2008 Performance: Revenue • Total revenue fell by 4% to £66m from £69m
• The Group’s UK van insurance broker Gladiator increased its customer numbers by 36% in 2008 to nearly 85,000, and increased revenue to £9.5m (+ 27%)
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£ m il li o n s pe n c e
£ m il li o n s m il li o n s pe n c e
We estimate that we now account for some 6% of the UK private motor market covering 1.6 million vehicles, 15% up on December 2007 and placing us third in terms of premium in this market. Since the business floated in September 2004 our vehicle count has grown by over 12% p.a. compound, testament to the relevance of our customer proposition; the effectiveness with which the business has seized the opportunities presented by the internet and the rise of aggregators; and continuing innovation such as Admiral MultiCar. This growth in our book in 2008 was accompanied by a 17% increase in profit derived from ancillary products and services.
Chairman's statement 8 c h A I R M A n ’ s s tAt E M E n t
The result for the year was a pre-tax profit of £202.5 million, an 11% increase on 2007 off a 13% growth in total written premiums.
As a principle we return all available surpluses to shareholders after taking into account our required solvency, our overseas expansion plans, and a prudent margin – currently £25m – against contingencies. We, therefore, commit to pay a standard normal dividend that has grown in line with our growth in profits based on a 45% pay-out ratio, and pay whatever remains as available surplus as a special dividend which will, therefore, fluctuate from year to year.
Admiral is now one of the largest private employers in Wales and, as such, is a significant part of the local community. The contribution that the company has made to Wales was recognised by the award of an honorary CBE to Henry Engelhardt in April 2008, on which may I once again extend to him our hearty congratulations. We encourage our staff to work with local projects and we provided financial support during the year to such disparate events as the Admiral Cardiff Big Weekend offering 3 days of quality live music, and the South Wales Echo Community Champion Awards.
Normally at this point in my commentary I like to get right to the highlights so that shareholders can see straight away what we accomplished in the year. This year, however, I think there are few key messages that I need to get across and, for those of you who never read beyond the third paragraph of these reports, I’d better put them next to make sure you get them. The highlights, and there were plenty of them, will follow, further down the page.
So, for those of you who only do three paras, thanks for your time. For those who want to know more, please read on.
Resistant, not proof Car insurance is probably as good an industry as there is in a recession. The very simple fact that it’s compulsory purchase means consumers aren’t deciding whether or not to buy it this year, they’re just asking ‘who from?’ I don’t think any industry is airtight, recession-proof, but this one is recession-resistant – it’s a compulsory purchase product! I don’t see people giving up their cars en masse and so they’ll have to buy the insurance. I do see consumers shopping around even more to ensure they get the best deal. In the UK, I think this additional shopping, especially when it’s done
on price comparison sites, plays very nicely in Admiral’s hands, because it becomes more and more a survival of the fittest. And we’re one of, if not the, fittest. And in those markets where we have fledgling businesses, additional shopping around will only make our job easier.
You might now wonder what the ‘gaining speed’ part of the freight train is all about. Well, we’ve made changes to our reinsurance arrangements that will mean we get a greater share of any underwriting profits in the future. This means that even if we stand still, we’ll be more profitable.
In addition to getting a greater share of the profits through improved reinsurance arrangements we fully expect the UK business to grow further in 2009. The combination of all these factors means that the lowrisk, capital-lite, high-dividend model moves forward in 2009.
Headlines don’t mirror reality The UK car insurance market remains a very competitive place. The market performed pretty much as we forecast with rates grudgingly (sloth-like?), inching upwards in 2008. Based on our data, headlines of 5%-10% rate increases during the year are misleading. I don’t know the exact methodology of either the AA or 2008 Financial highlights
All in all, I think it means a bit of a sleepy year on rates, with the above cocktail of factors working to produce rate increases similar to 2008. For those needing animal imagery I’d suggest the koala bear. There are a number of idiosyncrasies about the koala bear that resonate with similarity to the UK car insurance market. Here are three, I leave it to you to pick and choose which ones best represent the UK car insurance market: koalas sleep some 16 hours a day, they can be nasty if provoked and they are known to smell quite bad.
Fierce competition Confused had a pretty good year. However, as predicted, competition was fierce and as a result profits reduced from £37m in 2007 to £26m in 2008. The spend on TV and press by price comparison sites has gone from approximately £5.5m in 2006 to £51m in 2007 to £76m in 2008. Confused’s portion of this spend has gone from virtually 100% in 06, to a third of the spend in 07 to around a fifth of the
spend in 08. Simply put, competition has taken a lot of profit out of this market through increased marketing costs, despite continued growth in the number of people using price comparison sites. The dominance of price comparison sites as the method of choice for buying car insurance in the UK is reflected by: • The fact that in 2008 73% of Admiral’s new business originated through price comparison sites, up from 50% in 2007, up from 30% in 2006.
But enough whinging about what a tough world it is, let me tell you what Confused is doing to respond. First, we took the better part of 2008 to rebuild the quote engine. It’s now faster and easier for the customer. It also looks better. Second, we’ve launched a new TV campaign which, given the number of times people have seen the old campaign over the last few years, will certainly be welcomed by the British public. Third, we are improving Confused’s offerings of other products. In particular we’re seeing growth in household insurance and energy comparisons.
It is very hard to predict Confused’s result for 2009, the sector remains under intense competitive pressures. However, the market is still growing and this, coupled with the changes Confused made at the end of 2008, has resulted in Confused producing the biggest number of car insurance quotes ever in January 2009. But, I’m sorry to say, it was not a record month for profits. The missing data point to the future is how much money each of the competitors in this sector is willing to spend in 2009 to try and reach, or grow, profitability. If January is anything to go by then Britain will be seeing a lot of price comparison advertising during the year!
We don’t do things on a grand scale until we are quite confident of the result and we work hard to learn as we go, but as we grow these businesses on top of each other the capital requirement increases. This should not put off investors, as our business model generates cash and we have no debt to repay.
Balumba was challenged to improve its loss ratio in 2008 and it did so. The loss ratio for 2007 at the end of 2007 was 137%. The loss ratio for 2008 at the end of 2008 was 102%. We are looking for continued improvement in 2009. Improving the loss ratio was our primary focus during the year and while we were making adjustments to pricing and claims management we pulled back a bit on our advertising spend, resulting in the number of customers Balumba services growing by 8,500, from 46,900 to 55,400 (18%). Balumba’s earned combined ratio was 165% for the year, compared to 232% in 2007. Overall however, Balumba posted a loss of only £1.2m (€1.5m). This sum appears modest largely due to the sale of ancillary products and services to its customers. This is very nice income to have but the key to long-term success for Balumba is to become a good insurer.
The German market is an odd beast (certainly bigger and arguably even less friendly than a koala). There is a season for car insurance in Germany that runs about 10 weeks, from early October to early December. There is very limited activity during the rest of the year. This comes about because almost the entire market renews on a single date, January 1, and consumers have to give their insurers a month’s notice to leave them, which means they have to give notice by the end of November. After that the only substantial group of people shopping are those who are changing vehicle. Besides the difficult logistics of trying to gear up for a short sales window, you lose the ability to test, re-calibrate, retest, re-re-calibrate, etc. that we employ everywhere else. You can test but then you have to wait 42 weeks to re-calibrate!
There’s good news and bad news from AdmiralDirekt.de. On the 1st of January 2009 (from the ‘2008 season’) we had around 30,000 policyholders. This was at the high end of our expectations. That’s the good news. The bad news is that the 8,000 policyholders that went on risk on January 1, 2008 did not perform well. The loss ratio for the 2008 year at the end of 2008 was 142%. Part of this is the volatility inherent in a small book of business where one or two large claims make a big difference. But part of this too is down to an inexperience in claims handling and the typically poorer loss ratios that accompany first year business.
In sum, I am pleased with the progress we’ve made in Spain, Germany and 1 � c h I E f E X E c U t I V E ’ s s tAt E M E n t
Italy despite the challenges noted above. They all hold great potential for the future.
Stick to the strategy Our strategy has been and continues to be, rather simple: continue our profitable growth in the UK and take what we know and do well and do it elsewhere. This means expanding our direct businesses geographically to take advantage of changing distribution patterns in countries with large, mature car insurance markets. I believe that this is the way to ensure a prosperous future. For 2009 this means that, besides continuing to invest in our Spanish, German and Italian operations, we are working on a launch in the United States, the world’s largest car insurance market.
Highlights Okay, if anyone’s gotten through all that, it’s time for some highlights of 2008. I’m proud to say that it was another excellent year for the Admiral Group: 1 Profit before tax up 11% to £202.5m 2 Number of customers up 17% to 1.75m 3 Turnover up 13% to £910m 4 Combined ratio still well below 5 Top 10 in the FT Best Companies To
Work For; 37th in the Sunday Times Best Companies To Work For in the UK
11 Number of people employed in the Group rose to 3,110 from 2,500 (+24%), we opened a new office in Newport (Wales, not Rhode Island) and we’re hiring in every operation!
It is a hugely exciting time within Admiral Group and I’m glad to be a part of it. I am fortunate to work with intelligent, highly motivated, nice people. I’d like to say a specific thanks to all the senior managers who are so dedicated to Admiral Group and to all the staff in all our offices who work hard every day to provide a great service to our customers. I’m looking forward to another excellent year in 2009.
• Our policies are distributed through direct channels – over the telephone, through our own websites and also increasingly via price comparison websites
• Our main locations are Cardiff, Swansea and Newport in Wales, though we also operate out of call centres in Nova Scotia, Canada and Bangalore, India
We measure customer and staff satisfaction through a number of key performance indicators (KPIs), some of which are outlined in the Customers and Employees sections below.
• Also boosted by innovative products, such as MultiCar and 10 month policies
• Expense ratio advantage is acquisition cost driven and also a focus on cost control
Significant increase in 2008 due to first recognition of income under improved arrangements
A D M I R A L G R O U P p l c 1 �
uk VehiclesLoss ratio Expense ratio £100.0m £80.0m £60.0m £40.0m £20.0m £0.0m 2008 Financial highlights
The principal advantages of this significant use of co- and reinsurance are the reduced capital requirements and also reduced exposure to underwriting risk. This creates a high return on shareholder equity and strong cash flows, supporting regular dividends.
The profit commission arrangements in the agreements allow Admiral to participate to a large extent in the profitability of the total underwriting, and the most recent reinsurance contracts allow for a significant proportion of the profit to be remitted back to Admiral.
The UK business again grew strongly in 2008, increasing total premiums written by 12% from £617m to £690m and also growing the number of vehicles insured by 15% to 1.59m. A fall in average premiums accounted for the difference in the growth rates.
Admiral’s premium rates actually increased by around 4% during 2008, but the continued growth in distribution via price comparison websites partly contributed to a fall in average premiums written. Also, the mix of the new business and renewal book has shifted very gradually towards slightly lower premium risks. Our own data on the competitiveness of Admiral’s rates suggests that market price changes were broadly in line with our own.
The underwriting results of 2008 showed continued improvement, with a combined ratio of 81% coming in two points better than 83% for 2007. The private motor market reported a combined ratio (i.e. including the effect of reserve releases) for 2007 of 104% (115% before releases), meaning Admiral enjoyed a 21 point outperformance in reported results for that year. We do not expect a material change in the market’s result for 2008.
The loss ratio improved to 62.0% from 66.7%, partly reflecting a larger impact resulting from prior year reserve surplus releases (positively contributing 23.5% in 2008 v 21.0% in 2007), but equally the ‘pure year’ ratio (i.e. the loss ratio without the benefit of releases) also improved, to 85.5% from 87.7%, reflecting better claims experience in the 2008 calendar year compared to 2007.
The expense ratio increased to 19.0% from 16.7% in 2007. Part of the increase results from an accounting impact arising from Admiral retaining more of the 2008 premium (27.5%) than 2007 (22.5%). A further element of the increase arose due to the commission structures of the quota share reinsurance contracts. On a like for like basis, the expense ratio for 2008 was in line with 2007.
Although Admiral does not underwrite all the car insurance generated for its own account, it does retain all ancillary income generated.
The major sources, along with a broad categorisation are set out below: Discretionary – Breakdown insurance, personal accident insurance, car hire cover, zero exclusion payment protection insurance
(Discretionary is defined as a product or service in respect of which a customer makes a decision whether or not to purchase.)
The UK car insurance business operates mainly under the regulation of the UK Financial Services Authority, and also, by virtue of a Gibraltar based insurance company, under the Financial Services Commission in that territory.
The FSA regulates two Group companies involved in this business – EUI Limited (an insurance intermediary) and Admiral Insurance Company Limited (AICL, an insurer), whilst the FSC regulates Admiral Insurance (Gibraltar) Limited (AIGL, also an insurer).
All three companies are required to maintain capital to levels prescribed by the home regulator, and all three maintained significant surpluses above those required levels throughout the year.
The Group’s insurance business faces inherent claims risk As with any insurance business, the value of future claims may be different to current expectations for a number of reasons, many of which are outside the Group’s control. These could include claims frequency shocks resulting from bad weather, higher claims inflation resulting from legislative changes. Adverse changes would affect the Group’s underwriting results and profit commission income.
Counterparty and other financial risks are discussed in the financial risks section in the notes to the accounts.
Confused’s strategy is to become the comparison website of choice in the UK for financial products, and to maximise the value to the business of each customer relationship.
Success in delivering against this strategy is measured by a wide range of key performance indicators, including quote volumes, conversion rates, sales, income per sale and cost per sale.
One of the main effects of the increased competition has been to remove a large amount of the market’s profitability – as business becomes significantly more expensive to acquire, against only a modest increase in income per sale. As a dominant and highly profitable player in the market, Confused’s results inevitably suffered against this backdrop.
In spite of the challenging market conditions, Confused achieved an operating profit of £26m, and an operating margin of 39%.
Confused did generate notable growth in its activities beyond car insurance. Household insurance and utilities were particularly strong and contributed to growth in other revenue of 28% (to £13.2m).
At the end of 2008, Confused launched its rebuilt website, which makes the quote process faster and easier for customers. It has also launched a new TV advertising campaign early in 2009, which led to January being a record month for quotes.
The Group is also currently in the process of developing a price comparison business to launch in Spain, and Rastreator.es (based in Madrid) is expected to start operating there in the first half of 2009.
The price comparison industry in the UK has attracted a lot of attention from a number of parties over the past year or two, including a review by the FSA. Confused contributed willingly to the review and actively responded to the issues raised by the regulator during its course.
This section sets out a list of risks which could affect the business’ future results and prospects. Again, it is not intended to cover all risks and uncertainties.
The business may be affected by difficult economic conditions Recession in the UK potentially offers an opportunity for Confused as more and more consumers use comparison websites to search for the best deals. It could also, however, pose a threat with fewer new car and home purchases possibly leading to fewer price searches than would otherwise arise. As yet, Confused has seen little evidence of this.
The industry may continue to attract new entrants and fierce competition As noted above, the price comparison market in the UK, especially in car insurance, has been extremely competitive over the past two years, leading to a position where the market overall is currently estimated to be unprofitable. Although these might not appear to be ideal conditions to attract new players, it remains possible that significant new companies might enter the market, further increasing competition.
The business faces regulatory risk Price comparison has attracted attention from a number of bodies, including the FSA and it is possible that the industry becomes subject to more stringent regulation that is currently in place. Any such change in regulation might adversely affect Confused’s business.
• The Group has three direct car insurance operations outside the UK – Balumba.es (based in Seville) launched in Spain in October 2006; AdmiralDirekt.de (Cologne) started trading a year later in October 2007 and more recently, ConTe.it (Rome) launched in May 2008
• The business models of each are based closely on the UK car insurance operation – distribution is through direct telephone and internet channels, and there is significant reinsurance support for each operation
• The combined operations insured 73,700 vehicles at 31 December 2008 and generated £26m of premium for the year
Underwriting arrangements for Balumba, AdmiralDirekt and ConTe are similar, with the Munich Re Group underwriting 65% of the risks in each. Admiral retains the remaining 35%.
Balumba: Balumba accounted for the majority of the non-UK volume, contributing 80% of the total premium and 75% of the insured vehicles. Its net insurance premium revenue totalled £7.0m. The key focus at Balumba during 2008 was improving the loss ratio, and whilst significant progress has been made in this area, management recognise that more improvement is needed. The rate of growth has been deliberately slowed whilst work continues in this area.
Numerous measures have been implemented to address the loss ratio, including: • Rating increases • Improvements to the claims function (including resourcing, enhancing the garage network) • Underwriting control improvements • Joining the Spanish “knock for knock” claims system 2008 Financial highlights
The Group has taken advantage of the ability to passport UK regulatory permissions into Europe in structuring the three new businesses. This means that whilst all three have to comply with local rules and regulations, the main regulator of each is either the FSA or the Gibraltar FSC, regimes that the Group is very familiar with. Capital requirements are also set by the UK and Gibraltar regulators.
Insurance, operational and regulatory risks The non-UK businesses face similar risks to those noted above in respect of the UK car insurance operation. Refer to page 20 for details.
Gladiator has successfully grown its market share of the UK van insurance market over the past few years, and achieved a significant increase in profits in 2008 compared to 2007. A material amount of Gladiator’s business is now distributed through price comparison websites, as this channel has become more important in the market.
Investment strategy The Group’s conservative approach to investment was maintained during 2008, with no change in overall strategy, and little change in where funds were invested.
The key element of Group-wide investment strategy is capital preservation, with additional priorities focusing on low volatility in returns and high levels of liquidity. The majority of insurance funds continue to be invested in AAA-rated money market funds, offering cash-like returns, same day liquidity, low risk and good diversification.
The Group continues to believe that capital preservation and low volatility are the most critical investment objectives, and there are no current plans to materially change investment strategy.
The Group continues to generate significant amounts of cash, enabling the Group to pay a large portion of after-tax profits to shareholders in the form of dividends. No debt financing is required to fund these payments.
Basic earnings per share rose by 13% to 54.9p from 48.6p. This rate of growth is higher than the pre-tax profit growth (11%) due to the change in the rate of UK corporation tax from April 2008 (from 30% to 28%).
The Directors are proposing a final dividend for 2008 of 26.5p. In line with the Group’s dividend strategy, this comprises a 12.4p normal element and a 14.1p special distribution, representing an increase of 14% on the final dividend paid in respect of 2007.
The payment date is 27 May 2009, ex-dividend date 6 May and record date 8 May.
The Group manages its capital to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities comfortably meet regulatory requirements Excess capital above these levels within subsidiaries is paid up to the Group holding company in the form of dividends on a regular basis.
Other than as stated below, as far as the Company is aware, there are no persons with significant direct or indirect holdings in the Company. Information provided to the Company pursuant to the Financial Services Authority’s (FSA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the Company’s website.
At 31 December 2008, the company had received notifications in accordance with the FSA’s DTRs of the following notifiable interests, in the voting rights in the company’s issued share capital: Number of shares %
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. We also try to make sure that the working day for our staff is as fun and rewarding as we can make it.
It is important for employees to understand the Company’s goals and objectives. We work to communicate this in as many ways as possible. As an example, we encourage staff to attend our Annual Staff General Meeting (SGM). The SGM is arranged to enable staff to hear the views of the executive directors and some of the non-executive directors on a wide range of subjects including the performance of the Group and the market within which we operate; the experiences of nonexecutive directors within and outside of the Group; and the Group’s share plans. We believe that employing well-informed staff will improve motivation and make Admiral a better place to work.
The Group also carries out its own annual internal web-based survey both to collect employees’ views on what it is like working for Admiral and to address areas where issues are raised. The survey includes questions relating to a wide range of topics including staff morale, staff development, management, communication and social aspects of working at Admiral.
The table below sets out a number of key results from the survey over the last three years and clearly shows that staff feel morale is high within the Company and their own departments and that management listen to their issues. They also feel that Admiral is truly customer oriented and treats its customers fairly.
Taking everything into account I am happy at Admiral 92% 87% 90%
Every effort is made to understand the opinions and thinking of staff 74% 73% 86%
I would recommend Admiral as a good place to work 90% 90% 94%
I am more likely to stay at Admiral because of the share schemes 69% 71% 71%
The Group has always regarded its customers as central to the success of the business. As at 31 December 2008 the Group had 1.75m customers, up 17% from 1.49m the year before. We focus on open communication with our customers providing high standards of service at all points in the customer cycle from new business, customer service, renewals, claims and complaints. The Group’s commitment to quality is demonstrated through its Quality Measures Programme.
Everyone in the organisation has a part to play in ensuring a high standard of quality. Every department in the Group has a unique set of quality measures to gauge performance. The measures are updated each year to challenge staff to make continual improvements. The programme is reported every month in the internal company magazine and awards are presented each year for the best departments. The annual measures bonus provides a financial incentive for staff to drive incremental change throughout the business and was paid out in full for the 2008 year.
The table below contains some of the key measures from the TCF report: TCF Measure June
Financial support is an important part of our commitment to our local communities and our customers. We contribute both as a Company and as individuals through a variety of schemes including a matching scheme whereby the Company matches funds raised for charity in the workplace.
The Group’s impact on the environment stems from its use of resources to run its offices in Cardiff, Swansea and Newport and its overseas branches in Spain, Germany, Italy and Canada. The Group does not own the properties that it occupies and is, therefore, reliant upon the cooperation of the managing agents of the properties to make changes that could reduce the consumption of energy and water. The figures quoted include all of the Group’s offices.
The Group is committed to: • Raising and maintaining staff awareness of, and ensuring that employees are actively engaged in, activities to reduce the impact of the Group’s operations on the environment.
• Reporting key environmental performance indicators, taking into account the ABI’s Guidelines on Responsible Investment Disclosure and guidance provided by the Department for Environment, Food and Rural Affairs (Defra).
Travel: Car miles 279,920 118 miles per employee 83 miles per employee
Rail miles 213,357 90 miles per employee 223 miles per employee
Air Miles 1,120,537 474 miles per employee 543 miles per employee
The figures above are for the Group’s worldwide operations. ** The Carbon emissions have been calculated using the Carbon Trust Calculator which uses the emissions factors published by Defra in April 2008.
Energy The main source of the Group’s carbon emissions is the consumption of electricity and gas for its two main UK offices. The Cardiff head office is the older and least efficient, built in the 1960s and housing just over 1,200 people. The Swansea office, housing 1,100 staff was built in 2006 and is therefore a much more efficient building. The other UK offices are located in Cardiff and Newport.
During the last quarter of 2007 electricity supply to the Cardiff office was switched to ‘Green electricity’ which has been excluded from the carbon emission calculation in the table above and has lead to a significant reduction in the Group’s absolute CO2 emissions.
The Board complied with the Combined Code in all respects during 2008 except for Code D.1.1, which requires that the Senior Independent Director should attend meetings with a range of shareholders. 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 issues or concerns of major shareholders should any be raised. Feedback from shareholders suggests that these arrangements for communication between the Company and its shareholders continue to be viewed by them as effective. The Senior Independent Director is always available to meet with individual shareholders on request to ensure the Board is aware of any shareholder concerns that cannot be resolved through the routine mechanisms for investor communications.
The Board met on eight occasions in 2008. The Board also held a strategy day and visited its operations in Italy. In addition, the Non-executive Directors and the Chairman met during the year without the Executive Directors being present. Agendas and papers are circulated to the Board 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. All Directors are, therefore, able to bring independent judgement to bear on issues such as strategy, performance, and resources. Additional meetings are called when required and there is frequent contact between meetings, where necessary, to progress the Group's business.
All the Directors have access to the advice and services of the Company Secretary. He has responsibility for ensuring that Board procedures are followed and for governance matters. The Company Secretary provides updates to the Board on regulatory and corporate governance issues, new legislation and Directors’ duties and obligations. The appointment and removal of the Company Secretary is one of the matters reserved for the Board.
During the year the Board carried out an evaluation of itself and its Committees. The process was facilitated by the Chairman and consisted of the completion of a questionnaire followed by one-to-one discussions between each Director and the Chairman where the Board’s role and structure, process and relationships and any emerging issues were discussed. A final detailed report was circulated to the Board and a number of recommendations agreed. The evaluation concluded that the Board and its Committees performed well during the year and are effective in meeting their objectives and fulfilling their obligations.
Corporate governance 3 � G O V E R n A n c E & R E M U n E R At I O n
The Chief Executive, to whom they report, appraises the performance of the individual Executive Directors annually. The Chairman, taking into account the views of the other Directors, conducts the performance appraisal of the Chief Executive. The performance of the Chairman is reviewed by the Non-executive Directors, led by the Senior Independent Non-executive Director (John Sussens), taking into account the views of the Executive Directors. John Sussens 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.
The number of full Board meetings and Committee meetings attended by each Director during 2008 is provided in the table below.
Board balance and independence The Board currently comprises ten Directors, the Chairman (who was independent on appointment), three Executive Directors, five independent Non-executive Directors and one Non-executive director who is employed by a significant shareholder and is not, therefore, considered independent. The Board has accepted the Nomination Committee’s assessment of the independence of the five Non-executive directors and is not aware of any relationships or circumstances which are likely to affect, or could appear to affect, the judgement of any of them.
The initial three-year period may be extended for one further three-year period and the Board may invite the non-executive director to serve for a further three-year period, subject to 2008 Financial highlights
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, Manfred Aldag, Henry Engelhardt and Kevin Chidwick will retire by rotation and seek re-election by shareholders at the forthcoming AGM.
Professional development On appointment, Directors take part in a comprehensive induction programme where they receive financial and operational information about the Group, details concerning their responsibilities and duties, as well as an introduction to the Group’s governance and control environment.
In fulfilment of the Chairman's obligations under the new Combined Code, the Chairman would give feedback to the Board on issues raised with him by major shareholders, although to date there have been no such issues.
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.
3 � G O V E R n A n c E & R E M U n E R At I O n
Board Committees The principal committees of the Board - Audit, Remuneration and Nomination - all comply fully with the requirements of the Combined Code. They are all chaired by an Independent Director and exclusively comprise, or, in the case of the Nomination Committee (where the Chairman of the Board is a member), have a majority of, Independent Directors. The committees are constituted with appropriate written terms of reference that are reviewed annually and minutes of the committee meetings are circulated to the Board.
The Committee has a formal terms of reference, which were reviewed by the Committee on 19 November 2008 and approved by the Board on 17 December 2008.
The Board considers that the members of the Committee have the appropriate competence and experience to carry out their duties and further considers that Martin Jackson (Committee Chairman) has the appropriate recent and relevant financial experience having held the position of Group Finance Director of Friends Provident Plc between 2001 and 2003 and being a fellow of the Institute of Chartered Accountants, which imposes requirements for Continuing Professional Development. The Committee is kept up to date with changes to Accounting Standards, relevant developments in financial reporting, company law and the various regulatory frameworks through presentations from the Group’s external auditors, Head of Finance and Company Secretary. In addition members are provided with information on seminars and conferences provided by external bodies. The Terms of Reference of the Audit Committee include all the matters suggested by the Code.
Other individuals such as the Finance Director, Chief Operating Officer, Chief Executive, Chairman of the Board, the Heads of Risk, Compliance and Internal Audit and representatives of different parts of the Group may be invited to attend all or part of any meeting as and when appropriate. The external auditors are invited to attend meetings of the Committee on a regular basis.
During the year the Committee reviewed the following: · Annual report and interim results
· Reports from the Group’s internal audit department on the effectiveness of the Group’s risk management procedures, details of key audit findings and actions taken by management
· Performance of the internal audit department through self assessment (the internal audit department is subject to external assessment once every five years)
During the year, the Committee received a presentation from the Group’s auditors on proportionate liability agreements although the Group has not yet entered into any such agreement with its auditors.
The Committee also approves the annual compliance review plan and receives copies of these reports. The Head of Compliance, who has responsibility for the Compliance and Risk management functions, provides the Committee with a quarterly Compliance report summarising the activities in this area.
The Committee has formal terms of reference, which were last reviewed on 17 December 2008 and approved by the Board on 27 February 2009. The Committee met on two occasions during 2008.
During 2008, the Committee discussed succession planning across the Group with the Executive team. Planning for the most senior management positions was formerly in place but below this, succession planning within the Group was not fully documented. The People Services Manager has implemented a process of documenting and improving the approach taken by the Group to assess and monitor succession planning throughout the Group through the development of a Talent Management programme.
The Committee reviewed the current Board size, structure, and composition and confirmed that no further changes were required and that the leadership of the organisation was such that the Company could continue to compete effectively in the marketplace in which it operates.
The Remuneration Committee The membership at the year-end was John Sussens (Chairman), Martin Jackson, and Margaret Johnson. The Company Secretary acts as Secretary to the Committee. The Committee invites the Chief Executive and Chairman to attend the meetings where it deems appropriate.
The Committee has formal terms of reference, which were last reviewed on 17 December 2008. The Committee met five times during 2008.
Internal control and risk management The Board is ultimately responsible for the Group’s system of internal control and, through the Audit Committee, has reviewed the effectiveness of these systems. The systems of internal control over business, operational, financial and compliance risks are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s internal controls; that it has been in place for the year ended 31 December 2008; and that, up to the date of approval of the annual report and accounts, it is regularly reviewed by the Board and accords with the internal control guidance for Directors provided in the Code.
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 effectively be controlled. The Head of Compliance and the 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, with the support of the Risk Manager, to undertake a full assessment process to identify and quantify the risks that their departments 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 and the Compliance function use the risk registers to plan their programme of audits to ensure that the controls described are actually in place.
The RMC receives reports setting out key performance and risk indicators and considers possible control issues brought to their attention by early warning mechanisms that are embedded within the operational units. The RMC and the Audit Committee also receive regular reports from Internal Audit, which include recommendations for improvement in the control and operational environment. The Audit Committee’s role in this area is primarily confined to a high-level review of the arrangements for internal control although at its discretion the Committee may well request more detailed information on specific issues should they arise. The Board’s agenda includes consideration of risk and control as a regular item and receives reports thereon from the RMC and the Audit Committee. The emphasis is on obtaining the relevant degree of assurance and not merely reporting by exception. On 27 February 2009 the Board carried out the annual assessment for the 2008 year by considering documentation from the Audit Committee, taking account of events since 31 December 2008.
One of the Committee’s principal responsibilities is to ensure that the risk management policy approved by the Board is implemented throughout the Group. The Committee has formal terms of reference and is required to manage regulatory issues, assess and monitor reinsurance protection, and ensure that a risk management strategy is effectively employed by the Group. The Committee meets around 8 times a year and each Committee member receives an agenda and papers in a timely manner allowing the Committee to make informed decisions and take appropriate actions.
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Going concern The Directors are satisfied that the Group has adequate resources to continue in operation for the foreseeable future and therefore consider it appropriate to prepare the financial statements on the going concern basis.
The Committee’s terms of reference, which are reviewed at least annually and approved by the Board, are available on the Group’s corporate website and are summarised in the Corporate Governance Report. They were reviewed by the Committee on 19 November 2008.
The members of the Committee do not have any personal financial interests, or any conflicts from cross-directorships, that relate to the business of the Committee. The members do not have any day-to-day involvement in the running of the Group.
· Shareholder aligned – A considerable part of the reward is related to the growth in earnings versus LIBOR. Executive Directors have agreed to retain a minimum shareholding equal to at least 100% of base salary, which can be built up over a period of five years from the date of appointment.
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· Group Personal Pension Plan, matching employee contributions up to a maximum 6% of base salary with maximum employer contribution of £4,800. This is available to all employees following completion of their probationary period.
The current performance criterion to determine how many shares vest under the DFSS is 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 Committee feels that this is a good indicator of long-term shareholder return with which to align staff incentivisation. The Committee recommends for approval by the Board awards to the Finance Director and other employees under the DFSS.
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 13.25% per annum (assuming LIBOR averages 3% over the period). Only 10% of shares vest for matching LIBOR over the threeyear period. There is then a linear relationship up to full vesting of the award whereby 2.5% of the award vests for each point over LIBOR.
The plan allows for a maximum award of £400,000 or 600% of basic salary if lower.
The Committee determines the fees for the Chairman of the Board after consultation with the Executive Directors and review of market data.
The Committee aims to ensure that the remuneration of the Finance Director is fair and in total, in line with market rates, and is designed to provide rewards for achieving increases in shareholder value.
Directors’ service contracts The following table summarises the notice periods relating to the service contracts of the Executive Directors serving at 31 December 2008.
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Alastair Lyons 3 years commencing 1 July 2007, terminable by either party giving three months’ written notice.
Indefinite (terminable on one months’ notice from either party) – automatically terminates should he cease employment with Munich Re.
Martin Jackson 3 years commencing 1 December 2006, terminable by either party giving one months’ written notice.
Non-executive Directors’ remuneration The remuneration of the Chairman is decided by the Remuneration Committee and that of the Non-executive Directors by the full Board. The Non-executive Directors do not participate in meetings when Non-executive Director fees are discussed.
Non-executive Directors do not have service contracts but each has a letter of appointment. The letters of appointment all require a period of one months’ notice should the Non-executive Director wish to resign. The Chairman’s appointment can be terminated by either party giving 3 month’s notice.
John Sussens 8,000 8,000 *Includes 871 shares within the Group’s SIP - details of which are shown below.
Sept-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sept-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Chairman and Non-executive Directors *1 Alastair Lyons waived 25% of his annual fee which is currently £120,000. *2 Keith James fees include £10,650 for chairing the Board of Admiral Insurance Company Limited and £13,350 for chairing the Board of Inspop.com Limited.
The table below sets out the awards made to Directors under the DFSS and SIP, including the dates of the awards, the value at the time of the award and vesting date. Awards to Kevin Chidwick under the DFSS and SIP
He has previously been Chief Executive of the National Provident Institution and of the National & Provincial Building Society, Managing Director of the Insurance Division of Abbey National plc, and Director of Corporate Projects at National Westminster Bank plc. Alastair was also a Non-executive Director of the Department for Transport and of the Department for Work and Pensions.
A Fellow of the Institute of Chartered Accountants, he was awarded the CBE in the 2001 Birthday Honours for services to social security.
Kevin is responsible for finance, information technology, compliance and investments. He joined Admiral in 2005, becoming Finance Director in September 2006.
Prior to Admiral, Kevin has been in UK financial services for over 20 years. He has held a number of senior roles in other insurance organisations including, most recently, Finance Director of Engage Mutual Assurance and Cigna UK.
Margaret was appointed Non-executive Director of the Company in September 2006. She is currently Group CEO of the international advertising agency Leagas Delaney and has been with that Company for the past 13 years.
Henry is a founder Director of Admiral and was recruited by the Brockbank Group in 1991 to set up the Admiral business.
David is a founder Director of Admiral. Initially the Marketing Director, he was appointed Director responsible for pricing in 1996 and claims and pricing in 1999. He was appointed as Chief Operating Officer in 2004.
He has worked for Munich Re since September 1981 and is currently the Senior Executive Manager responsible for United Kingdom / Ireland.
Martin was appointed Non-executive Director and Chairman of the Audit Committee in August 2004.
He was the Group Managing Director of Misys plc between 1998 and May 2004 having been on the Board of the Company since 1989. Prior to joining Misys, he was Manufacturing Director at JC Bamford Excavators Limited. He was a Non-executive Director at Chubb plc between 2001 and 2003.
The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2008.
Business review The Company is the holding Company for the Admiral Group of Companies. The Group’s principal activity continues to be the selling and administration of private motor insurance and related products.
Group results and dividends The profit for the year, after tax but before dividends, amounted to £144.9m (2007: £127.4m).
Share capital Refer to the Business review for the disclosure of substantial shareholdings in accordance with Chapter 5 of the Disclosure and Transparency rules.
Directors and their interests The present Directors of the Company are shown on pages 48 and 49 of this report, whilst Directors’ interests in the share capital of the Company are set out in the Remuneration Report.
There are no restrictions on the transfer of ordinary shares in the company other than: · certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws) and: · pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the company require the approval of the company to deal in the company's securities.
Power to issue shares At the last annual general meeting, held on 29 April 2008, authority was given to the directors to allot unissued relevant securities in the Company up to a maximum of an amount equivalent to one third of the shares in issue. This authority expires on the date of the annual general meeting to be held on 28 April 2009 and the directors will seek to renew this authority for the following year.
Annual General Meeting It is proposed that the next AGM be held at the Andrew Probert Room, Capital Tower, Greyfriars Road, Cardiff, CF10 3AZ on Tuesday 28 April 2009 at 3.00pm, notice of which will be sent to shareholders with the Annual Report.
Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they
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
· For the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements; and
· The directors’ report includes a fair view of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
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The Directors' responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) 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 in the Director’s report.
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 statement, the Chief Executive’s statement and the Business review that is cross referred from the Business review section of the Directors' Report.
Opinion In our opinion: · the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group's affairs as at 31 December 2008 and of its profit for the year then ended; · the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; · the Parent Company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Parent Company's affairs as at 31 December 2008 and of its profit for the year then ended; · the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and
Insurance claims and claims handling expenses recovered from reinsurers 99,204 72,816
Net cash flow into investments held at fair value (76,049) (76,849)
Cash flows from operating activities, net of movements in investments 175,584 136,318
Cash flows from investing activities: Purchases of property, plant and equipment and software (11,315) (5,390)
The financial statements comprise the results and balances of the Company and its subsidiaries (together referred to as the Group) for the year ended 31 December 2008 and comparative figures for the year ended 31 December 2007. 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.
Amendments to IAS 1 Presentation of Financial Statements: A Revised Presentation is effective for periods beginning on or after 1 January 2009 and the Group has elected not to adopt the Amendment in advance of the effective date. Although it will introduce a number of changes to the presentation of the primary financial statements, it will not change the recognition, measurement or disclosure of transactions or events that are required by other IFRS.
IFRIC 13 Customer Loyalty Programmes is effective for periods beginning on or after 1 July 2008. It is not applicable during the current accounting period, and on adoption will not have a material impact on the Group’s financial statements.
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2008 but have either yet to be endorsed by the EU, or were endorsed shortly after the year end. These are as follows: · Amendments to IAS 32 and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation
· Amendments to IFRS 1 and IAS 27 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
· IFRIC 16 Hedges of Net Investment in A Foreign Operation
IFRIC 11 addresses whether share based payments accounted for as equity-settled in consolidated financial statements, should be treated as equity or cash settled in the subsidiary. As it does not address treatment in the consolidated financial statements, it has no impact on the consolidated financial results or position of the Group for the current or previous financial years.
IFRIC 14 addresses the accounting treatment of a defined benefit pension scheme asset and is therefore not applicable to the Group in the current or previous financial years.
Basis of preparation The accounts have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board have reviewed the Group's projections for the next twelve months and beyond, including cash flow forecasts and regulatory capital surpluses. The Group has no debt.
Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Judgements: In applying the Group’s accounting policies as described in note 3, management has primarily applied judgement in the classification of the Group’s contracts with reinsurers as quota share reinsurance contracts. A contract is required to transfer significant insurance risk in order to be classified as such. Management reviews all terms and conditions of the contract, and if necessary obtains the opinion of an independent expert at the negotiation stage in order to be able to make these judgements.
The estimates of the ultimate cost of reported claims are based on the setting of claim provisions on a case-by-case basis, for all but the simplest of claims.
The most significant sensitivity in the use of the projection techniques arises from any future step change in claims costs, which would cause future claim cost inflation to deviate from historic trends. This is most likely to arise from a change in the regulatory or judicial regime that leads to an increase in awards or legal costs for bodily injury claims that is significantly above or below the historical trend.
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 income 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 or held to maturity deposits.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Translation of financial statements of foreign operations The financial statements of foreign operations whose functional currency is not pounds sterling are translated into the Group presentation currency (sterling) as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transaction); and
c) 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.
Whilst the Directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amounts provided.
Adjustments to the amounts of claims provisions established in prior years are reflected in the income statement for the period in which the adjustments are made and disclosed separately if material. The methods used, and the estimates made, are reviewed regularly.
At initial recognition assets are recognised at fair value and classified according to the purpose for which they were acquired: The Group's investments in money market liquidity funds are designated as financial assets at fair value through profit or loss at inception.
Impairment of financial assets The Group assesses at each balance sheet date whether any financial assets or groups of financial assets are impaired. Financial assets are impaired where there is evidence that one or more events occurring after the initial recognition of the asset, may lead to a reduction in the estimated future cashflows arising from the asset.
h) 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.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
l) Government grants Government grants are recognised in the financial statements in the period where it becomes reasonably certain that the conditions attaching to the grant will be met, and that the grant will be received. Grants relating to assets are deducted from the carrying amount of the asset. The grant is therefore recognised as income over the life of the depreciable asset by way of a reduced depreciation charge.
Under IAS 14 in previous financial years, the primary segments were identified by business type. No secondary geographical segments were presented on materiality grounds. As described below the segments presented under IFRS 8 continue to be identified by business type. In addition, the Group’s Directors consider that the car insurance segment should be sub-divided into two geographical reportable segments; UK and Non-UK, on the basis of it being useful information to users of the financial statements rather than the breach of quantitative thresholds within the standard.
Price comparison The segment relates to the Group’s price comparison operation Confused.com. This operation had previously been combined with the Group’s commercial van insurance broker, Gladiator, to form an ‘Insurance Broking’ segment. However based on the management reporting approach, the Directors consider that Price comparison is an independent reportable segment.
Non-UK car insurance The segment consists of the underwriting of car insurance and the generation of ancillary income outside of the UK. It specifically covers the Group’s Balumba.es, AdmiralDirekt.de and ConTe.it operations in Spain, Germany and Italy respectively.
Segment revenues The UK and Non–UK car insurance reportable segments derive all insurance premium income from external policyholders. Revenue within these segments is not derived from an individual policyholder that represents 10% or more of the Group’s total revenue.
The total of Price comparison revenues from transactions with other reportable segments is £11,050,000 (2007: £10,784,000).
A D M I R A L G R O U P p l c � 1
The identifiable segment assets and liabilities at 31 December 2008 are as follows.
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The Group’s share of the car insurance business was underwritten by Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). All contracts are short-term in duration, lasting for 10 or 12 months.
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Source of profit commission: Financial year: Underwriting year: 8. Investment and interest income 31 December 31 December
Analysis of other administration and other marketing costs: 31 December 31 December
The gross amount of expenses, before recoveries from co-insurers and reinsurers is £211,181,000 (2007: £167,773,000). This amount can be reconciled to the total expenses and share scheme charges above of £105,687,000 (2007: £81,957,000) as follows: 31 December 31 December
The amortisation of software and deferred acquisition cost assets is charged to expenses in the income statement.
Under / (over) provision relating to prior periods – deferred tax 104 (3)
Factors affecting the tax charge are: Profit before tax 202,518 182,098
Corporation tax thereon at UK corporation tax rate of 28.5% (2007: 30%) 57,718 54,629
14. Dividends Dividends were declared and paid as follows: March 2007 (24.0p per share, paid May 2007) - 62,412
The dividends declared in March represent the final dividends paid in respect of the 2007 and 2006 financial years. Dividends declared in September 2007 and July 2008 are interim distributions in respect of 2007 and 2008.
All investments held at fair value are invested in AAA-rated money market liquidity funds. These funds (spread across three very large providers) target a 7 day LIBID return with capital security and low volatility and continue to achieve these goals.
The Group also holds a number of fixed rate, longer-term deposits with UK credit institutions rated A or above. These are classified as held to maturity and valued at amortised cost. Therefore neither the capital value of the deposits, or the interest return will be impacted by fluctuations in interest rates.
No sensitivity analysis to interest rates has been presented on materiality grounds.
The fair value of receivables from policyholders represents the maximum exposure to credit risk. The group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2007 and 2008 is insignificant.
There were no significant financial assets that were past due at the close of either 2008 or 2007.
Financial institutions – Credit institutions A 128,705 22,591 8 � f I n A n c I A L s tAt E M E n t s
The Group has traditionally been strongly cash generative due to the large proportion of profit arising from non-underwriting activity. Further, as noted above, a significant portion of insurance funds are invested in money market liquidity funds with same day liquidity features, meaning that the vast majority of the Group cash and investments are immediately available. The current uncertainty in credit markets is not likely to impact this.
A breakdown of the Group’s financial liabilities – trade and other payables is shown in note 22. In terms of the maturity profile of these liabilities, all amounts may potentially mature within 12 months of the balance sheet date except for a minority of finance lease liabilities which will expire after 12 months. (Refer to note 23 for further detail)
All financial assets will mature within 12 months. The Group’s Directors believe that the cashflows arising from these assets will be consistent with this profile.
Fair value The carrying value of all of the Group’s financial assets equate to fair value. For money market funds, cash at bank and deposits, the fair value approximates to the book value due to their short maturity.
A) Objectives, policies and procedures for the management of insurance risk: The Group is involved in issuing motor insurance contracts that transfer risk from policyholders to the Group and its underwriting partners.
The key reserving risk is that the frequency and / or value of the claims arising exceeds expectation and the value of insurance liabilities established.
The Board implements certain policies in order to mitigate and control the level of insurance risk accepted by the Group. These include underwriting partnership arrangements, pricing policies and claims management and administration policies.
A number of the key elements of these policies and procedures are detailed below: i) Co-insurance and reinsurance: As noted in the Business review above, the Group cedes a significant amount of the motor insurance business written to external underwriters. In 2008, 55% of the risk was shared under a co-insurance contract, under which the primary risk is borne by the co-insurer.
D) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2008, of the retrospective re-estimation of claims provisions initially established at the end of the financial years stated. Figures are shown gross and net of reinsurance. These tables present data on an accident year basis.
Net unearned premium provision at end of period 90,483 64,871 20. Trade and other receivables
Between one and five years 15 1 14 4 - 4
The average term of leases outstanding is two years. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
The fair value of the Group’s lease obligations approximates to their carrying amount.
The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax liability / (asset): 31 December 2008
The share scheme charges reported above are net of the co-insurance share and therefore differ from the gross charge reported in note 10 (2008: £11,320,000, 2007: £5,560,000) and the gross credit to reserves reported in note 26.
The consolidated cashflow statement also shows the gross charge in the reconciliation between ‘profit after tax’ and ‘cashflows from operating activities’. The co-insurance share of the charge is included in the ‘change in trade and other payables’ line.
Eligible employees qualify for awards under the SIP based upon the performance of the Group in each half-year period. The current maximum award for each half-year amounts to 600,000 shares (or a maximum annual award of £3,000 per employee if smaller).
Under the DFSS, details of which are contained in the Remuneration report, individuals receive an award of free shares at no charge. Staff must remain in employment until the vesting date in order to receive shares. The maximum number of shares that can vest relating to the 2008 scheme is 1,372,001 (2007 scheme: 964,000).
Individual awards are calculated based on the growth in the Company’s earnings per share (EPS) relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This performance is measured over the same three-year period.
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
Awards under the DFSS are not eligible for dividends and hence the fair value of free shares to be awarded under this scheme has been revised downwards to take account of these distributions. The unadjusted fair value is based on the share price at the date on which awards were made (as stated in the Remuneration Report).
Total awards committed 5,340,242 * – being the maximum number of awards expected to be made before accounting for expected staff attrition.
Number of free share awards vesting during the year ended 31 December 2008: Original Awards Awards vested
29. Related party transactions There were no related party transactions occurring during 2008 that require disclosure. Details relating to the remuneration and shareholdings of key management personnel are set out in the Remuneration Report. Key management personnel are able to obtain discounted motor insurance at the same rates as all other Group staff, typically at a reduction of 15%.
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 The accounts have been prepared on a going concern basis. In considering the appropriateness of this assumption, the Board have reviewed the Company's projections for the next twelve months and beyond, including cash flow forecasts and regulatory capital surpluses. The Company has no debt.
In these financial statements the following new standards, abstracts and amendments to standards have been adopted for the first time: · Abstract 41 - ‘FRS 20 – Group and Treasury Share Transactions; · Amendment to FRS 17 – Retirement Benefits
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.
2. Investments Investments in subsidiary undertakings are valued at cost less any provision for impairment in value.