TIDMADM
8 March 2017
Admiral Group plc announces another year of strong growth and profit
before tax of GBP284 million for the year to 31 December 2016
2016 Preliminary Results Highlights
2016 2015 % change
Group's share of profit
before tax - pre
Ogden(*1) GBP389.7 million GBP376.8 million +3%
Group's share of profit
before tax - post
Ogden(*1) GBP284.3 million GBP376.8 million -25%
Group statutory profit
before tax GBP278.4 million GBP368.7 million -24%
Earnings per share -
pre Ogden 109.6 pence 107.3 pence +2%
Earnings per share -
post Ogden 78.7 pence 107.3 pence -27%
Full year dividend 114.4 pence 114.4 pence 0%
Return on equity(*1) 37% 49% -24%
Group turnover(*1) GBP2.58 billion GBP2.12 billion +22%
Group net revenue GBP1.02 billion GBP0.90 billion +13%
Group customers(*1) 5.15 million 4.43 million +16%
UK insurance
customers(*1) 4.12 million 3.61 million +14%
International car
insurance
customers(*1) 864,200 673,000 +28%
Group's share of price
comparison profit(*1) GBP2.7 million profit GBP7.2 million loss
Statutory price
comparison result GBP2.9 million loss GBP15.5 million loss
Solvency ratio (post
dividend)(*2) 212% 206% +3%
Almost 9,000 staff each receive free shares worth a total of GBP3,600
under the employee share scheme based on the full year 2016 results
(*1) Alternative Performance Measures - refer to the end of the report
for definition and explanation.
(*2) Refer to capital structure and financial position section later in
the report for further information.
Comment from David Stevens, Group Chief Executive Officer
"My first full year as CEO, and after 25 years of almost uninterrupted
profit growth under my predecessor, profits are down a quarter! Not
exactly a flying start!
On the other hand our ability to grow our businesses rapidly, both in
the UK and overseas, and to absorb the shock of an eccentric government
decision on discount rates while delivering a 37% return on equity and
again paying a substantial dividend is a tribute to the health of the
business and resilience of our model.
I am also delighted that for a record 17(th) year in a row, Admiral
Group has continued its success in the Sunday Times Best Companies to
Work For, placing 2(nd) , our joint highest position ever."
Dividend
The Directors have proposed a final dividend of 51.5 pence, representing
a normal dividend of 15.0 pence per share and a special dividend of 36.5
pence per share. The dividend will be paid on 2 June 2017. The
ex-dividend date is 11 May 2017 and the record date is 12 May 2017.
Management presentation
Analysts and investors will be able to access the Admiral Group
management presentation which commences at 8.00 GMT on Wednesday 8 March
2017 by dialling + 44 (0)20 3059 8125. A copy of the presentation
slides will be available at www.admiralgroup.co.uk
Chairman's Statement
Succession
As announced recently this will be my last statement as Chairman as I
shall be retiring at the forthcoming AGM. Given Admiral's distinctive
culture which underpins the success the business has achieved I have
considered it my responsibility to ensure the Board should have a choice
of strong internal candidates as my successor. I am very grateful to
Penny James for leading the selection process which confirmed that the
Board already had within its ranks individuals with the skills and
experience to lead the Board through the challenges of the next five to
ten years. I am delighted that as the outcome to that process the Board
has selected Annette Court as my successor and I wish her every success.
If I may be excused a little nostalgia, when I became Chairman in June
2000 Admiral provided private car insurance in the UK to 512k customers
with a 3% market share and employed 1,270 people just in Cardiff and
Swansea. Turnover and profitability in 2000 were GBP262 million and
GBP24 million respectively. We now have 5.2 million customers across 5
countries and employ almost 9,000 people across 16 sites and 8
countries. 2016 turnover and profits achieved GBP2.6 billion and GBP284
million, or GBP390 million if we back out the impact of the Ogden rate
change - that's almost a 10-fold increase in turnover and a 16-fold
increase in profitability in 16 years. We are valued at over GBP5
billion and are ranked 84 in the FTSE. We have 5 motor insurance
businesses; 4 price comparison businesses; a household insurance
business; 2 legal businesses; a start-up loans business and not to
mention a price comparison incubator.
The essence of Admiral
On the one hand Admiral has changed enormously, on the other not very
much at all. Fundamental to our success remains our culture - Admiral is
different in the way in which we engage and lead our people: in
demonstrating in so many practical ways that everyone matters regardless
of their role: in how we motivate their aiming for continuous
improvement in everything they do: in our use of teamwork and our
openness to share and support others to do a great job, whether or not
they are in the same department, business, or even country: in our use
of wide share ownership, both actual and potential, as a driver of
common purpose. To maintain a culture requires it to be continually
reinforced - to be lived by our leaders in the way in which they
interact with those they lead: to be trained into our people as part of
our development plans: to be the basis on which we select those who
should be promoted to greater responsibility. I consider one of our
management's greatest achievements to be that as we have broadened our
base, both geographically and by business-line, we have been able to
establish that culture in these new businesses. Whichever of Admiral's
offices I visit, from Seville to Swansea, I know I am in Admiral because
of the way in which our people interact with our customers and with each
other; their quest to identify the small changes in what we do and how
we do it that, taken together, create a big competitive difference; and
their openness to discuss problems and willingness to embrace the
thoughts of others.
Test and learn has always been core to Admiral's culture. Rather than
spending a lot of time analysing an opportunity from every perspective
and then committing a large investment we would rather make a small
investment of time and/or money quickly and learn by doing. Partnering
test and learn is the willingness to acknowledge openly when something
hasn't worked and either change or move on recognising these as
opportunities to improve rather than mistakes for which blame should be
attributed. This approach of test and learn is central to our assessing
which we will pursue seriously amongst the other business lines that
could complement our core strengths in car insurance, either because our
customers would view the new products as relevant to their existing
relationship with Admiral or because the new line of business uses
experience and skills that we have developed for car insurance. Our
current piloting of personal loans is a case in point here, whilst our
UK household insurance portfolio of 470,000 policies and already
profitable 3 years after launch is a great example of a line of business
that has passed successfully from pilot into full production.
Whilst we devote time and resource to exploring new opportunities
outside of car insurance we also recognise fully that this remains our
core focus with significant potential for growth beyond our current 13%
market share as and when it is the right point in the cycle to grow. So
the capability required to develop our business must be, and is,
incremental to, rather than dilutive of, our core. We continue to invest
as much thought and resource as we ever have in improving the
effectiveness of our motor insurance proposition, whether it be in
pricing analytics, claims management, or customer self-service. However
we also recognise that if we are to develop successfully new lines of
business such as personal loans we need to add new skills and experience
to our existing management whilst at the same time assimilating this new
talent within our distinctive culture.
We are also strong believers in the potential of partnership to combine
the skills, experience and resources of others with those that Admiral
has developed and to share both risk and reward when entering new
markets, particularly those that require material levels of investment.
Our long-term partnership with Munich Re has lasted for 17 years and is
committed through to at least 2020 in the UK: we are partnering with
Mapfre in Spanish and US price comparison and in Preminen, our price
comparison incubator: White Mountains, the US insurance venture capital
specialist, is also invested alongside Admiral in compare.com which has
made strong progress again this year, increasing the number of insurer
partners and, therefore, the number of quotes returned to customers,
driving down cost per sale, and raising its penetration of its target
markets. But changing the pattern of distribution in US auto insurance
is a big nut to crack and we may take others into partnership along this
journey.
2016 in overview
This year's performance is testament to our focussing successfully on
our core UK motor business, our book growing by 11% to 3.6 million cars,
a 13% market share whilst UK motor generated profits of GBP441 million
(before the impact of the Ogden rate change), maintaining last year's
level. The UK motor profit after the impact of the Ogden change is
GBP336m. We have continued to take advantage of firm market conditions
to move prices ahead a little more slowly than the average of the market
allowing us to grow our book whilst returning a good underwriting result
for Admiral and its reinsurance partners. Effective pricing supported by
data analysis and predictive modelling, and really insightful claims
management underpin our success and we are always looking for new ways
to make risk analysis more reflective of the characteristics of the
individual driver. In this vein we believe we are now the largest
deployer of telematics in the UK.
2016 was broadly a year of growth across our insurance businesses
outside the UK, taking advantage of the sound platforms that have now
been created in Italy, the US, and Spain and the move in France last
year to in-source all our operations as the precursor of growth. In the
US we had 20% more customers at the end of 2016 than at the beginning,
whilst our European operations grew by 31%. The insurance business model
in the US is different to Europe with much higher new business
acquisition costs, so growth requires investment. In Europe, there will
also be periods when countries decide the market conditions are right to
accelerate which may in turn justify further investment, as in Spain
this year.
Our price comparison sector combines a highly competitive operation in a
largely mature market (Confused); market-leading players with large
market shares but whose challenge is growth in markets where there is
little incentive for customers to look to switch insurers (Rastreator
and LeLynx); and a business that is seeking to rewrite the rules of
insurance customer engagement (compare.com). Across the piece our
combined price comparison operations made a small profit, supported by
encouraging progress by Confused as it seeks to establish a
differentiated market positioning as 'No. 1 for car savings'.
For the last couple of months the resetting of the Ogden rate by the
Ministry of Justice has represented a significant area of uncertainty
outside of our control. The announcement on 27 February by the Lord
Chancellor of the new rate of minus 0.75% has allowed this to be
reflected within our 2016 accounts and represents a very material
reduction from the previous 2.5% rate, increasing claims reserves by
more than we would want to absorb within the, albeit significant, margin
that we hold over best estimate. We have, therefore, reduced our second
half reported results by GBP105 million, and to a much lesser extent the
profits of subsequent years will also be reduced as the affected claims
settle. Given, however, our strong capital position, this has not
impacted our ability to maintain our 2016 final dividend at the level we
declared in 2015. We anticipate that if market pricing adjusts future
premiums to reflect the lower discount rate, there will be no
significant impact on future business and its profitability after the
change. We strongly support the ABI's call for a fundamental review of
the basis on which the Ogden rate is set in order to ensure that the
relevant compensation awards are set appropriately and welcome the
intent of the Lord Chancellor and the Chancellor of the Exchequer to
implement this review expeditiously.
A proposed final dividend of 51.5 pence per share brings dividends for
the year to 114.4 pence per share, a yield of 6.3% on the GBP18.18 share
price at the 2016 year end.
The team
May last year marked the retirement of Henry Engelhardt after 25 years
as Chief Executive albeit I am delighted he is continuing to give us
some of his time working in the UK and overseas. That the transition
from Henry to David Stevens has been seamless is itself testament to
Admiral's culture of teamwork and open management. Henry always said
that he would time his retirement when he judged the business had the
required depth of management and over the years the Board has focussed
on understanding the talent emerging within the business and how it has
been, and is planned to be, developed. It is, therefore, very gratifying
to see David now ably supported by Cristina Nestares leading the UK
Insurance business, with Alistair Hargreaves working alongside her, and
by Milena Mondini leading the European insurance businesses. Cristina
and Milena have both been with Admiral for 11 years having founded, and
successfully developed, our Spanish and Italian insurance businesses and
then broadened their management responsibilities leading to their
current roles. Alistair has been with Admiral 8 years, having begun his
career in finance and investor relations and then taken increasingly
significant management roles within the UK motor business. Development
and recruitment of management talent is a core enabler of Admiral's
continued growth and development and I am very encouraged by the quality
and potential of those I meet in middle and senior management positions
as I spend time across our various businesses.
Thank you
I have thoroughly enjoyed every year I have chaired Admiral. It is a
special business because of the way in which it does business, its
absolute focus on delivering what the customer wants, and its beliefs
that if people enjoy what they are doing and own part of the business
that employs them they will do a better job. In the same way as Admiral
seeks to assess the right price for each driver as an individual so it
respects the contribution of each individual who works with us, caring
about their well-being and giving them the opportunity to develop and
progress to fulfil their individual potential. It is a company with
which I am very proud to have been associated and I thank everyone in
Admiral with whom I have worked for a great experience.
With a core business in such good form, a nursery of other businesses at
varying stages of maturity, and a hothouse of opportunities which may or
may not take root and get planted out, but most of all with the people
we have in the business, I am confident that Admiral will continue to
develop and prosper over the next 16 years as it has over the last.
Alastair Lyons
Chairman
7 March 2017
Chief Executive's Statement
Very few people can claim to have contributed as much to Admiral's
success as Alastair Lyons. So it'd be wrong to start my first Chief
Executive report with anything other than a tribute to his contribution
over the last 16 years. The Board collectively, Admiral's senior
managers, and Henry and myself in particular, have benefitted from his
wisdom, experience and thoughtfulness, and during our (occasional)
moments of crisis, his composure.
Perhaps most importantly, notwithstanding an apparently conservative
profile as a chartered accountant and financial services veteran,
Alastair has consistently been an encouraging supporter of Admiral's
distinctiveness rather than an advocate of the apparently safe option of
convergence to industry norms.
In his statement, Alastair has laid out the transformation, in scale and
breadth, of Admiral over the 16 years of his stewardship. He describes
how 2016 has been another year of substantial growth both in our core UK
car insurance business and across the Group as a whole.
Rather than re-visit 2016 myself (and to duck the challenge of trying to
find a pithy culinary metaphor to describe the year - see previous Chief
Executive Statements), I'll look forward and answer a question some
shareholders may be asking. Namely: "Should I sell Admiral and buy
Insurtech?"
For those of you with limited time, or for whom the suspense is too much,
the short answer, in my view, is "no". Read on for a longer answer.
Insurtech is generating lots of excitement. Visiting investment bankers,
who historically would have arrived with fat packs on attractive big
ticket acquisitions, now also include charts showing the explosive
growth in Insurtech, along with a busy "Insurtech landscape" page,
packed with the colourful logos of whizzily named Insurtech start-ups,
bunched (sometimes shoe-horned) into helpful categories ("sharing
economy", "P2P", "mobile insurance", "telematics", "auto comparison",
"short term cover"). A big brand consulting firm recently shared the
results of a survey suggesting that "insurance CEO's" expect new
entrants to capture 30% of the insurance market over the next five
years.
I disagree.
I say that not because the ideas emerging aren't interesting, far from
it. Nor because many of the Insurtech pioneers aren't very bright and
creative (and it's great to see that creativity focussed on insurance).
I disagree for two reasons.
The first reason is that many of the ideas won't work in practice. Many,
while technologically feasible, even impressive, involve an
under-appreciation of the complexity of insurance; the importance, for
example, of avoiding customers you really don't want to insure or the
challenge of engaging policyholders in a deeper interaction with their
insurance when, in truth, most of our customers want the opposite.
Insurtech start-ups promising on-again, off-again, item by item
insurance are offering a consumer "benefit" that most of our customers
wouldn't recognise as such.
The second reason is that Admiral already, in many important respects,
is "Insurtech". The two most fundamental Insurtech sectors;
"fundamental" in terms of their ability to transform the competitive
landscape and substantially re-distribute market share, are
"auto-comparison" and "telematics". On "auto-comparison" we are leading
players with established, businesses in the UK, Spain and France and a
pioneering, potentially transformational, US price comparison business
in compare.com. And as for "telematics", we sell telematics-based car
insurance in three countries and in the UK we are, by some margin, the
largest player in the market with over 200,000 live policies. Beyond
those sectors, our ever-evolving range of products ("air bnb" home
insurance, Admiral short-term cover, insurance cover for the peer to
peer car sharing sites) show we're not neglecting the interesting, if at
this point more marginal, emerging opportunities.
Admiral's success has always been about embracing change when that's in
the interest of our customers and shareholders. So stick with us and
enjoy the best of insurance, and Insurtech, all in one bundle.
My priorities
My priorities for the forthcoming year are set out below. I expect them
to remain my priorities for a number of years to come.
Ensure Admiral remains one of, if not the, best car insurers in the UK
Admiral has built its success on doing car insurance more effectively
that its peers. Maintaining our lead in cost efficiency, rigorous risk
selection and effective claims management has required Admiral to keep
evolving and innovating and we need to continue to do so in the future.
Demonstrate Admiral can be a great car insurer beyond the UK
Our insurance operations beyond the UK are at different stages of
development and relative competitive competence. Mobilising, ideally,
all the collective talents of the Group, to ensure most, or all, of
these operations become sources of sustainable profitable growth is a
priority.
Develop sources of growth and profits beyond car insurance
Admiral's first major diversification from car insurance was household
insurance, launched three years ago in the UK. I expect the second will
be personal lending in the UK. Both take us into huge markets and, in
both cases, our car insurance heritage provides some of the necessary
skills and assets to succeed. Our priority will be to grow both,
focussing on a long-term objective of developing sources of competitive
advantage, not short-term top or bottom-line objectives.
Ensure Admiral stays a great place to work
I don't run Admiral purely for the benefit of shareholders. It's
important that those of us who work for Admiral are glad we do, most of
the time. Happily, what's good for staff is normally good for
shareholders. A key reason for Admiral's success over the last 25 years
has been the loyalty of talented staff to the company, and the
collective sense of shared endeavour that has helped us do lots of
things a little better than our competitors.
David Stevens
Chief Executive Officer
7 March 2017
Chief Financial Officer's Review
It's tempting to focus almost entirely on Ogden in writing a review of
2016's results, but whilst it deserves attention (and it's coming),
there is more to talk about.
Given Ogden, the Group's share of pre-tax profit reduced materially to
GBP284 million from GBP377 million last year. On a statutory basis, the
reduction is similar, with Group profit before tax at GBP278 million
compared to GBP369 million in 2015. Without the Ogden change, the
Group's share of pre-tax profit would have been GBP390 million, of which
the UK Insurance businesses would have contributed GBP441 million, in
line with last year. Our combined international insurance businesses
improved their result (GBP19 million loss v GBP22 million loss) whilst
the comparison operations recorded a profit of GBP3 million after making
losses of GBP7 million in 2015. On a statutory basis, the price
comparison result is a loss of GBP3 million compared to a loss of GBP16
million last year.
Notwithstanding the Ogden impact, the strength of the Group's capital
position has allowed us to propose a final dividend of 51.5 pence per
share, in line with the final 2015 dividend (before adding the return of
surplus capital that was paid a year ago).
If forced to describe the year in one word, for me it would be Growth.
2016 saw very strong advances in turnover (a record and 22% higher than
2015), customer numbers (another record at 5.2 million) and net revenue
(up 13% to GBP1 billion). Whilst UK motor grew healthily, our businesses
in other markets (including UK household) grew very nicely and continue
to represent a bigger share of the Group's KPIs.
Our international operations in insurance and comparison continued to
make meaningful and pleasing progress against their objectives.
It's inevitably hard to pick highlights, but some of mine would be:
-- 720,000 - the number of new customers we welcomed to the Group in twelve
months
-- 1,035,000 - customers beyond UK Insurance, up 215,000 in a year
-- 212% - solvency ratio after the Ogden impact and proposed final dividend
-- 100% - all UK insurance new business now transacted on the new policy
system, Guidewire
-- Record profits at Rastreator in Spain and another profit (for the third
successive financial year) from ConTe in Italy
Full detail on the results follows but let me cover a couple of things:
Ogden (inevitably), capital and dividend
Readers will be aware I'm sure, but in December 2016 we heard that a new
Ogden discount rate was imminent (the first change since 2001). The
announcement came at the end of February that the new rate would be
minus 0.75% - a substantial reduction on the previous rate of 2.5%.
We estimate that the ultimate cost (net of reinsurance and tax) on open
claims and claims arising on business written to the date of change of a
move to minus 0.75% from 2.5% will be approximately GBP150 million.
The reduction in profit in 2016 means that a large portion of the impact
of the change has been recognised already, with the balance (something
in the order of GBP65 million post-tax) to be reflected in the coming
years in the form of lower reserve releases and profit commission than
would otherwise have been the case with an unchanged rate.
Ogden is of course only one variable involved in estimating the reserves,
and as you would expect of Admiral, our booked reserves in the financial
statements continue to include a prudent and significant margin above
best estimates, the size of which is largely in line in relative terms
with a year earlier.
The Solvency II balance sheet technical provisions are also now on a
minus 0.75% Ogden basis.
After accounting for the proposed final dividend, the Group solvency
ratio is a very satisfactory 212%. Excluding amounts relating to return
of surplus capital, full year dividends for 2016 are held at their 2015
level of 102.5 pence per share.
The solvency ratio is above where we expect to operate in the medium to
long term (no change on our previously indicated 125%-150%). However we
consider it prudent to maintain a higher ratio in the near term as we
move towards submission of our application to use an internal model to
calculate our solvency capital requirement later in the year (we're
still hoping to 'go live' with the model in 2018). For the foreseeable
future, we envisage dividends will be in the order of 90-95% of
earnings.
In terms of the future impact of higher injury costs resulting from the
substantially lower discount rate, we expect that pricing action
(including our own material pre-emptive rate changes in December 2016
and most likely more to follow) should mean profitability on business
written after the date of the change will not be materially adversely
affected.
Brexit
Another 2016 surprise (in a year full of them) was the result of the EU
referendum in June.
Admiral currently has three insurers and two comparison businesses in
continental Europe, all benefitting from passporting arrangements.
Although the UK is very early in the process of extricating itself from
the EU, there is clearly a risk we lose access to these markets via the
passporting mechanism.
We are planning for potential outcomes and expect to be able to
establish new entities and/or arrangements which should result in
minimal disruption to our businesses and customers in those markets.
We also currently enjoy free movement of staff between our sites in
Europe which might also be restricted. Again we'll work to ensure the
impact on our staff is minimised to the extent possible under whatever
arrangements are put in place.
Chairman
Finally, at the 2017 AGM we will say farewell to Alastair, our Chairman
of over 16 years. David's tribute sums up Alastair's contribution
eloquently so I'll just say that I've hugely admired Alastair as a
Chairman and colleague since I've worked with him. We will miss him
greatly. We're fortunate to have an extremely capable successor in
Annette who's been on the Board since 2012. My best wishes go to both.
Geraint Jones
Chief Financial Officer
7 March 2017
2016 Group overview
The Group has seen strong growth in 2016 with turnover up 22% to GBP2.58
billion (2015: GBP2.12 billion). Net revenue increased by 13% to GBP1.02
billion (2015: GBP0.90 billion). Customer numbers were 16% higher at
5.15 million (2015: 4.43 million).
The Group's share of pre-tax profits of GBP284.3 million (2015: GBP376.8
million) and statutory profit before tax of GBP278.4 million (2015:
GBP368.7 million) have both been materially affected by the impact of
the change by the UK Government to the UK discount rate (commonly
referred to as the 'Ogden discount rate'), used to value personal injury
claims, which has reduced UK Insurance profits. See below for further
information. If the rate had remained unchanged, the Group's share of
pre-tax profit would have been GBP390 million.
During 2016, the Group's UK Insurance business, consisting of UK Car and
UK Household, enjoyed favourable market conditions and delivered strong
growth in turnover to GBP2.06 billion (2015: GBP1.76 billion). Net
revenue increased by 8% to GBP770.9 million (2015: GBP711.2 million).
Customer numbers reached 4.1 million (2015: 3.6 million). The UK
Insurance business accounts for 80% of Group turnover and customers
(2015: 83% and 81% respectively).
Outside the UK, Admiral's International Insurance businesses grew
combined turnover by 57% to GBP365.9 million (2015: GBP232.4 million).
Net revenue increased by 49% to GBP107.3 million (2015: GBP72.2
million). Customer numbers grew by 28% to 864,000 (2015: 673,000).
Encouraging progress was made in combined ratio terms, and in aggregate
the segment recorded reduced losses of GBP19.4 million (down from
GBP22.2 million) with the Group's Italian insurer ConTe recording a
profit for the third consecutive year.
Finally, Admiral's Price Comparison businesses made a combined profit,
again excluding minority interests' shares, of GBP2.7 million (2015:
loss GBP7.2 million). Confused.com http://confused.com in the UK grew
revenue and saw a 29% increase in profit to GBP16.1 million from GBP12.5
million. The international price comparison businesses reported a
reduced aggregate loss of GBP13.4 million (2015: loss GBP19.7 million)
with growing profit in the European operations (GBP2.8 million, up from
GBP1.8 million) offset by the loss in compare.com of GBP16.2 million
(2015: loss GBP21.5 million).
Other Group key performance indicators include:
-- Group loss ratio 72.0% post Ogden, 64.2% pre Ogden (2015: 65.1%) - an
improved international ratio offset by an Ogden-impacted higher UK car
insurance ratio;
-- Group expense ratio 22.4% (2015: 20.5%) - an increased UK ratio
reflecting an increase in acquisition costs resulting from growth offset
by a small improvement in the international ratio; and
-- Group combined ratio 94.4% post Ogden, 86.7% pre Ogden (2015: 85.6%).
Earnings per share
Earnings per share decreased by 27% to 78.7 pence (2015: 107.3 pence),
reflecting the decrease in Group profit as a result of the change in the
Ogden discount rate. If the rate had remained unchanged, earnings per
share would have risen to 109.6 pence per share.
Dividends
The Group's dividend policy is to pay 65% of post-tax profits as a
normal dividend and to pay a further special dividend comprising
earnings not required to be held in the Group for solvency or buffers.
Notwithstanding the lower second half profits, the strength of the
Group's capital position has allowed the Board to propose a final
dividend of 51.5 pence per share (GBP144 million), as follows:
-- 15.0 pence per share representing a normal element, based on the dividend
policy of distributing 65% of post-tax profits; and
-- A special element of 36.5 pence per share.
The final dividend is in line with the final 2015 dividend (excluding
the return of surplus capital of 11.9 pence per share that was paid with
the final 2015 dividend).
The total dividend for the 2016 financial year is 114.4 pence per share
(including 11.9 pence return of surplus capital), in line with 2015
(which also included 11.9 pence return of surplus capital).
The payment date is 2 June 2017, ex-dividend date 11 May 2017 and record
date 12 May 2017.
Return on equity
The impact of the changed Ogden discount rate on profit has led to a
reduction in return on equity to 37% from 49%. Had the rate remained
unchanged, return on equity would have been in line with 2015.
A key part of Admiral's business model is the extensive use of co- and
reinsurance across the Group which provides both loss protection and
capital relief and, when combined with high levels of profitability,
leads to a superior return on equity.
Change in UK discount rate ('Ogden')
On 27 February 2017, the UK Government announced the outcome of the
review of the discount rate (referred to as the Ogden discount rate)
used for calculating the value of lump sum personal injury compensation.
The new rate is minus 0.75% and will apply to all unsettled and new
claims from 20 March 2017.
The estimated total impact, net of reinsurance and post tax, of the
change to minus 0.75% from 2.5% is approximately GBP150 million.
The change in rate has been treated as an adjusting post balance sheet
event and the UK motor actuarial best estimates and Solvency II
technical provisions have been prepared on the basis of the new rate.
The booked reserves in the financial statements continue to include a
prudent and significant margin above the actuarial best estimates in
line with the Group's reserving policy.
The majority of the financial impact in respect of premiums earned up to
the date of change (GBP105 million pre-tax, GBP87 million post-tax), has
been recognised in the form of reduced 2016 profits. The balance, along
with the impact on business written but unearned at the date of change,
will be recognised in the form of lower reserve releases and profit
commission over the subsequent three to five financial years as the
affected claims settle.
The Group anticipates that if UK market pricing adjusts future premiums
to reflect the lower Ogden rate, there will be no significant impact on
future business and its profitability after the change. The Group is
confident that its strong capital position, along with its prudent
approach to claims reserving, will allow it to manage the outcome
without significant change to its business or long term financial
outlook.
Investments and cash
Investment strategy
Admiral's investment strategy was unchanged in 2016 and the Group
continued to invest in the same asset classes as previous years.
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. The Group's
Investment Committee performs regular reviews of the strategy to ensure
it remains appropriate.
Cash and investments analysis
GBPm 2014 2015 2016
Fixed income and debt securities 1,021.8 1,428.2 1,469.2
Money market funds and other fair value instruments 909.2 627.7 781.0
Cash deposits 263.1 267.6 170.0
Cash 255.9 265.3 326.6
Total 2,450.0 2,588.8 2,746.8
Money market funds, fixed income and debt securities comprise the
majority of the total; 82% at 31 December 2016 (2015: 79%).
Investment and interest income in 2016 was GBP53.1 million, an increase
of GBP20.5 million on 2015 (GBP32.6 million). GBP9.2 million of the
increase is due to a release of an accrual relating to quota share
reinsurance arrangements, whilst GBP4.9m of the increase relates to
unrealised gains on forward foreign exchange contracts. The balance is
due to additional investment income earned on higher average balances.
The underlying rate of return for the year (excluding the reinsurance
accrual) on the Group's cash and investments was 1.4% (2015: 1.3%).
The Group continues to generate significant amounts of cash and its
capital-efficient business model enables the distribution of the
majority of post-tax profits as dividends.
Cash flow
GBPm 2014 2015 2016
Operating cash flow, before transfers to
investments 521.9 487.2 525.1
Transfers to financial investments (258.4) (112.5) (18.1)
Operating cash flow 263.5 374.7 507.0
Tax payments (77.0) (63.8) (74.6)
Investing cash flows (capital expenditure) (50.6) (47.8) (31.6)
Financing cash flows (65.8) (256.3) (364.7)
Foreign currency translation impact 3.0 2.6 25.2
Net cash movement 73.1 9.4 61.3
Movement in unrealised gains on investments 10.9 (12.6) 35.2
Movement in accrued interest 22.8 29.5 43.4
Net increase in cash and financial investments 365.2 138.8 158.0
The main items contributing to the operating cash inflow are as follows:
GBPm 2014 2015 2016
Profit after tax 281.6 291.8 214.1
Change in net insurance liabilities 187.5 148.7 206.8
Net change in trade receivables and liabilities (34.7) (55.7) 25.3
Non-cash income statement items 18.4 25.5 14.6
Taxation expense 69.1 76.9 64.3
Operating cash flow, before transfers to investments 521.9 487.2 525.1
Total cash plus investments increased by GBP158 million or 6% (2015:
GBP139 million, 6%).
Capital structure and financial position
A key feature of the business model is the extensive use of co- and
reinsurance across the Group. The Group's co-insurance and quota share
reinsurance arrangements for the UK Car insurance business are in place
until at least the end of 2018. In 2017 and 2018, the Group will reduce
its net share of that business from 25% to 22%.
Similar long term arrangements are in place in the Group's International
Insurance operations and UK Household Insurance business.
The Group continues to manage its capital to ensure that all entities
within the Group are able to continue as going concerns and that
regulated entities comfortably meet regulatory capital requirements.
Surplus capital within subsidiaries is paid up to the Group holding
company in the form of dividends.
The Group's regulatory capital from January 2016 is based on the
Solvency II Standard Formula, with a capital add-on to reflect
recognised limitations in the Standard Formula with respect to Admiral's
business (predominantly in respect of profit commission arrangements in
co- and reinsurance agreements and risks arising from claims including
Periodic Payment Order (PPO) claims).
The capital add-on to the Standard Formula for 2017 is subject to the
usual regulatory approval process. The Group plans to submit an
application for approval to use an internal model to calculate capital
requirements during 2017.
The majority of the Group's capital requirement is derived from its
European insurance operations, Admiral Insurance (Gibraltar) Limited
(AIGL) and Admiral Insurance Company Limited (AICL). The estimated (and
unaudited) Solvency II position for the Group at the date of this report
was as follows:
Group capital position
Group GBPbn
Eligible Own Funds (pre 2016 final dividend) 1.07
2016 final dividend 0.14
Eligible Own Funds (post 2016 final dividend) 0.93
Solvency II capital requirement(*1) 0.44
Surplus over regulatory capital requirement 0.49
Solvency ratio (post dividend)(*2) 212%
*1 Solvency capital requirement includes updated capital add-on which
is subject to regulatory approval.
*2 Solvency ratio calculated on a volatility adjusted basis.
The Group's capital includes GBP200 million ten year dated subordinated
bonds. The rate of interest is fixed at 5.5% and the bonds mature in
July 2024. The bonds qualify as tier two capital under the Solvency II
regulatory regime.
Estimated sensitivities to the current Group solvency ratio are
presented in the table below. These sensitivities cover the two most
material risk types, insurance risk and market risk, and within these
risks cover the most significant elements of the risk profile. Aside
from the catastrophe events, estimated sensitivities have not been
calibrated to individual return periods.
Solvency ratio sensitivities
UK Motor - incurred loss ratio +5% -31%
UK Motor - 1 in 200 catastrophe event -1%
UK Household - 1 in 200 catastrophe event -2%
Interest rate - yield curve down 50 bps -12%
Credit spreads widen 100 bps -4%
Currency - 25% movement in euro and US dollar -3%
ASHE - long term inflation assumption up 0.5% -9%
Taxation
The tax charge reported in the Consolidated Income Statement is GBP64.3
million (2015: GBP76.9 million), which equates to 23.1% (2015: 20.9%) of
profit before tax. The higher effective rate of taxation compared to
2015 results from the unrecognised deferred tax asset arising on losses
in the Group's US businesses.
The Group's results are presented in the following sections as UK
Insurance, International Car Insurance and Price Comparison.
UK Insurance
UK Insurance Review - Cristina Nestares, CEO UK Insurance
It's always fun to write an annual review like this - and always
surprising when we look back and remember how much has happened and
changed in just 12 months.
Clearly the reported results of the UK Car insurance business have been
impacted by the change in the Ogden discount rate, but Alastair and
Geraint have covered this in detail, so I will focus on the underlying
business.
One of the more obvious achievements is the rate of growth of the car
insurance segment. We grew by 11% during 2016, adding almost 350,000 to
the customer base, which is about the same as we added in the previous
four years combined. But the more encouraging aspect is that this wasn't
achieved through chasing volume through price cuts and acquisition spend,
but through sensible underwriting and leveraging the still-growing price
comparison distribution channel that has facilitated our growth over the
last ten years and more.
What do I mean by sensible underwriting? We've always approached pricing
in a rational way, growing when we think it's the right time, and
holding back when the market is looking less attractive. That means that
we grew very modestly (in Admiral's historical context at least) over
the previous two or three years, but grew significantly more during 2016
as the market continued to increase prices quite significantly. We've
also seen some slight de-risking in our portfolio as some of our
competitors have been changing prices to attract higher-premium (higher
risk) drivers, and we've consciously decided not to follow.
Increasing market prices, whilst good for profitability, does however
bring some additional scrutiny both from the media and regulators.
Following the focus during the previous hardening part of the cycle, the
Government announced a number of changes in February, which are aimed at
reducing the costs of small bodily injury claims and therefore the cost
of motor insurance. The Prisons and Courts Bill included a number of
changes that will affect the process of dealing with minor whiplash
claims, including tariff-based damages that award compensation based on
the severity of the injury, and the banning of offers before medical
evidence is obtained. The Government also announced its intention to
increase the small claims limit for motor accident claims from GBP1,000
to GBP5,000. All of these changes will bring down the cost of claims,
but will level the playing field and make it a little harder for
insurers to obtain a competitive advantage. However, we think that
Admiral is well placed because of the increased importance of a quick
and efficient claims handling process, which is one of Admiral's
historical strengths.
Whilst the return to growth in our car insurance business was
encouraging, the 50% growth of our household business was particularly
impressive, to end the year with nearly 470,000 customers. A key driver
of that growth was an improvement in our online customer journey, but
equally pleasing was that growth was driven both by a growing price
comparison market and more customers being drawn directly to our
household product.
Aside from top line growth, we benefitted from another relatively benign
year in terms of weather events, and an improvement in claims frequency.
We made some efficiency gains from our increased size and website
development, and the small decrease in the underlying expense ratio
(despite the addition of the Flood Re levy in the year) contributed to
another improvement in the reported result. We expect distribution to
continue moving towards price comparison in 2017, which will enable us
to continue growing our book in a very familiar channel.
Finally, the mention of efficiency and an ability to react to changes
(whether externally or internally driven) brings me onto the IT
transformation process we have undertaken to replace the insurance
policy system that we selected before we launched back in 1993. It
served us amazingly well for the first 20+ years, but the Guidewire
platform we've successfully rolled out over the last 12 months is a key
development that will enable us to continue testing, learning and
growing and succeeding. In summary, a big change that will paradoxically
allow us to remain the same innovative company we've always been.
UK Insurance review
UK Insurance financial performance
GBPm 2014 2015 2016
Turnover(*1) 1,632.0 1,760.2 2,063.1
Total premiums written(*1) 1,481.5 1,590.4 1,862.6
Net insurance premium revenue 399.0 397.4 454.4
Underwriting profit(*1) 161.7 198.3 109.2
Profit commission and other income 236.2 245.9 229.3
UK Insurance profit before tax 397.9 444.2 338.5
*1 Alternative Performance Measures - refer to the end of this report
for definition and explanation
Split of UK Insurance profit before tax
GBPm 2014 2015 2016
Car 398.0 443.0 335.8
Household (0.1) 1.2 2.7
UK Insurance profit 397.9 444.2 338.5
Key performance indicators
2014 2015 2016
Vehicles insured at year end 3.15m 3.30m 3.65m
Households insured at year end 0.16m 0.31m 0.47m
Total UK Insurance customers 3.31m 3.61m 4.12m
UK Insurance financial performance
UK insurance includes the results of the UK Car and UK Household
insurance segments.
Admiral delivered strong growth in turnover and customers in its UK
Insurance business in 2016, taking advantage of favourable market
conditions with increasing prices and shopping activity. UK insurance
turnover of GBP2.06 billion increased by 17% (2015: GBP1.76 billion)
primarily due to growth in customer numbers in both UK Car and UK
Household. Net revenue increased by 8% to GBP770.9 million (2015:
GBP711.2 million). Increases in average premiums in UK Car insurance
also contributed to a 17% increase in total premiums written to GBP1.86
billion (2015: GBP1.59 billion).
Profit was lower in 2016 at GBP338.5 million (2015: GBP444.2 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 GBP444 million.
UK Car Insurance financial review
GBPm 2014 2015 2016
Turnover(*1) 1,602.7 1,708.2 1,987.0
Total premiums written(*1) 1,453.1 1,539.7 1,789.3
Net insurance premium revenue 394.3 386.5 437.4
Investment income 11.5 26.1 39.3
Net insurance claims (198.3) (161.3) (304.7)
Net insurance expenses (44.6) (52.1) (61.0)
Underwriting profit(*1) 162.9 199.2 111.0
Profit commission 71.8 85.2 52.7
Underwriting profit plus profit commission 234.7 284.4 163.7
Net other income 140.7 131.9 138.6
Instalment income 22.6 26.7 33.5
UK Car Insurance profit before tax 398.0 443.0 335.8
*1 Alternative Performance Measures - refer to the end of this report
for definition and explanation
Split of underwriting profit
GBPm 2014 2015 2016
Motor 144.2 183.2 93.6
Additional products 18.7 16.0 17.4
Underwriting profit 162.9 199.2 111.0
Key performance indicators
2014 2015 2016
Reported motor loss ratio(*1,*2) 68.6% 64.1% 73.3%
Reported motor expense ratio(*1,*3) 14.4% 16.9% 17.5%
Reported motor combined ratio 83.0% 81.0% 90.8%
Written basis motor expense ratio 16.0% 16.3% 16.5%
Reported total combined ratio(*1,*4) 79.5% 78.2% 87.5%
Claims reserve releases - original net
share(*1,*5) GBP66.8m GBP84.6m GBP58.3m
Claims reserve releases - commuted
reinsurance(*1,*6) GBP70.6m GBP88.8m GBP17.1m
Total claims reserve releases GBP137.4m GBP173.4m GBP75.4m
Vehicles insured at year end 3.15m 3.30m 3.65m
Other Revenue per vehicle GBP67 GBP63 GBP62
*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.
*3 Motor expense ratio is calculated by including claims handling
expenses that are reported within claims costs in the income statement.
Reconciliation in note 12c.
*4 Reported total combined ratio includes additional products
underwritten by Admiral.
*5 Original net share shows reserve releases on the proportion of the
portfolio that Admiral wrote on a net basis at the start of the
underwriting year in question.
*6 Commuted reinsurance shows releases on the proportion of the account
that was originally ceded under quota share reinsurance contracts but
has since been commuted and hence reported through underwriting and not
profit commission.
UK Car Insurance financial performance
UK Car Insurance benefited from continued success in attracting and
retaining motor customers in a competitive UK market and this, together
with higher average motor premiums, contributed to an increase in UK Car
turnover of 16% to GBP1.99 billion (2015: GBP1.71 billion). Net revenue
increased by 7% to GBP748.6 million (2015: GBP700.3 million). The
number of vehicles insured in the UK business increased by 11% to 3.65
million (2015: 3.30 million). Admiral continued to increase its prices
during 2016 and saw average premiums written increase by approximately
4%.
Profit
As a result of the impact of the change in Ogden, profit was lower in
2016 (GBP335.8 million v GBP443.0 million in 2015). Excluding the Ogden
impact, profit would have been GBP441 million. The combined ratio
increased to 87.5% (2015: 78.2%), or 77.8% pre Ogden. The underlying UK
Car insurance profit was also impacted by a number of other factors:
-- Significantly higher net insurance premium revenue (GBP437.4 million v
GBP386.5 million) resulting from the growth in the portfolio over the
past year
-- Underlying positive back year claims development, though lower reserve
releases on the portion of reserves originally reinsured but now commuted
-- Higher expense ratio of 17.5% (2015: 16.9%) as a result of strong growth
in new business
-- Higher contribution from Other Revenue sources (GBP172.1 million v
GBP158.6 million) resulting from growth in the portfolio, with Other
Revenue per Vehicle stable when compared with 2015
-- Higher investment return (GBP39.3 million v GBP26.1 million) as explained
in the Investments and Cash section above
Underwriting result and profit commission
The UK Car Insurance motor combined ratio is shown below:
UK Car Insurance motor combined ratio 2014 2015 2016
Loss ratio excluding reserve releases from original
net share and commuted reinsurance 86.9% 87.7% 87.7%
Reserve releases - original net share 18.3% 23.6% 14.4%
Loss ratio net of releases - original net share(*1) 68.6% 64.1% 73.3%
Expense ratio 14.4% 16.9% 17.5%
Combined ratio - original net share(*1) 83.0% 81.0% 90.8%
*1 Ratios calculated on original net share use the proportion of the
portfolio that Admiral wrote on a net basis at the start of the
underwriting year in question.
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.
Excluding reserve releases, the loss ratio remained flat at 87.7% (2015:
87.7%). Excluding the Ogden impact, the loss ratio before reserve
releases would have improved to 85.6% as a result of the more favourable
loss ratio assumptions for business earned during 2016 compared to 2015.
Claims reserving
Admiral's reserving policy (both within the claims function and in the
financial statements) is initially to reserve conservatively, above
internal and independent projections of actuarial best estimates. This
is designed to create a margin held in reserves to allow for unforeseen
adverse development in open claims and typically results in Admiral
making above industry average reserve releases. Admiral's booked claims
reserves continue to include a significant margin above projected best
estimates of ultimate claims costs.
As profit commission income is recognised in the income statement in
line with loss ratios accounted for on Admiral's own claims reserves,
the reserving policy also results in profit commission income being
deferred and recognised over time.
The projected ultimate loss ratio for Admiral for the 2016 accident year
is 82%, which is in line with the projection of the previous year at the
same point in its development despite the Ogden discount rate change.
The earned motor expense ratio increased modestly to 17.5% from 16.9%
mainly reflecting the increase in acquisition costs resulting from the
strong growth in the business. The written basis expense ratio also
increased to 16.5% from 16.3% for similar reasons.
The projected ultimate combined ratio (ultimate loss ratio plus written
expense ratio) for Admiral for the 2016 accident year is 98%. The
reported combined ratio for the UK market (excluding Admiral) for 2015,
excluding reserve releases was 115%.
UK Car Insurance - co-insurance and reinsurance
Admiral makes significant use of proportional risk sharing agreements,
where insurers outside the Group underwrite a majority of the risk
generated, either through co-insurance or quota share reinsurance
contracts. These arrangements include profit commission terms which
allow Admiral to retain a significant portion of the profit generated.
The two principal advantages of the arrangements are:
- Capital efficiency: a significant proportion of the capital supporting
the underwriting is held outside the Group. As Admiral is typically able
to retain much of the profit generated via profit commission (refer
below for further details), the return on Group capital is higher than
in an insurance company with a standard business model.
- Risk mitigation: co- and reinsurers bear their proportional shares of
claims expenses and hence provide protection should results worsen
substantially.
The Munich Re Group will underwrite 40% of the UK motor business until
at least 2020. 30% of this total is on a co-insurance basis, with the
remaining 10% under a quota share reinsurance agreement from 2017
onwards.
The Group also has other quota share reinsurance arrangements confirmed
to the end of 2018 covering 38% of the business written.
The Group has reduced its net underwriting share from 25% to 22% with
effect from 2017.
The nature of the co-insurance proportion underwritten by Munich Re (via
Great Lakes, a subsidiary of Munich Re) is such that 30% of all motor
premium and claims for the 2017 year will accrue directly to Great Lakes
and will not appear in the Group's income statement. Similarly, Great
Lakes reimburses the Group for its proportional share of expenses
incurred in acquiring and administering the motor business. This share
was 40% previously.
Admiral has options to commute quota share reinsurance contracts and
typically does so after two or three years of an underwriting year's
development when there is a reasonably certain view on the year's
outcome.
After commutation, movements in booked loss ratios result in reduced or
increased net claims costs (and not profit commission).
At 31 December 2016, all material UK quota share reinsurance contracts
for underwriting year up to and including 2014 had been commuted. All
reinsurance for the 2015 and 2016 years remain in effect.
UK Household Insurance - reinsurance
The Group's Household business is also supported by proportional
reinsurance arrangements covering 70% of the risk. For the 2016 year the
business is shared between Munich Re, 40% and Swiss Re, 30%. The
arrangements for 2017 will remain the same. In addition, the Group has
non-proportional reinsurance to cover the risk of catastrophes stemming
from weather events.
Profit commission
Admiral is potentially able to earn material amounts of profit
commission revenue from co- and reinsurance partners, depending on the
profitability of the insurance business underwritten by the partner.
Revenue is recognised in the income statement in line with the booked
loss ratios on Admiral's retained underwriting.
In 2016 Admiral recognised UK car insurance profit commission revenue of
GBP52.7 million down from GBP85.2 million in 2015. If reserve releases
from business that was originally ceded under quota share reinsurance
contracts that have since been commuted, are added to profit commission,
the total for 2016 would be GBP69.8 million compared to GBP174.0 million
in 2015, a decrease of 60%. The decrease arose mainly due to less
positive development of prior year booked loss ratios as a result of the
change in Ogden discount rate.
Note 5c to the financial statements analyses profit commission income by
underwriting year.
Commutations of quota share reinsurance
Admiral tends to commute its UK Car Insurance quota share reinsurance
contracts for an underwriting year 24 months from inception, assuming
there is sufficient confidence in the profitability of the business
covered by the reinsurance contract.
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.
During 2016, reinsurance contracts covering the 2014 underwriting year
were commuted. Whilst there is a satisfactory level of confidence in the
ultimate outcome of that year, Admiral's prudent approach to booking
loss ratios, which tend to improve over time from an initial cautious
level to the ultimate outcome, has meant that the 2014 year is booked at
a loss making combined ratio. Refer to note 5 (vi) of the financial
statements for analysis of reserve releases on commuted quota share
reinsurance contracts.
The ultimate projection of the 2014 year continues to show a profitable
outcome.
A further impact of the 2014 year commutation is a release of an accrual
held for notional investment income relating to the funds-withheld
nature of the contract. As noted on page 5, movements in the notional
investment income accruals resulted in an increase in investment income
of GBP9.2 million compared to 2015.
Other Revenue
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.
The most material contributors to net Other Revenue are:
-- Profit earned from motor policy upgrade products underwritten by Admiral,
including breakdown, car hire and personal injury covers
-- Revenue from other insurance products, not underwritten by Admiral
-- Fees such as administration fees and referral income
-- Interest charged to customers paying for cover in instalments
Contribution from Other Revenue (net of costs) increased by 9% to
GBP189.5 million (2015: GBP174.6 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.
Other revenue was equivalent to GBP62 per vehicle (gross of costs; 2015:
GBP63). Net Other Revenue (after deducting costs) per vehicle was GBP54,
in line with 2015.
UK Car Insurance Other Revenue - analysis of contribution:
GBPm 2014 2015 2016
Contribution from additional products and fees 177.8 173.7 185.7
Contribution from additional products underwritten
by Admiral(*1) 18.7 16.0 17.4
Instalment income 22.6 26.7 33.5
Other revenue 219.1 216.4 236.6
Internal costs (37.1) (41.8) (47.1)
Net other revenue 182.0 174.6 189.5
Other revenue per vehicle(*2) GBP67 GBP63 GBP62
Other revenue per vehicle net of internal costs GBP58 GBP54 GBP54
*1 Included in underwriting profit in income statement but re-allocated
to Other Revenue for purpose of KPIs.
*2 Other revenue (before internal costs) divided by average active
vehicles, rolling 12 month basis.
Instalment income
Instalment income reflects amounts charged to customers paying for cover
in instalments. During 2016 Admiral earned GBP33.5 million from
instalment income, up 25% on the prior period (2015: GBP26.7 million)
for a number of reasons including an increase in average premium,
customer numbers and the proportion of customers paying by instalment.
Additional products underwritten by Admiral
Besides car insurance, there are a number of other products underwritten
by Admiral that are core to providing motor insurance to customers
(personal injury insurance, breakdown cover and car hire cover).
Contribution from these products underwritten by Admiral during 2016 was
GBP17.4 million (2015: GBP16.0 million). This is included in
underwriting profit in the income statement, but reallocated to Other
Revenue for the purpose of management key performance indicators.
UK Household Insurance financial performance
GBPm 2014 2015 2016
Turnover(*1) 29.3 52.0 76.1
Total premiums written(*1) 28.4 50.7 73.3
Underwriting loss(*1) (1.2) (0.9) (1.8)
Profit commission and other income 1.1 2.1 4.5
UK Household insurance profit before tax (0.1) 1.2 2.7
*1 Alternative Performance Measures - refer to the end of this report
for definition and explanation
Key performance indicators
2014 2015 2016
Reported household loss ratio 72.3% 75.2% 76.5%
Reported household expense ratio 53.2% 33.0% 34.1%
Reported household combined ratio 125.5% 108.3% 110.6%
Households insured at year end 162,600 310,400 468,700
UK Household Insurance financial performance
UK Household Insurance was launched in December 2012 under the Admiral
brand.
The number of properties insured increased by 51% to 469,000 (2015:
310,000) and turnover increased by 46% to GBP76.1 million (2015: GBP52.0
million). Net revenue increased by 72% to GBP22.3 million (2015: GBP13.0
million). Profit from Household doubled from a year earlier to GBP2.7
million (2015: GBP1.2 million). Its expense ratio is already materially
lower than the UK market ratio.
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.
The FCA and PRA regulate the Group's UK registered subsidiaries
including EUI Limited (an insurance intermediary) and Admiral Insurance
Company Limited (AICL; an insurer), whilst the FSC regulates Admiral
Insurance (Gibraltar) Limited (AIGL; also an insurer).
The Group is required to maintain capital at a level prescribed by the
lead regulator for Solvency II purposes, the PRA, and maintains a
surplus above that required level at all times.
International Car Insurance
International Car Insurance review
Spain - Sarah Harris - CEO, Admiral Seguros
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.
It was a year of change in the Spanish market, with the introduction of
the new "Baremo" regulating indemnities paid in bodily injury cases. The
Baremo change increases claims costs, especially for more serious
injuries. It adds pressure to an auto-insurance market that reported
underwriting losses in 2015 for the first time in more than a decade.
We had hoped that the Baremo would trigger a price reaction and
insurance shopping. Many companies did raise prices towards the
beginning of the year, but changes were muted and not enough to
encourage consumers to shop around. We expect 2016 will turn out to be
another unprofitable year for the market as a whole.
In this context we made strong progress against our growth objective.
Both acquisition and retention processes were significantly improved. We
modernized our website allowing customers to buy from us more easily.
Investment in our Qualitas Auto brand - via a campaign starring Pierce
Brosnan - raised brand awareness to 57%. Meanwhile, strong technical
results allowed us to reduce prices and take a larger share of the price
comparison channel.
And the outlook for 2017? At a market level we don't expect much change.
Our focus will continue to be on scaling up the business in a
sustainable way.
Italy - Costantino Moretti - CEO, ConTe
ConTe closed for the third year in a row in profit. Market average
premium fell by 4.5% but in the last quarter we have seen timid signals
of market cycle upturn including a slight increase in claims frequency
and the end of the average premium downtrend. Despite this scenario, we
consciously decided to grow in 2016 and our active customer base grew by
over 30% year-on-year up to 415,000. This result is a mix of three
effects: an increase in quote volumes of price comparison sites; the
improvement of our customer journey; and the growth in brand awareness
generated by the new TV campaign and the second year of the Serie B
Football League sponsorship. To better serve our customers, we are
continuing to invest in technology and develop our services.
The direct channel now represents around 12% of the overall motor market
in Italy and the comparison sites are growing at an encouraging pace.
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.
Putting together all the pieces of the puzzle, 2016 was a good year,
where ConTe grew again and invested to reinforce technological
capabilities and brand awareness and, as a consequence, built a solid
basis for sustainable growth in the future.
USA - Kevin Chidwick - CEO, Elephant Auto
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. We estimate claims inflation to be running at
c.3-5% and premium increases at c.5-7%. 2016 has seen claims frequency
increasing across the industry as miles driven has increased. Texas in
particular has seen some large price increases this year as unusually
severe weather events in the first half of the year caused claims to
spike in the state.
Elephant also grew again in 2016. Written premium increased 46% to $198m,
as we increased our turnover in each of our existing states as well as
launching into two new states in the year. Elephant started writing car
insurance in Indiana and Tennessee in 2016. We continued to see very
satisfactory results from our marketing initiatives and were able to
increase our share of sales in both Texas and Virginia despite price
increases applied to both states. The loss ratio improved nicely in the
year. We also saw some expense ratio improvement from economies of scale,
offset by an increase in our marketing investment. The combined effect
of this was an improvement in the combined ratio on a written basis of
11 percentage points.
Elephant expects to continue to grow in 2017 and to see further
improvement in the combined ratio as a result of further progress on
each of the core metrics as we move the business towards the goal of
profitability. We do not anticipate further new states in the next 12
months, rather an increased investment in our existing states and
development of the marketing efforts in the two new states launched in
2016.
France - Pascal Gonzalvez - CEO, L'olivier - assurance auto
Despite challenging market conditions (stable market prices and a flat
aggregator market), L'olivier -assurance auto managed to play its cards
right with strong growth.
We grew the business substantially again and we ended the year up, with
61% more customers. The effects of "Loi Hamon" (the law that made the
switching process much smoother) are becoming more tangible.
L'olivier accelerated its branding efforts with two new TV spots focused
on service quality, helping to demonstrate to customers that direct
insurance and good quality are not mutually exclusive. As a consequence,
we managed to capture more customers than ever from traditional channels
willing to switch to a direct insurer. On top of the branding efforts,
we kept building strong foundations in 2016. Technical results improved
significantly thanks to our distinctive pricing process in the market,
helping us to build a clear competitive advantage in a high combined
ratio market.
Market profitability didn't improve in 2016. Indeed, for the second
consecutive year, the highly competitive environment hampered insurers'
willingness to increase motor insurance prices. Consequently, market
combined ratio remained high (it is expected to be around 104-105%). In
the past, weak technical results were offset by investment results but
in a low interest rate environment, this is not sustainable anymore. In
this context, motor insurance prices are expected to increase in 2017 by
2-3% and several insurers have already announced some price increases
(though more discreetly than in the previous years to avoid media
noise).
With strong foundations, L'olivier - assurance auto is well prepared to
scale up the business over the coming years and 2017 should be another
year of strong growth.
International Car Insurance review
International Car Insurance financial performance
GBPm 2014 2015 2016
Turnover(*1) 206.2 232.4 365.9
Total premiums written(*1) 185.4 213.3 331.3
Net insurance premium revenue 58.1 62.3 91.3
Investment income 0.2 - 0.4
Net insurance claims (50.5) (50.9) (75.5)
Net insurance expenses (34.0) (40.1) (46.2)
Underwriting result(*1) (26.2) (28.7) (30.0)
Net other income 6.3 6.5 10.6
International Car Insurance result (19.9) (22.2) (19.4)
Key performance indicators
2014 2015 2016
Loss ratio(*2) 77% 77% 76%
Expense ratio(*2) 50% 49% 49%
Combined ratio(*3) 127% 126% 125%
Combined ratio, net of Other revenue(*4) 116% 115% 113%
Vehicles insured at period end 592,600 673,000 864,200
*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.
*3 Combined ratio is calculated on Admiral's net share of premiums and
excludes Other Revenue. It excludes the impact of reinsurer caps.
Including the impact of reinsurer caps the reported combined ratio would
be 2016: 133%; 2015: 146%; 2014: 145%.
*4 Combined ratio, net of Other Revenue is calculated on Admiral's net
share of premiums and includes Other Revenue. Including the impact of
reinsurer caps the reported combined ratio, net of Other Revenue would
be 2016: 122%; 2015: 136%; 2014: 134%.
Geographical analysis(*1)
2016 Spain Italy France US Total
Vehicles insured at period end 189,200 415,500 91,500 168,000 864,200
Turnover (GBPm) 49.8 118.2 38.3 159.6 365.9
2015 Spain Italy France US Total
Vehicles insured at period end 160,700 315,300 56,800 140,200 673,000
Turnover (GBPm) 38.6 77.9 21.2 94.7 232.4
*1 Alternative Performance Measures - refer to the end of this report
for definition and explanation
International Car Insurance financial performance
Admiral's international insurance businesses continued to grow by 28%,
adding over 191,000 customers during the year. Turnover grew by 57% to
GBP365.9 million (2015: GBP232.4 million). Net revenue increased by 49%
to GBP107.3 million (2015: GBP72.2 million). Turnover and customers in
these businesses represent 14% (2015: 11%) and 17% (2015: 15%) of the
Group totals respectively.
The combined ratio improved marginally to 125% (2015: 126%). Continued
improvement in ConTe's prior years claims development and higher net
insurance premium revenue has been offset by continued investment in
operations in France and the US, resulting in an decreased loss of
GBP19.4 million in 2016 (2015: GBP22.2 million). The expense ratio has
remained level at 49% (2015: 49%). The expense ratio is high in
comparison to Admiral's UK business because of high acquisition costs as
the businesses grow and also the continued need to build scale. There
are also market specific reasons why the expense ratios are higher, for
example higher acquisition costs in the US cause a strain on the expense
ratio when the business is growing.
As the Group's international insurance operations grow, it is expected
that they will make losses until appropriate scale has been achieved.
The Group is satisfied with the progress each business continues to make
towards the goal of becoming a sustainable, growing, profitable
operation.
Admiral Seguros (Spain) which launched in 2006 is the oldest of
Admiral's international operations and operates under two brands,
Balumba and Qualitas Auto. Admiral Seguros focused on growth in 2016,
following the achievement of break-even on an underwriting year basis in
2015, and took advantage of market conditions resulting in growth of 18%
and ending the year with 189,200 customers at the end of 2016.
The Group's largest international operation is ConTe in Italy, which
insured 415,500 vehicles at the end of 2016, up 32% on 2015. ConTe was
launched in 2008 and in 2016 continued to experience positive
development in the projected ultimate outcomes of most underwriting
years allowing further reserve releases in 2016 and a third year of
profits. Despite this, ConTe continues to hold a prudent margin in its
claims reserves above actuarial best estimate.
Admiral's youngest and smallest international insurance business is
L'olivier - assurance auto, which launched in 2010 in France. L'olivier
insured 91,500 vehicles at the end of 2016, up over 60% on the prior
year and has focused on growth and accelerating brand development during
the year.
The consolidated result of Admiral's insurance operations in Spain,
Italy and France was a loss of GBP3.7 million, almost 50% down on 2015
(2015: GBP7.0 million). The combined ratio net of other revenue
(excluding the impact of reinsurer caps) improved to 99% from 103%
primarily due to improved claims experience.
In the USA, Admiral underwrites motor insurance in six states (Virginia,
Maryland, Illinois, Texas, Indiana and Tennessee) through its Elephant
Auto business, which launched at the end of 2009. At the end of 2016
Elephant Auto insured over 168,000 vehicles, up 20% year-on-year.
Turnover was GBP159.6 million, up almost 70% on the prior year (2015:
GBP94.7 million). Elephant's result for the period was a loss of GBP15.7
million, which is broadly consistent with GBP15.2 million in 2015,
despite significant growth, and reflects the ongoing investment in the
business. Elephant Auto's combined ratio net of other revenue improved
from 134% in 2015 to 130% in 2016.
International Car Insurance co-insurance and reinsurance
As noted earlier, Admiral makes significant use of proportional risk
sharing agreements, where insurers outside the Group underwrite a
majority of the risk generated, either through co-insurance or quota
share reinsurance contracts.
For the 2016 year Admiral retained 35% (Italy), 30% (France and Spain)
and 33% (USA) of the underwriting risk respectively. The arrangements
for 2017 will remain the same.
All contracts are subject to certain caps on the co-insurers and
reinsurers' exposures and all contracts have profit commission terms
that allow Admiral to receive a proportion of the profit earned on the
underwriting once the business reaches cumulative profitability. The
contracts include proportional sharing of Other Revenue.
Regulatory environment
Admiral's European insurance operations are generally subject to the
same regulation as the UK Car Insurance business, details of which are
summarised above, but also comply with local requirements as
appropriate. The Group's US insurer, Elephant Insurance Company, is
regulated by the Virginia State Corporation Commission's Bureau of
Insurance. The Company is required to maintain capital at levels
prescribed by the regulator and holds a surplus above these requirements
at all times.
Price Comparison
Price Comparison Review
UK - Martin Coriat - CEO, Confused.com
Confused.com has seen a lot of changes in the market since it pioneered
insurance comparison back in 2002, creating a growing and profitable
industry while offering transparency and savings to British consumers.
The UK car insurance price comparison market is characterised as mature
and highly competitive; with 70% penetration of annual new business car
insurance sales and four leading players spending in excess of GBP150
million on marketing each year.
In 2016 the high level of competition was further evidenced by the
closure of Google's comparison operation. However, 2016 was also a year
of strong growth for the market. Rising car insurance premiums, +14% as
per the Confused.com/Willis Towers Watson Car Insurance Price Index,
coupled with an all-time high in car sales for both new and used cars,
helped to stimulate shopping. Current estimates indicate the market grew
by around 8% in the year.
Confused.com benefited from this market growth but also its new
strategic direction, taken half way through the year, to focus on
motor-related products and services. As a result, Confused.com's revenue,
profit and profit margin all increased to GBP86 million, GBP16.1 million
and 19% respectively. (2015: GBP75 million; GBP12.5 million; and 17%).
A number of significant projects have been completed in the last 18
months, including investment in our platform to improve conversion with
a redesign of our website to allow better customer experience. In
addition, we have reviewed our online marketing capabilities and
established a new brand position as a car savings specialist to improve
acquisition costs and grow our customer base.
The regulatory agenda was quite busy in 2016 and we are constantly
working with the regulator to build an even more consumer focused
product and offer in an ever changing technological landscape.
2016 has seen Confused.com successfully focus its attention on what it
does best: saving customers money on their car insurance. Looking to
2017, I know that every day, every week and every month is a battle that
we must work hard to try and win.
Spain - Fernando Summers - CEO, Rastreator
During 2016 we continued with our growth, in terms of traffic, quotes
and sales and therefore in results. We have consolidated our leadership
position not only in car insurance comparison but also in other
insurance products, and in our other verticals, telephony and finance.
We are already working with more than 150 partners, which include most
of the biggest service providers in Spain - insurers, telecoms and
banks. We have increased our reach and site visit frequency across all
product lines, building on our brand awareness and preference.
We continue to work on our data strategy and we are well placed to be a
strategic partner in terms of information and data not only for our
partners, but also for other companies linked to our products.
For 2017 we will continue working on growth, converting our leads into
sales, consolidation of our role as the multiproduct price comparison
leader of the market and improving our existing products and value
proposition.
France - Elena Betés - European Price Comparison Director
2016 was a challenging year for LeLynx.fr.
Based on the 2015 results, our expectations of the impact of Loi Hamon,
in terms of changing behavior in 2016, were optimistic, however, the
aggregator market only grew by 1%. The French consumer has not yet taken
advantage of the opportunity to change their insurance provider, even if
the process has been simplified substantially.
In an effort to unblock the market and as a way to build trust, LeLynx
launched a TV campaign based on a well known celebrity.
Our vision is still positive on the French market and we remain
competitive in an increasingly crowded environment. We are focused on
maintaining our position as one of the market leaders, based on
delivering a superior product and customer experience.
USA - Andrew Rose - CEO, compare.com
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-by-state advertising investments
in light of the market conditions and our product offering to take
advantage of this swing in the auto insurance pricing cycle.
Compare.com made significant strides this year on both the quality of
our product offering and the efficiency of our customer acquisition. We
nearly doubled our number of auto insurance brands under contract, our
average number of rates returned nationwide and the number of policies
we helped our carrier partners bind. We also launched a second product
for customers looking for bundled auto and property policies, which is
how many US consumers prefer to shop. Over the same period this year,
our acquisition costs have dropped by nearly two thirds proving that we
can compete on acquisition economics at a level only achieved by a few
large personal lines insurance carriers in the US market. We outgrew our
office building this year and moved our staff into a new space three
times the size and customized to support the growth of our open and fun
culture.
In early 2016, we also saw our largest auto insurance comparison
competitor - Google - make the decision to withdraw for their own
strategic reasons, which gave us the opportunity to use earmarked IT
resources to broaden our relationships with key partners into even more
states. We even added a partner in Hawaii, so we can now quote in 50 of
the 51 markets. Other players continued to press into the comparison
market with similar, but different, models. The state-by-state and
carrier-by-carrier nature of the US insurance market gives us a solid
foothold as the largest auto insurance comparison site in the US.
While delivering a smaller than planned loss in 2016 it was on a smaller
than planned business. We remain very cognizant that we are one of
Admiral's largest investments and while we do have the great opportunity
to transform the US market we do not yet have the guarantee of doing so.
In fact we anticipate delivering continued losses in 2017 depending on
the dynamics and scale of the business and the overall behavior of the
market.
While the US price comparison market starts 2017 still in its infancy,
the potential remains enormous. A recent survey by Acxiom shows
consumers are six times more likely to buy their insurance via a
comparison site than in the past. Compare.com has built the carrier
network as well as the acquisition funnel to be the leading player as
consumers continue to adopt this better way to shop for insurance
products. We remain cautiously optimistic about our opportunity for
success in transforming the landscape of the US insurance market.
Price Comparison review
Price Comparison financial review
GBPm 2014 2015 2016
Revenue
Car insurance price comparison 81.0 82.3 97.7
Other 26.5 25.8 31.5
Total Revenue 107.5 108.1 129.2
Expenses (110.3) (123.6) (132.1)
Loss before tax (2.8) (15.5) (2.9)
Confused.com profit 15.8 12.5 16.1
International price comparison result (18.6) (28.0) (19.0)
(2.8) (15.5) (2.9)
Group's share of profit/(loss) before tax (*1)
Confused.com profit 15.8 12.5 16.1
International price comparison result (12.2) (19.7) (13.4)
3.6 (7.2) 2.7
*1 Alternative Performance Measure - refer to the end of this report
for definition and explanation
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 GBP85.7
million (2015: GBP75.4 million) from growth of 8% in the UK price
comparison market as well as a new driver-centric strategy supported by
new marketing . Profit increased by 29% to GBP16.1 million (2015:
GBP12.5 million).
Confused.com's operating margin improved to 19% (2015: 17%).
International Price Comparison
Admiral operates three price comparison businesses outside the UK: in
Spain (Rastreator), France (LeLynx) and the US (compare.com). Admiral
Group owns 75% of Rastreator, with the remaining 25% owned by Mapfre.
Admiral Group owns 71% of compare.com, with the remaining 29% owned by
White Mountains and Mapfre.
The combined revenue from the European operations in 2016 increased to
GBP36.2 million (2015: GBP28.6 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 GBP2.8 million (2015: GBP1.8 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 GBP3.9 million (2015: GBP2.3 million).
The Group continues to invest in compare.com, its US comparison
operation based in Virginia. During 2016 Admiral's share of
compare.com's loss reduced to GBP16.2 million before tax (2015: GBP21.5
million) reflecting a focus in key states on efficient advertising and
reducing acquisition costs. Statutory loss before tax decreased to
GBP22.8 million (2015: GBP30.3 million). The Group plans continued
investment in compare.com during 2017 and anticipates that the Group's
share of compare.com's losses for 2017 will be in the range of $15-25
million.
The combined result for International Price Comparison was therefore a
loss of GBP13.4 million (2015: loss GBP19.7 million) - the profit from
the European operations offset by investment in compare.com. Statutory
loss before tax was GBP19.0 million (2015: GBP28.0 million).
Preminen, the Group's newest price comparison operation continues to
explore the potential of price comparison in new markets overseas, in
partnership with Mapfre.
Regulatory environment
Confused.com is regulated by the Financial Conduct Authority (FCA) as an
insurance intermediary and is subject to all relevant intermediation
rules, including those on solvency capital.
The European operations are all structured as branches of UK companies,
with the UK insurance intermediary permission passported into Europe.
compare.com is a regulated insurance agency domiciled in Virginia, US,
and licensed in all other US states.
Other Group Items
Other Group items financial review
GBPm 2014 2015 2016
UK Commercial Vehicle operating profit 2.2 1.5 2.0
Other interest and investment income 3.7 6.5 13.4
Share scheme charges (21.2) (27.2) (31.9)
Business development costs (0.7) (1.9) (5.8)
Other central overheads (3.9) (5.6) (4.1)
Finance charges (4.6) (11.1) (11.4)
The Group operates a UK Commercial Vehicle insurance broker (Gladiator)
offering van insurance and associated products, typically to small
businesses, via telephone and the internet, including price comparison
websites. Gladiator has increased customer numbers from 146,600 to
170,800 at the end of 2016 and operating profit increased to GBP2.0
million (2015: GBP1.5 million).
Other interest and investment income includes GBP4.9 million (2015:
GBPnil) of unrealised gains on forward foreign exchange contracts which
have been impacted during 2016 by downward movements in the value of
sterling. These gains have the potential to reverse over time if the
sterling rate recovers before the contracts expire.
Share scheme charges relate to the Group's two employee share schemes
(refer to note 8 to the financial statements). The increase in the
charge is due to an increase in the number of awards reflecting the
increasing Group headcount.
Business development costs include costs associated with potential new
ventures, including investment in Admiral Loans and Preminen, the
Group's price comparison incubator.
Finance charges of GBP11.4 million (2015: GBP11.1 million) mainly
represents interest on the GBP200 million subordinated notes issued in
July 2014 (refer to note 6 to the financial statements).
UK Exit from the European Union ('Brexit')
On 23 June 2016, the UK voted in a referendum to leave the EU. At the
date of this report, the timetable for and details of the implementation
of this decision remain unclear.
Market volatility, including that which resulted from the Brexit vote
(notably very significant reductions in risk free interest rates)
adversely impacted the Group's solvency position reported in the interim
results in August 2016. This was due to an increased regulatory
valuation of claims liabilities, in particular in relation to longer
dated potential PPO claims, and hence reduced capital. Since August
2016, market volatility has reduced, risk free interest rates have
increased and the Group has received approval to use a volatility
adjusted yield curve in discounting claim liabilities. This has led to a
reduced regulatory valuation of claims liabilities and a stronger
solvency position.
As discussed above, the solvency ratio remains very strong at 212% after
the proposed final dividend is accounted for. The Directors are
satisfied this represents a very satisfactory level of surplus above
regulatory requirements and buffers.
Brexit also brings additional risks including:
-- potential further market volatility, particularly in interest and
exchange rates
-- the potential for the uncertainty or the emerging terms of exit regarding
Brexit to trigger or exacerbate less favourable economic conditions in
the UK and other countries in which Admiral operates (though it is worth
noting that car insurance has tended to be resilient to economic
downturns)
-- potential changes to or withdrawal of the right of UK financial services
firms to trade in Europe without the need for locally regulated entities
('passporting')
-- potential changes to the rules relating to the free movement of people
between the UK and EU member states
The Group is making plans to be able to deal with the withdrawal of
passporting, should this transpire, after the UK's exit from the EU is
finalised and will continue to closely monitor developments over the
coming months and years.
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.
Principal Risks and Uncertainties
The Group's 2016 Annual Report will contain an analysis of the Principal
Risks and Uncertainties identified by the Group's Enterprise Risk
Management Framework, along with the impacts of those risks and actions
taken to mitigate them.
Disclaimer on forward-looking statements
Certain statements made in this announcement are forward-looking
statements. Such statements are based on current expectations and
assumptions and are subject to a number of known and unknown risks and
uncertainties that may cause actual events or results to differ
materially from any expected future events or results expressed or
implied in these forward-looking statements.
Persons receiving this announcement should not place undue reliance on
forward-looking statements. Unless otherwise required by applicable law,
regulation or accounting standard, the Group does not undertake to
update or revise any forward-looking statements, whether as a result of
new information, future developments or otherwise.
Consolidated income statement
For the year ended 31 December 2016
Year ended
31 December 31 December
2016 2015
Note GBPm GBPm
Insurance premium revenue 1,353.6 1,130.2
Insurance premium ceded to reinsurers (804.8) (663.2)
Net insurance premium revenue 5 548.8 467.0
Other revenue 7 360.6 319.8
Profit commission 5 54.3 85.4
Investment and interest income 6 53.1 32.6
Net revenue 1,016.8 904.8
Insurance claims and claims handling expenses (1,103.8) (769.1)
Insurance claims and claims handling expenses recoverable
from reinsurers 709.2 542.6
Net insurance claims (394.6) (226.5)
Operating expenses and share scheme charges 8 (648.8) (548.0)
Operating expenses and share scheme charges recoverable
from co- and reinsurers 8 316.4 249.5
Net operating expenses and share scheme charges (332.4) (298.5)
Total expenses (727.0) (525.0)
Operating profit 289.8 379.8
Finance costs 6 (11.4) (11.1)
Profit before tax 278.4 368.7
Taxation expense 9 (64.3) (76.9)
Profit after tax 214.1 291.8
Profit after tax attributable to:
Equity holders of the parent 222.2 300.0
Non-controlling interests (NCI) (8.1) (8.2)
214.1 291.8
Earnings per share
Basic 11 78.7p 107.3p
Diluted 11 78.5p 107.1p
Dividends declared and paid (total) 11 349.8 274.6
Dividends declared and paid (per share) 11 126.3p 100.0p
Consolidated statement of comprehensive income
For the year ended 31 December 2016
Year ended
31 December 31 December
2016 2015
GBPm GBPm
Profit for the period 214.1 291.8
Other comprehensive income
Items that are or may be reclassified to profit or
loss
Movements in fair value reserve 30.3 (12.6)
Deferred tax charge in relation to movement in fair
value reserve (0.5) -
Exchange differences on translation of foreign
operations 21.2 2.6
Other comprehensive income for the period, net of
income tax 51.0 (10.0)
Total comprehensive income for the period 265.1 281.8
Total comprehensive income for the period attributable
to:
Equity holders of the parent 271.3 289.5
Non-controlling interests (6.2) (7.7)
265.1 281.8
Consolidated statement of financial position
As at 31 December 2016
As at
31 December 31 December
2016 2015
Note GBPm GBPm
ASSETS
Property and equipment 10 32.0 34.9
Intangible assets 10 162.3 142.3
Deferred income tax 9 8.4 20.6
Reinsurance assets 5 1,126.4 878.7
Insurance and other receivables 6, 10 784.9 537.1
Financial investments 6 2,420.2 2,323.5
Cash and cash equivalents 6 326.6 265.3
Total assets 4,860.8 4,202.4
EQUITY
Share capital 11 0.3 0.3
Share premium account 13.1 13.1
Other reserves 51.8 2.7
Retained earnings 505.7 599.6
Total equity attributable to equity holders of the
parent 570.9 615.7
Non-controlling interests 10.8 17.2
Total equity 581.7 632.9
LIABILITIES
Insurance contracts 5 2,749.5 2,295.0
Subordinated and other financial liabilities 6 224.0 223.9
Trade and other payables 6, 10 1,292.2 1,015.0
Current tax liabilities 13.4 35.6
Total liabilities 4,279.1 3,569.5
Total equity and total liabilities 4,860.8 4,202.4
The accompanying notes form part of these financial statements.
These financial statements were approved by the Board of Directors on 7
March 2017 and were signed on its behalf by:
Geraint Jones
Chief Financial Officer
Admiral Group plc
Company Number: 03849958
Consolidated cash flow statement
For the year ended 31 December 2016
Year ended
Restated(*1)
31 December 31 December
2016 2015
Note GBPm GBPm
Profit after tax 214.1 291.8
Adjustments for non-cash items:
- Depreciation 10.5 8.2
- Amortisation of software 12.6 6.1
- Other gains and losses - 3.2
- Share scheme charges 8 33.2 29.5
- Investment and interest income 6 (53.1) (32.6)
- Finance costs 6 11.4 11.1
- Taxation expense 9 64.3 76.9
Change in gross insurance contract liabilities 454.5 197.6
Change in reinsurance assets (247.7) (48.9)
Change in insurance and other receivables (254.6) (103.5)
Change in trade and other payables, including tax
and social security 279.9 47.8
Cash flows from operating activities, before movements
in investments 525.1 487.2
Purchases of financial instruments (646.6) (1,011.7)
Proceeds on disposal/ maturity of financial instruments 616.9 890.6
Interest and investment income received 11.6 8.6
Cash flows from operating activities, net of movements
in investments 507.0 374.7
Taxation payments (76.4) (63.8)
Taxation receipts 1.8 -
Net cash flow from operating activities 432.4 310.9
Cash flows from investing activities:
Purchases of property, equipment and software (31.6) (47.8)
Net cash used in investing activities (31.6) (47.8)
Cash flows from financing activities:
Non-controlling interest capital contribution (0.2) 10.7
Proceeds on issue of financial liabilities - 20.0
Finance costs paid (11.3) (11.0)
Repayment of finance lease liabilities (3.4) (1.4)
Equity dividends paid 11 (349.8) (274.6)
Net cash used in financing activities (364.7) (256.3)
Net increase in cash and cash equivalents 36.1 6.8
Cash and cash equivalents at 1 January 265.3 255.9
Effects of changes in foreign exchange rates 25.2 2.6
Cash and cash equivalents at end of period 6 326.6 265.3
[*1] Refer to note 2 for details.
Consolidated statement of changes in equity
For the year ended 31 December 2016
Attributable to the owners of the Company
Share Foreign Retained Non-
Share premium Fair value exchange profit controlling Total
capital account reserve reserve and loss Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2015 0.3 13.1 10.9 2.3 540.6 567.2 13.7 580.9
Profit/(loss) for the period - - - - 300.0 300.0 (8.2) 291.8
Other comprehensive income
Movements in fair value reserve - - (12.6) - - (12.6) - (12.6)
Currency translation differences - - - 2.1 - 2.1 0.5 2.6
Total comprehensive income for the period - - (12.6) 2.1 300.0 289.5 (7.7) 281.8
Transactions with equity holders
Dividends - - - - (274.6) (274.6) - (274.6)
Share scheme credit - - - - 29.5 29.5 - 29.5
Deferred tax credit on share scheme credit - - - - 4.7 4.7 - 4.7
Contributions by NCIs - - - - (0.1) (0.1) 10.7 10.6
Changes in ownership interests without a change in
control - - - - (0.5) (0.5) 0.5 -
Total transactions with equity holders - - - - (241.0) (241.0) 11.2 (229.8)
As at 31 December 2015 0.3 13.1 (1.7) 4.4 599.6 615.7 17.2 632.9
At 1 January 2016 0.3 13.1 (1.7) 4.4 599.6 615.7 17.2 632.9
Profit/(loss) for the period - - - - 222.2 222.2 (8.1) 214.1
Other comprehensive income
Movements in fair value reserve - - 30.3 - - 30.3 - 30.3
Deferred tax charge in relation to movement in fair
value reserve - - (0.5) - - (0.5) - (0.5)
Currency translation differences - - - 19.3 - 19.3 1.9 21.2
Total comprehensive income for the period - - 29.8 19.3 222.2 271.3 (6.2) 265.1
Transactions with equity holders
Dividends - - - - (349.8) (349.8) - (349.8)
Share scheme credit - - - - 33.2 33.2 - 33.2
Deferred tax credit on share scheme credit - - - - 0.5 0.5 - 0.5
Contributions by NCIs - - - - - - (0.2) (0.2)
Changes in ownership interests without a change in
control - - - - - - - -
Total transactions with equity holders - - - - (316.1) (316.1) (0.2) (316.3)
As at 31 December 2016 0.3 13.1 28.1 23.7 505.7 570.9 10.8 581.7
Notes to the financial statements
For the year ended 31 December 2016
1. General information
Admiral Group plc is a company incorporated in England and Wales. Its
registered office is at Ty Admiral, David Street, Cardiff, CF10 2EH and
its shares are listed on the London Stock Exchange.
The consolidated financial statements have been prepared and approved by
the Directors in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU). The Company has
elected to prepare its Parent Company financial statements in accordance
with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS
101).
Adoption of new and revised standards
The Group has adopted the following IFRS and interpretations during the
year, which have been issued and endorsed by the EU:
-- Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities - Applying
the Consolidation Exemption.
The application of these amendments has not had a material impact on the
Group's results, financial position and cash flows.
In 2016, the following standards, both with an effective date of 1
January 2018, were endorsed by the EU:
-- IFRS 9 Financial Instruments; and
-- IFRS 15 Revenue from Contracts with Customers
IFRS 9 - Financial Instruments
In 2014, the IASB issued the full, final version of IFRS 9. This version
supersedes all previous versions. The standard has an effective date of
1 January 2018 although earlier application is permitted. The standard
includes requirements relating to the recognition, measurement,
impairment, de-recognition of assets along with general hedge
accounting.
In late 2016, the IASB confirmed that the effective date for IFRS 17
'Insurance Contracts' will be 1 January 2021, with the full standard
expected to be issued during the first half of 2017. The 2021 effective
date means that the timescale is in line with that specified in an
amendment to IFRS 4, the existing Insurance Contracts standard, which
permits the deferral of the adoption of IFRS 9 for up to three years
from the 1 January 2018 effective date. The Group expects to take
advantage of this deferral approach and delay its adoption of IFRS 9
until 1 January 2021 to align with the effective date of IFRS 17.
Following the issuance of the full and final version of IFRS 17, the
Group plans to perform a detailed impact assessment of the
implementation of IFRS 17 and IFRS 9 on its results, financial position
and cash-flows during 2017.
IFRS 15 - Revenue from Contracts with Customers
IFRS 15 was issued during 2014 and applies to annual reporting periods
beginning on or after 1 January 2018. The standard introduces a simple,
five step principles-based model to be applied to the accounting of all
contracts with customers.
Revenue from insurance contracts and financial instruments is outside
the scope of the IFRS 15. The Group's detailed assessment of the impact
of the standard on its results, financial position and cash-flows is
currently in progress. The primary focus of this work is the other
revenue generated by a portfolio of products that supplement the core
car and household insurance policies and revenue generated by the
Group's price comparison businesses. Management's preliminary assessment
of the impact of this standard is that it is not expected to have a
material impact on the Group's financial statements.
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.
IFRS 16 - Leases
IFRS 16 Leases was issued in early 2016. The standard specifies how
firms will recognise, measure, present and disclose leases. It presents
a single lessee accounting model and requires that assets and
liabilities relating to leases of greater than 12 months are recognised
in the Consolidated Statement of Financial Position. The standard will
apply to reporting periods beginning on or after 1 January 2019.
The Group is currently assessing the impact of IFRS 16 on its results,
financial position and cash flows, along with any impacts of the other
standards and amendments which have yet to be endorsed.
2. Basis of preparation
The accounts have been prepared on a going concern basis. In considering
this requirement, the Directors have taken into account the following:
-- The Group's projections for the next 12 months and beyond, in particular
the profit forecasts, regulatory capital surpluses and levels and sources
of liquidity.
-- The risks included on the Group's risk register that could impact on the
Group's financial performance, levels of liquidity and solvency over the
next 12 months.
-- The risks on the Group's risk register that could be a threat to the
Group's business model and capital adequacy.
The Group's business activities, together with the factors likely to
affect its future development, performance and position are set out in
the Strategic Report. The Strategic Report also includes the Group's
principal risks and uncertainties. In addition, the Governance report
includes the Directors' statement on the viability of the Group over a
three year period.
Following consideration of the above, the Directors have reasonable
expectation that the Group has adequate resources to continue in
operation for the foreseeable future, a period not less than 12 months
from the date of this report, and that it is therefore appropriate to
adopt the going concern basis in preparing the financial statements.
Further information regarding the Company's business activities,
together with the factors likely to affect its future development,
performance and position, is set out earlier in this announcement.
Further information regarding the financial position of the Company, its
cash flows, liquidity position and borrowing facilities are also
described earlier in this announcement. In addition, notes 6 and 11 to
the financial statements include the Company's objectives, policies and
processes for managing its capital; its financial risk management
objectives; details of its financial instruments; and its exposures to
credit risk and liquidity risk.
The accounting policies set out in the notes to the financial statements
have, unless otherwise stated, been applied consistently to all periods
presented in these Group financial statements.
The financial statements are prepared on the historical cost basis,
except for the revaluation of financial assets classified as fair value
through profit or loss or as available for sale. The Group and Company
financial statements are presented in pounds sterling, rounded to the
nearest GBP0.1 million.
Subsidiaries are entities controlled by the Group. The Group controls an
entity when it is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those
returns through its power over the entity. In assessing control, the
Group takes into consideration potential voting rights that are
currently exercisable. The acquisition date is the date on which control
is transferred to the acquirer. The financial statements of subsidiaries
are included in the consolidated financial statements from the date that
control commences until the date that control ceases. Losses applicable
to the non-controlling interests in a subsidiary are allocated to the
non-controlling interests even if doing so causes the non-controlling
interests to have a deficit balance.
The preparation of financial statements in conformity with adopted IFRS
requires management to make judgements, estimates and assumptions that
affect the application of policies and reported amounts of assets and
liabilities, income and expenses. The estimates and associated
assumptions are based on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other
sources.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the year in
which the estimate is reviewed. To the extent that a change in an
accounting estimate gives rise to changes in assets and liabilities, it
is recognised by adjusting the carrying amount of the related asset or
liability in the period of the change.
Re-presentation of comparative information
Comparative amounts within the consolidated cash flow statement relating
to investments have been re-presented. Net cash flows into investments
have been analysed into purchases of financial instruments and proceeds
from financial instruments. Additionally, investment return and interest
income on financial investments are now captured within the adjustments
to profit after tax for non-cash items. There is no impact on total cash
and cash equivalents or on net cash flow from operating activities for
any period.
3. Critical accounting judgements and estimates
Judgements
In applying the Group's accounting policies as described in the notes to
the financial statements, management has primarily applied judgement in
the following area:
-- Classification of the Group's contracts with reinsurers as reinsurance
contracts:
A contract is required to transfer significant insurance risk in order
to be classified as such. Management reviews all terms and conditions of
each such contract, and if necessary obtains the opinion of an
independent expert at the negotiation stage in order to be able to make
this judgement. All reinsurance contracts (both excess of loss and quota
share contracts) held by the Group have been assessed and it has been
concluded that all contracts transfer significant insurance risk and
have therefore been classified and accounted for as reinsurance
contracts within these financial statements.
In addition there are two further significant accounting estimates
within the financial statements that also require management to apply
judgement:
-- Calculation of insurance claims reserves:
The Group's reserving methodology requires management to set insurance
claims reserves for the purpose of the financial statements, within a
range of potential outcomes above the projected best estimate outcome,
to allow for unforeseen adverse claims development. Management applies
judgement in determining where, within this range of potential outcomes,
the insurance claims reserves should sit. Refer to the section on
estimation techniques below for further detail on the calculation of the
projected best estimate outcome.
-- Recognition of deferred tax assets relating to unused tax losses:
Management applies judgement in determining the probability of future
taxable profits of an entity against which to utilise accumulated losses
in determining the recognition of deferred tax assets. In applying this
judgement, management makes an assessment of the reliability of approved
business plan projections using both qualitative and quantitative
factors including the age and status of the business, the Group's
previous experience in similar markets, historic performance against
business plans and the application of a number of stress and sensitivity
tests to the projections.
Estimation techniques used in calculation of claims provisions and
profit commission
Estimation techniques are used in the calculation of the provisions for
claims outstanding, which represent a projection of the ultimate cost of
settling claims that have occurred prior to the balance sheet date and
remain unsettled at the balance sheet date.
The key area where these techniques are used relates to the ultimate
cost of reported claims. A secondary area relates to the emergence of
claims that occurred prior to the balance sheet date, but had not been
reported at that date.
The estimates of the ultimate cost of reported claims are based on the
setting of claim provisions on a case-by-case basis, for all but the
simplest of claims.
The sum of these provisions is compared with projected ultimate costs
using a variety of different projection techniques (including incurred
and paid chain ladder and an average cost of claim approach) to allow an
actuarial assessment of their potential outcome. They include allowance
for unreported claims.
The most significant sensitivity in the use of the projection techniques
arises from any future step change in claims costs, which would cause
future claim cost inflation to deviate from historic trends. This is
most likely to arise from a change in the regulatory or judicial regime
that leads to an increase in awards or legal costs for bodily injury
claims that is significantly above or below the historical trend.
The Group's independent actuarial advisors project best estimate claims
reserves using a variety of recognised actuarial techniques.
As noted above, the Group's reserving policy requires management to
reserve within a range of potential outcomes above the projected best
estimate outcome, to allow for unforeseen adverse claims development.
For further detail on objectives, policies and procedures for managing
insurance risk, refer to note 5 of the financial statements.
Future changes in claims reserves also impact profit commission income,
as the measurement of this income is dependent on the loss ratio booked
in the financial statements, and cash receivable is dependent on
actuarial projections of ultimate loss ratios.
4. Group consolidation and operating segments
4a. Accounting policies
(i) Group consolidation
The consolidated financial statements comprise the results and balances
of the Company and its subsidiaries (together referred to as the Group)
for the year ended 31 December 2016 and comparative figures for the year
ended 31 December 2015. The financial statements of the Company's
subsidiaries are consolidated in the Group financial statements. The
Company controls 100% of the voting share capital of all its principal
subsidiaries, except Admiral Law Limited, BDE Law Limited, Inspop USA
LLC, the indirect holding in comparenow.com Insurance Agency LLC,
Rastreator.com Limited, the indirect holding in Comparaseguros
Correduría de Seguros, S.L., Sociedad Unipersonal, Preminen Price
Comparison Holdings Limited, the indirect holding in Preminen Dragon
Price Comparison Limited and the indirect holding in Long Yu Science and
Technology (Beijing) Co. Limited.
The Parent Company financial statements present information about the
Company as a separate entity and not about its Group. In accordance with
IAS 24, transactions or balances between Group companies that have been
eliminated on consolidation are not reported as related party
transactions in the consolidated financial statements.
(ii) Foreign currency translation
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 GBP0.1 million, which is the Group's presentation
currency.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year end
exchange rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement.
Non-monetary items measured at cost are translated at their historic
rate and non-monetary items held at fair value are translated using the
foreign exchange rate on the date that the fair value was established.
The financial statements of foreign operations whose functional currency
is not pounds sterling are translated into the Group presentation
currency (sterling) as follows:
-- Assets and liabilities for each balance sheet presented are translated at
the closing rate at the date of that balance sheet.
-- Income and expenses for each income statement are translated at average
exchange rates (unless this average is not a reasonable approximation of
the cumulative effect of the rates prevailing on the transaction dates,
in which case income and expenses are translated at the date of the
transaction).
-- All resulting exchange differences are recognised in other comprehensive
income and in a separate component of equity except to the extent that
the translation differences are attributable to non-controlling
interests.
On disposal of a foreign operation, the cumulative amount recognised in
equity relating to that particular operation is recognised in the income
statement.
4b. Segment reporting
The Group has four reportable segments, as described below. These
segments represent the principal split of business that is regularly
reported to the Group's Board of Directors, which is considered to be
the Group's chief operating decision maker in line with IFRS 8 Operating
Segments.
UK Insurance
The segment consists of the underwriting of car insurance, household
insurance and other products that supplement the car insurance policy
within the UK. It also includes the generation of revenue from
additional products and fees from underwriting car insurance in the UK.
The Directors consider the results of these activities to be reportable
as one segment as the activities carried out in generating the revenue
are not independent of each other and are performed as one business.
This mirrors the approach taken in management reporting.
International Car Insurance
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.
Price Comparison
The segment relates to the Group's price comparison businesses:
Confused.com in the UK, Rastreator in Spain, LeLynx in France and
compare.com in the US. Each of the price comparison businesses are
operating in individual geographical segments but are grouped into one
reporting segment as Rastreator, LeLynx and compare.com do not
individually meet the threshold requirements in IFRS 8.
Other
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, and commercial van insurance.
Taxes are not allocated across the segments and, as with the corporate
activities, are included in the reconciliation to the Consolidated
Income Statement and Consolidated Statement of Financial Position.
An analysis of the Group's revenue and results for the year ended 31
December 2016, by reportable segment, is shown below. The accounting
policies of the reportable segments are consistent with those presented
in the notes to the financial statements for the Group.
Year ended 31 December 2016
UK International Price
Insurance Car Insurance Comparison Other Eliminations(*2) Total
GBPm GBPm GBPm GBPm GBPm GBPm
Turnover(*1) 2,063.1 365.9 129.2 17.6 (20.8) 2,555.0
Net insurance
premium
revenue 454.4 94.3 - 0.1 - 548.8
Other Revenue
and profit
commission 277.2 12.6 129.2 16.7 (20.8) 414.9
Investment and
interest
income 39.3 0.4 - - - 39.7
Net revenue 770.9 107.3 129.2 16.8 (20.8) 1,003.4
Net insurance
claims (317.9) (76.5) - (0.2) - (394.6)
Expenses (114.5) (50.2) (132.1) (14.7) 20.8 (290.7)
Segment
profit/(loss)
before tax 338.5 (19.4) (2.9) 1.9 - 318.1
Other central revenue and expenses, including share
scheme charges (41.7)
Investment and
interest
income 13.4
Finance costs (11.4)
Consolidated
profit before
tax 278.4
Taxation expense (64.3)
Consolidated
profit after
tax 214.1
Other segment
items:
- Intangible and
tangible asset
additions 46.2 28.9 0.4 4.2 - 79.7
- Depreciation
and
amortisation 39.0 22.2 1.3 3.8 - 66.3
*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.
Revenue and results for the corresponding reportable segments for the
year ended 31 December 2015 are shown below.
Restated(*1) Year ended 31 December 2015
UK International Price
Insurance Car Insurance Comparison Other Eliminations(*3) Total
GBPm GBPm GBPm GBPm GBPm GBPm
Turnover(*2) 1,760.2 232.4 108.1 18.1 (14.2) 2,104.6
Net insurance
premium
revenue 397.4 64.5 - 5.1 - 467.0
Other Revenue
and profit
commission 287.7 7.7 108.1 15.9 (14.2) 405.2
Investment and
interest
income 26.1 - - - - 26.1
Net revenue 711.2 72.2 108.1 21.0 (14.2) 898.3
Net insurance
claims (169.5) (51.6) - (5.4) - (226.5)
Expenses (97.5) (42.8) (123.6) (14.1) 14.2 (263.8)
Segment
profit/(loss)
before tax 444.2 (22.2) (15.5) 1.5 - 408.0
Other central revenue and expenses, including share
scheme charges (34.7)
Investment and
interest
income 6.5
Finance costs (11.1)
Consolidated
profit before
tax 368.7
Taxation expense (76.9)
Consolidated
profit after
tax 291.8
Other segment
items:
- Intangible and
tangible asset
additions 62.3 18.7 1.4 4.1 - 86.5
- Depreciation
and
amortisation 26.9 16.1 1.5 3.8 - 48.3
*1 2015 comparatives have been restated to be consistent with the
segment splits applied in 2016, whereby UK Household Insurance is
included within the UK Insurance segment. Previously the results of the
UK Household business were reported within the Other segment as they
were not considered a material part of the UK result.
*2 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.
*3 Eliminations are in respect of the intra-group trading between the
Group's price comparison and UK and International insurance entities.
Segment revenues
The UK and International Car Insurance reportable segments derive all
insurance premium income from external policyholders. Revenue within
these segments is not derived from an individual policyholder that
represents 10% or more of the Group's total revenue.
The total of Price Comparison revenues from transactions with other
reportable segments is GBP20.8 million (2015: GBP14.2 million) which has
been eliminated on consolidation. There are no other transactions
between reportable segments.
Revenues from external customers for products and services are
consistent with the split of reportable segment revenues as shown above.
Information about geographical locations
All material revenues from external customers, and net assets attributed
to a foreign country, are shown within the International Car Insurance
reportable segment shown on the previous pages. The revenue and results
of the three international Price Comparison businesses, Rastreator,
LeLynx and compare.com are not yet material enough to be presented as a
separate segment.
Segment assets and liabilities
The identifiable segment assets and liabilities at 31 December 2016 are
as follows:
As at 31 December 2016
International
UK Car Price
Insurance Insurance Comparison Other Eliminations Total
GBPm GBPm GBPm GBPm GBPm GBPm
Property and
equipment 26.8 4.0 1.2 - - 32.0
Intangible
assets 73.8 23.0 1.8 63.7 - 162.3
Reinsurance
assets 881.4 244.7 - 0.3 - 1,126.4
Insurance and
other
receivables 890.3 132.8 14.8 (185.6) (67.4) 784.9
Financial
investments 2,145.0 45.6 12.2 - - 2,202.8
Cash and cash
equivalents 178.0 100.6 33.0 8.0 - 319.6
Reportable
segment
assets 4,195.3 550.7 63.0 (113.6) (67.4) 4,628.0
Insurance
contract
liabilities 2,359.9 385.4 - 4.2 - 2,749.5
Trade and
other
payables 1,147.7 122.1 11.3 11.1 - 1,292.2
Reportable
segment
liabilities 3,507.6 507.5 11.3 15.3 - 4,041.7
Reportable
segment net
assets 687.7 43.2 51.7 (128.9) (67.4) 586.3
Unallocated
assets and
liabilities (4.6)
Consolidated
net assets 581.7
Unallocated assets and liabilities consist of other central assets and
liabilities, plus deferred and current corporation tax balances. These
assets and liabilities are not regularly reviewed by the Board of
Directors in the reportable segment format.
There is an asymmetrical allocation of assets and income to the
reportable segments, in that the interest earned on cash and cash
equivalent assets deployed in the UK Insurance, Price Comparison and
International Car Insurance segments is not allocated in arriving at
segment profits. This is consistent with regular reporting to the Board
of Directors.
Eliminations represent inter-segment funding and balances included in
insurance and other receivables.
The segment assets and liabilities at 31 December 2015 are as follows:
Restated(*1) As at 31 December 2015
International
UK Car Price
Insurance Insurance Comparison Other Eliminations Total
GBPm GBPm GBPm GBPm GBPm GBPm
Property and
equipment 30.6 3.0 1.3 - - 34.9
Intangible
assets 62.1 14.2 2.3 63.7 - 142.3
Reinsurance
assets 719.4 159.0 - 0.3 - 878.7
Insurance and
other
receivables 576.6 41.5 19.2 (25.4) (74.8) 537.1
Financial
investments 2,042.4 43.2 - - - 2,085.6
Cash and cash
equivalents 93.8 94.3 59.5 11.8 - 259.4
Reportable
segment
assets 3,524.9 355.2 82.3 50.4 (74.8) 3,938.0
Insurance
contract
liabilities 2,031.6 257.3 - 6.1 - 2,295.0
Trade and
other
payables 939.5 55.5 9.1 10.9 - 1,015.0
Reportable
segment
liabilities 2,971.1 312.8 9.1 17.0 - 3,310.0
Reportable
segment net
assets 553.8 42.4 73.2 33.4 (74.8) 628.0
Unallocated
assets and
liabilities 4.9
Consolidated
net assets 632.9
*1 2015 comparatives have been restated to be consistent with the
segment splits applied in 2016, whereby UK Household Insurance is
included within the UK Insurance segment. Previously the results of the
UK Household business were reported within the Other segment as they
were not considered a material part of the UK result.
5. Premium, claims and profit commissions
5a. Accounting policies
(i) Revenue - premiums
Premiums relating to insurance contracts are recognised as revenue, net
of insurance premium tax, proportionally over the period of cover.
Premiums with an inception date after the end of the period are held in
the statement of financial position as deferred revenue. Outstanding
collections from policyholders are recognised within policyholder
receivables.
(ii) Revenue - profit commission
Under some of the co-insurance and reinsurance contracts under which
motor premiums are shared or ceded, profit commission may be earned on a
particular year of account, which is usually subject to performance
criteria such as loss ratios and expense ratios. The commission is
dependent on the ultimate outcome of any year, with revenue being
recognised when loss and expense ratios used in the preparation of the
financial statements move below a contractual threshold. Profit
commission receivable from reinsurance contracts is accounted for in
line with IFRS 4, whereas profit commission receivable from co-insurance
contracts is in line with IAS 18.
(iii) Insurance contracts and reinsurance assets
Premiums
The proportion of premium receivable on in-force policies relating to
unexpired risks is reported in insurance contract liabilities and
reinsurance assets as the unearned premium provision - gross and
reinsurers' share respectively.
Claims
Claims and claims handling expenses are charged as incurred, based on
the estimated direct and indirect costs of settling all liabilities
arising on events occurring up to the balance sheet date.
The provision for claims outstanding comprises provisions for the
estimated cost of settling all claims incurred but unpaid at the balance
sheet date, whether reported or not. Anticipated reinsurance recoveries
are disclosed separately as assets.
Whilst the Directors consider that the gross provisions for claims and
the related reinsurance recoveries are fairly stated on the basis of the
information currently available to them, the ultimate liability will
vary as a result of subsequent information and events and may result in
significant adjustments to the amounts provided.
Adjustments to the amounts of claims provisions established in prior
years are reflected in the income statement for the period in which the
adjustments are made and disclosed separately if material. The methods
used, and the estimates made, are reviewed regularly.
Provision for unexpired risks is made where necessary for the estimated
amount required over and above unearned premiums (net of deferred
acquisition costs) to meet future claims and related expenses.
Co-insurance
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.
Reinsurance assets
Contracts entered into by the Group with reinsurers under which the
Group is compensated for losses on the insurance contracts issued by the
Group are classified as reinsurance contracts. A contract is only
accounted for as a reinsurance contract where there is significant
insurance risk transfer between the insured and the insurer.
Reinsurance assets are comprised of balances due from reinsurance
companies for ceded insurance liabilities. Amounts recoverable from
reinsurers are estimated in a consistent manner with the outstanding
claims provisions or settled claims associated with the reinsured
policies and in accordance with the relevant reinsurance contract.
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.
On the commutation of reinsurance contracts, the reinsurer is discharged
from all obligations relating to the contract. Reinsurance assets and
liabilities relating to the commuted contracts are settled in the period
in which the commutation agreement is signed.
5b. Net insurance premium revenue
31 December 31 December
2016 2015
GBPm GBPm
Total motor insurance premiums written before
co-insurance 2,193.9 1,805.2
Group gross premiums written after co-insurance 1,482.0 1,199.9
Outwards reinsurance premiums (883.6) (709.8)
Net insurance premiums written 598.4 490.1
Change in gross unearned premium provision (128.4) (69.7)
Change in reinsurers' share of unearned premium
provision 78.8 46.6
Net insurance premium revenue 548.8 467.0
The Group's share of its insurance business was underwritten by Admiral
Insurance (Gibraltar) Limited, Admiral Insurance Company Limited and
Elephant Insurance Company. All contracts are short term in duration,
lasting for 10 or 12 months.
5c. Profit commission
31 December 31 December
2016 2015
GBPm GBPm
Underwriting year (UK car only)
2011 and prior 16.7 31.4
2012 9.6 36.9
2013 26.4 16.9
2014 - -
2015 - -
2016 - -
Total UK Car profit commission 52.7 85.2
Underwriting year (UK Household only)
2014 and prior - -
2015 0.7 0.2
2016 0.9 -
Total UK Household profit commission 1.6 0.2
Total profit commission 54.3 85.4
*1 Profit commission for the UK Car business relates solely to
co-insurance arrangements and profit commission for the UK Household
business relates solely to reinsurance arrangements.
5d. Reinsurance assets and insurance contract liabilities
(i) Objectives, policies and procedures for the management of insurance
risk
The Group's primary business is the issuance of insurance contracts that
transfer risk from policyholders to the Group and its co-insurance
partners.
Insurance risk involves uncertainty over the occurrence, amount or
timing of claims arising on insurance contracts issued. It is primarily
comprised of Reserve risk; the risk that the value of insurance
liabilities established is insufficient to cover the ultimate cost of
claims incurred at the balance sheet date, and Premium risk; the risk
that the claims experience on business written but not earned is higher
than allowed for in the premiums charged to policyholders.
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.
The Group also has a Reserving Committee which comprises senior managers
within the finance, claims, pricing and actuarial functions. The
Reserving Committee primarily recommends the approach for UK Car
Insurance reserving but also reviews the systems and controls in place
to support accurate reserving and material reserving issues such as
Periodic Payment Order (PPO) and claims inflation, which represent the
key uncertainties in the amount or timing of claims settlements.
The Board implements certain policies in order to mitigate and control
the level of insurance risk accepted by the Group. These include pricing
policies and claims management and administration processes, in addition
to reserving policies and co- and reinsurance arrangements as detailed
below.
Reserve Risk
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;
-- Regular management and internal actuarial review of large claims,
including claims settled or potentially settled by PPOs for which the
uncertainty is increased by factors such as the lifetime of the claimant
and movements in the indexation for the cost of future care of the
claimant;
-- Bi-annual external actuarial review of best estimate claims reserves
using a variety of recognised actuarial techniques;
-- Internal actuarial analysis of reserve uncertainty through qualitative
analysis, scenario testing and a range of stochastic reserving
techniques;
-- Ad hoc external reviews of reserving related processes and assumptions;
-- Use of a reserving methodology which informs management's reserving
decisions for the purposes of the Group's financial statements. As
described in note 3, critical accounting judgements and estimates, the
methodology determines that reserves should be set within a range above
projected best estimate outcomes to allow for unforeseen adverse claims
development.
As noted in the Strategic Report, the Group shares a significant amount
of the motor insurance business generated with external underwriters. In
2015, 40% of the UK car insurance risk was shared under a co-insurance
contract, under which the primary risk is borne by the co-insurer. A
further 35% of the UK risk was ceded under quota share reinsurance
contracts. Co-insurance and reinsurance contracts are also used in the
International Car Insurance businesses. Further detail can be found
earlier in this announcement.
As well as these proportional arrangements, an excess of loss
reinsurance programme is also purchased to protect the Group against
very large individual claims and catastrophe losses.
Premium Risk
As noted above, the Group defines Premium risk as the risk that claims
cost on business written but not yet earned is higher than allowed for
in the premiums charged to policyholders. This also includes catastrophe
risk; the risk of incurring significant losses as a result of the
occurrence of manmade catastrophe or natural weather events.
Key processes and controls operating to mitigate premium risk are as
follows:
-- Experienced and focused senior management and teams in relevant business
areas including pricing and claims management;
-- A data-driven and analytical approach to regular monitoring of claims and
underwriting performance;
-- Capability to identify and resolve underperformance promptly through
changes to key performance drivers, in particular pricing.
In addition, as mentioned above, an excess of loss reinsurance programme
is also purchased to protect the Group against very large individual
claims and catastrophe losses.
Other elements of insurance risk include reinsurance risk; the risk of
placement of ineffective reinsurance arrangements, or the economic risk
of reduced availability of co-insurance and reinsurance arrangements in
future periods.
The Group mitigates these risks by ensuring that it has a diverse range
of financially secure reinsurance partners, including a long-term
relationship with Munich Re and a number of other high profile
reinsurers.
Concentration of insurance risk
The Directors do not believe there are significant concentrations of
insurance risk. This is because, although the Group has historically
written only one significant line of UK insurance business, the risks
are spread across a large number of people and a wide regional base. The
introduction of the international car insurance businesses in recent
years and the launch of UK household business in 2012 will further
contribute to the diversification of the Group's insurance risk as these
businesses grow.
(ii) Event after the reporting period - Ogden discount rate change
On 27 February 2017, the Lord Chancellor announced a change in the Ogden
discount rate, which is used in the calculation of personal injury
claims compensation in the UK. The change reduced the discount rate from
2.5% to minus 0.75%. This change has been reflected in the gross and
reinsurers share of insurance liabilities reported in these financial
statements. Refer to the following section for sensitivities in this key
assumption.
(iii) Sensitivity of recognised amounts to changes in assumptions
Ogden discount rate
As noted above, the gross and reinsurers share of insurance liabilities
in these financial statements are prepared on the basis of an Ogden
discount rate of minus 0.75%. On 27 February 2017, the Lord Chancellor
also announced a consultation that considers options for reform in the
setting of this rate, resulting in potential for further changes in the
rate.
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.
2016 2016
Gross Net
GBPm GBPm
Impact of increase in assumed Ogden discount rate
of 75 basis points (to 0%) 125.7 68.7
Impact of decrease in assumed Ogden discount rate
of 75 basis points (to minus 1.5%) (198.1) (102.1)
The net impacts are stated net of co-insurance reinsurance and include
the impact on net insurance claims along with the associated profit
commission movements that result from the change in the Ogden rate.
Underwriting year loss ratios - UK Car Insurance
In addition to the sensitivity above, the following table sets out the
impact on equity and post-tax profit or loss at 31 December 2016 that
would result from a 1% movement (both increase and decrease) in the UK
Car insurance loss ratios used for each underwriting year for which
material amounts remain outstanding.
Underwriting year
2013 2014 2015 2016
Booked loss ratio 70% 84% 87% 88%
Impact of 1% change (GBPm) 11.4 6.8 3.0 1.8
As above, the impact is stated net of reinsurance and includes the
change in net insurance claims along with the associated profit
commission movements that result from changes in loss ratios. The
figures are stated net of tax at the current rate.
(iv) Analysis of recognised amounts
31 December 31 December
2016 2015
GBPm GBPm
Gross
Claims outstanding(*1) 2,030.8 1,725.0
Unearned premium provision 718.7 570.0
Total gross insurance liabilities 2,749.5 2,295.0
Recoverable from reinsurers
Claims outstanding 701.6 544.8
Unearned premium provision 424.8 333.9
Total reinsurers' share of insurance liabilities 1,126.4 878.7
Net
Claims outstanding 1,329.2 1,180.2
Unearned premium provision 293.9 236.1
Total insurance liabilities - net 1,623.1 1,416.3
*1 Gross claims outstanding at 31 December 2016 is presented before the
deduction of salvage and subrogation recoveries totalling GBP37.7
million.
The maturity profile of gross insurance liabilities at the end of 2016
is as follows:
< 1 year 1-3 years > 3 years
GBPm GBPm GBPm
Claims outstanding 754.4 700.1 576.3
Unearned premium provision 718.7 - -
Total gross insurance liabilities 1,473.1 700.1 576.3
The maturity profile of gross insurance liabilities at the end of 2015
was as follows:
< 1 year 1-3 years > 3 years
Restated(*1) GBPm GBPm GBPm
Claims outstanding 503.5 492.0 729.5
Unearned premium provision 570.0 - -
Total gross insurance liabilities 1,073.5 492.0 729.5
*1 Maturity profile for 2015 has been restated to recognise the maturity
of the unearned premium provision within 1 year. The analysis presented
previously presented the maturity of claims liabilities expected to
arise from the provision.
(v) Analysis of claims incurred
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.
Financial year ended 31 December
Analysis of
claims incurred 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
(gross amounts) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underwriting
year (UK
insurance)
2007 and prior (158.5) (33.2) 32.0 5.0 8.5 (0.5) (0.6) 0.0 (2.9) (2.7)
2008 - (146.4) (94.5) 16.8 4.6 (1.5) (0.6) 1.2 0.0 (0.5) (220.9)
2009 - - (176.8) (121.7) (6.0) (3.6) 6.2 7.3 0.0 3.2 (291.4)
2010 - - - (260.4) (257.2) 9.8 36.7 19.5 13.5 4.1 (434.0)
2011 - - - - (444.3) (329.7) 43.3 51.4 47.9 (0.9) (632.3)
2012 - - - - - (463.7) (334.7) 49.8 69.2 8.6 (670.8)
2013 - - - - - - (431.1) (325.5) 53.6 44.4 (658.6)
2014 - - - - - - - (438.2) (347.1) 25.6 (759.7)
2015 - - - - - - - - (428.4) (411.2) (839.6)
2016 - - - - - - - - - (529.4) (529.4)
UK insurance
gross claims
incurred (158.5) (179.6) (239.3) (360.3) (694.4) (789.2) (680.8) (634.5) (594.2) (858.8)
Underwriting
year
(International
insurance)
2007 and prior (7.9) (12.4) 0.3 0.1 (0.1) (0.1) (0.1) 0.0 0.0 0.0
2008 - (11.1) (12.7) (0.4) (0.6) (0.4) (0.2) 0.2 0.1 0.1 (25.0)
2009 - - (10.8) (13.9) (3.1) (3.9) 0.1 1.4 0.2 0.0 (30.0)
2010 - - - (17.6) (26.1) (7.1) 0.1 3.5 1.0 0.5 (45.7)
2011 - - - - (35.7) (42.7) 1.2 5.7 1.7 4.0 (65.8)
2012 - - - - - (58.0) (53.7) 0.7 4.0 6.0 (101.0)
2013 - - - - - - (68.2) (57.8) 4.2 7.7 (114.1)
2014 - - - - - - - (85.2) (65.5) 4.4 (146.3)
2015 - - - - - - - - (92.6) (101.6) (194.2)
2016 - - - - - - - - - (138.9) (138.9)
International
insurance gross
claims
incurred (7.9) (23.5) (23.2) (31.8) (65.6) (112.2) (120.8) (131.5) (146.9) (217.8)
Other gross
claims
incurred 0.0 (2.9) (10.5) (7.6) 0.0 (1.7) (2.2) (7.1) (5.4) (0.1)
Claims handling
costs (6.2) (7.8) (10.1) (17.0) (25.9) (26.0) (22.9) (21.4) (22.6) (27.1)
Total gross
claims
incurred (172.6) (213.8) (283.1) (416.7) (785.9) (929.1) (826.7) (794.5) (769.1) (1,103.8)
Financial year ended 31 December
Analysis of
claims incurred 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
(net amounts) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Underwriting
year (UK
insurance)
2007 and prior (93.5) (10.9) 22.2 2.9 8.9 (0.5) (0.6) 0.0 (2.9) (1.2)
2008 - (89.5) (57.7) 10.2 4.6 (1.5) (0.6) 1.2 0.0 1.6 (131.7)
2009 - - (96.9) (67.0) (4.8) (3.6) 6.2 7.3 0.0 4.8 (154.0)
2010 - - - (130.2) (128.6) 8.4 36.7 19.5 13.5 8.8 (171.9)
2011 - - - - (203.7) (151.1) 39.7 51.4 47.9 8.4 (207.4)
2012 - - - - - (196.0) (139.3) 49.8 69.2 19.4 (196.9)
2013 - - - - - - (184.4) (135.0) 38.4 49.3 (231.5)
2014 - - - - - - - (187.0) (144.1) (16.3) (347.7)
2015 - - - - - - - - (182.1) (162.0) (344.1)
2016 - - - - - - - - - (219.4) (219.4)
UK insurance
net claims
incurred (93.5) (100.4) (132.4) (184.1) (323.6) (344.3) (242.3) (192.8) (160.1) (306.7)
Underwriting
year
(International
insurance)
2007 and prior (2.8) (4.3) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 0.0
2008 - (3.9) (4.8) (0.1) (0.2) (0.2) (0.1) 0.1 0.0 0.0 (9.2)
2009 - - (4.4) (5.6) (1.6) (2.0) 0.0 0.7 0.1 0.0 (12.8)
2010 - - - (7.1) (11.5) (3.5) 0.0 1.7 0.5 0.2 (19.7)
2011 - - - - (14.9) (18.7) 0.4 2.9 0.8 2.0 (27.5)
2012 - - - - - (24.2) (22.8) (0.8) 2.0 2.2 (43.6)
2013 - - - - - - (26.6) (23.5) 1.7 4.8 (43.6)
2014 - - - - - - - (31.6) (23.3) 1.8 (53.1)
2015 - - - - - - - - (33.4) (39.6) (73.0)
2016 - - - - - - - - - (47.9) (47.9)
International
insurance net
claims
incurred (2.8) (8.2) (9.2) (12.8) (28.3) (48.6) (49.1) (50.5) (51.6) (76.5)
Other net
claims
incurred 0.0 (1.3) (4.4) (3.1) 0.0 (0.8) (2.1) (6.9) (5.4) (0.2)
Claims handling
costs (3.5) (4.7) (5.7) (8.5) (11.9) (10.8) (9.5) (8.9) (9.4) (11.2)
Total net
claims
incurred (99.8) (114.6) (151.7) (208.5) (363.8) (404.5) (303.0) (259.1) (226.5) (394.6)
The table below shows the development of UK Car Insurance loss ratios
for the past five financial periods, presented on an underwriting year
basis.
Financial year ended 31 December
UK Car Insurance loss ratio
development 2012 2013 2014 2015 2016
Underwriting year (UK car only)
2012 84% 78% 73% 66% 64%
2013 - 85% 82% 76% 70%
2014 - - 92% 89% 84%
2015 - - - 87% 87%
2016 - - - - 88%
(vi) Analysis of claims reserve releases
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
2012 2013 2014 2015 2016
Gross GBPm GBPm GBPm GBPm GBPm
Underwriting year (UK insurance)
2012 and prior 36.2 115.8 129.7 128.3 41.7
2013 - - 18.4 53.4 49.3
2014 - - - 16.0 42.8
2015 - - - - 1.9
Total gross release (UK Insurance) 36.2 115.8 148.1 197.7 135.7
Total gross release (International
Insurance) - - 12.6 14.0 21.0
Total gross release 36.2 115.8 160.7 211.7 156.7
Financial year ended 31 December
2012 2013 2014 2015 2016
Net GBPm GBPm GBPm GBPm GBPm
Underwriting year (UK Insurance)
2012 and prior 17.6 94.2 129.7 128.3 41.7
2013 - - 7.7 38.4 49.3
2014 - - - 6.7 (16.4)
2015 - - - - 0.8
Total net release (UK Insurance) 17.6 94.2 137.4 173.4 75.4
Total net release (International
Insurance) - - 6.3 6.5 9.9
Total net release 17.6 94.2 143.7 179.9 85.3
Analysis of net releases on UK
Insurance:
- Net releases on Admiral net share 16.3 53.3 66.8 84.6 58.3
- Releases on commuted quota share
reinsurance contracts(*1) 1.3 40.9 70.6 88.8 17.1
Total net release as above 17.6 94.2 137.4 173.4 75.4
Admiral typically commutes quota share reinsurance contracts in its UK
Car Insurance business 24 or 36 months following the start of the
underwriting year. After commutation, any changes in claims costs on the
commuted proportion of the business are reflected within claims costs
and are separately analysed here. Releases on commuted quota share
contracts are analysed by underwriting year as follows:
Financial year ended 31 December
2012 2013 2014 2015 2016
GBPm GBPm GBPm GBPm GBPm
Underwriting year
2012 and prior 1.3 40.9 70.6 72.5 22.6
2013 - - - 16.3 28.8
2014 - - - - (34.3)
2015 - - - - -
Total releases on commuted quota share reinsurance
contracts 1.3 40.9 70.6 88.8 17.1
Included within releases on commuted quota share contracts are accruals
for additional reserves arising from the commutation of 2014 year UK
motor quota share contracts. Refer to the business review earlier in
this report for further detail.
Profit commission is analysed in note 5c.
(vii) Reconciliation of movement in claims provision
31 December 2016
Gross Reinsurance Net
GBPm GBPm GBPm
Claims provision at start of period 1,725.0 (544.8) 1,180.2
Claims incurred (excluding releases) 1,233.4 (764.8) 468.6
Reserve releases (156.7) 71.4 (85.3)
Movement in claims provision due to commutation - 186.2 186.2
Claims paid and other movements (*1) (770.9) 350.4 (420.5)
Claims provision at end of period(*2) 2,030.8 (701.6) 1,329.2
31 December 2015
Gross Reinsurance Net
GBPm GBPm GBPm
Claims provision at start of period 1,596.0 (538.2) 1,057.8
Claims incurred (excluding releases) 963.4 (566.3) 397.1
Reserve releases (211.7) 31.8 (179.9)
Movement in claims provision due to commutation - 233.8 233.8
Claims paid and other movements (*1) (622.7) 294.1 (328.6)
Claims provision at end of period(*2) 1,725.0 (544.8) 1,180.2
*1 Net claims paid in the year to 31 December 2016 includes salvage and
subrogation recoveries of GBP37.7 million which have been reclassified
to insurance and other receivables.
*2 The increase in net claims reserve from GBP1,180.2 million at 31
December 2015 to GBP1,329.2 million at 31 December 2016 is partly as a
result of the increase in the size of gross claims reserves but largely
due to the impact of commutations of reinsurance contracts in the UK Car
Insurance business.
(viii) Reconciliation of movement in net unearned premium provision
31 December 2016
Gross Reinsurance Net
GBPm GBPm GBPm
Unearned premium provision at start of period 570.0 (333.9) 236.1
Written in the period 1,482.0 (883.6) 598.4
Earned in the period (1,333.3) 792.7 (540.6)
Unearned premium provision at end of period 718.7 (424.8) 293.9
31 December 2015
Gross Reinsurance Net
GBPm GBPm GBPm
Unearned premium provision at start of period 501.4 (291.6) 209.8
Written in the period 1,199.9 (709.8) 490.1
Earned in the period (1,131.3) 667.5 (463.8)
Unearned premium provision at end of period 570.0 (333.9) 236.1
6. Investments
6a. Accounting policies
(i) Investment income and finance costs
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 term deposits and gilts.
Finance costs from financial liabilities comprise interest expense on
subordinated notes, calculated on the effective interest rate method.
The effective interest rate method calculates the amortised cost of a
financial asset or liability (or group of financial assets or financial
liabilities) and allocates the interest income or expense over the
expected life of the asset or liability.
(ii) Financial assets - investments and receivables
Initial recognition
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.
At initial recognition assets are recognised at fair value and
classified according to the purpose for which they were acquired.
The Group's investments in money market liquidity funds are designated
as FVTPL at inception.
This designation is permitted under IAS 39, as the investments in money
market funds are managed as a group of assets and internal performance
evaluation of this group is conducted on a fair value basis.
The Group's holdings in Fixed Income and Asset Backed Securities are
classified as AFS investments, which is consistent with the intention
for which they were purchased.
The Group's deposits with credit institutions and gilts are classified
as held to maturity investments, which is consistent with the intention
for which they were purchased.
Transaction costs associated with the purchase of all financial assets
are expensed within the income statement as incurred.
Subsequent measurement
Financial assets at FVTPL are stated at fair value, with any resultant
realised or unrealised gain or loss recognised through the income
statement.
AFS fixed income and asset backed securities are stated at fair value.
Unrealised changes in the fair value of these assets are recognised in
Other Comprehensive Income (OCI). Interest income on debt securities is
recognised within profit or loss using the effective interest rate
method.
Deposits and gilts with fixed maturities, classified as held to maturity
investments, are measured at amortised cost using the effective interest
method. Movements in the amortised cost are recognised through the
income statement, as are any impairment losses.
Loans and receivables are stated at their amortised cost less impairment
using the effective interest method. Impairment losses are recognised
through the income statement.
Impairment of financial assets
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.
Objective evidence of impairment may include default on cash flows due
from the asset and reported financial difficulty of the issuer or
counterparty.
Identified impairments of financial assets are recognised in the income
statement, except in the case of assets classified as AFS where
unrealised gains have been recognised through OCI. In this instance,
impairments of the asset are first set against the unrealised gain in
OCI with any excess being recognised in the income statement.
De-recognition of financial assets
A financial asset is derecognised when the rights to receive cash flows
from that asset have expired, or when the Group transfers the asset and
all the attached substantial risks and rewards relating to the asset to
a third party.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call
with banks and other short term deposits with original maturities of
three months or less. All cash and cash equivalents are measured at
amortised cost.
(iii) Financial liabilities
Initial recognition
The Group's financial liabilities comprise subordinated notes and other
financial liabilities initially recognised at fair value received, net
of transaction costs incurred.
Subsequent measurement
Subsequent measurement is at amortised cost using the effective interest
method. Movements in the amortised cost are recognised through the
income statement.
De-recognition of financial liabilities
A financial liability is derecognised when the obligation under that
liability is discharged, cancelled or expires.
(iv) Fair value measurement of assets held at amortised cost
The fair value of gilts and subordinated notes held at amortised cost is
calculated with reference to quoted market valuations. See note 6d for a
comparison of fair value and carrying value at the statement of
financial position date.
The Group's deposits are held with well rated institutions; as such the
fair value approximates to the book value of the investment based on the
interest rates of the instruments, credit risk movements and durations
of the assets. The amortised cost carrying amount of receivables is a
reasonable approximation of fair value.
6b. Investment and interest income
31 December 31 December
2016 2015
GBPm GBPm
Investment income
Investment return on assets classified as FVTPL 2.9 2.2
Gains on forward contracts 6.5 -
Interest income on AFS debt securities 23.4 19.2
Interest income on term deposits with credit
institutions 4.7 4.7
Interest income on held to maturity gilt assets(*1) 6.2 6.1
43.7 32.2
Unwind of discount on gilts (0.8) (0.8)
Release of accrual for reinsurers' share of investment
returns 9.2 -
52.1 31.4
Interest receivable on cash and cash equivalents(*1) 1.0 1.2
Total investment and interest income 53.1 32.6
*1 Interest received during the year was GBP11.6 million (2015: GBP8.6
million)
6c. Finance costs
31 December 31 December
2016 2015
GBPm GBPm
Interest payable(*1) 11.4 11.1
Total finance costs 11.4 11.1
*1 Interest paid during the year was GBP11.3 million (2015: GBP11.0
million)
Finance costs represent interest payable on the GBP200 million
subordinated notes and other financial liabilities.
6d. Financial assets and liabilities
The Group's financial instruments can be analysed as follows:
31 December 31 December
2016 2015
GBPm GBPm
Investments held at fair value through profit or
loss
Money market funds 776.3 627.7
Derivative financial instruments 4.7 -
781.0 627.7
Investments classified as available for sale
Available for sale debt securities 1,271.8 1,230.0
1,271.8 1,230.0
Investments classified as held to maturity
Term deposits with credit institutions 170.0 267.6
Gilts 197.4 198.2
367.4 465.8
Total financial investments 2,420.2 2,323.5
Insurance and financial assets
Insurance receivables 606.6 437.0
Trade and other receivables 178.3 100.1
Cash and cash equivalents 326.6 265.3
Total financial assets 3,531.7 3,125.9
Financial liabilities
Subordinated notes 204.0 203.9
Other borrowings 20.0 20.0
Trade and other payables 1,292.2 1,015.0
Total financial liabilities 1,516.2 1,238.9
Financial liabilities are inclusive of GBP200 million subordinated notes
issued on 25 July 2014 at a fixed rate of 5.5% with a redemption date of
25 July 2024.
The notes are unsecured subordinated obligations of the Group and rank
pari passu without any preference among themselves. In the event of a
winding-up or bankruptcy, they are to be repaid only after the claims of
all other creditors have been met.
There have been no defaults on any of the notes during the year. The
Group has the option to defer interest payments on the notes but to date
has not exercised this right. The aggregate fair value of subordinated
dated notes at the balance sheet date is disclosed in the table below.
The Group holds a revolving credit facility of GBP100 million which
expires in July 2018. As at 31 December 2016, GBP20 million was drawn
under this agreement and is included as other borrowings in the table
above.
Fair value measurement
The measurement of investments at the end of the period, for investments
held at fair value and short term debt securities held at fair value, is
based on active quoted market values (level one).
The measurement of AFS debt securities at the end of the period is also
based on active quoted market values (level one).
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 GBP170.0 million (2015: GBP267.6 million).
The amortised cost carrying amount of receivables is a reasonable
approximation of fair value. The fair values of gilts and subordinated
notes (both level one valuations) together with their carrying values
shown in the Consolidated Statement of Financial Position are as
follows:
31 December 2016 31 December 2015
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
Financial assets
Gilts 197.4 225.4 198.2 211.7
Financial liabilities
Subordinated notes 204.0 212.9 203.9 202.4
The maturity profile of financial assets and liabilities at 31 December
2016 is as follows:
Between
On demand < 1 year 1 and 2 years > 2 years
GBPm GBPm GBPm GBPm
Financial investments
Investments held at fair value 776.3 4.7 - -
Term deposits with credit
institutions - 60.0 40.0 70.0
Available for sale debt
securities 2.5 324.4 224.4 720.5
Gilts - 0.9 - 196.5
Total financial investments 778.8 390.0 264.4 987.0
Insurance receivables - 606.6 - -
Trade and other receivables - 178.3 - -
Cash and cash equivalents 326.6 - - -
Total financial assets 1,105.4 1,174.9 264.4 987.0
Financial liabilities
Subordinated notes - 4.8 - 199.2
Other borrowings - 20.0 - -
Trade and other payables - 1,292.2 - -
Total financial liabilities - 1,317.0 - 199.2
The maturity profile of financial assets and liabilities at 31 December
2015 was as follows:
Between
On demand < 1 year 1 and 2 years > 2 years
GBPm GBPm GBPm GBPm
Financial investments
Investments held at fair value 627.7 - - -
Term deposits with credit
institutions 107.6 40.0 50.0 70.0
Available for sale debt
securities 437.2 117.1 201.1 474.6
Gilts - 0.8 - 197.4
Total financial investments 1,172.5 157.9 251.1 742.0
Insurance receivables - 437.0 - -
Trade and other receivables - 100.1 - -
Cash and cash equivalents 265.3 - - -
Total financial assets 1,437.8 695.0 251.1 742.0
Financial liabilities
Subordinated notes - 4.7 - 199.2
Other borrowings - 20.0 - -
Trade and other payables - 1,015.0 - -
Total financial liabilities - 1,039.7 - 199.2
Objectives, policies and procedures for managing financial assets and
liabilities
The Group's activities expose it primarily to financial risks of credit
risk, interest rate risk, liquidity risk and foreign exchange risk. The
Board of Directors has delegated the task of supervising risk management
and internal control to the Group Risk Committee. There is also an
Investment Committee that makes recommendations to the Board on the
Group's investment strategy.
There are several key elements to the risk management environment
throughout the Group. These are detailed in full in the Corporate
Governance Statement. Specific considerations for the risks arising from
financial assets and liabilities are detailed below.
Credit risk
The Group defines credit risk as the risk of loss if another party fails
to perform its obligations. The key areas of exposure to credit risk for
the Group result through its reinsurance programme, investments, bank
deposits and policyholder receivables.
Economic and financial market conditions have led the Directors to
consider counterparty exposure more frequently and in significant
detail. The Directors consider that the policies and procedures in place
to manage credit exposure continue to be appropriate for the Group's
risk appetite and, during 2016 and historically, no material credit
losses have been experienced by the Group.
There are no specific concentrations of credit risk with respect to
investment counterparties due to the structure of the liquidity funds
and the parameters set for managing the Fixed Income Mandates. Both
forms of investment hold a wide range of very short duration, high
quality securities. Cash balances and deposits are placed only with
highly rated credit institutions. The detailed holdings are reviewed
regularly by the Investment Committee.
To mitigate the risk arising from exposure to reinsurers (in the form of
reinsurance recoveries and profit commissions), the Group only conducts
business with companies of appropriate financial strength ratings. In
addition, many reinsurance contracts are operated on a funds withheld
basis, which substantially reduces credit risk, as the Group withholds
the cash received as collateral.
The other principal form of credit risk is in respect of amounts due
from policyholders, largely due to the potential for default by
instalment payers. The impact of this is mitigated by the large customer
base and low average level of balance recoverable. There is also
mitigation by the operation of numerous high- and low-level controls in
this area, including payment on policy acceptance as opposed to
inception and automated cancellation procedures for policies in default.
The Group's maximum exposure to credit risk at 31 December 2016 is
GBP3,263.0 million (2015: GBP2,913.3 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.
There were no significant financial assets that were past due at the
close of either 2016 or 2015.
The Group's credit risk exposure to assets with external ratings is as
follows:
31 December 31 December
2016 2015
Rating GBPm GBPm
Financial institutions - Credit
institutions AAA 269.3 247.8
Financial institutions - Credit
institutions AA 733.8 679.4
Financial institutions - Credit
institutions A 1,305.6 1,230.3
Financial institutions - Credit
institutions BBB and below 236.0 234.0
UK Government gilts AA 197.4 198.2
Reinsurers AA 277.1 266.8
Reinsurers A 29.1 9.2
Interest rate risk
The Group considers interest rate risk to be the risk that unfavourable
movements in interest rates could adversely impact on the capital values
of financial assets and liabilities.
As noted above, the Group invests the following asset types:
-- Money market liquidity funds and cash plus liquidity funds, which in turn
invest in a mixture of short dated fixed and variable rate securities,
such as cash deposits, certificates of deposits, floating rate notes and
other commercial paper.
-- Term deposits with well rated institutions are short in duration (one to
five years). These are classified as term 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.
-- Available for sale debt securities. These securities are held within two
segregated mandates. The guidelines of the investments retain a similar
credit quality of the money market funds (all holdings are investment
grade). The duration of the securities is relatively short and similar to
the duration of the on book claims liabilities (the average duration is
three years).
-- UK Government gilts. These are classified as term and valued at amortised
cost. Therefore neither the capital value of the gilts, nor the interest
return, will be impacted by fluctuations in interest rates.
The Group also holds a financial liability in the form of GBP200 million
of subordinated notes with a ten year maturity and fixed rate coupon of
5.5%. This liability is valued at amortised cost and therefore neither
the carrying value of the deposits, nor the interest payable, will be
impacted by fluctuations in interest rates.
No sensitivity analysis to interest rates has been presented on the
grounds of materiality.
Liquidity risk
Liquidity risk is defined as the risk that the Group does not have
sufficient, available financial resources to enable it to meet its
obligations as they fall due, or can only secure them at excessive cost.
The Group is strongly cash-generative due to the large proportion of
revenue arising from non-underwriting activity. Further, as noted above,
a significant portion of insurance funds are invested in money market
liquidity funds with same day liquidity, meaning that a large proportion
of the Group cash and investments is immediately available.
A breakdown of the Group's other financial liabilities, trade payables
and other payables is shown in note 10.
The subordinated notes have a ten year maturity whereas all trade and
other payables will mature within three to six months of the balance
sheet date. (Refer to the maturity profile at the start of this note for
further detail.)
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 GBP938.0 million (2015: GBP764.7 million), GBP610.1
million (2015: GBP554.3 million) is held under funds withheld
arrangements and therefore not expected to be settled within 12 months.
A maturity analysis for insurance contract liabilities is included in
note 5. The maturity profile for financial assets is included at the
start of this note.
The Group's Directors believe that the cash flows arising from these
assets will be consistent with this profile. Liquidity risk is not,
therefore, considered to be significant.
Foreign exchange risk
Foreign exchange risk arises from unfavourable movements in foreign
exchange rates that could adversely impact the valuation of overseas
assets and liabilities.
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.
The Group's exposure to net assets and profits in currencies other than
the reporting currency is immaterial other than for US dollars. The
Group's exposure to net assets held in dollars at the balance sheet date
was GBP70.5 million (2015: GBP87.3 million).
The loss before tax derived from business carried out in the US was
GBP39.1 million (2015: GBP45.9 million). If the Sterling rates with US
dollars had strengthened/weakened by 10%, the Group's profit before tax
for the year would increase/decrease by GBP3.6 million (2015: GBP4.2
million).
Fair value
For cash at bank and cash deposits and other receivables, the fair value
approximates to the book value due to their short maturity. For assets
held at fair value through profit and loss, their value equates to level
one (quoted prices in active markets) of the fair value hierarchy.
For gilts and subordinated notes, the fair value is calculated with
reference to the quoted market valuation. This is compared to carrying
value earlier in this note.
6e. Cash and cash equivalents
31 December 31 December
2016 2015
GBPm GBPm
Cash at bank and in hand 326.4 265.3
Short-term deposits 0.2 -
Total cash and cash equivalents 326.6 265.3
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.
7. Other Revenue
7a. Accounting policy
(i) Contribution from additional products and fees and Other Revenue
Contribution from additional products and fees and Other Revenue
includes revenue earned on the sale of products supplementing the core
motor insurance policy, administration and other charges paid by the
policyholder, referral fees, revenue from policies paid by instalments
and vehicle commission charges paid by co- and reinsurers. Revenue is
credited to the income statement over the period matching the Group's
obligations to provide services. Where the Group has no remaining
contractual obligations, the revenue is recognised immediately. An
allowance is made for expected cancellations where the customer may be
entitled to a refund of amounts charged.
Commission from price comparison activities and broking commission
earned by Gladiator is credited to revenue on the sale of the underlying
insurance policy.
7b. Contribution from additional products and fees and Other Revenue
31 December 31 December
2016 2015
GBPm GBPm
Contribution from additional products and fees 199.0 182.4
Price comparison revenue(*1) 108.4 93.9
Other revenue 53.2 43.5
Total Other Revenue 360.6 319.8
*1 Price comparison revenue excludes GBP20.8 million (2015: GBP14.2
million) of income from other Group companies.
Refer to the business review earlier in this report for further detail
on the sources of revenue.
8. Expenses
8a. Accounting policies
(i) Acquisition costs and operating expenses
Acquisition costs incurred in obtaining new and renewal business are
charged to the income statement over the period in which those premiums
are earned. All other operating expenses are charged to the income
statement in the period that they are incurred.
(ii) Employee benefits
Pensions
The Group contributes to defined contribution personal pension plans for
its employees. The contributions payable to these schemes are charged in
the accounting period to which they relate.
Employee share schemes
The Group operates a number of equity and cash settled compensation
schemes for its employees. The fair value of the employee services
received in exchange for the grant of free shares under the equity
settled schemes is recognised as an expense, with a corresponding
increase in equity. For cash settled schemes, the fair value of services
received are also recognised as an expense, with a corresponding
increase in liability.
For equity settled schemes, the total charge expensed over the vesting
period is determined by reference to the fair value of the free shares
granted as determined at the grant date (excluding the impact of
non-market vesting conditions). Non-market conditions such as
profitability targets as well as staff attrition rates are included in
assumptions over the number of free shares to vest under the applicable
scheme.
For cash settled schemes, the total charge expensed over the vesting
period is determined by reference to the closing Admiral Group share
price at the end of the period. Prior to the vesting of each scheme, the
closing share price at the end of the reporting period is used as an
approximation for the closing share price at the end of the vesting
period. As with equity settled schemes, non-market vesting conditions
also impact on the total charge expensed over the vesting period.
At each balance sheet date, the Group revises its assumptions on the
number of shares to be granted with the impact of any change in the
assumptions recognised through income.
Refer to note 8f for further details on share schemes.
(iii) Leases
Operating leases
Leases which do not transfer to the Group substantially all the risks
and benefits incidental to ownership of the leased items are classified
as operating leases. The Group has entered into a number of
non-cancellable operating lease arrangements for properties and other
assets. The leases have varying terms, escalation values and renewal
rights.
Operating lease payments, including the effects of any lease incentives,
are recognised as an expense in the income statement on a straight-line
basis over the lease term. Contingent rentals are recognised as an
expense in the period in which they are incurred.
8b. Operating expenses and share scheme charges
31 December 2016
Recoverable
from co- and
Gross reinsurers Net
GBPm GBPm GBPm
Acquisition of insurance contracts(*1) 98.0 (75.4) 22.6
Administration and other marketing costs (insurance
contracts) 293.9 (222.6) 71.3
Insurance contract expenses 391.9 (298.0) 93.9
Administration and other marketing costs (other) 206.6 - 206.6
Share scheme charges 50.3 (18.4) 31.9
Total expenses and share scheme charges 648.8 (316.4) 332.4
31 December 2015
Recoverable
from co- and
Gross reinsurers Net
GBPm GBPm GBPm
Acquisition of insurance contracts(*1) 77.5 (57.8) 19.7
Administration and other marketing costs (insurance
contracts) 238.5 (175.1) 63.4
Insurance contract expenses 316.0 (232.9) 83.1
Administration and other marketing costs (other) 188.2 - 188.2
Share scheme charges 43.8 (16.6) 27.2
Total expenses and share scheme charges 548.0 (249.5) 298.5
*1 Acquisition of insurance contracts expense excludes GBP20.8 million
(2015: GBP14.2 million) of aggregator fees from other Group companies.
The GBP71.3 million (2015: GBP63.4 million) administration and marketing
costs allocated to insurance contracts is principally made up of salary
costs.
Analysis of other administration and other marketing costs:
31 December 31 December
2016 2015
GBPm GBPm
Expenses relating to additional products and fees 49.9 43.0
Price comparison operating expenses 132.1 123.6
Other expenses 24.6 21.6
Total 206.6 188.2
Refer to note 12 for a reconciliation between insurance contract
expenses and the reported expense ratio.
8c. Staff costs and other expenses
31 December 31 December
2016 2015
Total Net Total Net
GBPm GBPm GBPm GBPm
Salaries 203.7 79.4 179.6 67.6
Social security charges 18.8 7.6 16.2 6.9
Pension costs 6.8 2.3 5.6 2.0
Share scheme charges (see note 8f) 50.3 31.9 43.8 27.2
Total staff expenses 279.6 121.2 245.2 103.7
Depreciation charge:
- Owned assets 8.6 3.3 7.9 2.1
- Leased assets 1.9 0.5 0.3 0.1
Amortisation charge:
- Software 12.6 4.1 6.1 3.1
- Deferred acquisition costs - 43.2 - 34.0
Operating lease rentals:
- Buildings 13.3 4.2 14.0 4.5
Auditor's remuneration (including VAT):
- Fees payable for the audit of the Company's annual
accounts - - - -
- Fees payable for the audit of the Company's subsidiary
accounts 0.2 0.2 0.4 0.3
- Fees payable for audit related assurance services
pursuant to legislation or regulation 0.2 0.1 - -
- Fees payable for other services(*1) - - 0.4 0.1
Analysis of fees paid to the auditor for other services:
- Tax compliance services - - 0.1 -
- Tax advisory services - - 0.1 -
- Other services - - 0.2 0.1
Total as above - - 0.4 0.1
*1 Fees payable to the auditor for other services in year ended 31
December 2015 were paid to the previous auditor, KPMG LLP.
Total and net expenses are before and after co- and reinsurance
arrangements respectively.
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%).
The amortisation of software and deferred acquisition cost assets is
charged to expenses in the income statement.
8d. Staff numbers (including Directors)
Average for the year
2016 2015
Number Number
Direct customer contact staff 5,993 5,868
Support staff 2,605 1,989
Total 8,598 7,857
8e. Directors' remuneration
(i) Directors' remuneration
31 December 31 December
2016 2015
GBPm GBPm
Directors' emoluments 1.6 1.7
Amounts receivable under SIP and DFSS share schemes 0.4 0.3
Company contributions to money purchase pension
plans - -
Total 2.0 2.0
(ii) Number of Directors
2016 2015
Number Number
Retirement benefits are accruing to the following
number of Directors under:
- Money purchase schemes 2 2
- Defined benefit schemes - -
8f. Staff share schemes
Analysis of share scheme costs (per the Consolidated Income Statement):
31 December 31 December
2016 2015
GBPm GBPm
SIP charge (i) 9.9 8.7
DFSS charge (ii) 22.0 18.5
Total share scheme charges 31.9 27.2
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 (2016: GBP50.3 million; 2015: GBP43.8 million) and
the gross credit to reserves reported in the Consolidated Statement of
Changes in Equity (2016: GBP33.2 million; 2015: GBP29.5 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.
(i) The Approved Share Incentive Plan (the SIP)
Eligible employees qualified for awards under the SIP based upon the
performance of the Group in each half-year period. The maximum award for
each year is GBP3,600 per employee. The awards are made with reference
to the Group's performance against prior year profit before tax.
Employees must remain in employment for the holding period (three years
from the date of award) otherwise the shares are forfeited.
The fair value of shares awarded is either the share price at the date
of award, or is estimated at the latest share price available when
drawing up the financial statements for awards not yet made (and later
adjusted to reflect the actual share price on the award date). Awards
under the SIP are entitled to receive dividends, and, hence, no
adjustment has been made to this fair value.
(ii) The Discretionary Free Share Scheme (the DFSS)
Under the DFSS, details of which are contained in the remuneration
policy section of the Directors' Remuneration Report, individuals
receive an award of free shares at no charge. Staff must remain in
employment until the vesting date in order to receive shares. The
maximum number of shares that can vest relating to the 2016 scheme is
3,247,136 (2015 scheme: 3,019,188).
The amount of 2016 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 2016 scheme, 50% of the shares awarded at the start of the three
year vesting period are subject to these performance conditions.
The range of awards is as follows:
-- If the growth in EPS is less than the RFR, no awards vest.
-- EPS growth is equal to RFR - 10% of maximum award vests.
-- To achieve the maximum award, EPS growth has to be 36 points higher than
RFR over the three year period.
Between 10% and 100% of the maximum awards, a linear relationship
exists.
For awards in 2015 and onwards there are now three performance
conditions which the 50% not guaranteed to vest are subject to. These
are three-year EPS growth vs. LIBOR, TSR vs. FTSE 350 (excluding
investment companies), and ROE, weighted equally.
Performance measure Performance range
Threshold Maximum
Growth of 10% p.a. in
EPS growth vs. LIBOR Growth in line with LIBOR excess of LIBOR
TSR vs. FTSE 350
(excluding investment
companies) Median Upper Quartile
ROE 25% 55%
Awards under the DFSS are not eligible for dividends (although a
discretionary bonus is currently paid equivalent to the dividend that
would have been paid on the respective shareholding) and hence the fair
value of free shares to be awarded under this scheme has been revised
downwards to take account of these distributions. The unadjusted fair
value is based on the share price at the date on which awards were made
(as stated in the Directors' Remuneration Report).
Number of free share awards committed at 31 December 2016
Awards Vesting
outstanding(*1) date
SIP H213 scheme 514,500 March 2017
SIP H114 scheme 575,016 September 2017
SIP H214 scheme 536,613 March 2018
SIP H115 scheme 636,612 August 2018
SIP H215 scheme 523,877 March 2019
SIP H116 scheme 501,785 September 2019
DFSS 2014 scheme 1st award 203,292 March 2017
DFSS 2014 scheme 2nd award 2,481,806 September 2017
DFSS 2015 scheme 1st award 190,275 March 2018
DFSS 2015 scheme 2nd award 2,828,913 September 2018
DFSS 2016 scheme 1st award 199,346 March 2019
DFSS 2016 scheme 2nd award 3,047,790 September 2019
Total awards committed 12,239,825
*1 Being the maximum number of awards expected to be made before
accounting for expected staff attrition
During the year ended 31 December 2016, awards under the SIP H212 and
H113 schemes and the DFSS 2013 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
2016
Original awards Awards vested
SIP H212 scheme 533,792 417,312
SIP H113 scheme 603,432 455,648
DFSS 2013 scheme 1st award 173,348 108,227
DFSS 2013 scheme 2nd award 2,175,665 1,432,540
The weighted average market share price at the date of exercise for
shares exercised during the year was GBP20.09 (2015: GBP15.42).
9. Taxation
9a. Accounting policy
Income tax on the profit or loss for the periods presented comprises
current and deferred tax.
(i) Current tax
Current tax is the expected tax payable on the taxable income for the
period, using tax rates that have been enacted or substantively enacted
by the balance sheet date, and includes any adjustment to tax payable in
respect of previous periods.
Current tax related to items recognised in other comprehensive income is
also recognised in other comprehensive income and not in the income
statement.
(ii) Deferred tax
Deferred tax is provided in full using the balance sheet liability
method, providing for temporary differences arising between the carrying
amount of assets and liabilities for accounting purposes and the amounts
used for taxation purposes. It is calculated at the tax rates that have
been enacted or substantially enacted by the balance sheet date and that
are expected to apply in the period when the liability is settled or the
asset is realised.
The principal temporary differences arise from carried forward losses,
depreciation of property and equipment and share scheme charges. The
resulting deferred tax is charged or credited in the income statement,
except in relation to share scheme charges where the amount of tax
benefit credited to the income statement is limited to an equivalent
credit calculated on the accounting charge. Any excess is recognised
directly in equity.
Deferred tax assets relating to carried forward losses are recognised
only to the extent that it is probable that future taxable profits will
be available against which the assets can be utilised. The probability
of the availability of future taxable profits is determined by a
combination of the classification of the status of the businesses
holding cumulative tax losses and the business plan profit projections
for that business, subject to appropriate stress testing.
9b. Taxation
31 December 31 December
2016 2015
GBPm GBPm
Current tax
Corporation tax on profits for the year 53.2 70.9
(Over) provision relating to prior periods (1.0) (1.0)
Current tax charge 52.2 69.9
Deferred tax
Current period deferred taxation movement 7.2 7.5
Under/(Over) provision relating to prior periods 4.9 (0.5)
Total tax charge per Consolidated Income Statement 64.3 76.9
Factors affecting the total tax charge are:
31 December 31 December
2016 2015
GBPm GBPm
Profit before tax 278.4 368.7
Corporation tax thereon at effective UK corporation
tax rate of 20.0% (2015: 20.25%) 55.7 74.7
Expenses and provisions not deductible for tax
purposes 0.8 1.4
Non-taxable income (7.2) (4.8)
Impact of change in UK tax rate on deferred tax
balances - 0.3
Adjustments relating to prior periods 3.2 (1.5)
Impact of different overseas tax rates (7.0) (12.9)
Unrecognised deferred tax 18.9 19.7
Other differences (0.1) -
Total tax charge for the period as above 64.3 76.9
9c. Deferred income tax asset
Analysis of deferred tax asset
Tax treatment
of share Capital Carried Other
schemes allowances forward losses differences Total
GBPm GBPm GBPm GBPm GBPm
Balance brought forward at 1 January 2015 4.8 4.6 13.4 0.1 22.9
Tax treatment of share scheme charges through income
or expense (2.4) - - - (2.4)
Tax treatment of share scheme charges through
reserves 4.7 - - - 4.7
Capital allowances - (1.9) - - (1.9)
Carried forward losses - - (3.5) - (3.5)
Other difference - - - 0.8 0.8
Balance carried forward at 31 December 2015 7.1 2.7 9.9 0.9 20.6
Tax treatment of share scheme charges through income
or expense (1.9) - - - (1.9)
Tax treatment of share scheme charges through
reserves 0.5 - - - 0.5
Capital allowances - (5.1) - - (5.1)
Carried forward losses - - (5.0) - (5.0)
Other difference - - - (0.7) (0.7)
Balance carried forward at 31 December 2016 5.7 (2.4) 4.9 0.2 8.4
Positive amounts presented above relate to a deferred tax asset
position.
The UK corporation tax rate reduced from 21% to 20% on 1 April 2015. The
average effective rate of tax for 2016 is 20.00% (2015: 20.25%). Further
reductions to the main rate of corporation tax to 19% (effective from 1
April 2017) and 17% (effective from 1 April 2020) were enacted on 26
October 2015 and 15 September 2016 respectively. This will reduce the
Group's future current tax charge accordingly.
The deferred tax asset at 31 December 2016 has been calculated based on
the rate at which each timing difference is most likely to reverse.
The deferred tax asset relating to carried forward losses of GBP4.9
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
(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 2016 the Group had unused tax losses amounting to
GBP142.7 million (2015: GBP89.6 million), relating to the Group's US
businesses Elephant Auto and compare.com, for which no deferred tax
asset has been recognised.
10. Other assets and other liabilities
10a. Accounting policy
(i) Property and equipment, and depreciation
All property and equipment is stated at cost less accumulated
depreciation. Depreciation is calculated using the straight line method
to write off the cost less residual values of the assets over their
useful economic lives. These useful economic lives are as follows:
Improvements to short leasehold buildings - four to ten years
Computer equipment - two to four years
Office equipment - four years
Furniture and fittings - four years
Motor vehicles - four years
(ii) Impairment of property and equipment
In the case of property and equipment, carrying values are reviewed at
each balance sheet date to determine whether there are any indications
of impairment. If any such indications exist, the asset's recoverable
amount is estimated and compared to the carrying value. The carrying
value is the higher of the fair value of the asset, less costs to sell
and the asset's value in use. Impairment losses are recognised through
the income statement.
(iii) Leased assets
The rental costs relating to assets held under operating leases are
charged to the income statement on a straight line basis over the life
of the lease.
Leases under the terms of which the Group assumes substantially all of
the risks and rewards of ownership are classed as finance leases. Assets
acquired under finance leases are included in property and equipment at
fair value on acquisition and are depreciated in the same manner as
equivalent owned assets. Finance lease and hire purchase obligations are
included in creditors and the finance costs are spread over the periods
of the agreements based on the net amount outstanding.
(iv) Intangible assets
Goodwill
All business combinations are accounted for using the acquisition
method. Goodwill has been recognised in acquisitions of subsidiaries,
and represents the difference between the cost of the acquisition and
the fair value of the net identifiable assets acquired.
The classification and accounting treatment of acquisitions occurring
before 1 January 2004 have not been reconsidered in preparing the
Group's opening IFRS balance sheet at 1 January 2004 due to the
exemption available in IFRS 1 (First time adoption). In respect of
acquisitions prior to 1 January 2004, goodwill is included at the
transition date on the basis of its deemed cost, which represents the
amount recorded under UK GAAP, which was tested for impairment at the
transition date. On transition, amortisation of goodwill has ceased as
required by IAS 38.
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 2016 is allocated
solely to the UK Car Insurance segment.
Impairment of goodwill
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 recoverable amount is the greater of the fair value of the asset
less costs to sell and the value in use of the CGU.
The value in use calculations use cash flow projections based on
financial budgets approved by management covering a three year period.
Cash flows beyond this period are considered, but not included in the
calculation. The discount rate applied to the cash flow projections in
the value in use calculations is 6.5% (2015: 5.9%), based on the Group's
weighted average cost of capital, which is in line with the market
(source: Bloomberg).
The key assumptions used in the value in use calculations are those
regarding growth rates and expected changes in pricing and expenses
incurred during the period. Management estimates growth rates and
changes in pricing based on past practices and expected future changes
in the market.
The headroom above the goodwill carrying value is very significant, and
there is no foreseeable event that would eliminate this margin.
Deferred acquisition costs
Acquisition costs comprise all direct and indirect costs arising from
the conclusion of insurance contracts. Deferred acquisition costs
represent the proportion of acquisition costs incurred that correspond
to the unearned premiums provision at the balance sheet date. This
balance is held as an intangible asset. It is amortised over the term of
the contract as premium is earned.
Software
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.
The carrying value of software is reviewed every six months for evidence
of impairment, with the value being written down if any impairment
exists. Impairment may be reversed if conditions subsequently improve.
(v) Provisions, contingent liabilities and contingent assets
Provisions are recognised when a legal or constructive obligation arises
as a result of an event that occurred before the balance sheet date,
when a cash-outflow relating to this obligation is probable and when the
amount can be estimated reliably.
Where an obligation exists, but the likelihood of a cash out-flow or the
amount is uncertain, or where there is a possible obligation arising
from a past event that is contingent on a future event, a contingent
liability is disclosed.
Contingent assets are possible assets that arise from past events, whose
existence will be confirmed only by the occurrence or non-occurrence of
future events. Where it is probable that a cash-inflow will arise from a
contingent asset, this is disclosed.
10b. Property and equipment
Improvements
to short
leasehold Computer Office Furniture
buildings equipment equipment and fittings Total
GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January 2015 24.9 39.5 14.0 7.8 86.2
Additions 0.8 8.8 1.2 0.4 11.2
Disposals - (0.5) - - (0.5)
At 31 December
2015 25.7 47.8 15.2 8.2 96.9
Depreciation
At 1 January 2015 7.6 29.7 11.6 5.0 53.9
Charge for the
year 2.4 3.8 1.0 1.0 8.2
Disposals - (0.1) - - (0.1)
At 31 December
2015 10.0 33.4 12.6 6.0 62.0
Net book amount
At 1 January 2015 17.3 9.8 2.4 2.8 32.3
Net book amount
At 31 December
2015 15.7 14.4 2.6 2.2 34.9
Cost
At 1 January 2016 25.7 47.8 15.2 8.2 96.9
Additions 1.3 3.4 1.1 0.8 6.6
Disposals - - (0.2) - (0.2)
Foreign exchange
movement 0.6 0.9 0.9 0.4 2.8
At 31 December
2016 27.6 52.1 17.0 9.4 106.1
Depreciation
At 1 January 2016 10.0 33.4 12.6 6.0 62.0
Charge for the
year 2.0 6.5 1.0 1.0 10.5
Disposals - - (0.1) - (0.1)
Foreign exchange
movement 0.4 0.6 0.6 0.1 1.7
At 31 December
2016 12.4 40.5 14.1 7.1 74.1
Net book amount
At 31 December
2016 15.2 11.6 2.9 2.3 32.0
The net book value of assets held under finance leases is as follows:
31 December 31 December
2016 2015
GBPm GBPm
Computer equipment 4.4 5.7
10c. Intangible assets
Deferred
acquisition
Goodwill costs(*1) Software(*2) Total
GBPm GBPm GBPm GBPm
At 1 January 2015 62.3 14.8 30.1 107.2
Additions - 35.8 39.5 75.3
Amortisation charge - (34.0) (6.1) (40.1)
Disposals - - (0.1) (0.1)
At 31 December 2015 62.3 16.6 63.4 142.3
Additions - 48.5 24.6 73.1
Amortisation charge - (43.2) (12.6) (55.8)
Disposals - - (0.3) (0.3)
Foreign exchange movement - 1.5 1.5 3.0
At 31 December 2016 62.3 23.4 76.6 162.3
*1 Deferred acquisition costs additions and amortisation charges from
prior periods have been re-presented to reflect appropriate net of
reinsurance movements in each period. There are no changes to the
carried forward or brought forward deferred acquisition costs balance
for any period.
*2 Software additions include GBP21.1 million relating to internal
development (2015: GBP31.3 million)
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.
10d. Insurance and other receivables
31 December 31 December
2016 2015
GBPm GBPm
Insurance receivables(*1) 606.6 437.0
Trade receivables 172.4 92.1
Prepayments and accrued income 5.9 8.0
Total insurance and other receivables 784.9 537.1
*1 Insurance receivables at 31 December 2016 includes GBP37.7 million in
respect of salvage and subrogation recoveries.
10e. Trade and other payables
31 December 31 December
2016 2015
GBPm GBPm
Trade payables 35.6 35.1
Amounts owed to co-insurers 247.5 186.9
Amounts owed to reinsurers 690.5 577.8
Finance leases due within 12 months 0.1 2.8
Other taxation and social security liabilities 40.1 28.3
Other payables 112.4 88.5
Accruals and deferred income (see below) 166.0 95.6
Total trade and other payables 1,292.2 1,015.0
Of amounts owed to reinsurers, GBP610.1 million (2015: GBP554.3 million)
is held under funds withheld arrangements.
Analysis of accruals and deferred income:
31 December 31 December
2016 2015
GBPm GBPm
Premium receivable in advance of policy inception 92.4 53.1
Accrued expenses 53.1 24.4
Deferred income 20.5 18.1
Total accruals and deferred income as above 166.0 95.6
10f. Obligations under finance leases
Analysis of finance lease liabilities:
At 31 December 2016 At 31 December 2015
Minimum Minimum
lease lease
payments Interest Principal payments Interest Principal
GBPm GBPm GBPm GBPm GBPm GBPm
Less than
one year 0.1 - 0.1 2.8 - 2.8
Between one
and five
years - - - - - -
More than
five years - - - - - -
0.1 - 0.1 2.8 - 2.8
The fair value of the Group's lease obligations approximates to their
carrying amount.
10g. Financial commitments
The Group was committed to total minimum obligations under operating
leases on land and buildings as follows:
31 December 31 December
2016 2015
GBPm GBPm
Minimum payments due on operating leases
Within one year 12.0 10.4
Within two to five years 42.1 37.0
Over five years 119.3 125.1
Total commitments 173.4 172.5
Operating lease payments represent rentals payable by the Group for its
office properties.
11. Share capital
11a. Accounting policies
(i) Share capital
Shares are classified as equity when there is no obligation to transfer
cash or other assets.
(ii) Dividends
Dividends are recorded in the period in which they are declared and
paid.
11b. Dividends
Dividends were declared and paid as follows:
31 December 31 December
2016 2015
GBPm GBPm
March 2015 (49.0 pence per share, paid May 2015) - 134.4
August 2015 (51.0 pence per share, paid October
2015) - 140.2
March 2016 (63.4 pence per share, paid June 2016) 175.4 -
August 2016 (62.9 pence per share, paid October
2016) 174.4 -
Total dividends 349.8 274.6
The dividends declared in March represent the final dividends paid in
respect of the 2014 and 2015 financial years. The dividends declared in
August are interim distributions in respect of 2015 and 2016.
A final dividend of 51.5 pence per share (GBP144 million) has been
proposed in respect of the 2016 financial year. Refer to the Chairman's
Statement and Strategic Report for further detail.
11c. Earnings per share
31 December 31 December
2016 2015
GBPm GBPm
Profit for the financial year after taxation attributable
to equity shareholders 222.2 300.0
Weighted average number of shares - basic 282,419,324 279,627,738
Unadjusted earnings per share - basic 78.7p 107.3p
Weighted average number of shares - diluted 283,033,681 280,018,741
Unadjusted earnings per share - diluted 78.5p 107.1p
The difference between the basic and diluted number of shares at the end
of 2016 (being 614,357; 2015: 391,003) relates to awards committed, but
not yet issued under the Group's share schemes. Refer to note 8 for
further detail.
11d. Share capital
31 December 31 December
2016 2015
GBPm GBPm
Authorised
500,000,000 ordinary shares of 0.1 pence 0.5 0.5
Issued, called up and fully paid
284,352,270 ordinary shares of 0.1 pence 0.3 -
281,587,953 ordinary shares of 0.1 pence - 0.3
0.3 0.3
During 2016 2,764,317 (2015: 2,898,211) new ordinary shares of 0.1 pence
were issued to the trusts administering the Group's share schemes.
764,317 (2015: 948,211) of these were issued to the Admiral Group Share
Incentive Plan Trust for the purposes of this share scheme to give a
closing number at 31 December 2016 of 8,944,922 (31 December 2015:
8,180,605). These shares are entitled to receive dividends.
2,000,000 (2015: 1,950,000) 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 2016 of 16,811,948 (31 December
2015: 14,811,948). 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 number of shares in issue at flotation was 258,595,400. There is one
class of share with no unusual restrictions.
11e. Objectives, policies and procedures for managing capital
The Group manages its capital to ensure that all entities within the
Group are able to continue as going concerns and also to ensure that
regulated entities 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 Group's dividend policy is to make distributions after taking into
account capital that is required to be held a) for regulatory purposes;
b) to fund expansion activities; and c) as a further buffer against
unforeseen events. This policy gives the Directors flexibility in
managing the Group's capital.
The Group's regulatory capital requirements are discussed in the Group
Financial Review within the Strategic Report.
11f. Group related undertakings
The Parent Company's subsidiaries are as follows:
Subsidiary Class of % Ownership Principal
shares held activity
Incorporated in England and Wales
Registered office: 9(th) Floor Brunel House, Fitzalan
Road, Cardiff, CF24 0EB
Admiral Law Limited Ordinary 90 Legal
company
Registered office: Admiral House, Queensway, Newport,
NP20 4AG
BDE Law Limited Ordinary 90 Legal
company
Registered office: Capital Tower, Greyfriars Road,
Cardiff, CF10 3AZ
EUI Limited Ordinary 100 Insurance
Intermediary
Registered office: Ellipse Ground Floor, Padley Road,
Swansea, SA1 8AN
Able Insurance Services Limited Ordinary 100 Insurance
Intermediary
Registered office: Greyfriars House, Greyfriars Road,
Cardiff, CF10 3AL
Inspop.com (France) Limited Ordinary 100 Insurance
Intermediary
Inspop.com Limited Ordinary 100 Insurance
Intermediary
Rastreator.com Limited Ordinary 75 Insurance
Intermediary
Registered office: Ty Admiral, David Street, Cardiff,
CF10 2EH
Admiral Insurance Company Limited Ordinary 100 Insurance
company
Admiral Life Limited Ordinary 100 Dormant
Admiral Syndicate Limited Ordinary 100 Dormant
Admiral Syndicate Management Limited Ordinary 100 Dormant
Bell Direct Limited Ordinary 100 Dormant
Confused.com Limited Ordinary 100 Dormant
Diamond Motor Insurance Services Limited Ordinary 100 Dormant
Elephant Insurance Services Limited Ordinary 100 Dormant
Admiral Financial Services Limited Ordinary 100 Financial
services
company
EUI (France) Limited Ordinary 100 Insurance
Intermediary
Preminen Price Comparison Holdings Limited Ordinary 50 Insurance
Intermediary
Preminen Dragon Price Comparison Limited Ordinary 50 (indirect) Insurance
Intermediary
Incorporated in Gibraltar
Registered office: 1st Floor, 24 College Lane, Gibraltar,
GX11 1AA
Admiral Insurance (Gibraltar) Limited Ordinary 100 Insurance
company
Incorporated in India
Registered office: 514 JMD Regent Square, Mehrauli
Gurgaon Road, Gurgaon, 122001, India
Inspop Technologies Private Limited Ordinary 100 Internet
technology
supplier
Incorporated in Spain
Registered office: Paseo Castellana 163 4 Izq, 28046
Madrid
Comparaseguros Correduría de Seguros, S.L., Sociedad Ordinary 75 Insurance
Unipersonal (indirect) Intermediary
Incorporated in the United States of America
Registered office: Deep Run 1; Suite 400, 9950 Mayland
Drive, Henrico, VA 23233
Elephant Insurance Company Ordinary 100 Insurance
company
Elephant Insurance Services LLC Ordinary 100 Insurance
Intermediary
Registered office: 140 East Shore Drive, Suite 300,
Glen Allen, VA 23059
comparenow.com Insurance Agency LLC Ordinary 71.1 Insurance
(indirect) Intermediary
Inspop USA LLC Ordinary 71.1 Insurance
Intermediary
Incorporated in China
Registered office: Room 1806, Block 16 Jianwai SOHO,
No. 39 East 3rd Ring Road, Chaoyang District, Beijing
Long Yu Science and Technology (Beijing) CO., Limited Ordinary 20.5 Insurance
(indirect) Intermediary
For further information on how the Group conducts its business across
the UK, Europe and the US, refer to the Strategic Report.
11g. Related party transactions
Details relating to the remuneration and shareholdings of key management
personnel are set out in the Directors' Remuneration Report. Key
management personnel are able to obtain discounted motor insurance at
the same rates as all other Group staff, typically at a reduction of
15%.
The Board considers that only the Executive Directors of Admiral Group
plc are key management personnel. Aggregate compensation for the
Executive Directors will be disclosed in the Directors' Remuneration
Report in the Group's 2016 Annual Report.
12. Reconciliations
The following tables reconcile significant key performance indicators
and non-GAAP measures included in the Strategic Report to items included
in the financial statements.
12a. Reconciliation of turnover to reported gross premiums written and
Other Revenue as per the financial statements
31 December 31 December
2016 2015
GBPm GBPm
Gross premiums written after co-insurance per note
5b of financial statements 1,482.0 1,199.9
Premiums underwritten through co-insurance
arrangements 711.9 605.3
Total premiums written before co-insurance
arrangements 2,193.9 1,805.2
Other Revenue per note 7b of financial statements 360.6 319.8
2,554.5 2,125.0
UK vehicle commission(*1) (20.9) (31.8)
Other(*2) 21.4 11.4
Turnover as per note 4b of financial statements 2,555.0 2,104.6
Intra-group income elimination(*3) 20.8 14.2
Total turnover 2,575.8 2,118.8
*1 During 2012 Admiral ceased earning Other Revenue from the sale of
non-optional legal protection policies. At the same point, the Group
began charging its panel of co- and reinsurers a vehicle commission. The
substance of these changes meant that the total premiums written
increased by the amount of revenue that was previously earned from the
sale of non-optional legal protection policies. The vehicle commission
included within Other Revenue is therefore eliminated from the turnover
measure to avoid double counting.
*2 Other reconciling items represent co-insurer and reinsurer shares of
Other Revenue in the Group's International Car Insurance businesses.
*3 Intra-group income elimination relates to price comparison income
earned in the Group from other Group companies.
12b. Reconciliation of claims incurred to reported loss ratios,
excluding releases on commuted reinsurance
31 December 2016 31 December 2015
UK Car International Car Group UK Car International Car Group
GBPm GBPm GBPm GBPm GBPm GBPm
Net insurance
claims 290.1 76.5 394.5 150.5 51.6 226.5
Net claims
handling
expenses (11.0) - (11.2) (9.4) - (9.4)
Reinsurer cap
impact - (6.4) (6.4) - (2.9) (2.9)
Reserve
releases on
commuted
reinsurance 17.1 - 17.1 88.8 - 88.8
Other
adjustment(*1) - (1.0) (1.0) - (0.6) (0.6)
Adjusted net
claims 296.2 69.1 393.0 229.9 48.1 302.4
Net insurance
premium
revenue 404.3 94.3 548.8 358.6 64.5 467.0
Other
adjustment(*1) - (3.0) (3.0) - (2.2) (2.2)
Adjusted net
insurance
premium
revenue 404.3 91.3 545.8 358.6 62.3 464.8
Reported loss
ratio 73.3% 75.7% 72.0% 64.1% 77.2% 65.1%
*1 Other adjustments relate to additional products underwritten in the
Group's international car insurance businesses. The contribution from
these products is reported as ancillary income and as such the amounts
are excluded for the purpose of calculation of loss and expense ratios.
12c. Reconciliation of expenses related to insurance contracts to
reported expense ratios
31 December 2016 31 December 2015
UK Car International Car Group UK Car International Car Group
GBPm GBPm GBPm GBPm GBPm GBPm
Net insurance
expenses 46.2 41.1 94.0 41.5 37.0 83.1
Net claims
handling
expenses 11.0 - 11.2 9.4 - 9.4
Reinsurer cap
impact - (1.5) (1.5) - (9.8) (9.8)
Intra-group
expenses
elimination(*1) 13.7 7.1 20.8 9.5 4.7 14.2
Other
adjustment(*2) - (2.0) (2.0) - (1.6) (1.6)
Adjusted net
expenses 70.9 44.7 122.5 60.4 30.3 95.3
Net insurance
premium
revenue 404.3 94.3 548.8 358.6 64.5 467.0
Other
adjustment(*1) - (3.0) (3.0) - (2.2) (2.2)
Adjusted net
insurance
premium
revenue 404.3 91.3 545.8 358.6 62.3 464.8
Reported expense
ratio 17.5% 49.0% 22.4% 16.9% 48.6% 20.5%
*1 The intra-group expenses elimination amount relates to aggregator
fees charged by the Group's price comparison entities to other Group
companies.
*2 Other adjustments relate to additional products underwritten in the
Group's international car insurance businesses. The contribution from
these products is reported as ancillary income and as such the amounts
are excluded for the purpose of calculation of loss and expense ratios.
12d. Reconciliation of statutory profit before tax to Group's share
of profit before tax
31 December 31 December
2016 2015
GBPm GBPm
Statutory profit before tax per the Consolidated Income
Statement 278.4 368.7
Non-controlling interest share of profit before tax 5.9 8.1
Group's share of profit before tax (Post Ogden) 284.3 376.8
Impact of reduction in UK Ogden discount rate 105.4 -
Group's share of profit before tax (Pre Ogden) 389.7 376.8
13. Statutory Information
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 December 2016 or
2015. Statutory accounts for 2015 have been delivered to the registrar
of companies, and those for 2016 will be delivered in due course. The
auditors have reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which
the auditors drew attention by way of emphasis without qualifying their
report and (iii) did not contain a statement under section 498 (2) or
(3) of the Companies Act 2006.
Consolidated financial summary
Basis of preparation
The figures below are as stated in the Group financial statements
preceding this financial summary and issued previously. Only selected
lines from the income statement and balance sheet have been included.
Income statement
2016 2015 2014 2013 2012
GBPm GBPm GBPm GBPm GBPm
Total premiums 2,193.9 1,805.2 1,675.6 1,737.6 1,897.2
Net insurance premium revenue 548.8 467.0 464.9 483.0 498.9
Other Revenue 360.6 319.8 332.5 327.8 361.1
Profit commission 54.3 85.4 71.8 99.3 108.4
Investment and interest income 53.1 32.6 15.4 14.3 15.9
Net revenue 1,016.8 904.8 884.6 924.4 984.3
Net insurance claims (394.6) (226.5) (259.1) (303.0) (404.5)
Net expenses (332.4) (298.5) (270.2) (251.2) (235.2)
Operating profit 289.8 379.8 355.3 370.2 344.6
Finance costs (11.4) (11.1) (4.6) - -
Profit before tax 278.4 368.7 350.7 370.2 344.6
Balance sheet
2016 2015 2014 2013 2012
GBPm GBPm GBPm GBPm GBPm
Property and equipment 32.0 34.9 32.3 12.4 16.5
Intangible assets 162.3 142.3 107.2 92.8 92.5
Deferred income tax 8.4 20.6 22.9 17.0 15.2
Reinsurance assets 1,126.4 878.7 829.8 821.2 803.0
Insurance and other receivables 784.9 537.1 435.3 445.6 458.8
Financial investments 2,420.2 2,323.5 2,194.1 1,896.9 1,601.6
Cash and cash equivalents 326.6 265.3 255.9 187.9 216.6
Total assets 4,860.8 4,202.4 3,877.5 3,473.8 3,204.2
Equity 581.7 632.9 580.9 524.1 460.7
Insurance contracts 2,749.5 2,295.0 2,097.4 1,901.3 1,696.9
Subordinated and other financial
liabilities 224.0 223.9 203.8 - -
Trade and other payables 1,292.2 1,015.0 965.8 1,013.7 1,006.5
Current tax liabilities 13.4 35.6 29.6 34.7 40.1
Total equity and total
liabilities 4,860.8 4,202.4 3,877.5 3,473.8 3,204.2
Alternative Performance Measures
Throughout this report, the Group uses a number of Alternative
Performance Measures (APMs); measures that are not required or commonly
reported under International Financial Reporting Standards, the
Generally Accepted Accounting Principles (GAAP) under which the Group
prepares its financial statements.
These APMs are used by the Group, alongside GAAP measures, for both
internal performance analysis and to help shareholders and other users
of the Annual Report and financial statements to better understand the
Group's performance in the period in comparison to previous periods and
the Group's competitors.
The table below defines and explains the primary APMs used in this
report. Financial APMs are usually derived from financial statement
items and are calculated using consistent accounting policies to those
applied in the financial statements, unless otherwise stated. Non
financial KPIs incorporate information that cannot be derived from the
financial statements but provide further insight into the performance
and financial position of the Group.
APMs may not necessarily be defined in a consistent manner to similar
APMs used by the Group's competitors. They should be considered as a
supplement rather than a substitute for GAAP measures.
Turnover Turnover is defined as total premiums written (as
below) and other revenue. It is reconciled to financial
statement line items in note 12a to the financial
statements.
This measure has been presented by the Group in every
Annual Report since it became a listed Group in 2004.
It reflects the size of the revenue generated by the
Group and analysis of this measure over time provides
a clear indication of the growth in this revenue.
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.
Total Premiums Total premiums written are the premiums written within
Written the Group, including co-insurance. It is reconciled
to financial statement line items in note 12a to the
financial statements.
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.
The reasons for presenting this measure are consistent
with that for the Turnover APM noted above.
Group's share of Group profit before tax represents the Group's share
Profit before of profit before tax, excluding the impact of Non-controlling
Tax Interests. It is reconciled to statutory profit before
tax in note 12d to the financial statements.
This measure is useful in presenting the limit of
the Group's exposure to the expenditure incurred in
starting up new businesses and demonstrates the 'test-and-learn'
strategy employed by the Group to expansion into new
territories.
In 2016, Group's share of Profit before Tax is presented
on a 'Pre Ogden' and a 'Post Ogden basis. 'Pre Ogden'
represents the Group's share of profit before tax
before the impact of the reduction in the UK Ogden
discount rate confirmed by the Lord Chancellor in
February 2017.
Underwriting For each insurance business an underwriting result
result (profit is presented showing the segment result prior to the
or loss) inclusion of profit commission, other income contribution
and instalment income. It demonstrates the insurance
result, i.e. premium revenue and investment income
less claims incurred and insurance expenses.
Loss Ratio Reported loss ratios are expressed as a percentage
of claims incurred divided by net earned premiums.
There are a number of instances within the Annual
Report where adjustments are made to this calculation
in order to more clearly present the underlying performance
of the Group and operating segments within the Group.
The calculations of these are presented within note
12b to the accounts and explanation is as follows.
UK reported motor loss ratio: Within the UK insurance
segment we separately present motor ratios, i.e. excluding
the underwriting of other products that supplement
the car insurance policy. The motor ratio is adjusted
to i) exclude the impact of reserve releases on commuted
reinsurance contracts and ii) exclude claims handling
costs that are reported within claims costs in the
income statement.
International insurance loss ratio: As for the UK
motor loss ratio, the international insurance loss
ratios presented exclude the underwriting of other
products that supplement the car insurance policy.
The motor ratio is adjusted to exclude the claims
element of the impact of reinsurer caps as inclusion
of the impact of the capping of reinsurer claims costs
would distort the underlying performance of the business.
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.
Expense Ratio Reported expense ratios are expressed as a percentage
of net operating expenses divided by net earned premiums.
There are a number of instances within the Annual
Report where adjustments are made to this calculation
in order to more clearly present the underlying performance
of the Group and operating segments within the Group.
The calculations of these are presented within note
12c to the accounts and explanation is as follows.
UK reported motor expense ratio: Within the UK insurance
segment we separately present motor ratios, i.e. excluding
the underwriting of other products that supplement
the car insurance policy. The motor ratio is adjusted
to i) include claims handling costs that are reported
within claims costs in the income statement and ii)
include intra-group aggregator fees charged by the
UK price comparison business to the UK insurance business.
International insurance expense ratio: As for the
UK motor loss ratio, the international insurance expense
ratios presented exclude the underwriting of other
products that supplement the car insurance policy.
The motor ratio is adjusted to i) exclude the expense
element of the impact of reinsurer caps as inclusion
of the impact of the capping of reinsurer expenses
would distort the underlying performance of the business
and ii) include intra-group aggregator fees charged
by the overseas price comparison businesses to the
international insurance businesses.
Group expense ratios: Group expense ratios are reported
on a consistent basis as the UK and international
ratios noted above. Adjustments are made to i) include
claims handling costs that are reported within claims
costs in the income statement, ii) include intra-group
aggregator fees charged by the Group's price comparison
businesses to the Group's insurance businesses and
iii) exclude the expense element of the impact of
international reinsurer caps.
Combined Ratio Reported combined ratios are the sum of the loss and
expense ratios as defined above. Explanation of these
figures is noted above and reconciliation of the calculations
are provided in notes 12b and 12c.
Return on Equity Return on equity is calculated as profit before tax
for the period attributable to equity holders of the
Group divided by the average total equity attributable
to equity holders of the Group in the year. This average
is determined by dividing the opening and closing
positions for the year by two.
The relevant figures for this calculation can be found
within the Statement of Changes in Equity.
Group Customers Group customer numbers are the total number of car,
household and van policyholders within the Group
This measure has been presented by the Group in every
Annual Report since it became a listed Group in 2004.
It reflects the size of the Group's customer base
and analysis of this measure over time provides a
clear indication of the growth. It is also a useful
indicator of the growing significance to the Group
of the different lines of business and geographic
regions.
Effective Tax Effective tax rate is defined as the approximate tax
Rate rate derived from dividing the Group's profit before
tax by the tax charge going through the income statement.
It is a measure historically presented by the Group
and enables users to see how the tax cost incurred
by the Group compares over time and to current corporation
tax rates.
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: Admiral Group PLC via Globenewswire
http://www.admiralgroup.co.uk
(END) Dow Jones Newswires
March 08, 2017 02:00 ET (07:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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