Admiral Group is one of the UK’s largest and most profitable car insurance providers, with over 11% market share and market-leading financial results.
The history of the Admiral Group is one of growth, profitability and innovation. Admiral launched in 1993 with just one brand, zero customers and 57 members of staff. The Group now has operations in Spain, Italy, France and the US, and has over four million customers.
Admiral’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.
Find out more about how people make our businesses work from page 12
Financial statements 76 Independent Auditor’s Report 78 Consolidated Income Statement 79 Consolidated Statement of Comprehensive Income 80 Consolidated Statement of Financial Position 81 Consolidated Cash Flow Statement 82 Consolidated Statement of Changes in Equity 83 Notes to the financial statements 111 Parent Company financial statements 112 Notes to the Parent Company financial statements 114 Consolidated financial summary
Other information 115 Glossary 116 Directors and advisors 117 Further information
Group highlights @ Group profit before tax*2 4% lower at £356.5 million
@ Earnings per share 2% lower at 103.0 pence (2013: 104.6 pence)
@ Over 7,000 staff to receive free shares worth £3,000 in the employee share scheme *1 Segment result, excludes share scheme charges. These charges are included in the ‘Other’ segment *2 Represents Group’s share of profit before tax after excluding Minority Interests *3 Turnover is defined as total premiums written (including co-insurers’ share)
July Admiral announced a successful inaugural bond offering of £200 million
August Admiral announced Geraint Jones as new Chief Financial Officer (CFO) and Executive Director
September Admiral celebrates 10 years since flotation on the London Stock Exchange
November Admiral was named the Best Car Insurance Provider at the Personal Finance Awards for the second year running
Read more about what we’ve achieved over the last ten years from page 10
The Admiral team has set about building private motor businesses in five countries, price comparison businesses in four, and a household insurance business in the UK.”
Alastair Lyons, CBE Chairman 2014 in summary @ The UK motor insurance market was again characterised by falling prices
@ Italy is the Group’s largest business outside the UK with almost half of our overseas customers
@ In the US and Spain, growth came from expanding the accessible market
@ Confused.com faces very strong competition that has impacted conversion and hence profitability
@ Compare.com is making progress and we are planning a material increase next year in promotional support
Admiral has applied these consistently to deliver against a straightforward highly focused strategy – to make the most of the market-leading positions we have developed in the UK in direct motor insurance and price comparison and apply our learning in these sectors in overseas markets of appropriate scale, structure and stage of development. Applying the tenets of controlled test and learn, low capital employed and low risk, the Admiral team has set about building private motor businesses in five countries, price comparison businesses in four, and a household insurance business in the UK. We have then sought to embed in these new businesses our management capability, our culture and the quality of our employees.
Notwithstanding this step-by-step approach of test and learn, whilst each of our overseas businesses began life as a business plan Admiral now has nearly 600,000 customers outside the UK. It will, however, still be some years before these businesses, all at varying stages in their growth and required investment, make the material contribution to Group profits of which we believe they are capable. As now the second largest insurer of private cars in the UK Admiral’s fortunes will, therefore, be driven for the foreseeable future by the UK motor insurance cycle.
The UK motor insurance market was again characterised by falling prices, albeit that the sustained reduction since the market turned in 2010 now appears to be running out of steam.
We have also had major systems development taking place in our operations in Italy and France as these businesses prepare for the next stage in their growth. Italy is our largest business outside the UK with almost half of our overseas customers. As in the UK, with growth of the book unattractive in an environment of falling prices, the Italian business has focused on building its learning into a new operating platform that we believe will provide competitive advantage when the market turns. In France, the youngest of our overseas insurance operations, we had adopted a different outsourced start-up model to get into the market quickly, cost-effectively and at low risk. Four years on from launch our initial assessment of the French market suggests the potential for accelerated growth of direct motor insurance supported both by the growth of price comparison, in part reflecting the success of our own market-leading business LeLynx, and by the recently implemented change in the law making it easier for customers to switch insurance providers. Hence our move to bring all our functions in-house onto our own platform now that we understand what the French market needs.
In the US and Spain growth came from expanding the accessible market – in the case of Elephant Auto in the US by building on the entry into Texas in 2013, and for Admiral Seguros in Spain through the addition of a second brand, Qualitas Auto.
In price comparison we have continued to achieve strong growth outside the UK, with both Rastreator and Le Lynx holding leading positions in their respective markets in Spain and France. By contrast, price comparison in the UK has continued to be challenging, with Confused.com facing very strong competition that has impacted conversion and hence profitability. In the US, compare.com launched in 2013 as the first truly European-style aggregator as distinct from lead generators.
Our capital structure Our low risk approach to our business with significant use of reinsurance has made it possible to maintain low levels of capital employed. However in 2014 we recognised that favourable capital markets and very reasonable rates of interest created the opportunity to strengthen and diversify our capital resources as we make a prudent transition into Solvency II in 2016, with the attendant regulatory capital requirement and buffers. Raising £200 million of additional capital in the form of ten-year tier two subordinated notes also sets us up well for the growth we expect from all our businesses in the coming years whilst being consistent with our existing dividend policy.
Thank you To our employees for their commitment and enthusiasm; to our management for their leadership and inspiration; to our shareholders for their support and confidence; but most of all to our customers for their business and choice of Admiral in preference to others in the highly competitive markets in which we operate.
We believe it is for our investors rather than Admiral to determine how they wish to invest funds surplus to the requirements of our business.”
In the UK, Admiral is one of the largest and most recognised car insurance providers, and the Admiral Group includes Confused.com, one of the leading price comparison websites, as well as a budding household insurance business. Outside the UK, the Group has exported the knowledge and experience gained from its UK businesses and owns four insurance and three price comparison businesses.
Admiral is one of the largest and most profitable private car insurers in the UK
Confused.com, one of the UK’s leading price comparison websites, profitable operations in Spain and France and a new business in the US
UK Household Insurance, commercial vehicle insurance broking and other central costs (including share scheme charges and finance costs)
Household *1 All segment results exclude share scheme charges. These charges are included in the ‘Other’ segment *2 Price Comparison pre-tax profit excluding Minority Interests
@ Longer term there will be greater balance as reliance on the UK Car Insurance portfolio reduces 2014 goes down as the year of the Baked Alaska
My impression is that CEO statements are supposed to present a veneer of progress against a backdrop of challenging conditions: “the mountain was a tricky climb, the climate inhospitable, but we a) did it, b) are doing it or c) will soon do it”.
6. Confused’s Get a Free Brian Toy campaign does not resonate with consumers and my house ends up decorated in Brian Toys.
Admiral Group’s 2014 was the year of the Baked Alaska – hot and cold in a single bite.”
All of the above worries, cumulatively, just about total my number one worry. The number one worry in this hit parade of worries is always number one on my worry list: irrational competitors.
So things can look jolly nice for them for quite a period of time (growth is good, right?). And the rest of the world is left with a choice: be rational in response, which means you lose a lot of business, or join the ranks of the irrational and sacrifice profits. That’s the position we found ourselves in, in the UK during 2014 as we tried to slalom our way through the poorest part of the UK cycle. Our growth in vehicles insured, achieved in the first half of the year, was a modest 4%. Our rates went up during the year across all customer segments. As our rates went up, our competitiveness declined. However, due to these rate increases, we feel we are in a better place starting 2015, and there are signs that the market is now raising rates which, given our superior expense ratio in particular, would give us the choice of continuing to raise rates or growing our customer count.
But I must admit, I don’t lose a lot of sleep over the UK in particular because the CEO of our UK business is David Stevens, one of the founders of Admiral. As one of our Non-Executive Directors recently put it: there is no one more qualified to run the UK business. The ‘no one’ did not mean ‘no one in Admiral’, or ‘no one in the UK’ or even ‘no one in Europe’, it was a very clear: no one. And I couldn’t agree more. To find out if David’s sleeping well or not you’ll have to turn a few pages to read his report.
As David takes responsibility for the UK, I spend a lot of time with our businesses outside the UK. In particular, I spent a couple of weeks towards the end of 2014 with our insurance business in Seville, Admiral Seguros (brands: Qualitas Auto and Balumba), and the desire for success from every person I met, in every part of the business, was contagious. I always leave Seville more energised than when I arrive. I don’t usually talk about specific goals for the year ahead in this report, but I’ll share this one with you: the goal for Admiral Seguros in 2015 is break-even on a written premium basis. I’m going to go out on a limb now and say that I am very confident the team will succeed in reaching this goal.
So here’s my Top Ten Things I’m Looking Forward To in 2015: 10. Successful use of mobile phones for consumers, particularly in ConTe (Italy).
8. Continued sector dominance for Rastreator and growth, particularly in telephony comparison.
3. Success of the new compare.com TV campaign coupled with lots of word of mouth.
I’m sad to see the consecutive profit record go, it was a source of great pride. But, like the hot versus cold of Baked Alaska, I’m also glad to see it go, because it means we’re investing in our future and not afraid to sacrifice some of the present to do so.
Read more about our financial performance on pages 18 to 21 *1 Represents Group’s share of profit before tax after excluding Minority Interests
Since Admiral listed on the London Stock Exchange in 2004, it has transformed from a company based solely in the UK, to a company that today has insurance and price comparison businesses in five countries in Europe and the US. All its growth has been based on an approach of test and learn and applying Admiral’s expertise to new products and markets.
Elephant Auto Insurance launches in Richmond, Virginia selling car insurance in the US.
Putting customers at the heart of our business model We value our customers above everything else and believe that good service and customer satisfaction are crucial for success. Our staff and departments are rewarded through incentive schemes that place emphasis on the quality of service provided to our customers.
Every day revolves around attracting, keeping and satisfying customers and the Group strives to design products that customers want and that represent value for money.
Our track record of strong growth is based on a low risk business model that places great emphasis on customer satisfaction and staff wellbeing.
A great place to work 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.
Profitability Admiral continues to focus on profitability both in the short, medium and long term, and will continue to do what is right for the long term success of the business.
Low capital employed Sharing risk with co- and reinsurance partners is an important part of Admiral’s business. Our model is based on reinsurance relationships underpinned by strong underwriting results, with
Admiral itself only providing the capital backing for a minority of its business.
People We believe that if people enjoy what they do, they do a better job – in 2014 Admiral was voted the 2nd Best Large Workplace in the UK by the Great Place to Work Institute and was awarded the FTSE Female Pipeline Award, which recognises Admiral for the success of women in its workplace. Admiral has been in The Sunday Times 100 Best Companies to Work For in the UK every year the list has been compiled and was 2nd in this year’s list. We also win numerous awards in our overseas businesses reflecting the successful export of the Admiral culture to those newer businesses.
Profit focus Admiral is focused on bottom line profitability in the short, medium and long term across all its business operations. We don’t spend too much time thinking about things like market share, size and target customers; these factors are all by-products, not drivers, of the decisions that we make that are focused on generating profits.
Focus Admiral has spent more than 20 years refining how best to provide the service people look for from their car insurer, and the last 13 years developing Price Comparison. It is only since the advent of Admiral Household Insurance in 2012 that the Group has dedicated any material effort outside private motor insurance and price comparison.
Controlled test and learn Admiral Group has been built from the ground up, taking measured steps to test how well we understand the challenge ahead and the effectiveness of our solutions, and then to learn from that experience and from the experience of those who have tried other strategies. That is how the Admiral team has set about building private motor businesses in five countries, price comparison businesses in four, and a household insurance business in the UK.
Culture Many companies document their culture at length but the best way to understand Admiral’s culture is to spend a day in one of our offices to appreciate the depth of staff engagement with a business of which they all own a part; the vibrancy of the working environment; the commitment to the customer; and the engrained desire to produce a quality output and continuously improve that quality.
Our strategy is simple: we aim to build on our existing strengths.
What this means Learn from our experiences in the UK and Europe and export those learnings (including sophisticated pricing techniques) to the US. Understand the US consumer: what insurance cover and products they want and how they want to buy them. Educate the US consumer: shopping for car insurance online is a good thing!
What this means Develop profitable, growing, sustainable businesses in insurance and price comparison that mirror the UK model. This means building on the market profiles developed by our strong management teams.
Our focus for 2015 Capitalise on ConTe’s performance in 2014 and grow the premium base. Generate further growth from Rastreator and LeLynx’s market-leading positions in the Spanish and French price comparison markets. Admiral Seguros to follow ConTe to break-even.
L’olivier Assurances to capitalise on its new infrastructure and grow following the introduction of the Hamon Law, which allows consumers to switch insurers any time after one year without penalty.
What this means Test and learn approach to utilising our existing skills and expertise to develop products that customers want and that represent value for money.
1 Maintain strong performance of our UK Car Insurance business 14 ANNUAL REPORT AND ACCOUNTS 2014 WWW.ADMIRALGROUP.CO.UK
Expanding internationally In recent years Admiral Group has expanded across Europe and to the US. An important attribute to success in these markets is our staff. We have created office environments to help motivate staff, combining the best of what’s been learned over time in the UK with local habits and traditions.
Alastair’s statement indicates that the downturn in the Group result is due to the investment in compare.com. How long do you see the investment continuing and when will you know if the model works in the US? With price comparison operations, the amount of investment in the early years roughly equates to the loss, as the earnings profile is very much driven by marketing spend. Both Rastreator and LeLynx were profitable within three years of launch.
Compare.com continues to make good progress in the US which justifies the ongoing investment we have outlined for 2015. We have focused marketing spend on the larger US states of California, Illinois, Texas and Virginia. We continue to view the internet as an irresistible force and believe more and more consumers will turn to the internet for more and more shopping opportunities. Feedback from US consumers is positive and, as you will see from Andrew Rose’s (compare.com CEO) report, with more than 40 auto insurance carriers under contract, it’s an attractive choice for insurers as well.
The day we floated on the Stock Exchange and next day when we went around the offices offering (little) bottles of champagne to every member of staff. That was a very happy group!
You (and the team) have built a fantastic business over the last 21 years. What would you like to see your eventual successor aim for? There’s definitely success in succession at Admiral. I am fully convinced that the group of young senior managers we’ve got in our Group are brighter and more inventive then those of us moving on over the next few years. These managers have already spent a number of years in the Group and so we’ve also been able to brainwash them with the way we do things. Not only are these people interesting and talented, but they are also hungry to succeed.
If we cannot find our future leaders from this group then I will have done my job very poorly. And we certainly don’t want that to be the case, do we?!
Our reserving philosophy has always been and remains conservative and consistent across time – we claim to take full credit for an underwriting profit only when it has a very high degree of certainty, which typically involves waiting a couple of years.
Alastair’s statement makes reference to ‘a major systems upgrade’ in the UK, so what have you been up to and how will this impact the UK business? Henry has also made reference in his statement to Guidewire being implemented in the UK and France. We already use Guidewire in our US operation.
Although it’s a big and complex project, I am confident that we are dedicating the right level of internal and external expertise to ensure a successful implementation.
Admiral has always prided itself on being a low-cost operation, but you are investing in systems, facilities and staff. How will this affect your historical expense ratio advantage? Our expense ratio advantage over our competitors runs at over ten percentage points and has done for years. We see the investments we are making as important to maintaining that advantage.
Admiral is a cash generative business with a high dividend payout. If you needed capital, why not just reduce the dividend? Why did you issue debt? As Alastair mentioned in his statement, we recognised that favourable capital markets offered an opportunity to strengthen and diversify the capital base. The bond counts towards capital in the current and future solvency regimes and we believe it was a prudent course of action as we make the transition into the new Solvency II regime in 2016.
The increased level of capital will also support our growth aspirations for all Admiral’s businesses in the coming years.
In terms of dividends, we continue to believe firmly in not holding excess capital in the Group and will again distribute 95% of earnings in 2014 – the same level as 2013.
There has been a lot of talk about the potential impact of Solvency II on capital and dividends. So what will be the impact on capital and how might this affect Admiral’s dividend policy? As I mention in my statement, whilst some uncertainty still remains, based on what we know today, we expect the level of capital requirement for the Group in 2016 to be not too dissimilar from that agreed by the PRA under the UK ICAS rules for 2015.
I don’t foresee any change to Admiral’s philosophy on dividends and expect the Group to continue distributing to shareholders capital we don’t need to keep within the Group for solvency, growth or for contingencies. Based on what we know today, I don’t expect material changes for the foreseeable future in the level of dividends in terms of the percentage of earnings distributed.
The final dividend proposed for 2014 is 49.0 pence per share – bringing the total dividend to 98.4 pence per share, within 1% of the total 2013 dividend. That represents a payout ratio of 95% and brings to £271 million the full year dividend (£271 million last year).”
Consistent with our approach to the calculation of the interim 2014 dividend, we have, at year end, retained a significant margin over current economic capital requirements to ensure a smooth transition to the new Solvency II regulatory regime coming into effect in January 2016. We are making very good progress towards full compliance with the various requirements of the regulation and expect clarity in the coming months on the level of capital requirement that will apply next year. Acknowledging that some uncertainty remains, based on what we know today, we expect the level of capital requirement in 2016 to be not too dissimilar to the current ICAS requirements.
And finally, we were pleased to complete successfully the issue of Admiral’s first public bond in July 2014, which both strengthened and diversified the capital available to the Group. The net annual cost of the £200 million ten-year subordinated notes (lower tier two capital under the current regime and expected to qualify as tier two under Solvency II) is approximately £4.5 million per year: we welcome this new set of investors in the Admiral Group.
@ International Car Insurance losses totalled £19.9 million (2013: £22.1 million).
@ Other Group Items, including employee share schemes and net debt financing charges, amounted to a cost of £24.6 million (2013: £22.0 million).
Total dividends paid and proposed for the financial year amount to 98.4 pence per share (£271 million), a decrease of 1% on the previous year (2013: 99.5 pence, £271 million). This is equal to 95% of post-tax profits. The final dividend proposed is 49.0 pence per share (3% lower than the final 2013 dividend of 50.6 pence).
The final dividend is made up of a 22.5 pence normal element, based on the stated dividend policy of distributing 45% of post-tax profits, and a further special element of 26.5 pence. The special dividend is calculated by reference to distributable reserves after taking into account solvency requirements and a margin for contingencies.
Divisional performance highlights The Group’s UK Car Insurance business accounts for 81% of Group turnover (2013: 84%) and 78% of customers (2013: 82%). The relative decreases are due to the continued growth and development of the Group’s other businesses, leading to lower concentration of the core business.
Lower average premiums in the competitive UK market, in part offset by success in increasing the number of renewal customers, contributed to a reduction in UK turnover of 6% to £1,602.7 million (2013: £1,698.9 million).
In a very competitive UK comparison market, Confused.com, the Group’s UK Price Comparison business, reported a pre-tax profit of £15.8 million – £5.9 million lower than 2013’s result. Outside the UK, the European Price Comparison businesses (Rastreator in Spain and LeLynx in France) contributed a combined profit of £2.8 million (2013: £1.9 million) to the Group’s profits. During the year, the Group invested in growing compare.com, its US comparison business, and the Group’s share of the pre-tax loss was £15.0 million.
@ Group expense ratio 19.7% (2013: 19.9%) – a slight decrease in the UK ratio offset by an increased international ratio.
*1 Represents Group’s share of profit before tax after excluding Minority Interests
There has been a change in the allocation of funds during 2014, with a greater proportion invested in fixed income and other short dated securities (and less in money market funds and deposits). This change has been made in order to increase yield without materially increasing risk. This change has not resulted in a material change in credit quality and only a moderate increase in average duration, due to the features of the underlying investments.
Financing cash flows (dividends offset by proceeds of debt issue) (214.8) (250.3) (64.4)
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.”
Total cash plus investments increased by £365 million or 18% (2013: £267 million, 15%). The net change in actual cash balances was less significant, as funds were transferred into investments.
The Group continues to manage its capital to ensure that all entities within the Group are able to continue as going concerns and 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.
In July 2014, the Group completed the issue of £200 million of ten-year dated subordinated bonds. The rate of interest is fixed at 5.5% and the bonds mature in July 2024. The bonds qualify as lower tier two capital under the current regulatory capital regime and are expected to qualify as tier two capital under Solvency II.
Solvency II During 2014 further requirements and guidance continued to be issued on implementing the Solvency II regulatory regime in the EU ahead of the effective date of 1 January 2016. Solvency II aims to provide an EU-wide set of capital requirement and risk management standards. Principal themes include risk-based capital, market-consistent balance sheets and Own Risk and Solvency Assessments (ORSA). The Directors do not believe, based on guidance issued to date, that there will be a material change in the level of the Group’s capital surplus as a result of the new regime compared to the surplus expected during 2015. The Group is making good progress towards full compliance with the various requirements of the regulation and expects clarity in the coming months on the level of capital requirement that will apply from 2016.
Taxation The tax charge reported in the Consolidated Income Statement is £69.1 million (2013: £83.3 million), which equates to 19.7% (2013: 22.5%) of profit before tax. The lower effective rate of taxation compared to 2013 predominantly results from reductions in the rate of UK corporation tax in 2013 and 2014, but is also impacted by deferred tax movements relating to losses in the Group’s US businesses. The average rate of UK corporation tax in 2014 was 21.50% (2013: 23.25%). The average rate will fall to 20.25% in 2015 and 20.00% in 2016.
They mainly involve singing… either with the band at the floor 22 Christmas party in 2011, or in front of 5,000 Germans at the Oktoberfest in Munich.
The avid readers (or possibly reader) of my UK review will have noted its subtle rebranding from UK Car Insurance Review to UK Insurance Review – a nod to Admiral’s entry into the second biggest non-life market in the UK – household insurance.
Within an overall cycle there are often mini-cycles that make subsets of the market relatively more or less attractive. A combination of factors has made the younger driver segment more challenging than the market as a whole at this particular juncture. This has partly been an equal and opposite reaction to the panic premium hikes and withdrawals of 2010/11, with a number of important competitors re-embracing the segment in 2013/14. It’s also partly a dislocation caused by the impact of telematics. Telematics, though largely irrelevant for the market as a whole, is important in the younger driver segment. Whatever the potential in the long run, in the short term, because of the extra expenses involved and the size of the discounts required to overcome customer resistance, it has reduced the profitability of the young driver segment. This segment is, and is likely to remain, a significant minority of our business, but its importance to us shrank somewhat during 2014 through relatively higher price increases, as we responded to these pressures.
Across all segments, we started increasing our new business prices in May and renewal prices in July, and by year end had implemented a series of price increases cumulatively, in percentage terms, in the high single digits. We anticipate further price increases during 2015, reversing some of the margin reduction of the last two to three years. However, longer term followers of our Company will appreciate that price increases today are a case of ‘jam tomorrow’ in profit terms – any year’s actual profitability is essentially reflected in reported profitability over the following two to three years, due to our cautious approach to recognising underwriting profit. Still, it’s good to be heading in the right direction.
After over two years of almost unprecedented premium deflation, premiums across the car insurance market stabilised in the second half of 2014, and even began to drift up.”
UK Insurance strategy The strategy for Admiral’s UK business is unchanged and remains simple: @ The Group aims to grow profitably its share of the UK private motor insurance market whilst maintaining a capital-efficient structure.
@ At the same time, Admiral endeavours always to give excellent service to customers, whilst providing a positive environment in which staff can work and develop.
Two years on and we insure more households than we did cars two years from our launch as a motor insurer, and we’re growing fast as more and more people embrace price comparison shopping for household cover. Results are encouraging. Our strategic bet is that we can materially undercut the 40%+ expense ratios of many of the established players, while also delivering a decent loss ratio outcome. Our expense ratio, on a written basis, is already actually below market average and our loss ratio is also encouraging. We have, of course, (and here’s a hostage to fortune, given the time lag from written to read) benefited, along with other players, from unusually benign weather, notwithstanding increasing tabloid ‘weather bomb’ hysteria. So, it’s ‘so far, so good’, but it is early days.
Achievements and goals UK Insurance achievements in 2014 @ Profit before tax increased 1% to £398 million (2013: £394 million).
@ 95% of customers who have submitted a claim would renew with Admiral, based on their claims experience (2013: 91%).
@ 2nd Best Big Company to Work For, The Sunday Times 100 Best Companies to Work For.
@ Best Car Insurance Provider in the Personal Finance Awards for the second year in a row.
UK Insurance goals for 2015 @ Appropriate rate increases in response to claims trends and market conditions.
Service with a smile The customer is the centre of everything we do, and our most important stakeholder. I feel a sense of pride in the work I do, by ensuring I do my utmost to leave each customer I speak to with a smile on their face.
Other Revenue per vehicle £79 £67 £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 in the income statement. Reconciliation in note 12c *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
Turnover and premiums UK turnover of £1,602.7 million decreased by 6% (2013: £1,698.9 million) primarily due to reductions in average premiums which also led to a 6% reduction in total premiums written to £1,453.1 million (2013: £1,553.0 million). The closing vehicle count increased to 3.15 million (2013: 3.02 million). Average written premium for the year was around £453 down 10% on 2013 (2013: £505), largely a result of rate cuts made in 2013 along with portfolio mix changes (notably a shift in the balance of the portfolio towards renewal business).
Arrangements for 2014 to 2016 In early 2014 the Group was pleased to announce extensions to its arrangements such that capacity is fully placed until the end of 2016. The underwriting splits can be summarised as follows: Great Lakes (Munich Re) 40.00% 40.00% 40.00%
Great Lakes will underwrite 40% of the UK business until at least the end of 2018.
At 31 December 2014, all material UK quota share reinsurance contracts for underwriting years up to and including 2012 have been commuted. All reinsurance for the 2013 and 2014 years remained in effect.
Loss ratio net of releases – original net share*1 68.0% 68.6%
Excluding reserve releases, the loss ratio increased to 86.9% (2013: 81.2%), largely due to the impact of falling premiums.
As profit commission income is recognised in the income statement in line with loss ratios accounted for on Admiral’s own claims reserves, the reserving policy also results in profit commission income being deferred and released over time.
The projected ultimate combined ratio (ultimate loss ratio plus written expense ratio) for Admiral for the 2014 accident year is 97%, compared to 85% for 2013, resulting from the increased loss ratio. The reported combined ratio for the whole UK market (excluding Admiral) for 2013, excluding reserve releases, was 108%.
Helping drive my career! Each department in Admiral has their own training teams. The customer service team have recently launched a new training plan with programmes designed to help staff develop in their own roles, as well as climb up the ladder.
Johnny Senior Customer Representative 26 ANNUAL REPORT AND ACCOUNTS 2014 WWW.ADMIRALGROUP.CO.UK
In 2014 Admiral recognised profit commission revenue of £71.8 million (2013: £99.3 million) and reserve releases from business that was originally ceded under quota share reinsurance contracts that have since been commuted of £70.6 million (2013: £40.9 million). Total income from both of the above therefore increased marginally to £142.4 million (2013: £140.2 million) due to improvements in prior year claims costs. Note 5c to the financial statements analyses profit commission income by underwriting year.
Total profit (excluding investment income) from car insurance underwriting of £144.2 million and profit commission of £71.8 million decreased, by 2% to £216.0 million from £221.1 million in 2013.
Other Revenue Admiral generates Other Revenue from a portfolio of insurance products that complement the core car insurance product, and also fees generated over the life of the policy.
@ Instalment income – interest charged to customers paying for cover in instalments.
Other Revenue (net of costs and including contribution from additional products underwritten by Admiral) increased by 5% to £182.0 million (2013: £172.8 million). This was equivalent to £67 per vehicle (gross of costs) – consistent with 2013. Net Other Revenue (after deducting costs) per vehicle was £58 (2013: £57).
Instalment income Instalment income is interest charged to customers paying for their insurance in instalments. During 2014 Admiral earned £22.6 million from instalment income, down 5% on the prior period (2013: £23.7 million). Instalment charges are calculated as a percentage of premium and therefore a reduction in average premium leads to a reduction in instalment income.
FCA review into insurance add-on products In September 2014, the FCA released the outcomes of its investigations into insurance ‘add-ons’, i.e. those insurance products that are sold alongside the core car insurance product, resulting in the introduction of a small number of reforms, including greater disclosures on these products. The impact of these reforms on Admiral’s longer term profitability is not currently considered to be material.
Italy ConTe (Rome, Italy) Launched in May 2008, ConTe is the largest of the non-UK insurers within the Group
The Spanish market has continued with the same trends of the past few years: profitable but shrinking. In 2014, gross written premium decreased by a further 1.5%, a modest decrease compared to the previous years. The market combined ratio looks set to remain below 100% – it finished 2013 at 99% and we expect a similar result for 2014 with H1 finishing at 98%. This makes it below 100% for more than 10 years in succession.
As Henry has mentioned, we hope that 2015 will be an important year for Admiral Seguros as our challenge is to break-even on an underwriting year basis. Given the small size of our book this is a challenging task!
Despite this competitive context, ConTe’s policy base grew slightly (+2%) and with a lower acquisition cost. Whilst defending the top line has been a major challenge, ConTe has focused primarily on increasing the profitability of the existing book, optimising the cost structure, improving portfolio quality and continued investments in underwriting and anti-fraud processes and product innovation. We believe that we now have a much stronger foundation to scale up the business when the market conditions become more favourable.
Highlight of the year? An extremely positive development of the back years, leading ConTe to report a profit for the first time in its life!
Admiral has four direct car insurance businesses operating outside the UK: Milena Mondini CEO, ConTe 28 ANNUAL REPORT AND ACCOUNTS 2014 WWW.ADMIRALGROUP.CO.UK
@ 3rd Best Multinational Place to Work in Europe, awarded by Great Place to Work.
@ Admiral Seguros increased turnover by 8% and policy count by 20%.
@ Elephant Auto grew its customer base by more than 50%.
@ Elephant Auto voted 4th Top Work Places 2014 (Medium), awarded by Richmond Times-Dispatch.
@ L’olivier Assurances – conversion from out-sourced to in-sourced operation completed.
@ Elephant Auto to focus on continued growth and improving its combined ratio.
USA Elephant Auto (Virginia, US) Launched in October 2009 and provides car insurance in four US states (Virginia, Maryland, Illinois and Texas) with a combined market size larger than the UK
France L’olivier Assurances (Paris, France) The Group’s youngest (and smallest) international car insurance business, launched in December 2010
The US market is represented by 200 million vehicles and $180 billion of premium. It is the biggest car insurance market in the world and each year it moves a little bit more towards the direct distribution model that is so familiar to UK readers. Direct, which is what Elephant does, is about 25% of the market, but is estimated to be roughly 40% of new business. The US has a nascent online price comparison market and compare.com is a significant contributor to that emerging channel.
2014 was a good year for Elephant. Our business grew its customer base by more than 50% in 2014 whilst once again delivering good acquisition economics in its core markets. The business also made a number of significant infrastructure improvements in the year and grew its renewal book substantially, both of which augur well for the future.
We continue to sell insurance in four states – Virginia, Maryland, Texas and Illinois. At some point we will look to expand beyond these states, but it is true to say that there is plenty of opportunity to grow within these existing four markets. Those states have 34 million vehicles in them – making them larger in aggregate than the UK market. With 109,000 customers at year end, Elephant still has plenty of market share left to go for.
In 2014, the French motor insurance market continued to grow modestly. After many years of improvement, the claims frequency pattern increased, especially for bodily injury. This increasing frequency together with higher claim costs and limited price increases led to a worsening market combined ratio.
For L’olivier Assurances, 2014 was a special year devoted to the full in-sourcing of its operations with controlled growth. We successfully completed the development of a modern infrastructure, with a new cutting-edge IT system and in-house operations, opening a new office in the north of France. With the right infrastructure and control of our own operations, we’re convinced L’olivier Assurances now has all the levers to make the most of its competitive advantage going forward.
International Car Insurance financial performance Non-GAAP format income statement £m £m £m
Adjusted Reported combined ratio, net of Other Revenue*3 147% 129% 116%
*3 Adjusted combined ratio, net of Other Revenue is calculated on Admiral’s net share of premiums and includes Other Revenue. Including the impact of reinsurer caps the reported combined ratio, net of Other Revenue would be 2014: 134%; 2013: 141%; 2012: 157%
Vehicles insured at period end 136,500 279,900 28,600 70,300 515,300 *1 Turnover includes total premium written and income generated by the sale of additional products and services and fees
For the 2014 year Admiral retained 35% (Italy), 30% (France and Spain) and 33% (USA) of the underwriting risk respectively. The arrangements for 2015 will remain the same.
International Car Insurance financial performance Admiral’s international insurance businesses (in aggregate and individually) continued to grow, adding over 77,000 customers and ending 2014 15% larger than a year earlier. Turnover grew by 10% to £206.2 million (2013: £187.8 million). Vehicles and turnover from these businesses represent 15% and 10% of the Group totals respectively, up from 14% and 9% in 2013.
Improved prior year claims development, especially in ConTe in Italy, led to an improvement in the adjusted combined ratio, which decreased from 140% to 127%. This improvement, in conjunction with higher net insurance premium revenue, led to a lower loss of £19.9 million in 2014, down from £22.1 million in 2013.
As noted, the lower combined ratio was a result of an improvement in the loss ratio to 77% (2013: 91%), whilst the expense ratio was broadly flat at 50% (2013: 49%). The expense ratio is high in comparison to Admiral’s UK business because all of the international operations need to continue to grow to achieve economies of scale. In addition, there are market specific reasons why the expense ratios are higher, for example higher acquisition costs in the US.
Admiral Seguros (Spain) was launched in 2006 and is the oldest of Admiral’s international operations. In 2013, Admiral Seguros launched a second brand (Qualitas Auto) to complement its original Balumba brand. The business insured 164,400 customers at the end of 2014, 20% more than a year earlier.
In the US, Admiral operates in four states (Virginia, Maryland, Illinois and Texas) through its Elephant Auto business, which launched at the end of 2009. At the end of 2014 Elephant Auto insured almost 109,000 vehicles, up by 55% year-on-year. Elephant Auto’s expense ratio is currently high as the business is spending significant amounts on advertising to develop the Elephant Auto brand and grow the portfolio. Elephant Auto’s written combined ratio*1 improved from 152% in 2013 to 141% in 2014 primarily resulting from an improved expense ratio due to vehicle count growth. *1 European combined ratio is calculated on the earned basis, and Elephant Auto combined ratio is calculated on the written basis due to market claims patterns. Both combined ratios are calculated on 100% of underwritten premium (including co- and reinsurers’ share) and include the results from the sale of additional products and services and fees
Price Comparison strategy Admiral’s strategy is to develop websites that allow consumers to compare a range of general insurance and financial services products across price and policy benefits. The international strategy is to exploit the UK expertise in price comparison and export it overseas.
Spain Rastreator (Madrid, Spain) Launched in March 2009, offers comparison on motor, home, motorcycle and life insurance, and now the leading price comparison site in Spain.
UK Confused.com (Cardiff, UK) The most mature of the Group’s price comparison businesses, having traded since 2002 and one of the UK’s leading price comparison websites.
Beyond the comparison of car insurance, Confused.com continues to find success in other products such as the comparison of home and life insurance.
During the year the price comparison sector has come under further scrutiny from the Financial Conduct Authority (FCA) and the Competition and Market Authority (CMA). Both the CMA and the FCA released remedies that Confused welcomed, as their main focus is on the need to provide sufficient, clear and consistent product information to consumers.
Focusing on insurance, Rastreator´s panel now represents 85% of the Spanish market, the strongest panel in Spain. In 2014 we offered the first Spanish car insurance price index, Rastreator-Deloitte, which indicated that price reductions have slowed and that we may see increases during 2015. Our leadership puts us in the right place to benefit from this, as price increases will always produce an increase in customer shopping for car insurance.
During 2014 Rastreator agreed to acquire seguros.es, a broker competitor. Once the acquisition is completed in 2015, we believe this will allow us to increase market share and broaden our platform.
International Price Comparison achievements in 2014 @ Quote volumes: combined 6.6 million (2013: 5.1 million).
@ Rastreator won Best Website of the Year in Spain, awarded by eAwards Barcelona 2014.
@ Develop and promote new products and offers in order to have more diversified revenue sources.
International Price Comparison goals in 2015 @ Rastreator – continued defence of market-leading position in car insurance comparison and further development of other comparison services.
@ LeLynx – exploitation of the new Hamon law in France.
USA Compare.com (Virginia, USA) Launched in March 2013 and offers comparison on motor insurance: the first European-style price comparison site in the US.
All players are now looking forward to the new Hamon law, which should bring flexibility to the insurance sector. This law, which was published at the very end of the year, will enable customers to switch insurers at any time after one year easily and without financial penalties.
In 2014, compare.com returned rates in 49 of the 51 US markets (sorry Alaska and Hawaii!), but we focused effort on California, Illinois, Texas and Virginia, where the number of potential rates returned to consumers was maximized. Compare.com accelerated its advertising, yielding more than a million rates to interested consumers.
We hope Brian will be proven right as consumers are ultimately undefeated in pursuit of simplicity and transparency – something compare.com delivers in spades.
All that said, we remain positive and intend to continue to invest in what we believe will be a transformative force in the market.
Price Comparison financial performance Non-GAAP format income statement £m £m £m
*1 Excludes pre-launch costs. 2012 figures include results of Chiarezza.it, which was sold in April 2012. The disposal did not have material impact on the income statement *2 Represents the Group’s share of Price Comparison profit/(loss) and excludes the impact of Minority Interests
International Price Comparison Following the sale of the Italian Price Comparison operation (Chiarezza.it) during H1 2012 and the launch in Q1 2013 of a new operation in the US, Admiral now operates three Price Comparison businesses outside the UK: in Spain (Rastreator), France (LeLynx) and the US (compare.com).
The combined revenue from the European operations in 2014 remained stable despite a weakening Euro at £25.3 million (2013: £25.0 million), with 20% more quotes provided. Both Rastreator and LeLynx have market-leading positions and strong brand recognition in their respective markets. The Group’s share of the combined result for Rastreator and LeLynx was a record profit of £2.8 million (2013: £1.9 million) reflecting increased quote volumes and improved conversion rates. The acquisition of seguros.es by Rastreator will allow Rastreator to increase its market share, but it is not expected to have a material impact on the Group financial statements when completed in 2015. Admiral Group owns 75% of Rastreator, with the remaining 25% owned by Mapfre.
Following the launch in March 2013 of compare.com, a US comparison operation based in Virginia, the Group has continued to invest in the operation. During 2014 Admiral’s share of compare.com’s loss was £15 million before tax.
The combined result for International Price Comparison was therefore a loss of £12.2 million (2013: £0.6 million) – the profit from Rastreator and LeLynx offset by investment in compare.com.
Regulatory environment Confused.com is regulated by the Financial Conduct Authority (FCA) as an insurance intermediary and is subject to all relevant intermediation rules, including those on solvency capital.
Revenue from non-car insurance comparison sources increased in actual terms and now represents over a quarter of total revenue.”
UK Household Insurance UK Household Insurance was launched in December 2012 under the Admiral brand. The product is underwritten within the Group and in common with other businesses it is supported by proportional reinsurance covering 70% of the risk (shared between Munich Re, 40%, and Swiss Re, 30%). The business enjoyed another year of strong growth in policy numbers and another broadly break-even financial result.
UK Commercial Vehicle The Group operates a Commercial Vehicle insurance broker (Gladiator) offering van insurance and associated products, typically to small businesses. Distribution is via telephone and internet (including price comparison websites).
UK Commercial Vehicle operating profit in the year decreased to £2.2 million from £2.5 million, although customer numbers increased from 117,900 at the end of 2013 to 143,900 at the end of 2014.
Finance charges Finance charges of £4.6 million (2013: £nil) represent interest on the £200 million subordinated notes (refer to note 6 to the financial statements for further details).
Adverse run-off leading to higher claims costs in the financial statements. Also, resultant loss of profit commission from proportional co-insurance and reinsurance arrangements.
Many of the potential causes of claims shocks are outside the control of Admiral (for example legislative changes or changes in the Ogden discount rate) and the focus is, therefore, on how to prepare for and react to the occurrence of such events.
Higher claims costs and loss ratios, reducing profitability or resulting in underwriting losses. Also, resultant loss of profit commission from proportional co-insurance and reinsurance arrangements.
@ Highly data-driven and analytical approach to regular monitoring of claims and underwriting performance.
Admiral mitigates the risk to its reinsurance arrangements by ensuring that it has a diverse range of financially secure partners. Admiral has enjoyed a long term relationship with one of the world’s largest reinsurers, Munich Re, which has supported Admiral since 2000.
In the UK, reinsurance arrangements have been agreed until at least the end of 2016, reflecting confidence in the Admiral UK Car Insurance business. The long term co-insurance agreement with Munich Re (covering 40% of the UK Car Insurance business) will remain in place until at least the end of 2018.
This advantage and/or the level of underwriting profit (and associated profit commission) could be eroded.
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 on page 36, but in addition: @ Track record of innovation and ability to react quickly to market conditions and developments.
Higher than planned losses (and potentially closure costs) and distraction of key management.
The Directors are mindful of management stretch and regularly assess the suitability of the management structure in place for Admiral’s new UK and international operations.
The new UK Household Insurance business is backed by proportional reinsurance support which provides mitigation against start-up losses and excess of loss reinsurance which mitigates potential losses from catastrophe events.
Admiral continuously assesses the value to its customers of the products it offers, and makes changes to ensure the products continue to meet customer needs and offer good value.
However, a more competitive market might benefit the UK Car Insurance business through lower acquisition costs.
Admiral’s ownership of Confused.com (one of the leading UK price comparison websites which operates independently of the UK Car Insurance business) helps to mitigate the risk of over-reliance on this distribution channel.
Admiral is primarily exposed to credit risk in the form of a) default of reinsurer and b) failure of banking or investment counterparty.
Admiral would also need to ensure that it had sufficient liquid assets to meet its claims and other liabilities as they fell due.
Potential customer detriment and/or potential regulatory censure/ enforcement and/or reputational damage as a result of Admiral’s action.
Failure to recruit, develop and retain suitable talent. Further detail on how Admiral interacts with its employees is set out on page 13 and in the CSR Report available online.
Strong Company culture underpinned by communication, equality, reward, recognition and fun.
@ Regular review of the effectiveness of the Group’s IT capability by Executive management and the Board.
Regulatory risk Failure to comply with regulatory requirements and/or changes. In particular, the risk of non-compliance with Solvency II requirements ahead of 1st January 2016.
Mitigated by regular review of the Group’s compliance with current and proposed requirements and interaction with regulators by Executive management and the Board.
To read more about our corporate social responsibility strategy visit www.admiralgroup.co.uk
The Board remains committed to maintaining the highest standards of corporate governance.” Alastair Lyons, CBE Chairman
We also confirm the Group’s compliance, with the principles and provisions set out in the UK Corporate Governance Code (the Code), which was revised by the Financial Reporting Council in September 2012 and is applicable to the year under review. The Group is mindful that a new version of the Code was issued in September 2014 and applies to accounting periods beginning on or after 1 October 2014. The Group has considered the provisions contained in the revised Code and intends to report compliance against the revised code in the 2015 Annual 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. However, we also believe that good governance should be proportionate and that individual responsibility and accountability should not be lost within a multi-layered committee structure that distances senior management from the day-to-day reality of operational activity.
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. However, we also believe that good governance should be proportionate and that individual responsibility and accountability should not be lost within a multi-layered committee structure that distances senior management from the day to day reality of operational activity.” Alastair Lyons, CBE Chairman
Gender diversity as at 4 March 2015 *1 Roger Abravanel will not be seeking re-election at Admiral Group plc’s forthcoming Annual General Meeting on 29 April 2015 and will be stepping down as a Non-Executive Director of Admiral Group plc effective from that date *2 Penny James was appointed to the Board on 1 January 2015 and joined the Audit Committee with effect from that date
David is a founder Director of Admiral and was recruited in 1991 to set up the Admiral business. Prior to joining Admiral David worked at McKinsey & Co, in the Financial Interest Group, and Cadbury Schweppes in the UK and the US. David has an MBA from INSEAD and he was awarded a CBE in 2010 for services to business and the community in Wales.
@ Non-Executive Director serving on, amongst others, the Boards of: Teva Pharmaceutical Industries Ltd, Banca Nazionale del Lavoro S.p.A. and COFIDE S.p.A.
Roger has significant international consulting experience having been with McKinsey and Co. from 1972 until his retirement, as Director Emeritus, in 2006. Roger holds an MBA from INSEAD. Roger has authored several books and currently writes for an Italian daily newspaper.
@ Chief Executive Manager of Munich Re, responsible for UK, Ireland, Netherlands, Nordics, Baltics and Russia
Manfred graduated from University of Essen with a degree in economics and business management. Since 1981, Manfred has been working for Munich Re.
Geraint is responsible for finance, actuarial, compliance and investments. He joined Admiral in 2002 and has since held a number of senior finance positions, including Head of Finance, before being promoted to Deputy Chief Financial Officer in January 2012. A Fellow of the Institute of Chartered Accountants in England and Wales, Geraint has also worked as an external auditor at Ernst & Young and KPMG.
In her 21 years at the Financial Times Lucy has been an oil correspondent, a Lex columnist and Brussels correspondent. Lucy has authored various books.
Jean was Group Chief Risk Officer at the Phoenix Group from 2009 until June 2013, during which time she held responsibility for the Group’s relationship with the regulator and founded the Board Risk Committee. Previously, she was Risk Management Director of the Insurance and Investments division of Lloyds TSB and, before that, Head of Compliance and Audit at Scottish Widows. Jean is a Member of the Institute of Chartered Accountants of Scotland.
Between 2007 and 2011 Penny was Group Chief Financial Officer of Omega Insurance Holdings. Prior to this, Penny spent 12 years with Zurich Financial Services where she held a number of senior finance roles including Chief Financial Officer of the UK General Insurance division and a Director of Eagle Star Insurance. Penny is a Member of the Institute of Chartered Accountants in England and Wales.
The role of the Board The Board is the principal decision-making forum for the Group providing entrepreneurial leadership, both directly and through its Committees, and delegating authority to the Executive team. The Board is responsible for organising and directing the affairs of the Group in a manner that is most likely to promote its success for the benefit of its members as a whole. The Board is accountable to shareholders for setting and achieving the Group’s strategic objectives; for the creation and delivery of strong sustainable financial and operational performance; for ensuring that in carrying out its duties the Group’s legal and regulatory obligations are being met; and for ensuring that it operates within appropriately established risk parameters. The Group’s UK regulated entities are responsible to the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) for ensuring compliance with the Group’s UK regulatory obligations and that dealings with the FCA and PRA are handled in a constructive, co-operative and transparent manner. Similar provisions apply in respect of the Group’s international businesses with regard to the relevant regulatory authorities in those overseas jurisdictions in which the Group also operates.
@ The annual review of its own performance and that of its Board Committees.
The Board met on seven occasions in 2014 with six of these meetings being held over two days. The Board also held an additional telephone meeting to consider and respond to the formal notification of the PRA’s Individual Capital Guidance (ICG) with respect to the Group. Unfortunately, given prior commitments, Manfred Aldag and Roger Abravanel were unable to join this telephone meeting.
The Chairman seeks to visit each of the Group’s overseas operations every year and Non-Executive Directors are invited to join either him or the Chief Executive on one or more of their overseas visits each year. In addition, the Non-Executive Directors and the Chairman met during the year without the Executive Directors being present. In order to increase their understanding of the operation of the Group below Board level, the Non-Executive Directors and the Chairman also attended a dinner with members of the Group’s senior management team without the Executive Directors being present.
The Board is accountable to shareholders for setting and achieving the Group’s strategic objectives; for the creation and delivery of strong sustainable financial and operational performance; for ensuring that in carrying out its duties the Group’s legal and regulatory obligations are being met; and for ensuring that it operates within appropriately established risk parameters.”
Meetings and attendance Directors are expected to attend all meetings of the Board and the Committees on which they serve and to devote sufficient time to the Group to perform their duties. Where Directors are unable to attend meetings they receive papers for that meeting giving them the opportunity to raise any issues with the Chairman in advance of the meeting. The number of scheduled Board meetings and Committee meetings of which they are a member attended by each Director during 2014 is provided in the table below.
John Sussens and Martin Jackson stepped down from the Board with effect from 9 April 2014.
Jean Park joined the Group Risk Committee on appointment from 17 January 2014 and attended all Group Risk Committee meetings held after this time.
Agendas and papers are circulated to the Board electronically in a timely and secure manner in preparation for Board and Committee meetings. The Board agenda is carefully structured by the Chairman in consultation with the Company Secretary and Chief Executive. These papers are supplemented by information specifically requested by the Directors from time to time. All Board and Committee meetings during the year were held in an open atmosphere conducive to robust and constructive challenge and debate. All Directors have, therefore, been able to bring independent judgement to bear on issues such as strategy, risk management, performance and resources. Additional meetings are called when required and there is contact between meetings, where necessary, to progress the Group’s business.
The Company Secretary All the Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for advising the Board, through the Chairman, on governance matters. The Company Secretary provides updates to the Board on regulatory and corporate governance issues, new legislation and Directors’ duties and obligations. The appointment and removal of the Company Secretary is one of the matters reserved for the Board.
The results of the review were presented by the Chairman to the Board in January 2015. Overall the review found that good progress had been made against most recommendations, that the Board continued to work effectively and that each Director contributes and demonstrates full commitment to his/her duties.
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 composition of the Board evolved during the year as John Sussens and Martin Jackson stepped down from the Board after nine years’ service. Careful consideration continues to be given to Board structure and balance particularly given another two Directors will reach nine years’ service in the next two years. In this context the Group continues to monitor the need to refresh Board and Committee membership in an orderly manner so as to maintain the continuity of Board process and the strength of personal interaction which underlies the effectiveness of the Board as a team. 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.
The Board, having given thorough consideration to the matter, considers seven 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.
Director Date of appointment Current length of service as a Non-Executive Director at 31 December 2014
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 office during the year to meet with the Executive Directors and senior management in order to get a better understanding of how the Group operates and how it intends to achieve its strategic and operational objectives. Senior Executives from the Group’s overseas businesses also visit the UK in order to present to, and meet with, analysts and investors. Site visits and individual discussions with the Executive Directors are also arranged throughout the year with individual shareholders.
In addition the Chairman had individual meetings during the year with major shareholders and reported to the Board on issues raised with him.
This is supplemented by feedback to the Board on meetings between management and investors. In addition, the Investor Relations team produces a quarterly Investor Relations
The Senior Independent Director has specific responsibility to be available to investors who have any issues or concerns, and in cases where contact with the Chairman, Chief Executive and Chief Financial Officer has either failed to resolve their concerns, or for where such contact is inappropriate. No such concerns have been raised in the year under review.
The Group maintains a corporate website (www.admiralgroup.co.uk) containing a wide range of information of interest to institutional and private investors. The major shareholders of the Company are listed on page 74.
Conflicts of interest In compliance with the requirements of the Companies Act 2006 regarding Directors’ duties in relation to conflicts of interest, the Group’s Articles of Association allow the Board to authorise potential conflicts of interest that may arise and to impose such limits as it thinks fit. The Company has put in place procedures to deal with conflicts of interest. These procedures include each Board member completing, annually, a conflict of interest questionnaire that sets out any situation in which they, or their connected persons have, or could have, a direct or indirect interest that could conflict with the interests of the Company. Any current directorships that they, or their connected persons hold, any advisory roles or trusteeships held, together with any companies in which they hold more than 1% of the issued share capital are also disclosed. These procedures were reviewed by the Board in November 2014 and it was concluded that they continued to operate effectively.
All Committees are chaired by an independent Director, except the Nomination Committee which is chaired by the Chairman of the Board, and comprise a majority of independent Directors. Appointments to the Committees are made on the recommendation of the Nomination Committee and are for a period of up to three years, which may be extended for two further three-year periods, provided the Director remains independent. The Committees are constituted with written Terms of Reference that are reviewed annually to ensure that they remain appropriate and reflect any changes in good practice and governance. These Terms of Reference are available on request from the Company Secretary and can also be found on the Company’s website: www.admiralgroup.co.uk. Directors are fully informed of all Committee matters by the Committee Chairs reporting on the proceedings of their Committee at the subsequent Board meeting. Copies of Committee minutes are also distributed to the Board. Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary. The Chair of each Committee attends the Annual General Meeting to respond to any shareholder questions that might be raised on the Committee’s activities.
Dear Shareholder, I’m pleased to provide an update on the main activities of Admiral’s Audit Committee during 2014.
The key areas of focus for the Committee during the year have been to provide support to the Board in its oversight of financial reporting and the control environment across the Group. The setting of insurance claims reserves continues to be a key accounting judgement in the Group’s financial statements, and the Committee placed considerable focus on reviewing the recommendations of management and discussing the key reserving judgements with the Group’s independent actuaries and external auditor. In addition, the Committee continued to monitor the appropriateness of the Group’s system of risk management and internal controls as well as the robustness of the Internal and External Audit processes.
The growing materiality of the Group’s international businesses has been a key focus of the Committee, with presentations from the key CEOs and an improved oversight of the businesses’ audit activities. Also during the year the Group issued its first public bond, with the Committee reviewing the accuracy and completeness of the financial information being provided as part of the prospectus.
Finally as previously communicated the Group plans to tender the External Audit of the Group to coincide with the rotation of the current KPMG audit partner. In preparation for the tender process the Committee has spent time considering how it will manage this process to ensure the Group continues to have a strong External Audit team into the future.
The Committee continues to provide strong oversight of the Group and I would like to thank all those who have made this possible. In particular I would like to thank my two colleagues, Margaret Johnson and Annette Court, for their invaluable contribution over the last year, and equally to welcome Penny James to the Committee following her appointment to the Board in January.
The key areas of focus have been to provide support to the Board in its oversight of financial reporting and the control environment across the Group.” Colin Holmes Chairman of the Audit Committee
@ Review the Group’s procedures for handling allegations from whistleblowers and for detecting fraud.
@ Monitor and assess the role and effectiveness of the Group’s Internal Audit functions in the context of the Group’s overall internal control and risk management systems.
@ Consider and make recommendations to the Board, to be put to shareholders for their approval at the AGM, in relation to the appointment, reappointment and removal of the Group’s external auditor.
@ Review the policy on the engagement of the external auditor to provide non-audit services, considering the relevant regulatory guidance regarding the provision of non-audit services by the external auditor.
@ Reports from the external auditor on the proposed audit scope, fees, audit findings, and auditor independence.
@ The proposed Internal Audit plans for both the UK and international businesses.
@ Performance and effectiveness of the Internal Audit departments including review of the results of the external effectiveness review of Internal Audit.
@ The Committee also received presentations and discussions on a range of important issues including: IT Security; the Group’s Excess of Loss arrangements; Periodic Payment Order (PPO) identification; reserving and the impact on the Group of the introduction of the Gender Directive in the context of considering whether any portfolio shifts could lead to material changes in claims development patterns and impact the appropriateness of claims estimation at the year end.
@ The accuracy and completeness of the financial information contained within the prospectus for the Group’s public bond issue.
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 Group’s financial calendar and other important issues that arise throughout the year which fall for consideration by the Committee under its remit.
The Board considers that the members of the Committee have the appropriate competence and experience necessary to contribute meaningfully to the Committee’s deliberations and further considers that Colin Holmes (Chair), as a Chartered Management Accountant, has appropriate recent and relevant financial experience having previously been the UK Finance Director for Tesco plc. Penny James is currently Director of Group Finance at Prudential plc.
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, 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, the Chief Operating Officer, the Chief Executive Officer, the Chairman of the Board, the Director 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 2014, 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.
These issues were discussed with management during the year and with the auditor at the time the Committee reviewed and agreed the auditor’s Group audit plan, when the auditor reviewed the interim financial statements in August 2014 and also at the conclusion of the audit of these full year financial statements.
The Committee held separate meetings with the Group’s external actuaries at which there was challenge and debate of the methodology used and best estimates developed by the external actuaries and recommended for adoption by management. At these meetings management provided further information on the reserving levels proposed and were challenged by the Committee as to their adequacy and level of prudency. In particular, the Committee reviewed the process for identifying and grading cases which potentially would settle as Payment Protection Orders (PPO). The Committee was satisfied that PPOs were being appropriately identified and reserved for.
The Committee also discussed the Reserving Letter sent to insurance CEOs by the Prudential Regulatory Authority (PRA) which set out the PRA’s reserving expectations for firms; their approach to reviewing firms’ reserving processes and reserve levels; and forthcoming Solvency II requirements. The Committee discussed and approved a response with management that reiterated the Group’s strong reserving processes and methodology set out in the Group’s Reserving Policy and the clear process by which the matters raised in the PRA’s letter could be addressed.
The Committee also received an update from the auditor regarding the procedures used to test management’s methodology in setting best estimates and considered the auditor’s assertion that they had challenged the reserving approach taken by management and considered compliance with current accounting standards. Based on this and the reserving process, the Committee was satisfied with the Group’s approach to setting reserves.
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 an 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 the auditor continued to report an unadjusted difference in relation to intra-group trading between the Group’s insurance and price comparison operations. Management had opted not to make the elimination adjustments as the effect would have a misleading impact on the key ratios for the business as typically used by the industry and also to maintain consistency with prior years. KPMG confirmed that although this was an unadjusted difference, it was both immaterial and consistent with prior years.
The Committee fully considered and challenged management on the approach they had taken not to make elimination adjustments on the grounds of immateriality. Following comprehensive review, the Committee confirmed its acceptance of management’s position on the basis that accounting for intra-group trading in this way was acceptable given the immateriality of the sums involved and resulted in a better overall presentation of the financial statements.
Non-audit fees During the year the Committee reviewed its policy on non-audit services that sets out the procedure for approval, by the Committee, of expenditure with the Group’s auditor of over £30,000, including the process where it is necessary for approval of such work to be given outside of the normal Committee meeting timetable. Such circumstances will require the approval of the Audit Committee Chair, who will consider and approve such fees on behalf of the Committee and will ensure that auditor independence and objectivity are not compromised. Such approval of fees in excess of £30,000 will then be notified by the Committee Chair to the next Committee meeting following approval.
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 handles the key accounting and audit judgements. Following this review the Committee concluded that the auditor, KPMG LLP, remained independent and provided a service that was robust and fit for purpose.
Audit tender The Committee confirmed in last year’s Annual Report that it was the Group’s intention to put the External Audit services contract out to tender at the end of the five-year rotation of the current audit engagement partner. Although the transitional rules under the EU legislation give the Group the option to delay the tender process until 2022, the Committee remains of the view that the audit for the year ending 31 December 2016 will be put out to tender in 2015.
The Committee has focused on developing the Board’s approved risk strategy and risk appetite.” Jean Park Chair of the Group Risk Committee
During the year the Committee has focused on developing the Board’s approved risk strategy and risk appetite to a more granular level. This has been developed as part of the Group’s Enterprise Risk Management Framework (ERMF). A significant amount of time has been dedicated to Solvency II work. In particular, the GRC signed off the annual Own Risk and Solvency Assessment (ORSA) report towards the end of the year as well as approving a number of new policies required as part of the overall systems of governance.
I look forward to continuing the good work of 2014 this year as we move towards the implementation of Solvency II.
@ Monitoring the Group’s prudential risk exposure, which includes ensuring that the Group’s capital resources and liquidity profile are appropriate to its needs whilst meeting minimum regulatory requirements, including overseeing and challenging the design and execution of the Group’s stress and scenario testing.
@ Ensuring the adequacy and effectiveness of the Group’s systems and controls for the prevention of financial crime, including prevention of bribery and adequacy of anti-money laundering and data protection systems and controls.
@ Considered the adequacy of risk mitigation measures and contingency plans.
@ Reviewed in-depth analysis of a number of the Group’s most significant risk areas, including insurance risk in the UK Car Insurance operation.
@ Provided quarterly written reports to the Group Board on conduct risk and complaints.
@ Approved the new Terms of Reference for the UK Risk Management Committee following the creation of the GALCO.
@ Reviewed the progress and risks associated with the IT project responsible for the implementation of a new policy administration system and data warehouse.
The work of the Committee is supported by more detailed work undertaken by executive Risk Management Committees in each of the Group’s operational entities. The membership of the UK Risk Management Committee includes the Group Chief Operating Officer, Group Chief Financial Officer and Group Director of Risk. Membership of the other UK and overseas Committees includes the Managing Director of the operation. At each meeting, the Risk Management Committees consider significant movements in the operation’s risk profile, any risks that have arisen and any emerging risks. Risk Management Committees also assess and monitor any regulatory issues, ensuring that their resolution and the action taken are appropriately recorded. In the UK, the Risk Management Committee receives regular information on Conduct Risk, such as complaint handling reports and other related management information.
The Committee Chair reports formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities, as set out in previously circulated minutes to the Board. The Committee Chair also reports on the activities of the Committee in a formal written report that is submitted to and discussed by the Board every six months.
Following a review of the Committee effectiveness in December 2013, the Committee has overseen development of an Enterprise Risk Management Framework. The aim of the framework is to improve the understanding of risks at a Group level to help evaluate strategic opportunities and support the preparation for Solvency II implementation in 2016. The new framework includes an updated Risk Strategy alongside a refreshed suite of KRIs with associated triggers and limits. This has also included the development of the Conduct Risk MI Framework, with the introduction of a new suite of metrics for monitoring the key risks in this area. These updates have improved the effectiveness of the Committee by enabling greater focus on the main risks affecting the business.
The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s internal controls; that it has been in place for the year ended 31 December 2014; and that, up to the date of approval of the Annual Report and Accounts, it is regularly reviewed by the Board and accords with the internal control guidance for Directors provided in the Code.
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 Group 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, and the oversight of the activities of the Group Risk function 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 Group Risk function defines and prescribes the financial and operational risk assessment processes for the business; performs second line reviews, including reserving and capital modelling processes; maintains the risk registers; undertakes regular reviews of these risks in conjunction with line management; delivers the Own Risk and Solvency Assessment (ORSA); and records any actual losses or near misses that occur as a consequence of the realisation of risk. The Director of Risk has responsibility for ensuring that managers are aware of their risk management obligations, providing them with support and advice, and ensuring that the risk management strategy is properly communicated. Reports are produced showing the most significant risks identified and the controls in place. Internal Audit uses the risk registers to plan and inform their programme of audits around the most significant risks to the Group to ensure that the prescribed controls are in place and are operating effectively.
The GRC receives reports setting out key performance and risk indicators and considers possible control issues brought to its attention by early warning mechanisms that are embedded within the operational units. It, together with the Audit Committee, also receives regular reports from the relevant Internal Audit functions, which include recommendations for improvement of the control and operational environment. Twice a year the Chair of the Group Risk Committee provides a comprehensive written report to the Board on the Group’s risk appetite, risk strategy and risk management policy considering the principal assessed exposures and the effectiveness of the mitigation strategies adopted.
The Audit Committee reports to the Board on the appropriateness and effectiveness of the risk management systems and internal controls (including financial controls). Where appropriate, the Committee provides a high-level challenge to the steps being taken by the GRC to implement the risk management strategy. The Internal Audit functions undertake regular reviews of internal control systems and business processes, identifying control weaknesses and making recommendations to management on improvements where necessary. Internal Audit also reviews the effectiveness of the Group Risk function.
Dear Shareholder, In accordance with its remit to review regularly the composition and experience of the Board, the focus and attention of the Committee during the year was on succession planning. The Committee led the process of Executive and Non-Executive Board appointments given Kevin Chidwick’s move to devote himself full-time to the role of CEO of Elephant Auto, the Group’s US insurance business, entailing his stepping down from the role of CFO and from membership of the Board, and John Sussens and Martin Jackson stepped down from their Non-Executive roles on the Board during the year after their allotted nine years. The Committee assessed the appropriateness of Geraint Jones, the Deputy CFO, to succeed Kevin Chidwick as CFO and carried out a robust and comprehensive Non-Executive recruitment process resulting in the appointment of Penny James. This appointment further enhanced the range of skills, breadth of experience and diversity around the Board table.
Given that Roger Abravanel will not be seeking re-election at the forthcoming AGM, the Nomination Committee will consider the appropriate size and composition of the Board going forward.
The Nomination Committee’s primary responsibilities are to: @ Lead the process for making appointments to the Board.
@ Ensure plans are in place for orderly succession for appointments to the Board and for other senior management positions.
Appointments Following this process, the Committee identified Penny James, who has extensive insurance experience in particular in her current role as Director of Group Finance at Prudential plc since March 2011 and her previous appointments as Chief Finance Officer of Omega Insurance Holdings and UK General Insurance CFO of Zurich Financial Services. Given Penny’s 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.
Two of the three Executive Directors are founding Directors and receive remuneration that comprises salary and modest benefits only. The Committee continues to hold the view that this is appropriate, as their significant shareholdings provide a sufficient alignment of their interest with those of other shareholders. In order to provide full transparency of pay arrangements for our Executive Directors, this Report includes single figure and comparative data for our CFO as well as for our CEO, as the pay arrangements for the CFO are more reflective of those for (non-founder) executives.
The key changes that have been proposed to the DFSS are: @ Increased maximum DFSS opportunity of £2 million. For awards above £1 million, a maximum of 600% of base salary applies. We would only expect to utilise the increased maximum award in certain particular circumstances such as the recruitment of a new Executive Director. In this case, we would provide an explanation in our Annual Report on Remuneration.
@ In addition to Earnings per Share (EPS), two additional performance measures in the DFSS: relative Total Shareholder Return (TSR) and Return on Equity (ROE). The exact measures for each award may vary to reflect strategic priorities. For the 2015 awards, it is intended that vesting will be linked one third to each of EPS, TSR and ROE.
@ Introduction of malus and clawback provisions to allow the recovery of both vested and unvested awards, for example, in the event of gross misconduct or misstatement.
During the early part of 2015, we consulted with our top shareholders on the proposed revisions to the DFSS. Feedback has been positive and we hope to receive your support for both the revised DFSS and the revised Remuneration Policy at the upcoming AGM.
@ Reviewing the appropriateness of the performance conditions for the Free Share Incentive Plan (SIP) awards.
@ Reviewing the Group’s two key share plans to ensure both are up to date with current legislation.
@ Reviewing the maximum limit for shares distributed via the SIP.
@ Reviewing the Committee’s Terms of Reference and recommending amendments to the Board for approval.
Compliance statement This Remuneration Report has been prepared according to the requirements of the Companies Act 2006 (the Act), Regulation 11 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and other relevant requirements of the FCA Listing Rules. In addition, the Board has applied the principles of good corporate governance set out in the UK Corporate Governance Code (the Code) and has considered the guidelines issued by its leading shareholders and bodies such as the Association of British Insurers and the National Association of Pension Funds.
This section of the report sets out the policy for Executive Directors which shareholders are asked to approve at the 2015 Annual General Meeting (AGM). The Committee intends that this policy will formally come into effect from the date of the 2015 AGM.
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.
@ Performance-linked – a significant part of the Executive Directors’ (excluding the founding Directors) and senior managers’ reward remains performance-linked and shareholder-aligned.
@ Transparent – all aspects of the remuneration structure are clear to employees and openly communicated.
None of the existing Executive Directors received total taxable benefits exceeding 5% of salary (excluding relocation) during the most recent financial year, and it is not anticipated that the cost of benefits provided will exceed this level over the term of this policy.
Discretionary Free Share Scheme (DFSS) To motivate and reward longer term performance, aid long term retention of key executive talent, use capital efficiently, grow profits sustainably and further strengthen the alignment of the interests of shareholders and staff.
Executive Directors may be granted awards annually at the discretion of the Committee. Henry Engelhardt and David Stevens have declined to participate given their significant shareholdings.
Threshold performance will result in vesting of up to 25% of the maximum award.
DFSS bonus payments are subject to clawback in exceptional circumstances (such as material misstatement or gross misconduct).
The Committee is satisfied that the above Remuneration Policy is in the best interests of shareholders and does not promote excessive risk-taking. The Committee retains discretion to make non-significant changes to the Remuneration Policy without reverting to shareholders.
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. This includes all outstanding awards under the DFSS, made prior to the approval of the 2015 DFSS, and awards of DFSS shares that vest 50% on performance and 50% on continued employment made to the new CFO prior to his appointment to the Board.
Selection of performance measures EPS vs. LIBOR has been selected as a performance measure for awards under both the existing and 2015 DFSS as the Committee feels it is a strong indicator of both long term shareholder return and the underlying financial performance of the business. It is transparent and visible and provides good line-of-sight to executives. For awards to be made in 2015, two further measures will be added. The first additional measure is TSR vs. the FTSE 350 (excluding investment companies), selected to reflect value creation for Admiral’s shareholders as compared with the general market. The second additional measure is ROE, selected as the Committee believes that ROE reinforces the focus on capital efficiency and delivery of strong returns for our shareholders, thereby further strengthening the alignment of management’s incentives with Admiral’s strategy. The specific performance measures and their respective weightings in respect of each DFSS award may vary to reflect the strategic priorities at the time of the award.
Performance targets are set to be stretching and achievable, taking into account the Company’s strategic priorities and the economic environment in which the Company operates. The financial targets are set taking into account a range of reference points including the Group’s strategic plan and broker forecasts for both Admiral and its insurance peers. The Committee believes that the performance targets set are stretching, provide motivation, and that maximum outcomes are only available for outstanding performance.
Approximately 2,300 employees from across the Group, as well as the CFO, participate in the DFSS. The Committee recommends for approval by the Board awards to all participants under the DFSS. For the CFO and around 20 senior managers, all share awards are subject to the performance conditions detailed in the policy table. For employees at lower organisational levels, awards are split: 50% of the award is subject to the same performance conditions and the other 50% has no performance conditions attached other than the requirement that the recipient remains an employee of the Group at the date of vesting. Award sizes vary by organisational level. All holders of DFSS awards receive the DFSS bonus. Overseas employees receive an equivalent award to the UK SIP awards under the DFSS. These awards have no performance measures attached.
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.
When considering termination payments, the Committee reviews all potential incentive outcomes to ensure they are fair to both shareholders and participants. The table below summarises how the awards under the DFSS and DFSS bonus scheme are typically treated in specific circumstances, with the final treatment remaining subject to the Committee’s discretion: Plan Scenario Timing of vesting Treatment of awards
To attract and retain NEDs of the highest calibre with experience relevant to the Company
Fee levels are reviewed by reference to time commitment and responsibility.
The current Group Chairman, as with the founding Directors, holds a significant shareholding in the Group and this is reflected in the size of his fee, which is materially below that of Chairs of organisations of similar size and complexity.
Approach to remuneration relating to new appointments 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
Internal appointments Remuneration for new Executive Directors appointed by way of internal promotion will similarly be determined in line with the policy for external appointees, as detailed on page 64. Where an individual has contractual commitments made prior to their promotion to the Board, the Company will continue to honour these arrangements. Incentive opportunities for below Board employees are typically no higher than for Executive Directors, but measures may vary if necessary.
Further detail on the votes received on the Directors’ Remuneration Policy and Annual Report on Remuneration are provided in the Annual Report on Remuneration.
Remuneration Committee membership in 2014 The Board sets the Group’s Remuneration Policy and, through the authority delegated to it by the Board, the Committee is responsible for making recommendations to the Board on the structure and implementation of the Remuneration Policy across the Group with consideration to the prevailing economic climate within the economies in which the Group operates. Its remit includes recommending the remuneration of the Group Board Chairman, the Executive Directors and the Company Secretary; reviewing the remuneration of senior management; and reviewing the composition of and awards made under the performance-related incentive schemes.
Advisor to the Committee During the year, in order to enable the Committee to reach informed decisions on Executive remuneration, advice on market data and trends was obtained from independent consultants, Kepler Associates. Kepler reports directly to the Committee Chair and is a signatory to the Code of Conduct for Remuneration Consultants (which can be found at www.remunerationconsultantsgroup.com). Kepler does not provide any other services to the Group. The fees paid to Kepler in respect of work carried out in 2014 (based on time and materials) totalled £4,135, excluding expenses and VAT.
In addition, PricewaterhouseCoopers LLP (PwC) provided the Committee with advice on the structure of the Group’s share schemes. The fees paid to PwC for work during 2014 totalled £8,200, excluding expenses and VAT. The Company Secretary also circulates market survey results as appropriate.
Summary of shareholder voting at the 2014 AGM The table below shows the results of the binding and advisory votes on the Directors’ Remuneration Policy and Annual Report on Remuneration of the 2014 Directors’ Remuneration Report, respectively, at the 2014 AGM.
Total single figure of remuneration for Executive Directors (audited) The table below sets out the total single figure remuneration received by each Executive Director for the year ended 31 December 2014 and the prior year.
Executive Director 1. Base salary 2. Benefits 3. Pension 4. SIP 5. DFSS 6. DFSS bonus 7. Other Total remuneration 2013 n/a n/a n/a n/a n/a n/a n/a n/a
The figures have been calculated as follows: 1. Base salary/fee: amount earned for the year.
8. Geraint Jones was appointed to the Board as CFO on 13 August 2014. His 2014 remuneration includes salary, pension and benefits in respect of his service as CFO, his full year DFSS and his full year DFSS bonus.
9. Kevin Chidwick left the Board on 13 August 2014 to focus on his new role as CEO of Elephant Auto. His 2014 remuneration includes salary, pension and benefits in respect of his service as CFO, his full year DFSS and his full year DFSS bonus.
Geraint Jones was also granted an award in April 2014 of 20,000 shares with a value at date of award of £274,800. As this award was made prior to his appointment to the Board, only 50% of this award is subject to performance.
Scheme interests awarded in 2014 continued DFSS continued Awards made up to and including 2014 vest based on EPS growth vs. LIBOR, as outlined on page 61.
CFO (Geraint Jones): 20,000 shares on 15 April 2014 with a value at the date of award of £274,800 (based on share price of £13.74) (50% of the award is subject to performance); and 35,000 shares on 22 September 2014 with a value at the date of award of £429,520 (based on share price of £12.272) (100% of the award is subject to performance).
Previous CFO (Kevin Chidwick): 35,000 shares on 22 September 2014 with a value at the date of award of £429,520 (based on share price of £12.272)
Maximum (100% vests) Growth of 10% p.a. in excess of LIBOR over 3 years
Implementation of remuneration policy for 2015 Executive Directors Salary, pension and benefits Remuneration for the Executive Directors in 2015 will be determined in line with the latest policy. The Committee approved the following base salaries for the Executive Directors in 2014: Director Latest salary 2014 salary % change Effective date
@ Two additional performance measures in the DFSS: relative TSR and ROE.
Median Top quartile 25% for median, with straight line relationship to 100% for top quartile.
ROE 25% 55% 25% for reaching threshold with straight line relationship to 100% at maximum performance.
The Committee will determine the precise targets closer to the time of making the awards, later in the year, and will disclose them in the 2015 Annual Report on Remuneration.
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 2013 to the financial year ended 31 December 2014.
The Directors are proposing a final dividend for the year ended 31 December 2014 of 49.0 pence per share bringing the total dividend for 2014 to 98.4 pence per share (2013: 99.5 pence per share).
DFSS vesting outcome (% of maximum) 98% 100% 100% 100% 100% 70% 85%
*1 These figures include reimbursement of £177,104 and £165,000 in 2014 and 2013, respectively, for expenses incurred in respect of the previous CFO’s relocation
Annual bonus outcome has been excluded as Admiral does not operate any performance-based annual bonus schemes.
Dilution The Company has controls in place to ensure that shares awarded under the schemes operated by the Company within any rolling ten-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.
Former Chief Financial Officer Kevin Chidwick’s interests in shares under the DFSS and SIP (audited)
All employees 3,598 3,601 *1 Company Directors consists of the Board of Directors, as detailed on pages 42 to 43, excluding Penny James who was appointed to the Board on 1 January 2015 *2 Other senior managers is as defined in the Companies Act 2006 (Strategic Report and Directors’ Report) and includes persons responsible for planning, directing or controlling the activities of the Company, or a strategically significant part of the Company, other than Company Directors. Any other Directors of undertakings included in the consolidated accounts that are not considered strategically significant have not been included
Contractual arrangements The Group considers its co-insurance and reinsurance contracts, as described in the Strategic Report section on page 25 to be essential to the running of the Group’s business. No other contractual arrangements are considered to be essential.
Directors and their interests The present Directors of the Company are shown on pages 42 to 43 of this Report, whilst Directors’ interests in the share capital of the Company are set out in the Remuneration Report on page 71.
Greenhouse gas emissions The annual level of greenhouse gas emissions, resulting from activities for which the Group is responsible, in 2014 was 6,836 CO2e (2013: 6,383 CO2e), equivalent to 1.19 tonnes (2013: 1.11 tonnes) per employee*1. Please note that the comparative figures have changed since the 2013 Annual Report, reflecting a validation process and different locations included in the measure. *1 Average employee number excludes employees from three offices for which data could not be collected.
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).
There are no material exclusions from this data. Exclusions included figures for gas, air conditioning and water because the information was not available from the managing agents of the Group’s multiple office locations. In addition, emissions data from the US, France and one of the Indian offices has been excluded due to difficulties in collecting complete and accurate data. These locations together total 8% (2013: 7%) of Group headcount and are therefore considered immaterial.
Going concern The Directors consider that the Group has adequate financial resources to continue operating for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing the financial statements. In considering the appropriateness of this assumption, the Board has reviewed the Group’s projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses.
At 30 January 2015, 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 %
@ Pursuant to the Listing Rules of the FCA whereby certain employees of the Company require the approval of the Company to deal in the Company's securities.
Power to issue shares At the last Annual General Meeting, held on 9 April 2014, authority was given to the Directors to allot unissued relevant securities in the Company up to a maximum of £91,127, equivalent to one third of the issued share capital as at 7 March 2014. This authority expires on the date of the Annual General Meeting to be held on 29 April 2015 and the Directors will seek to renew this authority for the following year.
Appointments of Directors The Company’s Articles of Association (the Articles) give the Directors power to appoint and replace Directors. Under the Terms of Reference of the Nomination Committee, any appointment must be recommended by the Nomination Committee for approval by the Board of Directors. The Articles also require Directors to retire and submit themselves for election at the first Annual General Meeting following appointment and all Directors who held office at the time of the two preceding Annual General Meetings to submit themselves for re-election.
However, in accordance with the requirement under the UK Corporate Governance Code (the Code) for annual election of Directors, all Directors, except for Roger Abravanel, will submit themselves for re-election at the Group's Annual General Meeting on 29 April 2015.
Admiral is subject to the UK Corporate Governance Code, published by the Financial Reporting Council (FRC) and available on their website, www.frc.org.uk.
During the year to 31 December 2014, the Company has in all respects complied with the provisions of the 2012 Code.
Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements, in accordance with applicable law and regulations.
In preparing each of the Group and Parent Company financial statements, the Directors are required to: @ Select suitable accounting policies and then apply them consistently.
@ For the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU.
@ For the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements.
Responsibility statement The Directors confirm that to the best of their knowledge: @ The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
@ The management report required by DTR 4.1.8R (contained in the Strategic Report and the Directors’ Report) includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
@ Our response – Our audit procedures included testing the controls over the underwriting and claims process and performing substantive analysis over the trends in claims frequency and size. Using our actuarial specialists to support us, we assessed the level of reserves held for incurred claims through evaluating the competence, capability and objectivity of the Group’s external actuary, assessing the actuarial methodologies employed, including the use of paid and incurred chain ladders and the average cost per claim method, challenging key judgements, for example the extent to which improvements in claims trends are taken into account in reserve projections, and benchmarking key assumptions against KPMG sourced market data. In respect of the amounts related to large bodily injury claims and actual and potential PPOs, we investigated the process for identifying and assessing the required reserve for large claims and for updating this reserve as more information becomes available, investigated the process for assessing cases that have the potential to be settled as PPOs and benchmarked the key assumptions made in calculating large bodily injury claims reserves, including mortality (in the case of PPO cases) and discount rates applied. The focus of our work is the UK Motor portfolio.
In respect of the margin held above the actuarial best estimate, we assessed the rationale for this margin including consideration of the level of prudence within the margin, the consistency with which the underlying judgements have been applied in relation to the current year and prior periods and the existence of any management bias.
Co-insurance and reinsurance Refer to page 51 (Audit Committee statement), note 5 (accounting policy and financial disclosures).
@ Our response – Our audit procedures included critically assessing the contract terms for these arrangements to ascertain whether, taking into account relevant accounting standards, the appropriate risk transfer has occurred to support the treatment of the arrangement as co-insurance or quota share reinsurance. We reviewed the terms of the reinsurance caps, re-calculated the expected total cap cost and compared to the actual cap cost recognised, and assessed the appropriateness of the allocation between insurance claims and operating expenses. We have also considered the adequacy of the Group’s disclosures and appropriateness of the presentation of transactions and balances relating to these arrangements.
@ The risk – The recognition of profit commission income from co-insurers and quota share reinsurers is initially in line with the loss ratios booked in the financial statements and will vary with movements in the loss ratios. The recognition of this income is therefore subject to the same level of estimation as the claims liability noted above until, in the case of quota share reinsurance, the relevant contracts are commuted, at which point no further profit commission is recognised. In addition, different contractual arrangements are in place with the Group’s co-insurance and reinsurance partners and there is a risk that the differences in arrangements are not appropriately accounted for, resulting in significant misstatement.
For these remaining components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these.
The Group audit team instructed two component auditors as to the significant risk focused audit procedures to be performed. The procedures on the remaining components were performed by the Group audit team. The Group audit team approved the component materialities, which ranged from £500,000 to £16,500,000, having regard to the mix of size and risk profile of the Group across the 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; and
@ 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.
@ the Audit Committee Statement does not appropriately address matters communicated by us to the Audit Committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion: @ adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
@ we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review: @ the directors’ statement, set out on page 73, in relation to going concern; and
Scope and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 75, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Profit after tax attributable to: Equity holders of the parent 285.2 287.0
Other comprehensive income for the period, net of income tax 13.9 (1.3)
Total equity attributable to equity holders of the parent 567.2 515.8
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2014
Cash flows from operating activities, before movements in investments 540.2 616.8
Cash and cash equivalents at end of period 6 255.9 187.9
Profit for the period — — — — 287.0 287.0 (0.1) 286.9
Share scheme credit — — — — 25.7 25.7 — 25.7
Deferred tax charge on share scheme credit — — — — 2.1 2.1 — 2.1
Profit for the period — — — — 285.2 285.2 (3.6) 281.6
Movements in fair value reserve — — 10.9 — — 10.9 — 10.9
Total comprehensive income for the period — — 10.9 2.5 285.2 298.6 (3.1) 295.5
Total transactions with equity holders — — — — (247.2) (247.2) 8.5 (238.7)
The Consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The Company has elected to prepare its Parent Company financial statements in accordance with UK Generally Accepted Accounting Practice (GAAP).
Adoption of new and revised standards The Group has applied all adopted IFRS and interpretations endorsed by the EU at 31 December 2014, including all amendments to extant standards that are not effective until later accounting periods. This is inclusive of: @ IFRIC Interpretation 21 Levies IFRIC Interpretation 21 Levies was endorsed on 13 June 2014 and subsequently adopted by the Group. The IFRIC is effective for accounting periods beginning on or after 1 January 2014. It clarifies the IFRS requirements in relation to the timing of recognition of provisions for levies charged by public authorities. This is relevant to the Group in terms of its obligations to pay levies relating to insurance business, primarily to the Motor Insurers’ Bureau, Financial Services Compensation Scheme and other regulatory bodies in the UK.
The Group has aligned the timing of its recognition of provisions for levies to that required by the IFRIC. The impact of the adjustment in 2014 is a reduction in net operating expenses of £6.7 million. Whilst this is considered to be a change in accounting policy in line with IAS 8, no restatement of comparative information has been performed on materiality grounds.
In accordance with the transitional provisions of IFRS 10, the Group reassessed the control conclusion for its investees at 1 January 2014. No modifications of previous conclusions about control regarding the Group’s investees were required.
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2014 but have either yet to be endorsed by the EU, or were endorsed shortly after the year end. The following IFRSs have been issued but have not been applied by the Group in these financial statements: @ IFRS 9 Financial Instruments.
@ Amendments to IFRS 10, 11 and 12 and IAS 1, 16, 27, 28, 38 and 41.
In 2014, the IASB issued the full, final version of IFRS 9. This version supersedes all previous versions. The standard has an effective date of 1 January 2018 although earlier application is permitted. The standard includes requirements relating to the recognition, measurement, impairment, de-recognition of assets along with general hedge accounting.
2. Basis of preparation The accounts have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board has reviewed the Group’s projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses. During July 2014, the Group announced a successful, inaugural bond placement of £200 million, ten-year, tier two subordinated notes with a fixed interest charge of 5.5%.
The financial statements are prepared on the historical cost basis, except for the revaluation of financial assets classified as at fair value through profit or loss or as ‘available for sale’. The Group and Company financial statements are presented in Pounds sterling, rounded to the nearest £0.1 million.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is reviewed if this revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, it is recognised by adjusting the carrying amount of the related asset or liability in the period of the change.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 3. 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 following two areas: @ Classification of the Group’s contracts with reinsurers as reinsurance contracts: A contract is required to transfer significant insurance risk in order to be classified as such. Management reviews all terms and conditions of each such contract, and if necessary obtains the opinion of an independent expert at the negotiation stage in order to be able to make this judgement.
The Group’s reserving policy requires management to reserve within a range of potential outcomes above the projected best estimate outcome, to allow for unforeseen adverse claims development.
The financial statements of foreign operations whose functional currency is not pounds sterling are translated into the Group presentation currency (sterling) as follows: @ Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet.
Price Comparison The segment relates to the Group’s price comparison websites; Confused.com in the UK, Rastreator in Spain, LeLynx in France and compare.com in the US. Each of the Price Comparison businesses are operating in individual geographical segments but are grouped into one reporting segment as Rastreator, LeLynx and compare.com do not individually meet the threshold requirements in IFRS 8.
Other revenue and profit commission 293.4 6.6 112.7 14.4 — 427.1
Within the UK Car Insurance segment, transactions between the Group’s intermediary and the Group’s insurance companies relating to vehicle commission totalling £13.3 million (2013: £18.4 million) have been eliminated (from the insurance expenses and other revenue lines in the income statement) on the basis that the non-elimination would have materially distorted the presentation of key performance indicators.
5. Premium, claims and profit commissions continued 5c. Profit commission £m £m
Reserving policies and controls Reserving risk is mitigated through a series of processes and controls. The key processes are as follows: @ Regular management and internal actuarial review of individual and aggregate case claim reserves, including regular reporting of management information and exception reporting of significant movements.
@ Regular management and internal actuarial review of large claims, including claims settled or potentially settled by PPOs for which the uncertainty is increased by factors such as the lifetime of the claimant and movements in the indexation for the cost of future care of the claimant.
@ Bi-annual external actuarial review of best estimate claims reserves using a variety of recognised actuarial techniques, including reviews of the potential ranges around best estimates.
Co-insurance and reinsurance As noted in the Strategic Report, the Group shares a significant amount of the motor insurance business generated with external underwriters. In 2014, 40% of the UK risk was shared under a co-insurance contract, under which the primary risk is borne by the co-insurer. A further 35% of the UK risk was ceded under quota share reinsurance contracts. Co-insurance and reinsurance contracts are also used in the International Car Insurance businesses. Further detail can be found in the Strategic Report on page 30.
The maturity profile of gross insurance liabilities at the end of 2014 is as follows: < 1 year £m 1–3 years £m > 3 years £m
UK gross claims incurred (excluding claims handling costs) (360.3) (694.4) (789.2) (671.2) (613.6)
International and other gross claims incurred (39.4) (65.6) (113.9) (132.6) (159.5)
UK net claims incurred (excluding claims handling costs) (184.1) (323.6) (339.5) (233.6) (180.0)
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 5. Premium, claims and profit commissions continued 5d. Reinsurance assets and insurance contract liabilities continued (v) Analysis of claims reserve releases (UK Car Insurance business only) The following table analyses the impact of movements in prior year claims provisions on a gross and net basis. Figures are presented on an underwriting year basis.
Total gross release (UK Car Insurance) 40.7 10.3 36.2 115.8 148.1
Total net release (International Car Insurance) — — — — 6.3
Analysis of net releases on UK Car Insurance: – Net releases on Admiral net share 23.1 7.8 16.3 53.3 66.8
– Releases on commuted quota share reinsurance contracts*1 0.4 2.5 1.3 40.9 70.6
Total net release as above 23.5 10.3 17.6 94.2 137.4 *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. £70.6 million of releases on commuted quota share contracts is split as follows: 2012: £29.1 million; 2011: £27.9 million; 2010 and prior: £13.6 million
Finance costs from financial liabilities comprise interest expense on subordinated notes, calculated on the effective interest rate method. The effective interest rate method calculates the amortised cost of a financial asset (or group of financial assets) and allocates the interest income over the expected life of the asset.
(ii) Financial assets – investments and receivables Initial recognition Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss (FVTPL), loans and receivables or held to maturity investments.
This designation is permitted under IAS 39, as the investments in money market funds and short dated securities are managed as a group of assets and internal performance evaluation of this group is conducted on a fair value basis.
The Group’s holdings in Fixed Income and Asset Backed Securities are classified as available for sale (AFS) investments, which is consistent with the intention for which they were purchased.
Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short term deposits with original maturities of three months or less. All cash and cash equivalents are measured at amortised cost.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 6. Investments continued 6a. Accounting policies continued (iii) Financial liabilities – subordinated notes Initial recognition The Group’s financial liabilities comprising subordinated notes were initially recognised at fair value received, net of transaction costs incurred.
Subsequent measurement Subordinated notes are measured at amortised cost using the effective interest method. Movements in the amortised cost are recognised through the income statement.
Total investment and interest income 15.4 14.3 *1 Interest received during the year was £1.5 million (2013: £1.9 million)
Total financial liabilities per Consolidated Statement of Financial Position 1,169.6 1,013.7
The measurement of available for sale debt securities at the end of the period, is also based on active quoted market values (level one).
The amortised cost carrying amount of receivables is a reasonable approximation of fair value. The fair values of gilts and subordinated notes (both level one valuations) together with their carrying values shown in the Consolidated Statement of Financial Position are as follows: Carrying amount £m
The maturity profile of financial assets and liabilities at 31 December 2013 was as follows: On demand £m
Credit risk The Group defines credit risk as the risk of loss if another party fails to perform its obligations. The key areas of exposure to credit risk for the Group result through its reinsurance programme, investments, bank deposits and policyholder receivables.
@ Term deposits with well rated institutions are short in duration (one to five years). These are classified as term and valued at amortised cost. Therefore neither the carrying value of the asset, nor the interest return will be impacted by fluctuations in interest rates.
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 £756.5 million (2013: £785.3 million), £585.7 million (2013: £629.3 million) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
Foreign exchange risks Foreign exchange risks arise from unfavourable movements in foreign exchange rates that could adversely impact the valuation of overseas assets.
The Group’s exposures to net assets held in euros and dollars at the balance sheet date were £2.2 million and £72.0 million respectively (2013: £7.1 million and £60.2 million).
The £47.5 million (2013: £53.0 million) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Depreciation charge: Amortisation charge: – Deferred acquisition costs — 42.7 — 68.8
Analysis of fees paid to the auditor for other services: – Tax compliance services 0.1 — 0.1 —
Support staff 1,738 1,420 8e. Directors’ remuneration (i) Directors’ remuneration £m £m
8f. Staff share schemes Analysis of share scheme costs (per the Consolidated Income Statement): £m £m
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 (2014: £34.1 million; 2013: £36.0 million) and the gross credit to reserves reported in the Consolidated Statement of Changes in Equity (2014: £23.2 million; 2013: £25.7 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 2014 scheme is 2,680,858 (2013 scheme: 2,348,549).
The amount of award that actually vests is based on the growth in the Company’s earnings per share (EPS) relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This performance is measured over the three year period the award applies to. For the 2014 and 2013 schemes, 50% of the shares awarded at the start of the three year vesting period are subject to these performance conditions.
The range of awards is as follows: @ If the growth in EPS is less than the RFR, no awards vest.
@ To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the three year period.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 8. Expenses continued 8f. Staff share schemes continued (ii) The Discretionary Free Share Scheme (the DFSS) continued Awards under the DFSS are not eligible for dividends (although a discretionary bonus is currently paid equivalent to the dividend that would have been paid on the respective shareholding) and hence the fair value of free shares to be awarded under this scheme has been revised downwards to take account of these distributions. The unadjusted fair value is based on the share price at the date on which awards were made (as stated in the Directors’ Remuneration Report).
Total awards committed 10,633,745 *1 Being the maximum number of awards expected to be made before accounting for expected staff attrition
Number of free share awards vesting during the year ended 31 December 2014 Original awards Awards vested
DFSS 2011 scheme 2nd award 157,312 102,121 9. Taxation 9a. Accounting policy Income tax on the profit or loss for the periods presented comprises current and deferred tax.
Over provision relating to prior periods – deferred tax (0.9) (0.6)
Corporation tax thereon at effective UK corporation tax rate of 21.50% (2013: 23.25%) 75.4 86.1
Impact of change in UK tax rate on deferred tax balances — 2.7
Total tax charge for the period as above 69.1 83.3 9c. Deferred income tax asset Analysis of deferred tax asset
Balance brought forward at 1 January 2013 (3.8) (1.9) (5.7) (3.8) (15.2)
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 9. Taxation continued 9c. Deferred income tax asset continued Analysis of deferred tax asset continued The UK corporation tax rate reduced from 23% to 21% on 1 April 2014. The average effective rate of tax for 2014 is 21.50% (2013: 23.25%). It will fall to 20% in April 2015. Deferred tax has therefore been calculated at 20% where the temporary difference is expected to reverse after this date.
Elephant Auto (asset recognised: £3.6 million; remaining unused losses: £33 million) – the asset is expected to be recovered over the next seven years. The recognised asset has been limited to the amount supported by forecast cash flows over the next seven years. Whilst profits are expected to be available after 2021, the Group considers these longer term forecasts to be more uncertain and has therefore not recognised an asset that would only be supported by profits beyond the seven year period.
compare.com (asset recognised: £9.8 million; remaining unused losses: £nil) – the asset is expected to be fully recovered over the next five years. The recognised asset has been limited to the amount supported by forecast cash flows over the next five years. The forecasts and underlying assumptions have been reviewed and approved by the Board. In addition, the forecasts have been stressed for both revenue and profit reductions and the asset remains recoverable under the stressed scenarios.
The Group considers full recovery of the assets to be probable in both cases.
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.
10. Other assets and other liabilities continued 10a. Accounting policy continued (iv) Intangible assets continued The key assumptions used in the value in use calculations are those regarding growth rates and expected changes in pricing and expenses incurred during the period. Management estimates growth rates and changes in pricing based on past practices and expected future changes in the market.
Software Purchased software is recognised as an intangible asset and amortised over its expected useful life (generally the licence term). Internally generated software is recognised as an intangible asset, with directly attributable costs incurred in the development stage capitalised. The internally generated software assets are amortised over the expected useful life of the systems and amortisation commences when the software is available for use.
Net book amount *1 The increase in additions is due to investment in the fit-out of new premises
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 10. Other assets and other liabilities continued 10c. Intangible Assets
Goodwill relates to the acquisition of Group subsidiary EUI Limited (formerly Admiral Insurance Services Limited) in November 1999. It is allocated solely to the UK Car Insurance segment. As described in the accounting policies, the amortisation of this asset ceased on transition to IFRS on 1 January 2004. All annual impairment reviews since the transition date have indicated that the estimated recoverable value of the asset is greater than the carrying amount and therefore no impairment losses have been recognised. Refer to the accounting policy for goodwill for further information.
10h. Contingent liabilities The Group is, from time to time, engaged in legal matters or disputes (including, but not limited to, employment, regulatory matters and data protection) which might result in an outflow of benefits from the Group. Where the Group is able to reliably estimate probable losses, provision is made. The Group has not disclosed estimates of the potential financial effect of contingent liabilities arising from matters where the impact is highly unlikely to be material, or where it is not practicable to do so, or, in cases where it is practicable, where disclosure could prejudice conduct of the matters.
In particular, the Group’s US insurance operation is subject to legal action in relation to alleged breach of consumer protection legislation. At the balance sheet date, the outcome and duration of the legal action is highly uncertain and it is not possible to make a reliable estimate of the outcome.
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.
11b. Dividends Dividends were declared and paid as follows: £m £m
August 2013 (48.9 pence per share, paid October 2013) — 132.7
August 2014 (49.4 pence per share, paid October 2014) 135.2 —
The dividends declared in March represent the final dividends paid in respect of the 2012 and 2013 financial years. The dividends declared in August are interim distributions in respect of 2013 and 2014.
NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 11. Share capital continued 11c. Earnings per share £m £m
Profit for the financial year after taxation attributable to equity shareholders 285.2 287.0
The difference between the basic and diluted number of shares at the end of 2014 (being 448,937; 2013: 502,105) relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note 8 for further detail.
748,310 (2013: 917,838) 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 2014 of 7,232,394 (31 December 2013: 6,484,084). These shares are entitled to receive dividends.
11. Share capital continued 11f. Group subsidiary companies The Parent Company’s subsidiaries are as follows: Subsidiary Country of incorporation
Turnover as per note 4b of financial statements 1,971.0 2,030.2 *1 During 2012 Admiral ceased earning Other Revenue from the sale of non-optional 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 non-optional 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 12b. Reconciliation of claims incurred to reported Group loss ratio, excluding releases on commuted reinsurance
These financial statements were approved by the Board of Directors on 4 March 2015 and were signed on its behalf by: Geraint Jones Chief Financial Officer Admiral Group plc
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 has reviewed the Company’s projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses.
Other investments are money market liquidity funds and gilts. Refer to note 6 of the Group financial statements details of the Group’s investments, including money market liquidity funds and gilts.
7. Trade and other receivables – due within one year £m £m
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.
Commutation An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment and complete discharge of all obligations between the parties under a particular reinsurance contract.
Loss ratio The loss ratio can be calculated on an accident year or underwriting year basis, and is expressed as a percentage of (i) claims incurred, divided by (ii) net premiums.
Reinsurance Contractual arrangements whereby the Group transfers part or all of the insurance risk accepted to another insurer. This can be on a quota share basis (a percentage share of premiums, claims and expenses) or an excess of loss basis (full reinsurance for claims over an agreed value).
Financial calendar Final 2014 dividend 7 May 2015 – Ex dividend date 8 May 2015 – Record date 29 May 2015 – Payment date
The Group does not produce printed copies of interim results for shareholders unless requested.
The interim results will be available on the corporate website from 19 August 2015.
Best Workplaces 3rd Best Large UK Workplace Great Place to Work Institute, 2014 2nd place in the Sunday Times Best Big Companies to Work For listings, 2014 23rd Best Best Large Workplace in Canada (Admiral Halifax)
8th Best Company to Work for in Spain (Admiral Seguros: Balumba and Qualitas Auto)
5th Best Workplaces PYMES (SMEs) in Spain Great Place to Work Institute, 2014 (Rastreator)
4th Best Large Employer in the Richmond Times Dispatch Sterling Award (Elephant Auto)