios.
The Group is exposed to credit risk from the Admiral Loans business which has expanded during 2019.
The following table sets out information about the credit quality of the loans and advances to customers measured at amortised cost. Credit grades are used to segment customers by apparent credit risk at the time of acquisition. Higher grades are the lowest credit risk with each subsequent grade increasing in expected credit risk. The Group does not have any purchased or originated creditimpaired (POCI) assets. These tables are inclusive of the finance lease assets which are held by the Group, further analysis of these balances can be found in note 7c.
All probability of defaults figures included in this paragraph allow for forward-looking information, i.e. the PDs are a weighted average from the economic scenarios considered. The average PD for stage 1 assets is 1.8% (2018: 1.8%) reflecting the expectation of defaults within 12 months of the reporting date. The average PD for assets in stage 2 is 58.7% (2018: 5.2%) reflecting expected losses over the remaining life of the assets. The PD for assets in stage 3 is 100.0% (2018: 100.0%) as these assets are deemed to have defaulted.
Gross carrying amount as at 1 January 2019 296.9 8.9 4.6 310.4
Transfers from Stage 2 to Stage 3 – (2.7) 2.7 –
Gross carrying amount as at 31 December 2019 456.2 6.5 16.4 479.1
Transfers from Stage 3 to Stage 1 – – – –
Expected credit loss allowance as at 31 December 2019 5.6 3.4 14.4 23.4
Transfers from Stage 2 to Stage 3 – (1.0) 1.0 –
7c. Finance lease receivables Loans and advances to customers include the following finance leases. The group is the lessor for leases of cars.
Interest expense represents the interest payable on funding for the Admiral Loans business, in the form of credit facilities of £220.0 million (2018: £200.0 million) of which £20.0 million was drawn down at 31 December 2019 (2018: £71.5 million) and loan backed securities through an SPE of £400.0 million (2018: £300.0 million) of which £304.5 million was drawn down at 31 December 2019 (2018: £168.3 million).
The performance obligation is the provision of insurance intermediary services, at which point the performance obligation is met. Revenue is therefore recognised at a point in time. Payment of the commission is due within 30 days of the period close.
The performance obligation is the change requested being made to the underlying policy, at which point the performance obligation is met.
Revenue is recognised over time because as the Group has an enforceable right to payment for performance completed to date and the work performed to date has no alternative use to the Group
• Claims ratio (more typically referred to as a loss ratio).
Whilst the premiums and insurance expenses related to an underwriting year are typically fixed at the conclusion of each underwriting year and are not subject to judgement, the claims ratio is calculated from the underwriting year loss ratios that result from the setting of claims reserves in the Financial Statements meaning it is subject to inherent uncertainty. As stated in note 5d, Admiral’s reserving policy is initially to reserve conservatively, above internal and independent projections of actuarial best estimates. This is designed to create a margin held in reserves to allow for unforeseen adverse development in open claims.
Admiral’s financial statement loss ratios, used in the calculation of profit commission income, continue to include a significant margin above projected best estimates of ultimate claims costs. It is this margin for uncertainty, included in the financial statement loss ratios, which creates the constraint over the recognition of the variable consideration, as using the booked loss ratio rather than the actuarial best estimate constrains the profit commission income to a level where there is a high probability of no significant reversal of the revenue recognised.
Instalment income on insurance premium paid via instalments is recognised under IFRS 9 using the effective interest rate, and as such is not within the scope of IFRS 15. Profit commission from reinsurers is within the scope of IFRS 4, and not within the scope of IFRS 15 due to the nature of the income.
Revenue outside the scope of IFRS 15 103.9 3.8 – – 107.7
Total other revenue and profit commission 389.5 18.6 131.7 2.6 542.4
Revenue outside the scope of IFRS 15 80.8 2.7 – – 83.5 *1 Comparison revenue excludes £19.4 million (2018: £19.3 million) of income from other Group companies.
Instalment income is recognised applying the effective interest rate over the term of the policy, and is outside the scope of IFRS 15. Profit commission from reinsurers is recognised under IFRS 4, and is discussed further in note 5 to the Financial Statements.
Within note 9b, the charges for base salaries and pension contributions (and the related social security costs) are recognised within insurance contract expenses or administration and other marketing costs, based on the role of the employee.
The rules of the share schemes ensure that the actual dilution level does not exceed 10% in any rolling ten-year period, by funding of any vested (and future) DFSS and SIP awards as appropriate with market-purchased shares. This corresponds to approximately a 1% dilution of share capital each year.
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.
• the Discretionary Free Share Scheme (‘DFSS’). DFSS shares are typically awarded to managers, and for the majority of employees 50% of the DFSS shares awarded are subject to three performance conditions being Earnings per Share growth, Return on Equity and Total Shareholder Return vs. the FTSE 350 (excluding investment companies) over a three-year period.
The majority of these schemes are classed as equity settled under IFRS 2, due to the employees receiving shares (rather than cash) as consideration for the services provided.
For the DFSS equity settled awards, awards are not eligible for dividends, although a discretionary bonus is currently paid equivalent to the dividend that would have been paid on the shareholding, hence the fair value of the shares is revised downwards to take account of these expected dividends.
For the DFSS cash settled awards, the fair value is based on the share price at the vesting date. The closing share price at the end of each reporting period is used as an approximation for the closing price at the end of the vesting period.
• attrition rates, which impact the ultimate number of shares that vest; • in the case of the DFSS, the vesting rates based on the performance conditions, which also impact the ultimate number of shares that vest.
The total social security costs are calculated based on the following: • The taxable value of the shares, being: – For the SIP, the lower of the share price at award date and the share price at the balance sheet date; – For the DFSS, the share price at the balance sheet date.
• the number of shares expected to vest for each scheme, driven by the number of shares awarded, attrition rates and, for the DFSS, the vesting rate based on performance conditions; • the appropriate social security rate.
These assumptions are updated at the end of each reporting period. The financial impact as a result of any change in the assumptions is recognised through the Income Statement. Any significant changes in assumptions may therefore result in an increased/decreased charge in an accounting period as a result of this true-up of the expected cumulative charge required.
The cost of the DFSS bonus is recognised and paid in each period equivalent to the dividends on shares allocated to employees that are still entitled to vest, but have not yet vested. The cost shown also includes the social security costs on the discretionary bonus. No accrual is made for future discretionary bonus payments due to there being no contractual obligation for such a bonus at the balance sheet date.
Refer to note 13 for a reconciliation between insurance contract expenses and the reported expense ratio.
– Fees payable for the audit of the Company’s subsidiary accounts 0.9 0.8 0.5 0.3
– Fees payable for audit related assurance services pursuant to legislation or regulation 0.4 – 0.4 –
Retirement benefits are accruing to the following number of Directors under: – Money purchase schemes 1 1 9f. Staff share schemes
Analysis of share scheme costs: SIP charge (i) DFSS charge (ii) Total charge
IFRS 2 charge for equity settled share schemes 16.4 11.2 40.3 25.8 56.7 37.0
Financial year ended 31 December 2016 and prior £m £m £m £m
Gross IFRS 2 costs – DFSS 29.5 40.9 43.4 *1 Awards are made in March and September of each year, and vest over 36 months from award date. On the 2017 scheme, an average of 5 months’ charge remains outstanding, on the 2018 scheme an average of 17 months’ charge remains outstanding, and on the 2019 schemes an average of 29 months’ charge remains outstanding.
*2 The main award is made in September of each year, with smaller awards made at other points through the year. The shares vest over 36 months from award date. On the 2017 main DFSS, 9 months’ charge remains outstanding; on the 2018 main DFSS 21 months’ charge remains outstanding, and on the 2019 main DFSS, 33 months’ charge remains outstanding.
The awards are made at the discretion of the remuneration committee, taking into account the Group’s performance.
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.
(iii) Number of free share awards committed at 31 December 2019
Total awards committed 12,589,682 *1 Being the maximum number of awards committed before accounting for expected staff attrition and vesting conditions.
*3 The main award is made in September of each year, with smaller awards made at other points through the year.
During the year ended 31 December 2019, awards under the SIP H116 and H216 schemes and the DFSS 2016 schemes vested. The total number of awards vesting for each scheme is as follows.
The weighted average market share price at the date of exercise for shares exercised during the year was £21.06 (2018: £20.05).
Current tax related to items recognised in other Comprehensive Income is also recognised in other Comprehensive Income and not in the Income Statement.
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.
The outstanding corporation tax payable as at 31 December 2019 was £48.3 million (2018: £49.3 million).
Balance brought forward at 1 January 2018 6.1 (4.5) 2.9 (4.6) 0.4 0.3
Movement in fair value reserve – – – (1.5) – (1.5)
Balance carried forward at 31 December 2019 5.9 (2.1) – (5.4) 1.2 (0.4)
The deferred tax asset in relation to carried forward losses remains at £nil at the year end (2018: £nil) due to uncertainty over the availability of future taxable profits against which to offset any deferred tax asset (see note 3 for details of how future taxable profits are estimated).
At 31 December 2019, the Group had unused tax losses amounting to £231.3 million (2018: £217.5 million), relating primarily to the Group’s US businesses Elephant Auto and Compare.com, for which no deferred tax asset has been recognised. The earliest expiry date for any of these tax losses is 2029. The total aggregated unrecognised deferred tax liabilities on temporary differences associated with subsidiaries is £nil (2018: £nil).
In the case of property and equipment, carrying values are reviewed at each balance sheet date to determine whether there are any indications of impairment. If any such indications exist, the asset’s recoverable amount is estimated and compared to the carrying value. The carrying value is the higher of the fair value of the asset, less costs to sell and the asset’s value in use. Impairment losses are recognised through the Income Statement.
The classification and accounting treatment of acquisitions occurring before 1 January 2004 have not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004 due to the exemption available in IFRS 1 (first time adoption). In respect of acquisitions prior to 1 January 2004, goodwill is included at the transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP, which was tested for impairment at the transition date. On transition, amortisation of goodwill has ceased as required by IAS 38.
The goodwill held on the balance sheet at 31 December 2019 and 2018 is allocated solely to the UK Insurance segment.
The carrying value of software is reviewed every six months for evidence of impairment, with the value being written down if any impairment exists. Impairment may be reversed if conditions subsequently improve.
Provisions are recognised when a legal or constructive obligation arises as a result of an event that occurred before the balance sheet date, when a cash outflow relating to this obligation is probable and when the amount can be estimated reliably.
Where a material obligation exists, but the likelihood of a cash outflow or the amount is uncertain, or where there is a possible obligation arising from a past event that is contingent on a future event, a contingent liability is disclosed.
Contingent assets are possible assets that arise from past events, whose existence will be confirmed only by the occurrence or non-occurrence of future events. Where it is probable that a cash inflow will arise from a contingent asset, this is disclosed.
Initial application of IFRS 16 – – – – – –
*1 Software additions relating to internal development are immaterial in both 2019 and 2018.
The Groups’ legal entities operate in numerous tax jurisdictions and on a regular basis are subject to review and enquiry by the relevant tax authority.
Rastreator Comparador Correduria Seguros (“Rastreator Comparador”), the Group’s Spanish Comparison business, has recently undergone a tax audit in respect of the 2013 and 2014 financial years. As a result of the audit, the Spanish Tax Authority has denied the VAT exemption relating to insurance intermediary services which Rastreator Comparador has applied. Rastreator Comparador is appealing this decision via the Spanish Courts and is confident in defending its position which is, in its view, in line with the EU Directive and is also consistent with the way similar supplies are treated throughout Europe.
The Group is also in early stage discussions on various corporate tax matters with tax authorities in the UK and Italy.
12. Share capital The Group’s capital includes share capital and the share premium account, other reserves which are comprised of the fair value reserve and foreign exchange reserve, and retained earnings.
A final dividend of 77.0 pence per share (£221.5 million) has been proposed in respect of the 2019 financial year. Refer to the Chair’s Statement and Strategic Report for further detail.
The difference between the basic and diluted number of shares at the end of 2019 (being 581,083; 2018: 648,598) relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note 9 for further detail.
Issued, called up and fully paid 293,686,329 ordinary shares of 0.1 pence 0.3 –
The balance of awards made to employees under the Discretionary Free Share Scheme that have not either vested or lapsed is 8,691,542 (2018: 9,218,956).
12. Share capital continued 12e. Objectives, policies and procedures for managing capital
The Group aims to operate a capital-efficient business model by transferring a significant proportion of underwriting risk to co-insurance and reinsurance partners. This in turn reduces the amount of capital the Group needs to retain to operate and grow, and allows the Group to distribute the majority of its earnings as dividends.
The Group’s current risk appetite buffer is 30% above the regulatory SCR. This forms the lower bound of the longer-term solvency target operating range of 130% to 150%.
The Group’s dividend policy is to: • Pay a normal dividend equal to 65% of post-tax profits for the period; • Pay a special dividend calculated with reference to distributable reserves and surplus capital held above the risk appetite buffer.
This policy gives the Directors flexibility in managing the Group’s capital.
At the date of this report (4 March 2020), the Group’s regulatory solvency ratio, calculated using a capital add-on that has not been subject to regulatory approval, is 190% (2018: 194%). This includes the recognition of the 2019 final dividend of 77.0 pence per share (2018: 66.0 pence per share).
The Group’s 2019 Solvency and Financial Condition Report (SFCR) will, when published, disclose a solvency ratio that is calculated at the balance sheet date rather than annual report date, using the capital add-on that was most recently subject to regulatory approval. The estimated and unaudited SFCR solvency ratio is 172%, with the reconciliation between this ratio and the 190% noted above being as follows: £m £m
Preminen Dragon Price Comparison Limited Ordinary 50 (indirect) Internet-based Comparison Site
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The related undertakings below are subsidiaries in accordance with IFRS 10, as Admiral can exercise dominant influence or control over them: Registered office: Level 37, 25 Canada Square, Canary Wharf, London, England, E14 5LQ
Registered office: Room 1806, 15th Floor, Block 16, No. 39 East 3rd Ring Middle Road, Chaoyang District, Beijing
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Registered office: 4th Floor, Office 42, LMC Building 852, Road 3618, Block 436, Al Seef District, PO Box 60138, Manama, Bahrain
Notes to the Financial Statements continued For the year ended 31 December 2019 12. Share capital continued 12f. Group related undertakings continued
The Board considers that only the Executive and Non-Executive Directors of Admiral Group plc are key management personnel.
A summary of the remuneration of key management personnel is as follows, with further detail relating to the remuneration and shareholdings of key management personnel are set out in the Directors’ Remuneration Report.
Gross premiums written after co-insurance per note 5b of Financial Statements 2,273.7 2,166.7
Total turnover 3,463.5 3,282.9 *1 Other reconciling items represent co-insurer and reinsurer shares of Other Revenue in the Group’s Insurance businesses outside of UK Car Insurance.
*2 Intra-group income elimination relates to comparison income earned in the Group from other Group companies.
Prior year release/strengthening – commuted share 121.7 – – 121.7 – – – 121.7
Impact of subsidence – – – – – – – –
Loss ratio – current period weather events – – – – – – – –
Loss ratio – current period subsidence events – – – – – – – –
Notes to the Financial Statements continued For the year ended 31 December 2019
Impact of weather events – (3.5) – (3.5) – – – (3.5)
Impact of subsidence – (2.5) – (2.5) – – – (2.5)
Loss ratio – current period subsidence events – 7.9% – 0.5% – – – 0.4%
13. Reconciliations continued 13c. Reconciliation of expenses related to insurance contracts to reported expense ratios
Impact of reinsurer caps – – – – 0.2 – 0.2 0.2 *1 The intra-group expenses elimination amount relates to aggregator fees charged by the Group’s comparison entities to other Group companies.
Reported profit before tax per the Consolidated Income Statement 522.6 476.2
Net share scheme charges included in Group profit before tax 53.4 49.8 13f. Reconciliation of note 4 to Strategic Report
UK Insurance profit before tax – Strategic report 591.5 7.5 (1.6) 597.4
Non-controlling interest share of profit/(loss) before tax – 0.9 (3.1) (2.2)
Other comprehensive income for the period, net of income tax 3.4 (1.6)
Total comprehensive income/(expense) for the period – – (1.6) 211.4 209.8
Deferred tax charge in relation to movements in fair value reserve – – (0.8) – (0.8)
Notes to the Parent Company Financial Statements For the year ended 31 December 2019 1. Accounting policies 1.1 Basis of preparation
• FRS 101.8 (f): the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of: – paragraph 118(3) of IAS 38 Intangible Assets
• FRS 101.8 (g): the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D and 111 of IAS 1 Presentation of Financial Statements to produce a cash flow statement, a third balance sheet and to make an explicit and unreserved statement of compliance with IFRSs
• FRS 101.8 (h): the requirements of IAS 7 Statements of Cash Flows to produce a cash flow statement
The Financial Statements 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 twelve months and beyond, including cash flow forecasts and regulatory capital surpluses.
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the annual Financial Statements.
The requirements of IAS 36 are applied to determine whether it is necessary to recognise any impairment loss with respect to the company’s investments in subsidiaries. When necessary, the entire carrying amount of the investment is tested for impairment in
The Company operates a number of share schemes for employees of the Group’s subsidiaries. For equity settled schemes, the fair value of the employee services received in exchange for the grant of free shares under the schemes is recognised as an increase in equity in the Company. A corresponding intercompany charge is made to the subsidiaries whose employees receive the free shares.
Based on these factors, the Company classifies its financial assets into one of the three categories below: • Amortised cost: assets held for collection of contractual cash-flows where the cash flows represent solely payments of principal and interest, that are not designated as FVTPL.
• Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash-flows and selling the assets, where the assets’ cash flows represent solely payments of principal and interest, and that are not designated at FVTPL.
• Fair value through profit or loss (FVTPL): Assets that do not meet the criteria for amortised cost or FVOCI, or which are designated as FVTPL at initial recognition.
The Company’s financial liabilities comprise of subordinated notes which are held at amortised cost using the effective interest method.
A full list of the Company’s subsidiaries is disclosed in note 12 of the consolidated Financial Statements.
The additions to investments in the period of £102.7 million relate to the following: • transfer of Admiral Europe Compañia De Seguros, S.A. (‘AECS’) (£88.9 million additional investment) from an indirect shareholding through Admiral Insurance Company Limited (‘AICL’), to a direct shareholding held by Admiral Group plc (‘AGp’); • Further investment in Admiral Financial Services Limited (‘AFSL’) (£11.0 million); • Further investment in Admiral Law (£0.6 million); and
The table below details the impact of a 1% change in the discount rate and terminal growth rate, and a 5% decrease in the year 5 projected profit (and thereby terminal value) on the recoverable amount.
In 2019 a non-cash impairment loss of £27.7 million has been recognised by the parent company in respect of its investment in the Group’s US comparison business Compare.com. The impairment charge is presented within the “Impairment losses” line of the Parent Company Income Statement and reduces the value of the investment to its recoverable amount, being its fair value less costs to sell (equivalent to the Group’s share of net asset value), of £5.1 million.
The impairment charge reflects challenging market conditions for comparison in the US and the decision taken in the first half of 2019 to downsize to a smaller team and more agile approach in order to adapt to those conditions.
Given the size of the remaining carrying value, no sensitivities are provided on the grounds of materiality.
Money market and other similar funds (level 1 of the IFRS 13 hierarchy) 150.2 5.5
The subordinated notes were issued on 25 July 2014 at a fixed rate of 5.5%, with a redemption date of 25 July 2024.
Interest payable of £11.3 million (2018: £11.3 million) was recognised in relation to the subordinated loan notes.
Corporation tax thereon at effective UK corporation tax rate of 19% (2018: 19%) 53.9 39.5
At the year end, the corporation tax asset was £4.0 million (2018: £3.7 million).
Analysis of deferred tax liability: Tax treatment of share schemes £m
Movement in fair value reserve – – – (0.4) – (0.4)
Movement in fair value reserve – – – 0.8 – 0.8
Balance carried forward at 31 December 2019 (0.2) – – 4.6 – 4.4
The deferred tax liability at 31 December 2019 has been calculated based on the rate at which each timing difference is most likely to reverse.
Notes to the Parent Company Financial Statements continued For the year ended 31 December 2019 7. Trade and other receivables £m £m
Held within amounts owed by subsidiary undertakings is £183.7 million (2018: £127.1 million) which relate to loans with formal agreements in place between the parent and the subsidiary. The estimated credit losses of these loans has been considered and any expected credit loss is considered to be immaterial due to the assessment of credit risk being low due to the positive net value of assets of the subsidiaries and future trading projections.
Of the above amount, £149.3 million is due in greater than one year (2018: £123.1 million).
Issued, called up and fully paid 293,686,329 (2018:290,502,737) ordinary shares of 0.1 pence 0.3 0.3
Declared August 2018 (60.0 pence per share, paid October 2018) – 169.4
Proposed March 2019 (66.0 pence per share, approved April 2019, paid June 2019) 188.0 –
11. Post balance sheet events No events have occurred since the reporting date that materially impact these Financial Statements.
Alternative Performance Measures Throughout this report, the Group uses a number of Alternative Performance Measures (APMs); measures that are not required or commonly reported under International Financial Reporting Standards, the Generally Accepted Accounting Principles (GAAP) under which the Group prepares its Financial Statements.
These APMs are used by the Group, alongside GAAP measures, for both internal performance analysis and to help shareholders and other users of the Annual Report and Financial Statements to better understand the Group’s performance in the period in comparison to previous periods and the Group’s competitors.
Total Premiums Written Total premiums written are the total forecast premiums, net of forecast cancellations written in the underwriting year within the Group, including co-insurance. It is reconciled to financial statement line items in note 13a to the Financial Statements.
There are a number of instances within the Annual Report where adjustments are made to this calculation in order to more clearly present the underlying performance of the Group and operating segments within the Group. The calculations of these are presented within note 13b to the Financial Statements and explanation is as follows.
UK reported motor loss ratio: Within the UK insurance segment the Group separately presents motor ratios, i.e. excluding the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) exclude the impact of reserve releases on commuted reinsurance contracts and ii) exclude claims handling costs that are reported within claims costs in the Income Statement.
International insurance loss ratio: As for the UK Motor loss ratio, the International insurance loss ratios presented exclude the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to exclude the claims element of the impact of reinsurer caps as inclusion of the impact of the capping of reinsurer claims costs would distort the underlying performance of the business.
Group loss ratios: Group loss ratios are reported on a consistent basis as the UK and International ratios noted above. Adjustments are made to i) exclude the impact of reserve releases on commuted reinsurance contracts, ii) exclude claims handling costs that are reported within claims costs in the Income Statement and iii) exclude the claims element of the impact of International reinsurer caps.
Expense Ratio Reported expense ratios are expressed as a percentage of net operating expenses divided by net earned premiums.
Group expense ratios: Group expense ratios are reported on a consistent basis as the UK and International ratios noted above. Adjustments are made to i) include claims handling costs that are reported within claims costs in the Income Statement, ii) include intra-group aggregator fees charged by the Group’s comparison businesses to the Group’s insurance businesses and iii) exclude the expense element of the impact of International reinsurer caps.
Effective Tax Rate Effective tax rate is defined as the approximate tax rate derived from dividing the Group’s profit before tax by the tax charge going through the Income Statement. It is a measure historically presented by the Group and enables users to see how the tax cost incurred by the Group compares over time and to current corporation tax rates.
Profit commission A clause found in some co-insurance and reinsurance agreements that provides for profit sharing.
Securitisation A process by which a group of assets, usually loans, is aggregated into a pool, which is used to back the issuance of new securities. A company transfer assets to a special purpose entity (SPE) which then issues securities backed by the assets.
An entity that is created to accomplish a narrow and well-defined objective. There are specific restrictions or limitations around ongoing activities. The Group uses an SPE set up under a securitisation programme.