Effective solutions 12 Admiral Group plc · Annual Report and Accounts 2016
UK Household customers consecutive years Best Companies to Work For Awards
Finally, Admiral’s Price Comparison businesses made a combined profit, again excluding minority interests’ shares, of £2.7 million (2015: loss £7.2 million). Confused. com in the UK grew revenue and saw a 29% increase in profit to £16.1 million from £12.5 million. The international price comparison businesses reported a reduced aggregate loss of £13.4 million (2015: loss £19.7 million) with growing profit in the European operations (£2.8 million, up from £1.8 million) offset by the loss in compare.com of £16.2 million (2015: loss £21.5 million).
The main focus of the Group’s strategy is capital preservation, with additional priorities including low volatility of returns and high levels of liquidity. All objectives continue to be met.
Eligible Own Funds (pre 2016 final dividend) 1.07 2016 final dividend 0.14
Profit was lower in 2016 at £338.5 million (2015: £444.2 million) due to the impact of the change in the Ogden discount rate which is discussed above. If the rate had remained unchanged, UK Insurance profit would have been £444 million.
UK Car Insurance profit before tax 398.0 443.0 335.8 *1 Alternative performance measures – refer to the Glossary on page 141 for definition and explanation.
The reported motor combined ratio was 90.8% (2015: 81.0%) (both figures exclude the impact of reserve releases from commuted reinsurance contracts) and was materially impacted by the change in Ogden discount rate and the resulting increase in ultimate loss ratios. Despite the Ogden impact, the Group continued to see positive claims development during 2016 that resulted in improvements in the projected ultimate loss ratios, especially for the 2012 to 2015 underwriting years.
Contribution from Other Revenue (net of costs) increased by 9% to £189.5 million (2015: £174.6 million). Whilst there were a number of smaller offsetting changes within the total, the main reason for the increase is the growth in the portfolio in the year.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 27Admiral Group plc · Annual Report and Accounts 2016
After achieving breakeven on an underwriting year basis in 2015, our focus in Spain in 2016 has been on sustainable growth. We increased customer numbers by 18% with pleasing technical results.
The back years continue to develop well and the latest actuarial projections indicate that 2011 was profitable on an underwriting basis as is already the case for 2012, 2013 and 2014.
The US car insurance market grew again in 2016. Definitive numbers are not yet available, but general consensus is that premium increases are outrunning claims inflation following last year’s deterioration in the industry loss ratio.
“I can honestly say that the chap I spoke to today on the phone was the politest, most helpful, non-robotic in conversation individual I have Come across from any car insurance provider I have ever had. To build a great company you need great employees and in my opinion Admiral have one in him. Thank you.” UK Renewals
While there are some differences among the 51 distinct auto insurance markets, an overall steady economy with sustained low gas prices has led to an increase in miles driven among US consumers. In 2016, that led to higher frequency for many of our insurance partners and they took action with higher rates for consumers. This was both an opportunity as rate increases drive more consumers to shop and a challenge for us as carriers shrink risk appetite and convert at lower levels. We continued optimizing both our national and state-bystate advertising investments in light of the market conditions and our product offering to take advantage of this swing in the auto insurance pricing cycle.
UK Price Comparison – Confused.com The UK price comparison market remained very competitive in 2016, but favourable market conditions (rising prices and more shopping activity) saw more visitors to Confused.com’s website and consequently higher quote volumes. Despite this competitive environment, Confused.com achieved a strong result, with revenue 14% higher than 2015 at £85.7 million (2015: £75.4 million) from growth of 8% in the UK price comparison market as well as a new drivercentric strategy supported by new marketing. Profit increased by 29% to £16.1 million (2015: £12.5 million).
The combined revenue from the European operations in 2016 increased to £36.2 million (2015: £28.6 million), reflecting nearly 10% more quotes provided to customers and improved conversion rates. Both Rastreator and LeLynx have strong brand recognition in their respective markets. The Group’s share of the combined result for Rastreator and LeLynx was a profit of £2.8 million (2015: £1.8 million), the increase reflecting strong performance from Rastreator which continues to build on its multi-product strategy covering insurance, telephony and utilities, amongst other product lines, and which doubled its profits in 2016, offset by marketing investment in LeLynx. Statutory profit before tax increased to £3.9 million (2015: £2.3 million).
At the current time the Group does not foresee a material adverse impact on day to day operations (including customers or staff), whilst recognising that other issues may emerge over time.
Admiral continuously assesses the value to its customer of the products it offers, and makes changes to ensure the products continue to meet customer needs and offer good value.
Market risk arises as a result of fluctuations in the value of market prices of investment assets, liabilities, or the income from our investment portfolio.
*1 Owen Clarke joined the Audit Committee with effect from 1 January 2016 and the Remuneration Committee with effect from 28 April 2016.
Membership at 31 December 2016 ••Alastair Lyons (Chair) ••Colin Holmes ••Penny James*2
In the context of the Board changes that occurred during the year and in order to ensure that the Board continued to represent the right mix of skills, experience and background, the Nomination Committee reviewed the balance and composition of the Board. Following this review, we were pleased to welcome Justine Roberts who joined the Board in June. Justine is CEO and co-founder of internet company, Mumsnet.com, which has grown into the UK’s biggest online network for parents. Justine has been responsible for the creation, strategic direction and overall management of Mumsnet, building it into one of the most recognisable internet brands in the UK. She brings a wealth of experience interacting with consumers across social media. Such experience will be invaluable as the Group seeks to grow its digital channels in the coming years.
Governance Report 48 Admiral Group plc · Annual Report and Accounts 2016
Manning Rountree 7 6 *1 Henry Engelhardt stepped down from the Board with effect from 12 May 2016.
The Board currently comprises 10 Directors, the Chairman (who was independent on appointment), two Executive Directors, and seven independent Non-Executive Directors. As can be seen from the Directors’ biographies on pages 46 to 47, the Directors have a broad range of skills and experience and can bring independent judgement to bear on issues of strategy, performance, risk management, resources and standards of conduct which are integral to the success of the Group.
“ The impact of a change to the Ogden Discount Rate on outstanding claims was also carefully considered, with the Committee supporting management’s view that claims reserves remain prudent and appropriate at the raised rate of minus 0.75%”
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
Summary of key activities in 2016 During the year the Committee: Reviewed the Group’s updated risk strategy, risk appetite and associated triggers and limits in the context of the Group’s agreed strategic objectives
Reviewed the Undertaking Specific Parameters and Volatility Adjustment applications submitted to the regulators
The Chairman succession process was led by Penny James. Where preparatory research was required ahead of meetings of the Selection Board Penny was assisted by Executive Director Geraint Jones to ensure that there was a balance of Non-Executive and Executive input. The principal aspects against which potential candidates would be assessed for suitability were agreed based on discussions held jointly by Penny and Geraint with the Selection Board and Board attendees, as well as with others who would have insightful perspectives as to what competencies, experience, and personal characteristics the next 62 Admiral Group plc · Annual Report and Accounts 2016
At the Board meeting in January 2017, Penny recommended on behalf of the Selection Board that the Board approve the appointment of Annette Court, as Chairman of the Board, subject to regulatory approval. Throughout the process it was agreed that Annette had demonstrated good strategic alignment with the Executive and the Board, breadth of experience across different organisations and boards, varied board experience including experience of chairing boards and board committees, experience of working with complex, multi-line and international companies, deep knowledge of the insurance sector, and clarity of the direction of the Board itself.
Notes to the remuneration policy table Payments from existing awards Executive Directors are eligible to receive payment from any award made prior to the approval and implementation of the Remuneration Policy. This includes all outstanding awards under the DFSS, made prior to the approval of the 2015 DFSS, and awards of DFSS shares that vest 50% on performance and 50% on continued employment made to the CFO prior to his appointment to the Board.
Summary of shareholder voting at the 2016 AGM The table below shows the result of the advisory vote on the 2015 Annual Report on Remuneration at the 2016 AGM.
CEO single figure of remuneration £328,027 £343,106 £358,199 £373,759 £387,546 £393,260 £397,688 £148,775 £246,023
Dilution The Company currently uses newly issued shares to fund the DFSS. The Company has controls in place to ensure that shares awarded under the incentive schemes operated by the Company within any rolling ten-year period do not exceed 10% of the number of ordinary shares in the capital of the Company in issue at the time of each award. As at the end of 2016, the ten-year rolling dilution level was 8.0%. The Company would consider using a mixture of newly issued shares and market purchase shares to fund the DFSS in the future.
The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2016.
The Directors have proposed a final dividend of £144 million (51.5 pence per share) payable on 2 June 2017.
There are no restrictions on the transfer of ordinary shares in the company other than: • Certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws).
The financial statements that we have audited 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
Following the conclusion of the government’s consultation on the Ogden discount rate used by courts to calculate the value of lump sum claims to be paid for long-term damages, management needed also to consider the interaction of this change with the assumed propensity of PPO settlements. The timing of the announced rate change from 2.5% to minus 0.75%, on 27 February 2017, meant that there was a high degree of uncertainty associated with projecting the ultimate impact of this change; given that no subsequent experience has yet emerged.
In our opinion, based on the work undertaken in the course of the audit: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or
Consolidated cash flow statement For the year ended 31 December 2016
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 2016 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 16 Leases; • IFRS 14 Regulatory Deferral Accounts; • Amendments to IFRS 2, 4, 10 and 12 and IAS 7, 12, and 40; • Annual improvements to IFRS standard 2014-2016 cycle; • IFRIC interpretation 22.
Financial year ended 31 December £m £m 2014 £m 2015 £m 2016 £m
Finance costs represent interest payable on the £200 million subordinated notes and other financial liabilities.
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 109Admiral Group plc · Annual Report and Accounts 2016
Notes to the Financial Statements continued For the year ended 31 December 2016 6. Investments continued 6d. Financial assets and liabilities The Group’s financial instruments can be analysed as follows: Investments held at fair value through profit or loss
The deposits are held with well rated institutions; as such the approximate fair value is the book value of the investment as impairment of the capital is not expected. There is no quoted market for these holdings and as such a level two valuation is used. The book value of term deposits is £170.0 million (2015: £267.6 million).
The Group’s maximum exposure to credit risk at 31 December 2016 is £3,263.0 million (2015: £2,913.3 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 2016 and 2015 is insignificant.
Refer to the Corporate Governance Report for details of the Audit Committee’s policy on fees paid to the Company’s auditor for non-audit services. The ratio of non-audit fees to audit fees in 2016 was 82% (2015: 88%).
Financial Statements Additional InformationCorporate GovernanceStrategic Report Introduction 123Admiral Group plc · Annual Report and Accounts 2016
Goodwill relates to the acquisition of Group subsidiary EUI Limited (formerly Admiral Insurance Services Limited) in November 1999. It is allocated solely to the UK Insurance segment. As described in the accounting policies, the amortisation of this asset ceased on transition to IFRS on 1 January 2004. All annual impairment reviews since the transition date have indicated that the estimated recoverable value of the asset is greater than the carrying amount and therefore no impairment losses have been recognised. Refer to the accounting policy for goodwill for further information.
Financial Statements: Notes to the Financial Statements 130 Admiral Group plc · Annual Report and Accounts 2016
3. Financial assets and liabilities The Company’s financial instruments can be analysed as follows: Investments held at fair value through profit or loss
Profit commission A clause found in some reinsurance and coinsurance agreements that provides for profit sharing.