A year of successA year of successAnnual Report 2005

www.admiralgroup.co.uk

Annual Report 2005

Registered Number: 03849958. Admiral Group plc, Capital Tower, Greyfriars Road, Cardiff CF10 3AZ

ADMIRAL GROUP plc

 DIRECTORS AND ADVISORS

Directors and advisors
Directors
Alastair Lyons CBE (Non-executive Chairman)
Henry Engelhardt (Chief Executive)
Kevin Chidwick (Finance Director, appointed 4 September 2006)
David Stevens (Chief Operating Officer)
Manfred Aldag (Non-executive Director)
Martin Jackson (Non-executive Director)
Keith James OBE (Non-executive Director)
Margaret Johnson (Non-executive Director, appointed 4 September 2006)
Lucy Kellaway (Non-executive Director, appointed 4 September 2006)
John Sussens (Senior Independent Non-executive Director)

Company Secretary
Stuart Clarke

Registered Office
Capital Tower
Greyfriars Road
Cardiff CF10 3AZ

AuditorActuarial advisors

KPMG Audit Plc
Marlborough House
Fitzalan Court
Cardiff CF24 0TE

Ernst & Young
1 More Place
London SE1 2AF

Bankers
Lloyds TSB Bank Plc
City Office
Bailey Drive
Gillingham Business Park
Kent ME08 0LS

Bank of Scotland
Corporate Banking
55 Temple Row
Birmingham B2 5LS

HSBC Business Banking
97 Bute Street
Cardiff CF10 5NA

Joint Corporate Brokers
Merrill Lynch International
2 King Edward Street
London EC1A 1HQ

Citigroup Financial Markets
UK Equity Limited
Citigroup Centre
33 Canada Square
London E14 5LB

Registrar

Solicitor

Capita IRG Plc
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU

Norton Rose
Kempson House
Camomile Street
London EC3A 7AN

Notes

ADMIRAL GROUP plc Contents
6-7

Chairman’s statement

8-17

Chief Executive’s statement

18-27

Financial review

28-34

Corporate governance

35-39

Remuneration report

41-45

Corporate responsibility

46-47

The Board of Directors

48-97

Financial statements OUR BRANDS

Our brands
The Group’s first brand, set up in 1993 – mainly targeting
those who traditionally pay higher than average premiums,
including drivers under-35 and those living in big cities.
www.admiral.com

Balumba is the Group’s first overseas brand and launchedin Spain in 2006. www.balumba.es

Bell was set up in 1997 – its main target market being
drivers with zero or low no claims bonus. www.bell.co.uk

Confused.com is an intelligent, automated car insurance
shopper. Customers input their details once, and receive
quotes from major car insurance websites.
www.confused.com

Diamond was created for women in response to a needin the market place for insurance specifically for young
women drivers, which is not only good value, but also as
hassle free as possible. www.diamond.co.uk

Elephant.co.uk is the Group’s main online car insurance
service. Elephant passes on cost savings generated bybeing an online brand to customers in the form of lower
premiums. www.elephant.co.uk

Gladiator is the Group’s commercial vehicle insurance
broker that was launched in April 1998. The Company acts
on behalf of several of the largest commercial vehicle
insurers in the UK. www.gladiator.com

0.35
90

0.30
ADMIRAL GROUP plc 

0.25

60

0.20
30

0.15
0.10

0

Financial highlights
Profit before tax

0.05
0.00

Full year dividend
£0.40

150

1500

800
700
120

£Millions

600
90
500

400

£147.3m

60£119.5m

300
200
30

Full year dividend per share

£0.35

0

2006

60

£0.20 400

£708.2£0.361£638.4£0.246£0.10 20020£0.05 100

0.35
1,200
0.30
900
0.25

0.20
600

0.15

1,141.0

2006

2005

39.8p

32.7p

0

0

2006

2005

0.00

Earnings per share
£0.40

£0.35

£0.35
80%

£0.30
£0.25

60%

£0.20

£0.20

£0.15 40%87.3%
£0.36184.9%£0.246

£0.15
£0.10

20%

£0.05

£

1,284.7300
0.10£0.40 100%

£0.00

2005

0.05

0

Combined ratios

Full year dividend per share

Closing active vehicles (000s)£0.25 500
£Millions

Full year dividend per share£0.30 600
80

£0.10

2006

300

0.40

£0.35 700

£0.25

24.6p

1,500

100

£0.30

36.1p

£0.10

Closing active vehicles£0.40 800

£

£0.15
600

0

2005

Group turnover1

£0.00

900

£0.20

£0.00

0

40

£0.25

£0.05

100

£0.15 300

1200
£0.30

£0.05
0%

2006 2006

2005 2005

£0.00

2006

2005

EPS = 39.8P

EPS = 32.7P

1Group turnover includes total premiums, other revenue plus net investment return.
Total premiums comprise gross motor insurance premiums written by the Group, before co-insurance and reinsurance.

 C h airman ’ s S tat e m e n t

Chairman’s statement“

This year we will
distribute in total£93.7m, 47% up
on 2005”

2006 was a year when we not only
continued to develop our direct
UK private motor business but
also moved forward significantly
our outlined strategy to identify
profitable opportunities that exploit
the knowledge, skills, and resources
attaching to that core business.

Alastair Lyons CBE

Confused, our intelligent automatedcar insurance shopper, handled anamazing 9 million quotes contributing£23m to pre-tax profits, up from £9m
in 2005. We estimate that Confused
now accounts for approaching 30% of
the on-line UK private motor market.
At the end of October, as planned,
we launched Balumba, our on-line
Spanish motor insurer, the first leg of
our overseas expansion, and plans are
already well developed to launch inGermany towards the end of this year.
With the 2006 motor market remaining
in the poor part of the cycle we set
ourselves modest growth ambitions,finishing the year with 1.3 million
insured vehicles, 13% up on December
2005. However, continuing strong
ancillary income, tight control of
expenses, and the contribution from
Confused allowed pre-tax profits tomove 23% ahead to £147m despite
underwriting profits being behind lastyear on a 6% growth in total premiums.
Proportional support by Munich
Re and other leading reinsurers has
underpinned Admiral’s strategy since
the Group’s formation in late 1999.
It has allowed us to combine rapid
growth with strong cash generationand significant dividend payments. In
addition, it has helped us to deliver

to our shareholders a higher quality,
lower risk profit stream by providing amaterial level of protection against thecycle. The extension in December 2006
to the end of 2014 of our long-termco-insurance agreement with Munich
Re therefore represents a significant
milestone in the development of ourbusiness.
The new agreement is both more
flexible and, for 2010 onwards,
potentially materially more profitable.
The progressive reduction in theshare of our underwriting committed
to Munich Re makes it possible for
Admiral, should we so choose, to keepfor our own account a larger share of
the premium written, this increasing
progressively to as much as 60% by
2011. Munich Re has been a fantastic
partner and we look forward to a longand mutually beneficial relationship in
the years to come. We are also pleased
to deepen our reinsurance relationships
with Swiss Re and Partner Re, withwhom we entered into quota-sharecontracts at the same time.
We have maintained our approach of
considering dividends in two parts.
The first element, being the normal
dividend, is based on a 45% pay-out
ratio. The second element - the special
dividend - derives from our principleof returning to shareholders available
surpluses, calculated as the Group’s net
assets less three specific elements - its
required solvency; cover against any
specific expansion plans, being at thisyear-end £5m in respect of overseas;
and a prudent margin - currently £25m
- against contingencies.

This year we will distribute in total£93.7m, 47% up on 2005, in partreflecting the release of £13.5m of the£23.5m funds previously held at Lloyd’s.
We are retaining the balance whilst we
see how the cycle develops during 2007.
We will then decide the level of growth
appropriate for 2008 and whether or not
to take back 5% of the underwriting risk
at the end of this year during which weare only carrying 22.5% ourselves.
Going forward we would anticipate
maintaining this approach to dividend
distribution. We will be looking to add
subordinated debt to our available
solvency capital so that we have thecapacity in future years to increase,should it be appropriate, the share of
our motor book that we underwrite
ourselves without materially restricting
our ability to return trading surpluses toshareholders in the form of dividends.
Our total dividends for the year at
36.1p per share (24.0p final : 12.1p
interim) represent a yield of 3.6%
based on the closing share price on
1 March 2007. Admiral’s share pricehas again sustained material growthover the last year, the business being
valued at £2.7Bn on 1 March 2007, 76%
higher than a year previous. We led
the FTSE350 as the Company with thegreatest percentage gain in share priceduring 2006. Taking dividends and shareappreciation together, we achieveda 151% total return for shareholders
during 2006, itself part of an overall
318% since flotation in September 2004.
Alignment of the interests of ourstaff and our shareholders is one of
our core principles. Our Approvedand Executive Share Schemes aredesigned to strengthen that alignment
over time. We are delighted thatstrong out-performance against ourplan during 2006 resulted in eligible
employees realising the maximum
award of £3,000 free shares under

our Approved Scheme. The Executive
Share Scheme is based on growth inearnings per share over three years andwill, therefore, first vest after the 2007
financial year. Our being placed, for theseventh consecutive year, amongst the
Sunday Times Top 100 Companies To
Work For in the UK is testament to thestrength of Admiral’s relationship with
its employees.
The Company is also closely involved
with the communities within which ourstaff live and work. We encourage them
to be associated with the local projects
that are important to both them andtheir families, and during 2006 provided
financial support to 109 such projects.
Admiral also sponsored a number ofhigh profile local events within South
Wales, more details of which will
be found in the report on corporate
responsibility. This also describes thesteps we take to minimise the impactof our operations on the environment.
In September last year we said
goodbye to Andrew Probert who had
been the Group’s Finance Director
for fourteen years, over which period
he made an enormous contribution
to our successful growth, taking theCompany through both managementbuy-out and flotation. His clear
thinking, straightforwardness, energy
and consistent good humour will bemuch missed. His place on our Board
has been taken by Kevin Chidwick whojoined Admiral in September 2005
as Deputy Finance Director, having
previously been Finance Director ofEngage Mutual. I am delighted that
Kevin is already making his clear markon our Board deliberations.
In my report last year I advised that
Gillian Wilmot would step down as a
Non-executive Director at the 2005
AGM. In September we welcomed two
new Non-executives, Margaret Johnson
and Lucy Kellaway. Margaret has

been Group Managing Director of theinternational advertising agency Leagas
Delaney since 2002 and brings us
extensive marketing experience gained
during her 11 years with that Company.
Lucy is the management columnist at
the Financial Times, with whom she has
been for the last twenty years.
Our strategy remains clear andstraightforward – to continue togrow our share of the UK direct
private motor market, maximising thevalue derived from each customer
relationship, whilst also identifying
profitable opportunities, in particular
our expansion overseas, to exploit
the knowledge, skills and resources
attaching to our core business. We lookforward to continuing consistently tocreate value for all our shareholders.

Alastair Lyons
Chairman

Alastair Lyons
Chairman

Chairman’s Statement 06 - 07

ADMIRAL GROUP plc  C h i e f E x e cu t i v e ’ s S tat e m e n t

Chief Executive’s statement“

On 31 October, 2006,
almost 14 years after
Admiral started trading,
Admiral Group wentinternational with thelaunch of Balumba.es
in Spain.

”

Henry Engelhardt‘2006: Adios Amigo’
I have no doubt that when we look backin, say, five or ten years, we will point
to two events that took place in 2006
as key in the development of AdmiralGroup.
The first event was one that was long
overdue. Back in 1991 when we prepared
the first draft of the Admiral businessplan we planned on opening our UK
operation first, followed soon after by
a second European country and thenanother country soon after that, etc.
Continental domination! However,before that draft ever saw the light of
day we wisely decided to temper ourambitions and present a business plan
dedicated solely to a UK operation. But
the dream has lived on.
On 31 October 2006, some 15 years afterthat first draft and almost 14 years after
Admiral started trading, Admiral Group
went international with the launch ofBalumba.es in Spain. Our newly formed
Business Development Team basedin Cardiff and our Spanish Directora
General along with the team she
developed in Seville did a brilliant job tocreate something from nothing.
Balumba sold 25 policies on its first day,which compares quite favourably to the
13 policies Admiral sold when it launchedon 2 January 1993. (So the pressure’s
really on Balumba now!) In just thelast two months of the year Balumba
sold over 2,000 policies with premiumincome of around €1m.

Okay, so we were over a decade behind
our original schedule, but we are moving
forward and I promise you that thelaunch of our next European operation
won’t be another decade away.
The second key event was the extension
and renegotiation of our partnershipwith Munich Re. I am pleased to saythat we will continue to have a close
partnership with Munich Re until at least
2014. This is a partnership that began in2000 with an agreement for five years.
That agreement was re-written in 2002
to go for eight years, through 2009. Now
we have re-re-written the agreement,such that it goes to the middle of thenext decade. In the first seven years of
the agreement Munich Re has taken
nearly £2 billion of risk through Admiral
and, as the business is expected togrow, there should be a few more billion
to come.
For a business partnership to last for 15
years, as this one will by the year 2014, it
must be good for both parties. From mypoint of view, Munich is a great partner.
What makes a partner great? First off,
they can handle billions of pounds of
risk! More to the point, they understand
we’re in the risk business and that there
are good days (years) and less good days
(years). They understand the cyclicalnature of our industry and adapt their
expectations accordingly. Lastly, theyrealise that our success is their success.

ADMIRAL GROUP plc •	Made a record profit of £147m, up
23% from £119m in 2005
•	Total turnover for the year was£708m, up 11% from 2005
•	Total motor premium written grewto £567m, up 6% from 2005
•	Produced a combined ratio of 87%
up from 85% in 2005
•	Ended the year with more than 1.28m
customers (+ 12.6%)•	Direct brands gave more than 15m
quotes, of which almost all of themstarted on the internet (96%) manyof which came from Confused•	Confused.com gave more than
9m quotes and made a profit ofover £23m•	Set up a new operation in Spain fromscratch, launched on 31 October andsold more than 2,000 policies•	Named to The Sunday Times list of
Top 100 Places To Work in the UK forthe seventh year in a row (every year
it’s been run)•	Named by the Financial Times as
the eighth Best Workplace in the UK
and one of the Top 100 Workplacesin the EU

What We Do
For those of you looking through our
accounts for the first time, Admiral’s
primary business is to sell car insurance
direct to the public in the UK and now
Spain. We do everything involved in theprocess of acquiring and servicing ourcustomers. However, we are not yourtypical insurance operation, as we sharethe income and commensurate risk withseveral reinsurance partners. In 2006
we took 25% of the underwriting risk
for our own account (in 2007 we’ll take
22.5%). We operate through a numberof targeted brands: Admiral (general andmulti-car households), Diamond (women
drivers), elephant.co.uk (internet users)and Bell (zero no claims bonus). We
have three other brands, Confused.com,
the leading car insurance aggregator in
the UK, Gladiator, which operates as anintermediary in the commercial vehicle
market, and, in Spain, Balumba.es, whichtargets internet users.
2006 was our 14th year of trading. The
first seven were in a Lloyd’s of London
environment. However, toward theend of 1999 Management teamed up
with Barclays Private Equity to buy thebusiness. The result of this transaction
was the creation of Admiral Group
Ltd. (AGL) as the holding Company. In
September of 2004 we floated AGL on
the London Stock Exchange and created
Admiral Group plc.
As already noted, we have a close
relationship with Munich Re. The recently
signed agreement for the UK is a perpetual
contract with first break potential after
2014. We also have a similar, but separate,agreement in place for Spain. Munich Re
is also a major shareholder in the Group, a
position it established in 2002. It currently
owns 14% of the Group. Management andstaff currently own around 27% of theGroup.

Chief Executive’s Statement 08 – 17These two major events not withstanding,
2006 on its own merits was a pretty
good year in a very competitiveenvironment. Here, in a nutshell, are thehighlights:

1 0 C h i e f E x e cu t i v e ’ s S tat e m e n t

Key Performance Information
Our total written premium for 2006,
before sharing it with our reinsurance
partners, was £567m, accounting for 80%
of our total turnover. The number ofcustomers we service rose to 1,285,000
from 1,141,000 (+12.6%). All our growththroughout our history has been organic.

“

The UK Car InsuranceMarket: A Game of0

Chicken, or a Gameof Leapfrog?

In 2006 75% of our premium wasunderwritten by a number of reinsurers:
Munich Re (65%), Swiss Re (5%) and Axis
100Re(5%). The remaining 25% was kept by
the Group. Our net written premium for
80 was £139m. In 2007 Admiral Group
2006
will take 22.5% of the premium income60
to its own account. Munich Re, throughGreat Lakes, will take 60%, Swiss Re will
40
take 10% and Partner Re will take 7.5%.
The Swiss Re and Partner Re agreements20
are both for multiple years.
Some key numbers from the accounts
which follow:• 100
Loss ratio 72% up from 70% in 2005
•	Earned expense ratio, excluding regulatory
80
levies, up to 12.9% from 12.3%•	Combined ratio, including all levies,
60
87%, up from last year’s 85%•	Revenue from products and services
40
we do not underwrite totalled£131.6m up from £93.4m (+41%)”

Henry Engelhardt

20

The increase in the loss ratio from
070% last year to 72% in 2006 is to be

expected. There was very little, if any,
upward price movement in the market in2006. As claims inflation is running wellahead of the retail price index a modest
decline in claims frequency could
not offset the net rise in claims costs.
The result is a deteriorating loss ratio.
Without any releases taken into accountthe loss ratio moved from 82% to 86%.
The bar chart below shows thedevelopment of the loss ratios for theback years on an underwriting year basis.
The years noted at the bottom of thechart are the underwriting years. The
coloured bars represent the reported
loss ratios published in the Annual
Accounts over the last five years. So, forexample, in the 2005 Accounts the loss
ratio for the 2002 underwriting year was
58%, down from 66% in the previous
year’s accounts. This year the result forthe 2002 year has matured to 55%.
The expense ratio, not including
government levies, moved up by 0.6%
from 2005. This reflects no growthin the average price at which we sell
our product against inflation in ourcosts, partially offset by some modest
productivity gains. Despite the small
upward move in the expense ratio, weare still one of, if not the, most efficient
firm in the market.

Loss Ratio Development
100%
90
85
79
73

80%

76

85

80

79
73

71

70

66

65

65
58

60%

58

70

82

76
69

60

55

40%

20%

0%
2003

2004

2005

2002

Underwriting year
2003 Accounts
2004 Accounts

2003

2004

2005

2006

Underwriting year
2005 Accounts

2002 Accounts

2004 Accounts

2003 Accounts

2005 Accounts

2006 Accounts

Ancillary income (income fromproducts and services where we take nounderwriting risk) per customer moved
up by £1 in 2006 versus 2005, from£56.60 to £57.60. There were no majorchanges within these figures from theyear before.
To put all this income into context, I’ve
done a little calculation where the nonunderwriting income is added to earned
150premium to give a ‘big picture’ combined
120ratio. I think this gives an interestingmeasure of the entire business. Expressed
90in this way, the combined ratio would
have been 58%! Here’s another interesting
60calculation: we made £147m on incomeof £277m, a return on income of 53%
30(2005 51%).

The UK Car Insurance Market:
A Game Of Chicken, Or A
Game Of Leapfrog?

Chief Executive’s Statement 08 – 17

In the first nine months of the year weraised our new business rates a total of
1%, and that happened gradually andgrudgingly. We did move rates upwards
almost 3% in the fourth quarter but it
is not clear if those rate increases willhold in the early part of 2007. Please
note, rate changes at the end of a year
have little or no effect on the result of
the year they are implemented. Ourconversion rate, which is a measure of
our prices versus the market, did notfluctuate much during the year, indicativethat our rate moves were consistent withthe market.

Yes, I know, frogs again. This time we’re
not boiling them, but possibly jumping
over them. The UK car insurance market
is at that critical moment that seems
to occur in every cycle, when prices
are expected to rise but don’t. Prices
are expected to rise because, simply,
underwriting results aren’t good. It would
be very rational for prices to rise now.
There has been and continues to beclaims inflation eating away at premiums.
All the while that premiums don’t go up
results deteriorate. Even if premiums rise,
they have to rise circa 5% just to maintainthe status quo. If you’re writing a piece ofbusiness at the market average today the
combined ratio for that piece of businessis somewhere around 115%. Maybe more.
That’s not profitable and not sustainable;
eventually rates must go up. Right?
However, the market dynamics resemble
a classic game of chicken. This seems to
be a market full of James Deans. Whowill blink first? Who will knowingly
raise their rates, make themselves
uncompetitive, shed share and reducevolumes in an effort to enhance orprotect profits? And if one firm gives
up the game of chicken, will the others
follow suit?

0

30%

30%

0%

0%

19

93

94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
F2
00
6

19

19

91

92

19

90

89

19

19

19

87

88

19

85

86

19

19

90
19
91
19
92
19
93
19
94
19
95
19
9

60%

89

60%

19

90%

88

90%

19

120%

19

120%

86

150%

19

150%

87

UK Motor – Combined Ratios

19

05

ADMIRAL GROUP plc 11

1 2 C h i e f E x e cu t i v e ’ s S tat e m e n t

Well, some of those questions wereanswered in the middle of the year
when Norwich Union, the market’s
second biggest player, announced it had
moved rates up and would continue
to move rates up. On average, NU said,
rates would rise some 16%. It was a very
brave step. But the rest of the market
continued to play chicken. In particular,
the market leader, Royal Bank of
Scotland, which holds some 35% market
share, appeared to hold the line.
Late in the year RBS announced thatit too would be moving rates up. How
much RBS has moved or will move its
rates is not clear. At the time of writing
I cannot confirm what RBS has doneon rates although it appears, based on
our conversion data and data on where
customers were insured before joining us
versus where customers go when theyleave us, that they have moved theirrates up at least a little bit.
If RBS continues to raise rates, thenthe market might move from a gameof chicken to one where companies
which don’t raise rates see their volumes
increase. When that happens these firms
then raise their rates, which means thatthe companies that had raised rates andhad seen their volumes decrease see
their volumes increase, so they raise rates
again, etc. etc. A game of chicken thenbecomes a game of leapfrog.
As I write this, with 2007 just getting
underway, there seems to be very littleof this barnyard activity taking place.
Rates may have moved up a touch, but
certainly not as much as claims inflationand the game of chicken continues.
The idea that the market as a wholeis not moving much on rates may be
a sign of a fundamental change inmarket dynamics. The power of RBS,
despite its 35% market share, appears
to have been diluted over time by thegrowth of aggregators, the largest ofwhich is our own Confused.com. The
growth of aggregators means increasedtransparency of rates and gives theconsumer a better chance of finding thelowest possible rate than ever before.
In the days before aggregators, if thelowest rate in the market was being
offered by a small company that couldn’t
spend a lot of money advertisingor operated through a small broker
network, that company could not anchor
rates, no matter how cheap they mightbe. Bigger companies, like RBS, could
raise rates because the vast majority of
consumers never knew a better rate
was available.
But in the new, aggregator world, small
companies that are listed on aggregators
do not need to invest up front in
expensive marketing campaigns andthey can, much more easily, anchor themarket by not raising rates. The small
companies get the same exposure to
consumers that the big companies get.
Over the longer term these companies
might find out that, actually, whoops,
they really should have raised rates. But
this information will take a few years tocome to light.
I believe that the rise of aggregators andchanging shape of distribution will put
ever-greater pressure on insurers to beefficient. Insurers who run high expense
ratios will have nowhere to hide in amarketplace with such a level of pricetransparency.
The pattern of results for the market
for all motor insurance in 2005 (mostrecent market data available) was similar
to 2004. The overall result wasn’t all thatbad (102.2%), but this was flattered bylarge back year releases (6.5%). Private
motor performed a bit worse, with a
combined ratio of 105% and releasesof 5.7%. The underlying trend of higher

bodily injury costs more than offset amodest reduction in claims frequency.
Overall claims inflation continues tomount, over the last two years theaverage is roughly 5% a year, pushed up
in no small part by the cost of care.
The market expense ratio certainly didn’t
make up for the increase in claims costs,
in fact, it rose 0.3%, to 27.6%.
Without the 6.5% of reserve releases
the pure year loss ratio was 81% and the
combined ratio was almost 109%, anincrease of 5% on the comparable figure
from 2004.
Given that there was almost no net
increase in prices in 2006 that would
affect the 2006 result (increases latein the year have very little effect onthat year), it implies that the pure year
combined ratio for 2006 will be northof 110%. Ouch. I’m sure you’d agree,
this is not a particularly good result.
However, it is yet unclear how big thereserve releases will be and therefore
what the headline result will be. The UK
market has something of a history of not
moving on price until reserve releases are
exhausted.
Will history repeat itself? One mightlook at 2007 as one looked at 1998. At
the end of 1997 it was clear to one andall that the market was unprofitable
and that price increases were required.
But prices didn’t move in 1998 while
claims costs rose, and most industry
observers gave up hope that the market
would ever move, predicting a futureof perpetual losses. It was only in 1999,
when everyone had seemingly given up
on the market altogether, that it began
to move. When prices did start to rise in1999 they went up fast, some 20% in thatyear alone.

So which year will 2007 most resemble?
1998 or 1999? If marketing spend isanything to go by then we’re still at 1998.
The spend on TV and press has come
off its highs, but it certainly hasn’t fallen
sharply. And the amounts being paid tointernet search engines like Google (cost
per click) are ever growing.
Bids for key search terms are as high inJanuary 2007 as they were in January
2006. Not only are the bids for key terms
as high as they were last year, but the
number of terms being bid on is everrising. All in all it seems to add up to atleast as much money being spent on
advertising now as a year ago.
Fortunately, our own business issomewhat insulated from thisdeterioration by two factors. First, ourresults historically have been far better
than the market average and therefore,
despite tighter margins, our result is stillrather profitable.
Second, our unique underwriting
structure means we have a limited shareof our own result, which reduces profits
in the good times, but also reduces theeffect of narrowing margins in the lessgood times, leaving us with a high returnon capital. Moreover, as we continue togrow our customer base, we continue
to grow our ancillary revenues. All in all
it should result in sustainable, profitable
growth in the future.

Moving Forward To Maintain
Our Advantage
Last year and the year before I wrote
about the internet being a key factor
to our good results. Today I think theinternet is a given. Every company
is concentrating on this distribution
channel, etc. The focus now is on
creating new, more interesting products
for consumers.

Chief Executive’s Statement 08 – 17

ADMIRAL GROUP plc 13

0

15000
1 4 C h i e f E x e c u t i v e ’ s S tat e m e n t

10000

“

Confused’s growth in 2006
made 2005 look absolutely
pedestrian.

”What do I mean by ‘products’? After
5000
all, the ‘product’ is car insurance andthat doesn’t change radically from one
year to the next.0Last year we launched
two different types of car insurance for
consumers to choose from.

another car it was something not worth
paying for. While those who did need todrive another car could add it back in.
FlexiBell launched in the second half ofthe year and is being rolled out slowly.

Henry Engelhardt

Quote Volumes Split By Phone And Internet
10,00020,0008,000

Quotes – 000s

Quotes – 000s

15,00010,000

5,000

2001

2002

Internet quotes

2003

2004
Phone quotes

2005

6,000

4,000

2,000

0

0
2002

2003
Phone quotes

First was Admiral MultiCar, which takes
a look at all the vehicles in a household
before generating a price. It’s more thanjust a volume discount. In many cases
the knowledge we gain from knowing
about all the vehicles and drivers ina household can lead to lower prices
overall and usually those discounts go
not only to the second and third vehicle
brought on cover, but also to the firstvehicle. The popularity of this concept
meant that 12% of all our new vehicles
last year were on MultiCar policies.
The second innovation was FlexiBell.
Here we took everything we could outof a comprehensive policy such that it
was still a comprehensive policy andthen offered the items we had takenout in an optional, menu-like list. In thisway consumers could build their own
policies but only pay for the parts of thecover they felt were valuable to them.
For example, we made driving othercars optional. For those who never drive

2004

2005

2006

Internet quotes

The Admiral brand regained the crown as
the Group’s biggest brand largely becauseof the efficient growth in MultiCar
policies. The number of vehicles insured
in Admiral grew 26% to 440,000.
Elephant, which held the crown since2004 but isn’t present on aggregators,
grew 3% to 422,000. In percentage terms,
Bell grew the most, 29%, while Diamondgrew 4%.
It was also yet another good year for
Gladiator. Gladiator sells van insurance,largely to private tradesmen, as anintermediary. Admiral Group does nottake any underwriting risk with thisbusiness. At the end of 2006 Gladiator’scustomer count stood at 42,000 and it
contributed £2m to the Group’s bottom
line, up 9%.

2000

05

A D MI R A L G R O U P p l c 1 542,342

98,795

280,1852,194

439,546
421,643

AdmiralElephant

Bell

Gladiator

Diamond

Balumba

10000The Way Car
Changing
Insurance Is Bought In The UK
8000– Confused.com:
ConsumerChamp

Last year 6000
I wrote that 2005 was really ahuge growth year for Confused.com. Well,
4000
I was wrong. Confused’s growth in 2006
made 2005 look absolutely pedestrian.
2000
Confused delivered 8.4 million motor
quotes during the year, an increase of0110% over 2005. It also delivered over 525k
quotes for home insurance.

For those who don’t know, Confused,launched in its current form in the
middle of 2002, is an intelligent,
automated car insurance shopper. Simply
put, all a customer has to do is put his or
her details into Confused and Confusedthen goes out to the major car insurance
websites, populates the appropriate
fields, and, in real time, brings thecustomer back a list of prices. Confusedgoes out to direct operations as well asintermediary sites. One-stop shopping!

Chief Executive’s Statement 08 – 17

Customers By Brand 31 December 2006

Not only did Confused generate a lotof quotes, but it also made money.
Confused made a profit of £23.1m
compared to £8.8m last year and £2.0m
the year before. It has also gotten off to aflying start in 2007. January saw it deliver
over 1 million quotes to its insurance
partners for the first time and it also set a
new, monthly record for profits.
During the year Confused also added
products and now delivers prices
for home insurance, gas & electricity,
travel insurance, breakdown cover, life
insurance, credit cards and mortgages.

Confused.com Quotes
20000

10,00015000

Quotes – 000s

Quotes

8,000

6,000

4,000

10000

5000
2,000
0

0
2002

2003
Other quotes

2004

2005
Motor quotes

2006

2002

2003

2004

Internet quotes

200

Phone q

1 6 C h i e f E x e c u t i v e ’ s S tat e m e n t

Where Next?
We’re in the UK. We’re now up andrunning in Spain. So where next?
Germany, that’s where.
We hope to launch a direct operationin Germany late in 2007. The Germanmarket is huge, some 45m vehicles. It isalso a good internet market for manythings, although, currently, car insurance
isn’t one of them. However, we see thatsituation evolving and our strategy ofentering new markets has not changed:
we plan to use the experience we’ve
gained in the UK of delivering car
insurance efficiently via the internet inother markets, Germany next.

2006 – More Change
2006 was a challenging, but productive
year. Challenging because of the cyclicalnature of our industry, productive
because we still turned in a good result.
In addition, it was productive because of
the things we did that had no real effecton the results for the year itself, but will
have a big effect on our future.
From the facts and figures at hand we
still believe we are the most efficientand, pound for pound, the mostprofitable firm in the UK motor insurance
market. Our goal is to continue to write
the above sentence for the annual
accounts year after year after year.
During the year two key managers
stepped back into part-time roles. Kate
Armstrong who joined Admiral on April
Fool’s Day 1992 and was the Group’s
sixth member of staff, is now doing
management training a couple of days
each month and she continues as a
Director of Confused. In her years withus Kate wore many hats, including: MD
of Confused, IT Manager and Marketing
Manager. Kate’s final role with us was as
MD of MDs.

Kate’s wide array of talents coupled withher fearlessness in tackling any challengeallowed her to step down holding animportant Admiral record: most deskchanges in a career. Kate is now busy
taking care of a young family while also
working to get her PhD.
The other retiree was our FinanceDirector, Andrew Probert. Andrew was
actually our second FD, the first one
being unable to move his family to
Cardiff from the South East back in 1992.
Andrew, a Cardiff native, was living nearGloucester when we came looking,which was very helpful.
Andrew did everything for Admiral.
He takes great pride in relating thestory of buying the first company
kettle when we moved into our Cardiff
offices in September, 1992. He also
enjoys explaining that he bought thesecond kettle as well, because the first
one didn’t work! Andrew led finance,planning, property management, legal,
audit, facilities, accounts and was, fromtime to time, the Director responsible for
People Services and Confused. He dideverything but polish the doorknobs andI have no doubt that if the doorknobs
had really needed polishing he would
have been the first to volunteer to dothat too.
We’ll certainly miss the experience andbig personalities of Kate and Andrew.
I wish them all the best in their new lives.
The good news is that their replacements,
Kevin Chidwick as Finance Director andNicolas Weng Kan as MD of MDs, aretalented, intelligent and keen.

A D MI R A L G R O U P p l c 1 7

Chief Executive’s Statement 08 – 17

A big thanks goes out to all our staff for
all their effort in 2006, with a special
mention to those further afield servicing
our customers from Canada and India.
We’re lucky to have such a motivated,
enthusiastic workforce.

Henry Engelhardt
Chief Executive
P.S. For those keeping score, we set a
new attendance record at our Staff
Children’s Christmas Party (always thebest party of the year!) with 461 kids, up
28% on last year (360). We’re nothing if
not fertile.

Henry Engelhardt
Chief Executive

1 8 F I N A N C I A L R EV I E W

Financial review
Key financial highlights
The Group’s pre-tax profit showed another significant increase in 2006 – rising 23% from £119.5m
to £147.3m. Earnings per share grew by 22% from 32.7p to 39.8p.
The results of the four key elements of the Group’s business were as follows:
2006

2005

£000

£000

Underwriting profit

28,35132,361

Profit commission

19,926

14,735Ancillary and other net income

75,98565,516

Confused.com profit

23,0806,882

Pre-tax profit		147,342

119,494

During 2006 the Group retained 25% of the UK motor business it generated, and hence limited
downside exposure to the motor cycle. The Group participates in the upside through the profit
commission arrangements within these contracts. Using co-insurance and reinsurance significantly
reduces the amount of capital the Group is required to hold and frees up resources either for
distribution to shareholders or growing the business.
Ownership of the 1.2m UK policy base remains with the Group and significant non-insurance
profits continue to be generated. These ancillary profits continue to be the single largest
contributor to the Group’s result.
The Group is able to deliver continued and significant profit growth even at times when the
motor insurance cycle is in its worst years because of the significant contribution made by nonunderwriting income, and also the fact that the Group’s underwriting has returned superior resultscompared to the market as a whole.
The proportion of the profit earned from non-underwriting activity continues to rise, moving
up from 73% in 2005 to over 80% in 2006. This is partly a factor of the further deterioration of
the UK motor insurance cycle, but is more a reflection of the continued absolute growth in nonunderwriting profits, most notably ancillaries and Confused.com.
Turnover – which comprises total premiums written, gross other income and net investment
return (and measures the combined size of the Group’s businesses) continued to show double
digit growth:

800
700

A D MI R A L G R O U P p l c 1 9

500

2006

2005

400

£000

£000

566,608

533,616

Other revenue

131,621

93,405

Net investment return

9,925

11,342

708,154

638,363

Total premium
300written

200
100

Group turnover0

Other revenue (which is made up predominantly of ancillary revenue and Confused.com income)grew by over 40% in the year. Confused.com was a key factor in this growth (refer to below). Total
premiums written grew by around 6%, also discussed below.

Group turnover

800
700
600

£m

500
400
300
200
100
2005

0
2002

2003

2004

2005

2006

Underwriting
Underwriting arrangements
The Group’s UK underwriting structure for 2006 was as follows:
65% of the business was underwritten by Great Lakes (a UK subsidiary of Munich Re) under a longterm co-insurance contract.
35% of the business was underwritten by the Group through Admiral Insurance (Gibraltar) Limited(AIGL) and Admiral Insurance Company Limited (AICL). 10% (of the total business) was ceded
via quota share contracts that qualify for deductions in required solvency capital (5% to Axis Re
Europe and 5% to Swiss Reinsurance Company UK Limited). The Group retained 25% of 2006
underwriting on a net basis.
As well as proportional reinsurance, the Group has also arranged an excess of loss reinsurance
programme with a number of reinsurers to protect itself against very large claims.
For the 2000 to 2002 underwriting years, the Group’s retained share of the motor business wasunderwritten through the Group’s Syndicate (Syndicate 2004) at Lloyd’s of London. During earlyJuly 2006, the Group achieved the release of a significant proportion of the profits earned by
the Group’s Syndicate – amounting to around £24m, net of amounts retained to meet corporation
tax liabilities.

Financial Review 18 - 27

600

2 0 F I N A N C I A L R EV I E W

New co-insurance and reinsurance arrangements, 2007 onwards
During 2007, the Group concluded the successful renegotiation of the long-term UK motor
reinsurance treaty with Great Lakes, and also put in place new quota share reinsurance
arrangements for 2007 and beyond. The new Great Lakes contract will run until the end of 2014
at the earliest, and the percentage of business underwritten under the contract will decline by
5% per annum until 2011, so that in that year and beyond, Great Lakes will underwrite 40% of thetotal.
The declining share passed to Great Lakes allows the Group to position itself for an upturn in thecycle and retain more of the profitable business it has historically generated. Flexible use of quota
share reinsurance allows the Group to reduce its own retention (to a minimum of 25% after 2007)
where this is appropriate.
The new contract is also on improved terms – most notably:•	A more flexible growth cap, allowing the Group to vary the speed of policy growth inresponse to cyclical changes in underwriting profitability•	Revision of the profit commission structure: Although these new terms are not expected
to have a material impact on the results from 2007 to 2009, they could potentially lead to
substantial increases in the level of profit commission earned in 2010 and beyond, should thecycle turn as expected
The new quota share contracts (with Swiss Re and Partner Re) provide protection against anegative insurance result. Whilst there is a cap on the extent of protection provided by the Swiss
Re contract, cover exists throughout the range of probable loss ratio outcomes.
The profit commission arrangements under these two contracts allow Admiral a greater share of
the underwriting result than the 2006 quota share contracts with Swiss Re and Axis Re.

The potential split of the net UK motor business over the next three years is as follows:
2007

2008

2009

Great Lakes

60.0%

55.0%

50.0%

Swiss Re 10.0%

10.0%

10.0%

10.0%

Partner Re

7.5%

7.5%

-

Maximum available to Admiral

22.5%

27.5%

40.0%

100.0%

100.0%

100.0%The Group retains 35% of the Spanish motor risks, with 65% being reinsured by Munich Re under along term treaty on similar terms to the UK contract.

Underwriting results
Total premiums increased by 6% from £534m to £567m, and all Group brands again increased in size.
Premium growth was somewhat lower than policy count growth, due primarily to lower averagepremiums resulting from a mix effect. Premium rates were again broadly flat across the year. The
Group’s Spanish motor insurance business generated around £0.6m of premium during 2006, in twomonths of trading.
The number of quotes the UK direct brands gave showed another large increase in 2006 – up almost
60% from 9.7m to 15.4m. Continued and substantial growth in Confused.com (further detail below) andother aggregator volume were the principal reasons.
Net insurance premium revenue increased by around 4% from £139.5m to £145.0m. This increase waslower than the rise in written premiums due to the reduction in the retention of premium from 30% in2005 to 25% in 2006.
The reported loss ratio increased by around 2 points from 70% to 72%. Reserve releases continued toform a significant part of the underwriting result, rising from £17.3m to £20.9m in 2006 (refer to note 19).
In relative terms, the 2006 release improves the loss ratio by around 14 points, whereas 2005’s release
contributed 12 points. This means the pure year loss ratio has worsened by around 4 points, from 82%
to 86%. This increase is broadly in line with claims inflation experience. Movements in loss ratios are
120 in the Chief Executive’s statement.
further discussed

100 ratio increased from 15.1% to 15.8% in 2006, reflecting expense inflation with little
The motor expense
movement in premium rates. Excluding regulatory levies, the figures are 12.3% in 2005 and 12.9% in 2006.
80

The expense ratio is reconciled to the figures included in the income statement in note 9 below, whilst
60
the underwriting result is reconciled later in this review.

40

Combined ratio development
The Group’s combined ratio (being the aggregation of the loss and expense ratios above) has
20
risen by around 2 points, from 85% to 87%. This compares to an expected combined ratio forthe overall UK 0motor market in 2006 of around 109% (source – Deloitte) - an outperformance
consistent with previous years of around 20 points. Further detail on market results is set out in
the Chief Executive’s statement.

Combined ratio development
120%
100%
80%
60%
40%
20%
0%
2000

2001

2002

Combined ratio

2003

2004

Loss ratio

2005

2006

Expense ratio

Financial Review 18 - 27

ADMIRAL GROUP plc 21

2 2 Financial r e v i e w

The underwriting result (including investment income) fell by £4m in 2006 (£28.4m v £32.4m). Thiswas due to the increased combined ratio (87% v 85%) and also a fall in investment income.
Some additional ratios are noted in the Chief Executive’s statement – firstly the ratio of total
outgoings to net income at 58% (2005: 60%) and secondly the ratio of profit to net income at 53%(2005: 51%). Reconciliations to the figures in the accounts are set out at the end of this review.

Profit commission
The Group earns profit commission through its co-insurance and reinsurance arrangements.
The amount receivable is dependent on the volume and profitability of 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 contract with Great
Lakes. £15.4m has been recognised in 2006, compared to £11.1m in 2005. The increase compared
to last year reflects additional income recognised resulting from improvements in reported loss
ratios on earlier underwriting years (predominantly 2003 and 2004).
A further £2.0m of profit commission (2005: £0.5m) relating to earlier underwriting years (2000– 2002) contracts with Hibernian Re has also been recognised in these results. No further
material amounts are anticipated relating to these contracts due to the relative maturity of theunderwriting results of these years.
Profit commission – quota share reinsurance
A total of £2.5m has been recognised during 2006 (2005: £3.1m) from quota share profit
commission arrangements.
As noted above, the new quota share deals for 2007 and beyond include scope for the Group toearn a larger share of the underwriting result than the 2006 and earlier contracts.

Ancillary and other net income
This figure can be broken down as follows:
2006

2005

£000

£000

Ancillary profit

67,02259,092

Interest income

4,539

4,176

Instalment income

5,676

3,768

Gladiator profit

2,025

1,871

Other expenses and share scheme costs(3,277)(3,391)

Ancillary and other net income

75,98565,516			Ancillary profit and instalment income
This primarily involves commissions and fees earned on sales of insurance products andservices complementing the motor policy, but which are underwritten by external parties. Net
contribution from these sales grew by 13% in 2006 – from £59.1m to £67.0m. Average gross income
per motor policy sold in the UK increased from £56 in 2005 to just under £58 in 2006. Ancillary
income per average active vehicle rose from £68.5 to £69.3.

Gladiator
Gladiator enjoyed another good year, contributing £2.0m to the Group, up from £1.9m in 2005. 2006
was a transitional year for Gladiator as the commercial vehicle market shifted towards a predominatelyinternet based distribution channel. This has predictably led to increased competition within the sector,
which has in turn led to increases in acquisition costs and softening of premium rates.
Gladiator successfully managed this change and increased new business volumes by 27% whilst
maintaining its expense ratio. During 2006, Gladiator also grew its overall active policy base by 16% andreturned a 34% net operating margin (36% in 2005).

Confused.com

Confused.com profit

2006

2005

£000

£000

23,0806,882**Confused.com earns a proportion of its revenue from Group brands in the form of commission charged at normal
commercial rates. The 2006 Confused result includes these transactions, with a corresponding reduction in theunderwriting profit. Previously an adjustment was made for these intra-group sales. The impact of this adjustment on the2005 figures was to decrease Confused profit by £1.9m.

Confused enjoyed a year of substantial growth in 2006. Increased media activity led to an increasein the number of quotes provided by Confused of almost 120%, from 4.1m in 2005 to 9.0m in
2006. Revenue (including payments from Admiral Group brands) increased by around 150% to£38.5m.
Profit (including intra-Group sales) rose 162% to £23.1m from £8.8m in 2005. The 2005 figure differsfrom that in the table due to the £1.9m adjustment referred to above.
Despite a number of new entrants entering the market during 2006, Confused has successfully
maintained its share of total motor sales generated by aggregators and remains the market leader
in motor insurance aggregation.
In addition to its core motor insurance offering, Confused’s home insurance product also grewsignificantly in 2006 – quotes rising almost fivefold to 0.5m. New price comparison solutions forbreakdown, travel insurance and utilities were also added to the Confused website.

Balumba.es
At the end of October 2006, the Group successfully launched its first operation outside of theUK. Balumba.es, a direct motor insurer based on the Group’s UK model, is located in Seville,
Spain and generated around £0.6m of premium in the short period before the year-end, making
a pre-tax loss (including start-up costs) of around £0.6m. Balumba trades via two branches of UK
companies – EUI Limited and Admiral Insurance Company Limited.
Whilst it is still very early days for Balumba, management are encouraged by the results to date,and hope to replicate the model in other markets in the future.

Financial Review 18 - 27

ADMIRAL GROUP plc 23

2 4 Financial r e v i e w

Earnings per share (EPS)
Earnings per share rose 22% from 32.7p to 39.8p in 2006, broadly in line with the increasein profits.

Taxation
The total taxation charge reported in the income statement is £43.6m (2005: £34.8m), representing
29.6% (2005: 29.1%) of pre-tax profit. The lower effective rate in 2005 arose from utilisation oflosses brought forward.
Refer to note 13 to the accounts for further detail on taxation.

Investments and cash
The Group continues to generate significant amounts of cash from all aspects of its operations.
At the end of the year, the Group held a total of £448.9m in cash and investments – an increaseof 11% on the £406.1m held at the end of 2005. This increase is after distributions to shareholdersof £70.1m during 2006 (£49.2m in 2005).
The balances making up this total can be analysed as follows:
2006

2005

£000

£000

257,634-

Government and sovereign bond holdings-

83,071

Corporate bonds and similar instruments-

172,866

Deposits with credit institutions

26,25340,646

Cash at bank

63,33739,824347,224

336,407

101,652

69,682448,876

406,089

Liquid funds in underwriting companies:
Money market funds

Liquid funds held outside underwriting companies:
Cash at bankDuring the last quarter of 2006, the Group changed its investment strategy, moving away fromfixed income mandates and into money market funds. This decision was motivated by thedisappointing and volatile returns generated by the bond portfolios during 2006 and a desire
for stable, relatively risk free returns in 2007 as the UK motor market cycle potentially hits its
worst point.
To this end, a number of money market fund accounts have been set up, into which the existing
funds were transferred and future cashflows will be invested. The bond portfolios were fullyliquidated before the year-end.

ADMIRAL GROUP plc 25

There has been no change in dividend policy, which is based on the principle of returning excess
cash to shareholders. The Directors expect to make a normal distribution of at least 45% of posttax profits each half-year, and will regularly review the Group’s available resources to determine
whether it is appropriate for the Company to pay further special dividends.
Having regard to this policy, as outlined in the Chairman’s statement, the Directors have declareda final dividend for 2006 of 24.0p per share, which is made up of 9.6p per share normal element,
plus 14.4p per share special distribution based on the Group’s resources at the end of the year.
The distribution includes £13.5m (5.2p) relating to the release of capital previously held at Lloyd’s,
which was achieved during the second half of the year. £10m of this release has been retained inorder to assess the potential need for additional capital to support growth over the short term.
Taken together with the interim dividend (12.1p), this final payment results in a total distribution for2006 of 36.1p (2005: 24.6p) per share.

Employee share schemes
The Board continues to take the view that actual or prospective share ownership plays a vitalrole in staff incentivisation across all levels of employee. The Group has two share schemes – anInland Revenue approved Share Incentive Plan (the SIP) and the Senior Executive Restricted SharePlan - The ‘Unapproved Free Share Scheme’.
1. The Approved Share Incentive Plan (SIP)
This SIP is open to all staff of Admiral Group plc (Henry Engelhardt and David Stevens havedeclined to be included in the plan).
The maximum award under the SIP is £3,000 per employee per annum, those shares being
forfeited if staff leave within three years of the award. As the scheme is Inland Revenue approved,
awards will be free of income tax after five years. The £3,000 limit is based on the market value ofthe shares at the date of award.
Awards are made twice a year, based on the results of each half-year. During 2005 and 2006, theGroup’s results have meant that qualifying staff have received maximum awards in both years.
Inland Revenue rules dictate that staff must hold the shares for three years before being able tosell them, but dividends will be payable during the vesting period. If a member of staff leaves theGroup before the end of the three year period, without being a ‘good leaver’, they get no benefit
from the shares not yet vested.
Further details of the awards - actual and anticipated - are included in note 26 below.

Financial Review 18 - 27

Dividends

2 6 Financial r e v i e w

2 – The Unapproved Free Share Scheme (UFSS)The UFSS is not Inland Revenue approved. Awards under the plan are made at the discretion of
the Chief Executive and Senior Managers, with approval being obtained from the Remuneration
Committee. Awards under the plan are distributed on a wider basis than most plans of this type.
The Board believes that as the UFSS develops and awards begin to vest in 2008, it will have theeffect of reducing staff attrition and creating a definite alignment of the interests of staff andshareholders. Of the Group’s current Executive Directors, only Kevin Chidwick participates in thisscheme.
The main performance criterion in determining awards under the Unapproved Plan will be thegrowth in earnings per share (EPS) in excess of a risk free return, defined as average 3-month
LIBOR, over a three year period. The Board feels that this is a good indicator of long-term
shareholder return with which to align staff incentivisation.
Although no shares have yet vested under the UFSS, awards totalling 685,000 shares weremade in 2005 and 681,000 in 2006. This represents 0.5% of the Group’s issued share capital over
the two years.
The EPS targets are such that for full vesting of shares to occur, the average EPS growth over thethree year performance period would have to be approximately 16% per annum, assuming LIBOR
averages 5%. Only 10% of shares vest for matching LIBOR over the three year period.
The Board is conscious of the maximum allowable awards under both schemes and controls arein place to ensure that neither scheme issues shares in excess of 5% of the Group’s issued sharecapital over the 10 year period from 1 January 2005.

ADMIRAL GROUP plc 27

2006

2005

£000

£000

Net insurance premium revenue

144,955

139,454

Net insurance claims(107,145)(100,526)

Net expenses related to insurance contracts(19,384)(17,909)

Investment return (see note 8)

9,925

11,342

Underwriting profit			28,35132,361

2006

2005

£000

£000

Net insurance claims

107,145

100,526

Deduct: claims handling costs 		

(3,538)(3,202)Adjusted net insurance claims

103,607

97,324

Net premium revenue

144,955

139,454

Loss ratio

71.5%

69.8%

2006

2005

Outgoings:

£000

£000

Net insurance claims

107,145

100,526

Insurance contract expenses

19,384

17,909Ancillary / Confused / Gladiator expenses

33,81821,792

160,347

140,227

Net insurance premium revenue

144,955

139,454

Other revenue

131,621

93,405276,576

232,859

Outgoings to income

58%

60%

Profit before tax to income

53%

51%

Reconciliation of loss ratios reported

Reconciliation of alternative operating ratios

Income:		

Financial Review 18 - 27

Reconciliation of underwriting profit

2 8 C orporat e G o v e rnanc e

Corporate governance
The Combined Code on
Corporate GovernanceThis report explains key features of the Group’s
governance structure, how it applies theprinciples in the revised Combined Code on
Corporate Governance (the ‘Code’), and theextent to which the Company has compliedwith the provisions of the Code.
In September 2006 the Group announced
the appointment of two new independentNon-executive Directors. This brings the total
number of independent Directors to five andmakes the Board fully compliant with CodeA.3.2. The appointments were made on 4
September 2006. Throughout 2006 up to thisdate the Audit, Nominations and Remuneration
Committees did not comply with the
Combined Code requirements with respect
to their membership (Codes A.3.2 C.3.1, A.4.1
and B.2.1).
The Group has now put in place specified
terms for its independent Non-executive
Directors. Details are contained within the
remuneration report. All Non-executive
Directors are appointed for fixed terms of
three years.
Code D.1.1 requires that the Senior Independent
Director should attend meetings with arange of shareholders. The Company has acomprehensive programme of meetings anddialogue with institutional investors. The
views of investors expressed through this
dialogue are communicated to the Board
as a whole through the investor relations
report. All Directors can, therefore, develop
an understanding of any issues or concernsof major shareholders should any be raised.
Feedback from shareholders suggests thatthese arrangements for communication
between the Company and its shareholders
continue to be satisfactory and effective.

The Senior Independent Director is always
available to meet with individual shareholders
on request to ensure the Board is aware of any
shareholder concerns that cannot be resolved
through the routine mechanisms for investor
communications.

The Admiral Group Board
The Board has a formal schedule of mattersspecifically reserved to it for decision, including
corporate strategy, approval of budgets andfinancial results, new Board appointments,
proposals for dividend payments and theapproval of all major transactions. This
schedule is reviewed on an annual basis andwas last reviewed on 5 March 2007.
The Board met on nine occasions in 2006. In
addition the Board held a strategy day andalso visited its operations in Spain. Agendas
and papers are circulated to the Board ina timely manner in preparation for Board
and Committee meetings. These papers aresupplemented by information specificallyrequested by the Directors from time to time.
All Directors are, therefore, able to bring
independent judgement to bear on issues
such as strategy, performance, and resources.
Additional meetings are called when required
and there is frequent contact between
meetings, where necessary, to progress theCompany’s business.
During the year the Board carried out anevaluation of itself and its Committees. In
2005 the evaluation consisted of detailed
questionnaires completed by all Directors.
The Board has decided that given the resultsof the process carried out in 2005, the 2006
evaluation would consist of one-to-one
discussions between the Chairman and all
Directors and a meeting between the Chairman
and the Non-executive Directors without the
Executive Directors being present.

The results of the evaluation were discussed
at a Board meeting in November 2006 at
which the Chairman presented his findings
and the Board had an open discussion on theperformance of the Board resulting in a numberof recommendations. No major issues wereidentified during the process but some changes
have been made to the structure of the Board
meetings and the amount of time devoted tomeeting senior managers within the Group.
The performance of the individual Executive
Directors is appraised annually by the Chief
Executive, to whom they report. The Chairman,
taking into account the views of the other
Directors conducts the performance appraisalof the Chief Executive. The performance of the
Chairman is reviewed by the Non-executive
Directors, led by the Senior Independent Nonexecutive Director (John Sussens), taking into
account the views of the Executive Directors.

Total meetings held

A meeting was held in November 2006 under
the Chairmanship of John Sussens to discuss
the results of this review. John Sussens also
gave individual feedback to the Chairman and
was able to confirm that the performance of
the Chairman continues to be effective, andthat the Chairman continues to demonstratecommitment to his role.
The number of full Board meetings andCommittee meetings attended by each Director
during 2006 is provided in the table below.
The figures in brackets show the numberof meetings that the Director could haveattended.

ScheduledBoard
meetings

Audit
Committee
meetings

Nominations
Committee
meetings

Remuneration
Committee
meetings

9

4

3

4

Alastair Lyons (Chairman)

9 (9)Henry Engelhardt(Chief Executive)

9 (9)David Stevens(Chief operating Officer)

9 (9)

3 (3)

Kevin Chidwick**(Finance Director)

3 (3)Andrew Probert *6 (7)Manfred Aldag

9 (9)Martin Jackson

9 (9)

4 (4)

Keith James

9 (9)

4 (4)

Margaret Johnson**

3 (3)

1 (1)

Lucy Kellaway**

3 (3)John Sussens

8 (9)Gillian Wilmot *

3 (4)

3 (3)
4 (4)
3 (3)
1 (1)
1 (1)
4 (4)
1 (1)

*Gillian Wilmot and Andrew Probert resigned from the Board on 18 May 2006 and 4 September 2006 respectively.
**Kevin Chidwick, Margaret Johnson and Lucy Kellaway were appointed to the Board on 4 September 2006.

2 (2)Corporate governance 28 - 34

ADMIRAL GROUP plc 29

3 0 C orporat e G o v e rnanc e

The roles of the Chairman andChief Executive
The Board has approved a statement of
the division of responsibilities between
the Chairman and the Chief Executive. The
Chairman is primarily responsible for theworkings of the Board and is not involved in
the day-to-day aspects of the business. Savefor matters reserved for decision by the Board,
the Chief Executive, with the support of theother Executive Directors, is responsible forthe running of the business, carrying out theagreed strategy adopted by the Board andimplementing specific Board decisions relating
to the operation of the Group.

Directors and Directors’
independence
The Board currently comprises the Chairman,
five independent Non-executive Directors, one
Non-executive Director who is employed bya significant shareholder and is not, therefore,
independent, and three Executive Directors.
Independent Non-executive Directors are
currently appointed for fixed periods of three
years, subject to election by shareholders. The
initial three-year period may be extended for
one further three-year period and the Board
may invite the Non-executive Director toserve for a further three-year period, subject
to re-election by shareholders. Their lettersof appointment may be inspected at theCompany’s registered office or can be obtainedon request from the Company Secretary.
The independent Non-executive Directors
are of sufficient calibre and number that theirviews carry significant weight in the Board’s
decision making.
Details of the Chairman’s other commitments
are included in the Chairman’s biography. The
Chairman does perform a number of otherNon-executive roles outside of the Group but
the Board is satisfied that these are not suchas to interfere with the performance of the
Chairman’s duties within the Group.

John Sussens has been appointed as the Senior
Independent Non-executive Director. He isavailable to shareholders if they have concerns
which contact through the normal channels ofChairman, Chief Executive or Finance Director
has failed to resolve or for which such contact
is inappropriate.
In accordance with the Company’s Articles,
which provide that a set number of Directors
retire by rotation and stand for re-election ateach AGM, Martin Jackson, and Keith James
will retire by rotation and seek re-election
by shareholders at the forthcoming AGM. In
addition Kevin Chidwick, Lucy Kellaway andMargaret Johnson will also stand for re-election
due to their appointments occurring after thelast AGM.
The Directors are given access to independent
professional advice at the Group’s expense,
should they deem it necessary, to carry out
their responsibilities.

Professional development
On appointment, Directors take part in
a comprehensive induction programme
where they receive financial and operational
information about the Group, details
concerning their responsibilities and duties,
as well as an introduction to the Group’s
governance and control environment.
The induction is supplemented by visits to theGroup’s head office in Cardiff and meetings
with members of the senior management
team and their departments. Throughout theirperiod in office the Directors are continually
updated on the Group’s business, legal
matters concerning their role and duties, thecompetitive environments in which the Group
operates and any other significant changes
affecting the Group and the industry in which
it operates.
The Board receives presentations fromsenior managers from within the Group on aregular basis as a component of the ongoingdevelopment of the Non-executive Directors.

Relations with shareholders

The Audit Committee

The Investor Relations team has day-today primary responsibility for managing
communications with institutional shareholders
through a combination of briefings to analysts
and institutional shareholders, both at thehalf-year and full-year results. Site visits andindividual discussions with the Executive
Directors are also arranged throughout the yearwith individual shareholders. Regular dialogue
with shareholders helps to ensure that theCompany’s strategy is understood and that any
issues are addressed in a constructive way.

Constitution and membership
The membership at the year-end was Martin
Jackson (Chairman), Keith James, and Margaret
Johnson (appointed 4 September 2006). The
Company Secretary acts as Secretary to theCommittee. For the period between 18 May
2006 and 4 September 2006 the Committee
comprised of Martin Jackson and Keith James.
Two meetings were held between those dates.
There have been a total of four meetings during
2006.

In fulfilment of the Chairman’s obligations
under the new Combined Code, the Chairman
would give feedback to the Board on issues
raised with him by major shareholders,
although to date there have been no such
issues. This is supplemented by monthly
feedback to the Board on meetings between
management and investors. External analyst
reports are circulated to all the Directors. In
December 2006 major investors were given
the opportunity to meet with the Chairman
and a number of Non-executive Directors. A
number of investors took part in the meeting.
It is intended to carry out a similar meeting in
September 2007.
The Chairmen of the Audit, Remuneration
and Nomination Committees attend theCompany’s Annual General Meeting along withother Directors, and are available to answer
shareholders’ questions on the activities of theCommittees they chair.
The Group maintains a corporate website(www.admiralgroup.co.uk) containing a wide
range of information of interest to institutional
and private investors.

Board Committees
The terms of reference of the principal
Committees of the Board - Audit,
Remuneration and Nominations - are available
on the corporate website. Those terms ofreference are reviewed annually.

The Board considers that the members of theCommittee have the appropriate competence
and experience to carry out their duties
and further considers that Martin Jackson(Committee Chairman) has the appropriate
recent and relevant financial experience having
held the position of Group Finance Director of
Friends Provident Plc between 2001 and 2003
and being a fellow of the Institute of Chartered
Accountants, which imposes requirements forContinuing Professional Development. Ongoingtraining is provided to all members, and thisis intended to cover relevant developments
in financial reporting, company law and thevarious regulatory frameworks. The Terms ofReference of the Audit Committee include all
matters suggested by the Code.
Summary of key activities during 2006
During the year the Committee reviewed theinterim and audited final year-end Reportand Accounts prior to approval by the Board.
The external auditors were present at both
meetings and the external actuaries attended
the meeting in February 2007 at which the2006 Report and Accounts were reviewed.
The Committee also reviewed the performanceand independence of the Group’s relationshipwith the external auditor both through its
own assessment of the relationship and also
the controls in place within the external
auditors business. The Committee has reviewed
the nature and extent of non-audit work
services provided by the external auditor. The
Committee has in place a policy that, amongst
other things, requires that the Committee

Corporate governance 28 - 34

ADMIRAL GROUP plc 31

3 2 C orporat e G o v e rnanc e

approve all proposals for expenditure of over
£30,000 on non-audit services. The policy
was last reviewed on 5 December 2006. The
Group’s auditors, KPMG Audit plc, provide
some non-audit services, the majority of which
comprise compliance services on the various
taxation issues within the Group, and are notconsidered by the Committee to compromise
their independence as auditors. The level of
non-audit fees is reviewed at each Committee
meeting and details are included in note 10 to
the Report and Accounts.
The Head of Internal Audit is invited to all
Committee meetings and provides a range ofpresentations and papers to the Committee,
through which the Committee monitors theeffectiveness of the Group’s internal controls.
Committee members receive copies of allinternal audit reports and are given theopportunity to raise questions on the content
and recommendations contained within thereports. The Committee approves the internal
audit programme at the start of each calendar
year and monitors the progress made inachieving the plan.
The Committee receives reports fromthe Group’s Company Secretary who has
responsibility for the Compliance and Risk
management functions to enable it to monitor
the risk management policies and systems.
The Executive Directors, Head of Internal Audit,
and external auditors are invited to all meetings
The Non-executive Directors are entitled toattend any meeting. At least once a year theCommittee meets with the external auditor
without any Executive Directors present.

The Nominations Committee
The membership at the year-end was Keith
James (Chairman), Lucy Kellaway and Alastair
Lyons. The Company Secretary acts as
Secretary to the Committee.
The Committee has formal terms of reference,
which were last reviewed on 19 October 2006.
The Committee met on three occasions during
2006. From 19 October 2006, following theappointment of Lucy Kellaway on 4 September

2006 and resignation from the Committee ofManfred Aldag, the Committee as required by
the Code contains a majority of independentNon-executive Directors.
The Committee leads the process for making
appointments to the Board or where theappointee is likely to become a Board
member. The Committee ensures there is aformal, rigorous and transparent procedure
for the appointment of new Directors to theBoard through a full evaluation of the skills,
knowledge and experience of Directors. The
Committee also ensures plans are in place fororderly succession for appointments to theBoard, and reviews the plans for other senior
management positions. Responsibility formaking senior management appointments rests
with the Chief Executive.
During 2006, the Committee instructed
external search consultants to provide support
in relation to the appointment of two Nonexecutive Directors. Detailed role specifications
were drawn up with reference to the mixof skills, knowledge and experience of theexisting Directors and the requirements of
the Board. Interviews were carried out with arange of potential candidates, by the external
agency, members of the Committee, and othermembers of the Board. As a result of theprocess, the Committee recommended to theBoard, and the Board agreed, that Margaret
Johnson and Lucy Kellaway be appointed to
the Board as Non-executive Directors witheffect from 4 September 2006. The anticipatedtime commitments for the role were discussed
and agreed with both candidates.
The Committee also reviewed the progressof the Deputy Finance Director, recruited in
September 2005 and following the retirementof Andrew Probert on 4 September 2006
recommended that the Board appoint Kevin
Chidwick as Finance Director.
The Committee reviewed the current Board
size, taking into account the changes noted
above, structure and composition andconfirmed that no further changes wererequired and that the leadership of theorganisation was such that the Company
could continue to compete effectively in themarketplace in which it operates.

Remuneration Committee
The membership at the year-end was John
Sussens (Chairman), Martin Jackson andMargaret Johnson (appointed 4 September2006). The Company Secretary acts as
Secretary to the Committee.
The Committee has formal terms ofreference, which were last reviewed on 4
September 2006. The Committee met fourtimes during 2006.
During the year the Committee carried out thefollowing tasks:•	reviewed the Group’s overall remuneration
policy and strategy•	recommended for approval individual
remuneration packages for Executive
Directors, Chairman, and Company
Secretary•	reviewed the rules and performancemeasures of the Group share schemes andthe grant, award, allocation or issue ofshares under such schemes
The Committee did not use the services of any
external consultants during the year but did
receive reports produced by various external
agencies to enable it to make judgments on thelevels of remuneration for the Directors and toreview the remuneration of the Group's senior
executives.

Internal control andrisk management
The Board is responsible for the Group’ssystem of internal control and for reviewing
its effectiveness. Such a system is designed to
manage rather than eliminate the risk of failure
to achieve business objectives and can only
provide reasonable and not absolute assurance
against material misstatement or loss.
The Board is of the view that there is an
ongoing process for identifying, evaluating

and managing the Group’s internal controls,that it has been in place for the year ended 31
December 2006 and that, up to the date of
approval of the annual report and accounts, it
is regularly reviewed by the Board and accords
with the internal control guidance for Directors
provided in the Code.
A key element of the control system is thatthe Board meets regularly with a formalschedule of matters reserved to it for decisionand has put in place an organisational structurewith clearly defined lines of responsibility.
In order to ensure these responsibilities areproperly discharged, the Board has delegated
the task of supervising risk management andinternal control to the Risk Management
Committee (RMC).
There are several key elements to the risk
management environment throughout
the Group. These include the setting ofrisk management policy at Board level,
enforcement of that policy by the Chief
Executive, delivery of the policy by the RMC
via the Group’s systems of internal control andrisk management and the overall assurance
provided by the Audit Committee that thesystems operate effectively.
The Board recognises that the day-to-day
responsibility for implementing these policies
must lie with the management team, whose
operational decisions must take into accountrisk and how this can be effectively controlled.
The Company Secretary and Risk Officer takeresponsibility for ensuring management areaware of their risk management obligations,providing them with support and advice andensuring that the risk management strategy
is properly communicated. The head of eachbusiness unit or business area is required toundertake a full assessment process to identify
and quantify the risks that their areas face orpose to the Group and the adequacy of thecontrols in place to mitigate or reduce thoserisks. Reports are produced showing the mostsignificant risks identified and the controls inplace. Internal Audit uses the risk registers toplan its programme of audits to ensure that thecontrols described are actually in place.

Corporate governance 28 - 34

A D M I R A L G R O U P p l c 33

3 4 C orporat e G o v e rnanc e

The RMC receives reports setting out key
performance and risk indicators and considers
possible control issues brought to theirattention by early warning mechanisms, which
are embedded within the operational units. The
RMC and the Audit Committee also receive
regular reports from Internal Audit, which
include recommendations for improvementin the control and operational environment.
The Audit Committee’s role in this area isprimarily confined to a high-level review of thearrangements for internal control although at
its discretion the Committee may well request
more detailed information on specific issues
should they arise. The Board’s agenda includes
a regular item for consideration of risk andcontrol and receives reports thereon from the
RMC and the Audit Committee. The emphasis
is on obtaining the relevant degree of assurance
and not merely reporting by exception. At its
March 2007 meeting, the Board carried out
the annual assessment for the 2006 year byconsidering documentation from the Audit
Committee, taking account of events since 31
December 2006.
The Audit Committee’s ability to provide theappropriate assurance to the Board depends
on the provision of periodic and independentconfirmation, primarily by Internal Audit, thatthe controls established by management areoperating effectively. The Audit Committee
reviews the wider aspects of internal control
and risk management, providing a highlevel challenge to the steps being taken to
implement the risk management strategy.
The Board confirms that there were no
significant issues arising during the year underreview.
The Risk Management Committee
The Committee’s members include the three
Executive Directors, the Group Company
Secretary (who chairs the meetings), theDeputy Compliance Officer the Risk Officer
and senior management representatives.

One of the Committee’s principal
responsibilities is to ensure that the risk
management policy approved by the Board
is implemented throughout the Group. The
Committee has formal terms of reference
and is required to manage regulatory issues,
assess and monitor reinsurance protection
and to ensure that a risk management strategy
is effectively employed by the Group. The
Committee meets approximately eight times
a year and each Committee member receives
an agenda and papers in a timely manner
allowing the Committee to make informed
decisions and actions.
The Committee develops policies to ensurecompliance with regulation and ensures thatappropriate action is taken by the management
team to implement compliant systems andprocedures.
Internal Audit
The Internal Audit function assists management
by providing it with timely, independent
assurance that the controls established areoperating effectively. This includes regularreviews of internal control systems andbusiness processes, including compliancesystems and procedures and identification ofcontrol weakness and recommendations tomanagement on improvements.

Going concern
The Directors are satisfied that the Group has
adequate resources to continue in operation
for the foreseeable future and therefore
consider it appropriate to prepare the financial
statements on the going concern basis.

Remuneration report
The following report has been approved by the Remuneration Committee (the Committee) andthe Board for submission to shareholders.

Section 1: Information not subject to audit
The Remuneration Committee
The Committee is chaired by John Sussens, the Senior Independent Non-executive Director, withthe other members being Martin Jackson and Margaret Johnson. Margaret Johnson was appointed
to the Committee on 4 September 2006. Gillian Wilmot who resigned from the Committee
and Board on 18 May 2006 had previously been the third Non-executive member. None of
the Committee has any personal financial interest in the matters to be decided other than as
shareholders. The Chairman and Chief Executive are invited to meetings where the Committee
considers it appropriate to obtain their advice on the matters under review.
The Committee determines the Admiral Group Executive Board Directors' remuneration. The
Committee also reviews and approves the fees of the Chairman of the Board. The Committee also
reviews and recommends any changes proposed to the Group’s share plans, as well as having an
overview of shares awarded under the terms of the Group’s Senior Executive Restricted Share Plan
(The “Unapproved Free Share Plan”).
During the year the Committee did not purchase any consultancy services.
Policy on Executive Directors’ remuneration
Two of the three Executive Directors (Henry Engelhardt and David Stevens) are founding Directors.
They and the Committee continue to hold the view that the significant shareholdings held bythem provide a sufficient alignment of their interest in the performance of the Group with theinterests of other shareholders.
In light of this, their remuneration packages consist of base salary (reviewed against market rates
by the Committee) and benefits such as private medical cover, permanent health insurance anddeath in service cover. The Group does not contribute to any pension arrangements on behalfof these Executive Directors, and it is not intended that they will participate in any Group shareschemes. Their remuneration was reviewed in May 2006 and Henry Engelhardt was awarded a riseof 5.5% taking his salary to £290,000. David Stevens declined to accept a rise in his remuneration,
which stayed at £250,000.
There is only one other Executive Director. Kevin Chidwick joined the Board on 4 September 2006
as the Finance Director, replacing the retiring Andrew Probert. The Committee aims to ensure thatthe remuneration of the Finance Director is fair and in line with market rates and is designed toprovide rewards for achieving increases in shareholder value.

Remuneration report 35 - 39

ADMIRAL GROUP plc 35

3 6 R e mun e rat ion r e por t

There are two main elements to the Finance Director’s remuneration package:••

Basic annual salaryAwards under the Unapproved Free Share Plan.

It is the Committee’s general strategy to pay salaries at or slightly below median levels withincreased remuneration coming from the value of the awards under the Unapproved Free SharePlan. In addition to his salary of £200,000 Kevin Chidwick received an award of 21,186 shares on
18 April 2006 and a further 18,480 on 5 September 2006 on his appointment to the Board. The
awards are the maximum number of shares that could vest after a three year period and are
subject to performance criteria. Maximum awards vest if the Group’s earnings per share growthover the three year period is significantly better than a LIBOR return. Further details of the
Unapproved Free Share Plan are set out in the Financial Review.
Awards to staff under the Unapproved Free Share Plan are made upon the advice of the Chief
Executive. The Committee reviews the approach taken and approves any awards greater than
100% of salary. The actual number of shares that vest under the scheme is dependent upon
meeting the performance criteria with regard to earnings per share growth.
The remuneration of the Chairman is decided by the Remuneration Committee and that of theNon-executive Directors by the full Board. The Non-executive Directors do not participate inmeetings when Non-executive Director fees are discussed.
A summary of their contracts and remuneration is shown in the following section.
There is no minimum shareholding requirement for any Director, although the Board encourages
directors to buy shares in the Company should they wish to.
Directors’ service contracts
The following table summarises the notice periods relating to the service contracts of the
Executive Directors serving at 31 December 2006:
Notice – Director (months)

Notice – Company (months)

Kevin Chidwick

12

12Henry Engelhardt

1212David Stevens

12

12

There is no provision in the Executive Directors’ contracts for compensation to be payable onearly termination of their contract over and above the notice period element.

ADMIRAL GROUP plc 37

The Company has entered into letters of appointment with its Non-executive Directors. Summary
details of terms and notice are included below.

Alastair Lyons

Indefinite (terminable on three months’ notice fromeither party)

Manfred Aldag

Indefinite (terminable on one month’s notice from either
party) – automatically terminates should he cease
employment with Munich

Martin Jackson

3 years commencing 1 December 2006, terminable byeither party giving one month’s written notice

Keith James

3 years commencing 1 December 2006, terminable byeither party giving one month’s written notice

Margaret Johnson

3 years commencing 4 September 2006, terminable byeither party giving one month’s written notice(appointed 4 September 2006)

Lucy Kellaway

Remuneration report 35 - 39

Term and notice

3 years commencing 4 September 2006, terminable byeither party giving one month’s written notice(appointed 4 September 2006)

John Sussens

3 years commencing 1 December 2006, terminable byeither party giving one month’s written notice

Given the short notice periods applicable, mitigation issues are unlikely to arise.
The following table sets out the results of a review of Non-executive fees and expected timecommitments.
Expected time commitment (in days) for the Board and Committees:
Audit

Remuneration

Nominations

Member

3

1

1

18

Chairman

4-5

2-3

2-4

As required

Other

SeniorIndependent
Director

Board

1-3

Fees payable (£’000) with respect to Board and Committee membership are as follows:
Audit

Remuneration

Nominations

Member

3

1

1

30

Chairman

5

3

3

120

Other

SeniorIndependent
Director5

Board

3 8 R e mun e rat ion r e por t

Total Shareholder Return (TSR)
The following graph sets out a comparison of Total Shareholder Return for Admiral Groupplc shares with that of the FTSE 350 Index, of which the Company is a constituent. The graphmeasures the period from the commencement of conditional trading on 23 September 2004
up to 31 December 2006. TSR is defined as the percentage change over the period, assuming
reinvestment of income.
The Directors consider this to be the most appropriate index against which the Company should
be compared.
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Directors’ shareholdings
Directors’ interests in the ordinary shares of the Company are set out below:
Ordinary shares of 0.1p
31 December 2006

31 December 2005

250

250

Henry Engelhardt *40,466,720

40,466,720

David Stevens *19,768,000

19,768,000

Alastair Lyons

615,600

715,600

Manfred Aldag--

Martin Jackson--

Keith James *44,50044,500--Executive Directors
Kevin Chidwick

Non-executive Directors

Margaret Johnson
Lucy Kellaway--

John Sussens

8,000

8,000

* Include amounts held by family members and in trusts settled by family members

ADMIRAL GROUP plc 39

Section 2: Information subject to audit
Remuneration for the year ended 31 December 2006 was as follows:
Base salaryand fees(£000)

Bonusesand other(£000)

Benefits(£000)

2006
Total(£000)

2005
Total(£000)

65

9

1

75

-

Henry Engelhardt

285

-

-

285

268

Andrew Probert

159

-

-

159

224

250

-

-

250

240

Alastair Lyons *

75

-

-

75

60

Manfred Aldag

6

-

-

6

6

Martin Jackson

30

-

-

30

30

Keith James

38

-

-

38

38

Margaret Johnson

11

-

-

11

-

10

-

-

10

-

John Sussens

35

-

-

35

35

Gillian Wilmot

15

-

-

15

28

979

9

1

989

929

Executive Directors
Kevin Chidwick(appointed 4 September 2006)(resigned 4 September 2006)

David Stevens
Non-executive Directors(appointed 4 September 2006)

Lucy Kellaway(appointed 4 September 2006)(resigned 18 May 2006)

Totals			*Alastair Lyons waives 25% of his annual fee, which is currently £120,000.

For details of Directors’ responsibilities, please refer to the biographies section.

This report was approved by the Board of Directors on 5 March 2007 and is signed on its behalfby the Committee Chairman:

John Sussens
Remuneration Committee Chairman

Remuneration report 35 - 39

Directors’ emoluments

ADMIRAL GROUP plc 41

The Admiral Group is committed todealing fairly and with a high levelof integrity with all its stakeholders.
This includes its actions and policies
towards staff, the local communities inwhich both the business operates andour staff live, and the environment.

This initiative is supported by “Henry’sPot”. This fund started in 1999 andallows staff to apply for a donation orsponsorship toward an organisation of
their choice. In 2006, 109 awards weremade from this fund to all kinds ofdifferent interests.

Workplace

We also believe that it is importantfor our staff to understand what
are the Company’s goals andobjectives: consequently we work
to communicate this in as many
ways as possible. As an example, we
encourage staff to attend our Annual
Staff General Meeting (SGM). The SGM
is arranged to enable staff to hear theviews of the Executive Directors andsome of the Non-executive Directors
on a wide range of subjects including
the performance of the Group andthe market within which we operate;
the experiences of Non-executive
Directors within and outside of theGroup; and the Group’s share plans.
We believe that employing wellinformed staff will provide the best
possible service to our customers.

We believe the happier our staff
are, the better they will do theirjob. This means that we constantly
work to improve our staff’s working
environment. During 2006 the Group
relocated 650 people to brand new
offices in Swansea Bay from offices
within the town centre. We also try to
make sure that the working day for our
staff is as fun and rewarding as we canmake it.
We are one of the leading employers
in the South Wales region, andemploy people from a wide range ofcommunities. The Group encourages
staff to get involved in local
communities and projects that areimportant to both them and theirfamilies. This can range from the local
football club to an amateur dramatics
society.

Born Free & Childline Recycling

Corporate responsibility 41 - 45

Corporate responsibility

Top Departments Award Winners

4 2 C orporat e R e sponsibili t y

The best measures of our staff’s
assessment of their working
environment are the surveys thatthey have completed. Following
independent measurement by theorganisations involved Admiral hasreceived the following awards:

Admiral Sponsored Festival of SportThe Sunday Times 100 Best Companies
to Work For – Admiral has been
included in all seven years of the
publication and was ranked 21st overall in
the last list published.
The Financial Times 100 Best Workplacesin the UK – we have been included in all
four years of the publication
100 Best Workplaces in the EU –again Admiral has been included in all
four years.

Staff share schemes
The Group operates two share schemesthat give staff actual and prospective
share ownership. All staff are eligible
to receive shares under the Approved
Share Incentive Plan (SIP) as long as
they commenced their employment at
the start of the relevant performance
period. Staff who were working for
the Group at the start of 2005 havereceived £6,000 worth of free shares
under the SIP, which had a value of£11,252 at 9 March 2007. The Groupalso operates a Senior Executive

Tusk expedition to South Africa

Restricted Share Plan, although thename is somewhat misleading asawards approved by the Board in 2006
amounted to over 681,000 free shares,
which were distributed amongst 380
staff, including those in our Spanish
operation. Both schemes haveoverall Group performance criteria
applied to them.
Further detail on these schemes is set
out in the Financial Review.

Disability
The Group gives fair consideration
to all applicants. The abilities andaptitudes of the applicant will
be considered with regard to therequirement of the job for which he or
she has applied. Employees who findthemselves no longer able to carry out
the job for which they are employed
will be given individual consideration.
Depending on the nature, severity, andduration of the disability, they may
be considered for an alternative post
within the Group. Admiral continues
to train and encourage the careerdevelopment of all disabled persons in
its employment.

ADMIRAL GROUP plc 43

Admiral has also sponsored a numberof high profile local events in 2006.
•	Wales National Waterfront
Museum• Swansea Bay Festival 2006
• The Swansea Jazz Festival 2006
• The 2006 Swansea 10K•	The Admiral Cardiff Big Weekend
2006• Admiral Calenning Family Fireshow• The Welsh Business Awards•	The 2006 South Wales Echo
Champion Child of Courage Award

Charitable contributions
In addition to sponsoring these local
initiatives, we have continued tosupport several larger charities:•	WellBeing of Women through the
Diamond Brand. This charity is the
only national charity that funds
obstetric and gynaelogical researchby supporting research projects.
Wellbeing of Women’s mission is tobring an end to fear and suffering
caused by reproductive healthproblems.
•	Born Free Foundation and Tusk
through elephant.co.uk. Born Free
Foundation is an international
wildlife charity that works to
reduce animal suffering and toencourage people to treat animals
with respect.
	It is involved in campaigns against
cruelty in zoos, and dedicated toaiding conservation of elephants,
big cats, wolfs, dolphins, primatesand bears.

 ver the last fifteen years Tusk hasOsupported more than 30 projects in
15 African countries. Last year alone
Tusk supported 21 different projects
in 11 African countries. Tusk’s support
comes in many different guises suchas provision of 4x4 vehicles, wildlife
clinics, rhino and cheetah sanctuaries,
and chimpanzee enclosures.

Corporate responsibility 41 - 45

External sponsorship

Environment
The Group’s impact on theenvironment stems from its use ofresources to run its offices in Cardiff
and Swansea and its communications
with customers. The Group does not
own the properties that it occupies
and is, therefore, reliant upon thecooperation of the managing agentsof the properties to make changes
that could reduce the consumption ofenergy and water.
The Group Company Secretary hastaken responsibility for the Group’s
approach to its impact upon theenvironment and has set up a project
team to take forward a more robust
approach to environmental reporting.
2006 is the first year the Group has
focussed its attention on measuring
its environmental footprint and thetable below provides the initial data
gathered for that year.
The Project Team will review theGroup’s processes with a view toconsuming less natural resource per
employee; recycle more of the waste
produced; and ensure that waste thatcannot be recycled is disposed of incompliance with relevant legislation.
The Group is committed to improving
its performance in the following areas:•	Minimising consumption of natural
resources, including energy, waterand other raw materials

Admiral Sponsored Champion Childof Courage Award4 4 C orporat e R e sponsibili t y•	Reducing the waste produced,
encouraging recycling andminimising the use of landfill sites,
whilst ensuring compliance with all
relevant legislation

Admiral Sponsored Swansea Pantomime•	Achieving the most efficientmeans of travel to businessmeetings in the UK and abroadwith the objective of reducing
the environmental impact of theresulting journeys•	Encouraging staff to support
initiatives that positively impact
the local, national and global
environments•	Raising and maintaining staff
awareness of this policy andensuring that employees areactively engaged in supporting theresulting practices•	Measuring, monitoring andreporting on the key aspects of theGroup’s environmental performanceand regularly reviewing progress to
reduce the amount of resources
consumed per employee

EnergyWe have based our energy usage on
our head offices in Cardiff, built in
the 1960’s and housing just over 1,200
people. Measures to reduce resource
consumption have to be discussed andagreed with the building’s managing
agent and other tenants. Up until theend of 2006 our Swansea staff werelocated in an ageing building withinefficient electricity and water supply.
As noted above, the Group hastaken a long-term lease on a newly
constructed building on a brownfieldsite in Swansea Bay. Future reportingon energy usage will combine bothbuildings.
Within the Group we have worked
hard with our staff and our managing
agents to reduce the use of energy andhave introduced a number of measures
to help lower energy usage such as:•	All the lights in the building go off
after working hours• Screen savers on all PCs•	Communicating the advantages ofswitching PCs off each evening

We have not been able to accurately
assess the CO2 emissions generated by
the Group’s direct activities. Improved
measurement of resource usage will
enable the Project Team to provide
estimated CO2 emissions for 2007.
Impact Area

MeasurePerformance

EnergyElectricity

280 KWh/m2

Water

Water consumption

11.2 m3 per person

Waste management

Total waste generated

77,180 Kg

Wastage recycled by weight

57,993Kg

Waste to landfill

19,187Kg

Paper use

5,732 sheets per person

Cartridges

0.4 cartridges per person

Mileage by rail

213,900

Mileage by air

621,240

Resource management
Travel* As the Group moved its Swansea workforce to new offices in quarter two of 2006, the figures areshown based on the resources used for Cardiff office only and where usage per employee is stated, isbased on an average of 1,200 employees working in the Cardiff office. Both offices will be included in
the 2007 calculation.

ADMIRAL GROUP plc 45

As noted above, the Group is reliant
on the co-operation of the managing
agent with respect to any changes to
its use of water. In future years, water
consumption per employee will bemeasured and compared to similar
office environments to ensure that
consumption within our offices iswithin reasonable limits.

Waste management
We have run a recycling programme fora number of years, to which our staff
have shown considerable commitment.
Throughout the Company we advertise
our recycling facilities and every floor
has an area for recycling. As a result,
we currently only send 25% of ourwaste to landfill.
We are currently in the process oftrialling the use of recycled paper
within photocopiers and printers as
this is the source of the vast majorityof the Group’s internal printing.
The Project Team will also review thecurrent printing usage to seek ways toreduce the amount of internal printing.
Policyholder documentation is not
currently printed on recycled paper.
The Project Team will revisit thesourcing of recycled paper and will
test its use for communications withcustomers.

TravelWe have based our offices centrally in
Cardiff and Swansea to enable staff totake advantage of public transport.

We also provide all staff with thebenefit of an interest free loan for
public transport passes.
The Group only operates twocompany cars for its engineers and has
no plans to increase this.

Corporate responsibility 41 - 45

Water consumption

A central booking facility is provided
for staff to request train and airline
tickets, avoiding the need for themto fund the costs up front and toencourage staff to use the service.
Monitoring systems are being put inplace to more accurately measurebusiness travel by employees.

Environmental risks
The Group has reviewed the risksfacing its business operations as aresult of climate change. The volume
of motor insurance claims for any
given portfolio of business is to alarge degree dependent upon weather
conditions. The risk associatedwith climate change is the potentialchange to claims frequency throughthe impact of more extreme weather
patterns. It is virtually impossible
to model the potential impact ofclimate change on claims frequency
as the actual climate change induced
outcome for the UK is unknown.
However, the Group does assess
the potential costs associated witha number of disaster scenarios suchas a major storm in the South East,
major flood on the East Coast, anda complete flooding of the Thamesin the London area. The Group
maintains sufficient reinsurance cover
to provide protection in the event ofcatastrophes of this nature.

Henry’s Pot supports Penarth
Badminton Club

46 BOARD OF DIRECTORSThe Board of Directors
Directors (names from left to right)
Manfred Aldag
Stuart Clarke (Company Secretary)
Margaret Johnson
Keith James
Kevin Chidwick
Alastair Lyons
Henry Engelhardt
Lucy Kellaway
David Stevens
Martin JacksonJohn Sussens

Alastair Lyons CBE (53)
Chairman (N)Kevin Chidwick, (43)Finance Director

Alastair was appointed Chairman of the Company
in July 2000. He is also Executive Chairman ofPartners for Finance Limited, and Non-executive
Chairman of Buy-as-you-View Holdings Limited,and of Higham Dunnett Shaw plc.

Kevin is responsible for finance, information
technology, facilities and investments. He
joined Admiral in 2005, becoming a Director in
September 2006.

He has previously been Chief Executive of the
National Provident Institution and the National& Provincial Building Society, Managing Directorof the Insurance Division of Abbey National plc,
and Director of Corporate Projects at National
Westminster Bank plc. Alastair has also been a
Non-executive Director of the Department forTransport and of the Department for Work andPensions.
A Fellow of the Institute of Chartered
Accountants, he was awarded the CBE in the 2001
Birthday Honours for services to social security.

Henry Engelhardt, (49)
Chief Executive Officer
Henry is a founder Director of Admiral and was
recruited by the Brockbank Group in 1991 to set
up the Admiral business.
He was part of the management team that led

KEY A - Audit Committee member
R - Remuneration Committee member
N - Nominations Committee member

the MBO in 1999. Prior to joining Admiral, he
was Marketing and Sales Manager for Churchill
Insurance.
He has substantial experience in direct response
financial services in the United Kingdom, UnitedStates and France. He has an MBA from Insead.

Prior to Admiral, Kevin has been in UK financial
services for over 20 years. He has held a numberof senior roles in other insurance organisations
including, most recently, Finance Director ofEngage Mutual Assurance and Cigna UK.
He is a fellow of the Chartered Institute ofCertified Accountants and has an MBA from
London Business School.

David Stevens (45)
Chief Operating Officer
David is a founder Director of Admiral. Initially
the Marketing Director, he was appointed
Director responsible for pricing in 1996 andclaims and pricing in 1999. He was appointed as
Chief Operating Officer in 2004.
He joined Admiral in 1991 from McKinsey & Co.
where he worked in the Financial Interest Group,
London office. Prior to working for McKinsey &Co, he worked for Cadbury Schweppes in the
United Kingdom and the United States.
David has an MBA from Insead.

The Board of Directors 46 - 47

ADMIRAL GROUP plc 47

Manfred Aldag (56)Non-executive Director (N)Margaret Johnson (47)Non-executive Director (A,R)

Lucy Kellaway (46)Non-executive Director (N)Manfred was appointed a Non-executive Director of
the Company in 2003 as a representative of Munich
Re. He graduated from University of Essen andhas a degree in Economics/Business Management(Diplom-Kaufmann).

Margaret was appointed Non-executive Director of
the Company in September 2006. She is currently
Group Managing Director of the international
advertising agency Leagas Delaney and has been withthat Company for the past 11 years.

He has worked for Munich Re since September
1981 and is currently the Senior Executive Manager
responsible for Northern Europe (United Kingdom,
Ireland, Netherlands and the Nordic countries).

Margaret joined the Group’s Audit and Remuneration
Committees on appointment to the Board.

Lucy joined the Board as a Non-executive
Director in September 2006. She is the
management columnist on the Financial Times
and author of various books. In 20 years on
the FT she has been oil correspondent, a Lex
columnist and Brussels correspondent.

Martin Jackson (58)Non-executive Director (A, R)

Keith James OBE (62)Non-executive Director (A, N)

John Sussens (61)Non-executive Director (R)Martin was appointed Non-executive Director andChairman of the Audit Committee in August 2004.

Keith was appointed a Non-executive Director
in December 2002. He is Chairman of theNominations Committee and is also the
Independent Chairman of Admiral Insurance
Company Limited and Inspop.com Limited.

John was appointed the Senior Independent Nonexecutive Director in August 2004, and is Chairmanof the Remuneration Committee. He is also a Nonexecutive Director of Cookson plc, Phoenix IT GroupPlc, and Anglo & Overseas Trust Plc.

He is also a Non-executive Director of Julian
Hodge Bank Limited and is Non-executive
Chairman of Atlantic Venture Capital Limited andInternational Greetings plc.

He was the Group Managing Director of Misys plc
between 1998 and May 2004 having been on the
Board of the Company since 1989. Prior to joining
Misys, he was Manufacturing Director at JC Bamford
Excavators Limited. He was a Non-executive Director
at Chubb plc between 2001 and 2003.

He was the Group Finance Director of Friends
Provident plc between 2001 and 2003 andFriends’ Provident Life Office between 1999 and2001. Prior to that he was the Group FinanceDirector at London & Manchester Groupplc from 1992 to 1998, up to the date of its
acquisition by Friends’ Provident Life Office.
Martin is also a Non-executive Director of IG
Holdings plc.
He is a fellow of the Institute of Chartered
Accountants.

He is a solicitor and was the Chairman ofEversheds LLP from June 1995 to April 2004. He
was a Non-executive Director of Bank of Walesplc between 1988 and 2001 and AXA Insurance
Company Limited between 1992 and 2000. Keith
was awarded an OBE in 2005 for services tobusiness and the community in Wales.

Lucy also joined the Nominations Committee on
appointment to the Board.

4 8 F I N A N C I A L S TATE M E N T S

ADMIRAL GROUP plc 49

50-51

Directors’ report

52-53

Independent auditor’s report

54

Consolidated income statement

55

Consolidated balance sheet

56

Consolidated statement of recognised
income and expense

57

Consolidated cash flow statement

58-90

Notes to the financial statements

91

Consolidated financial summary

92-97

Admiral Group plc Company financial statements

Financial statements 48 - 97

Financial statements

5 0 F I N A N C I A L S TATE M E N T S

Director’s report
The Directors present their Annual Report andthe audited financial statements for the year
ended 31 December 2006.

Business review
The Company is the holding Company for
the Admiral Group of companies. The Group’s
principal activity continues to be the selling
and administration of private motor insurance
and related products.
Detailed descriptions of the Group’s activities,
results and prospects are contained in the
Chairman’s statement, the Chief Executive’s
statement and the financial review.

Group results and dividends
The profit for the year, after tax but before
dividends, amounted to £103.7m (2005: £84.7m).
The Directors declared and paid dividends of£70.1m during 2006 (2005: £49.2m) – refer tonote 14 for further details.
The Directors are proposing a final dividend of£62.3m (24.0p per share), payable on 25 May
2007.

Share capital
Other than the holdings of the Directors as
disclosed in the remuneration report, so far as
the Directors are aware, or have been notified
pursuant to section 198 of the Companies Act
1985, the following shareholders have interests
in 3% or more of the ordinary share capital of
the Company at 28 February 2007:
Number ofshares%Munich Re

37,540,469

14.36%

Capital Group
Companies Inc

12,766,870

4.88%

Jupiter AssetManagement

12,361,774

4.73%

Fidelity Investments

12,244,822

4.68%

College Retirement
Equities Fund

10,438,937

4.00%

Directors and their interests
The present Directors of the Company are
shown on the inside cover of this report, whilst
Directors’ interests in the share capital of theCompany are set out in the remuneration
report.

Charitable and political donations
During the year the Group donated £38,000(2005: £108,000) to various local and national
charities. The Group has never made political
donations. Refer to the corporate responsibility
report for further detail.

Employee policies
Detailed information on the Group’s
employment practices is set out in thecorporate responsibility report.
The Group purchases appropriate liability
insurance for all staff and Directors.

Creditor payment policy
It is the policy of the Group to pay all purchaseinvoices by their due date, and appropriatequality measures are in place to monitor
and encourage this. At the end of the year
outstanding invoices represented 28 days
purchases (2005: 30).

Annual General Meeting
It is proposed that the next AGM be heldat The St David’s Hotel and Spa, Cardiff on
Wednesday 16 May 2007, at 3.00 pm, notice of
which will be sent to shareholders with
the Annual Report.

Directors’ responsibilities
The Directors are responsible for preparing
the Annual Report and the Group and Parent
Company financial statements, in accordancewith applicable law and regulations.

Company law requires the Directors to
prepare Group and Parent Company financial
statements for each financial year. Under that
law they are required to prepare the Groupfinancial statements in accordance with
International Financial Reporting Standards(IFRS) as adopted by the EU and applicablelaw and have elected to prepare the Parent
Company financial statements in accordancewith UK Accounting Standards and applicablelaw (UK Generally Accepted Accounting
Practice).
The Group financial statements are required bylaw and IFRS as adopted by the EU to present
fairly the financial position and performance of
the Group; the Companies Act 1985 provides
in relation to such financial statements thatreferences in the relevant part of that Act
to financial statements giving a true and fairview are references to their achieving a fairpresentation.
The Parent Company financial statements are
required by law to give a true and fair view ofthe state of affairs of the Parent Company.
In preparing each of the Group and Parent
Company financial statements, the Directors
are required to:•	select suitable accounting policies and thenapply them consistently•	make judgments and estimates that arereasonable and prudent•	for the Group financial statements, state
whether they have been prepared inaccordance with IFRS as adopted by the EU•	for the Parent Company financial
statements, state whether applicable UK
Accounting Standards have been followed,
subject to any material departures disclosed
and explained in the Parent Company
financial statements; and•	prepare the financial statements on thegoing concern basis unless it is inappropriate
to presume that the Group and the Parent
Company will continue in business
The Directors are responsible for keeping
proper accounting records that disclose withreasonable accuracy at any time the financial

position of the Parent Company and enable
them to ensure that its financial statementscomply with the Companies Act 1985. They
have general responsibility for taking such steps
as are reasonably open to them to safeguard
the assets of the Group and to prevent anddetect fraud and other irregularities.
Under applicable law and regulations, theDirectors are also responsible for preparinga Directors’ report, Directors’ remuneration
report and corporate governance statementthat comply with that law and thoseregulations.
The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination offinancial statements may differ from legislationin other jurisdictions.

Disclosure of information to auditors
The Directors who held office at the dateof approval of this Directors’ report confirm
that, so far as they are each aware, there is
no relevant audit information of which theCompany’s auditor is unaware; and each
Director has taken all the steps that he ought
to have taken as a Director to make himself
aware of any relevant audit information and toestablish that the Company’s auditor is awareof that information.

Auditor
The Company’s auditor, KPMG Audit Plc, has
indicated willingness to continue in office andresolutions to reappoint it and to authorise
the Directors to fix its remuneration will be
proposed at the Annual General Meeting.
By order of the Board,

Stuart Clarke
Company Secretary
5 March 2007

Financial statements 48 - 97

ADMIRAL GROUP plc 51

5 2 Financial s tat e m e n t s

Independent auditor’s reportto the members of Admiral Group plc
We have audited the Group and Parent
Company financial statements (the ‘financial
statements’) of Admiral Group plc for the year
ended 31 December 2006 which comprise
the Group Income Statement, the Group andParent Company Balance Sheets, the Group
Cash Flow Statement, the Group Statementof Recognised Income and Expense and therelated notes. These financial statements havebeen prepared under the accounting policies
set out therein. We have also audited theinformation in the Directors’ remuneration
report that is described as having been audited.
This report is made solely to the Company’s
members, as a body, in accordance with section
235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state
to the Company’s members those matters weare required to state to them in an auditor’sreport and for no other purpose. To the fullest
extent permitted by law, we do not accept orassume responsibility to anyone other than the
Company and the Company’s members as abody, for our audit work, for this report, or forthe opinions we have formed.

Respective responsibilities of
Directors and auditors
The Directors’ responsibilities for preparing
the Annual Report and the Group financial
statements in accordance with applicablelaw and International Financial ReportingStandards (IFRS) as adopted by the EU, andfor preparing the Parent Company financial
statements and the Directors’ remuneration
report in accordance with applicable law
and UK Accounting Standards (UK Generally
Accepted Accounting Practice) are set out in
the Statement of Directors’ Responsibilities
above.

Our responsibility is to audit the financial
statements and the part of the Directors’
remuneration report to be audited inaccordance with relevant legal and regulatory
requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether
the financial statements give a true and fairview and whether the financial statements andthe part of the Directors’ remuneration report
to be audited have been properly preparedin accordance with the Companies Act 1985
and, as regards the Group financial statements,
Article 4 of the IAS Regulation. We also report
to you whether in our opinion the information
given in the Directors’ report is consistent withthe financial statements. The information givenin the Directors’ Report includes that specificinformation presented in the Chairman’sstatements, the Chief Executive’s statement andthe financial review that is cross referred fromthe business review section of the Directors’
Report.
In addition we report to you if, in our opinion,
the Company has not kept proper accounting
records, if we have not received all theinformation and explanations we require forour audit, or if information specified by law
regarding Directors’ remuneration and othertransactions is not disclosed.
We review whether the corporate governancestatement reflects the Company’s compliancewith the nine provisions of the 2003 Combined
Code specified for our review by the Listing
Rules of the Financial Services Authority, andwe report if it does not. We are not required
to consider whether the Board’s statements on
internal control cover all risks and controls, orform an opinion on the effectiveness of theGroup’s corporate governance procedures or its
risk and control procedures.

ADMIRAL GROUP plc 53

Basis of audit opinion
We conducted our audit in accordance with
International Standards on Auditing (UK and
Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis,of evidence relevant to the amounts anddisclosures in the financial statements andthe part of the Directors’ remuneration report
to be audited. It also includes an assessmentof the significant estimates and judgments
made by the Directors in the preparationof the financial statements, and of whether
the accounting policies are appropriate to
the Group’s and Company’s circumstances,consistently applied and adequately disclosed.
We planned and performed our audit so as toobtain all the information and explanations
which we considered necessary in orderto provide us with sufficient evidence togive reasonable assurance that the financial
statements and the part of the Directors’
remuneration report to be audited are freefrom material misstatement, whether caused byfraud or other irregularity or error. In forming
our opinion we also evaluated the overall
adequacy of the presentation of informationin the financial statements and the part of the
Directors’ remuneration report to be audited.

OpinionIn our opinion:•	the Group financial statements give a trueand fair view, in accordance with IFRS as
adopted by the EU, of the state of theGroup’s affairs as at 31 December 2006 andof its profit for the year then ended;•	the Group financial statements have been
properly prepared in accordance with theCompanies Act 1985 and Article 4 of the
IAS Regulation;•	the Parent Company financial statements
give a true and fair view, in accordance with
UK Generally Accepted Accounting Practice,of the state of the Parent Company’s affairs
as at 31 December 2006;•	the Parent Company financial statements
and the part of the Directors’ remuneration
report to be audited have been properly
prepared in accordance with the Companies
Act 1985; and•	the information given in the Directors’
report is consistent with the financial
statements.

KPMG Audit Plc
Chartered Accountants
Registered Auditor
Cardiff
5 March 2007

Financial statements 48 - 97

We read the other information containedin the Annual Report and consider whether
it is consistent with the audited financial
statements. We consider the implications forour report if we become aware of any apparent
misstatements or material inconsistencies withthe financial statements. Our responsibilities do
not extend to any other information.

5 4 Financial s tat e m e n t s

Consolidated income statement
		Year ended:
31 December 2006

31 December 2005

£000

£000

Insurance premium revenue

188,288

176,214

Insurance premium ceded to reinsurers(43,333)(36,760)Note

Net insurance premium revenue

5

144,955

139,454

Other revenue

6

131,621

93,405

Profit commission

7

19,926

14,735Investment and interest income

8

14,464

15,518

Net revenue

310,966

263,112

Insurance claims and claims handlingexpenses(136,472)(121,123)

Insurance claims and claims handlingexpenses recovered from reinsurers

29,327

20,597

Net insurance claims(107,145)(100,526)

Expenses

9(54,528)(40,492)

Share scheme charges

9, 26

(933)

(438)

Total expenses(162,606)(141,456)

Operating profit

148,360

121,656

Finance charges

12(1,018)(2,162)

Profit before tax

10

147,342

119,494

Taxation expense

13(43,620)(34,774)

103,72284,720

Profit after tax attributable to equity
holders of the Company
Earnings per share:
Basic

15

39.8p

32.7p

Diluted

15

39.8p

32.7p

Dividends declared (total)

14

70,10449,190

Dividends declared (per share)

14

27.0p

19.0p

ADMIRAL GROUP plc 55

Consolidated balance sheet

31 December 2006

31 December 2005

Note

£000

£000

Property, plant and equipment

16

7,448

4,636

Intangible assets

17

66,75766,490Financial assets

18395,938

378,747

Reinsurance assets

19

74,68954,166

Trade and other receivables

20

16,931

9,392

Cash and cash equivalents

21

191,242

150,152753,005

663,583

ASSETS

Total assets

EQUITY
Share capital

26

261

260

Share premium account27

13,145

13,145Retained earnings

27

205,682

167,990

Other reserves

27

(33)

17

219,055

181,412

Total equity

LIABILITIESInsurance contracts

19

294,425

254,130

Financial liabilities

22-

22,000

Deferred income tax

25

981

3,550

Trade and other payables

23

215,137

182,935

Current tax liabilities

23,407

19,556

Total liabilities

533,950

482,171

Total equity and total liabilities

753,005

663,583

These financial statements were approved by the Board of Directors on 5 March 2007 and weresigned on its behalf by:

Kevin Chidwick
Director

Financial statements 48 - 97

As at:

5 6 Financial s tat e m e n t s

Consolidated statement of recognised income and expense
As at:
31 December 2006

31 December 2005

£000

£000

Exchange differences on translation of foreign
operations

(50)

-

Net expense recognised directly in equity

(50)

-

Profit for the period

103,72284,720Total recognised income and expense for theperiod103,672

84,720ADMIRAL GROUP plc 57

31 December 2006
£000
103,72231 December 2005
£000
84,720

2,489
446
(624)
2,667

1,824
896
893
1,247

151
40,295(20,523)503
38,023
11,971(23,150)(18,693)

33,652
1,018
43,62018,041
2,162
34,774

183,763

176,361(1,073)(53,413)

182,690(1,018)(40,931)

122,948(2,617)(26,090)

Net cash flow from operating activities
Cash flows from investing activities:
Purchases of property, plant andequipment and software

140,741

94,241(6,046)(3,999)Net cash used in investing activities
Cash flows from financing activities:
Repayments of borrowings
Capital element of new finance leases
Repayment of finance lease liabilities
Equity dividends paid

(6,046)(3,999)(22,000)(1,451)(70,104)(10,667)
1,201
(635)
(49,190)(93,555)(59,291)

41,140150,152(50)

30,951
119,201-

191,242

150,152

Note
Profit after tax
Adjustments for non-cash items:- Depreciation- Amortisation of software- Unrealised (gains) / losses on investments- Share scheme charge
Loss on disposal of property, plant andequipment and software
Change in gross insurance contract liabilities
Change in reinsurance assets
Change in trade and other receivables,
including from policyholders
Change in trade and other payables,
including tax and social security
Interest expense
Taxation expense
Cash flows from operating activities,
before movements in investments
Net cash flow into investments held atfair value
Cash flows from operating activities, netof movements in investments
Interest payments
Taxation payments

Net cash used in financing activities
Net increase in cash and cash
equivalents
Cash and cash equivalents at 1 January
Effects of changes in foreign exchange rates
Cash and cash equivalents at end of
period21

Financial statements 48 - 97

Consolidated cash flow statement

5 8 Financial s tat e m e n t s

Notes to the financial statements
1.	General information and basis ofpreparation
Admiral Group plc is a Company incorporated
in England and Wales. Its registered office is
at Capital Tower, Greyfriars Road, Cardiff CF10
3AZ and its shares are listed on the London
Stock Exchange.
The financial statements comprise theresults and balances of the Company and its
subsidiaries (together referred to as the Group)for the two years ended 31 December 2005
and 2006. The financial statements of theCompany’s subsidiaries are consolidated in
the Group financial statements. The Company
controls 100% of the voting share capital of allits subsidiaries. The Parent Company financial
statements present information about theCompany as a separate entity and not about
its Group. In accordance with International
Accounting Standard (IAS) 24, transactions
or balances between Group companies thathave been eliminated on consolidation are notreported as related party transactions.
The consolidated financial statements havebeen prepared and approved by the Directors
in accordance with International Financial
Reporting Standards (IFRS) as adopted by
the European Union (EU). The Company has
elected to prepare its Parent Company financial
statements in accordance with UK Generally
Accepted Accounting Practice (GAAP).
Other than those listed below, the Group has
applied all adopted IFRS and interpretations
adopted by the EU at 31 December 2006,
including all amendments to extant standards
that are not effective until later accounting
periods.
The following IFRS adopted by the EU wereavailable for early adoption but have notbeen applied by the Group in these financial
statements:•	IFRS 7 (Financial instruments: Disclosure)– applicable for years commencing on orafter 1 January 2007; and•	Proposed amendment to IAS 1 (Capital
disclosures)
The application of IFRS 7 and the proposed
amendment to IAS 1 in the current year
would not have affected the balance sheetor the income statement as the standards areconcerned only with disclosure. The Groupplans to adopt these in 2007.
The accounting policies set out below
have, unless otherwise stated, been appliedconsistently to all periods presented in theseGroup financial statements.
The financial statements are prepared on thehistorical cost basis, except for the revaluationof financial assets classified as at fair value
through profit or loss.
Subsidiaries are entities controlled by theGroup. Control exists when the Group has
the power, directly or indirectly, to govern thefinancial and operating policies of an entity
so as to obtain benefits from its activities. In
assessing control, potential voting rights thatare currently exercisable or convertible aretaken into account. The financial statements ofsubsidiaries are included in the consolidated
financial statements from the date that control
commences until the date that control ceases.
The preparation of financial statements
in conformity with adopted IFRS requires
management to make judgements, estimatesand assumptions that affect the application ofpolicies and reported amounts of assets andliabilities, income and expenses. The estimatesand associated assumptions are based on
historical experience and various other factorsthat are believed to be reasonable under thecircumstances, the results of which form thebasis of making the judgements about carrying
values of assets and liabilities that are notreadily apparent from other sources.

ADMIRAL GROUP plc 59

2. Significant estimates
Estimation techniques used in calculation ofclaims provisions:
Estimation techniques are used in thecalculation of the provisions for claims
outstanding, which represents a projection of
the ultimate cost of settling claims that haveoccurred prior to the balance sheet date andremain unsettled at the balance sheet date.
The key area where these techniques are used
relates to the ultimate cost of reported claims.
A secondary area relates to the emergence ofclaims that occurred prior to the balance sheet
date, but had not been reported at that date.
The estimates of the ultimate cost of reported
claims are based on the setting of claim
provisions on a case-by-case basis, for all but
the simplest of claims.
The sum of these provisions are comparedwith projected ultimate costs using a variety
of different projection techniques (including
incurred and paid chain ladder and an average
cost of claim approach) to allow an actuarialassessment of their likely accuracy and toinclude allowance for unreported claims.
The most significant sensitivity in the use of
the projection techniques arises from any
future step change in claims costs, which
would cause future claim cost inflation todeviate from historic trends. This is most
likely to arise from a change in the regulatory
or judicial regime that leads to an increase
in awards or legal costs for bodily injury
claims that is significantly above or below thehistorical trend.

The claims provisions are subject toindependent review by the Group’s actuarial
advisors.

3. Significant accounting policiesa) Revenue recognition
Premiums, ancillary income and profit
commission:
Premiums relating to insurance contracts arerecognised as revenue proportionally over theperiod of cover.
Income earned on the sale of ancillary
products and income from policies paidby instalments is credited to the income
statement over the period matching theGroup’s obligations to provide services. Where
the Group has no remaining contractual
obligations, the income is recognised
immediately. An allowance is made for
expected cancellations where the customer
may be entitled to a refund of ancillaryamounts charged.
Under some of the co-insurance andreinsurance contracts under which motor
premiums are shared or ceded, profit
commission may be earned on a particular
year of account, which is usually subject toperformance criteria such as loss ratios andexpense ratios. The commission is dependent
on the ultimate outcome of any year, withincome being recognised based on loss andexpense ratios used in the preparation of thefinancial statements.
Income is allocated to profit commission
in the income statement when the right toconsideration is achieved, and is capable ofreliable measurement.
Revenue from Gladiator and Confused.com:
Commission from these activities is credited toincome on the sale of the underlying insurance
policy.

Financial statements 48 - 97

The estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in theyear in which the estimate is reviewed if thisrevision affects only that year, or in the yearof the revision and future years if the revisionaffects both current and future years.

6 0 Financial s tat e m e n t s

Investment income:Investment income from financial assets
comprises interest income and net gains (bothrealised and unrealised) on financial assets
classified as fair value through profit and loss.
b) Segment reporting
The Group’s primary format for segment
reporting is business segments. There is nosecondary segment. A business segment isdefined as a group of assets and operations
engaged in providing products and services
that are subject to risks and returns that are
different from other business segments.
For the Group, the risks and returns of its
insurance broking activities, namely Gladiator
Commercial and Confused.com, are clearly
distinguishable from its motor insurance
segment. This is reflected in the Group’s
management and organisation structure andinternal financial reporting systems.
c) Foreign currency translation
Functional and presentation currency:
Items included in the financial statementsof each of the Group’s entities are measured
using the currency of the primary economic
environment in which the entity operates(‘the functional currency’). The consolidated
financial statements are presented in thousandsof pounds sterling, which is the Group’s
presentation currency.
Transactions and balances:
Foreign currency transactions are translated
into the functional currency using the exchange
rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting
from the settlement of such transactions, andfrom the translation at year end exchange rates
of monetary assets and liabilities denominatedin foreign currencies are recognised in theincome statement.

Translation differences on non-monetary items,
such as equities held at fair value throughprofit or loss, are reported as part of the fairvalue gain or loss. Translation differences on
non-monetary items are included in the fairvalue reserve in equity.
Translation of financial statements offoreign branches
The financial statements of foreign branches
whose functional currency is not pounds
sterling are translated into the Group
presentation currency (sterling) as follows:(i)	Assets and liabilities for each balance sheet
presented are translated at the closing rate
at the date of that balance sheet;(ii)	Income and expenses for each income
statement are translated at averageexchange rates (unless this average is not areasonable approximation of the cumulative
effect of the rates prevailing on thetransaction dates, in which case income andexpenses are translated at the date of thetransaction); and(iii)	All resulting exchange differences arerecognised as a separate component ofequity.

d) Insurance contracts and reinsurance assets
Premium:
The proportion of premium receivable on
in-force policies relating to unexpired risks isreported in insurance contract liabilities andreinsurance assets as the unearned premiumprovision – gross and reinsurers’ sharerespectively.
Claims:Claims and claims handling expenses arecharged as incurred, based on the estimateddirect and indirect costs of settling all liabilities
arising on events occurring up to the balance
sheet date.

The provision for claims outstanding comprises
provisions for the estimated cost of settling all
claims incurred but unpaid at the balance sheet
date, whether reported or not. Anticipatedreinsurance recoveries are disclosed separately
as assets.
Whilst the Directors consider that thegross provisions for claims and the related
reinsurance recoveries are fairly stated on thebasis of the information currently available tothem, the ultimate liability will vary as a resultof subsequent information and events and may
result in significant adjustments to the amounts
provided.

e) Intangible assets
Goodwill:
All business combinations are accounted forusing the purchase method. Goodwill has beenrecognised in acquisitions of subsidiaries, andrepresents the difference between the cost of
the acquisition and the fair value of the net
identifiable assets acquired.
The classification and accounting treatment ofacquisitions occurring before 1 January 2004
have not been reconsidered in preparing theGroup’s opening IFRS balance sheet at 1 January
2004 due to the exemption available in IFRS 1(First time adoption).

Adjustments to the amounts of claims
provisions established in prior years arereflected in the income statement for theperiod in which the adjustments are made anddisclosed separately if material. The methods
used, and the estimates made, are reviewed
regularly.

In respect of acquisitions prior to 1 January
2004, goodwill is included at the transition
date on the basis of its deemed cost, which
represents the amount recorded under UK
GAAP, which was tested for impairment at thetransition date. On transition, amortisation of
goodwill has ceased as required by IFRS 1.

Provision for unexpired risks is made where
necessary for the estimated amount required
over and above unearned premiums to meet
future claims and related expenses.

Goodwill is stated at cost less any accumulated
impairment losses. Goodwill is allocated to
cash generating units (CGU’s) according tobusiness segment and is reviewed annually for
impairment.

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 are classified
as reinsurance contracts. A contract is only
accounted for as an insurance or reinsurance
contract where there is significant insurance
risk transfer between the insured and theinsurer.
The benefits to which the Group is entitled underthese contracts are held as reinsurance assets.
The Group assesses its reinsurance assets for
impairment on a regular basis, and in detail every
six months. If there is objective evidence that theasset is impaired, then the carrying value will be
written down to its recoverable amount.

The Goodwill held on the balance sheet at
31 December 2006 is allocated solely to theprivate motor insurance segment.
Impairment of goodwill:
The annual impairment review involves
comparing the carrying amount to theestimated recoverable amount (by allocating
the goodwill to CGU’s) and recognising an
impairment loss if the recoverable amountis lower. Impairment losses are recognised
through the income statement and are notsubsequently reversed.
The recoverable amount is the greater of the net
realisable value and the value in use of the CGU.
The value in use calculations use cash flow
projections based on financial budgets
approved by management covering a threeyear period. Cash flows beyond this period areconsidered, but not included in the calculation.

Financial statements 48 - 97

ADMIRAL GROUP plc 61

6 2 Financial s tat e m e n t s

The key assumptions used in the value in use
calculations are those regarding growth rates
and expected changes in pricing and expenses
incurred during the period. Management
estimates growth rates and changes in pricing
based on past practices and expected futurechanges in the market.
Deferred acquisition costs:
Acquisition costs comprise all direct andindirect costs arising from the conclusion of
insurance contracts. Deferred acquisition costs
represent the proportion of acquisition costs
incurred that corresponds to the unearned
premiums provision at the balance sheet date.
This balance is held as an intangible asset. It
is amortised over the term of the contract aspremium is earned.
Software:Purchased software is recognised as anintangible asset and amortised over its
expected useful life (generally between two
and four years). The carrying value is reviewed
every six months for evidence of impairment,with the value being written down if any
impairment exists. Impairment may be reversed
if conditions subsequently improve.
f) Property, plant and equipment anddepreciation
All property, plant and equipment is statedat cost less accumulated depreciation.
Depreciation is calculated using the straightline method to write off the cost less residual
values of the assets over their useful economic
lives. These useful economic lives are as
follows:
Motor vehicles

4 years

Fixtures, fittings and equipment

4 years

Computer equipment

2 to 4years

Improvements to shortleasehold properties

4 years

Impairment of property, plant and equipment:
In the case of property, plant and equipment,
carrying values are reviewed at each balance
sheet date to determine whether there are
any indications of impairment. If any such
indications exist, the asset’s recoverable
amount is estimated and compared to thecarrying value. The carrying value is the higherof the net realisable value and the asset’svalue in use. Impairment losses are recognised
through the income statement.
g) Leased assets
The rental costs relating to assets held underoperating leases are charged to the income
statement on a straight-line basis over the lifeof the lease.
Leases under the terms of which the Groupassumes substantially all of the risks andrewards of ownership are classed as financeleases. Assets acquired under finance leases areincluded in property, plant and equipment at
fair value on acquisition and are depreciated in
the same manner as equivalent owned assets.
Finance lease and hire purchase obligations
are included in creditors, and the finance costs
are spread over the periods of the agreements
based on the net amount outstanding.
h) Financial assets – investments andreceivables
Financial assets are classified according to the
purpose for which they were acquired. The
Group’s investments in quoted fixed income
and other debt securities are classified as
financial assets at fair value through profit orloss at inception.
Financial assets classified as fair value throughprofit and loss are initially recorded at cost(which equates to fair value) and subsequently
carried at fair value (based on closing bid
prices on the balance sheet date, or the last
trading day before the balance sheet date) withchanges in the fair value of these investments
being recognised through the income
statement.

ADMIRAL GROUP plc 63i) Cash and cash equivalents
Cash and cash equivalents includes cashin hand, deposits held at call with banks,and other short-term deposits with original
maturities of three months or less.
j) Share capital
Shares are classified as equity when there is no
obligation to transfer cash or other assets.
k) Loans and borrowings
Interest bearing loans and borrowings
are recognised initially at fair value lessattributable transaction costs. Subsequent toinitial recognition, interest bearing loans andborrowings are stated at amortised cost withany difference between cost and redemption
value being recognised in the income statement
over the life of the borrowings on an effective
interest basis.
l) Employee benefits
Pensions:
The Group contributes to a number of defined
contribution personal pension plans for its
employees. The contributions payable to theseschemes are charged in the accounting period
to which they relate.
Employee share schemes:
The Group operates a number of equity settled
compensation schemes for its employees. For
schemes commencing 1 January 2004 and after,
the fair value of the employee services received
in exchange for the grant of free shares under
the schemes is recognised as an expense, with acorresponding increase in equity.
The total charge expensed over the vesting
period is determined by reference to the fairvalue of the free shares granted (excluding theimpact of non-market vesting conditions).

Non-market conditions such as profitability
targets as well as staff attrition rates areincluded in assumptions over the numberof free shares to vest under the applicable
scheme.
At each balance sheet date, the Group revises
its assumptions on the number of shares to be
granted with the impact of any change in theassumptions recognised through income.
Refer to note 26 for further details on shareschemes.
m) Taxation
Income tax on the profit or loss for the periods
presented comprises current and deferred 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 adjustment to tax payable in respect ofprevious periods.
Deferred tax:
Deferred tax is provided in full using thebalance sheet liability method, providing for
temporary differences arising between the
carrying amount of assets and liabilities foraccounting purposes, and the amounts used fortaxation purposes.
The principal temporary differences arise fromdepreciation of property and equipment, sharescheme charges and the tax treatment of
Lloyd’s profits.
A deferred tax asset is recognised only to theextent that it is probable that future taxable
profits will be available against which the asset
can be utilised.

Financial statements 48 - 97

Trade and other receivables are stated at their
historic cost (discounted if material) unless they
are impaired. Impairment losses are recognised
through the income statement.

6 4 Financial s tat e m e n t s

4. Segment reporting
Revenue and results for the year ended 31 December 2006, split by business segment are shown
below. Consolidation adjustments represent the elimination of inter-segment trading, specificallyinterest charged on inter-company loans.
As noted above, the Directors consider there to be two business segments. These are private
motor insurance and insurance broking (Confused.com and Gladiator Commercial). No
geographical business split has been presented as the results of the Group’s Spanish operation are
not material to the 2006 figures.

		
31 December 2006
Private motor
insurance

Insurance
broking

Consolidation
adjustment

Group

£000

£000

£000

£000

Net revenue

266,168

45,069(271)

310,966

Profit after tax

85,69918,023-

103,722

2,366

123

-

2,489

Other segment items :Depreciation

Amortisation
6,508
6,508
					
The segment assets and liabilities at 31 December 2006 and capital expenditure for the year are as
follows. Consolidation adjustments represent the elimination of inter-company balances.
		
31 December 2006
Private motor
insurance

Insurance
broking

Consolidation
adjustment

Group

£000

£000

£000

£000

Total assets

736,160

18,780(1,935)753,005

Total liabilities

525,932

9,953(1,935)533,950

Intangible assets

6,764

-

-

6,764

Plant, property andequipment

5,088

364

-

5,452

Capital expenditure:

Revenue and results for the corresponding business segments for the year ended 31 December
2005 are reported below.

ADMIRAL GROUP plc 65

Private motor
insurance

Insurance
broking

Consolidation
adjustment

Group

£000

£000

£000

£000

Net revenue

245,854

20,732(3,474)

263,112

Profit after tax

76,773

7,947-

84,720Depreciation

1,739

85

-

1,824

Amortisation

7,769

-

-

7,769

Other segment items:

The segment assets and liabilities at 31 December 2005 and capital expenditure for the year are as
follows.
		
31 December 2005
Private motor
insurance

Insurance
broking

Consolidation
adjustment

Group

£000

£000

£000

£000

Total assets

657,390

15,672(9,479)663,583

Total liabilities

485,782

5,868(9,479)482,171

Intangible assets

7,792

-

-

7,792

Plant, property andequipment

3,475

139

-

3,614

Capital expenditure:

Financial statements 48 - 97

31 December 2005

6 6 Financial s tat e m e n t s

5. Net insurance premium revenue
31 December 2006

31 December 2005

£000

£000

Total motor insurance premiums
before co-insurance

566,608

533,616

Group gross premiums written
after co-insurance

196,378

186,989

Outwards reinsurance premiums(57,731)(28,052)

Net insurance premiums written

138,647

158,937

Change in gross unearned
premium provision(8,090)(10,775)

Change in reinsurers’ share ofunearned premium provision

14,398(8,708)Net insurance premium revenue

144,955

139,454

The Group’s share of the UK and Spanish private motor insurance business was underwritten by
Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). All
contracts are short-term in duration, lasting for 10 or 12 months.

6. Other revenue			
31 December 2006

31 December 2005

£000

£000

Ancillary revenue

81,52772,470

Revenue from Confused.com

38,517

12,044

Instalment income earned

5,676

3,768

Revenue from Gladiator

5,901

5,123

Total other revenue

131,621

93,405Ancillary revenue primarily constitutes commission from sales of insurance products thatcomplement the motor policy, but which are underwritten by external parties.

ADMIRAL GROUP plc 67

31 December 2006

31 December 2005

£000

£000

19,926

14,73531 December 2006

31 December 2005

£000

£000

Net investment return

9,925

11,342

Interest receivable

4,539

4,176

Total investment and interest income

14,464

15,518

Total profit commission

8. Investment and interest income

9. Expenses and share scheme charges
31 December 2006

31 December 2005

Insurance
contracts

Other

Total

Insurance
contracts

Other

Total

£000

£000

£000

£000

£000

£000

Acquisition of
insurance contracts

7,375

-

7,375

6,888

-

6,888

Administration andother marketingcosts

12,00935,14447,153

11,021

22,58333,604

Expenses

19,38435,14454,52817,90922,58340,492

-

933

933

-

438

438

19,38436,07755,461

17,90923,02140,930Share scheme
charges
Total expenses andshare scheme
charges

Financial statements 48 - 97

7. Profit commission

6 8 Financial s tat e m e n t s

Analysis of other administration and other marketing costs:
31 December 2006

31 December 2005

£000

£000

Ancillary sales expenses

14,505

13,378

Confused.com operating expenses

15,437

5,162

Gladiator operating expenses

3,876

3,252

Central overheads

1,326

791

Total

35,144

22,583The £12,009,000 (2005: £11,021,000) administration and marketing costs allocated to insurance
contracts is principally made up of salary costs.

Reconciliation of expenses related to insurance contracts to reported expense ratio:
31 December 2006

31 December 2005

£000

£000

Insurance contract expenses fromabove

19,384

17,909Add: claims handling expenses

3,538

3,202

Adjusted expenses

22,922

21,111

Net insurance premium revenue

144,955

139,454

Reported expense ratio

15.8%

15.1%

ADMIRAL GROUP plc 69

10. Staff costs and other expenses

31 December 2006

31 December 2005

£000

£000

36,08329,955Social security charges

3,337

2,782

Pension costs

517

490

Share scheme charges(see note 26)

2,667

1,247

Total staff expenses

42,60434,474- Owned assets

1,009

446

- Leased assets

1,480

1,378

- Software

446

896

- Deferred acquisition costs

6,062

6,873

3,292

2,969

- Fees payable for the audit of theCompany’s annual accounts

19

21- Fees payable for the audit of theCompany’s subsidiary accounts

154

189

- Fees payable for other services

60

109

Loss on disposal of property, plantand equipment

151

503

Tax services

45

91

Other services

15

18

Total as above

60

109

Salaries

Depreciation charge:

Amortisation charge:

Operating lease rentals:- Buildings
Auditor’s remuneration:

Analysis of fees paid to theauditor for other services:

The amortisation of software and deferred acquisition cost assets is charged to expenses in theincome statement.
There were no net exchange differences credited or charged to the income statement during the year.

Financial statements 48 - 97

Included in profit, before co-insurance arrangements are the following:7 0 Financial s tat e m e n t s

11. Staff numbers (including Directors)
Average for the year
2006

2005

NumberNumberDirect customer contact staff

1,593

1,377

Support staff

404

339

Total

1,997

1,716

31 December 2006

31 December 2005

£000

£000

Term loan interest

166

1,520

Finance lease interest

481

388

Letter of credit charges

221

221

Other interest payable

150

33

Total finance charges

1,018

2,162

12. Finance charges
		

13. Taxation		
31 December 2006

31 December 2005

£000

£000

45,43036,051(648)

11

44,782

36,062(1,249)

(654)

87

(634)

43,62034,774

UK Corporation tax
Current charge at 30%(Over) / under provision relating to priorperiods – corporation tax
Current tax charge
Deferred tax
Current period deferred taxation
movement
Under / (over) provision relating to priorperiods – deferred tax
Total tax charge per income statement

ADMIRAL GROUP plc 71

31 December 2006

31 December 2005

£000

£000

Profit before taxation

147,342

119,494

Corporation tax thereon at 30%

44,20335,848

Utilisation of brought forward tax
losses-(421)

Adjustments in respect of prioryear insurance technicalprovisions

17

(161)

Expenses and provisions notdeductible for tax purposes

114

152

Other differences

(153)

(21)

Adjustments relating to priorperiods

(561)

(623)

43,62034,77431 December 2006

31 December 2005

£000

£000

March 2005 (9.3p per share, paid
May 2005)-

24,049September 2005 (9.7p per share,
paid October 2005)-

25,141March 2006 (14.9p per share, paid
May 2006)

38,667-

September 2006 (12.1p per share,
paid October 2006)

31,437-

Total dividends

70,10449,190

Tax charge for the period as above

14. Dividends
Dividends were declared and paid as follows.

The dividends declared in March represent the final dividends paid in respect of the 2005 and2004 financial years. Dividends declared in September are interim distributions in respect of 2006
and 2005.
A final dividend of 24.0p per share has been proposed in respect of the 2006 financial year. Referto the Chairman’s statement and financial review for further detail.

Financial statements 48 - 97

Factors affecting the tax charge are:

7 2 Financial s tat e m e n t s

15. Earnings per share

Profit for the financial year after taxation (£000s)
Weighted average number of shares – basic
Unadjusted earnings per share – basic
Weighted average number of shares – diluted
Unadjusted earnings per share – diluted

31 December 2006

31 December 2005

103,72284,720260,632,740

258,987,515

39.8p

32.7p

260,906,740

259,387,515

39.8p

32.7p

			
The difference between the basic and diluted number of shares at the end of 2006 (being 274,000)
relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note
26 for further detail.

ADMIRAL GROUP plc 73

Improvements
to short
leaseholdbuildings

Computerequipment

Officeequipment

Furniture andMotorfittings vehicles

Total

£000

£000

£000

£000

£000

£000

At 1 January 2005

1,931

6,792

2,978

1,627

12

13,340Additions

567

2,742

155

150

-

3,614

Disposals(1,818)

-

(510)

(405)

-

(2,733)

At 31 December 2005

680

9,534

2,623

1,372

12

14,221

At 1 January 2005

1,554

4,424

2,467

1,545

1

9,991

Charge for the year

226

1,179

355

61

3

1,824

Disposals(1,352)

-

(502)

(376)

-

(2,230)At 31 December 2005

428

5,603

2,320

1,230

4

9,585

252

3,931

303

142

8

4,636

At 1 January 2006

680

9,534

2,623

1,372

12

14,221

Additions

1,655

1,672

1,684

441

-

5,452

Disposals

(2)

(15)

(138)

(1)

-

(156)

2,333

11,191

4,169

1,812

12

19,517

At 1 January 2006

428

5,603

2,320

1,230

4

9,585

Charge for the year

220

1,750

396

120

3

2,489

-

(5)

-

-

-

(5)

648

7,348

2,716

1,350

7

12,069

1,685

3,843

1,453

462

5

7,448

Cost

Depreciation

Net book amountAt 31 December 2005
Cost

At 31 December 2006
Depreciation

Disposals
At 31 December 2006
Net book amountAt 31 December 2006

Financial statements 48 - 97

16. Property, plant and equipment

7 4 Financial s tat e m e n t s

The net book value of assets held under finance leases is as follows:

Computer equipment

31 December 2006

31 December 2005

£000

£000

2,996

2,380

-

767

2,996

3,147

Office equipment

17. Intangible assets
Goodwill

Deferredacquisition costs

Software

Total

£000

£000

£000

£000

62,354

2,794

1,319

66,467

Additions

-

7,407

385

7,792

Amortisation charge-(6,873)(896)(7,769)At 31 December 2005

62,354

3,328

808

66,490Additions

-

6,179

596

6,775

Amortisation charge-(6,062)(446)(6,508)At 31 December 2006

62,354

3,445

958

66,757

Carrying amount:
At 1 January 2005

ADMIRAL GROUP plc 75

18. Financial assets

31 December 2006

31 December 2005

£000

£000

Investments held at fair value

257,634

255,937

Receivables – amounts owed bypolicyholders

138,304

122,810

Total financial assets

395,938

378,747

All receivables from policyholders are due within 12 months of the balance sheet date.
Analysis of investments held at fair value:		
31 December 2006

31 December 2005

£000

£000

257,634-

Government bonds-

83,071Other listed securities-

156,071-

16,795

257,634

255,937

Money market funds
Fixed income securities:

Variable interest securities:
Other listed securities

Management of credit and market risk
Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, theGroup only conducts business with companies with specified financial strength ratings.
The other primary form of credit risk is in respect of amounts due from policyholders. Credit riskarises due to the potential for default on credit card payments. The impact of this is mitigatedby the large customer base and the low level of the average balance recoverable. This risk isalso mitigated by the operation of controls over this area including the automated cancellation
procedures for those policies in default, resulting in minimal financial impact.
The Group switched investment strategy during the second half of 2006, away from shortduration fixed income securities and into money market cash funds or cash deposits. Prior to thischange, the Group was exposed to market risk in terms of the impact of movements in market
interest rates on the carrying value of the investment funds. This risk has now been virtuallyeliminated, as the money market funds are designed to achieve stable net asset values.
The Group’s investment returns should now directly track underlying market interest rates andhence will rise or fall in line with this benchmark. At 31 December 2006, the Group had fullyliquidated the fixed income portfolios.

Financial statements 48 - 97

The Group’s financial assets can be analysed as follows:		7 6 Financial s tat e m e n t s

19. Reinsurance assets and insurance contract liabilities
A) Management of insurance risk:
The Group is involved in issuing motor insurance contracts that transfer risk from policyholders to
the Group and its underwriting partners.
Insurance risk primarily involves uncertainty over the occurrence, amount and timing of claims
arising on insurance contracts issued. The key risk is that the frequency and / or value of theclaims arising exceeds expectation and the value of insurance liabilities established.
There are a number of elements forming part of the Group’s strategy to manage insurance 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 of the motor insurance business written to external underwriters. In 2006,
65% of the risk was shared under a co-insurance contract, under which the primary risk is borneby the co-insurer.
A further 10% was ceded under quota share reinsurance contracts.
As well as these proportional arrangements, an excess of loss reinsurance programme is alsopurchased to protect the Group against very large individual claims and catastrophe losses.
ii) Data driven pricing:
The Group’s underwriting philosophy is focused on a sophisticated data-driven approach topricing and underwriting and on exploiting the competitive advantages direct insurers enjoy overtraditional insurers through:•••Collating and analysing more comprehensive data from customers;
Tight control over the pricing guidelines in order to target profitable business sectors; andFast and flexible responsiveness to data analysis and market trends.

The Group is committed to establishing premium rates that appropriately price the underwriting
risk and exposure. Rates are set utilising a larger than average number of underwriting criteria.
The Directors believe that there is a strong link between the increase in depth of data that theGroup has been able to collate over time and the lower than average historic reported loss ratios
enjoyed by the Group.

ADMIRAL GROUP plc 77•	An effective, computerised workflow system (which along with the appropriate level ofresources 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 insurance risk.
B) Sensitivity of recognised amounts to changes in assumptions:
The following table sets out the impact on equity at 31 December 2006 that would result from a
1 per cent change in the loss ratios used for each underwriting year for which material amounts
remain outstanding.
UNDERWRITING YEAR

Loss ratio
Impact of 1% change (£000s)

TOTAL

2002

2003

2004

2005

2006

54.5%

59.5%

69.0%

82.0%

89.5%

465

1,214

1,552

1,798

529

5,558

The impact is stated net of reinsurance and includes the change in net insurance claims along withthe associated profit commission movements that result from changes in loss ratios. The figures
are stated net of tax at the current rate.

Financial statements 48 - 97iii) Effective claims management:
The Group adopts various claims management strategies designed to ensure that claims are paid
at an appropriate level and to minimise the expenses associated with claims management. These
include:7 8 Financial s tat e m e n t sC) Analysis of recognised amounts:		
31 December 2006

31 December 2005

£000

£000

Claims outstanding

202,421

170,216

Unearned premium provision

92,004

83,914

Total gross insurance liabilities

294,425

254,130

Claims outstanding

47,71041,585

Unearned premium provision

26,97912,581

Total reinsurers’ share of insurance
liabilities

74,68954,166Claims outstanding

154,711

128,631

Unearned premium provision

65,02571,333

Total net insurance liabilities

219,736

199,964

Gross:

Recoverable from reinsurers:

Net:

ADMIRAL GROUP plc 79

D) Analysis of re-estimation of claims provisions:

Financial year ended 31 December
2002

2003

2004

2005

2006

£000

£000

£000

£000

£000

124,478

115,169

142,968

170,216

202,421

One year later

114,051

111,599

137,075

162,205-

Two years later

109,490

105,748

127,613--

Three years later

101,910

100,880---

Four years later

98,904----

Five years later

-

-

-

-

-

As re-estimated at 31 December 2006

98,904

100,880

127,613

162,205-

Gross cumulative overprovision(25,574)(14,289)(15,355)(8,011)-Gross amounts:
Gross claims provision as originallyestimated
Provision re-estimated as of:Financial statements 48 - 97

The following tables set out the cumulative impact, to 31 December 2006, of the retrospective reestimation of claims provisions initially established at the end of the financial years stated. Figures
are shown gross and net of reinsurance. These tables present data on an accident year basis.

8 0 Financial s tat e m e n t s

Financial year ended 31 December
2002

2003

2004

2005

2006

Net Amounts

£000

£000

£000

£000

£000

Net claims provision as originallyestimated

71,07175,54998,120128,631

154,711One year later

64,32572,57993,910122,423-

Two years later

61,16767,726

87,761--Three years later

55,974

63,954---

Four years later

53,857----

Five years later

-

-

-

-

-

As re-estimated at 31 December 2006

53,857

63,95487,761

122,423-

Net cumulative overprovision(17,214)(11,595)(10,359)(6,208)-Provision re-estimated as of:E) Analysis of net claims provision releases:
The following table analyses the impact of movements in prior year claims provisions, in termsof their net value, and their impact on the reported loss ratio. This data is presented on anunderwriting year basis.

Financial year ended 31 December
2002

2003

2004

2005

2006

Underwriting year:

£000

£000

£000

£000

£000

2000

6,188

5,176

1,480

370

1,110

2001

2,490

7,938

2,967

5,043

1,879

2002

-

2,975

3,229

5,166

2,260

2003

-

-

1,513

4,622

5,084

2004

-

-

-

2,076

7,948

2005

-

-

-

-

2,623

Total net release

8,678

16,0899,189

17,277

20,904

Net premium revenue

81,336

79,327

107,501

139,454

144,955

Release as % of net premium
revenue

10.7%

20.3%

8.5%

12.4%

14.4%

ADMIRAL GROUP plc 81

31 December 2006

31 December 2005

£000

£000

Net claims provision at start ofperiod128,631

98,120Net claims incurred

103,607

97,325

Net claims paid

(77,527)(66,814)

Net claims provision at end of period

154,711

128,631G) Reconciliation of movement in net unearned premium provision:
31 December 2006

31 December 2005

£000

£000

Net unearned premium provision
at start of period

71,33351,850

Written in the period

138,647

160,244

Earned in the period(144,955)(140,761)

Net unearned premium provision
at end of period

65,02571,33331 December 2006

31 December 2005

£000

£000

Trade debtors

14,982

6,905

Prepayments and accrued income

1,949

2,487

Total trade and other receivables

16,931

9,392

20. Trade and other receivables

Financial statements 48 - 97

F) Reconciliation of movement in net claims provision:		8 2 Financial s tat e m e n t s

21. Cash and cash equivalents		
31 December 2006

31 December 2005

£000

£000

Cash at bank and in hand

164,989

109,506

Cash on short term deposit

26,25340,646

Total cash and cash equivalents

191,242

150,152

Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other shortterm deposits with original maturities of three months or less.

22. Financial liabilities		
31 December 2006

31 December 2005

£000

£000

-

22,00031 December 2006

31 December 2005

£000

£000

Repayments falling due within
12 months--

Repayments falling due after
12 months-

22,000-22,000Interest bearing bank loans

Analysis of borrowings:

Interest continues to be charged on amounts drawn down based on LIBOR plus a margin.

ADMIRAL GROUP plc 83

31 December 2006

31 December 2005

£000

£000

4,601

4,423

124,238

98,054

1,337

1,963

Finance leases due after 12 months

61

886

Other taxation and social security
liabilities

4,742

4,174

Other payables

13,70810,066

Accruals and deferred income(see below)

66,45063,369Total trade and other payables

215,137

182,935

31 December 2006

31 December 2005

£000

£000

Premium receivable in advance ofpolicy inception

31,77230,471

Accrued expenses

25,45624,559Deferred income

9,222

8,339

Total accruals and deferredincome as above

66,45063,369Trade payables
Amounts owed to co-insurers andreinsurers
Finance leases due within 12
monthsAnalysis of accruals and deferred income:		Financial statements 48 - 97

23. Trade and other payables

8 4 Financial s tat e m e n t s

24. Obligations under finance leases
Analysis of finance lease liabilities:
31 At December 2006
Minimum
lease
payments

Interest

£000

£000

£000

1,383

46

Between one and five years

63

More than five years

Less than one year

31 At December 2005

Principal Minimum
lease
payments

Interest

Principal

£000

£000

£000

1,337

2,171

208

1,963

2

61

921

35

886

-

-

-

-

-

-

1,446

48

1,398

3,092

243

2,849

It is the Group’s policy to lease certain of its IT equipment under finance leases. The averagelease term is two years. All leases are on a fixed repayment basis and no arrangements have beenentered into for contingent rental payments.
The fair value of the Group’s lease obligations approximates their carrying amount.

25. Deferred income tax liability
31 December 2006

31 December 2005

£000

£000

Brought forward at start of period

3,550

4,838

Movement in period(2,569)(1,288)

981

3,550

Carried forward at end of period

ADMIRAL GROUP plc 85

31 December 2006

31 December 2005

£000

£000

Tax treatment of Lloyd’s Syndicates

1,936

3,816

Tax treatment of share scheme
charges

(853)

315

Capital allowances

149

(392)

Other differences

(251)

(189)

Deferred tax liability at end of period

981

3,550

31 December 2006

31 December 2005

£000

£000

500

500

261,186,599 ordinary shares of 0.1p

261-

259,861,965 ordinary shares of 0.1p

-

260

261

260

26. Share capital

Authorised:
500,000,000 ordinary shares of 0.1p
Issued, called up and fully paid:

During 2006, 1,324,634 new ordinary shares of 0.1p were issued to the trusts administering theGroup’s share schemes.
646,634 of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes ofthis share scheme. These shares are entitled to receive dividends.
678,000 were issued to the Admiral Group Employee Benefit Trust for the purposes of theAdmiral Group Senior Executive Restricted Share Plan. The Trustees have waived the right todividend payments, other than to the extent of 0.001p per share, unless and to the extent
otherwise directed by the Company from time to time.

Financial statements 48 - 97

The net balance provided at the end of the year is made up as follows:8 6 Financial s tat e m e n t s

Staff share schemes:
Analysis of share scheme costs (per income statement):

31 December 2006

31 December 2005

£000

£000

SIP charge (note i)

495

263

UFSS charge (note ii)

438

175

Total share scheme charges

933

438

(i) The Approved Share Incentive Plan (the SIP)
Eligible employees qualify for awards under the SIP based upon the performance of the Groupin each half-year against budget. The current maximum award for each half-year amounts to
600,000 shares (or a maximum annual award of £3,000 per employee if smaller). For the 2006
financial year, a maximum of 916,328 shares (2005: 1,181,565 shares) will vest under this scheme.
The awards are made with reference to the Group’s performance against its budget. Employees
must remain in employment until the vesting date (three years 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 the financial statements for awards not yet made(and later adjusted to reflect the actual share price on the award date). Awards under the SIP are
entitled to receive dividends, and hence no adjustment has been made to this fair value.

(ii) The Unapproved Free Share Scheme (the UFSS)
This scheme is open to managers and exceptional performers within the Group (Henry Engelhardt
and David Stevens have elected not to participate) with variable awards available.
Under the scheme, individuals receive an award of free shares at no charge. A total of 380
employees received awards under this scheme during 2006. Staff must remain in employment
until the vesting date in order for the shares to vest. The maximum number of shares that can vest
relating to the 2006 scheme is 681,375.
In the 2005 scheme, for an award to vest, the total shareholder return (TSR) of Admiral Groupplc shares over the three years 2005 to 2007 must be at least equal to the TSR of the FTSE 350
index, of which the Company is a constituent. If the Company’s TSR does not meet this target, noawards will vest under the 2005 UFSS scheme.
This initial hurdle has been removed for the 2006 scheme.
Individual awards are calculated based on the growth in the Company’s earnings per share (EPS)
relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This
performance is measured over the same three-year period.

ADMIRAL GROUP plc 87

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 of free shares to beawarded under this scheme has been revised downwards to take account of these distributions.
The unadjusted fair value is based on the share price at the date on which awards were made(being £3.62 for the 2005 scheme and £6.71 for the 2006 scheme).
Number of free share awards committed at 31 December 2006:

Awards outstanding*1

Vesting date

SIP H105 scheme

581,565

September 2008

SIP H205 scheme

330,306

March 2009

SIP H106 scheme

316,328

September 2009

SIP H206 scheme

274,000

April 2010

UFSS 2005 scheme

685,000

June 2008

UFSS 2006 scheme
1st Award

604,187

April 2009

UFSS 2006 scheme
2nd Award

77,248September 2009

Total awards committed

2,868,634*1 – being the maximum number of awards expected to be made before accounting for expectedstaff attrition. Of the 2,868,634 share awards outstanding above, 2,591,199 have been issued to thetrusts administering the schemes, and are included in the issued share capital figures above.

Financial statements 48 - 97

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 threeyear period

8 8 Financial s tat e m e n t s

27. Analysis of movements in capital and reserves
SharecapitalSharepremium
account

Capitalredemption
reserve

Foreign Retained
exchange profit andreserveloss

Total
equity

£000

£000

£000

£000

£000

£000

As at 1 January 2005

259

13,145

17-

131,213

144,634

Retained profit for theperiod----84,72084,720

Dividends

-

-

-

-

(49,190)(49,190)

Issues of share capital

1

-

-

-

-

1

Share scheme charges

-

-

-

-

1,247

1,247

As at 31 December 2005

260

13,14517-

167,990

181,412Retained profit for theperiod----103,722103,722

Dividends

-

-

-

-

(70,104)(70,104)

Issues of share capital

1

-

-

-

-

1

Currency translationdifferences

-

-

-

(50)

-

(50)

Share scheme charges

-

-

-

-

2,667

2,667

Deferred tax credit on
share scheme charges

-

-

-

-

1,407

1,407

As at 31 December 2006

261

13,14517(50)

205,682

219,055

The capital redemption reserve arose in 2002 on the redemption of shares previously in issue at
below par.
The foreign exchange reserve represents the net gains or losses on translation of the Group’s net
investment in foreign operations.

ADMIRAL GROUP plc 89

28. Financial commitments

31 December 2006

31 December 2005

£000

£000

Within one year-434

Within two to five years--

Over five years

33,42529,523

Total commitments

33,42529,957

Operating leases expiring:Operating lease payments represent rentals payable by the Group for its office properties.
In addition, the Group had contracted to spend the following on property, plant and equipment
at the end of each period:

31 December 2006

31 December 2005

£000

£000

1,539

1,342

Expenditure contracted to

29. Group subsidiary companies
The Parent Company’s principal subsidiaries (all of which are 100% directly owned) are as follows:
Subsidiary

Country ofincorporation

Class of shares held

Principal activity

EUI Limited

England and Wales

Ordinary

General insuranceintermediary

Admiral Insurance
Company Limited

England and Wales

Ordinary

Insurance Company

Admiral Insurance(Gibraltar) Limited

Gibraltar

Ordinary

Insurance Company

Admiral Syndicate
LimitedEngland and Wales

Ordinary

Lloyd’s corporate
capital vehicle

Admiral Syndicate
Management Limited

England and Wales

Ordinary

Lloyd’s managing
agencyAble Insurance
Services Limited

England and Wales

Ordinary

Intermediary

Inspop.com Limited

England and Wales

Ordinary

Internet insuranceintermediary

Financial statements 48 - 97

The Group was committed to total minimum obligations under operating leases on land andbuildings as follows:9 0 Financial s tat e m e n t s

30. Related party transactions
There were no related party transactions occurring during 2006 that require disclosure. Details
relating to the remuneration and shareholdings of key management personnel are set out in the
remuneration report, above. Key management personnel are able to obtain discounted motor
insurance at the same rates as all other Group staff, typically at a reduction of 15%.

ADMIRAL GROUP plc 91

Consolidated financial summary

Figures for 2002 and 2003 have not been restated under IFRS, although have been reclassified into
the formats used in these financial statements.
Income statement
IFRS

UK GAAP

2006

2005

2004

2003

2002

£m

£m

£m

£m

£m

Total motor premiums

566.6

533.6

470.4

371.6

333.0

Net insurance premium revenue

145.0

139.5

107.5

79.3

81.4

Other revenue

131.6

93.4

69.5

50.8

40.1

Profit commission

19.9

14.7

21.7

1.4

-

Investment and interest income

14.5

15.5

11.9

6.8

7.4

Net revenue

311.0

263.1

210.6

138.3

128.9

Net insurance claims(107.1)(100.5)(74.3)(43.5)(52.6)

Total expenses(55.5)(40.9)(28.9)(34.4)(28.5)

Operating profit

148.4

121.7

107.4

60.4

47.8

Balance sheet
IFRS

UK GAAP

2006

2005

2004

2003

2002

£m

£m

£m

£m

£m

7.5

4.6

3.3

5.8

6.7

Intangible assets

66.8

66.5

66.5

62.4

66.3

Financial assets

395.9

378.7

300.7

241.6

179.1

Reinsurance assets

74.7

54.2

66.1

56.7

53.4

Property, plant and equipment

Trade and other receivables

16.9

9.4

16.7

12.5

8.9

Cash and cash equivalents

191.2

150.2

119.3

70.1

63.0

Total assets

753.0

663.6

572.6

449.1

377.4

Equity

219.1

181.4

144.6

108.1

68.9

Insurance contracts

294.4

254.1

216.1

174.8

155.1

Financial liabilities

-

22.0

33.1

35.4

47.8

Provisions for other liabilities
andcharges

-

-

-

11.7

-

Deferred income tax

1.0

3.6

4.8

6.4

3.4

Trade and other payables

215.1

182.9

164.3

104.0

98.1

Current tax liabilities

23.4

19.6

9.7

8.7

4.1

Total liabilities

753.0

663.6

572.6

449.1

377.4

Financial statements 48 - 97

Basis of preparation:
The 2006, 2005 and 2004 figures below are as stated in the financial statements preceding thisfinancial summary and issued previously. Only selected lines from the income statement and balance
sheet have been included.

9 2 F I N A N C I A L S TATE M E N T S

ADMIRAL GROUP plc 93

94

Balance sheet

95

Basis of preparation95

Accounting policies

96-97

Notes to the accounts

Financial statements 48 - 97

Parent Company financial
statements contents

9 4 Financial s tat e m e n t sParent Company
financial statements
Parent Company balance sheet
Year ended:
31 December 2006

31 December 2005

Note

£000

£000

4

103,804

103,804

591

455,61659,80855,70759,812(6,857)(17,709)

(183)

(216)

(7,040)(17,925)

Net current assets

48,66741,887

Total assets less current liabilities

152,471

145,691-(22,000)

152,471

123,691261

260

Share premium account13,145

13,145

Capital redemption reserve17

17

139,048

110,269

152,471

123,691

Fixed asset investments
Current assets
Debtors
Cash at bank and in hand

Creditors – falling due within one
year
Other creditors

7

Accruals and deferred income

Creditors – falling due after one
year
Loans

6

Net assets
Capital and reserves

8

Called up share capital

9

Profit and loss account

These financial statements were approved by the Board of Directors on 5 March 2007 and weresigned on its behalf by:

Kevin Chidwick
Director

Parent Company accounting policies
The following accounting policies have been applied consistently in dealing with items which areconsidered material in relation to the financial statements:

1. Basis of preparation
In these financial statements the following new standards have been adopted for the first time:• FRS 20 ‘Share-based payments’;•	the presentation requirements of FRS 25 ‘Financial instruments: presentation and disclosure’; and• FRS 28 ‘Corresponding amounts’.
The adoption of all three new standards did not have a material impact on either the current year
or comparative figures.
The Admiral Group plc Company financial statements have been prepared in accordance withapplicable accounting standards, under the historical cost convention and in accordance with theprovisions of Section 226 of, and Schedule 4 to, the Companies Act 1985.
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Parent
Company is not presented. Under FRS 1 (Cash flow statements) the Company is exempt fromhaving to present a cash flow statement on the grounds that its cash flows are included in theGroup’s published consolidated financial statements.
The Company has taken advantage of the exemption in FRS 8 not to disclose transactions orbalances with its 90% or more owned subsidiary undertakings on the basis that the consolidated
accounts are publicly available.
The Parent Company audit fee is not disclosed in these accounts as it is disclosed in the
consolidated Group accounts which precede them at note 10.

2. Investments
Investments in subsidiary undertakings are valued at cost less any provision for impairment in value.

3. Taxation
The charge for taxation is based on the profit for the year and takes into account taxation
deferred because of timing differences between the treatment of certain items for taxation andaccounting purposes.
Deferred tax assets are recognised to the extent that they are regarded as recoverable. They
are regarded as recoverable to the extent that, on the basis of all available evidence, it can be
regarded as more likely than not that there will be sufficient taxable profits from which the future
reversal of the underlying timing differences can be deducted.

Financial statements 48 - 97

ADMIRAL GROUP plc 95

9 6 Financial s tat e m e n t s

Notes to the Parent Company financial statements
4. Fixed asset investments

Investments in subsidiary undertakings

31 December 2006

31 December 2005

£000

£000

103,804

103,804

The Company’s principal subsidiaries (all of which are 100% directly owned) are disclosed in note
29 of the Group financial statements.

5. Debtors
31 December 2006

31 December 2005

£000

£000

Amounts owed by subsidiary
undertakings

86-

Deferred tax asset

5

4

91

4

6. Loans
Full details of the Company’s debt are included in the consolidated financial statements above.
The note, whilst prepared under IFRS also conforms to UK GAAP.

7. Other creditors – due within one year
31 December 2006

31 December 2005

£000

£000

6,775

2,738

Amounts owed to subsidiary
undertakings

10

14,971Other creditors

72

-

6,857

17,709Corporation tax payable

ADMIRAL GROUP plc 97

8. Reconciliation of movements in shareholders’ funds
Sharepremium
account

£000

£000

£000

£000

£000

259

13,145

17

79,812

93,233Retained profit for the period

-

-

-

78,40078,400

Dividends---(49,190)(49,190)

Issues of share capital

1

-

-

-

1

Share scheme charges

-

-

-

1,247

1,247

As at 31 December 2005

260

13,14517

110,269

123,691

Retained profit for the period

-

-

-

96,216

96,216

Dividends---(70,104)(70,104)

Issues of share capital

1

-

-

-

1

Share scheme charges

-

-

-

2,667

2,667

As at 31 December 2006

261

13,14517

139,048

152,471

At 1 January 2005

Capital Retained
redemption profit andreserveloss

Total
equity9. Share capital
Full details of the Company’s share capital are included in the consolidated financial statements above.

Financial statements 48 - 97

Sharecapital98 Notes

Notes

ADMIRAL GROUP plc

 DIRECTORS AND ADVISORS

Directors and advisors
Directors
Alastair Lyons CBE (Non-executive Chairman)
Henry Engelhardt (Chief Executive)
Kevin Chidwick (Finance Director, appointed 4 September 2006)
David Stevens (Chief Operating Officer)
Manfred Aldag (Non-executive Director)
Martin Jackson (Non-executive Director)
Keith James OBE (Non-executive Director)
Margaret Johnson (Non-executive Director, appointed 4 September 2006)
Lucy Kellaway (Non-executive Director, appointed 4 September 2006)
John Sussens (Senior Independent Non-executive Director)

Company Secretary
Stuart Clarke

Registered Office
Capital Tower
Greyfriars Road
Cardiff CF10 3AZ

AuditorActuarial advisors

KPMG Audit Plc
Marlborough House
Fitzalan Court
Cardiff CF24 0TE

Ernst & Young
1 More Place
London SE1 2AF

Bankers
Lloyds TSB Bank Plc
City Office
Bailey Drive
Gillingham Business Park
Kent ME08 0LS

Bank of Scotland
Corporate Banking
55 Temple Row
Birmingham B2 5LS

HSBC Business Banking
97 Bute Street
Cardiff CF10 5NA

Joint Corporate Brokers
Merrill Lynch International
2 King Edward Street
London EC1A 1HQ

Citigroup Financial Markets
UK Equity Limited
Citigroup Centre
33 Canada Square
London E14 5LB

Registrar

Solicitor

Capita IRG Plc
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU

Norton Rose
Kempson House
Camomile Street
London EC3A 7AN

Notes

A year of successA year of successAnnual Report 2005

www.admiralgroup.co.uk

Annual Report 2005

Registered Number: 03849958. Admiral Group plc, Capital Tower, Greyfriars Road, Cardiff CF10 3AZ