Admiral Regulatory News (ADM)

21 Mar 2005 07:00

Admiral Group PLC21 March 2005 Admiral Group plc Results for the Year to 31 December 200421 March 2005 Admiral Reports Record Profits and Reaffirms Growth Prospects Admiral Group plc ("Admiral", or "the Group") today announces a record adjustedcore profit of £100.6 million for the year to December 2004, an increase of 30%over the year earlier. Aggregate group turnover, comprising total premiumswritten, gross other income and allocated investment income, rose 28% to £548.0million. 2004 Highlights • Adjusted core profit* up 30% at £100.6 million (2003: £77.2 million)• Statutory pre-tax profit of £101.0 million (2003: £57.2 million)• Normal final dividend of 3.1p per share, special dividend of 6.2p per share• Aggregate group turnover up 28% at £548.0 million (2003: £427.3 million)• Total motor premiums written up 27% at £470.4 million (2003: £371.6 million)• Net income from products and services not underwritten by the Group up 47% at £56.9 million (2003: £38.7 million)• Active customers at year end up 29% to 1,041,000 * Adjusted core profit is statutory operating profit (plus interest receivableand less charges for staff share schemes, goodwill amortisation and bonuses paidin lieu of dividends) excluding £6 million of profit commission from Munich Reaccounted for in 2004 but relating to premiums earned in 2003 Comment from Henry Engelhardt, Group Chief Executive "The growth in revenue, profits and cash flow during 2004 underlines thestrength of our business model and the effectiveness of our distributionstrategy. "As already indicated we look forward in 2005 to growing our business andwidening our margins relative to industry averages." Comment from Alastair Lyons, Group Chairman "Consistent with our principle of returning excess cash to our shareholders, weare very pleased to be able to propose a normal final dividend of 3.1p per shareand a special dividend of 6.2p per share. "We will continue to review available cash to determine whether it isappropriate for the Group to pay further special dividends from time to time, inaddition to its normal policy of distributing no less than 45% of after-taxprofits at each half year." Senior management will brief analysts at 10.30am GMT at Financial Dynamics. Thepresentation will be available later today at www.admiralgroup.co.uk. For further information, please contact:Admiral +44 (0)29 20434394Louisa ScaddenJustin Beddows Financial Dynamics +44 (0)20 7269 7200Robert BailhacheDominick Peasley Chairman's Statement In every year since I became Chairman in 2000, following the management buy-outof Admiral backed by Barclays Private Equity, the Group has moved stronglyforward, increasing both the value of business written and its profitability.During 2004 we have secured our 1 millionth customer, written £470m totalpremiums and achieved pre-tax profits of £101m, with an outstanding 82.0%combined ratio. The sustained growth in franchise and profitability thatAdmiral's distinctive business model has made possible underpinned the highpoint of 2004 - the Company's highly successful listing in a difficult marketfor new issues, valuing the business at £711m, some 12 years after it was firstconceived by the senior executive team that leads it today. It was hugely satisfying to follow this success by winning Business of the Yearat the 2004 National Business Awards, a much deserved reflection of our listingpositioning - "Admiral is different". To create that difference, Admiralcombines commercial creativity, exemplified by its reinsurance structure, highratio of ancillary sales, and multi-branding, with a distinctive culture ofopenness, informality, team work and delegation of responsibility made possibleby excellent management information and effective control systems. Our listing brought with it significant changes to our Board. Owen Clarke andPratt Thompson, who respectively had represented the interests of BarclaysPrivate Equity and XL, stepped down as non-executive directors. Our thanks tothem for many years of active involvement and sound advice and support. Intheir place we have been joined by Martin Jackson and John Sussens. Martinbrings a wealth of experience of financial management in the insurance sector,having, as Finance Director, taken Friends Provident through demutualisation.We are delighted to have him as Chairman of our Audit Committee. John'ssignificant exposure to the quoted sector, having served for many years asManaging Director of Misys and now also as a non-executive director of Cookson,makes him well qualified to be our Senior Independent Director and Chairman ofour Remuneration Committee. My thanks also to Manfred Aldag and Keith James fortheir continuing contributions during a year which made exceptional demands onour non-executives. The combination of the different experiences and perspectives of ournon-executives with the energy, clarity of purpose and depth of knowledge of ourexecutive team gives me confidence in our Board's ability to chart an effectivestrategy for Admiral and identify correctly the resources we require toimplement this strategy. Admiral's strategy is clear and straightforward - to continue to grow our shareof the direct private motor market, maximising the value derived from eachcustomer relationship. Along the way we will identify profitable opportunitiesto exploit the knowledge, skills and resources attaching to our core business.As an example, Confused, the intelligent automated car insurance shopper that weset up in 2000, last year handled 1.4 million quotes. Our continued successful development reflects not only the quality of ourexecutive directors but also the strength in depth of Admiral's management andits whole team. Our philosophy is to give people the opportunity to develop totheir full potential, and ongoing alignment of interest between staff andshareholders is one of our core principles. We were, therefore, delighted thatso many of our staff - 1,418 out of a total of 1,616 - were able to participatein the distribution of shares on listing as a consequence of our Employee ShareOwnership Trust (ESOT). As this ceased at listing we have established areplacement scheme under which all employees will receive a bi-annual grant offree shares subject to the achievement of challenging pre-determined performancecriteria based on Group profitability. We have also established a seniorexecutive share plan under which awards are determined according to growth inGroup earnings per share. The Group is well capitalised with a proven approach to reserving, and withsolvency ratios in both the UK and Gibraltar which carry an appropriate marginover minimum solvency statutory requirements. Our business model is stronglycash generative, with year-end non-regulated cash balances increasing from £30mto £50m. In addition relief for the cost of the ESOT distribution at listingcreated an abnormally low tax charge in the 2004 accounts which will reduceAdmiral's tax payment in 2005. Consistent with our principle of returning excess cash to our shareholders weare, therefore, pleased to be able to propose a two-part final dividend for2004. The first element, representing 3.1 pence per share is based on a 45%pay-out ratio, the actual amount paid reflecting our listing part way throughthe financial year. The second special element of 6.2 pence per share reflectsthe abnormally low tax charge in 2004. We shall maintain a policy of reviewingour available free cash to determine whether or not the Company is able to payfurther special dividends from time to time in addition to a consistent normalpay-out ratio. In conclusion, I am very confident in Admiral's ability to pass the test ofclarity of strategy, quality of management, and adequacy of resources tocontinue consistently to create value for all our shareholders. Alastair LyonsChairman18 March 2005 Chief Executive's Statement As you will see from reading these accounts, this was a smashing year for theGroup. Smashing as in smashing records for things like: profit, premium income,expense ratio and more. Clearly the highlight reel starts with our successful public offering andlisting on the London Stock Exchange; changing our status from a private Companyto a public Company. What stands out for me is that a large number of investors who previously didn'tknow much (anything?) about us decided that ours was a Company worth buying astake in. It was a highlight because everyone at Admiral (in particular, thefinance and communications departments) pitched in and worked together to ensurethat the process of going public was a smooth one. It was also a highlightbecause it was a validation of all the hard work we have put into our businessover 12 years; becoming quoted was a tangible, cumulative measurement of ourachievements. Admiral didn't just pop up in the summer of 2004 and decide to bea publicly quoted Company. Over 12 years a lot of people have put a lot ofeffort into making Admiral a great Company and the listing was another, albeithighly visible, tick in our scorecard of success. So, let's get into the meaty bits. Let me try and list some of the other thingsthat brought a smile to our faces in 2004: • Made a record core profit of £100.6m, up 30% from 2003;• Core profit per share was 38.9p, up 30% from 29.9p in 2003;• Total turnover for the year was £548m, up 28% from 2003;• Premium income grew to £470m, up 27% from 2003;• Produced a combined ratio of 82%;• Gave more than 6.25m quotes, of which 5m started on the internet (82%);• Ended the year with more than 1,000,000 customers;• Experienced continued improvement in loss ratios across all the back years;• Crystallised the Staff Trust with a value of £57m upon listing;• Won Business of the Year at the National Business Awards;• Named by The Sunday Times as the 20th best place to work in the UK in its Top 100 Places To Work in the UK competition. This listing is in its fifth year and we're one of only 11 firms to be in the list all five years;• Named by the Financial Times as the 16th Best Workplace in the UK and one of the Top 100 Workplaces in the EU;• Winner of the Best small/mid Cap IPO of the Year at the Financial News Awards;• Had over 250 children at our Staff Children's Christmas party (up more than 25% on 2003);• Wow! What We Do: For those of you looking through our accounts for the first time, Admiral'sprimary business is to sell car insurance direct to the public in the UK. Weare not your typical insurance underwriting operation as we primarily distributeinsurance on behalf of reinsurance partners, taking only 25% of the underwritingrisk for our own account. However, we do own all our customers and have theability to sell other products and services to them. We operate through anumber of targeted brands: Admiral (younger drivers, London area), Diamond(women drivers), Elephant.co.uk (internet users) and Bell. We have two otherbrands, Gladiator Commercial, which operates as an intermediary in thecommercial vehicle market, and Confused.com, which operates as an internet 'shopper' for car insurance. 2004 was our 12th year of trading. The first 7 were in a Lloyd's of Londonenvironment. However, toward the end of 1999 Management teamed up with BarclaysPrivate Equity to buy the business. The result of this transaction was thecreation of Admiral Group Ltd. (AGL) as the holding Company. In September of2004 we listed the Company on the London Stock Exchange. This is our first setof accounts as Admiral Group plc, a public Company. In 1999 we also put in place a long-term co-insurance agreement with Great LakesUK, a wholly-owned subsidiary of Munich Re, the world's largest reinsurer. In2001 we extended this agreement and it currently runs through at least 2008. In2002 Munich Re also became a shareholder in AGL and it currently owns 14% of theGroup. Key Performance Information: Our total premium written for 2004, before sharing premium with our reinsurancepartners, was £470m, accounting for 86% of our total turnover. The number ofcustomers we service rose to 1,041,000 from 808,000 (+29%). All our growth hasbeen organic. In 2004 75% of our premium was underwritten by two external reinsurers.Therefore, the Group's net premium written was £117m. In 2005 Admiral Groupwill once again take 25% of the premium income to its own account. Munich Re,through Great Lakes, will take 65%, Axis and Gen Re will each take 5%respectively. Some key numbers from the accounts which follow: • Loss ratio 67% up from 52% in 2003;• Earned expense ratio, less government levies, down to 12.5% from 13.5%;• Combined ratio, including all levies, 82%, up from last year's phenomenal 67.7%;• Income from products and services we do not underwrite totalled £69.5m up from £50.8m (+37%). The movement in loss ratio from 52% last year to 67% in 2004 is to be expected.The 52% represented a year with a large percentage of releases from previousyears. It is the reflection of the quality of those back year results which hasbeen a catalyst to our explosive growth in 2004. It made sense to accelerategrowth on the back of fantastic results. But such growth meant we had tosacrifice some margin. However, the 2004 loss ratio of 67% leaves plenty ofmargin and on a much larger base. This is a superb result and only pales whencompared to 2003! The change in loss ratio across years is characterised by aslightly less good underlying trend, proportionally less substantial back-yearreleases and the aforementioned growth, in excess of 25%. Without any releasestaken into account the loss ratio move was modest, from 72% to 75%. We have a history of back reserve releases and 2004 was no exception. The 2000underwriting year was reported with a loss ratio of 89% in the 2000 accounts,now that same year has a reported loss ratio of 64%. 2001 has dropped from 76%to 60%, 2002 from 80% to 66% and 2003 from 73% to 70%. 2004 comes into theworld with a reported loss ratio of 79%. The expense ratio, not including government levies, moved downwards by 1.0% from2003, a reduction of 7%. This reflects our continued efficiency improvements.However, do not expect swingeing cuts in the expense ratio going forward. It isone of our strengths that we use our efficiency to help our underwritingselectivity. Because we are efficient, particularly in generating quotes, wecan afford to convert fewer quotes into business. In this way we are helpingensure that we only take the right risks at the right prices. The end result isa better combined ratio. If we concentrated on reducing the expense ratio itmay turn out to be a false economy, as it might come at the expense of the lossratio through reduced selectivity. So, for instance, we could cut the marketingbudget and do fewer quotes, but then we'd need to convert more of them to hittarget. To convert more quotes we'd have to be less selective. Clearly, themore selective we can be the better our loss ratio should be. As we've alreadysaid publicly, we intend to reduce our growth rate in 2005 through the use ofselective price increases. Ancillary income moved forward largely due to the increased customer count. Toput this income into context, I've done a little calculation where the ancillaryincome is added to earned premium to give a 'big picture' combined ratio. Ithink this gives an interesting measure of the entire business. Expressed inthis way, the combined ratio would have been 59%! Here's another interestingcalculation: we made £101m on income of £195m, a ratio of 52%. The UK Car Insurance Market Cycle: Last year I said that the car insurance market was turning, albeit slowly. Iexplained that premiums would not keep up with claims inflation in 2004. Andthis is, indeed, what has happened. On average, rates probably fell by 2-4%across the market, while claims costs continued to rise faster than inflation at4-6%. Therefore, when all the results are tallied, the market should showdeterioration of several points. The private car market finished 2003 with a combined ratio around 102%. Theresult for 2004 is unlikely to be better than 104%. In previous cycles, theworst point in one cycle is typically seven years from the worst point in thenext cycle. 1991 was the worst year of that cycle and seven years later 1998was the worst year of the next cycle. In both 1991 and 1998 combined ratioswere around 120%. We are now seven years on from 1998 and the market's combinedratio is nowhere near 120%. To my mind, this indicates the rise of a newcyclical pattern. I think this pattern will be characterised by being moregentle, less good in the good times and correspondingly less bad in the badtimes. The reasons for this new pattern lie in the changing dynamics of themarket. There are three key factors which have provoked such change: • Consolidation• Reduced investment returns• The growth of direct writers Market consolidation has meant that where previously it took some 10 firms toaccount for 50% market share, this figure is now accounted for by two firms(Royal Bank of Scotland and Aviva). As these two firms have a great deal tolose from large rate reductions and they are both under the watchful eye of thepublic arena, I believe that their large market share is a force for marketstability. The loss of large investment returns from the halcyon days of the 90's also putsmore pressure on the insurance result, which in turn should provide morestability to the market. The growth of direct writing which, I estimate, now accounts for more than 50%of the market, means quicker response times to changes in market pricing. Inthe past, changes in rates by competitors weren't visible to underwriters forseveral months and then couldn't be responded to for several months. I believethat this led to over-corrections in anticipation of continued trends. Now,direct writers see very quickly through their daily conversion data what themarket as a whole is doing and individual firms can react by changing rates fromone day to the next. I believe that this leads to a greater number of smallercorrections and serves to further reduce the volatility in the market. In short, I believe that the market is still cyclical and there is no reason tothink that it won't remain so. However, I believe the movements of the marketwill be less severe, with the best times of the cycle less good than previouscycles and the worst times of the cycle less bad. That's the long-range outlook for the market. Looking at the next 12 months,the good times the market has enjoyed over the last few years have resulted inmore firms looking for greater market share. I believe that if you could add upthe policy numbers from all the business plans of all the firms in the marketyou would account for more policies than actually exist. At the moment, thebattle for market share is being waged in the media. As consumers can probablytestify to, there does not seem to be a corner of the UK that doesn't seem to besubmerged in car insurance advertising. The respective marketing coffers ofcompanies in the market have been swollen and the result is a record spend,around £100m on TV and in the press alone in 2004. This figure is some 40%higher than the same figure in 2003. This increase partly ties into the sharegrowth of direct operations, who use advertising to get custom rather than usingintermediaries. But it is also a reflection of appetite for business. I don't see a great deal of change to this landscape in 2005. Certainly thefirst half of the year will be characterised by intense marketing spend. Whensome companies begin to fall short of their respective targets (they can't allhit target!), while, simultaneously, the deterioration of results from previousyears begins to filter through, it will result in two reactions: some firms willcut rates to ensure hitting volume targets, despite the offsetting reduction inmargins, while others will reduce their targets to more achievable levels, whilemaintaining margins. On balance I believe rates will be static during the year. Our own business is somewhat insulated from this deterioration by two factors.First, our results historically have been far better than the market average andtherefore, despite tighter margins our result is still rather profitable.Second, our unique underwriting structure means we have a limited share of ourown result, which reduces profits in the good times, but also reduces the effectof narrowing margins in the less good times. And, as we continue to grow ourcustomer base, we continue to grow our ancillary revenues. All in all it shouldresult in sustainable, profitable growth going forward. A Brief Explanation of Why Our Results Are So Good! Some explanation of our excellent numbers lies with our ability to make theinternet work. This is also a source of confidence in our future. Our 2004internet results exceeded our forecasts and, in the absolute, are quitestunning. (Except for changing the year from 2003 to 2004 this was exactly whatI wrote last year. It's not that I'm being lazy, it's just that it's stilltrue!) Of the more than 6.2m quotes we did last year 82% started on theinternet. Around 71% of all our sales came from these internet quotes. Ibelieve that there is still growth to be had in internet distribution, albeitprobably less rampant than before. As we are among the leaders in the internetdelivery of car insurance we are well placed for continued success through thischannel in the coming years. (In 2004 we had some 1 billion hits to ourwebsites!) Elephant's end-of-year customer count reached 360,000 (up over 75% from the yearbefore). Elephant quote volumes were up from 2.0m in 2003 to 2.5m in 2004.Elephant is now the biggest brand in the Group. A tremendous achievementconsidering it launched only in August 2000. The other brands all grew thenumber of customers they service in 2004 as well, Diamond by 18%, Admiral by 11%and Bell by 4%. Beyond Direct Response Car Insurance: It was also yet another good year for Gladiator Commercial. Gladiator sells vaninsurance, largely to private tradesmen, as an intermediary. Admiral Group doesnot take any underwriting risk with this business. At the end of 2004Gladiator's customer count stood at 33,000 and it contributed £1.8m to theGroup's bottom line. 2004 was a huge growth year for Confused.com. Confused.com is an intelligent,automated car insurance shopper. Simply put, all a customer has to do is puthis or her details into Confused.com and Confused then goes out to the major carinsurance websites, populates the appropriate fields, and brings the customerback a list of prices. One-stop shopping! Confused goes out to directoperations as well as intermediary sites. It generated over 1.37m quotes upfrom 590k in 2003. A great deal of Confused's growth is coming from word ofmouth, the most powerful form of advertising. We fully expect Confused to growsubstantially in 2005. Inspop.com Ltd., the trading Company which ownsConfused.com, made a profit in 2004 of £2.1m, most of which is down to Confused.This compares to a profit of £300k last year. In Conclusion All in all it was a brilliant year. From the facts and figures at hand we stillbelieve we are the most efficient and, pound for pound, the most profitable firmin the UK motor insurance market. Our goal is to continue to write the abovesentence for the annual accounts year after year after year. Henry EngelhardtChief Executive Officer18 March 2005 Financial Review Key financial highlights Profit before tax increased significantly during 2004, up from £57.2m to£101.0m. The Group also achieved significant core profit growth - of over 30% during2004, as shown in the table below. The directors use core profit as an effective assessment of the underlyingprofitability of the Group. This measure can be split into the three keyelements of the Group's business model - 1) underwriting profits, 2) profitcommissions and 3) net other income (in particular ancillary income). 2004 2003 £000 £000 Underwriting profit 27,969 31,048Profit commissions 21,673 1,447Net other income 56,916 38,701 Unadjusted total 106,558 71,196 Profit commission adjustment (1) (5,994) 5,994 Adjusted Group core profits 100,564 77,190 (1) During 2004 £5,994,000 of profit commission relating to the 2003financial year became recognisable in accordance with the Group's accountingpolicy for such commissions and is, therefore, included in the 2004 results inthe statutory accounts. The directors believe this amount should be reallocatedback to 2003 for the purposes of comparing 2004 against 2003. 2004's core profit of £100.6m (a reconciliation to which is set out later inthis section), equates to a growth rate of over 30% on 2003, and compoundedannual growth of almost 51% since 2000 - the first year in which consolidatedaccounts were drawn up for the Group. A further measure used by the directors to assess the growth in the size of thebusiness is 'Group turnover' - which includes total premiums written, grossother income and net investment return, all as reported on the face of theprofit and loss account. The Group has also achieved substantial growth in thismeasure, as shown below: 2004 2003 £000 £000 Total premium written 470,400 371,600Gross other income 69,457 50,783Net investment return 8,135 4,881 Group turnover 547,992 427,264 Turnover has increased by 28% in 2004 with compounded growth over the five yearsof over 20%. As noted, the Group generates profits from three principal sources: • the share of the motor insurance business it retains and underwrites itself• profit commission earned from the Group's co-insurance and reinsurance partners• intermediary activities - primarily the selling of ancillary motor products, but also from Gladiator Commercial and Confused.com. The hybrid nature of the business significantly reduces the volatility ofearnings inherent in motor insurance and has some important advantages.Firstly, the Group currently only underwrites 25% of the motor insurance itsells. The Group therefore, materially limits its downside exposure, whilstretaining the potential, through the profit commission arrangements in place, togenerate potentially significant income from the other 75% of the businessdepending upon the underwriting results achieved. The second key advantage comes from retaining ownership of the entire customerbase. This means the Group is able to generate substantial non-insurance incomefrom all policyholders. Underwriting Underwriting structure The underwriting arrangements in place for 2004 were unchanged on the previousyear. 65% of the total business was underwritten by Great Lakes Reinsurance(UK) Plc (Great Lakes - a UK subsidiary of Munich Re currently rated A+ by A MBest) under a co-insurance arrangement. (This is in contrast to a reinsurancecontract and means Great Lakes is the primary risk carrier on this portion ofthe book.) The remaining 35% is underwritten through two Admiral Group entities - AdmiralInsurance Company Limited (AICL) and Admiral Insurance (Gibraltar) Limited(AIGL), both of which commenced trading in 2003. 10% of the total business wasreinsured to Converium Re (Converium) under a proportional quota share contractthrough AIGL (as in 2003) on a funds withheld basis. The net effect of this isthat the Group retained a net share of 25% of the total book. The quota share contract with Converium was terminated at the end of 2004 andhas been replaced with two new contracts (each for 5% of the total book) - withGen Re (part of the Berkshire Hathaway Group and rated AAA by Standard & Poors)and Axis Re (rated A by Standard & Poors). As well as proportional reinsurance, the Group has also arranged an excess ofloss reinsurance programme with a number of reinsurers to protect itself (alongwith its co-insurance and reinsurance partners) against very large claims. For the 2000 to 2002 underwriting years, the Group's retained share of the motorbusiness was underwritten through the Group's Syndicate (Syndicate 2004) atLloyd's of London. The Group is currently managing the run-off of Syndicate2004, and the last year of account (2002) remained open at the end of 2004. Adecision is to be made during 2005 as to the closure of the 2002 year, and therelease of any remaining capital held at Lloyd's. Underwriting results In 2004, the Group has again generated significant underwriting profits,reflecting both superior loss and expense ratios. The aggregate of these - thecombined ratio - is again expected to rank highly in the UK motor market and hasled to an underwriting profit of £28.0m (before reinsurance profit commissions),compared to £31.0m in 2003. This decrease is due to a combination of the higherloss ratios experienced on the more recent underwriting years (a factor of themotor insurance cycle) and the higher level of reserve releases realised in 2003following the favourable development of the earlier underwriting years. Growth in total premium written was 27% in 2004, up from £371.6m to £470.4m.This was due to targeted increases in marketing spend, and the continuing,highly successful development of Elephant.co.uk - the Group's internet-onlybrand. This growth generated an increase in the Group's market share, and aneven more notable increase in its share of the internet motor market. Premium rates were on average around 3% lower in 2004 than in 2003. Thisreduction was implemented as a strategy to take advantage of the Group'ssuperior combined ratio to help achieve the substantial growth in both policiesand premiums written while delivering attractive combined ratios, both for theGroup and our reinsurers. 2004's loss ratio (excluding claims handling expenses - which are allocated tonet claims incurred but are included in expenses for this analysis) is 67.0%, upfrom 52.1% in 2003. The 2003 ratio was flattered by substantial reservereleases (£16.1m) resulting from the favourable development of earlierunderwriting years. The 2003 releases accounted for a reduction of over 20points in the reported loss ratio, compared to £9.2m of releases, or an 8.5point reduction in the loss ratio in 2004. A full understanding of the impact of reserve releases on the Group's results isimportant. The following analysis sets out net reserve releases (byunderwriting year) included in the financial statements since the 2001 financialyear (no releases were included in the 2000 financial statements as this was thefirst year the Group underwrote premiums and prepared consolidated accounts): Financial year: 2004 2003 2002 2001Underwriting year: £000 £000 £000 £000 2000 1,480 5,176 6,188 3,9232001 2,967 7,938 2,490 -2002 3,229 2,975 - -2003 1,513 - - - Total net release 9,189 16,089 8,678 3,923 Net earned premium 107,501 79,327 81,336 84,135Releases as % of premium 8.5% 20.3% 10.7% 4.7% This pattern of releases reflects consistent downward revision of loss ratiosacross all underwriting years, in response to consistently favourabledevelopment of these years. The Chief Executive's Statement above refers tothis development in some detail. As regards expense ratios, the Group's direct distribution model, focussed onthe internet and telesales, is highly cost effective - especially in terms ofthe cost of acquiring new business. Passing on a share of these costs to itsco-insurance and reinsurance partners also means the Group is able to benefitfrom economies of scale. Continued growth of internet sourced business has, along with tight control ofcosts within the Group, led to a further improvement in the expense ratio(including claims handling costs) to 15.0% in 2004, down from 15.6% in 2003.These ratios are derived as follows: 2004 2003 £000 £000 Net earned premium 107,501 79,327 Net operating expenses per technical account 13,796 10,308add back: claims handling costs 2,352 2,230deduct: non-recurring Lloyd's charges - (193) Adjusted net technical expenses 16,148 12,345 Adjusted expense ratio 15.0% 15.6% The Group's adjusted combined ratio (being the aggregation of the loss andexpense ratios above) for 2004 is 82.0%, compared to 67.7% in 2003. Theincrease is primarily due to the reserve releases in 2003 as discussed above.Once again it is expected that the combined ratio will rank the Group towardsthe top of the UK market. Profit commission The Group receives profit commission through both its proportional co-insuranceand reinsurance arrangements. The amount of commission receivable is dependenton the volume and profitability of the insurance business, measured by referenceto loss and expense ratios. Profit commission - Quota share reinsurance For the 2003 and 2004 underwriting years, the Group earned profit commissionfrom Converium, depending on the loss ratio returned on these underwritingyears. During 2004, £3.1m of commission was recognised, compared to £1.2m in2003. This contract is operated on a funds withheld basis. The new quota share contracts that came into effect on 1 January 2005 havesimilar profit commission arrangements. Profit commission - Co-insurance The Group also receives profit commission from Great Lakes, based on the sizeand profitability of the business written. £16.7m of commission has beenrecognised in the 2004 results, although, as referred to in the financialhighlights section above, £6.0m of this commission relates to premium earned in2003. A further £1.9m of profit commission was recognised during 2004 (£0.3m in 2003)under co-insurance arrangements relating to earlier underwriting year contractswith Swiss Re. An additional £1.2m should become due (based on current reportedloss ratios) from Swiss Re when the 2002 year of account within the Syndicate isclosed or the profit commission is received from Swiss Re. This did not occurat the end of 2004 as the Board of the Managing Agent, Admiral SyndicateManagement Limited felt that a number of opportunities were still to be examinedfor closing the 2002 year. Net other income This figure can be further analysed as follows: 2004 2003 £000 £000 £000 £000 Ancillary contribution 48,493 35,856Instalment income 2,603 1,257Gladiator contribution 1,756 1,575Gross Inspop.com Limited contribution 2,033 322Net Inspop.com consolidation adjustments * (750) (721)Net Inspop.com contribution / (deficit) 1,283 (399)Aggregate interest receipts 3,348 1,166Other Group / central overheads (567) (754) Net other income 56,916 38,701 * - adjustments relate to intra-group sales. Confused.com is a trading name ofInspop.com Limited. As noted above, the Group is able to use its direct customer contact model togenerate significant intermediary revenue through sales of ancillary products tothe customer base. This, therefore, represents the majority of net otherincome. The products involved are primarily insurance products that complementthe motor policy, but which are underwritten by external parties. Thecontribution above is largely commission earned on such sales. Net contributionfrom ancillary sales grew by over 35% during the year, with average gross incomeper motor policy amounting to £51.20 (2003: £50.70). Financial investments, cash and indebtedness All aspects of the Group's business generate significant operating cash inflows.At 31 December 2004, the Group held a total of £322.6m in cash and financialinvestments (2003: £239.0m) - an increase of 35% on 2003: 2004 2003 £000 £000 £000 £000 Non-regulated cash 50,096 30,035Regulated cash 38,515 40,040Total cash 88,611 70,075 Deposits with credit institutions 30,590 24,464Government and sovereign bond holdings 42,980 63,525Corporate bonds and similar instruments 160,438 80,936Total financial investments 234,008 168,925 Grand total cash plus investments 322,619 239,000 The Group has four managed investment funds in which the majority of theinsurance funds are invested. Three of these (one each for Syndicate 2004, AICLand AIGL) are managed by Alliance Capital Management, whilst the fourth (anotherAIGL fund) is managed by Lloyds TSB International. Investment strategy is set by the Group Investment Committee (and approved bythe Boards of directors of the relevant entity). The strategy is conservative,with much of the funds invested in high quality corporate or government bonds.No investments are made in equity shares. Group cash holdings earn interest at just below the UK base interest rate. At 31 December 2004, the Group had £33.1m (2003: £35.4m) of debt in respect of acommercial loan facility drawn down in 2002. £4.3m in capital and interest wasrepaid during the year with a further £4.1m on 3 January 2005. The originalarrangement included a £10m revolving credit facility that the directorscancelled in 2004 as it was unlikely to be required. Refer to note 21 to the accounts for further details on the Group's debt. Dividends The directors have established a dividend policy based on the principle ofreturning excess cash to shareholders. In accordance with this principle theywould expect to make a normal distribution of at least 45% of post-tax profits,and to review regularly the Group's available cash to determine whether it isappropriate for the Company to pay a further special dividend. The directors have, therefore, declared final dividends totalling 9.3p per shareon 18 March 2005. These comprised a normal dividend of 3.1p per share and aspecial dividend of 6.2p per share. The normal dividend took into account ourlisting part way through the financial year and is based on a 45% pay-out ratio.The special dividend reflected the abnormally low tax charge in the 2004accounts resulting from relief for the cost of the ESOT distribution on listingwhich will reduce the Group's tax payment in 2005. In addition dividends of £52.0m were paid during 2004 prior to the Company'slisting. Taxation The total taxation charge reported in the profit and loss account is £14.4m(2003: £18.0m) representing 14.3% (2003: 31.5%) of pre-tax profits. Thesignificant decrease in the effective tax rate is mostly due to the impact ofthe ESOT share awards made during the year, which attracted a significantdeduction for corporation tax purposes A charge for the employer's National Insurance contributions arising from theshare provision (£7.2m) has been included in the profit and loss account. Thetax deduction on this charge was accrued in previous years. Refer to notes 8 and 20 to the accounts for further detail on taxation and theESOT. International Financial Reporting Standards (IFRS) From 1 January 2005, EU regulations require companies listed on regulatedmarkets in the EU to prepare their consolidated accounts under IFRS. TheAdmiral Group consolidated accounts for 2005 will, therefore be prepared underIFRS, as opposed to UK GAAP. 2004 comparative information must also berestated. Reconciliations of profit and shareholders' equity will be provided in order toset out the major differences between the 2004 UK GAAP and IFRS numbers. The Group has considered the impact of the 'stable platform' of IFRS standardson the financial results to 31 December 2004 and the position at the balancesheet date. The directors are confident that, based on the guidance currentlyin existence, no material reconciling items (other than in respect of accountingfor dividends and goodwill amortisation) will be required when the 2004 figuresare restated and reconciled in 2005. Reconciliation of profit before tax to adjusted core profit 2004 2003 £000 £000 Profit before tax 101,000 57,244Add back: interest payable 2,451 3,146Add back: goodwill amortisation 3,906 3,906(Deduct) / add back: share scheme (credit) / charges (4,144) 6,900Add back: bonuses paid in lieu of dividends 3,345 - Core profit 106,558 71,196 Profit commission adjustment (5,994) 5,994 Adjusted core profit 100,564 77,190 Consolidated Profit and Loss Account - Technical Account (General Business)(audited) For the year ended 31 December 2004 Note 2004 2003 £000 £000 £000 £000 Total premiums written 3 470,400 371,600 Gross premiums written 3 165,343 129,851Outwards reinsurance premiums (48,606) (38,555)Net premiums written 116,737 91,296 Change in the gross provision for unearnedpremiums (13,479) (29,015)Change in the provision for unearnedpremiums, reinsurers' share 4,243 17,046 Change in net unearned premium provision (9,236) (11,969) Earned premiums, net of reinsurance 107,501 79,327 Profit commission - insurance business 9 3,069 1,178 Allocated investment return transferredfrom the non-technical account 8,135 4,881 Interest receivable 7 401 705 Total technical income 119,106 86,091 Claims paid:- Gross amount (74,805) (55,233)- Reinsurers' share 23,104 16,154- Net claims paid (51,701) (39,079)Change in the provision for claims:- Gross amount (27,799) 9,309- Reinsurers' share 5,228 (13,787)- Net change in claims provisions (22,571) (4,478)Claims incurred, net of reinsurance (74,272) (43,557) Balance on technical account before netoperating expenses 44,834 42,534 Net operating expenses 4 (13,796) (10,308) Balance on technical account 31,038 32,226 Consolidated Profit and Loss Account - Non-Technical Account (audited)For the year ended 31 December 2004 Note 2004 2003 £000 £000 £000 £000 Balance on the technical account 31,038 32,226 Investment income 8,602 7,599Net unrealised losses on investments (197) (2,518)Investment expenses and charges (270) (200)Other income 7 69,457 50,783Profit commission - agency business 9 18,604 269Other charges:- Amortisation of goodwill (3,906) (3,906)- ESOT / share scheme charges 20 4,144 (6,900)- Bonuses in lieu of dividends (3,345) -- Other 7 (15,889) (13,248) - Total other charges (18,996) (24,054) Allocated investment return transferred tothe technical account (8,135) (4,881) 69,065 26,998 Operating profit 100,103 59,224 Interest receivable 7 3,348 1,166Interest payable 7 (2,451) (3,146) Profit on ordinary activities beforetaxation 101,000 57,244Taxation on ordinary activities excludingESOT share award 8 (31,385) (18,031)Exceptional tax credit on ESOT share award 8 16,985 - (14,400) (18,031) Profit for the financial year after tax 86,600 39,213Dividends paid and proposed 10 (76,045) - Retained profit for the financial year 10,555 39,213 Basic and diluted earnings per share -unadjusted 11 33.5p 15.2p Basic and diluted earnings per share -adjusted 11 26.9p 15.2p There were no acquisitions in the financial year, and no operations werediscontinued. All income and expenditure therefore relates to continuingoperations. There are no recognised gains and losses in either year other than thosereported above in the profit and loss account. In accordance with the amendment to FRS 3 (Reporting Financial Performance), nonote of historical cost profits has been prepared, as the Group's only materialgains and losses on assets relate to the holding and disposal of investments. Consolidated Balance Sheet (audited)At 31 December 2004 Assets Note 2004 2003 £000 £000 £000 £000 Intangible assets 12 58,448 62,354 Other financial investments 14 234,008 168,925 Reinsurers' share of technical provisionsProvision for unearned premiums 22 21,289 17,046Claims outstanding 22 44,848 39,620 66,137 56,666DebtorsDebtors arising out of direct insuranceoperations 16 99,390 73,611Debtors arising out of reinsuranceoperations 5,470 2,622Other debtors 7,549 5,099 112,409 81,332 Other assetsCash at bank and in hand 88,131 54,957Cash on short term deposit 480 15,118Tangible assets 15 4,668 5,849 93,279 75,924 Prepayments and accrued incomeDeferred acquisition costs 2,794 2,270Other prepayments and accrued income 1,634 1,561 4,428 3,831 Total assets 568,709 449,032 Consolidated Balance Sheet (audited)At 31 December 2004 Liabilities Note 2004 2003 £000 £000 £000 £000 Capital and reservesCalled up share capital 23 259 25Share premium account 24 13,145 15,746Capital redemption reserve 24 17 -Profit and loss account 24 103,258 92,395Shareholders' funds attributable to equityinterests 116,679 108,166 Technical provisionsProvision for unearned premiums 22 73,139 59,660Claims outstanding 22 142,968 115,169 216,107 174,829 Provisions for other risks and charges 19 4,838 18,105 Creditors - falling due within one yearCreditors arising out of reinsuranceoperations 91,347 48,867Loans 21 11,455 6,423Other creditors including taxation andsocial security 17 54,114 24,833Accruals and deferred income 18 50,390 36,368 207,306 116,491 Creditors - falling due after one yearLoans 21 21,667 29,000Other creditors 17 741 1,741Accruals and deferred income 18 1,371 700 23,779 31,441 Total liabilities 568,709 449,032 Company Balance Sheet (audited)At 31 December 2004 Note 2004 2003 £000 £000 £000 £000 Fixed asset investments 13 103,804 101,804 Current assetsDebtors 2,519 21,555Cash at bank and in hand 25,587 5,090 28,106 26,645 Creditors - falling due within one yearLoans 21 (11,455) (6,423)Other creditors 17 (29,345) (2,060)Accruals and deferred income 18 (258) (252) (41,058) (8,735) Net current (liabilities) / assets (12,952) 17,910 Total assets less current liabilities 90,852 119,714 Creditors - falling due after one yearLoans 21 (21,667) (29,000) (21,667) (29,000) Net assets 69,185 90,714 Capital and reservesCalled up share capital 23 259 25Share premium account 24 13,145 15,746Capital redemption reserve 24 17 -Profit and loss account 24 55,764 74,943 69,185 90,714 Consolidated Cash Flow Statement (audited)For the year ended 31 December 2004 Note 2004 2003 £000 £000 £000 £000 Net cash inflow from operating activities 27 157,517 96,229 Returns on investments and servicing offinanceInterest received 3,348 1,166Interest paid (2,418) (4,120) 930 (2,954)TaxationUK Corporation tax paid (15,060) (10,428) Capital expenditurePurchases of fixed assets (1,394) (2,921)Sales of fixed assets 15 20 (1,379) (2,901) Equity dividends paid (51,996) - FinancingIssues of ordinary shares - -Expenses related to share issue (2,354) -Repayment of loan capital (2,333) (12,333)Net movement in finance lease capital (1,509) 32 (6,196) (12,301) 83,816 67,645 Cash flows were invested as follows: Increase in cash 18,536 7,079 Debt and other fixed income securities 65,280 60,566 83,816 67,645 Notes to the financial statements (audited)For the year ended 31 December 2004 1 Basis of preparation The Group financial statements, which consolidate the financial statements ofthe Company and its wholly owned subsidiary undertakings, have been prepared in