3 Annual Report 1 0 2 t r o p e R al 2013 u n n A c pl s g n di ol H z n a Alli Allianz Holdings plc 4 1 3. 0 7 1 www.allianz.co.uk 6 5 J Contents 01 At a Glance StrategicReview 02 Chief Executive’s Report 05 Group Strategic Report Governance 15 Directors and Officers 16 Management Board 17 Corporate Governance Report and Accounts The cover image was used as part of the 2013 Allianz SE Group Brand campaign "Insurance from A-Z". From insuring the first 22 Report of the Directors production car over 100 years ago, the Group now covers over 23 Statement of Directors’ Responsibilities 70 million cars worldwide today. 24 Report of the Auditors 25 Financial Statements 31 Notes to the Financial Statements 73 Group Organisation Our mission To be the outstandingcompetitor in our chosen markets by delivering: • products and services that our clients recommend • a great company to work for • the best combination of profit and growth 01 AtaGlance 1 Financial Highlights Restated 2013 2012 £m £m General insurance contracts premium revenue (Note 3) Grosswrittenpremiums 1,931.3 1,879.8 Netwrittenpremiums 1,820.5 1,773.6 Results Totalrevenue 1,925.1 1,871.3 Total claims and expenses (1,737.8) (1,692.3) Profitbeforetax 187.3 179.0 Income tax charge (40.1) (47.0) Profit after tax 147.2 132.0 Total equity 991.5 994.1 NetWrittenPremiums Commercial Retail £1,000m 934 906 886 868 £800m £600m £400m £200m £0m 2013 2012 2013 2012 2 AnnualReport2013 Strategic Review Chief Executive’s Report 2013 saw continued strong performance with operating Profit growing by 5.6% despite the persistence of difficult economic conditions and a very competitive insurance market. less profitable than in 2012 and also saw a small decrease in premium volumes. The Liability accounts continued to make losses in 2013 but at a much reduced level from 2012. After two years of suffering increases in the reserve for prior year claims, 2013 showed a decrease on prior year, and the strong action taken over the last 3 years to eliminate poor performing business and raise premium rates is having very noticeable effects. Despite the floods seen towards the end of 2013, the weather for the year as a whole was benign and helped the Property business make a good underwriting profit after a small loss in 2012 in the face of a much more difficult year. Commission rates to intermediaries reduced over the year, but this was mainly the result of changes in business mix rather than an underlying fall in broker remuneration rates. Rate increases in excess of claims inflation were achieved again in 2013, with increases on liability remaining ahead of other areas, but in general there is little sign of the significant hardening needed in many lines for the market to return to strong profitability in a low interest rate environment. Operating Profit(1)in 2013 was £170.5m, an increase of 5.6% from 2012 despite a decrease in prior year reserve The results from Allianz Retail varied significantly by releases, reflecting the improved 2013 trading account in 2013. The broker motor account again conditions, particularly in commercial lines. This was made a strong profit in 2013, although a bit down from £11.6m ahead of Plan. Allianz Commercial produced a 2012. Premium volumes have been reduced substantial increase in profit delivery through sustained significantly to achieve this result due to the weakness rate strengthening and this mitigated the fall in profit of the rating environment: the market has anticipated from Allianz Retail which arose largely through the significant benefits from the changes to the legal initial investments needed to support both new environment in respect of claims costs, although we corporate partner deals and the growth of our direct believe that the ultimate effects are still uncertain and business. Profit after tax was £147.2m, against will take some time to become clear. The direct motor £132.0m in 2012. Gross written premium grew by account made a loss as a result of the costs of building 2.7%, a pleasing result in the context of the economic up the business and this is expected to continue next situation and our determination to maintain year as we build a stronger position in this key retail underwriting standards. market. The broker household account returned to profit in 2013 which was a benign year for weather The main accounts of Allianz Commercial continued to until the fourth quarter. Direct household business also perform in different ways in 2013. The Motor business made a useful profit. Our animal health business had retained its good record of profitability, and the Motor another very good year, continuing to grow strongly Trade and Engineering businesses also produced very and deliver attractive returns, and the legal protection satisfactory returns. The Packages account was much account also delivered strong profits. The latter account (1) Operating Profit is profit before tax adjusted for realised gains, impairments and other income on an Allianz SE Group Basis. 02 Chief Executive’s Report 3 05 Group Strategic Report has, though, been affected by the expected changes in The Group continues to engage actively in numerous the civil justice system relating to the recovery of legal projects being undertaken with other companies in the expenses and premiums, and written premiums Allianz family to leverage skills, expertise and scale in therefore declined by more than 25%. Premiums will specific areas. The innovation programme continues to continue to run at lower levels for the foreseeable deliver a large number of valuable ideas which assist future, but we have been reshaping the account to both growth and efficiency. The Group has continued allow a continuance of good returns. The Corporate to put significant effort into minimising its impact on Partners business has continued to grow its motor the environment, including reducing its carbon book, as the partnerships in the automotive industry emissions, and into promoting social responsibility. bear fruit, and it has begun to grow its own animal Amounts raised for charity have continued to increase. health business. Losses on the Corporate Partners account continue while we invest in new partnerships. During 2013 we began a much more active The volumes from extended warranty, creditor and all programme to promote our brand in the UK. We think risk accounts continue to decrease as many of these that this is an important issue to tackle in the light of partnerships are run off. our aspirations for growth in commercial and retail markets, particularly via direct business. The branding Investment returns continue to be impacted by low activities are designed to appeal to our target market interest rates and these levels are expected to continue and have included advertising in many formats, for the foreseeable future, underlining the importance of including on television. The branding work also achieving strong underwriting profits. Investment policy includes our sponsorship of Saracens rugby club. Their has continued to evolve during 2013, with a further shift newly refurbished stadium, which opened in early away from Government bonds to enable the purchase of 2013, is named Allianz Park and is used extensively by a small portfolio of equities and a modest increase in the the local community as well as the club themselves. exposure to property. Overall, the fixed interest investment portfolio was above its benchmark. The During 2013 we made further good progress in our property portfolio was helped by the much better project to implement the requirements of Solvency II. market in 2013, and it also out-performed its This is a far reaching piece of legislation that requires benchmark. The capital base of the Group at the end of significant changes to the way insurers run and control 2013 was £991.5m compared to £994.1m last year, after their businesses. The Group has been working with the restating 2012 having adopted the amendments to the Prudential Regulation Authority towards gaining pensions accounting standard applicable from 2013. Internal Model Approval. It now seems likely that the formal start of Solvency II will be in 2016, but many of The Group continues to pursue its strategy of only the requirements will be introduced earlier. Although underwriting business where there is a realistic prospect there is still significant work to be done for reporting of achieving a return in excess of the cost of capital. purposes, we have already implemented large parts of Central to our objective of profitable growth is the the new requirements to reap the advantage of more continuing investment in the development of the advanced risk control and a better capital model. technical, sales and leadership skills of our employees. The well established Underwriting Academy and Claims In 2013, the Financial Services Authority split formally Academy programmes are key to the continued into two new regulators, the Prudential Regulation development of technical insurance skills. We have also Authority and the Financial Conduct Authority. The been running for several years an extensive programme regulators had already been acting primarily in their of development in our sales skills and this continues. new roles in 2012 and we had been subject at the end 4 AnnualReport2013 Strategic Review of 2012 to a formal visit of both sets, as part of the The Group has been widely recognised both within and normal regulatory review cycle. We received the beyond the insurance industry and a number of awards feedback from these visits in early 2013 and we have have been won over the last few years. In 2013, Allianz completed all the actions that were requested of us. won the Investing in the Profession and Young Achiever We continue to work closely with our regulators and categories at the British Insurance Awards, was voted maintain an open and regular communication. Brokers’ Insurer of the Year at the UK Broker Awards, Commercial Insurer of the Year at the Insurance Times There continues to be legal and political pressure Awards and won three categories in the Underwriting regarding the way personal injury claims are handled, Service Awards. Additionally, individuals and teams at and the way the motor market operates in respect of Allianz won awards in the fields of Technology, Claims, credit hire and referral fees. Legislation was effected in Social Media and Business Analysis. These awards and 2013 to prevent lawyers’ success fees and After The our performance in 2013 would not have been possible Event insurance premiums being recoverable from the without the highly skilled and committed contributions losing party and to ban referral fees. In addition, lower of our employees, both in the UK and India. My thanks fixed fees were introduced for legal work on to everyone in the Group for what was delivered to our straightforward personal injury cases. Discussion on customers and shareholders during the year, and also whiplash claims continues, and the Competition for their generosity in supporting, both with their time Commission has produced preliminary findings from and financially, the various charities and voluntary their investigation into the private motor insurance organisations with which the Group is involved. As a sector with a specific focus on credit vehicle hire CEO who has only been in post for 6 months, I would companies and insurers’ repair networks. It is expected also like to thank Andrew Torrance, my predecessor, that their final report will recommend fundamental who spent ten successful years leading the company to changes to the way in which claims are handled, but the prominent position within the industry that we any changes are unlikely to take effect before 2015. have achieved. We welcome the various legislative changes and The Group begins 2014 in a strong business and market investigations, as we believe that the old system financial position relative to our competitors. There are delayed valid compensation payments to claimants, now some signs of economic recovery in the UK, but and resulted in too much of the total cost of claims several years of reductions in real earnings have put being spent on the costs of settlement rather than significant financial pressures on many of our compensating the injured party. Even with the changes customers, and these are unlikely to be significantly already implemented, there is too little opportunity for alleviated in the short term. At the same time we the at fault insurer to control the costs of compensating expect continued low investment income and non-fault claimants, which drives up overall costs. continued strong competition to write business at rates that on too many occasions are inadequate. The Allianz business had another good year in 2013, Nevertheless, the Group is well equipped through its with good results from both Allianz Retail and Allianz customer relationships, strong service delivery, wide Commercial, and the acquisition of further major range of products, robust financial position and a corporate partner deals. In addition, a further increase knowledgeable and dedicated workforce to meet these from our brokers in Retail’s ‘net promoter score’ (a challenges and again be successful in 2014. customer service metric) means that both Retail and Commercial are ranked as the top customer-service insurer amongst their peers using the same measure. Commercial have held this position for a number of years. J M Dye Chief Executive 02 Chief Executive’s Report 5 05 Group Strategic Report Group Strategic Report In accordance with the Companies Act 2006, the Directors present their Group Strategic Report for the year ended 31 December 2013. Group Overview A number of the Group’s subsidiaries are regulated by the Financial Conduct Authority and/or the Prudential Background Regulation Authority. Allianz Holdings plc controls the principal insurance operations of Allianz SE in Great Britain. Through its Business Strategy and Overview subsidiary companies, Allianz Holdings is one of the of 2013 Results country’s leading general insurance groups. The Company is not required to prepare an Operating and The Group’s mission is “to be the outstanding Financial Review as recommended as best practice by competitor in its chosen markets by delivering the Accounting Standards Board. The Board of the products and services that clients recommend, being a Company is conscious of its position as a major great company to work for, and delivering the best financial services provider and includes in the combination of profit and growth”. following Strategic Report details of its performance, some of the key influences on its business in 2013 and Consistent with its mission the Group in recent years the prospects for 2014. has pursued a strategy of proactively managing the insurance cycle to maximise the return for The Strategic Report does not purport to meet the shareholders whilst carefully managing its capital base. requirements of an Operating and Financial Review. It This strategy has been highly successful and the should be read in conjunction with the Chief underlying profitability of the companies that comprise Executive’s Report and the other sections in the Annual the Group has been very satisfactory in recent years. report, including the Notes to the Accounts. The Group’s overall performance and investment in a number of market leading initiatives has been widely Nature of Business recognised both within and beyond the insurance industry and a number of awards have been won over Through its insurance subsidiaries the Group is one of the last few years. In 2013, Allianz won the Investing in the top ten general insurers in the United Kingdom the Profession and Young Achiever categories at the measured by gross written premium. The Group offers British Insurance Awards, was voted Brokers' Insurer of a wide range of products and has a presence in most the Year at the UK Broker Awards, Commercial Insurer general insurance markets. However it concentrates of the Year at the Insurance Times Awards and won resources on markets and products which will deliver three categories in the Underwriting Service Awards. the best return for shareholders. The Group distributes its products almost entirely in Great Britain. The insurance market is subject to pricing cycles as capacity expands and contracts driven by fluctuating The Group operates through three regulated insurance returns. During the year, insurance rates fell by over companies and is organised into retail and commercial 10% in the personal lines motor market, primarily in divisions. Each division trades in its own market response to changes in the civil law surrounding the segment distributing a range of products under a costs of handling bodily injury claims. It is unclear by number of brands. An analysis of the 2013 results and how much ultimate costs will fall, and the company the prospects for 2014 are set out in the individual reduced its volume of broker motor business in the trading division Business and Financial Reviews. belief that the market had over-reacted to this 6 AnnualReport2013 Strategic Review KeyPerformanceIndicators 2013 2012 2011 £m £m £m Grosswrittenpremium 1,931.3 1,879.8 1,832.2 Netwrittenpremium 1,820.5 1,773.6 1,716.1 Underwriting results 73.0 65.4 70.4 Operatingprofit 170.5 161.5 168.7 Profitbeforetax 187.3 166.5 175.9 Economicvalueadded 71.1 73.1 75.0 Claimsratio 64.5% 64.4% 63.9% Expenseratio 31.4% 31.9% 31.8% Combinedratio 95.9% 96.3% 95.7% UKemployeeturnover 14.0% 13.9% 15.3% Source – Management Accounts. Prior years have not been restated for any change in accounting standards. development. The account remained profitable in 2013 Operating profit is profit before tax adjusted for and adequate returns should be achievable in the near realised gains, impairments and other income on an term provided the market does not weaken further. The Allianz SE Group basis. motor accounts written direct and through Corporate Partners made losses, primarily as a result of investing in the growth of these channels. More detail can be Future Outlook found in the Chief Executive’s Report. Premium income at both a gross and a net level is In commercial lines, rate strength varied by account, expected to increase in 2014, driven by further rate with liability increasing by most and property by least. increases and the impact of new direct and corporate All lines except the engineering element of the partners business. It is not intended to have any property business saw rate strength above claims significant underlying growth in commercial volumes inflation again in 2013, but in general there has not until the environment improves further, but some been sufficient strengthening yet to return current modest volume increase is expected in 2014. By accident year loss ratios to acceptable levels for all contrast, Retail expect to continue to drive up customer classes. Despite the difficulties of obtaining adequate numbers faster in direct and corporate partner areas. rate strength, strict underwriting discipline has been There remains a risk that both growth and profitability maintained to minimise the impact of the insurance may be tempered by the continuation of the current cycle. Gross written premiums for the Group were difficult market, especially in private motor, and by the £1,931m, a 3% increase over last year, with very similar impact of the economy on our customers. Profitability rates of growth for Commercial and Retail. Operating is expected to reduce from current levels as the costs of profit at £170.5m was at a satisfactory level, new investment, especially in direct, will counteract particularly given the market conditions. Profit before improvements that should arise as previously achieved tax was £187.3m compared with £179.0m in 2012 rate increases ahead of claims inflation earn through after restating for the new pensions standard. into 2014. The difficult economic conditions have already had a significant impact on liability claims, and The Group has identified a number of Key the company remains very vigilant with respect to Performance Indicators against which to measure its claims fraud. By definition, insurance is an uncertain progress. One of the most important of these is business and profitability in 2014 could also be Economic Value Added. Economic Value Added is the influenced by a higher than expected level of major profit after tax in excess of the cost of assigned capital. claims and weather events. 02 Chief Executive’s Report 7 05 Group Strategic Report Risk and Capital Management for discussions with the parent company. Capital is allocated to each insurance company and trading A Risk Management department, independent of division based upon the underlying risks the business normal business activities, assists the Board and presents. Each division is required to make a minimum Management Board with the development of risk return on its allocated capital. The minimum returns policies and the identification and monitoring of the on allocated capital are incorporated into divisional key controls that mitigate risk. To ensure risk objectives and the personal performance targets of management is fully integrated into the business and senior management to ensure that the underlying effective control is maintained, each key risk is owned business operations are run and managed in a manner by a member of the Management Board. The Risk consistent with the Board’s appetite for risk and with management department has teams of both the capital available. quantitative and qualitative risk analysts, and the Chief Risk Officer attends Management Board During the last few years, the internal risk model meetings and personally presents his reports to the has been further developed to meet the emerging Board Risk Committee. standards expected in a Solvency II environment. The Group has been actively working within the Allianz SE, the ultimate parent company, has PRA’s Internal Model Approval Process, which allows introduced minimum risk standards which the Group the Group to have a close dialogue with the Regulator, must adopt. The Group complies with the group and to develop the significant volume of evidence minimum standards in all material respects. needed before ultimate model approval can be obtained. The PRA ICA requirement is met by the The key internal operational and financial controls are internal Solvency II model, suitably adjusted to meet regularly tested by Internal Audit. A comprehensive ICA requirements and to reflect developments in the programme of risk based reviews is conducted. Key risks being run by the Group. Although there was a issues from individual audit reports are summarised to regulatory Risk Assessment visit during 2012, the PRA form a regular assessment of the control climate did not conduct a separate review of the ICA, and across the business. Internal Audit maintains a close amended the existing Individual Capital Guidance working relationship with the Allianz SE Internal (ICG) only to allow for pensions risk. Although this Audit Department. addition was in line with our own calculations for pension risk, using the PRA basis for pensions, the All the material key controls operated by the business underlying ICG we believe is now conservative. We that guard against financial mis-statement have been have therefore asked the PRA to assess our latest ICA to reviewed, documentation updated and subjected to reconsider the ICG. We believe that a capital management and internal audit testing. No material requirement in line with the Group’s own ICA would weaknesses or significant deficiencies have arisen in still allow us to operate the business without undue either 2013 or 2012. New controls and standards have risk to policyholders or shareholders. been gradually introduced so that the Group can meet the standards of governance and risk management The Group has little exposure to either industrial required to satisfy Solvency II. disease claims arising from asbestos exposure or pollution claims. Historically the Group wrote a very The Group uses a number of risk based capital models limited portfolio of UK liability business but did write and techniques to ensure that its capital base is some London market marine and non-marine consistent with its risk appetite and sufficient to meet business which is now in run-off and is where most of its current and future business plans. These models the exposure arises. The ongoing risks were reduced in are used for the PRA Individual Capital Assessment 2007 following the approval by the English and US (ICA), rating agency discussions, internally for Courts of a Scheme of Arrangement to enable a determining capital adequacy and allocation as well as significant part of the Group’s run-off exposure to be 8 AnnualReport2013 Strategic Review determined and settled. In other areas of the business The Group employs around 5,600 people dedicated to there has been some increase in the number of the UK business. Approximately 4,600 are employed in reported claims in 2013. There are many uncertainties Great Britain and approximately 1,000 in India in an determining disease reserves but based on the offshore service centre. The offshore service centre available evidence, the Group believes it is fully principally provides IT and administration services to reserved for the remaining liabilities. the Group’s businesses. The number of people employed in India is expected to continue to increase in 2014 as the Group increases the range of services Share Capital provided to other Allianz SE companies. There were no changes in the capital structure or issued share capital of the Company during the year. Employees The Company owns 100% of all its subsidiaries. All employee incentive share schemes use the shares of The Group continues to invest in the development Allianz SE. of its employees and believes that it will deliver superior returns through investing in market leading technical, customer, sales and leadership skills. Technical Group Organisation employees continue to undergo development through either the Underwriting Academy or the Claims The Group’s insurance, non insurance and policy Academy initiatives, and there are a range of servicing activities are undertaken in a number of professional development programmes covering other specialist companies. Allianz Holdings plc is the aspects of the business. All managers are enrolled in a holding company. Allianz Insurance plc is the main leadership programme which is regularly enhanced. insurance company with the non regulated activities being carried out in a number of specialist companies. The Group has a comprehensive management and The largest are Allianz Engineering Inspection Services development training programme. The Group is an Limited, Allianz Management Services Limited and Investor in People. Allianz Cornhill Information Services Private Limited, a company registered in India. Employees at the start of their Annual Charity Bike Ride.The team comprising of 20 employees and 5 support crew cycled from Guildford Head Office to Brussels to raise money for Help The Hospices.