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 £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 £548.0
million.
2004 Highlights
• Adjusted core profit* up 30% at £100.6 million (2003: £77.2 million)
• Statutory pre-tax profit of £101.0 million (2003: £57.2 million)
• Normal final dividend of 3.1p per share, special dividend of 6.2p per share
• Aggregate group turnover up 28% at £548.0 million (2003: £427.3 million)
• Total motor premiums written up 27% at £470.4 million (2003: £371.6 million)
• Net income from products and services not underwritten by the Group up 47% at
£56.9 million (2003: £38.7 million)
• 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 £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 £470m total
premiums and achieved pre-tax profits of £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 £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 £30m
to £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:
• Made a record core profit of £100.6m, up 30% from 2003;
• Core profit per share was 38.9p, up 30% from 29.9p in 2003;
• Total turnover for the year was £548m, up 28% from 2003;
• Premium income grew to £470m, up 27% from 2003;
• Produced a combined ratio of 82%;
• Gave more than 6.25m quotes, of which 5m started on the internet (82%);
• Ended the year with more than 1,000,000 customers;
• Experienced continued improvement in loss ratios across all the back years;
• Crystallised the Staff Trust with a value of £57m upon listing;
• Won Business of the Year at the National Business Awards;
• 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;
• Named by the Financial Times as the 16th Best Workplace in the UK and one
of the Top 100 Workplaces in the EU;
• Winner of the Best small/mid Cap IPO of the Year at the Financial News
Awards;
• Had over 250 children at our Staff Children's Christmas party (up more than
25% on 2003);
• 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 £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 £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:
• Loss ratio 67% up from 52% in 2003;
• Earned expense ratio, less government levies, down to 12.5% from 13.5%;
• Combined ratio, including all levies, 82%, up from last year's phenomenal
67.7%;
• Income from products and services we do not underwrite totalled £69.5m up
from £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 £101m on income of £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:
• Consolidation
• Reduced investment returns
• 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 £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 £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 £2.1m, most of which is down to Confused.
This compares to a profit of £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 £57.2m to
£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
£000 £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 £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 £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
£000 £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:
• the share of the motor insurance business it retains and underwrites itself
• profit commission earned from the Group's co-insurance and reinsurance
partners
• 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 £28.0m (before reinsurance profit commissions),
compared to £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 £371.6m to £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 (£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 £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: £000 £000 £000 £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
£000 £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, £3.1m of commission was recognised, compared to £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. £16.7m of commission has been
recognised in the 2004 results, although, as referred to in the financial
highlights section above, £6.0m of this commission relates to premium earned in
2003.
A further £1.9m of profit commission was recognised during 2004 (£0.3m in 2003)
under co-insurance arrangements relating to earlier underwriting year contracts
with Swiss Re. An additional £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
£000 £000 £000 £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 £51.20 (2003: £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 £322.6m in cash and financial
investments (2003: £239.0m) - an increase of 35% on 2003:
2004 2003
£000 £000 £000 £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 £33.1m (2003: £35.4m) of debt in respect of a
commercial loan facility drawn down in 2002. £4.3m in capital and interest was
repaid during the year with a further £4.1m on 3 January 2005. The original
arrangement included a £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 £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 £14.4m
(2003: £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 (£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
£000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £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
£144,001,000 during 2004 (2003: £118,443,000), profit before taxation of
£18,170,000 (2003: £4,851,000) and net assets of £36,032,000 (2003:
£19,862,000).
4 Net operating expenses
2004 2003
£000 £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
£000 £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 £12,000 (2003: £6,000)) 160 106
- Other audit fees (Company £nil) 16 11
- Other services (Company £nil, 2003: £23,000) 116 76
Loss on disposal of tangible assets 4 875
In 2004, fees of £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
£000 £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
£000 £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
£000 £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
£000 £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
£000 £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
£000 £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
£000 £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
£000 £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 £18,604,000 recognised to 31
December 2004 in the non-technical account, £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
£000 £000
Dividends paid:
1) 2 March 2004 (£55.67 per share) 14,179 -
2) 2 August 2004 (£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 £000 £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
£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
£000 £000
Investments in group undertakings 103,804 101,804
The only movement in the year related to a £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
£000 £000 £000 £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
£000 £000 £000 £000 £000 £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
£000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £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 £5,132,000 (2003: £8,878,000) relating to the tax
treatment of Lloyd's Syndicates, and a deferred tax asset of £294,000 (2003:
£2,512,000) in respect of other timing differences.
At the year-end, there was an unprovided deferred tax asset of £531,000 (2003:
£1,113,000) relating to losses carried forward.
There was a deferred tax asset provided in the Company accounts at the year-end
of £5,000 (2003: £nil). There was an unprovided asset of £171,000 (2003:
£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
£000 £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 £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 £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 £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 £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 £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 £2.75.
The 2004 profit and loss account includes a charge of £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 £40m term loan (paid down during the year
to £33m), along with a £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
£000 £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 £000 £000 £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 £000 £000 £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 £000 £000 £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 £000 £000 £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 £000 £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 £000 £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:
• On 7 September 2004, the authorised share capital was increased to
£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.
• Also on 7 September, the directors capitalised £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.
• 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.
• Also on 17 September, the ESOT subscribed for 29,412 new C shares fully
paid for consideration of £2,941.20.
• 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.
• Also on the same date, the directors capitalised a further £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 £000 £000 £000 £000 £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 £000 £000 £000 £000 £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: £000 £000 £000 £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 £373,000 on
tangible assets during 2005 (2003: £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
£000 £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
£000 £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
£000 £000 £000 £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
£000 £000 £000 £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
£000 £000 £000 £000 £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
£000 £000 £000 £000 £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
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