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
A D J U S T E D G R O U P C O R E P R O F I T S 1
G R O U P T U R N O V E R 2
A D J U S T E D C O M B I N E D R A T I O S 3 1. Refer to page 19 in the financial review 2. Group turnover includes total premiums, gross other income plus allocated investment return. Total premiums comprise gross motor insurance premiums written by the Group, before co-insurance and reinsurance 3. 2003 figure adjusted for non-recurring Lloyd’s charges 4. 2004 EPS adjusted for exceptional tax credit on ESOT share award. Refer to note 20 www.admiralgroup.co.uk 13531 Admiral AR a/w 5/4/05 9:59 am Page 4
In every year since I became Chairman in 2000, following the Management Buyout of Admiral backed by Barclays Private Equity, the Group has moved strongly forward, increasing both the value of business written and its profitability. During 2004 we have secured our 1 millionth customer, written £470m total premiums and achieved pretax profits of £101m, with an outstanding 82.0% combined ratio. The sustained growth in franchise and profitability that Admiral’s distinctive business model has made possible underpinned the high point of 2004 – the Company’s highly successful listing in a difficult market for new issues, valuing the business at £711m, some 12 years after it was first conceived by the senior executive team that leads it today.
Committee. John’s significant exposure to the quoted sector, having served for many years as Managing Director of Misys and now also as a non-executive director of Cookson, makes him well qualified to be our Senior Independent Director and Chairman of our Remuneration Committee. My thanks also to Manfred Aldag and Keith James for their continuing contributions during a year which made exceptional demands on our non-executives.
The combination of the different experiences and perspectives of our non-executives with the energy, clarity of purpose and depth of knowledge of
Our continued successful development reflects not only the quality of our executive directors but also the strength in depth of Admiral’s management and its whole team. Our philosophy is to give people the opportunity to develop to their full potential, and ongoing alignment of interest between staff and shareholders is one of our core principles. We were, therefore, delighted that so many of our staff – 1,418 out of a total of 1,616 – were able to participate in the distribution of shares on listing as a consequence of our Employee Share Ownership Trust (ESOT). As this ceased at listing we have established a replacement scheme under which all employees will receive a bi-annual grant of free shares subject to the achievement of challenging pre-determined performance criteria based on Group profitability. We have also established a senior executive share plan under which awards are determined according to growth in Group earnings per share.
The Group is well capitalised with a proven approach to reserving, and with solvency ratios in both the UK and Gibraltar, which carry an appropriate margin over minimum solvency statutory requirements. Our business model is strongly cash generative, with year-end non-regulated cash balances increasing from £30m to £50m. In addition relief for the cost of the ESOT distribution at listing created an abnormally low tax charge in the 2004 accounts which will reduce Admiral’s tax payment in 2005.
Consistent with our principle of returning excess cash to our shareholders we are, therefore, pleased to be able to propose a two-part final dividend for 2004. The first element, representing 3.1 pence per share is based on a 45% pay-out ratio, the actual amount paid reflecting our listing part way through the financial year. The second special element of 6.2 pence per share reflects the abnormally low tax charge in 2004. We shall maintain a policy of reviewing our available free cash to determine whether or not the Company is able to pay further special dividends from time to time in addition to a consistent normal pay-out ratio.
“We are pleased to be able to propose a final dividend for 2004 of 9.3p per share.”
Have you ever had one of those days where everything seems to go right? You know, a day where there’s hardly any traffic getting to the office and all the lights are green, a day where someone comes to your office for a meeting and brings you a really nice coffee, a day where the rain stops just when you come out of the building, a day where you tell the kids dinner’s ready and they immediately turn off the telly and go to the table, a day where … well, you get the picture: a day where everything seems to go spot on right?
• core profit per share was 38.9p, up 30% from 29.9p in 2003
• experienced continued improvement in loss ratios across all the back years
• crystallised the Staff Trust with a value of £57m upon listing
• named by the Financial Times as the 16th Best Workplace in the UK and one of the Top 100 Workplaces in the EU
• had over 250 children at our Staff Children’s Christmas party (up more than 25% on 2003)
We operate through a number of targeted brands: Admiral (younger drivers, London area), Diamond (women drivers), Elephant.co.uk (internet users) and Bell. We have two other brands, Gladiator Commercial, which operates as an intermediary in the commercial vehicle market, and Confused.com, which operates as an internet ‘shopper’ for car insurance.
2004 was our 12th year of trading. The first 7 were in a Lloyd’s of London environment. However, toward the end of 1999 Management teamed up with Barclays Private Equity to buy the business. The result of this transaction was the creation of Admiral Group Ltd. (AGL) as the holding Company. In September of 2004 we listed the Company on the London Stock Exchange.
• income from products and services we do not underwrite totalled £69.5m up from £50.8m (+37%)
Admiral Group plc is named Business of the Year at the National Business Awards
The expense ratio, not including government levies, moved downwards by 1.0% from 2003, a reduction of 7%. This reflects our continued efficiency improvements. However, do not expect swingeing cuts in the expense ratio going forward. It is one of our strengths that we use our efficiency to help our underwriting selectivity. Because we are efficient, particularly in generating quotes, we can afford to convert fewer quotes into business. In this way we are helping ensure that we only take the right risks at the right prices. The end result is a better combined ratio. If we concentrated on reducing the expense ratio it may turn out to be a false economy, as it might come at the expense of the loss ratio through reduced selectivity. So, for instance, we could cut the marketing budget and do fewer quotes, but then we’d need to convert more of them to hit target. To convert more quotes we’d have to be less selective. Clearly, the more selective we can be the better our loss ratio should be. As we’ve already said publicly, we intend to reduce our growth rate in 2005 through the use of selective price increases.
Ancillary income moved forward largely due to the increased customer count. To put this income into context, I’ve done a little calculation where the ancillary 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 59%! Here’s another interesting calculation: we made £101m on income of £195m, a ratio of 52%.
Market consolidation has meant that where previously it took some 10 firms to account for 50% market share, this figure is now accounted for by two firms (Royal Bank of Scotland and Aviva). As these two
firms have a great deal to lose from large rate reductions and they are both under the watchful eye of the public arena, I believe that their large market share is a force for market stability.
The loss of large investment returns from the halcyon days of the 90s also puts more pressure on the insurance result, which in turn should provide more stability to the market.
The growth of direct writing which, I estimate, now accounts for more than 50% of the market, means quicker response times to changes in market pricing. In the past, changes in rates by competitors weren’t visible to underwriters for several months and then couldn’t be responded to for several months. I believe that this led to overcorrections in anticipation of continued trends. Now, direct writers see very quickly through their daily conversion data what the market as a whole is doing and individual firms can react by changing rates from one day to the next. I believe that this leads to a greater number of smaller corrections and serves to further reduce the volatility in the market.
That’s the long-range outlook for the market. Looking at the next 12 months, the good times the market has enjoyed over the last few years have resulted in more firms looking for greater market share. I believe that if you could add up the policy numbers from all the business plans of all the firms in the market you would account for more policies than actually exist. At the moment, the battle for market share is being waged in the media. As consumers can probably testify to, there does not seem to be a corner of the UK that doesn’t seem to be submerged in car insurance advertising.
The respective marketing coffers of companies in the market have been swollen and the result is a record spend, around £100m on TV and in the press alone in 2004. This figure is some 40% higher than the same figure in 2003. This increase partly ties into the share growth of direct operations, who use advertising to get custom rather than using intermediaries. But it is also a reflection of appetite for business.
I don’t see a great deal of change to this landscape in 2005. Certainly the first half of the year will be characterised by intense marketing spend. When some companies begin to fall short of their respective targets (they can’t all hit target!), while, simultaneously, the deterioration of results from previous years begins to filter through, it will result in two reactions: some firms will cut rates to ensure hitting volume targets, despite the offsetting reduction in margins, while others will reduce their targets to more achievable levels, while maintaining margins. On balance I believe rates will be static during the year.
Our own business is somewhat insulated from this deterioration by two factors. First, our results historically have been far better than the market average and therefore, despite tighter margins our result is still rather profitable. Second, our unique underwriting structure means we have a limited share of our own result, which reduces profits in the good times, but also reduces the effect of narrowing margins in the less good times. And, 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’s end-of-year customer count reached 360,000 (up over 75% from the year before). Elephant quote volumes were up from 2.0m in 2003 to 2.5m in 2004. Elephant is now the biggest brand in the Group. A tremendous achievement considering it launched only in August 2000. The other brands all grew the number of customers they service in 2004 as well, Diamond by 18%, Admiral by 11% and Bell by 4%.
Beyond Direct Response Car Insurance: 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 2004 Gladiator’s customer count stood at 33,000 and it contributed £1.8m to the Group’s bottom line.
2004 was a huge growth year for Confused.com. 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 brings the customer back a list of prices. One-stop shopping! Confused goes out to direct operations as well as intermediary sites. It generated over 1.37m quotes up from 590k in 2003. A great deal of Confused’s growth is coming from word of mouth, the most powerful form of advertising. We fully expect Confused to grow substantially in 2005. Inspop.com Ltd, the trading Company which owns Confused.com, made a profit in 2004 of £2.1m, most of which is down to Confused. This compares to a profit of £300k last year.
2004 – Please Put It In An Aerosol Spray Can For Future Use All in all it was a brilliant year. 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.
There were a number of firms and many individuals who helped make the listing a success. However, given my limited page count, I only have room to carve one individual from the pack. I’d like to say a personal thanks to Andrew Sibbald of Lexicon Partners. Andrew was key to this achievement, not only for the good advice he gave (note: he didn’t really ‘give’ it, we did pay him!) but really for instilling in us the belief that the stock market would be open for a good Company with a good business and that we were such a Company.
Last, but in no way least, I’d like to thank Alastair for all his efforts and guidance in what was a very challenging year, and Manfred and Keith, our other nonexecutive directors for all their commitment to our business. I’d also like to say a special thanks to my fellow executive directors, David Stevens and Andrew Probert. We’ve come a long way together and as a team we only seem to get stronger with time. Finally, a thanks to all our brilliant senior managers for, as per usual, stepping in while we did that float thing and making the business sing.
Q U O T E V O L U M E S S P L I T B Y P H O N E A N D I N T E R N E T
“All our staff have played a key part in the success of the business.”
A further measure used by the directors to assess the growth in the size of the business is ‘Group turnover’ – which includes total premiums written, gross other income and net investment return, all as reported on the face of the profit and loss account. The Group has also achieved substantial growth in this measure, as shown below: PAGES 11 12F I N A N C I A L R E V I E W
Key financial highlights Profit before tax increased significantly during 2004, up from £57.2m to £101.0m.
The directors use core profit as an effective assessment of the underlying profitability of the Group. This measure can be split into the three key elements of the Group’s business model – 1) underwriting profits, 2) profit commissions and 3) net other income (in particular ancillary income).
(1) During 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 comparing 2004 against 2003.
As noted, the Group generates profits from three principal sources: • the share of the motor insurance business it retains and underwrites itself
• profit commission earned from the Group’s co-insurance and reinsurance partners
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.
The second key advantage comes from retaining ownership of the entire customer base. This means the Group is able to generate substantial non-insurance income from all policyholders.
Net other incomeProfit commissions 0’ s 0’ s 2004’s core profit of £100.6m (a reconciliation to which is set out later in this section on page 19), equates to a growth rate of over 30% on 2003, and compounded annual growth of almost 51% since 2000 – the first year in which consolidated accounts were drawn up for the Group.
Turnover has increased by 28% in 2004 with compounded growth over the five years of over 20%.
The underwriting arrangements in place for 2004 were unchanged on the previous year. 65% of the total business was underwritten by Great Lakes Reinsurance (UK) Plc (Great Lakes – a UK subsidiary of Munich Re currently rated A+ by A M Best) under a co-insurance arrangement. (This is in contrast to a reinsurance contract and means Great Lakes is the primary risk carrier on this portion of the book.)
As well as proportional reinsurance, the Group has also arranged an excess of loss reinsurance programme with a number of reinsurers to protect itself (along with its co-insurance and reinsurance partners) against very large claims.
A full understanding of the impact of reserve releases on the Group’s results is important. The table below sets out net reserve releases (by underwriting year) included in the financial statements since the 2001 financial year (no releases were included in the 2000 financial statements as this was the first year the Group underwrote premiums and prepared consolidated accounts): This pattern of releases reflects consistent downward revision of loss ratios across all underwriting years, in response to consistently favourable development of these years.
The Chief Executive’s Statement refers to this development in some detail and presents a graph which sets out the development of the loss ratios by underwriting year over the past five years.
The new quota share contracts that came into effect on 1 January 2005 have similar profit commission arrangements.
C O M B I N E D R A T I O D E V E L O P M E N T
The Group’s adjusted combined ratio (being the aggregation of the loss and expense ratios above) for 2004 is 82.0%, compared to 67.7% in 2003. The increase is primarily due to the reserve releases in 2003 as discussed above. Once again it is expected that the combined ratio will rank the Group towards the top of the UK market.
A further £1.9m of profit commission was recognised during 2004 (£0.3m in 2003) under co-insurance arrangements relating to earlier underwriting year contracts with Swiss Re. An additional £1.2m should become due (based on current reported loss ratios) from Swiss Re when the 2002 year of account within the Syndicate is closed or the profit commission is received from Swiss Re. This did not occur at the end of 2004 as the Board of the Managing Agent, Admiral Syndicate Management Limited felt that a number of opportunities were still to be examined for closing the 2002 year.
Net other income This figure can be further analysed as follows: As noted above, the Group is able to use its direct customer contact model to generate significant intermediary revenue through sales of ancillary products to the customer base. This represents the majority of net other income. The products involved are primarily insurance products that complement the motor policy, but which are underwritten by external parties. The contribution above is largely commission earned on such sales. Net contribution from ancillary sales grew by over 35% during the year, with average gross income per motor policy amounting to £51.20 (2003: £50.70).
Financial investments, cash and indebtedness All aspects of the Group’s business generate significant operating cash inflows. At 31 December 2004, the Group held a total of £322.6m in cash and financial investments (2003: £239.0m) – an increase of 35% on 2003: Ancillary contribution 48,493 35,856
Investment strategy is set by the Group Investment Committee (and approved by the Boards of directors of the relevant entity). The strategy is conservative, with much of the funds invested in high quality corporate or government bonds. No investments are made in equity shares.
At 31 December 2004, the Group had £33.1m (2003: £35.4m) of debt in respect of a commercial loan facility drawn down in 2002. £4.3m in capital and interest was repaid during the year with a further £4.1m on 3 January 2005. The original arrangement included a £10m revolving credit facility that the directors cancelled in 2004 as it was unlikely to be required.
Refer to note 21 to the accounts for further details on the Group’s debt.
The directors have, therefore, declared final dividends totalling 9.3p per share on 18 March 2005. These comprise a normal dividend of 3.1p per share and a special dividend of 6.2p per share. The normal dividend took into account our listing part way through the financial year and is based on a 45% pay-out ratio, adjusted for the exceptional tax credit. The special dividend reflected the abnormally low tax charge in the 2004 accounts resulting from relief for the cost of the ESOT distribution on listing which will reduce the Group's tax payment in 2005.
In addition dividends of £52.0m were paid during 2004 prior to the Company's listing.
Taxation The total taxation charge reported in the profit and loss account is £14.4m (2003: £18.0m) representing 14.3% (2003: 31.5%) of pre-tax profits. The significant decrease in the effective tax rate is mostly due to the impact of the ESOT share awards made during the year, which attracted a significant deduction for corporation tax purposes.
A charge for the employer’s National Insurance contributions arising from the share provision (£7.2m) has been included in the profit and loss account. The tax deduction on this charge was accrued in previous years.
Refer to notes 8 and 20 to the accounts for further detail on taxation and the ESOT.
Employee share schemes This section is split into two – the first covers the Admiral Employee Share Ownership Trust (ESOT) established in 2000, and under which no further grants are to be made. The second section deals with the new schemes that will take effect in 2005, under which no awards have yet been made.
The Board is strongly of the view that actual or prospective share ownership plays a key role in staff incentivisation (across all levels – not restricted to executives or senior management). Given that no further awards are possible under the ESOT, new arrangements have, therefore, been established in its place.
This scheme is intended to replace the previous staff profit share scheme, and is open to all staff, (excluding current executive directors) of Admiral Group plc.
The maximum to be awarded under the SIP will be £3,000 per employee per annum, with the awards being subject to a three-year vesting period. As the scheme is Inland Revenue approved, the awards will be free of income tax after 5 years. The £3,000 limit will be based on the market value of the shares at the date of award.
Awards will be made twice a year, based on the stand-alone results of each half-year. 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.
A linear relationship will exist between the size of the award and the percentage over the Group’s budgeted core profit achieved. Awards will start to be made if the Group achieves over 90% of its budgeted core profit and full award will be made if the Group exceeds 111.5% of its budgeted core profit.
This scheme is not Inland Revenue approved, and is open to Group employees of a certain level of seniority, excluding the current executive directors of the Group.
The main performance criteria will be the growth in earnings per share (EPS) in excess of a risk free return (RFR), defined as average 3month 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 total shareholder return.
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.
Approximately 250 staff will be included within the plan, commensurate with the Group’s philosophy that real difference can be achieved by incentivising staff that have direct control over customer interaction as well as the Group’s most senior managers.
The plan includes provision for a maximum individual award equal to the lower of £400,000 or 600% of salary. Such an amount is included to provide flexibility for future succession planning in the most senior positions.
(Deduct) / add back: share scheme (credit) / charges (4,144) 6,900
C O R P O R AT E G O V E R N A N C E
The changes primarily involved some restructuring of the Board and its subCommittees. The Board is satisfied that the Group complied with the provisions of the Combined Code on corporate governance, issued by the Financial Reporting Council in July 2003, from the date of listing, with the exception relating to paragraphs C.3.1 and B.2.1 of the Combined Code, which state that the Audit and Remuneration Committees should comprise three independent nonexecutive directors. The Group’s Committees had only two independent non-executive members. The Board is currently actively recruiting a new independent non-executive director who will join both Committees on appointment.
The details below focus on the structures that existed at the balance sheet date (and at the date the Annual Report was signed).
The Admiral Group Board The Group is controlled by its Board of directors. The Board is responsible for the proper management of the Group as well as setting the Group’s strategic goals and objectives, ensuring the necessary financial and other resources are made available to meet them, and measuring progress towards achieving them. The Board is ultimately responsible to shareholders for the financial and operational success of the Group.
• approving policies relating to director's remuneration and the severance of director's contracts
• implementation of the strategies and policies of the Group as determined by the Board
The Board is aware of its responsibilities to carry out performance evaluation on itself, its Committees and individual directors and is committed to undertaking each on an annual basis.
The independent directors are of sufficient calibre and number that their views carry significant weight in the Board's decision making.
The Board considers that the Chairman and all but one of its non-executive directors are independent directors in accordance with the criteria set out in the Combined Code. The other, Manfred Aldag, by reference to his association with Munich Re, represents a significant shareholder and for this reason is not considered to be an independent nonexecutive director.
The Company Secretary The Company Secretary is responsible for advising the Board through the Chairman on all governance matters. The directors have access to the advice and services of the Company Secretary. The Company’s Articles of Association and the schedule of matters reserved to the Board for decision provide that appointment and removal of the Company Secretary is a matter for the Board.
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.
The non-executive directors receive monthly management accounts and other regular management reports and information, enabling them to scrutinise the Group's performance against agreed objectives and budgets.
The Group maintains a corporate website (www.admiralgroup.co.uk) containing a wide range of information of interest to institutional and private investors. Management has regular discussions with institutional investors and responds to ad hoc requests for discussions and information from institutional shareholders.
Board Committees The number of full Board meetings and Committee meetings attended by each director during 2004 was as set out below.
Attendance at Board and Committee meetings 13531 Admiral AR a/w 5/4/05 9:59 am Page 24
The Audit Committee Constitution and membership The constitution of the Audit Committee was amended prior to the Company’s listing in order to establish a structure that best suited the Group’s needs and moves towards compliance with the Combined Code and in particular the Smith Guidance on Audit Committees. The membership in place at the year-end was as set out below: In addition to the above, other Group employees or external parties are invited to attend where the Committee considers this appropriate. The Internal Audit manager has unfettered access to the Committee.
The Committee is required to meet at least three times per annum, and has met five times during 2004. As noted above, all members attended all meetings.
In the event of dispute or disagreement between the Committee and the Board, adequate time must be devoted to attempt to resolve the issue. In the event that no resolution can be reached, the Committee has the right to include a report on the issue to shareholders in the Group’s Annual Report.
The Committee’s Chairman is required to present to the Board, at least three times annually, on the Committee’s activities.
The Committee regularly reviews the Group’s approach to internal control and the overall Admiral 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.
• considering the appropriateness of the resource, remit and other 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
• be put in the role of advocate for the Group
The Nominations Committee As with the Audit Committee, the current membership of the Committee was changed on 19 August 2004 prior to listing. The Committee is currently chaired by Keith James, with the other members being Manfred Aldag and Alastair Lyons. (Prior to this the members were Alastair Lyons, Manfred Aldag and Owen Clarke, who resigned from the Board on 7 September 2004).
The key responsibilities of the Committee are: • assessment of the current Board – including size, structure, membership, responsibilities
Remuneration Committee As with the Audit and Nominations Committees, the current membership of the Committee was changed on 19 August 2004 prior to listing. The Committee is chaired by John Sussens, with the other member being Martin Jackson. Prior to this, membership consisted of Alastair Lyons, Henry Engelhardt and Owen Clarke (who resigned from the Board on 7 September 2004).
The Committee’s principal responsibilities are: • setting, reviewing and recommending to the Board for approval the Group’s overall remuneration policy and strategy
In addition the Committee will review the Group’s remuneration policy in relation to: • its competitors and industry norms
The Committee’s terms of reference are available on the Group’s website.
The Committee’s principal responsibilities are: • determining and recommending investment strategy
• monitoring the performance of invested funds and external investment managers
There are several key elements to the risk management environment throughout the Group. These include the setting of risk management policy at Board level, enforcement of that policy by the Chief Executive, delivery of the policy by the Risk Management Committee via the Group’s systems of internal control and risk management and the overall assurance provided by the Audit Committee that the systems operate effectively.
The Board recognises that the day-to-day responsibility for implementing these policies must lie with the management team, whose operational decisions must take into account risk and how this can be effectively controlled. The
Compliance Officer takes 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 Committee’s members include the three executive directors, the Compliance Officer and the Group Company Secretary.
• consider the likelihood of occurrence of the risks identified and assess the Company’s ability to manage these risks
• identification of control weakness and recommendations to management on improvements and fixes
• contributing to the design of the Risk Management Strategy, and supporting management in its implementation
As discussed in the financial review, Syndicate 2004 is now in run-off, although this element of the business is still regulated by Lloyd’s (which itself is now regulated by the FSA).
Since 2003, the Group’s retained insurance risk has been underwritten through two insurance companies – Admiral Insurance Company Limited (AICL) and Admiral Insurance (Gibraltar) Limited (AIGL).
AICL is a UK incorporated company operating wholly in the UK, and is regulated by the FSA. The Company is subject to the rules set out in the FSA Handbook. This most notably included the Prudential Sourcebook for Insurers – IPRU (INS) until 31 December 2004, when the FSA ‘switched-on’ the Integrated Prudential Sourcebook (PRU). This guidance supersedes IPRU (INS) and related rules. The new rules have been in circulation for some time, and the Group has fully prepared for their arrival.
AIGL is incorporated and authorised in Gibraltar (although currently only underwrites UK motor insurance business), and is regulated by the Gibraltar Financial Services Commission (FSC). The rules and guidance applicable to AIGL issued by the FSC must comply with EU legislation (as must the FSA rules) and are similar to those applicable to AICL in the UK.
Up to 14 January 2005, two of the Group’s insurance intermediaries – Admiral Insurance Services Limited (AISL) and Able Insurance Services Limited (Able) were voluntarily regulated by the General Insurance Standards Council (GISC) and were obliged to comply with the GISC Private Customer Code.
From 14 January 2005, the GISC regime was replaced by statutory regulation of insurance intermediaries by the FSA. AISL and Able, along with a further Group intermediary, Inspop.com Limited (Inspop) have received Scope of Permission Notices and are authorised to trade under the new intermediary regime.
The three intermediaries are now also subject to the rules set out in the FSA Handbook, most notably, the Insurance Conduct of Business Sourcebook (ICOB).
Manfred Aldag Indefinite (terminable on one month’s notice from either party) – automatically terminates should Manfred cease employment with Munich Re
John Sussens Indefinite (terminable on one month’s notice from either party)
There is no provision in the executive directors’ contracts for compensation to be payable on early termination of their contract over and above the notice period element.
The remuneration of non-executive directors is decided by the full Board, the non-executive directors abstaining.
Pratt Thompson – – – – – ordinary A shares B shares C shares Total shares of of 10p of 10p of 10p 0.1p
* Include amounts held by family members and in trusts settled by family members.
* With effect from August 2004 Alastair Lyons has agreed to waive 25% of his annual fee.
The directors consider this is the most appropriate index against which the Company should be compared and the index is also the benchmark against which future Executive Restricted Share Plan awards will be assessed.
Workplace The Group aims to provide a workplace which staff consider to be one of the best places to work and has a philosophy that staff are more productive if they enjoy what they do and where they do it. The Group’s efforts to this end have been recognised with a growing number of awards including: • The Sunday Times 100 Best Companies to work for – included in all five years (20th place in the latest list)
• The Financial Times 100 Best Workplaces in the UK – included in both years of the award
As discussed in the remuneration report, the Board believes that equity shareholdings play a vital role in staff incentivisation (across all levels) and the original scheme which was set up in 2000 (the ESOT) crystallised during 2004 on the Company’s listing. As has been well documented, a large majority of staff benefited from the ESOT, with average financial awards in the region of £40,000.
PAGES 31 32C O R P O R AT E R E S P O N S I B I L I T Y
Admiral is once again named one of 100 Best Companies to Work For
The Group supports a large number of local charities and organisations through its ‘Henry’s Pot’ scheme. This fund was started in 1999 and allows staff to apply for a donation or sponsorship towards organisations they or their families are connected with. During 2004, well over 80 awards were made to a wide variety or organisations.
• WellBeing of Women through the Diamond brand. This charity is the only national charity funding vital research into all aspects of women’s reproductive health. WellBeing of Women’s mission is to bring an end to the fear and suffering caused by reproductive health problems. Their work is dedicated to raising awareness and funds to invest in new medical research
• the Born Free Foundation through elephant.co.uk. This international wildlife charity works to reduce animal suffering and to encourage people around the world to treat all animals with respect. Born Free believes that wildlife belongs in the wild and is dedicated to the conservation of rare species in their natural habitat, and the phasing out of traditional zoos
Environment As a large organisation, the Group recognises that whilst its operations do not impact on the environment as much as more industrial entities, it can put in place practices to minimise the impact its operations do have.
Children having fun at the Admiral Kids Christmas Party in Swansea
He has previously been Chief Executive of the National Provident Institution and the National & Provincial Building Society,
Henry is a founder director of Admiral and was recruited by the Brockbank
He was part of the management team that led the MBO in 1999. Prior to joining
He has substantial experience in direct response financial services in the United
Officer of two life insurance companies and several Lloyd’s brokers. He is a
Initially the Marketing Director, he was appointed director responsible for pricing in 1996 and claims and pricing in 1999. He was appointed as Chief
September 1981 and is currently the senior executive manager responsible for Northern Europe (United Kingdom,
June 1995 to April 2004. He was a nonexecutive director of Bank of Wales plc between 1998 and 2001 and AXA
Insurance Company Limited between 1992 and 2000. Keith was awarded on
OBE in 2005 for services to business and the community in Wales.
Independent Non-Executive Director in August 2004, and is Chairman of the
Remuneration Committee. He is also a non-executive director of Cookson plc,
He was the Group Managing Director of Misys plc between 1998 and
Limited. He was a non-executive director at Chubb plc between 2001 and 2003.
KEY A - Audit Committee member R - Remuneration Committee member N - Nominations Committee member
Principal activity, business review and future developments The Company is the holding Company for the Admiral Group of companies. The Group’s principal activity continues to be the selling and administration of private motor insurance and related products.
Detailed descriptions of the Group’s activities, results and prospects are contained in the Chairman’s statement, the Chief Executive’s statement and the financial review.
Employee policies Detailed information on the Group’s employment practices is set out in the corporate responsibility report.
PAGES 37 38D I R E C T O R S ’ R E P O RT
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business
Auditor The Company’s auditor, KPMG Audit Plc, has indicated willingness to continue in office and as stated above, resolutions to reappoint it and to authorise the directors to fix its remuneration will be proposed at the Annual General Meeting.
Share Capital As a consequence of the listing of the Company’s shares on the London Stock Exchange in September 2004, the Company’s share capital has been increased from 254,706 ordinary shares of 10p each to 258,595,400 ordinary shares of 0.1p each. Further details of share capital movements are set out in note 23 to the accounts.
Other than the holdings of the directors as disclosed in the remuneration report, so far as the directors are aware, or have been notified pursuant to section 198 of the Companies Act 1985, the following shareholders have interests in 3% or more of the ordinary share capital of the Company at 18 March 2005: Number % of shares
Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report and the directors’ remuneration report. As described on page 38, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority, and by our profession's ethical guidance.
We review whether the corporate governance statement on page 20 to 27 reflects the company's compliance with the nine provisions of the 2003 FRC Code specified for our review by the Listing Rules, 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.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the directors' remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the directors' remuneration report to be audited.
Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and the group as at 31 December 2004 and of the profit of the group for the year then ended; and 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.
Change in the gross provision for unearned premiums (13,479) (29,015) Change in the provision for unearned premiums, reinsurers’ share 4,243 17,046 Change in net unearned premium provision (9,236) (11,969)
Basic and diluted earnings per share - adjusted 11 26.9p 15.2p
There were no acquisitions in the financial year, and no operations were discontinued. All income and expenditure therefore relates to continuing operations.
Debtors Debtors arising out of direct insurance operations 16 99,390 73,611 Debtors arising out of reinsurance operations 5,470 2,622 Other debtors 7,549 5,099
Prepayments and accrued income Deferred acquisition costs 2,794 2,270 Other prepayments and accrued income 1,634 1,561
Creditors – falling due within one year Creditors arising out of reinsurance operations 91,347 48,867
Other creditors including taxation and social security 17 54,114 24,833 Accruals and deferred income 18 50,390 36,368
These financial statements were approved by the Board of directors on 18 March 2005 and were signed on its behalf by: Andrew Probert Director 13531 Admiral AR a/w 5/4/05 9:59 am Page 46
Returns on investments and servicing of finance Interest received 3,348 1,166 Interest paid (2,418) (4,120)
Financing Issues of ordinary shares - Expenses related to share issue (2,354) Repayment of loan capital (2,333) (12,333) Net movement in finance lease capital (1,509) 32
Cash flows were invested as follows: Increase in cash 18,536 7,079 Debt and other fixed income securities 65,280 60,566
These financial statements were approved by the Board of directors on 18 March 2005 and were signed on its behalf by: Andrew Probert Director 13531 Admiral AR a/w 5/4/05 9:59 am Page 48
The financial statements have also been prepared in accordance with applicable accounting standards and comply with the Statement of Recommended Practice (“SORP”) issued by the Association of British Insurers as revised in November 2003.
The provision for unearned premiums comprises the proportion of gross premiums written which, it is estimated, will be earned in the following or subsequent financial years. It is computed separately for each insurance contract using the daily pro-rata method.
Fixed assets are stated at cost less depreciation. Depreciation is provided to write off the cost less estimated residual value of tangible assets in equal instalments of their estimated useful economic lives as follows: g) Profit commission
Under some of the co-insurance and reinsurance contracts the Group is party to, 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 statutory accounts.
The income is allocated to the technical account (under the caption “Profit commission – insurance business”) if the commission is earned by one of the Group’s regulated insurance companies, or alternatively to the non-technical account (under the caption “Profit commission – agency business”) if earned by other companies.
Assets acquired under finance leases or hire purchase contracts are included in tangible assets at fair value on acquisition and are depreciated in the same manner as equivalent owned assets. Finance lease and hire purchase obligations are included in creditors, and the finance costs are spread over the periods of the agreements based on the net amount outstanding.
Ancillary income is credited to the profit and loss account over the period matching the Group’s obligations to provide services. Where the Group has no remaining contractual obligations, the income is recognised immediately. A provision is made for expected cancellations where the customer may be entitled to a refund of ancillary amounts charged.
Instalment income is credited to the profit and loss account in line with the earning of the motor premium to which the instalment income relates. Provision is made for expected cancellations.
Investments in subsidiary undertakings are valued at cost less any provision for impairment in value.
Notes to the financial statements for the year ended 31 December 2004
Investment return (including realised and the movement in unrealised investment gains and losses) on investments attributable to the general business and associated shareholders’ funds is reported in the non-technical account. An allocation is made from the nontechnical account to the general business technical account of the longer-term investment return on investments supporting the general insurance technical provisions and related shareholders’ funds.
Deferred tax assets are recognised to the extent that they are regarded as recoverable. They are regarded as recoverable to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight line basis over its estimated useful life. The useful life of each acquisition is determined at the time of acquisition, and reviewed annually to ensure the life assigned remains appropriate.
PAGES 49 50N O T E S T O T H E F I N A N C I A L S TAT E M E N T S
AIGL, which is registered in Gibraltar, had gross premiums written of £144,001,000 during 2004 (2003: £118,443,000), profit before taxation of £18,170,000 (2003: £4,851,000) and net assets of £36,032,000 (2003: £19,862,000).
Movement in deferred element of gross reinsurance commission receivable 164 787
Details of directors’ remuneration are set out in the remuneration report.
Depreciation charge: Operating lease rentals: - Machinery and equipment - -
Auditor’s remuneration: - Statutory audit fees (including Company £12,000 (2003: £6,000)) 160 106 - Other audit fees (Company £nil) 16 11 - Other services (Company £nil, 2003: £23,000) 116 76
Bank and other interest receivable Allocated to technical account 401 705
Interest receivable allocated to the technical account relates to interest earned on the Funds at Lloyd’s (being regulatory capital held in support of the run-off of Syndicate 2004).
Refer also to the financial review for details of further profit commission receivable on the closure of the Syndicate’s final open year of account.
UK Corporation tax Current year charge at 30% (2003: 30%) 31,342 15,192
Factors affecting the current tax charge are as follows: 2004 2003
Adjustments in respect of prior year insurance technical provisions (216) -
Total dividends 76,045 13531 Admiral AR a/w 5/4/05 9:59 am Page 56
The only movement in the year related to a £2m capital injection in Admiral Insurance Company Limited.
The Company’s principal subsidiaries (all of which are 100% directly owned) are as follows: 14. Other financial investments
Unadjusted EPS Profit for the financial year after taxation 86,600 39,213
Adjusted EPS Profit for the financial year after tax 86,600 39,213
PAGES 57 58N O T E S T O T H E F I N A N C I A L S TAT E M E N T SN O T E S T O T H E F I N A N C I A L S TAT E M E N T S
Improvements to Computer Office Furniture Motor Total short leasehold equipment equipment and fittings vehicles buildings and software
Amounts falling due within one year 13531 Admiral AR a/w 5/4/05 9:59 am Page 60
18. Accruals and deferred income 20. Employee and director share schemes 1. Employee Share Ownership Trust (ESOT)
The flotation of the Company’s shares on 23 September 2004 triggered an issue of shares to the Trust, prior to the listing taking place.
No further awards are to be made to the ESOT and the provision in the balance sheet at 31 December 2004 is nil.
Total share scheme charges (4,144) 6,900 19. Provisions for other risks and charges 1. Deferred tax
The net balance provided at the end of the current year is made up of a gross deferred tax liability of £5,132,000 (2003: £8,878,000) relating to the tax treatment of Lloyd’s Syndicates, and a deferred tax asset of £294,000 (2003: £2,512,000) in respect of other timing differences.
At the year-end, there was an unprovided deferred tax asset of £531,000 (2003: £1,113,000) relating to losses carried forward.
The key area where these techniques are used relates to the ultimate cost of reported claims. A secondary area relates to the emergence of claims that occurred prior to the end of 2004, but had not been reported at the year-end.
The claims provisions are subject to annual independent review by the Group’s actuarial advisors.
Interest is charged on amounts drawn down based on three elements: a) LIBOR
Amounts outstanding (including accrued interest) at 31 December were as follows: Repayable Within one year 11,455 6,423 Two to five years 21,667 29,000 Greater than five years - -
As a result of the re-registration of the Company as a public limited company and the listing during 2004, significant reorganisations of the share capital were effected during the year. These can be summarised as follows: • On 7 September 2004, the authorised share capital was increased to £54,032.80 by the creation of 132,488 new A shares, 60,176 new B shares, 27,500 new C shares, 29,836 new D shares and 20,164 new E shares
• Also on 7 September, the directors capitalised £25,470.60 of the Company’s share premium account and the sum was used to effect a one for one bonus issue. This resulted in the issued share capital being increased to 264,976 A shares, 120,352 B shares, 24,084 C shares, 59,672 D share and 40,328 E shares
• Also on 17 September, the ESOT subscribed for 29,412 new C shares, fully paid for consideration of £2,941.20
All ordinary shares in issue at 31 December 2004 have the same rights.
PAGES 63 64N O T E S T O T H E F I N A N C I A L S TAT E M E N T SN O T E S T O T H E F I N A N C I A L S TAT E M E N T S
Issued, called up and fully paid 2004 2003 132,488 A ordinary shares of 10p - 13 60,176 B ordinary shares of 10p - 6 12,042 C ordinary shares of 10p - 1 29,836 D ordinary shares of 10p - 3 20,164 E ordinary shares of 10p - 2
immediately prior to a flotation of the Company’s shares. These were repurchased at an amount below par, with the balance transferred to a capital redemption reserve.
25. Financial commitments Annual commitments of the Group under non-cancellable operating leases are as follows: At the year-end, the Group had contracted to spend approximately £373,000 on tangible assets during 2005 (2003: £167,000 during 2004). The Company itself does not hold tangible assets, and was not committed to any expenditure after 31 December 2004.
26. Contingent liabilities The Group had no contingent liabilities at the year-end, other than those arising out of insurance contracts, and other agreements entered into in the normal course of business.
In the second to fifth year inclusive 509 - 460 27. Cash flow statement a) Reconciliation of operating profit to net cash inflow from operating activities: Operating profit 100,103 59,224 Add back / (deduct): - Unrealised losses on investments 197 2,518 - Employer’s National Insurance charge on share schemes (7,284) - - ESOT (credit) / charge (4,452) 6,900 - Share option charges 308 Loss on disposal of tangible assets 4 875 Change in gross technical provisions 41,278 19,706 Change in reinsurers’ share of technical provisions (9,471) (3,259) Change in debtors and prepayments (31,674) (7,992) Change in creditors and accruals - excluding tax and social security 61,380 10,071 Change in tax and social security creditor 666 1,422
27. Cash flow statement (cont.) c) Movements in cash, portfolio investments and financing: 28. Related party transactions There were no related party transactions occurring during 2004 that require disclosure.
Cash at bank and in hand 54,957 33,174 - 88,131 Cash on short term deposit 15,118 (14,638) - 480
Fixed income and other debt securities 144,461 59,154 (197) 203,418 Deposits with credit institutions 24,464 6,126 - 30,590 2003 At 1 Cash Market At 31 January Flow Value December
Provisions for other risks and charges 4,838 18,105 8,259 - 13531 Admiral AR a/w 5/4/05 9:59 am Page 70
Notice of Annual General Meeting To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions: 14. Subject to passing Resolution 13, that the directors be and they are hereby empowered pursuant to section 95 of the Act to allot equity securities (as defined in section 94(2) of the Act and as amended by the Regulations) for cash pursuant to the authority conferred by Resolution 13 above as if section 89(1) of the Act did not apply to such an allotment provided that this power shall be limited to the allotment of such equity securities: a) in connection with an offer of equity securities by way of rights to the holders of the ordinary shares in proportion (as nearly as may be practicable) to their holdings on a record date fixed by the directors (but subject to exclusions or other arrangements as the directors may consider necessary or expedient to deal with any legal or practical problems under the laws of any territory or the requirements of any regulatory body or stock exchange in any territory or in connection with fractional entitlements or otherwise howsoever) and b) otherwise than pursuant to subparagraph a) above up to a maximum aggregate nominal amount equal to £12,930
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.
15. 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 12,900,000 (representing 4.99% of the issued ordinary share capital)
Ordinary Business 1. To receive the reports of the directors and the audited accounts of the Company for the year ended 31 December 2004 2. To approve the directors’ remuneration report set out on pages 28 to 30 for the year ended 31 December 2004 3. To declare a final dividend on the ordinary shares of the Company for the year ended 31 December 2004 of 9.3 pence per ordinary share 4. To re-elect Alastair Lyons CBE (Nonexecutive Chairman and a member of the Nominations Committee) as a director of the Company 5. To re-elect Henry Engelhardt (Chief Executive Officer) as a director of the Company 6. To re-elect David Stevens (Chief Operating Officer) as a director of the Company 7. To re-elect Andrew Probert (Finance Director) as a director of the Company 8. To re-elect Manfred Aldag (Nonexecutive director and member of the Nominations Committee) as a director of the Company 9. To re-elect Martin Jackson (Nonexecutive director, Chairman of the Audit Committee and member of the Remuneration Committee) as a director of the Company 10.To re-elect Keith James OBE (Nonexecutive director, Chairman of the Nominations Committee and member of the Audit Committee) as a director of the Company 11. To re-elect John Sussens (Senior Independent Non-Executive Director and Chairman of the Remuneration Committee) as a director of the Company
Martin Jackson and John Sussens have joined the Board during the last year and none of the other current directors of the Company submitted themselves for retirement and re-election at the two Annual General Meetings of the Company that took place prior to the listing. Accordingly, as a matter of good order, all of the current directors of the Company believe that they should retire and submit themselves for re-election at this Annual General Meeting, the first such meeting following the listing.
Biographical details of all of the directors may be found in the Annual Report of the Company on pages 35 to 36.
The directors consider, in certain circumstances, that it may be appropriate and in the best interest of shareholders generally for the Company to purchase its own shares. This resolution gives authority for the Company to purchase up to 12,900,000 ordinary shares which is approximately equivalent to 4.99% of the issued share capital of the Company as at 11 April 2005. The directors have no specific plans to exercise any authority granted by this resolution, but will keep the matter under review and will only make purchases where, in the light of prevailing market conditions, they consider it will result in an increase in earnings per ordinary share in the Company.
16. That the Articles of Association of the Company be amended by the deletion of Article 168.1 and the substitution therefore of the following: “168.1 Subject to the provisions of the Act, but without prejudice to any indemnity to which he may be otherwise entitled, each director, alternate director, secretary or other officer of the Company may, at the discretion of the Board, be indemnified out of the assets of the Company against all costs, charges, losses, damages and liabilities incurred by him in the actual or purported execution and/or discharge of his duties or exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or office, provided that this Article 168.1 shall be deemed not to provide for, or entitle any such person to, indemnification to the extent that it would cause this Article 168.1, or any element of it, to be treated as void under the Act’’.
The Companies (Audit, Investigations and Community Enterprise) Act 2004 makes changes to section 310 of the Companies Act 1985 in relation to the indemnification of directors by companies for liabilities arising in connection with the performance of their functions. Consequently the Company will be able, at the discretion of the Board and subject to the Companies Act 1985, to indemnify the directors for costs and losses incurred by them in facing and defending liability in civil, criminal and regulatory proceedings. This change comes into force on 6 April 2005.
• if you hold your shares in certificated form and have your share certificate to hand, online at www.capitaregistrars.com by following the instructions provided or
5. 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 6.00pm on 16 May 2005 (or 6.00pm 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.
7. Copies of the executive directors’ service contracts and the non-executive directors’ terms of appointment will be available for inspection at the meeting from 10.45am until the conclusion of the meeting.
Registered Number: 03849958. Admiral Group plc. Capital Tower, Greyfriars Road, Cardiff CF10 3AZ