Last checked at 6 Mar 2007 07:03
Admiral Group PLC06 March 2007 Admiral Group plc Results for the Year to 31 December 2006 6 March 2007 Admiral Reports Record Profits and Strong Growth Admiral Group plc ("Admiral" or "the Group") today announces a record annualresult with a profit of £147.3 million for the year to December 2006, anincrease of 23% over the previous year. Group turnover, comprising totalpremiums written, gross other income and investment income, rose 11% to £708.2million. 2006 Highlights • Profit up 23% at £147.3 million (2005: £119.5 million)• Total final dividend of 24.0p comprising normal dividend of 9.6p; special dividend of 14.4p per share• Total 2006 dividend of £93.7 million up 47% on 2005• Group turnover up 11% at £708.2 million (2005: £638.4 million)• Revenue from products and services not underwritten by the Group up 41% at £131.6m million (2005: £93.4 million)• Year-end vehicle count up 13% to 1.3m from 1.1m at 31 December 2005• Confused.com gave 9 million quotes and made a profit of £23.1 million (2005: £8.8 million)• Employee Share Scheme - over 1,800 staff are to receive around 274,000 free shares based on the H2 2006 results. This means that staff will have received the full allocation of free shares for 2006, valued at £3,000 Comment from Henry Engelhardt, Group Chief Executive "We're delighted to be again reporting record profits and strong growth inturnover, despite the challenging market environment. Confused.com, ourautomated car insurance shopper has again achieved an excellent result. We alsolaunched two new products, Admiral MultiCar and FlexiBell which have beenworking well for the Group. "In 2006 we also saw two key long-term developments for the Admiral Group.Admiral went international on 31 October 2006 with the launch of Balumba.es inSpain. The team in Spain have done a brilliant job to create something fromnothing. The second key event was the renegotiation and extension until at least2014 of our partnership with Munich Re. Munich Re have worked with us since 2000and continue to be a great partner to work with. "I believe the Group's performance continues to demonstrate the strength of ourmodel and the hard work of all our staff." Comment from Alastair Lyons, Group Chairman "We are very pleased to be able to propose a total final dividend of 24.0p pershare, comprising a normal dividend of 9.6p and a special of 14.4p, the latterfollowing our principle of returning available surpluses to shareholders. Ourtotal dividends for the year at 36.1p per share mean that we will havedistributed £93.7 million to shareholders, up 47% on 2005. This represents ayield of 3.6% based on the closing share price at 1 March 2007. "Admiral's share price has again sustained material growth over the last year,the business being valued at £2.7Bn on 1 March 2007, 76% higher than a yearprevious. "Taking dividends and share appreciation together, the total return forshareholders in 2006 was 151%." Final dividend Subject to approval at the Company's AGM, the final dividend of 24.0p per sharewill be paid on 24 May 2007. The ex-dividend date is 18 April 2007, the recorddate 20 April 2007. Chairman's statement 2006 was a year when we not only continued to develop our direct UK privatemotor business but also moved forward significantly our outlined strategy toidentify profitable opportunities that exploit the knowledge, skills, andresources attaching to that core business. Confused, our intelligent automated car insurance shopper, handled an amazing 9million quotes contributing £23m to pre-tax profits, up from £9m in 2005. Weestimate that Confused now accounts for approaching 30% of the on-line UKprivate motor market. At the end of October, as planned, we launched Balumba,our on-line Spanish motor insurer, the first leg of our overseas expansion, andplans are already well developed to launch in Germany towards the end of thisyear. With the 2006 motor market remaining in the poor part of the cycle we setourselves modest growth ambitions, finishing the year with 1.3 million insuredvehicles, 13% up on December 2005. However, continuing strong ancillary income,tight control of expenses, and the contribution from Confused allowed pre-taxprofits to move 23% ahead to £147m despite underwriting profits being behindlast year on a 6% growth in total premiums. Proportional support by Munich Re and other leading reinsurers has underpinnedAdmiral's strategy since the Group's formation in late 1999. It has allowed usto combine rapid growth with strong cash generation and significant dividendpayments. In addition, it has helped us to deliver to our shareholders a higherquality, lower risk profit stream by providing a material level of protectionagainst the cycle. The extension in December 2006 to the end of 2014 of ourlong-term co-insurance agreement with Munich Re therefore represents asignificant milestone in the development of our business. The new agreement is both more flexible and, for 2010 onwards, potentiallymaterially more profitable. The progressive reduction in the share of ourunderwriting committed to Munich Re makes it possible for Admiral, should we sochoose, to keep for our own account a larger share of the premium written, thisincreasing progressively to as much as 60% by 2011. Munich Re has been afantastic partner and we look forward to a long and mutually beneficialrelationship in the years to come. We are also pleased to deepen our reinsurancerelationships with Swiss Re and Partner Re, with whom we entered intoquota-share contracts at the same time. We have maintained our approach of considering dividends in two parts. The firstelement, being the normal dividend, is based on a 45% pay-out ratio. The secondelement - the special dividend - derives from our principle of returning toshareholders available surpluses, calculated as the Group's net assets lessthree specific elements - its required solvency; cover against any specificexpansion plans, being at this year-end £5m in respect of overseas; and aprudent margin - currently £25m - against contingencies. This year we will distribute in total £93.7m, 47% up on 2005, in part reflectingthe release of £13.5m of the £23.5m funds previously held at Lloyd's. We areretaining the balance whilst we see how the cycle develops during 2007. We willthen decide the level of growth appropriate for 2008 and whether or not to takeback 5% of the underwriting risk at the end of this year during which we areonly carrying 221/2 % ourselves. Going forward we would anticipate maintaining this approach to dividenddistribution. We will be looking to add subordinated debt to our availablesolvency capital so that we have the capacity in future years to increase,should it be appropriate, the share of our motor book that we underwriteourselves without materially restricting our ability to return trading surplusesto shareholders in the form of dividends. Our total dividends for the year at 36.1p per share (24.0p final : 12.1pinterim) represent a yield of 3.6% based on the closing share price on 1 March2007. Admiral's share price has again sustained material growth over the lastyear, the business being valued at £2.7Bn on 1 March 2007, 76% higher than ayear previous. We led the FTSE350 as the company with the greatest percentagegain in share price during 2006. Taking dividends and share appreciationtogether, we achieved a 151% total return for shareholders during 2006, itselfpart of an overall 318% since flotation in September 2004. Alignment of the interests of our staff and our shareholders is one of our coreprinciples. Our Approved and Executive Share Schemes are designed to strengthenthat alignment over time. We are delighted that strong out-performance againstour plan during 2006 resulted in eligible employees realising the maximum awardof £3,000 free shares under our Approved Scheme. The Executive Share Scheme isbased on growth in earnings per share over three years and will, therefore,first vest after the 2007 financial year. Our being placed, for the seventhconsecutive year, amongst the Sunday Times Top 100 Companies To Work For in theUK is testament to the strength of Admiral's relationship with its employees. The Company is also closely involved with the communities within which our stafflive and work. We encourage them to be associated with the local projects thatare important to both them and their families, and during 2006 providedfinancial support to 109 such projects. Admiral also sponsored a number of highprofile local events within South Wales, more details of which will be found inthe report on corporate responsibility. This also describes the steps we take tominimise the impact of our operations on the environment. In September last year we said goodbye to Andrew Probert who had been theGroup's Finance Director for fourteen years, over which period he made anenormous contribution to our successful growth, taking the Company through bothmanagement buy-out and flotation. His clear thinking, straightforwardness,energy and consistent good humour will be much missed. His place on our Boardhas been taken by Kevin Chidwick who joined Admiral in September 2005 as DeputyFinance Director, having previously been Finance Director of Engage Mutual. I amdelighted that Kevin is already making his clear mark on our Boarddeliberations. In my report last year I advised that Gillian Wilmot would step down as aNon-executive Director at the 2005 AGM. In September we welcomed two newNon-executives, Margaret Johnson and Lucy Kellaway. Margaret has been GroupManaging Director of the international advertising agency Leagas Delaney since2002 and brings us extensive marketing experience gained during her 11 yearswith that Company. Lucy is the management columnist at the Financial Times, withwhom she has been for the last twenty years. Our strategy remains clear and straightforward - to continue to grow our shareof the UK direct private motor market, maximising the value derived from eachcustomer relationship, whilst also identifying profitable opportunities, inparticular our expansion overseas, to exploit the knowledge, skills andresources attaching to our core business. We look forward to continuingconsistently to create value for all our shareholders. Alastair LyonsChairman Chief Executive's statement '2006: Adios Amigo' I have no doubt that when we look back in, say, 5 or 10 years, we will point totwo events that took place in 2006 as key in the development of Admiral Group. The first event was one that was long overdue. Back in 1991 when we prepared thefirst draft of the Admiral business plan we planned on opening our UK operationfirst, followed soon after by a second European country and then another countrysoon after that, etc. Continental domination! However, before that draft eversaw the light of day we wisely decided to temper our ambitions and present abusiness plan dedicated solely to a UK operation. But the dream has lived on. On October 31, 2006, some 15 years after that first draft and almost 14 yearsafter Admiral started trading, Admiral Group went international with the launchof Balumba.es in Spain. Our newly formed Business Development Team based inCardiff and our Spanish Directora General along with the team she developed inSeville did a brilliant job to create something from nothing. Balumba sold 25 policies on its first day, which compares quite favourably tothe 13 policies Admiral sold when it launched on January 2, 1993. (So thepressure's really on Balumba now!) In just the last two months of the yearBalumba sold over 2,000 policies with premium income of around €1m. Okay, so we were over a decade behind our original schedule, but we are movingforward and I promise you that the launch of our next European operation won'tbe another decade away. The second key event was the extension and renegotiation of our partnership withMunich Re. I am pleased to say that we will continue to have a close partnershipwith Munich Re until at least 2014. This is a partnership that began in 2000with an agreement for five years. That agreement was re-written in 2002 to gofor 8 years, through 2009. Now we have re-re-written the agreement, such that itgoes to the middle of the next decade. In the first 7 years of the agreementMunich Re has taken nearly £2 billion of risk through Admiral and, as thebusiness is expected to grow, there should be a few more billion to come. For a business partnership to last for 15 years, as this one will by the year2014, it must be good for both parties. From my point of view, Munich is a greatpartner. What makes a partner great? First off, they can handle billions ofpounds of risk! More to the point, they understand we're in the risk businessand that there are good days (years) and less good days (years). They understandthe cyclical nature of our industry and adapt their expectations accordingly.Lastly, they realise that our success is their success. These two major events not withstanding, 2006 on its own merits was a prettygood year in a very competitive environment. Here, in a nutshell, are thehighlights: • Made a record profit of £147m, up 23% from £119m in 2005; • Total turnover for the year was £708m, up 11% from 2005. • Total motor premium written grew to £567m, up 6% from 2005; • Produced a combined ratio of 87% up from 85% in 2005; • Ended the year with more than 1.28m customers (+ 12.6%); • Direct brands gave more than 15m quotes, of which almost all of them started on the internet (96%) many of which came from Confused • Confused.com gave more than 9m quotes and made a profit of over £23m; • Set up a new operation in Spain from scratch, launched on October 31 and sold more than 2,000 policies; • Named to The Sunday Times list of Top 100 Places To Work in the UK for the seventh year in a row (every year it's been run). • Named by the Financial Times as the 8th Best Workplace in the UK and one of the Top 100 Workplaces in the EU; 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 and nowSpain. We do everything involved in the process of acquiring and servicing ourcustomers. However, we are not your typical insurance operation, as we share theincome and commensurate risk with several reinsurance partners. In 2006 we took25% of the underwriting risk for our own account (in 2007 we'll take 22.5%). Weoperate through a number of targeted brands: Admiral (general and multi-carhouseholds), Diamond (women drivers), Elephant.co.uk (internet users) and Bell(zero no claims bonus). We have three other brands, Confused.com, the leadingcar insurance aggregator in the UK, Gladiator Commercial, which operates as anintermediary in the commercial vehicle market, and, in Spain, Balumba.es, whichtargets internet users. 2006 was our 14th 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 floated AGL on the London Stock Exchange and created Admiral Group plc. As already noted, we have a close relationship with Munich Re. The recentlysigned agreement for the UK is a perpetual contract with first break potentialafter 2014. We also have a similar, but separate, agreement in place for Spain.Munich Re is also a major shareholder in the Group, a position it established in2002. It currently owns 14% of the Group. Management and staff currently ownaround 27% of the Group. Key Performance Information Our total written premium for 2006, before sharing it with our reinsurancepartners, was £567m, accounting for 80% of our total turnover. The number ofcustomers we service rose to 1,285,000 from 1,141,000 (+12.6%). All our growththroughout our history has been organic. In 2006 75% of our premium was underwritten by a number of reinsurers: Munich Re(65%), Swiss Re (5%) and Axis Re (5%). The remaining 25% was kept by the Group.Our net written premium for 2006 was £139m. In 2007 Admiral Group will take22.5% of the premium income to its own account. Munich Re, through Great Lakes,will take 60%, Swiss Re will take 10% and Partner Re will take 7.5%. The SwissRe and Partner Re agreements are both for multiple years. Some key numbers from the accounts which follow: • Loss ratio 72% up from 70% in 2005; • Earned expense ratio, excluding regulatory levies, up to 12.9% from 12.3%; • Combined ratio, including all levies, 87%, up from last year's 85%; • Revenue from products and services we do not underwrite totalled £131.6m up from £93.5m (+41%). The increase in the loss ratio from 70% last year to 72% in 2006 is to beexpected. There was very little, if any, upward price movement in the market in2006. As claims inflation is running well ahead of the retail price index amodest decline in claims frequency could not offset the net rise in claimscosts. The result is a deteriorating loss ratio. Without any releases taken intoaccount the loss ratio moved from 82% to 86%. The expense ratio, not including government levies, moved up by 0.6% from 2005.This reflects no growth in the average price at which we sell our productagainst inflation in our costs, partially offset by some modest productivitygains. Despite the small upward move in the expense ratio, we are still one of,if not the, most efficient firm in the market. In the first nine months of the year we raised our new business rates a total of1%, and that happened gradually and grudgingly. We did move rates upwards almost3% in the fourth quarter but it is not clear if those rate increases will holdin the early part of 2007. Please note, rate changes at the end of a year havelittle or no effect on the result of the year they are implemented. Ourconversion rate, which is a measure of our prices versus the market, did notfluctuate much during the year, indicative that our rate moves were consistentwith the market. Ancillary income (income from products and services where we take nounderwriting risk) per customer moved up by £1 in 2006 versus 2005, from £56.60to £57.60. There were no major changes within these figures from the yearbefore. To put all this income into context, I've done a little calculation where thenon-underwriting income is added to earned premium to give a 'big picture'combined ratio. I think this gives an interesting measure of the entirebusiness. Expressed in this way, the combined ratio would have been 58%! Here'sanother interesting calculation: we made £147m on income of £277m, a return onincome of 53% (2005 51%). The UK Car Insurance Market: A Game of Chicken, Or A Game Of Leapfrog? Yes, I know, frogs again. This time we're not boiling them, but possibly jumpingover them. The UK car insurance market is at that critical moment that seems tooccur in every cycle, when prices are expected to rise but don't. Prices areexpected to rise because, simply, underwriting results aren't good. It would bevery rational for prices to rise now. There has been and continues to be claimsinflation eating away at premiums. All the while that premiums don't go upresults deteriorate. Even if premiums rise, they have to rise circa 5% just tomaintain the status quo. If you're writing a piece of business at the marketaverage today the combined ratio for that piece of business is somewhere around115%. Maybe more. That's not profitable and not sustainable; eventually ratesmust go up. Right? However, the market dynamics resemble a classic game of chicken. This seems tobe a market full of James Deans. Who will blink first? Who will knowingly raisetheir rates, make themselves uncompetitive, shed share and reduce volumes in aneffort to enhance or protect profits? And if one firm gives up the game ofchicken, will the others follow suit? Well, some of those questions were answered in the middle of the year whenNorwich Union, the market's second biggest player, announced it had moved ratesup and would continue to move rates up. On average, NU said, rates would risesome 16%. It was a very brave step. But the rest of the market continued to playchicken. In particular, the market leader, Royal Bank of Scotland, which holdssome 35% market share, appeared to hold the line. Late in the year RBS announced that it too would be moving rates up. How muchRBS has moved or will move its rates is not clear. At the time of writing Icannot confirm what RBS has done on rates although it appears, based on ourconversion data and data on where customers were insured before joining usversus where customers go when they leave us, that they have moved their ratesup at least a little bit. If RBS continues to raise rates, then the market might move from a game ofchicken to one where companies which don't raise rates see their volumesincrease. When that happens these firms then raise their rates, which means thatthe companies that had raised rates and had seen their volumes decrease seetheir volumes increase, so they raise rates again, etc. etc. A game of chickenthen becomes a game of leapfrog. As I write this, with 2007 just getting underway, there seems to be very littleof this barnyard activity taking place. Rates may have moved up a touch, butcertainly not as much as claims inflation and the game of chicken continues. The idea that the market as a whole is not moving much on rates may be a sign ofa fundamental change in market dynamics. The power of RBS, despite its 35%market share, appears to have been diluted over time by the growth ofaggregators, the largest of which is our own Confused.com. The growth ofaggregators means increased transparency of rates and gives the consumer abetter chance of finding the lowest possible rate than ever before. In the days before aggregators, if the lowest rate in the market was beingoffered by a small company that couldn't spend a lot of money advertising oroperated through a small broker network, that company could not anchor rates, nomatter how cheap they might be. Bigger companies, like RBS, could raise ratesbecause the vast majority of consumers never knew a better rate was available. But in the new, aggregator world, small companies that are listed on aggregatorsdo not need to invest up front in expensive marketing campaigns and they can,much more easily, anchor the market by not raising rates. The small companiesget the same exposure to consumers that the big companies get. Over the longerterm these companies might find out that, actually, whoops, they really shouldhave raised rates. But this information will take a few years to come to light. I believe that the rise of aggregators and changing shape of distribution willput ever-greater pressure on insurers to be efficient. Insurers who run highexpense ratios will have nowhere to hide in a marketplace with such a level ofprice transparency. The pattern of results for the market for all motor insurance in 2005 (mostrecent market data available) was similar to 2004. The overall result wasn't allthat bad (102.2%), but this was flattered by large back year releases (6.5%).Private motor performed a bit worse, with a combined ratio of 105% and releasesof 5.7%. The underlying trend of higher bodily injury costs more than offset amodest reduction in claims frequency. Overall claims inflation continues tomount, over the last two years the average is roughly 5% a year, pushed up in nosmall part by the cost of care. The market expense ratio certainly didn't makeup for the increase in claims costs, in fact, it rose 0.3%, to 27.6%. Without the 6.5% of reserve releases the pure year loss ratio was 81% and thecombined ratio was almost 109%, an increase of 5% on the comparable figure from2004. Given that there were almost no net increase in prices in 2006 that would affectthe 2006 result (increases late in the year have very little effect on thatyear), it implies that the pure year combined ratio for 2006 will be north of110%. Ouch. I'm sure you'd agree, this is not a particularly good result.However, it is yet unclear how big the reserve releases will be and thereforewhat the headline result will be. The UK market has something of a history ofnot moving on price until reserve releases are exhausted. Will history repeat itself? One might look at 2007 as one looked at 1998. At theend of 1997 it was clear to one and all that the market was unprofitable andthat price increases were required. But prices didn't move in 1998 while claimscosts rose, and most industry observers gave up hope that the market would evermove, predicting a future of perpetual losses. It was only in 1999, wheneveryone had seemingly given up on the market altogether, that it began to move.When prices did start to rise in 1999 they went up fast, some 20% in that yearalone. So which year will 2007 most resemble? 1998 or 1999? If marketing spend is anything to go by then we're still at 1998. The spend onTV and press has come off its highs, but it certainly hasn't fallen sharply. Andthe amounts being paid to internet search engines like Google (cost per click)are ever growing. Bids for key search terms are as high in January 2007 as theywere in January 2006. Not only are the bids for key terms as high as they werelast year, but the number of terms being bid on is ever-rising. All in all itseems to add up to at least as much money being spent on advertising now as ayear ago. Fortunately, our own business is somewhat insulated from this deterioration bytwo factors. First, our results historically have been far better than themarket average and therefore, despite tighter margins, our result is stillrather 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, leaving us with a high return oncapital. Moreover, as we continue to grow our customer base, we continue to growour ancillary revenues. All in all it should result in sustainable, profitablegrowth in the future. Moving Forward To Maintain Our Advantage Last year and the year before I wrote about the internet being a key factor toour good results. Today I think the internet is a given. Every company isconcentrating on this distribution channel, etc. The focus now is on creatingnew, more interesting products for consumers. What do I mean by 'products'?After all, the 'product' is car insurance and that doesn't change radically fromone year to the next. Last year we launched two different types of car insurancefor consumers to choose from. First was Admiral MultiCar, which takes a look at all the vehicles in ahousehold before generating a price. It's more than just a volume discount. Inmany cases the knowledge we gain from knowing about all the vehicles and driversin a household can lead to lower prices overall and usually those discounts gonot only to the second and third vehicle brought on cover, but also to the firstvehicle. The popularity of this concept meant that 12% of all our new vehicleslast year were on MultiCar policies. The second innovation was FlexiBell. Here we took everything we could out of acomprehensive policy such that it was still a comprehensive policy and thenoffered the items we had taken out in an optional, menu-like list. In this wayconsumers could build their own policies but only pay for the parts of the coverthey felt were valuable to them. For example, we made driving other carsoptional. For those who never drive another car it was something not worthpaying for. While those who did need to drive another car could add it back in.FlexiBell launched in the second half of the year and is being rolled outslowly. The Admiral brand regained the crown as the Group's biggest brand largelybecause of the efficient growth in MultiCar policies. The number of vehiclesinsured in Admiral grew 26% to 440,000. Elephant, which held the crown since2004 but isn't present on aggregators, grew 3% to 422,000. In percentage terms,Bell grew the most, 29%, while Diamond grew 4%. 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 2006Gladiator's customer count stood at 42,000 and it contributed £2m to the Group'sbottom line, up 9%. Changing The Way Car Insurance Is Bought In The UK -Confused.com: Consumer Champ Last year I wrote that 2005 was really a huge growth year for Confused.com.Well, I was wrong. Confused's growth in 2006 made 2005 look absolutelypedestrian. Confused delivered 8.4 million motor quotes during the year, anincrease of 110% over 2005. It also delivered over 525k quotes for homeinsurance. For those who don't know, Confused, launched in its current form in the middleof 2002, is an intelligent, automated car insurance shopper. Simply put, all acustomer has to do is put his or her details into Confused and Confused thengoes out to the major car insurance websites, populates the appropriate fields,and, in real time, brings the customer back a list of prices. Confused goes outto direct operations as well as intermediary sites. One-stop shopping! Not only did Confused generate a lot of quotes, but it also made money. Confusedmade a profit of £23.1m compared to £8.8m last year and £2.0m the year before.It has also gotten off to a flying start in 2007. January saw it deliver over 1million quotes to its insurance partners for the first time and it also set anew, monthly record for profits. During the year Confused also added product and now delivers prices for homeinsurance, gas & electricity, travel insurance, breakdown cover, life insurance,credit cards and mortgages. Where Next? We're in the UK. We're now up and running in Spain. So where next? Germany,that's where. We hope to launch a direct operation in Germany late in 2007. The German marketis huge, some 45m vehicles. It is also a good internet market for many things,although, currently, car insurance isn't one of them. However, we see thatsituation evolving and our strategy of entering new markets has not changed: weplan to use the experience we've gained in the UK of delivering car insuranceefficiently via the internet in other markets, Germany next. 2006 - More Change 2006 was a challenging, but productive year. Challenging because of the cyclicalnature of our industry, productive because we still turned in a good result. Inaddition, it was productive because of the things we did that had no real effecton the results for the year itself, but will have a big effect on our future. From the facts and figures at hand we still believe we are the most efficientand, pound for pound, the most profitable firm in the UK motor insurance market.Our goal is to continue to write the above sentence for the annual accounts yearafter year after year. During the year two key managers stepped back into part-time roles. KateArmstrong who joined Admiral on April Fool's Day 1992 and was the Group's sixthmember of staff, is now doing management training a couple of days each monthand she continues as a Director of Confused. In her years with us Kate wore manyhats, including: MD of Confused, IT Manager and Marketing Manager. Kate's finalrole with us was as MD of MDs. Kate's wide array of talents coupled with herfearlessness in tackling any challenge allowed her to step down holding animportant Admiral record: most desk changes in a career. Kate is now busy takingcare of a young family while also working to get her PhD. The other retiree was our Finance Director, Andrew Probert. Andrew was actuallyour second FD, the first one being unable to move his family to Cardiff from theSouth East back in 1992. Andrew, a Cardiff native, was living near Gloucesterwhen we came looking, which was very helpful. Andrew did everything for Admiral. He takes great pride in relating the story ofbuying the first company kettle when we moved into our Cardiff offices inSeptember, 1992. He also enjoys explaining that he bought the second kettle aswell, because the first one didn't work! Andrew led finance, planning, propertymanagement, legal, audit, facilities, accounts and was, from time to time, theDirector responsible for People Services and Confused. He did everything butpolish the doorknobs and I have no doubt that if the doorknobs had really neededpolishing he would have been the first to volunteer to do that too. We'll certainly miss the experience and big personalities of Kate and Andrew. Iwish them all the best in their new lives. The good news is that their replacements, Kevin Chidwick as Finance Director andNicolas Weng Kan as MD of MDs, are talented, intelligent and keen. A big thanks goes out to all our staff for all their effort in 2006, with aspecial mention to those further afield servicing our customers from Canada andIndia. We're lucky to have such a motivated, enthusiastic workforce. Henry EngelhardtChief Executive P.S. For those keeping score, we set a new attendance record at our StaffChildren's Christmas Party (always the best party of the year!) with 461 kids,up 28% on last year (360). We're nothing if not fertile. Financial review Key financial highlights The Group's pre-tax profit showed another significant increase in 2006 - rising23% from £119.5m to £147.3m. Earnings per share grew by 22% from 32.7p to 39.8p. The results of the four key elements of the Group's business were as follows: 2006 2005 £000 £000 Underwriting profit 28,351 32,361Profit commissions 19,926 14,735Ancillary and other net income 75,985 65,516Confused.com profit 23,080 6,882 ------- ------- Pre-tax profit 147,342 119,494 ------- ------- During 2006 the Group retained 25% of the UK motor business it generated, andhence limited downside exposure to the motor cycle. The Group participates inthe upside through the profit commission arrangements within these contracts.Using co-insurance and reinsurance significantly reduces the amount of capitalthe Group is required to hold and frees up resources either for distribution toshareholders or growing the business. Ownership of the 1.2m UK policy base remains with the Group and significantnon-insurance profits continue to be generated. These ancillary profits continueto be the single largest contributor to the Group's result. The Group is able to deliver continued and significant profit growth even attimes when the motor insurance cycle is in its worst years because of thesignificant contribution made by non-underwriting income, and also the fact thatthe Group's underwriting has returned superior results compared to the market asa whole. The proportion of the profit earned from non-underwriting activity continues torise, moving up from 73% in 2005 to over 80% in 2006. This is partly a factor ofthe further deterioration of the UK motor insurance cycle, but is more areflection of the continued absolute growth in non-underwriting profits, mostnotably ancillaries and Confused.com. Turnover - which comprises total premiums written, gross other income and netinvestment return (and measures the combined size of the Group's businesses)continued to show double digit growth: 2006 2005 £000 £000 Total premium written 566,608 533,616Other revenue 131,621 93,405Net investment return 9,925 11,342 -------- --------Group turnover 708,154 638,363 -------- -------- Other revenue (which is made up predominantly of ancillary revenue andConfused.com income) grew by over 40% in the year. Confused.com was a key factorin this growth (refer to below). Total premiums written grew by around 6%, alsodiscussed below. Underwriting Underwriting arrangements The Group's UK underwriting structure for 2006 was as follows: 65% of the business was underwritten by Great Lakes (a UK subsidiary of MunichRe) under a long-term co-insurance contract. 35% of the business was underwritten by the Group through Admiral Insurance(Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 10% (ofthe total business) was ceded via quota share contracts that qualify fordeductions in required solvency capital (5% to Axis Re Europe and 5% to SwissReinsurance Company UK Limited). The Group retained 25% of 2006 underwriting ona net basis. As well as proportional reinsurance, the Group has also arranged an excess ofloss reinsurance programme with a number of reinsurers to protect itself againstvery 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. During early July 2006, the Group achieved the release of asignificant proportion of the profits earned by the Group's Syndicate -amounting to around £24m, net of amounts retained to meet corporation taxliabilities. New co-insurance and reinsurance arrangements, 2007 onwards During 2007, the Group concluded the successful renegotiation of the long-termUK motor reinsurance treaty with Great Lakes, and also put in place new quotashare reinsurance arrangements for 2007 and beyond. The new Great Lakes contractwill run until the end of 2014 at the earliest, and the percentage of businessunderwritten under the contract will decline by 5% per annum until 2011, so thatin that year and beyond, Great Lakes will underwrite 40% of the total. The declining share passed to Great Lakes allows the Group to position itselffor an upturn in the cycle and retain more of the profitable business it hashistorically generated. Flexible use of quota share reinsurance allows the Groupto reduce its own retention (to a minimum of 25% after 2007) where this isappropriate. The new contract is also on improved terms - most notably: o A more flexible growth cap, allowing the Group to vary the speed ofpolicy growth in response to cyclical changes in underwriting profitability o Revision of the profit commission structure: Although these new termsare not expected to have a material impact on the results from 2007 to 2009,they could potentially lead to substantial increases in the level of profitcommission earned in 2010 and beyond, should the cycle turn as expected The new quota share contracts (with Swiss Re and Partner Re) provide protectionagainst a negative insurance result. Whilst there is a cap on the extent ofprotection provided by the Swiss Re contract, cover exists throughout the rangeof probable loss ratio outcomes. The profit commission arrangements under these two contracts allow Admiral agreater share of the underwriting result than the 2006 quota share contractswith Swiss Re and Axis Re. The potential split of the net UK motor business over the next three years is asfollows: 2007 2008 2009 Great Lakes 60.0% 55.0% 50.0%Swiss Re 10.0% 10.0% 10.0%Partner Re 7.5% 7.5% -Maximum available to Admiral 22.5% 27.5% 40.0% -------- -------- -------- 100.0% 100.0% 100.0% -------- -------- --------The Group retains 35% of the Spanish motor risks, with 65% being reinsured byMunich Re under a long term treaty on similar terms to the UK contract. Underwriting results Total premiums increased by 6% from £534m to £567m, and all Group brands againincreased in size. Premium growth was somewhat lower than policy count growth,due primarily to lower average premiums resulting from a mix effect. Premiumrates were again broadly flat across the year. The Group's Spanish motorinsurance business generated around £0.6m of premium during 2006, in two monthsof trading. The number of quotes the UK direct brands gave showed another large increase in2006 - up almost 60% from 9.7m to 15.4m. Continued and substantial growth inConfused.com (further detail below) and other aggregator volume were theprincipal reasons. Net insurance premium revenue increased by around 4% from £139.5m to £145.0m.This increase was lower than the rise in written premiums due to the reductionin the retention of premium from 30% in 2005 to 25% in 2006. The reported loss ratio increased by around 2 points from 70% to 72%. Reservereleases continued to form a significant part of the underwriting result, risingfrom £17.3m to £20.9m in 2006 (refer to note 19). In relative terms, the 2006release improves the loss ratio by around 14 points, whereas 2005's releasecontributed 12 points. This means the pure year loss ratio has worsened byaround 4 points, from 82% to 86%. This increase is broadly in line with claimsinflation experience. Movements in loss ratios are further discussed in theChief Executive's statement. The motor expense ratio increased from 15.1% to 15.8% in 2006, reflectingexpense inflation with little movement in premium rates. Excluding regulatorylevies, the figures are 12.3% in 2005 and 12.9% in 2006. The expense ratio is reconciled to the figures included in the income statementin note 9 below, whilst the underwriting result is reconciled later in thisreview. Combined ratio development The Group's combined ratio (being the aggregation of the loss and expense ratiosabove) has risen by around 2 points, from 85% to 87%. This compares to anexpected combined ratio for the overall UK motor market in 2006 of around 109%(source - Deloitte) - an outperformance consistent with previous years of around20 points. Further detail on market results is set out in the Chief Executive'sstatement. The underwriting result (including investment income) fell by £4m in 2006(£28.4m v £32.4m). This was due to the increased combined ratio (87% v 85%) andalso a fall in investment income. Some additional ratios are noted in the Chief Executive's statement - firstlythe ratio of total outgoings to net income at 58% (2005: 60%) and secondly theratio of profit to net income at 53% (2005: 51%). Reconciliations to the figuresin the accounts are set out at the end of this review. Profit commission The Group earns profit commission through its co-insurance and reinsurancearrangements. The amount receivable is dependent on the volume and profitabilityof the insurance business, measured by reference to loss and expense ratios. Profit commission - co-insurance The principal source of profit commission is the long-term co-insurance contractwith Great Lakes. £15.4m has been recognised in 2006, compared to £11.1m in2005. The increase compared to last year reflects additional income recognisedresulting from improvements in reported loss ratios on earlier underwritingyears (predominantly 2003 and 2004). A further £2.0m of profit commission (2005: £0.5m) relating to earlierunderwriting years (2000 - 2002) contracts with Hibernian Re has also beenrecognised in these results. No further material amounts are anticipatedrelating to these contracts due to the relative maturity of the underwritingresults of these years. Profit commission - quota share reinsurance A total of £2.5m has been recognised during 2006 (2005: £3.1m) from quota shareprofit commission arrangements. As noted above, the new quota share deals for 2007 and beyond include scope forthe Group to earn a larger share of the underwriting result than the 2006 andearlier contracts. Ancillary and other net income This figure can be broken down as follows: 2006 2005 £000 £000 Ancillary profit 67,022 59,092Interest income 4,539 4,176Instalment income 5,676 3,768Gladiator Commercial profit 2,025 1,871Other expenses and share scheme (3,277) (3,391) costs -------- -------- Ancillary and other net income 75,985 65,516 -------- -------- Ancillary profit & instalment income This primarily involves commissions and fees earned on sales of insuranceproducts and services complementing the motor policy, but which are underwrittenby external parties. Net contribution from these sales grew by 13% in 2006 -from £59.1m to £67.0m. Average gross income per motor policy sold in the UKincreased from £56 in 2005 to just under £58 in 2006. Ancillary income peraverage active vehicle rose from £68.5 to £69.3. Gladiator Commercial Gladiator enjoyed another good year, contributing £2.0m to the Group, up from£1.9m in 2005. 2006 was a transitional year for Gladiator as the commercialvehicle market shifted towards a predominately internet based distributionchannel. This has predictably led to increased competition within the sector,which has in turn led to increases in acquisition costs and softening of premiumrates. Gladiator successfully managed this change and increased new business volumes by27% whilst maintaining its expense ratio. During 2006, Gladiator also grew itsoverall active policy base by 16% and returned a 34% net operating margin (36%in 2005). Confused.com 2006 2005 £000 £000 Confused.com profit 23,080 6,882* ------- ------- * Confused.com earns a proportion of its revenue from Group brands in the formof commission charged at normal commercial rates. The 2006 Confused resultincludes these transactions, with a corresponding reduction in the underwritingprofit. Previously an adjustment was made for these intra-group sales. Theimpact of this adjustment on the 2005 figures was to decrease Confused profit by£1.9m. Confused enjoyed a year of substantial growth in 2006. Increased media activityled to an increase in the number of quotes provided by Confused of almost 120%,from 4.1m in 2005 to 9.0m in 2006. Revenue (including payments from AdmiralGroup brands) increased by around 150% to £38.5m. Profit (including intra-Group sales) rose 162% to £23.1m from £8.8m in 2005. The2005 figure differs from that in the table due to the £1.9m adjustment referredto above. Despite a number of new entrants entering the market during 2006, Confused hassuccessfully maintained its share of total motor sales generated by aggregatorsand remains the market leader in motor insurance aggregation. In addition to its core motor insurance offering, Confused's home insuranceproduct also grew significantly in 2006 - quotes rising almost fivefold to 0.5m.New price comparison solutions for breakdown, travel insurance and utilitieswere also added to the Confused website. Balumba.es At the end of October 2006, the Group successfully launched its first operationoutside of the UK. Balumba.es, a direct motor insurer based on the Group's UKmodel, is located in Seville, Spain and generated around £0.6m of premium in theshort period before the year-end, making a pre-tax loss (including start-upcosts) of around £0.6m. Balumba trades via two branches of UK companies - EUILimited and Admiral Insurance Company Limited. Whilst it is still very early days for Balumba, management are encouraged by theresults to date, and hope to replicate the model in other markets in the future. Earnings per share (EPS) Earnings per share rose 22% from 32.7p to 39.8p in 2006, broadly in line withthe increase in profits. Taxation The total taxation charge reported in the income statement is £43.6m (2005:£34.8m), representing 29.6% (2005: 29.1%) of pre-tax profit. The lower effectiverate in 2005 arose from utilisation of losses brought forward. Refer to note 13 to the accounts for further detail on taxation. Investments and cash The Group continues to generate significant amounts of cash from all aspects ofits operations. At the end of the year, the Group held a total of £448.9m incash and investments - an increase of 11% on the £406.1m held at the end of2005. This increase is after distributions to shareholders of £70.1m during 2006(£49.2m in 2005). The balances making up this total can be analysed as follows: 2006 2005 £000 £000 Liquid funds in underwriting companies: Money market funds 257,634 -Government and sovereign bond - 83,071 holdingsCorporate bonds and similar - 172,866 instrumentsDeposits with credit 26,253 40,646 institutionsCash at bank 63,337 39,824 -------- -------- 347,224 336,407Liquid funds held outsideunderwriting companies: Cash at bank 101,652 69,682 -------- -------- 448,876 406,089 -------- -------- During the last quarter of 2006, the Group changed its investment strategymoving away from fixed income mandates and into money market funds. Thisdecision was motivated by the disappointing and volatile returns generated bythe bond portfolios during 2006 and a desire for stable, relatively risk freereturns in 2007 as the UK motor market cycle potentially hits its worst point. To this end, a number of money market fund accounts have been set up, into whichthe existing funds were transferred and future cashflows will be invested. Thebond portfolios were fully liquidated before the year-end. Dividends There has been no change in dividend policy, which is based on the principle ofreturning excess cash to shareholders. The Directors expect to make a normaldistribution of at least 45% of post-tax profits each half-year, and willregularly review the Group's available resources to determine whether it isappropriate for the Company to pay further special dividends. Having regard to this policy, as outlined in the Chairman's statement, theDirectors have declared a final dividend for 2006 of 24.0p per share, which ismade up of 9.6p per share normal element, plus 14.4p per share specialdistribution based on the Group's resources at the end of the year. The distribution includes £13.5m (5.2p) relating to the release of capitalpreviously held at Lloyd's, which was achieved during the second half of theyear. £10m of this release has been retained in order to assess the potentialneed for additional capital to support growth over the short term. Taken together with the interim dividend (12.1p), this final payment results ina total distribution for 2006 of 36.1p (2005: 24.6p) per share. Employee share schemes The Board continues to take the view that actual or prospective share ownershipplays a vital role in staff incentivisation across all levels of employee. TheGroup has two share schemes - an Inland Revenue approved Share Incentive Plan(the SIP) and the Senior Executive Restricted Share Plan - The 'Unapproved FreeShare Scheme'. 1. The Approved Share Incentive Plan (SIP) This SIP is open to all staff of Admiral Group plc (Henry Engelhardt and DavidStevens have declined to be included in the plan). The maximum award under the SIP is £3,000 per employee per annum, those sharesbeing forfeited if staff leave within three years of the award. As the scheme isInland Revenue approved, awards will be free of income tax after five years. The£3,000 limit is based on the market value of the shares at the date of award. Awards are made twice a year, based on the results of each half-year. During2005 and 2006, the Group's results have meant that qualifying staff havereceived maximum awards in both years. Inland Revenue rules dictate that staff must hold the shares for three yearsbefore being able to sell them, but dividends will be payable during the vestingperiod. If a member of staff leaves the Group before the end of the three yearperiod, without being a 'good leaver', they get no benefit from the shares notyet vested. Further details of the awards - actual and anticipated - are included in note 26below. 2 - The Unapproved Free Share Scheme (UFSS) The UFSS is not Inland Revenue approved. Awards under the plan are made at thediscretion of the Chief Executive and Senior Managers, with approval beingobtained from the Remuneration Committee. Awards under the plan are distributedon a wider basis than most plans of this type. The Board believes that as theUFSS develops and awards begin to vest in 2008, it will have the effect ofreducing staff attrition and creating a definite alignment of the interests ofstaff and shareholders. Of the Group's current Executive Directors, only KevinChidwick participates in this scheme. The main performance criterion in determining awards under the Unapproved Planwill be the growth in earnings per share (EPS) in excess of a risk free return,defined as average 3-month LIBOR, over a three year period. The Board feels thatthis is a good indicator of long-term shareholder return with which to alignstaff incentivisation. Although no shares have yet vested under the UFSS, awards totaling 685,000shares were made in 2005 and 681,000 in 2006. This represents 0.5% of theGroup's issued share capital over the two years. The EPS targets are such that for full vesting of shares to occur, the averageEPS growth over the three year performance period would have to be approximately16% per annum, assuming LIBOR averages 5%. Only 10% of shares vest for matchingLIBOR over the three year period. The Board is conscious of the maximum allowable awards under both schemes andcontrols are in place to ensure that neither scheme issues shares in excess of5% of the Group's issued share capital over the 10 year period from 1 January2005. Reconciliation of underwriting profit 2006 2005 £000 £000 Net insurance premium revenue 144,955 139,454Net insurance claims (107,145) (100,526)Net expenses related to insurance contracts (19,384) (17,909)Investment return (see note 8) 9,925 11,342 -------- --------Underwriting profit 28,351 32,361 -------- -------- Reconciliation of loss ratios reported 2006 2005 £000 £000 Net insurance claims 107,145 100,526Deduct: claims handling costs (3,538) (3,202) -------- -------- Adjusted net insurance claims 103,607 97,324Net premium revenue 144,955 139,454Loss ratio 71.5% 69.8% -------- -------- Reconciliation of alternative operating ratios 2006 2005 £000 £000Outgoings:Net insurance claims 107,145 100,526Insurance contract expenses 19,384 17,909Ancillary / Confused / Gladiator expenses 33,818 21,792 -------- -------- 160,347 140,227 -------- --------Income:Net insurance premium revenue 144,955 139,454Other revenue 131,621 93,405 -------- -------- 276,576 232,859 -------- -------- Outgoings to income 58% 60%Profit before tax to income 53% 51% Consolidated income statement (audited) Year ended: 31 December 31 December 2006 2005 Note: £000 £000 Insurance premium revenue 188,288 176,214Insurance premium ceded to reinsurers (43,333) (36,760) -------- --------Net insurance premium revenue 5 144,955 139,454 Other revenue 6 131,621 93,405Profit commission 7 19,926 14,735Investment and interest income 8 14,464 15,518 -------- --------Net revenue 310,966 263,112 Insurance claims and claims handling expenses (136,472) (121,123)Insurance claims and claims handling expenses recovered from reinsurers 29,327 20,597 -------- --------Net insurance claims (107,145) (100,526) Expenses 9 (54,528) (40,492)Share scheme charges 9, 26 (933) (438) -------- --------Total expenses (162,606) (141,456) -------- --------Operating profit 148,360 121,656 Finance charges 12 (1,018) (2,162) -------- --------Profit before tax 10 147,342 119,494 -------- --------Taxation expense 13 (43,620) (34,774) Profit after tax attributable to equity holders of the Company 103,722 84,720 -------- --------Earnings per share:Basic 15 39.8p 32.7pDiluted 15 39.8p 32.7p -------- -------- Dividends declared (total) 14 70,104 49,190Dividends declared (per share) 14 27.0p 19.0p -------- -------- Consolidated balance sheet (audited) As at: 31 December 31 December 2006 2005 Note £000 £000ASSETS Property, plant and equipment 16 7,448 4,636Intangible assets 17 66,757 66,490Financial assets 18 395,938 378,747Reinsurance assets 19 74,689 54,166Trade and other receivables 20 16,931 9,392Cash and cash equivalents 21 191,242 150,152 -------- --------Total assets 753,005 663,583 -------- --------EQUITY Share capital 26 261 260Share premium account 27 13,145 13,145Retained earnings 27 205,682 167,990Other reserves 27 (33) 17 -------- --------Total equity 219,055 181,412 -------- --------LIABILITIES Insurance contracts 19 294,425 254,130Financial liabilities 22 - 22,000Deferred income tax 25 981 3,550Trade and other payables 23 215,137 182,935Current tax liabilities 23,407 19,556 -------- --------Total liabilities 533,950 482,171 -------- --------Total equity and total liabilities 753,005 663,583 -------- -------- Consolidated statement of recognised income and expense (audited) As at: 31 December 31 December 2006 2005 £000 £000 Exchange differences on translation of foreign operations (50) - -------- --------Net expense recognised directly in (50) -equityProfit for the period 103,722 84,720 -------- -------- Total recognised income and expense for the period 103,672 84,720 -------- -------- Consolidated cash flow statement (audited) 31 31 December December Note 2006 2005 £000 £000 Profit after tax 103,722 84,720Adjustments for non-cash items:- Depreciation 2,489 1,824- Amortisation of software 446 896- Unrealised (gains) / losses on investments (624) 893- Share scheme charge 2,667 1,247 Loss on disposal of property, plant and equipment and software 151 503Change in gross insurance contract liabilities 40,295 38,023Change in reinsurance assets (20,523) 11,971 Change in trade and other receivables, including from policyholders (23,150) (18,693)Change in trade and other payables, including tax and social security 33,652 18,041Interest expense 1,018 2,162Taxation expense 43,620 34,774 -------- --------Cash flows from operating activities, before movements in investments 183,763 176,361 Net cash flow into investments held at fair value (1,073) (53,413) -------- --------Cash flows from operating activities, net of movements in investments 182,690 122,948 Interest payments (1,018) (2,617)Taxation payments (40,931) (26,090) -------- --------Net cash flow from operating activities 140,741 94,241 Cash flows from investing activities: Purchases of property, plant and equipment and software (6,046) (3,999) -------- --------Net cash used in investing activities (6,046) (3,999) Cash flows from financing activities: Repayments of borrowings (22,000) (10,667)Capital element of new finance leases (1,451) 1,201Repayment of finance lease liabilities - (635)Equity dividends paid (70,104) (49,190) -------- --------Net cash used in financing activities (93,555) (59,291) -------- --------Net increase in cash and cash equivalents 41,140 30,951 Cash and cash equivalents at 1 January 150,152 119,201Effects of changes in foreign exchange rates (50) - -------- --------Cash and cash equivalents at end of period 21 191,242 150,152 -------- -------- Notes to the financial statements 1. General information and basis of preparation Admiral Group plc is a Company incorporated in England and Wales. Its registeredoffice is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares arelisted on the London Stock Exchange. The financial statements comprise the results and balances of the Company andits subsidiaries (together referred to as the Group) for the two years ended 31December 2005 and 2006. The financial statements of the Company's subsidiariesare consolidated in the Group financial statements. The Company controls 100% ofthe voting share capital of all its subsidiaries. The Parent Company financialstatements present information about the Company as a separate entity and notabout its Group. In accordance with International Accounting Standard (IAS) 24,transactions or balances between Group companies that have been eliminated onconsolidation are not reported as related party transactions. The consolidated financial statements have been prepared and approved by theDirectors in accordance with International Financial Reporting Standards (IFRS)as adopted by the European Union (EU). The Company has elected to prepare itsParent Company financial statements in accordance with UK Generally AcceptedAccounting Practice (GAAP). Other than those listed below, the Group has applied all adopted IFRS andinterpretations adopted by the EU at 31 December 2006, including all amendmentsto extant standards that are not effective until later accounting periods. The following IFRS adopted by the EU were available for early adoption but havenot been applied by the Group in these financial statements: • IFRS 7 (Financial instruments: Disclosure) - applicable for years commencing on or after 1 January 2007; and • Proposed amendment to IAS 1 (Capital disclosures) The application of IFRS 7 and the proposed amendment to IAS 1 in the currentyear would not have affected the balance sheet or the income statement as thestandards are concerned only with disclosure. The Group plans to adopt these in2007. The accounting policies set put below have, unless otherwise stated, beenapplied consistently to all periods presented in these Group financialstatements. The financial statements are prepared on the historical cost basis, except forthe revaluation of financial assets classified as at fair value through profitor loss. Subsidiaries are entities controlled by the Group. Control exists when the Grouphas the power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. In assessingcontrol, potential voting rights that are currently exercisable or convertibleare taken into account. The financial statements of subsidiaries are included inthe consolidated financial statements from the date that control commences untilthe date that control ceases. The preparation of financial statements in conformity with adopted IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the year in which theestimate is reviewed if this revision affects only that year, or in the year ofthe revision and future years if the revision affects both current and futureyears. 2. Significant estimates Estimation techniques used in calculation of claims provisions: Estimation techniques are used in the calculation of the provisions for claimsoutstanding, which represents a projection of the ultimate cost of settlingclaims that have occurred prior to the balance sheet date and remain unsettledat the balance sheet date. The key area where these techniques are used relates to the ultimate cost ofreported claims. A secondary area relates to the emergence of claims thatoccurred prior to the balance sheet date, but had not been reported at thatdate. The estimates of the ultimate cost of reported claims are based on the settingof claim provisions on a case-by-case basis, for all but the simplest of claims. The sum of these provisions are compared with projected ultimate costs using avariety of different projection techniques (including incurred and paid chainladder and an average cost of claim approach) to allow an actuarial assessmentof their likely accuracy and to include allowance for unreported claims. The most significant sensitivity in the use of the projection techniques arisesfrom any future step change in claims costs, which would cause future claim costinflation to deviate from historic trends. This is most likely to arise from achange in the regulatory or judicial regime that leads to an increase in awardsor legal costs for bodily injury claims that is significantly above or below thehistorical trend. The claims provisions are subject to independent review by the Group's actuarialadvisors. 3. Significant accounting policies a) Revenue recognition Premiums, ancillary income and profit commission: Premiums relating to insurance contracts are recognised as revenueproportionally over the period of cover. Income earned on the sale of ancillary products and income from policies paid byinstalments is credited to the income statement over the period matching theGroup's obligations to provide services. Where the Group has no remainingcontractual obligations, the income is recognised immediately. An allowance ismade for expected cancellations where the customer may be entitled to a refundof ancillary amounts charged. Under some of the co-insurance and reinsurance contracts under which motorpremiums are shared or ceded, profit commission may be earned on a particularyear of account, which is usually subject to performance criteria such as lossratios and expense ratios. The commission is dependent on the ultimate outcomeof any year, with income being recognised based on loss and expense ratios usedin the preparation of the financial statements. Income is allocated to profit commission in the income statement when the rightto consideration is achieved, and is capable of reliable measurement. Revenue from Gladiator Commercial and Confused.com: Commission from these activities is credited to income on the sale of theunderlying insurance policy. Investment income: Investment income from financial assets comprises interest income and net gains(both realised and unrealised) on financial assets classified as fair valuethrough profit and loss. b) Segment reporting The Group's primary format for segment reporting is business segments. There isno secondary segment. A business segment is defined as a group of assets andoperations engaged in providing products and services that are subject to risksand returns that are different from other business segments. For the Group, the risks and returns of its insurance broking activities, namelyGladiator Commercial and Confused.com, are clearly distinguishable from itsmotor insurance segment. This is reflected in the Group's management andorganisation structure and internal financial reporting systems. c) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates ('the functional currency'). The consolidated financialstatements are presented in thousands of pounds sterling, which is the Group'spresentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions, and fromthe translation at year end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. Translation differences on non-monetary items, such as equities held at fairvalue through profit or loss, are reported as part of the fair value gain orloss. Translation differences on non-monetary items are included in the fairvalue reserve in equity. Translation of financial statements of foreign branches The financial statements of foreign branches whose functional currency is notpounds sterling are translated into the Group presentation currency (sterling)as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) 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); and (iii) All resulting exchange differences are recognised as a separate component of equity. d) Insurance contracts and reinsurance assets Premium: The proportion of premium receivable on in-force policies relating to unexpiredrisks is reported in insurance contract liabilities and reinsurance assets asthe unearned premium provision - gross and reinsurers' share respectively. Claims: Claims and claims handling expenses are charged as incurred, based on theestimated direct and indirect costs of settling all liabilities arising onevents occurring up to the balance sheet date. The provision for claims outstanding comprises provisions for the estimated costof settling all claims incurred but unpaid at the balance sheet date, whetherreported or not. Anticipated reinsurance recoveries are disclosed separately asassets. Whilst the Directors consider that the gross provisions for claims and therelated reinsurance recoveries are fairly stated on the basis of the informationcurrently available to them, the ultimate liability will vary as a result ofsubsequent information and events and may result in significant adjustments tothe amounts provided. Adjustments to the amounts of claims provisions established in prior years arereflected in the income statement for the period in which the adjustments aremade and disclosed separately if material. The methods used, and the estimatesmade, are reviewed regularly. Provision for unexpired risks is made where necessary for the estimated amountrequired over and above unearned premiums to meet future claims and relatedexpenses. Reinsurance assets: Contracts entered into by the Group with reinsurers under which the Group iscompensated for losses on the insurance contracts issued by the Group areclassified as reinsurance contracts. A contract is only accounted for as aninsurance or reinsurance contract where there is significant insurance risktransfer between the insured and the insurer. The benefits to which the Group is entitled under these contracts are held asreinsurance assets. The Group assesses its reinsurance assets for impairment on a regular basis, andin detail every six months. If there is objective evidence that the asset isimpaired, then the carrying value will be written down to its recoverableamount. e) Intangible assets Goodwill: All business combinations are accounted for using the purchase method. Goodwillhas been recognised in acquisitions of subsidiaries, and represents thedifference between the cost of the acquisition and the fair value of the netidentifiable assets acquired. The classification and accounting treatment of acquisitions occurring before 1January 2004 have not been reconsidered in preparing the Group's opening IFRSbalance sheet at 1 January 2004 due to the exemption available in IFRS 1 (Firsttime adoption). In respect of acquisitions prior to 1 January 2004, goodwill is included at thetransition date on the basis of its deemed cost, which represents the amountrecorded under UK GAAP, which was tested for impairment at the transition date.On transition, amortisation of goodwill has ceased as required by IFRS 1. Goodwill is stated at cost less any accumulated impairment losses. Goodwill isallocated to cash generating units (CGU's) according to business segment and isreviewed annually for impairment. The Goodwill held on the balance sheet at 31 December 2006 is allocated solelyto the private motor insurance segment. Impairment of goodwill: The annual impairment review involves comparing the carrying amount to theestimated recoverable amount (by allocating the goodwill to CGU's) andrecognising an impairment loss if the recoverable amount is lower. Impairmentlosses are recognised through the income statement and are not subsequentlyreversed. The recoverable amount is the greater of the net realisable value and the valuein use of the CGU. The value in use calculations use cash flow projections based on financialbudgets approved by management covering a three year period. Cash flows beyondthis period are considered, but not included in the calculation. The key assumptions used in the value in use calculations are those regardinggrowth rates and expected changes in pricing and expenses incurred during theperiod. Management estimates growth rates and changes in pricing based on pastpractices and expected future changes in the market. Deferred acquisition costs: Acquisition costs comprise all direct and indirect costs arising from theconclusion of insurance contracts. Deferred acquisition costs represent theproportion of acquisition costs incurred that corresponds to the unearnedpremiums provision at the balance sheet date. This balance is held as anintangible asset. It is amortised over the term of the contract as premium isearned. Software: Purchased software is recognised as an intangible asset and amortised over itsexpected useful life (generally between two and four years). The carrying valueis reviewed every six months for evidence of impairment, with the value beingwritten down if any impairment exists. Impairment may be reversed if conditionssubsequently improve. f) Property, plant and equipment and depreciation All property, plant and equipment is stated at cost less accumulateddepreciation. Depreciation is calculated using the straight-line method to writeoff the cost less residual values of the assets over their useful economiclives. These useful economic lives are as follows: Motor vehicles - 4 yearsFixtures, fittings and equipment - 4 yearsComputer equipment - 2 to 4 yearsImprovements to short leasehold properties - 4 years Impairment of property, plant and equipment In the case of property plant and equipment, carrying values are reviewed ateach balance sheet date to determine whether there are any indications ofimpairment. If any such indications exist, the asset's recoverable amount isestimated and compared to the carrying value. The carrying value is the higherof the net realisable value and the asset's value in use. Impairment losses arerecognised through the income statement. g) Leased assets The rental costs relating to assets held under operating leases are charged tothe 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 risksand rewards of ownership are classed as finance leases. Assets acquired underfinance leases are included in property, plant and equipment at fair value onacquisition and are depreciated in the same manner as equivalent owned assets.Finance lease and hire purchase obligations are included in creditors, and thefinance costs are spread over the periods of the agreements based on the netamount outstanding. h) Financial assets - investments and receivables Financial assets are classified according to the purpose for which they wereacquired. The Group's investments in quoted fixed income and other debtsecurities are classified as financial assets at fair value through profit orloss at inception. Financial assets classified as fair value through profit and loss account areinitially recorded at cost (which equates to fair value) and subsequentlycarried at fair value (based on closing bid prices on the balance sheet date, orthe last trading day before the balance sheet date) with changes in the fairvalue of these investments being recognised through the income statement. Trade and other receivables are stated at their historic cost (discounted ifmaterial) unless they are impaired. Impairment losses are recognised throughthe income statement. i) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, and other short-term deposits with original maturities of three months orless. j) Share capital Shares are classified as equity when there is no obligation to transfer cash orother assets. k) Loans and borrowings Interest bearing loans and borrowings are recognised initially at fair valueless attributable transaction costs. Subsequent to initial recognition, interestbearing loans and borrowings are stated at amortised cost with any differencebetween cost and redemption value being recognised in the income statement overthe life of the borrowings on an effective interest basis. l) Employee benefits Pensions: The Group contributes to a number of defined contribution personal pension plansfor its employees. The contributions payable to these schemes are charged in theaccounting period to which they relate. Employee share schemes: The Group operates a number of equity settled compensation schemes for itsemployees. For schemes commencing 1 January 2004 and after, the fair value ofthe employee services received in exchange for the grant of free shares underthe schemes is recognised as an expense, with a corresponding increase inequity. The total charge expensed over the vesting period is determined by reference tothe fair value of the free shares granted (excluding the impact of non-marketvesting conditions). Non-market conditions such as profitability targets as wellas staff attrition rates are included in assumptions over the number of freeshares to vest under the applicable scheme. At each balance sheet date, the Group revises its assumptions on the number ofshares to be granted with the impact of any change in the assumptions recognisedthrough income. Refer to note 26 for further details on share schemes. m) Taxation Income tax on the profit or loss for the periods presented comprises current anddeferred tax. Current tax: Current tax is the expected tax payable on the taxable income for the period,using tax rates in effect at the balance sheet date, and includes any adjustmentto tax payable in respect of previous periods. Deferred tax: Deferred tax is provided in full using the balance sheet liability method,providing for temporary differences arising between the carrying amount ofassets and liabilities for accounting purposes, and the amounts used fortaxation purposes. The principal temporary differences arise from depreciation of property andequipment, share scheme charges and the tax treatment of Lloyd's profits. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can be utilised. 4. Segment reporting Revenue and results for the year ended 31 December 2006, split by businesssegment are shown below. Consolidation adjustments represent the elimination ofinter - segment trading, specifically interest charged on inter company loans. As noted above, the Directors consider there to be two business segments. Theseare private motor insurance and insurance broking (Confused.com and GladiatorCommercial). No geographical business split has been presented as the results ofthe Group's Spanish operation are not material to the 2006 figures. 31 December 2006 Private Insurance Consolidation Group motor broking insurance adjustment £000 £000 £000 £000 Net revenue 266,168 45,069 (271) 310,966 Profit after tax 85,699 18,023 - 103,722 -------- -------- -------- --------Other segment items: Depreciation 2,366 123 - 2,489 Amortisation 6,508 - - 6,508 -------- -------- -------- -------- The segment assets and liabilities at 31 December 2006 and capital expenditurefor the year are as follows. Consolidation adjustments represent the eliminationof inter-company balances. 31 December 2006 Private Insurance Consolidation Group motor broking insurance adjustment £000 £000 £000 £000 Total assets 736,160 18,780 (1,935) 753,005 -------- -------- -------- -------- Total liabilities 525,932 9,953 (1,935) 533,950 -------- -------- -------- -------- Capital expenditure: Intangible assets 6,764 - - 6,764 Plant, property and equipment 5,088 364 - 5,452 Revenue and results for the corresponding business segments for the year ended31 December 2005 are reported below. 31 December 2005 Private Insurance Consolidation Group motor broking insurance adjustment £000 £000 £000 £000 Net revenue 245,854 20,732 (3,474) 263,112 Profit after tax 76,773 7,947 - 84,720 -------- -------- -------- -------- Other segment items: Depreciation 1,739 85 - 1,824 Amortisation 7,769 - - 7,769 The segment assets and liabilities at 31 December 2005 and capital expenditurefor the year are as follows. 31 December 2005 Private Insurance Consolidation Group motor broking insurance adjustment £000 £000 £000 £000 Total assets 657,390 15,672 (9,479) 663,583 -------- -------- -------- -------- Total liabilities 485,782 5,868 (9,479) 482,171 -------- -------- -------- -------- Capital expenditure: Intangible assets 7,792 - - 7,792 Plant, property and equipment 3,475 139 - 3,614 5. Net insurance premium revenue 31 31 December December 2006 2005 £000 £000 Total motor insurance premiums before co-insurance 566,608 533,616 -------- --------Group gross premiums written after co-insurance 196,378 186,989Outwards reinsurance premiums (57,731) (28,052) -------- --------Net insurance premiums written 138,647 158,937 Change in gross unearned premium provision (8,090) (10,775) Change in reinsurers' share of unearned premium provision 14,398 (8,708) -------- -------- Net insurance premium revenue 144,955 139,454 -------- -------- The Group's share of the UK and Spanish private motor insurance business wasunderwritten by Admiral Insurance (Gibraltar) Limited (AIGL) and AdmiralInsurance Company Limited (AICL). All contracts are short-term in duration,lasting for 10 or 12 months. 6. Other revenue 31 31 December December 2006 2005 £000 £000 Ancillary revenue 81,527 72,470Revenue from Confused.com 38,517 12,044Instalment income earned 5,676 3,768Revenue from Gladiator Commercial 5,901 5,123 -------- -------- Total other revenue 131,621 93,405 -------- -------- Ancillary revenue primarily constitutes commission from sales of insuranceproducts that complement the motor policy, but which are underwritten byexternal parties. 7. Profit commission 31 31 December December 2006 2005 £000 £000 Total profit commission 19,926 14,735 -------- -------- 8. Investment and interest income 31 31 December December 2006 2005 £000 £000 Net investment return 9,925 11,342Interest receivable 4,539 4,176 -------- -------- Total investment and interest income 14,464 15,518 -------- -------- 9. Expenses and share scheme charges 31 December 2006 31 December 2005 Insurance Other Total Insurance Other Total contracts contracts £000 £000 £000 £000 £000 £000 Acquisition ofinsurancecontracts 7,375 - 7,375 6,888 - 6,888Administrationand othermarketing costs 12,009 35,144 47,153 11,021 22,583 33,604 ------- ------- ------- ------- ------- -------Expenses 19,384 35,144 54,528 17,909 22,583 40,492 ------- ------- ------- ------- ------- ------- Share schemecharges - 933 933 - 438 438 ------- ------- ------- ------- ------- -------Total expensesand share schemecharges 19,384 36,077 55,461 17,909 23,021 40,930 ------- ------- ------- ------- ------- ------- Analysis of other administration and other marketing costs: 31 31 December December 2006 2005 £000 £000 Ancillary sales expenses 14,505 13,378Confused.com operating expenses 15,437 5,162Gladiator Commercial operating expenses 3,876 3,252Central overheads 1,326 791 -------- -------- Total 35,144 22,583 -------- --------The £12,009,000 (2005: £11,021,000) administration and marketing costs allocatedto insurance contracts is principally made up of salary costs. Reconciliation of expenses related to insurance contracts to reported expenseratio: 31 31 December December 2006 2005 £000 £000 Insurance contract expenses from above 19,384 17,909Add: claims handling expenses 3,538 3,202 -------- --------Adjusted expenses 22,922 21,111 -------- --------Net insurance premium revenue 144,955 139,454Reported expense ratio 15.8% 15.1% -------- -------- 10. Staff costs and other expenses Included in profit, before co-insurance arrangements are the following: 31 31 December December 2006 2005 £000 £000 Salaries 36,083 29,955Social security charges 3,337 2,782Pension costs 517 490Share scheme charges (see note 26) 2,667 1,247 -------- -------- Total staff expenses 42,604 34,474 -------- -------- Depreciation charge:- Owned assets 1,009 446- Leased assets 1,480 1,378Amortisation charge:- Software 446 896- Deferred acquisition costs 6,062 6,873Operating lease rentals:- Buildings 3,292 2,969Auditor's remuneration:- Fees payable for the audit of the Company's annual accounts 19 21- Fees payable for the audit of the Company's subsidiary accounts 154 189- Fees payable for other services 60 109Loss on disposal of property, plant and 151 503equipment -------- -------- Analysis of fees paid to the auditor for other services: Tax services 45 91Other services 15 18 -------- --------Total as above 60 109 -------- -------- The amortisation of software and deferred acquisition cost assets is charged toexpenses in the income statement. There were no net exchange differences credited or charged to the incomestatement during the year. 11. Staff numbers (including Directors) Average for the year 2006 2005 Number Number Direct customer contact staff 1,593 1,377Support staff 404 339 ------- ------- Total 1,997 1,716 ------- -------12. Finance charges 31 31 December December 2006 2005 £000 £000 Term loan interest 166 1,520Finance lease interest 481 388Letter of credit charges 221 221Other interest payable 150 33 ------- ------- Total finance charges 1,018 2,162 ------- ------- 13. Taxation 31 31 December December 2006 2005 £000 £000UK Corporation taxCurrent charge at 30% 45,430 36,051(Over) / Under provision relating to prior (648) 11 periods - corporation tax ------- ------- Current tax charge 44,782 36,062 Deferred taxCurrent period deferred taxation movement (1,249) (654)Under / (Over) provision relating to prior periods - deferred tax 87 (634) ------- ------- Total tax charge per income statement 43,620 34,774 ------- ------- Factors affecting the tax charge are: 31 31 December December 2006 2005 £000 £000 Profit before taxation 147,342 119,494 Corporation tax thereon at 30% 44,203 35,848Utilisation of brought forward tax losses - (421)Adjustments in respect of prior year 17 (161) insurance technical provisionsExpenses and provisions not deductible for 114 152 tax purposesOther differences (153) (21)Adjustments relating to prior periods (561) (623) ------- ------- Tax charge for the period as above 43,620 34,774 ------- -------14. Dividends Dividends were declared and paid as follows. 31 31 December December 2006 2005 £000 £000 March 2005 (9.3p per share, paid May 2005) - 24,049September 2005 (9.7p per share, paid - 25,141 October 2005)March 2006 (14.9p per share, paid March 38,667 - 2006)September 2006 (12.1p per share, paid 31,437 - October 2006) ------- ------- Total dividends 70,104 49,190 ------- ------- The dividends declared in March represent the final dividends paid in respect ofthe 2005 and 2004 financial years. Dividends declared in September are interimdistributions in respect of 2006 and 2005. A final dividend of 24.0p per share has been proposed in respect of the 2006financial year. Refer to the Chairman's statement and financial review forfurther detail. 15. Earnings per share 31 31 December December 2006 2005 Profit for the financial year after taxation (£000s) 103,722 84,720 Weighted average number of shares - basic 260,632,740 258,987,515 Unadjusted earnings per share - basic 39.8p 32.7p -------- ------- Weighted average number of shares - diluted 260,906,740 259,387,515Unadjusted earnings per share - diluted 39.8p 32.7p -------- ------- The difference between the basic and diluted number of shares at the end of 2006(being 274,000) relates to awards committed, but not yet issued under theGroup's share schemes. Refer to note 26 for further detail. 16. Property, plant and equipment Improvements Computer Office Furniture Motor Total to short equipment equipment and vehicles leasehold fittings buildings £000 £000 £000 £000 £000 £000 CostAt 1 January 2005 1,931 6,792 2,978 1,627 12 13,340Additions 567 2,742 155 150 - 3,614Disposals (1,818) - (510) (405) - (2,733) ------ ------ ------ ------ ------ ------At 31 December 2005 680 9,534 2,623 1,372 12 14,221 ------ ------ ------ ------ ------ ------DepreciationAt 1 January 2005 1,554 4,424 2,467 1,545 1 9,991Charge for the year 226 1,179 355 61 3 1,824Disposals (1,352) - (502) (376) - (2,230) ------ ------ ------ ------ ------ ------At 31 December 2005 428 5,603 2,320 1,230 4 9,585 ------ ------ ------ ------ ------ ------ Net book amountAt 31 December 2005 252 3,931 303 142 8 4,636 ------ ------ ------ ------ ------ ------ CostAt 1 January 2006 680 9,534 2,623 1,372 12 14,221Additions 1,655 1,672 1,684 441 - 5,452Disposals (2) (15) (138) (1) - (156) ------ ------ ------ ------ ------ ------At 31 December 2006 2,333 11,191 4,169 1,812 12 19,517 ------ ------ ------ ------ ------ ------ DepreciationAt 1 January 2006 428 5,603 2,320 1,230 4 9,585Charge for the year 220 1,750 396 120 3 2,489Disposals - (5) - - - (5) ------ ------ ------ ------ ------ ------At 31 December 2006 648 7,348 2,716 1,350 7 12,069 ------ ------ ------ ------ ------ ------ Net book amountAt 31 December 2006 1,685 3,843 1,453 462 5 7,448 ------ ------ ------ ------ ------ ------ The net book value of assets held under finance leases is as follows: 31 31 December December 2006 2005 £000 £000 Computer equipment 2,996 2,380Office equipment - 767 ------- ------- 2,996 3,147 ------- ------- 17. Intangible assets Goodwill Deferred Software Total acquisition costs £000 £000 £000 £000Carrying amount:At 1 January 2005 62,354 2,794 1,319 66,467Additions - 7,407 385 7,792Amortisation charge - (6,873) (896) (7,769) ------- ------- ------- -------At 31 December 2005 62,354 3,328 808 66,490Additions - 6,179 596 6,775Amortisation charge - (6,062) (446) (6,508) ------- ------- ------- ------- At 31 December 2006 62,354 3,445 958 66,757 ------- ------- ------- ------- 18. Financial assets The Group's financial assets can be analysed as follows: 31 31 December December 2006 2005 £000 £000 Investments held at fair value 257,634 255,937Receivables - amounts owed by policyholders 138,304 122,810 -------- --------Total financial assets 395,938 378,747 -------- -------- All receivables from policyholders are due within 12 months of the balance sheetdate. Analysis of investments held at fair value: 31 31 December December 2006 2005 £000 £000 Money market funds 257,634 -Fixed income securities: Government bonds - 83,071 Other listed securities - 156,071Variable interest securities: Other listed securities - 16,795 -------- -------- 257,634 255,937 -------- -------- 19. Reinsurance assets and insurance contract liabilities A) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2006 that wouldresult from a 1 per cent change in the loss ratios used for each underwritingyear for which material amounts remain outstanding. UNDERWRITING YEAR TOTAL 2002 2003 2004 2005 2006 Loss ratio 54.5% 59.5% 69.0% 82.0% 89.5% Impact of 1% change(£000s) 465 1,214 1,552 1,798 529 5,558 The impact is stated net of reinsurance and includes the change in net insuranceclaims along with the associated profit commission movements that result fromchanges in loss ratios. The figures are stated net of tax at the current rate. B) Analysis of recognised amounts: 31 31 December December 2006 2005 £000 £000Gross:Claims outstanding 202,421 170,216Unearned premium provision 92,004 83,914 -------- -------- Total gross insurance liabilities 294,425 254,130 -------- --------Recoverable from reinsurers:Claims outstanding 47,710 41,585Unearned premium provision 26,979 12,581 -------- -------- Total reinsurers' share of insurance liabilities 74,689 54,166 -------- -------- Net:Claims outstanding 154,711 128,631Unearned premium provision 65,025 71,333 -------- --------Total insurance liabilities - net 219,736 199,964 -------- -------- C) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2006, of theretrospective re-estimation of claims provisions initially established at theend of the financial years stated. Figures are shown gross and net ofreinsurance. These tables present data on an accident year basis. Financial year ended 31 December Gross amounts: 2002 2003 2004 2005 2006 £000 £000 £000 £000 £000 Gross claims provision as originally estimated 124,478 115,169 142,968 170,216 202,421 Provision re-estimated as of:One year later 114,051 111,599 137,075 162,205 -Two years later 109,490 105,748 127,613 - -Three years later 101,910 100,880 - - -Four years later 98,904 - - - -Five years later - - - - - As re-estimated at 31 December 2006 98,904 100,880 127,613 162,205 - Gross cumulative overprovision (25,574) (14,289) (15,355) (8,011) - ------- ------- ------- ------- ------- Financial year ended 31 DecemberNet amounts: 2002 2003 2004 2005 2006 £000 £000 £000 £000 £000 Net claims provision as originally estimated 71,071 75,549 98,120 128,631 154,711 Provision re-estimated as of:One year later 64,325 72,579 93,910 122,423 -Two years later 61,167 67,726 87,761 - -Three years later 55,974 63,954 - - -Four years later 53,857 - - - -Five years later - - - - - As re-estimated at 31 December 2006 53,857 63,954 87,761 122,423 - Net cumulative overprovision (17,214) (11,595) (10,359) (6,208) - ------- ------- ------- ------- ------- D) Analysis of net claims provision releases: The following table analyses the impact of movements in prior year claimsprovisions, in terms of their net value, and their impact on the reported lossratio. This data is presented on an underwriting year basis. Financial year ended 31 December 2002 2003 2004 2005 2006 £000 £000 £000 £000 £000Underwriting year: 2000 6,188 5,176 1,480 370 1,1102001 2,490 7,938 2,967 5,043 1,8792002 - 2,975 3,229 5,166 2,2602003 - - 1,513 4,622 5,0842004 - - - 2,076 7,9482005 - - - - 2,623 ------ ------ ------ ------ ------ Total net release 8,678 16,089 9,189 17,277 20,904 ------ ------ ------ ------ ------ Net premium revenue 81,336 79,327 107,501 139,454 144,955Release as % of net premium revenue 10.7% 20.3% 8.5% 12.4% 14.4% ------ ------ ------ ------ ------ E) Reconciliation of movement in net claims provision: 31 31 December December 2006 2005 £000 £000 Net claims provision at start of period 128,631 98,120Net claims incurred 103,607 97,325Net claims paid (77,527) (66,814) -------- --------Net claims provision at end of period 154,711 128,631 -------- -------- F) Reconciliation of movement in net unearned premium provision: 31 31 December December 2006 2005 £000 £000 Net unearned premium provision at start of period 71,333 51,850Written in the period 138,647 160,244Earned in the period (144,955) (140,761) -------- -------- Net unearned premium provision at end of period 65,025 71,333 -------- -------- 20. Trade and other receivables 31 31 December December 2006 2005 £000 £000 Trade debtors 14,982 6,905Prepayments and accrued income 1,949 2,487 -------- --------Total trade and other receivables 16,931 9,392 -------- -------- 21. Cash and cash equivalents 31 31 December December 2006 2005 £000 £000 Cash at bank and in hand 164,989 109,506Cash on short term deposit 26,253 40,646 -------- --------Total cash and cash equivalents 191,242 150,152 -------- -------- Cash and cash equivalents includes cash in hand, deposits held at call withbanks, and other short-term deposits with original maturities of three months orless. 22. Financial liabilities 31 31 December December 2006 2005 £000 £000 Interest bearing bank loans - 22,000 -------- --------Analysis of borrowings: 31 31 December December 2006 2005 £000 £000 Repayments falling due within 12 months - -Repayments falling due after 12 months - 22,000 -------- -------- - 22,000 -------- -------- Interest continues to be charged on amounts drawn down based on LIBOR plus amargin. 23. Trade and other payables 31 31 December December 2006 2005 £000 £000 Trade payables 4,601 4,423Amounts owed to co-insurers and reinsurers 124,238 98,054 Finance leases due within 12 months 1,337 1,963Finance leases due after 12 months 61 886Other taxation and social security liabilities 4,742 4,174Other payables 13,708 10,066Accruals and deferred income (see below) 66,450 63,369 -------- -------- Total trade and other payables 215,137 182,935 -------- --------Analysis of accruals and deferred income: 31 31 December December 2006 2005 £000 £000 Premium receivable in advance of policy inception 31,772 30,471Accrued expenses 25,456 24,559Deferred income 9,222 8,339 -------- -------- Total accruals and deferred income as above 66,450 63,369 -------- -------- 24. Obligations under finance leases Analysis of finance lease liabilities: At 31 December 2006 At 31 December 2005 Minimum Interest Principal Minimum Interest Principal lease lease payments payments £000 £000 £000 £000 £000 £000 Less than one year 1,383 46 1,337 2,171 208 1,963Between one and five years 63 2 61 921 35 886More than five years - - - - - - ------ ------ ------ ------ ------ ------ 1,446 48 1,398 3,092 243 2,849 ------ ------ ------ ------ ------ ------ It is the Group's policy to lease certain of its IT equipment under financeleases. The average lease term is two years. All leases are on a fixed repaymentbasis and no arrangements have been entered into for contingent rental payments. The fair value of the Group's lease obligations approximates their carryingamount. 25. Deferred income tax liability 31 31 December December 2006 2005 £000 £000 Brought forward at start of period 3,550 4,838Movement in period (2,569) (1,288) ------ ------Carried forward at end of period 981 3,550 ------ ------ The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax liability: 31 31 December December 2006 2005 £000 £000 Tax treatment of Lloyd's Syndicates 1,936 3,816Tax treatment of share scheme charges (853) 315Capital allowances 149 (392)Other differences (251) (189) ------ ------ Deferred tax liability at end of period 981 3,550 ------ ------ 26. Share capital 31 31 December December 2006 2005 £000 £000Authorised:500,000,000 ordinary shares of 0.1p 500 500 Issued, called up and fully paid:261,186,599 ordinary shares of 0.1p 261 -259,861,965 ordinary shares of 0.1p - 260 ------ ------ 261 260 ------ ------ During 2006, 1,324,634 new ordinary shares of 0.1p were issued to the trustsadministering the Group's share schemes. 646,634 of these were issued to the Admiral Group Share Incentive Plan Trust forthe purposes of this share scheme. These shares are entitled to receivedividends. 678,000 were issued to the Admiral Group Employee Benefit Trust for the purposesof the Admiral Group Senior Executive Restricted Share Plan. The Trustees havewaived the right to dividend payments, other than to the extent of 0.001p pershare, unless and to the extent otherwise directed by the Company from time totime. Staff share schemes: Analysis of share scheme costs (per income statement): 31 31 December December 2006 2005 £000 £000 SIP charge (note i) 495 263UFSS charge (note ii) 438 175 ------ ------Total share scheme charges 933 438 ------ ------ (i) The Approved Share Incentive Plan (the SIP) Eligible employees qualify for awards under the SIP based upon the performanceof the Group in each half-year against budget. The current maximum award foreach half-year amounts to 600,000 shares (or a maximum annual award of £3,000per employee if smaller). For the 2006 financial year, a maximum of 916,328shares (2005: 1,181,565 shares) will vest under this scheme. The awards are made with reference to the Group's performance against itsbudget. Employees must remain in employment until the vesting date (three yearsfrom the date of award), otherwise the shares will be 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 thefinancial statements for awards not yet made (and later adjusted to reflect theactual share price on the award date). Awards under the SIP are entitled toreceive dividends, and hence no adjustment has been made to this fair value. (ii) The Unapproved Free Share Scheme (the UFSS) This scheme is open to managers and exceptional performers within the Group(Henry Engelhardt and David Stevens have elected not to participate) withvariable awards available. Under the scheme, individuals receive an award of free shares at no charge. Atotal of 380 employees received awards under this scheme during 2006. Staff mustremain in employment until the vesting date in order for the shares to vest. Themaximum number of shares that can vest relating to the 2006 scheme is 681,435. In the 2005 scheme, for an award to vest, the total shareholder return (TSR) ofAdmiral Group plc shares over the three years 2005 to 2007 must be at leastequal to the TSR of the FTSE 350 index, of which the Company is a constituent.If the Company's TSR does not meet this target, no awards will vest under the2005 UFSS scheme. This initial hurdle has been removed for the 2006 scheme. Individual awards are calculated based on the growth in the Company's earningsper share (EPS) relative to a risk free return (RFR), for which LIBOR has beenselected as a benchmark. This performance is measured over the same three-yearperiod. 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. Awards under the UFSS are not eligible for dividends and hence the fair value offree shares to be awarded under this scheme has been revised downwards to takeaccount of these distributions. The unadjusted fair value is based on the shareprice at the date on which awards were made (being £3.62 for the 2005 scheme and£6.71 for the 2006 scheme). Number of free share awards committed at 31 December 2006: Awards Vesting outstanding (*1) date SIP H105 scheme 581,565 September 2008SIP H205 scheme 330,306 March 2009SIP H106 scheme 316,328 September 2009SIP H206 scheme 274,000 April 2010UFSS 2005 scheme 685,000 June 2008UFSS 2006 scheme, 1st award 604,187 April 2009UFSS 2006 scheme, 2nd award 77,248 September 2009 --------- Total awards committed 2,868,634 --------- *1 - being the maximum number of awards expected to be made before accountingfor expected staff attrition. Of the 2,868,634 share awards outstanding above,2,591,199 have been issued to the trusts administering the schemes, and areincluded in the issued share capital figures above. 27. Analysis of movements in capital and reserves Share Share Capital Foreign Retained Total capital premium exchange profit equity account redemption reserve and loss reserve £000 £000 £000 £000 £000 £000 As at 1 January 2005 259 13,145 17 - 131,213 144,634Retained profit for the period - - - - 84,720 84,720Dividends - - - - (49,190) (49,190)Issues of share capital 1 - - - - 1Share scheme charges - - - - 1,247 1,247 ------ ------ ------ ------ ------ ------As at 31 December 2005 260 13,145 17 - 167,990 181,412 Retained profit for the period - - - - 103,722 103,722 Dividends - - - - (70,104) (70,104)Issues of share capital 1 - - - - 1Currency translation differences - - - (50) - (50)Share scheme charges - - - - 2,667 2,667Deferred tax credit on share scheme charges - - - - 1,407 1,407 As at 31 December 2006 261 13,145 17 (50) 205,682 219,055 ------ ------ ------ ------ ------ ------ The capital redemption reserve arose in 2002 on the redemption of sharespreviously in issue at below par. The foreign exchange reserve represents the net gains or losses on translationof the Group's net investment in foreign operations. 28. Financial commitments The Group was committed to total minimum obligations under operating leases onland and buildings as follows: 31 31 December DecemberOperating leases expiring: 2006 2005 £000 £000 Within one years - 434Within two to five years - -Over five years 33,425 29,523 ------ ------ Total commitments 33,425 29,957 ------ ------ Operating lease payments represent rentals payable by the Group for its officeproperties. In addition, the Group had contracted to spend the following on property, plantand equipment at the end of each period: 31 31 December December 2006 2005 £000 £000 Expenditure contracted to 1,539 1,342 ------ ------ 29. Related party transactions There were no related party transactions occurring during 2006 that requiredisclosure. Details relating to the remuneration and shareholdings of keymanagement personnel are set out in the remuneration report, which will beincluded in the statutory accounts referred to below. Key management personnelare able to obtain discounted motor insurance at the same rates as all otherGroup staff, typically at a reduction of 15%. 30. Non-statutory accounts The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2006 or 2005. Statutoryaccounts for 2005 have been delivered to the registrar of companies and thosefor 2006 will be delivered following the Company's Annual General Meeting. Theauditors have reported on those accounts; their reports were unqualified and didnot contain statements under section 237 (2) or (3) of the Companies Act 1985. 31. Annual Report The Company's annual report and accounts for the year ended 31 December 2006 isexpected to be posted to shareholders by 11 April 2007. Copies of both thisannouncement and the annual report and accounts will be available to the publicat the Company's registered office at Capital Tower, Greyfriars Road, CardiffCF10 3AZ and through the Company's website at www.admiralgroup.co.uk. Consolidated financial summary Basis of preparation: The 2006, 2005 and 2004 figures below are as stated in the financial statementspreceding this financial summary and issued previously. Only selected lines fromthe income statement and balance sheet have been included. Figures for 2002 and 2003 have not been restated under IFRS, although have beenreclassified into the formats used in these financial statements. Income statement IFRS UK GAAP ------------------------ -------------- 2006 2005 2004 2003 2002 £m £m £m £m £m Total motor premiums 566.6 533.6 470.4 371.6 333.0 Net insurance premium revenue 145.0 139.5 107.5 79.3 81.4Other revenue 131.6 93.4 69.5 50.8 40.1Profit commission 19.9 14.7 21.7 1.4 -Investment and interest income 14.5 15.5 11.9 6.8 7.4 ------- ------- ------- ------- ------- Net revenue 311.0 263.1 210.6 138.3 128.9 Net insurance claims (107.1) (100.5) (74.3) (43.5) (52.6)Total expenses (55.5) (40.9) (28.9) (34.4) (28.5) ------- ------- ------- ------- -------Operating profit 148.4 121.7 107.4 60.4 47.8 ------- ------- ------- ------- ------- Balance sheet IFRS UK GAAP ------------------------ -------------- 2006 2005 2004 2003 2002 £m £m £m £m £mProperty, plant and equipment 7.5 4.6 3.3 5.8 6.7Intangible assets 66.8 66.5 66.5 62.4 66.3Financial assets 395.9 378.7 300.7 241.6 179.1Reinsurance assets 74.7 54.2 66.1 56.7 53.4Trade and other receivables 16.9 9.4 16.7 12.5 8.9Cash and cash equivalents 191.2 150.2 119.3 70.1 63.0 ------- ------- ------- ------- ------- Total assets 753.0 663.6 572.6 449.1 377.4 ------- ------- ------- ------- ------- Equity 219.1 181.4 144.6 108.1 68.9Insurance contracts 294.4 254.1 216.1 174.8 155.1Financial liabilities - 22.0 33.1 35.4 47.8Provisions for other liabilities and charges - - - 11.7 -Deferred income tax 1.0 3.6 4.8 6.4 3.4Trade and other payables 215.1 182.9 164.3 104.0 98.1Current tax liabilities 23.4 19.6 9.7 8.7 4.1 ------- ------- ------- ------- ------- Total liabilities 753.0 663.6 572.6 449.1 377.4 ------- ------- ------- ------- ------- This information is provided by RNS The company news service from the London Stock Exchange
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Share Price Information for Admiral (ADM)
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Share Price:
2,748.00
Bid:
2,743.00
Ask:
2,745.00
Change:
-25.00 (-0.90%)
Spread:
2.00 (0.073%)
Open:
2,746.00
High:
2,753.00
Low:
2,711.00
Prev. Close:
2,773.00
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| Date | Source | Headline | |
|---|---|---|---|
| 26th Apr 2024 | 11:33 am | GNW | Board Committee Changes |
| 25th Apr 2024 | 3:53 pm | GNW | Result of AGM |
| 22nd Mar 2024 | 12:14 pm | GNW | Notice of AGM and Annual Report and Accounts |
| 13th Mar 2024 | 12:44 pm | GNW | Director/PDMR Shareholding |
| 12th Mar 2024 | 12:40 pm | GNW | Director/PDMR Shareholding |
| 7th Mar 2024 | 4:30 pm | GNW | Block listing Interim Review |
| 7th Mar 2024 | 2:00 pm | GNW | Directorate change |
| 7th Mar 2024 | 7:00 am | GNW | Annual Financial Report |
| 6th Mar 2024 | 11:10 am | GNW | Holding(s) in Company |
| 28th Feb 2024 | 4:14 pm | GNW | Holding(s) in Company |
| 22nd Feb 2024 | 2:23 pm | GNW | Holding(s) in Company |
| 20th Feb 2024 | 5:01 pm | GNW | Electronic Communications Letter |
| 26th Jan 2024 | 3:03 pm | GNW | Holding(s) in Company |
| 5th Jan 2024 | 3:24 pm | GNW | Holding(s) in Company |
| 3rd Jan 2024 | 2:49 pm | GNW | Holding(s) in Company |
| 28th Dec 2023 | 5:08 pm | GNW | Holding(s) in Company |
| 22nd Dec 2023 | 10:23 am | GNW | Director/PDMR Shareholding |
| 8th Dec 2023 | 7:30 am | GNW | Holding(s) in Company |
| 6th Dec 2023 | 10:18 am | GNW | Holding(s) in Company |
| 1st Dec 2023 | 3:42 pm | GNW | Holding(s) in Company |
| 27th Nov 2023 | 2:54 pm | GNW | Holding(s) in Company |
| 24th Oct 2023 | 6:57 pm | GNW | Directorate change |
| 13th Oct 2023 | 2:46 pm | GNW | Director/PDMR Shareholding |
| 10th Oct 2023 | 12:33 pm | GNW | Director/PDMR Shareholding |
| 10th Oct 2023 | 12:30 pm | GNW | Director/PDMR Shareholding |
| 2nd Oct 2023 | 10:00 am | GNW | Directorate change |
| 29th Sep 2023 | 3:01 pm | GNW | Total voting rights |
| 28th Sep 2023 | 12:41 pm | GNW | Additional Listing |
| 25th Sep 2023 | 5:39 pm | GNW | Director/PDMR Shareholding |
| 5th Sep 2023 | 4:17 pm | GNW | Director/PDMR Shareholding |
| 5th Sep 2023 | 4:14 pm | GNW | Director/PDMR Shareholding |
| 4th Sep 2023 | 2:35 pm | GNW | Block listing Interim Review |
| 31st Aug 2023 | 8:00 am | GNW | Total voting rights |
| 23rd Aug 2023 | 4:21 pm | GNW | Holding(s) in Company |
| 22nd Aug 2023 | 9:00 am | GNW | Director/PDMR Shareholding |
| 21st Aug 2023 | 3:38 pm | GNW | Additional Listing |
| 16th Aug 2023 | 3:49 pm | GNW | Director/PDMR Shareholding |
| 16th Aug 2023 | 7:00 am | GNW | Half-year report |
| 5th Jul 2023 | 12:51 pm | GNW | Result of Tender Offer |
| 4th Jul 2023 | 1:12 pm | GNW | Publication of Prospectus |
| 27th Jun 2023 | 9:23 am | GNW | Tender Offer |
| 16th Jun 2023 | 11:53 am | GNW | Directorate change |
| 15th Jun 2023 | 4:05 pm | GNW | Director/PDMR Shareholding |
| 14th Jun 2023 | 10:22 am | GNW | Holding(s) in Company |
| 6th Jun 2023 | 3:20 pm | GNW | Director/PDMR Shareholding |
| 5th Jun 2023 | 3:05 pm | GNW | Director/PDMR Shareholding |
| 2nd Jun 2023 | 11:23 am | GNW | Holding(s) in Company |
| 30th May 2023 | 10:01 am | GNW | Director/PDMR Shareholding |
| 19th May 2023 | 2:58 pm | GNW | Director/PDMR Shareholding |
| 27th Apr 2023 | 4:29 pm | GNW | Directorate change |
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