Henry Engelhardt (Chief Executive) Andrew Probert (Finance and IT Director) David Stevens (Chief Operating Officer) Manfred Aldag (Non-executive Director) Martin Jackson (Non-executive Director)
Keith James OBE (Non-executive Director) John Sussens (Senior Independent Non-executive Director)
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 elephant.co.uk is the Group’s main online car insurance service. Elephant passes on cost savings generated by being an online brand to customers in the form of lower premiums. www.elephant.co.uk
Gladiator Commercial 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
Chairman’s statement 2005, our first full year since coming to the market in September 2004, continued the sustained growth in customer franchise and profitability that the Group has achieved since it was launched in 1993. Henry Engelhardt, our Chief Executive, writes in detail about the achievements of the year in his own report – I shall, therefore, content myself with the headlines.
In a year when, given our assessment of where the motor market was in its cycle, we deliberately set out to grow less rapidly, we were pleased to add 10% to customer numbers and finish the year with 1.1 million policyholders. This growth, together with a continuing excellent expense ratio, helped offset the impact of the cycle on our claims ratio, whilst we achieved further strong growth in income from products and services that we do not underwrite. Profit before tax was up 14% at £119m whilst total premiums written, including those we share with our reinsurance partners, grew by 13% to £534m.
During the year we paid dividends to shareholders totalling £49.2m, comprising a 9.3p per share final dividend for 2004 and a 9.7p per share interim dividend for 2005.
On this basis there is £38.7m available to distribute out of year-end nonregulated cash balances totalling £69.7m. A final dividend of 14.9p per share (7.8p normal; 7.1p special) is, therefore, proposed for 2005, which will bring total dividends for the year to 24.6p per share, a yield of 4.3% based on the closing share price on 1 March 2006. This is the first full dividend since flotation.
Ongoing alignment of interest between our staff and our shareholders is one of our core principles. Our Approved and Executive Share Schemes are designed to strengthen that alignment over time and we are delighted that the strong out-performance against our plan for 2005 resulted in the Approved Scheme realising its maximum award of £3,000 free shares for each eligible employee. The Executive Share Scheme is based on growth in earnings per share over three years and will, therefore, first vest after the 2007 financial year.
As I wrote last year, Admiral’s strategy is clear and straightforward – to continue to grow our share of the direct private motor market, maximising the value derived from each customer relationship. Along the way we will identify profitable opportunities to exploit the knowledge, skills and resources attaching to our core business in the UK. Our plans to launch later this year in Spain, the first leg of our expansion into Europe, flow directly from this strategy, as does our continuing development of Confused, our intelligent automated car insurance shopper which last year handled 4 million quotes and added household and travel insurance to its core motor offering.
We look forward to continuing consistently to create value for all our shareholders.
Total turnover for the year was £638m, up 16% from 2004
Gave more than 9.7m quotes, of which almost 9 million started on the internet (92%)
Confused.com gave more than 4m quotes and made a profit of £8.8m (including payments from Group brands)
Named to The Sunday Times list of Top 100 Places To Work in the UK for the sixth year in a row (every year it’s been run)
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 do everything involved in the process of acquiring and servicing our customers. However, we are not your typical insurance operation as we share the income and commensurate risk with several reinsurance partners, taking only 30% of the underwriting risk for our own account. We operate through a number of targeted brands: Admiral (younger drivers, London area), Diamond (women drivers), Elephant.co.uk (internet users) and Bell (zero no claims bonus). We have two other brands, Gladiator Commercial, which operates as an intermediary in the commercial vehicle market, and Confused.com, which is an internet ‘shopper’ for insurance products.
In 2005 70% of our premium was underwritten by Munich Re (65%) and Axis Re (5%). The remaining 30% was kept by the Group. Our net written premium for 2005 was £159m. In 2006 Admiral Group will take 25% of the premium income to its own account. Munich Re, through Great Lakes, will continue to take 65%, Axis Re, as last year, has 5% and we have a new partner for 2006, Swiss Re, also taking 5%.
To put this income into context, I’ve done a little calculation where the non-underwriting 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 60%! Here’s another interesting calculation: we made £122m on income of £233m, a ratio of 52%.
The UK car insurance market cycle: Boil a frog slowly Did you know that if you want to boil a frog (note: no frogs have been boiled in the making of these accounts or the writing of this commentary) and you throw the frog into boiling water it will jump right out? But if you put the frog in a pot of cool water and turn up the heat, it will boil quite nicely? The UK car insurance market is now akin to that slowly boiling frog. Previous cycles were more like throwing the frog into the boiling pot. The market would scream and react. The current cycle is
But although 105% is a good result considering the nature of the cycle, it is still a marginal proposition to write UK motor insurance at the average. And it is a worse result than 2003.
The second phenomenon is a reduction in the inflation rate of bodily injury costs. This is a much more volatile measure and subject to potential shock should, for instance, there be a change in the discount rate for calculation of long term liabilities. But at the moment inflation in this area is below the average for the last decade.
However, the marketing spend seemed to have come off the boil in the second half of the year. The spend peaked in July 2005. Since then less was spent in each month of 2005 than the same month in 2004. Historically marketing spend has been a measure of appetite for business. It serves as a rough precursor for cyclical change, with a rise in the spend bringing about a poorer future underwriting result and a reduction in spend indicating a better future result. The last time the spend actually decreased, as it did in the latter part of 2005, was 1998. The spend then levelled off for two years, at which point the market was moving to the better phase of the cycle. The marketing spend started to rise again in 2001, when the market result was very good, and continued to rise, unabated, until the middle of 2005.
Nothing has occurred to alter my thoughts on the long-range outlook for the market. It is still a cyclical market, but, versus historical patterns, I’d expect the good times to be less good and the bad times to be less bad. In large part this is due to consolidation in the market. The largest two players in the market combine to have around 45% market share, whereas in the mid-1990s, prior to consolidation, it took more than a handful of firms to account for 45% market share. These two firms, Royal Bank of Scotland (@34%) and Aviva Norwich Union (@11%), appear to be disciplined and keen to make good returns. This lends a great deal of stability to the market.
As the ‘boil the frog’ analogy indicates, I don’t see a great deal of change to this landscape in 2006. I believe the market will continue to deteriorate, but not in a dramatic fashion. I think we’ll see some firms trying to grow share through marketing, others through rate changes and others willing to sacrifice share to maintain a healthy bottom line. We might see some volatility in marketing spend for the market as a whole as from time to time individual firms step up the marketing to meet ambitious targets.
“Our ability to make the internet work goes a long way to explaining our excellent results. This is also a source of confidence in our future.” Henry Engelhardt
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. 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 going forward.
Elephant, our pure internet brand, saw its end-of-year customer count reach 410,000 (up 14% from the year before). Elephant is still the biggest brand in the Group. The other brands all grew the number of customers they service in 2005 as well, Admiral by 11%, Bell by 18% and Diamond by 1%.
It was also yet 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 2005 Gladiator’s customer count stood at 36,000 and it contributed £1.9m to the Group’s bottom line.
Changing the way car insurance is bought in the UK – Confused.com: The consumer champ 2005 was really a huge growth year for Confused.com. Confused is now a major force in the distribution of car insurance in the UK. Confused.com is 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 the major car insurance websites, populates the appropriate fields, and, in real time, brings the customer back a list of prices. Confused goes out to direct operations as well as intermediary sites. One-stop shopping!
2005 – A year of change So there you have it. 2005 wasn’t too shabby, was it? From the facts and figures at hand we still believe we are the most efficient and, pound for pound, the most profitable firm in the UK motor insurance market. Our goal is to continue to write the above sentence for the annual accounts year after year after year.
One of the inevitable consequences of going public was that, for some managers, it was the culmination of their career. Of the 15 senior managers in the Group at the time of float six have now retired; even though some of them are not yet 40! The float has given them financial security and they felt it was the right time to dedicate themselves to family and other interests. All of this was communicated well in advance and we spent a good part of the year putting the appropriate replacements in place, either from the existing team or going outside to recruit.
All of the managers who retired had joined us prior to our January 2, 1993 launch. It should never be forgotten that these are the people who built the foundation upon which our current and future success rests. We will always be deeply indebted to the contributions from (in alphabetical order): Claire Carrel, Nicole Griffiths, Tanzie Oliver, Jane Stone (still with us part-time!), Dave Walker and Graham
Wilson. I wish them all the very best with Life After Admiral.
360 is the number of children at our Staff Children’s Christmas Party, an
Core profit is used as an effective measure of the three key elements of the Group’s business: 1) underwriting profits, 2) profit commissions and 3) net other income (most notably ancillary income). Each element is discussed below.
Underwriting profit 32,361 27,969 Profit commissions1 14,735 15,679 Net other income 74,998 56,916
Adjusted Group core profit 122,094 100,564 1During 2004 £5,994,000 of profit commission relating to the 2003 financial year became recognisable in accordance with the Group’s accounting policy for such commissions and is, therefore, included in the 2004 results in the statutory accounts. The Directors believe this amount should be reallocated back to 2003 for the purposes of comparisons and it has been deducted above.
The proportion of the Group’s core profits earned from non-underwriting increased again during 2005 - with 73% now arising from intermediary activities and profit commissions (72% in 2004).
The hybrid nature of the business significantly reduces the volatility of earnings inherent in motor insurance and has some important advantages. Firstly, the Group currently only underwrites 25% of the motor insurance it sells. The Group therefore, materially limits its downside exposure, whilst retaining the potential, through the profit commission arrangements in place, to generate potentially significant income from the other 75% of the business depending upon the underwriting results achieved. (Refer to the underwriting structure section below for further detail.)
The growth of 16% in the year contributes to compounded average annual growth since 2000 of around 20% shown by the steady growth trend in the graph below. Gross other income, which is made up predominantly of ancillary revenue (before allocation of overhead) and Confused.com income, demonstrated an especially high increase (over 34%) in the year - both are discussed further below.
Underwriting structure The Group’s underwriting structure is as follows: 65% of the business written continues to be underwritten by Great Lakes under a long-term coinsurance contract.
35% of the business is underwritten by the Group through Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 10% (of the total business) is ceded via quota share contracts that qualify for deductions in required solvency capital.
The Gen Re contract was commuted with effect from 31 December 2005, and in line with accounting guidelines, has not been treated as reinsurance in the financial statements. This has the effect (for contracts incepted in 2005 only) of grossing-up premiums, claims and expenses retained by the Group to a net 30%.
Underwriting results Total premium written increased by 13.4% from £470m to £534m during the year. This has once again resulted from targeted marketing spend increases and the continued growth of elephant.co.uk, the Group’s principal internet offering and largest brand. All Group brands increased in size during 2005. Note that whilst premium increased by 13.4%, the Group’s closing policy base increased by around 10%. The differential consists of the overall rate increases effected over 2005, combined with a change in the mix of business which also led to higher average premiums.
The accounting treatment adopted for the commutation of the Gen Re contract has meant that for contracts incepted in 2005, the Group effectively underwrites 30% of the total motor business. For this reason, net insurance premium revenue has increased by almost 30% in the year - although on a like for like basis (that is, had the Group underwrote 25% as opposed to 30% of 2005 business), the increase is 16% – much more in line with the written premium increase noted above.
Positive development of prior year claims provisions has continued, and the 2005 income statement contains £17.3m of net releases (up significantly from £9.2m in 2004). 2005’s releases effectively reduce the reported loss ratio by 12.4 percentage points (8.5 points in 2004). Note 19 to the financial statements includes further detail on claims provision development.
The Group’s combined ratio (being the aggregation of the loss and expense ratios above) is 84.9% up from 82.0% in 2004. The increase is due to the loss ratio move noted above. The Group’s 85% compares to an expected market combined ratio in 2005 of around 105% (source – Deloitte) – an outperformance, consistent with previous years of around 20 points. Further detail on market combined ratios is set out in the Chief Executive’s statement.
Net other income This figure can be broken down as follows: Ancillary contribution 59,092 48,493 Gross Confused.com contribution 8,823 2,033 Intra-group adjustment* (1,941) (750) Confused.com contribution 6,882 1,283 Aggregate interest receipts 4,176 3,348 Instalment income 3,768 2,603 Gladiator contribution 1,871 1,756 Other Group/central overheads (791) (567)
Ancillary contribution & instalment income This primarily involves commissions earned on sales of insurance products complementing the motor policy, but which are underwritten by external parties. Net contribution from these sales grew by 22% in 2005 - from £48.5m to £59.1m. Average gross income per motor policy sold also increased significantly during the year, from £51 in 2004 to £56 in 2005.
Instalment income represents charges for payment by instalments on motor policies sold which are paid for over the course of the policy life by direct debit.
Gladiator Commercial Gladiator had another profitable year, with relatively little change in the overall result or level of business. In spite of this, it has been a year of change for Gladiator - with the development of its own interactive quote facility that is expected to make the internet its principal distribution channel.
Taxation The total taxation charge reported in the income statement is £34.8m (2004: £14.4m), representing 29.1% (2004: 13.7%) of pre-tax profits. The unusually low effective rate in 2004 is due to the impact of the ESOT share awards made during that year, which attracted a significant deduction (£17m) for corporation tax purposes. This tax deduction is the reason why post tax profits in 2004 were higher than in 2005.
Earnings per share (EPS) The tax deduction referred to above also has a distorting impact on the EPS figures presented in the income statement. Note 15 to the accounts sets out a calculation of adjusted EPS, which backs out the impact in the 2004 comparatives. EPS for 2005 is 32.7p, up from the adjusted 2004 figure of 28.4p - an increase of 15%, in line with the increase in pre-tax profits reported on the income statement.
Financial investments, cash and debt A continuing feature of the Group’s business is the significant generation of cash from all operations. At the end of the year, the Group held a total of £406.1m in cash and financial investments - up 26% on the £322.6m held at the end of 2004. This increase is after distributions to shareholders of £49.2m during 2005 (£52.0m in 2004).
The balances making up this total can be analysed as follows: Liquid funds in underwriting companies: Government and sovereign bond holdings 83,071 42,980 Corporate bonds and similar instruments 172,866 160,438 Deposits with credit institutions 40,646 31,070 Cash at bank 39,824 38,035
Liquid funds held outside underwriting companies: Cash at bank 69,682 50,096
The Group maintains four externally managed investment funds in which the majority of the insurance funds are invested. Three of these (one each for Syndicate 2004, AICL and AIGL) are managed by Alliance Capital Management, whilst the fourth (another AIGL fund) is managed by Lloyds TSB International.
The Group restructured its loan facility during 2005 in order to reduce the interest margin being incurred on the debt and to increase its flexibility.
Refer to note 22 to the accounts for further details on the Group’s debt.
Dividends There has been no change in dividend policy, which is based on the principle of returning excess cash to shareholders. The Directors expect to make a normal distribution of at least 45% of posttax profits each half-year, and will regularly review the Group’s available cash to determine whether it is appropriate for the Company to pay a further special dividend.
In line with this policy, as outlined in the Chairman’s statement, the Directors have declared a final dividend for 2005 of 14.9p per share, which is made up of 7.8p per share normal element, plus 7.1p per share special distribution based on the Group’s cash resources at the end of the year.
International Financial Reporting Standards (IFRS) From 1 January 2005, EU regulations require companies listed on regulated markets in the EU to prepare their consolidated accounts under IFRS. As such, these financial statements are the first full year accounts to be prepared under IFRS. The 2004 full year accounts were reported under IFRS in the 2005 interim accounts document, reported in September 2005.
1. The Approved Share Incentive Plan (SIP) This plan is open to all staff of Admiral Group plc (the current Executive Directors have opted not to participate in the Scheme).
The maximum award under the SIP will be £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.
Inland Revenue rules dictate that staff must hold the shares for three years before being able to sell them, but dividends will be payable during the vesting period. If a member of staff leaves the Group before the end of the three year period, without being a ‘good leaver’, they get no benefit from the shares not yet vested.
Further details of the awards – actual and anticipated – are included in note 26 to the financial statements.
The main performance criteria in determining awards under the UFSS 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 and aligns senior staff incentivisation with it.
In addition, for any shares to vest, the Group’s Total Shareholder Return (TSR) must at least match the TSR of the FTSE 350 over the three year vesting period.
Around 270 staff received awards during 2005, demonstrating the Directors’ belief that a real difference can be made by incentivising staff that have direct control over customer interaction as well as the Group’s most senior managers.
The performance criteria for future awards under the UFSS have been amended by removing the TSR hurdle. The Board considered that it would de-motivational for staff if a structure was in place whereby significant increases in EPS may not rewarded.
The Board believes that the EPS targets alone provide sufficient incentivisation and align the interests of staff and shareholders. 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 15% per annum, assuming LIBOR remains at approximately 4.5%. Only 10% of shares vest for matching the growth of LIBOR over the three year period.
Profit before tax 119,494 104,906 Add back: finance charges 2,162 2,451 Add back/(deduct): share scheme charges/(credit) 438 (4,144) Add back: bonuses paid in lieu of dividends – 3,345 2003 profit commission adjustment – (5,994)
Net insurance premium revenue 139,454 107,501 Net insurance claims (100,526) (74,272) Net expenses related to insurance contracts (17,909) (13,796) Investment return 11,342 8,536
Net insurance claims from income statement 100,526 74,272 Deduct: claims handling costs (3,202) (2,352)
Income: Net premium revenue 139,454 107,501 Gross other revenue 93,405 69,457
The provisions of the Code have been reviewed and where appropriate steps have been taken to ensure that the Company is in compliance with all of the provisions of the Code. As at the date of this Report the Company complies with all of the provisions of the Code, save the requirement in Code D.1.1 that the Senior Independent Director should attend meetings with a range of shareholders, Code A.7.2 that Non-executive Directors should be appointed for specified terms and Code A.3.2 that at least half of the Board, excluding the Chairman, should comprise Non-executive Directors determined by the Board to be independent.
A.7.2 – This is currently being reviewed by the Nomination Committee.
The Company has a comprehensive programme of meetings and dialogue with institutional investors. The views of investors expressed through this dialogue are communicated to the Board as a whole through the investor relations report. All Directors can, therefore, develop an understanding of any issues and concerns of major shareholders should any be raised. Feedback from shareholders suggests that these arrangements for communication between the Company and its shareholders are considered to be satisfactory and effective.
The roles of the Chairman and Chief Executive The division of responsibilities between the Chairman of the Board, Alastair Lyons, and the Chief Executive, Henry Engelhardt, is clearly defined in written job specifications and has been approved by the Board.
The Board is conscious of the requirement of the Combined Code and at such a time as a Non-executive Director’s length of service goes beyond that recommended to be considered independent, the Board will review the position. Manfred Aldag’s appointment is contingent upon his continued employment with Munich Re.
Information Reports and papers are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time.
Henry Engelhardt (Chief Executive) 9 (100%) Andrew Probert 9 (100%) David Stevens 9 (100%)
*Gillian Wilmot attended all of the meetings after her appointment date on 26th April 2005.
The Committee has reviewed the effectiveness of the Group’s system of internal control and the overall Risk Management strategy. In this context, the Committee works closely with the Group’s Risk Management Committee, whose activities are described later in this statement.
The Committee also reviews the effectiveness of processes in place throughout the Group to identify, assess and manage business risks. It is also responsible for reviewing and approving the statement on internal control and risk management that is included later in this statement.
3) Internal audit The Committee is responsible for monitoring and has reviewed the effectiveness of the Group’s Internal Audit function. This involves, inter alia:reviewing, assessing and approving the annual internal audit programme considering the appropriateness of the resource, remit and terms of reference of the internal audit function receiving, on a regular basis, reports on the work of internal audit and updates on the progress through the work programme meeting with the Internal Audit Manager and Compliance Officer at least once annually, without the attendance of management 4) Auditor’s independence and objectivity The Committee has reviewed and made recommendations on the appointment and remuneration of the external auditor and monitored their performance. The Audit Committee regularly monitors the non-audit services being provided to the Group by its external auditor.
Both the Board and the external auditor have safeguards in place to prevent the auditor’s independence and objectivity being compromised. The Audit Committee has put in place a comprehensive policy to regulate the use of the external auditor for non-audit services. This policy sets out the nature of the work the external auditor may not undertake.
The policy includes four key principles that underpin the provision of non-audit services by the external auditor. The auditor should not: audit its own firm’s work make management decisions for the Group have a mutuality of financial interest with the Group, or be put in the role of advocate for the Group
Prior approval of the Committee is required for any services provided by the external auditor where the fee is likely to be in excess of £30,000. In any case, activities that may be perceived to be in conflict with the role of the external auditor must be submitted to the Committee for approval prior to engagement, regardless of the amounts involved. The Committee monitors the amounts paid to the external auditor for non-audit services on a regular basis.
The Nominations Committee The membership in place at the year-end was Keith James (Chairman), Alastair Lyons and Manfred Aldag. The Company Secretary acts as Secretary to the Committee.
The Committee as required by the Code contains a majority of independent Nonexecutive Directors.
The Committee leads the process for making appointments to the Board or where the appointee is likely to become a Board member. The Committee ensures there is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board through a full evaluation of the skills, knowledge and experience of Directors. The Committee also ensures plans are in place for orderly succession for appointments to the Board, and to other senior management positions. Responsibility for making senior management appointments is vested in the Chief Executive.
During 2005, the Committee instructed external search consultants to provide support in relation to the appointment of a Non-executive Director. Detailed role specifications were drawn up with reference to the mix of skills, knowledge and experience of the existing Directors and the requirements of the Board. Interviews were carried out with a range of potential candidates, by the external agency, members of the Committee, and other members of the Board. As a result
of the process, the Committee recommended to the Board, and the Board agreed, that Gillian Wilmot be appointed to the Board as a Non-executive Director with effect from 26 April 2005. The anticipated time commitments for the role were discussed and agreed with Gillian.
During the year the Committee carried out the following tasks; reviewed the Group’s overall remuneration policy and strategy recommended for approval individual remuneration packages for Executive Directors and the Chairman including terms and conditions of employment and any changes to packages reviewed the rules and performance measures of the Group share schemes and the grant, award, allocation or issue of shares under such schemes
The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s significant risks, that it has been in place for the year ended 31 December 2005 and up to the date of approval of the annual report and accounts, that it is regularly reviewed by the Board and that it accords with the internal control guidance for Directors on the Combined Code.
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) – which is discussed further below.
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 Compliance Officer 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.
Another key responsibility is to assess the extent of regulation applying to authorised companies within the Group. The Committee develops policies to ensure compliance with such regulation and ensures that appropriate action is taken by the management team to implement compliant systems and procedures.
The Admiral Group Board Directors’ remuneration is determined by the Committee. The Committee also reviews and recommends any changes proposed to the Group’s share schemes, as well as having an overview of shares issued by the Group’s Senior Executive Restricted Share Scheme.
In light of this, their remuneration packages consist of base salary (benchmarked against market rates by the Committee) and benefits such as private medical cover, permanent health insurance and death in service cover. The Group does not contribute to any pension arrangements on behalf of the Executive Directors, and it is not intended that they will participate in any Group share schemes.
Executive Directors’ remuneration is reviewed annually by the Committee, taking into account salary levels of comparable companies. Salaries were last reviewed in May 2005, when it was decided to give increases to Executive Directors which averaged 6.3%.
The following table summarises the notice periods relating to the service contracts of the Executive Directors.
The Company has entered into letters of appointment with its Non-executive Directors. Summary details of terms and notice are included below. Again, there is no provision for compensation for early termination of the appointments.
As noted in the Corporate Governance Report, the Non-executive Directors’ appointments are not for specified terms as recommended by the Combined Code (A.7.2). This is currently being reviewed by the Nominations Committee.
Total Shareholder Return (TSR) The following graph sets out a comparison of Total Shareholder Return for Admiral Group plc shares with that of the FTSE 350 Index, of which the Company is a constituent. The graph measures the period from the commencement of conditional trading on 23 September 2004 up to 31 December 2005. TSR is defined as the percentage change over the period , assuming reinvestment of income and funding of liabilities.
Term and notice Alastair Lyons Indefinite (terminable on three month’s notice from either party) Manfred Aldag Indefinite (terminable on one month’s notice from either party)
Sep ’04 Nov ’04 Jan ’05 Mar ’05 May ’05 Jul ’05 Sep ’05 Nov ’05
Executive Directors Henry Engelhardt* 40,466,720 40,466,720 Andrew Probert 3,500,000 5,250,000 David Stevens* 19,768,000 19,768,000
Non-executive Directors Alastair Lyons 715,600 915,600 Manfred Aldag – – Martin Jackson – – Keith James* 44,500 42,000 John Sussens 8,000 8,000 Gillian Wilmot – –
Admiral Group Senior Executive Restricted Share Plan This scheme is open to Group employees of a certain level of seniority and those achieving outstanding performance. It excludes the current Executive Directors of the Group. The Group feels strongly that this type of compensation is the most effective way to align the interests of staff with the interests of shareholders.
Further detail on these schemes is set out in the financial review and remuneration report.
requirement of the job for which he or she has applied. Employees who find themselves no longer able to carry out the job for which they are employed will be given individual consideration. Depending on the nature, severity, and duration of the disability, they may be considered for an alternative post within the Group. Admiral continues to train and encourage the career developments of all disabled persons in its employment.
External sponsorship The Group sponsored a number of high profile local events in 2005.
Charitable Contributions In addition to sponsoring these local initiatives, the Group supports the following larger charities: WellBeing of Women through the Diamond Brand: This charity is the only national charity that funds obstetric and gynaecological research by supporting research projects.
Environment Whilst the Group’s operations do not directly impact on the environment, the Group still strives to minimise any impact its operation may have. With that in mind some key environmental policies have been implemented: Widespread recycling schemes, including paper, cups, cans, PCs, printing, and photocopying cartridges
Staff are offered loans and discounts to incentivise the use of public transport
Alastair Lyons CBE (52) Chairman (N) Alastair was appointed Chairman of the
He was part of the management team that led the MBO in 1999. Prior to joining Admiral, he was
Prior to that, he was Chief Financial Officer of two life insurance companies and several Lloyd’s brokers. He is a fellow of the Institute of
David Stevens (44) Chief Operating Officer David is a founder Director of Admiral. Initially the Marketing Director, he was appointed
Manfred Aldag (55) Non-executive Director (N) Manfred was appointed a Non-executive Director of the Company in 2003 as a representative of
He has worked for Munich Re since September 1981 and is currently the Senior Executive
Martin Jackson (57) Non-executive Director (A, R) Martin was appointed Non-executive Director and
Gillian Wilmot (46) Non-executive Director (A, R) Gillian was appointed to the Board in April 2005.
Group results and dividends The profit for the year, after tax but before dividends, amounted to £84.7m (2004: £90.5m).
The Directors declared and paid dividends of note 14 for further details.
Annual General Meeting It is proposed that the next AGM be held at The Celtic Manor Resort, Coldra Woods, Chepstow Road, Newport, Gwent NP18 1HQ on 18 May 2006, at 2.00pm, notice of which is set out at the back of the report and accounts.
The Group financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position and performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
In preparing each of the Group and Parent Company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently make judgments and estimates that are reasonable and prudent for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU
We have audited the Group financial statements of Admiral Group plc for the year ended 31 December 2005, which comprise the Group income statement, the Group balance sheet, the Group cash flow statement, the Group statement of recognised income and expense and the related notes. These Group financial statements have been prepared under the accounting policies set out therein.
We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ report is not consistent with the Group financial statements, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Director’s remuneration and other transactions is not disclosed.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
estimates and judgments made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Insurance claims and claims handling expenses (121,123) (102,604) Insurance claims and claims handling expenses recovered from reinsurers 20,597 28,332 Net insurance claims (100,526) (74,272)
Profit after tax attributable to equity holders of the Company 84,720 90,506
Trade and other receivables 21 9,392 16,739 Cash and cash equivalents 20 150,152 119,201
Also refer to basis of preparation and significant accounting policies sections below.
Consolidated statement of recognised income and expense No separate consolidated statement of recognised income and expense has been prepared. The profit for the period of £84.7m (2004: £90.5m) represents all recognised income and expenses for the period.
Profit after tax 84,720 90,506 Adjustments for non-cash items: – Amortisation of software 896 981 – Unrealised (gains)/losses on investments 893 200 – Share option charge 1,247 308 – Share scheme credit, net of employer’s NIC – (4,452) Employer’s NIC charge on ESOT – (7,284) Loss on disposal of property, plant and equipment and software 503 4 Change in gross insurance contract liabilities 38,023 41,278 Change in reinsurance assets 11,971 (9,471) Change in trade and other receivables, including from policyholders (18,693) (31,675) Change in trade and other payables, including tax and social security 18,041 62,048 Interest expense 2,162 2,451 Taxation expense 34,774 14,400
Cash flows from operating activities, before movements in investments 176,361 160,870
Net cash flow into investments held at fair value (53,413) (59,154) Cash flows from operating activities, net of movements in investments 122,948 101,716
The financial statements comprise the results and balances of the Company and its subsidiaries (the Group) for the two years ended 31 December 2004 and 2005. 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. In accordance with IAS 24, transactions or balances between Group companies that have been eliminated on consolidation are not reported as related party transactions.
equity as at 1 January 2004 and 31 December 2004 from previous GAAP to the comparatives included in the consolidated balance sheet above reported under IFRS
The Group is managed as one operation involving the sale and administration of private motor insurance and related products and is reported as one segment.
Premiums, ancillary income and profit commission Premiums relating to insurance contracts are recognised as revenue proportionally over the period of cover.
Under some of the co-insurance and reinsurance contracts under which motor premiums are shared or ceded, profit commission may be earned on a particular year of account, which is usually subject to performance criteria such as loss ratios and expense ratios. The commission is dependent on the ultimate outcome of any year, with commission being recognised based on loss and expense ratios used in the preparation of the financial statements.
Investment income Investment income from financial assets comprises interest income and net gains (both realised and unrealised) on financial assets classified as fair value through profit and loss.
In respect of acquisitions prior to 1 January 2004, goodwill is included at the transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP, which was tested for impairment at the transition date. On transition, amortisation of goodwill has ceased as required by IFRS 1.
Impairment of goodwill The annual impairment review involves comparing the carrying amount to the estimated recoverable amount (by allocating the goodwill to CGU’s) and recognising an impairment loss if the recoverable amount is lower. Impairment losses are recognised through the income statement and are not subsequently reversed.
Software Purchased software is recognised as an intangible asset and amortised over its expected useful life (generally between two and four years). The carrying value is reviewed every six months for evidence of impairment, with the value being written down if any impairment exists. Impairment may be reversed if conditions subsequently improve.
g) Loans and borrowings Interest bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing loans and borrowings are stated at amortised cost with
The total charge expensed over the vesting period is determined by reference to the fair value of the free shares granted (excluding the impact of non-market vesting conditions). Nonmarket conditions such as profitability targets as well as staff attrition rates are included in assumptions over the number of free shares to vest under the applicable scheme.
Prior to 2005, only one equity based compensation scheme had been operated (the Employee Share Ownership Trust or ESOT). All benefits due under this scheme were settled during 2004 at the time of the Company’s flotation on the London Stock Exchange. No further benefits will accrue. In accordance with the exemption available under IFRS 1, the transactions relating to this scheme have not been restated in accordance with IFRS 2 (Share Based Payment).
i) Taxation Income tax on the profit or loss for the periods presented comprises current and deferred tax.
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.
Financial assets 300,722 – 300,722 Reinsurance assets 66,137 – 66,137 Trade and other receivables 16,739 – 16,739 Cash and cash equivalents 119,201 – 119,201
EQUITY Share capital 259 – 259 Retained earnings (ii) 103,258 27,955 131,213 Other reserves 13,162 – 13,162
LIABILITIES Insurance contracts 216,107 – 216,107 Financial liabilities 33,122 – 33,122 Provisions for other liabilities and charges – – – Trade and other payables (iii) 188,378 (24,049) 164,329 Deferred income tax 4,838 – 4,838 Corporation tax liabilities 9,585 – 9,585
Total equity and total liabilities 568,709 3,906 572,615 4. Explanation of the transition to IFRS As stated in note 1, these are the first financial statements prepared by the Group under IFRS and the accounting policies detailed in note 3 have been applied in preparing the financial statements, comparative data and the IFRS transition balance sheet at 1 January 2004.
The following table contains a summary of the differences in the balance sheets at 31 December 2004: Notes on table A: (i) Intangible assets The adjustments to goodwill relate to reinstating goodwill to the balance standing at the transition balance sheet date as required under the transition provisions of IFRS 3 (Business Combinations).
B) Reconciliation of profit for 2004 comparatives The following table reconciles the differences in profit after tax (but before distributions to equity shareholders), for the year ended 31 December 2004: (all £000) Year ended 31 December 2004 Note UK GAAP Impact IFRS
Insurance premium revenue 151,864 – 151,864 Insurance premium ceded to reinsurers (44,363) – (44,363) Net insurance premium revenue 107,501 – 107,501
Insurance claims and claims handling expenses (102,604) – (102,604) Insurance claims and claims handling expenses recovered from reinsurers 28,332 – 28,332 Net insurance claims (74,272) – (74,272)
C) Reconciliation of cash flow statement Aside from the reclassification of certain cash deposits from financial investments under UK GAAP to cash under IFRS, there are no differences to the cash flow statement presented under IFRS and that presented under UK GAAP. Therefore no reconciliation has been presented.
Ancillary revenue 72,470 59,175 Instalment income earned 3,768 2,603 Revenue from Gladiator Commercial 5,123 4,475 Revenue from Confused.com 12,044 3,204
Total investment and interest income 15,518 11,884 8. Profit commission 31 December 31 December
The £11,021,000 (2004: £8,024,000) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Insurance contract expenses from above 17,909 13,796 Add: claims handling expenses 3,202 2,352
10. Staff costs and other expenses Included in profit, before co-insurance arrangements are the following: 31 December 31 December
Social security charges 2,782 2,406 Pension costs 490 399 Share scheme charges (see note 26) 1,247 308 ESOT credit – (4,452)
Depreciation charge: – Owned assets 894 915 – Leased assets 1,826 1,641 Operating lease rentals: Auditor’s remuneration: – Statutory audit fees 210 160 – Other audit fees 18 16 – Other services 91 116 Loss on disposal of property, plant and equipment 503 4
Analysis of fees paid to the auditor for other services: Indirect tax consultancy 61 42 Corporate tax services 24 29 Internal audit advisory – 20
During 2004, fees of £827,000 were paid to the Group’s auditor in respect of professional services relating to the listing of the Company’s shares on the London Stock Exchange, which were debited against the share premium account.
Transactions with key management personnel: The compensation paid to key management personnel, being the Board of Directors of Admiral Group plc, is set out in the remuneration report.
Term loan interest 1,520 2,020 Finance lease interest 388 256 Letter of credit charges 221 175 Other interest payable 33 –
Corporation tax thereon at 30% 35,848 31,472 ESOT tax relief – (16,985) Utilisation of brought forward tax losses (421) (582) Adjustments in respect of prior year insurance technical provisions (161) (216) Expenses and provisions not deductible for tax purposes 152 29 Other timing differences (21) (4) Impact of using lower tax rate – (8) Adjustments relating to prior periods (623) 694
Dividends were declared and paid as follows: 31 December 31 December
January 2004 (5.5p per share, paid February 2004)* – 14,179 July 2004 (14.6p per share, paid August 2004)* – 37,817 March 2005 (9.3p per share, paid May 2005) 24,049 – September 2005 (9.7p per share, paid October 2005) 25,141 –
The dividend declared in March 2005 represents the final dividend paid in respect of the 2004 financial year. The dividend declared in September 2005 is the interim distribution in respect of 2005. Refer to the Chairman’s statement and financial review for further detail.
Adjusted earnings per share – basic 32.7p 28.4p Adjusted earnings per share – diluted 32.7p 28.4p
The difference between the basic and diluted number of shares at the end of 2005 (being 400,000) relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note 26 for further detail.
Investments held at fair value 255,937 203,418 Receivables – amounts owed by policyholders 122,810 97,304
Analysis of investments held at fair value: 31 December 31 December
There are a number of elements forming part of the Group’s strategy to manage insurance risk. These include: i) Co-insurance and reinsurance As noted in the underwriting structure section of the financial review above, the Group passes out a significant amount (currently 75%) of the motor insurance business written to external underwriters. 65% of the risk is shared under a co-insurance contract, under which the primary risk is borne by the co-insurer.
A further 10% is ceded under quota share reinsurance contracts (although as noted, the 5% Gen Re quota share agreement for 2005 was commuted at 31 December 2005).
ii) Data driven pricing The Group’s underwriting philosophy is focused on a sophisticated data-driven approach to pricing and underwriting and on exploiting the competitive advantages direct insurers enjoy over traditional insurers through: collating and analysing more comprehensive data from customers tight control over the pricing guidelines in order to target profitable business sectors; and fast and flexible responsiveness to data analysis and market trends
iii) Effective claims management The Group adopts various claims management strategies designed to ensure that claims are paid at an appropriate level and to minimise the expenses associated with claims management. These include: an effective, computerised workflow system (which along with the appropriate level of resources employed helps reduce the scope for error and avoids significant backlogs)
B) Sensitivity of recognised amounts to changes in assumptions The following table sets out the impact on equity at 31 December 2005 that would result from a 1 per cent change in the loss ratios used for each underwriting year for which material amounts remain outstanding.
Recoverable from reinsurers: Claims outstanding 41,585 44,848 Unearned premium provision 12,581 21,289
D) Analysis of re-estimation of claims provisions The following tables set out the cumulative impact, to 31 December 2005, of the retrospective reestimation of claims provisions initially established at the end of the financial years stated. Gross and net figures are shown. These tables present data on an accident year basis.
Provision re-estimated as of: Two years later 92,282 109,490 105,748 – – Three years later 87,840 101,910 – – – Four years later 82,205 – – – –
As re-estimated at 31 December 2005 37,890 55,974 67,726 93,910 –
Written in the period 160,244 118,102 Earned in the period (140,761) (108,866)
Repayments falling due within 12 months – 11,455 Repayments falling due after 12 months 22,000 21,667
The security (over Group assets and subsidiary shares) that was part of the former arrangement has also been withdrawn - the new facility is unsecured.
Brought forward at start of period – 11,739 Utilised in period – (7,287) Released to income statement in period – (4,452)
Premium receivable in advance of policy inception 30,471 23,960 Accrued expenses 24,559 20,288 Deferred income 8,339 7,513
Analysis of finance lease liabilities: At 31 December 2005 At 31 December 2004
Between one and five years 921 35 886 877 136 741 More than five years – – – – – –
Brought forward at start of period 4,838 6,366 Movement in period (1,288) (1,528)
The net balance provided at the end of the current year is made up of a gross deferred tax liability of £3,816,000 (2004: £5,132,000) relating to the tax treatment of Lloyd’s Syndicates, and a deferred tax asset of £266,000 (2004: £294,000) in respect of other timing differences.
Staff share schemes Analysis of share scheme charges/(credit) per income statement: 31 December 31 December
SIP charge* 263 – UFSS charge** 175 – ESOT credit – (4,452) Non-executive Director option charges – 308
Under the scheme, individuals receive an award of free shares at no charge. A total of 269 employees received awards under this scheme during June 2005. Staff must remain in employment until the vesting date (in June 2008) in order for the shares to vest. The maximum number of shares that can be awarded relating to the 2005 scheme is 685,000.
As noted in the financial review, the criteria for UFSS awards have been amended for the 2006 scheme. Further details are contained in the financial review.
Number of free share awards committed at 31 December 2005 Awards Vesting committed* date
SIP H105 scheme 581,565 September 2008 SIP H205 scheme 400,000 March 2009
Total awards committed 1,666,565 *Being the maximum number of awards expected to be made before accounting for expected staff attrition. Of the 1,666,565 share awards committed above, 1,266,565 have been issued to the trusts administering the schemes, and are included in the issued share capital figures above.
Share option charges – – – 308 308 Cancellation of shares (17) – 17 – –
Issues of share capital 1 – – – 1 Share scheme charges – – – 1,247 1,247 28. Financial commitments
Within one years 434 – Within two to five years 52 509 Over five years 2,820 1,465
In addition, the Group had contracted to spend the following on property, plant and equipment at the end of each period: 31 December 31 December
Provisions for other liabilities and charges – – 11.7 – –
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Parent Company is not presented. Under FRS 1 (Cash Flow Statements) the Company is exempt from having to present a cash flow statement on the grounds that its cash flows are included in the Group’s published consolidated financial statements.
The Company has taken advantage of the exemption in FRS 8 (Related Party Transactions) not to disclose transactions or balances with its 90% or more owned subsidiary undertakings on the basis that the consolidated accounts are publicly available.
Notes to the financial statements 4. Fixed asset investments 31 December 31 December
The Company’s principal subsidiaries (all of which are 100% directly owned) are as follows: Subsidiary Country of Class of Principal activity incorporation shares held
Admiral Insurance England and Wales Ordinary Service Company Services Limited Admiral Insurance England and Wales Ordinary Insurance Company Company Limited Admiral Insurance Gibraltar Ordinary Insurance Company (Gibraltar) Limited Admiral Syndicate England and Wales Ordinary Lloyd’s corporate capital vehicle Limited Admiral Syndicate England and Wales Ordinary Lloyd’s managing agency Management Limited Able Insurance England and Wales Ordinary Intermediary Services Limited Inspop.com Limited England and Wales Ordinary Internet services 5. Loans Full details of the Company’s debt are included in the consolidated financial statements earlier in this report at note 22. The note, whilst prepared under IFRS also conforms to UK GAAP.
6. Other creditors – due within one year 31 December 31 December
Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the Parent Company financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the statement of Directors’ responsibilities above.
Our responsibility is to audit the Parent Company financial statements and the part of the Directors’ remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
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 Parent Company 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 Parent Company financial statements and the part of the Directors’ remuneration report to be audited.
Opinion In our opinion: the Parent Company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2005; and the Parent Company financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985
Ordinary Business 1. To receive the reports of the Directors and the audited accounts of the Company for the year ended 31 December 2005.
2. To approve the Directors’ remuneration report set out on pages 33 to 36 for the year ended 31 December 2005.
3. To declare a final dividend on the ordinary shares of the Company for the year ended 31 December 2005 of 14.9 pence per ordinary share.
According to the Articles of Association a minimum of one third of Directors (or if this is not a whole number, the nearest number not exceeding one third) should resign and offer themselves for re-election.
To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions:
(ii) otherwise than pursuant to sub-paragraph (i) above up to a maximum aggregate nominal amount equal to £13,000.
Provided that this power shall, unless previously revoked or varied by special resolution of the Company in general meeting, expire 15 months after the date of the passing of this resolution or, if earlier, at the conclusion of the next Annual General Meeting of the Company after the date of the passing of this resolution save that the Company may, before the expiry of such power, make offers or agreements which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offers or agreements as if the power conferred hereby had not expired.
For the purposes of this resolution, the “Regulations” means The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003.
9. That the Company be generally and unconditionally authorised to make one or more market purchases (within the meaning of Section 163(3) of the Companies Act 1985) on the London Stock Exchange of ordinary shares of 0.1p in the capital of the Company (ordinary shares) provided that: a) the maximum aggregate number of ordinary shares authorised to be purchased is 13,000,000 (representing 5.00% of the issued ordinary share capital)
e) the Company may make a contract to purchase ordinary shares under this authority before the expiry of the authority which will or may be executed wholly or partly after the expiry of the authority, and may make a purchase of ordinary shares in pursuance of any such contract
Notes A member entitled to attend and vote at the annual general meeting (‘AGM’) may appoint a proxy (who need not be a member of the Company) to attend and, on a poll, to vote on his or her behalf. In order to be valid an appointment of proxy must be returned by one of the following methods: • in hard copy form by post, by courier or by hand to the Company’s registrars, Capita Registrars, Proxy Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU; or
• in the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below
Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, in order to be able to attend and vote at the AGM or any adjourned meeting, (and also for the purposes of calculating how many votes a person may cast), a person must have his/her name entered on the register of members of the Company by 6.00 p.m. on 16th May 2006 (or 6.00 p.m. on the date two days before any adjourned meeting). Changes to entries on the register of members after this time shall be disregarded in determining the rights of any person to attend or vote at the meeting.