Citigroup Financial Markets UK Equity Limited Citigroup Centre 33 Canada Square London E14 5LB
The Group’s first brand, set up in 1993 – mainly targeting those who traditionally pay higher than average premiums, including drivers under-35 and those living in big cities. admiral.com
AdmiralDirekt is the Group's second overseas brand and launched in Germany in 2007. admiraldirekt.de
Bell was set up in 1997 – its main target market being drivers with zero or low no claims bonus. bell.co.uk
Diamond was created for women in response to a need in the market place for insurance specifically for young women drivers, which is not only good value, but also as hassle free as possible. diamond.co.uk
Fu ll ye ar d iv id en d pe r s ha re £0.
I ended my statement last year by saying that our strategy remained clear and straightforward – to continue to grow our share of the UK direct private motor market, maximising the value derived from each customer relationship, whilst also identifying profitable opportunities, in particular our expansion overseas, to exploit the knowledge, skills and resources attaching to our core business. As Henry Engelhardt sets out in detail in his statement, 2007 was a year in which the Group made significant progress in that strategic direction.
During the year we announced that we had entered discussions with potential private equity investors regarding the sale of a minority interest in our price comparison business, Confused.com. Having, however, understood in detail the implications of such an investment for the flexibility of Confused’s ongoing management, the Board determined that taking such a step would materially constrain our ability to maximise Confused’s contribution to the Group in the medium to long term. We, therefore, determined that it was in our shareholders’ best interests to terminate the discussions and retain a 100% interest in Confused. We will continue our strategy of maintaining Confused’s strong market position in car insurance price comparison and developing its potential to extend into price comparison within other product areas. 2007 was another very successful year for Confused, profits growing by 59% to £37million. As we have said previously, there is growing competition in this sector and we will continue to work hard to defend our leadership position in this rapidly expanding market.
In a strongly competitive market we are pleased to be able to announce a 24% increase in Group pre-tax profits to £182million off an 11% growth in total written premiums. Taking into account the increased solvency capital required by the higher underwriting retained in 2008, this allows us to lift our dividends for the year by 22% to 43.8p per share (23.2p final: 20.6p interim).
Alignment of the interests of our staff and our shareholders is one of our core principles. Our Free Share Schemes are designed to strengthen that alignment over time. We are delighted that strong out-performance against our plan during 2007 resulted in eligible employees once again realising the maximum award of £3,000 free shares under our Approved Scheme. The 2007 financial year marked the end of the first 3-year period for the Discretionary Free Share Scheme. A 54.8% outperformance of growth in earnings per share over and above the risk-free return qualified the scheme to vest the maximum share entitlement under the individual awards. Following the 2007 awards there are now 1,645 employees participating in the Discretionary Free Share Scheme, itself consistent with our philosophy of achievement through teamwork.
But I won’t. Why was it a good year? Well, the Group made more money than ever before. A lot more. We made more money by serving more customers than ever before, which resulted in a larger turnover than ever before. All these new records were set within the context of a challenging, highly competitive environment.
The list of achievements: · Profit before tax up 24% to £182m; · Number of customers up 16% to 1.5m; · Net revenue up 17% to £364m; · Turnover* up 16% to £825m; · Confused record pre-tax profit of £37m on 13m quotes; · Combined ratio improved to 85% from 87%; · Top 10 in the FT Best Companies To Work For; 57th in The Sunday Times Best Companies To Work For in the UK; · Invested in Balumba in Spain where we ended the year with 47,000 customers and £16.6m turnover; · Invested in AdmiralDirekt.de, our new operation in Germany that launched on October 16 and had 9,000 customers on January 1, 2008; · Began investing in an operation in Italy which is planned to launch in 2008.
So the market is moving, keeping up with claims inflation, but will we see a definitive improvement in results? It looks like the market has found the corner and is, well, considering turning. But it hasn’t quite turned yet. It is somewhat reminiscent of what happened in 1997-98-99 (showing my age). In 1997 the market moved up, maybe a bit faster than claims costs but in 1998 the market failed to follow through on those increases, leading to a combined ratio in excess of 120%. Only in 1999 did the market start to move in earnest. 1997 – 98 was something of a false dawn, which we might see again in the 2007 – 08 years.
According to Deloitte, the UK market average pure year combined ratio for 2006 (latest data available) was 113%, again confirming the UK’s status as one of (if not the) most competitive car insurance markets in the world; a market where companies are willing to subsidise consumers. This is the true power of a free market. For those that think regulation is the key to lower prices, just look at the UK. Strange as it might seem, collectively UK Insurers seem happy to subsidise consumers, not once in a while, but for years on end.
As we are fond of saying: Admiral’s different. We actually are not keen to subsidise consumers. We’re very happy to offer a precise rate for every risk and give a great service to every customer, but we believe we should do these things without making a loss ourselves. The sustainable way to offer consumers lower rates is to operate more efficiently than the competition.
This philosophy manifests itself in our advantage over the market in both claims ratio and loss ratio in the UK. Our UK loss ratio for the year was 66.7% and our expense ratio was 16.7% for a combined ratio of 83.4%. On a comparable basis Deloitte predicts that the market loss ratio will be 79% and the expense ratio will be 28%, resulting in a combined ratio, including releases, of 107%.
In addition to a combined ratio more than 20 points better than the market average, we also grew the business. Our UK turnover increased by 14% (£708m to £808m) and the number of vehicles we insure rose 13% (1.28m to 1.44m).
Changing Distribution: The Growth of Price Comparison However, when one bemoans the effect of price comparison sites on the market keep in mind that the leader in car insurance price comparison is our own Confused.com.
Confused had it rather cosy for a number of years, amassing a market share of some 65%. But we predicted back in March 2006 that this market would be a competition magnet and we’ve only been surprised at how long it took for the competition to materialise. But materialise it has!
Confused.com £20.4m £36.7m Sources - 1985 - 1991 ML Research 1991 - 2004 Deloitte analysis of UK motor 2005 - 2006 Deloitte analysis of UK Private motor
Given the development of the price comparison sector, it is not surprising that Confused’s market share declined during 2007. However, this decline has been into a growing market and as a result its quote and sale volumes have held up rather well. We accept that some erosion of share is unavoidable in the short term but, as we’ve said previously, we will spend money to defend our market-leading position.
Balumba’s combined ratio totalled 232%, with a loss ratio of 141% and an expense ratio of 91%. The ratio of expenses to premium written during the year was 50%, a very credible figure. Balumba’s result was helped by contribution from ancillary products.
The launch in Germany, some 50 weeks after the launch in Spain, was very satisfying. Most of the German market renews its car insurance on January 1. In addition, consumers have to give their insurers one month notice if they are planning to switch. So the window for attracting new business is about 8 weeks long, from early October through early December.
Once again, the key test was marketing. And, once again, we were pleased by the results. AdmiralDirekt.de made 9,000 sales with income of £1.7m, all with a policy start date of January 1, 2008. Lo and behold, the first claim occurred the morning of January 2, 2008, when one of our customers hit a boar at 5:30 a.m. I suspect this will be a first claim not soon forgotten!
Gladiator grows and we begin to take calls in Canada Other notable accomplishments during the year include the growth in customer numbers of Gladiator Commercial and the creation of a call centre in Halifax, Nova Scotia primarily to handle evening calls from the UK.
This is a very exciting time for the Admiral Group and we’re looking forward to another great year in 2008.
Key financial highlights Group profit before tax again grew strongly in 2007 – moving up 24% to £182.1m from £147.3m last year. Earnings per share grew 22% to 48.6p from 39.8p.
Within the overall increase of 16%, UK vehicles insured grew by 11½%, and Gladiator grew by 47%. Balumba increased its customer base to end the year at 47,000 (having ended 2006, two months after launch with around 2,200)
October 2007 saw the successful launch of AdmiralDirekt.de – the Group’s German car insurer, based in Cologne. In the relatively short period before the end of the year, AdmiralDirekt sold 9,000 policies, generating around £1.7m in premium and ancillary income. Cover for these risks started 1 January 2008.
Ancillary and other net income 91,517 1,846 93,363 79,186 76 79,262
Share scheme, pre-launch and other charges (4,534) (1,408) (5,942) (2,782) (495) (3,277)
Europe figures include the results of Balumba in Spain, and set up and pre-launch costs relating to AdmiralDirekt (Germany) and the Italian business.
Turnover, comprising total premiums written (including premium underwritten by co-insurers), gross other income and net investment return (as a measure of the combined size of the Group’s businesses) continued to grow strongly: UK GROUP
A reconciliation of turnover to figures appearing in the income statement is shown at the end of this review.
Overall growth of 16% was made up of an 11% increase in total premium, a 34% rise in other revenue (predominantly ancillary income and Confused.com revenue) and a 69% increase in investment return after a disappointing investment year in 2006. Net revenue in the income statement increased by 17% to £364m.
Balumba (providing all the European figures above) contributed 2% of total Group turnover.
The Group also retains 35% of the risks generated by Balumba in Spain and AdmiralDirekt in Germany, with 65% being reinsured.
Vehicle growth exceeded premium growth due in part to lower average premiums in Spain and also in the UK due to mix effects. As noted above, German motor risks sold in the latter part of 2007 do not incept until 2008 and are not included in the premium or results.
Positive development of prior year reserves continued, and the 2007 result includes releases of almost £30m (up from £21m last year) – improving the loss ratio by around 21 percentage points. The pure year loss ratio (including Balumba) declined to 88% from 86% in 2006.
As a consequence, the Group’s combined ratio improved by two points to 85% (87% in 2006). Taken together with the increase in premiums, this resulted in a 32% rise in underwriting profits, to £37.5m from £28.4m.
Around £20.4m was recognised in 2007, which is £0.5m higher than 2006, although as reported last year, the 2006 total included £2.0m relating to earlier year contracts (£0.5m in 2007).
Ancillary profit & instalment income This is primarily made up of commissions and fees earned on sales of insurance products and services complementing the motor policy, but which are underwritten by external parties. It continues to be a major component of Group profit.
Net ancillary contribution increased by 16% in 2007 to £78m from £67m, broadly in line with the growth in vehicles insured. Gross UK ancillary income per average active vehicle was £69 for both years, with no notable change in the component elements. Balumba has also been successful in selling ancillary products, with income per policy sold of around £45.
Gladiator offered 230,000 quotes in 2007, up 68% on last year. Increased investment in new business growth meant that Gladiator’s net margin reduced to 27% from 34% in 2006.
Confused enjoyed another year of significant growth in 2007. Increased media activity (along with the return of large numbers of previous visitors to the site) led to an increase in the total number of insurance quotes provided by Confused of 43%, to 13.0m from 9.1m in 2006. Revenue increased by 81% to £69.2m from £38.5m.
As noted in the Chief Executive’s statement, Confused faced a significant increase in the level of competition in the motor insurance price comparison market during 2007. In spite of this, Confused maintained its position as market leader. Advertising spend by the main competitors in this market has grown substantially over the past year and continues to grow into 2008.
The Group’s Italian motor insurer is expected to launch later in the year. The business, based in Rome, is making made good progress towards launch in all the key areas (management team, premises, IT system, pricing and marketing).
Taxation The taxation charge reported in the income statement is £54.7m (2006: £43.6m) representing 30.0% of pre-tax profit (2006: 29.6%).
Refer to note 13 to the financial statements for further detail on taxation.
Dividends The Directors propose a final dividend for 2007 of 23.2p per share, which is made up of 11.6p per share normal element, plus 11.6p per share special distribution based on the Group’s resources at the end of the year.
The total distribution for 2007 will be 43.8p per share – up 21% on the 36.1p declared in 2006.
The Combined Code on Corporate Governance This report explains key features of the Group’s governance structure, how it applies the principles set out in the revised Combined Code on Corporate Governance (the ‘Code’), and the extent to which the Company has complied with the provisions of the Code.
The Admiral Group Board The Board is the principal decision making forum for the Group providing leadership either directly or through its Committees of Directors and delegated authority. It is responsible to shareholders for setting and achieving its strategic objectives and for its financial and operational performance. The Board has adopted a formal schedule of matters specifically reserved to it including corporate strategy, approval of budgets and financial results, policies in relation to risk management, health and safety and environmental matters, new Board appointments, proposals for dividend payments and the approval of major transactions. This schedule is reviewed on an annual basis and was last reviewed on 30 January 2008.
The Board met on eight occasions in 2007. In addition the Board held a strategy day and visited its operations in Germany. Agendas and papers are circulated to the Board in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time. All Directors are, therefore, able to bring independent judgement to bear on issues such as strategy, performance, and resources. Additional meetings are called when required and there is frequent contact between meetings, where necessary, to progress the Company’s business.
The number of full Board meetings and Committee meetings attended by each Director during 2007 is provided in the table below.
This induction is supplemented by visits to the Group’s head office in Cardiff and meetings with members of the senior management team and their departments. Throughout their period in office the Directors are regularly updated on the Group’s business; legal matters concerning their role and duties; the competitive environments in which the Group operates; and any other significant changes affecting the Group and the industry in which it operates.
The Chairmen of the Audit, Remuneration and Nominations Committees attend the Company’s Annual General Meeting along with other Directors, and are available to answer shareholders’ questions on the activities of the Committees they chair.
Board Committees The principal Committees of the Board - Audit, Remuneration and Nominations - all comply fully with the requirements of the Combined Code. They are all chaired by an independent Director and exclusively comprise, or, in the case of the Nominations Committee (where the Chairman of the Board is a member), have a majority of, independent Directors. The Committees are constituted with appropriate written terms of reference that are reviewed annually and minutes of the Committee meetings are circulated to the Board.
The Audit Committee Constitution and membership The membership at the year-end was Martin Jackson (Chairman), Keith James, and Margaret Johnson. The Company Secretary acts as Secretary to the Committee. Appointments to the Committee are for a period of up to three years, which may be extended for two further three year periods, provided the Director remains independent. The Committee meets at least three times per year and has an agenda linked to events in the Company’s financial calendar.
· Reports from the external auditors on their audit, proposed audit scope, fees and auditor independence; · Performance of the internal audit department through self assessment (the internal audit department is subject to external assessment once every five years); · The Group’s ‘whistleblowing’ procedures.
The Committee adopted a policy on non-audit services that, amongst other things, requires that the Committee approve all proposals for expenditure of over £30,000 on non-audit services. The policy was last reviewed on 28 November 2007. The Group’s auditors, KPMG Audit plc, provide some non-audit services, the majority of which comprise compliance services on the various taxation issues within the Group, and which are not considered by the Committee to compromise their independence as auditors. In addition, the Committee reviewed the fees with respect to VAT services in relation to the Group’s Gibraltan insurance Company and agreed that the work carried out did not compromise the auditor’s independence. The level of non-audit fees is reviewed at each Committee meeting and details are included in note 10 of the Report and Accounts.
During the year, the Committee received a presentation from the Group’s external actuaries, Ernst & Young, on reserving methodologies used in assessing the Group’s claims reserves.
The Committee also approves the annual compliance review plan and receives copies of these reports. The Group’s Company Secretary, who has responsibility for the Compliance and Risk management functions, provides the Committee with a quarterly Compliance Officer’s report summarising the activities in this area.
The Nominations Committee The membership at the year-end was Keith James (Chairman), Lucy Kellaway and Alastair Lyons. The Company Secretary acts as Secretary to the Committee. The Committee normally invites the Chief Executive to attend meetings.
The Committee has formal terms of reference, which were last reviewed on 22 November 2007. The Committee met on two occasions during 2007.
During 2007, the Committee advised the Executive team on the expectations for succession planning. Planning for the most senior management positions was formerly in place but below this, succession planning within the Group was not well documented. The People Services Manager has started a process of documenting and improving the approach taken by the Group to assess and monitor succession planning throughout the Group.
· Reviewed the Group’s overall remuneration policy and strategy; · Recommended for approval individual remuneration packages for Executive Directors, and Company Secretary; · Reviewed the rules and performance measures of the Group share schemes and recommended for approval the grant, award, allocation or issue of shares under such schemes.
The Committee did not use the services of any external consultants during the year but did receive reports produced by various external agencies to enable it to make judgements on the levels of remuneration for the Directors and to review the remuneration of the Group’s senior executives.
The Board is of the view that there is an ongoing process for identifying, evaluating and managing the Group’s internal controls; that it has been in place for the year ended 31 December 2007; and that, up to the date of approval of the annual report and accounts, it is regularly reviewed by the Board and accords with the internal control guidance for Directors provided in the Code.
A key element of the control system is that the Board meets regularly with a formal schedule of matters reserved to it for decision and has put in place an organisational structure with clearly defined lines of responsibility.
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 RMC 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 Audit Committee’s ability to provide the appropriate assurance to the Board depends on the provision of periodic and independent confirmation, primarily by Internal Audit, that the controls established by management are operating effectively. The Audit Committee reviews the wider aspects of internal control and risk management, providing a high level challenge to the steps being taken to implement the risk management strategy.
The Board confirms that there were no significant issues arising during the year under review.
One of the Committee’s principal responsibilities is to ensure that the risk management policy approved by the Board is implemented throughout the Group.
The Committee has formal terms of reference and is required to manage regulatory issues, assess and monitoring reinsurance protection, and ensure that a risk management strategy is effectively employed by the Group. The Committee meets around 8 times a year and each Committee member receives an agenda and papers in a timely manner allowing the Committee to make informed decisions and actions.
Remuneration Committee The Committee is appointed by the Board and comprises only Non-executive Directors. The Committee is chaired by John Sussens, the Senior Independent Non-executive Director, with the other members being Martin Jackson and Margaret Johnson. The Chairman and Chief Executive are invited to meetings where the Committee considers it appropriate to obtain their advice on the matters under review. During the year ended 31 December 2007, the Committee met on five separate occasions. Its remit includes recommending the remuneration of the Chairman, the Executive Directors, and the Company Secretary; review of the remuneration of senior management; review of the awards made under the performance related incentive schemes.
The Committee’s terms of reference, which are reviewed at least annually and approved by the Board, are available on the Group’s corporate website and are summarised in the Corporate Governance Report.
· Performance linked – A significant part of Executive Directors’ and senior managers’ reward is determined by the Group’s earnings growth. Failure to achieve threshold levels of growth in the Group’s earnings results in reduced or no payout under the Group’s Long-term incentive plan.
· Shareholder aligned – A considerable part of the reward is related to the growth in earnings versus LIBOR. Executive Directors have agreed to retain a minimum shareholding equal to at least 100% of base salary which can be built up over a period of five years from the date of appointment.
· Death in Service scheme, paying three times salary available to all employees following completion of their probationary period.
· Group Personal Pension Plan, matching employee contributions up to a maximum 6% of base salary with a total annual cap of £4,800. Available to all employees with one year’s service.
· Private Medical Cover, available to approximately 100 management level staff. · Permanent Health Insurance policy covering the same staff who are eligible for Private
· Approved Free Share Incentive Plan (SIP). The SIP is available to all staff (Henry Engelhardt and David Stevens have declined to be included in the plan). The maximum annual award under the SIP is £3,000 per employee. Shares awarded under the SIP are forfeited if the employee leaves within three years of the award. Awards are made twice a year, based on the results of each half-year. During 2005, 2006 and 2007 the Group’s results have meant that qualifying staff have received maximum awards in each year.
· Discretionary Free Share Scheme (DFSS). Awards under the DFSS are distributed on a wider basis than most plans of this type. The Committee believes that as the DFSS develops and awards begin to vest in 2008, it will have the effect of reducing staff attrition and creating a definite alignment of the interests of staff and shareholders.
Of the Group’s current Executive Directors, only Kevin Chidwick (Finance Director) participates in this scheme.
The performance criterion in determining how many shares vest under the DFSS is the growth in earnings per share (EPS) in excess of a risk free return, defined as average 3-month LIBOR, over a three-year period. The Committee feels that this is a good indicator of long-term shareholder return with which to align staff incentivisation. The Committee recommends for approval by the Board awards to the Finance Director and other employees under the DFSS. The EPS targets are such that for full vesting of shares to occur, the average EPS growth over the three-year performance period would have to be approximately 16% per annum (assuming LIBOR averages 5% over the period). Only 10% of shares vest for matching LIBOR over the three-year period. The plan allows for a maximum award of £400,000 or 600% of basic salary if lower.
The Committee determines the fees for the Chairman of the Board after consultation with the Executive Directors and review of market data. The fees of the Chairman were not subject to review in 2007. The Chairman waives 25% of his fee.
Executive Directors’ remuneration Two of the three Executive Directors (Henry Engelhardt and David Stevens) are founding Directors. They and the Committee continue to hold the view that the significant shareholdings held by them provide a sufficient alignment of their interest in the performance of the Group with the interests of other shareholders.
The Committee aims to ensure that the remuneration of the Finance Director is fair and in total, in-line with market rates, and is designed to provide rewards for achieving increases in shareholder value.
Keith James 3 years commencing 1 December 2006, terminable by either party giving one months’ written notice.
Expected time commitment (in days) for the Board and Committees: Audit Remuneration Nominations
Fees payable (£’000) with respect to Board and Committee membership are as follows: Audit Remuneration Nominations
Total Shareholder Return (TSR) The following graph sets out a comparison of Total Shareholder Return for Admiral Group plc shares with that of the FTSE 350 Index, of which the Company is a constituent. The graph measures the period from the commencement of conditional trading on 23 September 2004 up to 31 December 2007. TSR is defined as the percentage change over the period, assuming reinvestment of income.
A d mir a l G ro u p PL C FTSE 3 50
Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07
Directors’ remuneration - Audited Remuneration for the year ended 31 December 2007 was as follows: Base salary and fees
The Admiral Group is committed to dealing fairly and with a high level of integrity with all its stakeholders. The corporate responsibility report sets out our approach and the way we measure our success in dealing with each group of stakeholders: Customers The Group has always regarded its customers as central to the success of the business. As at 31 December 2007 the Group insured 1.5m vehicles, up 16% from 1.3m the year before. We focus on open communication with our customers providing high standards of service at all points in the customer cycle from new business, customer service, renewals, claims and complaints. The Group's commitment to quality is demonstrated through its Quality Measures Programme. Everyone in the organisation has a part to play in ensuring a high standard of quality. Every department in the Group has a unique set of quality measures to gauge performance.. The measures are updated each year to challenge staff to make continual improvements. The programme is reported every month in the internal Company magazine and awards are presented each year for the best departments. The annual measures bonus provides a financial incentive for staff to drive incremental change throughout the business and was paid out in full for the 2007 year.
The Sunday Times 100 Best Companies to Work For – Admiral has been included in all eight years of the publication and was ranked 57th overall in the last list published.
* Individual positions within the top 10 were not provided in 2007.
The survey results are split down by department and each manager is expected to share the survey results with their team, explore issues and concerns, and then make recommendations to address them.
Community Admiral has adopted a charitable giving policy, which supports the local communities in which its employees live and work. During 2007, 110 local organisations were helped with a total donation of £25,000.
· Raising and maintaining staff awareness of, and ensuring that employees are actively engaged in, activities to reduce the impact of the Group’s operations on the environment.
Admiral sponsored Champion Child of Courage Award Custard pie throwing for charity
Travel Car miles Rail miles Air Miles 118 miles per employee 90 miles per employee 474 miles per employee * The figures above are for the Group’s UK operations.
During the year the Group started purchasing re-cycled paper for all internal use and is investigating sources of recycled paper for communications with customers.
Alastair Lyons CBE (54) Chairman (N) Alastair was appointed Chairman of the Company in July 2000. He is also Executive Chairman of
Accountants, he was awarded the CBE in the 2001 Birthday Honours for services to social security.
Kevin Chidwick (44) Finance Director Kevin is responsible for finance, information technology, facilities and investments. He joined Admiral in 2005, becoming a Director in
He has substantial experience in direct response financial services in the United Kingdom, United
Manfred Aldag (57) Non-executive Director (N) Manfred was appointed a Non-executive
Director of the Company in 2003 as a representative of Munich Re. He graduated from University of Essen and has a degree in
Director in September 2006. She is the management columnist on the Financial Times and author of various books. In 20 years on the FT she has been oil correspondent, a Lex columnist and Brussels correspondent.
He was the Group Managing Director of Misys plc between 1998 and May 2004 having been on the Board of the Company since 1989. Prior to joining Misys, he was Manufacturing Director at
The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2007.
Business review The Company is the holding Company for the Admiral Group of companies. The Group’s principal activity continues to be the selling and administration of private motor insurance and related products.
The information that fulfils the requirements of the Business review, as required by Section 234 ZZB of the Companies Act 1985, and which should be treated as forming part of this report by reference are included in the following sections of the annual report: · Chairman’s statement.
The Directors declared and paid dividends of £116.0m during 2007 (2006: £70.1m) – refer to note 14 for further details.
The Directors are proposing a final dividend of £60.9m (23.2p per share), payable on 7th May 2008.
Charitable and political donations During the year the Group donated £87,000 (2006: £38,000) to various local and national charities. The Group has never made political donations. Refer to the corporate responsibility report for further detail.
Creditor payment policy It is the policy of the Group to pay all purchase invoices by their due date, and appropriate quality measures are in place to monitor and encourage this. At the end of the year outstanding invoices represented 15 days purchases (2006: 18).
At 31 December 2007, the Company's issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital and shares issued during the year can be found in note 25.
There are no restrictions on the transfer of ordinary shares in the Company other than: · certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws) and: · pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the Company require the approval of the Company to deal in the Company's securities.
Appointments of Directors The Company’s Articles of Association (“the Articles”) give the Directors power to appoint and replace Directors. Under the terms of reference of the Nominations Committee, any appointment must be recommended by the Nominations Committee for approval by the Board of Directors. The Articles also require Directors to retire and submit themselves for election at the first annual general meeting following appointment and all Directors who held office at the time of the two preceding annual general meeting, to submit themselves for re-election.
The Parent Company financial statements are required by law to give a true and fair view of the state of affairs of the Parent Company.
· for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU
· for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chairman’s statements, the Chief Executive’s statement and the financial review that is cross referred from the business review section of the Directors’ Report.
We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
Opinion In our opinion: · the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 31 December 2007 and of its profit for the year then ended; · the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; · the Parent Company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Parent Company’s affairs as at 31 December 2007 and of its profit for the year then ended; · the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and
Cash flows from operating activities, before movements in investments 213,167 183,763
Net cash flow into investments held at fair value (76,849) (1,073)
Cash flows from operating activities, net of movements in investments 136,318 182,690
Cash flows from investing activities: Purchases of property, plant and equipment and software (5,390) (6,046)
Cash and cash equivalents at end of period 21 155,773 191,242
1. General information and basis of preparation Admiral Group plc is a Company incorporated in England and Wales. Its registered office is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares are listed on the London Stock Exchange.
The financial statements comprise the results and balances of the Company and its subsidiaries (together referred to as the Group) for the year ended 31 December 2007 and comparative figures for the year ended 31 December 2006. The financial statements of the Company’s subsidiaries are consolidated in the Group financial statements. The Company controls 100% of the voting share capital of all its subsidiaries. The Parent Company financial statements present information about the Company as a separate entity and not about its Group. In accordance with International Accounting Standard (IAS) 24, transactions or balances between Group companies that have been eliminated on consolidation are not reported as related party transactions.
The Group has applied all adopted IFRS and interpretations endorsed by the EU at 31 December 2007, including all amendments to extant standards that are not effective until later accounting periods, except for those listed below: · IFRS 8 (Operating Segments); and
There are a number of standards, amendments to standards and interpretations that were issued by 31 December 2007 but have yet to be endorsed by the EU. Of these, only the amendment to IAS 1 (Presentation of financial statements: a revised presentation) is expected to have any impact on the Group’s financial statements. This amendment introduces a number of changes to the primary financial statements, but does not change the recognition, measurement or disclosure of transactions or events that are required by other IFRS.
Revenue from Gladiator Commercial and Confused.com: Commission from these activities is credited to income on the sale of the underlying insurance policy.
Management classify the private motor insurance underwriting and private motor insurance ancillary income results as one business segment (private motor insurance). This is because although the results are distinguishable between underwriting and non-underwriting, the activities carried out in generating the income are not independent of each other and are carried on as one business. This mirrors the approach in management reporting.
c) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in thousands of pounds sterling, which is the Group’s presentation currency.
The benefits to which the Group is entitled under these contracts are held as reinsurance assets.
The Goodwill held on the balance sheet at 31 December 2007 is allocated solely to the private motor insurance segment.
Software: Purchased software is recognised as an intangible asset and amortised over its expected useful life (generally between two and four years). The carrying value is reviewed every six months for evidence of impairment, with the value being written down if any impairment exists. Impairment may be reversed if conditions subsequently improve.
Impairment of property, plant and equipment In the case of property plant and equipment, carrying values are reviewed at each balance sheet date to determine whether there are any indications of impairment. If any such indications exist, the asset’s recoverable amount is estimated and compared to the carrying value. The carrying value is the higher of the net realisable value and the asset’s value in use. Impairment losses are recognised through the income statement.
k) Loans and borrowings Interest bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing loans and borrowings are stated at amortised cost with
l) Employee benefits Pensions: The Group contributes to a number of defined contribution personal pension plans for its employees. The contributions payable to these schemes are charged in the accounting period to which they relate.
The total charge expensed over the vesting period is determined by reference to the fair value of the free shares granted as determined at the grant date (excluding the impact of non-market vesting conditions). Non-market conditions such as profitability targets as well as staff attrition rates are included in assumptions over the number of free shares to vest under the applicable scheme.
Deferred tax: Deferred tax is provided in full using the balance sheet liability method, providing for temporary differences arising between the carrying amount of assets and liabilities for accounting purposes, and the amounts used for taxation purposes. It is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
The principal temporary differences arise from depreciation of property and equipment, share scheme charges and the tax treatment of Lloyd’s profits. The resulting deferred tax is charged or credited in the income statement, except in relation to share scheme charges where the amount of tax benefit credited to the income statement is limited to an equivalent credit calculated on the accounting charge. Any excess is recognised directly in equity.
4. Segment reporting Revenue and results for the year ended 31 December 2007, split by business segment are shown below. Consolidation adjustments represent the elimination of inter-segment trading, specifically interest charged on inter-company loans.
As noted above, the Directors consider there to be two business segments. These are private motor insurance and insurance broking (Confused.com and Gladiator Commercial). No geographical business split has been presented as the results of the Group’s European operations are not material to the 2007 figures.
Other segment items : The segment assets and liabilities at 31 December 2007 and capital expenditure for the year are as follows. Consolidation adjustments represent the elimination of inter-company balances.
Revenue and results for the corresponding business segments for the year ended 31 December 2006 are reported below.
Total liabilities excluding current and deferred tax balances 506,426 5,071 (1,935) 509,562
Total investment and interest income 24,572 14,464 9. Expenses and share scheme charges
Administration and other marketing costs 13,314 57,252 70,566 12,009 35,144 47,153
Total expenses and share scheme charges 21,734 60,223 81,957 19,384 36,077 55,461
The £13,314,000 (2006: £12,009,000) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Included in profit, before co-insurance arrangements are the following: Social security charges 6,231 3,337
Operating lease rentals: Auditor’s remuneration: - Fees payable for the audit of the Company’s annual accounts 25 19 - Fees payable for the audit of the Company’s subsidiary accounts 169 154 - Fees payable for other services 85 60
Over provision relating to prior periods – corporation tax (87) (648)
(Over) / Under provision relating to prior periods – deferred tax (3) 87
Dividends were declared and paid as follows: March 2006 (14.9p per share, paid May 2006) - 38,667
A final dividend of 23.2p per share has been proposed in respect of the 2007 financial year. Refer to the Chairman’s statement and financial review for further detail.
The difference between the basic and diluted number of shares at the end of 2007 (being 310,000) relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note 25 for further detail.
The net book value of assets held under finance leases is as follows: Computer equipment 2,149 2,996 17. Intangible assets
The Group’s financial instruments can be analysed as follows: Financial assets and liabilities £000 £000
All investments held at fair value are invested in AAA-rated money market liquidity funds. These funds (spread across three very large providers) target a 7day LIBID return with capital security and low volatility and continue to achieve these goals.
Objectives, policies and procedures for managing financial assets and liabilities The Group’s activities expose it primarily to the significant financial risks of credit risk, liquidity risk, interest rate risk and foreign exchange risk. The Board of Directors has delegated the task of supervising risk management and internal control to the Risk Management Committee (RMC). There is also an Investment Committee that makes recommendations to the Board on the Group’s investment strategy.
Interest rate risk The Group considers interest rate risk to be the risk that unfavourable movements in interest rates could adversely impact on the capital values of financial assets and liabilities. This relates primarily to investments held at fair value.
The Group has a policy of investing in AAA-rated money market liquidity funds, which invest in a mixture of very short dated fixed and variable rate securities, such as certificates of deposits, floating rate notes and other commercial paper.
Although the Group had no financial liabilities at 31 December 2007 or 31 December 2006, it currently holds a facility of £30m which allows it to draw down interest bearing borrowings on
demand. Any such borrowings would be subject to variable interest rate changes, at LIBOR plus a margin. However the Group has not held any drawn down amounts on this facility since 2005.
The fair value of receivables from policyholders represents the maximum exposure to credit risk. The Group does not use credit derivatives or similar instruments to mitigate exposure. The amount of bad debt expense relating to policyholder debt charged to the income statement in 2006 and 2007 is insignificant.
There are no specific concentrations of credit risk with respect to investment counterparties due to the structure of the liquidity funds which invest in a wide range of very short duration, high quality securities.
There were no significant financial assets that were past due at the close of either 2007 or 2006.
Objectives, policies and procedures for managing capital The Group manages its capital to ensure that all entities within the Group are able to continue as going concerns and also to ensure that regulated entities meet regulatory requirements Excess capital above these levels within subsidiaries is paid up to the Group holding Company in the form of dividends on a regular basis.
The Group’s capital is all in equity form, with no debt.
External capital requirements The Group’s business is subject to regulatory and solvency requirements in two main jurisdictions: Admiral Insurance (Gibraltar) Limited is the only subsidiary incorporated outside the UK. It is an insurance Company registered in Gibraltar and is regulated by the Commissioner of Insurance of the Gibraltar Financial Services Commission (FSC).
All other subsidiaries as detailed in Note 29 are incorporated in the UK and most are subject to the regulatory regime of the Financial Services Authority (FSA).
A) Objectives. policies and procedures for the management of insurance risk: The Group is involved in issuing motor insurance contracts that transfer risk from policyholders to the Group and its underwriting partners.
The Board of Directors is responsible for the management of insurance risk, although as mentioned in note 18, it has delegated the task of supervising risk management to the RMC.
A number of the key elements of these policies and procedures are detailed below: i) Co-insurance and reinsurance: As noted in the underwriting structure section of the financial review above, the Group passes out a significant amount of the motor insurance business written to external underwriters. In 2007, 60% of the risk was shared under a co-insurance contract, under which the primary risk is borne by the co-insurer.
Gross amounts: Gross claims provision as originally estimated 115,169 142,968 170,216 202,421 242,576
Net amounts: Net claims provision as originally estimated 75,549 98,120 128,631 154,711 166,521
Provision re-estimated as of: As re-estimated at 31 December 2007 61,620 82,004 111,964 146,435 -
Underwriting year: Release as % of net premium revenue 20.3% 8.5% 12.4% 14.4% 20.7%
Net unearned premium provision at end of period 64,871 65,025 20. Trade and other receivables
Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term deposits with original maturities of three months or less.
Analysis of accruals and deferred income: Premium receivable in advance of policy inception 38,477 31,772
The amount of deferred tax income / (expense) recognised in the income statement for each of the temporary differences reported above is: Amounts credited to income or expense: 31 December 2007
The closing deferred tax balance reflects the change in UK corporation tax rate from 30% to 28% which becomes effective on 1 April 2008. The change in rate does not have a significant impact on the value of the asset.
964,000 were issued to the Admiral Group Employee Benefit Trust for the purposes of the Discretionary Free Share Scheme. The Trustees have waived the right to dividend payments, other than to the extent of 0.001p per share, unless and to the extent otherwise directed by the Company from time to time.
Staff share schemes: Analysis of share scheme costs (per income statement): SIP charge (note i) 1,268 495
The share scheme charges reported above are net of the co-insurance share and therefore differ from the gross charge reported in note 10 (2007: £5,560,000, 2006: £2,667,000) and the gross credit to reserves reported in note 26.
The awards are made with reference to the Group’s performance against its budget. Employees must remain in employment for the holding period (three years from the date of award), otherwise the shares will be forfeited.
The fair value of shares awarded is either the share price at the date of award, or is estimated at the latest share price available when drawing up the financial statements for awards not yet made (and later adjusted to reflect the actual share price on the award date). Awards under the SIP are entitled to receive dividends, and hence no adjustment has been made to this fair value.
(ii) The Discretionary Free Share Scheme (the DFSS) Under the scheme, details of which are contained in the remuneration report, individuals receive an award of free shares at no charge. A total of 1,645 employees received awards under this scheme during 2007. Staff must remain in employment until the vesting date in order to receive shares. The maximum number of shares that can vest relating to the 2007 scheme is 964,000.
Number of free share awards committed at 31 December 2007: Awards outstanding
Total awards committed 4,439,461 *1 – being the maximum number of awards expected to be made before accounting for expected staff attrition. Of the 4,439,461 share awards outstanding above, 4,129,461 have been issued to the trusts administering the schemes, and are included in the issued share capital figures above.
27. Financial commitments The Group was committed to total minimum obligations under operating leases on land and buildings as follows: Operating leases expiring: £000 £000
Admiral Syndicate Limited England and Wales Ordinary Lloyd’s corporate capital vehicle
29. Related party transactions There were no related party transactions occurring during 2007 that require disclosure. Details relating to the remuneration and shareholdings of key management personnel are set out in the remuneration report, which will be included in the statutory accounts referred to below. Key management personnel are able to obtain discounted motor insurance at the same rates as all other Group staff, typically at a reduction of 15%.
Notes to the Parent Company financial statements The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements: 1. Basis of preparation and accounting policies In these financial statements the following new standards have been adopted for the first time: · FRS 29 ‘Financial Instruments: Disclosures’; The adoption of this standard has not had a material impact on either the current year or comparative figures as the standard exempts parent companies in their single-entity financial statements from preparing such disclosures. Refer to Note 18 in the Admiral Group consolidated accounts, which precede these accounts, for disclosures that comply with this standard.
The Admiral Group plc Company financial statements have been prepared in accordance with applicable accounting standards, under the historical cost convention and in accordance with the provisions of Section 226 of, and Schedule 4 to, the Companies Act 1985.
The Company’s principal subsidiaries (all of which are 100% directly owned) are disclosed in note 28 of the Group financial statements.
Deferred tax asset 6 5 6. Loans Full details of the Company’s debt are included in the consolidated financial statements above. The note, whilst prepared under IFRS also conforms to UK GAAP.
Full details of the Company’s share capital are included in the consolidated financial statements above.