Admiral offers motor and household insurance in the UK and the Group includes Confused.com, a leading price comparison website.
Outside the UK, Admiral owns four insurance and three price comparison businesses.
The journey so far… We launched in 1993 with 0 customers, 1 brand and 57 staff.
Corporate Governance 42 Governance overview 43 Board of Directors 46 Governance Report 51 The Audit Committee 56 The Group Risk Committee 60 The Nomination and Governance Committee 62 The Remuneration Committee 64 Remuneration at a glance 65 Directors’ Remuneration Policy 73 Annual Report on Remuneration 82 Directors’ Report
Statutory price comparison result £5.4 million profit (2016: £2.9 million loss)
Over 9,600 staff each receive free shares worth a total of £3,600 under the employee share scheme based on the full year 2017 results *1 Alternative Performance Measures – refer to the Glossary for definition and explanation.
*3 2016 and 2015 dividends excludes additional return of surplus capital. Full year dividend including additional return was 114.4 pence for each period.
Financial Statements Additional InformationCorporate GovernanceStrategic ReportIntroduction 03Admiral Group plc · Annual Report and Accounts 2017
In 2018 we celebrate 25 years since the launch of the company in January 1993. The core of the company’s success remains the distinctive Admiral culture which drives the way that our people work and serve our customers in the UK, Italy, Spain, France and the US.
“ On behalf of the Board, I would like to thank all the 9,600 people at Admiral for their continued hard work and contribution to a record-breaking set of results for the Group in 2017.”
As Chairman of the Group I will focus my efforts on: • Continuing to build on the remarkably special Admiral culture and in so doing putting our people and customers at the heart of what we do
Becoming only the 2nd ever Welsh business to join the FTSE 100 index.
Whilst we devote time and resources to exploring new opportunities outside of car insurance we also recognise that this remains our core focus. We continue to invest heavily in improving our core skills as evidenced by our continuing growth in premiums and profit. We also have a range of innovations including car sharing insurance, learner driver insurance and we remain the largest telematics provider in the UK.
Household Insurance continues to grow apace. Turnover is now £107.1 million and properties insured have increased by 41% to 0.7 million. Customers buy from us either using price comparison sites, directly and, increasingly, using our MultiCover offering, building on the success of MultiCar.
As a result of Brexit, we are exploring establishing an insurance company and an insurance intermediary business in Spain to support our European operations.
• Prudent reserving – continuing our conservative approach to claims reserving
• Claims management – consistent positive feedback from customers on the service they receive
• Low-cost approach – constantly challenging ourselves on how we can do things more cost effectively
This will bring the total dividend for the year to 114.0 pence per share, an overall increase of 11% (excluding the additional return of surplus capital in 2016) and the 13th consecutive year that Admiral has paid an increased dividend. This represents a payout ratio of 97%.
The Board and I feel that the Board has a good balance of experience, skills and knowledge to support and challenge the management team and it is supported by effective governance and control systems. During the year the Board undertook a review of its effectiveness. Further details are provided in the Governance Report on pages 46 to 81.
Admiral’s incentive schemes remain distinctive, as every employee is a shareholder. They are designed to ensure that decisions are made by management to support longterm growth, that the right behaviours are rewarded and that our people’s interests are aligned with those of shareholders. Our core belief is that over the long-term, share appreciation depends on delivering great outcomes for our customers. Further details are provided in the Remuneration Report on pages 62 to 81.
Our role in society Admiral takes its role in society very seriously and has an active corporate responsibility programme (more information in Corporate Social Responsibility Report on pages 38 to 41. We are proud to be Wales’ only FTSE 100 headquartered company. Our staff play an active part in the communities in which we operate.
Chairman 5 million customers globally 07Admiral Group plc · Annual Report and Accounts 2017
Unusually for a CEO statement, I am not going to talk about what a great job the managers have done for the shareholders, nor about the company’s performance over the last twelve months, or indeed, prospects for the next twelve.
Instead, at a time when the public support for the free market economy is fraying and many more people see the world of business as a zero sum game, where profit can only be earned at the expense of, rather than in the service of, customers, I’d like to talk about the value that Admiral has delivered for UK motorists over the last 20 years, while making, and not despite making, good profits throughout.
The first reason Admiral has been, and remains, good news for customers is that we operate at a lower cost than almost all our competitors. When shopping for car insurance, most motorists are looking for the best possible price, along with reassurance that they’ll be looked after well, when needed. Admiral’s lower costs mean lower premiums for our customers.
MultiCover; Telematics (200k+ customers, and rising); 10-month Bonus Accelerator (one from the nineties for real insurance anoraks) have all made our policies more attractive and more accessible to UK motorists and householders, and helped keep our acquisition costs low.
I strongly believe that a market made up of a large number of companies competing actively for customers’ attention and loyalty, combined with appropriate regulatory oversight, is a recipe for the best possible outcome for motorists and householders, and I believe that Admiral’s success over the last 25 years demonstrates why.
P.S. I don’t want to count chickens, but in a year during which our Italian insurer broke through 500,000 vehicles on cover, delivered a fourth year of profit in a row and reduced its expense ratio by an amazing six percentage points, I’m looking forward, in a few years time, to saving myself an hour or two by recycling the above CEO Statement, but just substituting “ConTe” for “Admiral”.
But we recognise the long-term value of the company depends on us making sure our customers, by and large, are not only glad to join us but also happy to stay with us.
UK Motor market share 4th year of ConTe profits growth in
Ensure Admiral remains one of, if not, the best car insurers in the UK
Q The International Insurance businesses have been part of the strategy for a number of years but have yet to deliver meaningful profits – does it make sense to keep them?
A David: Our strategy has always been about building value over the longer term, by developing sustainable profitable businesses, rather than delivering shortterm profits. We believe that the combined European insurance businesses are on the cusp of demonstrating that value. ConTe, our Italian business delivered another profit for the year (a record) and collectively our European insurance businesses practically broke even over 2017 despite growing fast. We continue to invest in Admiral Seguros in Spain, L’olivier in France and Elephant in the US because we believe that there are strong prospects for long-term value creation in all three markets. The International Insurance businesses now insure over one million customers and may ultimately provide us with an opportunity to offer those customers more than just car insurance.
Q Admiral Household continues to grow and appears to be less affected by market conditions than competitors – why?
A Cristina: The UK household market is going through a period of change as more and more householders realise that they can shop online for their home insurance. We are taking advantage of that shift in customer behaviour. We recognise, however, that the household market is very different from motor insurance, so whilst our growth has been very strong since launch we continue to adopt a test and learn approach to our underwriting. We started with a relatively cautious underwriting footprint and have gradually expanded this as we have grown.
During 2017 we have seen similar claims experience to the market but our cautious starting point has allowed us to absorb this with no significant impact on the Household result.
Q There has been a change of CEO at your US insurance operation, Elephant Auto – what does that mean for future strategy?
A David: Alberto Schiavon, our new CEO at Elephant, working alongside Henry Engelhardt, took advantage of a second set of eyes to judge what was good about what we were doing and what could be done better. The conclusion was that we need to continue our drive towards lower loss ratios and to sharpen our focus on higher retaining customers throughout our product and process design, our pricing and underwriting rules and our marketing.
Q Can you give us an update on the Internal Model and what this means for capital?
Q How do you see the long-term prospect of motor insurance given the continuing focus on autonomous technology and driverless cars?
Q What was the outcome of this year’s excess of loss reinsurance renewals and how was this influenced by Ogden?
But Admiral is not standing still and waiting for them to catch up! We continue to look at ways in which we can improve and automate our internal processes to identify further efficiencies; to explore innovative ways of doing business as consumer behaviours change; and we continue to look for ways in which our detailed understanding of that customer behaviour can further enhance our underwriting strength.
Admiral continues to focus on bottom-line profitability both in the short, medium and long-term, and this perspective guides the decisions we make across all of our business operations. The Group’s strategy is to build profitable and sustainable business operations for the long-term.
Continue to be an efficient business by a focus on expenses and costs.
Continued Development Identify and develop new products for customers that add value.
Maximise the value of our core business and lay the foundation for future growth.
Develop profitable, growing, sustainable insurance businesses that mirror the UK model.
UK New Products Develop Admiral Loans and offer UK customers better products and a better online buying experience.Develop a competitive advantage in products beyond insurance.
Objectives 2018 Focus KPI's 13Admiral Group plc · Annual Report and Accounts 2017
These accounts and our current capital position assume the minus 0.75% rate remains effective indefinitely, as we think that’s the prudent thing to do in the absence of other information.
Sensitivities in terms of balance sheet and capital to different rates are set out on page 22.
The financial statements continue to include a significant and prudent margin above the projected ultimate claims outcomes, although this margin has reduced since the end of 2016, partly due to increased confidence over the impact of the change in Ogden rate to minus 0.75%.
• A near break-even EU insurance result (plus improvements in some key metrics whilst growing premiums by almost a quarter in not exactly the easiest of market conditions)
• Comfortably beating our targets for Admiral Loans in its first proper year of operation
And for balance, a few of the less positive aspects: • Investment behind the Drivers Win campaign alongside new product development cost and a generally fierce market led to a fall in profits at Confused. com (£16 million to £10 million)
• Despite continued confidence in the longterm prospects of the business, there was a £25 million write down in the carrying value of Elephant Auto in the parent company balance sheet
• 2017 saw higher Group overheads and other items (some of which are nonrecurring ) at £52.9 million v £36.8 million.
Capital, Dividends, Internal Model Speaking of capital, not too much has changed since the end of 2016. Our solvency ratio remains very strong at over 200%, though has reduced modestly since the end of 2016, mainly as the result of growth. A ratio of over 200% is still higher than we’d expect to report in the medium/ long-term. However (copy and paste alert), we continue to believe that’s the prudent approach as we move towards applying to use our own model to calculate the capital requirement (no change to report on the expected submission date which is late in 2018). We’ll continue to provide updates as we make progress.
The Group’s 2017 results reflect higher UK Insurance profits, an improved Price Comparison result and a lower loss in the International Insurance segment, partially offset by higher other Group charges and business development costs. The Group’s 2016 profit before tax was adversely impacted by the change in the UK discount rate (commonly referred to as the ‘Ogden’ discount rate) used to value personal injury claims. The distorting impact of this on the 2016 profit before tax means that 2016 does not provide a meaningful comparison for the 2017 Group and UK Insurance profit before tax figures (refer to page 22 for further detail on Ogden).
During 2017, the Group’s UK Insurance business, consisting of UK Motor and UK Household, delivered strong growth in turnover of 14% to £2.35 billion (2016: £2.06 billion). Net revenue increased by 9% to £841.0 million (2016: £770.9 million). Customer numbers reached 4.6 million (2016: 4.1 million).
Outside the UK, Admiral’s International Insurance businesses grew combined turnover by 23% to £449.8 million (2016: £365.9 million) whilst net revenue increased by 35% to £144.8 million (2016: £107.3 million). Customer numbers were up 20% to 1.03 million (2016: 0.86 million). Encouraging progress was made in combined ratio terms with a 4 point improvement, and in aggregate the segment recorded reduced losses of £14.3 million (down from £19.4 million, despite the impact of a significant hurricane on the US result). The Group’s Italian insurer ConTe recorded a profit for the fourth consecutive year.
Admiral’s Price Comparison businesses made an increased combined profit (excluding minority interests’ shares) of £7.1 million (2016: £2.7 million). In the UK, the high level of competition in the price comparison market and investment in the new marketing campaign and product development by Confused.com resulted in reduced profits of £10.1 million in 2017 (2016: £16.1 million). This lower Confused.com profit was offset by a significantly reduced combined loss of £3.0 million (2016: loss £13.4 million) from the international price comparison businesses, where a growing profit in the European operations of £4.1 million (2016: £2.8 million) was offset by a significantly smaller loss in Compare.com of £7.1 million (2016: loss £16.2 million).
Earnings per share Earnings per share were 117.2 pence (2016: 78.7 pence), the near 50% increase being higher than the increase in pre-tax profit as a result of a lower effective rate of taxation in 2017.
The continued strength in the Group’s solvency ratio has allowed the Board to propose a final dividend of 58.0 pence per share (£163 million) as follows: • 39.5 pence per share representing a normal element, based on the dividend policy of distributing 65% of post-tax profits; and
This final dividend reflects a 13% increase on the final 2016 dividend of 51.5 pence per share. The total dividend for the 2017 financial year is 114.0 pence per share, which is broadly in line with the 114.4 pence paid in 2016 and in 2015, both years including an additional return of surplus capital of 11.9 pence per share. Excluding this additional return, the total dividend for 2017 is 11% higher than 2016 and 2015.
As noted above, 2016’s result was materially distorted by the impact of the Ogden rate change.
*1 Solvency capital requirement includes updated capital add-on which is subject to regulatory approval.
Taxation The tax charge reported in the Consolidated income statement is £71.9 million (2016: £64.3 million), which equates to 17.8% (2016: 23.1%) of profit before tax. The lower effective rate of taxation compared to 2016 results from lower losses in the Group’s US businesses leading to a lower level of unrecognised deferred tax asset and the reduction in the UK corporation tax rate to 19.0% (from 20.0% from 1 April 2017).
Admiral’s investment strategy was unchanged in 2017 and the Group continued to invest in the same asset classes as previous years.
Money market funds and other fair value instruments 1,074.3 781.0 627.7
The underlying rate of return for the year (excluding accruals related to reinsurance contract funds withheld) on the Group’s cash and investments was 1.3% (2016: 1.4%).
The main items contributing to the operating cash inflow are as follows: Profit after tax 331.6 214.1 291.8
Group financial review continued 18 Admiral Group plc · Annual Report and Accounts 2017
The last twelve months has been a year of big birthdays and a couple of births for Admiral’s UK Insurance segment. It’s now 25 years since we sold our first car insurance policy (2 January 1993), and 5 years since we sold our first household policy (18 December 2012). Over that time, our customer focused approach and strategy of providing excellent service at an affordable price has attracted more than 4.5 million customers. I’m very excited that we’ve launched another two insurance businesses during 2017, with Admiral Van launching in May and Admiral Travel in late November. We hope that by expanding our offering we can provide a fuller product set to satisfy our existing customers, as well as attracting new customers to the Admiral brand.
I opened last year’s review with a brief reference to the Ogden discount rate, which had changed a few days before we announced our 2016 results. Whilst it’s not quite such a hot topic this time around, it seems like a fairly logical place to start this time around too, as it has continued to influence the UK Car Insurance business throughout the year.
One of the cornerstones of Admiral’s success is of course our strong underwriting record, which has enabled us to consistently grow profits over the last 25 years. To protect that underwriting result in a time of significant uncertainty, we put up prices considerably at the start of the year, which impacted our volumes in the first couple of months of 2017 (having grown by more than 10% over the course of 2016). Our competitiveness gradually improved over the first half (despite significant further rate increases) as other insurers gradually adjusted their prices after the new Ogden rate was announced.
Confidence then returned to the market in the second half of the year and we and many others started to reduce prices, partly following the announcement that the Ogden rate would be reviewed (which may lead to a partial reversal of the rate increases required following the February announcement), but significantly also due to the marketwide favourable experience on bodily injury (BI) frequency. The frequency of BI claims registered on the MOJ portal is 12.5% lower than in 2016, which is consistent with Admiral’s experience.
Whilst some of that benefit has been offset by continued inflation on accidental damage claims, due to the increasing sophistication of cars and movements in exchange rates, the net impact of the price rises and claims frequency reduction means that 2017’s underwriting year looks like Admiral’s best year for a number of years, encouragingly achieved against a backdrop of a 5% growth in the customer base despite the slow start to the year. There’s also scope for further improvement should the Government’s review of the discount rate result in lower settlements than those currently reserved on large BI claims.
CEO, UK Insurance 25 years ago, I was… …studying at a high school in the US as an exchange student.
UK Insurance includes the results of the UK Motor and UK Household Insurance segments.
Turnover grew by 14% to £2.35 billion (2016: £2.06 billion) whilst customer numbers increased by 12% to 4.62 million from 4.12 million, due to growth across both Motor and Household. UK Insurance profit increased to £465.5 million (2016: £337.8 million).
Group’s share of UK Motor Insurance profit before tax 461.4 335.1 442.5
*1 Alternative Performance Measures – refer to the end of this report for definition and explanation *2 Motor loss ratio adjusted to exclude impact of reserve releases on commuted reinsurance contracts. Reconciliation in note 12b.
• Improved competitiveness at new business following the market response to Ogden and generally positive customer retention
• Another profitable year for UK Household Insurance, though the total remains small in the context of the overall result.
UK Insurance review continued 20 Admiral Group plc · Annual Report and Accounts 2017
UK Motor Insurance includes UK Car and UK van results. During May 2017, the Group ceased operating its commercial vehicle insurance broker and started underwriting van insurance directly through two brands, Gladiator and Admiral Van. Admiral offers van insurance and associated products, typically to small businesses, via telephone and the internet, including price comparison websites.
The UK Motor Insurance business continued to attract and retain customers in the competitive UK market and this, together with higher average premiums, contributed to an increase in turnover of 13% to £2.25 billion (2016: £1.99 billion) and vehicles insured increased by 8% to 3.96 million from 3.65 million. Group’s share of UK Motor Insurance profit before tax was £461.4 million (2016: £335.1 million).
• Higher reserve releases on Admiral’s original net share (approximately £34 million positive impact) reflecting improvement in prior year claims reserves
• Higher profit commission income (£12 million positive impact) resulting from higher reserve releases
Note 5d to the financial statements analyses reserve releases in the period.
The decrease in the current period loss ratio (85.3% v 87.7%) reflects sustained price increases more than offsetting general claims inflation. Claims trends include favourable small bodily injury frequency being only partially offset by higher accidental damage costs, as the costs of replacing vehicle parts continues to increase.
The projected ultimate Car Insurance loss ratio for Admiral for the 2017 accident year is 76%, which is significantly lower than the projection of the 2016 year at the same point in its development (which was 82%). This reflects the impact of the pricing increases and reduced claims inflation highlighted above.
Ogden discount rate sensitivities The table below shows the sensitivity of profit before tax and solvency ratio to the Ogden discount rate assumption. The profit impacts presented are the total impact of the change on the Group’s pre-tax profit on an ultimate basis. It should be noted that not all of the impact would be recognised immediately.
Increase in Ogden discount rate of 75 basis points (to 0%) 85.6 +6%
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.
After the commutation is executed, movements in booked loss ratios result in reserve releases (or strengthening if the booked loss ratio were to increase) rather than reduced or increased reinsurance claims recoveries or profit commission.
In 2017 Admiral recognised reserve releases from commuted reinsurance contracts of £73.8 million (2016: £17.1 million). The increase from 2016 arose mainly due to the improvements in the booked loss ratios on prior years, although the comparative figure was adversely affected by the impact (£31 million) of the 2014 underwriting year commutation which was completed in 2016.
During 2017, a number of reinsurance contracts relating to the 2015 underwriting year were commuted. At 31 December 2017, reinsurance contracts remain in place for the 2015, 2016 and 2017 years.
Refer to note 5d (vi) of the financial statements for analysis of reserve releases on commuted quota share reinsurance contracts.
Other revenue per vehicle*1 £64 £62 £63 *1 Other revenue (before internal costs) divided by average active vehicles, rolling 12 month basis.
Admiral generates other revenue from a portfolio of insurance products that complement the core car insurance product, and also fees generated over the life of the policy.
Households insured at year end 659,800 468,700 310,400 *1 Alternative Performance Measures – refer to the Glossary for definition and explanation
UK Insurance 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.
To build a success story as a new direct insurer in Europe – where price comparison websites (PCWs) are not yet the dominant acquisition channel – in my opinion, you need to prove two essential things: first, to grow efficiently and, second, to have better underwriting capabilities than competitors.
On both these drivers, 2017 has been a truly great year. We continued growth, 23% in written premiums, while at the same time drastically reduced our acquisition cost per policy. We achieved that despite limited growth of PCWs and in the absence of premium increases in the market. This resulted in a decrease of four points in the expense ratio.
In parallel, we improved our pricing, antifraud and underwriting skills and experienced reserve releases on the recent years. We are confident that we underwrite business with a competitive loss ratio in all three countries. At the same time, we increased our reserve buffer in France and Spain to mirror the same conservative approach already adopted in Italy and the UK.
We now have 500,000 vehicles insured in ConTe, which continues to report profits. L’olivier and Admiral Seguros are growing rapidly and approaching a scale that we expect will sustain profitability in the near future.
Through better risk selection, higher service levels, and a better customer journey, Elephant has been able to significantly shift the mix of our sales distribution in favor of these higher retaining customers. This is an important step towards creating the foundation for future growth, as the effect of those actions will continue to pay off in future years.
Our customer interactions also materially improved throughout the year. Thanks to technology investments, we were able to deliver a more complete digital journey and better service levels in our claims and operational departments.
New initiatives planned for 2018, revolving around continued improvements to the customer experience and product offering, will continue to accelerate our progress in attracting higher persisting and profitable customers.
25 years ago, I was… …in high school and had a Summer trip to learn English in Cardiff!
L’olivier – assurance auto had another year of strong growth, with a more than 40% increase in turnover and closing the year with 130,000 customers. This was due to a growing aggregator market and some effective TV investments that improved our brand awareness. Two years ago, a new regulation was passed helping French customers to switch their motor insurance more easily. Though more an evolution than a revolution, this change is having a growing impact in market fluidity and L’olivier – assurance auto is benefiting from it.
L’olivier – assurance auto managed to improve its technical results thanks to our unique way of pricing in the French market. Our pricing competitive advantage should become even more significant with a larger book of business, more data and more exposure.
In this context, ConTe continues to pursue its ‘sustainable growth’ strategy and to maintain a consistent level of investment in technology, brand and people.
In 2018 we don´t expect much change in the market. We will maintain focus on scaling up the business in a sustainable way.
Sarah Harris CEO, Admiral Seguros 25Admiral Group plc · Annual Report and Accounts 2017
Vehicles insured at period end 1.03m 0.86m 0.67m *1 Alternative Performance Measures – refer to the end of this report for definition and explanation *2 Loss ratios and expense ratios have been adjusted to remove the impact of reinsurer caps so the underlying performance of the business is transparent.
*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 2017: 112%; 2016: 122%; 2015: 136%.
Vehicles insured at period end (m) 0.22 0.50 0.13 0.18 1.03 2016 Spain Italy France US Total
The key features of the International Car Insurance results are: • An aggregate loss of £14.3 million (2016: loss of £19.4 million)
• A significant improvement in Elephant Auto’s result, despite the impact of Hurricane Harvey in Texas (approximately £2.9 million)
In 2017, a non-cash impairment charge of £25 million was recognised by the parent company in respect of its investment in Elephant Auto. This followed the regular review of the carrying value of subsidiary companies and coincided with a review of the long-term strategy of Elephant by its management team and subsequent approval by the Board. During 2017, additional capital of £16 million was provided to Elephant to continue to maintain a strong surplus over regulatory requirements. Elephant remains loss making at this stage in its development, which is in line with its long-term plan. Whilst the long-term plan did support the carrying value of the subsidiary, impairment was considered appropriate following the results of a number of stress tests applied to the plans.
Focus areas for 2018 are to consolidate our core business, as we develop our data strategy, and launch our car buying/selling vertical and mortgage brokerage model. We will do this by improving customer experience in our existing verticals.
25 years ago, I was… …at school, spending my days studying, horse riding and working (walking dogs!).
In 2017, Confused.com celebrated 15 years of establishing insurance comparison in the UK, creating a growing and profitable industry and most importantly, saving millions of customers time and money. Much has changed since we attracted our first customer back in 2002 and as the Group’s most mature price comparison business we have a lot to be proud of.
2017 has continued to be a period of change and investment, as we focus on differentiating the Confused.com brand by establishing our Drivers Win campaign and further developing significant projects including our car finance product and car buying/selling. We believe these innovative products will reinforce our position as the go-to place for all things driver related. This investment in our strategy has, however, impacted our 2017 results, reducing profit to £10.1 million from £16.1 million.
2017 has seen Confused.com focus its attention on what it does best: saving drivers money throughout their journey from buying, insuring, running and selling their vehicle. Looking to 2018, we aim to turn that driving frown upside down by building on this strategy.
Louise O'Shea CEO, Confused.com 25 years ago, I was… ...playing chess for Yorkshire.
• Confused.com in the UK continued to invest in its new focus on motor-related products and services, with increased marketing costs leading to a reduced profit of £10.1 million (2016: £16.1 million)
The combined revenue from the European operations increased by 23% to £44.4 million (2016: £36.2 million), reflecting continued growth in traffic and quotes provided to customers and improved conversion rates. Both Rastreator and LeLynx continue to enjoy strong brand recognition in their respective markets.
In the US, Compare.com exceeded its target of ‘marketing break-even’ (revenue minus marketing expenses) in selected states by achieving the goal nationally, and for the year as a whole. The business delivered substantial improvements in its main key performance indicators, including reduced cost per quote and sale metrics while at the same time growing quote and sales volumes.
Compare.com’s plans for 2018 and beyond include continuing to scale marketing activity while further enhancing conversion and improving the panel of insurers and customer journey. The Group anticipates that the Group’s share of Compare.com’s losses for 2018 will be in the range of $5–$15 million.
Preminen, the Group’s price comparison venture with Mapfre, continues to explore price comparison in new markets overseas and has recently launched a price comparison operation in Mexico.
The UK commercial vehicle result relates to the Gladiator broking business which is migrating its portfolio to being underwritten within the UK Insurance business of the Group. Future results from the business are expected to be insignificant.
During the first half of 2017, the Group successfully rolled out the first release of its new technology platform for UK personal loans. The business currently distributes unsecured personal loans and car finance through the price comparison channel and also direct to consumers via the Admiral website. The Group expects the business to make small losses in its early phase mostly as a result of high fixed costs relative to the current scale of the business.
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. The Group does not anticipate further significant increases in the volume of awards.
Business development costs include costs associated with potential new ventures, including the launch of Admiral Travel insurance and investment in Preminen Ventures, including the launch of a price comparison operation in Mexico. Other central overheads of £6.2 million are £2.1 million higher than 2016 (£4.1 million), as a result of a number of non-recurring costs relating to ongoing Group projects.
UK Exit from the European Union (‘Brexit’) Although uncertainty remains as to the outcome of the Brexit negotiations between the UK and the EU, the Group has adopted a prudent approach that will ensure it is well prepared in the event of a ‘hard’ Brexit which includes being ready to deal with the likely loss of passporting rights from the UK and Gibraltar into the EU.
Applications for new licenses for insurance and intermediary companies have been made to the Spanish regulator, with approvals expected in 2018.
Brexit continues to bring risks to the Group, which include: • The potential for market volatility, particularly in interest and exchange rates
• Potential changes to the rules relating to the free movement of people between the UK and the remaining EU member states.
At present, the Group does not foresee a material adverse impact on day to day operations (including customers or staff), nor does it expect the costs associated with any Group restructure to be material in the context of the Group.
“ The Group has continued to grow strongly with turnover increasing by 15% to £2.96 billion. Customer numbers increased 11% to over 5.7 million"
Turnover grew by 14% to £2.4 billion. Customer numbers increased by 12% to 4.62 million, due to growth in both Motor and Household. UK Insurance profit increased to £465.5 million.
US Car Insurance A significant improvement in Elephant Auto’s result, despite the impact of hurricane Harvey in Texas.
US Price Comparison Compare.com achieved marketing break-even nationally and delivered substantial improvements in its main key performance indicators, while growing quote and sales volumes.
UK UK Price Comparison New strategy of Drivers Win required a significant level of investment and contributed to lower profits in 2017.
Europe Price Comparison Record profit reflects continued growth in traffic and quotes provided to customers and improved conversion rates.
The Board, with support from the Group Risk Committee and the Group Risk Department, undertakes a regular and robust assessment of the principal risks. These risks have been summarised as those which would threaten its business model, future performance, liquidity and solvency. The table below sets out the principal risks which Admiral has identified through its Enterprise Risk Management Framework (‘ERMF’). The impact of those risks and actions taken to mitigate them are explained below.
The Group is exposed to the risk of increased claims and reduced business volumes following both a UK and European recession.
• 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
Admiral’s focus remains on the wide range of factors that contribute to Admiral’s combined ratio outperformance of the UK market. Some are set out earlier in the Strategic Report, but in addition: • Track record of innovation and ability to react quickly to market conditions and developments
A potential need to raise additional capital or reduce dividends to support an increased underwriting share. This could be in the form of equity or debt.
Admiral continues to enjoy a long-term relationship with some of the world’s largest reinsurers.
Product expansion into new areas could lead to unprofitable business and increased regulatory risk.
Growth in business plans exceeds the scale of infrastructure of the operation.
Admiral’s approach to expansion and product development remains conservative, applying the ‘test and learn’ philosophy that has proven successful for previous operations. International Insurance businesses have generally executed cautious launch strategies and are all backed by proportional reinsurance support which provides substantial mitigation against start-up losses in the early years.
The Directors are mindful of management stretch and regularly assess the suitability of the infrastructure and management structure in place for Admiral’s new UK and International operations.
The Group’s low appetite for market risk results in an investment strategy that focuses on preservation of the amount invested, low volatility of returns and strong liquidity. The majority of the portfolio is invested in high quality fixed income and other debt securities, and money market funds in order to achieve these objectives.
There is investment in resources to prepare for a Partial Internal Model application. The project will have regular progress updates with the Board and Regulators.
In particular: Potential customer detriment and/or potential regulatory censure/enforcement and/ or reputational damage as a result of Admiral’s action.
Admiral continues to invest in its security programme in order to mitigate information security risks
“ We are continuously looking for ways to improve the impact we have as a business” As we continue to grow we must ensure that we do our utmost to continue to be a responsible business. At its core insurance serves a real social purpose, protecting people from the adverse impact of potentially life changing events. That is why we continue to base our business model around building sustainable operations for the long-term. In addition to providing protection for our customers we also aim to contribute positively to the wider communities in which we operate and minimize our impacts on the environment.
We take a materiality approach to our corporate social responsibility reporting, where we identify the areas that have the most impact on our stakeholders. This allows us to report effectively on the topics that matter most.
"We put our customers at the centre of everything we do”
Simply put, without our customers we wouldn't have a business, so we put our customers at the centre of everything we do.
During the year we have restructured our customer quality departments to form a new customer assurance team that delivers not only effective complaints handling but also includes a prevention team who deal with auditing, monitoring and training our customer facing staff to improve customer experience.
Our customers share a lot of personal data with us and we have a responsibility to keep this safe. We do this by training all our staff on our Data Handling Process and Data Policy, and ensure that every member of staff receives training on cyber security.
“We also encourage our staff to get their hands dirty and help local causes”
We play a positive role in our communities through charitable giving and sponsorship of local community partnerships. As an employer, we promote payroll giving and provide matched funding for eligible staff initiatives. In 2017 Admiral Group donated £140,000 to local and national charities.
This year we have established the Admiral Ministry of Giving in the UK with the aim of complementing the way that our staff already give back to the community. Over a two year period the Ministry will give significant donations to a small number of local charities across South Wales, chosen by our staff, totalling £400,000.
Our Environmental Policy is aligned with our policy of sustainable growth as outlined in the Group business model.
We are committed to: • Raising and maintaining employee awareness of, and ensuring that all of our people are actively engaged in, activities to reduce our environmental impact
• Measuring and monitoring key aspects of our environmental performance and regularly reviewing progress to reduce the amount of resources consumed per employee.
This year we held our first Admiral Green Month. This month was all about reaching out to staff to make Admiral a greener place to work, and minimise the impact we have on the environment. Highlights of the month included a talk from our partners Size of Wales, who seek to protect the rainforest and 1,500 employees signing our environmental commitment.
of customers would renew following a claim of staff say they feel good about the ways we contribute to the community of staff agree that we are working to reduce our environmental impact 39Admiral Group plc · Annual Report and Accounts 2017
The claim was reported to us at 10:40am and was settled and paid by 12:30pm – less than two hours.
Safety We pride ourselves on the relaxed, fun and most importantly safe atmosphere at Admiral and we have a number of initiatives in place to ensure all our staff feel safe coming to work. Recently we introduced a Company-wide Employee Assistance Programme (EAP) to provide proactive assistance to all UK employees on a range of issues from eldercare to face-to-face counselling. In addition, we have an extensive whistle blowing policy to prevent fraud, theft or ethically questionable practices. This is explained fully to staff via the company intranet.
Communication Communication is at the forefront of what we do and we strive for open and honest communication at all levels of the business. This focus has a range of scales from annual Staff General Meetings where the senior managers address all staff to talk about the company’s performance and business plan, to friendly forums where small numbers of individuals from different departments will get together to discuss a range of topics. In addition there are several digital communications channels, ranging from a monthly Group-wide online chats to an 'Ask David' website where anyone in the company can submit a question for CEO David Stevens.
Equality We believe that all employees have the right to be treated equally, with dignity, integrity and respect. This year we have updated our Equal Opportunities Policy with the support of The Advisory, Conciliation and Arbitration Service (ACAS) to create a more comprehensive policy based on Diversity and Inclusion. A new Diversity and Inclusion training programme was also rolled out for all staff to reflect this new revised policy.
We fully support the aims of the Modern Slavery Act and seek to ensure slavery and human trafficking does not feature in our business or supply chain, more information about our commitment to preventing modern slavery can be found in our Modern Slavery Statement on our corporate website.
Gender pay gap We are confident men and women are paid equally for performing the same role, but we acknowledge that there is a difference in proportion of men and women at differing levels of the Group. We encourage women to advance professionally and offer opportunities to do this from funding support for training to mentorship programmes. We endeavour to make it easier for both men and women to reconcile their work lives with their family lives.
Further information on our gender pay gap can be found in our Gender Pay Gap Report on our website www.admiralgroup.co.uk
Since 2005 employees at Admiral have been awarded shares in the Group’s two Share Plans. The first is the All Employee Approved Share Incentive Plan (SIP). In the SIP every member of staff receives the same number of shares regardless of seniority – the Group awards up to £3,600 worth of shares to each staff member every year.
The second scheme that the Group runs is the Discretionary Free Share Scheme (DFSS). The DFSS was also set up in 2005 when the Group floated to complement the SIP and to enable the Board of directors to reward staff with further shares in the Group.
Andy Crossley joined the Board as a NonExecutive Director and member of the Audit Committee in February 2018. Andy has broad financial services and insurance experience having served most recently on the Board of Domestic and General. The process of succession planning is ongoing as the composition and balance of the Board is reviewed to ensure that continuity is maintained, and appropriate skills and experience are added.
As the Board undertook an externally facilitated evaluation last year, the process of evaluating the Board’s performance this year consisted of each Board member completing a questionnaire detailing specific areas of focus for the Board including succession planning and Board composition, the priorities for change, the impact of previous evaluations, and Board expertise to meet future challenges. The results of the completed questionnaires then formed the basis for discussion when the results of the evaluation and areas for development were discussed and considered by the Board at the meeting in January 2018. A summary of the outcomes of the Board’s discussion and consideration of the results of the evaluation are set out in more detail at page 48 of this report.
David has an MBA from INSEAD and he was awarded a CBE in 2010 for services to business and the community in Wales.
25 years ago… …as Admiral’s marketing manager, with two dozen hungry salesmen to feed, I was worrying whether Admiral’s first ad, a half page in the Western Mail, would set the phones on fire (It didn’t, but fortunately others did).
25 years ago, I was… …working as an account manager at IBM.
Nomination and Governance Committee member Senior Independent Director 43Admiral Group plc · Annual Report and Accounts 2017
25 years ago, I was… …a Global Economist at S. G. Warburg.
25 years ago, I was… …doing my junior year abroad in Venice, Italy.
25 years ago, I was… …the Finance Director of the Agricultural Mortgage Corporation, which provided mortgages to farmers.
Background and experience: Manning joined White Mountains in 2004 and is the former President of White Mountains Advisors and White Mountains Capital.
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
Board Activity During 2017 The Board met on seven occasions in 2017 with all these meetings being held over two days and one of the meetings being a separate strategy meeting held off-site. In addition to the seven scheduled meetings, there were five additional unscheduled telephone meetings that were called at short notice. The majority of these meetings were called in relation to consideration of the change to the Ogden discount rate announced in February 2017 and the impact this would have on the Group.
At each scheduled meeting the Board receives updates from the Chief Executive and Chief Financial Officer as to the financial and operational performance of the Group and any specific developments in the areas of the business for which they are directly responsible and of which the Board should be aware. Items that are considered on an annual basis are included in an annual schedule of rolling agenda items to ensure that they are considered at the appropriate point in the financial and regulatory cycle. Meetings are structured so as to allow for consideration and debate of all matters. The Head of the Group’s European insurance businesses and the CEO of UK Motor (respectively Milena Mondini and Cristina Nestares) together with the Chief Risk Officer (James Armstrong) are invited to attend every Board meeting and regular Board dinners. This has proved an effective means of ensuring that senior managers below Board level have exposure to and gain experience of the operation of the Board.
*2 Annette Court was appointed Chairman of the Board with effect from 26 April 2017 and stepped down form the Audit Committee from that date.
*3 Penny James stepped down from the Board with effect from 8 September 2017.
Agendas and papers are circulated to the Board electronically in a timely and secure manner in preparation for Board and Committee meetings. The Board agenda is structured by the Chairman in consultation with the Company Secretary and Chief Executive. Routine Board papers are supplemented by information specifically requested by the directors from time to time. All Board and Committee meetings during the year were held in an open atmosphere conducive to robust and constructive challenge and debate. All Directors have, therefore, been able to bring independent judgement to bear on issues such as strategy, risk management, performance, and resources. Additional meetings are called when required and there is contact between meetings, where necessary, to progress the Group’s business.
• Succession planning including the oversight of the Group’s processes for Managing, developing and retaining talent; • Management of group subsidiaries
The Chief Executive, to whom he reports, appraises annually the performance of the Chief Financial Officer. 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 is effective and that she demonstrates appropriate commitment to her role.
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. As a result of recent appointments, 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.
Manning Rountree is the Chief Executive Officer for White Mountains Insurance Group Limited (White Mountains) and acts as Board Observer for White Mountains on the Board of the Group’s US price comparison subsidiary, in which White Mountains has a minority shareholding. Given the relatively small size of White Mountains’ shareholding in an overseas Group subsidiary company, the Board has determined that Manning Rountree remains independent in character and judgement and that his attendance at Inspop USA LLC Board meetings does not affect his ability to present an objective, rigorous and constructive challenge to the assumptions and viewpoints presented by management and the Board. A process for managing any potential conflicts has been agreed by the Board such that Manning Rountree will recuse himself from any Group Board discussions where a potential conflict of interest with his role with White Mountains has been identified.
The Board, having given thorough consideration to the matter, considers the six Non-Executive Directors to be independent and is not aware of any relationships or circumstances, other than the above, which are likely to affect, or could appear to affect, the judgement of any of them. It is the view of the Board that the independent NonExecutive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making.
5 years 9 months 2 years 4 months 3 years 11 months 2 years 6 months 1 years 6 months 7 years 1 month
This is supplemented by feedback to the Board on meetings between management and investors. In addition, the Investor Relations team produces a quarterly Investor Relations Report that is circulated to the Board for their consideration. The Report contains an analysis of share price performance; a summary of analyst reports received during the month and of meetings that have been held with investors and analysts; together with details of any significant changes to the shareholders’ register.
All Committees are chaired by an independent Non-Executive Director except, the Nomination and Governance 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 and Governance 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.
Dear Shareholder, 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 proposal from management to enhance the Group’s reserving methodology was considered by the Committee to ensure that it was consistent with the Group’s stated reserving approach and appropriate in the context of the Group setting claims reserves at a prudent level. The analysis of outstanding claims by management was reviewed alongside that of the Group’s independent actuaries and external auditor.
The impact of last year’s change in the Ogden discount rate continued to be tracked by the Committee, along with the potential impact of legislative changes to the way in which the rate is set in the future.
" I’m pleased to provide an update on the main activities of Admiral’s Audit Committee in 2017."
During the year the group published its first Group Solvency and Financial Condition Report and the Committee spent time on this, along with other Solvency II issues, to ensure robust processes and controls existed for its production.
In addition, the Committee continued to monitor the appropriateness of the Group’s system of risk management and internal control. The Committee maintained a close focus on the UK motor business but also reviewed overseas subsidiaries and the newly established UK loans business.
The Annual Report and interim results, including key accounting judgements and disclosures
Reports from the external auditor on the principal findings from their review of the
Group’s systems and controls, and on their key accounting and audit issues and conclusions on the half and full year reporting
Reports on the controls in place in respect of overseas subsidiaries and cyber security
During the year the Committee reviewed the following: Presentations from independent actuaries to assist the Committee in concluding on the adequacy of the Group’s reserves
Updates on the impact of the Ogden rate and the potential legislative changes to the method of setting the rate in the future
A continued review of the Group’s Reserving methodology so as to ensure an appropriately prudent claims reserve is booked 52 Admiral Group plc · Annual Report and Accounts 2017
Policy which sets out the arrangements for raising and handling allegations from whistle blowers
The Committee is kept up to date with changes to Accounting Standards and relevant developments in financial reporting, company law, and the various regulatory frameworks through presentations from the Group’s external auditor, Chief Financial Officer and Company Secretary. In addition, members attend relevant seminars and conferences provided by external bodies. The Terms of Reference of the Audit Committee include all the matters required under the Code.
Proposed external audit fee and the drivers of the year on year increase
Reports from the Internal Audit departments within the Group on the effectiveness of the Group’s risk management and internal control procedures, approval of the audit plans, details of key audit findings, and actions taken by management to manage and reduce the impact of the risks identified 53Admiral Group plc · Annual Report and Accounts 2017
Other individuals such as the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, the Chief Risk Officer, Heads of Compliance and Internal Audit, and representatives of different parts of the Group may be invited to attend all or part of any meeting as and when appropriate. The Chair of the Audit Committee meets privately with the Head of Internal Audit on a regular basis. The external auditor was invited to attend all of the Committee’s meetings held in 2017, excepting those agenda items when its own performance/ appointment was to be reviewed and provision of non-audit services discussed. In addition, a number of private meetings were held between members of the Committee and the auditor.
• Keep under review the effectiveness of the Company’s internal financial controls, 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
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 2017 and also at the conclusion of the audit of these full year financial statements.
Given the material impact of changes to the Ogden rate, the Committee has continued to monitor developments in this area to ensure that it was well prepared to manage any impact on its reserves. The Committee is satisfied that in accounting for reserves using the current discount rate, the value contained in the balance sheet for future claims remains appropriate and prudent.
The Committee also received an update from the auditor regarding the procedures they had used to test management’s methodology in setting best estimates and considered the auditor’s assertion that they had challenged the reserving approach taken by management and were satisfied with management’s assumptions and that the Group’s approach to setting reserves was in compliance with current accounting standards.
After reviewing the presentations and reports from management and consulting where necessary with the auditor, the
Unless required by law, regulatory or tax authority and 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, on the 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
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. In the year under review an external quality assessment of Internal Audit was carried out, results of which were considered and discussed by the Committee at the meeting in August 2017. The Committee had noted that the review indicated that there was a strong endorsement of the Internal Audit function but noted that there were some suggested recommendations to further enhance the efficiency and effectiveness of the Internal Audit function that should be considered further. The recommendations are in the process of being implemented.
During the year the Committee reviewed the Board’s risk strategy and risk appetite across the Group. This included further updates in the UK business as well as the international businesses, established as a key part of the Group’s Enterprise Risk Management Framework (‘ERMF’). A further refresh to the suite of Key Risk Indicators with associated triggers and limits was completed. These updates have improved the effectiveness of the Committee by placing greater focus on the main risks affecting the business.
Good progress has also been made on enhancing the project governance framework and the Committee looks forward to seeing the increased reporting to support some of the material projects ongoing across the Group.
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 builds on the levels of compliance resources and monitoring that all Group firms must apply to their respective regulatory obligations.
In terms of new products and businesses the Committee oversaw the development of the new Loans business and the successful regulatory application for the new company. The Committee also oversaw the launch of the new travel insurance product which will be embedded within the existing reporting templates to support future oversight.
Dear Shareholder, The year began with focus on the Ogden rate change. The Committee spent time reviewing the impact on solvency ratio as well as the customer and pricing impacts. There were also a number of updates on the future Ogden developments and consideration was given to numerous scenarios as part of the annual stress and scenario testing process.
A significant amount of time has also been dedicated to developing the Group’s Partial Internal Model for Solvency II. Whilst the committee considered and approved the recommendation of a change in scope of the model good progress has been made on the IMAP programme. In the interim period the
“ The Committee continues to focus on key operational risks that affect the Group.”
level, capital plan and capital buffer in line with the capital policy
Recommended to the Board approval of the 2017 ORSA Report prior to submission to the regulator and approved the ORSA policy
Received regular updates in relation to key programmes of work including IT Security, GDPR
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 re-insurer
Last Year’s Premium, the triggering of article 50 and Hurricane Harvey
Received regular risk monitoring reports on performance of Key Risk Indicators within the overall risk management framework
During the year the Committee: 57Admiral Group plc · Annual Report and Accounts 2017
Duties and responsibilities of the Group Risk Committee The duties and responsibilities of the Committee are set out in Terms of Reference that were reviewed during the year and approved by the Board in December 2017.
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
• 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 and approve the remuneration report from the Chief Risk Officer prior to Remuneration Committee sign off.
Internal Control and Risk Management Statement The Board is ultimately responsible for the Group’s system of risk management and internal control including that relating to financial reporting processes and, through the Audit Committee, has reviewed the effectiveness of this system. The system of risk management and internal control over insurance, operational, market, credit and group risks is designed to manage rather than eliminate the risk of failure to achieve business objectives and breaches of risk appetites and can only provide reasonable and not absolute assurance against material misstatement or loss.
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 page 33.
The Group Risk Committee continued 58 Admiral Group plc · Annual Report and Accounts 2017
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.
There is compliance resource assigned to each operation who review and report on the first line of defence’s compliance with designated control activities. The Group compliance function consolidates these reviews and provides reports to the Group Risk Committee.
Viability In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospect of the Company over a longer period than the 12 months required by the ‘Going Concern’ provision. The Board conducted this review for a period of three years to December 2020. This assessment has been made taking into account the current financial position of the Group, the Group’s business plans, the Group’s ‘Own Risk and Solvency Assessment’ (ORSA) process, and the principal risks and uncertainties faced by the Group, which are disclosed on pages 39 to 44 of the strategic report.
In October 2017, the Committee expanded its remit to include reviewing the governance arrangements for the Group and its principal and material regulated entities to ensure they remain appropriate by reference to best practice in corporate governance. In addition, the Committee has taken on responsibility for review and approval of appointments to these regulated entities to ensure that the overall balance of skills, knowledge, experience and diversity on the relevant Board remains appropriate.
“ As Chairman of the Nomination and Governance Committee, I am pleased to report on the activities of the Committee during the year.”
An external review of the Group’s governance arrangements was carried out during the year and the completed report was considered by the Board at the January 2018 Board meeting. The recommendations, contained in the report, to strengthen the Group’s existing governance arrangements so they remain fit for purpose in the future will be an area of focus for the Committee in 2018 as new entities are established and Board constituents change.
Membership The membership of the Committee at the year end was: Annette Court (Chairman), Colin Holmes and Owen Clarke. The Company Secretary acts as Secretary to the Committee. The Committee invites the Chief Executive and/or the Chief Financial Officer to attend meetings when it deems appropriate. The Committee met formally on seven occasions in 2017. In addition, members of the Committee corresponded and met informally on a number of occasions to consider and meet with individuals that the Committee had identified as possible candidates to join the Board.
Given Andy’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.
Each Committee member met separately with Andy and agreed that he would bring invaluable experience to the Board. The Board approved the Committee’s recommendations and following regulatory approval Andy was formally appointed to the Board with effect from 27 February 2018.
Gender and diversity Given women constitute 33% of our plc Board, the Group has already met the target set by both Lord Davies in his report. Women on Boards’, and the Hampton Alexander Review (that builds on the Davies Review) which encourages FTSE 350 companies to achieve at least 33% women on Boards by 2020. The Group also already meets the
2017 has been another strong year for the Admiral Group, Earnings per Share in the year were 117.2 pence (2016: 78.7 pence) and Return on Equity was 55% (2016: 37%). Total dividends for the financial year (including the proposed final dividend of 58.0 pence per share) will be 114.0 pence per share.
“ This year we will be asking shareholders to approve a new Remuneration Policy for Executive Directors at the 2018 Annual General Meeting.”
Proposed changes to Remuneration Policy This year we will be asking shareholders to approve a new Remuneration Policy for Executive Directors at the 2018 Annual General Meeting. By way of background, Admiral has a remuneration structure, which we believe reinforces our culture and creates strong alignment with our shareholders. Base salaries are targeted at the lower end of our peer group, and executives are encouraged to build up significant shareholdings in the Group to maximise shareholder alignment. Our main incentive plan is the Discretionary Free Share Scheme (‘DFSS’), which incentivises Earnings per Share growth, Return on Equity and Total Shareholder Return vs. the FTSE 350 (excluding investment companies) over a three-year period. We do not pay annual cash bonuses and instead have in place a simple bonus structure that is directly linked to the number of DFSS awards held and actual dividends paid out to shareholders. This structure contributes to a culture of focusing on collective, rather than individual, success, and is aligned with our philosophy around the efficient use of capital and distribution of surplus profits.
The Committee also agreed that the current suite of incentives remains effective in incentivising key performance categories for the business. However, a closer review of the CFO’s remuneration package showed that his salary is significantly behind market, and his remuneration is out of line with other senior Admiral executives in terms of pay mix and structure. The Committee also concluded that a couple of areas in our previous Remuneration Policy should be updated to align with evolving best practice and regulatory requirements. To address these points, the Committee is proposing a number of changes to the Policy: • CFO ‘salary’ shares: To bring the CFO’s salary closer to market in a way that is fair to the individual and aligned with shareholder interests, we propose supplementing his current cash salary of £245,000 with an annual award of ‘salary’ shares. For 2018, the CFO’s cash salary will remain unchanged and an award of 5,000 salary shares (equivalent to circa £95,000) is proposed, bringing total salary to £340,000. The salary share award will vest after three years subject to continued employment. An additional two-year holding period will apply, during which time shares may not be sold, save to meet income tax, NI or other regulatory obligations. Malus and clawback provisions will apply during the vesting and holding periods. The salary share award is not included in base salary when calculating the CFO’s pension benefit, DFSS award opportunity or achieved against the shareholding guideline.
• DFSS post-vesting holding period: Extension of the overall DFSS time horizon with the introduction of a mandatory two-year holding period on vested awards, effective from awards made in 2018
• Risk adjustment to DFSS bonus: DFSS bonus to include a ±20% adjustment based on performance against a set of risk metrics, effective from awards made in 2018
• Shareholding guideline: Increase to the guideline from 200% to 300% of base salary.
The Committee believes that structuring the CFO’s salary increase as an award of shares, rather than cash, is better aligned with shareholders, is consistent with our philosophy of low cash awards balanced by the award of shares, and more effectively supports the CFO’s retention. The proposed change will bring the CFO’s package closer to market (though it will remain in the bottom quartile). It also reflects a move towards improving internal consistency between the CFO’s remuneration structure and that of the broader Admiral executive team below the Board, for whom a proportion of their share awards are subject to continued employment but not subject to the DFSS vesting criteria.
The Board undertakes a regular and robust assessment of the principal risks to the business, and is keen to ensure that the Group’s Remuneration Policy and practices promote sound and effective risk management and excellent customer outcomes. It is in this context that the Committee proposes making a change to the DFSS bonus made to Executive Directors and other senior staff to include a ±20% adjustment based on risk performance. A scorecard of risk performance measures will be set by the Committee each year for all significant areas of the business with specified targets to determine the amount of any DFSS bonus adjustment. It is anticipated that many of these measures will be directly related to customer outcomes to reinforce the Group’s focus on delivering a great customer experience. Whilst the bonus may be adjusted upwards or downwards by up to 20% in any given year, it is not anticipated that the adjustment will increase the CFO’s remuneration on average over the longterm. The Committee believes that this change will help to reinforce our focus on risk management and our customers, whilst also more clearly demonstrating alignment of Group remuneration practices with the requirements of Solvency II.
The Committee also reviewed the Company’s fixed pay arrangements during 2017. It is proposed that the pension provision of 6% of salary should remain unchanged, but that the internal cap on pension will increase from £9,000 to £15,000 p.a. and the Company will offer individuals a choice between pension contributions and cash in lieu. No other changes to Remuneration Policy in respect of fixed pay are proposed.
During the early part of 2018, we consulted with our largest shareholders on the proposed revisions to the Remuneration Policy. Feedback has been positive and we hope to receive your support for the revised Policy at the upcoming AGM. Subject to shareholder approval, the proposed Policy will take effect from the date of the AGM, being 26 April 2018. The first DFSS award under the revised Policy will be made in September 2018.
Remuneration in 2017 In addition to consideration of the proposed Policy changes set out above and oversight of the associated shareholder consultation, the activities of the Committee during the year ended 31 December 2017 included: • Reviewing the salary arrangements and fee proposals for the Executive Directors, the former and current Chairman and senior management
• Considering the appropriate performance conditions to attach to the DFSS awards for the Group’s European insurance operations
• Reviewed the impact of the Living Wage on the Group’s current remuneration structure
In September 2017, Geraint Jones was granted an award under the DFSS of 50,000 shares, equivalent to £905,000 or 369% of salary. Consistent with the approach for 2016, the award will vest on three-year EPS growth vs. LIBOR, TSR vs. FTSE 350 (excluding investment companies), and ROE, weighted equally. David Stevens again declined to be included given his significant shareholding.
Acting Chairman of the Remuneration Committee 63Admiral Group plc · Annual Report and Accounts 2017
The key changes to the previous Policy: Earnings per Share 117.2p
Adjustment to the DFSS bonus to be based on risk performance
No change to pension provision of 6% of salary subject to an internal cap, but increase to cap from £9,000 to £15,000 p.a., and choice between pension contribution and cash in lieu
Compliance Statement This Remuneration Report has been prepared according to the requirements of the Companies Act 2006 (the Act), Regulation 11 and Schedule 8 of the Large and MediumSized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and other relevant requirements of the FCA Listing Rules. In addition, the Board has applied the principles of good corporate governance set out in the UK Corporate Governance Code (the Code) and has considered the guidelines issued by its leading shareholders and bodies such as ISS, the Investment Association, and the Pensions and Lifetime Savings Association. Unless otherwise stated, information contained within this Remuneration Report is unaudited.
• Extension of the overall DFSS time horizon with the introduction of a mandatory two-year holding period on vested awards, effective from awards made in 2018
• Remuneration Committee discretion to adjust formulaic DFSS outcome to ensure alignment between pay and performance
• Increase to the shareholding guideline from 200% to 300% of base salary
• No change to pension provision of 6% of salary subject to an internal cap, but increase to cap from £9,000 to £15,000 p.a., and choice between pension contribution and cash in lieu.
Subject to shareholder approval, the new Remuneration Policy will formally come into effect from the date of the 2018 AGM.
Key principles of Admiral remuneration arrangements The Group is committed to the primary objective of maximising shareholder value over time in a way that also promotes effective risk management and excellent customer outcome and ensuring that there is a strong link between performance and reward. This is reflected in the Group’s stated Remuneration Policy of paying competitive, performance-linked and shareholder-aligned total remuneration packages comprising basic salaries coupled with participation in performance-based share schemes to generate competitive total reward packages for superior performance. The Board is satisfied that the adoption of this Policy continues to meet the objectives of attracting and retaining executives of the highest quality across the Group.
• Significantly share-based – our base salaries are targeted towards the lower end of market, but are combined with meaningful annual share awards that vest on long-term performance to ensure strong alignment with shareholders and the long-term interests of the Group.
Executives are also encouraged to build up significant shareholdings in the Group to maximise shareholder alignment
• Effective risk management – incentives are designed to ensure they do not encourage excessive risk-taking. They are aligned with the delivery of positive customer outcomes and reinforce the Group’s risk policy
Salaries are reviewed annually or following a significant change in responsibilities.
To motivate and reward longer term performance, aid long-term retention of key executive talent, use capital efficiently, grow profits sustainably and further strengthen the alignment of the interests of shareholders and staff.
For DFSS awards made in 2018 and subsequent years, a twoyear holding period applies to vested awards, during which time Executive Directors may not sell the vested awards except to cover tax liabilities.
Awards are subject to malus and clawback provisions, i.e. forfeiture or reduction of unvested awards and recovery of vested awards in exceptional circumstances (such as material misstatement or gross misconduct).
The Remuneration Committee has discretion to adjust the formulaic vesting outcome to ensure the final outcome is a fair and true reflection of underlying business performance.
The DFSS bonus is subject to a ±20% adjustment based on performance against a set of risk metrics. The metrics will be set each year for all significant areas of the business with specified targets to determine the amount of any DFSS bonus adjustment. It is anticipated that many of these measures will be directly related to customer outcomes. Whilst the bonus may be adjusted upwards or downwards by up to 20% in any given year, it is not anticipated that the adjustment will increase the CFO’s remuneration on average over the long term.
The DFSS bonus is subject to malus and clawback provisions, i.e. forfeiture or reduction of unvested awards and recovery of vested awards in exceptional circumstances (such as material misstatement or gross misconduct).
No bonus is payable unless dividends are payable on Admiral shares.
To encourage share ownership across all employees using HMRC approved schemes.
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 changes required to satisfy legal or regulatory requirements and other non-significant changes to the Remuneration Policy without reverting to shareholders.
Performance targets are set to be stretching and achievable, taking into account broker forecasts, the Company’s strategic priorities and the economic environment in which the Company operates. The financial targets are set taking into account a range of reference points including the Group’s strategic plan and broker forecasts for both Admiral and its insurance peers. The Committee believes that the performance targets set are stretching and motivational, and that maximum outcomes are available only for outstanding performance.
Remuneration Policy table continued 68 Admiral Group plc · Annual Report and Accounts 2017
Any unvested award will be pro-rated for time with reference to the proportion of the vesting period remaining at termination, and performance, unless the Committee determines otherwise.
Change of control Any unvested award will be pro-rated for time with reference to the proportion of the vesting period remaining at change of control, at the point of change of control, unless the Committee determines otherwise.
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. Whilst the final bonus outcome may be adjusted upwards or downwards for risk by up to 20% in any given year, it is anticipated that the average adjustment over the long term will be close to 0%. The figures shown in the chart below for the CFO’s DFSS bonus include the value of the actual DFSS bonus paid in 2017 as an illustration of the value he might receive. Under all scenarios, potential reward opportunities are based on the proposed Remuneration Policy and expected awards for 2018, applied to salaries as at 1 January 2018.
Corporate Governance: Directors’ Remuneration Policy 70 Admiral Group plc · Annual Report and Accounts 2017
DFSS • 0% vesting • 20% average vesting • 100% vesting
Corporate Governance: Directors’ Remuneration Policy 72 Admiral Group plc · Annual Report and Accounts 2017
This section of the report provides details of how Admiral’s 2015 Remuneration Policy was implemented in 2017 and how the Remuneration Committee intends to implement the proposed Remuneration Policy in 2018.
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 2017 and the prior year.
Executive Director 1. Base salary 2. Benefits 3. Pension 4. SIP 5. DFSS 6. DFSS bonus Total remuneration 1. David Stevens does not participate in any incentive plan given his significant shareholdings.
Total single figure of remuneration for Non-Executive Directors (audited) The table below sets out the total single figure remuneration received by each NED for the year ended 31 December 2017 and the prior year.
2. Annette Court was appointed Chairman of the Board with effect from 26 April 2017.
3. Owen Clarke was appointed Chair of the Remuneration Committee with effect from 26 April 2017 4. Penny James retired from the Board with effect from 8 September 2017 5. Jean Park’s fees for 2017 include additional fees in relation to the years ended 31 December 2016 and 2017 relating to her position as Chair of the Group Risk Committee and in recognition of the increased time commitment required of her as a consequence of Solvency II regulations and the Internal Model Application Process.
On 29 September 2015, Geraint Jones was granted an award under the DFSS of 50,000 shares with a value at the date of award of £743,500 (based on a grant date share price of £14.87), equivalent to 372% of salary.
Vesting of the award was based 100% on the achievement of performance conditions, being EPS growth vs. LIBOR, TSR vs. FTSE 350 (excluding investment companies), and ROE, weighted equally and all measured over the three-year period 1 January 2015 to 31 December 2017. Over this period, the returns to our shareholders were strong, with TSR in the top quartile of FTSE350 companies and with ROE of over 47%. The combination of these shareholder returns and EPS growth comfortably in excess of the threshold performance set for these awards contributed to a vesting level of 74.3%. The table below details the Company’s performance against targets and the resulting vesting outcome.
Median Upper quartile 25% for median, with straight line relationship to 100% for upper quartile 77th percentile 100%
25% 55% 25% for achieving threshold with straight line relationship to 100% for maximum performance
Based on performance, the total amount that will vest to Geraint Jones in September 2018 will therefore be 74.3% of his award (i.e. 37,150 shares), subject to his continued employment on the vesting date.
DFSS bonus payments are subject to clawback provisions in exceptional circumstances, such as material misstatement or gross misconduct.
In September 2017, Geraint Jones was granted an award under the DFSS of 50,000 shares with a value at the date of award of £905,000 (based on share price of £18.10), equivalent to 369% of salary. The three-year period over which performance will be measured is 1 January 2017 to 31 December 2019. The award is eligible to vest in its entirety on the third anniversary of the date of grant (i.e. September 2020), subject to performance and to continued employment. David Stevens again declined to be included given his significant shareholding.
The award will vest dependent on three-year EPS growth vs. LIBOR, TSR vs. FTSE 350 (excluding investment companies), and ROE, weighted equally. The performance conditions are summarised in the table below.
In March and August 2017, Geraint Jones was granted awards under the SIP of 95 shares in March 2017, with a face value of £1,902, and 85 shares in September 2017, with a face value of £1,792. 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.
Payments to past Directors (audited) No payments were made to a past Director during the year.
Salaries for the Executive Directors in 2018 will be determined in line with the proposed Remuneration Policy, subject to shareholder approval. The Committee approved the following base salaries for the Executive Directors for 2018: Director Latest salary 2017 salary % change Effective date 1. Comprising £245,000 in cash and circa £95,000 in shares, subject to shareholder approval.
For 2018, the CFO’s cash salary will remain unchanged at £245,000 and an award of 5,000 salary shares is proposed, bringing total salary to circa £340,000. The salary share award will vest after three years subject to continued employment. An additional two-year holding period will apply, during which time shares may not be sold, save to meet income tax, NI or other regulatory obligations. Malus and clawback provisions will apply during the vesting and holding periods. The salary share award is not included in base salary when calculating the CFO’s pension benefit.
Geraint Jones will continue to participate in the Group Personal Pension Plan, where employee contributions are matched up to a maximum 6% of base salary with internal cap on the maximum employer contribution. Effective from 2018 and subject to shareholder approval, whilst pension provision will remain 6% of base salary, the cap will be increased from £9,000 to £15,000 p.a. and the Company will offer individuals a choice between pension contributions and cash in lieu. David Stevens will also continue to participate in the plan, on the same basis as Geraint. Both Executive Directors will continue to receive benefits in line with the Policy.
As in prior years, Geraint Jones will be eligible to receive a DFSS bonus in 2018. The bonus is calculated to be equivalent to dividends that would have been payable during the year on all outstanding DFSS shares and any salary shares awarded but not vested. Effective from 2018, the DFSS bonus will include a ±20% adjustment based on performance against a set of risk metrics. The details of the risk metric and any adjustment applied will be provided in the 2018 Annual Report on Remuneration.
Implementation of Remuneration Policy for 2018 continued Chairman and Non-Executive Directors
Fees for the Board Chairman and other Non-Executive Directors were last reviewed in January 2018, and increases effective from 1 January 2018 are as follows: 2018 fee (p.a.) Previous fee (p.a.)
Percentage change in CEO remuneration The table below shows the percentage change in CEO remuneration from 2016 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 2016 and 2017 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.
2. DFSS bonus change represents the change in dividends paid, which is the driver of the level of bonus payable to holders of unvested DFSS shares.
DFSS vesting outcome (% of maximum) 98% 100% 100% 100% 100% 70% 85% 69% 50% and 0% 74.3%7 1. Henry Engelhard stepped down from the Board on 13 May 2016. His 2016 remuneration includes salary and benefits in respect of his service as CEO.
7. 74.3% of Geraint Jones’ 2015 DFSS award will vest in September 2018 subject to his continued employment on the vesting date.
Interests held by Directors (audited) The Company has adopted Executive Director shareholding guidelines whereby all Executive Directors are required to acquire and retain a beneficial shareholding in the Company equal to at least 300% of base salary, excluding salary shares where applicable, which can be built up over a period of five years from the later of the introduction of the guidelines and the individual’s date of appointment. The guideline was previously set at 200% of base salary, but was increased to 300% from 2018 for additional shareholder alignment. All Executive Directors currently hold shares in excess of the guideline.
There have been no changes to Directors’ shareholdings since 31 December 2017.
3. The vesting percentage for performance related awards made in 2014 was 0%. The award made to Geraint Jones in September 2014 was 100% performance related vesting percentage was 0%. This resulted in the lapsing of 35,000 shares.
The closing price of Admiral shares on 31 December 2017 was £20.02 per share.
The profit for the year, after tax but before dividends, amounted to £331.6 million (2016: £214.1 million).
The Directors declared and paid dividends of £300.3 million during 2017 (2016: £349.8 million) – refer to note 11b for further details.
The Group’s Anti-bribery Policy strictly prohibits the solicitation or the acceptance of any bribe, whether cash or inducement, to or from any person or company, wherever they are situated and whether they are a public official or body or private person or company, by any individual employee, Board member, agent or other person or body on the Group’s behalf.
Notes *1 Company Directors consists of the Board of Directors, as detailed on pages 43 to 45.
Managers in the Group are sensitive to health concerns and special needs and will not knowingly allow any employee with a disabling or life threatening illness to suffer from discrimination at work. The Group provides staff with access to the EAP Care First confidential helpline which offers advice and support on a range of health issues.
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.
At the last Annual General Meeting, held on 26 April 2017, authority was given to the Directors to allot unissued relevant securities in the Company up to a maximum of £93,836, equivalent to one third of the issued share capital as at 20 March 2017. This authority expires on the date of the Annual General Meeting to be held on 26 April 2018 and the Directors will seek to renew this authority for the following year.
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 2018.
The Directors are responsible for managing the business of the Company and may exercise all powers of the Company subject to the provisions of relevant statutes, to any directions given by special resolution and to the Company’s Memorandum and Articles. The Articles, for example, contain specific provisions and restrictions concerning the Company’s power to borrow money. Powers relating to the issuing of new shares are also included in the Articles and such authorities are renewed by shareholders at the Annual General Meeting each year.
Directors and Officers insurance cover is in place for all Directors to provide cover against certain acts or omissions on behalf of the Company. A Deed Poll of Indemnity was executed in October 2015, indemnifying each of the Directors, and Company Secretary, in relation to certain losses and liabilities that they might incur in the course of acting as Directors of the Company. The Deed Poll of Indemnity is categorised as qualifying third party indemnity provisions as defined by section 234 of the Companies Act 2006 and remains in force for all past and present Directors of the Company.
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.
Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards, including FRS 101 Reduced Disclosure Framework.
• for the Parent Company financial statements, state whether applicable UK Accounting Standards, including FRS 101 Reduced Disclosure Framework, have been followed, subject to any material departures disclosed and explained in the parent company financial statements.
We have audited the financial statements of Admiral Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise: • the Consolidated and Parent Company Income Statements; • the Consolidated and Parent Company Statements of Comprehensive Income; • the Consolidated and Parent Company Statements of Financial Position; • the Consolidated Cash Flow Statement; • the Consolidated and Parent Company Statements of Changes in Equity; • the related notes 1 to 12 to the group financial statements; and
• the related notes 1 to 9 to the Parent Company financial statements.
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
Independent Auditor’s Report 86 Admiral Group plc · Annual Report and Accounts 2017
Key audit matters The key audit matters that we identified in the current year were: • Valuation of gross insurance claims reserves; and
Further specific audit procedures were completed in respect of two further components which, although not financially significant, did present some specific audit risks which needed to be addressed.
Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 33 to 37 that describe the principal risks and explain how they are being managed or mitigated; • the directors' confirmation on page 33 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; or
The group’s gross insurance claims reserves total £2,403m (2016 year-end: £2,031m). The judgements which are made by management in determining the total valuation of incurred claims reserves, including those claims which are incurred but not reported (“IBNR”) are by far the most significant, in terms of their impact on the group’s financial position. Setting these claims reserves is an inherently subjective exercise and small changes in underlying assumptions such as average frequency or average severity may have a material impact on the overall year end result reported. We therefore consider that this account balance contains potential fraud risks.
Specifically, our significant areas of focus are management’s assumptions underpinning the modelled frequency and severity of large bodily injury claims arising in the UK Car Insurance business. These particular claims result in higher individual claims reserves and are more judgemental, in terms of the development of the ultimate losses, due to the longer-term nature of the group’s exposure (compared to property damage claims).
Refer to page 54 in the audit committee report where this is included as a significant issue and note 5d and note 3 in the financial statements which refer to this matter.
We have assessed the design and implementation and tested the operating effectiveness of key controls relating to the key actuarial assumptions identified above and the setting of the reserve margin. This included testing controls concerning management and Audit Committee challenge of the external actuarial expert’s work and the appropriate governance oversight in respect of the key assumptions and margins determined.
We challenged management's qualitative and quantitative justifications for the margin held over the actuarial best estimate through review of the accounting judgement papers produced, including involvement of Deloitte actuarial experts. Further, we analysed its consistency with previous reporting periods and challenged management's justification for the booked margin in relation to the uncertainty in the ultimate claims reserves.
The risk is particularly acute where there have been changes to the terms of the profit commission arrangements or other one-off adjustments which therefore mean that the calculation to be performed is not uniform across all underwriting years – i.e. where the same underwriting result within two different periods could give rise to different levels of profit commissions for each because of variances in the applicable contracted terms. The accuracy of the calculation in respect of these changes is the specific risk area which we determined represents a significant risk of misstatement.
Refer to page 54 in the audit committee report where this is included as a significant issue, and note 5c and note 3 in the financial statements which refer to this matter.
We consider profit before tax to be the critical benchmark of the performance of the group and consider this benchmark to be suitable having compared to other benchmarks: our materiality equates to 1% of gross earned premium and 2% of equity (2016: 1% of gross earned premium and 2% of equity).
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1m (2016: £700k) for the group and £189k (2016: £155k) for the parent company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Inspop USA LLC was included in the scope of our specified audit procedures in 2016 but not for the 2017 audit, as we determined that the subsidiary no longer presents any specific audit risks to the group financial statements. Conversely, the Spanish branch of Admiral Insurance Company Limited was brought into the scope of these specified procedures for the first time in 2017, due to the specific audit risks which the branch presents to the underwriting subsidiary. This change in scope also reflects the growing contribution of the group’s insurance activities in Spain.
We engaged local component auditors, being Deloitte member firms in the USA, Italy and Spain, to perform the audit work and specified audit procedures in these respective territories on our behalf. We directed and supervised the work of the component auditors, including through visits to the components and component auditors in Rome, Seville and Richmond and remote communication and review of their work.
Full audit scope 83% Full audit scope 89% Full audit scope 88% Specified audit procedures 9% Specified audit procedures 4% Specified audit procedures 4% Review at group level 8% Review at group level 7% Review at group level 8%
Profit before tax coverage is stated in absolute terms – i.e. based on contribution to group profit less group loss 91Admiral Group plc · Annual Report and Accounts 2017
Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
Insurance claims and claims handling expenses recoverable from reinsurers 961.7 709.2
Operating expenses and share scheme charges recoverable from co- and reinsurers 8 386.6 316.4
Dividends declared and paid (per share) 11 107.5p 126.3p 94 Admiral Group plc · Annual Report and Accounts 2017
Deferred tax charge in relation to movement in fair value reserve (4.1) (0.5)
Other comprehensive income for the period, net of income tax 0.3 51.0
Total equity attributable to equity holders of the parent 646.1 570.9
Cash flows from operating activities, before movements in investments 617.2 525.1
Cash and cash equivalents at end of period 6 326.8 326.6 97Admiral Group plc · Annual Report and Accounts 2017
Profit/(loss) for the period – – – – 222.2 222.2 (8.1) 214.1
Changes in ownership interests without a change in control – – – – – – – –
Profit/(loss) for the period – – – – 334.2 334.2 (2.6) 331.6
Movements in fair value reserve – – 12.4 – – 12.4 – 12.4
Deferred tax charge in relation to movement in fair value reserve – – (4.1) – – (4.1) – (4.1)
Total comprehensive income for the period – – 8.3 (7.7) 334.2 334.8 (2.9) 331.9
Deferred tax credit on share scheme credit – – – – 2.8 2.8 – 2.8
As at 31 December 2017, the following standards had been endorsed by the EU but are not yet effective: • IFRS 9 Financial Instruments (effective date 1 January 2018), along with Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts; • IFRS 15 Revenue from Contracts with Customers (effective date 1 January 2018); • IFRS 16 Leases (effective date 1 January 2019).
In 2014, the IASB issued the final version of IFRS 9. The standard has an effective date of 1 January 2018 although earlier application is permitted. The standard affects a number of areas within the accounts including the classification and measurement of financial instruments, and a requirement to use the expected loss impairment model.
In 2017 the Group conducted an assessment of the impact of IFRS 9 and based on current information expects no significant impact on its balance sheet and equity, with the significant classes of financial assets being accounted for using the same measurement and valuation techniques as those currently used.
– No significant adjustment to IFRS equity is expected at the transition date of 1 January 2019.
Notes to the Financial Statements continued For the year ended 31 December 2017 1. General information continued Standards yet to be endorsed by the EU
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2017 but have either yet to be endorsed by the EU, or were endorsed shortly after the year end. The following IFRSs have been issued but have not been applied by the Group in these financial statements: • IFRS 17 Insurance Contracts
• Amendments to IFRS 2 Classification and Measurement of Share-based payment transactions.
The Group is currently assessing the impact of IFRS 17 on its results and financial position, along with any impacts of the other standards and amendments which have yet to be endorsed.
The Group’s reserving policy requires management to reserve above the projected best estimate outcome, to allow for unforeseen adverse claims development. The Group’s reserving methodology which determines the basis for setting this reserve estimate has been developed and enhanced in the period in line with new information that has become available in relation to both the projected best estimate reserve and the reserve uncertainty through the Group’s development of its internal capital model.
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 2017 and comparative figures for the year ended 31 December 2016. 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 and the indirect holding in Preminen Dragon Price Comparison Limited.
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in pounds sterling, rounded to the nearest £0.1 million, which is the Group’s presentation currency.
The segment consists of the underwriting of car insurance, van insurance, household insurance and other products that supplement these insurance policies within the UK. It also includes the generation of revenue from additional products and fees from underwriting 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.
The segment consists of the underwriting of car insurance and the generation of revenue from additional products and fees from underwriting car insurance outside of the UK. It specifically covers the Group operations Admiral Seguros in Spain, ConTe in Italy, L’olivier – assurance auto in France and Elephant Auto in the US. None of these operations are reportable on an individual basis, based on the threshold requirements in IFRS 8.
The ‘Other’ segment is designed to be comprised of all other operating segments that do not meet the threshold requirements for individual reporting. It includes the Group’s commercial van insurance broker, Gladiator.
Other revenue and profit commission 316.8 16.7 143.6 10.8 (19.8) 468.1
Other segment items: – Intangible and tangible asset additions 37.3 30.5 0.9 – – 68.7 *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.
*2 Eliminations are in respect of the intra-group trading between the Group’s Price Comparison and UK and International Insurance entities.
The identifiable segment assets and liabilities at 31 December 2017 are as follows: As at 31 December 2017
The segment assets and liabilities at 31 December 2016 are as follows: As at 31 December 2016
Notes to the Financial Statements continued For the year ended 31 December 2017 5. Premium, claims and profit commissions continued 5a. Accounting policies continued
The Group has entered into certain co-insurance contracts under which insurance risks are shared on a proportional basis, with the co-insurer taking a specific percentage of premium written and being responsible for the same proportion of each claim. The co-insurer therefore takes direct insurance risk from the policyholder and is subsequently directly responsible to the claimant for its proportion of the claim. As the contractual liability is several and not joint, neither the premiums nor claims relating to the co-insurance are included in the income statement. Under the terms of these agreements the co-insurers reimburse the Group for the same proportionate share of the costs of acquiring and administering the business.
The Group assesses its reinsurance assets for impairment on a regular basis, and in detail every six months. If there is objective evidence that the asset is impaired, then the carrying value will be written down to its recoverable amount.
The Group’s primary business is the issuance of insurance contracts that transfer risk from policyholders to the Group and its co- insurance partners.
The Board of Directors is responsible for the management of insurance risk, although as mentioned in note 6, it has delegated the detailed oversight of risk management to the Group Risk Committee.
Notes to the Financial Statements continued For the year ended 31 December 2017 5. Premium, claims and profit commissions continued 5d. Reinsurance assets and insurance contract liabilities continued
Reserving risk is mitigated through a series of processes and controls. The key processes are as follows: • Regular management and internal actuarial review of individual and aggregate case claim reserves, including regular reporting of management information and exception reporting of significant movements
• Ad hoc external reviews of reserving related processes and assumptions
Admiral continues to develop and enhance its methodology in setting the margin held above actuarial best estimates. A wide range of factors inform management’s recommendation which is subject to approval from the Group’s Reserving and Audit Committees, including: • Reserve KPIs such as the level of margin as a percentage of the ultimate reserve
As at 31 December 2017, the level of reserve margin is lower than at 31 December 2016, although remains very prudent when measured against the internal reserve risk distribution and other market benchmarks. The reduction in the level of reserve margin since 2016 is partly due to the increased level of confidence over the impact of the Ogden rate change to -0.75%.
• Capability to identify and resolve underperformance promptly through changes to key performance drivers, in particular pricing.
The sensitivity of a change in this assumption by 75 basis points (both an increase and decrease) is shown in the table below. The impact is presented is the total impact of the change on the Group’s pre-tax profit on an ultimate basis. It should be noted that not all of the ultimate impact would necessarily be recognised immediately.
In addition to the sensitivity above, the following table sets out the impact on equity and post-tax profit or loss at 31 December 2017 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.
Total insurance liabilities – net 1,676.3 1,623.1 *1 Gross claims outstanding at 31 December 2017 is presented before the deduction of salvage and subrogation recoveries totalling £42.7 million (2016: £37.7m).
The maturity profile of gross insurance liabilities at the end of 2016 was as follows: < 1 year £m 1–3 years £m > 3 years £m
The following tables illustrate the development of gross and net UK Insurance and International Insurance claims incurred for the past ten financial periods, including the impact of re-estimation of claims provisions at the end of each financial year. The first table shows actual gross claims incurred and the second shows actual net claims incurred. Figures are presented on an underwriting year basis.
UK insurance gross claims incurred (179.6) (239.3) (360.3) (694.4) (789.2) (680.8) (634.5) (594.2) (858.8) (991.5)
Financial year ended 31 December 2008 £m 2009 £m 2010 £m £m 2012 £m £m £m 2015 £m £m 2017 £m
UK insurance net claims incurred (100.4) (132.4) (184.1) (323.6) (344.3) (242.3) (192.8) (160.1) (306.7) (239.2)
The following table analyses the impact of movements in prior year claims provisions on a gross and net basis. Figures are presented on an underwriting year basis.
Financial year ended 31 December 2013 £m 2014 £m 2015 £m 2016 £m 2017 £m
Unearned premium provision at end of period 718.7 (424.8) 293.9 6. Investments 6a. Accounting policies
Investment income from financial assets comprises distributions as well as net realised and unrealised gains on financial assets classified as ‘fair value through profit or loss’ (FVTPL), interest income and net realised gains from assets classified as ‘available for sale’ (AFS), and interest income on holdings in deposits and gilts.
Financial assets within the scope of IAS 39 are classified as financial assets at FVTPL, AFS assets, loans and receivables or held to maturity investments.
The Group’s investments in investment funds are designated as FVTPL at inception.
The Group assesses at each balance sheet date whether any financial assets or groups of financial assets held at fair value or amortised cost are impaired. Financial assets are impaired where there is evidence that one or more events occurring after the initial recognition of the asset, may lead to a reduction in the estimated future cash flows arising from the asset.
The Group’s financial liabilities comprise subordinated notes and other financial liabilities initially recognised at fair value received, net of transaction costs incurred.
Total investment and interest income 41.7 53.1 *1 Interest received during the year was £8.0 million (2016: £11.6 million)
Total finance costs 11.4 11.4 *1 Interest paid during the year was £11.1million (2016: £11.3 million)
Notes to the Financial Statements continued For the year ended 31 December 2017 6. Investments continued 6d. Financial assets and liabilities
The fair value of subordinated notes (level one valuation) at 31 December 2017 is £229.2 million (2016: £212.9 million).
The maturity profile of financial assets and liabilities at 31 December 2017 is as follows: On demand £m
The maturity profile of financial assets and liabilities at 31 December 2016 was as follows: On demand £m
There are several key elements to the risk management environment throughout the Group. These are detailed in full in the Corporate Governance Statement. Specific considerations for the risks arising from financial assets and liabilities are detailed below.
The Directors consider counterparty exposure frequently and in significant detail. The Directors consider that the policies and procedures in place to manage credit exposure continue to be appropriate for the Group’s risk appetite and, during 2017 and historically, no material credit losses have been experienced by the Group.
The Group’s maximum exposure to credit risk at 31 December 2017 is £3,723.8 million (2016: £3,263.0 million), being the carrying value of financial investments and cash, and the excess of reinsurance assets over amounts owed to reinsurers under funds withheld arrangements. The Group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2017 and 2016 is insignificant. £1.0m was charged to the income statement in respect of loans and advances to customers.
• Deposits with well rated institutions are short in duration (one to five years). These are classified as loans and receivables and valued at amortised cost. Therefore neither the carrying value of the asset, nor the interest return will be impacted by fluctuations in interest rates.
• UK Government gilts. These are classified as available for sale due to a sale of a portion of the assets in 2017.
Notes to the Financial Statements continued For the year ended 31 December 2017 6. Investments continued 6d. Financial assets and liabilities continued
A breakdown of the Group’s other financial liabilities, trade payables and other payables is shown in note 10.
In practice, the Group’s Directors expect actual cash flows to be consistent with this maturity profile except for amounts owed to co-insurers and reinsurers. Of the total amounts owed to co-insurers and reinsurers of £1,157.5 million (2016: £938.0 million), £938.4 million (2016: £610.1 million) is held under funds withheld arrangements and therefore not expected to be settled within 12 months.
The Group is exposed to foreign exchange risk through its operations overseas. Although the relative size of the international operations means that the risks are relatively small, increasingly volatile foreign exchange rates could result in larger potential gains or losses. Assets held to fund insurance liabilities are held in the currency of the liabilities; however, surplus assets held as regulatory capital in foreign currencies remain exposed.
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 and AFS their value equates to level one (quoted prices in active markets) of the fair value hierarchy.
For subordinated notes, the fair value is calculated with reference to the quoted market valuation. This is compared to carrying value earlier in this note.
Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term term deposits with original maturities of three months or less.
Contribution from additional products and fees and other revenue includes revenue earned on the sale of products supplementing the core motor, van and household insurance policies, 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.
7b. Contribution from additional products and fees and other revenue £m £m
Total expenses and share scheme charges 648.8 (316.4) 332.4 *1 Acquisition of insurance contracts expense excludes £19.8 million (2016: £20.8 million) of aggregator fees from other Group companies.
Auditor’s remuneration (including VAT): – Fees payable for the audit of the Company’s annual accounts – –
– Fees payable for audit related assurance services pursuant to legislation or regulation 0.2 – 0.2 0.1 £nil (2016: £nil) was payable to the auditor for other services in the year.
Notes to the Financial Statements continued For the year ended 31 December 2017 8. Expenses continued 8e. Directors’ remuneration
Analysis of share scheme costs (per the Consolidated Income Statement): SIP charge (i) 6.7 9.9
The share scheme charges reported above are net of the co- and reinsurers share of the cost and therefore differ from the gross charge reported in note 8c (2017: £54.4 million; 2016: £50.3 million) and the gross credit to reserves reported in the Consolidated statement of changes in equity (2017: £37.9 million; 2016: £33.2 million).
The Consolidated cash flow statement also shows the gross charge in the reconciliation between ‘profit after tax’ and ‘cash flows from operating activities’. The co-insurance share of the charge is included in the change in trade and other payables line.
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 2017 scheme is 3,205,433 (2016 scheme: 3,247,136).
The amount of 2017 award that actually vests is based on the growth in the Company’s earnings per share (EPS) relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This performance is measured over the three year period the award applies to. For the 2017 scheme, 50% of the shares awarded at the start of the three year vesting period are subject to these performance conditions.
Total awards committed 12,658,883 *1 Being the maximum number of awards expected to vest before accounting for expected staff attrition.
During the year ended 31 December 2017, awards under the SIP H213 and H114 schemes and the DFSS 2014 scheme vested. The total number of awards vesting for each scheme is as follows.
Number of free share awards vesting during the year ended 31 December 2017
The weighted average market share price at the date of exercise for shares exercised during the year was £18.51 (2016: £20.09).
Notes to the Financial Statements continued For the year ended 31 December 2017 9. Taxation 9a. Accounting policy
Factors affecting the total tax charge are: Profit before tax 403.5 278.4
Corporation tax thereon at effective UK corporation tax rate of 19.25% (2016: 20.00%) 77.7 55.7
Impact of change in UK tax rate on deferred tax balances 0.3 –
Total tax charge for the period as above 71.9 64.3 128 Admiral Group plc · Annual Report and Accounts 2017
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
Balance carried forward at 31 December 2016 5.7 (2.4) 4.9 (0.5) 0.7 8.4
The deferred tax asset relating to carried forward losses of £13.9 million relates to losses incurred in the Group’s US price comparison business Compare.com, and is calculated at the local US rate of tax of 21% (2016: 35%). The recognised asset has been limited to the amount supported by forecast cash flows over the next five years. The forecasts and underlying assumptions have been reviewed and approved by the Board. In addition, the forecasts have been stressed for both revenue and profit reductions and the asset remains recoverable under the stressed scenarios.
At 31 December 2017 the Group had unused tax losses amounting to £166.1 million (2016: £142.7 million), relating to the Group’s US businesses Elephant Auto and Compare.com, for which no deferred tax asset has been recognised.
Notes to the Financial Statements continued For the year ended 31 December 2017 10. Other assets and other liabilities 10a. Accounting policy
The rental costs relating to assets held under operating leases are charged to the income statement on a straight line basis over the life of the lease.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGUs) according to business segment and is reviewed annually for impairment.
The goodwill held on the balance sheet at 31 December 2017 is allocated solely to the UK Car Insurance segment.
The annual impairment review involves comparing the carrying amount to the estimated recoverable amount (by allocating the goodwill to CGUs) and recognising an impairment loss if the recoverable amount is lower. Impairment losses are recognised through the income statement and are not subsequently reversed.
The headroom above the goodwill carrying value is very significant, and there is no foreseeable event that would eliminate this margin.
Purchased software is recognised as an intangible asset and amortised over its expected useful life (generally the licence term). Internally generated software is recognised as an intangible asset, with directly attributable costs incurred in the development stage capitalised. The internally generated software assets are amortised over the expected useful life of the systems and amortisation commences when the software is available for use.
Foreign exchange movement – (0.4) 0.7 0.3 *1 Software additions include £6.1 million relating to internal development (2016: £21.1 million)
Total insurance and other receivables 939.7 782.6 *1 Insurance receivables at 31 December 2017 includes £42.7 million in respect of salvage and subrogation recoveries (2016: £37.7 million).
Notes to the Financial Statements continued For the year ended 31 December 2017 10. Other assets and other liabilities continued 10f. Trade and other payables £m
Of amounts owed to co-insurers and reinsurers, £938.4million (2016: £610.1 million) is held under funds withheld arrangements.
Analysis of finance lease liabilities: At 31 December 2017 At 31 December 2016
March 2016 (63.4 pence per share, paid June 2016) – 175.4
The dividends declared in March represent the final dividends paid in respect of the 2015 and 2016 financial years. The dividends declared in August are interim distributions in respect of 2016 and 2017.
A final dividend of 58.0 pence per share (£163million) has been proposed in respect of the 2017 financial year. Refer to the Chairman’s Statement and Strategic Report for further detail.
2,050,000 (2016: 2,000,000) shares were issued to the Admiral Group Employee Benefit Trust for the purposes of the Discretionary Free Share Scheme to give a closing number at 31 December 2017 of 18,861,948 (31 December 2016: 16,811,948). The Trustees have waived the right to dividend payments, other than to the extent of 0.001 pence per share, unless and to the extent otherwise directed by the Company from time to time.
The Group manages its capital to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities meet regulatory requirements with an appropriate margin. Excess capital above these levels within subsidiaries is paid up to the Group holding company in the form of dividends on a regular basis.
The Parent Company’s subsidiaries are as follows: Subsidiary Class of shares held % Ownership Principal activity
Inspop Technologies Private Limited Ordinary 100 Internet technology supplier * Exempt from audit under S479A of Companies Act 2006 137Admiral Group plc · Annual Report and Accounts 2017
Notes to the Financial Statements continued 11. Share capital continued 11f. Group related undertakings continued
Preminen Online Fiyat Karşılaştırma Hizmetleri Anonim Şirketi Ordinary 50 (indirect) Insurance intermediary
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 on pages 62 to 81.
12a. Reconciliation of turnover to reported gross premiums written and other revenue as per the financial statements £m
*2 Other reconciling items represent co-insurer and reinsurer shares of other revenue in the Group's Insurance business outside of UK Car Insurance.
*3 Intra-group income elimination relates to price comparison income earned in the Group from other Group companies.
Reported profit before tax per the Consolidated income statement 403.5 278.4
Deferred tax in relation to movement in fair value reserve (4.2) –
Other comprehensive income for the period, net of income tax 18.1 –
Parent Company Financial Statements 141Admiral Group plc · Annual Report and Accounts 2017
These financial statements were approved by the Board of Directors on 27 February 2018 and were signed on its behalf by: Geraint Jones
Company Number: 03849958 142 Admiral Group plc · Annual Report and Accounts 2017
Total comprehensive income for the period – – – 150.1 150.1
Deferred tax on share scheme credit – – – 0.1 0.1
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). The amendments to FRS 101 (2015/16 Cycle) issued in June 2016 and effective immediately have been applied. The financial statements are prepared on the historical cost basis except for the revaluation of financial assets classified as fair value through the profit or loss.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.
• FRS 101.8 (e): the disclosure requirements of IFRS13 Fair Value Measurement
• FRS 101.8 (f): the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of: - paragraph 118(3) of IAS 38 Intangible Assets
• FRS 101.8 (k): the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to transaction is wholly owned by such a member
The financial statements have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board have reviewed the Company's projections for the next twelve months and beyond, including cash flow forecasts and regulatory capital surpluses.
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).
Shares in Group undertakings are valued at cost less any provision for impairment in value.
All material investments held at fair value at the end of the period are invested in AAA-rated money market liquidity funds. The measurement of these investments is based on active quoted market values (level 1).
Total investment and interest income 310.5 164.4 145Admiral Group plc · Annual Report and Accounts 2017
A full list of the Company’s subsidiaries is disclosed in note 11 of the consolidated financial statements.
All investments in group undertakings are considered level 3 in the fair value hierarchy of IFRS 13.
The cash flows supporting the value in use are based on financial forecasts prepared for a 10 year period, this being justified by the historical accuracy of the forecasting process along with the strategy of long-term profitable growth. Beyond the 10 year forecast period, a long-term growth rate of 2.5% has been used.
The key assumptions used in the underlying forecasts are those regarding acquisition and retention rates of customers, ancillary sales, loss and expense ratios. The estimates are based on past practice and the experience of management, the long-term strategy as approved by the Board and reflect expected future changes in the market.
Notes to the Parent Company Financial Statements continued 146 Admiral Group plc · Annual Report and Accounts 2017
The amortised cost carrying amount of deposits and receivables is a reasonable approximation of fair value. The fair value of subordinated notes (level one valuation) together with their carrying value shown in the Statement of Financial Position as follows: Carrying amount £m
Interest payable of £11.3 million (2016: £11.4 million) was recognised in relation to the subordinated loan notes.
Factors affecting the total tax credit are: Profit before tax 265.8 148.1
Tax treatment of share scheme charges through reserves – – – – –
Movement in fair value reserve – – – 4.2 – 4.2
The UK corporation tax rate reduced from 20% to 19% on 1 April 2017. The average effective rate of tax for 2017 is 19.25% (2016: 20.00%). A further reduction to the main rate of corporation tax to 17% (effective from 1 April 2020) was enacted on 15 September 2016. This will reduce the Company’s future current tax charge accordingly.
Issued, called up and fully paid 287,214,262 ordinary shares of 0.1 pence 0.3 –
284,352,270 ordinary shares of 0.1 pence – 0.3 149Admiral Group plc · Annual Report and Accounts 2017
Dividends were declared and paid as follows: March 2016 (63.4 pence per share, paid June 2016) – 175.4
August 2017 (56.0 pence per share, paid October 2017) 156.6 –
A final dividend of 58.0 pence per share (£163 million) has been proposed in respect of the 2017 financial year. Refer to the Chairman’s Statement and Strategic Report for further detail.
9. Continued application of Financial Reporting Standard (FRS) 101 – Reduced Disclosure Framework Following the first time application of FRS 101 Reduced Disclosure Framework in 2015, the Board considers that it is in the best interests of the Group for Admiral Group plc to continue to apply the FRS 101 Reduced Disclosure Framework in future periods. A shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in Admiral Group plc may serve objections to the use of the disclosure exemptions on Admiral Group plc, in writing, to its registered office (Tŷ Admiral, David Street, Cardiff CF10 2EH) no later than 30 June 2018.
Notes to the Parent Company Financial Statements continued 150 Admiral Group plc · Annual Report and Accounts 2017
Consolidated financial summary 151Admiral Group plc · Annual Report and Accounts 2017
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 co-insurance 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.
This measure has been presented by the Group in every Annual Report since it became a listed Group in 2004. It reflects the total premiums written by the Group’s insurance intermediaries and analysis of this measure over time provides a clear indication of the growth in premiums, irrespective of how co-insurance agreements have changed over time.
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 estimated profit before tax before the impact of the reduction in the UK Ogden discount rate confirmed by the Lord Chancellor in February 2017.
UK reported motor loss ratio: Within the UK insurance segment the Group separately presents motor ratios, i.e. excluding the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) exclude the impact of reserve releases on commuted reinsurance contracts and ii) exclude claims handling costs that are reported within claims costs in the income statement.
Group loss ratios: Group loss ratios are reported on a consistent basis as the UK and international ratios noted above. Adjustments are made to i) exclude the impact of reserve releases on commuted reinsurance contracts, ii) exclude claims handling costs that are reported within claims costs in the income statement and iii) exclude the claims element of the impact of international reinsurer caps.
UK reported motor expense ratio: Within the UK insurance segment the Group separately presents motor ratios, i.e. excluding the underwriting of other products that supplement the car insurance policy. The motor ratio is adjusted to i) 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 Customers Group customer numbers are the total number of cars, households and vans on cover at the end of the year, across the Group.
Additional terminology There are many other terms used in this report that are specific to the Group or the markets in which it operates. These are defined as follows: Accident year The year in which an accident occurs, also referred to as the earned basis.
Net claims The cost of claims incurred in the period, less any claims costs recovered under reinsurance contracts. It includes both claims payments and movements in claims reserves.
Ultimate loss ratio A projected actuarial best estimate loss ratio for a particular accident year or underwriting year
• Earnings per share (Post Ogden) of 78.7 pence (2015: 107.3 pence)
• Final dividend of 51.5 pence per share, bringing full year dividend to 114.4 pence per share (2015: 114.4 pence)
• Group’s share of price comparison profit before tax of £2.7 million (2015: loss of £7.2 million)
Financial calendar Final 2016 dividend 10 May 2018 – Ex dividend date 11 May 2018 – Record date 1 June 2018 – Payment date
The interim results will be available on the corporate website from 15 August 2018.
Short-term Insurance Veygo www.veygo.com 157Admiral Group plc · Annual Report and Accounts 2017