Final Results

Admiral Group PLC 06 March 2007 Admiral Group plc Results for the Year to 31 December 2006 6 March 2007 Admiral Reports Record Profits and Strong Growth Admiral Group plc ('Admiral' or 'the Group') today announces a record annual result with a profit of Â£147.3 million for the year to December 2006, an increase of 23% over the previous year. Group turnover, comprising total premiums written, gross other income and investment income, rose 11% to Â£708.2 million. 2006 Highlights â€¢ Profit up 23% at Â£147.3 million (2005: Â£119.5 million) â€¢ Total final dividend of 24.0p comprising normal dividend of 9.6p; special dividend of 14.4p per share â€¢ Total 2006 dividend of Â£93.7 million up 47% on 2005 â€¢ Group turnover up 11% at Â£708.2 million (2005: Â£638.4 million) â€¢ Revenue from products and services not underwritten by the Group up 41% at Â£131.6m million (2005: Â£93.4 million) â€¢ Year-end vehicle count up 13% to 1.3m from 1.1m at 31 December 2005 â€¢ Confused.com gave 9 million quotes and made a profit of Â£23.1 million (2005: Â£8.8 million) â€¢ Employee Share Scheme - over 1,800 staff are to receive around 274,000 free shares based on the H2 2006 results. This means that staff will have received the full allocation of free shares for 2006, valued at Â£3,000 Comment from Henry Engelhardt, Group Chief Executive 'We're delighted to be again reporting record profits and strong growth in turnover, despite the challenging market environment. Confused.com, our automated car insurance shopper has again achieved an excellent result. We also launched two new products, Admiral MultiCar and FlexiBell which have been working well for the Group. 'In 2006 we also saw two key long-term developments for the Admiral Group. Admiral went international on 31 October 2006 with the launch of Balumba.es in Spain. The team in Spain have done a brilliant job to create something from nothing. The second key event was the renegotiation and extension until at least 2014 of our partnership with Munich Re. Munich Re have worked with us since 2000 and continue to be a great partner to work with. 'I believe the Group's performance continues to demonstrate the strength of our model and the hard work of all our staff.' Comment from Alastair Lyons, Group Chairman 'We are very pleased to be able to propose a total final dividend of 24.0p per share, comprising a normal dividend of 9.6p and a special of 14.4p, the latter following our principle of returning available surpluses to shareholders. Our total dividends for the year at 36.1p per share mean that we will have distributed Â£93.7 million to shareholders, up 47% on 2005. This represents a yield of 3.6% based on the closing share price at 1 March 2007. 'Admiral's share price has again sustained material growth over the last year, the business being valued at Â£2.7Bn on 1 March 2007, 76% higher than a year previous. 'Taking dividends and share appreciation together, the total return for shareholders in 2006 was 151%.' Final dividend Subject to approval at the Company's AGM, the final dividend of 24.0p per share will be paid on 24 May 2007. The ex-dividend date is 18 April 2007, the record date 20 April 2007. Chairman's statement 2006 was a year when we not only continued to develop our direct UK private motor business but also moved forward significantly our outlined strategy to identify profitable opportunities that exploit the knowledge, skills, and resources attaching to that core business. Confused, our intelligent automated car insurance shopper, handled an amazing 9 million quotes contributing Â£23m to pre-tax profits, up from Â£9m in 2005. We estimate that Confused now accounts for approaching 30% of the on-line UK private motor market. At the end of October, as planned, we launched Balumba, our on-line Spanish motor insurer, the first leg of our overseas expansion, and plans are already well developed to launch in Germany towards the end of this year. 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 Â£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. We have maintained our approach of considering dividends in two parts. The first element, being the normal dividend, is based on a 45% pay-out ratio. The second element - the special dividend - derives from our principle of returning to shareholders available surpluses, calculated as the Group's net assets less three specific elements - its required solvency; cover against any specific expansion plans, being at this year-end Â£5m in respect of overseas; and a prudent margin - currently Â£25m - against contingencies. This year we will distribute in total Â£93.7m, 47% up on 2005, in part reflecting the release of Â£13.5m of the Â£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 221/2 % 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 Â£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 Â£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. The Company is also closely involved with the communities within which our staff live and work. We encourage them to be associated with the local projects that are important to both them and their families, and during 2006 provided financial support to 109 such projects. Admiral also sponsored a number of high profile local events within South Wales, more details of which will be found in the report on corporate responsibility. This also describes the steps we take to minimise the impact of our operations on the environment. In September last year we said goodbye to Andrew Probert who had been the Group's Finance Director for fourteen years, over which period he made an enormous contribution to our successful growth, taking the Company through both management buy-out and flotation. His clear thinking, straightforwardness, energy and consistent good humour will be much missed. His place on our Board has been taken by Kevin Chidwick who joined Admiral in September 2005 as Deputy Finance Director, having previously been Finance Director of Engage Mutual. I am delighted that Kevin is already making his clear mark on our Board deliberations. 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. Our strategy remains 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. We look forward to continuing consistently to create value for all our shareholders. Alastair Lyons Chairman Chief Executive's statement '2006: Adios Amigo' I have no doubt that when we look back in, say, 5 or 10 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. On October 31, 2006, some 15 years after that first draft and almost 14 years after Admiral started trading, Admiral Group went international with the launch of Balumba.es in Spain. Our newly formed Business Development Team based in Cardiff and our Spanish Directora General along with the team she developed in Seville did a brilliant job to create something from nothing. Balumba sold 25 policies on its first day, which compares quite favourably to the 13 policies Admiral sold when it launched on January 2, 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 â‚¬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 8 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 7 years of the agreement Munich Re has taken nearly Â£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. These two major events not withstanding, 2006 on its own merits was a pretty good year in a very competitive environment. Here, in a nutshell, are the highlights: â€¢ Made a record profit of Â£147m, up 23% from Â£119m in 2005; â€¢ Total turnover for the year was Â£708m, up 11% from 2005. â€¢ Total motor premium written grew to Â£567m, up 6% from 2005; â€¢ Produced a combined ratio of 87% up from 85% in 2005; â€¢ Ended the year with more than 1.28m customers (+ 12.6%); â€¢ Direct brands gave more than 15m quotes, of which almost all of them started on the internet (96%) many of which came from Confused â€¢ Confused.com gave more than 9m quotes and made a profit of over Â£23m; â€¢ Set up a new operation in Spain from scratch, launched on October 31 and sold more than 2,000 policies; â€¢ Named to The Sunday Times list of Top 100 Places To Work in the UK for the seventh year in a row (every year it's been run). â€¢ Named by the Financial Times as the 8th 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 Commercial, 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 7 were in a Lloyd's of London environment. However, toward the end of 1999 Management teamed up with Barclays Private Equity to buy the business. The result of this transaction was the creation of Admiral Group Ltd. (AGL) as the holding Company. In September of 2004 we floated AGL on the London Stock Exchange and created Admiral Group plc. As already noted, we have a close relationship with Munich Re. The recently signed agreement for the UK is a perpetual contract with first break potential after 2014. We also have a similar, but separate, agreement in place for Spain. Munich Re is also a major shareholder in the Group, a position it established in 2002. It currently owns 14% of the Group. Management and staff currently own around 27% of the Group. Key Performance Information Our total written premium for 2006, before sharing it with our reinsurance partners, was Â£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 Â£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. Some key numbers from the accounts which follow: â€¢ Loss ratio 72% up from 70% in 2005; â€¢ Earned expense ratio, excluding regulatory levies, up to 12.9% from 12.3%; â€¢ Combined ratio, including all levies, 87%, up from last year's 85%; â€¢ Revenue from products and services we do not underwrite totalled Â£131.6m up from Â£93.5m (+41%). 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 expense ratio, not including government levies, moved up by 0.6% from 2005. This reflects no growth in the average price at which we sell our product against inflation in our costs, partially offset by some modest productivity gains. Despite the small upward move in the expense ratio, we are still one of, if not the, most efficient firm in the market. In the first nine months of the year we raised our new business rates a total of 1%, and that happened gradually and grudgingly. We did move rates upwards almost 3% in the fourth quarter but it is not clear if those rate increases will hold in the early part of 2007. Please note, rate changes at the end of a year have little or no effect on the result of the year they are implemented. Our conversion rate, which is a measure of our prices versus the market, did not fluctuate much during the year, indicative that our rate moves were consistent with the market. Ancillary income (income from products and services where we take no underwriting risk) per customer moved up by Â£1 in 2006 versus 2005, from Â£56.60 to Â£57.60. There were no major changes within these figures from the year before. To put all this income into context, I've done a little calculation where the non-underwriting income is added to earned premium to give a 'big picture' combined ratio. I think this gives an interesting measure of the entire business. Expressed in this way, the combined ratio would have been 58%! Here's another interesting calculation: we made Â£147m on income of Â£277m, a return on income of 53% (2005 51%). The UK Car Insurance Market: A Game of Chicken, Or A Game Of Leapfrog? Yes, I know, frogs again. This time we're not boiling them, but possibly jumping over them. The UK car insurance market is at that critical moment that seems to occur in every cycle, when prices are expected to rise but don't. Prices are expected to rise because, simply, underwriting results aren't good. It would be very rational for prices to rise now. There has been and continues to be claims inflation eating away at premiums. All the while that premiums don't go up results deteriorate. Even if premiums rise, they have to rise circa 5% just to maintain the status quo. If you're writing a piece of business at the market average today the combined ratio for that piece of business is somewhere around 115%. Maybe more. That's not profitable and not sustainable; eventually rates must go up. Right? 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? Well, some of those questions were answered in the middle of the year when Norwich Union, the market's second biggest player, announced it had moved rates up and would continue to move rates up. On average, NU said, rates would rise some 16%. It was a very brave step. But the rest of the market continued to play chicken. In particular, the market leader, Royal Bank of Scotland, which holds some 35% market share, appeared to hold the line. Late in the year RBS announced that it too would be moving rates up. How much RBS has moved or will move its rates is not clear. At the time of writing I cannot confirm what RBS has done on rates although it appears, based on our conversion data and data on where customers were insured before joining us versus where customers go when they leave us, that they have moved their rates up at least a little bit. If RBS continues to raise rates, then the market might move from a game of chicken to one where companies which don't raise rates see their volumes increase. When that happens these firms then raise their rates, which means that the companies that had raised rates and had seen their volumes decrease see their volumes increase, so they raise rates again, etc. etc. A game of chicken then becomes a game of leapfrog. As I write this, with 2007 just getting underway, there seems to be very little of this barnyard activity taking place. Rates may have moved up a touch, but certainly not as much as claims inflation and the game of chicken continues. 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. I believe that the rise of aggregators and changing shape of distribution will put ever-greater pressure on insurers to be efficient. Insurers who run high expense ratios will have nowhere to hide in a marketplace with such a level of price transparency. The pattern of results for the market for all motor insurance in 2005 (most recent market data available) was similar to 2004. The overall result wasn't all that bad (102.2%), but this was flattered by large back year releases (6.5%). Private motor performed a bit worse, with a combined ratio of 105% and releases of 5.7%. The underlying trend of higher bodily injury costs more than offset a modest reduction in claims frequency. Overall claims inflation continues to mount, over the last two years the average is roughly 5% a year, pushed up in no small part by the cost of care. The market expense ratio certainly didn't make up for the increase in claims costs, in fact, it rose 0.3%, to 27.6%. Without the 6.5% of reserve releases the pure year loss ratio was 81% and the combined ratio was almost 109%, an increase of 5% on the comparable figure from 2004. Given that there were almost no net increase in prices in 2006 that would affect the 2006 result (increases late in the year have very little effect on that year), it implies that the pure year combined ratio for 2006 will be north of 110%. Ouch. I'm sure you'd agree, this is not a particularly good result. However, it is yet unclear how big the reserve releases will be and therefore what the headline result will be. The UK market has something of a history of not moving on price until reserve releases are exhausted. Will history repeat itself? One might look at 2007 as one looked at 1998. At the end of 1997 it was clear to one and all that the market was unprofitable and that price increases were required. But prices didn't move in 1998 while claims costs rose, and most industry observers gave up hope that the market would ever move, predicting a future of perpetual losses. It was only in 1999, when everyone had seemingly given up on the market altogether, that it began to move. When prices did start to rise in 1999 they went up fast, some 20% in that year alone. 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 ever-rising. All in all it seems to add up to at least as much money being spent on advertising now as a year ago. Fortunately, our own business is somewhat insulated from this deterioration by two factors. First, our results historically have been far better than the market average and therefore, despite tighter margins, our result is still rather profitable. Second, our unique underwriting structure means we have a limited share of our own result, which reduces profits in the good times, but also reduces the effect of narrowing margins in the less good times, leaving us with a high return on capital. Moreover, as we continue to grow our customer base, we continue to grow our ancillary revenues. All in all it should result in sustainable, profitable growth in the future. 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%. It was also yet another good year for Gladiator Commercial. Gladiator sells van insurance, largely to private tradesmen, as an intermediary. Admiral Group does not take any underwriting risk with this business. At the end of 2006 Gladiator's customer count stood at 42,000 and it contributed Â£2m to the Group's bottom line, up 9%. Changing The Way Car Insurance Is Bought In The UK - Confused.com: Consumer Champ Last year I wrote that 2005 was really a huge growth year for Confused.com. Well, I was wrong. Confused's growth in 2006 made 2005 look absolutely pedestrian. Confused delivered 8.4 million motor quotes during the year, an increase of 110% over 2005. It also delivered over 525k quotes for home insurance. 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! Not only did Confused generate a lot of quotes, but it also made money. Confused made a profit of Â£23.1m compared to Â£8.8m last year and Â£2.0m the year before. It has also gotten off to a flying start in 2007. January saw it deliver over 1 million quotes to its insurance partners for the first time and it also set a new, monthly record for profits. During the year Confused also added product and now delivers prices for home insurance, gas & electricity, travel insurance, breakdown cover, life insurance, credit cards and mortgages. Where Next? We're in the UK. We're now up and running in Spain. So where next? Germany, that's where. We hope to launch a direct operation in Germany late in 2007. The German market is huge, some 45m vehicles. It is also a good internet market for many things, although, currently, car insurance isn't one of them. However, we see that situation evolving and our strategy of entering new markets has not changed: we plan to use the experience we've gained in the UK of delivering car insurance efficiently via the internet in other markets, Germany next. 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. The other retiree was our Finance Director, Andrew Probert. Andrew was actually our second FD, the first one being unable to move his family to Cardiff from the South East back in 1992. Andrew, a Cardiff native, was living near Gloucester when we came looking, which was very helpful. Andrew did everything for Admiral. He takes great pride in relating the story of buying the first company kettle when we moved into our Cardiff offices in September, 1992. He also enjoys explaining that he bought the second kettle as well, because the first one didn't work! Andrew led finance, planning, property management, legal, audit, facilities, accounts and was, from time to time, the Director responsible for People Services and Confused. He did everything but polish the doorknobs and I have no doubt that if the doorknobs had really needed polishing he would have been the first to volunteer to do that too. We'll certainly miss the experience and big personalities of Kate and Andrew. I wish them all the best in their new lives. The good news is that their replacements, Kevin Chidwick as Finance Director and Nicolas Weng Kan as MD of MDs, are talented, intelligent and keen. A big thanks goes out to all our staff for all their effort in 2006, with a special mention to those further afield servicing our customers from Canada and India. We're lucky to have such a motivated, enthusiastic workforce. Henry Engelhardt Chief Executive P.S. For those keeping score, we set a new attendance record at our Staff Children's Christmas Party (always the best party of the year!) with 461 kids, up 28% on last year (360). We're nothing if not fertile. Financial review Key financial highlights The Group's pre-tax profit showed another significant increase in 2006 - rising 23% from Â£119.5m to Â£147.3m. Earnings per share grew by 22% from 32.7p to 39.8p. The results of the four key elements of the Group's business were as follows: 2006 2005 Â£000 Â£000 Underwriting profit 28,351 32,361 Profit commissions 19,926 14,735 Ancillary and other net income 75,985 65,516 Confused.com profit 23,080 6,882 ------- ------- Pre-tax profit 147,342 119,494 ------- ------- During 2006 the Group retained 25% of the UK motor business it generated, and hence limited downside exposure to the motor cycle. The Group participates in the upside through the profit commission arrangements within these contracts. Using co-insurance and reinsurance significantly reduces the amount of capital the Group is required to hold and frees up resources either for distribution to shareholders or growing the business. Ownership of the 1.2m UK policy base remains with the Group and significant non-insurance profits continue to be generated. These ancillary profits continue to be the single largest contributor to the Group's result. The Group is able to deliver continued and significant profit growth even at times when the motor insurance cycle is in its worst years because of the significant contribution made by non-underwriting income, and also the fact that the Group's underwriting has returned superior results compared to the market as a whole. 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 non-underwriting 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: 2006 2005 Â£000 Â£000 Total premium written 566,608 533,616 Other revenue 131,621 93,405 Net investment return 9,925 11,342 -------- -------- Group turnover 708,154 638,363 -------- -------- Other revenue (which is made up predominantly of ancillary revenue and Confused.com income) grew by over 40% in the year. Confused.com was a key factor in this growth (refer to below). Total premiums written grew by around 6%, also discussed below. 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 long-term 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. As well as proportional reinsurance, the Group has also arranged an excess of loss reinsurance programme with a number of reinsurers to protect itself against very large claims. 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 Â£24m, net of amounts retained to meet corporation tax liabilities. New co-insurance and reinsurance arrangements, 2007 onwards During 2007, the Group concluded the successful renegotiation of the long-term UK motor reinsurance treaty with Great Lakes, and also put in place new quota share reinsurance arrangements for 2007 and beyond. The new Great Lakes contract will run until the end of 2014 at the earliest, and the percentage of business underwritten under the contract will decline by 5% per annum until 2011, so that in that year and beyond, Great Lakes will underwrite 40% of the total. 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: o A more flexible growth cap, allowing the Group to vary the speed of policy growth in response to cyclical changes in underwriting profitability o Revision of the profit commission structure: Although these new terms are not expected to have a material impact on the results from 2007 to 2009, they could potentially lead to substantial increases in the level of profit commission earned in 2010 and beyond, should the cycle turn as expected The new quota share contracts (with Swiss Re and Partner Re) provide protection against a negative insurance result. Whilst there is a cap on the extent of protection provided by the Swiss Re contract, cover exists throughout the range of probable loss ratio outcomes. The profit commission arrangements under these two contracts allow Admiral a greater share of the underwriting result than the 2006 quota share contracts with Swiss Re and Axis Re. The potential split of the net UK motor business over the next three years is as follows: 2007 2008 2009 Great Lakes 60.0% 55.0% 50.0% Swiss Re 10.0% 10.0% 10.0% Partner Re 7.5% 7.5% - Maximum available to Admiral 22.5% 27.5% 40.0% -------- -------- -------- 100.0% 100.0% 100.0% -------- -------- -------- 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 Â£534m to Â£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 Â£0.6m of premium during 2006, in two months of trading. The number of quotes the UK direct brands gave showed another large increase in 2006 - up almost 60% from 9.7m to 15.4m. Continued and substantial growth in Confused.com (further detail below) and other aggregator volume were the principal reasons. Net insurance premium revenue increased by around 4% from Â£139.5m to Â£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 reported loss ratio increased by around 2 points from 70% to 72%. Reserve releases continued to form a significant part of the underwriting result, rising from Â£17.3m to Â£20.9m in 2006 (refer to note 19). In relative terms, the 2006 release improves the loss ratio by around 14 points, whereas 2005's release contributed 12 points. This means the pure year loss ratio has worsened by around 4 points, from 82% to 86%. This increase is broadly in line with claims inflation experience. Movements in loss ratios are further discussed in the Chief Executive's statement. The motor expense ratio increased from 15.1% to 15.8% in 2006, reflecting expense inflation with little movement in premium rates. Excluding regulatory levies, the figures are 12.3% in 2005 and 12.9% in 2006. The expense ratio is reconciled to the figures included in the income statement in note 9 below, whilst the underwriting result is reconciled later in this review. Combined ratio development The Group's combined ratio (being the aggregation of the loss and expense ratios above) has risen by around 2 points, from 85% to 87%. This compares to an expected combined ratio for the overall UK motor market in 2006 of around 109% (source - Deloitte) - an outperformance consistent with previous years of around 20 points. Further detail on market results is set out in the Chief Executive's statement. The underwriting result (including investment income) fell by Â£4m in 2006 (Â£28.4m v Â£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 The Group earns profit commission through its co-insurance and reinsurance arrangements. The amount receivable is dependent on the volume and profitability of the insurance business, measured by reference to loss and expense ratios. Profit commission - co-insurance The principal source of profit commission is the long-term co-insurance contract with Great Lakes. Â£15.4m has been recognised in 2006, compared to Â£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). A further Â£2.0m of profit commission (2005: Â£0.5m) relating to earlier underwriting years (2000 - 2002) contracts with Hibernian Re has also been recognised in these results. No further material amounts are anticipated relating to these contracts due to the relative maturity of the underwriting results of these years. Profit commission - quota share reinsurance A total of Â£2.5m has been recognised during 2006 (2005: Â£3.1m) from quota share profit commission arrangements. As noted above, the new quota share deals for 2007 and beyond include scope for the Group to earn a larger share of the underwriting result than the 2006 and earlier contracts. Ancillary and other net income This figure can be broken down as follows: 2006 2005 Â£000 Â£000 Ancillary profit 67,022 59,092 Interest income 4,539 4,176 Instalment income 5,676 3,768 Gladiator Commercial profit 2,025 1,871 Other expenses and share scheme (3,277) (3,391) costs -------- -------- Ancillary and other net income 75,985 65,516 -------- -------- Ancillary profit & instalment income This primarily involves commissions and fees earned on sales of insurance products and services complementing the motor policy, but which are underwritten by external parties. Net contribution from these sales grew by 13% in 2006 - from Â£59.1m to Â£67.0m. Average gross income per motor policy sold in the UK increased from Â£56 in 2005 to just under Â£58 in 2006. Ancillary income per average active vehicle rose from Â£68.5 to Â£69.3. Gladiator Commercial Gladiator enjoyed another good year, contributing Â£2.0m to the Group, up from Â£1.9m in 2005. 2006 was a transitional year for Gladiator as the commercial vehicle market shifted towards a predominately internet based distribution channel. This has predictably led to increased competition within the sector, which has in turn led to increases in acquisition costs and softening of premium rates. Gladiator successfully managed this change and increased new business volumes by 27% whilst maintaining its expense ratio. During 2006, Gladiator also grew its overall active policy base by 16% and returned a 34% net operating margin (36% in 2005). Confused.com 2006 2005 Â£000 Â£000 Confused.com profit 23,080 6,882* ------- ------- * Confused.com earns a proportion of its revenue from Group brands in the form of commission charged at normal commercial rates. The 2006 Confused result includes these transactions, with a corresponding reduction in the underwriting profit. Previously an adjustment was made for these intra-group sales. The impact of this adjustment on the 2005 figures was to decrease Confused profit by Â£1.9m. Confused enjoyed a year of substantial growth in 2006. Increased media activity led to an increase in the number of quotes provided by Confused of almost 120%, from 4.1m in 2005 to 9.0m in 2006. Revenue (including payments from Admiral Group brands) increased by around 150% to Â£38.5m. Profit (including intra-Group sales) rose 162% to Â£23.1m from Â£8.8m in 2005. The 2005 figure differs from that in the table due to the Â£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 Â£0.6m of premium in the short period before the year-end, making a pre-tax loss (including start-up costs) of around Â£0.6m. Balumba trades via two branches of UK companies - EUI Limited and Admiral Insurance Company Limited. Whilst it is still very early days for Balumba, management are encouraged by the results to date, and hope to replicate the model in other markets in the future. Earnings per share (EPS) Earnings per share rose 22% from 32.7p to 39.8p in 2006, broadly in line with the increase in profits. Taxation The total taxation charge reported in the income statement is Â£43.6m (2005: Â£34.8m), representing 29.6% (2005: 29.1%) of pre-tax profit. The lower effective rate in 2005 arose from utilisation of losses brought forward. 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 Â£448.9m in cash and investments - an increase of 11% on the Â£406.1m held at the end of 2005. This increase is after distributions to shareholders of Â£70.1m during 2006 (Â£49.2m in 2005). The balances making up this total can be analysed as follows: 2006 2005 Â£000 Â£000 Liquid funds in underwriting companies: Money market funds 257,634 - Government and sovereign bond - 83,071 holdings Corporate bonds and similar - 172,866 instruments Deposits with credit 26,253 40,646 institutions Cash at bank 63,337 39,824 -------- -------- 347,224 336,407 Liquid funds held outside underwriting companies: Cash at bank 101,652 69,682 -------- -------- 448,876 406,089 -------- -------- During the last quarter of 2006, the Group changed its investment strategy moving away from fixed income mandates and into money market funds. This decision was motivated by the disappointing and volatile returns generated by the bond portfolios during 2006 and a desire for stable, relatively risk free returns in 2007 as the UK motor market cycle potentially hits its worst point. To this end, a number of money market fund accounts have been set up, into which the existing funds were transferred and future cashflows will be invested. The bond portfolios were fully liquidated before the year-end. 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 post-tax 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 Â£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. Â£10m of this release has been retained in order to assess the potential need for additional capital to support growth over the short term. Taken together with the interim dividend (12.1p), this final payment results in a total distribution for 2006 of 36.1p (2005: 24.6p) per share. Employee share schemes The Board continues to take the view that actual or prospective share ownership plays a vital role in staff incentivisation across all levels of employee. The Group has two share schemes - an Inland Revenue approved Share Incentive Plan (the SIP) and the Senior Executive Restricted Share Plan - The 'Unapproved Free Share Scheme'. 1. The Approved Share Incentive Plan (SIP) This SIP is open to all staff of Admiral Group plc (Henry Engelhardt and David Stevens have declined to be included in the plan). The maximum award under the SIP is Â£3,000 per employee per annum, those shares being forfeited if staff leave within three years of the award. As the scheme is Inland Revenue approved, awards will be free of income tax after five years. The Â£3,000 limit is based on the market value of the shares at the date of award. 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. Inland Revenue rules dictate that staff must hold the shares for three years before being able to sell them, but dividends will be payable during the vesting period. If a member of staff leaves the Group before the end of the three year period, without being a 'good leaver', they get no benefit from the shares not yet vested. Further details of the awards - actual and anticipated - are included in note 26 below. 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 main performance criterion in determining awards under the Unapproved Plan will be 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 Board feels that this is a good indicator of long-term shareholder return with which to align staff incentivisation. Although no shares have yet vested under the UFSS, awards totaling 685,000 shares were made in 2005 and 681,000 in 2006. This represents 0.5% of the Group's issued share capital over the two years. 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%. Only 10% of shares vest for matching LIBOR over the three year period. The Board is conscious of the maximum allowable awards under both schemes and controls are in place to ensure that neither scheme issues shares in excess of 5% of the Group's issued share capital over the 10 year period from 1 January 2005. Reconciliation of underwriting profit 2006 2005 Â£000 Â£000 Net insurance premium revenue 144,955 139,454 Net insurance claims (107,145) (100,526) Net expenses related to insurance contracts (19,384) (17,909) Investment return (see note 8) 9,925 11,342 -------- -------- Underwriting profit 28,351 32,361 -------- -------- Reconciliation of loss ratios reported 2006 2005 Â£000 Â£000 Net insurance claims 107,145 100,526 Deduct: claims handling costs (3,538) (3,202) -------- -------- Adjusted net insurance claims 103,607 97,324 Net premium revenue 144,955 139,454 Loss ratio 71.5% 69.8% -------- -------- Reconciliation of alternative operating ratios 2006 2005 Â£000 Â£000 Outgoings: Net insurance claims 107,145 100,526 Insurance contract expenses 19,384 17,909 Ancillary / Confused / Gladiator expenses 33,818 21,792 -------- -------- 160,347 140,227 -------- -------- Income: Net insurance premium revenue 144,955 139,454 Other revenue 131,621 93,405 -------- -------- 276,576 232,859 -------- -------- Outgoings to income 58% 60% Profit before tax to income 53% 51% Consolidated income statement (audited) Year ended: 31 December 31 December 2006 2005 Note: Â£000 Â£000 Insurance premium revenue 188,288 176,214 Insurance premium ceded to reinsurers (43,333) (36,760) -------- -------- Net insurance premium revenue 5 144,955 139,454 Other revenue 6 131,621 93,405 Profit commission 7 19,926 14,735 Investment and interest income 8 14,464 15,518 -------- -------- Net revenue 310,966 263,112 Insurance claims and claims handling expenses (136,472) (121,123) Insurance claims and claims handling expenses recovered from reinsurers 29,327 20,597 -------- -------- Net insurance claims (107,145) (100,526) Expenses 9 (54,528) (40,492) Share scheme charges 9, 26 (933) (438) -------- -------- Total expenses (162,606) (141,456) -------- -------- Operating profit 148,360 121,656 Finance charges 12 (1,018) (2,162) -------- -------- Profit before tax 10 147,342 119,494 -------- -------- Taxation expense 13 (43,620) (34,774) Profit after tax attributable to equity holders of the Company 103,722 84,720 -------- -------- Earnings per share: Basic 15 39.8p 32.7p Diluted 15 39.8p 32.7p -------- -------- Dividends declared (total) 14 70,104 49,190 Dividends declared (per share) 14 27.0p 19.0p -------- -------- Consolidated balance sheet (audited) As at: 31 December 31 December 2006 2005 Note Â£000 Â£000 ASSETS Property, plant and equipment 16 7,448 4,636 Intangible assets 17 66,757 66,490 Financial assets 18 395,938 378,747 Reinsurance assets 19 74,689 54,166 Trade and other receivables 20 16,931 9,392 Cash and cash equivalents 21 191,242 150,152 -------- -------- Total assets 753,005 663,583 -------- -------- EQUITY Share capital 26 261 260 Share premium account 27 13,145 13,145 Retained earnings 27 205,682 167,990 Other reserves 27 (33) 17 -------- -------- Total equity 219,055 181,412 -------- -------- LIABILITIES Insurance contracts 19 294,425 254,130 Financial liabilities 22 - 22,000 Deferred income tax 25 981 3,550 Trade and other payables 23 215,137 182,935 Current tax liabilities 23,407 19,556 -------- -------- Total liabilities 533,950 482,171 -------- -------- Total equity and total liabilities 753,005 663,583 -------- -------- Consolidated statement of recognised income and expense (audited) As at: 31 December 31 December 2006 2005 Â£000 Â£000 Exchange differences on translation of foreign operations (50) - -------- -------- Net expense recognised directly in (50) - equity Profit for the period 103,722 84,720 -------- -------- Total recognised income and expense for the period 103,672 84,720 -------- -------- Consolidated cash flow statement (audited) 31 31 December December Note 2006 2005 Â£000 Â£000 Profit after tax 103,722 84,720 Adjustments for non-cash items: - Depreciation 2,489 1,824 - Amortisation of software 446 896 - Unrealised (gains) / losses on investments (624) 893 - Share scheme charge 2,667 1,247 Loss on disposal of property, plant and equipment and software 151 503 Change in gross insurance contract liabilities 40,295 38,023 Change in reinsurance assets (20,523) 11,971 Change in trade and other receivables, including from policyholders (23,150) (18,693) Change in trade and other payables, including tax and social security 33,652 18,041 Interest expense 1,018 2,162 Taxation expense 43,620 34,774 -------- -------- 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) -------- -------- Cash flows from operating activities, net of movements in investments 182,690 122,948 Interest payments (1,018) (2,617) Taxation payments (40,931) (26,090) -------- -------- Net cash flow from operating activities 140,741 94,241 Cash flows from investing activities: Purchases of property, plant and equipment and software (6,046) (3,999) -------- -------- Net cash used in investing activities (6,046) (3,999) Cash flows from financing activities: Repayments of borrowings (22,000) (10,667) Capital element of new finance leases (1,451) 1,201 Repayment of finance lease liabilities - (635) Equity dividends paid (70,104) (49,190) -------- -------- 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 Effects of changes in foreign exchange rates (50) - -------- -------- Cash and cash equivalents at end of period 21 191,242 150,152 -------- -------- 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 financial statements comprise the results and balances of the Company and its subsidiaries (together referred to as the Group) for the two years ended 31 December 2005 and 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 consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The Company has elected to prepare its Parent Company financial statements in accordance with UK Generally Accepted Accounting Practice (GAAP). Other than those listed below, the Group has applied all adopted IFRS and interpretations adopted by the EU at 31 December 2006, including all amendments to extant standards that are not effective until later accounting periods. The following IFRS adopted by the EU were available for early adoption but have not been applied by the Group in these financial statements: â€¢ IFRS 7 (Financial instruments: Disclosure) - applicable for years commencing on or after 1 January 2007; and â€¢ Proposed amendment to IAS 1 (Capital disclosures) The application of IFRS 7 and the proposed amendment to IAS 1 in the current year would not have affected the balance sheet or the income statement as the standards are concerned only with disclosure. The Group plans to adopt these in 2007. The accounting policies set put below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. The financial statements are prepared on the historical cost basis, except for the revaluation of financial assets classified as at fair value through profit or loss. Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is reviewed if this revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. 2. Significant estimates Estimation techniques used in calculation of claims provisions: Estimation techniques are used in the calculation of the provisions for claims outstanding, which represents a projection of the ultimate cost of settling claims that have occurred prior to the balance sheet date and remain unsettled at the balance sheet date. The key area where these techniques are used relates to the ultimate cost of reported claims. A secondary area relates to the emergence of claims that occurred prior to the balance sheet date, but had not been reported at that date. The estimates of the ultimate cost of reported claims are based on the setting of claim provisions on a case-by-case basis, for all but the simplest of claims. The 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. The most significant sensitivity in the use of the projection techniques arises from any future step change in claims costs, which would cause future claim cost inflation to deviate from historic trends. This is most likely to arise from a change in the regulatory or judicial regime that leads to an increase in awards or legal costs for bodily injury claims that is significantly above or below the historical trend. The claims provisions are subject to independent review by the Group's actuarial advisors. 3. Significant accounting policies a) Revenue recognition Premiums, ancillary income and profit commission: Premiums relating to insurance contracts are recognised as revenue proportionally over the period of cover. Income earned on the sale of ancillary products and income from policies paid by instalments is credited to the income statement over the period matching the Group's obligations to provide services. Where the Group has no remaining contractual obligations, the income is recognised immediately. An allowance is made for expected cancellations where the customer may be entitled to a refund of ancillary amounts charged. Under some of the co-insurance and reinsurance contracts under which motor premiums are shared or ceded, profit commission may be earned on a particular year of account, which is usually subject to performance criteria such as loss ratios and expense ratios. The commission is dependent on the ultimate outcome of any year, with income being recognised based on loss and expense ratios used in the preparation of the financial statements. Income is allocated to profit commission in the income statement when the right to consideration is achieved, and is capable of reliable measurement. Revenue from Gladiator Commercial and Confused.com: Commission from these activities is credited to income on the sale of the underlying insurance policy. Investment income: Investment income from financial assets comprises interest income and net gains (both realised and unrealised) on financial assets classified as fair value through profit and loss. b) Segment reporting The Group's primary format for segment reporting is business segments. There is no secondary segment. A business segment is defined as a group of assets and operations engaged in providing products and services that are subject to risks and returns that are different from other business segments. For the Group, the risks and returns of its insurance broking activities, namely Gladiator Commercial and Confused.com, are clearly distinguishable from its motor insurance segment. This is reflected in the Group's management and organisation structure and internal financial reporting systems. 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. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items are included in the fair value reserve in equity. Translation of financial statements of foreign branches The financial statements of foreign branches whose functional currency is not pounds sterling are translated into the Group presentation currency (sterling) as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date of the transaction); and (iii) All resulting exchange differences are recognised as a separate component of equity. d) Insurance contracts and reinsurance assets Premium: The proportion of premium receivable on in-force policies relating to unexpired risks is reported in insurance contract liabilities and reinsurance assets as the unearned premium provision - gross and reinsurers' share respectively. Claims: Claims and claims handling expenses are charged as incurred, based on the estimated direct and indirect costs of settling all liabilities arising on events occurring up to the balance sheet date. The provision for claims outstanding comprises provisions for the estimated cost of settling all claims incurred but unpaid at the balance sheet date, whether reported or not. Anticipated reinsurance recoveries are disclosed separately as assets. Whilst the Directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the income statement for the period in which the adjustments are made and disclosed separately if material. The methods used, and the estimates made, are reviewed regularly. Provision for unexpired risks is made where necessary for the estimated amount required over and above unearned premiums to meet future claims and related expenses. 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. The benefits to which the Group is entitled under these contracts are held as reinsurance assets. The Group assesses its reinsurance assets for impairment on a regular basis, and in detail every six months. If there is objective evidence that the asset is impaired, then the carrying value will be written down to its recoverable amount. 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 classification and accounting treatment of acquisitions occurring before 1 January 2004 have not been reconsidered in preparing the Group's opening IFRS balance sheet at 1 January 2004 due to the exemption available in IFRS 1 (First time adoption). In respect of acquisitions prior to 1 January 2004, goodwill is included at the transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP, which was tested for impairment at the transition date. On transition, amortisation of goodwill has ceased as required by IFRS 1. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGU's) according to business segment and is reviewed annually for impairment. The Goodwill held on the balance sheet at 31 December 2006 is allocated solely to the private motor insurance segment. Impairment of goodwill: The annual impairment review involves comparing the carrying amount to the estimated recoverable amount (by allocating the goodwill to CGU's) and recognising an impairment loss if the recoverable amount is lower. Impairment losses are recognised through the income statement and are not subsequently reversed. The recoverable amount is the greater of the net realisable value and the value in use of the CGU. The value in use calculations use cash flow projections based on financial budgets approved by management covering a three year period. Cash flows beyond this period are considered, but not included in the calculation. The key assumptions used in the value in use calculations are those regarding growth rates and expected changes in pricing and expenses incurred during the period. Management estimates growth rates and changes in pricing based on past practices and expected future changes in the market. Deferred acquisition costs: Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. Deferred acquisition costs represent the proportion of acquisition costs incurred that corresponds to the unearned premiums provision at the balance sheet date. This balance is held as an intangible asset. It is amortised over the term of the contract as premium is earned. 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. f) Property, plant and equipment and depreciation All property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line 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 Fixtures, fittings and equipment - 4 years Computer equipment - 2 to 4 years Improvements to short leasehold properties - 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. g) Leased assets The rental costs relating to assets held under operating leases are charged to the income statement on a straight-line basis over the life of the lease. Leases under the terms of which the Group assumes substantially all of the risks and rewards of ownership are classed as finance leases. Assets acquired under finance leases are included in property, plant and equipment at fair value on acquisition and are depreciated in the same manner as equivalent owned assets. Finance lease and hire purchase obligations are included in creditors, and the finance costs are spread over the periods of the agreements based on the net amount outstanding. 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. Financial assets classified as fair value through profit and loss account are initially recorded at cost (which equates to fair value) and subsequently carried at fair value (based on closing bid prices on the balance sheet date, or the last trading day before the balance sheet date) with changes in the fair value of these investments being recognised through the income statement. Trade and other receivables are stated at their historic cost (discounted if material) unless they are impaired. Impairment losses are recognised through the income statement. i) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term deposits with original maturities of three months or less. j) Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. 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 any difference between cost and redemption value being recognised in the income statement over the life of the borrowings on an effective interest basis. 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. Employee share schemes: The Group operates a number of equity settled compensation schemes for its employees. For schemes commencing 1 January 2004 and after, the fair value of the employee services received in exchange for the grant of free shares under the schemes is recognised as an expense, with a corresponding increase in equity. 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. At each balance sheet date, the Group revises its assumptions on the number of shares to be granted with the impact of any change in the assumptions recognised through income. Refer to note 26 for further details on share schemes. m) Taxation Income tax on the profit or loss for the periods presented comprises current and deferred tax. Current tax: Current tax is the expected tax payable on the taxable income for the period, using tax rates in effect at the balance sheet date, and includes any adjustment to tax payable in respect of previous periods. 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. The principal temporary differences arise from depreciation of property and equipment, share scheme charges and the tax treatment of Lloyd's profits. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. 4. Segment reporting Revenue and results for the year ended 31 December 2006, 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 Spanish operation are not material to the 2006 figures. 31 December 2006 Private Insurance Consolidation Group motor broking insurance adjustment Â£000 Â£000 Â£000 Â£000 Net revenue 266,168 45,069 (271) 310,966 Profit after tax 85,699 18,023 - 103,722 -------- -------- -------- -------- Other segment items: Depreciation 2,366 123 - 2,489 Amortisation 6,508 - - 6,508 -------- -------- -------- -------- The segment assets and liabilities at 31 December 2006 and capital expenditure for the year are as follows. Consolidation adjustments represent the elimination of inter-company balances. 31 December 2006 Private Insurance Consolidation Group motor broking insurance adjustment Â£000 Â£000 Â£000 Â£000 Total assets 736,160 18,780 (1,935) 753,005 -------- -------- -------- -------- Total liabilities 525,932 9,953 (1,935) 533,950 -------- -------- -------- -------- Capital expenditure: Intangible assets 6,764 - - 6,764 Plant, property and equipment 5,088 364 - 5,452 Revenue and results for the corresponding business segments for the year ended 31 December 2005 are reported below. 31 December 2005 Private Insurance Consolidation Group motor broking insurance adjustment Â£000 Â£000 Â£000 Â£000 Net revenue 245,854 20,732 (3,474) 263,112 Profit after tax 76,773 7,947 - 84,720 -------- -------- -------- -------- Other segment items: Depreciation 1,739 85 - 1,824 Amortisation 7,769 - - 7,769 The segment assets and liabilities at 31 December 2005 and capital expenditure for the year are as follows. 31 December 2005 Private Insurance Consolidation Group motor broking insurance adjustment Â£000 Â£000 Â£000 Â£000 Total assets 657,390 15,672 (9,479) 663,583 -------- -------- -------- -------- Total liabilities 485,782 5,868 (9,479) 482,171 -------- -------- -------- -------- Capital expenditure: Intangible assets 7,792 - - 7,792 Plant, property and equipment 3,475 139 - 3,614 5. Net insurance premium revenue 31 31 December December 2006 2005 Â£000 Â£000 Total motor insurance premiums before co-insurance 566,608 533,616 -------- -------- Group gross premiums written after co-insurance 196,378 186,989 Outwards reinsurance premiums (57,731) (28,052) -------- -------- Net insurance premiums written 138,647 158,937 Change in gross unearned premium provision (8,090) (10,775) Change in reinsurers' share of unearned premium provision 14,398 (8,708) -------- -------- Net insurance premium revenue 144,955 139,454 -------- -------- The Group's share of the UK and Spanish private motor insurance business was underwritten by Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). All contracts are short-term in duration, lasting for 10 or 12 months. 6. Other revenue 31 31 December December 2006 2005 Â£000 Â£000 Ancillary revenue 81,527 72,470 Revenue from Confused.com 38,517 12,044 Instalment income earned 5,676 3,768 Revenue from Gladiator Commercial 5,901 5,123 -------- -------- Total other revenue 131,621 93,405 -------- -------- Ancillary revenue primarily constitutes commission from sales of insurance products that complement the motor policy, but which are underwritten by external parties. 7. Profit commission 31 31 December December 2006 2005 Â£000 Â£000 Total profit commission 19,926 14,735 -------- -------- 8. Investment and interest income 31 31 December December 2006 2005 Â£000 Â£000 Net investment return 9,925 11,342 Interest receivable 4,539 4,176 -------- -------- Total investment and interest income 14,464 15,518 -------- -------- 9. Expenses and share scheme charges 31 December 2006 31 December 2005 Insurance Other Total Insurance Other Total contracts contracts Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Acquisition of insurance contracts 7,375 - 7,375 6,888 - 6,888 Administration and other marketing costs 12,009 35,144 47,153 11,021 22,583 33,604 ------- ------- ------- ------- ------- ------- Expenses 19,384 35,144 54,528 17,909 22,583 40,492 ------- ------- ------- ------- ------- ------- Share scheme charges - 933 933 - 438 438 ------- ------- ------- ------- ------- ------- Total expenses and share scheme charges 19,384 36,077 55,461 17,909 23,021 40,930 ------- ------- ------- ------- ------- ------- Analysis of other administration and other marketing costs: 31 31 December December 2006 2005 Â£000 Â£000 Ancillary sales expenses 14,505 13,378 Confused.com operating expenses 15,437 5,162 Gladiator Commercial operating expenses 3,876 3,252 Central overheads 1,326 791 -------- -------- Total 35,144 22,583 -------- -------- The Â£12,009,000 (2005: Â£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: 31 31 December December 2006 2005 Â£000 Â£000 Insurance contract expenses from above 19,384 17,909 Add: claims handling expenses 3,538 3,202 -------- -------- Adjusted expenses 22,922 21,111 -------- -------- Net insurance premium revenue 144,955 139,454 Reported expense ratio 15.8% 15.1% -------- -------- 10. Staff costs and other expenses Included in profit, before co-insurance arrangements are the following: 31 31 December December 2006 2005 Â£000 Â£000 Salaries 36,083 29,955 Social security charges 3,337 2,782 Pension costs 517 490 Share scheme charges (see note 26) 2,667 1,247 -------- -------- Total staff expenses 42,604 34,474 -------- -------- Depreciation charge: - Owned assets 1,009 446 - Leased assets 1,480 1,378 Amortisation charge: - Software 446 896 - Deferred acquisition costs 6,062 6,873 Operating lease rentals: - Buildings 3,292 2,969 Auditor's remuneration: - Fees payable for the audit of the Company's annual accounts 19 21 - Fees payable for the audit of the Company's subsidiary accounts 154 189 - Fees payable for other services 60 109 Loss on disposal of property, plant and 151 503 equipment -------- -------- Analysis of fees paid to the auditor for other services: Tax services 45 91 Other services 15 18 -------- -------- Total as above 60 109 -------- -------- The amortisation of software and deferred acquisition cost assets is charged to expenses in the income statement. There were no net exchange differences credited or charged to the income statement during the year. 11. Staff numbers (including Directors) Average for the year 2006 2005 Number Number Direct customer contact staff 1,593 1,377 Support staff 404 339 ------- ------- Total 1,997 1,716 ------- ------- 12. Finance charges 31 31 December December 2006 2005 Â£000 Â£000 Term loan interest 166 1,520 Finance lease interest 481 388 Letter of credit charges 221 221 Other interest payable 150 33 ------- ------- Total finance charges 1,018 2,162 ------- ------- 13. Taxation 31 31 December December 2006 2005 Â£000 Â£000 UK Corporation tax Current charge at 30% 45,430 36,051 (Over) / Under provision relating to prior (648) 11 periods - corporation tax ------- ------- Current tax charge 44,782 36,062 Deferred tax Current period deferred taxation movement (1,249) (654) Under / (Over) provision relating to prior periods - deferred tax 87 (634) ------- ------- Total tax charge per income statement 43,620 34,774 ------- ------- Factors affecting the tax charge are: 31 31 December December 2006 2005 Â£000 Â£000 Profit before taxation 147,342 119,494 Corporation tax thereon at 30% 44,203 35,848 Utilisation of brought forward tax losses - (421) Adjustments in respect of prior year 17 (161) insurance technical provisions Expenses and provisions not deductible for 114 152 tax purposes Other differences (153) (21) Adjustments relating to prior periods (561) (623) ------- ------- Tax charge for the period as above 43,620 34,774 ------- ------- 14. Dividends Dividends were declared and paid as follows. 31 31 December December 2006 2005 Â£000 Â£000 March 2005 (9.3p per share, paid May 2005) - 24,049 September 2005 (9.7p per share, paid - 25,141 October 2005) March 2006 (14.9p per share, paid March 38,667 - 2006) September 2006 (12.1p per share, paid 31,437 - October 2006) ------- ------- Total dividends 70,104 49,190 ------- ------- 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. 15. Earnings per share 31 31 December December 2006 2005 Profit for the financial year after taxation (Â£000s) 103,722 84,720 Weighted average number of shares - basic 260,632,740 258,987,515 Unadjusted earnings per share - basic 39.8p 32.7p -------- ------- Weighted average number of shares - diluted 260,906,740 259,387,515 Unadjusted earnings per share - diluted 39.8p 32.7p -------- ------- The difference between the basic and diluted number of shares at the end of 2006 (being 274,000) relates to awards committed, but not yet issued under the Group's share schemes. Refer to note 26 for further detail. 16. Property, plant and equipment Improvements Computer Office Furniture Motor Total to short equipment equipment and vehicles leasehold fittings buildings Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Cost At 1 January 2005 1,931 6,792 2,978 1,627 12 13,340 Additions 567 2,742 155 150 - 3,614 Disposals (1,818) - (510) (405) - (2,733) ------ ------ ------ ------ ------ ------ At 31 December 2005 680 9,534 2,623 1,372 12 14,221 ------ ------ ------ ------ ------ ------ Depreciation At 1 January 2005 1,554 4,424 2,467 1,545 1 9,991 Charge for the year 226 1,179 355 61 3 1,824 Disposals (1,352) - (502) (376) - (2,230) ------ ------ ------ ------ ------ ------ At 31 December 2005 428 5,603 2,320 1,230 4 9,585 ------ ------ ------ ------ ------ ------ Net book amount At 31 December 2005 252 3,931 303 142 8 4,636 ------ ------ ------ ------ ------ ------ Cost At 1 January 2006 680 9,534 2,623 1,372 12 14,221 Additions 1,655 1,672 1,684 441 - 5,452 Disposals (2) (15) (138) (1) - (156) ------ ------ ------ ------ ------ ------ At 31 December 2006 2,333 11,191 4,169 1,812 12 19,517 ------ ------ ------ ------ ------ ------ Depreciation At 1 January 2006 428 5,603 2,320 1,230 4 9,585 Charge for the year 220 1,750 396 120 3 2,489 Disposals - (5) - - - (5) ------ ------ ------ ------ ------ ------ At 31 December 2006 648 7,348 2,716 1,350 7 12,069 ------ ------ ------ ------ ------ ------ Net book amount At 31 December 2006 1,685 3,843 1,453 462 5 7,448 ------ ------ ------ ------ ------ ------ The net book value of assets held under finance leases is as follows: 31 31 December December 2006 2005 Â£000 Â£000 Computer equipment 2,996 2,380 Office equipment - 767 ------- ------- 2,996 3,147 ------- ------- 17. Intangible assets Goodwill Deferred Software Total acquisition costs Â£000 Â£000 Â£000 Â£000 Carrying amount: At 1 January 2005 62,354 2,794 1,319 66,467 Additions - 7,407 385 7,792 Amortisation charge - (6,873) (896) (7,769) ------- ------- ------- ------- At 31 December 2005 62,354 3,328 808 66,490 Additions - 6,179 596 6,775 Amortisation charge - (6,062) (446) (6,508) ------- ------- ------- ------- At 31 December 2006 62,354 3,445 958 66,757 ------- ------- ------- ------- 18. Financial assets The Group's financial assets can be analysed as follows: 31 31 December December 2006 2005 Â£000 Â£000 Investments held at fair value 257,634 255,937 Receivables - amounts owed by policyholders 138,304 122,810 -------- -------- Total financial assets 395,938 378,747 -------- -------- All receivables from policyholders are due within 12 months of the balance sheet date. Analysis of investments held at fair value: 31 31 December December 2006 2005 Â£000 Â£000 Money market funds 257,634 - Fixed income securities: Government bonds - 83,071 Other listed securities - 156,071 Variable interest securities: Other listed securities - 16,795 -------- -------- 257,634 255,937 -------- -------- 19. Reinsurance assets and insurance contract liabilities A) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2006 that would result from a 1 per cent change in the loss ratios used for each underwriting year for which material amounts remain outstanding. UNDERWRITING YEAR TOTAL 2002 2003 2004 2005 2006 Loss ratio 54.5% 59.5% 69.0% 82.0% 89.5% Impact of 1% change (Â£000s) 465 1,214 1,552 1,798 529 5,558 The impact is stated net of reinsurance and includes the change in net insurance claims along with the associated profit commission movements that result from changes in loss ratios. The figures are stated net of tax at the current rate. B) Analysis of recognised amounts: 31 31 December December 2006 2005 Â£000 Â£000 Gross: Claims outstanding 202,421 170,216 Unearned premium provision 92,004 83,914 -------- -------- Total gross insurance liabilities 294,425 254,130 -------- -------- Recoverable from reinsurers: Claims outstanding 47,710 41,585 Unearned premium provision 26,979 12,581 -------- -------- Total reinsurers' share of insurance liabilities 74,689 54,166 -------- -------- Net: Claims outstanding 154,711 128,631 Unearned premium provision 65,025 71,333 -------- -------- Total insurance liabilities - net 219,736 199,964 -------- -------- C) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2006, of the retrospective re-estimation of claims provisions initially established at the end of the financial years stated. Figures are shown gross and net of reinsurance. These tables present data on an accident year basis. Financial year ended 31 December Gross amounts: 2002 2003 2004 2005 2006 Â£000 Â£000 Â£000 Â£000 Â£000 Gross claims provision as originally estimated 124,478 115,169 142,968 170,216 202,421 Provision re-estimated as of: One year later 114,051 111,599 137,075 162,205 - Two years later 109,490 105,748 127,613 - - Three years later 101,910 100,880 - - - Four years later 98,904 - - - - Five years later - - - - - As re-estimated at 31 December 2006 98,904 100,880 127,613 162,205 - Gross cumulative overprovision (25,574) (14,289) (15,355) (8,011) - ------- ------- ------- ------- ------- Financial year ended 31 December Net amounts: 2002 2003 2004 2005 2006 Â£000 Â£000 Â£000 Â£000 Â£000 Net claims provision as originally estimated 71,071 75,549 98,120 128,631 154,711 Provision re-estimated as of: One year later 64,325 72,579 93,910 122,423 - Two years later 61,167 67,726 87,761 - - Three years later 55,974 63,954 - - - Four years later 53,857 - - - - Five years later - - - - - As re-estimated at 31 December 2006 53,857 63,954 87,761 122,423 - Net cumulative overprovision (17,214) (11,595) (10,359) (6,208) - ------- ------- ------- ------- ------- D) Analysis of net claims provision releases: The following table analyses the impact of movements in prior year claims provisions, in terms of their net value, and their impact on the reported loss ratio. This data is presented on an underwriting year basis. Financial year ended 31 December 2002 2003 2004 2005 2006 Â£000 Â£000 Â£000 Â£000 Â£000 Underwriting year: 2000 6,188 5,176 1,480 370 1,110 2001 2,490 7,938 2,967 5,043 1,879 2002 - 2,975 3,229 5,166 2,260 2003 - - 1,513 4,622 5,084 2004 - - - 2,076 7,948 2005 - - - - 2,623 ------ ------ ------ ------ ------ Total net release 8,678 16,089 9,189 17,277 20,904 ------ ------ ------ ------ ------ Net premium revenue 81,336 79,327 107,501 139,454 144,955 Release as % of net premium revenue 10.7% 20.3% 8.5% 12.4% 14.4% ------ ------ ------ ------ ------ E) Reconciliation of movement in net claims provision: 31 31 December December 2006 2005 Â£000 Â£000 Net claims provision at start of period 128,631 98,120 Net claims incurred 103,607 97,325 Net claims paid (77,527) (66,814) -------- -------- Net claims provision at end of period 154,711 128,631 -------- -------- F) Reconciliation of movement in net unearned premium provision: 31 31 December December 2006 2005 Â£000 Â£000 Net unearned premium provision at start of period 71,333 51,850 Written in the period 138,647 160,244 Earned in the period (144,955) (140,761) -------- -------- Net unearned premium provision at end of period 65,025 71,333 -------- -------- 20. Trade and other receivables 31 31 December December 2006 2005 Â£000 Â£000 Trade debtors 14,982 6,905 Prepayments and accrued income 1,949 2,487 -------- -------- Total trade and other receivables 16,931 9,392 -------- -------- 21. Cash and cash equivalents 31 31 December December 2006 2005 Â£000 Â£000 Cash at bank and in hand 164,989 109,506 Cash on short term deposit 26,253 40,646 -------- -------- Total cash and cash equivalents 191,242 150,152 -------- -------- 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. 22. Financial liabilities 31 31 December December 2006 2005 Â£000 Â£000 Interest bearing bank loans - 22,000 -------- -------- Analysis of borrowings: 31 31 December December 2006 2005 Â£000 Â£000 Repayments falling due within 12 months - - Repayments falling due after 12 months - 22,000 -------- -------- - 22,000 -------- -------- Interest continues to be charged on amounts drawn down based on LIBOR plus a margin. 23. Trade and other payables 31 31 December December 2006 2005 Â£000 Â£000 Trade payables 4,601 4,423 Amounts owed to co-insurers and reinsurers 124,238 98,054 Finance leases due within 12 months 1,337 1,963 Finance leases due after 12 months 61 886 Other taxation and social security liabilities 4,742 4,174 Other payables 13,708 10,066 Accruals and deferred income (see below) 66,450 63,369 -------- -------- Total trade and other payables 215,137 182,935 -------- -------- Analysis of accruals and deferred income: 31 31 December December 2006 2005 Â£000 Â£000 Premium receivable in advance of policy inception 31,772 30,471 Accrued expenses 25,456 24,559 Deferred income 9,222 8,339 -------- -------- Total accruals and deferred income as above 66,450 63,369 -------- -------- 24. Obligations under finance leases Analysis of finance lease liabilities: At 31 December 2006 At 31 December 2005 Minimum Interest Principal Minimum Interest Principal lease lease payments payments Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Less than one year 1,383 46 1,337 2,171 208 1,963 Between one and five years 63 2 61 921 35 886 More than five years - - - - - - ------ ------ ------ ------ ------ ------ 1,446 48 1,398 3,092 243 2,849 ------ ------ ------ ------ ------ ------ It is the Group's policy to lease certain of its IT equipment under finance leases. The average lease term is two years. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The fair value of the Group's lease obligations approximates their carrying amount. 25. Deferred income tax liability 31 31 December December 2006 2005 Â£000 Â£000 Brought forward at start of period 3,550 4,838 Movement in period (2,569) (1,288) ------ ------ Carried forward at end of period 981 3,550 ------ ------ The net balance provided at the end of the year is made up as follows: Analysis of net deferred tax liability: 31 31 December December 2006 2005 Â£000 Â£000 Tax treatment of Lloyd's Syndicates 1,936 3,816 Tax treatment of share scheme charges (853) 315 Capital allowances 149 (392) Other differences (251) (189) ------ ------ Deferred tax liability at end of period 981 3,550 ------ ------ 26. Share capital 31 31 December December 2006 2005 Â£000 Â£000 Authorised: 500,000,000 ordinary shares of 0.1p 500 500 Issued, called up and fully paid: 261,186,599 ordinary shares of 0.1p 261 - 259,861,965 ordinary shares of 0.1p - 260 ------ ------ 261 260 ------ ------ During 2006, 1,324,634 new ordinary shares of 0.1p were issued to the trusts administering the Group's share schemes. 646,634 of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of this share scheme. These shares are entitled to receive dividends. 678,000 were issued to the Admiral Group Employee Benefit Trust for the purposes of the Admiral Group Senior Executive Restricted Share Plan. 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): 31 31 December December 2006 2005 Â£000 Â£000 SIP charge (note i) 495 263 UFSS charge (note ii) 438 175 ------ ------ Total share scheme charges 933 438 ------ ------ (i) The Approved Share Incentive Plan (the SIP) Eligible employees qualify for awards under the SIP based upon the performance of the Group in each half-year against budget. The current maximum award for each half-year amounts to 600,000 shares (or a maximum annual award of Â£3,000 per employee if smaller). For the 2006 financial year, a maximum of 916,328 shares (2005: 1,181,565 shares) will vest under this scheme. The awards are made with reference to the Group's performance against its budget. Employees must remain in employment until the vesting date (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 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 681,435. 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. This initial hurdle has been removed for the 2006 scheme. Individual awards are calculated based on the growth in the Company's earnings per share (EPS) relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This performance is measured over the same three-year period. The range of awards is as follows: â€¢ If the growth in EPS is less than the RFR, no awards vest â€¢ EPS growth is equal to RFR - 10% of maximum award vests â€¢ To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the three year period Between 10% and 100% of the maximum awards, a linear relationship exists. 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 Â£3.62 for the 2005 scheme and Â£6.71 for the 2006 scheme). Number of free share awards committed at 31 December 2006: Awards Vesting outstanding (*1) date SIP H105 scheme 581,565 September 2008 SIP H205 scheme 330,306 March 2009 SIP H106 scheme 316,328 September 2009 SIP H206 scheme 274,000 April 2010 UFSS 2005 scheme 685,000 June 2008 UFSS 2006 scheme, 1st award 604,187 April 2009 UFSS 2006 scheme, 2nd award 77,248 September 2009 --------- Total awards committed 2,868,634 --------- *1 - being the maximum number of awards expected to be made before accounting for expected staff attrition. Of the 2,868,634 share awards outstanding above, 2,591,199 have been issued to the trusts administering the schemes, and are included in the issued share capital figures above. 27. Analysis of movements in capital and reserves Share Share Capital Foreign Retained Total capital premium exchange profit equity account redemption reserve and loss reserve Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 As at 1 January 2005 259 13,145 17 - 131,213 144,634 Retained profit for the period - - - - 84,720 84,720 Dividends - - - - (49,190) (49,190) Issues of share capital 1 - - - - 1 Share scheme charges - - - - 1,247 1,247 ------ ------ ------ ------ ------ ------ As at 31 December 2005 260 13,145 17 - 167,990 181,412 Retained profit for the period - - - - 103,722 103,722 Dividends - - - - (70,104) (70,104) Issues of share capital 1 - - - - 1 Currency translation differences - - - (50) - (50) Share scheme charges - - - - 2,667 2,667 Deferred tax credit on share scheme charges - - - - 1,407 1,407 As at 31 December 2006 261 13,145 17 (50) 205,682 219,055 ------ ------ ------ ------ ------ ------ The capital redemption reserve arose in 2002 on the redemption of shares previously in issue at below par. The foreign exchange reserve represents the net gains or losses on translation of the Group's net investment in foreign operations. 28. Financial commitments The Group was committed to total minimum obligations under operating leases on land and buildings as follows: 31 31 December December Operating leases expiring: 2006 2005 Â£000 Â£000 Within one years - 434 Within two to five years - - Over five years 33,425 29,523 ------ ------ Total commitments 33,425 29,957 ------ ------ Operating lease payments represent rentals payable by the Group for its office properties. In addition, the Group had contracted to spend the following on property, plant and equipment at the end of each period: 31 31 December December 2006 2005 Â£000 Â£000 Expenditure contracted to 1,539 1,342 ------ ------ 29. Related party transactions There were no related party transactions occurring during 2006 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%. 30. Non-statutory accounts The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2006 or 2005. Statutory accounts for 2005 have been delivered to the registrar of companies and those for 2006 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. 31. Annual Report The Company's annual report and accounts for the year ended 31 December 2006 is expected to be posted to shareholders by 11 April 2007. Copies of both this announcement and the annual report and accounts will be available to the public at the Company's registered office at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and through the Company's website at www.admiralgroup.co.uk. 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. Income statement IFRS UK GAAP ------------------------ -------------- 2006 2005 2004 2003 2002 Â£m Â£m Â£m Â£m Â£m Total motor premiums 566.6 533.6 470.4 371.6 333.0 Net insurance premium revenue 145.0 139.5 107.5 79.3 81.4 Other revenue 131.6 93.4 69.5 50.8 40.1 Profit commission 19.9 14.7 21.7 1.4 - Investment and interest income 14.5 15.5 11.9 6.8 7.4 ------- ------- ------- ------- ------- Net revenue 311.0 263.1 210.6 138.3 128.9 Net insurance claims (107.1) (100.5) (74.3) (43.5) (52.6) Total expenses (55.5) (40.9) (28.9) (34.4) (28.5) ------- ------- ------- ------- ------- Operating profit 148.4 121.7 107.4 60.4 47.8 ------- ------- ------- ------- ------- Balance sheet IFRS UK GAAP ------------------------ -------------- 2006 2005 2004 2003 2002 Â£m Â£m Â£m Â£m Â£m Property, plant and equipment 7.5 4.6 3.3 5.8 6.7 Intangible assets 66.8 66.5 66.5 62.4 66.3 Financial assets 395.9 378.7 300.7 241.6 179.1 Reinsurance assets 74.7 54.2 66.1 56.7 53.4 Trade and other receivables 16.9 9.4 16.7 12.5 8.9 Cash and cash equivalents 191.2 150.2 119.3 70.1 63.0 ------- ------- ------- ------- ------- Total assets 753.0 663.6 572.6 449.1 377.4 ------- ------- ------- ------- ------- Equity 219.1 181.4 144.6 108.1 68.9 Insurance contracts 294.4 254.1 216.1 174.8 155.1 Financial liabilities - 22.0 33.1 35.4 47.8 Provisions for other liabilities and charges - - - 11.7 - Deferred income tax 1.0 3.6 4.8 6.4 3.4 Trade and other payables 215.1 182.9 164.3 104.0 98.1 Current tax liabilities 23.4 19.6 9.7 8.7 4.1 ------- ------- ------- ------- ------- Total liabilities 753.0 663.6 572.6 449.1 377.4 ------- ------- ------- ------- ------- This information is provided by RNS The company news service from the London Stock Exchange

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Admiral Group (ADM)

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