Admiral Group Limited

Directors’ report and financial
statements
Registered number 03849958
31 December 2002

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Contents
Directors and advisers

1

Chief executive's statement2

Directors’ report

9

Corporate governance report

11Statement of directors’ responsibilities

13

Independent auditor's report to the members of Admiral Group Limited

14

Consolidated profit and loss account: technical account – general business

15

Consolidated profit and loss account: non-technical account16

Consolidated balance sheet

17

Parent Company balance sheet

19Group cash flow statement

20

Notes

21

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Directors and advisers
Chairman
A D Lyons *Chief Executive
H A Engelhardt

Directors
M Aldag * (appointed 13 March 2003)
O J Clarke *D K M James * (appointed 19 December 2002)
A C Probert
D G Stevens
W P Thompson ** non-executive

Secretary
S D Clarke

Registered office
Capital Tower
Greyfriars Road
Cardiff CF10 3AZ

Auditors
KPMG Audit Plc
Marlborough House
Fitzalan Court
Fitzalan Road
Cardiff CF24 0TE
Actuaries
Ernst & Young
Rolls House
7 Rolls Buildings
Fetter Lane
London EC4A 1NH

Bankers
Lloyds TSB
113-116 Leadenhall Street
London EC3 4AX

1

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement
Now that was a year!
Let me try and list what we accomplished during 2002:·

Added a new shareholder, Munich Re, which bought new shares in AGL as well as some of Barclays Private
Equity and Ridgewood (XL Capital) shares and now owns 18.6% of the Group;·

Refinanced our debt, which paid off all the debt created with the MBO at the end of 1999;·

Applied for and received a license to trade from the FSC in Gibraltar;·

Gave more than 2.5m quotes and made over 40% of our new business sales via the internet;·

Had total turnover of £378 million*·

Made an all-time record profit of £55m**, an increase of 45% from last year.

·

Celebrated the completion of (our first) 10 years of trading!

·

Named the 7th Best Workplace in the UK and a member of the Top 100 Workplaces in the EU as judged by the
Financial Times.

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. We operate through a number of targeted brands: Admiral (younger drivers, London),Bell Direct (credit card payers), Diamond (women) and Elephant.co.uk (internet users).
2002 was our 10th year of trading. The first 7 were under the auspices of a Lloyd’s of London Managing Agent.
However, toward the end of 1999, Management teamed up with Barclays Private Equity to buy the business. The
result of this transaction was the creation of Admiral Group Ltd. (AGL) as the holding Company. This is the third
set of accounts for AGL.
When we did the buyout we put in place long term co-insurance agreements with Munich Re, the world’s largest
reinsurer and another, highly rated, reinsurer for the majority of our premium. Since that original agreement we havere-negotiated the agreement with Munich Re for a longer duration.

Key Performance Measures:
Before ceding this premium to these reinsurers our total written premium for 2002 was £333m. This makes our total
turnover for the year £378m*, up from £323m in 2001 (+17%). The direct brands customer count rose to 679,000
from 587,000 (+15.7%). All our growth has been organic. The total customer count, including Gladiator
Commercial, reached 705,000, up from 608,500 (+15.8%).

2Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
Total motor premiums
350

300

250

£'m

200

150

100

50

0
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

In 2002 we ceded 80% of our premium to the two reinsurers. Our reinsurance arrangements have been slightly
restructured going forward and AGL will hold 25% of the premium and risk for 2003 and 2004. AGL’s net premiumincome was £69m in 2002.

Here are a few more key numbers:·

Claims ratio 64.6% an improvement from 75.9%·

Expense ratio 9.5% an improvement from 15.4%·

Combined ratio 74.1% an improvement from 91.4%·

Income from products and services we do not underwrite up to £40m from £35m.

The claims ratio reduction from 2001 is largely down to reserve releases from 2000 and 2001, accounting for 10
percentage points, virtually all of the difference. The loss ratio without releases still represents good value at 74%.
We believe that this loss ratio will prove to be better than that of the market average for 2002.
The incredible 9.5% expense ratio figure is unlikely to be repeated next year, since it includes a non-recurring
expense commission, which flatters the ratio by almost 8.5 percentage points. Our earned expense ratio, without thiscommission but also excluding non-recurring Lloyd’s charges, was still an excellent 15.4% ***. This compares
favourably with 18.2% on the same basis last year. Therefore, even without the benefit of the expense commission,
our combined ratio stood at 80%. If you go a step further and back-out the reserve releases (but please don’t forget
to go back and amend our previous returns!) our combined ratio is still a very healthy 90%.

3Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
COMBINED RATIO
140.0%

120.0%

100.0%

80.0%
Claims ratio
Expense ratio
60.0%

40.0%

20.0%

0.0%
1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Other income moved forward due to the increased customer count as well as greater penetration of sales of ancillary
products offset by some investment in future revenue streams. If you included the profits from Other Income in the
combined ratio as a measure of the entire business, then the combined ratio would drop from 74.1% to 55.5%!

The UK Car Insurance Market Cycle: What Next?
Unfortunately, the cyclical nature of the UK car insurance market means that these lofty levels of profitability are notsustainable. The market is turning as I write this very report. The mathematics are not complicated: claims costs arestill rising some 6-7% a year. Premiums aren’t!
The market is at a precarious point, with a variety of forces pushing it one way while also pulling it the other. On the
one hand you have poor investment returns and the forecast of poor returns going forward putting more pressure onunderwriting profits. This helps to keep prices up. But you also have other firms in the market producing goodresults and many of these firms will try and grow their market share. This pushes prices down.
Marketing spend in the market is at an all-time high, which is a reflection of appetite for business. However, thisspend has been ‘stuck’ on this high for some months now and, if history repeats itself, it will begin to recede
sometime in late 2003 or early 2004.
The increased market share of direct response firms over time has, I believe, two effects on the market. First, it
makes it more likely that the ad spend in the market will be higher than in the past, because that’s the way these firms
acquire business. Second, these firms have the ability to react more quickly to changes in market prices. Picture if
you will the market like someone in a pitch black tunnel trying to guide himself down the centre by bouncing fromone wall to the next. This is the market bouncing from raising prices to lowering prices. The effect of a larger,
faster-moving direct response sector is to bring the sides of the tunnel closer together.
Interestingly, the current range of results between firms appears to be quite wide (some firms on one side of thetunnel, some on the other!). Some firms, like Admiral, have combined ratios below 90%, while others are still
struggling to break even and have combined ratios above 100%. The speed and depth of the cycle will be
determined by how much price-cutting the successful firms initiate and how long the less efficient firms can hold out.
In the past we have predicted that this will be a more shallow market cycle, due to the factors above. At this writing
there is no evidence that this will not be the case.

4Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
In short, this means that the underwriting returns will be less robust over the coming years. However, I believe AGL
is well positioned to continue to outperform the market due to our better-than-market loss ratio, low expense ratio
and the scale of our additional income.

A Brief Explanation of Why Our Results Are So Good!
Some explanation of our excellent numbers lies with our ability to make the internet work. This is also a source ofconfidence in our future. Our 2002 internet results exceeded our forecasts and, in the absolute, are quite stunning.
Of the more than 4m quotes we did last year 59% were done on the internet. 41% of all our sales came from theseinternet quotes. I believe that there is still a huge amount of growth in internet distribution. Studies show that morethan 60% of the market have yet even to research car insurance on the internet. As a leader in the internet delivery of
car insurance we are well placed for continued success through this channel in the coming years.
Internet Quotes
3,000

2,500

2,000

K 1,500

1,000

500

0
1998

1999

2000
Elephant

2001

2002

Other Direct brands

Elephant.co.uk was the biggest beneficiary in the continued growth in internet use. Elephant quote volumes jumped
from 1.2m in 2001 to 1.7m in 2002. Elephant’s end-of-year customer count reached 122,000. In addition, Elephant
had the best claims ratio of all our brands for the 2002 year of account. However, Elephant was not the only internet
winner in the group. In particular, Diamond transacted a much greater proportion of its business over the net than ayear ago (36%, up from 14% in 2001).

5Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
Customers by Brand 31/12
800

700

600

Customers '000

500

400

300

200

100

0
1993

1994

1995
Admiral1996
Diamond

1997

1998
Bell

1999
Elephant

2000

2001

2002

Gladiator

Diamond’s real accomplishment came in September, when, after 62 months of trading, it became the top sellingbrand, finally selling more new policies in a month than Admiral brand. However, two months later, Elephant (after
just 26 months in business!) took over the Number 1 spot, which it held through the end of the year.
Bell Direct also made news during the year, by winning the ‘Best UK Customer Service Contact Centre Award (upto 100 seats)’ at the National Call Centre Awards in London. Although Bell is the smallest of the direct brands, its
spirit and enthusiasm for quality and innovation serves to validate our strategy of keeping working groups small.

Beyond Direct Response Car Insurance:
It was also another good year for Gladiator Commercial. Gladiator sells van insurance, largely to private tradesmen,
as an intermediary. Admiral Group does not take any underwriting risk with this business. At the end of 2002
Gladiator’s customer count stood at 26,368 and it contributed pre-tax £1,100,000 to the Group’s bottom line.
Including Gladiator, the Group’s customer count surpassed 700,000.
2002 also saw the launch of Confused.com, redeveloped using the Inspop platform. Confused.com has been reborn
to be an intelligent, automated car insurance shopper. Simply put, all a customer has to do is put his or her details
into Confused.com and Confused then goes out to all the major car insurance websites, populates the appropriate
fields, and brings the customer back a list of prices. One-stop shopping! We will watch the development of thisinnovative website closely during 2003.

Financial Management:
On top of outstanding business results there was also a lot of successful financial management activity during theyear.
The first achievement was refinancing the debt we acquired with the MBO in 1999. We repaid this debt, some
£75m, with some of our cash and new loans from two banks, Lloyds TSB and Bank of Scotland, both of which havebeen excellent to deal with. We are now comfortably holding less debt than we had before, with a longer period inwhich to pay it down and a bigger business from which to pay it!

6Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
Financial Management (continued):
The second financial transaction of the year was bringing Munich Re in as a shareholder. Munich Re now owns
18.6% of the Group, having bought shares from Barclays Private Equity and Ridgewood (XL Capital) as well as
subscribing for a slice of new shares. It was a complicated transaction and we were all pleased to complete on
December 24! Jingle Bells will never sound the same! We are very pleased to have Munich Re as an equity partner
and will do everything in our power to ensure that they look back on this investment as one of the best they’ve evermade.
Barclays Private Equity is still the Group’s largest shareholder, with 42.2% of the equity while management and staff
own 32.3% in the revised structure. The balance, 6.9%, is held by Ridgewood (XL Capital).

Regulation:
Lastly we come to our changes going forward with regards to regulation. Our first 10 years saw us underwriting at
Lloyd’s of London. However, the Lloyd’s concept of mutuality manifests itself through central fund charges on all
Lloyd’s members. As a motor insurer we are very unlikely to ever need to draw on the central fund, which makes theconcept of mutuality work against us. The charges have grown over time to the point which makes staying in
Lloyd’s uneconomical. We decided early in the year that a structured exit from Lloyd’s was in Admiral’s bestinterest. Late in the year we received permission to begin trading from an insurance company we set up in Gibraltar(Admiral Insurance Gibraltar Ltd., AIGL). So, from January 1, 2003 we are no longer trading forward in Lloyd’s,
simply running off the back years.

Thank you and you and you and you and …
All in all it was a most satisfying year. I’d like to thank all the staff who worked so well during the year, but I’d liketo pay a particular compliment for a job well done to the 14 senior managers who, in short, run the Company. Thesesenior managers have worked for Admiral for a combined 125 years, an average of almost 9 years per person (notbad for a company that’s only 10 years old!). From the outside looking in I suspect it appears that they run the
Company in an effortless fashion. But I know better! I know that every day there are new challenges in running abusiness. These managers tackle the challenges head on. Only businesses with the right people running them areable to succeed year in, year out. Many thanks.

Henry Engelhardt
Chief Executive

7

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Chief Executive’s statement (continued)
Asterisks:* Turnover

2002
£’000
333,000
40,123
5,338

2001
£’000
284,415
35,432
3,147

378,461

322,994

2002
£’000

2001
£’000

46,574
1,229
4,285
3,103

31,266
1,065
4,358
1,500

55,191

38,189

2002
£’000

2001
£’000

Earned premium

81,336

84,135

Page 15

Net technical expenses
Add non-recurring commission
Less non recurring Lloyd’s costs

7,729
6,915
(2,117)

12,9274,777(2,372)

Page 15 & note 5Page 15 & note 5Page 15 & note 512,527

15,332

15.4%

18.2%

Gross written premium
Other income
Technical account investment income

Page 15 & note 3
Page 16 & note 7
Page 15** Profit

Operating profit
Add interest receivable
Add back amortisation

Page 16
Page 16 & note 7
Page 16 & note 9Page 16 & note 25*** Adjusted expense ratio

Adjusted expense ratio8Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Directors’ report
The directors present their annual report and the audited financial statements for the year ended 31 December 2002.

Principal activity, business review and future developments
The Group’s principal activity continues to be the selling and administration of private motor insurance and related
products.
Prior to the 2000 year, the Group placed all its underwriting business with Syndicates at Lloyd’s managed by the XLGroup. It continues to run off claims for the Syndicates under a run off agreement entered into at the time of the
management buyout during 1999. For the 2000, 2001 and 2002 years, the Group placed its net share of theunderwriting business with its own Lloyd’s Syndicate – number 2004, the remainder being placed with major
European reinsurers. Syndicate 2004 is supported by a Lloyd’s Corporate Capital Vehicle, Admiral Syndicate
Limited, which is a wholly owned subsidiary of Admiral Group Limited.
Lloyd’s has been an expensive place to underwrite personal lines business, and, in common with a number of other
Lloyd’s vehicles, the Group has sought to set up underwriting vehicles outside of Lloyd’s.
In November 2002, the Group was granted a license by the Financial Services Commission in Gibraltar for a new
insurance company to be registered in Gibraltar, Admiral Insurance (Gibraltar) Limited (“AIGL”). This company
will underwrite the Group net retained share of the direct motor insurance business from 1 January 2003. Syndicate
2004 will go into run off from 31 December 2002, ceasing to accept new business. Again, the Group will continue torun off the claims for Syndicate 2004.
Furthermore, during the year, the Group also completed the refinancing of a substantial amount of indebtedness thatexisted at the prior year-end. This refinancing involved repayment of all outstanding loan note balances (along withthe additional consideration which was due in 2003), with a new commercial loan facility, repayable over the next
six years. Further details of this refinancing are set out in note 18.
More detailed analysis of the group’s activities, along with a review of the performance of the business are provided
in the Chief Executive’s statement on pages 2 to 8.

Group results and dividends
The profit for the year, after tax, amounted to £30.9m (2001: £18.3m). No dividend is proposed (2001: £nil).

Directors’ interests
The present directors of the Company are shown on page 1.
The following directors were beneficially interested in the ordinary shares of the Company:
Class of share
H Engelhardt
H Engelhardt
D Stevens
D Stevens
A Probert
A Probert
O Clarke
A Lyons

B
C
B
C
B
C
A
C

31 December
2002
Number
33,201
2,930
16,600
2,600
4,150
850
723
872

31 December
2001
Number
33,201
2,930
16,600
2,600
4,150
850
723
-

9

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Directors’ report (continued)
Directors’ interests (continued)
The 33,201 B Ordinary Shares relating to H Engelhardt are held in a Trust established in the name of Diane
Marguerite Noel Briere De L’Isle-Engelhardt, his spouse.

Charitable and political donations
During the year the Group donated £50,737 (2001: £17,050) to various local and national charities. The Group has
never made political donations.

Employee policies
In considering applications for employment from disabled people, the Group seeks to ensure that fair consideration
is given to the abilities and aptitudes of the applicant, while having regard to the requirements of the job for which heor she has applied. Employees who become unable to carry out the job for which they are employed are given
individual consideration, and depending on the nature, severity and duration of the disability, may be considered foralternative work and the Group continues to train and encourage the career development of disabled persons in its
employment.
The Group provides employees with regular information on its performance, other information that concerns them,and provides a forum for employee representatives to give their views. As described in note 25, the Group operates
an Employee Share Trust for the benefit of employees The charge to the 2002 profit and loss account in respect of
this was £3,103,000 (2001: £1,500,000). Further, the Group has also established a non-contractual profit sharescheme for staff, in which bonus payments are made according to Group profitability and numerous quality
measures. The current year charge for the scheme is £555,000 (2001: £210,000)
Every member of staff is invited to attend an annual staff general meeting to achieve a common awarenessthroughout the Company of the financial and economic factors that affect the performance of the group.

Auditors
The auditors, KPMG Audit Plc, have indicated their willingness to continue in office and resolutions to reappoint
them and to authorise the directors to fix their remuneration will be proposed at the annual general meeting.
By order of the board,

Stuart Clarke
S Clarke
Company Secretary

Capital Tower
Greyfriars Road
Cardiff
CF10 3AZ
4 April 2003

10

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Corporate Governance Report
The following report summarises the key elements of the Group’s corporate governance practices. As the Group is
not listed, it does not have to disclose compliance with formal rules on corporate governance (as set out in the
Combined Code), however, the directors consider it useful to set out how the Group manages risk, and how the
management of the Group’s operations is carried on.

The Board of Directors
The Board of directors of Admiral Group Limited (“AGL”) is structured to ensure an appropriate balance ofexecutive and non-executive directors, and to represent all groups of shareholders. Currently it comprises a nonexecutive Chairman, non-executive representatives of the corporate shareholders, one further non-executive director
and three executive directors. The names of all directors appear on page 1 of this report.
The Group has separated the roles of Chairman and Chief Executive, and each has separate, clearly defined
responsibilities. The three executive directors have substantial experience in the Group’s operations, and all havebeen with the Group since it commenced trading in January 1993.
In addition, two of the Group’s subsidiary companies – Admiral Syndicate Management Limited and Admiral
Insurance (Gibraltar) Limited have separate non-executive directors on their boards, over and above those referred toabove.
The Board has overall responsibility for controlling the Group, making decisions relating to the Group’s strategic
direction, and measuring progress towards these. It is ultimately responsible to shareholders for financial andoperational performance.
The Board meets at least six times a year and more if specific circumstances require it. It is provided withcomprehensive reports before each meeting, covering both financial and operational aspects of the Group’s
activities.

Operational Committees
In order to ensure it has effective control over the Group’s activities, the Group has established a number ofcommittees, each with responsibility for a certain aspect of Group’s operations. A summary of the activities andresponsibilities of the key committees is set out below.
The key committees are as follows:
Committee

Responsibility

Audit Committee

To monitor the adequacy of the control environment within the Group, including
approving the work programme for Internal Audit. Also, to approve the Groupfinancial statements and review any reports on internal controls from the auditors.
Finally, to ensure compliance with all aspects of regulation to which the Group is
subject. The Committee is chaired by a non-executive director. . The Group’s
auditors attend at least one meeting annually.

Remuneration
Committee

To consider and approve the remuneration of directors and the Company’s structureof bonuses and share scheme incentivisation. The Remuneration Committee’s
membership consists of two non-executive directors and the Chief Executive.

11

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Corporate Governance Report (continued)
Additional Committees
In addition to the high level committees above, there are a number of additional committees that are responsible for
ensuring the efficient day to day operation of the Group and the implementation of the board’s strategies andobjectives. These include a Reinsurance Committee and Investment Committee. The Senior Managers of the Group
meet monthly, as do the individual departmental managers. The individual brand managers also meet monthly with
the Chief Executive to discuss business performance and issues.

Internal Control, Risk Management & Internal Audit
The ultimate responsibility for the Group’s system of internal control and risk management lies with the board of
directors. Whilst they have not delegated the responsibility for these matters, they have delegated the mainsupervision of them to the Audit Committee as detailed above.
The Audit Committee is responsible for agreeing in advance the work that Internal Audit carries out. Internal Audit
plays a key role in identifying control weaknesses, and considering the level of all types of business risk to which theGroup is exposed. The Audit Committee is also responsible for the establishment of systems and controls to preventand detect fraud.
The Audit Committee recommends the approval of the Group financial statements to the main board of directors.
Appropriate financial and accounting qualifications exist among the membership, and there is significant experienceof the Group’s accounting policies and practices to ensure appropriate discussion can take place and decisions made.
As a provider of financial services, the Group is subject to regulation from a number of different bodies – mostnotably the Financial Services Authority, and is consequently exposed to a level of regulatory risk. In order tomitigate this, the Group Compliance Officer takes responsibility for ensuring compliance with all appropriate
regulation. A Risk Register produced by the Group identifies key regulatory risks. The Compliance Officer provides
advice to senior management and to the relevant Committees and Boards of directors. The Compliance Officer has
direct access to the boards of directors of all regulated entities in the Group.

FSC and Other Regulation
Admiral Syndicate Management Limited has had to comply with the FSA Lloyd’s Specialist Sourcebook for sometime, and this has meant that the Group has implemented a robust system of controls, systems and procedures acrossall aspects of its business.
Admiral Insurance (Gibraltar) Limited is regulated by the Financial Services Commission of Gibraltar. These FSC
rules must comply with the appropriate EU insurance legislation.
The two main non underwriting trading subsidiaries of Admiral Group Limited are also members of the General
Insurance Standards Council (“GISC”), and are both required to comply with the rules and guidance published by
the regulator.
As referred to in the section on internal control above, it is the responsibility of the Compliance Officer to ensurethat the Group is in full compliance with all guidance and regulation to which it is subject.

12Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Statement of directors’ responsibilities
Company law requires the directors to prepare financial statements for each financial year which give a true and fairview of the state of affairs of the company and of the profit or loss for that period. In preparing those financial
statements, the directors are required to:n select suitable accounting policies and then apply them consistently;
n make judgements and estimates that are reasonable and prudent;
n state whether applicable accounting standards have been applied, subject to any material departure disclosed andexplained in the accounts and;n prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company

will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any
time the financial position of the company and to enable them to ensure that the financial statements comply with theCompanies Act 1985. They have general responsibility for taking such steps as are reasonably open to them tosafeguard the assets of the company and to prevent and detect fraud and other irregularities.

13

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

kpmg
KPMG Audit Plc
Marlborough House
Fitzalan Court
Fitzalan Road
Cardiff CF24 0TE
United Kingdom

Independent auditors’ report to the members of Admiral Group Limited
We have audited the financial statements on pages 15 to 37.
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’s report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company and the company’s members as a body,for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors are responsible for preparing the directors’ report and, as described on page 13, the financial
statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as
independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board and by our
profession’s ethical guidance.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly
prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report
is not consistent with the financial statements, if the company has not kept proper accounting records, if we have notreceived all the information and explanations we require for our audit, or if information specified by law regarding
directors’ remuneration and transactions with the company is not disclosed.
We read the other information accompanying the financial statements and consider whether it is consistent with thosestatements. We consider the implications for our report if we become aware of any apparent misstatements ormaterial inconsistencies with the financial statements.
Basis of audit opinion
We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances,consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considerednecessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion
we also evaluated the overall adequacy of the presentation of information in the financial statements.
OpinionIn our opinion the financial statements give a true and fair view of the state of affairs of the company and the groupas at 31 December 2002 and of the profit of the group for the year then ended and have been properly prepared inaccordance with the Companies Act 1985.

KPMG Audit Plc
Chartered Accountants
Registered Auditor

14 April 2003

14

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Consolidated profit and loss account: technical account – general businessfor the year ended 31 December 2002
Note
Total premiums written

3

Gross premiums written
Outward reinsurance premiums

3

2002
£000

2001
£000

£000

284,415333,000

198,950(102,067)

69,089(3,662)

96,88365,427
Change in the gross provision for unearned
premiums
Change in the provision for unearned premiums,
reinsurers’ share

Earned premiums, net of reinsurance
Allocated investment return transferred from thenon-technical accountInterest receivable

62,464(25,497)(46,555)

12,7497

Total technical income
Claims incurred, net of reinsurance:
Claims paid:
Gross amount
Reinsurers’ share

Change in the provision for claims:
Gross amount
Reinsurers’ share£000

15,909(12,748)

81,336
5,338

84,135
3,147

807

908

87,481

88,190(68,083)
31,059(60,724)
28,198(37,024)(32,526)(9,092)(6,450)(66,491)
35,084(31,407)(15,542)
Claims incurred, net of reinsurance(52,566)(63,933)

Balance in general business technical accountbefore net operating expenses

34,91524,257(7,729)(12,927)

27,186

11,330Net operating expenses
Balance on the general business technical account415

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Consolidated profit and loss account: non-technical accountfor the year ended 31 December 2002
Note
Balance on the general business technical accountInvestment income
Net unrealised losses on investments
Investment expenses and charges
Other income
Other charges:
Amortisation of goodwill
Employee Share Trust
Staff profit share expense
Other

2001

2002
£000

£000

£000

11,33027,186725
6

Allocated investment return transferred to the technicalaccount

£000

6,515
(1,042)(135)
40,123

4,334(1,076)(112)
35,432(4,285)(3,103)(555)(12,792)(20,735)(5,338)(4,358)(1,500)(210)(9,427)(15,495)(3,147)

19,38819,936

Operating profit
Interest receivable
Interest payable7746,574
1,229(4,852)

31,266
1,065(4,896)

Profit on ordinary activities before tax
Tax on profit on ordinary activities

58

42,951(12,014)27,435(9,099)30,937-

18,336-30,937

18,336

Profit for the financial year after tax
Dividends proposed
Retained profit for the financial year transferred toreserves

21

There were no material acquisitions in the financial year, and no operations were discontinued. All income andexpenditure therefore relates to continuing operations.
There are no recognised gains and losses in either year other than those reported above in the profit and loss account.

16Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Consolidated balance sheet
at 31 December 2002
Note

2002
£000

£000

2001
£000

£000

AssetsIntangible fixed assets

966,26071,945Investments
Other financial investments

12

110,877

93,912

Reinsurers’ share of technical provisions
Provision for unearned premiums
Claims outstanding

19
19

46,55559,85753,407

106,41253,407
Debtors
Debtors arising out of direct insurance operations
Debtors arising out of reinsurance operations
Other debtors

14

71,1504,931
6,191

68,985
4,743

82,27273,728Other assets
Cash at bank and in hand
Tangible fixed assets

13

33,218
7,261

62,996
6,681

40,47969,677

Prepayments and accrued income
Deferred acquisition costs
Other prepayments and accrued income

Total assets

5,632
4,860

1,655
1,788
3,443

10,492

377,392

405,51217

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Consolidated balance sheet (continued)
at 31 December 2002
Note

2001

2002
£000

£000

£000

£000

Liabilities
Capital and reserves
Called up share capital
Share premium account
Profit and loss account

20
21
21

Shareholders’ funds attributable to equity interests
Technical provisions
Provision for unearned premiums
Claims outstanding

23
22,24525
15,74653,182

22,26868,95319
19

93,109115,386

30,645
124,478

208,495

155,123
Creditors – amounts due, falling within one year
Creditors arising out of reinsurance operations
Loan notes & other loans
Other creditors including taxation and social
security
Accruals and deferred income

18

52,2382,839

37,571
16,67015
1615,76025,99823,271
28,779106,291

96,835Creditors – amounts due, falling after one year
Loan notes & other loans
Other creditors
Other accruals and deferred income

Provisions for liabilities and charges

Total liabilities

18
15
16

17

45,697
2,789
19,97245,0002,343
5,718
53,061

68,4583,420-

377,392

405,512

These financial statements were approved by the board of directors on 4 April 2003 and were signed on its behalfby:Andrew Probert
A Probert
Director

18

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Parent company balance sheet
at 31 December 2002
Note

Fixed assets
Investments

10

Current assets
Debtors (amounts owed by subsidiaries)
Cash at bank and in hand

Creditors: amount due, falling within one year:
Loan notes & other loans
Other creditors
Accruals and deferred income

18
15
16

2001

2002
£000

£000

£000

£000

80,702

92,302

23,075
6,931

22,03917,26330,00639,302(2,839)
(459)
(240)

(16,670)(3,586)(139)(3,538)(20,395)

Net current assets

26,46818,907

Total assets less current liabilities

118,770

99,609Creditors: amounts due, falling after more than
one year:
Loan notes & other loans
Accruals and deferred income

18
16

Net assets
Capital and reserves
Called up share capital
Share premium account
Profit and loss account

20
21
21

(45,697)(17,100)(45,000)(45,000)(62,797)

73,77036,812

25
15,74657,99923
36,78973,77036,812

These financial statements were approved by the board of directors on 4 April 2003 and were signed on its behalfby:Andrew Probert
A Probert
Director

19

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Group cash flow statement
for the year ended 31 December 2002
Note

2001

2002
£000

£000

£000

78,292

88,211Servicing of finance
Net interest paid

(8,505)(1,610)

Taxation
Corporation tax paid

(10,079)(8,237)

Net cash inflow from operating activities

Capital expenditure
Purchases of fixed assets
Sales of fixed assets

24

£000

(5,015)
4(2,808)180

Net purchases of fixed assets(2,628)(5,011)

Acquisitions

-

(125)

Equity dividends paid--

Financing
Issues of ordinary shares
Drawdown of new loans
Repayment of loan notes and other loans
Net movement in finance lease capital
Deferred consideration(22,451)
3,088-

15,74860,000(68,757)(586)(15,700)(9,295)(19,363)

47,78553,865

Increase in cash holdings
Decrease in restricted cash holdings
Debt securities and other fixed income securities

29,77818,007

16,961(12,099)
49,003

Net investment of cash flows

47,78553,865

Cash flows were invested as follows:20Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes
(forming part of the financial statements)
1

Basis of preparation

The group financial statements, which consolidate the financial statements of the Company and its wholly owned
subsidiary undertakings, have been prepared in accordance with the provisions of Section 255 of, and Schedule 9A
to, the Companies Act 1985. The balance sheet of the parent Company is prepared in accordance with the provisionsof Section 226 of, and Schedule 4 to, the Companies Act 1985. The financial statements have also been prepared inaccordance with applicable accounting standards and under the historical cost accounting rules, and comply with theStatement of Recommended Practice issued by the Association of British Insurers.
The Group has adopted FRS 19 (Deferred Tax) in these financial statements. Deferred taxation, which requires fullprovision to be made for deferred tax assets and liabilities arising from timing differences between the recognition ofgains and losses in the financial statements and their recognition for tax purposes. Previously, deferred tax wasprovided for using the tax rates estimated to arise when the timing differences reversed and was accounted for to theextent that it was probable that a liability or asset would crystallise. Under FRS 19 deferred tax is provided using the
average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse.
The directors do not consider that the impact of adopting the standard on the brought forward profit and loss reserve
was material, and hence no prior period adjustment was made in the Group and Consolidated accounts.
The results of all directly and indirectly owned subsidiary undertakings are included in the consolidated accounts.
One of the Companies that was incorporated during the year – Admiral Insurance (Gibraltar) Limited - has its firstaccounting reference date at 31 December 2003. Accounts have been draw up for the Company (and audited) as at
31 December 2002 for inclusion in these consolidated financial statements. Refer to notes 10 & 11 for further detailon group investments.
The accounts of all group companies are made up to 31 December.
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the parent Company is notpresented.

2.

Accounting policies

The following accounting policies have been applied consistently in dealing with items which are consideredmaterial to the group’s financial statements.
Basis of accounting for general insurance business
General business is accounted for on an annual basis.
Premiums
General business written premiums comprise the premiums on contracts entered into during the year, irrespective ofwhether they relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission
payable to intermediaries and exclude taxes and levies based on premiums.
For general business accounted for on the annual basis, the provision for unearned premiums comprises the
proportion of gross premiums written which is estimated to be earned in the following or subsequent financial years,
computed separately for each insurance contract using the daily pro rata method, adjusted if necessary to reflect any
variation in the incidence of risk during the period covered by the contract.
Acquisition costs
Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. Deferredacquisition costs represent the proportion of acquisition costs incurred that corresponds to the unearned premiums
provision.

21

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
2.

Accounting policies (continued)

ClaimsClaims incurred in respect of general business consist of claims and claims handling expenses paid during the period
together with the movement in the provision of outstanding claims.
Claims outstanding comprise provisions for the estimated cost of settling all claims incurred but unpaid at thebalance sheet date whether reported or not, and related internal and external claims handling expenses. Anticipatedreinsurance recoveries are disclosed separately as assets.

Guarantee fund levies
Provision is made at the balance sheet date for levies declared by the Financial Services Compensation Scheme andMotor Insurers’ Bureau before completion of the financial statements. Provision is also made if it is more likely than
not that a levy will be raised based on premium income which has already been recognised in the financial
statements.
Investments
Listed investments are stated at mid-market value on the balance sheet date, or on the last stock exchange trading day
before the balance sheet date.
Investments in subsidiary undertakings are valued at cost less any provision for impairment in value.
Investment return
Interest receivable is accounted for on an accruals basis. Dividend income, grossed up where appropriate by the
imputed tax credit, is recognised when the related investment goes “ex-dividend”.
Realised gains or losses represent the difference between net sales proceeds and purchase price or in the case ofinvestments valued at amortised cost, the latest carrying value.
Unrealised gains and losses on investments represent the difference between the current value of investments at thebalance sheet date and their purchase price. The movement in unrealised investment gains/losses includes anadjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period.
Investment return (including realised and the movement in unrealised investment gains and losses) on investments
attributable to the general business and associated shareholders’ funds is reported in the technical account for generalbusiness.
Depreciation
Depreciation is provided to write off the cost less the estimated residual value of tangible assets by equal instalments
over their estimated useful economic lives as follows:
Motor vehicles-

4 years

Fixtures, fittings and equipment-

4 years

Computer equipment and software-

2 to 4 years

Improvement to short lease-hold properties-

4 years22

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
2.

Accounting policies (continued)

Goodwill
Goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and thefair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight line basis over its
estimated useful life. The useful life of each acquisition is determined at the time of acquisition, and reviewed
annually to ensure the life assigned remains appropriate.
Foreign currencies
Assets and liabilities denominated mainly in a foreign currency are translated using the closing rate method.
Exchange differences on operating net assets are taken to reserves. Other exchange differences are dealt with in the
profit and loss account through either the non-technical or technical account.

Leases
The rental costs relating to operating leases are charged to the profit and loss account on a straight-line basis over thelife of the lease.
Assets acquired under finance leases or hire purchase contracts are included in tangible fixed assets at an amountequal to the cost that would have been payable on purchase and are depreciated in the same manner as equivalentowned assets. Finance lease and hire purchase obligations are included in creditors, and the finance costs are spreadover the periods of the agreements based on the net amount outstanding.
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 and accounting purposes. Deferred tax assets arerecognised 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 suitable taxable
profits from which the future reversal of the underlying timing differences can be deducted.

3.

Analysis of underwriting results

All business written during both financial years is direct private motor insurance written in the United Kingdom.
During 2001 and 2002, the group share of business written was all underwritten by Syndicate 2004.
Year ended 31 December 2002
£000
Motor insurance - total premiums
Coinsurer share of total premiums

333,000(266,400)

Group share of total premiums
Release of excess prior year cancellation provision

66,6002,489

Gross premium written

69,08923

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
3.

Analysis of underwriting results (continued)

Year ended 31 December 2001
£000
Motor insurance - total premiums
Coinsurer share of total premiums

284,415(85,265)

Group share of total premiums
Under provision for cancellations in previous years

199,150(200)

Gross premium written

198,950

4.

Net operating expenses – Technical accountGross acquisition costs incurredDeferred acquisition costs
Expense commission receivable
Gross reinsurance commission receivable
Deferred element of gross reinsurance commission receivable
Administrative expenses
Lloyd’s charges

2002
£000

2001
£000

5,121
3,977
(6,915)(42,698)(4,364)50,491
2,117

12,046(5,632)(4,777)(31,155)
4,364
35,709
2,372

7,729

12,927The increase in administrative expenses for the Group is due to the change in coinsurance arrangements, and is offset
by higher reinsurance commission receivable.

5.

Profit on ordinary activities before tax

Operating profit is stated after charging the following items:

Financing & refinancing costs:
Initial financing (see note below)
2002 refinancing
Costs relating to new share issues
Operating lease rentals:
Machinery and equipment
Buildings
Auditor’s remuneration:
Audit fees (including Company £6,000 (2001: £5,000))
Other services: Refinancing & new share issues
Other (including Company £13,000 (2001: £nil))
Loss on disposal of assets

2002
£000

2001
£000

607
1,515
50

911
-

1,326

1,326

111
341
60
166

70
11
2

24

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
5.

Profit on ordinary activities before tax (continued)

Costs of initial financing relate to the costs of a one-off stop-loss reinsurance programme purchased in 2000 for£2.1m that has been expensed in line with estimated premiums over the three years to 31 December 2002. £607,000
was expensed in the current year (2001: £911,000).

6.

Employees

Staff costs (including directors)

Salaries
Social security
Other pension costs
Staff profit share scheme
Employee share trust charge (see note 25)

2002
£000

2001
£000

22,069
1,844
250
555
3,103

18,549
1,673
210
210
1,500

27,821

22,142

Pension costs relate to contributions made by the Group into the Group Personal Pension Plan, a matching scheme
open to all employees except for directors and subject to a maximum annual contribution of £3,000 per employee.

Number of staff (including directors)
Average for the year
2001
2002
NumberNumberDirect customer contact staff
Support staff

1,140
254

1,071
251

1,394

1,322

Directors’ emoluments
2002
£000

2001
£000

Emoluments (including Company £65,000)

827

569

Emoluments of the highest paid director (including Company £nil)

312

237

No contributions were made into pension schemes on behalf of directors.

25

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
7.

Net interest and other income receivable

Bank and other interest receivable
Allocated to technical account
Allocated to non-technical accountInterest payable
Commercial loan interest payable
Loan note interest payable
Finance lease interest
Bank interest
Other interest

Other income
Revenue from related sales
Commissions from broker operations
Instalment income
Other

8.

2002
£000

2001
£000

807
1,229

908
1,065

2,036

1,973

820
2,838
304
890

3,595
339
3
959

4,852

4,896

34,759
3,350
1,836
178

28,392
3,522
3,518
-

40,12335,432

2002
£000

2001
£000

9,123
(529)
3,420

8,780
319
-

12,014

9,099

Taxation on profit on ordinary activities

UK corporation tax
Current year at 30% (2001: 30%)
(Over) / under provision relating to prior years
Deferred taxation movement (note 17)26

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
8.

Taxation on profit on ordinary activities (continued)

Factors affecting tax charge for the period:
2002
£000

2001
£000

Profits on ordinary activities before taxation

42,951

27,435

Corporation tax thereon at 30%
Syndicate profits taxed on Lloyd’s basis
Expenses not deductible for tax purposes (primarily goodwill amortisation)
Other timing differences
Impact of using lower tax rate

12,885(4,997)
1,350
(104)
(11)

8,231
(813)
1,284
87
(9)

Current tax charge per accounts (as above)

9,123

8,780

9.

Intangible assets - goodwill

Cost

Group
£000

At 1 January 2002
Addition
Valuation adjustment (see below)

80,279(1,400)At 31 December 2002

78,879Amortisation
At 1 January 2002
Charged in the year

8,334
4,285

At 31 December 2002

12,619Net book amountAt 31 December 2002

66,260At 31 December 2001

71,945As at 31 December 2001, the goodwill valuation contained an amount of £17.1m relating to further consideration
payable in respect of the acquisition of Admiral Insurance Services Limited in 1999. This was settled during the year
at a discount of £1.4m, and goodwill has been revalued accordingly.

27

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
10.

Investments in group undertakings

Shares in group undertakings

2002
Company
Cost
£000

2001
Company
Cost£000

92,30280,702A £1.4m decrease has been included in the cost of the investment in Admiral Insurance Services Limited. This is dueto the adjustment to the calculation of the fair value of the consideration paid for the Company following thesettlement of the deferred element of the consideration during the year. Refer to note 9 for further detail.
The Company’s principal subsidiaries (all of whom are 100% owned) are as follows:
Country ofincorporation

Class ofshares held

Admiral Insurance Services Limited

England and Wales Ordinary

Able Insurance Services Limited
Admiral Insurance (Gibraltar) Limited
Admiral Syndicate Management Limited

England and Wales Ordinary
Gibraltar
Ordinary
England and Wales Ordinary

Admiral Syndicate Limited

England and Wales Ordinary

Confused.com Limited
Inspop.com Limited

England and Wales Ordinary
England and Wales Ordinary

11.

Principal activity

Held directly
or indirectly

Service company to
Lloyd’s Syndicate
Intermediary
Insurance company
Lloyd’s managing
agencyLloyd’s corporate
Capital vehicle
Non trading
Internet services

Directly
Directly
Directly
Directly
Directly
Indirectly
Directly

Group structure

During the year, the Group incorporated a company in Gibraltar, Admiral Insurance (Gibraltar) Limited (“AIGL”)
with a share capital subscription of £13m. This company will underwrite the Group share of the motor insurance
business generated from January 2003. AIGL received a license to do so from the Financial Services Commission in
Gibraltar during November 2002.

12.

Other financial investments

Group
Debt securities and other fixed income
securities
Deposits with credit institutions

Historic cost at
31 December
2002
£000

Market value at
31 December
2002
£000

Historic cost at
31 December
2001
£000

Market value at
31 December
2001
£000

91,14190,09967,32066,244

20,778

20,77827,66827,668111,919

110,877

94,98893,91228

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
13.

Tangible fixed assets

Group

Improvements
to short
leaseholdbuildings£000

Computerequipment
andsoftware£000

Officeequipment

Furnitureand fittingsMotorvehicles

Total

Cost
At 1 January 2002
Additions
Disposals

£000

£000

£000

£000

1,566
36
-

12,794
2,562
(356)

2,588
163
-

1,526
40
(3)

3
7
-

18,4772,808(359)

At 31 December 2002

1,602

15,000

2,751

1,563

10

20,926

Depreciation
At 1 January 2002
Charge for the year
Disposals

973
236
-

7,881
2,110
(12)

1,309
423
-

1,051
271
-

2
1
-

11,2163,041(12)

At 31 December 2002

1,209

9,979

1,732

1,322

3

14,245Net book amountAt 31 December 2002

393

5,021

1,019

241

7

6,681

At 31 December 2001

593

4,913

1,279

475

1

7,261

Net book amounts for the group include the following amounts related to leased assets:

Computer equipment and software
Office equipment
Furniture and fittings

2002
£000

2001
£000

3,438
140
64

2,201
52
161

3,642

2,414

The Company does not hold any fixed assets other than investments in subsidiaries as set out in note 10.

14.

Debtors arising out of direct insurance operations
Company
2002£000

Amounts owed by policyholders
Commissions due

Group
2002
£000

Company
2001
£000

Group
2001
£000

-

68,234751-

70,200950-

68,985-

71,15029Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
15.

Other creditors including taxation and social security

Amounts due, falling within one year:
Corporation tax payable
Other tax and social security
Finance leases
Other
Amounts owed to group companies

Amounts due, falling after one year:
Finance leases

16.

Company
2002
£000

Group
2002
£000

Company
2001
£000

Group
2001
£000

459
-

4,060
1,148
1,418
9,134
-

3,586

5,543
3,323
1,559
12,846-459

15,7603,586

23,271Company
2002
£000

Group
2002
£000

Company
2001
£000

Group
2001
£000

-

2,343

-

2,789

Company
2002
£000

Group
2002
£000

Company
2001
£000

Group
2001
£000

240

11,417
4,267
6,517
3,472
325

139

10,850
3,438
6,351
2,747
5,393

240

25,998139

28,779Company
2002

Group
2002

Company
2001
£000

Group
2001
£000

-

759
4,839
120

17,100-836
17,100
1,736
300

-

5,718

17,10019,972

Accruals and deferred income

Amounts due, falling within one year:
Premiums booked relating to the following year
Claims handling expenses
Motor Insurers’ Bureau
Deferred income
Other

Amounts due, falling after one year:
Claims handling expenses
Deferred consideration (see note below)
Employee Share Trust
Deferred income

As discussed in note 10, the deferred consideration was settled during the year.

30Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
17.

Provision for deferred tax

Group
2002
£000

2001
£000

Balance at 1 January
Movement in period, being charge to profit and loss account

3,420

-

Balance at 31 December 2002

3,420

-

At the year end, there was an unprovided deferred tax asset of £1,222,000 (2001: £2,854,000).
The net balance provided at the end of the current year is made up of a gross deferred tax liability of £3,698,000
relating to the tax treatment of Lloyd’s Syndicates, and a deferred tax asset of £278,000 in respect of capitalallowance related timing differences.
There was no deferred tax asset or liability provided in the Company accounts. There was an unprovided asset of£176,000 (2001: £353,000) relating to carried forward losses at the year end.

18.

Loans

During the year, the Company undertook a significant refinancing exercise, which resulted in the repayment of allloan notes that were previously in existence. In place of these liabilities, on 1 October 2002 the Company enteredinto a £50m facility with Lloyds TSB and Bank of Scotland.
The facility consists of a £40m term loan, along with a £10m revolving credit facility. The term loan is to be repaid
according to a set repayment schedule over six years from October 2002.
Interest is charged on amounts drawn down under the facility based on three elements:
a)

LIBOR

b) A margin – as set out in the facility agreement, varying between 1.25% and 2.25%c)

A “mandatory costs” contribution – currently around 0.01%

Accrued interest is paid off at the end of interest periods selected by the Company. It is envisaged that these periods
will be of three month duration on an ongoing basis.
Security granted in respect of the facility is in the form of fixed and floating charges over most Group assets(excluding assets subject to regulatory restriction) and charges over the shares in some subsidiary companies.
Amounts outstanding (including accrued interest) at 31 December were as follows:
Repayable:
Within one year
Two to five years
Greater than five years

2002
£000

2001
£000

2,839
28,00017,00016,67045,697-

47,83962,36731

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
19.

Technical provisions & estimation techniques

2002

Gross
£000

Reinsurance
£000

Net
£000

Claims outstanding
Unearned premiums

124,478
30,64553,407-

71,07130,645

At end of year

155,123

53,407

101,716

Gross
£000

Reinsurance
£000

Net
£000

Claims outstanding
Unearned premiums

115,386
93,10959,85746,55555,52946,554

At end of year

208,495

106,412102,083

Gross
£000

Reinsurance
£000

Net
£000

Claims reserve brought forward
Provision movement – current accident year
Releases of prior year provisions – 2000 accident year
2001 accident year

115,386
26,448(6,844)(10,512)59,8572,228(3,422)(5,256)55,52924,220(3,422)(5,256)Claims reserve carried forward

124,478

53,407

71,071

2001

Gross
£000

Reinsurance
£000

Net
£000

Claims reserve brought forward
Provision movement – current accident year
Releases of prior year provisions – 2000 accident year

48,89574,337(7,846)24,44739,333(3,923)24,44835,004(3,923)Claims reserve carried forward

115,386

59,85755,5292001

Analysis of claims reserves movements:
2002

32

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
19.

Technical provisions & estimation techniques (continued)

Estimation Techniques
Estimation is necessary to:a) predict the final claims costs arising from policies already written, andb) determine the price to be quoted for new business so as to maximise future returns
Accurate estimation of final claims costs requires forecasts of claims which have not yet occurred, and also the likely
final outcome of those which have been reported, but are not yet settled
Analyses of claims by development month is key in forecasting claims not yet arisen, ie by comparing the frequencyof claims observed for the current underwriting year with that for previous underwriting years at the samedevelopment month. These contribute to actuarial projections of the final outcome, which take account also of
external market conditions
The best early estimates of final claim size are obtained by the accurate setting of claim reserves by claims staff.
These reserves are based upon previous final outcomes of claims of similar type, and also, especially for injury
claims, upon a knowledge of current judicial decisions.
Historic claim triangles – where monthly changes observed in claim costs for claims reported some months
previously are assumed to apply to claims currently being reported – are also used to estimate final claim costs andloss ratios, although the main emphasis is on the accurate setting of reserves noted above.
To maximise future returns it is most important to set an appropriate price, which tends to attract profitable anddiscourage loss making business. For this, there are in place statistical pricing models, which analyse the historicclaims costs arising from segments of the business, and adjust the prices where costs have been out of line with thepremiums. Multivariate techniques are used which take account of all the rating factors together, which determine
the correct risk for each business segment, if necessary by individual claim type.
The claims provisions are subject to annual independent review by external actuaries.

20.

Called up share capital

Authorised
5,970,000 / 6,000,000 A ordinary shares of 10p each
2,000,000 B ordinary shares of 10p each
2,000,000 C ordinary shares of 10p each
29,836 D ordinary shares of 10p each
20,164 E ordinary shares of 10p each

2002
£000

2001
£000

597
200
200
3
2

600
200
200
-

1,002

1,000

33

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
20.

Called up share capital (continued)

Issued, called up and fully paid
132,488 / 162,324 A ordinary shares of 10p each60,176 B ordinary shares of 10p each
12,042 / 11,170 C ordinary shares of 10p each
29,836 D ordinary shares of 10p each
20,164 E ordinary shares of 10p each

2002
£000

2001
£000

13
6
1
3
2

16
6
1
-

25

23

During the year, the Group allocated 872 fully paid up C ordinary shares of 10p each, and 20,164 fully paid up E
ordinary shares of 10p each. Total consideration in respect of these issues was £15,747,920.
Further, 29,836 issued A ordinary shares were converted into the same number of new D ordinary shares.

Rights of shares
In the event of a winding up of the Company or other return of capital, the assets of the Company available for
distribution to shareholders will be distributed amongst the holders of the ordinary shares pari passu, as if they were
all shares of the same class. This is provided that, after the distribution of the first £500m of such balance, theDeferred Shares (as defined in the Company'’ Articles of Association) (if any) shall be entitled to receive an amountequal to the nominal value of such Deferred Shares. Any payment made to the holders of shares of a particular classshall be made in proportion to the numbers of shares of the relevant class held by each of them.
Immediately prior to a Sale or Listing (a “Conversion Date”), 61,552 A ordinary shares, 13,861 D ordinary shares
and 9,368 E ordinary shares shall convert into the same number of fully paid Deferred Shares (“The Conversion”)
which have limited rights.

21.

Movements on shareholders funds
Share Capital
£’000

Share
Premium£’000

Profit andloss account
£’000

Total

Group
At 1 January 2002
Issue of share capital
Retained profit for the financial year23
2-

15,746-22,24530,93722,26815,74830,937

At 31 December 2002

25

15,74653,182

68,953£’000

34Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
21.

Movements on shareholders funds (continued)

Share Capital
£’000

Share
Premium£’000

Company
At 1 January 2002
Issue of share capital
Retained profit for the financial year23
2-

15,746-36,78921,21036,812
15,74821,210At 31 December 2002

25

15,74657,99973,77022.

Profit andloss account
£’000

Total
£’000

Commitments

Annual commitments of the group under non-cancellable operating leases are as follows:
2002
Land andbuildings£’000
Operating leases which expire:Within one year
In the second to fifth years inclusive
Over five years

Other
£’000

2001
Land andbuildings
£’000

Other
£’000

1,506
-

-

1,506
-

-

1,506

-

1,506

-

At the year-end, the Group had contracted to spend around £335,000 on fixed assets over 2003 and 2004 (2001:£500,000 over three years). The Company itself does not hold tangible fixed assets, and was not committed to any
expenditure after 31 December 2002.

23.

Contingent liabilities

The Group had no contingent liabilities at the year-end, other than those arising out of insurance contracts, and otheragreements entered into in the normal course of business.

35

Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
24.

Cash flow statement

Reconciliation of operating profit to net cash inflow from operating activities
2002
£000

2001
£000

Operating profit
Add back:
Depreciation charge
Amortisation charge
Unrealised losses on investments
Loss on disposal of tangible fixed assets
Change in gross technical provisions
Change in reinsurers’ share of technical provisions
Change in debtors and prepayments
Change in creditors excluding tax and social security
Change in tax and social security creditor

46,57431,266

3,041
4,285
1,042
166
(53,372)
53,005
15,593
10,133(2,175)

2,409
4,358
1,076
2
91,988(48,159)(6,072)
16,931(5,588)Net cash inflow from operating activities

78,292

88,211

25.

Employee Share Trust

During 2000 the Group established an Employee Share Trust, under which 14,706 C ordinary shares are to be madeavailable to a trust in which the Group’s employees are allocated units. These shares will be issued to Group
employees on the earlier of a sale or flotation of the Company’s shares. Awards for participation in the scheme are
made annually by the trustees of the Group’s Employee Share Trust.
The Group is making provision for the costs of making the shares available under the terms of the trust, and isspreading the cost of doing this over the period leading up to the date at which the directors estimate the awards will
be made. Details of the charge for the current and preceding years are shown in note 6.

26.

Related Party Transactions

The following related party transaction took place during the year:

Settlement of outstanding loan notes:
As discussed in note 18, during 2002 the Company settled the loan notes which had been outstanding, and replacedthese with a new commercial loan facility.
Three of the Company’s directors were loan note holders, along with one of the director’s spouse. In addition, anumber of the Group’s major shareholders also received final settlements in respect of their indebtedness. The final
repayments made to each are set out below:

36Admiral Group Limited
Directors’ report and financial statements
31 December 2002

Notes (continued)
26.

Related Party Transactions (continued)

Barclays Industrial Development Limited
Barclays Private Equity PVLP Limited Partnership
Brockbank Underwriting Limited
Brockbank Syndicate Management Limited
H A Engelhardt
D G Stevens **A C Probert
Others, including Admiral staff
*
**

Loan
capital£000

Accruedinterest *
£000

Total
payment
£000

9,993
9,993
3,270
18,532
4,709
2,354
589
1,533

1,756
1,756
575
2,608
662
331
83
174

11,74911,7493,845
21,140
5,371
2,685
672
1,707

Net of income tax deduction where payment is to an individual
Includes repayments made to Mr Stevens’ spouse

The rate of interest accruing on the above loan notes was 6%. There are no further amounts due either to, or from,any directors, or to or from any of the Barclays entities at the end of 2002.
Furthermore, the deferred consideration which was payable as part of the Management Buyout deal was also settled
as part of the same transaction. £15.7m was paid to Brockbank entities named above. No further amounts are due
relating to the MBO.

37