Admiral Regulatory News (ADM)

7 Mar 2006 07:02

Admiral Group PLC07 March 2006 Admiral Group plc Results for the Year to 31 December 2005 7 March 2006 Admiral Reports Record Profits & Strong Growth Admiral Group plc ("Admiral" or "the Group") today announces a record annualresult with a core profit of £122.1 million for the year to December 2005, anincrease of 21% over the previous year. Group turnover, comprising totalpremiums written, gross other income and investment income, rose 16% to £638.4million. 2005 Highlights • Core profit up 21% at £122.1 million (2004: £100.6 million)• Total final dividend of 14.9p comprising normal dividend of 7.8p; special dividend of 7.1p per share (2005 total declared dividends: 24.6p)• Group turnover up 16% at £638.4 million (2004: £548.0 million)• Revenue from products and services not underwritten by the Group up 34% at £93.4 million (2004: £69.5 million)• Active customers up 10% at 1.1m from 1.0m at 31 December 2004• Confused.com gave 4 million quotes and made a profit of £8.8 million (2004: £2.0 million), including payments from Group brands• All Employee Share Scheme - over 1,500 staff are to receive around 400,000 free shares based on the strong H2 2005 results. This means that staff will have received the full allocation of free shares for 2005, 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. Admiral's performancedemonstrates the strength of its business model and the effectiveness of itsdistribution strategy. It also goes to show what motivated staff can accomplish. "Our growth of both profits and turnover strongly suggests that motoristscontinue to find our product offering attractive and competitive. I amespecially pleased with the excellent result achieved by Confused.com, ourautomated car insurance shopper." Comment from Alastair Lyons, Group Chairman "Consistent with our principle of returning excess cash to our shareholders, weare very pleased to be able to propose both a normal final dividend of 7.8p pershare and a special dividend of 7.1p per share. "We will continue to review available cash to determine whether it isappropriate for the Group to pay further special dividends from time to time, inaddition to its normal policy of distributing not less than 45% of after-taxprofits at each half year." Retirement of Andrew Probert Kevin Chidwick, Admiral's Deputy Finance Director, was today named FinanceDirector Designate following the notice from the Group's current Finance and ITDirector, Andrew Probert, of his forthcoming retirement. Mr Probert, 53, will leave the Group in September this year. He joined Admiralin September 1992, prior to the company's launch in January 1993. Andrew guidedthe company through its MBO in 1999 and, more recently, the company's IPO in2004. He is retiring to spend more time with his family and will hand over hisresponsibilities to Kevin over the course of the next six months. Kevin joined Admiral in September 2005 from Engage Mutual. He has over 20 yearsexperience in UK financial services, including senior positions with Cigna andNational Australia Bank. Kevin is a Fellow of the Association of CertifiedAccountants and has an MBA from London Business School. Final dividend The final dividend of 14.9p per share will be paid on 25 May 2006. Theex-dividend date is 19 April 2006, the record date 21 April 2006. For further information, please contact: Admiral:Louisa ScaddenJustin Beddows +44 (0)29 2043 4394 Financial Dynamics:Robert BailhacheDominick Peasley +44 (0)20 7269 7200 www.admiralgroup.co.uk Chairman's statement 2005, our first full year since coming to the market in September 2004,continued the sustained growth in customer franchise and profitability that thegroup has achieved since it was launched in 1993. Henry Engelhardt, our ChiefExecutive, writes in detail about the achievements of the year in his own report- I shall, therefore, content myself with the headlines. In a year when, given our assessment of where the motor market was in its cycle,we deliberately set out to grow less rapidly, we were pleased to add 10% tocustomer numbers and finish the year with 1.1 million policyholders. Thisgrowth, together with a continuing excellent expense ratio, helped offset theimpact of the cycle on our claims ratio, whilst we achieved further stronggrowth in income from products and services that we do not underwrite. Profitbefore tax was up 14% at £119m whilst total premiums written, including those weshare with our reinsurance partners, grew by 13% to £534m. We were delighted with the 48.3% Total Return that we achieved for Shareholdersduring 2005, itself part of an overall 73.9% since flotation. The sustainedgrowth in our share price has resulted in the business being valued at £1.5Bn on1 March 2006, which compares against £711m when first listed just under 18months previously. During the year we paid dividends to shareholders totalling £49.2m, comprising a9.3p per share final dividend for 2004 and a 9.7p per share interim dividend for2005. We consider dividends in two parts: the first element, being the normaldividend, is based on a 45% pay-out ratio. The second special element derivesfrom our principle of returning excess cash to our shareholders, reflecting thestrongly cash generative nature of our business model. We only retain in thebusiness sufficient cash to provide both a prudent margin against contingencies,currently set at £25m, and cover for planned investments, this year being £6mfor our expansion into Spain and moving our Swansea office into larger modernpremises. On this basis there is £38.7m available to distribute out of year-endnon-regulated cash balances totalling £69.7m. A final dividend of 14.9p pershare (7.8p normal : 7.1p special) is, therefore, proposed for 2005, which willbring total dividends for the year to 24.6p per share, a yield of 4.3% based onthe closing share price on 1 March 2006. This is the first full dividend sinceflotation. The Group is well capitalised with a proven approach to reserving, and withsolvency ratios in both the UK and Gibraltar which carry an appropriate marginover minimum solvency statutory requirements. We believe passionately that a business succeeds because people enjoy workingfor it. Enthusiasm is infectious, transmitting from our staff to our customersand to those thinking about coming to work for us. Quality is central toeverything that we do: we measure the quality of every department on a monthlybasis, and these quality scores translate into Quality Awards. Whilst qualitycannot be achieved without effective training, it is also a mindset that dependsupon people wanting to achieve a quality outcome. We were, therefore, very proud to have been named Employer of the Year at theNational Business Awards, to have won Welsh Company of the Year for the secondtime, and to have continued our uninterrupted series of being six years runningin the Sunday Times list of Top 100 Places to work in the UK. Being a leadingemployer of over 1,700 people in South Wales we recognise our widerresponsibility to the communities of which we are a part and support a largenumber of local charities - details of our activity in this area can be found inthe report on corporate responsibility. Ongoing alignment of interest between our staff and our shareholders is one ofour core principles. Our Approved and Executive Share schemes are designed tostrengthen that alignment over time and we are delighted that the strongout-performance against our plan for 2005 resulted in the approved schemerealising its maximum award of £3,000 free shares for each eligible employee.The Executive Share scheme is based on growth in earnings per share over threeyears and will, therefore, first vest after the 2007 financial year. In April of last year we welcomed Gillian Wilmot to our Board as a non-executivedirector, bringing us extensive marketing experience gained across a broad rangeof consumer-facing businesses. However, her subsequent appointment as ChiefExecutive of the privately owned credit retail business Buy-as-you-View resultsin her no longer being regarded as an independent director under the CombinedCode, as I am also Chairman of that business. As a consequence she will notoffer herself for re-election as a director of Admiral at the forthcoming AnnualGeneral Meeting and we are currently seeking a new non-executive director withequivalent skills and experience. I would like to take this opportunity to thankGillian for her contribution during her time with us. As I wrote last year, Admiral's strategy is clear and straightforward - tocontinue to grow our share of the direct private motor market, maximising thevalue derived from each customer relationship. Along the way we will identifyprofitable opportunities to exploit the knowledge, skills and resourcesattaching to our core business in the UK. Our plans to launch later this year inSpain, the first leg of our expansion into Europe, flow directly from thisstrategy, as does our continuing development of Confused, our intelligentautomated car insurance shopper which last year handled4 million quotes and added household and travel insurance to its core motoroffering. We look forward to continuing consistently to create value for all ourshareholders. Alastair LyonsChairman Chief Executive's statement 2005? Not too shabby... Our first full year as a publicly quoted company was, by virtually any measure,a successful one. Here in a nutshell are the highlights: • Made a record core profit of £122.1m, up 21% from £100.6m in 2004; • Total turnover for the year was £638m, up 16% from 2004. • Total motor premium written grew to £534m, up 13% from 2004; • Produced a combined ratio of 85%; • Gave more than 9.7m quotes, of which almost 9 million started on the internet (92%); • Ended the year with more than 1.1m customers (+ 10%); • Experienced continued improvement in loss ratios across all the back years; • Confused.com gave more than 4m quotes and made a profit of £8.8m (including payments from Group brands); • Named Employer of the Year at the National Business Awards; • Named to The Sunday Times list of Top 100 Places To Work in the UK for the sixth year in a row (every year it's been run). • Named by the Financial Times as the 17th Best Workplace in the UK and one of the Top 100 Workplaces in the EU; • Welsh Company of the Year, for the second time in eight years; • The number of children at our Staff Children's Christmas party? ......I'm going to put this one at the end - make you work for it! Read on -- 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. We doeverything involved in the process of acquiring and servicing our customers.However, we are not your typical insurance operation as we share the income andcommensurate risk with several reinsurance partners, taking only 30% of theunderwriting risk for our own account. We operate through a number of targetedbrands: Admiral (younger drivers, London area), Diamond (women drivers),Elephant.co.uk (internet users) and Bell (zero no claims bonus). We have twoother brands, Gladiator Commercial, which operates as an intermediary in thecommercial vehicle market, and Confused.com, which is an internet 'shopper' forinsurance products. 2005 was our 13th year of trading. The first 7 were in a Lloyd's of Londonenvironment. However, towards 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 the company on the London Stock Exchange and created AdmiralGroup plc. In 1999 we also put in place a long-term co-insurance agreement with Great LakesUK, a wholly-owned subsidiary of Munich Re. In 2001 we extended this agreementand it currently runs through at least 2008. In 2002 Munich Re also became ashareholder in AGL and it currently owns 14% of the Group. Management and staffcurrently own around 27% of the Group. Key Performance Information: Our total written premium for 2005, before sharing it with our reinsurancepartners, was £534m, accounting for 84% of our total turnover. The number ofcustomers we service rose to 1,141,000 from 1,041,000 (+10%). All our growththroughout our history has been organic. In 2005 70% of our premium was underwritten by Munich Re (65%) and Axis Re (5%).The remaining 30% was kept by the Group. Our net written premium for 2005 was£159m. In 2006 Admiral Group will take 25% of the premium income to its ownaccount. Munich Re, through Great Lakes, will continue to take 65%, Axis, aslast year, has 5% and we have a new partner for 2006, Swiss Re, also taking 5%. Some key numbers from the accounts which follow: • Claims ratio 70% up from 67% in 2004; • Earned expense ratio, excluding regulatory levies, down to 12.3% from 12.5%; • Combined ratio 85%, up from last year's 82%; • Revenue from products and services we do not underwrite totalled £93.4m up from £69.5m (+34%). The movement in loss ratio from 67% last year to 70% in 2005 is to be expected.The market has not moved much on price in several years and there is a claimsinflation factor at work. The change in loss ratio across years is characterisedby a less good underlying trend reflecting the paucity of price increases.Without any releases taken into account the loss ratio moved from 75% to 82%. The expense ratio, not including regulatory levies, moved downwards by 0.2% from2004, a reduction of 2%. This reflects our continued efficiency improvements.However, do not expect swingeing cuts in the expense ratio going forward. It isone of our strengths that we use our efficiency to help our underwritingselectivity. Because we are efficient, particularly in generating quotes, we canafford to convert fewer quotes into business. In this way we are helping ensurethat we only take the right risks at the right prices. The end result is abetter combined ratio. If we concentrated on reducing the expense ratio it mayturn out to be a false economy, as it might come at the expense of the lossratio through reduced selectivity. So, for instance, we could cut the marketingbudget and do fewer quotes, but then we'd need to convert more of them to growour premium income and customer numbers. To convert more quotes we'd have to beless selective. Clearly, the more selective you are the better your loss ratioshould be. In last year's report I explained our intention to reduce our growth rate in2005. We achieved our goal! We wound up reducing our growth rate in premium from27% in 2004 to 13% in 2005. We did this because the best part of the marketcycle was behind us and it would not have been beneficial to grow so rapidlyinto the poorest part of the cycle. We increased prices steadily in the firsthalf of the year to put the brakes on, finishing the half-year 3% above wherewe'd started. However, the market lagged well behind these increases and ourconversion rate suffered. Our choice was either to bring rates down or sacrificeprofitable business. We chose the former and made selective rate decreases inthe second half. The overall effect was a 1% increase in prices across the yearand a year-on-year increase in our customer numbers of 10%. Ancillary income moved forward, both through the increased number of customersand also through more income per customer. We finished the year with more than£56 of income per customer, not including Confused or Gladiator. We do notanticipate a further step-change in income per customer in 2006, although we'dbe pleasantly surprised if it occurred. The splendid result from Confused.comcertainly didn't hurt the 'other' income line either. To put 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 60%! Here'sanother interesting calculation: we made £122m on income of £233m, a ratio of52%. The UK Car Insurance Market Cycle: Boil A Frog Slowly: Did you know that if you want to boil a frog (note: no frogs have been boiled inthe making of these accounts or the writing of this commentary) and you throwthe frog into boiling water it will jump right out? But if you put the frog in apot of cool water and turn up the heat, it will boil quite nicely? The UK carinsurance market is now akin to that slowly boiling frog. Previous cycles weremore like throwing the frog into the boiling pot. The market would scream andreact. The current cycle is characterised by a gentle deterioration; a slowboil. The market result is just getting a bit worse each year, nothing overlydramatic, but .... 2004, the most recent year for which data is available, was a decent year forthe market. Blimey, actually not too far from an underwriting profit! Theofficial figure for the market combined ratio for 2004 was 101.3% (102.2% for2003), but this was distorted by a very large release of prior year claimsreserves, well beyond the norm for the market. The true year combined ratio wasmore like 105%, which is much more akin to a borderline break-even result.Typically, seven years on from the previous worst point in the cycle the marketis back to a combined ratio of 120%. So this, seven years on from 1998's 124%result, is clearly demonstrating the changing nature of the typical cyclicalpattern. But although 105% is a good result considering the nature of the cycle, it isstill a marginal proposition to write UK motor insurance at the average. And itis a worse result than 2003. Why did the market deteriorate a bit 2004 v 2003? Well, largely because thereweren't any major movements in price. And there was a modest amount of claimsinflation, albeit probably less than expected. The lower-than-expected claimsinflation is down to two phenomena: first, a gradual decline in overallfrequency, which has been happening for a number of years. This is probablycaused by a combination of factors including: the increase of speed cameras,more traffic congestion and therefore people driving slower, growth in low-costair travel which lets people travel abroad for holiday rather than driving inthe UK and a growth in the number of households where the number of cars exceedsthe number of drivers. Whatever the exact cause, it's a market-wide phenomena. The second phenomenon is a reduction in the inflation rate of bodily injurycosts. This is a much more volatile measure and subject to potential shockshould, for instance, there be a change in the discount rate for calculation oflong term liabilities. But at the moment inflation in this area is below theaverage for the last decade. There isn't much to say about market rates in 2005 because they didn't move verymuch! We saw this lack of movement via our conversion rate and, as notedearlier, moved our own rates accordingly. However, the marketing spend seemed to have come off the boil in the second halfof the year. The spend peaked in July 2005. Since then less was spent in eachmonth of 2005 than the same month in 2004. Historically marketing spend has beena measure of appetite for business. It serves as a rough precursor for cyclicalchange, with a rise in the spend bringing about a poorer future underwritingresult and a reduction in spend indicating a better future result. The last timethe spend actually decreased, as it did in the latter part of 2005, was 1998.The spend then levelled off for two years, at which point the market was movingto the better phase of the cycle. The marketing spend started to rise again in2001, when the market result was very good, and continued to rise, unabated,until the middle of 2005. It is not clear to me whether this is a false dawn or a true indication thatmost insurers are keen to produce a profitable result. It easily could be asituation where a number of traditionally big spenders have just paused, takingtime to assess their position and clean their weapons in anticipation of a majorassault on the market in 2006. Nothing has occurred to alter my thoughts on the long-range outlook for themarket. It is still a cyclical market, but, versus historical patterns, I'dexpect the good times to be less good and the bad times to be less bad. In largepart this is due to consolidation in the market. The largest two players in themarket combine to have around 45% market share, whereas in the mid-1990s, priorto consolidation, it took more than a handful of firms to account for 45% marketshare. These two firms, Royal Bank of Scotland (@34%) and Aviva Norwich Union(@11%), appear to be disciplined and keen to make good returns. This lends agreat deal of stability to the market. The loss of large investment returns from the halcyon days of the 90's also putsmore pressure on the insurance result, which in turn should provide morestability to the market. As the 'boil the frog' analogy indicates, I don't see a great deal of change tothis landscape in 2006. I believe the market will continue to deteriorate, butnot in a dramatic fashion. I think we'll see some firms trying to grow sharethrough marketing, others through rate changes and others willing to sacrificeshare to maintain a healthy bottom line. We might see some volatility inmarketing spend for the market as a whole as from time to time individual firmsstep up the marketing to meet ambitious targets. Our own business is somewhat insulated from this deterioration by two factors.First, our results historically have been far better than the market average andtherefore, despite tighter margins, our result is still rather profitable. Second, our unique underwriting structure means we have a limited share of ourown result, which reduces profits in the good times, but also reduces the effectof narrowing margins in the less good times, leaving us with a high return oncapital. As we continue to grow our customer base, we continue to grow ourancillary revenues. All in all it should result in sustainable, profitablegrowth going forward. At the very end of 2005 we launched Admiral MultiCar. This is a product targetedat households with more than one car. It is, in part, a volume discount product.However, we've taken the time and trouble to create something more involved thanjust that. MultiCar will take the information it gathers from the household anduse it in rating all the vehicles. This will allow us to be much more precise inour rating and, in many cases, save deserving customers a lot of money. Butthere's more for the customer than just saving money. MultiCar will ease theburden a customer currently has of getting quotes and keeping track of differentpolicies for their different cars, often with different insurers, often withdifferent renewal dates. MultiCar will unite all the renewal dates on theanniversary date of the renewal of the first car. Changes will be easier too: ifa customer moves house, he/she need but tell us once and all the cars in thepolicy will be updated. As you might be able to tell, we're excited about theprospects of MultiCar. Once Again, A Brief Explanation of Why Our Results Are So Good... Our ability to make the internet work goes a long way to explaining ourexcellent results. This is also a source of confidence in our future. Our 2005internet results exceeded our forecasts and, in the absolute, are quitestunning. (Except for changing the year from '2004' to '2005' this was exactlywhat I wrote last year andthe year before. It's not that I'm being lazy, it'sjust that it's still true!) Of the more than 9.7m quotes we did last year 92%started on the internet - that's almost 9,000,000 quotes on the internet! Around82% of all our sales came from these internet quotes. I believe that there isstill growth to be had in internet distribution, albeit probably less rampantthan before. As we are among the leaders in the internet delivery of carinsurance we are well placed for continued success through this channel in thecoming years. (In 2005 we had around a billion hits to our websites!) Elephant, our pure internet brand, saw its end-of-year customer count reach410,000 (up 14% from the year before). Elephant is still the biggest brand inthe Group. The other brands all grew the number of customers they service in2005 as well, Admiral by 11%, Bell by 18% and Diamond by 1%. 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 2005Gladiator's customer count stood at 36,000 and it contributed £1.9m to theGroup's bottom line. Changing The Way Car Insurance Is Bought In The UK -Confused.com: The Consumer Champ... 2005 was really a huge growth year for Confused.com. Confused is now a majorforce in the distribution of car insurance in the UK. Confused.com is anintelligent, automated car insurance shopper. Simply put, all a customer has todo is put his or her details into Confused.com and Confused then goes out to themajor car insurance websites, populates the appropriate fields, and, in realtime, brings the customer back a list of prices. Confused goes out to directoperations as well as intermediary sites. One-stop shopping! We launched Confused in its current form in the middle of 2002. 2005 sawConfused generate over 4m quotes up from 1.37m in 2004 (+192%). A great deal ofConfused's growth is coming from word of mouth, the most powerful form ofadvertising. We fully expect Confused to continue growing in 2006. Not only didConfused generate a lot of quotes, but it also made money. Confused.com made aprofit of £8.8m compared to £2.0m last year and £0.3m the year before. 2005 - A Year of Change: So there you have it. 2005 wasn't too shabby, was it? From the facts and figuresat hand we still believe we are the most efficient and, pound for pound, themost profitable firm in the UK motor insurance market. Our goal is to continueto write the above sentence for the annual accounts year after year after year. One of the inevitable consequences of going public was that, for some managers,it was the culmination of their career. Of the 15 senior managers in the Groupat the time of float six have now retired; even though some of them are not yet40! The float has given them financial security and they felt it was the righttime to dedicate themselves to family and other interests. All of this wascommunicated well in advance and we spent a good part of the year putting theappropriate replacements in place, either from the existing team or goingoutside to recruit. All of the managers who retired had joined us prior to our January 2, 1993launch. It should never be forgotten that these are the people who built thefoundation upon which our current and future success rests. We will always bedeeply indebted to the contributions from (in alphabetical order): ClaireCarrel, Nicole Griffiths, Tanzie Oliver, Jane Stone (still with us part-time!),Dave Walker and Graham Wilson. I wish them all the very best with Life AfterAdmiral. Besides replacing people, we have also been busy recruiting highly motivated MBAgraduates to help us grow our business inside and outside the UK. We are verypleased with our 'stable' of MBAs. They bring with them not only their intellectand analytical skills but also a fresh, ambitious spirit, which gives me greathope for our future. We are targeting Spain as the first country outside the UKin which we'll do business. I'm quite confident that when writing next year'sreport I will be able to describe in detail our successful launch there. Not to be forgotten are all those who actually stayed or joined more recently!Many thanks to all our staff who made 2005 an excellent year. 360... 360 is the number of children at our Staff Children's Christmas Party, anincrease of 44% over 2004 (250). Henry EngelhardtChief Executive Financial review Key financial highlights The Group recorded another significant increase in pre-tax profit in 2005 - arise of 14% from £104.9m in 2004 to £119.5m. Core profit was also significantlyhigher - a jump of 21% from £100.6m to £122.1m. Core profit is used as an effective measure of the three key elements of theGroup's business: 1) underwriting profits, 2) profit commissions and 3) netother income (most notably ancillary income). Each element is discussed below. 2005 2004 £000 £000 Underwriting profit 32,361 27,969Profit commissions (1) 14,735 15,679Net other income 74,998 56,916 -------- --------Adjusted Group core profit 122,094 100,564 ======== ======== (1) During 2004 £5,994,000 of profit commission relating to the 2003 financial year became recognisable in accordance with the Group's accounting policy for such commissions and is, therefore, included in the 2004 results in the statutory accounts. The directors believe this amount should be reallocated back to 2003 for the purposes of comparisons and it has been deducted above. A reconciliation of core profit to figures reported in the income statement isset out later in this section. Since 2000, the Group has returned substantialcore profit increases year-on-year, and the compounded annual rate of growthsince 2000 is over 44%. The proportion of the Group's core profits earned from non-underwritingincreased again during 2005 - with 73% now arising from intermediary activitiesand profit commissions (72% in 2004). The hybrid nature of the business significantly reduces the volatility ofearnings inherent in motor insurance and has some important advantages. Firstly,the Group currently only underwrites 25% of the motor insurance it sells. TheGroup therefore, materially limits its downside exposure, whilst retaining thepotential, through the profit commission arrangements in place, to generatepotentially significant income from the other 75% of the business depending uponthe underwriting results achieved. (Refer to the underwriting structure sectionbelow for further detail.) The second key advantage comes from retaining ownership of the entire customerbase. This means the Group is able to generate substantial non-insurance incomefrom the customer base. Group turnover - which comprises total premiums written, gross other income andnet investment return (and measures the combined size of the Group's businesses)also returned significant growth: 2005 2004 £000 £000 Total premium written 533,616 470,400Gross other income 93,405 69,457Net investment return 11,342 8,135 ------- -------Group turnover 638,363 547,992 ======= ======= The growth of 16% in the year contributes to compounded average annual growthsince 2000 of around 20%. Gross other income, which is made up predominantly ofancillary revenue (before allocation of overhead) and Confused.com income,demonstrated an especially high increase (over 34%) in the year - both arediscussed further below. Underwriting Underwriting structure The Group's underwriting structure is as follows: 65% of the business written continues to be underwritten by Great Lakes under along-term co-insurance contract. 35% of the business is underwritten by the Group through Admiral Insurance(Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 10% (ofthe total business) is ceded via quota share contracts that qualify fordeductions in required solvency capital. Of the 10%, 5% is ceded to Axis Re Europe under a contract covering 2005 and2006 and 5% to Cologne Reinsurance Company (Dublin) Limited (part of Gen Re) for2005 only. The Gen Re contract was commuted with effect from 31 December 2005, and in linewith accounting guidelines, has not been treated as reinsurance in the financialstatements. This has the effect (for contracts incepted in 2005 only) ofgrossing-up premiums, claims and expenses retained by the Group to a net 30%. A new quota share contract with Swiss Reinsurance Company UK Limited (Swiss Re)replaces the Gen Re contract for 2006 only. 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. The Group is currently managing the run-off of Syndicate2004, and the last year of account (2002) remained open at the end of 2005. The Group is currently pursuing the option of a transfer of the remainingliabilities for the 2000-2002 underwriting years into AICL under the provisionsof Part VII to the Financial Services and Markets Act 2000. Should this projectcomplete successfully, it is estimated that not less than £20m of fundscurrently maintained in the Syndicate would be released. Underwriting results Total premium written increased by 13.4% from £470m to £534m during the year.This has once again resulted from targeted marketing spend increases and thecontinued growth of elephant.co.uk, the Group's principal internet offering andlargest brand. All Group brands increased in size during 2005. Note that whilstpremium increased by 13.4%, the Group's closing policy base increased by around10%. The differential consists of the overall rate increases effected over 2005,combined with a change in the mix of business which also led to higher averagepremiums. Motor insurance quotes rose significantly from 6.2m in 2004 to 9.7m in 2005 (anincrease of 56%). This growth has partly come about as a result of the notableincrease in volume generated by Confused.com in the year - further analysis ofwhich is set out below. Although selective rate changes have been implementedthroughout the year, on average, premium levels at the end of 2005 are around 1%higher than those at the start of the year. The accounting treatment adopted for the commutation of the Gen Re contract hasmeant that for contracts incepted in 2005, the Group effectively underwrites 30%of the total motor business. For this reason, net insurance premium revenue hasincreased by almost 30% in the year - although on a like for like basis (thatis, had the Group underwrote 25% as opposed to 30% of 2005 business), theincrease is 16% - much more in line with the written premium increase notedabove. There was an increase in the underwriting result of around £4.4m in the year(£28.0m to £32.4m), although almost £3m of this is due to increased investmentreturn (which in turn primarily resulted from higher levels of invested funds).2005's reported loss ratio (excluding claims handling expenses) was 69.8%, upfrom 67.0% in 2004. Movements in loss ratios are discussed in the ChiefExecutive's statement. Positive development of prior year claims provisions has continued, and the 2005income statement contains £17.3m of net releases (up significantly from £9.2m in2004). 2005's releases effectively reduce the reported loss ratio by 12.4percentage points (8.5 points in 2004). Note 18 to the financial statementsincludes further detail on claims provision development. The Group's expense ratio continues to run at competitive levels - 15.1%(including claims handling expenses) in 2005, relatively unchanged from 15.0% in2004. Excluding regulatory levies, the figures are 12.3% in 2005 and 12.5% in2004. The expense ratio is reconciled to the figures included in the income statementin note 8 below, whilst the underwriting result is reconciled later in thisreview. The Group's combined ratio (being the aggregation of the loss and expense ratiosabove) is 84.9% up from 82.0% in 2004. The increase is due to the loss ratiomove noted above. The Group's 85% compares to an expected market combined ratioin 2005 of around 105% (source - Deloitte) - an outperformance, consistent withprevious years of around 20 points. Further detail on market combined ratios isset out in the Chief Executive's statement. Some additional ratios are noted in the Chief Executive's statement - firstlythe ratio of total outgoings to net income at 60% (2004: 58%) and secondly theratio of core profit to net income at 52% (2004: 57%). Reconciliations to thefigures in 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. £11.2m has been recognised in 2005, compared to £10.7m in 2004(after adjusting for the £6m noted above). An additional £0.5m of profit commission relating to earlier underwriting yearcontracts with Hibernian Re (100% reinsured into Swiss Re) has been recognisedin 2005 (£1.9m in 2004). It is expected that further amounts will be recognisedwhen the Group closes the final year of account of Syndicate 2004. Profit commission - quota share reinsurance The Group earns profit commission from Converium (relating to 2003 and 2004underwriting years) and Axis Re (on the 2005 year). A total of £3.1m has beenrecognised during 2005 (2004: £3.1m). No commission will be earned on the Gen Re contract as this has been commuted.The new 2006 quota share contract with Swiss Re has similar profit commissionarrangements to the current deals. Net other income This figure can be broken down as follows: 2005 2004 £000 £000 £000 £000 Ancillary contribution 59,092 48,493Gross Confused.com contribution 8,823 2,033Intra-group adjustment *1 (1,941) (750) ------- -------Confused.com contribution 6,882 1,283Aggregate interest receipts 4,176 3,348Instalment income 3,768 2,603Gladiator contribution 1,871 1,756Other Group / central overheads (791) (567) ------- -------Net other income 74,998 56,916 ======= =======*1 Confused.com adjustment: Confused.com earns a proportion of its income from Admiral Group brands andhence an adjustment is made to the gross contribution. This is to reflect thefact that a proportion of Confused.com's costs are incurred in acquiringinsurance business for the Group. The opposite side of the adjustment appears inthe costs of acquiring insurance contracts. Ancillary contribution & instalment income This primarily involves commissions earned on sales of insurance productscomplementing the motor policy, but which are underwritten by external parties.Net contribution from these sales grew by 22% in 2005 - from £48.5m to £59.1m.Average gross income per motor policy sold also increased significantly duringthe year, from £51 in 2004 to £56 in 2005. Instalment income represents charges for payment by instalments on motorpolicies sold which are paid for over the course of the policy life by directdebit. Confused.com As the profit figures suggest, Confused.com has seen substantial growth during2005 - both in terms of volume and profitability. This was driven by efficientincreases in marketing spend generating substantial increases in quote activity.Confused.com receives a commission from its partners and has a relatively smallfixed cost base. Gladiator Commercial Gladiator had another profitable year, with relatively little change in theoverall result or level of business. In spite of this, it has been a year ofchange for Gladiator - with the development of its own interactive quotefacility that is expected to make the internet its principal distributionchannel. Taxation The total taxation charge reported in the income statement is £34.8m (2004:£14.4m), representing 29.1% (2004: 13.7%) of pre-tax profits. The unusually loweffective rate in 2004 is due to the impact of the ESOT share awards made duringthat year, which attracted a significant deduction (£17m) for corporation taxpurposes. This tax deduction is the reason why post tax profits in 2004 werehigher than in 2005. Refer to note 12 to the accounts for further detail on taxation. Earnings per share (EPS) The tax deduction referred to above also has a distorting impact on the EPSfigures presented in the income statement. Note 14 to the accounts sets out acalculation of adjusted EPS, which backs out the impact in the 2004comparatives. EPS for 2005 is 32.7p, up from the adjusted 2004 figure of 28.4p -an increase of 15%, in line with the increase in pre-tax profits reported on theincome statement. Financial investments, cash and debt A continuing feature of the Group's business is the significant generation ofcash from all operations. At the end of the year, the Group held a total of£406.1m in cash and financial investments - up 26% on the £322.6m held at theend of 2004. This increase is after distributions to shareholders of £49.2mduring 2005 (£52.0m in 2004). The balances making up this total can be analysed as follows: 2005 2004 £000 £000Liquid funds in underwriting companies: Government and sovereign bond holdings 83,071 42,980Corporate bonds and similar instruments 172,866 160,438Deposits with credit institutions 40,646 31,070Cash at bank 39,824 38,035 ------- ------- 336,407 272,523Liquid funds held outside underwriting companies: Cash at bank 69,682 50,096 ------- ------- 406,089 322,619 ======= ======= The Group maintains four externally managed investment funds in which themajority of the insurance funds are invested. Three of these (one each forSyndicate 2004, AICL and AIGL) are managed by Alliance Capital Management,whilst the fourth (another AIGL fund) is managed by Lloyds TSB International. There have been no changes to investment strategy, which is set by the GroupInvestment Committee and approved by the Board of directors of the relevantentity. The strategy is conservative, with all of the funds invested in eithercash or short dated, high quality corporate or government bonds. The Group restructured its loan facility during 2005 in order to reduce theinterest margin being incurred on the debt and to increase its flexibility. Refer to note 21 to the accounts for further details on the Group's debt. 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 cash to determine whether it isappropriate for the Company to pay a further special dividend. In line with this policy, as outlined in the Chairman's statement, the directorshave declared a final dividend for 2005 of 14.9p per share, which is made up of7.8p per share normal element, plus 7.1p per share special distribution based onthe Group's cash resources at the end of the year. This final payment combines with the interim dividend to make a totaldistribution for 2005 of 24.6p per share. The final dividend declared in respectof the post-flotation period of 2004 was 9.3p International Financial Reporting Standards (IFRS) From 1 January 2005, EU regulations require companies listed on regulatedmarkets in the EU to prepare their consolidated accounts under IFRS. As such,these financial statements are the first full year accounts to be prepared underIFRS. The 2004 full year accounts were reported under IFRS in the 2005 interimaccounts document, reported in September 2005. As reported in the interim statements, the only significant impacts on theincome statement are the cessation of goodwill amortisation, the valuation offinancial investments at bid as opposed to mid-market price, and the inclusionof dividends in the retained profits of the period in which they were declaredas opposed to allocated. The changes have no impact on the Group's ability topay dividends. Reconciliation of profit before tax to core profit: 2005 2004 £000 £000 Profit before tax 119,494 104,906Add back: finance charges 2,162 2,451Add back / (deduct): share scheme charges / (credit) 438 (4,144)Add back: bonuses paid in lieu of dividends - 3,3452003 profit commission adjustment - (5,994) --------- ---------Core profit 122,094 100,564 ========= ========= Reconciliation of underwriting profit: 2005 2004 £000 £000 Net insurance premium revenue 139,454 107,501Net insurance claims (100,526) (74,272)Net expenses related to insurance contracts (17,909) (13,796)Investment return 11,342 8,536 --------- ---------Underwriting profit 32,361 27,969 ========= ========= Reconciliation of loss ratios reported: 2005 2004 £000 £000 Net insurance claims from income statement 100,526 74,272Deduct: claims handling costs (3,202) (2,352) --------- --------- Adjusted net insurance claims 97,324 71,920Net premium revenue 139,454 107,501Loss ratio 69.8% 67.0% ========= ========= Reconciliation of alternative operating ratios 2005 2004 £000 £000Outgoings:Net insurance claims 100,526 74,272Insurance contract expenses 17,909 13,796Ancillary / Gladiator / Confused expenses 21,792 15,322 --------- --------- 140,227 103,390Income:Net premium revenue 139,454 107,501Gross other revenue 93,405 69,457 --------- --------- 232,859 176,958 --------- ---------Outgoings to income 60% 58%Core profit (from above) to income 52% 57% --------- --------- Consolidated income statement (audited) Year ended: 31 December 31 December 2005 2004 Note: £000 £000 Insurance premium revenue 176,214 151,864Insurance premium ceded to reinsurers (36,760) (44,363) ---------- ---------Net insurance premium revenue 4 139,454 107,501 Other revenue 5 93,405 69,457Profit commission 7 14,735 21,673Investment and interest income 6 15,518 11,884 ---------- ---------Net revenue 263,112 210,515 Insurance claims and claims handling expenses (121,123) (102,604)Insurance claims and claims handling expenses recovered from reinsurers 20,597 28,332 ---------- ---------Net insurance claims (100,526) (74,272) Expenses 8 (40,492) (33,030)Share scheme charges 8, 25 (438) 4,144 ---------- ---------Total expenses (141,456) (103,158) Operating profit 121,656 107,357Finance charges 11 (2,162) (2,451) ---------- --------- Profit before tax 9 119,494 104,906Taxation expense 12 (34,774) (14,400) ---------- ---------Profit after tax attributable to equity holders of the Company 84,720 90,506 ========== =========Earnings per share:Basic 14 32.7p 35.0p ========== =========Diluted 14 32.7p 35.0p ========== ========= ---------- ---------Dividends declared (total) 13 49,190 51,996 Dividends declared (per share) 13 19.0p 20.1p ---------- --------- Consolidated balance sheet (audited) As at: 31 December 31 December 2005 2004 Note £000 £000ASSETS Property, plant and equipment 15 4,636 3,349Intangible assets 16 66,490 66,467Financial assets 17 378,747 300,722Reinsurance assets 18 54,166 66,137Trade and other receivables 20 9,392 16,739Cash and cash equivalents 19 150,152 119,201 ---------- ---------Total assets 663,583 572,615 ========== =========EQUITY Share capital 25 260 259Share premium account 26 13,145 13,145Retained earnings 26 167,990 131,213Other reserves 26 17 17 ---------- ---------Total equity 181,412 144,634 ========== =========LIABILITIES Insurance contracts 18 254,130 216,107Financial liabilities 21 22,000 33,122Provisions for other liabilities and charges 22 - -Deferred income tax 24 3,550 4,838Trade and other payables 23 182,935 164,329Current tax liabilities 19,556 9,585 ---------- ---------Total liabilities 482,171 427,981 ========== ========= Total equity and total liabilities 663,583 572,615 ========== ========= Consolidated statement of recognised income and expense (audited) No separate consolidated statement of recognised income and expense has beenprepared. The profit for the period of £84.7m (2004: £90.5m) represents allrecognised income and expenses for the period. Consolidated cash flow statement (audited) Note 31 31 December December 2005 2004 £000 £000 Profit after tax 84,720 90,506Adjustments for non-cash items:- Depreciation 1,824 1,576- Amortisation of software 896 981- Unrealised losses on investments 893 200- Share scheme charge 1,247 308- Share scheme credit, net of employer's NIC - (4,452)Employer's NIC charge on ESOT - (7,284)Loss on disposal of property, plant and equipment and software 503 4Change in gross insurance contract liabilities 38,023 41,278Change in reinsurance assets 11,971 (9,471)Change in trade and other receivables, including from policyholders (18,693) (31,675)Change in trade and other payables, including tax and social security 18,041 62,048Interest expense 2,162 2,451Taxation expense 34,774 14,400 --------- ---------Cash flows from operating activities, before movements in investments 176,361 160,870 Net cash flow into investments held at fair value (53,413) (59,154) --------- ---------Cash flows from operating activities, net of movements in investments 122,948 101,716 Interest payments (2,617) (2,423)Taxation payments (26,090) (15,060) --------- --------- Net cash flow from operating activities 94,241 84,233 Cash flows from investing activities:Purchases of property, plant and equipment and software (3,999) (1,394)Proceeds from sales of property, plant and equipment - 16 --------- ---------Net cash used in investing activities (3,999) (1,378) Cash flows from financing activities:Repayments of borrowings (10,667) (2,333)Capital element of new finance leases 1,201 447Repayment of finance lease liabilities (635) (1,957)Payments of transaction expenses - (2,354)Equity dividends paid (49,190) (51,996) --------- ---------Net cash used in financing activities (59,291) (58,193) --------- --------- Net increase in cash and cash equivalents 30,951 24,662 Cash and cash equivalents at 1 January 119,201 94,539Cash and cash equivalents at end of period 19 150,152 119,201 ========= ========= 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 (the Group) for the two years ended 31 December 2004 and 2005.The financial statements of the Company's subsidiaries are consolidated in theGroup financial statements. The Company controls 100% of the voting sharecapital of all its subsidiaries. In accordance with IAS 24, transactions orbalances between Group companies that have been eliminated on consolidation arenot 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). These are the Group's first consolidatedfinancial statements under IFRS and IFRS 1 (First Time Adoption) has beenapplied. The Company has elected to prepare its parent company financialstatements in accordance with UK GAAP. The Group has applied all IFRS and interpretations adopted by the EU at 31December 2005, including all amendments to extant standards that are noteffective until later accounting periods. In particular, the Group has earlyadopted the amendments to IAS 39: The Fair Value Option in these 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. The preparation of financial statements in conformity with 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. The Group is managed as one operation involving the sale and administration ofprivate motor insurance and related products and is reported as one segment. 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 commission being recognised based on loss and expense ratiosused in 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 having regard to the profile of services provided. 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) 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 material risk transfer betweenthe 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. c) 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. 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. 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. 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. d) 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. e) 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. f) 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 and subsequently carried at fair value (based onclosing bid prices on the balance sheet date, or the last trading day before thebalance sheet date) with changes in the fair value of these investments beingrecognised through the income statement. Trade and other receivables are stated at their nominal amount (discounted ifmaterial) unless they are impaired. Impairment losses are recognised throughthe income statement. g) 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. h) 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. Prior to 2005, only one equity based compensation scheme had been operated (theEmployee Share Ownership Trust or ESOT). All benefits due under this scheme weresettled during 2004 at the time of the Company's flotation on the London StockExchange. No further benefits will accrue. In accordance with the exemptionavailable under IFRS 1, the transactions relating to this scheme have not beenrestated in accordance with IFRS 2 (Share based payment). Refer to note 25 for further details on share schemes. i) 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. 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. Net insurance premium revenue 31 31 December December 2005 2004 £000 £000 Total motor insurance premiums before co-insurance 533,616 470,400 ======== ======== Group gross premiums written after co-insurance 186,989 165,343Outwards reinsurance premiums (28,052) (48,606) -------- --------Net insurance premiums written 158,937 116,737 Change in gross unearned premium provision (10,775) (13,479)Change in reinsurers' share of unearned premium provision (8,708) 4,243 -------- --------Net insurance premium revenue 139,454 107,501 ======== ======== All insurance business written during all periods is direct private motorinsurance written in the United Kingdom. The Group's share of the 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. 5. Other revenue 31 31 December December 2005 2004 £000 £000 Ancillary revenue 72,470 59,175Instalment income earned 3,768 2,603Revenue from Gladiator Commercial 5,123 4,475Revenue from Confused.com 12,044 3,204 -------- --------Total other revenue 93,405 69,457 ======== ======== Ancillary revenue primarily constitutes commission from sales of insuranceproducts that complement the motor policy, but which are underwritten byexternal parties. 6. Investment and interest income 31 31 December December 2005 2004 £000 £000 Net investment return 11,342 8,536Interest receivable 4,176 3,348 -------- --------Total investment and interest income 15,518 11,884 ======== ======== 7. Profit commission 31 31 December December 2005 2004 £000 £000 Total profit commission 14,735 21,673 ========= ========= 8. Expenses 31 December 31 December 2005 2004 Insurance Other Total Insurance Other Total contracts contracts £000 £000 £000 £000 £000 £000 Acquisition ofinsurance 6,888 - 6,888 5,772 - 5,772contractsAdministration andmarketing costs 11,021 22,583 33,604 8,024 19,234 27,258 -------- ------ ------ -------- ------ ------- Sub-total 17,909 22,583 40,492 13,796 19,234 33,030 Share scheme - 438 438 - (4,144) (4,144)charges Total expenses 17,909 23,021 40,930 13,796 15,090 28,886 ======== ====== ====== ======== ====== ======= Analysis of other administration and marketing costs: 31 31 December December 2005 2004 £000 £000 Ancillary sales expenses 13,378 10,682Confused.com operating expenses 5,162 1,921Gladiator Commercial operating expenses 3,252 2,719Special unit-holder bonus - 3,345Central overheads 791 567 --------- --------Total 22,583 19,234 ========= ========= The £11,021,000 (2004: £8,024,000) 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 2005 2004 £000 £000 Insurance contract expenses from above 17,909 13,796Add: claims handling expenses 3,202 2,352 --------- ---------Adjusted expenses 21,111 16,148 Net insurance premium revenue 139,454 107,501Reported expense ratio 15.1% 15.0% --------- --------- 9. Staff costs and other expenses Included in profit, before co-insurance arrangements are the following: 31 31 December December 2005 2004 £000 £000 Salaries 29,955 29,046Social security charges 2,782 2,406Pension costs 490 399Share scheme charges (see note 25) 1,247 308ESOT credit - (4,452) --------- ---------Total staff expenses 34,474 27,707 ========= ========= Depreciation charge:- Owned assets 894 915- Leased assets 1,826 1,641Operating lease rentals:- Buildings 2,969 1,574Auditor's remuneration:- Statutory audit fees 210 160- Other audit fees 18 16- Other services 91 116Loss on disposal of property, plant and equipment 503 4 ========= =========Analysis of fees paid to the auditor for other services: Indirect tax consultancy 61 42Corporate tax services 24 29Internal audit advisory - 20Other 6 25 --------- ---------Total as above 91 116 ========= ========= During 2004, fees of £827,000 were paid to the Group's auditor in respect ofprofessional services relating to the listing of the Company's shares on theLondon Stock Exchange, which were debited against the share premium account. 10. Staff numbers (including directors) Average for the year: 2005 2004 Number Number Direct customer contact staff 1,377 1,242Support staff 339 301 --------- ---------Total 1,716 1,543 ========= ========= 11. Finance charges 31 31 December December 2005 2004 £000 £000 Term loan interest 1,520 2,020Finance lease interest 388 256Letter of credit charges 221 175Other interest payable 33 - --------- ---------Total finance charges 2,162 2,451 ========= ========= 12. Taxation 31 31 December December 2005 2004 £000 £000UK Corporation tax:Current charge at 30% 36,051 31,342Tax relief in respect of ESOT share provision - (16,985)Under provision relating to prior periods - corporation tax 11 1,571 --------- ---------Current tax charge 36,062 15,928 Deferred tax:Current period deferred taxation movement (654) (651)Over provision relating to prior periods - deferred tax (634) (877) --------- ---------Total tax charge per income statement 34,774 14,400 ========= ========= Factors affecting the tax charge are: 31 31 December December 2005 2004 £000 £000 Profit before taxation 119,494 104,906 Corporation tax thereon at 30% 35,848 31,472ESOT tax relief - (16,985)Utilisation of brought forward tax losses (421) (582)Adjustments in respect of prior year insurance technical provisions (161) (216)Expenses and provisions not deductible for tax purposes 152 29Other timing differences (21) (4)Impact of using lower tax rate - (8)Adjustments relating to prior periods (623) 694 --------- ---------Tax charge for the period as above 34,774 14,400 ========= ========= 13. Dividends Dividends were declared and paid as follows: 31 31 December December 2005 2004 £000 £000 January 2004 (5.5p per share, paid February 2004) (*1) - 14,179July 2004 (14.6p per share, paid August 2004) (*1) - 37,817March 2005 (9.3p per share, paid May 2005) 24,049 -September 2005 (9.7p per share, paid October 2005) 25,141 - -------- ---------Total dividends 49,190 51,996 ======== ========= *1 = for comparability, the per-share amounts for these two dividends have beenre-stated to reflect the share capital in issue at the 2004 year-end. Both dividends included in the 2004 column were declared and paid before theCompany's flotation in September 2004. The dividend declared in March 2005 represents the final dividend paid inrespect of the 2004 financial year. The dividend declared in September 2005 isthe interim distribution in respect of 2005. Refer to the Chairman's statementand financial review for further detail. 14. Earnings per share 31 31 December December 2005 2004 £000 £0001) Unadjusted EPS Profit for the financial year after taxation 84,720 90,506 Weighted average number of shares - basic 258,987,515 258,595,400Unadjusted earnings per share - basic 32.7p 35.0p Weighted average number of shares - diluted 259,387,515 258,595,400Unadjusted earnings per share - diluted 32.7p 35.0p 2) Adjusted EPS Profit for the financial year after tax 84,720 90,506Deduct ESOT tax credit - (16,985) --------- ---------Adjusted profit after tax 84,720 73,521 Adjusted earnings per share - basic 32.7p 28.4pAdjusted earnings per share - diluted 32.7p 28.4p ========= ========= The difference between the basic and diluted number of shares at the end of 2005(being 400,000) relates to awards committed, but not yet issued under theGroup's share schemes. Refer to note 25 for further detail. 15. Property, plant and equipment Improvements Computer Office Furniture Motor Total to short equipment equipment and vehicles leasehold fittings buildingsCost:At 1 January 2004 1,658 6,542 2,785 1,583 - 12,568Additions 278 588 193 44 12 1,115Disposals (5) (338) - - - (343) -------- ------- ------- ------- ------- -------At 31 December 2004 1,931 6,792 2,978 1,627 12 13,340 -------- ------- ------- ------- ------- -------Depreciation:At 1 January 2004 1,405 3,729 2,127 1,483 - 8,744Charge for the year 149 1,024 340 62 1 1,576Disposals - (329) - - - (329) -------- ------- ------- ------- ------- -------At 31 December 2004 1,554 4,424 2,467 1,545 1 9,991 -------- ------- ------- ------- ------- -------Net book amount:At 31 December 2004 377 2,368 511 82 11 3,349 ======== ======= ======= ======= ======= ======= Cost:At 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 -------- ------- ------- ------- ------- -------Depreciation:At 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 amount:At 31 December 2005 252 3,931 303 142 8 4,636 ======== ======= ======= ======= ======= ======= The net book value of assets held under finance leases is as follows: 31 31 December December 2005 2004 £000 £000 Computer equipment 2,380 2,849Office equipment 767 83 -------- -------- 3,147 2,932 ======== ======== 16. Intangible assets Goodwill Deferred Software Total acquisition costs £000 £000 £000 £000 Carrying amount:At 1 January 2004 62,354 2,270 2,025 66,649Additions - 6,271 275 6,546Amortisation charge - (5,747) (981) (6,728) -------- -------- -------- --------At 31 December 2004 62,354 2,794 1,319 66,467 Additions - 7,407 385 7,792Amortisation charge - (6,873) (896) (7,769) -------- -------- -------- --------At 31 December 2005 62,354 3,328 808 66,490 ======== ======== ======== ======== 17. Financial assets The Group's financial assets can be analysed as follows: 31 31 December December 2005 2004 £000 £000 Investments held at fair value 255,937 203,418Receivables - amounts owed by policyholders 122,810 97,304 -------- --------Total financial assets 378,747 300,722 ======== ======== All receivables from policyholders are due within 12 months of the balance sheetdate. Analysis of investments held at fair value: 31 31 December December 2005 2004 £000 £000Fixed income securities:Government bonds 83,071 42,980Other listed securities 156,071 139,573 Variable interest securities:Other listed securities 16,795 20,865 -------- -------- 255,937 203,418 ======== ========Management of credit and market risk: Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, the Group only conducts business with companieswith specified financial strength ratings. The other primary form of credit risk is in respect of amounts due frompolicyholders. Credit risk arises due to the potential for default on creditcard payments. The impact of this is mitigated by the large customer base andthe low level of the average balance recoverable. This risk is also mitigatedby the operation of controls over this area including the automated cancellation procedures for those policies in default, resulting in minimal financial impact. As the Group holds a significant proportion of its financial investments in theform of fixed income securities, it is also exposed to market risk - primarilythe impact on investment return and the carrying value of investments that couldresult from shifts in interest rates. The Group's investment funds are managedon short duration strategies that effectively minimise the quantum of any impactthat could arise. At 31 December 2005 and the same date in 2004, the averageduration of the Group's investment funds was less than 17 months. The Groupdoes not invest in equity securities. 18. Reinsurance assets and insurance contract liabilities A) Management of insurance risk: The Group is involved in issuing motor insurance contracts that transfer riskfrom policyholders to the Group and its underwriting partners. Insurance risk primarily involves uncertainty over the occurrence, amount andtiming of claims arising on insurance contracts issued. The key risk is that thefrequency and / or value of the claims arising exceeds expectation and the valueof insurance liabilities established. There are a number of elements forming part of the Group's strategy to manageinsurance risk. These include: i) Co-insurance and reinsurance: As noted in the underwriting structure section of the financial review above,the Group passes out a significant amount (currently 75%) of the motor insurancebusiness written to external underwriters. 65% of the risk is shared under aco-insurance contract, under which the primary risk is borne by the co-insurer. A further 10% is ceded under quota share reinsurance contracts (although asnoted, the 5% Gen Re quota share agreement for 2005 was commuted at 31 December2005). As well as these proportional arrangements, an excess of loss reinsuranceprogramme is also purchased to protect the Group against very large individualclaims and catastrophe losses. ii) Data driven pricing: The Group's underwriting philosophy is focused on a sophisticated data-drivenapproach to pricing and underwriting and on exploiting the competitiveadvantages direct insurers enjoy over traditional insurers through: • Collating and analysing more comprehensive data from customers;• Tight control over the pricing guidelines in order to target profitable business sectors; and• Fast and flexible responsiveness to data analysis and market trends. The Group is committed to establishing premium rates that appropriately pricethe underwriting risk and exposure. Rates are set utilising a larger thanaverage number of underwriting criteria. The directors believe that there is a strong link between the increase in depthof data that the Group has been able to collate over time and the historicreported loss ratios enjoyed by the Group. iii) Effective claims management: The Group adopts various claims management strategies designed to ensure thatclaims are paid at an appropriate level and to minimise the expenses associatedwith claims management. These include: • An effective, computerised workflow system (which along with the appropriate level of resources employed helps reduce the scope for error and avoids significant backlogs);• Use of an outbound telephone team to contact third parties aiming to minimise the potential claims costs and to ensure that more third parties utilise the Group approved repairers;• Use of sophisticated and innovative methods to check for fraudulent claims. Concentration of insurance risk: The directors do not believe there are significant concentrations of insurancerisk. B) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2005 that wouldresult from a 1 per cent change in the loss ratios used for each underwritingyear for which material amounts remain outstanding. UNDERWRITING YEAR --------------------------- 2001 2002 2003 2004 2005 TOTAL Latest loss ratio 54.9% 58.0% 65.0% 75.8% 85.0%Impact of 1% change (£000s) 767 466 1,432 1,754 1,005 5,424 ------- ------- ------- ------- ------- ------- 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. C) Analysis of recognised amounts: 31 31 December December 2005 2004 £000 £000Gross:Claims outstanding 170,216 142,968Unearned premium provision 83,914 73,139 -------- --------Total gross insurance liabilities 254,130 216,107 ======== ========Recoverable from reinsurers:Claims outstanding 41,585 44,848Unearned premium provision 12,581 21,289 -------- --------Total reinsurers' share of insurance liabilities 54,166 66,137 ======== ========Net:Claims outstanding 128,631 98,120Unearned premium provision 71,333 51,850 -------- --------Total insurance liabilities - net 199,964 149,970 ======== ======== D) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2005, of theretrospective re-estimation of claims provisions initially established at theend of the financial years stated. Gross and net figures are shown. These tablespresent data on an accident year basis. Financial year ended 31 DecemberGross amounts: 2001 2002 2003 2004 2005 £000 £000 £000 £000 £000 Gross claims provision as originally estimated 115,386 124,478 115,169 142,968 170,216 Provision re-estimated as of:One year later 105,186 114,051 111,599 137,075 -Two years later 92,282 109,490 105,748 - -Three years later 87,840 101,910 - - -Four years later 82,205 - - - - ------- ------- ------- ------- -------As re-estimated at 31 December 2005 82,205 101,910 105,748 137,075 - Gross cumulative overprovision (33,181) (22,568) (9,421) (5,893) - ------- ------- ------- ------- ------- Financial year ended 31 DecemberNet amounts: 2001 2002 2003 2004 2005 £000 £000 £000 £000 £000 Net claims provision as originally estimated 55,529 71,071 75,549 98,120 128,631 Provision re-estimated as of:One year later 49,409 64,325 72,579 93,910 -Two years later 42,927 61,167 67,726 - -Three years later 40,706 55,974 - - -Four years later 37,890 - - - - ------- ------- ------- ------- -------As re-estimated at 31 December 2005 37,890 55,974 67,726 93,910 - Net cumulative overprovision (17,639) (15,097) (7,823) (4,210) - ------- ------- ------- ------- ------- E) Analysis of net claims reserve 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 2001 2002 2003 2004 2005 £000 £000 £000 £000 £000Underwriting year: 2000 3,923 6,188 5,176 1,480 370 2001 - 2,490 7,938 2,967 5,043 2002 - - 2,975 3,229 5,166 2003 - - - 1,513 4,622 2004 - - - - 2,076 ------- ------- ------- ------- -------Total net release 3,923 8,678 16,089 9,189 17,277 Net premium revenue 84,135 81,336 79,327 107,501 139,454Release as % of net premium revenue 4.7% 10.7% 20.3% 8.5% 12.4% F) Reconciliation of movement in net claims reserve: 31 31 December December 2005 2004 £000 £000Net claims reserve at start of period 98,120 75,549Net claims incurred 97,325 71,919Net claims paid (66,814) (49,348) -------- --------Net claims reserve at end of period 128,631 98,120 ======== ======== G) Reconciliation of movement in net unearned premium provision: 31 31 December December 2005 2004 £000 £000 Net unearned premium provision at start of period 51,850 42,614Written in the period 160,244 118,102Earned in the period (140,761) (108,866) -------- --------Net unearned premium provision at end of period 71,333 51,850 ======== ======== 19. Cash and cash equivalents 31 31 December December 2005 2004 £000 £000 Cash at bank and in hand 109,506 88,131Cash on short term deposit 40,646 31,070 -------- --------Total cash and cash equivalents 150,152 119,201 ======== ======== 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. 20. Trade and other receivables 31 31 December December 2005 2004 £000 £000 Trade debtors 6,905 15,105Prepayments and accrued income 2,487 1,634 -------- --------Total trade and other receivables 9,392 16,739 ======== ======== 21. Financial liabilities 31 31 December December 2005 2004 £000 £000 Interest bearing bank loans 22,000 33,122 ======== ========Analysis of borrowings: 31 31 December December 2005 2004 £000 £000 Repayments falling due within 12 months - 11,455Repayments falling due after 12 months 22,000 21,667 -------- -------- 22,000 33,122 ======== ======== During 2005, the Group renegotiated the terms of its debt with Lloyds TSB andBank of Scotland. The new facility is a revolving credit arrangement thatprovides the Group with greater flexibility over use of the funds and alsoattracts lower interest charges. The security (over Group assets and subsidiary shares) that was part of theformer arrangement has also been withdrawn - the new facility is unsecured. Interest continues to be charged on amounts drawn down based on LIBOR plus amargin. 22. Provisions for other liabilities and charges Employee share trust (ESOT) 31 31 December December 2005 2004 £000 £000 Brought forward at start of period - 11,739Utilised in period - (7,287)Released to income statement in period - (4,452) -------- --------Carried forward at end of period - - ======== ======== 23. Trade and other payables 31 31 December December 2005 2004 £000 £000 Trade payables 4,423 3,381Amounts owed to co-insurers and reinsurers 98,054 91,347Finance leases due within 12 months 1,963 1,543Finance leases due after 12 months 886 741Other taxation and social security liabilities 4,174 3,236Other payables 10,066 12,320Accruals and deferred income (see below) 63,369 51,761 -------- --------Total trade and other payables 182,935 164,329 ======== ========Analysis of accruals and deferred income: 31 31 December December 2005 2004 £000 £000 Premium receivable in advance of policy inception 30,471 23,960Accrued expenses 24,559 20,288Deferred income 8,339 7,513 -------- --------Total accruals and deferred income as above 63,369 51,761 ======== ========Analysis of finance lease liabilities: At 31 December 2005 At 31 December 2004 Minimum Interest Principal Minimum Interest Principal lease lease payments payments £000 £000 £000 £000 £000 £000Less than one year 2,171 208 1,963 1,798 255 1,543Between one and five years 921 35 886 877 136 741More than five years - - - - - - ------- ------- ------- ------- ------- ------- 3,092 243 2,849 2,675 391 2,284 ======= ======= ======= ======= ======= ======= 24. Deferred income tax liability 31 31 December December 2005 2004 £000 £000 Brought forward at start of period 4,838 6,366Movement in period (1,288) (1,528) -------- --------Carried forward at end of period 3,550 4,838 ======== ======== The net balance provided at the end of the current year is made up of a grossdeferred tax liability of £3,816,000 (2004: £5,132,000) relating to the taxtreatment of Lloyd's Syndicates, and a deferred tax asset of £266,000 (2004:£294,000) in respect of other timing differences. 25. Share capital 31 31 December December 2005 2004 £000 £000Authorised:500,000,000 ordinary shares of 0.1p 500 500 ======== ========Issued, called up and fully paid:259,861,965 ordinary shares of 0.1p 260 -258,595,400 ordinary shares of 0.1p - 259 -------- -------- 260 259 ======== ======== During 2005, 1,266,565 new ordinary shares of 0.1p were issued to the trustsadministering the Group's share schemes. 581,565 of these were issued to the Admiral Group Share Incentive Plan Trust forthe purposes of this share scheme. These shares are entitled to receivedividends. 685,000 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 2005 2004 £000 £000 SIP charge (note i) 263 -UFSS charge (note ii) 175 -ESOT credit - (4,452)Non executive director option charges - 308 -------- --------Total share scheme charges 438 (4,144) ======== ======== (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 2005 financial year, a maximum of 1,181,565shares will be awarded under this scheme. For maximum awards to be made, the Group's core profit must exceed budget by11.5 per cent. Employees must remain in employment until the vesting date (threeyears from 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 within the Group (excluding executive directors)with variable awards available. Under the scheme, individuals receive an award of free shares at no charge. Atotal of 269 employees received awards under this scheme during June 2005. Staffmust remain in employment until the vesting date (in June 2008) in order for theshares to vest. The maximum number of shares that can be awarded relating to the2005 scheme is 685,000. For an award to vest, the total shareholder return (TSR) of Admiral Group plcshares over the three years 2005 to 2007 must be at least equal to the TSR ofthe FTSE 350 index, of which the Company is a constituent. If the Company's TSRdoes not meet this target, no awards will vest under the 2005 UFSS scheme. If this initial hurdle is overcome, individual awards are calculated based onthe growth in the Company's earnings per share (EPS) relative to a risk freereturn (RFR), for which LIBOR has been selected as a benchmark. This performanceis measured over the same three-year period. 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). As noted in the financial review, the criteria for UFSS awards have been amendedfor the 2006 scheme. Further details are contained in the financial review. Number of free share awards committed at 31 December 2005: Awards outstanding Vesting (*1) date SIP H105 scheme 581,565 September 2008SIP H205 scheme 400,000 March 2009UFSS 2005 scheme 685,000 June 2008 ---------Total awards committed 1,666,565 ========= *1 - being the maximum number of awards expected to be made before accountingfor expected staff attrition. Of the 1,666,565 share awards outstanding above,1,266,565 have been issued to the trusts administering the schemes, and areincluded in the issued share capital figures above. 26. Analysis of movements in capital and reserves Share Share Capital Retained capital premium redemption profit Total account reserve and loss equity £000 £000 £000 £000 £000 At 1 January 2004 - as restated 25 15,746 - 92,395 108,166Retained profit for the period - - - 90,506 90,506Issues of share capital 251 (247) - - 4Share issue expenses - (2,354) - - (2,354)Dividends - - - (51,996) (51,996)Share option charges - - - 308 308Cancellation of shares (17) - 17 - - -------- -------- -------- -------- --------As at 31 December 2004 259 13,145 17 131,213 144,634 Retained 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 ======== ======== ======== ======== ======== 27. Financial commitments The Group was committed to obligations under operating leases on land andbuildings as follows: Operating leases expiring: 31 31 December December 2005 2004 £000 £000 Within one years 434 -Within two to five years 52 509Over five years 2,820 1,465 -------- --------Total commitments 3,306 1,974 ======== ======== In addition, the Group had contracted to spend the following on property, plantand equipment at the end of each period: 31 31 December December 2005 2004 £000 £000 Expenditure contracted to 1,342 373 ======== ======== 28. Related party transactions There were no related party transactions occurring during 2005 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 20%. 29. Non-statutory accounts The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2005 or 2004. Statutoryaccounts for 2004 have been delivered to the registrar of companies and thosefor 2005 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. 30. Annual Report The Company's annual report and accounts for the year ended 31 December 2005 isexpected to be posted to shareholders by 10 April 2006. 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 2004 and 2005 figures below are as stated in the financial statementspreceding this financial summary. Only selected lines from the income statementand balance sheet have been included. Figures for 2001 to 2003 have not been restated under IFRS, although have beenreclassified into the formats used in these financial statements. Income statement --------------- ----------------------- IFRS UK GAAP --------------- ----------------------- 2005 2004 2003 2002 2001 £m £m £m £m £m Total motor premiums 533.6 470.4 371.6 333.0 284.4 ======= ======= ======= ======= ======Net insurance premium revenue 139.5 107.5 79.3 81.4 84.2Other revenue 93.4 69.5 50.8 40.1 35.4Profit commission 14.7 21.7 1.4 - -Investment and interest income 15.5 11.9 6.8 7.4 5.1 ------- ------- ------- ------- -------Net revenue 263.1 210.6 138.3 128.9 124.7Net insurance claims (100.5) (74.3) (43.5) (52.6) (63.9)Total expenses (40.9) (28.9) (34.4) (28.5) (28.4) ------- ------- ------- ------- -------Operating profit 121.7 107.4 60.4 47.8 32.4 ======= ======= ======= ======= =======Balance sheet --------------- ----------------------- IFRS UK GAAP --------------- ----------------------- 2005 2004 2003 2002 2001 £m £m £m £m £m Property, plant and equipment 4.6 3.3 5.8 6.7 7.3Intangible assets 66.5 66.5 62.4 66.3 71.9Financial assets 378.7 300.7 241.6 179.1 164.1Reinsurance assets 54.2 66.1 56.7 53.4 106.4Trade and other receivables 9.4 16.7 12.5 8.9 22.6Cash and cash equivalents 150.2 119.3 70.1 63.0 33.2 ------- ------- ------- ------- -------Total assets 663.6 572.6 449.1 377.4 405.5 ======= ======= ======= ======= ======= Equity 181.4 144.6 108.1 68.9 22.2Insurance contracts 254.1 216.1 174.8 155.1 208.5Financial liabilities 22.0 33.1 35.4 47.8 62.4Provisions for other liabilities and charges - - 11.7 - -Deferred income tax 3.6 4.8 6.4 3.4 -Trade and other payables 182.9 164.3 104.0 98.1 106.9Current tax liabilities 19.6 9.7 8.7 4.1 5.5 ------- ------- ------- ------- -------Total liabilities 663.6 572.6 449.1 377.4 405.5 ======= ======= ======= ======= ======= End. 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