What we do: Admiral Group is a successful car insurer based in South Wales in the UK. The Group’s core UK Car Insurance business launched in 1993 and the Group has grown every year since.
Outside the UK, Admiral operates car insurance businesses in Spain, Italy, France and the USA which now insure over 300,000 vehicles. The Group also owns price comparison businesses in Spain, France and Italy.
At the end of 2011 Admiral had 3.4 million customers in fi ve countries. It employs over 6,000 people in nine countries.
Admiral’s Business Model: • Three-fold increase in profi ts to £299m (2004-2011) • Focussed on delivering profi t growth
• 100% organic, controlled growth • Three-fold increase in number of customers to 3.4m (2004-2011) • Flexibility to adjust growth according to market conditions
• Strong earnings growth • Highly capital effi cient • Transparent dividend policy and high dividend payout ratio
• The Group’s core business is UK private car insurance – it accounts for 90% of turnover and customers
Outside the UK, the Group has four car insurance and three price comparison operations.
• Gladiator increased profit to £2.8m in a difficult commercial vehicle market
• Confused generated profit of £16.1m in a highly competitive UK market
• Confused’s share of car insurance comparison market maintained in 2011
ConTe, an Italian car insurer launched in May 2008. Chiarezza, a price comparison website started trading in February 2010.
Admiral launched a private car insurance business in 1993. At the end of 2011 Admiral was operating through four brands: Admiral, Elephant, Diamond and Bell. Gladiator, a commercial van insurer started trading in 1998. Confused.com, a price comparison website started trading in 2002.
A lot has been written about Admiral over the past six months, not all of which I recognise as accurately reflecting the business I have chaired for the past eleven years. I think it is, therefore, appropriate to restate the clear and straightforward strategy that determines our direction and our priorities and remains, we believe, as relevant now as when we first listed:-
• Give all our staff a stake in what they create by making them shareholders
• Recognise the responsibility we have to the communities of which we are a part
It is important to underline that this did not result from inadequate booked reserves on prior years but from a higher than anticipated projected cost of bodily injury claims on a part of the business written during our recent rapid growth. The effect of our reinsurance agreements is that we receive a substantial share of emerging profit on all the business we write, while only bearing the risk of loss arising on a portion of that business. Changes to co- and reinsurance arrangements over the past few years give Admiral an even greater share of profits, meaning relatively small changes in the loss ratio have a material impact on our results.
This level of distribution, which sets Admiral apart from its peers, is made possible by our sharing the underwriting of our business with our reinsurance partners, and we have already announced the further extension of our current rolling quota share reinsurance contracts to cover the 2014 underwriting year.
Over the next two years, three of our Non-Executive Directors will reach the end of their permitted nine years. As I said last year, we are very keen to ensure continuity of knowledge and Board dynamics and have, therefore, a policy of recruiting well ahead of impending retirements. I am, therefore, delighted to welcome Roger Abravanel and Annette Court to the Board, the latter subject to FSA approval. With 34 years strategic consulting at McKinsey, and Non-Executive seats on the boards of a number of major international companies Roger brings to Admiral both an in-depth understanding of doing business in Italy, now our second largest market outside the UK, and a clear insight into how most effectively to develop our business internationally. Having been Chief Executive of RBS Insurance, the market leader in UK private motor insurance and European General Insurance CEO for Zurich Financial Services, Annette has both extensive experience in UK direct motor insurance and in building retail insurance businesses internationally.
Admiral has an experienced Board with the diverse range of backgrounds and perspectives needed to create an environment of challenging and constructive debate. As regards the specifics of gender diversity 23% of our Board are female whilst amongst our senior management team this proportion is 42%. We review annually the effectiveness of our Board, and of myself as Chairman, and the entire Board submits itself to annual re-election at the AGM. Recognising the needs of a growing and increasingly broad business the Board has a particular focus on the development of management talent. As Non-Executives we aim to understand the business by interacting with it informally as well as through the Board process. Each year Non-Executive Directors visit both specific parts of our UK business and one of our overseas businesses to spend time with local management. This provides an opportunity to discuss areas in more depth than is possible in the Board and to gain a first-hand view as to quality of management. The Board aims to maintain an appropriate balance between matters strategic and operational and each year has a multi-day off-site to review Admiral’s progress against its strategic objectives and to shape future strategy. Conscious of the increasing demands of developments such as Solvency II we have this year split into two Committees, Audit and Risk, the activities of the Audit Committee, and our Committee Chairmen have the responsibility for identifying, and ensuring the delivery of, the technical training requirements of their members.
Let me finish by thanking all our people for the contribution they have individually made to a year where we have extended our business still further whether measured by revenue, profit, market share, or geography. It is their ownership of their objectives, their commitment to their delivery, and the creativity of their thinking, that underpin the delivery of our strategy and the sustained profitable growth that I am confident we shall continue to be able to report.
Performance highlights: • For the eighth consecutive year, Admiral Group has reported record turnover and record profits, with a return on capital of 59%.
Fast forward a year. Profits are up 13%, and in most situations you’d call this a giant winner. But this is less than most people thought they would be. Far less than I thought they would be, that’s for sure. It has been a disappointing year. Not because it was a bad year, but because so much more was expected.
Meanwhile, we continue to grow our businesses outside the UK to ensure continued prosperity for Admiral Group well into the future. It was a good year for these operations, although all of the markets we’re in present their own individual challenges.
In short, 2011 was the year of the chameleon: quite useful (they eat insects!) but changeable and a bit fickle. As we enter 2012 I feel confident. If there was any complacency developing in our operation it is certainly gone now. I know we’ve got lots of people who work hard every day to ensure Admiral’s continued success well into the future.
For the eighth consecutive year, in fact every year since we became a public company, Admiral Group has reported record turnover and record profits with a return on capital of 59%. If this is, as Dickens put it, the winter of despair, then I say: Please, Sir, may I have some more?
Once again in 2011, the Group grew significantly, with turnover increasing by 38% to £2,190.3 million (2010: £1,584.8 million) and the number of customers served around the Group reaching 3.36 million – a rise of 22% (2010: 2.75 million).
Other Group key performance indicators include: • Group combined ratio at 95.7%, against 89.3% in 2010
• Net revenue up 36% to £870.3 million • Return on average equity at 59% – in line with 2010
Total dividends paid and proposed for the financial year amount to 75.6 pence per share (£203 million), an increase of 11% on the previous year (68.1 pence; £181 million).
Earnings per share (p) 81.9p * Turnover comprises total premiums written and other revenue
• 21% compound annual growth over 5 years • Over 11% share of UK market
• Our main operations are in Cardiff, Swansea and Newport in South Wales, and Nova Scotia, Canada and Bangalore, India
• Expense ratio at 14% – around half the market average
• Substantial profit generated from nonunderwriting activities – 31% increase in other revenue (ancillary plus instalment contribution)
• Other revenue (ancillary plus instalment contribution) per vehicle also stable at £84
(We include KPI’s on staff and customers in the Corporate Responsibility section later in the Business Review)
Reported loss ratio 66.9% 68.3% 77.3% Reported expense ratio 18.0% 15.2% 14.0% Reported combined ratio 84.9% 83.5% 91.3% Written basis expense ratio
UK Car Insurance – Co-insurance and Reinsurance Admiral (in the UK and internationally) makes significant use of proportional risk sharing agreements, where insurers outside the Group underwrite a majority of the risk generated, either though co-insurance or reinsurance contracts. These arrangements include attractive profit commission terms which allow Admiral to retain a significant portion of the profit generated.
• Underwriting risk mitigation – The co-insurer and reinsurers bear their proportional shares of claims expenses and hence provide protection should results worsen substantially
That contract will run until at least the end of 2016, and will see Great Lakes co-insure 40% of the UK business for the remaining period. Admiral has committed to retain at least 25% of the UK business for the duration, whilst the allocation of the balance is at Admiral’s discretion.
• Higher relative price increases, slowing the rate of growth in the second half of 2011
The effect of the higher booked loss ratio in 2011 (despite a 55% increase in net premium revenue) was a reduction in the level of profit commission, which fell to £61.8 million (15% of premium) from £67.0 million (25% of premium).
Claims experience in 2011 The reported loss ratio for 2011 is 77.3%, up from 68.3% in 2010. A significant proportion of the increase relates to a lower level of releases from prior year reserves, which in 2011 only equated to 2.5% of net premium revenue, compared to 8.7% in 2010. The loss ratio excluding the impact of releases was 79.8% in 2011, up from 77.0% in 2010.
The two main factors contributing to the higher loss ratio are: • Disappointing development in the number of 2009 and 2010 bodily injury claims that emerged as higher value (typically in excess of £100,000) claims than previously anticipated; and
The above experience was of particular note in quarters two and three of 2011. Experience in the first quarter of the year was in line with prior years, and in quarter four was better than quarter three.
To better understand and address the above claims experience, management has undertaken various actions including: • Detailed claims review (including additional independent actuarial analysis and independent expert reviews of higher value claims files)
In determining the quantum of releases from prior years, we seek to maintain a consistent level of prudence in reserves based on actuarial projections of ultimate loss ratios.
Other revenue (including net ancillary contribution and instalment income) increased by 31% to £204.8 million from £156.1 million. This increase is in line with the increase in the average number of vehicles insured over the period. Ancillary contribution per vehicle was £76 in 2011, broadly consistent with 2010. Other revenue (which includes ancillaries and instalment income) per vehicle was £84 in both 2011 and 2010.
Overall, despite the higher combined ratio, pre-tax profit grew by 14% to £313.6 million (2010: £275.8 million).
Regulatory environment The UK car insurance business operates mainly under the regulation of the UK Financial Services Authority (FSA), and also, through a Gibraltar based insurance company, under the Financial Services Commission (FSC) in that territory.
The FSA regulates two Group companies involved in the business – EUI Limited (an insurance intermediary) and Admiral Insurance Company Limited (an insurer), whilst the FSC regulates Admiral Insurance (Gibraltar) Limited (also an insurer).
Solvency II The Group’s two European insurance companies will be subject to the regulations of Solvency II – the EU’s new regulatory regime for insurers. The Group’s Solvency II Implementation Committee (chaired by Chief Financial Officer Kevin Chidwick) continues to work towards ensuring the Group is ready to comply with the new rules when they come into effect. Key areas of focus are: • Enhancing risk management and governance structures (including formation of Group Risk Committee which takes responsibility for Solvency II implementation)
Based on current guidance, the Group does not anticipate a material change in its capital requirements under the new regime.
• Optional products – such as breakdown cover, personal injury insurance, car hire insurance
• Fees and other – administration fees, wasted leads, claims referral income
Instalment income relates to interest charged to customers paying for their insurance in instalments over the policy term.
+21% The number of UK vehicles insured by Admiral rose by 21% during 2011
Committee and then, towards the end of the year, the OFT exploration of a wide range of issues to do with the car insurance market, all took car insurance from the personal finance sections of the press to the front pages. Hopefully, the result will be some much needed reform of an often dysfunctional system to the benefit of customers and ultimately insurers.
For ourselves ‘the game of two halves’ was more about the rate of policy growth than the rate of premium increases. In the first half of 2011 our vehicle count grew 15%, in the second half 5%. Our competitiveness on price comparison sites peaked in March and fell month on month thereafter as we deliberately maintained the pace of price increases above and beyond the increases being put through by our competitors.
Our relatively higher price increases through most of 2011 were, in part, a response to a disappointing bodily injury claims experience in quarters two and three. The main source of the disappointment was in the proportion of 2009 and 2010 claims that were emerging as potentially bigger, costlier claims than anticipated and the proportion of new, 2011 claims that were being identified as potentially big claims, and reserved accordingly. The development of earlier years remained reassuringly stable with small improvements in expected ultimate loss ratios across most years.
We also aim to learn by taking relatively small and inexpensive steps to test different approaches and identify the best way forward. Coupled with the use of proportional reinsurance across all these markets, this means the impact on the Group’s income statement of the new initiatives is modest.
As previously reported, the decision was made in late 2010 to exit the German car insurance market. AdmiralDirekt, our German insurer which had been writing business since the start of 2008, was sold to a German mutual insurer in early 2011. The impact on the financial statements is insignificant.
2. Develop each new operation into a profitable, sustainable, growing business
• The Group will not persevere in markets where there is no strong probability of success within a reasonable timeframe
Net insurance claims (13.0) (15.9) (28.3) Net insurance expenses (13.0) (16.5) (16.2)
Reported loss ratio 102% 85% 104% Reported expense ratio 102% 88% 60% Reported combined ratio 204% 173% 164%
International Car Insurance Financial Performance The combined businesses continued to develop and increase market share during 2011, ending the year with a combined total of over 300,000 vehicles insured. This represents an increase of over 140,000 (around 90%) on the end of 2010 (AdmiralDirekt figures excluded).
In the USA, the Group retains one third of the underwriting, with the remainder shared between two reinsurers. Both bear their proportional share of expenses and underwriting, subject to certain caps on the reinsurers’ total exposures.
All contracts have profit commission terms that allow Admiral to receive a proportion of the profit earned on the underwriting once the business reaches cumulative profitability.
All three sites allow consumers to compare a range of general insurance and financial services products across price and policy benefits
• Confused is one of the UK’s leading car and home insurance comparison websites
• A key part of the Group’s overall strategy is to exploit its UK expertise in insurance and price comparison and expand this overseas
Total quotes provided across all products also rose substantially, to 3.8 million in 2011 from 1.7 million last year.
Gladiator Gladiator is a commercial vehicle insurance broker offering van insurance and associated products, typically to small businesses. Distribution is via telephone and internet (including price comparison websites).
Expenses were also lower than in 2010, and consequently operating profit increased modestly to £2.8 million from £2.7 million, whilst the operating margin percentage also moved up slightly to 24% from 23%.
Share scheme charges The charge in the income statement increased to £18.6 million from £15.0 million for 2 key reasons: • Higher share price at award: The weighted average share price for shares awarded in 2011 was £15.60 compared to £13.90 in 2010 (+16%)
Investments and Cash Investment Strategy There was no change in investment strategy, and the Group’s funds continue to be held either in money market funds, term deposits or as cash at bank. The Group’s Investment Committee continues to perform regular reviews of the strategy to ensure it remains appropriate.
The Group continues to generate substantial amounts of cash, and the ‘capital-light’ business model enables the distribution of the majority of post-tax profits.
Operating cash flow, before transfers to investments 286.4 522.0 779.1 Transfers to financial investments (10.5) (240.8) (493.9)
Operating cash flow 275.9 281.2 285.2 Tax and interest payments (49.1) (69.5) (95.3) Investing cash flows (11.8) (11.1) (12.9) Financing cash flows (largely dividends) (142.2) (164.9) (198.1) Foreign currency translation impact (5.3) (0.8) (1.0)
Change in net insurance liabilities 51.1 129.7 244.3 Net change in trade receivables and liabilities (4.6) 101.4 203.7 Non-cash income statement items 24.1 25.4 32.0 Tax and net interest expense 58.9 71.9 77.8
The key focus of the Group’s investment strategy is capital preservation
Taxation The taxation charge reported in the income statement is £77.8 million (2010: £71.9 million), which equates to 26.0% (2010: 27.1%) of profit before tax. The lower effective rate of taxation results from the lower average rate of UK corporation tax in 2011.
Earnings per share Basic earnings per share rose by 13% to 81.9 pence from 72.3 pence. The change is in line with pre- and post-tax profit growth.
Dividends The Directors have proposed a final dividend for the financial year of 36.5 pence per share. Total dividends for the year amount to 75.6 pence per share, 11% higher than the 68.1 pence distributed in respect of 2010.
The final dividend is made up of a 17.4 pence normal element based on the stated dividend policy of distributing 45% of post tax profits, and a further special element of 19.1 pence. The special dividend is calculated with reference to distributable reserves after considering capital that is required to be held a) for regulatory purposes; b) to fund expansion activities; and c) as a further prudent buffer against unforeseen events.
The payment date is 1 June 2012, ex-dividend date 2 May and record date 4 May.
Munich Re 27,079,400 10.0% Morgan Stanley & Co Inc 21,848,582 8.1% BlackRock Inc 14,047,726 5.2% Power Corporation of Canada 10,295,739 3.8%
The interests of Directors and Officers and their connected persons in the issued share capital of the Company are given in the Remuneration report.
The table below sets out the principal risks currently faced by the Group, with further significant risks noted below. The report on corporate governance later in the Annual Report describes the risk management framework in place throughout the Group.
There are regular reviews of the interactions between vehicle growth, pricing and claims experience. Claims and other senior management continue to pay close attention to the key indicators of adverse developments in large bodily injury claims.
Admiral has typically been able to produce a significant advantage over the UK market in combined ratio terms. There is a risk that this advantage and/or the level of underwriting profit generated by Admiral could erode.
b) A need to either cut rates, or increase rates at a slower rate than the market in order to deliver growth (loss and expense ratio impacts)
c) A deterioration in the ability to obtain or use data to price effectively d) Adverse changes in claims costs or ability to handle claims
Many of the potential causes of claims shocks are outside the control of the Group and focus, therefore, is generally on how to prepare and react to the occurrence of such events.
To cover other potential claims shocks, we continue to hold an additional buffer in our reserves over the projected ultimate outcomes.
For very large claims (catastrophe and otherwise) the Group purchases excess of loss reinsurance, which mitigates the loss to the selected deductible amount (typically around £5 million at the total claim level).
c) Very large, non-catastrophe individual claims d) Fraud or other changes in claimant behaviour e) Significant increases in large bodily injury claims cost inflation
The Board also considers the following risks to be significant: • Operational risk – for example, major fraud (considered to be relatively low impact, and mitigated by a wide range of internal controls) and the resilience of IT systems
• People risk – failure to recruit, develop and retain suitable talent. Further detail on how Admiral interacts with its employees is set out in the Corporate Responsibility section following
The Directors are mindful of management stretch and monitor this risk on a regular basis though at present the Board is confident there is a suitable management structure in place for the Group’s international operations.
The Directors are not prepared to let unprofitable businesses continue to generate losses where there is limited foreseeable chance of success.
The Group has launched eight new operations outside the UK in the past five years. AdmiralDirekt in Germany was sold in early 2011. There is an ongoing risk that one or more of the operations fails to become a sustainable long-term business.
The most immediate risk to ancillary profits arises from the OFT market study in motor insurance. Whilst there are a range of possible outcomes from this study, Admiral welcomes any changes that are likely to lead to lower claims costs.
Confused management continually analyse the success or otherwise of all media activity.
The Directors believe Confused is a fundamentally strong business and is well positioned to maintain its position in the UK price comparison market.
The mitigation of these risks is discussed in note 17 to the financial statements.
The SGM is the one occasion each year where all UK employees are brought together. As well as presentations from Admiral’s Chairman and Executive Directors, there were guest speakers from the International Rugby Board and Wales Rugby Union.
One of the most important tools we use to measure how we are doing, is an anonymous survey that collects views on what it is like working for Admiral. The survey includes questions covering a wide range of topics including morale, development, management, communication and social aspects of working at Admiral.
Team briefings, suggestion schemes, staff forums, online chats and internal newsletters are a few of the other examples.
The organisers of the event have identified eight key factors that define the best companies to work for in Britain: • Leadership: how people feel about the head of the company and its most senior managers
• My company: feelings about the company people work for as opposed to the people they work with
• Fair deal: how happy employees are with their pay and benefits
The final results were announced on 23 February 2012 and are based on questionnaires completed by a number of UK employees, who were randomly selected by the organisers. For the 2012 results, surveyed during the fourth quarter of 2011, 3,322 (2011: 1,237) employees provided responses – a response rate of 75% (2011: 77%) of those receiving the questionnaires.
I am proud to be associated with Admiral 91% 91% 94% 96% 95% 95% I would recommend Admiral as a good place to work 90% 90% 94% 95% 94% 95% I am more likely to stay at Admiral because of the share schemes
The key results relating to morale and whether employees feel that their opinions are important are provided in the table above. There are no specific targets with respect to the survey results as the Executive team use the results to look at trends within the scores rather than absolute values.
The survey results in key areas such as morale, association with Admiral and how employees feel Admiral treats its customers, remained at very high levels in 2011 and encouragingly a number of areas have shown improvements. During 2011 the number of vehicles insured in the UK increased by over 20% and headcount increased by 27% (following vehicle growth in 2010 of 32%). Achieving positive results across these areas, whilst rapidly growing the business, is testament to the hard work of everyone at Admiral.
Award no Award date No. of shares per employee Total shares awarded No. of employees receiving award
It is not just Admiral’s UK operation which is being recognised as a fantastic place to work.
Share ownership is a key feature of the remuneration of employees. A full explanation of how both of the Group’s share plans work is provided within the Remuneration report. All UK employees are eligible to receive shares in the Group’s Approved Free Share Plan. Overseas employees are able to receive awards within the Group’s Discretionary Free Share Plan.
The table below provides details of awards given to employees that have matured and are now available to staff to sell. An employee who was working at Admiral before 1 January 2005 would have access to 2,241 shares – of which 851 could be sold free of income tax and national insurance. If none of the shares had been sold, these shares would be worth £24,600 (based on the share price of £10.96 on 1 March 2012).
Fun If people like what they do, they will do it better. Organised activities for our staff can be weird, wild and wonderful, but they are also a great tool for motivating.
The Ministry of Fun (MOF) operates across the company, encouraging our staff to have fun at work. Responsibility for the scheme is rotated around the company and different departments take control of organising quizzes and competitions across the company. Every member of staff has the opportunity to take part. 2012 has already seen a scalectrix competition, staff nominating another member of staff to receive a handwritten letter along with a song, a hug and a rose as well as a ‘beat the cube’ contest.
% Financial Ombundsman Service (FOS) complaints found in favour of Admiral
Each year Admiral celebrates its culture with a Top Ten Department competition.
There are many initiatives in place to ensure that customers are treated fairly, efficiently and with respect: • Measures programme • Monitoring programme • Comment form analysis • Treating customers fairly reporting • Complaints analysis • Issuing shares to “star performing” employees
A detailed report is produced each month together with a summary, providing details of any measures that have been graded red. The report is discussed at the UK Risk Management Committee (see Corporate Governance section of this report for details on the RMC) and process or behavioural changes agreed where appropriate.
Charitable, Community and Environment We have showcased below a handful of examples of our charitable giving and community work and initiatives to reduce our impact on the environment. More examples are included on our website www.admiralgroup.co.uk.
Balumba have chosen to ‘adopt’ Mariankiari village, in Junin, Peru. This will result in Balumba and its staff providing a helping hand to bring about sustainable improvements that meet basic human needs and improve the quality of life in the village. One visit was made during 2011, and a group of employees will be visiting the village in 2012 to further relationships with the villagers and establish the donation options which would be of most benefit to the community.
For the last 6 years Admiral has supported the Neath Port Talbot Festival of Sport for children with disabilities in Margam Park, South Wales.
He was part of the management team that led the MBO in 1999. Prior to joining Admiral, he was Marketing and Sales Manager for Churchill Insurance.
He is a fellow of the Chartered Institute of Certified Accountants and has an MBA from London Business School.
4. David Stevens, CBE (50) Chief Operating Officer u David is a founder Director of Admiral. Initially the Marketing Director, he was appointed Director responsible for pricing in 1996 and claims and pricing in 1999. He was appointed as Chief Operating Officer in 2004.
David has an MBA from Insead. David was awarded a CBE in 2010 for services to business and the community in Wales.
Remuneration Committee member u Risk Committee member Nomination Committee member 12.
He has worked for Munich Re since September 1981 and is currently the Chief Executive Manager responsible for United Kingdom/Ireland.
Martin is also a Non-Executive Director of IG Group Holdings plc and Rothesay Life Limited. He was the Group Finance Director of Friends Provident plc between 2001 and 2003 and Friends’ Provident Life Office between 1999 and 2001. Prior to that he was the Group Finance Director at London & Manchester Group plc from 1992 to 1998, up to the date of its acquisition by Friends’ Provident Life Office.
He is also Chairman of Julian Hodge Bank Limited and Hodge Life Assurance Company Limited.
He is a solicitor and was the Chairman of Eversheds LLP from June 1995 to April 2004. He was a Non-Executive Director of Bank of Wales plc between 1988 and 2001 and AXA Insurance Company Limited between 1992 and 2000. Keith was awarded an OBE in 2005 for services to business and the community in Wales.
Margaret joined the Group’s Audit and Remuneration Committees on appointment to the Board.
9. Lucy Kellaway, (52) Non-Executive Director Lucy joined the board as a Non-Executive Director in September 2006. She is the management columnist on the Financial Times and author of various books. In 20 years on the FT she has been oil correspondent, a Lex columnist and Brussels correspondent.
10. John Sussens, (66) Non-Executive Director u John was appointed the Senior Independent NonExecutive Director in August 2004. He is Chairman of the Remuneration Committee and a member of the Risk Committee. He is also a Non-Executive Director of Cookson plc.
He was the Group Managing Director of Misys plc between 1998 and May 2004 having been on the Board of the Company since 1989. Prior to joining Misys, he was Manufacturing Director at JC Bamford Excavators Limited. He was a Non-Executive Director at Chubb plc between 2001 and 2003.
11. Colin Holmes, (46) Non-Executive Director Colin was appointed a Non-Executive Director in December 2010 and immediately joined the Audit and Remuneration Committees. With effect from 1 January 2012, he has taken on the Chairmanship of the Audit Committee.
Roger is a Non-Executive Director, serving on, amongst others, the Boards of: Luxottica Group S.p.A.; Teva Pharmaceutical Industries LTD; Banca Nazionale del Lavoro S.p.A. and COFIDE S.p.A.
Group results and dividends The profit for the year, after tax but before dividends, amounted to £221.3 million (2010: £193.6 million).
The Directors declared and paid dividends of £198.8 million during 2011 (2010: £164.7 million) – refer to note 13 for further details.
Share capital Refer to the Business review for the disclosure of substantial shareholdings in accordance with Chapter 5 of the Transparency and Disclosure rules.
Financial Instruments The objectives and policies for managing risks in relation to financial instruments held by the Group are set out in note 17 to the financial statements.
Employee policies Detailed information on the Group’s employment practices is set out in the Business review. The Group purchases appropriate liability insurance for all staff and Directors.
At 31 December 2011, the company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital and shares issued during the year can be found in note 24.
There are no restrictions on the transfer of ordinary shares in the company other than: • certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws) and: • pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the company require the approval of the company to deal in the company’s securities.
There are no agreements between the company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid.
A further special resolution passed at that meeting granted authority to the Directors to allot equity securities in the Company (up to a maximum of 5% of the issued share capital of the Company) for cash, without regard to the pre-emption provisions of the Companies Act 2006. This authority also expires on the date of the annual general meeting to be held on 26 April 2012 and the Directors will seek to renew this authority for the following year.
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.
• The Directors’ report includes a fair view 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.
The UK Corporate Governance Code This report sets out the governance framework in which the Group operates and the approach that it has taken in 2011 to achieve the standards of good corporate governance for which it is accountable to the Group’s shareholders. It describes how the principles set out in the UK Corporate Governance Code (the ‘Code’) have been applied, and details the extent to which the Group has complied with the principles and provisions of the Code during the year under review.
The Board complied with the Code in all respects during 2011 except for Code E.1.1, which requires that the Senior Independent Director (John Sussens) should attend meetings with a range of shareholders. The Company has a comprehensive programme of meetings and dialogue with institutional investors, and the Chairman makes himself available for meetings with the largest 10 such investors. The views of investors expressed through this dialogue are communicated to the Board as a whole on a regular basis through the Investor Relations report. All Directors can, therefore, develop an understanding of issues or concerns of major shareholders should any be raised. Feedback from shareholders suggests that these arrangements for communication between the Company and its shareholders continue to be viewed by them as effective. The Senior Independent Director is always available to meet with individual shareholders on request to ensure the Board is aware of any shareholder concerns that cannot be resolved through the routine mechanisms for investor communications.
The Admiral Group Board The Board is the principal decision-making forum for the Group providing entrepreneurial leadership, both directly and through its Committees, and by delegating authority to the Executive team. 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 Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations and that dealings with the FSA are handled in a constructive, cooperative 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 Board has adopted a formal schedule of reserved matters, which is reviewed on an annual basis (this was last carried out in December 2011). Matters reserved to the Board include the approval of: • The Group’s long term objectives and corporate strategy
Board Effectiveness The performance and effectiveness of the Board and its Committees is fundamental to the success of the Group and there is a rigorous evaluation each year to assess how well the Board, its Committees, the Directors and the Chairman are performing. It is the Group’s policy that every three years an external consultant, who has no connection with the Company, carries out a formal review of the Board’s performance and such an evaluation process took place in 2010. The evaluation process in 2011 was led by the Chairman with support from the Company Secretary. The process consisted of the completion, by all Directors, of a comprehensive questionnaire evaluating the performance of the Board and its Committees. The questionnaire considered board processes and their effectiveness, board composition, board objectives, board support, and content of discussion and focus at Board meetings, and invited Directors to indicate where specific improvements could be made. Completion of the questionnaire by each Director was followed by one-to-one discussions between each Director and the Chairman where the Board’s role and structure, process, relationships, and any emerging issues were discussed.
In addition, the Chairman has concluded that each Director contributes effectively and demonstrates full commitment to his/her duties. As a result of the evaluation undertaken in 2011, the following emerged as areas of particular focus: • Further increasing depth of management by recruiting talented individuals to assist existing management and develop as leaders of tomorrow
• Ensure that the balance of management time between the Group’s core UK business and its overseas operations remains appropriate and aligned with the Group’s agreed long term strategy objectives
• The effectiveness of Board visits to the Group’s overseas operations was reviewed. Rather than annual formal visits to the Group’s foreign businesses it was proposed that in future individual Non-Executive Directors should accompany the Chairman and Chief Executive on at least one of their overseas visits made throughout the year
The Chief Executive, to whom they report, appraises annually the performance of the individual Executive Directors. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Non-Executive Directors, led by the Senior Independent Director (“SID”), taking into account the views of the Executive Directors. Following the latest review, the SID considered and discussed with the Chairman the comments and feedback relating to the Chairman’s performance that had been received from the Directors as part of the Chairman’s evaluation questionnaire. Following these discussions with the Chairman, the SID was able to confirm that the performance of the Chairman continues to be effective, and that the Chairman continues to demonstrate appropriate commitment to his role.
Alastair Lyons (Chairman) 6 3 Henry Engelhardt (Chief Executive) 6 David Stevens (Chief Operating Officer) 6 Kevin Chidwick (Chief Financial Officer) 6 Manfred Aldag 6
As part of the ongoing review of the balance and composition of the Board and in the context of several of the Non-Executive Directors reaching their maximum term over the next two years, the Nomination Committee initiated the process of recruiting two Non-Executive Directors with, between them, insurance and international business experience to reflect the growth in the Group’s overseas businesses. Appointments to the Board are the responsibility of the Board as a whole, acting on the advice and recommendations of the Nomination Committee. Following a formal, rigorous and transparent process implemented and led by the Nomination Committee the Board approved its recommendation and appointed Roger Abravanel and Annette Court as independent Non-Executive Directors. Roger Abravanel was appointed with effect from March 2012 and Annette Court was appointed subject to FSA approval. Roger Abravanel and Annette Court will be subject to election by shareholders at the forthcoming AGM.
Although the Chairman has served in that role since June 2000 the Board remains of the view that he should continue in office and the Company’s leading institutional investors have also confirmed their support for the Board’s express intent. The Chairman, along with all the Directors, seeks election by shareholders annually.
Keith James, having served for 9 years as a Non-Executive Director, will be retiring from the Board at the forthcoming AGM and will not be submitting himself for re-election by shareholders.
The Board receives presentations from senior managers within the Group on a regular basis and opportunity is also created for Non-Executive Directors to make informal visits to different parts of the Group and to meet with local management.
This is supplemented by feedback to the Board on meetings between management and investors. External analysts’ reports are circulated to all Directors. In addition, the Investor Relations team produces a quarterly Investor Relations Report that is circulated to the Board. The Report contains an analysis of share price performance; a summary of analyst reports received during the quarter and of meetings that have been held with investors and analysts; together with details of any significant changes to the shareholders’ register.
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 auditors, Deputy Chief Financial Officer, and Company Secretary. In addition members are provided with information on seminars and conferences provided by external bodies. The Terms of Reference of the Audit Committee include all the matters required under the Code.
• Effectiveness of the Group’s system of internal control, particularly gaining assurance that the internal control and risk management processes, including compliance, were operating effectively
• Performance of the internal audit department • The effectiveness of the Group’s arrangements in relation to its ‘whistle-blowing’ procedures • The Group’s reserving strategy which remained an area of focus for the Committee throughout the year
In accordance with agreed parameters, the overseas operations in Spain and Italy have their own locally based internal auditors, who report to their respective country heads. All reports are evaluated by the Head of Internal Audit to ensure the quality and effectiveness of the reported findings. In addition, the UK internal audit department carry out high level governance reviews of all foreign operations, assessing the internal control frameworks and system of risk management.
The Head of Internal Audit in the UK attends all Committee meetings and provides a range of presentations and papers to the Committee, through which the Committee monitors the effectiveness of the Group’s internal controls as well as obtaining all issued audit reports, enabling the Committee to challenge the content and related recommendations contained in the reports. The overseas internal auditors attend Committee meetings periodically. Committee members receive either the full reports or executive summaries and therefore have access to all internal audit reports, which gives the opportunity to raise questions on the content and recommendations contained within them. The Committee approves the internal audit programmes at the start of each calendar year and the activities performed, the effectiveness and workload of the internal audit functions, and the adequacy of available resources are monitored throughout the year.
During the year, the Committee specifically received presentations from senior managers on topics including the challenges of identifying fraud and the prevention and detection measures that were being implemented by the Group.
In addition to the evaluation of the Committee’s effectiveness undertaken by the Board and in the context of the split of the remit of the Committee’s activities with the establishment of a Risk Committee, the Committee also carried out a more detailed review of its own performance. As part of the review process, each Committee member completed a comprehensive online questionnaire designed to provide objective assessment of the Committee’s performance, including its effectiveness in monitoring internal and external audit. The Committee discussed the results of the review and it was concluded that the Committee and the audit process were effective and that the Committee had full access to all the information it required; that the Committee had appropriate terms of reference; and that it had achieved its remit.
• Reviewing the Group’s proposed strategy for achieving Solvency II compliance.
The work of the Risk Committee is supported by more detailed work undertaken by Risk Management Committees in each of the Group’s operational entities. Membership of each of these Committees includes the Managing Director of the operation. In the UK, membership of the Risk Management Committee includes the Group Chief Executive and the Chief Operating Officer. At each meeting, the Risk Management Committees consider significant movements in the operation’ s risk profile, any risks that have been realised and any emerging risks. The Risk Committees also assess and monitor any regulatory issues, ensuing that their resolution and relevant actions are appropriately recorded.
Annette Court is a former Chief Executive Officer of RBS Insurance/Direct Line and a member of the RBS Group Executive Management Committee. Between 2007 and 2010 Annette was Chief Executive Officer for Europe General Insurance for Zurich Financial Services and was a member of the Group Executive Committee.
Roger Abravanel has significant international consulting experience having been with McKinsey and Co. from 1972 until his retirement as Director Emeritus in 2006. Since his retirement Roger has applied his capacity for providing strategic, organisational and development advice as a Non-Executive Director, serving on, amongst others, the Boards of: Luxottica Group S.p.A.; Teva Pharmaceutical Industries LTD; Banca Nazionale del Lavoro S.p.A. and COFIDE S.p.A. Roger is also a member of the Board of the Italian Institute of Technology and is Chairman of the INSEAD Advisory Group in Italy.
The Committee and subsequently the Board, at their meetings in December 2011, considered the Group’s current Succession Plan. The Succession Plan considered the senior roles within the Group and identified whether there was emergency short term cover in place in the event that the individual left the organisation, and whether there was a permanent replacement available within the organisation, or whether the position would need to be filled externally. It also identified where there were individuals who would be capable of moving into particular senior management roles following the gaining of further experience.
During the year the Committee carried out the following activities: • Reviewed the Group’s overall remuneration policy and strategy
During the year, a Head of Risk was appointed to oversee the Risk Department and take responsibility for ensuring managers are aware of their risk management obligations, providing them with support and advice, and ensuring that the risk management strategy is properly communicated. The Risk Department defines and prescribes the financial and operational risk assessment processes for the business; maintains the risk registers and undertakes regular reviews of these risks in conjunction with line management. Reports are produced showing the most significant risks identified and the controls in place.
The Risk Committee, UK RMC and other UK and overseas Committees receive reports setting out key performance and risk indicators and consider possible control issues brought to their attention by early warning mechanisms that are embedded within the operational units. The RMC, the Group’s other UK and overseas Committees and the Audit
Committee also receive regular reports from their respective Internal Audit functions, which include recommendations for improvement of the control and operational environment. The Board undertakes periodic structured reviews of the Group’s risk map, focussing on the principal assessed exposures and the effectiveness of the mitigation strategies adopted and from 1 January 2012 this was delegated to the Risk Committee. The Board receives reports from the Chairman of the Audit Committee as to its activities, together with copies of the minutes of both the RMC and the Audit Committee. In March 2012 the Board carried out the annual review of the effectiveness of the Group’s system of internal controls for the 2011 year, also taking account of events since 31 December 2011, by considering documentation from the Audit Committee including the Internal Audit Annual Report prepared by the Group’s Head of Internal Audit.
The Audit Committee’s ability to provide the appropriate assurance to the Board depends on the provision of periodic and independent confirmation, primarily by Internal Audit, that the controls established by management are operating effectively and where appropriate provides a high-level challenge to the steps being taken by the Risk Committee to implement the risk management strategy.
Its terms of reference are available on the Group’s corporate website and are summarised in the Corporate Governance report.
The members of the Committee do not have any personal financial interests (other than shareholdings), or any conflicts that relate to the business of the Committee. The Committee is aware of the cross-directorships held by Colin Holmes and Alastair Lyons, who are both Directors of Bovis Homes plc. The Committee has satisfied itself as to the independence of Colin Holmes, however he has chosen to take no part in decisions on the Chairman’s remuneration. The members do not have any day-to-day involvement in the running of the Group.
Activities During the year ended 31 December 2011, the Committee met on six separate occasions. The key matters considered included: • Reviewing salary proposals for the Executive Directors and Senior Management
• Reviewing the company’s performance against the performance conditions applicable to the DFSS and SIP awards and where appropriate authorizing the vesting of awards
Advice provided 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. In addition, the Committee received advice on the structure of the Group’s share schemes from PricewaterhouseCoopers LLP (PwC). The Company Secretary also circulates market survey results as appropriate.
• Performance linked – A significant part of the Executive Director’s (excluding Henry Engelhardt and David Stevens) and senior managers’ reward, remains shareholder aligned given that it is determined by the Group’s earnings growth versus LIBOR. Failure to achieve threshold levels of growth in the Group’s earnings results in reduced or no payout under the Group’s long-term incentive plan. Executive Directors have agreed to retain a minimum shareholding equal to at least 100% of base salary, which can be built up over a period of five years from the date of appointment
• Private Medical Cover and Permanent Health Insurance, available to approximately 220 management level staff
• Discretionary Free Share Scheme (DFSS). Awards under the DFSS are distributed on a wider basis than is the case for most plans of this type. The Committee believes that as the DFSS develops, and awards continue to vest, it will have the effect of reducing staff attrition and further strengthening the alignment of the interests of staff and shareholders.
Following shareholder approval at the Group’s 2010 AGM, the plan allows for a maximum award of £1,000,000 or 600% of basic salary if lower.
Additional benefits include private medical cover, permanent health insurance, death in service cover and eligibility for the Group’s Personal Pension Plan.
Directors’ service contracts The following table summarises the notice periods relating to the service contracts of the Executive Directors serving at 31 December 2010.
In addition, the Group pays a bonus to all holders of DFSS shares. The bonus equates to the dividend payable on an equivalent number of the ordinary shares of the Group. The Committee continues to feel that having a group-wide bonus equivalent to the dividend flow received by investors further aligns the incentive structure with shareholders.
The Company has controls in place to ensure that shares awarded under both schemes operated by the Company within any rolling ten year period do not exceed 10 per cent of the number of ordinary shares in the capital of the Company in issue at the time of each award.
Executive Directors are allowed, although none currently do, to accept appointments as NonExecutive Directors of companies with prior approval of the Chairman. Approval will only be given where the appointment does not present a conflict of interest with the Group’s activities and the wider exposure gained will be beneficial to the development of the individual. Where fees are payable in respect of such appointments these would be passed to the Company.
Manfred Aldag Indefinite (terminable on one month’s notice from either party) – automatically terminates should he cease employment with Munich Re.
Directors’ shareholdings – Audited Directors’ interests in the ordinary shares of the Company are set out below: Ordinary shares of 0.1p
* Includes 1,755 shares within the Group’s SIP details of which are shown below. Of these, 898 have reached their three-year maturity date.
** The decrease in the shareholding of Henry Engelhardt since 31 December 2010 reflects the transfer of 2,200,000 shares to the Moondance Foundation - a charitable foundation of which both Henry Engelhardt and his wife Diane Briere de l’Isle are trustees. Diane Briere de l’Isle also acquired 1,022,845 shares during 2011.
Directors’ remuneration – Audited Remuneration for the year ended 31 December 2011 was as follows: Base salary and fees
*1 Kevin Chidwick received bonuses of £106,000 in lieu of dividends on shares awarded (but not yet vested) under the Group’s DFSS bonus plan (consistent with all DFSS scheme participants).
*2 Keith James fees include £7,500 for chairing the Board of Admiral Insurance Company Limited, £15,000 for chairing the Board of Inspop.com Limited and £15,000 for chairing the Group’s International Price Comparison Board.
Type At start of year Awarded during year Vested during year At end of year Price at award (£)
The closing price of Admiral shares on 31 December 2011 was £8.52 per share * 100% of the DFSS award made in April 2008 vested during 2011. The earnings per share index for the performance period (2008 to 2010 years, inclusive) was 149 points, compared to the LIBOR index for the same period of 108 (outperformance of 41 points). 10% of the award is achieved for meeting LIBOR, with a further 2.5% for each point of outperformance (up to a maximum of 100%).
This report was approved by the Board of Directors on 6 March 2012 and is signed on its behalf by the Committee Chairman: John Sussens Remuneration Committee Chairman
We have audited the financial statements of Admiral Group plc for the year ended 31 December 2011 set out on pages 53 to 84. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 35, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm
Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2011 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the Parent Company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; • the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• the information given in the Corporate Governance Statement set out on pages 44-45 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
• a Corporate Governance Statement has not been prepared by the company.
• certain elements of the report to shareholders by the Board on Directors’ remuneration.
Insurance premium revenue 959.7 574.6 Insurance premium ceded to reinsurers (513.9) (286.5) Net insurance premium revenue 5 445.8 288.1
Earnings per share: Dividends declared and paid (total) 13 198.8 164.7 Dividends declared and paid (per share) 13 74.6p 62.4p
Total comprehensive income for the period attributable to: Equity holders of the parent 220.2 193.0 Non-controlling interests 0.1 (0.2)
Purchases of property, equipment and software (16.8) (11.1) Net cash used in investing activities (12.9) (11.1)
Cash and cash equivalents at 1 January 246.7 211.8 Effects of changes in foreign exchange rates (1.0) (0.8) Cash and cash equivalents at end of period 20 224.6 246.7
Share scheme credit – – – 23.6 – 23.6 Deferred tax credit on share scheme credit – – – (1.4) – (1.4) Total transactions with equity-holders – – – (176.6) – (176.6)
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2011 but have either yet to be endorsed by the EU, or were endorsed shortly after the year end. These are as follows: • IFRS 9 Financial Instruments • IFRS 10 Consolidated Financial Statements • IFRS 11 Joint Arrangements • IFRS 12 Disclosures of Interests in Other Entities • IFRS 13 Fair Value Measurement • IAS 27 Separate Financial Statements • IAS 28 Investments in Associates and Joint
Ventures • Amendments to IFRS 12, IFRS 1, IAS 1, IAS 19,
2. Critical accounting judgements and estimates Judgements: In applying the Group’s accounting policies as described in note 3, management has primarily applied judgement in the classification of the Group’s contracts with reinsurers as reinsurance contracts. A contract is required to transfer significant insurance risk in order to be classified as such. Management reviews all terms and conditions of each such contract, and if necessary obtains the opinion of an independent expert at the negotiation stage in order to be able to make this judgement.
The claims provisions are subject to independent review by the Group’s actuarial advisors. Management’s reserving policy is to reserve at a level above best estimate assumptions to allow for unforeseen adverse claims development. For further detail on objectives, policies and procedures for managing insurance risk, refer to note 18 of the financial statements.
Investment income: Investment income from financial assets comprises interest income and net gains (both realised and unrealised) on financial assets classified as fair value through profit and loss and interest income on held to maturity deposits.
b) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in millions of pounds sterling, which is the Group’s presentation currency.
Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss.
Translation of financial statements of foreign operations: The financial statements of foreign operations whose functional currency is not pounds sterling are translated into the Group presentation currency (sterling) as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transaction); and
c) Insurance contracts and reinsurance assets Premiums: The proportion of premium receivable on in-force policies relating to unexpired risks is reported in insurance contract liabilities and reinsurance assets as the unearned premium provision – gross and reinsurers’ share respectively.
Admiral Group plc Annual Report 2011 61 d) Intangible assets Goodwill: All business combinations are accounted for using the purchase method. Goodwill has been recognised in acquisitions of subsidiaries, and represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
The value in use calculations use cash flow projections based on financial budgets approved by management covering a three year period. Cash flows beyond this period are considered, but not included in the calculation. The discount rate applied to the cashflow projections in the value in use calculations is 11.3% (2010: 11.5%), based on the Group’s weighted average cost of capital, which is in line with the market (source: Bloomberg).
Software: Purchased software is recognised as an intangible asset and amortised over its expected useful life (generally between 2 and 4 years). The carrying value is reviewed every six months for evidence of impairment, with the value being written down if any impairment exists. Impairment may be reversed if conditions subsequently improve.
e) Property and equipment, and depreciation All property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method to write off the cost less residual values of the assets over their useful economic lives. These useful economic lives are as follows: Motor vehicles – 4 years Fixtures, fittings and equipment – 4 years Computer equipment – 2 to 4 years Improvements to short leasehold properties – 4 years
Derecognition of financial assets A financial asset is derecognised when the rights to receive cashflows from that asset have expired or when the Group transfers the asset and all the attaching substantial risks and rewards relating to the asset, to a third party.
h) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other shortterm deposits with original maturities of three months or less. All cash and cash equivalents are measured at amortised cost.
g) 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, loans and receivables or held to maturity investments. The Group has not held any derivative instruments in the years ending 31 December 2011 and 31 December 2010.
At initial recognition assets are recognised at fair value and classified according to the purpose for which they were acquired.
Subsequent measurement Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised through the income statement.
Objective evidence of impairment may include default on cashflows due from the asset and reported financial difficulty of the issuer or counterparty.
UK Car Insurance The segment consists of the underwriting of car insurance and the generation of ancillary income from underwriting car insurance in the UK. The Directors consider the results of these activities to be reportable as one segment as the activities carried out in generating the income are not independent of each other and are performed as one business. This mirrors the approach taken in management reporting.
International Car Insurance The segment consists of the underwriting of car insurance and the generation of ancillary income from underwriting car insurance outside of the UK. It specifically covers the Group operations Admiral Seguros in Spain, ConTe in Italy, L’olivier in France and Elephant Auto in the USA. None of these operations are reportable on an individual basis, based on the threshold requirements in IFRS 8.
Deferred tax: Deferred tax is provided in full using the balance sheet liability method, providing for temporary differences arising between the carrying amount of assets and liabilities for accounting purposes, and the amounts used for taxation purposes. It is calculated at the tax rates that have been enacted or substantially enacted by the balance sheet date, or that are expected to apply in the period when the liability is settled or the asset is realised.
l) Government grants Government grants are recognised in the financial statements in the period where it becomes reasonably certain that the conditions attaching to the grant will be met, and that the grant will be received.
Segment income, results and other information: An analysis of the Group’s revenue and results for the year ended 31 December 2011, by reportable segment are shown below. The accounting policies of the reportable segments are consistent with those presented in note 3 for the Group.
Segment profit/(loss) before tax 313.6 (9.5) 10.5 2.8 – 317.4 Other central revenue and expenses, including share scheme charges
Segment profit/(loss) before tax 275.8 (8.0) 12.1 2.7 – 282.6 Other central revenue and expenses, including share scheme charges
Interest income 1.1 Consolidated profit before tax 265.5 Taxation expense (71.9) Consolidated profit after tax 193.6 Other segment items: *Turnover is a non-GAAP measure and consists of total premiums written (including co-insurers share) and other revenue.
Segment revenues: The UK and International Car Insurance reportable segments derive all insurance premium income from external policyholders. Revenue within these segments is not derived from an individual policyholder that represents 10% or more of the Group’s total revenue.
The total of Price Comparison revenues from transactions with other reportable segments is £16.1m (2010: £15.0m). These amounts have not been eliminated on consolidation in order to avoid distorting expense and combined ratios which are key performance indicators for insurance business. There are no other transactions between reportable segments.
Information about geographical locations: All material revenues from external customers, and net assets attributed to a foreign country are shown within the International Car Insurance reportable segment shown above. The revenue and results of the three International Price Comparison businesses, Rastreator, LeLynx and Chiarezza are not yet material enough to be presented as a separate segment.
Segment assets and liabilities: The identifiable segment assets and liabilities at 31 December 2011 are as follows.
Eliminations represent inter-segment funding and balances included in trade and other receivables.
Total expenses and share scheme charges 62.9 144.5 207.4 48.9 117.9 166.8
The gross amount of expenses, before recoveries from co-insurers and reinsurers is £369.9m (2010: £333.2m). This amount can be reconciled to the total expenses and share scheme charges above of £207.4m (2010: £166.8m) as follows: 31 December £m 31 December £m
Reconciliation of expenses related to insurance contracts to reported Group expense ratio: 31 December 2011 £m 31 December £m
Insurance contract expenses from above 62.9 48.9 Add: claims handling expenses 11.9 8.5 Adjusted expenses 74.8 57.4 Net insurance premium revenue 445.8 288.1 Reported expense ratio 16.8% 19.9%
Social security charges 10.3 12.7 Pension costs 1.3 1.3 Share scheme charges (see note 24) 23.6 18.5 Total staff expenses 149.7 125.0 Depreciation charge: – Owned assets 5.4 4.1 – Leased assets 0.7 0.5 Amortisation charge: – Deferred acquisition costs 41.8 23.4 Operating lease rentals: Auditor’s remuneration (including VAT): – Fees payable for the audit of the Company’s annual accounts – – – Fees payable for the audit of the Company’s subsidiary accounts 0.2 0.2 – Fees payable for other services 0.3 0.2 Net foreign exchange losses 0.8 0.8 Analysis of fees paid to the auditor for other services: Tax compliance services 0.1 – Tax advisory services 0.2 0.1 Other services – 0.1 Total as above 0.3 0.2
Admiral Group plc Annual Report 201168 12. Taxation 2011 £m £m
The dividends declared in March represent the final dividends paid in respect of the 2009 and 2010 financial years. Dividends declared in September 2010 and August 2011 are interim distributions in respect of 2010 and 2011.
A final dividend of 36.5p per share (£99m) has been proposed in respect of the 2011 financial year. Refer to the Chairman’s statement and Business review for further detail.
Admiral Group plc Annual Report 2011 69 15. Property and equipment
Depreciation: Transferred to ‘assets classified as held for sale’ (0.2) (0.5) (0.1) – (0.8)
Admiral Group plc Annual Report 201170 17. Financial assets and liabilities The Group’s financial instruments can be analysed as follows: £m £m
Financial assets: Investments held at fair value 862.1 363.6 Held to maturity deposits with credit institutions 297.0 299.6 Receivables – amounts owed by policyholders 423.9 341.5 Total financial assets per consolidated balance sheet 1,583.0 1,004.7 Trade and other receivables 52.1 47.9 Cash and cash equivalents 224.6 246.7
All investments held at fair value are invested in AAA-rated money market liquidity funds. These funds target a short term cash return with capital security and low volatility and continue to achieve these goals.
The approximate fair value of held to maturity deposits is £280.8m (2010: £285.2m) based on a calculation to discount expected cashflows arising at the Group’s weighted average cost of capital (WACC). The amortised cost carrying amount of receivables is a reasonable approximation of fair value.
The maturity profile of financial assets and liabilities at 31 December 2011 is as follows: On demand £m
Financial assets: Investments held at fair value 862.1 – – – Held to maturity deposits with credit institutions – 175.3 79.2 42.5 Receivables – amounts owed by policyholders – 423.9 – –
Trade and other receivables – 52.1 – – Cash and cash equivalents 224.6 – – –
Financial assets: Investments held at fair value 363.6 – – – Held to maturity deposits with credit institutions – 197.3 60.8 41.5 Receivables – amounts owed by policyholders – 341.5 – –
Objectives, policies and procedures for managing financial assets and liabilities: The Group’s activities expose it primarily to the significant financial risks of credit risk, interest rate risk, liquidity risk and foreign exchange risk. The Board of Directors has delegated the task of supervising risk management and internal control to the Risk Committee. There is also an Investment Committee that makes recommendations to the Board on the Group’s investment strategy.
There are several key elements to the risk management environment throughout the Group. These are detailed in full in the Corporate Governance statement. Specific considerations for the risks arising from financial assets and liabilities are detailed below.
Credit risk: The Group defines credit risk as the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion. The key areas of exposure to credit risk for the Group result through its reinsurance programme, investments, bank deposits and policyholder receivables.
Economic and financial market conditions have led the Directors to consider counterparty exposure more frequently and in significant detail. The Directors consider that the policies and procedures in place to manage credit exposure continue to be appropriate for the Group’s risk appetite, and no material credit losses have been experienced by the Group.
There are no specific concentrations of credit risk with respect to investment counterparties due to the structure of the liquidity funds which invest in a wide range of very short duration, high quality securities. Cash balances and deposits are placed only with highly rated credit institutions.
The Group’s maximum exposure to credit risk at 31 December 2011 is £1,807.6m (2010: £1,251.4m) being the carrying value of financial assets and cash. The group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2010 and 2011 is insignificant.
Interest rate risk: The Group considers interest rate risk to be the risk that unfavourable movements in interest rates could adversely impact on the capital values of financial assets and liabilities. This relates primarily to investments held at fair value.
The Group also holds a number of fixed rate, longer-term deposits with UK credit institutions. These are classified as held to maturity and valued at amortised cost. Therefore neither the capital value of the deposits, or the interest return will be impacted by fluctuations in interest rates.
The Group is strongly cash generative due to the large proportion of revenue arising from non-underwriting activity. Further, as noted above, a significant portion of insurance funds are invested in money market liquidity funds with same day liquidity, meaning that a large proportion of the Group cash and investments are immediately available.
In practice, the Group’s Directors expect actual cashflows 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 £579.4m (2010: £327.4m), £432.9m (2010: £213.8m) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
A maturity analysis for insurance contract liabilities is included in note 18.
The maturity profile for financial assets is included at the start of this note. The Group’s Directors believe that the cashflows arising from these assets will be consistent with this profile.
Fair value: For cash at bank and cash deposits, the fair value approximates to the book value due to their short maturity. For assets held at fair value through profit and loss, their value equates to level 1 (quoted prices in active markets) of the fair value hierarchy specified in the amendment to IFRS 7.
Objectives, policies and procedures for managing capital: The Group manages its capital to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities comfortably meet regulatory requirements. Excess capital above these levels within subsidiaries is paid up to the Group holding company in the form of dividends on a regular basis.
The Board of Directors is responsible for the management of insurance risk, although as mentioned in note 17, it has delegated the task of supervising risk management to the Risk Committee.
b) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2011 that would result from a 1% worsening in the UK loss ratios used for each underwriting year for which material amounts remain outstanding.
Gross: Claims outstanding 781.1 434.2 Unearned premium provision 552.6 372.4 Total gross insurance liabilities 1,333.7 806.6 Recoverable from reinsurers: Claims outstanding 334.2 165.2 Unearned premium provision 305.6 191.8 Total reinsurers’ share of insurance liabilities 639.8 357.0 Net: Claims outstanding 446.9 269.0 Unearned premium provision 247.0 180.6 Total insurance liabilities – net 693.9 449.6
The maturity profile of gross insurance liabilities at the end of 2010 was as follows: < 1 Year £m 1-3 years £m > 3 years £m
Unearned premium provision 372.4 – – Total gross insurance liabilities 502.7 147.6 156.3
Analysis of claims incurred (Net amounts): Financial year ended 31 December £m £m £m £m £m
Underwriting year (UK only): UK net claims incurred (excluding claims handling costs)
UK loss ratio development: Financial year ended 31 December £m £m £m £m £m
Net claims provision at start of period 269.0 209.4 Net claims incurred 351.9 199.9 Net claims paid (174.0) (140.3) Net claims provision at end of period 446.9 269.0 g) Reconciliation of movement in net unearned premium provision: 2011 £m £m
Of amounts owed to co-insurers and reinsurers, £432.9m (2010: £213.8m) is held under funds withheld arrangements.
Brought forward at start of period (12.4) 5.7 Movement in period 2.1 (18.1) Carried forward at end of period (10.3) (12.4)
The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax (asset): 2011 £m £m
The amount of deferred tax (expense)/income recognised in the income statement for each of the temporary differences reported above is: Amounts credited to income or expense: 2011 £m £m
Tax treatment of share scheme charges 1.9 (0.8) Capital allowances (0.2) (0.3) Other differences (1.0) 3.6 Remittance of overseas income – 12.3 Net deferred tax credited to income (0.7) 14.8
Authorised: Issued, called up and fully paid: 270,789,075 ordinary shares of 0.1p 0.3 – 268,571,725 ordinary shares of 0.1p – 0.3
717,350 (2010: 594,434) of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of this share scheme. These shares are entitled to receive dividends.
Staff share schemes: Analysis of share scheme costs (per income statement): £m £m
The awards are made with reference to the Group’s performance against prior year profit before tax. Employees must remain in employment for the holding period (3 years from the date of award) otherwise the shares are forfeited.
For the 2011 and 2010 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; • EPS growth is equal to RFR – 10% of maximum award vests; and • To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the 3-year period.
Number of free share awards vesting during the year ended 31 December 2011: Original Awards
SIP H207 scheme 337,770 294,192 SIP H108 scheme 352,732 313,123 DFSS 2008 scheme, 1st award 1,306,381 1,165,265 DFSS 2008 scheme, 2nd award 87,691 67,968
26. Group subsidiary companies The Parent Company’s principal subsidiaries are as follows: Subsidiary Country of incorporation Class of shares held
Admiral Life Limited England and Wales Ordinary 100 Dormant Bell Direct Limited England and Wales Ordinary 100 Dormant Confused.com Limited England and Wales Ordinary 100 Dormant Diamond Motor Insurance Services Limited
Net assets 168.4 146.0 Capital and reserves 7 Called up share capital 8 0.3 0.3 Share premium account 13.1 13.1 Capital redemption reserve – – Profit and loss account 155.0 132.6
Parent Company accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements: 1. Basis of preparation The accounts have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board have reviewed the Company’s projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses. The Company has no debt.
The Parent Company audit fee is not disclosed in these accounts as it is disclosed in the Consolidated financial statements for Admiral Group plc, which precede them at note 10.
4. Employee share schemes The Group operates a number of equity settled compensation schemes for its employees. For schemes commencing 1 January 2004 and after, the fair value of the employee services received in exchange for the grant of free shares under the schemes is recognised as an expense, with a corresponding increase in equity.
Refer to note 24 of the consolidated financial statements for further details on share schemes.
85 Consolidated fi nancial summary 86 Directors and advisers 86 Further information
6. Other creditors – due within 1 year 31 December 2011 £m 31 December £m
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