Final Results

Admiral Group PLC 21 March 2005 Admiral Group plc Results for the Year to 31 December 2004 21 March 2005 Admiral Reports Record Profits and Reaffirms Growth Prospects Admiral Group plc ('Admiral', or 'the Group') today announces a record adjusted core profit of Â£100.6 million for the year to December 2004, an increase of 30% over the year earlier. Aggregate group turnover, comprising total premiums written, gross other income and allocated investment income, rose 28% to Â£548.0 million. 2004 Highlights â€¢ Adjusted core profit* up 30% at Â£100.6 million (2003: Â£77.2 million) â€¢ Statutory pre-tax profit of Â£101.0 million (2003: Â£57.2 million) â€¢ Normal final dividend of 3.1p per share, special dividend of 6.2p per share â€¢ Aggregate group turnover up 28% at Â£548.0 million (2003: Â£427.3 million) â€¢ Total motor premiums written up 27% at Â£470.4 million (2003: Â£371.6 million) â€¢ Net income from products and services not underwritten by the Group up 47% at Â£56.9 million (2003: Â£38.7 million) â€¢ Active customers at year end up 29% to 1,041,000 * Adjusted core profit is statutory operating profit (plus interest receivable and less charges for staff share schemes, goodwill amortisation and bonuses paid in lieu of dividends) excluding Â£6 million of profit commission from Munich Re accounted for in 2004 but relating to premiums earned in 2003 Comment from Henry Engelhardt, Group Chief Executive 'The growth in revenue, profits and cash flow during 2004 underlines the strength of our business model and the effectiveness of our distribution strategy. 'As already indicated we look forward in 2005 to growing our business and widening our margins relative to industry averages.' 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 a normal final dividend of 3.1p per share and a special dividend of 6.2p 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 no less than 45% of after-tax profits at each half year.' Senior management will brief analysts at 10.30am GMT at Financial Dynamics. The presentation will be available later today at www.admiralgroup.co.uk. For further information, please contact: Admiral +44 (0)29 20434394 Louisa Scadden Justin Beddows Financial Dynamics +44 (0)20 7269 7200 Robert Bailhache Dominick Peasley Chairman's Statement In every year since I became Chairman in 2000, following the management buy-out of Admiral backed by Barclays Private Equity, the Group has moved strongly forward, increasing both the value of business written and its profitability. During 2004 we have secured our 1 millionth customer, written Â£470m total premiums and achieved pre-tax profits of Â£101m, with an outstanding 82.0% combined ratio. The sustained growth in franchise and profitability that Admiral's distinctive business model has made possible underpinned the high point of 2004 - the Company's highly successful listing in a difficult market for new issues, valuing the business at Â£711m, some 12 years after it was first conceived by the senior executive team that leads it today. It was hugely satisfying to follow this success by winning Business of the Year at the 2004 National Business Awards, a much deserved reflection of our listing positioning - 'Admiral is different'. To create that difference, Admiral combines commercial creativity, exemplified by its reinsurance structure, high ratio of ancillary sales, and multi-branding, with a distinctive culture of openness, informality, team work and delegation of responsibility made possible by excellent management information and effective control systems. Our listing brought with it significant changes to our Board. Owen Clarke and Pratt Thompson, who respectively had represented the interests of Barclays Private Equity and XL, stepped down as non-executive directors. Our thanks to them for many years of active involvement and sound advice and support. In their place we have been joined by Martin Jackson and John Sussens. Martin brings a wealth of experience of financial management in the insurance sector, having, as Finance Director, taken Friends Provident through demutualisation. We are delighted to have him as Chairman of our Audit Committee. John's significant exposure to the quoted sector, having served for many years as Managing Director of Misys and now also as a non-executive director of Cookson, makes him well qualified to be our Senior Independent Director and Chairman of our Remuneration Committee. My thanks also to Manfred Aldag and Keith James for their continuing contributions during a year which made exceptional demands on our non-executives. The combination of the different experiences and perspectives of our non-executives with the energy, clarity of purpose and depth of knowledge of our executive team gives me confidence in our Board's ability to chart an effective strategy for Admiral and identify correctly the resources we require to implement this strategy. 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. As an example, Confused, the intelligent automated car insurance shopper that we set up in 2000, last year handled 1.4 million quotes. Our continued successful development reflects not only the quality of our executive directors but also the strength in depth of Admiral's management and its whole team. Our philosophy is to give people the opportunity to develop to their full potential, and ongoing alignment of interest between staff and shareholders is one of our core principles. We were, therefore, delighted that so many of our staff - 1,418 out of a total of 1,616 - were able to participate in the distribution of shares on listing as a consequence of our Employee Share Ownership Trust (ESOT). As this ceased at listing we have established a replacement scheme under which all employees will receive a bi-annual grant of free shares subject to the achievement of challenging pre-determined performance criteria based on Group profitability. We have also established a senior executive share plan under which awards are determined according to growth in Group earnings per share. 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. Our business model is strongly cash generative, with year-end non-regulated cash balances increasing from Â£30m to Â£50m. In addition relief for the cost of the ESOT distribution at listing created an abnormally low tax charge in the 2004 accounts which will reduce Admiral's tax payment in 2005. Consistent with our principle of returning excess cash to our shareholders we are, therefore, pleased to be able to propose a two-part final dividend for 2004. The first element, representing 3.1 pence per share is based on a 45% pay-out ratio, the actual amount paid reflecting our listing part way through the financial year. The second special element of 6.2 pence per share reflects the abnormally low tax charge in 2004. We shall maintain a policy of reviewing our available free cash to determine whether or not the Company is able to pay further special dividends from time to time in addition to a consistent normal pay-out ratio. In conclusion, I am very confident in Admiral's ability to pass the test of clarity of strategy, quality of management, and adequacy of resources to continue consistently to create value for all our shareholders. Alastair Lyons Chairman 18 March 2005 Chief Executive's Statement As you will see from reading these accounts, this was a smashing year for the Group. Smashing as in smashing records for things like: profit, premium income, expense ratio and more. Clearly the highlight reel starts with our successful public offering and listing on the London Stock Exchange; changing our status from a private Company to a public Company. What stands out for me is that a large number of investors who previously didn't know much (anything?) about us decided that ours was a Company worth buying a stake in. It was a highlight because everyone at Admiral (in particular, the finance and communications departments) pitched in and worked together to ensure that the process of going public was a smooth one. It was also a highlight because it was a validation of all the hard work we have put into our business over 12 years; becoming quoted was a tangible, cumulative measurement of our achievements. Admiral didn't just pop up in the summer of 2004 and decide to be a publicly quoted Company. Over 12 years a lot of people have put a lot of effort into making Admiral a great Company and the listing was another, albeit highly visible, tick in our scorecard of success. So, let's get into the meaty bits. Let me try and list some of the other things that brought a smile to our faces in 2004: â€¢ Made a record core profit of Â£100.6m, up 30% from 2003; â€¢ Core profit per share was 38.9p, up 30% from 29.9p in 2003; â€¢ Total turnover for the year was Â£548m, up 28% from 2003; â€¢ Premium income grew to Â£470m, up 27% from 2003; â€¢ Produced a combined ratio of 82%; â€¢ Gave more than 6.25m quotes, of which 5m started on the internet (82%); â€¢ Ended the year with more than 1,000,000 customers; â€¢ Experienced continued improvement in loss ratios across all the back years; â€¢ Crystallised the Staff Trust with a value of Â£57m upon listing; â€¢ Won Business of the Year at the National Business Awards; â€¢ Named by The Sunday Times as the 20th best place to work in the UK in its Top 100 Places To Work in the UK competition. This listing is in its fifth year and we're one of only 11 firms to be in the list all five years; â€¢ Named by the Financial Times as the 16th Best Workplace in the UK and one of the Top 100 Workplaces in the EU; â€¢ Winner of the Best small/mid Cap IPO of the Year at the Financial News Awards; â€¢ Had over 250 children at our Staff Children's Christmas party (up more than 25% on 2003); â€¢ Wow! 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 are not your typical insurance underwriting operation as we primarily distribute insurance on behalf of reinsurance partners, taking only 25% of the underwriting risk for our own account. However, we do own all our customers and have the ability to sell other products and services to them. We operate through a number of targeted brands: Admiral (younger drivers, London area), Diamond (women drivers), Elephant.co.uk (internet users) and Bell. We have two other brands, Gladiator Commercial, which operates as an intermediary in the commercial vehicle market, and Confused.com, which operates as an internet ' shopper' for car insurance. 2004 was our 12th year of trading. The first 7 were in a Lloyd's of London environment. However, toward the end of 1999 Management teamed up with Barclays Private Equity to buy the business. The result of this transaction was the creation of Admiral Group Ltd. (AGL) as the holding Company. In September of 2004 we listed the Company on the London Stock Exchange. This is our first set of accounts as Admiral Group plc, a public Company. In 1999 we also put in place a long-term co-insurance agreement with Great Lakes UK, a wholly-owned subsidiary of Munich Re, the world's largest reinsurer. 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. Key Performance Information: Our total premium written for 2004, before sharing premium with our reinsurance partners, was Â£470m, accounting for 86% of our total turnover. The number of customers we service rose to 1,041,000 from 808,000 (+29%). All our growth has been organic. In 2004 75% of our premium was underwritten by two external reinsurers. Therefore, the Group's net premium written was Â£117m. In 2005 Admiral Group will once again take 25% of the premium income to its own account. Munich Re, through Great Lakes, will take 65%, Axis and Gen Re will each take 5% respectively. Some key numbers from the accounts which follow: â€¢ Loss ratio 67% up from 52% in 2003; â€¢ Earned expense ratio, less government levies, down to 12.5% from 13.5%; â€¢ Combined ratio, including all levies, 82%, up from last year's phenomenal 67.7%; â€¢ Income from products and services we do not underwrite totalled Â£69.5m up from Â£50.8m (+37%). The movement in loss ratio from 52% last year to 67% in 2004 is to be expected. The 52% represented a year with a large percentage of releases from previous years. It is the reflection of the quality of those back year results which has been a catalyst to our explosive growth in 2004. It made sense to accelerate growth on the back of fantastic results. But such growth meant we had to sacrifice some margin. However, the 2004 loss ratio of 67% leaves plenty of margin and on a much larger base. This is a superb result and only pales when compared to 2003! The change in loss ratio across years is characterised by a slightly less good underlying trend, proportionally less substantial back-year releases and the aforementioned growth, in excess of 25%. Without any releases taken into account the loss ratio move was modest, from 72% to 75%. We have a history of back reserve releases and 2004 was no exception. The 2000 underwriting year was reported with a loss ratio of 89% in the 2000 accounts, now that same year has a reported loss ratio of 64%. 2001 has dropped from 76% to 60%, 2002 from 80% to 66% and 2003 from 73% to 70%. 2004 comes into the world with a reported loss ratio of 79%. The expense ratio, not including government levies, moved downwards by 1.0% from 2003, a reduction of 7%. 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 hit target. To convert more quotes we'd have to be less selective. Clearly, the more selective we can be the better our loss ratio should be. As we've already said publicly, we intend to reduce our growth rate in 2005 through the use of selective price increases. Ancillary income moved forward largely due to the increased customer count. To put this income into context, I've done a little calculation where the ancillary 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 59%! Here's another interesting calculation: we made Â£101m on income of Â£195m, a ratio of 52%. The UK Car Insurance Market Cycle: Last year I said that the car insurance market was turning, albeit slowly. I explained that premiums would not keep up with claims inflation in 2004. And this is, indeed, what has happened. On average, rates probably fell by 2-4% across the market, while claims costs continued to rise faster than inflation at 4-6%. Therefore, when all the results are tallied, the market should show deterioration of several points. The private car market finished 2003 with a combined ratio around 102%. The result for 2004 is unlikely to be better than 104%. In previous cycles, the worst point in one cycle is typically seven years from the worst point in the next cycle. 1991 was the worst year of that cycle and seven years later 1998 was the worst year of the next cycle. In both 1991 and 1998 combined ratios were around 120%. We are now seven years on from 1998 and the market's combined ratio is nowhere near 120%. To my mind, this indicates the rise of a new cyclical pattern. I think this pattern will be characterised by being more gentle, less good in the good times and correspondingly less bad in the bad times. The reasons for this new pattern lie in the changing dynamics of the market. There are three key factors which have provoked such change: â€¢ Consolidation â€¢ Reduced investment returns â€¢ The growth of direct writers Market consolidation has meant that where previously it took some 10 firms to account for 50% market share, this figure is now accounted for by two firms (Royal Bank of Scotland and Aviva). As these two firms have a great deal to lose from large rate reductions and they are both under the watchful eye of the public arena, I believe that their large market share is a force for market stability. 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. The growth of direct writing which, I estimate, now accounts for more than 50% of the market, means quicker response times to changes in market pricing. In the past, changes in rates by competitors weren't visible to underwriters for several months and then couldn't be responded to for several months. I believe that this led to over-corrections in anticipation of continued trends. Now, direct writers see very quickly through their daily conversion data what the market as a whole is doing and individual firms can react by changing rates from one day to the next. I believe that this leads to a greater number of smaller corrections and serves to further reduce the volatility in the market. In short, I believe that the market is still cyclical and there is no reason to think that it won't remain so. However, I believe the movements of the market will be less severe, with the best times of the cycle less good than previous cycles and the worst times of the cycle less bad. That's the long-range outlook for the market. Looking at the next 12 months, the good times the market has enjoyed over the last few years have resulted in more firms looking for greater market share. I believe that if you could add up the policy numbers from all the business plans of all the firms in the market you would account for more policies than actually exist. At the moment, the battle for market share is being waged in the media. As consumers can probably testify to, there does not seem to be a corner of the UK that doesn't seem to be submerged in car insurance advertising. The respective marketing coffers of companies in the market have been swollen and the result is a record spend, around Â£100m on TV and in the press alone in 2004. This figure is some 40% higher than the same figure in 2003. This increase partly ties into the share growth of direct operations, who use advertising to get custom rather than using intermediaries. But it is also a reflection of appetite for business. I don't see a great deal of change to this landscape in 2005. Certainly the first half of the year will be characterised by intense marketing spend. When some companies begin to fall short of their respective targets (they can't all hit target!), while, simultaneously, the deterioration of results from previous years begins to filter through, it will result in two reactions: some firms will cut rates to ensure hitting volume targets, despite the offsetting reduction in margins, while others will reduce their targets to more achievable levels, while maintaining margins. On balance I believe rates will be static during the year. 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. And, 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. A Brief Explanation of Why Our Results Are So Good! Some explanation of our excellent numbers lies with our ability to make the internet work. This is also a source of confidence in our future. Our 2004 internet results exceeded our forecasts and, in the absolute, are quite stunning. (Except for changing the year from 2003 to 2004 this was exactly what I wrote last year. It's not that I'm being lazy, it's just that it's still true!) Of the more than 6.2m quotes we did last year 82% started on the internet. Around 71% 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 2004 we had some 1 billion hits to our websites!) Elephant's end-of-year customer count reached 360,000 (up over 75% from the year before). Elephant quote volumes were up from 2.0m in 2003 to 2.5m in 2004. Elephant is now the biggest brand in the Group. A tremendous achievement considering it launched only in August 2000. The other brands all grew the number of customers they service in 2004 as well, Diamond by 18%, Admiral by 11% and Bell by 4%. Beyond Direct Response Car Insurance: 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 2004 Gladiator's customer count stood at 33,000 and it contributed Â£1.8m to the Group's bottom line. 2004 was a huge growth year for Confused.com. 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 brings the customer back a list of prices. One-stop shopping! Confused goes out to direct operations as well as intermediary sites. It generated over 1.37m quotes up from 590k in 2003. A great deal of Confused's growth is coming from word of mouth, the most powerful form of advertising. We fully expect Confused to grow substantially in 2005. Inspop.com Ltd., the trading Company which owns Confused.com, made a profit in 2004 of Â£2.1m, most of which is down to Confused. This compares to a profit of Â£300k last year. In Conclusion All in all it was a brilliant year. 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. Henry Engelhardt Chief Executive Officer 18 March 2005 Financial Review Key financial highlights Profit before tax increased significantly during 2004, up from Â£57.2m to Â£101.0m. The Group also achieved significant core profit growth - of over 30% during 2004, as shown in the table below. The directors use core profit as an effective assessment of the underlying profitability of the Group. This measure can be split into the three key elements of the Group's business model - 1) underwriting profits, 2) profit commissions and 3) net other income (in particular ancillary income). 2004 2003 Â£000 Â£000 Underwriting profit 27,969 31,048 Profit commissions 21,673 1,447 Net other income 56,916 38,701 Unadjusted total 106,558 71,196 Profit commission adjustment (1) (5,994) 5,994 Adjusted Group core profits 100,564 77,190 (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 comparing 2004 against 2003. 2004's core profit of Â£100.6m (a reconciliation to which is set out later in this section), equates to a growth rate of over 30% on 2003, and compounded annual growth of almost 51% since 2000 - the first year in which consolidated accounts were drawn up for the Group. A further measure used by the directors to assess the growth in the size of the business is 'Group turnover' - which includes total premiums written, gross other income and net investment return, all as reported on the face of the profit and loss account. The Group has also achieved substantial growth in this measure, as shown below: 2004 2003 Â£000 Â£000 Total premium written 470,400 371,600 Gross other income 69,457 50,783 Net investment return 8,135 4,881 Group turnover 547,992 427,264 Turnover has increased by 28% in 2004 with compounded growth over the five years of over 20%. As noted, the Group generates profits from three principal sources: â€¢ the share of the motor insurance business it retains and underwrites itself â€¢ profit commission earned from the Group's co-insurance and reinsurance partners â€¢ intermediary activities - primarily the selling of ancillary motor products, but also from Gladiator Commercial and Confused.com. 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. 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 all policyholders. Underwriting Underwriting structure The underwriting arrangements in place for 2004 were unchanged on the previous year. 65% of the total business was underwritten by Great Lakes Reinsurance (UK) Plc (Great Lakes - a UK subsidiary of Munich Re currently rated A+ by A M Best) under a co-insurance arrangement. (This is in contrast to a reinsurance contract and means Great Lakes is the primary risk carrier on this portion of the book.) The remaining 35% is underwritten through two Admiral Group entities - Admiral Insurance Company Limited (AICL) and Admiral Insurance (Gibraltar) Limited (AIGL), both of which commenced trading in 2003. 10% of the total business was reinsured to Converium Re (Converium) under a proportional quota share contract through AIGL (as in 2003) on a funds withheld basis. The net effect of this is that the Group retained a net share of 25% of the total book. The quota share contract with Converium was terminated at the end of 2004 and has been replaced with two new contracts (each for 5% of the total book) - with Gen Re (part of the Berkshire Hathaway Group and rated AAA by Standard & Poors) and Axis Re (rated A by Standard & Poors). As well as proportional reinsurance, the Group has also arranged an excess of loss reinsurance programme with a number of reinsurers to protect itself (along with its co-insurance and reinsurance partners) 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 2004. A decision is to be made during 2005 as to the closure of the 2002 year, and the release of any remaining capital held at Lloyd's. Underwriting results In 2004, the Group has again generated significant underwriting profits, reflecting both superior loss and expense ratios. The aggregate of these - the combined ratio - is again expected to rank highly in the UK motor market and has led to an underwriting profit of Â£28.0m (before reinsurance profit commissions), compared to Â£31.0m in 2003. This decrease is due to a combination of the higher loss ratios experienced on the more recent underwriting years (a factor of the motor insurance cycle) and the higher level of reserve releases realised in 2003 following the favourable development of the earlier underwriting years. Growth in total premium written was 27% in 2004, up from Â£371.6m to Â£470.4m. This was due to targeted increases in marketing spend, and the continuing, highly successful development of Elephant.co.uk - the Group's internet-only brand. This growth generated an increase in the Group's market share, and an even more notable increase in its share of the internet motor market. Premium rates were on average around 3% lower in 2004 than in 2003. This reduction was implemented as a strategy to take advantage of the Group's superior combined ratio to help achieve the substantial growth in both policies and premiums written while delivering attractive combined ratios, both for the Group and our reinsurers. 2004's loss ratio (excluding claims handling expenses - which are allocated to net claims incurred but are included in expenses for this analysis) is 67.0%, up from 52.1% in 2003. The 2003 ratio was flattered by substantial reserve releases (Â£16.1m) resulting from the favourable development of earlier underwriting years. The 2003 releases accounted for a reduction of over 20 points in the reported loss ratio, compared to Â£9.2m of releases, or an 8.5 point reduction in the loss ratio in 2004. A full understanding of the impact of reserve releases on the Group's results is important. The following analysis sets out net reserve releases (by underwriting year) included in the financial statements since the 2001 financial year (no releases were included in the 2000 financial statements as this was the first year the Group underwrote premiums and prepared consolidated accounts): Financial year: 2004 2003 2002 2001 Underwriting year: Â£000 Â£000 Â£000 Â£000 2000 1,480 5,176 6,188 3,923 2001 2,967 7,938 2,490 - 2002 3,229 2,975 - - 2003 1,513 - - - Total net release 9,189 16,089 8,678 3,923 Net earned premium 107,501 79,327 81,336 84,135 Releases as % of premium 8.5% 20.3% 10.7% 4.7% This pattern of releases reflects consistent downward revision of loss ratios across all underwriting years, in response to consistently favourable development of these years. The Chief Executive's Statement above refers to this development in some detail. As regards expense ratios, the Group's direct distribution model, focussed on the internet and telesales, is highly cost effective - especially in terms of the cost of acquiring new business. Passing on a share of these costs to its co-insurance and reinsurance partners also means the Group is able to benefit from economies of scale. Continued growth of internet sourced business has, along with tight control of costs within the Group, led to a further improvement in the expense ratio (including claims handling costs) to 15.0% in 2004, down from 15.6% in 2003. These ratios are derived as follows: 2004 2003 Â£000 Â£000 Net earned premium 107,501 79,327 Net operating expenses per technical account 13,796 10,308 add back: claims handling costs 2,352 2,230 deduct: non-recurring Lloyd's charges - (193) Adjusted net technical expenses 16,148 12,345 Adjusted expense ratio 15.0% 15.6% The Group's adjusted combined ratio (being the aggregation of the loss and expense ratios above) for 2004 is 82.0%, compared to 67.7% in 2003. The increase is primarily due to the reserve releases in 2003 as discussed above. Once again it is expected that the combined ratio will rank the Group towards the top of the UK market. Profit commission The Group receives profit commission through both its proportional co-insurance and reinsurance arrangements. The amount of commission receivable is dependent on the volume and profitability of the insurance business, measured by reference to loss and expense ratios. Profit commission - Quota share reinsurance For the 2003 and 2004 underwriting years, the Group earned profit commission from Converium, depending on the loss ratio returned on these underwriting years. During 2004, Â£3.1m of commission was recognised, compared to Â£1.2m in 2003. This contract is operated on a funds withheld basis. The new quota share contracts that came into effect on 1 January 2005 have similar profit commission arrangements. Profit commission - Co-insurance The Group also receives profit commission from Great Lakes, based on the size and profitability of the business written. Â£16.7m of commission has been recognised in the 2004 results, although, as referred to in the financial highlights section above, Â£6.0m of this commission relates to premium earned in 2003. A further Â£1.9m of profit commission was recognised during 2004 (Â£0.3m in 2003) under co-insurance arrangements relating to earlier underwriting year contracts with Swiss Re. An additional Â£1.2m should become due (based on current reported loss ratios) from Swiss Re when the 2002 year of account within the Syndicate is closed or the profit commission is received from Swiss Re. This did not occur at the end of 2004 as the Board of the Managing Agent, Admiral Syndicate Management Limited felt that a number of opportunities were still to be examined for closing the 2002 year. Net other income This figure can be further analysed as follows: 2004 2003 Â£000 Â£000 Â£000 Â£000 Ancillary contribution 48,493 35,856 Instalment income 2,603 1,257 Gladiator contribution 1,756 1,575 Gross Inspop.com Limited contribution 2,033 322 Net Inspop.com consolidation adjustments * (750) (721) Net Inspop.com contribution / (deficit) 1,283 (399) Aggregate interest receipts 3,348 1,166 Other Group / central overheads (567) (754) Net other income 56,916 38,701 * - adjustments relate to intra-group sales. Confused.com is a trading name of Inspop.com Limited. As noted above, the Group is able to use its direct customer contact model to generate significant intermediary revenue through sales of ancillary products to the customer base. This, therefore, represents the majority of net other income. The products involved are primarily insurance products that complement the motor policy, but which are underwritten by external parties. The contribution above is largely commission earned on such sales. Net contribution from ancillary sales grew by over 35% during the year, with average gross income per motor policy amounting to Â£51.20 (2003: Â£50.70). Financial investments, cash and indebtedness All aspects of the Group's business generate significant operating cash inflows. At 31 December 2004, the Group held a total of Â£322.6m in cash and financial investments (2003: Â£239.0m) - an increase of 35% on 2003: 2004 2003 Â£000 Â£000 Â£000 Â£000 Non-regulated cash 50,096 30,035 Regulated cash 38,515 40,040 Total cash 88,611 70,075 Deposits with credit institutions 30,590 24,464 Government and sovereign bond holdings 42,980 63,525 Corporate bonds and similar instruments 160,438 80,936 Total financial investments 234,008 168,925 Grand total cash plus investments 322,619 239,000 The Group has four 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. Investment strategy is set by the Group Investment Committee (and approved by the Boards of directors of the relevant entity). The strategy is conservative, with much of the funds invested in high quality corporate or government bonds. No investments are made in equity shares. Group cash holdings earn interest at just below the UK base interest rate. At 31 December 2004, the Group had Â£33.1m (2003: Â£35.4m) of debt in respect of a commercial loan facility drawn down in 2002. Â£4.3m in capital and interest was repaid during the year with a further Â£4.1m on 3 January 2005. The original arrangement included a Â£10m revolving credit facility that the directors cancelled in 2004 as it was unlikely to be required. Refer to note 21 to the accounts for further details on the Group's debt. Dividends The directors have established a dividend policy based on the principle of returning excess cash to shareholders. In accordance with this principle they would expect to make a normal distribution of at least 45% of post-tax profits, and to review regularly the Group's available cash to determine whether it is appropriate for the Company to pay a further special dividend. The directors have, therefore, declared final dividends totalling 9.3p per share on 18 March 2005. These comprised a normal dividend of 3.1p per share and a special dividend of 6.2p per share. The normal dividend took into account our listing part way through the financial year and is based on a 45% pay-out ratio. The special dividend reflected the abnormally low tax charge in the 2004 accounts resulting from relief for the cost of the ESOT distribution on listing which will reduce the Group's tax payment in 2005. In addition dividends of Â£52.0m were paid during 2004 prior to the Company's listing. Taxation The total taxation charge reported in the profit and loss account is Â£14.4m (2003: Â£18.0m) representing 14.3% (2003: 31.5%) of pre-tax profits. The significant decrease in the effective tax rate is mostly due to the impact of the ESOT share awards made during the year, which attracted a significant deduction for corporation tax purposes A charge for the employer's National Insurance contributions arising from the share provision (Â£7.2m) has been included in the profit and loss account. The tax deduction on this charge was accrued in previous years. Refer to notes 8 and 20 to the accounts for further detail on taxation and the ESOT. 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. The Admiral Group consolidated accounts for 2005 will, therefore be prepared under IFRS, as opposed to UK GAAP. 2004 comparative information must also be restated. Reconciliations of profit and shareholders' equity will be provided in order to set out the major differences between the 2004 UK GAAP and IFRS numbers. The Group has considered the impact of the 'stable platform' of IFRS standards on the financial results to 31 December 2004 and the position at the balance sheet date. The directors are confident that, based on the guidance currently in existence, no material reconciling items (other than in respect of accounting for dividends and goodwill amortisation) will be required when the 2004 figures are restated and reconciled in 2005. Reconciliation of profit before tax to adjusted core profit 2004 2003 Â£000 Â£000 Profit before tax 101,000 57,244 Add back: interest payable 2,451 3,146 Add back: goodwill amortisation 3,906 3,906 (Deduct) / add back: share scheme (credit) / charges (4,144) 6,900 Add back: bonuses paid in lieu of dividends 3,345 - Core profit 106,558 71,196 Profit commission adjustment (5,994) 5,994 Adjusted core profit 100,564 77,190 Consolidated Profit and Loss Account - Technical Account (General Business) (audited) For the year ended 31 December 2004 Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Total premiums written 3 470,400 371,600 Gross premiums written 3 165,343 129,851 Outwards reinsurance premiums (48,606) (38,555) Net premiums written 116,737 91,296 Change in the gross provision for unearned premiums (13,479) (29,015) Change in the provision for unearned premiums, reinsurers' share 4,243 17,046 Change in net unearned premium provision (9,236) (11,969) Earned premiums, net of reinsurance 107,501 79,327 Profit commission - insurance business 9 3,069 1,178 Allocated investment return transferred from the non-technical account 8,135 4,881 Interest receivable 7 401 705 Total technical income 119,106 86,091 Claims paid: - Gross amount (74,805) (55,233) - Reinsurers' share 23,104 16,154 - Net claims paid (51,701) (39,079) Change in the provision for claims: - Gross amount (27,799) 9,309 - Reinsurers' share 5,228 (13,787) - Net change in claims provisions (22,571) (4,478) Claims incurred, net of reinsurance (74,272) (43,557) Balance on technical account before net operating expenses 44,834 42,534 Net operating expenses 4 (13,796) (10,308) Balance on technical account 31,038 32,226 Consolidated Profit and Loss Account - Non-Technical Account (audited) For the year ended 31 December 2004 Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Balance on the technical account 31,038 32,226 Investment income 8,602 7,599 Net unrealised losses on investments (197) (2,518) Investment expenses and charges (270) (200) Other income 7 69,457 50,783 Profit commission - agency business 9 18,604 269 Other charges: - Amortisation of goodwill (3,906) (3,906) - ESOT / share scheme charges 20 4,144 (6,900) - Bonuses in lieu of dividends (3,345) - - Other 7 (15,889) (13,248) - Total other charges (18,996) (24,054) Allocated investment return transferred to the technical account (8,135) (4,881) 69,065 26,998 Operating profit 100,103 59,224 Interest receivable 7 3,348 1,166 Interest payable 7 (2,451) (3,146) Profit on ordinary activities before taxation 101,000 57,244 Taxation on ordinary activities excluding ESOT share award 8 (31,385) (18,031) Exceptional tax credit on ESOT share award 8 16,985 - (14,400) (18,031) Profit for the financial year after tax 86,600 39,213 Dividends paid and proposed 10 (76,045) - Retained profit for the financial year 10,555 39,213 Basic and diluted earnings per share - unadjusted 11 33.5p 15.2p Basic and diluted earnings per share - adjusted 11 26.9p 15.2p There were no acquisitions in the financial year, and no operations were discontinued. All income and expenditure therefore relates to continuing operations. There are no recognised gains and losses in either year other than those reported above in the profit and loss account. In accordance with the amendment to FRS 3 (Reporting Financial Performance), no note of historical cost profits has been prepared, as the Group's only material gains and losses on assets relate to the holding and disposal of investments. Consolidated Balance Sheet (audited) At 31 December 2004 Assets Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Intangible assets 12 58,448 62,354 Other financial investments 14 234,008 168,925 Reinsurers' share of technical provisions Provision for unearned premiums 22 21,289 17,046 Claims outstanding 22 44,848 39,620 66,137 56,666 Debtors Debtors arising out of direct insurance operations 16 99,390 73,611 Debtors arising out of reinsurance operations 5,470 2,622 Other debtors 7,549 5,099 112,409 81,332 Other assets Cash at bank and in hand 88,131 54,957 Cash on short term deposit 480 15,118 Tangible assets 15 4,668 5,849 93,279 75,924 Prepayments and accrued income Deferred acquisition costs 2,794 2,270 Other prepayments and accrued income 1,634 1,561 4,428 3,831 Total assets 568,709 449,032 Consolidated Balance Sheet (audited) At 31 December 2004 Liabilities Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Capital and reserves Called up share capital 23 259 25 Share premium account 24 13,145 15,746 Capital redemption reserve 24 17 - Profit and loss account 24 103,258 92,395 Shareholders' funds attributable to equity interests 116,679 108,166 Technical provisions Provision for unearned premiums 22 73,139 59,660 Claims outstanding 22 142,968 115,169 216,107 174,829 Provisions for other risks and charges 19 4,838 18,105 Creditors - falling due within one year Creditors arising out of reinsurance operations 91,347 48,867 Loans 21 11,455 6,423 Other creditors including taxation and social security 17 54,114 24,833 Accruals and deferred income 18 50,390 36,368 207,306 116,491 Creditors - falling due after one year Loans 21 21,667 29,000 Other creditors 17 741 1,741 Accruals and deferred income 18 1,371 700 23,779 31,441 Total liabilities 568,709 449,032 Company Balance Sheet (audited) At 31 December 2004 Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Fixed asset investments 13 103,804 101,804 Current assets Debtors 2,519 21,555 Cash at bank and in hand 25,587 5,090 28,106 26,645 Creditors - falling due within one year Loans 21 (11,455) (6,423) Other creditors 17 (29,345) (2,060) Accruals and deferred income 18 (258) (252) (41,058) (8,735) Net current (liabilities) / assets (12,952) 17,910 Total assets less current liabilities 90,852 119,714 Creditors - falling due after one year Loans 21 (21,667) (29,000) (21,667) (29,000) Net assets 69,185 90,714 Capital and reserves Called up share capital 23 259 25 Share premium account 24 13,145 15,746 Capital redemption reserve 24 17 - Profit and loss account 24 55,764 74,943 69,185 90,714 Consolidated Cash Flow Statement (audited) For the year ended 31 December 2004 Note 2004 2003 Â£000 Â£000 Â£000 Â£000 Net cash inflow from operating activities 27 157,517 96,229 Returns on investments and servicing of finance Interest received 3,348 1,166 Interest paid (2,418) (4,120) 930 (2,954) Taxation UK Corporation tax paid (15,060) (10,428) Capital expenditure Purchases of fixed assets (1,394) (2,921) Sales of fixed assets 15 20 (1,379) (2,901) Equity dividends paid (51,996) - Financing Issues of ordinary shares - - Expenses related to share issue (2,354) - Repayment of loan capital (2,333) (12,333) Net movement in finance lease capital (1,509) 32 (6,196) (12,301) 83,816 67,645 Cash flows were invested as follows: Increase in cash 18,536 7,079 Debt and other fixed income securities 65,280 60,566 83,816 67,645 Notes to the financial statements (audited) For the year ended 31 December 2004 1 Basis of preparation The Group financial statements, which consolidate the financial statements of the Company and its wholly owned subsidiary undertakings, have been prepared in accordance with the provisions of Section 255A of, and Schedule 9A to, the Companies Act 1985. The balance sheet of the parent Company is prepared in accordance with the provisions of Section 226 of, and Schedule 4 to, the Companies Act 1985. The financial statements have also been prepared in accordance with applicable accounting standards and comply with the Statement of Recommended Practice (' SORP') issued by the Association of British Insurers as revised in November 2003. As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the parent Company is not presented. 2 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material to the group's financial statements. a) Basis of accounting for general insurance business General insurance business is accounted for on an annual basis. b) Premiums General business written premiums comprise the premiums on contracts entered into during the year, which incept during the current financial year. Premiums are disclosed gross of commission payable to intermediaries and exclude taxes and levies based on premiums. The provision for unearned premiums comprises the proportion of gross premiums written which, it is estimated, will be earned in the following or subsequent financial years. It is computed separately for each insurance contract using the daily pro-rata method. c) Claims Claims incurred in respect of general business consist of claims and claims handling expenses paid during the period together with the movement in the provision of outstanding claims. 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 financial statements for the period in which the adjustments are made and disclosed separately if material. The methods used, and the estimates made, are reviewed regularly. d) 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. e) Guarantee fund and other levies Provision is made at the balance sheet date for levies declared by the Financial Services Compensation Scheme and Motor Insurers' Bureau before completion of the financial statements. Provision is also made if it is more likely than not that a levy will be raised based on premium income which has already been recognised in the financial statements. f) Fixed assets and depreciation Fixed assets are stated at cost less depreciation. Depreciation is provided to write off the cost less estimated residual value of tangible assets in equal instalments over their estimated useful economic lives as follows: Motor vehicles - 4 years Fixtures, fittings and equipment - 4 years Computer equipment and software - 2 to 4 years Improvement to short lease-hold properties - 4 years g) Profit commission Under some of the co-insurance and reinsurance contracts the Group is party to, 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 statutory accounts. The income is allocated to the technical account (under the caption 'Profit commission - insurance business') if the commission is earned by one of the Group's regulated insurance companies, or alternatively to the non-technical account (under the caption 'Profit commission - agency business') if earned by other companies. Profit commission is recognised in the profit and loss account when the right to consideration is achieved, and is capable of reliable measurement. h) Leases The rental costs relating to operating leases are charged to the profit and loss account on a straight-line basis over the life of the lease. Assets acquired under finance leases or hire purchase contracts are included in tangible fixed assets 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. i) Ancillary income, commission and other income Ancillary income is credited to the profit and loss account over the period matching the Group's obligations to provide services. Where the Group has no remaining contractual obligations, the income is recognised immediately. A provision is made for expected cancellations where the customer may be entitled to a refund of ancillary amounts charged. Instalment income is credited to the profit and loss account in line with the earning of the motor premium to which the instalment income relates. Provision is made for expected cancellations. Commission from broking activities is credited to the profit and loss account on the sale of the underlying insurance policy. j) Investments Listed investments are stated at mid-market value on the balance sheet date, or on the last stock exchange trading day before the balance sheet date. Investments in subsidiary undertakings are valued at cost less any provision for impairment in value. k) Investment return Income from investments is accounted for on an accruals basis. Realised gains or losses represent the difference between net sales proceeds and purchase price or in the case of investments valued at amortised cost, the latest carrying value. Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price. The movement in unrealised investment gains/losses includes an adjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period. Investment return (including realised and the movement in unrealised investment gains and losses) on investments attributable to the general business and associated shareholders' funds is reported in the non-technical account. An allocation is made from the non-technical account to the general business technical account of the investment return on investments supporting the general insurance technical provisions and related shareholders' funds. l) Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax assets are recognised to the extent that they are regarded as recoverable. They are regarded as recoverable to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. m) Goodwill Goodwill arising on acquisitions, being the difference between the fair value of the purchase consideration and the fair value of net assets acquired, is capitalised in the balance sheet and amortised on a straight line basis over its estimated useful life. The useful life of each acquisition is determined at the time of acquisition, and reviewed annually to ensure the life assigned remains appropriate. n) Pensions The Group operates 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. 3 Analysis of underwriting results All insurance business written during both financial years is direct private motor insurance written in the United Kingdom. During 2004, the Group's share of the business was underwritten by Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). 2004 2003 Â£000 Â£000 Motor insurance - total premiums written 470,400 371,600 Co-insurers' share of total premiums (305,760) (241,540) Group share of total premiums 164,640 130,060 Adjustment for prior year cancellation premium 703 (209) Gross premiums written per technical account 165,343 129,851 AIGL, which is registered in Gibraltar, had gross written premium of Â£144,001,000 during 2004 (2003: Â£118,443,000), profit before taxation of Â£18,170,000 (2003: Â£4,851,000) and net assets of Â£36,032,000 (2003: Â£19,862,000). 4 Net operating expenses 2004 2003 Â£000 Â£000 Total administrative expenses incurred 55,827 44,788 Expenses recovered from co-insurers (45,098) (37,002) Gross acquisition costs payable 8,464 6,654 Movement in deferred acquisition costs (688) (1,402) Gross expense and reinsurance commissions receivable (4,873) (3,710) Movement in deferred element of gross reinsurance commission receivable 164 787 Lloyd's charges - 193 Net operating expenses 13,796 10,308 Staff profit share scheme charges included in administrative expenses above 2,708 1,932 Under the terms of the group's co-insurance arrangements, a proportion of the Group's total expenses are incurred on behalf of the co-insurers, and are reimbursed. 5 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging the following items: 2004 2003 Â£000 Â£000 Depreciation charge: - Owned assets 915 1,283 - Leased assets 1,641 1,575 Operating lease rentals: - Machinery and equipment - - - Buildings 1,574 1,444 Auditor's remuneration: - Statutory audit fees (including Company Â£12,000 (2003: Â£6,000)) 160 106 - Other audit fees (Company Â£nil) 16 11 - Other services (Company Â£nil, 2003: Â£23,000) 116 76 Loss on disposal of tangible assets 4 875 In 2004, fees of Â£827,000 were paid to the Group's auditor in respect of professional services relating to the listing, which have been debited against the share premium account. Profit before tax, using longer-term investment return assumptions is not materially different to the reported profit before tax using actual investment returns. 6 Employee costs Staff costs (including directors) 2004 2003 Â£000 Â£000 Salaries 26,338 23,651 Social security costs 2,406 2,158 Pension costs 399 308 Staff profit share scheme charge 2,708 1,932 Sub total before share scheme charges 31,851 28,049 Employee and director share scheme (credit) / charges (also refer to note 20) (4,144) 6,900 Staff numbers (including directors) Average for the year 2004 2003 Number Number Direct customer contact staff 1,242 1,078 Support staff 301 284 Total 1,543 1,362 7 Net interest, other income and other charges 2004 2003 Â£000 Â£000 Bank and other interest receivable Allocated to technical account 401 705 Allocated to non-technical account 3,348 1,166 3,749 1,871 Interest receivable allocated to the technical account relates to interest earned on the Funds at Lloyd's (being regulatory capital held in support of the run-off of Syndicate 2004). 2004 2003 Â£000 Â£000 Interest payable Commercial loan interest 2,020 2,142 Finance lease interest 256 270 Letter of credit charges 175 734 2,451 3,146 2004 2003 Â£000 Â£000 Other income Revenue from ancillary sales 59,175 44,687 Commission from broker operations 4,475 3,767 Instalment income 2,603 1,257 Other 3,204 1,072 69,457 50,783 2004 2003 Â£000 Â£000 Other charges Costs associated with ancillary sales 10,682 8,831 Broker operations operating costs 2,719 2,096 Other costs 2,488 2,321 15,889 13,248 8 Taxation on profit on ordinary activities 2004 2003 Â£000 Â£000 UK Corporation tax Current year charge at 30% (2003: 30%) 31,342 15,192 Tax relief in respect of ESOT share provision (16,985) - Under / (over) provision relating to prior years - corporation tax 1,571 (107) Current tax charge 15,928 15,085 Deferred tax Current year deferred taxation movement (651) 2,946 (Over) provision relating to prior years - deferred tax (877) - Total tax charge per profit and loss account 14,400 18,031 Factors affecting the current tax charge are as follows: 2004 2003 Â£000 Â£000 Profit on ordinary activities before taxation 101,000 57,244 Corporation tax thereon at 30% 30,300 17,173 Exceptional ESOT tax relief (refer to note 20) (16,985) - Utilisation of brought forward tax losses (582) (105) Syndicate profits taxed on Lloyd's basis 4,270 (5,251) Adjustments in respect of prior year insurance technical provisions (216) - Provisions previously disallowed, now deductible for corporation tax (3,485) - Expenses and provisions not deductible for tax purposes 1,201 3,291 Other timing differences (138) 93 Impact of using lower tax rate (8) (9) Adjustments relating to prior years 1,571 (107) Current tax charge for the year 15,928 15,085 9 Profit commission 2004 2003 Â£000 Â£000 Profit commission receivable Insurance business - allocated to the technical account 3,069 1,178 Agency business - allocated to the non-technical account 18,604 269 21,673 1,447 During 2004, profit commission was recognised in relation to the Group's co-insurance and reinsurance arrangements, being credited to the technical and non-technical accounts respectively. Of the Â£18,604,000 recognised to 31 December 2004 in the non-technical account, Â£5,994,000 was attributable to premiums earned in the year to 31 December 2003. The element relating to 2003 became capable of reliable measurement during 2004, as the basis of calculation of the profit commission was formalised and agreed between parties. Following this agreement, co-insurance profit commission will accrue in proportion to premiums earned. Refer also to the financial review for details of further profit commission receivable on the closure of the Syndicate's final open year of account. 10 Dividends 2004 2003 Â£000 Â£000 Dividends paid: 1) 2 March 2004 (Â£55.67 per share) 14,179 - 2) 2 August 2004 (Â£148.45 per share) 37,817 - Total dividends paid 51,996 - Dividends proposed (9.3p per share) payable 25 May 2005 24,049 - Total dividends 76,045 - Dividends paid during 2004 were paid before the Company's share capital was reorganised (described in note 23) in advance of the listing. Both dividends paid per share figures above reflect share capital in issue at the time the dividend was paid. 11 Earnings per share 2004 2003 Unadjusted EPS Â£000 Â£000 Profit for the financial year after taxation 86,600 39,213 Weighted average number of shares (basic and adjusted) 258,595,400 258,595,400 Unadjusted earnings per share (basic and diluted) 33.5p 15.2p Adjusted EPS Profit for the financial year after tax 86,600 39,213 Deduct exceptional ESOT tax credit (note 20) (16,985) - Adjusted profit after tax 69,615 39,213 Adjusted earnings per share (basic and diluted) 26.9p 15.2p In accordance with the provision of FRS 14 (Earnings per share), the number of shares included in the EPS calculations for 2003 and 2004 has been adjusted to assume all bonus share issues arose at the start of 2003. Details of the reorganisation of the Company's share capital that took place before the Company's flotation during September 2004 is set out in note 23 The two elements of the capital reorganisation that were not bonus issues (i.e. the subscription for shares by the ESOT and the subdivision) had no impact on the resources of the Group, and hence it has been assumed these also arose at the start of 2003. An adjusted EPS figure has been presented to eliminate the impact of the exceptional tax credit arising on the crystallisation of the ESOT which occurred during 2004. 12 Intangible assets Group Â£000 Cost At 31 December 2003 and 2004 78,879 Amortisation At 1 January 2004 16,525 Charged during the year 3,906 At 31 December 2004 20,431 Net book amount At 31 December 2004 58,448 At 31 December 2003 62,354 All of the above goodwill is currently being amortised over a 20 year useful life. 13 Investments in subsidiary undertakings 2004 2003 Company cost Company cost Â£000 Â£000 Investments in group undertakings 103,804 101,804 The only movement in the year related to a Â£2m capital injection in Admiral Insurance Company Limited. The Company's principal subsidiaries (all of which are 100% directly owned) are as follows: Subsidiary Country of incorporation Class of shares held Principal activity Admiral Insurance Services England and Wales Ordinary Service company Limited Admiral Insurance Company England and Wales Ordinary Insurance company Limited Admiral Insurance Gibraltar Ordinary Insurance company (Gibraltar) Limited Admiral Syndicate Limited England and Wales Ordinary Lloyd's corporate capital vehicle Admiral Syndicate England and Wales Ordinary Lloyd's managing agency Management Limited Able Insurance Services England and Wales Ordinary Intermediary Limited Inspop.com Limited England and Wales Ordinary Internet services 14 Other financial investments 31 December 2004 31 December 2003 Historic Cost Market Value Historic Cost Market Value Â£000 Â£000 Â£000 Â£000 Group Debt and other fixed income securities 203,615 203,418 146,979 144,461 Deposits with credit institutions 30,590 30,590 24,464 24,464 234,205 234,008 171,443 168,925 15 Tangible assets Improvements to Computer Office Furniture Motor Total short leasehold equipment equipment and fittings vehicles buildings and software Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Cost At 1 January 2004 1,658 13,861 2,785 1,583 - 19,887 Additions 278 867 193 44 12 1,394 Disposals (5) (342) - - - (347) At 31 December 2004 1,931 14,386 2,978 1,627 12 20,934 Depreciation At 1 January 2004 1,405 9,023 2,127 1,483 - 14,038 Charge for the year 149 2,004 340 62 1 2,556 Disposals - (328) - - - (328) At 31 December 2004 1,554 10,699 2,467 1,545 1 16,266 Net book amount At 31 December 2004 377 3,687 511 82 11 4,668 At 31 December 2003 253 4,838 658 100 - 5,849 Net book amounts include the following amounts relating to leased assets: 2004 2003 Â£000 Â£000 Computer equipment and software 2,849 4,187 Office equipment 83 125 Furniture and fittings - - 2,932 4,312 16 Debtors arising out of direct insurance operations Group Company Group Company 2004 2004 2003 2003 Â£000 Â£000 Â£000 Â£000 Amounts owed by policyholders 97,304 - 72,678 - Commission due 2,086 - 933 - 99,390 - 73,611 - 17 Other creditors including taxation and social security Group Company Group Company 2004 2004 2003 2003 Â£000 Â£000 Â£000 Â£000 Amounts falling due within one year Corporation tax payable 9,585 5,246 8,717 1,455 Dividends payable 24,049 24,049 - - Other tax and social security 3,236 - 2,570 - Finance leases 1,543 - 2,052 - Other creditors 15,701 - 11,494 - Amounts owed to subsidiary companies - 50 - 605 54,114 29,345 24,833 2,060 Group Company Group Company 2004 2004 2003 2003 Â£000 Â£000 Â£000 Â£000 Amounts falling due after one year Finance leases 741 - 1,741 - 18 Accruals and deferred income Group Company Group Company 2004 2004 2003 2003 Â£000 Â£000 Â£000 Â£000 Amounts falling due after one year Premiums receivable in advance of policy inception 23,960 - 16,495 - Claims handling expenses 5,865 - 5,289 - Motor Insurers' Bureau levy 12,032 - 5,797 - Deferred income 7,513 - 5,190 - Other 1,020 258 3,597 252 50,390 258 36,368 252 Group Company Group Company 2004 2004 2003 2003 Â£000 Â£000 Â£000 Â£000 Amounts falling due after one year Claims handling expenses 1,371 - 700 - 1,371 - 700 - 19 Provisions for liabilities and charges Deferred taxation1 ESOT2 Total Â£000 Â£000 Â£000 Balance at 1 January 2004 6,366 11,739 18,105 Movement in the financial year (1,528) (11,739) (13,267) Balance at 31 December 2004 4,838 - 4,838 1 - Deferred tax The net balance provided at the end of the current year is made up of a gross deferred tax liability of Â£5,132,000 (2003: Â£8,878,000) relating to the tax treatment of Lloyd's Syndicates, and a deferred tax asset of Â£294,000 (2003: Â£2,512,000) in respect of other timing differences. At the year-end, there was an unprovided deferred tax asset of Â£531,000 (2003: Â£1,113,000) relating to losses carried forward. There was a deferred tax asset provided in the Company accounts at the year-end of Â£5,000 (2003: Â£nil). There was an unprovided asset of Â£171,000 (2003: Â£171,000) relating to carried forward losses at the year-end. 2 - Employee Share Ownership Trust (ESOT) Refer to note 20. 20 Employee and director share schemes The (credit) / charge included in the profit and loss account is as follows: 2004 2003 Â£000 Â£000 ESOT1 (4,452) 6,900 Directors' share options2 308 - Total share scheme charges (4,144) 6,900 1 - Employee Share Ownership Trust (ESOT) The Group established an ESOT during 2000, under which a number of Admiral Group shares were to be made available for subscription by the Trust on the event of a sale or listing of the Company's shares. The flotation of the Company's shares on 23 September 2004 triggered an issue of shares to the Trust, prior to the listing taking place. The number of shares that were initially to be made available to the Trust was 14,706 C ordinary shares. However, following the reorganisation of the Company's capital (as set out in note 23), the actual number of shares held in the Trust at flotation was 20,588,400 ordinary 0.1p shares. The Trust benefited from bonus issues to the same extent as ordinary shareholders. The total value of shares issued to the Trust was Â£56.6m at flotation - representing 8% of the value of the Group at listing. The cumulative charge recognised in the Group accounts up to 31 December 2004 in respect of the ESOT is Â£7.2m, being the employer's National Insurance charge on the share awards to employees. Up to 31 December 2003, the Group had made provision of Â£11.7m, in the expectation that it would have to fund the Trust's subscription for shares at their full market value. As the Trust was only eventually funded at the share's par value, the Group's 2004 profit and loss account includes a credit of Â£4.5m, representing the release of the provision made in excess of the employer's National Insurance charge. No further awards are to be made to the ESOT and the provision in the balance sheet at 31 December 2004 is nil. Tax relief The Group benefited from a corporation tax deduction in respect of the award of shares to its employees under the ESOT. The tax credit of Â£17.0m (being 30% of the market value of the shares at listing) is shown as an exceptional item in the profit and loss account. 2 - Directors' share options Two non-executive directors within the Admiral group (one, Keith James, a director of Admiral Group plc) were issued with share options during September 2004. Each was granted (free of charge) options over 56,000 Admiral Group plc 0.1p ordinary shares, and each exercised their options shortly after grant, also during September 2004. The exercise price per share was 0.1p, and the fair value of each option at grant and exercise was Â£2.75. The 2004 profit and loss account includes a charge of Â£308,000 in respect of these options. No director was granted options during 2003 and no director held unexercised options at 31 December 2003 or 2004. 21 Loans The Company's debt consists of a facility negotiated in 2002 with Lloyds TSB and Bank of Scotland. This consists of a Â£40m term loan (paid down during the year to Â£33m), along with a Â£10m revolving credit facility that was cancelled by the directors during 2004. The term loan is to be repaid according to a set repayment schedule over six years from October 2002. Interest is charged on amounts drawn down based on three elements: a) LIBOR b) A margin - as set out in the facility agreement, varying between 1.25% and 2.25% c) A 'mandatory costs' contribution - currently around 0.01% Accrued interest is paid off at the end of quarterly interest periods. Security granted in respect of the facility is in the form of fixed and floating charges over most Group assets (excluding assets subject to regulatory restriction) and charges over the shares in some subsidiary companies. Amounts outstanding (including accrued interest) at 31 December were as follows: 2004 2003 Â£000 Â£000 Repayable Within one year 11,455 6,423 Two to five years 21,667 29,000 Greater than five years - - Total outstanding 33,122 35,423 22 Technical provisions and estimation techniques Gross Reinsurance Net At 31 December 2004 Â£000 Â£000 Â£000 Claims outstanding 142,968 44,848 98,120 Unearned premiums 73,139 21,289 51,850 Total 216,107 66,137 149,970 Gross Reinsurance Net At 31 December 2003 Â£000 Â£000 Â£000 Claims outstanding 115,169 39,620 75,549 Unearned premiums 59,660 17,046 42,614 Total 174,829 56,666 118,163 Analysis of movements in claims reserves Gross Reinsurance Net 2004 Â£000 Â£000 Â£000 Claims reserve brought forward 115,169 39,620 75,549 Provision movement - current year 115,179 31,569 83,610 Releases of prior year reserves (14,241) (5,052) (9,189) Claims reserve carried forward 216,107 66,137 149,970 Gross Reinsurance Net 2003 Â£000 Â£000 Â£000 Claims reserve brought forward 124,478 53,407 71,071 Provision movement - current year 19,894 (673) 20,567 Releases of prior year reserves (29,203) (13,114) (16,089) Claims reserve carried forward 115,169 39,620 75,549 Estimation techniques used in calculation of claims reserves Estimation techniques are used in the calculation of the technical provision for claims outstanding, which represents a projection of the ultimate cost of settling claims that have occurred prior to the end of 2004 and remain unsettled at the end 2004. 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 end of 2004, but had not been reported at the year-end. The estimates of the ultimate cost of reported claims are based on the accurate setting of claim reserves on a case by case basis, for all but the simplest of claims. The sum of these reserves 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 annual independent review by the Group's actuarial advisors. 23 Share capital 2004 2003 Authorised Â£000 Â£000 500,000,000 ordinary shares of 0.1p 500 - 132,488 A ordinary shares of 10p - 13 60,176 B ordinary shares of 10p - 6 27,500 C ordinary shares of 10p - 3 29,836 D ordinary shares of 10p - 3 20,164 E ordinary shares of 10p - 2 500 27 2004 2003 Issued, called up and fully paid Â£000 Â£000 258,595,400 ordinary shares of 0.1p 259 - 132,488 A ordinary shares of 10p - 13 60,176 B ordinary shares of 10p - 6 12,042 C ordinary shares of 10p - 1 29,836 D ordinary shares of 10p - 3 20,164 E ordinary shares of 10p - 2 259 25 Share capital reorganisation As a result of the re-registration of the Company as a public limited company and the listing during 2004, significant reorganisations of the share capital were effected during the year. These can be summarised as follows: â€¢ On 7 September 2004, the authorised share capital was increased to Â£54,032.80 by the creation of 132,488 new A shares, 60,176 new B shares, 27,500 new C shares, 29,836 new D shares and 20,164 new E shares. â€¢ Also on 7 September, the directors capitalised Â£25,470.60 of the Company's share premium account and the sum was used to effect a one for one bonus issue. This resulted in the issued share capital being increased to 264,976 A shares, 120,352 B shares, 24,084 C shares, 59,672 D share and 40,328 E shares. â€¢ On 17 September 2004, according to the provisions of the Company's Articles, the Company re-purchased 123,104 A shares, 27,722 D shares and 18,736 E shares for aggregate consideration of one penny. These shares were then cancelled. â€¢ Also on 17 September, the ESOT subscribed for 29,412 new C shares fully paid for consideration of Â£2,941.20. â€¢ On the same date, following the Company's re-registration as a public company, the share capital of the Company (issued and unissued) was re-designated ordinary shares of 10p and then each share sub-divided into 100 ordinary shares of 0.1p. The authorised share capital was increased to 500,000,000 ordinary shares of 0.1p. â€¢ Also on the same date, the directors capitalised a further Â£221,557.20 of the share premium account and effected a further bonus issue of six new to one existing share. Following the exercise of options by two Group directors of 56,000 ordinary shares each, this resulted in the issued capital being increased to 258,595,400 ordinary shares of 0.1p each, which was the year-end position. All ordinary shares in issue at 31 December 2004 have the same rights. 24 Reconciliation of movements in shareholders' funds Share Share Capital Profit and Total capital premium redemption loss account Account reserve Group Â£000 Â£000 Â£000 Â£000 Â£000 At 1 January 2004 25 15,746 - 92,395 108,166 Profit for the financial year - - - 86,600 86,600 Issues of share capital1 251 (247) - - 4 Share issue expenses - (2,354) - - (2,354) Dividends - - - (76,045) (76,045) Share option charges2 - - - 308 308 Cancellation of shares3 (17) - 17 - - At 31 December 2004 259 13,145 17 103,258 116,679 Share Share Capital Profit and Total capital premium redemption loss account Account reserve Company Â£000 Â£000 Â£000 Â£000 Â£000 At 1 January 2004 25 15,746 - 74,943 90,714 Profit for the financial year - - - 56,558 56,558 Issues of share capital1 251 (247) - - 4 Share issue expenses - (2,354) - - (2,354) Dividends - - - (76,045) (76,045) Share option charges 2 - - - 308 308 Cancellation of shares3 (17) - 17 - - At 31 December 2004 259 13,145 17 55,764 69,185 Notes 1 - Refer to note 23 for full details of share capital movements in 2004. 2 - Relates to the exercise of options by two directors within the Group during 2004 - refer to note 20 for further detail. 3 - As set out in note 23, the Company's Articles provided for the cancellation of a number of shares (the 'deferred shares') immediately prior to a flotation of the Company's shares. These were repurchased at an amount below par, with the balance transferred to a capital redemption reserve. 25 Financial commitments Annual commitments of the Group under non-cancellable operating leases are as follows: 31 December 2004 31 December 2003 Land and Other Land and Other buildings buildings Operating leases which expire: Â£000 Â£000 Â£000 Â£000 Within one year - - 16 - In the second to fifth year inclusive 509 - 460 - Over five years 1,465 - 1,147 - 1,974 - 1,623 - At the year-end, the Group had contracted to spend approximately Â£373,000 on tangible assets during 2005 (2003: Â£167,000 during 2004). The Company itself does not hold tangible assets, and was not committed to any expenditure after 31 December 2004. 26 Contingent liabilities The Group had no contingent liabilities at the year-end, other than those arising out of insurance contracts, and other agreements entered into in the normal course of business. 27 Cash flow statement a) Reconciliation of operating profit to net cash inflow from operating activities 2004 2003 Â£000 Â£000 Operating profit 100,103 59,224 Add back / (deduct): - Depreciation charge 2,556 2,858 - Amortisation charge 3,906 3,906 - Unrealised losses on investments 197 2,518 - Employer's National Insurance charge on share schemes (7,284) - - ESOT (credit) / charge (4,452) 6,900 - Share option charges 308 - Loss on disposal of tangible assets 4 875 Change in gross technical provisions 41,278 19,706 Change in reinsurers' share of technical provisions (9,471) (3,259) Change in debtors and prepayments (31,674) (7,992) Change in creditors and accruals - excluding tax and social security 61,380 10,071 Change in tax and social security creditor 666 1,422 Net cash inflow from operating activities 157,517 96,229 b) Movement in opening and closing portfolio of investments, net of financing 2004 2003 Â£000 Â£000 Net cash inflow for the financial year: Cash flow 18,536 7,079 Portfolio investments 65,280 60,566 Movement in financing 3,810 12,384 Movement arising from cashflows 87,626 80,029 Changes in market values (197) (2,518) Total movement in portfolio investments, net of financing 87,429 77,511 Opening portfolio investments, net of financing 199,784 122,273 Closing portfolio investments, net of financing 287,213 199,784 c) Movements in cash, portfolio investments and financing At 1 January Cash flow Market value At 31 December 2004 changes 2004 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 54,957 33,174 - 88,131 Cash on short term deposit 15,118 (14,638) - 480 70,075 18,536 - 88,611 Fixed income and other debt securities 144,461 59,154 (197) 203,418 Deposits with credit institutions 24,464 6,126 - 30,590 Finance leases (3,793) 1,509 - (2,284) Loans (35,423) 2,301 - (33,122) Total 199,784 87,626 (197) 287,213 At 1 January Cash flow Market value At 31 December 2003 changes 2003 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 50,021 4,936 - 54,957 Cash on short term deposit 12,975 2,143 - 15,118 62,996 7,079 - 70,075 Fixed income and other debt securities 90,099 56,880 (2,518) 144,461 Deposits with credit institutions 20,778 3,686 - 24,464 Finance leases (3,761) (32) - (3,793) Loans (47,839) 12,416 - (35,423) Total 122,273 80,029 (2,518) 199,784 28 Related party transactions There were no related party transactions occurring during 2004 that require disclosure. 29 Non-statutory accounts The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2003 or 2004. Statutory accounts for 2003 have been delivered to the registrar of companies and those for 2004 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 2004 is expected to be posted to shareholders by 22 April 2005. 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 Five years to 31 December 2004 Profit and loss account 2004 2003 2002 2001 2000 Â£000 Â£000 Â£000 Â£000 Â£000 Total written premium 470,400 371,600 333,000 284,415 232,000 Net earned premium 107,501 79,327 81,336 84,135 40,392 Profit commission - insurance business 3,069 1,178 - - - Allocated investment return 8,536 5,586 6,145 4,055 2,095 Net claims incurred (74,272) (43,557) (52,566) (63,933) (36,682) Net operating expenses (13,796) (10,308) (7,729) (12,927) (6,637) Technical account balance 31,038 32,226 27,186 11,330 (832) Profit commission - agency business 18,604 269 - - - Net other income 50,461 26,729 19,388 19,936 15,246 Operating profit 100,103 59,224 46,574 31,266 14,414 Net interest 897 (1,980) (3,623) (3,831) (3,654) Profit before taxation 101,000 57,244 42,951 27,435 10,760 Taxation (14,400) (18,031) (12,014) (9,099) (6,851) Profit after taxation 86,600 39,213 30,937 18,336 3,909 Dividends (76,045) - - - - Retained profit 10,555 39,213 30,937 18,336 3,909 Balance sheet 2004 2003 2002 2001 2000 Â£000 Â£000 Â£000 Â£000 Â£000 Assets Intangible assets 58,448 62,354 66,260 71,945 75,545 Financial investments 234,008 168,925 110,877 93,912 45,985 Reinsurers' share of technical provisions 66,137 56,666 53,407 106,412 58,253 Debtors 112,409 81,332 73,728 82,272 77,699 Cash 88,611 70,075 62,996 33,218 28,356 Tangible assets 4,668 5,849 6,681 7,261 4,644 Prepayments and accrued income 4,428 3,831 3,443 10,492 8,993 Total assets 568,709 449,032 377,392 405,512 299,475 Liabilities Shareholders' funds 116,679 108,166 68,953 22,268 3,932 Gross technical provisions 216,107 174,829 155,123 208,495 116,507 Creditors due within one year 207,306 116,491 96,835 106,291 95,201 Creditors due after one year 23,779 31,441 48,222 68,458 83,835 Provisions for liabilities and charges 4,838 18,105 8,259 - - Total liabilities 568,709 449,032 377,392 405,512 299,475 This information is provided by RNS The company news service from the London Stock Exchange

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