Diamond was created for women in response to a need in 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
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
Fu ll ye ar d iv id en d pe r s ha re £
Fu ll ye ar d iv id en d pe r s ha re
Confused, our intelligent automated car insurance shopper, handled an amazing 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 in Germany towards the end of this year.
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 principle of 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 this year-end £5m in respect of overseas; and a prudent margin - currently £25m - against contingencies.
The Company is also closely involved with the communities within which our staff live and work. We encourage them to be associated with the local projects that are important to both them and their families, and during 2006 provided financial support to 109 such projects. Admiral also sponsored a number of high profile local events within South Wales, more details of which will be found in the report on corporate responsibility. This also describes the steps we take to minimise the impact of 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 the Company through both management buy-out and flotation. His clear thinking, straightforwardness, energy and consistent good humour will be much missed. His place on our Board has been taken by Kevin Chidwick who joined Admiral in September 2005 as Deputy Finance Director, having previously been Finance Director of Engage Mutual. I am delighted that Kevin is already making his clear mark on our Board deliberations.
Our strategy remains clear and straightforward – to continue to grow our share of the UK direct private motor market, maximising the value 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 look forward to continuing consistently to create value for all our shareholders.
On 31 October 2006, some 15 years after that first draft and almost 14 years after Admiral started trading, Admiral Group went international with the launch of Balumba.es in Spain. Our newly formed Business Development Team based in Cardiff and our Spanish Directora General along with the team she developed in Seville did a brilliant job to create something from nothing.
Admiral Group went international with the launch of Balumba.es in Spain. Henry Engelhardt
These two major events not withstanding, 2006 on its own merits was a pretty good year in a very competitive environment. Here, in a nutshell, are the highlights: • Made a record profit of £147m, up 23% from £119m in 2005
• Total motor premium written grew to £567m, up 6% from 2005
• Ended the year with more than 1.28m customers (+ 12.6%)
• Confused.com gave more than 9m quotes and made a profit of over £23m
• Named to The Sunday Times list of Top 100 Places To Work in the UK for the seventh year in a row (every year it’s been run)
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 and staff currently own around 27% of the Group.
Some key numbers from the accounts which follow: • Loss ratio 72% up from 70% in 2005 • Earned expense ratio, excluding regulatory levies, up to 12.9% from 12.3% • Combined ratio, including all levies, 87%, up from last year’s 85% • Revenue from products and services we do not underwrite totalled £131.6m up from £93.4m (+41%)
The expense ratio, not including government levies, moved up by 0.6% from 2005. This reflects no growth in the average price at which we sell our product against inflation in our costs, partially offset by some modest productivity gains. Despite the small upward move in the expense ratio, we are still one of, if not the, most efficient firm in the market.
To put all this income into context, I’ve done a little calculation where the nonunderwriting income is added to earned premium to give a ‘big picture’ combined ratio. I think this gives an interesting measure of the entire business. Expressed in this way, the combined ratio would have been 58%! Here’s another interesting calculation: we made £147m on income of £277m, a return on income of 53% (2005 51%).
The UK Car Insurance Market: A Game Of Chicken, Or A Game Of Leapfrog? Yes, I know, frogs again. This time we’re not boiling them, but possibly 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 be claims 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 maintain the status quo. If you’re writing a piece of business at the market average today the combined ratio for that piece of business is somewhere around 115%. Maybe more. That’s not profitable and not sustainable; eventually rates must go up. Right?
Well, some of those questions were answered 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 that it 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 done on rates although it appears, based on our conversion data and data on where customers were insured before joining us versus where customers go when they leave us, that they have moved their rates up at least a little bit.
If RBS continues to raise rates, then the market might move from a game of 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 that the companies that had raised rates and had seen their volumes decrease see their volumes increase, so they raise rates again, etc. etc. A game of chicken then becomes a game of leapfrog.
As I write this, with 2007 just getting underway, there seems to be very little of this barnyard activity taking place. Rates may have moved up a touch, but certainly not as much as claims inflation and the game of chicken continues.
I believe that the rise of aggregators and changing shape of distribution will put ever-greater pressure on insurers to be efficient. Insurers who run high expense ratios will have nowhere to hide in a marketplace with such a level of price transparency.
The pattern of results for the market for all motor insurance in 2005 (most recent market data available) was similar to 2004. The overall result wasn’t all that bad (102.2%), but this was flattered by large back year releases (6.5%). Private motor performed a bit worse, with a combined ratio of 105% and releases of 5.7%. The underlying trend of higher
bodily injury costs more than offset a modest reduction in claims frequency. Overall claims inflation continues to mount, over the last two years the average is roughly 5% a year, pushed up in no small part by the cost of care.
Without the 6.5% of reserve releases the pure year loss ratio was 81% and the combined ratio was almost 109%, an increase 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 late in the year have very little effect on that year), it implies that the pure year combined ratio for 2006 will be north of 110%. Ouch. I’m sure you’d agree, this is not a particularly good result. However, it is yet unclear how big the reserve releases will be and 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.
Fortunately, our own business is somewhat insulated from this deterioration by two factors. First, our results historically have been far better than the market average and therefore, despite tighter margins, our result is still rather profitable.
Second, our unique underwriting structure means we have a limited share of our own result, which reduces profits in the good times, but also reduces the effect of narrowing margins in the less good times, leaving us with a high return on capital. Moreover, as we continue to grow our customer base, we continue to grow our ancillary revenues. All in all it should result in sustainable, profitable growth in the future.
It was also yet another good year for Gladiator. 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 2006 Gladiator’s customer count stood at 42,000 and it contributed £2m to the Group’s bottom line, up 9%.
Confused’s growth in 2006 made 2005 look absolutely pedestrian. Henry Engelhardt
Changing The Way Car Insurance Is Bought In The UK – Confused.com: Consumer Champ Last year I wrote that 2005 was really a huge growth year for Confused.com. Well, I was wrong. Confused’s growth in 2006 made 2005 look absolutely pedestrian. Confused delivered 8.4 million motor quotes during the year, an increase of 110% over 2005. It also delivered over 525k quotes for home insurance.
Not only did Confused generate a lot of 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 a flying 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.
We hope to launch a direct operation in Germany late in 2007. The German market is huge, some 45m vehicles. It is also a good internet market for many things, although, currently, car insurance isn’t one of them. However, we see that situation evolving and our strategy of entering 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 in other markets, Germany next.
The other retiree was our Finance Director, 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 near Gloucester when we came looking, which was very helpful.
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.
P.S. For those keeping score, we set a new attendance record at our Staff Children’s Christmas Party (always the best party of the year!) with 461 kids, up 28% on last year (360). We’re nothing if not fertile.
The results of the four key elements of the Group’s business were as follows: Underwriting profit 28,351 32,361
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 results compared to the market as a whole.
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.
• 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 the cycle turn as expected
The new quota share contracts (with Swiss Re and Partner Re) provide protection against a negative 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: Maximum available to Admiral 22.5% 27.5% 40.0%
The reported loss ratio increased by around 2 points from 70% to 72%. Reserve releases continued to form 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 further discussed in the Chief Executive’s statement.
The expense ratio is reconciled to the figures included in the income statement in note 9 below, whilst the underwriting result is reconciled later in this review.
Combined ratio Loss ratio Expense ratio Combined ratio Loss ratio Expense ratio
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 the underwriting results of these years.
As noted above, the new quota share deals for 2007 and beyond include scope for the Group to earn a larger share of the underwriting result than the 2006 and earlier contracts.
Ancillary profit and instalment income This primarily involves commissions and fees earned on sales of insurance products and services 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 predominately internet 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% and returned a 34% net operating margin (36% in 2005).
*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 the underwriting profit. Previously an adjustment was made for these intra-group sales. The impact of this adjustment on the 2005 figures was to decrease Confused profit by £1.9m.
Earnings per share (EPS) Earnings per share rose 22% from 32.7p to 39.8p in 2006, broadly in line with the increase in profits.
The balances making up this total can be analysed as follows: Liquid funds in underwriting companies: £000 £000
Liquid funds held outside underwriting companies: Cash at bank 101,652 69,682
During the last quarter of 2006, the Group changed its investment strategy, moving away from fixed income mandates and into money market funds. This decision was motivated by the disappointing 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 fully liquidated before the year-end.
Employee share schemes The Board continues to take the view that actual or prospective share ownership plays a vital role in staff incentivisation across all levels of employee. The Group has two share schemes – an Inland Revenue approved Share Incentive Plan (the SIP) and the Senior Executive Restricted Share Plan - 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 have declined 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 of the shares at the date of award.
Further details of the awards - actual and anticipated - are included in note 26 below.
The main performance criterion in determining awards under the Unapproved Plan will be the growth in earnings per share (EPS) in excess of a risk free return, defined as average 3-month LIBOR, over a three year period. The Board feels 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 were made 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 the three 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 are in place to ensure that neither scheme issues shares in excess of 5% of the Group’s issued share capital over the 10 year period from 1 January 2005.
Corporate governance The Combined Code on Corporate Governance This report explains key features of the Group’s governance structure, how it applies the principles in the revised Combined Code on Corporate Governance (the ‘Code’), and the extent to which the Company has complied with the provisions of the Code.
In September 2006 the Group announced the appointment of two new independent Non-executive Directors. This brings the total number of independent Directors to five and makes the Board fully compliant with Code A.3.2. The appointments were made on 4 September 2006. Throughout 2006 up to this date 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 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.
During the year the Board carried out an evaluation of itself and its Committees. In 2005 the evaluation consisted of detailed questionnaires completed by all Directors. The Board has decided that given the results of 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.
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, and that the Chairman continues to demonstrate commitment to his role.
**Kevin Chidwick, Margaret Johnson and Lucy Kellaway were appointed to the Board on 4 September 2006.
John Sussens has been appointed as the Senior Independent Non-executive Director. He is available to shareholders if they have concerns which contact through the normal channels of Chairman, 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 at each 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 and Margaret Johnson will also stand for re-election due to their appointments occurring after the last AGM.
The induction is supplemented by visits to the Group’s head office in Cardiff and meetings with members of the senior management team and their departments. Throughout their period in office the Directors are continually updated on the Group’s business, legal matters concerning their role and duties, the competitive environments in which the Group operates and any other significant changes affecting the Group and the industry in which it operates.
Relations with shareholders 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 the half-year and full-year results. Site visits and individual discussions with the Executive Directors are also arranged throughout the year with individual shareholders. Regular dialogue with shareholders helps to ensure that the Company’s strategy is understood and that any issues are addressed in a constructive way.
The Chairmen of the Audit, Remuneration and Nomination Committees attend the Company’s Annual General Meeting along with other Directors, and are available to answer shareholders’ questions on the activities of the Committees they chair.
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 of reference are reviewed annually.
The Audit Committee 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 the Committee. 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.
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 the appointment of Lucy Kellaway on 4 September 2006 and resignation from the Committee of Manfred Aldag, the Committee as required by the Code contains a majority of independent Non-executive Directors.
Remuneration Committee The membership at the year-end was John Sussens (Chairman), Martin Jackson and Margaret Johnson (appointed 4 September 2006). The Company Secretary acts as Secretary to the Committee.
• recommended for approval individual remuneration packages for Executive Directors, Chairman, and Company Secretary
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 the levels of remuneration for the Directors and to review the remuneration of the Group's senior executives.
Internal control and risk management The Board is responsible for the Group’s system 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.
A key element of the control system is that the Board meets regularly with a formal schedule of matters reserved to it for decision and has put in place an organisational structure with clearly defined lines of responsibility. In order to ensure these responsibilities are properly discharged, the Board has delegated the task of supervising risk management and internal control to the Risk Management Committee (RMC).
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 account risk and how this can be effectively controlled. The Company Secretary and Risk Officer take responsibility for ensuring management are aware of their risk management obligations, providing them with support and advice and ensuring that the risk management strategy is properly communicated. The head of each business unit or business area is required to undertake a full assessment process to identify and quantify the risks that their areas face or pose to the Group and the adequacy of the controls in place to mitigate or reduce those risks. Reports are produced showing the most significant risks identified and the controls in place. Internal Audit uses the risk registers to plan its programme of audits to ensure that the controls described are actually in place.
The following report has been approved by the Remuneration Committee (the Committee) and the 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, with the 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”).
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 that the remuneration of the Finance Director is fair and in line with market rates and is designed to provide rewards for achieving increases in shareholder value.
A summary of their contracts and remuneration is shown in the following section.
The Company has entered into letters of appointment with its Non-executive Directors. Summary details of terms and notice are included below.
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 by either party giving one month’s written notice
John Sussens 3 years commencing 1 December 2006, terminable by either party giving one month’s written notice
Given the short notice periods applicable, mitigation issues are unlikely to arise.
Expected time commitment (in days) for the Board and Committees: Audit Remuneration Nominations Senior Independent
Fees payable (£’000) with respect to Board and Committee membership are as follows: Audit Remuneration Nominations Senior Independent
Directors’ shareholdings Directors’ interests in the ordinary shares of the Company are set out below: Ordinary shares of 0.1p
Workplace We believe the happier our staff are, the better they will do their job. 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 can make it.
Staff share schemes The Group operates two share schemes that 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 have received £6,000 worth of free shares under the SIP, which had a value of £11,252 at 9 March 2007. The Group also operates a Senior Executive
Restricted Share Plan, although the name is somewhat misleading as awards 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 have overall Group performance criteria applied to them.
Further detail on these schemes is set out in the Financial Review.
• 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
Charitable contributions In addition to sponsoring these local initiatives, we have continued to support several larger charities: • WellBeing of Women through the Diamond Brand. This charity is the only national charity that funds obstetric and gynaelogical research by supporting research projects. Wellbeing of Women’s mission is to bring an end to fear and suffering caused by reproductive health problems.
• Born Free Foundation and Tusk through elephant.co.uk. Born Free Foundation is an international wildlife charity that works to reduce animal suffering and to encourage people to treat animals with respect.
The Group Company Secretary has taken responsibility for the Group’s approach to its impact upon the environment 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 the table below provides the initial data gathered for that year.
• Encouraging staff to support initiatives that positively impact the local, national and global environments
• Measuring, monitoring and reporting on the key aspects of the Group’s environmental performance and regularly reviewing progress to reduce the amount of resources consumed per employee
Energy We 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 and agreed with the building’s managing agent and other tenants. Up until the end of 2006 our Swansea staff were located in an ageing building with inefficient electricity and water supply.
Within the Group we have worked hard with our staff and our managing agents to reduce the use of energy and have introduced a number of measures to help lower energy usage such as: • All the lights in the building go off after working hours
Mileage by air * As the Group moved its Swansea workforce to new offices in quarter two of 2006, the figures are shown based on the resources used for Cardiff office only and where usage per employee is stated, is based on an average of 1,200 employees working in the Cardiff office. Both offices will be included in the 2007 calculation.
Travel We have based our offices centrally in Cardiff and Swansea to enable staff to take advantage of public transport.
We also provide all staff with the benefit of an interest free loan for public transport passes.
Environmental risks The Group has reviewed the risks facing its business operations as a result of climate change. The volume of motor insurance claims for any given portfolio of business is to a large degree dependent upon weather conditions. The risk associated with climate change is the potential change to claims frequency through the impact of more extreme weather patterns. It is virtually impossible to model the potential impact of climate 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 with a number of disaster scenarios such as a major storm in the South East, major flood on the East Coast, and a complete flooding of the Thames in the London area. The Group maintains sufficient reinsurance cover to provide protection in the event of catastrophes of this nature.
& Provincial Building Society, Managing Director of the Insurance Division of Abbey National plc, and Director of Corporate Projects at National
Kevin Chidwick, (43) Finance Director Kevin is responsible for finance, information technology, facilities and investments. He joined Admiral in 2005, becoming a Director in
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.
Lucy Kellaway (46) Non-executive Director (N) Lucy joined the Board as a Non-executive
Martin Jackson (58) Non-executive Director (A, R) Martin was appointed Non-executive Director and
Friends’ Provident Life Office between 1999 and 2001. Prior to that he was the Group Finance
Keith James OBE (62) Non-executive Director (A, N) Keith was appointed a Non-executive Director in December 2002. He is Chairman of the
John Sussens (61) Non-executive Director (R) John was appointed the Senior Independent Nonexecutive Director in August 2004, and is Chairman of the Remuneration Committee. He is also a Nonexecutive Director of Cookson plc, Phoenix IT Group
Excavators Limited. He was a Non-executive Director at Chubb plc between 2001 and 2003.
The Directors declared and paid dividends of £70.1m during 2006 (2005: £49.2m) – refer to note 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 of shares
The Group purchases appropriate liability insurance for all staff and Directors.
Creditor payment policy It is the policy of the Group to pay all purchase invoices by their due date, and appropriate quality 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 held at 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.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and corporate governance statement that comply with that law and those regulations.
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 and Parent Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited.
Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the EU, and for 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.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the 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, 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 with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chairman’s statements, the Chief Executive’s statement and the financial review that is cross referred from the business review section of the Directors’ Report.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ remuneration report to be audited 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 and the part of the Directors’ remuneration report to be audited.
• the information given in the Directors’ report is consistent with the financial statements.
As at: Exchange differences on translation of foreign operations (50) -
Profit after tax 103,722 84,720 Adjustments for non-cash items: - Amortisation of software 446 896 - Unrealised (gains) / losses on investments (624) 893 - Share scheme charge 2,667 1,247
Change in trade and other receivables, including from policyholders (23,150) (18,693)
Change in trade and other payables, including tax and social security 33,652 18,041
Cash flows from operating activities, net of movements in investments 182,690 122,948
Net cash flow from operating activities 140,741 94,241 Cash flows from investing activities: Purchases of property, plant and equipment and software (6,046) (3,999)
The financial statements comprise the results 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 the Company’s subsidiaries are consolidated in the Group financial statements. The Company controls 100% of the voting share capital of all its subsidiaries. The Parent Company financial statements present information about the Company as a separate entity and not about its Group. In accordance with International Accounting Standard (IAS) 24, transactions or balances between Group companies that have been eliminated on consolidation are not reported as related party transactions.
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 application of IFRS 7 and the proposed amendment to IAS 1 in the current year would not have affected the balance sheet or the income statement as the standards are concerned only with disclosure. The Group plans to adopt these in 2007.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements.
2. Significant estimates Estimation techniques used in calculation of claims provisions: Estimation techniques are used in the calculation of the provisions for claims outstanding, which represents a projection of the ultimate cost of settling claims that have occurred prior to the balance sheet date and remain unsettled at the balance sheet date.
Revenue from Gladiator and Confused.com: Commission from these activities is credited to income on the sale of the underlying insurance policy.
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 and internal financial reporting systems.
c) Foreign currency translation Functional and presentation currency: Items included in the financial statements of each of the Group’s entities 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 thousands of pounds sterling, which is the Group’s presentation currency.
d) Insurance contracts and reinsurance assets Premium: The proportion of premium receivable on in-force policies relating to unexpired risks is reported in insurance contract liabilities and reinsurance assets as the unearned premium provision – gross and reinsurers’ share respectively.
The classification and accounting treatment of acquisitions occurring before 1 January 2004 have not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004 due to the exemption available in IFRS 1 (First time adoption).
The Goodwill held on the balance sheet at 31 December 2006 is allocated solely to the private motor insurance segment.
g) Leased assets The rental costs relating to assets held under operating leases are charged to the income statement on a straight-line basis over the life of the lease.
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.
i) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term deposits with original maturities of three months or less.
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 a corresponding increase in equity.
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 of previous periods.
Deferred tax: Deferred tax is provided in full using the balance sheet liability method, providing for temporary differences arising between the carrying amount of assets and liabilities for accounting purposes, and the amounts used for taxation purposes.
The principal temporary differences arise from depreciation of property and equipment, share scheme charges and the tax treatment of Lloyd’s profits.
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, specifically interest charged on inter-company loans.
Other segment items : 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.
Revenue and results for the corresponding business segments for the year ended 31 December 2005 are reported below.
Other segment items: The segment assets and liabilities at 31 December 2005 and capital expenditure for the year are as follows.
Total investment and interest income 14,464 15,518 9. Expenses and share scheme charges
Administration and other marketing costs 12,009 35,144 47,153 11,021 22,583 33,604
Analysis of other administration and other marketing costs: Ancillary sales expenses 14,505 13,378
Operating lease rentals: Auditor’s remuneration: - Fees payable for the audit of the Company’s annual accounts 19 21 - Fees payable for the audit of the Company’s subsidiary accounts 154 189 - Fees payable for other services 60 109
Analysis of fees paid to the auditor for other services: Tax services 45 91
Under / (over) provision relating to prior periods – deferred tax 87 (634)
Tax charge for the period as above 43,620 34,774 14. Dividends
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.
The net book value of assets held under finance leases is as follows: Computer equipment 2,996 2,380
The Group’s financial assets can be analysed as follows: Investments held at fair value 257,634 255,937
Management of credit and market risk Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, the Group only conducts business with companies with specified financial strength ratings.
The other primary form of credit risk is in respect of amounts due from policyholders. Credit risk arises due to the potential for default on credit card payments. The impact of this is mitigated by the large customer base and the low level of the average balance recoverable. This risk is also 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’s investment returns should now directly track underlying market interest rates and hence will rise or fall in line with this benchmark. At 31 December 2006, the Group had fully liquidated the fixed income portfolios.
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 the claims arising exceeds expectation and the value of insurance liabilities established.
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.
Gross claims provision as originally estimated 124,478 115,169 142,968 170,216 202,421
Provision re-estimated as of: As re-estimated at 31 December 2006 98,904 100,880 127,613 162,205 -
Net claims provision as originally estimated 71,071 75,549 98,120 128,631 154,711
Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short- term deposits with original maturities of three months or less.
It is the Group’s policy to lease certain of its IT equipment under finance leases. The average lease term is two years. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
Deferred tax liability at end of period 981 3,550 26. Share capital
678,000 were issued to the Admiral Group Employee Benefit Trust for the purposes of the Admiral Group Senior Executive Restricted Share Plan. The Trustees have waived the right to dividend 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.
Staff share schemes: Analysis of share scheme costs (per income statement): SIP charge (note i) 495 263
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 range of awards is as follows: • If the growth in EPS is less than the RFR, no awards vest • EPS growth is equal to RFR – 10% of maximum award vests • To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the three year period
Number of free share awards committed at 31 December 2006: Awards outstanding*1 Vesting date
Total awards committed 2,868,634 *1 – being the maximum number of awards expected to be made before accounting for expected staff attrition. Of the 2,868,634 share awards outstanding above, 2,591,199 have been issued to the trusts administering the schemes, and are included in the issued share capital figures above.
F in a n c ia l st a te m e n ts -
Retained profit for the period - - - - 84,720 84,720
28. Financial commitments The Group was committed to total minimum obligations under operating leases on land and buildings as follows: Operating leases expiring: £000 £000
In addition, the Group had contracted to spend the following on property, plant and equipment at the end of each period: Expenditure contracted to 1,539 1,342 29. Group subsidiary companies The Parent Company’s principal subsidiaries (all of which are 100% directly owned) are as follows: Subsidiary Country of incorporation
Parent Company accounting policies The following accounting policies have been applied consistently in dealing with items which are considered 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 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.
The Company’s principal subsidiaries (all of which are 100% directly owned) are disclosed in note 29 of the Group financial statements.
Retained profit for the period - - - 96,216 96,216 9. Share capital Full details of the Company’s share capital are included in the consolidated financial statements above.
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)
Registered Number: 03849958. Admiral Group plc, Capital Tower, Greyfriars Road, Cardiff CF10 3AZ