Winner Best Large UK Workplace 2012 4th Best European Workplace 2012 6th Best UK Companies to Work For 2012
This report is printed on Lumi Silk that is manufactured from 100% post-consumer ECF (Elemental Chlorine Free) recycled pulp and meets the highest environmental standards.
The Admiral Group celebrates its 20th birthday this year. Turn to pages 2 and 3 to discover some of the key moments defining our success.
About us The Group’s core UK car insurance business launched in 1993 and the Group has grown every year since. In the UK, the Group has an 11% share of private car insurance through four brands: Admiral, Elephant, Diamond and Bell. It also owns Confused.com, one of the leading UK price comparison websites. Outside the UK, Admiral operates car insurance businesses in Spain, Italy, France and the USA which now insure over 430,000 vehicles.
The Group also owns price comparison businesses in Spain, France and the USA. At the end of 2012 Admiral had 3.6 million customers in five countries. It employs over 6,500 people in eight countries.
.5 p 3. 6m 3. 4m 2. 7m 2. 1m 1. 7m
Turnover £2,215m Contents Overview 01 Financial Highlights 02 Admiral’s 20 Years of
Growth,1993-2012 04 Admiral’s Markets and Businesses 06 Chairman’s statement 08 Chief Executive’s statement 10 UK Car Insurance Review
1999 Successful management buy-out of Admiral from the Brockbank Group, then owned by XL Capital Ltd. Barclays Private Equity backs the MBO.
2004 On 23 September, Admiral floats on the London Stock Exchange with a share price of £2.75 and market capitalisation of £711 million.
Munich Re acquires an 18.6% shareholding and Admiral’s debt is refinanced with Lloyds TSB.
2005 Admiral launches MultiCar, enabling UK customers to insure two or more cars on the same policy, with all cars eligible for a discount.
On 12 December, Admiral joins the FTSE 100 with a share price of £10.93 and market capitalisation of £2.9 billion.
1993 2 August The first ever Admiral TV commercial is broadcast.
2009 Rastreator.com, a car insurance price comparison website, launches in Madrid, Spain.
Inspop Technologies Pvt. Ltd. launches in Haryana, India, to provide IT support to the Group’s price comparison operations.
£18m £47m £73m £100m £120m £150m £207m £262m £320m £373m £422m £540m £627m £698m £808m £910m £1.08bn £1.58bn £2.19bn £2.22bn
For more information: UK Car Insurance Review Go to page 10
2010 LeLynx, a car insurance price comparison website, launches in Paris, France.
2012 Chiarezza, the Group’s Italian price comparison website, is sold to BlackFin Assurance Courtage.
As of 31 December, the closing price share price is £11.60 and Admiral has a market capitalisation of £3.2 billion.
Admiral is one of the largest and most profitable private car insurers in the UK. The Group also owns Confused.com, one of the UK’s leading price comparison websites and Gladiator, a commercial vehicle insurance broker.
• Profit increased by 19% to £372.8 million. • Lower combined ratio in 2012 versus 2011 primarily driven by higher reserve releases.
• The Group has four car insurers outside the UK, in Spain, Italy, the US and France.
• Combined ratio higher in 2012 versus 2011, predominantly due to growth in less mature markets.
• The Group exited Italian price comparison market with the sale of Chiarezza in April.
• The Group remains low-risk in its investment strategy. Investment and interest income increased on higher total cash and investment balances.
India 1. United Kingdom Since 1993 2. India Since 2001 3. Gibraltar Since 2003 4. Spain Since 2006 5. Canada (Halifax, Nova Scotia) Since 2007 6. Italy Since 2008 7. US (Texas, Virginia, Maryland and Illinois) Since 2009
In my statement last year I commented that I was very confident, given the quality of our management and our staff, that 2012 would demonstrate their capability and commitment to put the 2011 issue of higher than expected claims behind us and restore lost shareholder value. This confidence has, I believe, been fully justified with pre-tax profits 15% higher at £345m; reserve releases from the 2010 and 2011 years; and a share price that was 36% higher at the end of the year than the start.
This level of profitability delivered a 60% return on capital employed and supported total dividends of 90.6 pence per share, which represents a distribution of 95% of our earnings. Our normal dividend, growing in line with our growth in profits based on a 45% pay-out ratio, amounted to 42.7 pence per share, whilst our available surplus, after taking into account our required solvency, provision for our overseas expansion plans, and a margin for contingencies, made possible a further special dividend of 47.9 pence per share.
Our UK Business UK motor insurance is cyclical. As rates harden and profitability improves so too interest in growth increases amongst insurers, raising marketing spend; developing new offerings; and, in turn, leading to lower prices to grow share. This phase continues until the market recognises that the new business it is attracting is unprofitable for most, leading to a further turn. It makes good economic sense to grow in the up-cycle and refrain from chasing the market down in the down-cycle. This is even more the case for a player such as Admiral that has a significant combined ratio advantage over the market as a whole and can, therefore, afford to raise rates less quickly than the market as a whole when the cycle turns up. The UK market reached its low point in 2009, a year that saw a totally unsustainable overall market combined ratio of 127%, and then raised rates significantly over the subsequent two years to reflect the increasing cost of claims, in particular those relating to bodily injury. By contrast, in 2009 Admiral had achieved a combined ratio of 94% and was, therefore, able to take advantage of these market conditions to add material growth to its UK motor book, finishing 2011 almost 60% larger than two years previously. Similarly in 2012, as the second largest UK private motor insurer, we have not sought to add to the downward pressure on prices but have been content to hold our share broadly steady.
Admiral has always had a low appetite for risk. This is demonstrated by the fact that we reinsure 75% of our book either through co-insurance or quota share; we only invest in the highest quality assets with no equity exposure; and when we enter new markets we do so slowly through organic growth, adopting a test and learn approach. Nowhere is this low risk appetite more evident than our approach to reserving against motor claims. We establish initial reserves at the prudent end of potential outcomes, reviewing how claims develop in subsequent years and releasing parts of the reserve to profit as and when justified. In our reserving we seek to reflect not only what we know but what may happen, such as potential changes to discount rates and increasing numbers of periodic payment orders. Our approach to reserving is conservative; how conservative will vary with our assessment of the level of uncertainty and volatility to which our business is exposed.
Currently the UK motor market is undergoing significant change – the implementation of the EU gender directive; the OFT referral to the Competition Commission; the banning of referral fees; and the emergence of telematics offerings are all potentially disruptive events. Admiral has, however, built its business to embrace and profit from change, rather than fear it and we have been as transparent as we can as to the likely effects of these changes on our business. The management team has developed a flexible responsive, low-cost, data-rich business model that allows the effect of change to be identified quickly, measured accurately, and responded to effectively. By seeking to minimise bureaucracy, encourage individual managers to use their initiative, and avoid management by committee which leads to an absence of decision-taking and the abrogation of responsibility, we aim to react more quickly than our competitors to changes in our environment. Through our all-employee Free Share scheme we seek to motivate all of our people to work together to achieve the best outcome for what is their business, creating a total alignment between their interests and those of our
We are already seeing the results of investing in price comparison in new markets in order to kick start the process of change to more active switching of car insurance provider by consumers. Market data shows price comparison growth in Italy, Spain and France and we are delighted to see others being attracted by our initiative to establish their own price comparison sites in markets where we provide motor insurance – the launch of Les Furets in France is a case in point. The more impact price comparison can have the stronger the potential for direct insurance in these markets.
Our Board Over the past couple of years we have added to our Board beyond its normal size in anticipation of three of our Non-Executive Directors reaching the end of the nine years following which they are no longer regarded as independent under the UK Corporate Governance Code. By structuring this overlap we aim to maintain the continuity of Board process and the strength of personal interaction which underlies the effectiveness of the Board as a team. The first of these, Keith James, stood down at our 2012 AGM although he continues to bring his knowledge of our business and his wise counsel to bear through his chairmanship of our principal UK-regulated operating subsidiaries. May I take this opportunity to thank Keith for everything that he added to our debate during his time on the Board.
I would also like to extend this thanks more generally to all of our Non-Executives for the time they give and the commitment they make to our business. As our business expands and broadens, and against the backdrop of challenging economics and a demanding regulatory environment, what is expected of Non-Executives, and in particular Committee Chairs, bears little relation to the position that existed when Admiral floated in 2004. During 2012 all Non-Executives visited at least one of our overseas businesses in addition to the normal Board process. It is only by such active engagement with the business and the opportunity to spend time with management across many levels that Non-Executives can gain a real understanding of its underlying health and potential. In a business that has sustained profitable growth as its objective the depth and breadth of management is both the key enabler and the potential greatest inhibitor. Our Board, therefore, aims to assess not only the plans for immediate succession but, at least as, if not more, importantly, the emerging bench strength for five to 10 years time. Throughout 2012 we have had three senior managers join the Board in each of its meetings in order to broaden their understanding of the Group’s strategy and Board process and contribute actively to Board deliberations.
We’ve had our ups and downs, good moments and, well, less good moments, over the first 7,304 days (we started on 2 January 1993 and there have been five leap years along the way, but who’s counting?). In 20 years, we’ve done a lot of car insurance (total turnover? £13 billion, our combined ratio over the first 20 years? 84%), we’ve had a lot of laughs, lost (quite) a few hairs and gained a few pounds. But the net result is my belief that the next 20 years will make the first 20 seem downright pedestrian for Admiral Group. And if I do my job well, then when the next wave of management takes over, it will inherit a very strong foundation upon which to construct their skyscraper.
The insurance businesses made some strides towards being growing, profitable, sustainable businesses, however, these strides were not as long as anticipated. Overall the opportunities are well worth the investment but we do need to pick up our game and make more progress, more quickly.
4. Operate a ‘capital-light’ business model transferring a significant proportion of our underwriting risk to reinsurance partners, which in turn allows Admiral to distribute the majority of our earnings as dividends.
Following on from the success of Rastreator and LeLynx, just after the end of the year we launched the beta version of a price comparison site in the US, Comparenow.com. Until now no one has done European-style price comparison in the US and so Comparenow will plough new ground. Comparenow is attempting to change normal shopping patterns on a big scale and success is sure to be challenging and exciting in equal parts.
Admiral Group’s strategy is not complicated. Based on the premise that the internet is an irresistible force, our strategy is to continue to progress in the UK market while taking what we know and do well, which is internet and telephone delivery of car insurance, beyond the UK. Translation: keep doing what we’re doing but do it better than we did it last year.
Financial milestones are great but one of the most rewarding moments of the first 20 years came in 2012 when we were named the best large company to work for in the UK and the 4th best multinational company to work for in Europe, by the Great Place to Work® Institute. We have a simple philosophy at Admiral: if people like what they do, they’ll do it better. So we go out of our way to make this a good place to work. The result: happier staff, record profits.
Finally, it was a year marked by a long-overdue action. In the last half of December David Stevens, co-founder and COO, several other senior managers and I went through an entry-level sales training course and then got on the phones with customers. So after 19 years and 50 weeks, I made my first sale!
In sum, 2012 was the year of the kangaroo: it bounced around a little bit but it turns out to be pretty big, strong and energetic with the babies protected in the mother’s pouch.
Great. We‘re off to a good start. Let’s get on with the next 20 years.
For more information: Business Review – UK Car Insurance Go to page 12 2012 Winner Best Large UK Workplace
Twenty years ago, Admiral launched on a grey Saturday in Wales – the seventh of what ultimately became a couple of dozen Direct Line ‘clones’; new players and subsidiaries of big, established insurers, copying the over-the-‘phone ‘cut out the middle man’ model. For such a superficially dull industry, those twenty years have seen an astonishing pace of change.
For a start, of the top five private car insurers in 1993, only one made it into the top five in 2011 (Royal, Sun Alliance, AGF, Eagle Star, Direct Line in 1993 – Direct Line, Admiral, Aviva, LV & AXA in 2011).
Back in 1993, one in five customers made a claim each year and almost all of those were for bent metal or car theft. Twenty years on, it’s heading towards one in ten making a claim, but most of the cost of those claims is now attributable to ‘bodily injury’. Of course, most strikingly, none of the business in 1993 came via the internet, and only a minority over the ‘phone. Now, almost three quarters of new customers start their journey on the internet.
In terms of concrete future guidance on household, all I can really say is ‘so far, so good’. Ten weeks in. For what that’s worth.
UK Car Insurance delivered a profit of £372.8 million – up 19% on 2011’s result of £313.6 million, primarily driven by higher net insurance premium revenue and an improved combined ratio (along with associated profit commission). Turnover for this core business accounted for 87% of the Group total (2011: 90%) and 85% of customers (2011: 88%). Growth in the UK was moderated in 2012 in response to market conditions in the UK market.
Admiral’s international car insurance businesses continue to develop, with turnover rising 33% to £162.9 million (2011: £122.1 million) and customer numbers reaching 435,900 – an increase of 42% on a year earlier. The combined loss from the operations was, however, higher, at £24.5 million (2011: loss of £9.5 million). This was predominantly a result of growth in the younger businesses and some strengthening of back year claims reserves in the more mature businesses.
The Group’s UK price comparison business, Confused.com, delivered a pre-tax profit of £18.2 million – around £2 million higher than 2011’s result, on 7% higher revenue. Outside the UK, Admiral’s international price comparison businesses (Rastreator.com in Spain and LeLynx.fr in France) made a combined loss of only £0.2 million (2011: loss of £5.6 million) whilst combined revenue increased by nearly 70%. The Group sold its Italian price comparison business Chiarezza.it in April 2012.
Admiral’s capital-efficient and highly profitable business model led to return on capital employed of 60% (2011: 59%). A key feature of the business model is the extensive use of co- and reinsurance across the Group. During the first half of 2012 Admiral announced extensions to its UK reinsurance arrangements until at least the end of 2014. Admiral’s long-term UK co-insurance agreement (covering 40% of the business) runs to at least the end of 2016.
Other Group key performance indicators include: • Group loss ratio of 78.9%, in line with 2011
Total dividends paid and proposed for the financial year amount to 90.6 pence per share (£245 million), an increase of 20% on the previous year (2011: 75.6 pence; £203 million). The final dividend proposed is 45.5 pence per share (25% higher than the final 2011 dividend of 36.5 pence).
The Group’s results are presented in three key segments – UK Car Insurance, International Car Insurance and Price Comparison. Other Group items are summarised in a fourth section.
Admiral Group grew pre-tax profits in 2012 by 15% to £344.6 million (2011: £299.1 million) and earnings per share by 16% to 95.1 pence (2011: 81.9 pence).
Turnover increased slightly to £2,215.1 million (2011: £2,190.3 million), whilst net revenue rose 13% to £984.3 million (2011: £870.3 million). Customer numbers were 6% higher at the end of 2012 at 3.55 million (2011: 3.36 million).
(KPIs on staff and customers are included in the Corporate Responsibility section on page 24).
• Policies are distributed through price comparison websites and direct channels (Admiral’s own websites and the telephone).
• Admiral accounts for around 11% of the UK private car insurance market in vehicle terms, insuring over three million cars at the end of 2012. Total UK premium in 2012 was over £1.7 billion.
• Admiral’s main operations are in Cardiff, Swansea and Newport in South Wales; customers are also serviced from Nova Scotia, Canada and Bangalore, India.
Net insurance claims (192.6) (335.5) (355.1) Net insurance expenses (32.4) (46.7) (50.0)
Reported motor loss ratio 68.3% 77.3% 76.1% Reported motor expense ratio 15.2% 14.0% 13.6% Reported motor combined ratio 83.5% 91.3% 89.7% Written basis motor expense ratio 14.4% 13.2% 13.0% Claims reserve releases £23.5m £10.3m £17.6m Vehicles insured at year-end 2.46m 2.97m 3.02m Other revenue per vehicle £84 £84 £79
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 through co-insurance or quota share reinsurance contracts. These arrangements include profit commission terms which allow Admiral to retain a significant portion of the profit generated.
The two principal advantages of the arrangements are: • Capital efficiency – The majority of the capital supporting the underwriting is held outside the Group. As Admiral is typically able to retain much of the profit generated via profit commission, the return on Group capital is higher than in an insurance company with a standard business model.
• Risk mitigation – Co-and reinsurers bear their proportional shares of claims expenses and hence provide protection should results worsen substantially.
The proportion underwritten by Great Lakes (a UK subsidiary of Munich Re) is on a co-insurance basis, such that 40% of all motor premium and claims for the 2012 year accrues directly to Great Lakes and does not appear in the Group’s income statement. Similarly, Great Lakes reimburses the Group for its proportional share of expenses incurred in acquiring and administering the motor business.
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% for the duration, whilst the allocation of the balance is at Admiral’s discretion.
Net other revenue 156.1 204.8 204.8 Other revenue per vehicle £84 £84 £79
UK Car Insurance Financial Performance Commentary on Admiral’s UK Car Insurance business result and its market is contained in Chief Operating Officer David Stevens’ review on page 10.
As noted in the Group’s interim 2012 results, the UK Car Insurance market became substantially more price competitive in 2012 than it had been over 2010 and 2011, over which period Admiral grew its business significantly. Whilst the number of customers continued to grow, the rate of growth was slowed significantly as Admiral opted to preserve margin rather than chase growth.
Total premium written in 2012 was broadly flat compared to 2011 at just over £1.7 billion, whilst the number of customers rose 2% year-on-year to 3.02 million at 31 December 2012. Vehicle count in the second half of the year was flat. Across new business and renewals, Admiral cut its rates by around 6% in 2012. Average written premium for the year was around £580, down 9% on 2011, due in part to rate cuts and in part to portfolio changes (notably a shift in favour of renewal business).
UK Car Insurance Underwriting Result and Profit Commission The UK combined ratio improved by around two percentage points in 2012 as follows: UK Car Insurance Combined Ratio 2011 2012
Loss ratio excluding reserve releases 79.8% 80.0% Reserve releases 2.5% 3.9% Loss ratio net of releases 77.3% 76.1% Expense ratio 14.0% 13.6% Combined ratio 91.3% 89.7%
UK Car Insurance Review continued Claims Reserving Admiral’s reserving policy (both within the claims function and in the financial accounts) is initially to reserve conservatively, above internal and independent projections of ultimate loss ratios. This is designed to create a margin held in reserves to allow for unforeseen adverse development in open claims and typically results in Admiral making above industry average reserve releases.
Referral Fees As previously noted, personal injury referral fees will be banned with effect from 1 April 2013. In 2012 Admiral earned approximately £6 per vehicle insured (£18.6 million) from personal injury referral fees.
In additional, in 2012 Admiral earned around £5 per vehicle in credit hire referral fees (£13.6 million). Admiral notes that the UK Competition Commission has recently embarked upon a review of the car insurance market and a potential outcome of the review is a further ban on credit hire referral fees.
All three companies are required to maintain capital at levels prescribed by their regulator, and all three maintain surpluses above those required levels at all times.
The most material contributors to net other revenue are: • Profit earned from motor policy upgrade products underwritten by Admiral, including breakdown, car hire and personal injury covers.
• Vehicle Commission (see opposite). • Fees – administration fees, waster leads and referral income (see below).
• Instalment income – interest charged to customers paying for cover in instalments.
Vehicle Commission With effect from 1 April 2012, Admiral no longer earns Other Revenue from the sale of legal protection policies. In addition, the Group began charging its panel of co- and reinsurers a vehicle commission. Admiral’s car insurance policies will continue to include legal protection as an integral feature and there has been no impact on customers in the level of cover or cost of policies as a result of this change. The planned overall economic impact of these two changes is not significant.
Net insurance claims (15.9) (28.3) (49.4) Net insurance expenses (16.5) (16.2) (27.4)
Reported loss ratio 85% 104% 114% Reported expense ratio 88% 60% 63% Reported combined ratio 173% 164% 177%
Other revenue per vehicle £34 £32 £25 *1 Figures include Admiral Direkt (sold in January 2011)
• Elephant Auto (based in Richmond, Virginia, USA): Launched in October 2009 and provides car insurance in four US states (Virginia, Maryland, Illinois and Texas) with a market size greater than the UK.
Admiral initially identified five markets into which expansion was desirable (based on, among other things, the size of the market and the nature of distribution and regulation), and having sold German insurer AdmiralDirekt.de in 2011, the Group has an active presence in the remaining four.
Overall business progress and performance is discussed in the following sections.
International Car Insurance Financial Performance Admiral’s international insurance businesses (in aggregate and individually) continued to grow, adding 130,000 customers and ending 2012 42% larger than a year earlier. Turnover grew 33% to £162.9 million (2011: £122.1 million).
As the Group’s new insurance operations grow, it is expected that they will make losses until appropriate scale has been achieved. Although the 2012 loss was higher than anticipated, the Group is satisfied with the progress each business continues to make towards the goal of becoming a sustainable, growing, profitable operation.
Regulatory Environment Admiral’s European insurance operations are subject to the same regulation as the UK car insurance business, details of which are summarised above.
* Excludes pre-launch costs. Figures include results of Chiarezza.it, which was sold in April 2012. The disposal did not have material impact on the income statement.
UK Price Comparison – Confused.com Confused.com continues to operate in the very competitive UK price comparison market, which has been dominated by four businesses for a number of years. Media spend remained high, though growth in the number of car insurance policies distributed via the channel in 2012 was lower than in prior years.
• Confused’s income is primarily generated from commissions paid by the product provider on the sale of an insurance policy or financial product.
Price Comparison Strategy • Confused’s strategy is focused on car insurance comparison and is aimed at making Confused the most competitive car insurance price comparison website in the UK market.
International Price Comparison • At the end of 2012, the Group had two price comparison businesses operating outside the UK: – In Spain, Rastreator.com (launched in March 2009) offers comparison on motor, home, motorcycle and life insurance.
– LeLynx.fr in France (launched January 2010) offers comparison on a similar range of products.
• In early 2013, Admiral launched comparenow.com – a price comparison business based in the USA.
Success in delivering against the strategy for price comparison is measured against a large number of key performance indicators which are common across the UK and international businesses. These include market share, quote volumes, conversion rates, sales volumes, income per sale, revenue per customer and cost per sale.
International Price Comparison Following the sale of the Italian price comparison operation (Chiarezza) during H1 2012 and the launch in Q1 2013 of a new operation in the USA, Admiral now operates three price comparison businesses outside the UK: in Spain (Rastreator), France (LeLynx) and the USA (comparenow.com).
The combined result for International Price Comparison was a loss of £0.2 million – notably improved from a £5.6 million loss in 2011.
Regulatory Environment Confused.com is regulated by the UK FSA as an insurance intermediary and is subject to all relevant intermediation rules, including those on solvency capital.
Share Scheme Charges These costs relate to the Group’s two share schemes, further detail on which is set out in the notes to the financial statements. The increase in the charge relates to a higher number of shares awarded in 2012 compared to 2011 (resulting from increased headcount across the Group).
Investments and Cash Investment Strategy Admiral maintained a low-risk investment strategy throughout the year, with a broadly consistent allocation of funds to the three main asset categories (cash at bank, cash deposits and money market funds) as in recent years.
Money market funds and short-dated debt securities 1,074.5 76.7 – 74.6 1,225.8
The only notable change in asset allocation during 2012 was a higher proportion invested in money market funds and short-dated debt securities and a move away from cash compared to 2011. All investment objectives continue to be met.
Investment and interest income in 2012 was £15.9 million, up 16% on 2011 (£13.7 million). The rate of return was similar to 2011, at slightly less than 1%.
Earnings Per Share Basic earnings per share rose by 16% to 95.1 pence from 81.9 pence. The change is in line with profit growth.
Dividends The Directors have proposed a final dividend for the financial year of 45.5 pence per share. Total dividends for the year amount to 90.6 pence per share, 20% higher than the 75.6 pence per share distributed in respect of 2011.
The payment date is 24 May 2013, ex-dividend date 1 May and record date 3 May.
The majority of the Group’s capital requirement is derived from its European insurance operations, Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). The minimum capital requirements and surplus position at the end of the 2012 for those companies, along with the overall Group position was as follows: £m AIGL AICL Group
Total regulatory capital requirement £240m Surplus over regulatory capital requirement £155m
The Directors note the delay in the progress towards implementing the Solvency II regulatory regime in the EU. As previously noted, the Directors do not believe, based on current guidance, that there will be a material change in the level of the Group’s capital surplus under the new regime.
Munich Re 27,899,400 10.2% Morgan Stanley 18,110,492 6.6% BlackRock, Inc 13,755,935 5.0% Manning & Napier Advisors 11,056,280 4.0% Power Corporation of Canada 9,719,702 3.6%
Risk Impact Mitigating Factors 1. UK Car Insurance – erosion of competitive advantage Admiral has typically been able to produce a significant combined ratio advantage over the UK market as a whole. There is a risk that this advantage and/or the level of underwriting profit (and associated profit commission) generated by Admiral could erode.
An example of how this risk might arise is a failure to successfully adapt to the EU Gender Directive which came into effect in December 2012.
A sustained and uncorrected erosion of competitive advantage could affect the ability of the Group to extend its reinsurance arrangements, which might in turn mean the Group having to hold more capital.
A wide range of factors contribute to Admiral’s combined ratio outperformance of the UK market. These include: • Experienced and focused senior management and teams in key business areas including pricing, claims management, operations, IT and marketing
The Group is exposed to underwriting risk through its underwriting of motor insurance policies.
The impact on the Group would be that claims costs could rise significantly above historic or expected levels, reducing the Group’s profitability. This might be for a number of reasons, including: • Legislative changes (for example, periodic payment orders, Ogden discount rate changes, the EU Gender Directive)
Many of the potential causes of claims shocks are outside the control of the Group and the focus is, therefore, generally on how to prepare for and react to the occurrence of such events.
To cover other potential claims shocks, the Group continues to hold an additional buffer in its reserves in excess of the projected ultimate outcomes.
The Group has launched eight new operations outside the UK in the past six years, and launched a UK Household insurance product in December 2012.
There is an ongoing risk that one or more of the operations fail to become a sustainable long-term business.
A collective failure of these businesses would threaten the Group’s objective to diversify its earnings by expanding in overseas locations.
The Directors are mindful of management stretch and regularly assess the suitability of the management structure in place for the Group’s international operations.
Admiral is dependent on the four main UK price comparison websites as an important source of new business and growth. The growth in this distribution channel could slow, cease or reverse, or Admiral could lose one or more of the websites as a source of leads.
The impact on Confused.com of higher levels of competition in the price comparison market, either through the aggressive activities of existing players or the entry of significant new participants would be to lower profits. However, a more competitive market might benefit the car insurance business through lower acquisition costs.
The impact on the UK Car Insurance business of losing one or more of the websites would be a potentially material reduction in new business volumes.
There is a risk that such support will not be available in the future if the results of either the UK business or (more realistically) one or more of the international operations are not satisfactory to the co- and/or reinsurers.
Admiral mitigates risks to its reinsurance arrangements by ensuring that it has a strongly rated and diverse range of partners. Admiral has enjoyed a long-term relationship with one of the world’s strongest reinsurers, Munich Re, which has supported Admiral since 2000. The Group also has strong relationships with a number of other reinsurers, including Amlin, Hannover Re, Mapfre Re, New Re, Swiss Re and XL Re (avoiding reliance on a single partner).
In the UK, co- and reinsurance arrangements have been agreed up to the end of 2014, reflecting confidence in the Admiral UK car insurance business. Pricing on these deals was in line with existing arrangements. The longterm co-insurance agreement with Munich Re will remain in place (at 40% of the business) until at least the end of 2016.
7. Credit risk Admiral is primarily exposed to credit risk in the form of a) default of reinsurer; b) failure of banking or investment counterparty.
The impact of the materialisation of a major credit event on the Group may, dependent on its nature and severity, require additional capital to be raised. The Group would also need to ensure that it had sufficient liquid assets to meet its claims and other liabilities as they fell due.
The mitigation of these risks is discussed in note 5c of the financial statements.
• 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.
On call Our senior managers experience life in one of our call centres.
Corporate Responsibility at Admiral encompasses four key areas: • Employees • Customers • Charity and Community • Environment.
‘If people like what they do, they will do it better.’ This simple philosophy runs throughout the Group, in both our UK and overseas offices – and it works! In order to understand why our approach works so well, it is useful to understand the key characteristics of working life at Admiral: i) Communication ii) Equality iii) Reward and Recognition iv) Fun
We have a really simple approach to Equality. Everyone should be treated the same. There are no executive dining rooms, no company cars, no dress code, and everyone has their own desk.
Further details of our salary structure and our share schemes are available in the Remuneration Report on page 47.
Every effort is made to understand the thoughts and opinions of employees 74% 73% 86% 87% 88% 88% 91% I am proud to be associated with Admiral 91% 91% 94% 96% 95% 95% 96% I would recommend Admiral as a good place to work 90% 90% 94% 95% 94% 95% 96% I am more likely to stay at Admiral because of the share schemes 69% 71% 71% 79% 78% 79% 79% Admiral is truly customer-orientated 90% 88% 90% 90% 86% 87% 90% Admiral treats its customers fairly 86% 84% 87% 88% 86% 86% 88%
This year, eight of our senior managers visited our New Business call centre for two weeks of intensive sales training before taking live telephone calls from our customers. The team included Henry Engelhardt (CEO) and David Stevens (COO).
The Board firmly believes that share ownership motivates employees, decreases attrition and makes it easier to recruit successfully. According to our staff survey 79% of employees say they are more likely to stay with Admiral because of the share schemes.
Fun plays a vital role in helping us to ensure that our employees enjoy their work, encouraging each and every individual to produce excellent results. Organised activities for our staff are often weird, wild and wonderful, but they are also a great tool for motivation.
32nd 42nd 7th 16th 17th 8th Top 10 10th 6th 10th 9th 1st
Again this year we have continued to win awards for employee satisfaction, adding to those we have achieved previously. Notably, we were named the best large UK employer by the Great Place to Work® Institute.
Customers Ensuring that we give a great service to our customers is essential to the future growth of our business, both in the UK and overseas.
There are many initiatives in place to ensure that customers are treated fairly, efficiently and with respect including: • Customer-focused measures programme.
We work within the regulatory framework of the Financial Services Authority (FSA) in the UK. One of the FSA’s statutory objectives is to help customers get a fair deal. There is a comprehensive monthly Treating Customers Fairly (TCF) Management Information pack, pulling together specific measures that demonstrate we are consistently treating our customers fairly. Over 150 individual TCF measures have now been adopted.
The TCF management information is embedded in our culture. If either a red or amber grade occurs the department manager investigates the issues and provides information on the reason for the score, along with a plan to improve the results. The table below displays some of the key measures from the TCF report.
% Financial Ombudsman Service (FOS) complaints found in favour of Admiral 78% 67% 68% 66% 69% > 75% Customer Service call answer rate 95% 93% 91% 94% 92% > 90%
During 2012 the percentage of Financial Ombudsman Service complaints found in favour of Admiral was 69%, whereas the target is >75%. This is an area that has been below target for a number of years and the details of the decisions are closely reviewed to help identify further improvements to Admiral’s products, services and processes.
We encourage our customers to provide us with feedback on our services. The main way in which we do this is through our Customer Comment Form, which is a key measure of the TCF report. The Customer Comment Form enables our customers to rate the service of our call centre staff on a scale of one to ten in four key areas including ‘helpfulness’, ‘efficiency’, ‘communication’ or ‘knowledge’, and ‘politeness’.
The annual Quality Awards celebrate achievements from across the Group in our customer-focused measures programme.
Our Quality Awards encourage employees to perform well in quality measures throughout the year in order to increase both their own individual quality score, and that of their department. This helps to ensure that we are compliant with TCF requirements and that our customers are treated fairly.
Celebrating star performance Our Quality Awards reward those who provide excellent customer service.
The feedback gained from our Customer Comment Form analysis and SMS feedback allows us to pinpoint areas in need of improvement, and to identify employees who could benefit from further training. This enables us to continue to provide excellent customer service as the business continues to grow.
This year, we built upon this achievement by raising even more money! In September our CEO, Henry Engelhardt, set our UK employees an exciting objective in the form of the 90-Day Challenge. Each department had to compete against each other to raise the most money within 90 days, through any means they could think of. Fundraising activities included cake sales, sponsored walks, raffles and online auctions.
Through the hard work and generosity of our employees we managed to raise just over £50,000 for the Prince’s Trust through our 90-Day Challenge, bringing the total raised for the charity in 2012 to well over £100,000.
Cake sale Our Claims department held a cake sale to support the Prince’s Trust.
With 20 venues now open and 10 more due to open by March 2013, the Young Driver programme has delivered over 75,000 lessons, with plans for a further 75,000 in 2013. The scheme is proven to work; only 9% of Young Driver participants experience a crash within the first 6 months of passing their test, compared to the national average of 20%.
Making young drivers safer Admiral is a key sponsor of SEAT’s Young Driver Scheme.
• Complying with the requirement, expected to be effective from October 2013, to report annual levels of greenhouse gas emissions in line with guidance provided by the Department for Environment, Food and Rural Affairs (Defra) in partnership with the Department for Energy and Climate Change (DECC).
We encourage our employees to recycle wherever possible, and our Facilities department continue to discuss ways to reduce our UK energy consumption with the Carbon Trust.
Full details of our Corporate Responsibility strategy are available on our corporate website, www.admiralgroup.co.uk, including further examples of what we do for our employees, our customers, charity and community and the environment.
Introduction from the Chairman The Board is committed to maintaining the highest standards of corporate governance. We believe that having a sound corporate governance framework enables effective and efficient decision making and ensures that there is there is the right balance of skills and experience to assess and manage the risks in the markets in which the Group operates. 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.
This Report sets out the governance framework and the approach that it has taken in 2012 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.
David Stevens, CBE (50) Chief Operating Officer, appointed in 1999 Group Risk Committee member
Martin Jackson, (64) Non-Executive Director, appointed in August 2004 Group Risk Committee Chairman Remuneration Committee member
Current appointments Non-Executive Chairman of Serco Group plc Non-Executive Chairman of the Towergate Insurance Group Deputy Chairman of Bovis Homes Group plc Senior Independent Director at the Phoenix Group
Henry has an MBA from INSEAD and he was awarded an honorary CBE in 2008 for services to business in Wales.
Current appointments Munich Re Chief Executive Manager responsible for UK and Ireland.
Background and experience Manfred graduated from University of Essen with a degree in Economics and Business Management. Since 1981, Manfred has been working for Munich Re.
Background and experience Kevin is responsible for finance, compliance and investments, as well as the subsidiary Elephant Auto.
Kevin joined Admiral in 2005, becoming Finance Director in September 2006. Prior to Admiral Kevin has worked in UK financial services for over 25 years and he has held a number of senior roles in other insurance organisations, including being the Finance Director of Engage Mutual Assurance and Cigna UK.
Kevin is a Fellow of the Chartered Institute of Certified Accountants and has an MBA from London Business School.
Margaret Johnson, OBE (54) Non-Executive Director, appointed in September 2006 Audit Committee member Remuneration Committee member
Lucy Kellaway, (53) Non-Executive Director, appointed in September 2006 Nomination Committee member
Roger Abravanel, (66) Non-Executive Director, appointed in March 2012 Remuneration Committee member
Background and experience Margaret has worked for the international advertising agency Leagas Delaney for the past 15 years.
Current appointments Non-Executive Director and Chairman of the Remuneration Committee of Bovis Homes Group plc and Chairman of GO Outdoors Ltd.
Background and experience Colin was formerly a member of the Executive Committee of Tesco plc and during his 22 year career at Tesco he held a wide range of positions, including UK Finance Director and CEO of Tesco Express.
Current appointments Lucy is a management columnist on the Financial Times.
Current appointments 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.
Background and experience Roger has significant international consulting experience having been with McKinsey and Co. from 1972 until his retirement as Director Emeritus in 2006.
Background and experience John was the Group Managing Director of Misys plc between 1998 and 2004, having been on the Board of the Company since 1989.
Prior to joining Misys, John was Manufacturing Director at JC Bamford Excavators Ltd.
John was a Non-Executive Director at Chubb plc between 2001 and 2003.
Annette is former CEO of the Direct Line Group, formerly known as RBS Insurance. In this role Annette was also a member of the RBS Group Executive Management Committee.
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 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
Corporate Governance continued 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 matters reserved for the Board’s consideration which is monitored by the Company Secretary and reviewed by the Board on an annual basis. Specific matters reserved to the Board include the approval of: • The Group’s long term objectives and corporate strategy; • Operating and capital budgets, financial results, and any significant changes to accounting practices or policies; • The Group’s capital structure; • Results and financial reporting; • The system of internal control and risk management; • The Group’s overall risk appetite; • Changes to the structure, size and composition of the Board, including new appointments; • Succession plans for the Board and senior management; • Annual review of its own performance and that of its Board Committees; • Dividend policy and proposals for dividend payments; • Major acquisitions, disposals, and other transactions outside delegated limits; • Review of the Group’s overall corporate governance arrangements.
The Board met on seven occasions in 2012 with five of these meetings being held over two days. The Board also held a strategy day devoted entirely to analysis and challenge by the Directors, and particularly the NonExecutive Directors, of the strategic objectives of the Group’s UK and international businesses. The Chairman visits 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 two dinners with members of the Group’s senior management team without the Executive Directors being present.
Agendas and papers are circulated to the Board in a timely manner in preparation for Board and Committee meetings. 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 with their Chairmen encouraging 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.
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 Board will undergo an external review in 2013 as the Group seeks to further enhance the effectiveness of the Board.
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 2012, the following emerged as areas of particular focus: • Recognising that over the next three to four years there was likely to be succession of a number of Directors, the importance was stressed of having a structured succession plan that delivered the competencies and experience required amongst Directors, in particular where Committee Chairs were involved, and ensured that these various moves took place in the right order; • Greater utilisation to be made by the Group of the competencies and experience of Non-Executive Directors in order that they could be available for informal input into topics, if helpful, for Executive Directors and other senior managers between Board meetings; • To alter the process of business review so as to review each Group business in-depth once a year, combining an assessment of what had been achieved since last review against what had been planned; how the prior year’s actual and planned performance sit in comparison with those for earlier years; and to agree what might be expected to be achieved over the next 12 months, identifying the KPIs against which progress would be measured.
The Chief Executive, to whom they report, appraises annually the performance of the individual Executive Directors. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Board led by the Senior Independent Director (‘SID’). Following the latest review, the SID considered and discussed with the Chairman the comments and feedback that had been received from the Directors as part of the Chairman’s evaluation questionnaire. Following these discussions with the Chairman, the SID was able to confirm that the performance of the Chairman continues to be effective, and that he continues to demonstrate appropriate commitment to his role.
Board Balance and Independence The Board continues to give careful consideration to its structure and balance in the context of the need to refresh Board and committee membership in an orderly manner so as to maintain the continuity of Board process and the strength of personal interaction which underlies the effectiveness of the Board as a team. The Board remains satisfied that it has the appropriate balance of skills, experience, independence and knowledge of the Group to enable it and its Committees to discharge its duties and responsibilities effectively, as required by the Code.
Although Colin Holmes holds, with Alastair Lyons, a crossdirectorship in Bovis Homes Group PLC, the Board has determined that Colin Holmes remains independent in character and judgement and that his holding of a crossdirectorship does not affect his ability to present an objective, rigorous and constructive challenge to the assumptions and viewpoints presented by management and the Board.
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, and that they are free from any relationship or circumstance that could affect, or appear to affect, their independent judgement.
In accordance with the requirement under the Code for annual election of Directors, all directors will be submitting themselves for re-election by shareholders at the forthcoming AGM. The Board is satisfied that all are properly qualified for their reappointment by virtue of their skills and experience and their contribution to the Board and its Committees.
The Directors are given access to independent professional advice at the Group’s expense, should they deem it necessary, to carry out their responsibilities.
Relations with Shareholders The Company attaches considerable importance to communications with shareholders and engages with them on a variety of issues. 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. Regular dialogue with shareholders helps to ensure that the Company’s strategy is understood and that any issues are addressed in a constructive way.
All shareholders are invited to attend the Company’s Annual General Meeting (AGM). The Chairmen of the Audit, Remuneration, Nomination and Group Risk Committees attend the AGM along with the other Directors and are available to answer shareholders’ questions on the activities of the Committees they chair. Shareholders are also invited to ask questions during the meeting and have an opportunity to meet with Directors after the formal business of the meeting has been concluded. Details of proxy voting by shareholders, including votes withheld, are made available on request and are placed on the Company’s website following the meeting.
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 January 2013 and it was concluded that they had operated effectively in 2012.
Board Committees The Board has delegated authority to a number of permanent Committees to deal with matters in accordance with written terms of reference. The principal Committees of the Board – Audit, Remuneration, Risk and Nomination – all comply fully with the requirements of the Code.
The membership at the end of the year was: Colin Holmes (Chair), Margaret Johnson and Annette Court.
Other individuals such as the Chief Financial Officer, Chief Operating Officer, Chief Executive, Chairman of the Board, the heads of Risk, Compliance, and Internal Audit and representatives of different parts of the Group may be invited to attend all or part of any meeting as and when appropriate. The external auditors were invited to attend all of the Committee’s meetings held in 2012, excepting when their own performance was to be reviewed.
Summary of Key Activities During 2012 During the year the Committee reviewed the following: • The Annual Report and interim results; • Reports from the internal audit departments within the Group on the effectiveness of the Group’s risk management and internal control procedures, details of key audit findings, and actions taken by management to manage and reduce the impact of the risks identified; • Reports from the external auditors on the principal findings from their review of the Company’s systems and controls, and on their key issues and conclusions on the half and full year reporting; • Reports from the Chair of the Group Risk Committee on the principal risks faced by the Group and the work undertaken by the Committee to ensure risk is appropriately managed; • Presentations from independent actuaries to assist the Committee in concluding on the adequacy of the Group’s reserves; • Reports from the external auditors on their proposed audit scope, fees, audit, and auditor independence; • Performance and effectiveness of the internal audit department; • All reports from internal audit including management responses to the conclusions set out in the reports; • The effectiveness of the Group’s arrangements for handling allegations from whistleblowers and procedures for detecting fraud; • The Committee also had presentations and discussions on a range of important issues including the approach to reserving within the Group, a review of large claims and a review of the control environment in the Group’s Italian business; • Its own terms of reference; and • Its own effectiveness.
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 carries 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 Audit 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. Members of the Committee also receive all issued audit reports, enabling them to challenge the reports’ content and related recommendations. The overseas internal auditors attend Committee meetings periodically. The Committee approves the internal audit programmes at the start of each calendar year whilst the effectiveness and workload of the internal audit functions, and the adequacy of available resources are monitored throughout the year.
The Audit Committee has unrestricted access to the Group’s documents and information, as well as to its employees and external professional advisers.
As part of the Committee’s detailed annual review of its performance and processes, 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. Financial statem ents G
The Company Secretary acts as Secretary to the Committee. The Committee met four times during the year.
Non-Executive Directors Roger Abravanel and Annette Court joined the Board in March 2012, following a formal, rigorous and transparent recruitment process led by external consultants, instructed by the Committee, who identified and shortlisted potential candidates. Following this process, and separate interviews with Committee and Board members, the Committee unanimously recommended to the Board that Roger and Annette should be appointed to the Board.
During the year, the Committee kept under review the size of the Board and the balance of its composition particularly in the context of the continuing need to assess the balance of skills, knowledge, independence, diversity and experience on the Board and the impending retirement, over the next five years, of a number of current Non-Executive Directors who are approaching nine years’ service.
The Group remains strongly supportive of the principle of boardroom diversity, of which gender is an important, but not the only aspect. What is important is diversity of thought, experience, and approach and each new appointment must complement what already exists at the Board table. Accordingly, appointments will always be made on merit against objective criteria, including diversity, and not just to achieve an externally prescribed number.
Remuneration Committee Full details of the membership, responsibilities and activities of the Remuneration Committee can be found in the Directors’ Remuneration Report set out on pages 47 to 56.
Internal Control and Risk Management The Board is ultimately responsible for the Group’s system of internal control and, through the Audit Committee has reviewed the effectiveness of these systems. The systems of internal control over business, operational, financial, and compliance risks are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
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 and internal control to the Group Risk Committee (GRC).
The Risk Department defines and prescribes the financial and operational risk assessment processes for the business; maintains the risk registers, undertakes regular reviews of these risks in conjunction with line management and records any actual losses or near misses that occur as a consequence of the realisation of risk. The Head of the Risk Department 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, 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 UK RMC, the Group’s other UK and overseas committees and the Audit Committee also receive regular reports from the relevant Internal Audit functions, which include recommendations for improvement of the control and operational environment. Twice a year the Chairman of the Group Risk Committee provides a comprehensive report to the Board on the Group’s risk appetite, risk strategy and risk management policy with focus on a consideration of the principal assessed exposures and the effectiveness of the mitigation strategies adopted. In addition, the Board receives reports from the Chairman of the Audit Committee as to its activities, together with copies of the minutes of the UK RMC and the GRC and Audit Committees.
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 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.
Going Concern The financial statements 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 twelve months, including cash flow forecasts and regulatory capital surpluses. The Group has no debt.
Business Review The Company is the holding Company for the Admiral Group of companies. The Group’s principal activity continues to be the selling and administration of private motor insurance and related products.
The information that fulfils the requirements of the Business review, as required by Section 417 of the Companies Act 2006, and which should be treated as forming part of this report by reference are included in the following sections of the annual report: • Chairman’s statement • Chief Executive’s statement • Business review.
The Directors declared and paid dividends of £219.3 million during 2012 (2011: £198.8 million) – refer to note 10b for further details.
The Directors have declared a final dividend of £124.5 million (45.5 pence per share), payable on 24 May 2013.
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 5c to the financial statements.
Directors and their Interests The present Directors of the Company are shown on pages 30 and 31 of this report, whilst Directors’ interests in the share capital of the Company are set out in the Remuneration Report on pages 48 to 56.
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 2012, 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 10d.
• 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.
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 for annual election of Directors all Directors will submit themselves for re-election at the Group’s Annual General Meeting on 25 April 2013.
Annual General Meeting It is proposed that the next AGM be held at Cardiff City Hall, Cathays Park, Cardiff CF10 3ND on Thursday 25 April 2013 at 2.00pm, notice of which will be sent to shareholders with the Annual Report.
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 and financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
Mark Waters Kevin Chidwick Company Secretary Chief Financial Officer 5 March 2013 5 March 2013
• A third section containing information required this year under the existing regulations.
2012 has been another strong year for the Group despite a challenging external environment. The Group increased profits in the year by 15% to £344.6 million with a return on capital employed of 60% which supported total dividends for the financial year of 90.6 pence per share, and represents a distribution of 95% of our earnings. The Group’s strategy remains to continue to maximise our position in the UK while taking what we know and do well, which is internet and telephone delivery of car insurance and price comparison, to our overseas insurance and price comparison businesses.
Directors, the Chairman and Senior Management; • Reviewing the appropriateness of the performance conditions for both the Discretionary Free Share Scheme (DFSS) and Free Share Incentive Plan (SIP) awards; • Reviewing the Company’s performance against the performance conditions applicable to the DFSS and SIP awards and where appropriate authorising the vesting of awards; • Reviewing and authorising the grant of awards under both DFSS and SIP plans; • Reviewing the Committee’s terms of reference and recommending amendments to the Board for approval; and
Compliance Statement This Remuneration report has been prepared according to the requirements of the Companies Act 2006 (the Act), the Listing Rules of the UK Listing Authority and under Regulation 11 of and Schedule 8 to the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (the Regulations). In addition, the Board has applied the principles of good corporate governance set out in the UK Corporate Governance Code (the ‘Governance 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.
In accordance with Section 439 of the Companies Act, an advisory resolution to approve this report will be proposed at the Annual General Meeting (‘AGM’) of the Company to be held on 25 April 2013. The detail in this report sets out how the remuneration principles have been applied in 2012.
The Committee reviews the framework and remuneration packages of the Executive Directors and the most senior managers and recognises the need to ensure that the remuneration policy is firmly linked to the Group’s strategy including its risk management approach. In setting the policy and making remuneration decisions, the Committee takes into account pay and conditions elsewhere in the Group. The main principles underlying the remuneration policy are: • Competitive – the Group aims to combine salaries with attractive performance-related incentives, which provide the potential for competitive total reward packages for the achievement of superior performance. Base salaries reflect the role, job size and responsibility together with individual performance and effectiveness. Prevailing market and economic conditions and developments in governance are also considered, as are general salary levels throughout the organisation. In considering total remuneration for the Executive Directors, the Committee is aware of remuneration in companies of a similar size in the Financial Services sector.
• Performance-linked – a significant part of the Executive Directors’ (excluding the founding Directors) and senior managers’ reward remains shareholderaligned given that it is determined by the Group’s earnings growth vs. LIBOR (see Policy Table opposite).
Salary levels/increases take account of: • Scope and responsibility of the position; • Individual performance and effectiveness, and experience of the individual in the role; • Market pay levels; • Average increase awarded across the Group
The Group operates a Personal Pension Plan, a Defined Contribution scheme
This is available to all employees following completion of their probationary period
The Group matches employee contributions up to a maximum of 6% of base salary with maximum employer contribution of £9,000
Discretionary Free Share Scheme (DFSS) To motivate and reward longer-term performance, grow market share profitably, reduce staff attrition, and further strengthen the alignment of the interests of shareholders and staff
DFSS bonus To further align incentive structures with shareholder interests through the delivery of dividend equivalents
Bonus is calculated to be equivalent to dividends that would have been payable during the year on DFSS shares awarded but not vested
Fees take into account the time commitment, responsibilities, and the skills and experience required
Note: Approximately 1,800 employees from across the Group, as well as Kevin Chidwick, participate in the DFSS. The Committee recommends for approval by the Board awards to the CFO and other employees under the DFSS. For the CFO, all share awards are subject to the above performance criterion. For staff below Group Board level awards will be split. 50% of the award will be subject to the above performance criterion, and the other 50% will have no performance criteria 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.
Remuneration Arrangements for Founding Directors Two of the three Executive Directors (Henry Engelhardt and David Stevens) are founding Directors. They and the Committee continue to hold the view that the significant shareholdings held by them provide a sufficient alignment of their interest in the performance of the Group with the interests of other shareholders. In light of this, their remuneration packages consist only of a below market rate salary and benefits such as private medical cover, permanent health insurance and death in service cover. The Group does not contribute to any pension arrangements on behalf of these Executive Directors, and they have not participated, nor is it intended that they participate, in any Group share schemes.
Details of Directors’ Service Contracts The following table summarises the notice periods relating to the service contracts of the Executive Directors serving at March 2013.
Annette Court 3 years 21 March 2012 One month’s written notice
Martin Jackson 1 year 1 December 2012 One month’s written notice
John Sussens 1 years 1 December 2012 One month’s written notice
Under normal circumstances, good leavers are entitled to receive termination payments in lieu of notice based on base salary and compensation for loss of benefits. The notice period for all Executive Directors is one year.
In the event an Executive leaves for reasons of death, injury, disability, redundancy, retirement, or any other reason which the Remuneration Committee in its absolute discretion permits, any outstanding long-term incentive awards will be pro-rated for time and performance and will vest after the end of the performance period. Upon a change of control of the Company, awards will be pro-rated for time and vest immediately based on the extent to which the Committee determines that the performance conditions have been met or are likely to be met.
Pay-for-Performance: Scenario Analysis The following chart shows the potential split between the different elements of the Executive Directors’ total remuneration under two different performance scenarios: ‘Zero vesting’, and ‘Maximum vesting’. The Company is unable to provide a ‘target’ scenario as it does not operate an annual performance-related bonus scheme with threshold targets and maximum payment levels.
The charts above exclude the effect of any Company share price appreciation. For this reason, were the CFO’s DFSS shares vest in full, his actual total remuneration may exceed the £ value shown in the chart above.
Base salary Annual base salary for 2013 Annual base salary for 2013
Distribution Statement The table below shows the percentage change in profit after tax, dividends, and total employee compensation spend from the financial year ended 31 December 2011 to the financial year ended 31 December 2012.
Remuneration Committee Membership in 2012 The Board sets the Group’s remuneration policy and, through the authority delegated to it by the Board, the Committee is responsible for making recommendations to the Board on the structure and implementation of the remuneration policy across the Group with consideration to the prevailing economic climate within the economies in which the Group operates. Its remit includes recommending the remuneration of the Chairman, the Executive Directors and the Company Secretary; reviewing the remuneration of senior management; and reviewing the composition of and awards made under the performance-related incentive schemes.
At the end of 2012 the Committee consisted of Martin Jackson, Margaret Johnson, and Roger Abravanel under the Chairmanship of John Sussens, the Senior Independent Director. Colin Holmes stepped down from the Committee in March 2012 and Roger Abravanel joined the Committee with effect from that date. The Committee met five times during the year.
Colin Holmes is no longer a member of the Committee, the Committee had satisfied itself as to the independence of Colin Holmes. However, he had chosen to take no part in decisions on the Chairman’s remuneration. The Committee members do not have any day-to-day involvement in the running of the Group.
Adviser 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 Chairman 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 2012 (based on time and materials) totalled £4,500.
In addition, the Committee received advice on the structure of the Group’s share schemes from PricewaterhouseCoopers LLP (PwC). The fees paid to PwC totalled £15,360. The Company Secretary also circulates market survey results as appropriate.
Director 1. Base salary 2. Benefits 3. Pension 4. DFSS and SIP
Alastair Lyons £218,400 £218,400 Roger Abravanel £50,000 £50,000 Manfred Aldag £6,000 £6,000 Annette Court £74,000 £74,000 Colin Holmes £70,000 £70,000 Martin Jackson £70,000 £70,000 Keith James £38,167 £38,167 Margaret Johnson £62,000 £62,000 Lucy Kellaway £50,000 £50,000 John Sussens £72,000 £72,000
4. DFSS: the value at vesting of shares vesting on performance over the three-year period ending 31 December 2012. Given that vesting occurs in April, after the
Remuneration Report is finalised, the DFSS element of the single figure is based upon the average share price in the last three months of the calendar year in question. 5. DFSS bonus: the value at grant of bonus equivalent to dividends that would have been payable during the year on DFSS shares awarded but not yet vested. 6. Kevin Chidwick was paid £260,000 in January 2012 to reimburse him for expenses incurred in relation to his relocation to the USA after taking on CEO, responsibility for the Group’s US Insurer Elephant Auto.
Comparison of Overall Performance and Pay The graph below illustrates CEO and CFO total remuneration vs. TSR performance since 31 December 2004.
Left axis: TSR (£100 invested on 31 December 2004). Right axis: CFO total actual remuneration (£000 p.a.). Right axis: CEO total actual remuneration (£000 p.a.).
Discretionary Free Share Scheme (DFSS) Awards made during the year Kevin Chidwick and many members of the management team participate in this plan. Awards are generally made as over a specific number of shares, and vest after a three-year performance period with vesting determined by performance targets and employment conditions. Of the Group’s current Executive Directors, only Kevin Chidwick participates in this scheme, as Henry Engelhardt and David Stevens have declined to be included given their significant shareholdings.
Awards made up to 2012 vest based on growth in EPS in excess of a risk-free return, defined as average three-month LIBOR, over a three-year period. 10% of shares vest for matching LIBOR, full vesting occurs for outperforming LIBOR by 10% p.a., with straight-line vesting in between. No vesting occurs for EPS growth below LIBOR.
Awards Vesting during the Year and in 2013 The awards vesting during the year and in 2013 are subject to the same performance conditions as described above. The table below details the Company’s EPS performance vs. LIBOR and vesting outcomes over the performance periods.
Performance period Vesting date Admiral EPS index LIBOR index Outperformance % vesting Value for CFO (£000)
1 Jan 2009 – 31 Dec 2011 April 2012 149 points 103 points 46 points 100% £530,7101 1 Jan 2010 – 31 Dec 2012 April 2013 161 points 102 points 59 points 100% £533,3912 1 Calculated based on number of shares vesting in April 2012 (45,009) multiplied by the share price at the vesting date (£11.79). 2 Calculated based on the number of shares vesting in April (and December) 2013 (48,010) multiplied by the average share price over the final three months of 2012 (£11.11).
DFSS bonus 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.
Free Share Incentive Plan (SIP) The SIP is available to all UK staff (Henry Engelhardt and David Stevens have declined to be included in the plan). The maximum annual award under the SIP is £3,000 per employee. Shares awarded under the SIP are forfeited if the employee leaves within three years of the award. Awards are made twice a year, based on the results of each half-year. Overseas staff receive an award under the Discretionary Free Share Scheme equivalent to the SIP award made to UK employees.
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.
Total Shareholdings of Directors Executive Directors have agreed to (acquire and) retain a beneficial 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.
Henry Engelhardt 37,005,472 – Kevin Chidwick 83,926 150,260 David Stevens 10,631,950 –
*1 Kevin Chidwick received bonuses of £122,612 in lieu of dividends on shares awarded (but not yet vested) under the Group’s DFSS bonus plan (consistent with all DFSS scheme participants). He also received £260,000 in January 2012 to reimburse him for expenses incurred in relation to his relocation to the USA.
*2 Keith James stepped down from the Board at the AGM in April 2012. His 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.
We have audited the financial statements of Admiral Group plc for the year ended 31 December 2012 set out on pages 58 to 93. 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 46, 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.
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 2012 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; • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
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
• we have not received all the information and explanations we require for our audit; or
• a Corporate Governance Statement has not been prepared by the Company.
Earnings per share: Dividends declared and paid (total) 10 219.3 198.8 Dividends declared and paid (per share) 10 81.6p 74.6p 58 Admiral Group plc Annual Report 2012
Net decrease in cash and cash equivalents (5.3) (21.1) Cash and cash equivalents at 1 January 224.6 246.7 Effects of changes in foreign exchange rates (2.7) (1.0) Cash and cash equivalents at end of period 5 216.6 224.6
Profit for the period – – – 221.2 0.1 221.3 Other comprehensive income Currency translation differences – – (1.0) – – (1.0) Total comprehensive income for the period – – (1.0) 221.2 0.1 220.3
Share scheme credit – – – 23.6 – 23.6 Deferred tax charge on share scheme credit – – – (1.4) – (1.4) Total transactions with equity-holders – – – (176.6) – (176.6)
Profit for the period – – – 258.4 – 258.4 Other comprehensive income Currency translation differences – – (2.5) – (0.2) (2.7) Total comprehensive income for the period – – (2.5) 258.4 (0.2) 255.7
Share scheme credit – – – 23.7 – 23.7 Deferred tax credit on share scheme credit – – – 1.5 – 1.5 Transactions with non-controlling interests – – – 1.4 3.3 4.7 Total transactions with equity-holders – – – (192.7) 3.3 (189.4)
1. General information and basis of preparation General information Admiral Group plc is a Company incorporated in England and Wales. Its registered office is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares are listed on the London Stock Exchange.
Adoption of new and revised standards The Group has applied all adopted IFRS and interpretations endorsed by the EU at 31 December 2012, including all amendments to extant standards that are not effective until later accounting periods.
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2012 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 • Government Loans (Amendments to IFRS 1) • Improvements to IFRSs 2009-2011 • Transition guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) • Investment entities (Amendments to IFRS 10, IFRS 12 and IAS 27).
In addition, none of the standards or interpretations adopted for the first time in the year have had a material impact on the consolidated financial results or position of the Group for the year ended 31 December 2012.
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 Group’s projections for the next twelve months and beyond, including cash flow forecasts and regulatory capital surpluses. The Group has no debt.
The Directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the annual financial statements.
Further information regarding the company’s business activities, together with the factors likely to affect its future development, performance and position, is set out in the Business Review on pages 11 to 21 Further information regarding the financial position of the company, its cash flows, liquidity position and borrowing facilities are described in the Business Review on pages 20 to 21. In addition notes 5 and 10 to the financial statements include the company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk.
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.
3. Group consolidation and operating segments 3a Accounting policies (i) Group consolidation The consolidated financial statements comprise the results and balances of the Company and its subsidiaries (together referred to as the Group) for the year ended 31 December 2012 and comparative figures for the year ended 31 December 2011. The financial statements of the Company’s subsidiaries are consolidated in the Group financial statements. The Company controls 100% of the voting share capital of all its principal subsidiaries, except Rastreator.com Limited and Inspop USA LLC. The Parent Company financial statements present information about the Company as a separate entity and not about its Group. In accordance with International Accounting Standard (IAS) 24, transactions or balances between Group companies that have been eliminated on consolidation are not reported as related party transactions in the consolidated financial statements.
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; • 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
Notes to the Financial Statements continued 64 Admiral Group plc Annual Report 2012
3b Segment reporting The Group has four reportable segments, as described below. These segments represent the principal split of business that is regularly reported to the Group’s Board of Directors, which is considered to be the Group’s chief operating decision maker in line with IFRS 8, Operating Segments.
International Car Insurance: The segment consists of the underwriting of car insurance and the generation of 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 Assurances in France and Elephant Auto in the USA. None of these operations are reportable on an individual basis, based on the threshold requirements in IFRS 8.
Other central revenue and expenses, including share scheme charges (26.1) Interest income 1.9
Revenue and results for the corresponding reportable segments for the year ended 31 December 2011 are shown below.
The total of Price Comparison revenues from transactions with other reportable segments is £13.0m (2011: £14.9m). These amounts have not been eliminated on consolidation as the Directors consider that not doing so results in a better overall presentation of the financial statements. The impact on the financial statements in the current and prior period is not material. There are no other transactions between reportable segments.
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 two International Price Comparison businesses, Rastreator and LeLynx are not yet material enough to be presented as a separate segment.
• Reinsurance assets Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on the insurance contracts issued by the Group are classified as reinsurance contracts. A contract is only accounted for as a reinsurance contract where there is significant insurance risk transfer between the insured and the insurer.
The Group’s share of the car insurance business was underwritten by Admiral Insurance (Gibraltar) Limited, Admiral Insurance Company Limited and Elephant Insurance Company. All contracts are short-term in duration, lasting for 10 or 12 months.
• Data driven pricing: The Group’s underwriting philosophy is focused on a sophisticated data-driven approach to pricing and underwriting and on exploiting the competitive advantages direct insurers enjoy over traditional insurers through: – Collating and analysing more comprehensive data from customers; – Tight control over the pricing guidelines in order to target profitable business sectors; and – Fast and flexible responsiveness to data analysis and market trends.
• Effective claims management: The Group adopts various claims management strategies designed to ensure that claims are paid at an appropriate level and to minimise the expenses associated with claims management. These include: – An effective, computerised workflow system (which along with the appropriate level of resources employed helps reduce the scope for error and avoids significant backlogs); – Use of an outbound telephone team to contact third parties aiming to minimise the potential claims costs and to ensure that more third parties utilise the Group approved repairers; and – Use of sophisticated and innovative methods to check for fraudulent claims.
(ii) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity and profit or loss at 31 December 2012 that would result from a 1 per cent movement in the UK loss ratios used for each underwriting year for which material amounts remain outstanding.
Unearned premium provision 549.2 – – Total gross insurance liabilities 893.3 391.7 411.9
Unearned premium provision 552.6 – – Total gross insurance liabilities 786.9 266.6 280.2
Underwriting year (UK only): UK net claims incurred (excluding claims handling costs) (132.4) (184.1) (323.6) (339.5) International net claims incurred (13.6) (15.9) (28.3) (54.2)
Underwriting year: Net releases on Admiral net share1 31.3 23.1 7.8 16.3 Releases on commuted quota share reinsurance contracts1 – 0.4 2.5 1.3 Total net release as above 31.3 23.5 10.3 17.6 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.
Net claims provision at start of period 446.9 269.0 Net claims incurred 393.7 351.9 Movement in net claims provision due to commutation 102.2 44.0 Net claims paid (282.4) (218.0) Net claims provision at end of period 660.4 446.9
(vii) Reconciliation of movement in net unearned premium provision: £m £m
(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, loans and receivables or held to maturity investments. At initial recognition assets are recognised at fair value and classified according to the purpose for which they were acquired.
The Group’s investments in money market liquidity funds are designated as financial assets at fair value through profit or loss (FVTPL) at inception.
Deposits with fixed maturities, classified as held to maturity investments are measured at amortised cost using the effective interest method. Movements in the amortised cost are recognised through the income statement, as are any impairment losses.
• Impairment of financial assets The Group assesses at each balance sheet date whether any financial assets or groups of financial assets held at amortised cost, are impaired. Financial assets are impaired where there is evidence that one or more events occurring after the initial recognition of the asset, may lead to a reduction in the estimated future cash flows arising from the asset.
Financial assets: Investments held at fair value 1,025.4 862.1 Held to maturity deposits with credit institutions 375.8 297.0 Held to maturity short dated debt securities 200.4 – Receivables – amounts owed by policyholders 403.5 423.9 Total financial assets per consolidated statement of financial position 2,005.1 1,583.0 Trade and other receivables 55.3 52.1 Cash and cash equivalents 216.6 224.6
Notes to the Financial Statements continued 74 Admiral Group plc Annual Report 2012
The maturity profile of financial assets and liabilities at 31 December 2011 was as follows: On demand £m
Objectives, policies and procedures for managing financial assets and liabilities The Group’s activities expose it primarily to financial risks of credit risk, interest rate risk, liquidity risk and foreign exchange risk. The Board of Directors has delegated the task of supervising risk management and internal control to the Risk Committee. There is also an Investment Committee that makes recommendations to the Board on the Group’s investment strategy.
The other principal form of credit risk is in respect of amounts due from policyholders, largely due to the potential for default by instalment payers. The impact of this is mitigated by the large customer base and low average level of balance recoverable. There is also mitigation by the operation of numerous high- and low- level controls in this area, including payment on policy acceptance as opposed to inception and automated cancellation procedures for policies in default.
There were no significant financial assets that were past due at the close of either 2012 or 2011.
• 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.
As noted above, the Group invests in money market liquidity funds, which in turn invest in a mixture of very short dated fixed and variable rate securities, such as cash deposits, certificates of deposits, floating rate notes and other commercial paper.
During the year the Group has placed funds into two segregated mandates. The guidelines of the investments retain the credit quality of the money market liquidity funds, whilst holding the securities on a hold to maturity basis. As the duration of the securities is short there is no material interest rate risk relating to these investments.
The Group also holds a number of fixed rate, longer-term deposits with strongly rated 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.
Commission from price comparison activities and earned by Gladiator is credited to revenue on the sale of the underlying insurance policy.
Ancillary revenue 215.7 223.3 Price comparison revenue 103.5 90.4 Other revenue 41.9 35.3 Total other revenue 361.1 349.0
7. Expenses 7a Accounting policies (i) Acquisition costs, reinsurer vehicle commission and operating expenses: Acquisition costs incurred in obtaining new and renewal business are charged to the income statement over he period in which those premiums are earned. Vehicle commissions relating to new and renewal business is also recognised over the period in which those premiums are earned. All other operating expenses are charged to the income statement in the period that they are incurred.
(ii) Employee benefits: Pensions The Group contributes to defined contribution personal pension plans for its employees. The contributions payable to these schemes are charged in the accounting period to which they relate.
Acquisition of insurance contracts 50.6 – 50.6 36.2 – 36.2 Administration and other marketing costs 26.7 137.3 164.0 26.7 125.9 152.6
Social security charges 13.8 10.3 Pension costs 1.0 1.3 Share scheme charges (see note 7e) 32.5 30.8 Total staff expenses 184.4 156.9
Refer to the corporate governance report for details of the Audit Committee’s policy on fees paid to the Company’s auditor for non-audit services. The ratio of non-audit fees to audit fees in 2012 was 124% (2011: 119%).
Direct customer contact staff 4,991 4,264 Support staff 1,231 1,060 7e Staff share schemes Analysis of share scheme costs (per income statement): 31 December £m £m
SIP charge (note i) 6.6 6.0 DFSS charge (note ii) 14.0 12.6
The share scheme charges reported above are net of the co-insurer’s share of the cost and therefore differ from the gross charge reported in note 7c (2012: £32.5m, 2011: £30.8m) and the gross credit to reserves reported in the consolidated statement of changes in equity (2012: £23.7m, 2011: £23.6m).
The consolidated cash flow statement also shows the gross charge in the reconciliation between ‘profit after tax’ and ‘cash flows from operating activities’. The co-insurance share of the charge is included in the ‘change in trade and other payables’ line.
(i) The Approved Share Incentive Plan (the SIP) Eligible employees qualify for awards under the SIP based upon the performance of the Group in each half-year period. The current maximum award for each year is £3,000 per employee.
Notes to the Financial Statements continued 80 Admiral Group plc Annual Report 2012
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 Remuneration report).
Number of free share awards committed at 31 December 2012: Awards outstanding
SIP H209 scheme 377,641 March 2013 SIP H110 scheme 352,100 August 2013 SIP H210 scheme 346,590 March 2014 SIP H111 scheme 489,170 September 2014 SIP H211 scheme 598,528 March 2015 SIP H112 scheme 619,164 September 2015 DFSS 2010 scheme 1st award 1,542,453 April 2013 DFSS 2010 scheme 2nd award 121,051 August 2013 DFSS 2011 scheme 1st award 1,634,732 April 2014 DFSS 2011 scheme 2nd award 157,312 September 2014 DFSS 2012 scheme 1st award 181,668 March 2015 DFSS 2012 scheme 2nd award 1,967,898 October 2015
During the year ended 31 December 2012, awards under the SIP H208 and H109 schemes and the DFSS 2009 scheme vested. The total number of awards vesting for each scheme is as follows.
8. Taxation 8a Accounting policy Income tax on the profit or loss for the periods presented comprises current and deferred tax.
Notes to the Financial Statements continued 82 Admiral Group plc Annual Report 2012
Brought forward at start of period (10.3) (12.4) Movement in period (4.9) 2.1 Carried forward at end of period (15.2) (10.3)
The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax (asset): 31 December £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/(charged) to income or expense: 31 December £m £m
(iii) Leased assets: The rental costs relating to assets held under operating leases are charged to the income statement on a straight-line basis over the life of the lease.
Leases under the terms of which the Group assumes substantially all of the risks and rewards of ownership are classed as finance leases. Assets acquired under finance leases are included in property and equipment at fair value on acquisition and are depreciated in the same manner as equivalent owned assets. Finance lease and hire purchase obligations are included in creditors, and the finance costs are spread over the periods of the agreements based on the net amount outstanding.
Notes to the Financial Statements continued 86 Admiral Group plc Annual Report 2012
Less than one year 0.8 – 0.8 0.9 – 0.9 Between one and five years – – – – – – More than five years – – – – – –
March 2011 (35.5p per share, paid May 2011) – 94.5 August 2011 (39.1p per share, paid October 2011) – 104.3 March 2012 (36.5p per share, paid June 2012) 98.0 – August 2012 (45.1p per share, paid October 2012) 121.3 – Total dividends 219.3 198.8
A final dividend of 45.5p per share (£124.5m) has been proposed in respect of the 2012 financial year. Refer to the Chairman’s statement and business review for further detail.
During 2012, 2,797,519 (2011: 2,217,350) new ordinary shares of 0.1p were issued to the trusts administering the Group’s share schemes.
1,620,000 (2011: 1,500,000) were issued to the Admiral Group Employee Benefit Trust for the purposes of the Discretionary Free Share Scheme. The Trustees have waived the right to dividend payments, other than to the extent of 0.001p per share, unless and to the extent otherwise directed by the Company from time to time.
Admiral Insurance Company Limited England and Wales Ordinary 100 Insurance Company Admiral Insurance (Gibraltar) Limited Gibraltar Ordinary 100 Insurance Company Able Insurance Services Limited England and Wales Ordinary 100 Intermediary Inspop.com Limited England and Wales Ordinary 100 Internet insurance intermediary Elephant Insurance Company United States of America Ordinary 100 Insurance Company Elephant Insurance Services, LLC United States of America Ordinary 100 Insurance intermediary Rastreator.com Limited England and Wales Ordinary 75 Internet insurance intermediary Inspop Technologies Private Limited India Ordinary 100 Internet technology supplier Inspop.com (France) Limited England and Wales Ordinary 100 Internet insurance intermediary Inspop.com (Italy) Limited England and Wales Ordinary 100 Internet insurance intermediary Admiral Syndicate Limited England and Wales Ordinary 100 Dormant Admiral Syndicate Management Limited
Tooley Shelf Company 1 Limited England and Wales Ordinary 100 Dormant Tooley Shelf Company 2 Limited England and Wales Ordinary 100 Dormant
10g Related party transactions (i) Mapfre: In 2012, the Group participated in transactions with Mapfre S.A. during the normal course of its Car Insurance and Price Comparison operations. Mapfre is a related party of Admiral Group due to its 25% minority interest in Group subsidiary Rastreator.com Limited. Details of the transactions with Mapfre and balances outstanding as at 31 December in respect of price comparison business are given in the table below.
(ii) Other: Details relating to the remuneration and shareholdings of key management personnel are set out in the remuneration report (audited section). Key management personnel are able to obtain discounted motor insurance at the same rates as all other Group staff, typically at a reduction of 15%.
Fixed assets – investments Shares in group undertakings 5 192.3 142.5 Other investments 74.6 35.0
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Parent Company is not presented. Under FRS 1 (Cash flow statements) the Company is exempt from having to present a cash flow statement on the grounds that its cash flows are included in the Group’s published consolidated financial statements.
Refer to note 10 of the Consolidated financial statements for disclosure of related party transactions.
Refer to note 7 of the consolidated financial statements for further details on share schemes.
6. Other creditors – due within one year £m 31 December £m
Issues of share capital – – – – Share scheme charges – – 23.7 23.7 8. Share capital Full details of the Company’s share capital are included in the consolidated financial statements above.
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.
Bankers Lloyds TSB Bank plc City Office Bailey Drive Gillingham Business Park Kent ME8 0LS
Joint Corporate Brokers Bank of America Merrill Lynch 2 King Edward Street London EC1A 1HQ