Final Results

Admiral Group PLC 07 March 2006 Admiral Group plc Results for the Year to 31 December 2005 7 March 2006 Admiral Reports Record Profits & Strong Growth Admiral Group plc ('Admiral' or 'the Group') today announces a record annual result with a core profit of Â£122.1 million for the year to December 2005, an increase of 21% over the previous year. Group turnover, comprising total premiums written, gross other income and investment income, rose 16% to Â£638.4 million. 2005 Highlights â€¢ Core profit up 21% at Â£122.1 million (2004: Â£100.6 million) â€¢ Total final dividend of 14.9p comprising normal dividend of 7.8p; special dividend of 7.1p per share (2005 total declared dividends: 24.6p) â€¢ Group turnover up 16% at Â£638.4 million (2004: Â£548.0 million) â€¢ Revenue from products and services not underwritten by the Group up 34% at Â£93.4 million (2004: Â£69.5 million) â€¢ Active customers up 10% at 1.1m from 1.0m at 31 December 2004 â€¢ Confused.com gave 4 million quotes and made a profit of Â£8.8 million (2004: Â£2.0 million), including payments from Group brands â€¢ All Employee Share Scheme - over 1,500 staff are to receive around 400,000 free shares based on the strong H2 2005 results. This means that staff will have received the full allocation of free shares for 2005, 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. Admiral's performance demonstrates the strength of its business model and the effectiveness of its distribution strategy. It also goes to show what motivated staff can accomplish. 'Our growth of both profits and turnover strongly suggests that motorists continue to find our product offering attractive and competitive. I am especially pleased with the excellent result achieved by Confused.com, our automated car insurance shopper.' Comment from Alastair Lyons, Group Chairman 'Consistent with our principle of returning excess cash to our shareholders, we are very pleased to be able to propose both a normal final dividend of 7.8p per share and a special dividend of 7.1p per share. 'We will continue to review available cash to determine whether it is appropriate for the Group to pay further special dividends from time to time, in addition to its normal policy of distributing not less than 45% of after-tax profits at each half year.' Retirement of Andrew Probert Kevin Chidwick, Admiral's Deputy Finance Director, was today named Finance Director Designate following the notice from the Group's current Finance and IT Director, Andrew Probert, of his forthcoming retirement. Mr Probert, 53, will leave the Group in September this year. He joined Admiral in September 1992, prior to the company's launch in January 1993. Andrew guided the company through its MBO in 1999 and, more recently, the company's IPO in 2004. He is retiring to spend more time with his family and will hand over his responsibilities to Kevin over the course of the next six months. Kevin joined Admiral in September 2005 from Engage Mutual. He has over 20 years experience in UK financial services, including senior positions with Cigna and National Australia Bank. Kevin is a Fellow of the Association of Certified Accountants and has an MBA from London Business School. Final dividend The final dividend of 14.9p per share will be paid on 25 May 2006. The ex-dividend date is 19 April 2006, the record date 21 April 2006. For further information, please contact: Admiral: Louisa Scadden Justin Beddows +44 (0)29 2043 4394 Financial Dynamics: Robert Bailhache Dominick Peasley +44 (0)20 7269 7200 www.admiralgroup.co.uk Chairman's statement 2005, our first full year since coming to the market in September 2004, continued the sustained growth in customer franchise and profitability that the group has achieved since it was launched in 1993. Henry Engelhardt, our Chief Executive, writes in detail about the achievements of the year in his own report - I shall, therefore, content myself with the headlines. In a year when, given our assessment of where the motor market was in its cycle, we deliberately set out to grow less rapidly, we were pleased to add 10% to customer numbers and finish the year with 1.1 million policyholders. This growth, together with a continuing excellent expense ratio, helped offset the impact of the cycle on our claims ratio, whilst we achieved further strong growth in income from products and services that we do not underwrite. Profit before tax was up 14% at Â£119m whilst total premiums written, including those we share with our reinsurance partners, grew by 13% to Â£534m. We were delighted with the 48.3% Total Return that we achieved for Shareholders during 2005, itself part of an overall 73.9% since flotation. The sustained growth in our share price has resulted in the business being valued at Â£1.5Bn on 1 March 2006, which compares against Â£711m when first listed just under 18 months previously. During the year we paid dividends to shareholders totalling Â£49.2m, comprising a 9.3p per share final dividend for 2004 and a 9.7p per share interim dividend for 2005. We consider dividends in two parts: the first element, being the normal dividend, is based on a 45% pay-out ratio. The second special element derives from our principle of returning excess cash to our shareholders, reflecting the strongly cash generative nature of our business model. We only retain in the business sufficient cash to provide both a prudent margin against contingencies, currently set at Â£25m, and cover for planned investments, this year being Â£6m for our expansion into Spain and moving our Swansea office into larger modern premises. On this basis there is Â£38.7m available to distribute out of year-end non-regulated cash balances totalling Â£69.7m. A final dividend of 14.9p per share (7.8p normal : 7.1p special) is, therefore, proposed for 2005, which will bring total dividends for the year to 24.6p per share, a yield of 4.3% based on the closing share price on 1 March 2006. This is the first full dividend since flotation. The Group is well capitalised with a proven approach to reserving, and with solvency ratios in both the UK and Gibraltar which carry an appropriate margin over minimum solvency statutory requirements. We believe passionately that a business succeeds because people enjoy working for it. Enthusiasm is infectious, transmitting from our staff to our customers and to those thinking about coming to work for us. Quality is central to everything that we do: we measure the quality of every department on a monthly basis, and these quality scores translate into Quality Awards. Whilst quality cannot be achieved without effective training, it is also a mindset that depends upon people wanting to achieve a quality outcome. We were, therefore, very proud to have been named Employer of the Year at the National Business Awards, to have won Welsh Company of the Year for the second time, and to have continued our uninterrupted series of being six years running in the Sunday Times list of Top 100 Places to work in the UK. Being a leading employer of over 1,700 people in South Wales we recognise our wider responsibility to the communities of which we are a part and support a large number of local charities - details of our activity in this area can be found in the report on corporate responsibility. Ongoing alignment of interest between 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 and we are delighted that the strong out-performance against our plan for 2005 resulted in the approved scheme realising its maximum award of Â£3,000 free shares for each eligible employee. 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. In April of last year we welcomed Gillian Wilmot to our Board as a non-executive director, bringing us extensive marketing experience gained across a broad range of consumer-facing businesses. However, her subsequent appointment as Chief Executive of the privately owned credit retail business Buy-as-you-View results in her no longer being regarded as an independent director under the Combined Code, as I am also Chairman of that business. As a consequence she will not offer herself for re-election as a director of Admiral at the forthcoming Annual General Meeting and we are currently seeking a new non-executive director with equivalent skills and experience. I would like to take this opportunity to thank Gillian for her contribution during her time with us. As I wrote last year, Admiral's strategy is clear and straightforward - to continue to grow our share of the direct private motor market, maximising the value derived from each customer relationship. Along the way we will identify profitable opportunities to exploit the knowledge, skills and resources attaching to our core business in the UK. Our plans to launch later this year in Spain, the first leg of our expansion into Europe, flow directly from this strategy, as does our continuing development of Confused, our intelligent automated car insurance shopper which last year handled 4 million quotes and added household and travel insurance to its core motor offering. We look forward to continuing consistently to create value for all our shareholders. Alastair Lyons Chairman Chief Executive's statement 2005? Not too shabby... Our first full year as a publicly quoted company was, by virtually any measure, a successful one. Here in a nutshell are the highlights: â€¢ Made a record core profit of Â£122.1m, up 21% from Â£100.6m in 2004; â€¢ Total turnover for the year was Â£638m, up 16% from 2004. â€¢ Total motor premium written grew to Â£534m, up 13% from 2004; â€¢ Produced a combined ratio of 85%; â€¢ Gave more than 9.7m quotes, of which almost 9 million started on the internet (92%); â€¢ Ended the year with more than 1.1m customers (+ 10%); â€¢ Experienced continued improvement in loss ratios across all the back years; â€¢ Confused.com gave more than 4m quotes and made a profit of Â£8.8m (including payments from Group brands); â€¢ Named Employer of the Year at the National Business Awards; â€¢ Named to The Sunday Times list of Top 100 Places To Work in the UK for the sixth year in a row (every year it's been run). â€¢ Named by the Financial Times as the 17th Best Workplace in the UK and one of the Top 100 Workplaces in the EU; â€¢ Welsh Company of the Year, for the second time in eight years; â€¢ The number of children at our Staff Children's Christmas party? ......I'm going to put this one at the end - make you work for it! Read on -- 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. 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, taking only 30% of the underwriting risk for our own account. We operate through a number of targeted brands: Admiral (younger drivers, London area), Diamond (women drivers), Elephant.co.uk (internet users) and Bell (zero no claims bonus). We have two other brands, Gladiator Commercial, which operates as an intermediary in the commercial vehicle market, and Confused.com, which is an internet 'shopper' for insurance products. 2005 was our 13th year of trading. The first 7 were in a Lloyd's of London environment. However, towards 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 the company on the London Stock Exchange and created Admiral Group plc. In 1999 we also put in place a long-term co-insurance agreement with Great Lakes UK, a wholly-owned subsidiary of Munich Re. In 2001 we extended this agreement and it currently runs through at least 2008. In 2002 Munich Re also became a shareholder in AGL and 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 2005, before sharing it with our reinsurance partners, was Â£534m, accounting for 84% of our total turnover. The number of customers we service rose to 1,141,000 from 1,041,000 (+10%). All our growth throughout our history has been organic. In 2005 70% of our premium was underwritten by Munich Re (65%) and Axis Re (5%). The remaining 30% was kept by the Group. Our net written premium for 2005 was Â£159m. In 2006 Admiral Group will take 25% of the premium income to its own account. Munich Re, through Great Lakes, will continue to take 65%, Axis, as last year, has 5% and we have a new partner for 2006, Swiss Re, also taking 5%. Some key numbers from the accounts which follow: â€¢ Claims ratio 70% up from 67% in 2004; â€¢ Earned expense ratio, excluding regulatory levies, down to 12.3% from 12.5%; â€¢ Combined ratio 85%, up from last year's 82%; â€¢ Revenue from products and services we do not underwrite totalled Â£93.4m up from Â£69.5m (+34%). The movement in loss ratio from 67% last year to 70% in 2005 is to be expected. The market has not moved much on price in several years and there is a claims inflation factor at work. The change in loss ratio across years is characterised by a less good underlying trend reflecting the paucity of price increases. Without any releases taken into account the loss ratio moved from 75% to 82%. The expense ratio, not including regulatory levies, moved downwards by 0.2% from 2004, a reduction of 2%. This reflects our continued efficiency improvements. However, do not expect swingeing cuts in the expense ratio going forward. It is one of our strengths that we use our efficiency to help our underwriting selectivity. Because we are efficient, particularly in generating quotes, we can afford to convert fewer quotes into business. In this way we are helping ensure that we only take the right risks at the right prices. The end result is a better combined ratio. If we concentrated on reducing the expense ratio it may turn out to be a false economy, as it might come at the expense of the loss ratio through reduced selectivity. So, for instance, we could cut the marketing budget and do fewer quotes, but then we'd need to convert more of them to grow our premium income and customer numbers. To convert more quotes we'd have to be less selective. Clearly, the more selective you are the better your loss ratio should be. In last year's report I explained our intention to reduce our growth rate in 2005. We achieved our goal! We wound up reducing our growth rate in premium from 27% in 2004 to 13% in 2005. We did this because the best part of the market cycle was behind us and it would not have been beneficial to grow so rapidly into the poorest part of the cycle. We increased prices steadily in the first half of the year to put the brakes on, finishing the half-year 3% above where we'd started. However, the market lagged well behind these increases and our conversion rate suffered. Our choice was either to bring rates down or sacrifice profitable business. We chose the former and made selective rate decreases in the second half. The overall effect was a 1% increase in prices across the year and a year-on-year increase in our customer numbers of 10%. Ancillary income moved forward, both through the increased number of customers and also through more income per customer. We finished the year with more than Â£56 of income per customer, not including Confused or Gladiator. We do not anticipate a further step-change in income per customer in 2006, although we'd be pleasantly surprised if it occurred. The splendid result from Confused.com certainly didn't hurt the 'other' income line either. To put 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 60%! Here's another interesting calculation: we made Â£122m on income of Â£233m, a ratio of 52%. The UK Car Insurance Market Cycle: Boil A Frog Slowly: Did you know that if you want to boil a frog (note: no frogs have been boiled in the making of these accounts or the writing of this commentary) and you throw the frog into boiling water it will jump right out? But if you put the frog in a pot of cool water and turn up the heat, it will boil quite nicely? The UK car insurance market is now akin to that slowly boiling frog. Previous cycles were more like throwing the frog into the boiling pot. The market would scream and react. The current cycle is characterised by a gentle deterioration; a slow boil. The market result is just getting a bit worse each year, nothing overly dramatic, but .... 2004, the most recent year for which data is available, was a decent year for the market. Blimey, actually not too far from an underwriting profit! The official figure for the market combined ratio for 2004 was 101.3% (102.2% for 2003), but this was distorted by a very large release of prior year claims reserves, well beyond the norm for the market. The true year combined ratio was more like 105%, which is much more akin to a borderline break-even result. Typically, seven years on from the previous worst point in the cycle the market is back to a combined ratio of 120%. So this, seven years on from 1998's 124% result, is clearly demonstrating the changing nature of the typical cyclical pattern. But although 105% is a good result considering the nature of the cycle, it is still a marginal proposition to write UK motor insurance at the average. And it is a worse result than 2003. Why did the market deteriorate a bit 2004 v 2003? Well, largely because there weren't any major movements in price. And there was a modest amount of claims inflation, albeit probably less than expected. The lower-than-expected claims inflation is down to two phenomena: first, a gradual decline in overall frequency, which has been happening for a number of years. This is probably caused by a combination of factors including: the increase of speed cameras, more traffic congestion and therefore people driving slower, growth in low-cost air travel which lets people travel abroad for holiday rather than driving in the UK and a growth in the number of households where the number of cars exceeds the number of drivers. Whatever the exact cause, it's a market-wide phenomena. The second phenomenon is a reduction in the inflation rate of bodily injury costs. This is a much more volatile measure and subject to potential shock should, for instance, there be a change in the discount rate for calculation of long term liabilities. But at the moment inflation in this area is below the average for the last decade. There isn't much to say about market rates in 2005 because they didn't move very much! We saw this lack of movement via our conversion rate and, as noted earlier, moved our own rates accordingly. However, the marketing spend seemed to have come off the boil in the second half of the year. The spend peaked in July 2005. Since then less was spent in each month of 2005 than the same month in 2004. Historically marketing spend has been a measure of appetite for business. It serves as a rough precursor for cyclical change, with a rise in the spend bringing about a poorer future underwriting result and a reduction in spend indicating a better future result. The last time the spend actually decreased, as it did in the latter part of 2005, was 1998. The spend then levelled off for two years, at which point the market was moving to the better phase of the cycle. The marketing spend started to rise again in 2001, when the market result was very good, and continued to rise, unabated, until the middle of 2005. It is not clear to me whether this is a false dawn or a true indication that most insurers are keen to produce a profitable result. It easily could be a situation where a number of traditionally big spenders have just paused, taking time to assess their position and clean their weapons in anticipation of a major assault on the market in 2006. Nothing has occurred to alter my thoughts on the long-range outlook for the market. It is still a cyclical market, but, versus historical patterns, I'd expect the good times to be less good and the bad times to be less bad. In large part this is due to consolidation in the market. The largest two players in the market combine to have around 45% market share, whereas in the mid-1990s, prior to consolidation, it took more than a handful of firms to account for 45% market share. These two firms, Royal Bank of Scotland (@34%) and Aviva Norwich Union (@11%), appear to be disciplined and keen to make good returns. This lends a great deal of stability to the market. The loss of large investment returns from the halcyon days of the 90's also puts more pressure on the insurance result, which in turn should provide more stability to the market. As the 'boil the frog' analogy indicates, I don't see a great deal of change to this landscape in 2006. I believe the market will continue to deteriorate, but not in a dramatic fashion. I think we'll see some firms trying to grow share through marketing, others through rate changes and others willing to sacrifice share to maintain a healthy bottom line. We might see some volatility in marketing spend for the market as a whole as from time to time individual firms step up the marketing to meet ambitious targets. 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. As we continue to grow our customer base, we continue to grow our ancillary revenues. All in all it should result in sustainable, profitable growth going forward. At the very end of 2005 we launched Admiral MultiCar. This is a product targeted at households with more than one car. It is, in part, a volume discount product. However, we've taken the time and trouble to create something more involved than just that. MultiCar will take the information it gathers from the household and use it in rating all the vehicles. This will allow us to be much more precise in our rating and, in many cases, save deserving customers a lot of money. But there's more for the customer than just saving money. MultiCar will ease the burden a customer currently has of getting quotes and keeping track of different policies for their different cars, often with different insurers, often with different renewal dates. MultiCar will unite all the renewal dates on the anniversary date of the renewal of the first car. Changes will be easier too: if a customer moves house, he/she need but tell us once and all the cars in the policy will be updated. As you might be able to tell, we're excited about the prospects of MultiCar. Once Again, A Brief Explanation of Why Our Results Are So Good... Our ability to make the internet work goes a long way to explaining our excellent results. This is also a source of confidence in our future. Our 2005 internet results exceeded our forecasts and, in the absolute, are quite stunning. (Except for changing the year from '2004' to '2005' this was exactly what I wrote last year andthe year before. It's not that I'm being lazy, it's just that it's still true!) Of the more than 9.7m quotes we did last year 92% started on the internet - that's almost 9,000,000 quotes on the internet! Around 82% of all our sales came from these internet quotes. I believe that there is still growth to be had in internet distribution, albeit probably less rampant than before. As we are among the leaders in the internet delivery of car insurance we are well placed for continued success through this channel in the coming years. (In 2005 we had around a billion hits to our websites!) Elephant, our pure internet brand, saw its end-of-year customer count reach 410,000 (up 14% from the year before). Elephant is still the biggest brand in the Group. The other brands all grew the number of customers they service in 2005 as well, Admiral by 11%, Bell by 18% and Diamond by 1%. 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 2005 Gladiator's customer count stood at 36,000 and it contributed Â£1.9m to the Group's bottom line. Changing The Way Car Insurance Is Bought In The UK - Confused.com: The Consumer Champ... 2005 was really a huge growth year for Confused.com. Confused is now a major force in the distribution of car insurance in the UK. Confused.com is an intelligent, automated car insurance shopper. Simply put, all a customer has to do is put his or her details into Confused.com and Confused then goes out to the major car insurance websites, populates the appropriate fields, and, 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! We launched Confused in its current form in the middle of 2002. 2005 saw Confused generate over 4m quotes up from 1.37m in 2004 (+192%). A great deal of Confused's growth is coming from word of mouth, the most powerful form of advertising. We fully expect Confused to continue growing in 2006. Not only did Confused generate a lot of quotes, but it also made money. Confused.com made a profit of Â£8.8m compared to Â£2.0m last year and Â£0.3m the year before. 2005 - A Year of Change: So there you have it. 2005 wasn't too shabby, was it? 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. One of the inevitable consequences of going public was that, for some managers, it was the culmination of their career. Of the 15 senior managers in the Group at the time of float six have now retired; even though some of them are not yet 40! The float has given them financial security and they felt it was the right time to dedicate themselves to family and other interests. All of this was communicated well in advance and we spent a good part of the year putting the appropriate replacements in place, either from the existing team or going outside to recruit. All of the managers who retired had joined us prior to our January 2, 1993 launch. It should never be forgotten that these are the people who built the foundation upon which our current and future success rests. We will always be deeply indebted to the contributions from (in alphabetical order): Claire Carrel, Nicole Griffiths, Tanzie Oliver, Jane Stone (still with us part-time!), Dave Walker and Graham Wilson. I wish them all the very best with Life After Admiral. Besides replacing people, we have also been busy recruiting highly motivated MBA graduates to help us grow our business inside and outside the UK. We are very pleased with our 'stable' of MBAs. They bring with them not only their intellect and analytical skills but also a fresh, ambitious spirit, which gives me great hope for our future. We are targeting Spain as the first country outside the UK in which we'll do business. I'm quite confident that when writing next year's report I will be able to describe in detail our successful launch there. Not to be forgotten are all those who actually stayed or joined more recently! Many thanks to all our staff who made 2005 an excellent year. 360... 360 is the number of children at our Staff Children's Christmas Party, an increase of 44% over 2004 (250). Henry Engelhardt Chief Executive Financial review Key financial highlights The Group recorded another significant increase in pre-tax profit in 2005 - a rise of 14% from Â£104.9m in 2004 to Â£119.5m. Core profit was also significantly higher - a jump of 21% from Â£100.6m to Â£122.1m. Core profit is used as an effective measure of the three key elements of the Group's business: 1) underwriting profits, 2) profit commissions and 3) net other income (most notably ancillary income). Each element is discussed below. 2005 2004 Â£000 Â£000 Underwriting profit 32,361 27,969 Profit commissions (1) 14,735 15,679 Net other income 74,998 56,916 -------- -------- Adjusted Group core profit 122,094 100,564 ======== ======== (1) During 2004 Â£5,994,000 of profit commission relating to the 2003 financial year became recognisable in accordance with the Group's accounting policy for such commissions and is, therefore, included in the 2004 results in the statutory accounts. The directors believe this amount should be reallocated back to 2003 for the purposes of comparisons and it has been deducted above. A reconciliation of core profit to figures reported in the income statement is set out later in this section. Since 2000, the Group has returned substantial core profit increases year-on-year, and the compounded annual rate of growth since 2000 is over 44%. The proportion of the Group's core profits earned from non-underwriting increased again during 2005 - with 73% now arising from intermediary activities and profit commissions (72% in 2004). The hybrid nature of the business significantly reduces the volatility of earnings inherent in motor insurance and has some important advantages. Firstly, the Group currently only underwrites 25% of the motor insurance it sells. The Group therefore, materially limits its downside exposure, whilst retaining the potential, through the profit commission arrangements in place, to generate potentially significant income from the other 75% of the business depending upon the underwriting results achieved. (Refer to the underwriting structure section below for further detail.) The second key advantage comes from retaining ownership of the entire customer base. This means the Group is able to generate substantial non-insurance income from the customer base. Group turnover - which comprises total premiums written, gross other income and net investment return (and measures the combined size of the Group's businesses) also returned significant growth: 2005 2004 Â£000 Â£000 Total premium written 533,616 470,400 Gross other income 93,405 69,457 Net investment return 11,342 8,135 ------- ------- Group turnover 638,363 547,992 ======= ======= The growth of 16% in the year contributes to compounded average annual growth since 2000 of around 20%. Gross other income, which is made up predominantly of ancillary revenue (before allocation of overhead) and Confused.com income, demonstrated an especially high increase (over 34%) in the year - both are discussed further below. Underwriting Underwriting structure The Group's underwriting structure is as follows: 65% of the business written continues to be underwritten by Great Lakes under a long-term co-insurance contract. 35% of the business is underwritten by the Group through Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 10% (of the total business) is ceded via quota share contracts that qualify for deductions in required solvency capital. Of the 10%, 5% is ceded to Axis Re Europe under a contract covering 2005 and 2006 and 5% to Cologne Reinsurance Company (Dublin) Limited (part of Gen Re) for 2005 only. The Gen Re contract was commuted with effect from 31 December 2005, and in line with accounting guidelines, has not been treated as reinsurance in the financial statements. This has the effect (for contracts incepted in 2005 only) of grossing-up premiums, claims and expenses retained by the Group to a net 30%. A new quota share contract with Swiss Reinsurance Company UK Limited (Swiss Re) replaces the Gen Re contract for 2006 only. 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. The Group is currently managing the run-off of Syndicate 2004, and the last year of account (2002) remained open at the end of 2005. The Group is currently pursuing the option of a transfer of the remaining liabilities for the 2000-2002 underwriting years into AICL under the provisions of Part VII to the Financial Services and Markets Act 2000. Should this project complete successfully, it is estimated that not less than Â£20m of funds currently maintained in the Syndicate would be released. Underwriting results Total premium written increased by 13.4% from Â£470m to Â£534m during the year. This has once again resulted from targeted marketing spend increases and the continued growth of elephant.co.uk, the Group's principal internet offering and largest brand. All Group brands increased in size during 2005. Note that whilst premium increased by 13.4%, the Group's closing policy base increased by around 10%. The differential consists of the overall rate increases effected over 2005, combined with a change in the mix of business which also led to higher average premiums. Motor insurance quotes rose significantly from 6.2m in 2004 to 9.7m in 2005 (an increase of 56%). This growth has partly come about as a result of the notable increase in volume generated by Confused.com in the year - further analysis of which is set out below. Although selective rate changes have been implemented throughout the year, on average, premium levels at the end of 2005 are around 1% higher than those at the start of the year. The accounting treatment adopted for the commutation of the Gen Re contract has meant that for contracts incepted in 2005, the Group effectively underwrites 30% of the total motor business. For this reason, net insurance premium revenue has increased by almost 30% in the year - although on a like for like basis (that is, had the Group underwrote 25% as opposed to 30% of 2005 business), the increase is 16% - much more in line with the written premium increase noted above. There was an increase in the underwriting result of around Â£4.4m in the year (Â£28.0m to Â£32.4m), although almost Â£3m of this is due to increased investment return (which in turn primarily resulted from higher levels of invested funds). 2005's reported loss ratio (excluding claims handling expenses) was 69.8%, up from 67.0% in 2004. Movements in loss ratios are discussed in the Chief Executive's statement. Positive development of prior year claims provisions has continued, and the 2005 income statement contains Â£17.3m of net releases (up significantly from Â£9.2m in 2004). 2005's releases effectively reduce the reported loss ratio by 12.4 percentage points (8.5 points in 2004). Note 18 to the financial statements includes further detail on claims provision development. The Group's expense ratio continues to run at competitive levels - 15.1% (including claims handling expenses) in 2005, relatively unchanged from 15.0% in 2004. Excluding regulatory levies, the figures are 12.3% in 2005 and 12.5% in 2004. The expense ratio is reconciled to the figures included in the income statement in note 8 below, whilst the underwriting result is reconciled later in this review. The Group's combined ratio (being the aggregation of the loss and expense ratios above) is 84.9% up from 82.0% in 2004. The increase is due to the loss ratio move noted above. The Group's 85% compares to an expected market combined ratio in 2005 of around 105% (source - Deloitte) - an outperformance, consistent with previous years of around 20 points. Further detail on market combined ratios is set out in the Chief Executive's statement. Some additional ratios are noted in the Chief Executive's statement - firstly the ratio of total outgoings to net income at 60% (2004: 58%) and secondly the ratio of core profit to net income at 52% (2004: 57%). 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£11.2m has been recognised in 2005, compared to Â£10.7m in 2004 (after adjusting for the Â£6m noted above). An additional Â£0.5m of profit commission relating to earlier underwriting year contracts with Hibernian Re (100% reinsured into Swiss Re) has been recognised in 2005 (Â£1.9m in 2004). It is expected that further amounts will be recognised when the Group closes the final year of account of Syndicate 2004. Profit commission - quota share reinsurance The Group earns profit commission from Converium (relating to 2003 and 2004 underwriting years) and Axis Re (on the 2005 year). A total of Â£3.1m has been recognised during 2005 (2004: Â£3.1m). No commission will be earned on the Gen Re contract as this has been commuted. The new 2006 quota share contract with Swiss Re has similar profit commission arrangements to the current deals. Net other income This figure can be broken down as follows: 2005 2004 Â£000 Â£000 Â£000 Â£000 Ancillary contribution 59,092 48,493 Gross Confused.com contribution 8,823 2,033 Intra-group adjustment *1 (1,941) (750) ------- ------- Confused.com contribution 6,882 1,283 Aggregate interest receipts 4,176 3,348 Instalment income 3,768 2,603 Gladiator contribution 1,871 1,756 Other Group / central overheads (791) (567) ------- ------- Net other income 74,998 56,916 ======= ======= *1 Confused.com adjustment: Confused.com earns a proportion of its income from Admiral Group brands and hence an adjustment is made to the gross contribution. This is to reflect the fact that a proportion of Confused.com's costs are incurred in acquiring insurance business for the Group. The opposite side of the adjustment appears in the costs of acquiring insurance contracts. Ancillary contribution & instalment income This primarily involves commissions earned on sales of insurance products complementing the motor policy, but which are underwritten by external parties. Net contribution from these sales grew by 22% in 2005 - from Â£48.5m to Â£59.1m. Average gross income per motor policy sold also increased significantly during the year, from Â£51 in 2004 to Â£56 in 2005. Instalment income represents charges for payment by instalments on motor policies sold which are paid for over the course of the policy life by direct debit. Confused.com As the profit figures suggest, Confused.com has seen substantial growth during 2005 - both in terms of volume and profitability. This was driven by efficient increases in marketing spend generating substantial increases in quote activity. Confused.com receives a commission from its partners and has a relatively small fixed cost base. Gladiator Commercial Gladiator had another profitable year, with relatively little change in the overall result or level of business. In spite of this, it has been a year of change for Gladiator - with the development of its own interactive quote facility that is expected to make the internet its principal distribution channel. Taxation The total taxation charge reported in the income statement is Â£34.8m (2004: Â£14.4m), representing 29.1% (2004: 13.7%) of pre-tax profits. The unusually low effective rate in 2004 is due to the impact of the ESOT share awards made during that year, which attracted a significant deduction (Â£17m) for corporation tax purposes. This tax deduction is the reason why post tax profits in 2004 were higher than in 2005. Refer to note 12 to the accounts for further detail on taxation. Earnings per share (EPS) The tax deduction referred to above also has a distorting impact on the EPS figures presented in the income statement. Note 14 to the accounts sets out a calculation of adjusted EPS, which backs out the impact in the 2004 comparatives. EPS for 2005 is 32.7p, up from the adjusted 2004 figure of 28.4p - an increase of 15%, in line with the increase in pre-tax profits reported on the income statement. Financial investments, cash and debt A continuing feature of the Group's business is the significant generation of cash from all operations. At the end of the year, the Group held a total of Â£406.1m in cash and financial investments - up 26% on the Â£322.6m held at the end of 2004. This increase is after distributions to shareholders of Â£49.2m during 2005 (Â£52.0m in 2004). The balances making up this total can be analysed as follows: 2005 2004 Â£000 Â£000 Liquid funds in underwriting companies: Government and sovereign bond holdings 83,071 42,980 Corporate bonds and similar instruments 172,866 160,438 Deposits with credit institutions 40,646 31,070 Cash at bank 39,824 38,035 ------- ------- 336,407 272,523 Liquid funds held outside underwriting companies: Cash at bank 69,682 50,096 ------- ------- 406,089 322,619 ======= ======= The Group maintains four externally managed investment funds in which the majority of the insurance funds are invested. Three of these (one each for Syndicate 2004, AICL and AIGL) are managed by Alliance Capital Management, whilst the fourth (another AIGL fund) is managed by Lloyds TSB International. There have been no changes to investment strategy, which is set by the Group Investment Committee and approved by the Board of directors of the relevant entity. The strategy is conservative, with all of the funds invested in either cash or short dated, high quality corporate or government bonds. The Group restructured its loan facility during 2005 in order to reduce the interest margin being incurred on the debt and to increase its flexibility. Refer to note 21 to the accounts for further details on the Group's debt. 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 cash to determine whether it is appropriate for the Company to pay a further special dividend. In line with this policy, as outlined in the Chairman's statement, the directors have declared a final dividend for 2005 of 14.9p per share, which is made up of 7.8p per share normal element, plus 7.1p per share special distribution based on the Group's cash resources at the end of the year. This final payment combines with the interim dividend to make a total distribution for 2005 of 24.6p per share. The final dividend declared in respect of the post-flotation period of 2004 was 9.3p International Financial Reporting Standards (IFRS) From 1 January 2005, EU regulations require companies listed on regulated markets in the EU to prepare their consolidated accounts under IFRS. As such, these financial statements are the first full year accounts to be prepared under IFRS. The 2004 full year accounts were reported under IFRS in the 2005 interim accounts document, reported in September 2005. As reported in the interim statements, the only significant impacts on the income statement are the cessation of goodwill amortisation, the valuation of financial investments at bid as opposed to mid-market price, and the inclusion of dividends in the retained profits of the period in which they were declared as opposed to allocated. The changes have no impact on the Group's ability to pay dividends. Reconciliation of profit before tax to core profit: 2005 2004 Â£000 Â£000 Profit before tax 119,494 104,906 Add back: finance charges 2,162 2,451 Add back / (deduct): share scheme charges / (credit) 438 (4,144) Add back: bonuses paid in lieu of dividends - 3,345 2003 profit commission adjustment - (5,994) --------- --------- Core profit 122,094 100,564 ========= ========= Reconciliation of underwriting profit: 2005 2004 Â£000 Â£000 Net insurance premium revenue 139,454 107,501 Net insurance claims (100,526) (74,272) Net expenses related to insurance contracts (17,909) (13,796) Investment return 11,342 8,536 --------- --------- Underwriting profit 32,361 27,969 ========= ========= Reconciliation of loss ratios reported: 2005 2004 Â£000 Â£000 Net insurance claims from income statement 100,526 74,272 Deduct: claims handling costs (3,202) (2,352) --------- --------- Adjusted net insurance claims 97,324 71,920 Net premium revenue 139,454 107,501 Loss ratio 69.8% 67.0% ========= ========= Reconciliation of alternative operating ratios 2005 2004 Â£000 Â£000 Outgoings: Net insurance claims 100,526 74,272 Insurance contract expenses 17,909 13,796 Ancillary / Gladiator / Confused expenses 21,792 15,322 --------- --------- 140,227 103,390 Income: Net premium revenue 139,454 107,501 Gross other revenue 93,405 69,457 --------- --------- 232,859 176,958 --------- --------- Outgoings to income 60% 58% Core profit (from above) to income 52% 57% --------- --------- Consolidated income statement (audited) Year ended: 31 December 31 December 2005 2004 Note: Â£000 Â£000 Insurance premium revenue 176,214 151,864 Insurance premium ceded to reinsurers (36,760) (44,363) ---------- --------- Net insurance premium revenue 4 139,454 107,501 Other revenue 5 93,405 69,457 Profit commission 7 14,735 21,673 Investment and interest income 6 15,518 11,884 ---------- --------- Net revenue 263,112 210,515 Insurance claims and claims handling expenses (121,123) (102,604) Insurance claims and claims handling expenses recovered from reinsurers 20,597 28,332 ---------- --------- Net insurance claims (100,526) (74,272) Expenses 8 (40,492) (33,030) Share scheme charges 8, 25 (438) 4,144 ---------- --------- Total expenses (141,456) (103,158) Operating profit 121,656 107,357 Finance charges 11 (2,162) (2,451) ---------- --------- Profit before tax 9 119,494 104,906 Taxation expense 12 (34,774) (14,400) ---------- --------- Profit after tax attributable to equity holders of the Company 84,720 90,506 ========== ========= Earnings per share: Basic 14 32.7p 35.0p ========== ========= Diluted 14 32.7p 35.0p ========== ========= ---------- --------- Dividends declared (total) 13 49,190 51,996 Dividends declared (per share) 13 19.0p 20.1p ---------- --------- Consolidated balance sheet (audited) As at: 31 December 31 December 2005 2004 Note Â£000 Â£000 ASSETS Property, plant and equipment 15 4,636 3,349 Intangible assets 16 66,490 66,467 Financial assets 17 378,747 300,722 Reinsurance assets 18 54,166 66,137 Trade and other receivables 20 9,392 16,739 Cash and cash equivalents 19 150,152 119,201 ---------- --------- Total assets 663,583 572,615 ========== ========= EQUITY Share capital 25 260 259 Share premium account 26 13,145 13,145 Retained earnings 26 167,990 131,213 Other reserves 26 17 17 ---------- --------- Total equity 181,412 144,634 ========== ========= LIABILITIES Insurance contracts 18 254,130 216,107 Financial liabilities 21 22,000 33,122 Provisions for other liabilities and charges 22 - - Deferred income tax 24 3,550 4,838 Trade and other payables 23 182,935 164,329 Current tax liabilities 19,556 9,585 ---------- --------- Total liabilities 482,171 427,981 ========== ========= Total equity and total liabilities 663,583 572,615 ========== ========= Consolidated statement of recognised income and expense (audited) No separate consolidated statement of recognised income and expense has been prepared. The profit for the period of Â£84.7m (2004: Â£90.5m) represents all recognised income and expenses for the period. Consolidated cash flow statement (audited) Note 31 31 December December 2005 2004 Â£000 Â£000 Profit after tax 84,720 90,506 Adjustments for non-cash items: - Depreciation 1,824 1,576 - Amortisation of software 896 981 - Unrealised losses on investments 893 200 - Share scheme charge 1,247 308 - Share scheme credit, net of employer's NIC - (4,452) Employer's NIC charge on ESOT - (7,284) Loss on disposal of property, plant and equipment and software 503 4 Change in gross insurance contract liabilities 38,023 41,278 Change in reinsurance assets 11,971 (9,471) Change in trade and other receivables, including from policyholders (18,693) (31,675) Change in trade and other payables, including tax and social security 18,041 62,048 Interest expense 2,162 2,451 Taxation expense 34,774 14,400 --------- --------- Cash flows from operating activities, before movements in investments 176,361 160,870 Net cash flow into investments held at fair value (53,413) (59,154) --------- --------- Cash flows from operating activities, net of movements in investments 122,948 101,716 Interest payments (2,617) (2,423) Taxation payments (26,090) (15,060) --------- --------- Net cash flow from operating activities 94,241 84,233 Cash flows from investing activities: Purchases of property, plant and equipment and software (3,999) (1,394) Proceeds from sales of property, plant and equipment - 16 --------- --------- Net cash used in investing activities (3,999) (1,378) Cash flows from financing activities: Repayments of borrowings (10,667) (2,333) Capital element of new finance leases 1,201 447 Repayment of finance lease liabilities (635) (1,957) Payments of transaction expenses - (2,354) Equity dividends paid (49,190) (51,996) --------- --------- Net cash used in financing activities (59,291) (58,193) --------- --------- Net increase in cash and cash equivalents 30,951 24,662 Cash and cash equivalents at 1 January 119,201 94,539 Cash and cash equivalents at end of period 19 150,152 119,201 ========= ========= Notes to the financial statements 1. General information and basis of preparation Admiral Group plc is a Company incorporated in England and Wales. Its registered office is at Capital Tower, Greyfriars Road, Cardiff CF10 3AZ and its shares are listed on the London Stock Exchange. The financial statements comprise the results and balances of the Company and its subsidiaries (the Group) for the two years ended 31 December 2004 and 2005. 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. In accordance with 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). These are the Group's first consolidated financial statements under IFRS and IFRS 1 (First Time Adoption) has been applied. The Company has elected to prepare its parent company financial statements in accordance with UK GAAP. The Group has applied all IFRS and interpretations adopted by the EU at 31 December 2005, including all amendments to extant standards that are not effective until later accounting periods. In particular, the Group has early adopted the amendments to IAS 39: The Fair Value Option in these 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. The preparation of financial statements in conformity with 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. The Group is managed as one operation involving the sale and administration of private motor insurance and related products and is reported as one segment. 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 commission 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 having regard to the profile of services provided. 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) 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 material 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. c) 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. 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. 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. 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. d) 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. e) 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. f) 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 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 nominal amount (discounted if material) unless they are impaired. Impairment losses are recognised through the income statement. g) 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. h) 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. Prior to 2005, only one equity based compensation scheme had been operated (the Employee Share Ownership Trust or ESOT). All benefits due under this scheme were settled during 2004 at the time of the Company's flotation on the London Stock Exchange. No further benefits will accrue. In accordance with the exemption available under IFRS 1, the transactions relating to this scheme have not been restated in accordance with IFRS 2 (Share based payment). Refer to note 25 for further details on share schemes. i) 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. 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. Net insurance premium revenue 31 31 December December 2005 2004 Â£000 Â£000 Total motor insurance premiums before co-insurance 533,616 470,400 ======== ======== Group gross premiums written after co-insurance 186,989 165,343 Outwards reinsurance premiums (28,052) (48,606) -------- -------- Net insurance premiums written 158,937 116,737 Change in gross unearned premium provision (10,775) (13,479) Change in reinsurers' share of unearned premium provision (8,708) 4,243 -------- -------- Net insurance premium revenue 139,454 107,501 ======== ======== All insurance business written during all periods is direct private motor insurance written in the United Kingdom. The Group's share of the 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. 5. Other revenue 31 31 December December 2005 2004 Â£000 Â£000 Ancillary revenue 72,470 59,175 Instalment income earned 3,768 2,603 Revenue from Gladiator Commercial 5,123 4,475 Revenue from Confused.com 12,044 3,204 -------- -------- Total other revenue 93,405 69,457 ======== ======== Ancillary revenue primarily constitutes commission from sales of insurance products that complement the motor policy, but which are underwritten by external parties. 6. Investment and interest income 31 31 December December 2005 2004 Â£000 Â£000 Net investment return 11,342 8,536 Interest receivable 4,176 3,348 -------- -------- Total investment and interest income 15,518 11,884 ======== ======== 7. Profit commission 31 31 December December 2005 2004 Â£000 Â£000 Total profit commission 14,735 21,673 ========= ========= 8. Expenses 31 December 31 December 2005 2004 Insurance Other Total Insurance Other Total contracts contracts Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Acquisition of insurance 6,888 - 6,888 5,772 - 5,772 contracts Administration and marketing costs 11,021 22,583 33,604 8,024 19,234 27,258 -------- ------ ------ -------- ------ ------- Sub-total 17,909 22,583 40,492 13,796 19,234 33,030 Share scheme - 438 438 - (4,144) (4,144) charges Total expenses 17,909 23,021 40,930 13,796 15,090 28,886 ======== ====== ====== ======== ====== ======= Analysis of other administration and marketing costs: 31 31 December December 2005 2004 Â£000 Â£000 Ancillary sales expenses 13,378 10,682 Confused.com operating expenses 5,162 1,921 Gladiator Commercial operating expenses 3,252 2,719 Special unit-holder bonus - 3,345 Central overheads 791 567 --------- -------- Total 22,583 19,234 ========= ========= The Â£11,021,000 (2004: Â£8,024,000) 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 2005 2004 Â£000 Â£000 Insurance contract expenses from above 17,909 13,796 Add: claims handling expenses 3,202 2,352 --------- --------- Adjusted expenses 21,111 16,148 Net insurance premium revenue 139,454 107,501 Reported expense ratio 15.1% 15.0% --------- --------- 9. Staff costs and other expenses Included in profit, before co-insurance arrangements are the following: 31 31 December December 2005 2004 Â£000 Â£000 Salaries 29,955 29,046 Social security charges 2,782 2,406 Pension costs 490 399 Share scheme charges (see note 25) 1,247 308 ESOT credit - (4,452) --------- --------- Total staff expenses 34,474 27,707 ========= ========= Depreciation charge: - Owned assets 894 915 - Leased assets 1,826 1,641 Operating lease rentals: - Buildings 2,969 1,574 Auditor's remuneration: - Statutory audit fees 210 160 - Other audit fees 18 16 - Other services 91 116 Loss on disposal of property, plant and equipment 503 4 ========= ========= Analysis of fees paid to the auditor for other services: Indirect tax consultancy 61 42 Corporate tax services 24 29 Internal audit advisory - 20 Other 6 25 --------- --------- Total as above 91 116 ========= ========= During 2004, fees of Â£827,000 were paid to the Group's auditor in respect of professional services relating to the listing of the Company's shares on the London Stock Exchange, which were debited against the share premium account. 10. Staff numbers (including directors) Average for the year: 2005 2004 Number Number Direct customer contact staff 1,377 1,242 Support staff 339 301 --------- --------- Total 1,716 1,543 ========= ========= 11. Finance charges 31 31 December December 2005 2004 Â£000 Â£000 Term loan interest 1,520 2,020 Finance lease interest 388 256 Letter of credit charges 221 175 Other interest payable 33 - --------- --------- Total finance charges 2,162 2,451 ========= ========= 12. Taxation 31 31 December December 2005 2004 Â£000 Â£000 UK Corporation tax: Current charge at 30% 36,051 31,342 Tax relief in respect of ESOT share provision - (16,985) Under provision relating to prior periods - corporation tax 11 1,571 --------- --------- Current tax charge 36,062 15,928 Deferred tax: Current period deferred taxation movement (654) (651) Over provision relating to prior periods - deferred tax (634) (877) --------- --------- Total tax charge per income statement 34,774 14,400 ========= ========= Factors affecting the tax charge are: 31 31 December December 2005 2004 Â£000 Â£000 Profit before taxation 119,494 104,906 Corporation tax thereon at 30% 35,848 31,472 ESOT tax relief - (16,985) Utilisation of brought forward tax losses (421) (582) Adjustments in respect of prior year insurance technical provisions (161) (216) Expenses and provisions not deductible for tax purposes 152 29 Other timing differences (21) (4) Impact of using lower tax rate - (8) Adjustments relating to prior periods (623) 694 --------- --------- Tax charge for the period as above 34,774 14,400 ========= ========= 13. Dividends Dividends were declared and paid as follows: 31 31 December December 2005 2004 Â£000 Â£000 January 2004 (5.5p per share, paid February 2004) (*1) - 14,179 July 2004 (14.6p per share, paid August 2004) (*1) - 37,817 March 2005 (9.3p per share, paid May 2005) 24,049 - September 2005 (9.7p per share, paid October 2005) 25,141 - -------- --------- Total dividends 49,190 51,996 ======== ========= *1 = for comparability, the per-share amounts for these two dividends have been re-stated to reflect the share capital in issue at the 2004 year-end. Both dividends included in the 2004 column were declared and paid before the Company's flotation in September 2004. The dividend declared in March 2005 represents the final dividend paid in respect of the 2004 financial year. The dividend declared in September 2005 is the interim distribution in respect of 2005. Refer to the Chairman's statement and financial review for further detail. 14. Earnings per share 31 31 December December 2005 2004 Â£000 Â£000 1) Unadjusted EPS Profit for the financial year after taxation 84,720 90,506 Weighted average number of shares - basic 258,987,515 258,595,400 Unadjusted earnings per share - basic 32.7p 35.0p Weighted average number of shares - diluted 259,387,515 258,595,400 Unadjusted earnings per share - diluted 32.7p 35.0p 2) Adjusted EPS Profit for the financial year after tax 84,720 90,506 Deduct ESOT tax credit - (16,985) --------- --------- Adjusted profit after tax 84,720 73,521 Adjusted earnings per share - basic 32.7p 28.4p Adjusted earnings per share - diluted 32.7p 28.4p ========= ========= The difference between the basic and diluted number of shares at the end of 2005 (being 400,000) relates to awards committed, but not yet issued under the Group's share schemes. Refer to note 25 for further detail. 15. Property, plant and equipment Improvements Computer Office Furniture Motor Total to short equipment equipment and vehicles leasehold fittings buildings Cost: At 1 January 2004 1,658 6,542 2,785 1,583 - 12,568 Additions 278 588 193 44 12 1,115 Disposals (5) (338) - - - (343) -------- ------- ------- ------- ------- ------- At 31 December 2004 1,931 6,792 2,978 1,627 12 13,340 -------- ------- ------- ------- ------- ------- Depreciation: At 1 January 2004 1,405 3,729 2,127 1,483 - 8,744 Charge for the year 149 1,024 340 62 1 1,576 Disposals - (329) - - - (329) -------- ------- ------- ------- ------- ------- At 31 December 2004 1,554 4,424 2,467 1,545 1 9,991 -------- ------- ------- ------- ------- ------- Net book amount: At 31 December 2004 377 2,368 511 82 11 3,349 ======== ======= ======= ======= ======= ======= 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 ======== ======= ======= ======= ======= ======= The net book value of assets held under finance leases is as follows: 31 31 December December 2005 2004 Â£000 Â£000 Computer equipment 2,380 2,849 Office equipment 767 83 -------- -------- 3,147 2,932 ======== ======== 16. Intangible assets Goodwill Deferred Software Total acquisition costs Â£000 Â£000 Â£000 Â£000 Carrying amount: At 1 January 2004 62,354 2,270 2,025 66,649 Additions - 6,271 275 6,546 Amortisation charge - (5,747) (981) (6,728) -------- -------- -------- -------- At 31 December 2004 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 ======== ======== ======== ======== 17. Financial assets The Group's financial assets can be analysed as follows: 31 31 December December 2005 2004 Â£000 Â£000 Investments held at fair value 255,937 203,418 Receivables - amounts owed by policyholders 122,810 97,304 -------- -------- Total financial assets 378,747 300,722 ======== ======== 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 2005 2004 Â£000 Â£000 Fixed income securities: Government bonds 83,071 42,980 Other listed securities 156,071 139,573 Variable interest securities: Other listed securities 16,795 20,865 -------- -------- 255,937 203,418 ======== ======== Management of credit and market risk: Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, the Group only conducts business with companies with specified financial strength ratings. The other primary form of credit risk is in respect of amounts due from policyholders. Credit risk arises due to the potential for default on credit card payments. The impact of this is mitigated by the large customer base and the low level of the average balance recoverable. This risk is also mitigated by the operation of controls over this area including the automated cancellation procedures for those policies in default, resulting in minimal financial impact. As the Group holds a significant proportion of its financial investments in the form of fixed income securities, it is also exposed to market risk - primarily the impact on investment return and the carrying value of investments that could result from shifts in interest rates. The Group's investment funds are managed on short duration strategies that effectively minimise the quantum of any impact that could arise. At 31 December 2005 and the same date in 2004, the average duration of the Group's investment funds was less than 17 months. The Group does not invest in equity securities. 18. Reinsurance assets and insurance contract liabilities A) Management of insurance risk: The Group is involved in issuing motor insurance contracts that transfer risk from policyholders to the Group and its underwriting partners. Insurance risk primarily involves uncertainty over the occurrence, amount and timing of claims arising on insurance contracts issued. The key risk is that the frequency and / or value of the claims arising exceeds expectation and the value of insurance liabilities established. There are a number of elements forming part of the Group's strategy to manage insurance risk. These include: i) Co-insurance and reinsurance: As noted in the underwriting structure section of the financial review above, the Group passes out a significant amount (currently 75%) of the motor insurance business written to external underwriters. 65% of the risk is shared under a co-insurance contract, under which the primary risk is borne by the co-insurer. A further 10% is ceded under quota share reinsurance contracts (although as noted, the 5% Gen Re quota share agreement for 2005 was commuted at 31 December 2005). As well as these proportional arrangements, an excess of loss reinsurance programme is also purchased to protect the Group against very large individual claims and catastrophe losses. ii) Data driven pricing: The Group's underwriting philosophy is focused on a sophisticated data-driven approach to pricing and underwriting and on exploiting the competitive advantages direct insurers enjoy over traditional insurers through: â€¢ Collating and analysing more comprehensive data from customers; â€¢ Tight control over the pricing guidelines in order to target profitable business sectors; and â€¢ Fast and flexible responsiveness to data analysis and market trends. The Group is committed to establishing premium rates that appropriately price the underwriting risk and exposure. Rates are set utilising a larger than average number of underwriting criteria. The directors believe that there is a strong link between the increase in depth of data that the Group has been able to collate over time and the historic reported loss ratios enjoyed by the Group. iii) Effective claims management: The Group adopts various claims management strategies designed to ensure that claims are paid at an appropriate level and to minimise the expenses associated with claims management. These include: â€¢ An effective, computerised workflow system (which along with the appropriate level of resources employed helps reduce the scope for error and avoids significant backlogs); â€¢ Use of an outbound telephone team to contact third parties aiming to minimise the potential claims costs and to ensure that more third parties utilise the Group approved repairers; â€¢ Use of sophisticated and innovative methods to check for fraudulent claims. Concentration of insurance risk: The directors do not believe there are significant concentrations of insurance risk. B) Sensitivity of recognised amounts to changes in assumptions: The following table sets out the impact on equity at 31 December 2005 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 --------------------------- 2001 2002 2003 2004 2005 TOTAL Latest loss ratio 54.9% 58.0% 65.0% 75.8% 85.0% Impact of 1% change (Â£000s) 767 466 1,432 1,754 1,005 5,424 ------- ------- ------- ------- ------- ------- 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. C) Analysis of recognised amounts: 31 31 December December 2005 2004 Â£000 Â£000 Gross: Claims outstanding 170,216 142,968 Unearned premium provision 83,914 73,139 -------- -------- Total gross insurance liabilities 254,130 216,107 ======== ======== Recoverable from reinsurers: Claims outstanding 41,585 44,848 Unearned premium provision 12,581 21,289 -------- -------- Total reinsurers' share of insurance liabilities 54,166 66,137 ======== ======== Net: Claims outstanding 128,631 98,120 Unearned premium provision 71,333 51,850 -------- -------- Total insurance liabilities - net 199,964 149,970 ======== ======== D) Analysis of re-estimation of claims provisions: The following tables set out the cumulative impact, to 31 December 2005, of the retrospective re-estimation of claims provisions initially established at the end of the financial years stated. Gross and net figures are shown. These tables present data on an accident year basis. Financial year ended 31 December Gross amounts: 2001 2002 2003 2004 2005 Â£000 Â£000 Â£000 Â£000 Â£000 Gross claims provision as originally estimated 115,386 124,478 115,169 142,968 170,216 Provision re-estimated as of: One year later 105,186 114,051 111,599 137,075 - Two years later 92,282 109,490 105,748 - - Three years later 87,840 101,910 - - - Four years later 82,205 - - - - ------- ------- ------- ------- ------- As re-estimated at 31 December 2005 82,205 101,910 105,748 137,075 - Gross cumulative overprovision (33,181) (22,568) (9,421) (5,893) - ------- ------- ------- ------- ------- Financial year ended 31 December Net amounts: 2001 2002 2003 2004 2005 Â£000 Â£000 Â£000 Â£000 Â£000 Net claims provision as originally estimated 55,529 71,071 75,549 98,120 128,631 Provision re-estimated as of: One year later 49,409 64,325 72,579 93,910 - Two years later 42,927 61,167 67,726 - - Three years later 40,706 55,974 - - - Four years later 37,890 - - - - ------- ------- ------- ------- ------- As re-estimated at 31 December 2005 37,890 55,974 67,726 93,910 - Net cumulative overprovision (17,639) (15,097) (7,823) (4,210) - ------- ------- ------- ------- ------- E) Analysis of net claims reserve 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 2001 2002 2003 2004 2005 Â£000 Â£000 Â£000 Â£000 Â£000 Underwriting year: 2000 3,923 6,188 5,176 1,480 370 2001 - 2,490 7,938 2,967 5,043 2002 - - 2,975 3,229 5,166 2003 - - - 1,513 4,622 2004 - - - - 2,076 ------- ------- ------- ------- ------- Total net release 3,923 8,678 16,089 9,189 17,277 Net premium revenue 84,135 81,336 79,327 107,501 139,454 Release as % of net premium revenue 4.7% 10.7% 20.3% 8.5% 12.4% F) Reconciliation of movement in net claims reserve: 31 31 December December 2005 2004 Â£000 Â£000 Net claims reserve at start of period 98,120 75,549 Net claims incurred 97,325 71,919 Net claims paid (66,814) (49,348) -------- -------- Net claims reserve at end of period 128,631 98,120 ======== ======== G) Reconciliation of movement in net unearned premium provision: 31 31 December December 2005 2004 Â£000 Â£000 Net unearned premium provision at start of period 51,850 42,614 Written in the period 160,244 118,102 Earned in the period (140,761) (108,866) -------- -------- Net unearned premium provision at end of period 71,333 51,850 ======== ======== 19. Cash and cash equivalents 31 31 December December 2005 2004 Â£000 Â£000 Cash at bank and in hand 109,506 88,131 Cash on short term deposit 40,646 31,070 -------- -------- Total cash and cash equivalents 150,152 119,201 ======== ======== 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. 20. Trade and other receivables 31 31 December December 2005 2004 Â£000 Â£000 Trade debtors 6,905 15,105 Prepayments and accrued income 2,487 1,634 -------- -------- Total trade and other receivables 9,392 16,739 ======== ======== 21. Financial liabilities 31 31 December December 2005 2004 Â£000 Â£000 Interest bearing bank loans 22,000 33,122 ======== ======== Analysis of borrowings: 31 31 December December 2005 2004 Â£000 Â£000 Repayments falling due within 12 months - 11,455 Repayments falling due after 12 months 22,000 21,667 -------- -------- 22,000 33,122 ======== ======== During 2005, the Group renegotiated the terms of its debt with Lloyds TSB and Bank of Scotland. The new facility is a revolving credit arrangement that provides the Group with greater flexibility over use of the funds and also attracts lower interest charges. The security (over Group assets and subsidiary shares) that was part of the former arrangement has also been withdrawn - the new facility is unsecured. Interest continues to be charged on amounts drawn down based on LIBOR plus a margin. 22. Provisions for other liabilities and charges Employee share trust (ESOT) 31 31 December December 2005 2004 Â£000 Â£000 Brought forward at start of period - 11,739 Utilised in period - (7,287) Released to income statement in period - (4,452) -------- -------- Carried forward at end of period - - ======== ======== 23. Trade and other payables 31 31 December December 2005 2004 Â£000 Â£000 Trade payables 4,423 3,381 Amounts owed to co-insurers and reinsurers 98,054 91,347 Finance leases due within 12 months 1,963 1,543 Finance leases due after 12 months 886 741 Other taxation and social security liabilities 4,174 3,236 Other payables 10,066 12,320 Accruals and deferred income (see below) 63,369 51,761 -------- -------- Total trade and other payables 182,935 164,329 ======== ======== Analysis of accruals and deferred income: 31 31 December December 2005 2004 Â£000 Â£000 Premium receivable in advance of policy inception 30,471 23,960 Accrued expenses 24,559 20,288 Deferred income 8,339 7,513 -------- -------- Total accruals and deferred income as above 63,369 51,761 ======== ======== Analysis of finance lease liabilities: At 31 December 2005 At 31 December 2004 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 2,171 208 1,963 1,798 255 1,543 Between one and five years 921 35 886 877 136 741 More than five years - - - - - - ------- ------- ------- ------- ------- ------- 3,092 243 2,849 2,675 391 2,284 ======= ======= ======= ======= ======= ======= 24. Deferred income tax liability 31 31 December December 2005 2004 Â£000 Â£000 Brought forward at start of period 4,838 6,366 Movement in period (1,288) (1,528) -------- -------- Carried forward at end of period 3,550 4,838 ======== ======== The net balance provided at the end of the current year is made up of a gross deferred tax liability of Â£3,816,000 (2004: Â£5,132,000) relating to the tax treatment of Lloyd's Syndicates, and a deferred tax asset of Â£266,000 (2004: Â£294,000) in respect of other timing differences. 25. Share capital 31 31 December December 2005 2004 Â£000 Â£000 Authorised: 500,000,000 ordinary shares of 0.1p 500 500 ======== ======== Issued, called up and fully paid: 259,861,965 ordinary shares of 0.1p 260 - 258,595,400 ordinary shares of 0.1p - 259 -------- -------- 260 259 ======== ======== During 2005, 1,266,565 new ordinary shares of 0.1p were issued to the trusts administering the Group's share schemes. 581,565 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. 685,000 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 2005 2004 Â£000 Â£000 SIP charge (note i) 263 - UFSS charge (note ii) 175 - ESOT credit - (4,452) Non executive director option charges - 308 -------- -------- Total share scheme charges 438 (4,144) ======== ======== (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 2005 financial year, a maximum of 1,181,565 shares will be awarded under this scheme. For maximum awards to be made, the Group's core profit must exceed budget by 11.5 per cent. 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 within the Group (excluding executive directors) with variable awards available. Under the scheme, individuals receive an award of free shares at no charge. A total of 269 employees received awards under this scheme during June 2005. Staff must remain in employment until the vesting date (in June 2008) in order for the shares to vest. The maximum number of shares that can be awarded relating to the 2005 scheme is 685,000. 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. If this initial hurdle is overcome, 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). As noted in the financial review, the criteria for UFSS awards have been amended for the 2006 scheme. Further details are contained in the financial review. Number of free share awards committed at 31 December 2005: Awards outstanding Vesting (*1) date SIP H105 scheme 581,565 September 2008 SIP H205 scheme 400,000 March 2009 UFSS 2005 scheme 685,000 June 2008 --------- Total awards committed 1,666,565 ========= *1 - being the maximum number of awards expected to be made before accounting for expected staff attrition. Of the 1,666,565 share awards outstanding above, 1,266,565 have been issued to the trusts administering the schemes, and are included in the issued share capital figures above. 26. Analysis of movements in capital and reserves Share Share Capital Retained capital premium redemption profit Total account reserve and loss equity Â£000 Â£000 Â£000 Â£000 Â£000 At 1 January 2004 - as restated 25 15,746 - 92,395 108,166 Retained profit for the period - - - 90,506 90,506 Issues of share capital 251 (247) - - 4 Share issue expenses - (2,354) - - (2,354) Dividends - - - (51,996) (51,996) Share option charges - - - 308 308 Cancellation of shares (17) - 17 - - -------- -------- -------- -------- -------- As at 31 December 2004 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 ======== ======== ======== ======== ======== 27. Financial commitments The Group was committed to obligations under operating leases on land and buildings as follows: Operating leases expiring: 31 31 December December 2005 2004 Â£000 Â£000 Within one years 434 - Within two to five years 52 509 Over five years 2,820 1,465 -------- -------- Total commitments 3,306 1,974 ======== ======== 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 2005 2004 Â£000 Â£000 Expenditure contracted to 1,342 373 ======== ======== 28. Related party transactions There were no related party transactions occurring during 2005 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 20%. 29. Non-statutory accounts The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2005 or 2004. Statutory accounts for 2004 have been delivered to the registrar of companies and those for 2005 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. 30. Annual Report The Company's annual report and accounts for the year ended 31 December 2005 is expected to be posted to shareholders by 10 April 2006. 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 2004 and 2005 figures below are as stated in the financial statements preceding this financial summary. Only selected lines from the income statement and balance sheet have been included. Figures for 2001 to 2003 have not been restated under IFRS, although have been reclassified into the formats used in these financial statements. Income statement --------------- ----------------------- IFRS UK GAAP --------------- ----------------------- 2005 2004 2003 2002 2001 Â£m Â£m Â£m Â£m Â£m Total motor premiums 533.6 470.4 371.6 333.0 284.4 ======= ======= ======= ======= ====== Net insurance premium revenue 139.5 107.5 79.3 81.4 84.2 Other revenue 93.4 69.5 50.8 40.1 35.4 Profit commission 14.7 21.7 1.4 - - Investment and interest income 15.5 11.9 6.8 7.4 5.1 ------- ------- ------- ------- ------- Net revenue 263.1 210.6 138.3 128.9 124.7 Net insurance claims (100.5) (74.3) (43.5) (52.6) (63.9) Total expenses (40.9) (28.9) (34.4) (28.5) (28.4) ------- ------- ------- ------- ------- Operating profit 121.7 107.4 60.4 47.8 32.4 ======= ======= ======= ======= ======= Balance sheet --------------- ----------------------- IFRS UK GAAP --------------- ----------------------- 2005 2004 2003 2002 2001 Â£m Â£m Â£m Â£m Â£m Property, plant and equipment 4.6 3.3 5.8 6.7 7.3 Intangible assets 66.5 66.5 62.4 66.3 71.9 Financial assets 378.7 300.7 241.6 179.1 164.1 Reinsurance assets 54.2 66.1 56.7 53.4 106.4 Trade and other receivables 9.4 16.7 12.5 8.9 22.6 Cash and cash equivalents 150.2 119.3 70.1 63.0 33.2 ------- ------- ------- ------- ------- Total assets 663.6 572.6 449.1 377.4 405.5 ======= ======= ======= ======= ======= Equity 181.4 144.6 108.1 68.9 22.2 Insurance contracts 254.1 216.1 174.8 155.1 208.5 Financial liabilities 22.0 33.1 35.4 47.8 62.4 Provisions for other liabilities and charges - - 11.7 - - Deferred income tax 3.6 4.8 6.4 3.4 - Trade and other payables 182.9 164.3 104.0 98.1 106.9 Current tax liabilities 19.6 9.7 8.7 4.1 5.5 ------- ------- ------- ------- ------- Total liabilities 663.6 572.6 449.1 377.4 405.5 ======= ======= ======= ======= ======= End. 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Admiral Group (ADM)

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