Balumba is the Group’s first overseas brand and launched in Spain in 2006. www.balumba.es
Elephant.co.uk is the Group’s main online car insurance service. Elephant passes on cost savings generated by being an online brand to customers in the form of lower premiums. www.elephant.co.uk
C lo si ng a ct iv e ve hi cl es s)
Combined ratios Earnings per share 1 Group turnover includes total premiums, other revenue plus net investment return. Total premiums comprise gross motor insurance premiums written by the Group, before co-insurance and reinsurance.
With the 2006 motor market remaining in the poor part of the cycle we set ourselves modest growth ambitions, finishing the year with 1.3 million insured vehicles, 13% up on December 2005. However, continuing strong ancillary income, tight control of expenses, and the contribution from Confused allowed pre-tax profits to move 23% ahead to £147m despite underwriting profits being behind last year on a 6% growth in total premiums.
Proportional support by Munich Re and other leading reinsurers has underpinned Admiral’s strategy since the Group’s formation in late 1999. It has allowed us to combine rapid growth with strong cash generation and significant dividend payments. In addition, it has helped us to deliver to our shareholders a higher quality, lower risk profit stream by providing a material level of protection against the cycle. The extension in December 2006 to the end of 2014 of our long-term co-insurance agreement with Munich Re therefore represents a significant milestone in the development of our business.
The new agreement is both more flexible and, for 2010 onwards, potentially materially more profitable. The progressive reduction in the share of our underwriting committed to Munich Re makes it possible for Admiral, should we so choose, to keep for our own account a larger share of the premium written, this increasing progressively to as much as 60% by 2011. Munich Re has been a fantastic partner and we look forward to a long and mutually beneficial relationship in the years to come. We are also pleased to deepen our reinsurance relationships with Swiss Re and Partner Re, with whom we entered into quota-share contracts at the same time.
This year we will distribute in total £93.7m, 47% up on 2005, in part reflecting the release of £13.5m of the £23.5m funds previously held at Lloyd’s. We are retaining the balance whilst we see how the cycle develops during 2007. We will then decide the level of growth appropriate for 2008 and whether or not to take back 5% of the underwriting risk at the end of this year during which we are only carrying 22.5% ourselves.
Going forward we would anticipate maintaining this approach to dividend distribution. We will be looking to add subordinated debt to our available solvency capital so that we have the capacity in future years to increase, should it be appropriate, the share of our motor book that we underwrite ourselves without materially restricting our ability to return trading surpluses to shareholders in the form of dividends.
Our total dividends for the year at 36.1p per share (24.0p final : 12.1p interim) represent a yield of 3.6% based on the closing share price on 1 March 2007. Admiral’s share price has again sustained material growth over the last year, the business being valued at £2.7Bn on 1 March 2007, 76% higher than a year previous. We led the FTSE350 as the Company with the greatest percentage gain in share price during 2006. Taking dividends and share appreciation together, we achieved a 151% total return for shareholders during 2006, itself part of an overall 318% since flotation in September 2004.
Alignment of the interests of our staff and our shareholders is one of our core principles. Our Approved and Executive Share Schemes are designed to strengthen that alignment over time. We are delighted that strong out-performance against our plan during 2006 resulted in eligible employees realising the maximum award of £3,000 free shares under our Approved Scheme. The Executive Share Scheme is based on growth in earnings per share over three years and will, therefore, first vest after the 2007 financial year. Our being placed, for the seventh consecutive year, amongst the Sunday Times Top 100 Companies To Work For in the UK is testament to the strength of Admiral’s relationship with its employees.
In my report last year I advised that Gillian Wilmot would step down as a Non-executive Director at the 2005 AGM. In September we welcomed two new Non-executives, Margaret Johnson and Lucy Kellaway. Margaret has been Group Managing Director of the international advertising agency Leagas Delaney since 2002 and brings us extensive marketing experience gained during her 11 years with that Company. Lucy is the management columnist at the Financial Times, with whom she has been for the last twenty years.
8 C h I e f e x e C U t I v e ’ S S tAt e M e N t
‘2006: Adios Amigo’ I have no doubt that when we look back in, say, five or ten years, we will point to two events that took place in 2006 as key in the development of Admiral Group.
The first event was one that was long overdue. Back in 1991 when we prepared the first draft of the Admiral business plan we planned on opening our UK operation first, followed soon after by a second European country and then another country soon after that, etc. Continental domination! However, before that draft ever saw the light of day we wisely decided to temper our ambitions and present a business plan dedicated solely to a UK operation. But the dream has lived on.
Balumba sold 25 policies on its first day, which compares quite favourably to the 13 policies Admiral sold when it launched on 2 January 1993. (So the pressure’s really on Balumba now!) In just the last two months of the year Balumba sold over 2,000 policies with premium income of around €1m.
Okay, so we were over a decade behind our original schedule, but we are moving forward and I promise you that the launch of our next European operation won’t be another decade away.
The second key event was the extension and renegotiation of our partnership with Munich Re. I am pleased to say that we will continue to have a close partnership with Munich Re until at least 2014. This is a partnership that began in 2000 with an agreement for five years. That agreement was re-written in 2002 to go for eight years, through 2009. Now we have re-re-written the agreement, such that it goes to the middle of the next decade. In the first seven years of the agreement Munich Re has taken nearly £2 billion of risk through Admiral and, as the business is expected to grow, there should be a few more billion to come.
For a business partnership to last for 15 years, as this one will by the year 2014, it must be good for both parties. From my point of view, Munich is a great partner. What makes a partner great? First off, they can handle billions of pounds of risk! More to the point, they understand we’re in the risk business and that there are good days (years) and less good days (years). They understand the cyclical nature of our industry and adapt their expectations accordingly. Lastly, they realise that our success is their success.
• Direct brands gave more than 15m quotes, of which almost all of them started on the internet (96%) many of which came from Confused
• Set up a new operation in Spain from scratch, launched on 31 October and sold more than 2,000 policies
• Named by the Financial Times as the eighth Best Workplace in the UK and one of the Top 100 Workplaces in the EU
What We Do For those of you looking through our accounts for the first time, Admiral’s primary business is to sell car insurance direct to the public in the UK and now Spain. We do everything involved in the process of acquiring and servicing our customers. However, we are not your typical insurance operation, as we share the income and commensurate risk with several reinsurance partners. In 2006 we took 25% of the underwriting risk for our own account (in 2007 we’ll take 22.5%). We operate through a number of targeted brands: Admiral (general and multi-car households), Diamond (women drivers), elephant.co.uk (internet users) and Bell (zero no claims bonus). We have three other brands, Confused.com, the leading car insurance aggregator in the UK, Gladiator, which operates as an intermediary in the commercial vehicle market, and, in Spain, Balumba.es, which targets internet users.
2006 was our 14th year of trading. The first seven were in a Lloyd’s of London environment. However, toward the end of 1999 Management teamed up with Barclays Private Equity to buy the business. The result of this transaction was the creation of Admiral Group Ltd. (AGL) as the holding Company. In September of 2004 we floated AGL on the London Stock Exchange and created Admiral Group plc.
Key Performance Information Our total written premium for 2006, before sharing it with our reinsurance partners, was £567m, accounting for 80% of our total turnover. The number of customers we service rose to 1,285,000 from 1,141,000 (+12.6%). All our growth throughout our history has been organic.
In 2006 75% of our premium was underwritten by a number of reinsurers: Munich Re (65%), Swiss Re (5%) and Axis Re (5%). The remaining 25% was kept by the Group. Our net written premium for 2006 was £139m. In 2007 Admiral Group will take 22.5% of the premium income to its own account. Munich Re, through Great Lakes, will take 60%, Swiss Re will take 10% and Partner Re will take 7.5%. The Swiss Re and Partner Re agreements are both for multiple years.
The increase in the loss ratio from 70% last year to 72% in 2006 is to be expected. There was very little, if any, upward price movement in the market in 2006. As claims inflation is running well ahead of the retail price index a modest decline in claims frequency could not offset the net rise in claims costs. The result is a deteriorating loss ratio. Without any releases taken into account the loss ratio moved from 82% to 86%.
The bar chart below shows the development of the loss ratios for the back years on an underwriting year basis. The years noted at the bottom of the chart are the underwriting years. The coloured bars represent the reported loss ratios published in the Annual Accounts over the last five years. So, for example, in the 2005 Accounts the loss ratio for the 2002 underwriting year was 58%, down from 66% in the previous year’s accounts. This year the result for the 2002 year has matured to 55%.
2001 Accounts 2002 Accounts 2003 Accounts 2004 Accounts 2005 Accounts 2002 Accounts 2003 Accounts 2004 Accounts 2005 Accounts 2006 Accounts
Ancillary income (income from products and services where we take no underwriting risk) per customer moved up by £1 in 2006 versus 2005, from £56.60 to £57.60. There were no major changes within these figures from the year before.
However, the market dynamics resemble a classic game of chicken. This seems to be a market full of James Deans. Who will blink first? Who will knowingly raise their rates, make themselves uncompetitive, shed share and reduce volumes in an effort to enhance or protect profits? And if one firm gives up the game of chicken, will the others follow suit?
The idea that the market as a whole is not moving much on rates may be a sign of a fundamental change in market dynamics. The power of RBS, despite its 35% market share, appears to have been diluted over time by the growth of aggregators, the largest of which is our own Confused.com. The growth of aggregators means increased transparency of rates and gives the consumer a better chance of finding the lowest possible rate than ever before.
In the days before aggregators, if the lowest rate in the market was being offered by a small company that couldn’t spend a lot of money advertising or operated through a small broker network, that company could not anchor rates, no matter how cheap they might be. Bigger companies, like RBS, could raise rates because the vast majority of consumers never knew a better rate was available.
But in the new, aggregator world, small companies that are listed on aggregators do not need to invest up front in expensive marketing campaigns and they can, much more easily, anchor the market by not raising rates. The small companies get the same exposure to consumers that the big companies get. Over the longer term these companies might find out that, actually, whoops, they really should have raised rates. But this information will take a few years to come to light.
The market expense ratio certainly didn’t make up for the increase in claims costs, in fact, it rose 0.3%, to 27.6%.
So which year will 2007 most resemble? 1998 or 1999? If marketing spend is anything to go by then we’re still at 1998. The spend on TV and press has come off its highs, but it certainly hasn’t fallen sharply. And the amounts being paid to internet search engines like Google (cost per click) are ever growing.
Bids for key search terms are as high in January 2007 as they were in January 2006. Not only are the bids for key terms as high as they were last year, but the number of terms being bid on is everrising. All in all it seems to add up to at least as much money being spent on advertising now as a year ago.
Moving Forward To Maintain Our Advantage Last year and the year before I wrote about the internet being a key factor to our good results. Today I think the internet is a given. Every company is concentrating on this distribution channel, etc. The focus now is on creating new, more interesting products for consumers.
What do I mean by ‘products’? After all, the ‘product’ is car insurance and that doesn’t change radically from one year to the next. Last year we launched two different types of car insurance for consumers to choose from.
First was Admiral MultiCar, which takes a look at all the vehicles in a household before generating a price. It’s more than just a volume discount. In many cases the knowledge we gain from knowing about all the vehicles and drivers in a household can lead to lower prices overall and usually those discounts go not only to the second and third vehicle brought on cover, but also to the first vehicle. The popularity of this concept meant that 12% of all our new vehicles last year were on MultiCar policies.
The second innovation was FlexiBell. Here we took everything we could out of a comprehensive policy such that it was still a comprehensive policy and then offered the items we had taken out in an optional, menu-like list. In this way consumers could build their own policies but only pay for the parts of the cover they felt were valuable to them. For example, we made driving other cars optional. For those who never drive another car it was something not worth paying for. While those who did need to drive another car could add it back in. FlexiBell launched in the second half of the year and is being rolled out slowly.
The Admiral brand regained the crown as the Group’s biggest brand largely because of the efficient growth in MultiCar policies. The number of vehicles insured in Admiral grew 26% to 440,000. Elephant, which held the crown since 2004 but isn’t present on aggregators, grew 3% to 422,000. In percentage terms, Bell grew the most, 29%, while Diamond grew 4%.
For those who don’t know, Confused, launched in its current form in the middle of 2002, is an intelligent, automated car insurance shopper. Simply put, all a customer has to do is put his or her details into Confused and Confused then goes out to the major car insurance websites, populates the appropriate fields, and, in real time, brings the customer back a list of prices. Confused goes out to direct operations as well as intermediary sites. One-stop shopping!
Where Next? We’re in the UK. We’re now up and running in Spain. So where next? Germany, that’s where.
2006 – More Change 2006 was a challenging, but productive year. Challenging because of the cyclical nature of our industry, productive because we still turned in a good result. In addition, it was productive because of the things we did that had no real effect on the results for the year itself, but will have a big effect on our future.
From the facts and figures at hand we still believe we are the most efficient and, pound for pound, the most profitable firm in the UK motor insurance market. Our goal is to continue to write the above sentence for the annual accounts year after year after year.
During the year two key managers stepped back into part-time roles. Kate Armstrong who joined Admiral on April Fool’s Day 1992 and was the Group’s sixth member of staff, is now doing management training a couple of days each month and she continues as a Director of Confused. In her years with us Kate wore many hats, including: MD of Confused, IT Manager and Marketing Manager. Kate’s final role with us was as MD of MDs.
Kate’s wide array of talents coupled with her fearlessness in tackling any challenge allowed her to step down holding an important Admiral record: most desk changes in a career. Kate is now busy taking care of a young family while also working to get her PhD.
We’ll certainly miss the experience and big personalities of Kate and Andrew. I wish them all the best in their new lives.
The proportion of the profit earned from non-underwriting activity continues to rise, moving up from 73% in 2005 to over 80% in 2006. This is partly a factor of the further deterioration of the UK motor insurance cycle, but is more a reflection of the continued absolute growth in nonunderwriting profits, most notably ancillaries and Confused.com.
Turnover – which comprises total premiums written, gross other income and net investment return (and measures the combined size of the Group’s businesses) continued to show double digit growth:
Underwriting Underwriting arrangements The Group’s UK underwriting structure for 2006 was as follows: 65% of the business was underwritten by Great Lakes (a UK subsidiary of Munich Re) under a longterm co-insurance contract.
35% of the business was underwritten by the Group through Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 10% (of the total business) was ceded via quota share contracts that qualify for deductions in required solvency capital (5% to Axis Re Europe and 5% to Swiss Reinsurance Company UK Limited). The Group retained 25% of 2006 underwriting on a net basis.
For the 2000 to 2002 underwriting years, the Group’s retained share of the motor business was underwritten through the Group’s Syndicate (Syndicate 2004) at Lloyd’s of London. During early July 2006, the Group achieved the release of a significant proportion of the profits earned by the Group’s Syndicate – amounting to around £24m, net of amounts retained to meet corporation tax liabilities.
The declining share passed to Great Lakes allows the Group to position itself for an upturn in the cycle and retain more of the profitable business it has historically generated. Flexible use of quota share reinsurance allows the Group to reduce its own retention (to a minimum of 25% after 2007) where this is appropriate.
The new contract is also on improved terms – most notably: • A more flexible growth cap, allowing the Group to vary the speed of policy growth in response to cyclical changes in underwriting profitability
The Group retains 35% of the Spanish motor risks, with 65% being reinsured by Munich Re under a long term treaty on similar terms to the UK contract.
Underwriting results Total premiums increased by 6% from £534m to £567m, and all Group brands again increased in size. Premium growth was somewhat lower than policy count growth, due primarily to lower average premiums resulting from a mix effect. Premium rates were again broadly flat across the year. The Group’s Spanish motor insurance business generated around £0.6m of premium during 2006, in two months of trading.
Net insurance premium revenue increased by around 4% from £139.5m to £145.0m. This increase was lower than the rise in written premiums due to the reduction in the retention of premium from 30% in 2005 to 25% in 2006.
The underwriting result (including investment income) fell by £4m in 2006 (£28.4m v £32.4m). This was due to the increased combined ratio (87% v 85%) and also a fall in investment income.
Some additional ratios are noted in the Chief Executive’s statement – firstly the ratio of total outgoings to net income at 58% (2005: 60%) and secondly the ratio of profit to net income at 53% (2005: 51%). Reconciliations to the figures in the accounts are set out at the end of this review.
Profit commission – co-insurance The principal source of profit commission is the long-term co-insurance contract with Great Lakes. £15.4m has been recognised in 2006, compared to £11.1m in 2005. The increase compared to last year reflects additional income recognised resulting from improvements in reported loss ratios on earlier underwriting years (predominantly 2003 and 2004).
Profit commission – quota share reinsurance A total of £2.5m has been recognised during 2006 (2005: £3.1m) from quota share profit commission arrangements.
Ancillary and other net income This figure can be broken down as follows: Ancillary profit 67,022 59,092
Profit (including intra-Group sales) rose 162% to £23.1m from £8.8m in 2005. The 2005 figure differs from that in the table due to the £1.9m adjustment referred to above.
Despite a number of new entrants entering the market during 2006, Confused has successfully maintained its share of total motor sales generated by aggregators and remains the market leader in motor insurance aggregation.
In addition to its core motor insurance offering, Confused’s home insurance product also grew significantly in 2006 – quotes rising almost fivefold to 0.5m. New price comparison solutions for breakdown, travel insurance and utilities were also added to the Confused website.
Balumba.es At the end of October 2006, the Group successfully launched its first operation outside of the UK. Balumba.es, a direct motor insurer based on the Group’s UK model, is located in Seville, Spain and generated around £0.6m of premium in the short period before the year-end, making a pre-tax loss (including start-up costs) of around £0.6m. Balumba trades via two branches of UK companies – EUI Limited and Admiral Insurance Company Limited.
A D M I R A L G R O U P p l c 2 �
Refer to note 13 to the accounts for further detail on taxation.
Investments and cash The Group continues to generate significant amounts of cash from all aspects of its operations. At the end of the year, the Group held a total of £448.9m in cash and investments – an increase of 11% on the £406.1m held at the end of 2005. This increase is after distributions to shareholders of £70.1m during 2006 (£49.2m in 2005).
Dividends There has been no change in dividend policy, which is based on the principle of returning excess cash to shareholders. The Directors expect to make a normal distribution of at least 45% of posttax profits each half-year, and will regularly review the Group’s available resources to determine whether it is appropriate for the Company to pay further special dividends.
Having regard to this policy, as outlined in the Chairman’s statement, the Directors have declared a final dividend for 2006 of 24.0p per share, which is made up of 9.6p per share normal element, plus 14.4p per share special distribution based on the Group’s resources at the end of the year.
The distribution includes £13.5m (5.2p) relating to the release of capital previously held at Lloyd’s, which was achieved during the second half of the year. £10m of this release has been retained in order to assess the potential need for additional capital to support growth over the short term.
Awards are made twice a year, based on the results of each half-year. During 2005 and 2006, the Group’s results have meant that qualifying staff have received maximum awards in both years.
2 – The Unapproved Free Share Scheme (UFSS) The UFSS is not Inland Revenue approved. Awards under the plan are made at the discretion of the Chief Executive and Senior Managers, with approval being obtained from the Remuneration Committee. Awards under the plan are distributed on a wider basis than most plans of this type. The Board believes that as the UFSS 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 participates in this scheme.
The Group has now put in place specified terms for its independent Non-executive Directors. Details are contained within the remuneration report. All Non-executive Directors are appointed for fixed terms of three years.
The Admiral Group Board The Board has a formal schedule of matters specifically reserved to it for decision, including corporate strategy, approval of budgets and financial results, new Board appointments, proposals for dividend payments and the approval of all major transactions. This schedule is reviewed on an annual basis and was last reviewed on 5 March 2007.
The Board met on nine occasions in 2006. In addition the Board held a strategy day and also visited its operations in Spain. 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 results of the evaluation were discussed at a Board meeting in November 2006 at which the Chairman presented his findings and the Board had an open discussion on the performance of the Board resulting in a number of recommendations. No major issues were identified during the process but some changes have been made to the structure of the Board meetings and the amount of time devoted to meeting senior managers within the Group.
The performance of the individual Executive Directors is appraised annually by the Chief Executive, to whom they report. 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 Nonexecutive Director (John Sussens), taking into account the views of the Executive Directors.
The number of full Board meetings and Committee meetings attended by each Director during 2006 is provided in the table below. The figures in brackets show the number of meetings that the Director could have attended.
*Gillian Wilmot and Andrew Probert resigned from the Board on 18 May 2006 and 4 September 2006 respectively.
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.
Directors and Directors’ independence The Board currently comprises the Chairman, five independent Non-executive Directors, one Non-executive Director who is employed by a significant shareholder and is not, therefore, independent, and three Executive Directors.
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 re-election 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.
The independent Non-executive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making.
Details of the Chairman’s other commitments are included in the Chairman’s biography. The Chairman does perform a number of other Non-executive roles outside of the Group but the Board is satisfied that these are not such as to interfere with the performance of the Chairman’s duties within the Group.
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. In December 2006 major investors were given the opportunity to meet with the Chairman and a number of Non-executive Directors. A number of investors took part in the meeting. It is intended to carry out a similar meeting in September 2007.
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.
Summary of key activities during 2006 During the year the Committee reviewed the interim and audited final year-end Report and Accounts prior to approval by the Board. The external auditors were present at both meetings and the external actuaries attended the meeting in February 2007 at which the 2006 Report and Accounts were reviewed.
The Committee also reviewed the performance and independence of the Group’s relationship with the external auditor both through its own assessment of the relationship and also the controls in place within the external auditors business. The Committee has reviewed the nature and extent of non-audit work services provided by the external auditor. The Committee has in place a policy that, amongst other things, requires that the Committee
The Committee receives reports from the Group’s Company Secretary who has responsibility for the Compliance and Risk management functions to enable it to monitor the risk management policies and systems.
The Executive Directors, Head of Internal Audit, and external auditors are invited to all meetings The Non-executive Directors are entitled to attend any meeting. At least once a year the Committee meets with the external auditor without any Executive Directors present.
During 2006, the Committee instructed external search consultants to provide support in relation to the appointment of two Nonexecutive Directors. Detailed role specifications were drawn up with reference to the mix of skills, knowledge and experience of the existing Directors and the requirements of the Board. Interviews were carried out with a range of potential candidates, by the external agency, members of the Committee, and other members of the Board. As a result of the process, the Committee recommended to the Board, and the Board agreed, that Margaret Johnson and Lucy Kellaway be appointed to the Board as Non-executive Directors with effect from 4 September 2006. The anticipated time commitments for the role were discussed and agreed with both candidates.
The Committee also reviewed the progress of the Deputy Finance Director, recruited in September 2005 and following the retirement of Andrew Probert on 4 September 2006 recommended that the Board appoint Kevin Chidwick as Finance Director.
The Committee reviewed the current Board size, taking into account the changes noted above, structure and composition and confirmed that no further changes were required and that the leadership of the
organisation was such that the Company could continue to compete effectively in the marketplace in which it operates.
During the year the Committee carried out the following tasks: • reviewed the Group’s overall remuneration policy and strategy
• reviewed the rules and performance measures of the Group share schemes and the grant, award, allocation or issue of shares under such schemes
The RMC receives reports setting out key performance and risk indicators and considers possible control issues brought to their attention by early warning mechanisms, which are embedded within the operational units. The RMC and the Audit Committee also receive regular reports from Internal Audit, which include recommendations for improvement in the control and operational environment. The Audit Committee’s role in this area is primarily confined to a high-level review of the arrangements for internal control although at its discretion the Committee may well request more detailed information on specific issues should they arise. The Board’s agenda includes 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 2007 meeting, the Board carried out the annual assessment for the 2006 year by considering documentation from the Audit Committee, taking account of events since 31 December 2006.
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 Officer and senior management representatives.
One of the Committee’s principal responsibilities is to ensure that the risk management policy approved by the Board is implemented throughout the Group. The Committee has formal terms of reference and is required to manage regulatory issues, assess and monitor reinsurance protection and to ensure that a risk management strategy is effectively employed by the Group. The Committee meets approximately eight 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.
During the year the Committee did not purchase any consultancy services.
Policy on 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.
In light of this, their remuneration packages consist of base salary (reviewed against market rates by the Committee) and benefits such as private medical cover, permanent health insurance and death in service cover. The Group does not contribute to any pension arrangements on behalf of these Executive Directors, and it is not intended that they will participate in any Group share schemes. Their remuneration was reviewed in May 2006 and Henry Engelhardt was awarded a rise of 5.5% taking his salary to £290,000. David Stevens declined to accept a rise in his remuneration, which stayed at £250,000.
R e m u n e ra ti o n r e p o rt -
It is the Committee’s general strategy to pay salaries at or slightly below median levels with increased remuneration coming from the value of the awards under the Unapproved Free Share Plan. In addition to his salary of £200,000 Kevin Chidwick received an award of 21,186 shares on 18 April 2006 and a further 18,480 on 5 September 2006 on his appointment to the Board. The awards are the maximum number of shares that could vest after a three year period and are subject to performance criteria. Maximum awards vest if the Group’s earnings per share growth over the three year period is significantly better than a LIBOR return. Further details of the Unapproved Free Share Plan are set out in the Financial Review.
Awards to staff under the Unapproved Free Share Plan are made upon the advice of the Chief Executive. The Committee reviews the approach taken and approves any awards greater than 100% of salary. The actual number of shares that vest under the scheme is dependent upon meeting the performance criteria with regard to earnings per share growth.
The remuneration of the Chairman is decided by the Remuneration Committee and that of the Non-executive Directors by the full Board. The Non-executive Directors do not participate in meetings when Non-executive Director fees are discussed.
There is no minimum shareholding requirement for any Director, although the Board encourages directors to buy shares in the Company should they wish to.
Directors’ service contracts The following table summarises the notice periods relating to the service contracts of the Executive Directors serving at 31 December 2006: Notice – Director (months) Notice – Company (months)
Alastair Lyons Indefinite (terminable on three months’ notice from either party)
Keith James 3 years commencing 1 December 2006, terminable by either party giving one month’s written notice
3 years commencing 4 September 2006, terminable by either party giving one month’s written notice
The following table sets out the results of a review of Non-executive fees and expected time commitments.
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 2006. TSR is defined as the percentage change over the period, assuming reinvestment of income.
John Sussens 8,000 8,000 * Include amounts held by family members and in trusts settled by family members
*Alastair Lyons waives 25% of his annual fee, which is currently £120,000.
This report was approved by the Board of Directors on 5 March 2007 and is signed on its behalf by the Committee Chairman: John Sussens Remuneration Committee Chairman
Corporate responsibility The Admiral Group is committed to dealing fairly and with a high level of integrity with all its stakeholders. This includes its actions and policies towards staff, the local communities in which both the business operates and our staff live, and the environment.
We are one of the leading employers in the South Wales region, and employ people from a wide range of communities. The Group encourages staff to get involved in local communities and projects that are important to both them and their families. This can range from the local football club to an amateur dramatics society.
This initiative is supported by “Henry’s Pot”. This fund started in 1999 and allows staff to apply for a donation or sponsorship toward an organisation of their choice. In 2006, 109 awards were made from this fund to all kinds of different interests.
We also believe that it is important for our staff to understand what are the Company’s goals and objectives: consequently 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 wellinformed staff will provide the best possible service to our customers.
The best measures of our staff’s assessment of their working environment are the surveys that they have completed. Following independent measurement by the organisations involved Admiral has received the following awards: The Sunday Times 100 Best Companies to Work For – Admiral has been included in all seven years of the publication and was ranked 21st overall in the last list published.
The Financial Times 100 Best Workplaces in the UK – we have been included in all four years of the publication 100 Best Workplaces in the EU – again Admiral has been included in all four years.
External sponsorship Admiral has also sponsored a number of high profile local events in 2006.
It is involved in campaigns against cruelty in zoos, and dedicated to aiding conservation of elephants, big cats, wolfs, dolphins, primates and bears.
Over the last fifteen years Tusk has supported more than 30 projects in 15 African countries. Last year alone Tusk supported 21 different projects in 11 African countries. Tusk’s support comes in many different guises such as provision of 4x4 vehicles, wildlife clinics, rhino and cheetah sanctuaries, and chimpanzee enclosures.
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. 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.
C o rp o ra te r e sp o n si b ili ty -
• Achieving the most efficient means of travel to business meetings in the UK and abroad with the objective of reducing the environmental impact of the resulting journeys
• Raising and maintaining staff awareness of this policy and ensuring that employees are actively engaged in supporting the resulting practices
As noted above, the Group has taken a long-term lease on a newly constructed building on a brownfield site in Swansea Bay. Future reporting on energy usage will combine both buildings.
Water consumption As noted above, the Group is reliant on the co-operation of the managing agent with respect to any changes to its use of water. In future years, water consumption per employee will be measured and compared to similar office environments to ensure that consumption within our offices is within reasonable limits.
We are currently in the process of trialling the use of recycled paper within photocopiers and printers as this is the source of the vast majority of the Group’s internal printing. The Project Team will also review the current printing usage to seek ways to reduce the amount of internal printing.
Policyholder documentation is not currently printed on recycled paper. The Project Team will revisit the sourcing of recycled paper and will test its use for communications with customers.
The Group only operates two company cars for its engineers and has no plans to increase this.
Monitoring systems are being put in place to more accurately measure business travel by employees.
Alastair Lyons CBE (53) Chairman (N) Alastair was appointed Chairman of the Company in July 2000. He is also Executive Chairman of
Chairman of Buy-as-you-View Holdings Limited, and of Higham Dunnett Shaw plc.
Manfred Aldag (56) 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 Economics/Business Management
He has worked for Munich Re since September 1981 and is currently the Senior Executive Manager responsible for Northern Europe (United Kingdom,
Group Managing Director of the international advertising agency Leagas Delaney and has been with that Company for the past 11 years.
Lucy also joined the Nominations Committee on appointment to the Board.
He was the Group Managing Director of Misys plc between 1998 and May 2004 having been on the
Director’s report The Directors present their Annual Report and the audited financial statements for the year ended 31 December 2006.
Group results and dividends The profit for the year, after tax but before dividends, amounted to £103.7m (2005: £84.7m).
Charitable and political donations During the year the Group donated £38,000 (2005: £108,000) to various local and national charities. The Group has never made political donations. Refer to the corporate responsibility report for further detail.
• 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
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.
Opinion In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the EU, of the state of the Group’s affairs as at 31 December 2006 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 2006; • 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
Loss on disposal of property, plant and equipment and software 151 503
Cash flows from operating activities, before movements in investments 183,763 176,361 Net cash flow into investments held at fair value (1,073) (53,413)
Net cash used in financing activities (93,555) (59,291) Net increase in cash and cash equivalents 41,140 30,951 Cash and cash equivalents at 1 January 150,152 119,201
Notes to the financial statements 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 following IFRS adopted by the EU were available for early adoption but have not been applied by the Group in these financial statements: • IFRS 7 (Financial instruments: Disclosure) – applicable for years commencing on or after 1 January 2007; and
The sum of these provisions are compared with projected ultimate costs using a variety of different projection techniques (including incurred and paid chain ladder and an average cost of claim approach) to allow an actuarial assessment of their likely accuracy and to include allowance for unreported claims.
Transactions and balances: Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
(iii) All resulting exchange differences are recognised as a separate component of equity.
Reinsurance assets: Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on the insurance contracts issued by the Group are classified as reinsurance contracts. A contract is only accounted for as an insurance or reinsurance contract where there is significant insurance risk transfer between the insured and the insurer.
e) Intangible assets Goodwill: All business combinations are accounted for using the purchase method. Goodwill has been recognised in acquisitions of subsidiaries, and represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
The recoverable amount is the greater of the net realisable value and the value in use of the CGU.
f) Property, plant and equipment and depreciation All property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straightline method to write off the cost less residual values of the assets over their useful economic lives. These useful economic lives are as follows: Motor vehicles 4 years
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.
h) Financial assets – investments and receivables Financial assets are classified according to the purpose for which they were acquired. The Group’s investments in quoted fixed income and other debt securities are classified as financial assets at fair value through profit or loss at inception.
j) Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets.
The total charge expensed over the vesting period is determined by reference to the fair value of the free shares granted (excluding the impact of non-market vesting conditions).
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.
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 Spanish operation are not material to the 2006 figures.
Ancillary revenue primarily constitutes commission from sales of insurance products that complement the motor policy, but which are underwritten by external parties.
Total expenses and share scheme charges 19,384 36,077 55,461 17,909 23,021 40,930
The £12,009,000 (2005: £11,021,000) administration and marketing costs allocated to insurance contracts is principally made up of salary costs.
Reconciliation of expenses related to insurance contracts to reported expense ratio: Insurance contract expenses from above 19,384 17,909
Included in profit, before co-insurance arrangements are the following: Social security charges 3,337 2,782
There were no net exchange differences credited or charged to the income statement during the year.
(Over) / under provision relating to prior periods – corporation tax (648) 11
Factors affecting the tax charge are: Profit before taxation 147,342 119,494
Adjustments in respect of prior year insurance technical provisions 17 (161)
The dividends declared in March represent the final dividends paid in respect of the 2005 and 2004 financial years. Dividends declared in September are interim distributions in respect of 2006 and 2005.
A final dividend of 24.0p per share has been proposed in respect of the 2006 financial year. Refer to the Chairman’s statement and financial review for further detail.
Analysis of investments held at fair value: Money market funds 257,634 -
The Group switched investment strategy during the second half of 2006, away from short duration fixed income securities and into money market cash funds or cash deposits. Prior to this change, the Group was exposed to market risk in terms of the impact of movements in market interest rates on the carrying value of the investment funds. This risk has now been virtually eliminated, as the money market funds are designed to achieve stable net asset values.
19. Reinsurance assets and insurance contract liabilities A) 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.
There are a number of elements forming part of the Group’s strategy to manage insurance risk. These include: i) Co-insurance and reinsurance: As noted in the underwriting structure section of the financial review above, the Group passes out a significant amount of the motor insurance business written to external underwriters. In 2006, 65% of the risk was shared under a co-insurance contract, under which the primary risk is borne by the co-insurer.
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.
D) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2006, of the retrospective reestimation 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 2006 53,857 63,954 87,761 122,423 -
Release as % of net premium revenue 10.7% 20.3% 8.5% 12.4% 14.4%
F) Reconciliation of movement in net claims provision: Net claims provision at start of period 128,631 98,120
G) Reconciliation of movement in net unearned premium provision: Net unearned premium provision at start of period 71,333 51,850
Net unearned premium provision at end of period 65,025 71,333 20. Trade and other receivables
Analysis of borrowings: Repayments falling due within 12 months - -
Analysis of accruals and deferred income: Premium receivable in advance of policy inception 31,772 30,471
Analysis of finance lease liabilities: 31 At December 2006 31 At December 2005
Between one and five years 63 2 61 921 35 886
The fair value of the Group’s lease obligations approximates their carrying amount.
The net balance provided at the end of the year is made up as follows: Tax treatment of Lloyd’s Syndicates 1,936 3,816
Authorised: Issued, called up and fully paid: During 2006, 1,324,634 new ordinary shares of 0.1p were issued to the trusts administering the Group’s share schemes.
(ii) The Unapproved Free Share Scheme (the UFSS) This scheme is open to managers and exceptional performers within the Group (Henry Engelhardt and David Stevens have elected not to participate) with variable awards available.
Under the scheme, individuals receive an award of free shares at no charge. A total of 380 employees received awards under this scheme during 2006. Staff must remain in employment until the vesting date in order for the shares to vest. The maximum number of shares that can vest relating to the 2006 scheme is 681,375.
In the 2005 scheme, for an award to vest, the total shareholder return (TSR) of Admiral Group plc shares over the three years 2005 to 2007 must be at least equal to the TSR of the FTSE 350 index, of which the Company is a constituent. If the Company’s TSR does not meet this target, no awards will vest under the 2005 UFSS scheme.
Awards under the UFSS are not eligible for dividends and hence the fair value of free shares to be awarded under this scheme has been revised downwards to take account of these distributions. The unadjusted fair value is based on the share price at the date on which awards were made (being £3.62 for the 2005 scheme and £6.71 for the 2006 scheme).
Deferred tax credit on share scheme charges - - - - 1,407 1,407
The foreign exchange reserve represents the net gains or losses on translation of the Group’s net investment in foreign operations.
Operating lease payments represent rentals payable by the Group for its office properties.
Consolidated financial summary Basis of preparation: The 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.
Figures for 2002 and 2003 have not been restated under IFRS, although have been reclassified into the formats used in these financial statements.
These financial statements were approved by the Board of Directors on 5 March 2007 and were signed on its behalf by: Kevin Chidwick Director
� 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
Lucy Kellaway (Non-executive Director, appointed 4 September 2006) John Sussens (Senior Independent Non-executive Director)
Bank of Scotland Corporate Banking 55 Temple Row Birmingham B2 5LS