Admiral Regulatory News (ADM)

6 Sep 2005 07:00

Admiral Group PLC06 September 2005 Admiral Group plc Results for the six months ended 30 June 2005 6 September 2005 Admiral Group plc ("Admiral", or "the Group") today announces its results forthe six months ended 30 June 2005. 2005 H1 Highlights • Core profit* up 17% at £56.9 million (2004 H1: £48.6 million) • Group turnover up 19% at £319.3 million (2004 H1: £269.3 million) • Total motor premiums written up 15% at £268.5 million (2004 H1: £233.3 million) • Net income from products and services not underwritten by the Group up 38% at £36.5 million (2004 H1: £26.5 million) • Active customers at period-end up 5% to 1,057,000 from 1,008,000 at 31 December 2004 and up 16% from the 911,000 customers at 30 June 2004 • Underwriting ratios: H1 05 FY 04 H2 04 H1 04 Loss ratio 71.6% 67.0% 69.6% 63.9% Expense ratio 14.9% 15.0% 16.3% 13.6% Combined ratio 86.5% 82.0% 85.8% 77.5% • Interim dividend of 9.7p per share, payable 5 October 2005 - includes special element of 2.9p per share * Core profit is operating profit less charges for staff share schemes andbonuses paid in lieu of dividends. 2004's comparatives exclude £6 million ofprofit commission from Great Lakes accounted for in 2004 but relating topremiums earned in 2003. A reconciliation of this figure to the income statementis set out below. Copies of this statement will be sent to all shareholders and will be availablefrom the registered office and on the corporate website www.admiralgroup.co.uk. Chief Executive's statement Not surprisingly, we're very pleased with our results for the first half of2005. Not only did we make a record core profit (£56.9m) but we did this in anenvironment of declining market profitability. Furthermore, we raised our ratesin this period and yet we were still able to grow our premium income andcustomer numbers. As noted in our recent trading statement, this is still a cyclical market and weare in the poorer part of the cycle. This has been independently reconfirmed byactuarial analysis of the industry's 2004 regulatory returns. There is nothingthat has occurred since our trading statement that leads us to believe that themarket will not be cyclical or that we are anywhere but in the declining part ofthe cycle. We continue to hold the view, however, that the cyclical pattern haschanged and that the cycle will be less volatile and less severe than previouscycles. In the short term, we plan to maintain a significant combined ratio advantageover the market average and continue to grow our book of business. As part ofour longer-term strategy we continue to investigate opportunities for businessoutside the UK. The board has declared a normal interim dividend of 6.8p per share, amounting to£17.5m, 45% of post tax profits. Also, the board has reviewed the amount of cashin the business, as we previously said we would do, and as a result of thisreview the board has decided to declare a special dividend of 2.9p per share,amounting to £7.5m, making the total interim dividend £25m, 9.7p per share. Financial review Key financial highlights Core profit increased by 17% from £48.6m in H1 2004 to £56.9m. Core profit isused by the directors to measure the underlying profitability of the Group, anda reconciliation of this measure to the income statement is set out later inthis section. Core profit is split into three to reflect the key components ofthe Group's business: Analysis of core profit Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Underwriting profit 14,730 14,452 27,969Profit commission (*1) 5,666 7,732 15,679Net other income 36,476 26,462 56,916 ------- ------- -------Core profit 56,872 48,646 100,564 ------- ------- ------- *1: 2004 comparatives both adjusted to deduct £5,994,000 of profit commissionrecognised in the 2004 results, but relating to premium earned in 2003. As shown below, the Group increased turnover by 19% in H1 2005, from £269.3m to£319.3m. All components of turnover achieved double-digit growth and arereviewed in more detail below. Analysis of Group turnover Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Total premiums written 268,462 233,297 470,400Gross other income 44,769 33,180 69,457Net investment return 6,087 2,792 8,135 ------- ------- -------Group turnover 319,318 269,269 547,992 ------- ------- ------- Underwriting business review Underwriting structure The Group's underwriting structure is as follows: 65% of the business continues to be taken by Great Lakes under the long-termco-insurance contract. 35% of the business is underwritten by the Group through Admiral Insurance(Gibraltar) Limited and Admiral Insurance Company Limited. 10% (of the totalbusiness) is ceded via quota share contracts that qualify for deductions inrequired solvency capital. Of the 10%, 5% is ceded to Axis Re under a contract covering 2005 and 2006 and5% is ceded to Gen Re for 2005 only. In accordance with accounting guidelines, the Gen Re contract has not beenaccounted for as reinsurance in the financial statements. This has the effect(for contracts incepted in 2005 only) of grossing-up premiums and claimsretained by the Group to a net 30%. Underwriting results As reported previously, The Group decreased the rate of total premium growthduring H1 2005 by implementing premium rate increases. In line with plans, totalpremiums written increased by 15% to £268.5m, with average premium rates around3% higher than at the end of 2004. Market premium rates in the first half of theyear were broadly flat. The closing policy-count (being the number of active policies on risk) at theend of June 2005 was 1,057,000, up 5% from 1,008,000 at December 2004 and 16% onthe 911,000 policies at the end of June 2004. The loss ratio for the half-year (excluding claims handling costs) was 71.6%,compared to 69.6% in the second half of 2004 and 67.0% in the full financialyear. Back year claims reserve releases included in the income statement amount to£5.2m, or 8.1% of net premium revenue. This compares to £5.2m in H1 2004 (10.3%of net premium revenue) and £9.2m for the full 2004 year (8.5% of net premium revenue). A table analysing historical reserve release patterns is set out in note 18 below. The H1 2005 expense ratio (including claims handling expenses) was 14.9%, upfrom 13.6% in H1 2004 and consistent with 15.0% in the full year. The Group's combined ratio, being the aggregate of the loss and expense ratiosequated to 86.5% in H1 2005, compared to 77.5% in the first half of 2004 and82.0% for the full year. For comparison, analysis of insurers' regulatoryreturns shows the private motor market's combined ratio for 2004 was over 100%. Profit commission The Group continues to earn profit commission from both the co-insurance andreinsurance contracts to which it is party. Amounts recognised: Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Total profit commission recognised 5,666 13,725 21,673Great Lakes 2003 adjustment - (5,993) (5,994) ------ ------- -------Adjusted profit commission 5,666 7,732 15,679 ====== ======= ======= The amounts recognised in the 2005 year to date are lower than for thecomparative period due to the higher loss ratio on the more recent underwritingyears, reflecting the development of the cycle. Net other income This can be further analysed as follows: Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Ancillary contribution 29,630 23,491 48,493Instalment income 1,657 1,210 2,603Gladiator Commercial contribution 900 773 1,756Net Inspop.com Limited contribution 2,314 (140) 1,283Interest receivable 2,268 1,242 3,348Other Group overheads (293) (114) (567) ------- ------- -------Net other income 36,476 26,462 56,916 ------- ------- ------- Ancillary contribution continues to comprise the bulk of this source of profit,showing an increase of 26% between half-years from £23.5m to £29.6m. Grossancillary revenue per policy sold was £56 in the first-half of 2005, compared to£50 in the equivalent period last year and £51 for the full year 2004. Financial investments and cash Total cash plus financial investments can be broken down as follows: Period end: June 2005 June 2004 Dec 2004Liquid funds in underwriting companies: £000 £000 £000 Government and sovereign bond holdings 68,188 20,329 42,980Corporate bonds and similar instruments 179,330 117,263 160,438Deposits with credit institutions 21,799 25,862 31,070Cash at bank 46,711 51,109 38,035 ------- ------- ------- 316,028 214,563 272,523Liquid funds held outside underwriting companies: Cash at bank 50,666 57,718 50,096 ------- ------- ------- 366,694 272,281 322,619 ------- ------- ------- The Group has increased its total cash plus invested funds by 14% since the endof 2004 and by 35% since the end of the equivalent six-month period in 2004.This is after distributions to shareholders of £37.8m in the second half of 2004and £24.0m in 2005 to date. The Group's net investment return rose sharply in the first half of 2005 - up by118% from £2.8m in H1 2004 to £6.1m in H1 2005 (£8.1m in the full year 2004).The increase reflected the positive impact on fixed income securities resultingfrom changes in the market's view of future interest rates. There have been no changes to the Group's investment strategy, with fundscontinuing to be invested in government and high quality corporate bonds. Dividends The directors have declared an interim dividend of 9.7p per share. This figureincludes a regular interim dividend (based on the established policy ofdistributing a minimum of 45% of post-tax profits) of 6.8p along with a specialelement of 2.9p per share, reflecting surplus cash available at the balancesheet date. The dividend is payable on 5 October 2005, the ex-dividend date being 14September 2005 and the record date 16 September 2005. International financial reporting standards (IFRS) These interim financial statements are the first results published by the Groupunder IFRS. As noted in the 2004 Annual Report, the only significant impacts onthe income statement are the cessation of goodwill amortisation, the valuationof financial investments at bid as opposed to mid-market price, and theinclusion of dividends in the retained profits of the period in which they weredeclared as opposed to allocated. A section of the financial statements (note 3) is devoted to explaining thetransition and includes reconciliations of profit and equity for the 2004comparative periods included in the financial statements. The changes have no impact on the Group's ability to pay dividends. Reconciliation of profit before tax to core profit Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Profit before tax 55,587 54,654 104,906Add back: bonuses paid in lieu of dividends - 3,361 3,345Add back / (deduct) share scheme charges 125 (4,602) (4,144)Add back: finance charges 1,160 1,227 2,451Deduct: 2003 profit commission adjustment - (5,994) (5,994) ------- ------- -------Core profit 56,872 48,646 100,564 ------- ------- ------- Reconciliation of loss ratios reported: Six months to Year ended June 2005 June 2004 Dec 2004 £000 £000 £000 Net insurance claims from income statement 47,294 33,357 74,272Deduct; claims handling costs (*1) (1,611) (1,400) (2,352) ------- ------- ------- Adjusted net insurance claims 45,683 31,957 71,920Net premium revenue 63,833 50,049 107,501Loss ratio 71.6% 63.9% 67.0% ------- ------- ------- *1 Claims handling costs are allocated to insurance related expenses incalculating ratios Consolidated income statement 6 months ended Year ended 30 June 2005 30 June 2004 31 December 2004 Note £000 £000 £000 Insurance premium revenue 84,865 70,787 151,864Insurance premium ceded to reinsurers (21,032) (20,738) (44,363) --------- --------- ---------Net insurance premium revenue 4 63,833 50,049 107,501 Other revenue 7 44,769 33,180 69,457Investment and interest income 6 8,355 4,411 11,884Profit commission 5 5,666 13,725 21,673 --------- --------- --------- Net revenue 122,623 101,365 210,515 Insurance claims and claims handling expenses (61,334) (45,845) (102,604)Insurance claims and claims handling expenses recovered from reinsurers 14,040 12,488 28,332 --------- --------- ---------Net insurance claims (47,294) (33,357) (74,272) Total operating expenses 8 (18,457) (16,729) (33,030)Share scheme charges 25 (125) 4,602 4,144 --------- --------- ---------Total expenses (65,876) (45,484) (103,158) Operating profit 56,747 55,881 107,357 Finance charges 11 (1,160) (1,227) (2,451) --------- --------- --------- Profit before tax 9 55,587 54,654 104,906 Taxation expense 12 (16,316) (16,601) (14,400) --------- --------- ---------Profit after tax attributable to equity holders of the Company 39,271 38,053 90,506 ========= ========= ========= Dividends declared (total) 13 24,049 14,179 51,996Dividends declared (per share) 13 9.3p 5.5p 20.1p Earnings per share: 14Basic 15.2p 14.7p 35.0p ========= ========= ========= Diluted 15.1p 14.7p 35.0p ========= ========= ========= All results relate to continuing operations. Refer to notes 1 and 3 for an explanation of the transition from UK GAAP toIFRS. Also refer to basis of preparation and significant accounting policies sectionsbelow. Consolidated balance sheet As at: 30 June 2005 30 June 2004 31 December 2004 Note £000 £000 £000ASSETS Property, plant andequipment 15 2,986 3,625 3,349Intangible assets 16 66,754 66,749 66,467Financial assets 17 366,875 234,240 300,722Reinsurance assets 18 60,699 61,338 66,137Trade and other receivables 20 29,604 27,081 16,739Cash and cash equivalents 19 119,176 134,689 119,201 --------- --------- --------- Total assets 646,094 527,722 572,615 ========= ========= ========= EQUITY Share capital 25 259 25 259Retained earnings 26 146,435 116,269 131,213Other reserves 26 13,519 15,746 13,162 --------- --------- --------- Total equity 160,213 132,040 144,634 ========= ========= ========= LIABILITIES Insurance contracts 18 241,628 195,255 216,107Financial liabilities 21 29,471 33,072 33,122Provisions for other liabilities and charges 22 - 7,137 -Trade and other payables 23 190,066 137,133 164,329Deferred income tax 24 6,377 2,073 4,838Corporation tax liabilities 18,339 21,012 9,585 --------- --------- --------- Total liabilities 485,881 395,682 427,981 ========= ========= ========= Total equity and totalliabilities 646,094 527,722 572,615 ========= ========= ========= Refer to notes 1 and 3 for an explanation of the transition from UK GAAP toIFRS. Also refer to basis of preparation and significant accounting policies sectionsbelow. Consolidated statement of recognised income and expense No separate consolidated statement of recognised income and expense has beenprepared as all recognised income and expenses are included in the incomestatement above. Consolidated cash flow statement 6 months ended Year ended 30 June 2005 30 June 2004 31 December 2004 Note £000 £000 £000Cash flows from operating activities, before movements in investments 27 77,904 61,869 160,870Net cashflow into investments held at fair value 27 (41,624) 5,904 (59,154) --------- --------- ---------Cash flows from operating activities, net of movements in investments 27 36,280 67,773 101,716Interest payments (1,144) (1,244) (2,423)Taxation payments (6,023) (8,600) (15,060) --------- --------- ---------Net cash flow from operating activities 29,113 57,929 84,233 Cash flows from investing activities: Purchases of property, plant and equipment and software (1,333) (740) (1,394)Proceeds from sales of property, plant and equipment 8 10 16 --------- --------- ---------Net cash used in investing activities (1,325) (730) (1,378) Cash flows from financing activities: Issue of shares - - -Repayments of borrowings (3,667) (2,333) (2,333)Repayment of finance lease liabilities (97) (537) (1,510)Payments of transaction expenses - - (2,354)Equity dividends paid (24,049) (14,179) (51,996) --------- --------- ---------Net cash used in financing activities (27,813) (17,049) (58,193) --------- --------- ---------Net (decrease) / increase in cash and cash equivalents (25) 40,150 24,662 Cash and cash equivalents at 1 January 119,201 94,539 94,539Cash and cash equivalents at end of period 119,176 134,689 119,201 ========= ========= ========= Refer to notes 1 and 3 for an explanation of the transition from UK GAAP toIFRS. Also refer to basis of preparation and significant accounting policies sectionsbelow. Notes to the interim financial statements 1. General information and basis of preparation Admiral Group plc is a Company domiciled in the United Kingdom. Its registeredoffice is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares arelisted on the London Stock Exchange. The interim financial statements comprise the results and balances of theCompany and its subsidiaries (the Group) for the two six month periods ended 30June 2004 and 2005 and also the year ended 31 December 2004. EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the Company, for the year ended 31 December 2005, beprepared in accordance with International Financial Reporting Standards (IFRS)adopted for use in the EU (adopted IFRS). This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areendorsed by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005, the Group's first annual reporting date atwhich it is required to use adopted IFRS. Based on these adopted and unadopted IFRSs, the directors have made assumptionsabout the accounting policies expected to be applied, which are as set outbelow, when the first annual IFRS financial statements are prepared for the yearended 31 December 2005. In particular, the directors have assumed that theAmendment to IAS 39 (The Fair Value Option) issued by the InternationalAccounting Standards Board will be adopted by the EU in sufficient time that itwill be available for use in the annual IFRS financial statements for the yearended 31 December 2005: In addition, the adopted IFRS that will be effective (or available for earlyadoption) in the annual financial statements for the year ended 31 December 2005are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ended 31 December 2005. The comparative figures for the financial year ended 31 December 2004 are notthe Company's statutory accounts for that financial year. Those accounts, whichwere prepared under UK Generally Accepted Accounting Practices (UK GAAP), havebeen reported on by the Company's auditors and delivered to the registrar ofcompanies. The report of the auditors was unqualified and did not containstatements under section 237(2) or (3) of the Companies Act 1985. The financial statements have also been prepared under the historical costaccounting convention, as modified for the revaluation of certain financialassets at fair value. An explanation of the impact of the transition to IFRS is set out in note 3.This includes reconciliations of the following: - profit for the 6 months ended 30 June 2004 and year ended 31 December 2004 under previous GAAP to the comparative figures stated in the consolidated income statement above reported under IFRS- equity as at 1 January 2004, 30 June 2004 and 31 December 2004 from previous GAAP to the comparatives included in the consolidated balance sheet above reported under IFRS The preparation of financial statements involves the use of certain criticalaccounting estimates. Actual results may differ from these estimates. 2. Significant accounting policies a) Consolidation 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. b) Intangible assets A) 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. Goodwill is stated at cost less any accumulated impairment losses. Goodwill isallocated to cash generating units (CGU's) and is no longer amortised, but 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. The recoverable amount is the greater of the net realisable value and the valuein use of the CGU. B) 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. C) 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. c) 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. d) 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. e) Financial assets - investments The Group's investments in quoted fixed income and other debt securities areclassified as financial assets at fair value (based on closing bid prices on thebalance sheet date, or the last trading day before the balance sheet date). Changes in the fair value of these investments are recognised through the incomestatement. f) Revenue recognition A) Premiums Premiums relating to insurance contracts are recognised as revenueproportionally over the period of cover. The proportion of premium receivable onin-force policies relating to unexpired risks is reported in insurance contractliabilities and reinsurance assets as the unearned premium provision - gross andreinsurers' share respectively. B) Other income Income earned on the sale of ancillary products is credited to income over theperiod matching the Group's obligations to provide services. Where the Group hasno remaining contractual obligations, the income is recognised immediately. Aprovision is made for expected cancellations where the customer may be entitledto a refund of ancillary amounts charged. Instalment income is credited to income in line with the earning of the motorpremium to which the instalment income relates. Provision is made for expectedcancellations. Commission from broking activities is credited to income on the sale of theunderlying insurance policy having regard to the profile of services provided. C) Profit commission Under some of the co-insurance and reinsurance contracts to which the Group isparty, profit commission may be earned on a particular year of account, which isusually subject to performance criteria such as loss ratios and expense ratios.The commission is dependent on the ultimate outcome of any year, with commissionbeing recognised based on loss and expense ratios used in the preparation of thefinancial statements. Income is allocated to profit commission in the income statement when the rightto consideration is achieved, and is capable of reliable measurement. g) 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. h) Reinsurance contracts 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. i) Employee benefits A) 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. B) 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) areincluded in assumptions over the number of free shares to vest under theapplicable 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. j) Taxation Income tax on the profit or loss for the periods presented comprises current anddeferred tax. A) 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. B) 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. 3. Explanation of the transition to IFRS As stated in note 1, these are the first financial statements prepared by theGroup under IFRS and the accounting policies detailed in note 2 have beenapplied in preparing the financial statements, comparative data and the IFRStransition balance sheet at 1 January 2004. An explanation of the impact of the transition from UK GAAP to IFRS is set outin the following reconciliations and notes. A) Reconciliation of equity There is no difference in equity reported on the transition balance sheet (i.e.at 1 January 2004) under IFRS and that under previous (UK) GAAP. The following tables contain summaries of the differences in the balance sheetsat 30 June 2004 and 31 December 2004: (all £000) At 30 June 2004 Note UK GAAP Impact IFRSASSETS Property, plant and equipment 3,625 - 3,625Intangible assets (i) 64,796 1,953 66,749Financial assets 234,240 - 234,240Reinsurance assets 61,338 - 61,338Trade and other receivables 27,081 - 27,081Cash and cash equivalents 134,689 - 134,689 -------- -------- -------- Total assets 525,769 1,953 527,722 ======== ======== ======== EQUITY Share capital 25 - 25Retained earnings (ii) 76,499 39,770 116,269Other reserves 15,746 - 15,746 -------- -------- -------- Total equity 92,270 39,770 132,040 ======== ======== ======== LIABILITIES Insurance contracts 195,255 - 195,255Financial liabilities 33,072 - 33,072Provisions for other liabilities and charges 7,137 - 7,137Trade and other payables (iii) 174,950 (37,817) 137,133Deferred income tax 2,073 - 2,073Corporation tax liabilities 21,012 - 21,012 -------- -------- -------- Total liabilities 433,499 (37,817) 395,682 ======== ======== ======== Total equity and total liabilities 525,769 1,953 527,722 ======== ======== ======== (all £000) At 31 December 2004 Note UK GAAP Impact IFRSASSETS Property, plant and equipment 3,349 - 3,349Intangible assets (i) 62,561 3,906 66,467Financial assets 300,722 - 300,722Reinsurance assets 66,137 - 66,137Trade and other receivables 16,739 - 16,739Cash and cash equivalents 119,201 - 119,201 -------- -------- -------- Total assets 568,709 3,906 572,615 ======== ======== ======== EQUITY Share capital 259 - 259Retained earnings (ii) 103,258 27,955 131,213Other reserves 13,162 - 13,162 -------- -------- -------- Total equity 116,679 27,955 144,634 ======== ======== ======== LIABILITIES Insurance contracts 216,107 - 216,107Financial liabilities 33,122 - 33,122Provisions for other liabilities and charges - - - Trade and other payables (iii) 188,378 (24,049) 164,329Deferred income tax 4,838 - 4,838Corporation tax liabilities 9,585 - 9,585 -------- -------- -------- Total liabilities 452,030 (24,049) 427,981 ======== ======== ======== Total equity and total liabilities 568,709 3,906 572,615 ======== ======== ======== Notes on table A: (i) Intangible assets The adjustments to goodwill at both balance sheet dates relate to reinstatinggoodwill to the balance standing at the transition balance sheet date asrequired under the transition provisions of IFRS 3 (Business Combinations). (ii) Retained earnings The following table sets out the reconciling items to retained earnings: 30 June 31 December 2004 2004 £000 £000 Retained earnings under UK GAAP 76,499 103,258 Reinstatement of goodwill (see note (i) above) 1,953 3,906Elimination of dividend liability (see note (iii) below) 37,817 24,049 -------- -------- Retained earnings under IFRS 116,269 131,213 ======== ======== (iii) Trade and other payables The adjustments to this balance relate to the elimination of dividends for whichliabilities had been recognised under UK GAAP. Under IAS 10 (Events after thebalance sheet date) liabilities for dividends are only recognised when thedividends are declared. At both balance sheet dates above, liabilities had beenrecognised for dividends declared after the balance sheet date. Theseliabilities have been eliminated. B) Reconciliation of profit for 2004 comparatives The following tables reconcile the differences in profit after tax (but beforedistributions to equity shareholders), for the six months to 30 June 2004 andthe year ended 31 December 2004: (all £000) Six months ended 30 June 2004 Note UK GAAP Impact IFRS Insurance premium revenue 70,787 - 70,787Insurance premium ceded to reinsurers (20,738) - (20,738) -------- -------- --------Net insurance premium revenue 50,049 - 50,049 Other revenue 33,180 - 33,180Profit commission 13,725 - 13,725Investment and interest income 4,411 - 4,411 -------- -------- --------Net revenue 101,365 - 101,365 Insurance claims and claims handling expenses (45,845) - (45,845)Insurance claims and claims handling expenses recovered from reinsurers 12,488 - 12,488 -------- -------- --------Net insurance claims (33,357) - (33,357) Total operating expenses (i) (18,682) 1,953 (16,729)Share scheme charges 4,602 - 4,602 -------- -------- --------Total expenses (47,437) 1,953 (45,484) Operating profit 53,928 1,953 55,881 Finance charges (1,227) - (1,227) -------- -------- --------Profit before tax 52,701 1,953 54,654 Taxation expense (16,601) - (16,601) -------- -------- --------Profit after tax attributable to equity holders of the Company 36,100 1,953 38,053 ======== ======== ======== (all £000) Year ended 31 December 2004 Note UK GAAP Impact IFRS Insurance premium revenue 151,864 - 151,864Insurance premium ceded to reinsurers (44,363) - (44,363) -------- -------- --------Net insurance premium revenue 107,501 - 107,501 Other revenue 69,457 - 69,457Profit commission 21,673 - 21,673Investment and interest income 11,884 - 11,884 -------- -------- --------Net revenue 210,515 - 210,515 Insurance claims and claims handling expenses (102,604) - (102,604)Insurance claims and claims handling expenses recovered from reinsurers 28,332 - 28,332 -------- -------- --------Net insurance claims (74,272) - (74,272) Total operating expenses (i) (36,936) 3,906 (33,030)Share scheme charges 4,144 - 4,144 -------- -------- --------Total expenses (107,064) 3,906 (103,158) Operating profit 103,451 3,906 107,357 Finance charges (2,451) - (2,451) -------- -------- --------Profit before tax 101,000 3,906 104,906 Taxation expense (14,400) - (14,400) -------- -------- --------Profit after tax attributable to equity holders of the Company 86,600 3,906 90,506 ======== ======== ======== Notes on table B: (i) Other operating expenses Both adjustments relate solely to the reinstatement of goodwill to thetransition date balance. Refer to the reconciliation of equity above. 4. Net insurance premium revenue 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Total motor insurance premiums written (*1) 268,462 233,297 470,400 ======== ======== ======== Group gross premiums written 93,962 82,362 165,343Outwards reinsurance premiums (14,075) (24,453) (48,606) -------- -------- --------Net premiums written 79,887 57,909 116,737 Change in gross unearned premium provision (9,097) (11,575) (13,479)Change in reinsurers' share of unearned premium provision (6,957) 3,715 4,243 -------- -------- --------Net insurance premium revenue 63,833 50,049 107,501 ======== ======== ======== *1 = before co-insurance and reinsurance 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. Profit commission 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Total profit commission 5,666 13,725 21,673 ======== ======== ======== As reported in the 2004 Annual Report, both 2004 comparative figures aboveinclude £5,994,000 attributable to premiums earned in the year to 31 December2003. 6. Investment and interest income 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Net investment return 6,087 3,169 8,536Interest receivable 2,268 1,242 3,348 -------- -------- --------Total investment and interest income 8,355 4,411 11,884 ======== ======== ======== 7. Other revenue 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Ancillary revenue (*1) 35,954 28,699 59,175Instalment income earned 1,657 1,210 2,603Revenue from Gladiator Commercial 2,544 2,141 4,475Revenue from Inspop.com Limited (*2) 4,614 1,130 3,204 -------- -------- --------Total other revenue 44,769 33,180 69,457 ======== ======== ======== *1 Ancillary revenue: Ancillary revenue primarily constitutes commission from sales of insuranceproducts that complement the motor policy, but which are underwritten byexternal parties. It also includes revenue not earned from product sales, mainlyadministrative fees. *2 = Net of intra-group consolidation adjustments. 8. Total operating expenses 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Net expenses related to insurance contracts: Administrative expenses 29,689 25,195 55,827Expenses recovered from co-insurers (24,354) (21,223) (45,098)Gross acquisition costs payable 4,331 4,215 8,464Movement in deferred acquisition costs (117) (591) (688)Expense contributions from reinsurers (1,653) (2,189) (4,709) -------- -------- --------Net expenses related to insurance contracts 7,896 5,407 13,796 Other operating expenses: Special unit-holder bonus - 3,361 3,345Expenses associated with ancillary sales 6,324 5,208 10,682Gladiator Commercial operations expenses 1,644 1,368 2,719Inspop.com Limited operating expenses 2,300 1,270 1,921Other expenses 293 115 567 -------- -------- --------Total other operating expenses 10,561 11,322 19,234 -------- -------- --------Total operating expenses 18,457 16,729 33,030 ======== ======== ======== 9. Profit before taxation Profit before taxation is stated after charging: 30 30 31 June June December 2005 2004 2004 £000 £000 £000Depreciation charge:- Owned assets 465 443 915- Leased assets 878 829 1,641Operating lease rentals:- Buildings 1,377 756 1,574Auditor's remuneration:- Statutory audit fees 110 80 160- Other audit fees - - 16- Other services 84 37 116Loss on disposal of property, plant and equipment 504 4 4 ======== ======== ========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 expenses Analysis of staff expenses: 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Salaries 14,166 13,262 29,046Social security charges 1,314 1,164 2,406Pension costs 226 181 399Share scheme charges (*1) (see note 25) 357 - 308ESOT credit (see note 25) - (4,602) (4,452) -------- -------- --------Total staff expenses 16,063 10,005 27,707 ======== ======== ======== *1 The share scheme charge stated here differs from that included in the incomestatement. This is because an element of the gross cost is recharged and the netamount is shown in the income statement. 11. Finance charges 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Term loan interest 896 990 2,020Finance lease interest 154 144 256Letter of credit charges 110 93 175 -------- -------- --------Total finance charges 1,160 1,227 2,451 ======== ======== ======== 12. Taxation 30 30 31 June June December 2005 2004 2004 £000 £000 £000UK Corporation tax:Current charge at 30% 14,777 20,894 31,342Tax relief in respect of ESOT share provision - - (16,985)Under provision relating to prior periods - corporation tax - - 1,571 -------- -------- --------Current tax charge 14,777 20,894 15,928 Deferred tax:Current period deferred taxation movement 1,539 (4,293) (651)(Over) provision relating to prior periods - deferred tax - - (877) -------- -------- --------Total tax charge per income statement 16,316 16,601 14,400 ======== ======== ======== Factors affecting the tax charge are: 30 30 31 June June December 2005 2004 2004 £000 £000 £000 Profit on ordinary activities before taxation 55,587 54,654 104,906 Corporation tax thereon at 30% 16,676 16,396 31,472