International customers 01Admiral Group plc · Annual Report and Accounts 2016
Group highlights Group’s share of profit before tax*1 (Pre Ogden) of £389.7 million (2015: £376.8 million)
Group’s share of profit before tax*1 (Post Ogden) of £284.3 million (2015: £376.8 million)
Group statutory profit before tax of £278.4 million (2015: £368.7 million)
Almost 9,000 staff eligible to receive free shares worth a total of £3,600 each in the employee share scheme based on the full year 2016 results
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction *1 Alternative Performance Measures – refer to the Glossary on page 141 for definition and explanation.
Succession As announced recently this will be my last statement as Chairman as I shall be retiring at the forthcoming AGM. Given Admiral’s distinctive culture which underpins the success the business has achieved I have considered it my responsibility to ensure the Board should have a choice of strong internal candidates as my successor. I am very grateful to Penny James for leading the selection process which confirmed that the Board already had within its ranks individuals with the skills and experience to lead the Board through the challenges of the next five to ten years. I am delighted that as the outcome to that process the Board has selected Annette Court as my successor and I wish her every success.
If I may be excused a little nostalgia, when I became Chairman in June 2000 Admiral provided private car insurance in the UK to 512k customers with a 3% market share and employed 1,270 people just in Cardiff and Swansea. Turnover and profitability in 2000 were £262 million and £24 million respectively. We now have 5.2 million customers across 5 countries and employ almost 9,000 people across 16 sites and 8 countries. 2016 turnover and profits achieved £2.6 billion and £284 million, or £390 million if we back out the impact of the Ogden rate change – that’s almost a 10-fold increase in turnover and a 16-fold increase in profitability in 16 years. We are valued at over £5 billion and are ranked 84 in the FTSE. We have 5 motor insurance businesses; 4 price comparison businesses; a household insurance business; 2 legal businesses; a start-up loans business and not to mention a price comparison incubator.
A great customer experience which has made strong progress again this year, increasing the number of insurer partners and, therefore, the number of quotes returned to customers, driving down cost per sale, and raising its penetration of its target markets. But changing the pattern of distribution in US auto insurance is a big nut to crack and we may take others into partnership along this journey.
2016 was broadly a year of growth across our insurance businesses outside the UK, taking advantage of the sound platforms that have now been created in Italy, the US, and Spain and the move in France last year to in-source all our operations as the precursor of growth. In the US we had 20% more customers at the end of 2016 than at the beginning, whilst our European operations grew by 31%. The insurance business model in the US is different to Europe with much higher new business acquisition costs, so growth requires investment. In Europe, there will also be periods when countries decide the market conditions are right to accelerate which may in turn justify further investment, as in Spain this year.
Financial Statements Additional InformationCorporate GovernanceIntroduction 05Admiral Group plc · Annual Report and Accounts 2016
For the last couple of months the resetting of the Ogden rate by the Ministry of Justice has represented a significant area of uncertainty outside of our control. The announcement on 27 February 2017 by the Lord Chancellor of the new rate of minus 0.75% has allowed this to be reflected within our 2016 accounts and represents a very material reduction from the previous 2.5% rate, increasing claims reserves by more than we would want to absorb within the, albeit significant, margin that we hold over best estimate. We have, therefore, reduced our second half reported results by £105 million, and to a much lesser extent the profits of subsequent years will also be reduced as the affected claims settle. Given, however, our strong capital position, this has not impacted our ability to maintain our 2016 final dividend at the level we declared in 2015. We anticipate that if market pricing adjusts future premiums to reflect the lower discount rate, there will be no significant impact on future business and its profitability after the change. We strongly support the ABI’s call for a fundamental review of the basis on which the Ogden rate is set in order to ensure that the relevant compensation awards are set appropriately and welcome the intent of the Lord Chancellor and the Chancellor of the Exchequer to implement this review expeditiously.
A proposed final dividend of 51.5 pence per share brings dividends for the year to 114.4 pence per share, a yield of 6.3% on the £18.18 share price at the 2016 year end.
Chairman’s statement continued 06 Admiral Group plc · Annual Report and Accounts 2016
5. Elephant starts selling in two new US states 6. 5 millionth customer 7. Admiral Seguros’ 10th birthday
Investing in our future 08 Admiral Group plc · Annual Report and Accounts 2016
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 09Admiral Group plc · Annual Report and Accounts 2016
The Admiral Group has five insurance and four price comparison operations in five countries. It has over 5 million customers and employs almost 9,000 staff.
UK Car Insurance Admiral is one of the largest car insurers in the UK.
Growing car insurance businesses in Spain, Italy, France and the US.
Commercial vehicle insurance broking and other central costs (including share scheme charges and finance costs).
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 11Admiral Group plc · Annual Report and Accounts 2016
All our growth, at home and overseas, has been organic. We have built each business from the ground up, identifying and understanding the opportunity, taking measured steps to test how well we understand the challenge ahead and the effectiveness of our solutions, and then to learn from that experience and from the experience of those who have tried other strategies.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 13Admiral Group plc · Annual Report and Accounts 2016
Increase customer retention by providing an excellent level of customer service.
Continue to build the brand profiles developed by our strong management teams.
Take advantage of changes in markets, regulations and consumer shopping habits to grow policy base.
Identify and take advantage of new technology to develop products for customers that add value.
Continued Growth Grow profitably our share of the UK private motor and household markets whilst giving excellent service to customers.
Continued Development Maximise the value of our core business and lay the foundation for growth.
UK New Products Develop a competitive advantage in products beyond insurance.
Investing in our future 14 Admiral Group plc · Annual Report and Accounts 2016
Perhaps most importantly, notwithstanding an apparently conservative profile as a Chartered Accountant and financial services veteran, Alastair has consistently been an encouraging supporter of Admiral’s distinctiveness rather than an advocate of the apparently safe option of convergence to industry norms.
The first reason is that many of the ideas won’t work in practice. Many, while technologically feasible, even impressive, involve an underappreciation of the complexity of insurance; the importance, for example, of avoiding customers you really don’t want to insure or the challenge of engaging policyholders in a deeper interaction with their insurance when, in truth, most of our customers want the opposite. Insurtech startups promising on-again, off-again, item by item insurance are offering a consumer “benefit” that most of our customers wouldn’t recognise as such.
UK Motor market share 3rd year of ConTe profits growth in
“ Admiral’s success has always been about embracing change when that’s in the interest of our customers and shareholders” David Stevens, CBE Chief Executive Officer 16 Admiral Group plc · Annual Report and Accounts 2016
Ensure Admiral remains one of, if not the, best car insurers in the UK
Admiral’s first major diversification from car insurance was household insurance, launched three years ago in the UK. I expect the second will be personal lending in the UK. Both take us into huge markets and in both cases our car insurance heritage provides some of the necessary skills and assets to succeed. Our priority will be to grow both, focussing on a long term objective of developing sources of competitive advantage, not short term top or bottomline objectives.
Given Ogden, the Group’s share of pre-tax profit reduced materially to £284 million from £377 million last year. On a statutory basis, the reduction is similar, with Group profit before tax at £278 million compared to £369 million in 2015.
Notwithstanding the Ogden impact, the strength of the Group’s capital position has allowed us to propose a final dividend of 51.5 pence per share, in line with the final 2015 dividend (before adding the return of surplus capital that was paid a year ago).
It’s inevitably hard to pick highlights, but some of mine would be: • 720,000 – the number of new customers we welcomed to the Group in 12 months.
• 212% – solvency ratio after the Ogden impact and proposed final dividend.
Full detail on the results follows but let me cover a couple of things: Ogden (inevitably), capital and dividend Readers will be aware I’m sure, but in December 2016 we heard that a new Ogden discount rate was imminent (the first change since 2001). The announcement came at the end of February 2017 that the new rate would be minus 0.75% – a substantial reduction on the previous rate of 2.5%.
“ If forced to describe the year in one word, for me it would be Growth” Geraint Jones Chief Financial Officer 18 Admiral Group plc · Annual Report and Accounts 2016
After accounting for the proposed final dividend, the Group solvency ratio is a very satisfactory 212%. Excluding amounts relating to return of surplus capital, full year dividends for 2016 are held at their 2015 level of 102.5 pence per share.
Brexit Another 2016 surprise (in a year full of them) was the result of the EU referendum in June.
We are planning for potential outcomes and expect to be able to establish new entities and/or arrangements which should result in minimal disruption to our businesses and customers in those markets.
We also currently enjoy free movement of staff between our sites in Europe which might also be restricted. Again we’ll work to ensure the impact on our staff is minimised to the extent possible under whatever arrangements are put in place.
“Ben was extremely helpful and covered all the policy options with me without pushing any covers or excesses that I did not want – I told him, as I now tell you, that he provided me with the best customer service from a call centre environment that I have ever had...and that’s in 46 years!”
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 19Admiral Group plc · Annual Report and Accounts 2016
The Group’s share of pre-tax profits of £284.3 million (2015: £376.8 million) and statutory profit before tax of £278.4 million (2015: £368.7 million) have both been materially affected by the impact of the change by the UK Government to the UK discount rate (commonly referred to as the ‘Ogden discount rate’), used to value personal injury claims, which has reduced UK Insurance profits. See below for further information. If the rate had remained unchanged, the Group’s share of pre-tax profit would have been approximately £390 million.
During 2016, the Group’s UK Insurance business, consisting of UK Car and UK Household, enjoyed favourable market conditions and delivered strong growth in turnover to £2.06 billion (2015: £1.76 billion). Net revenue increased by 8% to £770.9 million (2015: £711.2 million). Customer numbers reached 4.1 million (2015: 3.6 million). The UK Insurance business accounts for 80% of Group turnover and customers (2015: 83% and 81% respectively).
Outside the UK, Admiral’s International Insurance businesses grew combined turnover by 57% to £365.9 million (2015: £232.4 million). Net revenue increased by 49% to £107.3 million (2015: £72.2 million). Customer numbers grew by 28% to 864,000 (2015: 673,000). Encouraging progress was made in combined ratio terms, and in aggregate the segment recorded reduced losses of £19.4 million (down from £22.2 million) with the Group’s Italian insurer ConTe recording a profit for the third consecutive year.
Earnings per share Earnings per share decreased by 27% to 78.7 pence (2015: 107.3 pence), reflecting the decrease in Group profit as a result of the change in the Ogden discount rate. If the rate had remained unchanged, earnings per share would have risen to 109.6 pence per share.
Notwithstanding the lower second half profits, the strength of the Group’s capital position has allowed the Board to propose a final dividend of 51.5 pence per share (£144 million), as follows: • 15.0 pence per share representing a normal element, based on the dividend policy of distributing 65% of post-tax profits; and
Change in UK discount rate (‘Ogden’) On 27 February 2017, the UK Government announced the outcome of the review of the discount rate (referred to as the Ogden discount rate) used for calculating the value of lump sum personal injury compensation. The new rate is minus 0.75% and will apply to all unsettled and new claims from 20 March 2017.
Group financial review 20 Admiral Group plc · Annual Report and Accounts 2016
Money market funds, fixed income and debt securities comprise the majority of the total; 82% at 31 December 2016 (2015: 79%).
The underlying rate of return for the year (excluding the reinsurance accrual) on the Group’s cash and investments was 1.4% (2015: 1.3%).
Total cash plus investments increased by £158 million or 6% (2015: £139 million, 6%).
The estimated total impact, net of reinsurance and post tax, of the change to minus 0.75% from 2.5% is approximately £150 million.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 21Admiral Group plc · Annual Report and Accounts 2016
The Group’s capital includes £200 million 10 year dated subordinated bonds. The rate of interest is fixed at 5.5% and the bonds mature in July 2024. The bonds qualify as tier two capital under the Solvency II regulatory regime.
The Group’s results are presented in the following sections as UK Insurance, International Car Insurance and Price Comparison.
Capital structure and financial position A key feature of the business model is the extensive use of co- and reinsurance across the Group. The Group’s co-insurance and quota share reinsurance arrangements for the UK Car Insurance business are in place until at least the end of 2018. In 2017 and 2018, the Group will reduce its net share of that business from 25% to 22%.
Similar long term arrangements are in place in the Group’s International Insurance operations and UK Household Insurance business.
The capital add-on to the Standard Formula for 2017 is subject to the usual regulatory approval process. The Group plans to submit an application for approval to use an internal model to calculate capital requirements during 2017.
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 estimated (and unaudited) Solvency II position for the Group at the date of this report was as follows: Group capital position
UK Insurance profit before tax 397.9 444.2 338.5 *1 Alternative performance measures – refer to the Glossary on page 141 for definition and explanation.
It’s always fun to write an annual review like this – and always surprising when we look back and remember how much has happened and changed in just 12 months.
Clearly the reported results of the UK Car insurance business have been impacted by the change in the Ogden discount rate, but Alastair and Geraint have covered this in detail, so I will focus on the underlying business.
One of the more obvious achievements is the rate of growth of the car insurance segment. We grew by 11% during 2016, adding almost 350,000 to the customer base, which is about the same as we added in the previous four years combined. But the more encouraging aspect is that this wasn’t achieved through chasing volume through price cuts and acquisition spend, but through sensible underwriting and leveraging the still-growing price comparison distribution channel that has facilitated our growth over the last ten years and more.
What do I mean by sensible underwriting? We’ve always approached pricing in a rational way, growing when we think it’s the right time, and holding back when the market is looking less attractive. That means that we grew very modestly (in Admiral’s historical context at least) over the previous two or three years, but grew significantly more during 2016 as the market continued to increase prices quite significantly. We’ve also seen some slight de-risking in our portfolio as some of our competitors have been changing prices to attract higher-premium (higher risk) drivers, and we’ve consciously decided not to follow.
The Prisons and Courts Bill included a number of changes that will affect the process of dealing with minor whiplash claims,
including tariff-based damages that award compensation based on the severity of the injury, and the banning of offers before medical evidence is obtained. The Government also announced its intention to increase the small claims limit for motor accident claims from £1,000 to £5,000. All of these changes will bring down the cost of claims, but will level the playing field and make it a little harder for insurers to obtain a competitive advantage. However, we think that Admiral is well placed because of the increased importance of a quick and efficient claims handling process, which is one of Admiral’s historical strengths.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 23Admiral Group plc · Annual Report and Accounts 2016
UK Insurance financial performance UK insurance includes the results of the UK Car and UK Household insurance segments.
Admiral delivered strong growth in turnover and customers in its UK Insurance business in 2016, taking advantage of favourable market conditions with increasing prices and shopping activity. UK insurance turnover of £2.06 billion increased by 17% (2015: £1.76 billion) primarily due to growth in customer numbers in both UK Car and UK Household. Net revenue increased by 8% to £770.9 million (2015: £711.2 million). Increases in average premiums in UK Car insurance also contributed to a 17% increase in total premiums written to £1.86 billion (2015: £1.59 billion).
*3 Motor expense ratio is calculated by including claims handling expenses that are reported within claims costs in the income statement. Reconciliation in note 12c.
UK Car Insurance financial performance UK Car Insurance benefited from continued success in attracting and retaining motor customers in a competitive UK market and this, together with higher average motor premiums, contributed to an increase in UK Car turnover of 16% to £1.99 billion (2015: £1.71 billion). Net revenue increased by 7% to £748.6 million (2015: £700.3 million). The number of vehicles insured in the UK business increased by 11% to 3.65 million (2015: 3.30 million). Admiral continued to increase its prices during 2016 and saw average premiums written increase by approximately 4%.
Loss ratio net of releases – original net share*1 68.6% 64.1% 73.3%
• Higher expense ratio of 17.5% (2015: 16.9%) as a result of strong growth in new business
• Higher contribution from Other Revenue sources (£172.1 million v £158.6 million) resulting from growth in the portfolio, with Other Revenue per vehicle stable when compared with 2015
• Higher investment return (£39.3 million v £26.1 million) as explained in the Investments and Cash section on page 21.
The projected ultimate loss ratio for Admiral for the 2016 accident year is 82%, which is in line with the projection of the previous year at the same point in its development despite the Ogden discount rate change.
The projected ultimate combined ratio (ultimate loss ratio plus written expense ratio) for Admiral for the 2016 accident year is 98%. The reported combined ratio for the UK market (excluding Admiral) for 2015, excluding reserve releases was 115%.
UK Car Insurance – co-insurance and reinsurance Admiral 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: a significant proportion 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.
The Munich Re Group will underwrite 40% of the UK motor business until at least 2020. 30% of this total is on a co-insurance basis, with the remaining 10% under a quota share reinsurance agreement from 2017 onwards.
The Group also has other quota share reinsurance arrangements confirmed to the end of 2018 covering 38% of the business written.
The Group has reduced its net underwriting share from 25% to 22% with effect from 2017.
Commutations of quota share reinsurance Admiral tends to commute its UK Car Insurance quota share reinsurance contracts for an underwriting year 24 months from inception, assuming there is sufficient confidence in the profitability of the business covered by the reinsurance contract.
Profit commission Admiral is potentially able to earn material amounts of profit commission revenue from co- and reinsurance partners, depending on the profitability of the insurance business underwritten by the partner. Revenue is recognised in the income statement in line with the booked loss ratios on Admiral’s retained underwriting.
In 2016 Admiral recognised UK car insurance profit commission revenue of £52.7 million down from £85.2 million in 2015. If reserve releases from business that was originally ceded under quota share reinsurance contracts that have since been commuted, are added to profit commission, the total for 2016 would be £69.8 million compared to £174.0 million in 2015, a decrease of 60%. The decrease arose mainly due to less positive development of prior year booked loss ratios as a result of the change in Ogden discount rate.
The number of properties insured increased by 51% to 469,000 (2015: 310,000) and turnover increased by 46% to £76.1 million (2015: £52.0 million). Net revenue increased by 72% to £22.3 million (2015: £13.0 million). Profit from Household doubled from a year earlier to £2.7 million (2015: £1.2 million). Its expense ratio is already materially lower than the UK market ratio.
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
Other revenue was equivalent to £62 per vehicle (gross of costs; 2015: £63). Net Other Revenue (after deducting costs) per vehicle was £54, in line with 2015.
Instalment income Instalment income reflects amounts charged to customers paying for cover in instalments. During 2016 Admiral earned £33.5 million from instalment income, up 25% on the prior period (2015: £26.7 million) for a number of reasons including an increase in average premium, customer numbers and the proportion of customers paying by instalment.
Additional products underwritten by Admiral Besides car insurance, there are a number of other products underwritten by Admiral that are core to providing motor insurance to customers (personal injury insurance, breakdown cover and car hire cover). Contribution from these products underwritten by Admiral during 2016 was £17.4 million (2015: £16.0 million). This is included in underwriting profit in the income statement, but reallocated to Other Revenue for the purpose of management key performance indicators.
*1 Included in underwriting profit in income statement but re-allocated to Other Revenue for purpose of KPIs.
Regulatory environment The UK Insurance business operates predominantly under the regulation of the UK Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA), and through a Gibraltar-based insurance company, under the Financial Services Commission (FSC) in that territory.
Other revenue per vehicle net of internal costs £58 £54 £54
Strategic Report: The customer, the customer, the customer 28 Admiral Group plc · Annual Report and Accounts 2016
Customer service Our customers are the most important part of our business; without them, there would be no business. Our staff and departments are rewarded through incentive schemes that place emphasis on the quality of service provided to our customers. We encourage customers to provide feedback, whether good or bad, so that we can continue to improve the level of service that we provide.
Peace of mind You can rely on us. We have a tradition of excellence and millions of happy customers.
In 2016 we were honoured to be again voted by consumers as the Best Motor Insurance Provider at the Personal Finance Awards for the FOURTH year in a row.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 29Admiral Group plc · Annual Report and Accounts 2016
And the outlook for 2017? At a market level we don’t expect much change. Our focus will continue to be on scaling up the business in a sustainable way.
ConTe closed for the third year in a row in profit. Market average premium fell by 4.5% but in the last quarter we have seen timid signals of market cycle upturn including a slight increase in claims frequency and the end of the average premium downtrend.
Despite this scenario, we consciously decided to grow in 2016 and our active customer base grew by over 30% year-on-year up to 415,000. This result is a mix of three effects: an increase in quote volumes of price comparison sites; the improvement of our customer journey; and the growth in brand awareness generated by the new TV campaign and the second year of the Serie B Football League sponsorship. To better serve our customers, we are continuing to invest in technology and develop our services.
Costantino Moretti CEO, ConTe 30 Admiral Group plc · Annual Report and Accounts 2016
Tennessee in 2016. We continued to see very satisfactory results from our marketing initiatives and were able to increase our share of sales in both Texas and Virginia despite price increases applied to both states. The loss ratio improved nicely in the year. We also saw some expense ratio improvement from economies of scale, offset by an increase in our marketing investment. The combined effect of this was an improvement in the combined ratio on a written basis of 11 percentage points.
Elephant expects to continue to grow in 2017 and to see further improvement in the combined ratio as a result of further progress on each of the core metrics as we move the business towards the goal of profitability. We do not anticipate further new states in the next 12 months, rather an increased investment in our existing states and development of the marketing efforts in the two new states launched in 2016.
“I called various insurance companies asking for a quote, and finally chose Balumba for the good treatment, the patience and clarity of the explanations of your employee. I got the feeling being a nuisance to the agents in the other companies, the Balumba agent was thoughtful, kind and professional, and repeated the information as many times as I needed. After that, I received a welcome call from another agent, and his manner was excellent too. Congratulations to your employees!!”
Despite challenging market conditions (stable market prices and a flat aggregator market), L’olivier – assurance auto managed to play its cards right with strong growth.
We grew the business substantially again and we ended the year up, with 61% more customers. The effects of “Loi Hamon” (the law that made the switching process much smoother) are becoming more tangible.
L’olivier accelerated its branding efforts with two new TV spots focused on service quality, helping to demonstrate to customers that direct insurance and good quality are not mutually exclusive. As a consequence, we managed to capture more customers than ever from traditional channels willing to switch to a direct insurer. On top of the branding efforts, we kept building strong foundations in 2016. Technical results improved significantly thanks to our distinctive pricing process in the market, helping us to build a clear competitive advantage in a high combined ratio market.
Market profitability didn’t improve in 2016. Indeed, for the second consecutive year, the highly competitive environment hampered insurers’ willingness to increase motor insurance prices. Consequently, market combined ratio remained high (it is expected to be around 104–105%). In the past, weak technical results were offset by investment results but in a low interest rate environment, this is not sustainable anymore. In this context, motor insurance prices are expected to increase in 2017 by 2–3% and several insurers have already announced some price increases (though more discreetly than in the previous years to avoid media noise).
With strong foundations, L’olivier – assurance auto is well prepared to scale up the business over the coming years and 2017 should be another year of strong growth.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 31Admiral Group plc · Annual Report and Accounts 2016
Vehicles insured at period end 592,600 673,000 864,200 *1 Alternative performance measures – refer to the Glossary on page 141 for definition and explanation.
*4 Combined ratio, net of Other Revenue is calculated on Admiral’s net share of premiums and includes Other Revenue. Including the impact of reinsurer caps the reported combined ratio, net of Other Revenue would be 2016: 122%; 2015: 136%; 2014: 134%.
“I just completed a transaction with Patrice in your Customer Service Department. Seldom do I have the opportunity to speak with as kind and considerate an employee.
Regulatory environment Admiral’s European insurance operations are generally subject to the same regulation as the UK Car Insurance business, details of which are summarised above, but also comply with local requirements as appropriate. The Group’s US insurer, Elephant Insurance Company, is regulated by the Virginia State Corporation Commission’s Bureau of Insurance. The Company is required to maintain capital at levels prescribed by the regulator and holds a surplus above these requirements at all times.
All contracts are subject to certain caps on the co-insurers and reinsurers’ exposures and all contracts have profit commission terms that allow Admiral to receive a proportion of the profit earned on the underwriting once the business reaches cumulative profitability. The contracts include proportional sharing of Other Revenue.
Communication We believe that it is really important for everyone to understand what is happening in the business and we share information in a number of ways, but communication is two-way and we remain impressed by the openness of our staff and their willingness to share their experiences and suggestions for improvements for customers.
Equality We want every member of staff to feel part of the Admiral collective endeavour; after all everyone is a shareholder, no matter what their role or location. There are no obvious signs of separation or inequality and everyone values each staff member’s contribution.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 35Admiral Group plc · Annual Report and Accounts 2016
The UK car insurance price comparison market is characterised as mature and highly competitive, with 70% penetration of annual new business car insurance sales and four leading players spending in excess of £150 million on marketing each year.
In 2016 the high level of competition was further evidenced by the closure of Google’s comparison operation. However, 2016 was also a year of strong growth for the market. Rising car insurance premiums, +14% as per the Confused.com/Willis Towers Watson Car Insurance Price Index, coupled with an all-time high in car sales for both new and used cars, helped to stimulate shopping. Current estimates indicate the market grew by around 8% in the year.
2016 has seen Confused.com successfully focus its attention on what it does best: saving customers money on their car insurance. Looking to 2017, I know that every day, every week and every month is a battle that we must work hard to try and win.
We continue to work on our data strategy and we are well placed to be a strategic partner in terms of information and data not only for our partners, but also for other companies linked to our products.
For 2017 we will continue working on growth, converting our leads into sales, consolidation of our role as the multiproduct price comparison leader of the market and improving our existing products and value proposition.
compare.com made significant strides this year on both the quality of our product offering and the efficiency of our customer acquisition. We nearly doubled our number of auto insurance brands under contract, our average number of rates returned nationwide and the number of policies we helped our carrier partners bind. We also launched a second product for customers looking for bundled auto and property policies, which is how many US consumers prefer to shop. Over the same period this year, our acquisition costs have dropped by nearly two thirds proving that we can compete on acquisition economics at a level only achieved by a few large personal lines insurance carriers in the US market. We outgrew our office building this year and moved our staff into a new space three times the size and customized to support the growth of our open and fun culture.
While the US price comparison market starts 2017 still in its infancy, the potential remains enormous. A recent survey by Acxiom shows consumers are six times more likely to buy their insurance via a comparison site than in the past. compare.com has built the carrier network as well as the acquisition funnel to be the leading player as consumers continue to adopt this better way to shop for insurance products. We remain cautiously optimistic about our opportunity for success in transforming the landscape of the US insurance market.
“Thanks! I’m going to contract the insurance. It’s been great checking your website, I’ve saved 300€, you can suppose that I have been pleasantly surprised”
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 37Admiral Group plc · Annual Report and Accounts 2016
International Price Comparison Admiral operates three price comparison businesses outside the UK: in Spain (Rastreator), France (LeLynx) and the US
The Group continues to invest in compare. com, its US comparison operation based in Virginia. During 2016 Admiral’s share of compare.com’s loss reduced to £16.2 million before tax (2015: £21.5 million) reflecting a focus in key states on efficient advertising and reducing acquisition costs. Statutory loss before tax decreased to £22.8 million (2015: £30.3 million). The Group plans continued investment in compare.com during 2017 and anticipates that the Group’s share of compare.com’s losses for 2017 will be in the range of $15-25 million.
The combined result for International Price Comparison was therefore a loss of £13.4 million (2015: loss £19.7 million) – the profit from the European operations offset by investment in compare.com. Statutory loss before tax was £19.0 million (2015: £28.0 million).
Preminen, the Group’s newest price comparison operation continues to explore the potential of price comparison in new markets overseas, in partnership with Mapfre.
The Group operates a UK Commercial Vehicle insurance broker (Gladiator) offering van insurance and associated products, typically to small businesses, via telephone and the internet, including price comparison websites. Gladiator has increased customer numbers from 146,600 to 170,800 at the end of 2016 and operating profit increased to £2.0 million (2015: £1.5 million).
Other interest and investment income includes £4.9 million (2015: £nil) of unrealised gains on forward foreign exchange contracts which have been impacted during 2016 by downward movements in the value of sterling. These gains have the potential to reverse over time if the sterling rate recovers before the contracts expire.
Share scheme charges relate to the Group’s two employee share schemes (refer to note 8 to the financial statements). The increase in the charge is due to an increase in the number of awards reflecting the increasing Group headcount.
Business development costs include costs associated with potential new ventures, including investment in Admiral Loans and Preminen, the Group’s price comparison incubator.
UK Exit from the European Union (‘Brexit’) On 23 June 2016, the UK voted in a referendum to leave the EU. At the date of this report, the timetable for and details of the implementation of this decision remain unclear.
• the potential for the uncertainty or the emerging terms of exit regarding Brexit to trigger or exacerbate less favourable economic conditions in the UK and other countries in which Admiral operates (though it is worth noting that car insurance has tended to be resilient to economic downturns)
• potential changes to or withdrawal of the right of UK financial services firms to trade in Europe without the need for locally regulated entities (‘passporting’)
The Group is making plans to be able to deal with the withdrawal of passporting, should this transpire, after the UK’s exit from the EU is finalised and will continue to closely monitor developments over the coming months and years.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 39Admiral Group plc · Annual Report and Accounts 2016
Admiral is exposed to reserving risk through its underwriting of motor and household insurance policies. Claims reserves in the financial statements may prove inadequate to cover the ultimate cost of earned claims which are by nature uncertain.
Best estimate reserves are estimated both internally and externally by an independent actuary.
Admiral’s investment portfolio is the result of a structured, disciplined and transparent investment process which considers settled and potential future PPOs.
The group is exposed to the risk of increased claims and reduced business volumes following both a UK and European recession.
Catastrophe Risk: Admiral is exposed to the risk of high losses due to the occurrence of man-made catastrophes or natural weather events.
There are a number of aspects which contribute to Admiral’s strong UK underwriting results, including: • Experienced and focused senior management and teams in key business areas including pricing and claims management; • Highly data-driven and analytical approach to regular monitoring of claims and underwriting performance; • Capability to identify and resolve underperformance promptly through changes to key performance drivers, particularly pricing; and
A collective failure of these businesses would threaten Admiral’s objective to diversify its earnings by expanding into new markets and products.
Admiral also contributes materially to the revenues of other price comparison businesses and therefore it is not considered probable that a material source of new business would be lost.
The Group has relatively low exposure to net assets and liabilities in currencies other than pounds sterling.
Risk to Admiral occurs through the losses that could occur if the internal control framework to manage these business processes fails.
Regular review of the effectiveness of the Group’s IT capability by Executive Management and the Board.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 43Admiral Group plc · Annual Report and Accounts 2016
Membership at 31 December 2016 ••Jean Park (Chair) ••Annette Court ••Manning Rountree ••David Stevens
Membership at 31 December 2016 ••Annette Court (Chair) ••Owen Clarke*1 ••Jean Park
People and Corporate responsibility Read more on Gender diversity on Page 78
Succession planning has been a key area of focus for the Board in 2016
Dear Shareholder, On behalf of the Board I am pleased to present the Corporate Governance Report for the financial year ended 31 December 2016. The focus of the Board continues to be on maintaining high standards of corporate governance which it achieves by ensuring the appropriateness and effectiveness of the Group’s management and control framework. This Report sets out the Admiral framework of governance and the approach the Board has taken during 2016 to promote the standards of good corporate governance that are rightly expected by our shareholders.
Succession planning has been a key area of focus for the Board in 2016. As you will have seen from my Chairman’s letter earlier in this report, I will be retiring as Chairman at the forthcoming AGM in April after serving for 16 years. I am delighted that Annette Court has been selected by the Board to take the chair as she has considerable experience, both of the industry and as a non-executive director of Admiral. As a consequence there will be review of the composition of the Group’s committees, in particular those of which Annette is currently a member, to ensure that they continue to comply with governance requirements. In May, Henry Engelhardt retired as Chief Executive although he continues to work with our businesses in the UK and overseas. The Group was fortunate to have someone of David Stevens’ capability and experience to pursue the Group’s successful development as CEO. In April, we also said goodbye to Non-Executive Directors Lucy Kellaway and Margaret Johnson who both stepped down at the AGM in April, each having served 9 years on the Board.
Background and experience: David is a founder Director of Admiral and was recruited in 1991 to set up the Admiral business.
A Fellow of the Institute of Chartered Accountants in England and Wales, Geraint spent the early part of his career as an external auditor at Ernst & Young and KPMG.
Background and experience: Penny was previously Director of Group Finance at Prudential plc from March 2011 until September 2015.
Her previous appointments include being Chief Finance Officer of Omega Insurance Holdings and Chief Financial Officer of the Zurich Financial Services UK General Insurance business.
Current Appointments: Non-Executive Director of Jardine Lloyd Thompson Group plc, Foxtons plc and Workshare
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.
Current Appointments: Chief Executive Officer and Director of White Mountains Insurance Group Limited and Director of OneBeacon Insurance Group Ltd, a subsidiary of White Mountains Insurance Group Limited.
Background and experience: Justine founded Mumsnet in 2000 and is responsible for creation, strategic direction and overall management. In May 2011, Justine founded Gransnet, a sister site to Mumsnet, for the over-50s. Before that Justine was a freelance football and cricket journalist for the Times and Daily Telegraph, after working for Deutsche Bank, managing the South African equity operation in US.
Leadership The role of the Board The Board is the principal decisionmaking forum for the Group providing entrepreneurial leadership, both directly and through its Committees, and delegating authority to the Executive team. The Board is responsible for organising and directing the affairs of the Group in a manner that is most likely to promote its success for the benefit of its members as a whole. The Board is accountable to shareholders for setting and achieving the Group’s strategic objectives; for the creation and delivery of strong sustainable financial and operational performance; for ensuring that in carrying out its duties the Group’s legal and regulatory obligations are being met; and for ensuring that it operates within appropriately established risk parameters. The Group’s UK regulated entities are responsible to the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) for ensuring compliance with the Group’s UK regulatory obligations and that dealings with the FCA and PRA are handled in a constructive, 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. This is monitored by the Company Secretary and reviewed by the Board on an annual basis. Specific matters reserved to the Board include the approval of: • The Group’s long term objectives and corporate strategy
In addition to his visits to the Group’s UK operations, the Chairman has sought to visit each of the Group’s overseas operations every year and Non-Executive Directors are invited to join either him or the Chief Executive on one or more of their overseas visits each year. In addition, the NonExecutive Directors and the Chairman met during the year without the Executive Directors being present. Non-Executive Directors also attended briefing sessions in Cardiff on different aspects of the Group’s UK business. In order to increase their understanding of the depth and breadth of management across the Group below Board level, the Non-Executive Directors and the Chairman also attended a dinner with members of the Group’s senior management team without the Executive Directors being present. When management teams present to the Board on their operations they are invited to join the Board for dinner which gives the opportunity for informal interaction between directors and management.
*2 Margaret Johnson stepped down from the Board with effect from 28 April 2016.
*4 Justine Roberts joined the Board with effect from 17 June 2016.
Board effectiveness Having last carried out an external Board evaluation in 2013 and in accordance with the Code requirement that FTSE 350 companies should carry out an externally facilitated evaluation of the Board at least every 3 years, this year the Board evaluation process was led by Ian
The objectives of the evaluation were to provide an assessment of the effectiveness of the Board and make recommendations to improve the Board process; provide guidance for the new Chairman in leading the Board and working with the CEO; and establish a clear set of actions and objectives for the Board to prioritise and focus on in 2017.
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The results of the review were presented by Ian to the Board in February 2017. Overall the review found that the Board continued to work effectively and that each Director demonstrates full commitment to his/ her duties and contributes in an open and transparent way, enabling a detailed level of debate and discussion around material matters affecting the Group. The review also identified good awareness by the Board of the governance and regulatory environment in which the Group operates and the main risks impacting the Group and how they should be managed and mitigated.
The Chief Executive, to whom he reports, appraises annually the performance of the Executive Director. The Chairman, taking into account the views of the other Directors, reviews the performance of the Chief Executive. The performance of the Chairman is reviewed by the Board led by the Senior Independent Director (SID). Following the latest review, the SID considered and discussed with the Chairman the comments and feedback that had been received from the Directors as part of the Chairman’s evaluation questionnaire, and was able to confirm that the performance of the Chairman continues to be effective and that he continues to demonstrate appropriate commitment to his role.
Governance Report continued 50 Admiral Group plc · Annual Report and Accounts 2016
Board balance and independence In the context of recent and forthcoming Board changes, careful consideration continues to be given to the composition and balance of the Board. As a result the Group continues to monitor the need to refresh Board and Committee membership in an orderly manner so as to maintain the continuity of Board process and the strength of personal interaction which underlies the effectiveness of the Board as a team. The Board remains satisfied that it has the appropriate balance of skills, experience, independence and knowledge of the Group to enable it and its Committees to discharge their duties and responsibilities effectively, as required by the Code.
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Alastair Lyons has served in the role of Chairman since July 2000 and has already confirmed that he will not be seeking reelection at the AGM in April. His successor as Chairman, Annette Court, along with all the Directors, seek re-election by shareholders annually.
The Group maintains a corporate website (www.admiralgroup.co.uk) containing a wide range of information of interest to institutional and private investors. The major shareholders of the Company are listed on page 79.
All Committees are chaired by an independent Non-Executive Director, except the Nomination Committee which is chaired by the Chairman of the Board, and comprise a majority of independent Non-Executive Directors. Appointments to the Committees are made on the recommendation of the Nomination Committee and are for a period of up to three years, which may be extended for two further three year periods, provided the Director remains independent. The Committees are constituted with written Terms of Reference that are reviewed annually to ensure that they remain appropriate and reflect any changes in good practice and governance. These Terms of Reference are available on request from the Company Secretary and can also be found on the Company’s website: www.admiralgroup. co.uk. Directors are fully informed of all Committee matters by the Committee Chairmen reporting on the proceedings of their Committee at the subsequent Board meeting. Copies of Committee minutes are also distributed to the Board. Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary. The Chairman of each Committee attends the Annual General Meeting to respond to any shareholder questions that might be raised on the Committee’s activities.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 53Admiral Group plc · Annual Report and Accounts 2016
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 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
Reports and updates on the project and financial controls of the new UK IT system
The effectiveness of the Group’s Whistleblowing Policy which sets out the arrangements for raising and handling allegations from whistle blowers
The requirements from 2018 to include enhanced reporting from the auditor on their findings
Dear Shareholder, I’m pleased to provide an update on the main activities of Admiral’s Audit Committee in 2016.
During the year, the key areas of focus of the Committee have been to provide support to the Board in its oversight of financial reporting and the control environment across the Group. The setting of insurance claims reserves continues to be a key accounting judgement in the Group’s financial statements, and the Committee placed considerable focus on this subject. The analysis of outstanding claims by management was reviewed alongside that of the Group’s independent actuaries and external auditor. The impact of a change to the Ogden Discount Rate on outstanding claims was also carefully considered, with the Committee supporting management’s view that claims reserves remain prudent and appropriate at the revised rate of minus 0.75%.
During the year, Admiral’s UK operation completed the roll out of a new software system for all new business transactions. Updates were received from the Project Team and Internal Audit, with the Committee being satisfied with the controls in place during the implementation of the system. Given the importance of this new software platform it will remain a focus of the Committee in 2017. The Committee also studied a number of issues, particularly around IT Security and Controls, highlighted through a range of different sources including the Risk Register, Internal Audit and the Committee’s previous work. In each case the Committee was satisfied with the proposed management actions.
The appointment of Deloitte LLP, as the Group’s external auditor, was approved by shareholders at the AGM in April 2016. Deloitte have, therefore, led the audit process for the finalisation of the Group’s Half Year and Full Year 2016 financial statements. The transition from the Group’s previous external auditor, KPMG LLP, has occurred in an effective and seamless manner.
Finally, given that Annette Court will step down from the Committee at the AGM in April to take on the role of Chair of the Board, I would like to take this opportunity to thank her for her important contribution.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 55Admiral Group plc · Annual Report and Accounts 2016
Mindful of the changes to the Code which will apply to the 2017 financial year and requires the Committee as a whole to have competence relevant to the sector in which the company operates, the Board considers that Committee members already have a broad range of skills, experience and knowledge of the insurance sector such that they are able to effectively analyse, challenge and debate the issues that fall within the Committee’s remit. The Board further considers that Colin Holmes (Committee Chair), as a Chartered Management Accountant, has appropriate recent and relevant financial experience having previously been the UK Finance Director for Tesco plc.
The Audit Committee’s primary responsibilities are to: • Monitor the integrity of the Group’s financial statements and any formal announcement relating to the Group’s financial performance, reviewing any significant financial reporting judgements which they contain; • Keep under review the effectiveness of the Company’s internal financial controls, internal control and risk management systems; • Review the Group’s procedures for handling allegations from whistleblowers and for detecting fraud; • Monitor and assess the role and effectiveness of the Group’s Internal Audit functions in the context of the Group’s overall internal control and risk management systems; • Consider and make recommendations to the Board, to be put to shareholders for their approval at the AGM, in relation to the appointment, reappointment and removal of the Group’s external auditor; • Review the external auditor’s independence and objectivity and the effectiveness of the audit process; • Review the policy on the engagement of the external auditor to provide nonaudit services, considering the relevant regulatory guidance regarding the provision of non-audit services by the external auditor.
These issues were discussed with management during the year and with the auditor at the time the Committee reviewed and agreed the auditor’s Group audit plan; when the auditor reviewed the interim financial statements in August 2016 and also at the conclusion of the audit of these full year financial statements.
Prior to the announcement by the Lord Chancellor that revises the Ogden discount rate, the impact of potential various rate changes was studied by the Committee, including the review of the calculated impact of the change provided by both management and the external actuaries. Following the Lord Chancellor’s announcement of the revised rate, the Committee is satisfied that a comprehensive approach has been taken to calculating the impact, and also that following the change, the value contained in the balance sheet for future claims is appropriate and prudent.
and that the Group’s approach to setting reserves was in compliance with current accounting standards.
Profit commission The Committee considered the impact on profit commission income of future changes in claims reserves as the recognition of this income is dependent on the loss ratio booked in the financial statements and cash receivable is dependent on actuarial projections of ultimate loss ratios. The Committee remained satisfied that profit commission was correctly accounted for by the Group and was in accordance with the contractual arrangements that were in place.
Non-audit fees The Committee reviewed and approved its policy on non-audit services in February 2017, and were satisfied that it was aligned with current regulatory guidance. Under the policy, the Group’s statutory auditor would only be engaged to carry out non-audit work in exceptional circumstances or where there was a regulatory or tax authority request and where agreed by the Committee.
Unless required by law, regulatory or tax authority any non-audit services will: a) be subject to prior approval from the Committee and b) in aggregate, shall not cost more than 70% of the average statutory audit fee for the past three financial years. In considering whether to approve such non-audit services, the Committee shall ensure that: • There is no direct effect, or in the view of an objective, reasonable and informed third party, would have an inconsequential effect, of the non-audit services on the Group’s financial statements; • The estimation of the effect on the financial statements is comprehensively documented and explained in a report to the Committee; • The non-audit services provided comply with the principle of independence; and
Effectiveness of the external audit process The Committee undertakes an annual review to assess the independence and objectivity of the external auditor and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements, the progress achieved against the agreed audit plan, and the competence with which the auditor handled the key accounting and audit judgements. Following this review the Committee concluded that the auditor, Deloitte LLP, remained independent and provided a service that was robust and fit for purpose.
Internal audit The Group Head of Internal Audit 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. The Committee reviewed and approved the Group Internal Audit Terms of Reference which set out the role; objectives; reporting lines and accountability; authority; independence; and objectivity of the Internal Audit function. The role and competence of each Internal Audit function across the Group was also assessed and considered by the Committee. As agreed last year, the Group Head of Internal Audit continues to have responsibility to ensure the quality of the Internal Audit activities in the Group’s overseas locations.
Through stress and scenario testing and reverse stress testing, considered in-depth analysis of a number of the Group’s most significant risk areas, including the default of a reinsurer
Considered the adequacy of risk mitigation measures and contingency plans including a review of the Group’s reinsurance arrangements
Considered the provisions of the Senior Insurance Managers Regime and approved the Group’s approach
Received regular updates on IT Security and presentations on a number of key risk topics including cyber risk, GDPR, reinsurance and the Partial Internal Model
Reviewed regular reports on the risks and progress of the major change programme responsible for the implementation of a new policy administration system and data warehouse, known as Project Bolt
The Committee continues to focus on key operational risks that affect the Group. A full programme of work to reduce cyber risk has been agreed throughout the year. This programme will also support the data protection work as the Group seeks to comply with the upcoming GDPR requirements.
The Committee challenged and reviewed the setting of and outputs from the regular stress and scenario testing and reverse stress testing. The output was incorporated into the Own Risk and Solvency Assessment (‘ORSA’) report for 2016, which the Committee also reviewed.
The focus on monitoring and reporting customer outcome risks continued during the year and included reports showing progress against the Group minimum compliance standards, which introduces the levels of compliance resources and monitoring levels that all Group firms must apply to their respective regulatory obligations.
Jean Park Chair of the Group Risk Committee 7 March 2017
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 59Admiral Group plc · Annual Report and Accounts 2016
Composition of the Group Risk Committee Membership at the end of the year was: Jean Park (Chair), Annette Court, David Stevens and Manning Rountree. The Company Secretary acts as Secretary to the Committee.
Duties and responsibilities of the Group Risk Committee The duties and responsibilities of the Committee are set out in Terms of Reference that were approved by the Board in January 2013 and updated and approved in January 2016. The responsibilities of the Committee can be summarised as: • Oversee the development, implementation and maintenance of the Group’s overall Risk Management Framework and ensure that it is in line with emerging regulatory, corporate governance and best practice guidelines; • Monitoring the Group’s prudential risk exposure, which includes ensuring that the Group’s capital resources and liquidity profile are appropriate to its needs whilst meeting minimum regulatory requirements, including overseeing and challenging the design and execution of the Group’s stress and scenario testing; • Monitoring the Group’s current and future conduct risk exposure; • Ensuring the adequacy and effectiveness of the Group’s systems and controls for the prevention of financial crime, data protection systems and controls; • Monitoring the adequacy and effectiveness of the Group’s Compliance functions; • Reviewing the Group’s progress towards achieving Solvency II compliance; • Reviewing compliance with Group policies, including the established Reserving Policy and process; • Considering and recommending to the Board for approval the Group’s risk appetite, including any changes to the appetite for each material type of risk faced by the Group; • Approving the annual plans for the Group Risk and Compliance functions which include reviewing regulatory developments and regular meetings with the PRA and FCA; • Review the ORSA report each year with recommendations being provided to the Group Board for approval; • Review and approve the Solvency II Actuarial Function Reports on Reinsurance and Underwriting each year; • Review and approve the remuneration report from the Chief Risk Officer prior to Remuneration Committee sign off.
The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s risks and internal controls; that it has been in place for the year ended 31 December 2016; and that, up to the date of approval of the Annual Report and Accounts, it is regularly reviewed by the Board and accords with the internal control guidance for Directors provided in the UK Corporate Governance Code.
The Board confirms that it has performed a robust assessment of the Group’s principal risks. These risks, along with explanations of how they are being managed and mitigated, are included in the Strategic Report on pages 40 to 43.
The Group Risk Committee continued 60 Admiral Group plc · Annual Report and Accounts 2016
The ‘second line of defence’ describes the Committees and functions that are in place to provide an oversight of the effective operation of the internal control framework. The Group Risk Department and the Compliance functions are part of the second line of defence.
The Group Risk Department defines and prescribes the insurance, operational, market, credit and group risk assessment processes for the business. It performs second line reviews, including of the reserving, capital modelling and business planning processes, and undertakes regular reviews of all risks in conjunction with management, with the results of these reviews recorded in risk registers collated centrally on the Group risk management system. Furthermore, Group Risk records any actual losses or near misses that occur as a consequence of the crystallisation of risk and analyses the sufficiency of the action taken to avoid reoccurrence. The Chief Risk Officer has responsibility for ensuring that managers are aware of their risk management obligations, providing them with support and advice, and ensuring that risk management strategies are 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 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 necessary provides a high-level challenge to the steps being taken by the Group Risk Committee to implement the risk management strategy.
The results of the stress tests form part of the process to set the Group’s capital risk appetite, which ensures that a buffer on top of the Group’s regulatory capital requirement is held to protect its capital position against shocks and stresses. Refer to the Strategic Report for information on sensitivities to the reported 2016 solvency ratio position.
“ What is important is diversity of thought, experience and approach and each new appointment must complement what already exists at the Board table”
Policy which sets out the process of assessment for every person who performs a key function to ensure that they meet the requirements in terms of qualifications, capability, honesty and integrity.
Alastair Lyons, CBE Chairman of the Nomination Committee 7 March 2017
Admiral Chairman would ideally have. The views expressed by leading institutional shareholders with whom the Chairman had recently conducted Corporate Governance meetings indicated that the majority were supportive of an internal process, given the Group’s distinctive culture and market position and subject to there being sufficient suitably qualified and experienced internal candidates.
Based on all of the input Penny and the Selection Board had received, it was agreed that they had more than one highly capable internal candidate. Having reviewed the external candidate list and discussed with Zygos their relative strengths, and after taking to account feedback from the Selection Board after the panel session, it was concluded that the internal candidates were sufficiently strong that approaching additional external candidates was unnecessary.
The Group has in place a policy of recruiting well ahead of impending retirements in order to ensure continuity of knowledge and Board dynamics, hence the recruitment of Owen Clarke in 2015. In the context of the retirements that took place during 2016, with Henry Engelhardt, Margaret Johnson and Lucy Kellaway stepping down from the Board and having regard to forthcoming retirements and the changing nature of the Group’s business, the Board initiated a search for a new Non-Executive Director. The Committee developed an appropriate specification for a new Non-Executive Director and identified the required skills and experience. Following this process, the Committee identified Justine Roberts as best placed to fill the role identified.
Justine is CEO and co-founder of internet company, Mumsnet.com, which has grown into the UK’s biggest online network for parents. Justine has been responsible for the creation, strategic direction and overall management of Mumsnet, building it into one of the most recognisable internet brands in the UK. She brings a wealth of experience in interacting with consumers across social media. Given Justine’s background, experience and competence, and the external references that were obtained, the Committee did not consider it either necessary or appropriate to undertake a full search led by an external recruitment consultancy.
The Board, at its meeting in April 2016, considered talent management within the Group and identified where there were individuals who, with further experience and guidance, might be capable of moving into particular senior management roles. The Committee remains satisfied that succession plans for Directors and senior management are in place to ensure the continued ability of the Group to implement strategy and compete effectively in the markets in which it operates.
During the year, the Committee held a strategy session in which the Committee considered all aspects of the Group’s current remuneration arrangements together with a consideration of trends in UK corporate governance and the most recent AGM season. The Group’s remuneration consultants also provided a comprehensive update on remuneration trends at sector comparators and across the broader UK market. Following this meeting, the Committee concluded that the Group’s Remuneration Policy continued to remain appropriate and that it supported the view, held by the Board, that wide share ownership drives outstanding performance and promotes the long term success of the business whilst remaining in alignment with shareholder interests.
• References to Henry Engelhardt in the policy report have been removed, as he stepped down from the Board in May 2016.
Remuneration policy table This table describes the key components of the remuneration arrangements for Executive Directors as approved at the 2015 AGM.
Awards are generally made as a specific number of shares and vest after a minimum of three years subject to Group performance and continued employment.
Maximum opportunity: £2,000,000. For awards above £1,000,000 a maximum of 600% of base salary applies.
The Committee is satisfied that the above Remuneration Policy is in the best interests of shareholders and does not promote excessive risktaking. The Committee retains discretion to make non-significant changes to the Remuneration Policy without reverting to shareholders.
The NEDs are not eligible to participate in the DFSS or DFSS bonus schemes and do not receive any pension contributions.
Pay-for-performance: scenario analysis The following charts provide an estimate of the potential future reward opportunities for the Executive Directors, and the potential split between the different elements of pay under three different performance scenarios: ‘Minimum’, ‘On-target’ and ‘Maximum’. As described above, Admiral’s DFSS bonus is directly aligned with dividends received by our shareholders. As such, there is no performance range defined for this element of pay; the figures shown in the chart below for the CFO’s DFSS bonus include the value of the actual DFSS bonus paid in 2016 as an illustration of the value he might receive. Under all scenarios, potential reward opportunities are based on expected awards for 2017 (in accordance with Admiral’s Remuneration Policy), applied to salaries as at 1 January 2017.
Multi-year variable (DFSS) Single-year variable (DFSS bonus) Salary, pension and benefits
The value of DFSS awards vesting is calculated based on the average share price in the last three months of 2016 (£19.06) and the number of DFSS shares awarded in 2016.
Directors’ Remuneration Report continued 68 Admiral Group plc · Annual Report and Accounts 2016
The charts on the previous page exclude the effect of any Company share price movement. For this reason, were the CFO’s DFSS shares to vest in full, his actual total remuneration may exceed the £ value shown in the chart above.
Approach to remuneration relating to new Executive Director appointments External appointment In the case of appointing a new Executive Director, the Committee may make use of any of the existing components of remuneration, as follows: Component Approach Maximum annual grant value
SIP New appointees will be eligible to participate in the SIP.
£2,000,000. Awards over £1,000,000 are subject to a maximum of 600% of base salary.
DFSS bonus New appointees will be granted awards under the DFSS bonus scheme on the same terms as other Executive Directors, as described in the policy table.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 69Admiral Group plc · Annual Report and Accounts 2016
Annual report on remuneration This section of the report provides details of how Admiral’s Remuneration Policy was implemented in 2016 and the remuneration arrangements proposed for 2017.
Remuneration Committee membership in 2016 The Board sets the Group’s Remuneration Policy and, through the authority delegated to it by the Board, the Committee is responsible for making recommendations to the Board on the structure and implementation of the Remuneration Policy across the Group with consideration to the prevailing economic climate within the economies in which the Group operates. Its remit includes recommending the remuneration of the Group Board Chairman, the Executive Directors and the Company Secretary; reviewing the remuneration of senior management; and reviewing the composition of and awards made under the performance-related incentive schemes.
At the end of 2016 the Committee consisted of Owen Clarke and Jean Park under the Chairmanship of Annette Court. Owen Clarke joined the Remuneration Committee with effect from 28 April 2016. Margaret Johnson was a member of the Committee until the date of her retirement from the Board, being 28 April 2016. The Committee met five times during the year.
Advisor to the Committee During the year, in order to enable the Committee to reach informed decisions on Executive remuneration, advice on market data and trends was obtained from independent consultants, Kepler Associates, a brand of Mercer (which is part of the MMC group of companies). Kepler reports directly to the Committee Chair, and is a signatory to and abides by the Code of Conduct for Remuneration Consultants (which can be found at www.remunerationconsultantsgroup.com). Other than advice on remuneration, no other services were provided by Kepler (or any other part of the MMC group of companies) to the Company. The fees paid to Kepler in respect of work carried out in 2016 (based on time and materials) totalled £36,090, excluding expenses and VAT.
For Against Total votes cast Abstentions 2015 Annual Report on Remuneration
The current Remuneration Policy was approved by shareholders with 95.5% vote in favour at the 2015 AGM.
Total single figure of remuneration for Executive Directors (audited) The table below sets out the total single figure remuneration received by each Executive Director for the year ended 31 December 2016 and the prior year.
5. DFSS: the value at vesting of shares vesting on performance over the three-year periods ending 31 December 2016 and 31 December 2015. For the 2016 calculations, given that vesting occurs during 2017, after this 2016 Directors’ Remuneration Report is finalised, the figures are based on the average share price in the last three months of 2016 (£19.06). The 2015 calculations have been trued up based on the actual share price on vest (£20.17). Henry Engelhardt and David Stevens do not participate in the Plan given their significant shareholdings.
7. Henry Engelhardt stepped down from the Board on 13 May 2016. In this table, his 2016 remuneration includes salary and benefits in respect of the period 1 January to 13 May 2016.
2. Margaret Johnson and Lucy Kellaway retired from the Board with effect from 28 April 2016.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 71Admiral Group plc · Annual Report and Accounts 2016
The table below details the Company’s EPS performance against targets and vesting outcome over the performance period ending on 31 December 2016.
2. Overall percentage vesting of Geraint Jones’ April 2014 DFSS award is 50.0%.
In 2016, Geraint Jones received a DFSS bonus of £174,209 (2015: £104,340). Neither Henry Engelhardt nor David Stevens received a DFSS bonus as they do not participate in the DFSS.
From 2015, DFSS bonus payments are subject to clawback in exceptional circumstances, such as material misstatement or gross misconduct.
Since 2015, DFSS awards made have been subject to clawback and malus, i.e. forfeiture or reduction of unvested awards and recovery of vested awards in exceptional circumstances (such as material misstatement or gross misconduct).
Directors’ Remuneration Report continued 72 Admiral Group plc · Annual Report and Accounts 2016
SIP In March and September 2016, Geraint Jones was granted awards under the SIP of 92 shares in March 2016, with a face value of £1,791, and 87 shares in September 2016, with a face value of £1,784. The shares will vest on 11 March 2019 and 2 September 2019 respectively subject to continued employment only. David Stevens again declined to be included given his significant shareholding.
Exit payments (audited) Henry Engelhardt stepped down from the Board as CEO on 13 May 2016. He received salary and benefits in line with the approved policy up to his termination date. He has not received any exit payments. In addition, the Group did not contribute to any pension arrangements on behalf of Henry Engelhardt, and he did not participate in any of the Group’s incentive schemes.
Henry Engelhardt continues to be employed by the Group, though has not been an Executive Director since stepping down from the Group Board on 13 May 2016.
Payments to past Directors (audited) As disclosed in last year’s report, based on performance to 31 December 2015, 19,855 DFSS shares vested to Kevin Chidwick on 10 October 2016. The total value at vest was £405,638 based on share price on vest of £20.43. Please refer to the 2015 Directors’ Remuneration Report for full details of actual performance against targets for this award.
Implementation of remuneration policy for 2017 Executive Directors Salary, Pension and Benefits
Remuneration for the Executive Directors in 2017 will be determined in line with the latest policy. The Committee approved the following base salaries for the Executive Directors in 2016: Director Latest salary 2016 salary % change Effective date
Fees for the Board Chairman and other Non-Executive Directors were last reviewed in January 2017, and increases effective from 1 January 2017 are as follows: 2017 fee (p.a.) Previous fee (p.a.)
Percentage change in CEO remuneration The table below shows the percentage change in CEO remuneration from 2015 compared to the average percentage change in remuneration for all other employees. The analysis is based on a consistent set of employees, i.e. the same individuals appear in the 2015 and 2016 populations. As the CEO does not participate in the DFSS bonus scheme, to provide a meaningful comparison we have also included data for the CFO who receives DFSS awards.
CEO CFO Other employees 1. Based on the sum of remuneration paid to Henry Engelhardt up to and including 13 May 2016 and to David Stevens from 13 May 2016.
Relative importance of spend on pay The table below shows the percentage change in dividends and total employee remuneration spend from the financial year ended 31 December 2015 to the financial year ended 31 December 2016.
Pay for performance The following graph sets out a comparison of Total Shareholder Return (TSR) for Admiral Group plc shares with that of the FTSE 100 and 350 indices, of which the Company is a constituent, over the eight-year period to 31 December 2016. The Directors consider these to be the most appropriate indices against which the Company should be compared. TSR is defined as the percentage change over the period, assuming reinvestment of income.
8-Year TSR performance: Admiral vs. FTSE 100 and FTSE 350 indices Growth in the value of a hypothetical £100 holding over the 8 years to 31 December 2016
DFSS vesting outcome (% of maximum) n/a n/a n/a n/a n/a n/a n/a n/a n/a
CFO single figure of remuneration £632,312 £1,269,535 £1,048,130 £1,431,218 £1,444,4435 £1,204,1645 £363,551 £539,7046 £587,739
2. David Stevens was appointed as the CEO on 13 May 2016. His 2016 remuneration includes salary, pension and benefits in respect of his service as CEO.
6. This figure has been trued up since the 2015 report for the value of the 2013 DFSS based on the actual share price on vest (£20.17).
7. 50% and 0% of Geraint Jones’ April and September 2014 DFSS awards, respectively, will vest in April 2017 and September 2017, respectively, subject to his continued employment on the vesting dates.
Interests held by Directors (audited) Executive Directors have agreed to (acquire and) retain a beneficial shareholding equal to at least 200% of base salary, which can be built up over a period of five years from the date of appointment.
3. Justine Roberts was appointed to the Board on 17 June 2016.
There have been no changes to Directors’ shareholdings since 31 December 2016.
Directors’ Remuneration Report continued 76 Admiral Group plc · Annual Report and Accounts 2016
2. The vesting percentage for performance-related awards made in 2013 and vesting in 2016 was 38%. As awards made to Geraint Jones in 2013 were 50% performancerelated and 50% non-performance-related, the blended vesting percentage was 69%. This resulted in the lapsing of 4,960 shares from the 16,000 shares awarded in October 2013. The value at maturity only relates to shares that vested.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 77Admiral Group plc · Annual Report and Accounts 2016
Statutory disclosures Group results and dividends The profit for the year, after tax but before dividends, amounted to £214.1 million (2015: £291.8 million).
Disabled employees Admiral Group gives full and fair consideration to applications for employment made by those with disabilities, having regard to their particular aptitudes and abilities. The Group was recently accredited the Two Ticks symbol by Jobcentre Plus for meeting five key standards of conduct regarding the recruitment, training, retention and career development of disabled employees.
Contractual arrangements The Group considers its co-insurance and reinsurance contracts, as described in the Strategic Report, to be essential to the running of the Group’s business. No other contractual arrangements are considered to be essential.
Greenhouse gas emissions The annual level of greenhouse gas emissions, resulting from activities for which the Group is responsible, in 2016 was 4,424 CO2e (2015: 3,691 CO2e), equivalent to 0.53 tonnes (2015: 0.55 tonnes) per employee*1. In accordance with GHG Protocol Scope 2 guidance released 20 January 2015, Admiral is exempt from reporting greenhouse gas emissions from electricity supply to the three largest UK offices which meets the GHG Protocol Corporate Standard. Note that the election to apply the exemptions available in the GHG Protocol Corporate Standard was not taken in the 2015 Annual Report and so the comparative figures have been updated from the previous disclosure made.
*1 Average employee number excludes employees from three offices for which data could not be collected.
Share Capital, AGM and related matters Major Shareholders Other than as stated below, as far as the Company is aware, there are no persons with significant direct or indirect holdings in the Company. Information provided to the Company pursuant to the Financial Conduct Authority’s (FCA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the Company’s website.
At 31 January 2017, the Company had received notifications in accordance with the FCA’s DTRs of the following notifiable interests in the voting rights in the Company’s issued share capital: Number of shares %
At 31 December 2016, the Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital and shares issued during the year can be found in note 11d.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 79Admiral Group plc · Annual Report and Accounts 2016
A further special resolution passed at that meeting granted authority to the Directors to allot equity securities in the Company (up to a maximum of 5% of the issued share capital of the Company) for cash, without regard to the pre-emption provisions of the Companies Act 2006. This authority also expires on the date of the Annual General Meeting to be held on 26 April 2017 and the Directors will seek to renew this authority for the following year.
In line with the new principles published by the Pre-Emption Group in March 2015, and their template resolutions published in May 2016, allowing a company the ability to seek authority over a further 5% of the issued ordinary share capital on a non-pre-emptive basis subject to certain conditions, it is the intention of the Company, at the AGM on 26 April 2017, to seek this additional authority by special resolution and will confirm in the Notice of AGM that such additional shares are only issued in connection with a specified acquisition or capital investment.
However, in accordance with the requirement under the UK Corporate Governance Code (the Code) for annual election of Directors, all Directors will submit themselves for re-election at the Group’s Annual General Meeting on 26 April 2017.
The Board is of the view that it is in the best interests of the Group to attract and retain the services of the most able and experienced directors by offering competitive terms of engagement, including the granting of such indemnities. Neither the Deed Poll of Indemnity nor insurance cover would provide any coverage in the event that a Director is proved to have acted fraudulently or dishonestly.
Annual General Meeting (AGM) It is proposed that the next AGM be held at City Hall, Cardiff on Wednesday 26 April 2017 at 2.00pm, notice of which will be sent to shareholders with the Annual Report.
Directors’ responsibilities The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.
Responsibility statement The Directors confirm that to the best of their knowledge: • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Change of auditor At the Annual General Meeting on 28 April 2016, shareholders approved the appointment of Deloitte LLP as auditor to the Company and its subsidiaries. Deloitte LLP have indicated a willingness to continue in office and resolutions to reappoint it and to authorise the Directors to fix its remuneration will be proposed at the Annual General Meeting.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 81Admiral Group plc · Annual Report and Accounts 2016
• the related notes 1 to 6 to the Parent Company financial statements.
The key risks that we identified in the current year were: • Valuation of gross insurance claims reserves
We have identified five reporting components which we consider are of individual financial significance to the group’s reported results and these components were subjected to audits for group reporting purposes.
Going concern & the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the group As required by the Listing Rules we have reviewed the directors’ statement regarding the appropriateness of the going concern basis of accounting contained within note 2 to the financial statements and the directors’ statement on the longer-term viability of the group contained within the governance report on page 61.
We are required to state whether we have anything material to add or draw attention to in relation to: • the directors’ confirmation on page 40 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; • the disclosures on pages 40 to 43 that describe those risks and explain how they are being managed or mitigated; • the directors’ statement in note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the group’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
We confirm that we have nothing material to add or draw attention to in respect of these matters.
We agreed with the directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern.
We have assessed the design and implementation and tested the operating effectiveness of the key controls which management performs in relation to insurance reserving. This included testing controls over the data provided to the group’s external actuarial expert, the internal challenge of that expert’s work, and the appropriate governance oversight in determining the key assumptions for both the actuarial best estimates and the additional margin applied above the best estimate reserve.
We completed procedures to assess the competence and objectivity of management’s external actuarial expert and involved our own Deloitte actuarial experts to review and provide challenge on the methodology applied and the key assumptions and judgements taken in determining the gross insurance reserves noted above as significant risks.
Our challenge focussed on benchmarking the claims severity assumptions adopted by the group against our wider industry experience to assess suitability, evaluating the reserve releases and development trends from previous accident years, to verify the robustness of the reserving policy adopted, and understanding the year-on-year consistency in determining the reserve margins.
Finally, we have reviewed the specific adjustments made to refine the actuarial models for the change in Ogden discount rate and considered the related changes in PPO propensity assumptions.
Risk description We have identified a risk in revenue recognition in respect of the profit commission class of income. This revenue line contributed £54.3m to group profit before tax in the year (2015: £85.4m) and is recorded on the basis of management’s year end calculations, which are subject to the same underlying estimation as the insurance claims reserves. There is, therefore, a greater risk associated with this class of transactions than more automated revenue streams which are recorded at source through a large number of individually insignificant transactions.
In addition to the procedures outlined above in respect of the valuation of insurance reserves, we reviewed the profit commission calculation in detail, and compared the calculation logic and the inputs included by management to the terms of the relevant co-insurance contracts in force at the balance sheet date. On the basis of this understanding of the contractual terms, we independently formed an expectation for the recorded income using audited loss ratios and expenses data and compared this to that actually recorded by management.
We have also assessed the design and implementation and tested the operating effectiveness of the internal review controls performed by management, which are designed to identify any errors in the inputs or mechanical workings of the calculations.
Finally, we vouched the settlement of profit commissions during the year to cash receipts on bank statements and used this to reconcile the income recorded to the movement in the balance sheet position associated with these arrangements.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 85Admiral Group plc · Annual Report and Accounts 2016
For the remaining components not subject to audit or specified audit procedures, we performed analysis at an aggregated group level to reassess our evaluation that there were no significant risks of material misstatement presented by any of these components. There are several non-significant components including branch operations in Europe; the branches in Spain and Italy were visited this year by members of the group engagement team and, to enhance our risk assessment and understanding of the group in our first year as group auditor, we assessed the design and implementation of key controls in key business cycles in these and the French branches.
The components within the scope of our audit procedures account for 94% of the group’s pre-tax profits and losses, 87% of revenue and 95% of the group’s net assets.
Review at group level Review at group level Review at group level
In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors’ Report.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns.
Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance Code.
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or
Mark McQueen ACA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 7 March 2017
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 87Admiral Group plc · Annual Report and Accounts 2016
Operating expenses and share scheme charges recoverable from co- and reinsurers 8 316.4 249.5
Consolidated income statement For the year ended 31 December 2016 88 Admiral Group plc · Annual Report and Accounts 2016
Deferred tax charge in relation to movement in fair value reserve (0.5) –
Total comprehensive income for the period attributable to: Equity holders of the parent 271.3 289.5
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 89Admiral Group plc · Annual Report and Accounts 2016
Total equity attributable to equity holders of the parent 570.9 615.7
Change in trade and other payables, including tax and social security 279.9 47.8
Cash flows from operating activities, net of movements in investments 507.0 374.7
Cash flows from investing activities: Purchases of property, equipment and software (31.6) (47.8)
Cash flows from financing activities: Non-controlling interest capital contribution (0.2) 10.7
Cash and cash equivalents at end of period 6 326.6 265.3 *1 Refer to note 2 for details.
Share scheme credit – – – – 29.5 29.5 – 29.5
Deferred tax credit on share scheme credit – – – – 4.7 4.7 – 4.7
Total transactions with equity holders – – – – (241.0) (241.0) 11.2 (229.8)
Contributions by NCIs – – – – – – (0.2) (0.2)
Total transactions with equity holders – – – – (316.1) (316.1) (0.2) (316.3)
Consolidated statement of changes in equity For the year ended 31 December 2016 92 Admiral Group plc · Annual Report and Accounts 2016
The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The Company has elected to prepare its Parent Company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101).
Adoption of new and revised standards The Group has adopted the following IFRS and interpretations during the year, which have been issued and endorsed by the EU: • Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities – Applying the Consolidation Exemption
IFRS 15 was issued during 2014 and applies to annual reporting periods beginning on or after 1 January 2018. The standard introduces a simple, five step principles-based model to be applied to the accounting of all contracts with customers.
Revenue from insurance contracts and financial instruments is outside the scope of the IFRS 15. The Group’s detailed assessment of the impact of the standard on its results, financial position and cash-flows is currently in progress. The primary focus of this work is the other revenue generated by a portfolio of products that supplement the core car and household insurance policies and revenue generated by the Group’s price comparison businesses. Management’s preliminary assessment of the impact of this standard is that it is not expected to have a material impact on the Group’s financial statements.
IFRS 16 Leases was issued in early 2016. The standard specifies how firms will recognise, measure, present and disclose leases. It presents a single lessee accounting model and requires that assets and liabilities relating to leases of greater than 12 months are recognised in the Consolidated Statement of Financial Position. The standard will apply to reporting periods beginning on or after 1 January 2019.
Notes to the Financial Statements For the year ended 31 December 2016
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is reviewed. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, it is recognised by adjusting the carrying amount of the related asset or liability in the period of the change.
3. Critical accounting judgements and estimates Judgements In applying the Group’s accounting policies as described in the notes to the financial statements, management has primarily applied judgement in the following area: • Classification of the Group’s contracts with reinsurers as reinsurance contracts: A contract is required to transfer significant insurance risk in order to be classified as such. Management reviews all terms and conditions of each such contract, and if necessary obtains the opinion of an independent expert at the negotiation stage in order to be able to make this judgement. All reinsurance contracts (both excess of loss and quota share contracts) held by the Group have been assessed and it has been concluded that all contracts transfer significant insurance risk and have therefore been classified and accounted for as reinsurance contracts within these financial statements.
Financial Statements: Notes to the Financial Statements 94 Admiral Group plc · Annual Report and Accounts 2016
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 2016 and comparative figures for the year ended 31 December 2015. 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 Admiral Law Limited, BDE Law Limited, Inspop USA LLC, the indirect holding in comparenow.com Insurance Agency LLC, Rastreator.com Limited, the indirect holding in Comparaseguros Correduría de Seguros, S.L., Sociedad Unipersonal, Preminen Price Comparison Holdings Limited, the indirect holding in Preminen Dragon Price Comparison Limited and the indirect holding in Long Yu Science and Technology (Beijing) Co. Limited.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 95Admiral Group plc · Annual Report and Accounts 2016
The segment consists of the underwriting of car insurance, household insurance and other products that supplement the car insurance policy within the UK. It also includes the generation of revenue from additional products and fees from underwriting car insurance in the UK. The Directors consider the results of these activities to be reportable as one segment as the activities carried out in generating the revenue are not independent of each other and are performed as one business. This mirrors the approach taken in management reporting.
An analysis of the Group’s revenue and results for the year ended 31 December 2016, by reportable segment, is shown below. The accounting policies of the reportable segments are consistent with those presented in the notes to the financial statements for the Group.
Other segment items: – Intangible and tangible asset additions 46.2 28.9 0.4 4.2 – 79.7 *1 Turnover is an Alternative Performance Measure and consists of total premiums written (including co-insurers’ share) and Other Revenue. Refer to the glossary and note 12 for further information.
Revenue and results for the corresponding reportable segments for the year ended 31 December 2015 are shown below.
Other Revenue and profit commission 287.7 7.7 108.1 15.9 (14.2) 405.2
The segment assets and liabilities at 31 December 2015 are as follows: Restated*1 As at 31 December 2015
5. Premium, claims and profit commissions 5a. Accounting policies (i) Revenue – premiums
Under some of the co-insurance and reinsurance contracts under which premiums are shared or ceded, profit commission may be earned on a particular year of account, which is usually subject to performance criteria such as loss ratios and expense ratios. The commission is dependent on the ultimate outcome of any year, with revenue being recognised when loss and expense ratios used in the preparation of the financial statements move below a contractual threshold. Profit commission receivable from reinsurance contracts is accounted for in line with IFRS 4, whereas profit commission receivable from co-insurance contracts is in line with IAS 18.
Reinsurance assets are comprised of balances due from reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a consistent manner with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 99Admiral Group plc · Annual Report and Accounts 2016
Total profit commission 54.3 85.4 *1 Profit commission for the UK Car business relates solely to co-insurance arrangements and profit commission for the UK Household business relates solely to reinsurance arrangements.
Insurance risk involves uncertainty over the occurrence, amount or timing of claims arising on insurance contracts issued. It is primarily comprised of Reserve risk; the risk that the value of insurance liabilities established is insufficient to cover the ultimate cost of claims incurred at the balance sheet date, and Premium risk; the risk that the claims experience on business written but not earned is higher than allowed for in the premiums charged to policyholders.
Financial Statements: Notes to the Financial Statements 100 Admiral Group plc · Annual Report and Accounts 2016
As noted in the Strategic Report, the Group shares a significant amount of the motor insurance business generated with external underwriters. In 2016, 40% of the UK car insurance risk was shared under a co-insurance contract, under which the primary risk is borne by the co-insurer. A further 35% of the UK risk was ceded under quota share reinsurance contracts. Co-insurance and reinsurance contracts are also used in the International Car Insurance businesses. Further detail can be found in the Strategic Report.
As noted above, the Group defines Premium risk as the risk that claims cost on business written but not yet earned is higher than allowed for in the premiums charged to policyholders. This also includes catastrophe risk; the risk of incurring significant losses as a result of the occurrence of manmade catastrophe or natural weather events.
Key processes and controls operating to mitigate premium risk are as follows: • Experienced and focused senior management and teams in relevant business areas including pricing and claims management; • A data-driven and analytical approach to regular monitoring of claims and underwriting performance; • Capability to identify and resolve underperformance promptly through changes to key performance drivers, in particular pricing.
The Group mitigates these risks by ensuring that it has a diverse range of financially secure reinsurance partners, including a long term relationship with Munich Re and a number of other high profile reinsurers.
The Directors do not believe there are significant concentrations of insurance risk. This is because, although the Group has historically written only one significant line of UK insurance business, the risks are spread across a large number of people and a wide regional base. The introduction of the international car insurance businesses in recent years and the launch of UK household business in 2012 will further contribute to the diversification of the Group’s insurance risk as these businesses grow.
Notes to the Financial Statements continued For the year ended 31 December 2016 5. Premium, claims and profit commissions continued 5d. Reinsurance assets and insurance contract liabilities continued (ii) Event after the reporting period – Ogden discount rate change
As noted above, the gross and reinsurers share of insurance liabilities in these financial statements are prepared on the basis of an Ogden discount rate of minus 0.75%. On 27 February 2017, the Lord Chancellor also announced a consultation that considers options for reform in the setting of this rate, resulting in potential for further changes in the rate.
Impact of decrease in assumed Ogden discount rate of 75 basis points (to minus 1.5%) (198.1) (102.1)
The net impacts are stated net of co-insurance and reinsurance and include the impact on net insurance claims along with the associated profit commission movements that result from the change in the Ogden rate.
In addition to the sensitivity above, the following table sets out the impact on equity and post-tax profit or loss at 31 December 2016 that would result from a 1% movement (both increase and decrease) in the UK Car insurance loss ratios used for each underwriting year for which material amounts remain outstanding.
Financial Statements: Notes to the Financial Statements 102 Admiral Group plc · Annual Report and Accounts 2016
Total insurance liabilities – net 1,623.1 1,416.3 *1 Gross claims outstanding at 31 December 2016 is presented before the deduction of salvage and subrogation recoveries totalling £37.7 million.
The maturity profile of gross insurance liabilities at the end of 2016 is as follows: < 1 year £m 1–3 years £m > 3 years £m
The maturity profile of gross insurance liabilities at the end of 2015 was as follows: Restated*1
< 1 year £m 1–3 years £m > 3 years £m
Notes to the Financial Statements continued For the year ended 31 December 2016 5. Premium, claims and profit commissions continued 5d. Reinsurance assets and insurance contract liabilities continued (v) Analysis of claims incurred
Financial year ended 31 December 2007 £m £m 2009 £m 2010 £m 2011 £m £m 2013 £m £m 2015 £m 2016 £m
Financial Statements: Notes to the Financial Statements 104 Admiral Group plc · Annual Report and Accounts 2016
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 105Admiral Group plc · Annual Report and Accounts 2016
Financial year ended 31 December £m 2013 £m 2014 £m £m 2016 £m
Analysis of net releases on UK Insurance: – Net releases on Admiral net share 16.3 53.3 66.8 84.6 58.3
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. Releases on commuted quota share contracts are analysed by underwriting year as follows: Financial year ended 31 December 2012 £m £m 2014 £m 2015 £m £m
Total releases on commuted quota share reinsurance contracts 1.3 40.9 70.6 88.8 17.1
Included within releases on commuted quota share contracts are accruals for additional reserves arising from the commutation of 2014 year UK motor quota share contracts. Refer to the business review earlier in this report for further detail.
Claims provision at end of period*2 1,725.0 (544.8) 1,180.2 *1 Net claims paid in the year to 31 December 2016 includes salvage and subrogation recoveries of £37.7 million which have been reclassified to insurance and other receivables.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 107Admiral Group plc · Annual Report and Accounts 2016
Deposits and gilts 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.
Identified impairments of financial assets are recognised in the income statement, except in the case of assets classified as AFS where unrealised gains have been recognised through OCI. In this instance, impairments of the asset are first set against the unrealised gain in OCI with any excess being recognised in the income statement.
Financial Statements: Notes to the Financial Statements 108 Admiral Group plc · Annual Report and Accounts 2016
A financial asset is derecognised when the rights to receive cash flows from that asset have expired, or when the Group transfers the asset and all the attached substantial risks and rewards relating to the asset to a third party.
Release of accrual for reinsurers’ share of investment returns 9.2 –
Total investment and interest income 53.1 32.6 *1 Interest received during the year was £11.6 million (2015: £8.6 million).
Financial Statements: Notes to the Financial Statements 110 Admiral Group plc · Annual Report and Accounts 2016
The measurement of investments at the end of the period, for investments held at fair value and short term debt securities held at fair value, is based on active quoted market values (level one).
The maturity profile of financial assets and liabilities at 31 December 2016 is as follows: On demand £m
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 111Admiral Group plc · Annual Report and Accounts 2016
The Group defines credit risk as the risk of loss if another party fails to perform its obligations. The key areas of exposure to credit risk for the Group result through its reinsurance programme, investments, bank deposits and policyholder receivables.
The Group’s credit risk exposure to assets with external ratings is as follows: Rating £m £m
As noted above, the Group invests the following asset types: • Money market liquidity funds and cash plus liquidity funds, which in turn invest in a mixture of short dated fixed and variable rate securities, such as cash deposits, certificates of deposits, floating rate notes and other commercial paper.
The Group’s exposure to net assets and profits in currencies other than the reporting currency is immaterial other than for US dollars. The Group’s exposure to net assets held in dollars at the balance sheet date was £70.5 million (2015: £87.3 million).
For cash at bank and cash deposits and other receivables, the fair value approximates to the book value due to their short maturity. For assets held at fair value through profit and loss, their value equates to level one (quoted prices in active markets) of the fair value hierarchy.
For gilts and subordinated notes, the fair value is calculated with reference to the quoted market valuation. This is compared to carrying value earlier in this note.
Financial Statements: Notes to the Financial Statements 114 Admiral Group plc · Annual Report and Accounts 2016
7. Other Revenue 7a. Accounting policy (i) Contribution from additional products and fees and Other Revenue
Contribution from additional products and fees and Other Revenue includes revenue earned on the sale of products supplementing the core motor insurance policy, administration and other charges paid by the policyholder, referral fees, revenue from policies paid by instalments and vehicle commission charges paid by co- and reinsurers. Revenue is credited to the income statement over the period matching the Group’s obligations to provide services. Where the Group has no remaining contractual obligations, the revenue is recognised immediately. An allowance is made for expected cancellations where the customer may be entitled to a refund of amounts charged.
Total Other Revenue 360.6 319.8 *1 Price comparison revenue excludes £20.8 million (2015: £14.2 million) of income from other Group companies.
8. Expenses 8a. Accounting policies (i) Acquisition costs and operating expenses
Operating lease payments, including the effects of any lease incentives, are recognised as an expense in the income statement on a straightline basis over the lease term. Contingent rentals are recognised as an expense in the period in which they are incurred.
Total expenses and share scheme charges 548.0 (249.5) 298.5 *1 Acquisition of insurance contracts expense excludes £20.8 million (2015: £14.2 million) of aggregator fees from other Group companies.
Refer to note 12 for a reconciliation between insurance contract expenses and the reported expense ratio.
Financial Statements: Notes to the Financial Statements 116 Admiral Group plc · Annual Report and Accounts 2016
Depreciation charge: Amortisation charge: – Deferred acquisition costs – 43.2 – 34.0
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 117Admiral Group plc · Annual Report and Accounts 2016
Notes to the Financial Statements continued For the year ended 31 December 2016 8. Expenses continued 8d. Staff numbers (including Directors)
Financial Statements: Notes to the Financial Statements 118 Admiral Group plc · Annual Report and Accounts 2016
Under the DFSS, details of which are contained in the remuneration policy section of the Directors’ Remuneration Report, individuals receive an award of free shares at no charge. Staff must remain in employment until the vesting date in order to receive shares. The maximum number of shares that can vest relating to the 2016 scheme is 3,247,136 (2015 scheme: 3,019,188).
• EPS growth is equal to RFR – 10% of maximum award vests.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 119Admiral Group plc · Annual Report and Accounts 2016
Number of free share awards vesting during the year ended 31 December 2016
The weighted average market share price at the date of exercise for shares exercised during the year was £20.09 (2015: £15.42).
Financial Statements: Notes to the Financial Statements 120 Admiral Group plc · Annual Report and Accounts 2016
Deferred tax is provided in full using the balance sheet liability method, providing for temporary differences arising between the carrying amount of assets and liabilities for accounting purposes and the amounts used for taxation purposes. It is calculated at the tax rates that have been enacted or substantially enacted by the balance sheet date and that are expected to apply in the period when the liability is settled or the asset is realised.
Corporation tax thereon at effective UK corporation tax rate of 20.0% (2015: 20.25%) 55.7 74.7
Impact of change in UK tax rate on deferred tax balances – 0.3
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 121Admiral Group plc · Annual Report and Accounts 2016
Notes to the Financial Statements continued For the year ended 31 December 2016 9. Taxation continued 9c. Deferred income tax asset Analysis of deferred tax asset
Balance brought forward at 1 January 2015 4.8 4.6 13.4 0.1 22.9
Tax treatment of share scheme charges through income or expense (2.4) – – – (2.4)
Tax treatment of share scheme charges through reserves 4.7 – – – 4.7
Balance carried forward at 31 December 2015 7.1 2.7 9.9 0.9 20.6
Tax treatment of share scheme charges through income or expense (1.9) – – – (1.9)
Tax treatment of share scheme charges through reserves 0.5 – – – 0.5
The deferred tax asset at 31 December 2016 has been calculated based on the rate at which each timing difference is most likely to reverse.
At 31 December 2016 the Group had unused tax losses amounting to £142.7 million (2015: £89.6 million), relating to the Group’s US businesses Elephant Auto and compare.com, for which no deferred tax asset has been recognised.
10. Other assets and other liabilities 10a. Accounting policy (i) Property and equipment, and depreciation
The goodwill held on the balance sheet at 31 December 2016 is allocated solely to the UK Insurance segment.
The value in use calculations use cash flow projections based on financial budgets approved by management covering a three year period. Cash flows beyond this period are considered, but not included in the calculation. The discount rate applied to the cash flow projections in the value in use calculations is 6.5% (2015: 5.9%), based on the Group’s weighted average cost of capital, which is in line with the market (source: Bloomberg).
Financial Statements: Notes to the Financial Statements 124 Admiral Group plc · Annual Report and Accounts 2016
*2 Software additions include £21.1 million relating to internal development (2015: £31.3 million).
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 125Admiral Group plc · Annual Report and Accounts 2016
Of amounts owed to reinsurers, £610.1 million (2015: £554.3 million) is held under funds withheld arrangements.
Total accruals and deferred income as above 166.0 95.6 10f. Obligations under finance leases Analysis of finance lease liabilities: At 31 December 2016 At 31 December 2015
Between one and five years – – – – – –
10g. Financial commitments The Group was committed to total minimum obligations under operating leases on land and buildings as follows: Minimum payments due on operating leases
Dividends are recorded in the period in which they are declared and paid.
764,317 (2015: 948,211) of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of this share scheme to give a closing number at 31 December 2016 of 8,944,922 (31 December 2015: 8,180,605). These shares are entitled to receive dividends.
Financial Statements: Notes to the Financial Statements 128 Admiral Group plc · Annual Report and Accounts 2016
11f. Group related undertakings The Parent Company’s subsidiaries are as follows: Subsidiary Class of shares held % Ownership Principal activity
Registered office: 9th Floor Brunel House, Fitzalan Road, Cardiff, CF24 0EB
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 129Admiral Group plc · Annual Report and Accounts 2016
Notes to the Financial Statements continued For the year ended 31 December 2016 11. Share capital continued 11f. Group related undertakings continued
Registered office: 140 East Shore Drive, Suite 300, Glen Allen, VA 23059 comparenow.com Insurance Agency LLC Ordinary 71.1 (indirect) Insurance Intermediary
Registered office: Room 1806, Block 16 Jianwai SOHO, No. 39 East 3rd Ring Road, Chaoyang District, Beijing
The Board considers that only the Executive Directors of Admiral Group plc are key management personnel. Aggregate compensation for the Executive Directors is disclosed in the Directors’ Remuneration Report.
12a. Reconciliation of turnover to reported gross premiums written and Other Revenue as per the financial statements
Gross premiums written after co-insurance per note 5b of financial statements 1,482.0 1,199.9
Adjusted net insurance premium revenue 404.3 91.3 545.8 358.6 62.3 464.8 *1 Other adjustments relate to additional products underwritten in the Group’s international car insurance businesses. The contribution from these products is reported as ancillary income and as such the amounts are excluded for the purpose of calculation of loss and expense ratios.
12. Reconciliations continued 12c. Reconciliation of expenses related to insurance contracts to reported expense ratios
Adjusted net insurance premium revenue 404.3 91.3 545.8 358.6 62.3 464.8 *1 The intra-group expenses elimination amount relates to aggregator fees charged by the Group’s price comparison entities to other Group companies.
*2 Other adjustments relate to additional products underwritten in the Group’s international car insurance businesses. The contribution from these products is reported as ancillary income and as such the amounts are excluded for the purpose of calculation of loss and expense ratios.
12d. Reconciliation of statutory profit before tax to Group's share of profit before tax
Notes to the Financial Statements continued For the year ended 31 December 2016 132 Admiral Group plc · Annual Report and Accounts 2016
Other comprehensive income for the period, net of income tax – –
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 133Admiral Group plc · Annual Report and Accounts 2016
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 135Admiral Group plc · Annual Report and Accounts 2016
1.2 Disclosure exemptions applied under FRS 101 The Company has taken advantage of the following disclosure exemptions under FRS 101: • FRS 101.8 (d): the requirement of IFRS 7 Financial Instruments: Disclosure to make disclosures about financial instruments
1.4 Critical accounting judgements In applying the Group’s accounting policies as described below management has primarily applied judgement in the impairment testing of the Company’s investment in group undertakings. Management has applied judgement in determining whether the carrying value of the investment, or asset may be supported by the recoverable amount calculation based on the ‘value in use’ of the asset (the net present value of future cash-flows arising from the asset).
The requirements of IAS 36 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Company’s investments in subsidiaries. When necessary, the entire carrying amount of the investment is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
1.7 Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes.
Investments classified as held to maturity are comprised of UK government gilts, and are held in the Statement of Financial Position at amortised cost.
Cash and cash equivalents include cash in hand and deposits held at call with banks. All cash and cash equivalents are measured at amortised cost.
Notes to Parent Company Financial Statements continued For the year ended 31 December 2016 138 Admiral Group plc · Annual Report and Accounts 2016
Issued, called up and fully paid 284,352,270 ordinary shares of 0.1 pence 0.3 –
Dividends were declared and paid as follows: March 2015 (49.0 pence per share, paid May 2015) – 134.4
August 2015 (51.0 pence per share, paid October 2015) – 140.2
March 2016 (63.4 pence per share, paid June 2016) 175.4 –
August 2016 (62.9 pence per share, paid October 2016) 174.4 –
Income statement £m 2015 £m 2014 £m 2013 £m 2012 £m
Consolidated Financial Summary 140 Admiral Group plc · Annual Report and Accounts 2016
Turnover Turnover is defined as total premiums written (as below) and other revenue. It is reconciled to financial statement line items in note 12a to the financial statements.
The measure was developed as a result of the Group’s business model. The core UK Car insurance business has historically shared a significant proportion of the risks with Munich Re, a third party insurance Group, through a coinsurance arrangement, with the arrangement subsequently being replicated in some of the Group’s international insurance operations. Premiums and claims accruing to the external co-insurer are not reflected in the Group’s income statement and therefore presentation of this metric enables users of the Annual Report to see the scale of the Group’s insurance operations in a way not possible from taking the income statement in isolation.
Total premiums written are the premiums written within the Group, including co-insurance. It is reconciled to financial statement line items in note 12a to the financial statements.
Group’s share of profit before tax represents profit before tax, excluding the impact of Non-controlling Interests. It is reconciled to statutory profit before tax in note 12d to the financial statements.
In 2016, Group’s share of Profit before Tax is presented on a ‘Pre Ogden’ and a ‘Post Ogden basis. ‘Pre Ogden’ represents the Group’s share of profit before tax before the impact of the reduction in the UK Ogden discount rate confirmed by the Lord Chancellor in February 2017.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 141Admiral Group plc · Annual Report and Accounts 2016
UK reported motor loss ratio: Within the UK insurance segment we separately present motor ratios, i.e. excluding the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) exclude the impact of reserve releases on commuted reinsurance contracts and ii) exclude claims handling costs that are reported within claims costs in the income statement.
There are a number of instances within the Annual Report where adjustments are made to this calculation in order to more clearly present the underlying performance of the Group and operating segments within the Group. The calculations of these are presented within note 12c to the accounts and explanation is as follows.
UK reported motor expense ratio: Within the UK insurance segment we separately present motor ratios, i.e. excluding the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) include claims handling costs that are reported within claims costs in the income statement and ii) include intra-group aggregator fees charged by the UK price comparison business to the UK insurance business.
Group expense ratios: Group expense ratios are reported on a consistent basis as the UK and international ratios noted above. Adjustments are made to i) include claims handling costs that are reported within claims costs in the income statement, ii) include intra-group aggregator fees charged by the Group’s price comparison businesses to the Group’s insurance businesses and iii) exclude the expense element of the impact of international reinsurer caps.
Group Customers Group customer numbers are the total number of car, household and van policyholders within the Group.
The tendency for the insurance market to swing between highs and lows of profitability over time, with the potential to influence premium rates (also known as the “underwriting cycle”).
Ogden discount rate The discount rate used in calculation of personal injury claims settlements. The rate is set by the Lord Chancellor, the most recent rate of minus 0.75% being announced on 27 February 2017.
Also referred to as the written basis. Claims incurred are allocated to the calendar year in which the policy was underwritten. Underwriting year basis results relate to the 2015 underwriting year, are calculated on the whole account (including co-insurance and reinsurance shares) and include all premiums, claims, expenses incurred and other revenue (for example instalment income and commission income relating to the sale of products that are ancillary to the main insurance policy) relating to policies incepting in the relevant underwriting year.