Confused.com is an intelligent, automated car insurance shopper. Customers input their details once, and receive quotes from major car insurance websites. confused.com
Elephant.co.uk is the Group’s main online car insurance service. Elephant passes on cost savings generated by being an online brand to customers in the form of lower premiums. elephant.co.uk
Gladiator is the Group’s commercial vehicle insurance broker that was launched in April 1998. The Company acts on behalf of several of the largest commercial vehicle insurers in the UK. gladiator.com 4 O U R B R A N D S
In the UK, despite market conditions remaining challenging, Admiral increased both underwriting and ancillary profits whilst substantially growing the number of vehicles insured. At the end of the year our brands covered 1.49 million vehicles, 16% up on December 2006. The 13% increase achieved in profit derived from ancillary products and services is testament to the success we continue to derive from our focus on maximising the value of each customer relationship.
We have made significant progress during 2007 with our international strategy. Balumba.es, the on-line Spanish motor insurer that we launched in October 2006, ended 2007 with 47,000 customers – a great achievement in little over a year from a standing start. We followed this with the launch in October 2007
A highlight of 2007 was our admission in December to the FTSE 100 Alastair Lyons CBE
Chairman's statement 6 C H A I R M A N ’ S S TAT E M E N T
of AdmiralDirekt.de, our new online German motor insurer based in Cologne, and we announced at the time of our half-year results that we were well advanced with plans to launch into Italy during 2008. Our teams in each country have built on the learning of their colleagues who launched before them and I would take this opportunity to give them credit for their enthusiasm, resilience, and consequent achievements. Staying with the international theme I should also mention the establishment of our new customer service centre in Halifax, Canada where we now employ directly over 100 staff helping to share the load of our long opening hours with our teams in the UK.
We have maintained our approach of considering dividends in two parts. The first element, being the normal dividend, is based on a 45% pay-out ratio. The second element - the special dividend - derives from our principle of returning to shareholders available surpluses, calculated as the Group’s net assets less its required solvency; cover against any specific expansion plans, being at this year-end £5m in respect of overseas; and a prudent margin - currently £25m - against contingencies. Special dividends since flotation in September 2004 amount to £146.6m, this being in addition to £149.5m normal dividends over the same period.
As at the end of the year we employed 2,500 staff, 90% of whom live and work in South Wales. This makes Admiral a significant part of the local community and we encourage our staff to be associated with the local projects that are important to both them and their families. During 2007 we provided financial support to 110 such projects. In addition Admiral sponsored a number of high profile local events within South Wales - the Admiral Cardiff Big Weekend and the Swansea Waterfront Winterland, of both of which Admiral was the main sponsor in 2007, together attracted over 365,000 visitors. More details of which will be found in the report on corporate responsibility. This report also describes the steps we take to minimise the impact of our operations on the environment.
May I end by thanking everyone who has contributed so much to achieve the successes that I have been able to outline above – first and foremost our staff who make Admiral the Company it is: our executive management team whose quality of leadership justifies our being placed for 8 consecutive years amongst The Sunday Times Top 100 Companies to Work For in the UK: and our Non-executive Directors for their commitment and wise counsel.
We had a bumper year in absolute terms AND we made great strides towards the creation of an even better future Henry Engelhardt 2007 was a good year for the Admiral Group. I should quit right there!
But those items don’t tell the whole story. As compelling as they may be, they only account for part of the reason why I think the year was successful. For me, the reason it was such a good year is that we did all the good things already mentioned while simultaneously making large investments of time and money in our future. These investments could easily have retarded our 2007 trading performance. But they didn’t. We had a bumper year in absolute terms AND we made great strides towards the creation of an even better future.
Chief Executive’s statement 8 C H I E F E X E C U T I V E ’ S S TAT E M E N T
· Turnover is defined and reconciled in the financial review below
Only in a few years time, when Spain, Germany, Italy, etc. are running at full throttle, will we really appreciate how good 2007 was. Here’s a closer look at our results and the UK car insurance market.
UK Car Insurance: Sloth-like The UK car insurance market cycle is turning with sloth-like speed. Have you ever seen a sloth up close? Their muscle control is quite incredible. You try moving that slowly! (See com/animals/mammals/three-toedsloth. html) Sloths are an appropriate metaphor for the UK car insurance market today. The market is moving. But slooooowwwwllllyyyy.
It is just possible that in 2007, on a written basis, premium inflation for the market will have outpaced claims inflation for the first time since 2000. But, when all the results are tallied, I think that this move will be modest, and, as an earned basis lags rate movements, it won’t fully flow through to the market’s results until 2008.
We put 4% on our rates during the year against a claims inflation factor above 3%.
Our conservative reserving philosophy meant we released £29.5m from prior years into this year’s profit. We build claims reserves because history tells us that this is an area that changes quite quickly. It has not been unusual to see changes in the claims environment result in additional costs to all your open claims, some of which are four or more years old. So there is a method to our madness, we reserve in case the world changes and then release if it does not. From what I know at the moment, I do not see any reason to believe that this pattern will not continue.
The important point of this change in distribution is that small insurers can get exposure to consumers equal to that of big insurers. Previously smaller insurers wouldn’t have the muscle to get equal exposure. The big insurers, who could spend a lot of money advertising and/or be on lots of broker sites, could dominate the market by the very fact that they were always visible to consumers. Now small insurers, without spending a penny of marketing money, can get equal time. For car insurance this is revolutionary stuff.
This means that the market is pinned to the lowest quote for any given risk. That is, a single firm could undercut the entire market or, for any given risk, one firm could undercut the rest. Either way, this chain is going to move only as quickly as the slowest link.
On an earned basis it looks like 2007 or 2008 will be the worst point in this cycle, which is 9 or 10 years on from the previous worst point of 1998. Think sloths. And if the 2007 rate rises prove to be a false dawn, think slowmoving sloths!
At last count there were more than half a dozen price comparison sites actively touting for business. Not surprisingly, consumers have been seduced by the ease in which they can now get countless quotes. Overall ad spend in the market, which had been on the decline in 2006 began to rise again in 2007 and continues to rise, setting new records along the way. Price comparison sites accounted for approximately 35% of the car insurance tv and press spend in 2007. However, this figure grew throughout the year and in January 2008 it was
67%. Advertising as a stand-alone car insurance brand to generate direct quotes has become awfully expensive, as it is almost impossible for a single brand to better the proposition of multiple quotes put forward by price comparison sites.
Beyond the UK: Spain, Germany and Italy 2007 was a dramatic year in the development of the Group’s business beyond the UK. Balumba in Spain, which launched at the end of October 2006, grew quickly. A year after Balumba’s start, AdmiralDirekt. de successfully launched in Germany and during the year we began implementation of our plan to launch in Italy during 2008.
Balumba in Spain ended the year with 47,000 policyholders and a turnover of £16.6m. It posted a loss of just £0.7m in its first full year of trading.
As you can imagine, there is still a lot of work to do on Balumba, particularly in the pricing and claims areas, although high loss ratios are not unusual in a Company’s first year of trading. The key question surrounding Balumba beginning the year was: could it market to consumers efficiently? It appears that the answer to that question is a resounding ‘yes’ as we gave over 396,000 quotes in the year.
It was imperative that we launch the operation in October to get some experience in the ‘season’.
Project Chianti, otherwise known as The Italian Job, is moving forward at pace with an anticipated launch later in 2008. The operation will be based in Rome.
A combination of a strong service ethic and a four-hour time difference led us to open a call centre in eastern Canada. We now have almost 100 agents on the phones, taking over from the UK in the early evening (midafternoon there).
Almost the end of the report I’m proud to say that it was another very good year for return on capital. This is the benefit of our model, where we have reinsurers put up the capital pro-rata for their share of the underwriting, but we get profit commissions from them when we make profits and we keep the revenue from everything else we do, like Confused, for ourselves. Although we do sacrifice some profit to get this reinsurance support it gives us a layer of protection against losses and serves to make us capital efficient. A good measure of this is our return on capital, which in 2007 was 58% (2006: 57%). Another important indicator is our return on income - 57% in 2007, up from 53% in 2006.
Finally, the best possible tribute to our staff: the first lot of free shares distributed since our 2004 float will vest in 2008. We want all our staff to feel like they own part of the Company and the best way to do that is to give them part of the Company to own. We are very pleased that those who qualified in 2005 and earned free shares will take control of those shares later this year. Our staff give a lot of themselves to the organisation and it is great to share the fruits of our communal efforts with every person in the Company.
Last point of note, at the end of 2007 we joined the FTSE 100. We are the only Welsh Company in this elite club. In fact, we are only the second Welsh Company in history to be in the 100, the first one having been a member for 9 months back in 1992-93. (I hope that by the time you read this we’re still a member!) Our rapid rise into the FTSE 100 is a tribute to all the staff across our six sites in five countries who are building a great business by working hard every day to give customers great service.
Group underwriting profits grew significantly in 2007 (by around one third) – this despite a very slowly turning pricing environment in the UK motor market and the inclusion of a first full year’s result for Balumba.es (the Group’s Spanish motor insurer).
In UK motor, the Group reduced its share of the underwriting to 22.5% (from 25.0%) in a year when this cycle possibly hit its worst point. The number customers grew significantly once again: 000s 000s
Underwriting Underwriting arrangements During 2007 the Group retained 22.5% (2006: 25%) of UK motor underwriting on a net basis. 60% of the total is underwritten by Great Lakes Reinsurance (UK) Plc (a subsidiary of Munich Re) under a long term co-insurance arrangement. The remaining 17.5% is ceded to two reinsurers – Swiss Re, 10.0% and Partner Re, 7.5%.
The nature of the co-insurance arrangement is such that 60% of all motor premium and claims for the 2007 year accrues directly to Great Lakes and does not appear in the Group’s income statement. Similarly, Great Lakes reimburses the Group for its proportional share of expenses.
In 2008, the share of the UK motor underwriting retained increases to 27.5% as Great Lakes’ share declines by the 5% set out in the revised co-insurance arrangement.
Underwriting results Total premiums increased by around 11% to £631m from £567m – Balumba accounted for around £14m of this total (having written less than £1m in 2006). The total number of vehicles insured (excluding Gladiator) rose by around 15% to 1.43m from 1.24m. Balumba grew its customer count from around 2,000 to 47,000 at the end of the year.
Net insurance premium revenue fell marginally to £142m - due to the decrease in the proportion of UK premium retained.
The overall loss ratio improved to 68% - four points down from the 72% reported in 2006. The UK motor ratio improved significantly to 67% from 72%. Balumba’s reported loss ratio in its first full year of trading is 141%.
The UK expense ratio was 16.7%, up 1 percentage point on the previous year primarily as a result of lower average premiums resulting from changes in the mix of the portfolio. When the Balumba figures are included, the Group expense ratio totals 17.7%.
During November 2007, the Group completed the transfer of the remaining liabilities of Syndicate 2004 (through which the Group underwrote UK private motor insurance from 2000 to 2002) into one of its active insurers - Admiral Insurance Company Limited. Whilst the transfer has a number of advantages in terms of simplifying Group structure and administrative requirements, the transfer has not had a material financial impact on the results in 2007.
The reinsurance contracts entered into with Munich Re in Spain and Germany also have profit commission clauses, though these require the underwriting results to move into cumulative profitability before any commission will be earned.
Gladiator Commercial Gladiator made a contribution to profit of £2m in 2007, consistent with 2006. In a highly competitive market, Gladiator grew market share by increasing its customer base by 44% to 62,000. This was partly as a result of new distribution through price comparison sites, and partly the result of improved conversion from a larger and more comprehensive panel.
Confused also increased its share of the home and travel insurance markets by improving market coverage and panel depth, and revenue growth has also been achieved in a number of other general insurance areas including van and motorbike insurance. Home insurance quotes increased by almost 80% to 0.9m from 0.5m, whilst Confused also gave 0.5m travel insurance quotes (up substantially from just over 0.1m last year).
International operations Balumba has completed its first full year of trading and has progressed well. Management are pleased with the development of the business, which has grown ahead of plan and is well positioned to continue to grow market share and move towards profitability. The European figures above show Balumba made a loss of around £0.7m in the year (the net effect of the underwriting loss, offset by ancillary profits).
AdmiralDirekt launched successfully in Cologne, Germany during October, just under one year after Balumba. The German market brings new challenges, not least the large proportion of motor policies that incept 1 January. AdmiralDirekt sold around 9,000 policies in its short period of trading, managing to commence operating in time to target the January renewals. The business will continue to develop its infrastructure over the coming months, building towards the next peak period in Q4 2008.
Investments and cash The Group invests its insurance funds in three AAA-rated sterling liquidity funds, which have performed very consistently in 2007. Against a background of extreme volatility in other asset classes during the year, the three funds delivered a net return of 5.6%, with the variance between the highest and lowest fund’s performance in the year being just 0.1%.
The funds target a 7-day LIBID return with capital security and low volatility and they continue to achieve this.
Total investment return and interest income was £24.6m up substantially from the £14.5m earned last year. This increase is due in part to the higher level of cash and investments held, but more to the increase in investment return rates.
During the year the Board carried out an evaluation of itself and its Committees. An external consultant facilitated the evaluation process. The process consisted of the completion of a questionnaire followed by one-to-one discussions between each Director and the facilitator. A final detailed report was discussed at a separate meeting in January 2008 at which the Chairman presented the findings and the Board had an open discussion resulting in a number of agreed recommendations. 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. The main recommendations were related to the focus of Board meeting discussions and improving the process by which Non-executive Directors can arrange to spend time informally with senior management within the Group.
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.
The roles of the Chairman and Chief Executive The Board has approved a statement of the division of responsibilities between the Chairman and the Chief Executive. The Chairman is primarily responsible for the workings of the Board and is not involved in the day-to-day aspects of the business. Save for matters reserved for decision by the Board, the Chief Executive, with the support of the other Executive Directors, is responsible for the running of the business, carrying out the agreed strategy adopted by the Board and implementing specific Board decisions relating to the operation of the Group. The statement of division of responsibilities and matters reserved for decision by the Board were reviewed in January 2008.
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 Nominations 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.
Independent Non-executive Directors are currently appointed for fixed periods of three years, subject to election by shareholders.
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 reelection by shareholders. Their letters of appointment may be inspected at the Company’s registered office or can be obtained on request from the Company Secretary.
In the view of the Board, the Independent Non-executive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making.
John Sussens has been appointed as the Senior Independent Non-executive Director. He is available to shareholders if they have concerns that contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate.
The Board receives presentations from senior managers from within the Group on a regular basis.
Relations with shareholders The Investor Relations team has day-to-day primary responsibility for managing communications with institutional shareholders through a combination of briefings to analysts and institutional shareholders, both at the half-year and full year results. Site visits and individual discussions with the Executive Directors are also arranged throughout the year with individual shareholders. Regular dialogue with shareholders helps to ensure that the Company’s strategy is understood and that any issues are addressed in a constructive way.
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.
This is supplemented by monthly feedback to the Board on meetings between management and investors. External analyst reports are circulated to all the Directors.
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. Ongoing training is provided to all members, and this is intended to cover relevant developments in financial reporting, company law and the various regulatory frameworks. The Terms of Reference of the Audit Committee include all 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 from within the Company may be invited to attend all or part of any meeting as and when appropriate. The external auditors will be invited to attend meetings of the Committee on a regular basis.
The Committee has a policy that provision of external audit services be tendered every five years. This was last carried out in 2006 when the decision was made to retain the services of the incumbent external auditors. At the same time the external audit partner was rotated.
The Committee leads the process for making appointments to the Board or where the appointee is likely to become a Board member. The Committee ensures there is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board through a full evaluation of the skills, knowledge and experience of Directors. The Committee also ensures plans are in place for orderly succession for appointments to the Board, and reviews the plans for other senior management positions. Responsibility for making senior management appointments rests with the Chief Executive.
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 22 November 2007. The Committee met five times during 2007.
In order to ensure these responsibilities are properly discharged, the Board has delegated the task of supervising risk management and internal control to the Risk Management Committee (RMC).
The 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 highlevel 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 a regular item for consideration of risk and control 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. At its March 2008 meeting, the Board carried out the annual assessment for the 2007 year by considering documentation from the Audit Committee, taking account of events since 31 December 2007.
The Risk Management Committee The Committee’s members include the three Executive Directors, the Group Company Secretary (who chairs the meetings), the Deputy Compliance Officer, the Risk Manager and senior management representatives.
The Committee develops policies to ensure compliance with regulation and ensures that appropriate action is taken by the management team to implement compliant systems and procedures.
C o rp o ra te g o ve rn a n c e -
Scope of report The remuneration report summarises the Group’s remuneration policy and particularly its application with respect to the Directors. The report also describes how the Group applies the principles of good corporate governance in relation to Directors’ remuneration in accordance with the Combined Code and Directors Remuneration Report Regulations 2002.
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.
The Committee is conscious of the maximum allowable awards under both share schemes and controls are in place to ensure that neither scheme is issued shares in excess of 5% of the Group's issued share capital over the 10 year period from 1 January 2005.
Non-executive Directors’ remuneration is set by the Chairman and Executive Directors and approved by the Board as a whole. A summary of their contracts and remuneration is shown below.
In addition to benefits such as private medical cover, permanent health insurance, death in service cover and eligibility to the Group’s Personal Pension Plan, there are two main elements to the Finance Director’s remuneration package: · Basic annual salary · Awards under the DFSS.
It is the Committee’s general strategy to pay salaries at or slightly below median levels together with awards under the DFSS bringing the total remuneration to competitive levels for superior performance. With effect from 1 October 2007 Kevin Chidwick’s base salary was increased to £240,000, an increase of 20%. Kevin Chidwick received an award of 23,000 free shares on 18 April 2007 with a value at the date of the award of £241,500. The awards are the maximum number of shares that could vest after a three-year period and are subject to performance criteria as described above.
Lucy Kellaway 3 years commencing 4 September 2006, terminable by either party giving one months’ written notice.
The following tables set out Non-executive fees and expected time commitments.
John Sussens 8,000 8,000 * Kevin Chidwick holds 546 shares (2006: 213) within the Group’s SIP details of which are shown below ** Include amounts held by family members and in trusts settled by family members *** David Stevens and his wife transferred 9,884,000 shares to The Waterloo Foundation, a charitable foundation they established in February 2007
Chairman and Non-executive Directors * £34,000 of other payments to Kevin Chidwick relate to relocation expenses ** Alastair Lyons waives 25% of his annual fee which is currently £120,000 *** Keith James also received £5,000 for chairing the Board of Admiral Insurance Company Limited and £5,000 for chairing the Board of Inspop.com Limited
Awards made under the Discretionary Free Share Scheme (DFSS) and Free Share Incentive Plan (SIP)
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.
This report was approved by the Board of Directors on 3 March 2008 and is signed on its behalf by the Committee Chairman: John Sussens Remuneration Committee Chairman
As well as this programme, quality representatives throughout the Group monitor the service the Company provides through the thousands of comment forms it receives back from customers every month. By listening to customer comments, Admiral can improve the quality of service it provides.
The Group’s Compliance department is now working on a Treating Customers Fairly management information pack pulling together specific measures that will demonstrate that we are consistently treating our customers fairly.
Employees 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 non-executive 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 Financial Times 50 Best Workplaces in the UK – we have been included in all five years of the publication, which has not yet been published for 2008.
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. In 2007, 85% of staff completed the survey (2006, 85%). Overall, the results continued to show that 91% of employees feel proud to be associated with Admiral, 82% feel that morale is high in their department and 89% feel that morale is high throughout the Company as a whole.
Environment The Group’s impact on the environment stems from its use of resources to run its offices in Cardiff and Swansea and its communications with customers. In addition, the Group now has operations in Spain, Germany and will launch in Italy later in 2008. It also operates a call centre in Halifax, Canada, which employs over 100 staff. 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 for energy use do not yet include overseas properties but travel to and from these businesses is included within the figures quoted in the table below. In 2008 reporting will be included by country.
The Group Company Secretary is responsible for the Group’s approach to its impact upon the environment and during 2007 steps were taken to ensure that systems were put in place to collect the information necessary to report fully on the Group’s UK operations.
· Measuring, monitoring and reporting on the key aspects of the Group’s environmental performance and regularly reviewing progress to reduce the amount of resources consumed per employee.
· 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).
Waste management: Total waste Waste to landfill Waste recycled 239,139 KG 128,278 KG 110,861 KG 46% recycled
Energy The main source of the Group’s carbon emissions is the consumption of electricity and gas for its three UK offices . The Cardiff head office is the older and least efficient , built in the 1960’s 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 third office is also located in Cardiff housing 130 staff.
During the last quarter of 2007 electricity supply to the Cardiff office was switched to ‘Green electricity’ which is defined in the The Renewables Obligation Order 2002 as the following types of electricity (in order of importance in 2006-07): landfill gas, On-shore wind, small Hydro <20 MW DNC, Co-firing of biomass with fossil fuel, Biomass, Off-shore wind, Sewage gas, Micro hydro, Biomass and waste using advanced conversion technology, Photovoltaics and Wave power.
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
Henry Engelhardt (50) Chief Executive Officer Henry is a founder Director of Admiral and was recruited by the Brockbank Group in 1991 to set up the Admiral business.
Margaret Johnson (49) Non-executive Director (A,R) Margaret was appointed Non-executive Director of the Company in September 2006. She is currently
Lucy Kellaway (48) Non-executive Director (N) Lucy joined the board as a Non-executive
Friends’ Provident Life Office between 1999 and 2001. Prior to that he was the Group
Group plc from 1992 to 1998, up to the date of its acquisition by Friends’ Provident Life
Office. Martin is also a Non-executive Director of IG Holdings plc, Homeserve GB Limited and
Keith James OBE (63) Non-executive Director (A, N) Keith was appointed a Non-executive Director in December 2002. He is Chairman of the
Eversheds LLP from June 1995 to April 2004. He was a Non-executive Director of Bank of Wales plc between 1988 and 2001 and AXA Insurance
John Sussens (62) Non-executive Director (R) John was appointed the Senior Independent
Chairman of the Remuneration Committee. He is also a Non-executive Director of Cookson plc, Phoenix IT Group Plc, and Anglo & Overseas
Group results and dividends The profit for the year, after tax but before dividends, amounted to £127.4m (2006: £103.7m).
Financial Instruments The objectives and policies for managing risks in relation to financial instruments held by the Group are set out in note 18 to the financial statements.
Directors and their interests The present Directors of the Company are shown on the inside cover of this report, whilst Directors’ interests in the share capital of the Company are set out in the remuneration report.
Employee policies Detailed information on the Group’s employment practices is set out in the Corporate responsibility report.
Additional information for shareholders Where not provided previously in this Directors' Report, the following provides the additional information required for shareholders as a result of the implementation of the Takeovers Directive into UK law.
On a show of hands at a general meeting of the Company every holder of shares present in person and entitled to vote shall have one vote and on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the general meeting specifies deadlines for exercising voting rights either by proxy notice or present in person or by proxy in relation to resolutions to be passed at general meeting. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the annual general meeting and published on the Company's website after the meeting.
The Company has not purchased any of its own shares during the period. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid.
There are a number of agreements that alter or terminate upon a change of control of the Company following a takeover bid, such as commercial contracts. None is considered to be significant in terms of their impact on the business of the Group as a whole except for the long-term co-insurance agreement in place with Great Lakes Resinsurance (UK) Plc. Details relating to this agreement are contained in the Financial Review.
Power to issue shares At the last annual general meeting, held on 16 May 2007, 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 29 April 2008 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 Cardiff City Hall, Cathays Park, Cardiff CF10 3ND on Tuesday 29 April 2008 at 2.00pm, 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 are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
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
Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and Corporate governance statement that comply with that law and those regulations.
We have audited the Group and Parent Company financial statements (the ‘’financial statements’’) of Admiral Group plc for the year ended 31 December 2007 which comprise the Group Income Statement, the Parent Company Profit and Loss Account, the Group and Parent Company Balance Sheets, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expenses and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (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 Directors' Report.
We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2003 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.
· the information given in the Directors’ Report is consistent with the financial statements.
Insurance claims and claims handling expenses recovered from reinsurers 72,816 29,327
Profit after tax attributable to equity holders of the Company 127,416 103,722
These financial statements were approved by the Board of Directors on 3 March 2008 and were signed on its behalf by: Kevin Chidwick Director
Adjustments for non-cash items: - Amortisation of software 725 446 - Unrealised gains on investments (1,123) (624)
Change in trade and other receivables, including from policyholders (14,772) (23,150)
IFRS 8 becomes effective for the period commencing 1 January 2009, whilst IFRIC 11 will become effective for the period commencing 1 January 2008. The application of either the standard or the interpretation would not have had a material impact on these financial statements.
The following IFRS have been adopted and applied by the Group for the first time in these financial statements: · IFRS 7 (Financial instruments: Disclosure); and
2. Critical accounting judgements and estimates Judgements: In applying the Group’s accounting policies as described in note 3, management has primarily applied judgement in the classification of the Groups 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.
Claims: Claims and claims handling expenses are charged as incurred, based on the estimated direct and indirect costs of settling all liabilities arising on events occurring up to the balance sheet date.
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.
Co-insurance: The Group has entered into certain coinsurance contracts under which insurance risks are shared on a proportional basis, with the co-insurer taking a specific percentage of each premium written and being responsible for the same proportion of each claim. As the contractual liability is several and not joint, neither the premiums nor claims relating to the co-insurance are included in the income statement. Under the terms of these agreements the co-insurers reimburse the Group for the same proportionate share of the costs of acquiring the business.
The classification and accounting treatment of acquisitions occurring before 1 January 2004 have not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004 due to the exemption available in IFRS 1 (First time adoption). In respect of acquisitions prior to 1 January 2004, goodwill is included at the transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP, which was tested for impairment at the transition date. On transition, amortisation of goodwill has ceased as required by IFRS.
The value in use calculations use cash flow projections based on financial budgets approved by management covering a three year period. Cash flows beyond this period are considered, but not included in the calculation. The discount rate applied to the cashflow projections in the value in use calculations is 10.3%, based on the Group’s weighted average cost of capital.
The key assumptions used in the value in use calculations are those regarding growth rates
and expected changes in pricing and expenses incurred during the period. Management estimates growth rates and changes in pricing based on past practices and expected future changes in the market.
h) Financial assets – investments and receivables Financial assets are 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 (FVTPL) at inception.
This designation is permitted under IAS 39, as the investments in money market funds are managed as a group of assets and internal performance evaluation of this group is conducted on a fair value basis.
Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised through the income statement. Receivables are stated at their historic cost (discounted if material) unless they are impaired. Impairment losses are recognised through the income statement.
n) 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.
Analysis of other administration and other marketing costs: Ancillary sales expenses 16,613 14,505
The gross amount of expenses, before recoveries from co-insurers and reinsurers is £167,773,000 (2006: £122,343,000). This amount can be reconciled to the total expenses and share scheme charges above of £81,957,000 (2006: £55,461,000) as follows: Gross expenses 167,773 122,343
Reconciliation of expenses related to insurance contracts to reported expense ratio: Insurance contract expenses from above 21,734 19,384
Analysis of fees paid to the auditor for other services: Tax services 85 45
Factors affecting the tax charge are: Profit before taxation 182,098 147,342
Adjustments in respect of prior year insurance technical provisions - 17
Tax charge for the period as above 54,682 43,620 14. Dividends
The dividends declared in March represent the final dividends paid in respect of the 2006 and 2005 financial years. Dividends declared in September are interim distributions in respect of 2007 and 2006.
Carrying amount: F in a n c ia l st a te m e n ts -
There are several key elements to the risk management environment throughout the Group. These are detailed in full in the corporate governance statement. Specific considerations for the risks arising from financial assets and liabilities are detailed below.
The funds are not permitted to have an average maturity greater than 60 days and hence are not subject to large movements in yield and value resulting from changes in market interest rates (as longer duration fixed income portfolios experience). Returns are likely to closely track the 7 day LIBID benchmark and hence while the Group’s investment return will vary according to market interest rates, the capital value of the investment funds will not be impacted by rate movements. The interest rate risk arising is therefore considered to be minimal.
Credit risk The Group defines credit risk as the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion.
Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, the Group only conducts business with companies of specified financial strength ratings. In addition, management also contract with certain reinsurers on a funds withheld basis, which substantially reduces credit risk.
The other principal form of credit risk is in respect of amounts due from policyholders due to the potential for default on credit card payments. The impact of this is mitigated by the large customer base and low average level of balance recoverable. There is also mitigation by the operation of numerous high and low level controls in this area, including payment on policy acceptance as opposed to inception and automated cancellation procedures for policies in default.
The Group may be exposed to foreign exchange risk through its expanding operations in Europe. However, given the relative size of the European operations, the risks are relatively small. Assets held to fund insurance liabilities are held in the currency of the liabilities.
A sensitivity analysis based on fluctuations in foreign exchange risk has not been presented on materiality grounds.
The Group has traditionally been strongly cash generative due to the large proportion of profit arising from non-underwriting activity. Further, as noted above, 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. Liquidity risk is therefore considered to be insignificant.
At Group level, capital is managed in conjunction with dividend policy. As noted in the financial review, the policy is to make distributions after taking into account capital that is required to be held for regulatory purposes, for expansion activities and also holding a general capital buffer £25m (2006: £25m). This policy gives the Directors flexibility in managing the capital requirements of the Group.
ii) Data driven pricing: The Group’s underwriting philosophy is focused on a sophisticated data-driven approach to pricing and underwriting and on exploiting the competitive advantages direct insurers enjoy over traditional insurers through: · Collating and analysing more comprehensive data from customers; · Tight control over the pricing guidelines in order to target profitable business sectors; and · Fast and flexible responsiveness to data analysis and market trends.
iii) Effective claims management: The Group adopts various claims management strategies designed to ensure that claims are paid at an appropriate level and to minimise the expenses associated with claims management. These include: · An effective, computerised workflow system (which along with the appropriate level of resources employed helps reduce the scope for error and avoids significant backlogs); · Use of an outbound telephone team to contact third parties aiming to minimise the potential claims costs and to ensure that more third parties utilise the Group approved repairers; · Use of sophisticated and innovative methods to check for fraudulent claims.
B) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2007 that would result from a 1 per cent change in the loss ratios used for each underwriting year for which material amounts remain outstanding.
D) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2007, 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.
Provision re-estimated as of: As re-estimated at 31 December 2007 97,850 119,625 149,317 192,283 -
E) Analysis of net claims provision releases: The following table analyses the impact of movements in prior year claims provisions, in terms of their net value, and their impact on the reported loss ratio. This data is presented on an underwriting year basis.
F) Reconciliation of movement in net claims provision: Net claims provision at start of period 154,711 128,631
G) Reconciliation of movement in net unearned premium provision: Net unearned premium provision at start of period 65,025 71,333
Analysis of finance lease liabilities: At 31 December 2007 At 31 December 2006
The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax (asset) / liability: 31 December 2007
Deferred tax (asset) / liability at end of period (1,629) 981
Authorised: Issued, called up and fully paid: During 2007, 1,534,827 new ordinary shares of 0.1p were issued to the trusts administering the Group’s share schemes.
570,827 of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of this share scheme. These shares are entitled to receive dividends.
(i) The Approved Share Incentive Plan (the SIP) Eligible employees qualify for awards under the SIP based upon the performance of the Group in each half-year against budget. 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).
Individual awards are calculated based on the growth in the Group'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.
Retained profit for the period - - - - 103,722 103,722
Retained profit for the period - - - - 127,416 127,416
In addition, the Group had contracted to spend the following on property, plant and equipment at the end of each period: Expenditure contracted to 489 1,539 28. Group subsidiary companies The Parent Company’s principal subsidiaries (all of which are 100% directly owned) are as follows: Subsidiary Country of incorporation Class of shares held Principal activity
Consolidated financial summary The 2007, 2006, 2005 and 2004 figures below are as stated in the financial statements preceding this financial summary and issued previously. Only selected lines from the income statement and balance sheet have been included.
Provisions for other liabilities and charges - - - - 11.7
The Parent Company audit fee is not disclosed in these accounts as it is disclosed in the consolidated Group accounts, which precede them at note 10.
Retained profit for the period - - - 107,052 107,052 9. Share capital
D i r e c t o r s A n D A D v i s o r s A D M i r A L G r o U P p l c