Admiral Group Annual Report 2006

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FY2006 Annual Report · Admiral Group

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A year of success

Annual Report 2005

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Registered Number: 03849958. Admiral Group plc, Capital Tower, Greyfriars Road, Cardiff CF10 3AZ

www.admiralgroup.co.uk

D I R E C T O R S A N D A D V I S O R S

A D M I R A L G R O U P p l c

Directors and advisors

Notes

Directors
Alastair Lyons CBE (Non-executive Chairman)
Henry Engelhardt (Chief Executive)
Kevin Chidwick (Finance Director, appointed 4 September 2006)
David Stevens (Chief Operating Officer)
Manfred Aldag (Non-executive Director)
Martin Jackson (Non-executive Director)
Keith James OBE (Non-executive Director)
Margaret Johnson (Non-executive Director, appointed 4 September 2006)
Lucy Kellaway (Non-executive Director, appointed 4 September 2006)
John Sussens (Senior Independent Non-executive Director)

Company Secretary
Stuart Clarke

Registered Office
Capital Tower
Greyfriars Road
Cardiff CF10 3AZ

Bankers
Bank of Scotland
Corporate Banking
55 Temple Row
Birmingham B2 5LS

Joint Corporate Brokers

Actuarial advisors
Ernst & Young
1 More Place
London SE1 2AF

HSBC Business Banking
97 Bute Street
Cardiff CF10 5NA

Citigroup Financial Markets
UK Equity Limited
Citigroup Centre
33 Canada Square
London E14 5LB

Solicitor
Norton Rose
Kempson House
Camomile Street
London EC3A 7AN

Auditor
KPMG Audit Plc
Marlborough House
Fitzalan Court
Cardiff CF24 0TE

Lloyds TSB Bank Plc
City Office
Bailey Drive
Gillingham Business Park
Kent ME08 0LS

Merrill Lynch International
2 King Edward Street
London EC1A 1HQ

Registrar
Capita IRG Plc
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU

A D M I R A L G R O U P p l c

Contents

Chairman’s statement

Chief Executive’s statement

Financial review

Corporate governance

Remuneration report

Corporate responsibility

The Board of Directors

Financial statements

6-7

8-17

18-27

28-4

5-9

41-45

46-47

48-97

4 O U R B R A N D S

Our brands

The Group’s first brand, set up in 1993 – mainly targeting
those who traditionally pay higher than average premiums,
including drivers under-35 and those living in big cities.
www.admiral.com

Balumba is the Group’s first overseas brand and launched
in Spain in 2006. www.balumba.es

Bell was set up in 1997 – its main target market being
drivers with zero or low no claims bonus. www.bell.co.uk

Confused.com is an intelligent, automated car insurance
shopper. Customers input their details once, and receive
quotes from major car insurance websites.
www.confused.com

Diamond was created for women in response to a need
in the market place for insurance specifically for young
women drivers, which is not only good value, but also as
hassle free as possible. www.diamond.co.uk

Elephant.co.uk is the Group’s main online car insurance
service. Elephant passes on cost savings generated by
being an online brand to customers in the form of lower
premiums. www.elephant.co.uk

Gladiator is the Group’s commercial vehicle insurance
broker that was launched in April 1998. The Company acts
on behalf of several of the largest commercial vehicle
insurers in the UK. www.gladiator.com

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120

Financial highlights

A D M I R A L G R O U P p l c 5

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00

Profit before tax

Full year dividend

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150
800

700
120
600

90
500

400
60
300

200
30

100
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£147.3m

£119.5m

2006

2005

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£0.40
1500
£0.35

1200
£0.30

£0.25
900

£0.20

£0.15
600

£0.10

300

£0.05

£0.00

36.1p

24.6p

2006

2005

Group turnover1

Closing active vehicles

£0.40

£0.35

£0.30

£0.25

£0.20

£0.15

£0.10

£0.05

£0.00

£0.40

£0.35

£0.30

£0.25

£0.20

£0.15

£0.10

£0.05

£0.00

£0.361

£0.246

£0.361

£0.246

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£0.35

800
100
700

£0.30

80
600

£0.25
s
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£0.20
M
£

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£0.15

500
60
400

300
40

£0.10

200

£0.05

20
100

£0.00

0
0

£708.2

£0.361

£638.4

£0.246

2006

2005

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1,500
0.40

0.35
1,200

0.30

900
0.25

0.20
600
0.15

0.10
300

0.05
0
0.00

Combined ratios

Earnings per share

£0.40

100%

£0.35

£0.30

£0.25

£0.20

80%

60%

£0.15

40%

£0.10

£0.05

20%

£0.00

87.3%

£0.361

84.9%

£0.246

£0.40

£0.35

£0.30

£0.25

£0.20

£0.15

£0.10

£0.05

£0.00

1,284.7

1,141.0

2006

2005

39.8p

32.7p

2006

2005

2006

1 Group turnover includes total premiums, other revenue plus net investment return.

EPS = 39.8P

2005

EPS = 32.7P

Total premiums comprise gross motor insurance premiums written by the Group, before co-insurance and reinsurance.

6 C h A I R M A N ’ S S tAt e M e N t

£9.7m, 47% up

distribute in total

“ this year we will
Alastair Lyons CBE”

on 2005

Chairman’s statement

2006 was a year when we not only
continued to develop our direct
UK private motor business but
also moved forward significantly
our outlined strategy to identify
profitable opportunities that exploit
the knowledge, skills, and resources
attaching to that core business.

Confused, our intelligent automated
car insurance shopper, handled an
amazing 9 million quotes contributing
£23m to pre-tax profits, up from £9m
in 2005. We estimate that Confused
now accounts for approaching 30% of
the on-line UK private motor market.
At the end of October, as planned,
we launched Balumba, our on-line
Spanish motor insurer, the first leg of
our overseas expansion, and plans are
already well developed to launch in
Germany towards the end of this year.

With the 2006 motor market remaining
in the poor part of the cycle we set
ourselves modest growth ambitions,
finishing the year with 1.3 million
insured vehicles, 13% up on December
2005. However, continuing strong
ancillary income, tight control of
expenses, and the contribution from
Confused allowed pre-tax profits to
move 23% ahead to £147m despite
underwriting profits being behind last
year on a 6% growth in total premiums.

Proportional support by Munich
Re and other leading reinsurers has
underpinned Admiral’s strategy since
the Group’s formation in late 1999.
It has allowed us to combine rapid
growth with strong cash generation
and significant dividend payments. In
addition, it has helped us to deliver

to our shareholders a higher quality,
lower risk profit stream by providing a
material level of protection against the
cycle. The extension in December 2006
to the end of 2014 of our long-term
co-insurance agreement with Munich
Re therefore represents a significant
milestone in the development of our
business.

The new agreement is both more
flexible and, for 2010 onwards,
potentially materially more profitable.
The progressive reduction in the
share of our underwriting committed
to Munich Re makes it possible for
Admiral, should we so choose, to keep
for our own account a larger share of
the premium written, this increasing
progressively to as much as 60% by
2011. Munich Re has been a fantastic
partner and we look forward to a long
and mutually beneficial relationship in
the years to come. We are also pleased
to deepen our reinsurance relationships
with Swiss Re and Partner Re, with
whom we entered into quota-share
contracts at the same time.

We have maintained our approach of
considering dividends in two parts.
The first element, being the normal
dividend, is based on a 45% pay-out
ratio. The second element - the special
dividend - derives from our principle
of returning to shareholders available
surpluses, calculated as the Group’s net
assets less three specific elements - its
required solvency; cover against any
specific expansion plans, being at this
year-end £5m in respect of overseas;
and a prudent margin - currently £25m
- against contingencies.

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A D M I R A L G R O U P p l c 7

been Group Managing Director of the
international advertising agency Leagas
Delaney since 2002 and brings us
extensive marketing experience gained
during her 11 years with that Company.
Lucy is the management columnist at
the Financial Times, with whom she has
been for the last twenty years.

Our strategy remains clear and
straightforward – to continue to
grow our share of the UK direct
private motor market, maximising the
value derived from each customer
relationship, whilst also identifying
profitable opportunities, in particular
our expansion overseas, to exploit
the knowledge, skills and resources
attaching to our core business. We look
forward to continuing consistently to
create value for all our shareholders.

Alastair Lyons
Chairman

This year we will distribute in total
£93.7m, 47% up on 2005, in part
reflecting the release of £13.5m of the
£23.5m funds previously held at Lloyd’s.
We are retaining the balance whilst we
see how the cycle develops during 2007.
We will then decide the level of growth
appropriate for 2008 and whether or not
to take back 5% of the underwriting risk
at the end of this year during which we
are only carrying 22.5% ourselves.

Going forward we would anticipate
maintaining this approach to dividend
distribution. We will be looking to add
subordinated debt to our available
solvency capital so that we have the
capacity in future years to increase,
should it be appropriate, the share of
our motor book that we underwrite
ourselves without materially restricting
our ability to return trading surpluses to
shareholders in the form of dividends.

Our total dividends for the year at
36.1p per share (24.0p final : 12.1p
interim) represent a yield of 3.6%
based on the closing share price on
1 March 2007. Admiral’s share price
has again sustained material growth
over the last year, the business being
valued at £2.7Bn on 1 March 2007, 76%
higher than a year previous. We led
the FTSE350 as the Company with the
greatest percentage gain in share price
during 2006. Taking dividends and share
appreciation together, we achieved
a 151% total return for shareholders
during 2006, itself part of an overall
318% since flotation in September 2004.

Alignment of the interests of our
staff and our shareholders is one of
our core principles. Our Approved
and Executive Share Schemes are
designed to strengthen that alignment
over time. We are delighted that
strong out-performance against our
plan during 2006 resulted in eligible
employees realising the maximum
award of £3,000 free shares under

our Approved Scheme. The Executive
Share Scheme is based on growth in
earnings per share over three years and
will, therefore, first vest after the 2007
financial year. Our being placed, for the
seventh consecutive year, amongst the
Sunday Times Top 100 Companies To
Work For in the UK is testament to the
strength of Admiral’s relationship with
its employees.

The Company is also closely involved
with the communities within which our
staff live and work. We encourage them
to be associated with the local projects
that are important to both them and
their families, and during 2006 provided
financial support to 109 such projects.
Admiral also sponsored a number of
high profile local events within South
Wales, more details of which will
be found in the report on corporate
responsibility. This also describes the
steps we take to minimise the impact
of our operations on the environment.

In September last year we said
goodbye to Andrew Probert who had
been the Group’s Finance Director
for fourteen years, over which period
he made an enormous contribution
to our successful growth, taking the
Company through both management
buy-out and flotation. His clear
thinking, straightforwardness, energy
and consistent good humour will be
much missed. His place on our Board
has been taken by Kevin Chidwick who
joined Admiral in September 2005
as Deputy Finance Director, having
previously been Finance Director of
Engage Mutual. I am delighted that
Kevin is already making his clear mark
on our Board deliberations.

In my report last year I advised that
Gillian Wilmot would step down as a
Non-executive Director at the 2005
AGM. In September we welcomed two
new Non-executives, Margaret Johnson
and Lucy Kellaway. Margaret has

8 C h I e f e x e C U t I v e ’ S S tAt e M e N t

“

On 1 October, 2006,

almost 14 years after

Admiral started trading,

Admiral Group went

international with the

launch of Balumba.es
in Spain.

Henry Engelhardt

”

Chief Executive’s statement

‘2006: Adios Amigo’
I have no doubt that when we look back
in, say, five or ten years, we will point
to two events that took place in 2006
as key in the development of Admiral
Group.

The first event was one that was long
overdue. Back in 1991 when we prepared
the first draft of the Admiral business
plan we planned on opening our UK
operation first, followed soon after by
a second European country and then
another country soon after that, etc.
Continental domination! However,
before that draft ever saw the light of
day we wisely decided to temper our
ambitions and present a business plan
dedicated solely to a UK operation. But
the dream has lived on.

On 31 October 2006, some 15 years after
that first draft and almost 14 years after
Admiral started trading, Admiral Group
went international with the launch of
Balumba.es in Spain. Our newly formed
Business Development Team based
in Cardiff and our Spanish Directora
General along with the team she
developed in Seville did a brilliant job to
create something from nothing.

Balumba sold 25 policies on its first day,
which compares quite favourably to the
13 policies Admiral sold when it launched
on 2 January 1993. (So the pressure’s
really on Balumba now!) In just the
last two months of the year Balumba
sold over 2,000 policies with premium
income of around €1m.

Okay, so we were over a decade behind
our original schedule, but we are moving
forward and I promise you that the
launch of our next European operation
won’t be another decade away.

The second key event was the extension
and renegotiation of our partnership
with Munich Re. I am pleased to say
that we will continue to have a close
partnership with Munich Re until at least
2014. This is a partnership that began in
2000 with an agreement for five years.
That agreement was re-written in 2002
to go for eight years, through 2009. Now
we have re-re-written the agreement,
such that it goes to the middle of the
next decade. In the first seven years of
the agreement Munich Re has taken
nearly £2 billion of risk through Admiral
and, as the business is expected to
grow, there should be a few more billion
to come.

For a business partnership to last for 15
years, as this one will by the year 2014, it
must be good for both parties. From my
point of view, Munich is a great partner.
What makes a partner great? First off,
they can handle billions of pounds of
risk! More to the point, they understand
we’re in the risk business and that there
are good days (years) and less good days
(years). They understand the cyclical
nature of our industry and adapt their
expectations accordingly. Lastly, they
realise that our success is their success.

A D M I R A L G R O U P p l c 9

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These two major events not withstanding,
2006 on its own merits was a pretty
good year in a very competitive
environment. Here, in a nutshell, are the
highlights:

•

Made a record profit of £147m, up
23% from £119m in 2005

Total turnover for the year was
£708m, up 11% from 2005

Total motor premium written grew
to £567m, up 6% from 2005

Produced a combined ratio of 87%
up from 85% in 2005

Ended the year with more than 1.28m
customers (+ 12.6%)

Direct brands gave more than 15m
quotes, of which almost all of them
started on the internet (96%) many
of which came from Confused

Confused.com gave more than
9m quotes and made a profit of
over £23m

Set up a new operation in Spain from
scratch, launched on 31 October and
sold more than 2,000 policies

Named to The Sunday Times list of
Top 100 Places To Work in the UK for
the seventh year in a row (every year
it’s been run)

Named by the Financial Times as
the eighth Best Workplace in the UK
and one of the Top 100 Workplaces
in the EU

What We Do
For those of you looking through our
accounts for the first time, Admiral’s
primary business is to sell car insurance
direct to the public in the UK and now
Spain. We do everything involved in the
process of acquiring and servicing our
customers. However, we are not your
typical insurance operation, as we share
the income and commensurate risk with
several reinsurance partners. In 2006
we took 25% of the underwriting risk
for our own account (in 2007 we’ll take
22.5%). We operate through a number
of targeted brands: Admiral (general and
multi-car households), Diamond (women
drivers), elephant.co.uk (internet users)
and Bell (zero no claims bonus). We
have three other brands, Confused.com,
the leading car insurance aggregator in
the UK, Gladiator, which operates as an
intermediary in the commercial vehicle
market, and, in Spain, Balumba.es, which
targets internet users.

2006 was our 14th year of trading. The
first seven were in a Lloyd’s of London
environment. However, toward the
end of 1999 Management teamed up
with Barclays Private Equity to buy the
business. The result of this transaction
was the creation of Admiral Group
Ltd. (AGL) as the holding Company. In
September of 2004 we floated AGL on
the London Stock Exchange and created
Admiral Group plc.

As already noted, we have a close
relationship with Munich Re. The recently
signed agreement for the UK is a perpetual
contract with first break potential after
2014. We also have a similar, but separate,
agreement in place for Spain. Munich Re
is also a major shareholder in the Group, a
position it established in 2002. It currently
owns 14% of the Group. Management and
staff currently own around 27% of the
Group.

1 0 C h I e f e x e C U t I v e ’ S S tAt e M e N t

Key Performance Information
Our total written premium for 2006,
before sharing it with our reinsurance
partners, was £567m, accounting for 80%
of our total turnover. The number of
customers we service rose to 1,285,000
from 1,141,000 (+12.6%). All our growth
throughout our history has been organic.

In 2006 75% of our premium was
underwritten by a number of reinsurers:
Munich Re (65%), Swiss Re (5%) and Axis
100
Re (5%). The remaining 25% was kept by
the Group. Our net written premium for
2006 was £139m. In 2007 Admiral Group
will take 22.5% of the premium income
to its own account. Munich Re, through
Great Lakes, will take 60%, Swiss Re will
take 10% and Partner Re will take 7.5%.
The Swiss Re and Partner Re agreements
are both for multiple years.

the UK Car Insurance

Market: A Game of

Chicken, or a Game
of Leapfrog?

Henry Engelhardt

”

Some key numbers from the accounts
which follow:
100
• Loss ratio 72% up from 70% in 2005
•

Earned expense ratio, excluding regulatory
80
levies, up to 12.9% from 12.3%
Combined ratio, including all levies,
60
87%, up from last year’s 85%
Revenue from products and services
40
we do not underwrite totalled
£131.6m up from £93.4m (+41%)
20

•

The increase in the loss ratio from
70% last year to 72% in 2006 is to be

“

expected. There was very little, if any,
upward price movement in the market in
2006. As claims inflation is running well
ahead of the retail price index a modest
decline in claims frequency could
not offset the net rise in claims costs.
The result is a deteriorating loss ratio.
Without any releases taken into account
the loss ratio moved from 82% to 86%.

The bar chart below shows the
development of the loss ratios for the
back years on an underwriting year basis.
The years noted at the bottom of the
chart are the underwriting years. The
coloured bars represent the reported
loss ratios published in the Annual
Accounts over the last five years. So, for
example, in the 2005 Accounts the loss
ratio for the 2002 underwriting year was
58%, down from 66% in the previous
year’s accounts. This year the result for
the 2002 year has matured to 55%.

The expense ratio, not including
government levies, moved up by 0.6%
from 2005. This reflects no growth
in the average price at which we sell
our product against inflation in our
costs, partially offset by some modest
productivity gains. Despite the small
upward move in the expense ratio, we
are still one of, if not the, most efficient
firm in the market.

100

Loss Ratio Development

85
82

100%

80%

60%

40%

20%

2004

2005

2002

2003

2004

2005

2006

2001

2003

2003
Underwriting year

2001 Accounts

2002 Accounts

2003 Accounts

2004 Accounts

2005 Accounts

2002 Accounts

2003 Accounts

Underwriting year

2004 Accounts

2005 Accounts

2006 Accounts

A D M I R A L G R O U P p l c 1 1

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In the first nine months of the year we
raised our new business rates a total of
1%, and that happened gradually and
grudgingly. We did move rates upwards
almost 3% in the fourth quarter but it
is not clear if those rate increases will
hold in the early part of 2007. Please
note, rate changes at the end of a year
have little or no effect on the result of
the year they are implemented. Our
conversion rate, which is a measure of
our prices versus the market, did not
fluctuate much during the year, indicative
that our rate moves were consistent with
the market.

Ancillary income (income from
products and services where we take no
underwriting risk) per customer moved
up by £1 in 2006 versus 2005, from
£56.60 to £57.60. There were no major
changes within these figures from the
year before.

The UK Car Insurance Market:
A Game Of Chicken, Or A
Game Of Leapfrog?
Yes, I know, frogs again. This time we’re
not boiling them, but possibly jumping
over them. The UK car insurance market
is at that critical moment that seems
to occur in every cycle, when prices
are expected to rise but don’t. Prices
are expected to rise because, simply,
underwriting results aren’t good. It would
be very rational for prices to rise now.
There has been and continues to be
claims inflation eating away at premiums.
All the while that premiums don’t go up
results deteriorate. Even if premiums rise,
they have to rise circa 5% just to maintain
the status quo. If you’re writing a piece of
business at the market average today the
combined ratio for that piece of business
is somewhere around 115%. Maybe more.
That’s not profitable and not sustainable;
eventually rates must go up. Right?

150

120

To put all this income into context, I’ve
done a little calculation where the non-
underwriting income is added to earned
premium to give a ‘big picture’ combined
ratio. I think this gives an interesting
measure of the entire business. Expressed
in this way, the combined ratio would
have been 58%! Here’s another interesting
calculation: we made £147m on income
of £277m, a return on income of 53%
(2005 51%).

However, the market dynamics resemble
a classic game of chicken. This seems to
be a market full of James Deans. Who
will blink first? Who will knowingly
raise their rates, make themselves
uncompetitive, shed share and reduce
volumes in an effort to enhance or
protect profits? And if one firm gives
up the game of chicken, will the others
follow suit?

150%

120%

90%

60%

30%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

F2005

UK Motor – Combined Ratios

150%

120%

90%

60%

30%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

F2006

150%

120%

90%

60%

30%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

F2005

1 2 C h I e f e x e C U t I v e ’ S S tAt e M e N t

Well, some of those questions were
answered in the middle of the year
when Norwich Union, the market’s
second biggest player, announced it had
moved rates up and would continue
to move rates up. On average, NU said,
rates would rise some 16%. It was a very
brave step. But the rest of the market
continued to play chicken. In particular,
the market leader, Royal Bank of
Scotland, which holds some 35% market
share, appeared to hold the line.

Late in the year RBS announced that
it too would be moving rates up. How
much RBS has moved or will move its
rates is not clear. At the time of writing
I cannot confirm what RBS has done
on rates although it appears, based on
our conversion data and data on where
customers were insured before joining us
versus where customers go when they
leave us, that they have moved their
rates up at least a little bit.

If RBS continues to raise rates, then
the market might move from a game
of chicken to one where companies
which don’t raise rates see their volumes
increase. When that happens these firms
then raise their rates, which means that
the companies that had raised rates and
had seen their volumes decrease see
their volumes increase, so they raise rates
again, etc. etc. A game of chicken then
becomes a game of leapfrog.

As I write this, with 2007 just getting
underway, there seems to be very little
of this barnyard activity taking place.
Rates may have moved up a touch, but
certainly not as much as claims inflation
and the game of chicken continues.

The idea that the market as a whole
is not moving much on rates may be
a sign of a fundamental change in
market dynamics. The power of RBS,
despite its 35% market share, appears
to have been diluted over time by the

growth of aggregators, the largest of
which is our own Confused.com. The
growth of aggregators means increased
transparency of rates and gives the
consumer a better chance of finding the
lowest possible rate than ever before.

In the days before aggregators, if the
lowest rate in the market was being
offered by a small company that couldn’t
spend a lot of money advertising
or operated through a small broker
network, that company could not anchor
rates, no matter how cheap they might
be. Bigger companies, like RBS, could
raise rates because the vast majority of
consumers never knew a better rate
was available.

But in the new, aggregator world, small
companies that are listed on aggregators
do not need to invest up front in
expensive marketing campaigns and
they can, much more easily, anchor the
market by not raising rates. The small
companies get the same exposure to
consumers that the big companies get.
Over the longer term these companies
might find out that, actually, whoops,
they really should have raised rates. But
this information will take a few years to
come to light.

I believe that the rise of aggregators and
changing shape of distribution will put
ever-greater pressure on insurers to be
efficient. Insurers who run high expense
ratios will have nowhere to hide in a
marketplace with such a level of price
transparency.

The pattern of results for the market
for all motor insurance in 2005 (most
recent market data available) was similar
to 2004. The overall result wasn’t all that
bad (102.2%), but this was flattered by
large back year releases (6.5%). Private
motor performed a bit worse, with a
combined ratio of 105% and releases
of 5.7%. The underlying trend of higher

A D M I R A L G R O U P p l c 1

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bodily injury costs more than offset a
modest reduction in claims frequency.
Overall claims inflation continues to
mount, over the last two years the
average is roughly 5% a year, pushed up
in no small part by the cost of care.

The market expense ratio certainly didn’t
make up for the increase in claims costs,
in fact, it rose 0.3%, to 27.6%.

Without the 6.5% of reserve releases
the pure year loss ratio was 81% and the
combined ratio was almost 109%, an
increase of 5% on the comparable figure
from 2004.

Given that there was almost no net
increase in prices in 2006 that would
affect the 2006 result (increases late
in the year have very little effect on
that year), it implies that the pure year
combined ratio for 2006 will be north
of 110%. Ouch. I’m sure you’d agree,
this is not a particularly good result.
However, it is yet unclear how big the
reserve releases will be and therefore
what the headline result will be. The UK
market has something of a history of not
moving on price until reserve releases are
exhausted.

Will history repeat itself? One might
look at 2007 as one looked at 1998. At
the end of 1997 it was clear to one and
all that the market was unprofitable
and that price increases were required.
But prices didn’t move in 1998 while
claims costs rose, and most industry
observers gave up hope that the market
would ever move, predicting a future
of perpetual losses. It was only in 1999,
when everyone had seemingly given up
on the market altogether, that it began
to move. When prices did start to rise in
1999 they went up fast, some 20% in that
year alone.

So which year will 2007 most resemble?
1998 or 1999? If marketing spend is
anything to go by then we’re still at 1998.
The spend on TV and press has come
off its highs, but it certainly hasn’t fallen
sharply. And the amounts being paid to
internet search engines like Google (cost
per click) are ever growing.

Bids for key search terms are as high in
January 2007 as they were in January
2006. Not only are the bids for key terms
as high as they were last year, but the
number of terms being bid on is ever-
rising. All in all it seems to add up to at
least as much money being spent on
advertising now as a year ago.

Fortunately, our own business is
somewhat insulated from this
deterioration by two factors. First, our
results historically have been far better
than the market average and therefore,
despite tighter margins, our result is still
rather profitable.

Second, our unique underwriting
structure means we have a limited share
of our own result, which reduces profits
in the good times, but also reduces the
effect of narrowing margins in the less
good times, leaving us with a high return
on capital. Moreover, as we continue to
grow our customer base, we continue
to grow our ancillary revenues. All in all
it should result in sustainable, profitable
growth in the future.

Moving Forward To Maintain
Our Advantage
Last year and the year before I wrote
about the internet being a key factor
to our good results. Today I think the
internet is a given. Every company
is concentrating on this distribution
channel, etc. The focus now is on
creating new, more interesting products
for consumers.

1 4 C h i e f e x e C u t i v e ’ s s tat e m e n t

20000

15000

10000

“

Confused’s growth in 2006

made 2005 look absolutely
pedestrian.

Henry Engelhardt

”

–

10,000

8,000

6,000

4,000

2,000

2000

2001

2002

2003

2004

2005

Internet quotes

Phone quotes

5000

What do I mean by ‘products’? After
all, the ‘product’ is car insurance and
that doesn’t change radically from one
year to the next. Last year we launched
two different types of car insurance for
consumers to choose from.

another car it was something not worth
paying for. While those who did need to
drive another car could add it back in.
FlexiBell launched in the second half of
the year and is being rolled out slowly.

2000

2001

2002

2003

2004

2005

Quote Volumes Split By Phone And Internet

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20,000

15,000

10,000

5,000

s
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–
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10,000

8,000

6,000

4,000

2,000

2002

2003

2004

2005

2006

Phone quotes

Internet quotes

The Admiral brand regained the crown as
the Group’s biggest brand largely because
of the efficient growth in MultiCar
policies. The number of vehicles insured
in Admiral grew 26% to 440,000.
Elephant, which held the crown since
2004 but isn’t present on aggregators,
grew 3% to 422,000. In percentage terms,
Bell grew the most, 29%, while Diamond
grew 4%.

It was also yet another good year for
Gladiator. Gladiator sells van insurance,
largely to private tradesmen, as an
intermediary. Admiral Group does not
take any underwriting risk with this
business. At the end of 2006 Gladiator’s
customer count stood at 42,000 and it
contributed £2m to the Group’s bottom
line, up 9%.

First was Admiral MultiCar, which takes
a look at all the vehicles in a household
before generating a price. It’s more than
just a volume discount. In many cases
the knowledge we gain from knowing
about all the vehicles and drivers in
a household can lead to lower prices
overall and usually those discounts go
not only to the second and third vehicle
brought on cover, but also to the first
vehicle. The popularity of this concept
meant that 12% of all our new vehicles
last year were on MultiCar policies.

The second innovation was FlexiBell.
Here we took everything we could out
of a comprehensive policy such that it
was still a comprehensive policy and
then offered the items we had taken
out in an optional, menu-like list. In this
way consumers could build their own
policies but only pay for the parts of the
cover they felt were valuable to them.
For example, we made driving other
cars optional. For those who never drive

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For those who don’t know, Confused,
launched in its current form in the
middle of 2002, is an intelligent,
automated car insurance shopper. Simply
put, all a customer has to do is put his or
her details into Confused and Confused
then goes out to the major car insurance
websites, populates the appropriate
fields, and, in real time, brings the
customer back a list of prices. Confused
goes out to direct operations as well as
intermediary sites. One-stop shopping!

Not only did Confused generate a lot
of quotes, but it also made money.
Confused made a profit of £23.1m
compared to £8.8m last year and £2.0m
the year before. It has also gotten off to a
flying start in 2007. January saw it deliver
over 1 million quotes to its insurance
partners for the first time and it also set a
new, monthly record for profits.

During the year Confused also added
products and now delivers prices
for home insurance, gas & electricity,
travel insurance, breakdown cover, life
insurance, credit cards and mortgages.

Customers By Brand -
31 December 2006

98,795

42,342

2,194

280,185

439,546

421,643

Admiral

Elephant

Bell

Diamond

Gladiator

Balumba

8000

6000

10000

Changing The Way Car
Insurance Is Bought In The UK
– Confused.com: Consumer
Champ
Last year I wrote that 2005 was really a
huge growth year for Confused.com. Well,
I was wrong. Confused’s growth in 2006
made 2005 look absolutely pedestrian.
Confused delivered 8.4 million motor
quotes during the year, an increase of
110% over 2005. It also delivered over 525k
quotes for home insurance.

4000

2000

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10,000

8,000

6,000

4,000

2,000

2000

2001

2002

2003

2004

2005

Internet quotes

Phone quotes

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10,000

8,000

6,000

4,000

2,000

Confused.com Quotes

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20000

15000

10000

5000

2002

2003

2004

2005

2006

Other quotes

Motor quotes

2002

2003

2004

2005

2006

Internet quotes

Phone quotes

1 6 C h i e f e x e C u t i v e ’ s s tat e m e n t

Kate’s wide array of talents coupled with
her fearlessness in tackling any challenge
allowed her to step down holding an
important Admiral record: most desk
changes in a career. Kate is now busy
taking care of a young family while also
working to get her PhD.

The other retiree was our Finance
Director, Andrew Probert. Andrew was
actually our second FD, the first one
being unable to move his family to
Cardiff from the South East back in 1992.
Andrew, a Cardiff native, was living near
Gloucester when we came looking,
which was very helpful.

Andrew did everything for Admiral.
He takes great pride in relating the
story of buying the first company
kettle when we moved into our Cardiff
offices in September, 1992. He also
enjoys explaining that he bought the
second kettle as well, because the first
one didn’t work! Andrew led finance,
planning, property management, legal,
audit, facilities, accounts and was, from
time to time, the Director responsible for
People Services and Confused. He did
everything but polish the doorknobs and
I have no doubt that if the doorknobs
had really needed polishing he would
have been the first to volunteer to do
that too.

We’ll certainly miss the experience and
big personalities of Kate and Andrew.
I wish them all the best in their new lives.

The good news is that their replacements,
Kevin Chidwick as Finance Director and
Nicolas Weng Kan as MD of MDs, are
talented, intelligent and keen.

Where Next?
We’re in the UK. We’re now up and
running in Spain. So where next?
Germany, that’s where.

We hope to launch a direct operation
in Germany late in 2007. The German
market is huge, some 45m vehicles. It is
also a good internet market for many
things, although, currently, car insurance
isn’t one of them. However, we see that
situation evolving and our strategy of
entering new markets has not changed:
we plan to use the experience we’ve
gained in the UK of delivering car
insurance efficiently via the internet in
other markets, Germany next.

2006 – More Change
2006 was a challenging, but productive
year. Challenging because of the cyclical
nature of our industry, productive
because we still turned in a good result.
In addition, it was productive because of
the things we did that had no real effect
on the results for the year itself, but will
have a big effect on our future.

From the facts and figures at hand we
still believe we are the most efficient
and, pound for pound, the most
profitable firm in the UK motor insurance
market. Our goal is to continue to write
the above sentence for the annual
accounts year after year after year.

During the year two key managers
stepped back into part-time roles. Kate
Armstrong who joined Admiral on April
Fool’s Day 1992 and was the Group’s
sixth member of staff, is now doing
management training a couple of days
each month and she continues as a
Director of Confused. In her years with
us Kate wore many hats, including: MD
of Confused, IT Manager and Marketing
Manager. Kate’s final role with us was as
MD of MDs.

A big thanks goes out to all our staff for
all their effort in 2006, with a special
mention to those further afield servicing
our customers from Canada and India.
We’re lucky to have such a motivated,
enthusiastic workforce.

Henry Engelhardt
Chief Executive

P.S. For those keeping score, we set a
new attendance record at our Staff
Children’s Christmas Party (always the
best party of the year!) with 461 kids, up
28% on last year (360). We’re nothing if
not fertile.

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Henry Engelhardt
Chief executive

1 8 f I N A N C I A L R e v I e W

Financial review

Key financial highlights
The Group’s pre-tax profit showed another significant increase in 2006 – rising 23% from £119.5m
to £147.3m. Earnings per share grew by 22% from 32.7p to 39.8p.

The results of the four key elements of the Group’s business were as follows:

Underwriting profit

Profit commission

Ancillary and other net income

Confused.com profit

2006

£000

28,351

19,926

75,985

23,080

2005

£000

32,361

14,735

65,516

6,882

Pre-tax profit

147,342

119,494

During 2006 the Group retained 25% of the UK motor business it generated, and hence limited
downside exposure to the motor cycle. The Group participates in the upside through the profit
commission arrangements within these contracts. Using co-insurance and reinsurance significantly
reduces the amount of capital the Group is required to hold and frees up resources either for
distribution to shareholders or growing the business.

Ownership of the 1.2m UK policy base remains with the Group and significant non-insurance
profits continue to be generated. These ancillary profits continue to be the single largest
contributor to the Group’s result.

The Group is able to deliver continued and significant profit growth even at times when the
motor insurance cycle is in its worst years because of the significant contribution made by non-
underwriting income, and also the fact that the Group’s underwriting has returned superior results
compared to the market as a whole.

The proportion of the profit earned from non-underwriting activity continues to rise, moving
up from 73% in 2005 to over 80% in 2006. This is partly a factor of the further deterioration of
the UK motor insurance cycle, but is more a reflection of the continued absolute growth in non-
underwriting profits, most notably ancillaries and Confused.com.

Turnover – which comprises total premiums written, gross other income and net investment
return (and measures the combined size of the Group’s businesses) continued to show double
digit growth:

800

700

600

500

400

300

200

100

700

600

500

400

300

200

100

2000

2001

2002

2003

2004

2005

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800

700

600

500

400

Total premium written

300

Other revenue

200

Net investment return

100

0
Group turnover

a D m i R a L G R O u P p l c 1 9

2006

£000

566,608

131,621

9,925

2005

£000

533,616

93,405

11,342

708,154

638,363

Other revenue (which is made up predominantly of ancillary revenue and Confused.com income)
grew by over 40% in the year. Confused.com was a key factor in this growth (refer to below). Total
premiums written grew by around 6%, also discussed below.

Group turnover

800

700

600

500

m
£

400

300

200

100

2002

2003

2004

2005

2006

Underwriting
Underwriting arrangements
The Group’s UK underwriting structure for 2006 was as follows:

65% of the business was underwritten by Great Lakes (a UK subsidiary of Munich Re) under a long-
term co-insurance contract.

35% of the business was underwritten by the Group through Admiral Insurance (Gibraltar) Limited
(AIGL) and Admiral Insurance Company Limited (AICL). 10% (of the total business) was ceded
via quota share contracts that qualify for deductions in required solvency capital (5% to Axis Re
Europe and 5% to Swiss Reinsurance Company UK Limited). The Group retained 25% of 2006
underwriting on a net basis.

As well as proportional reinsurance, the Group has also arranged an excess of loss reinsurance
programme with a number of reinsurers to protect itself against very large claims.

For the 2000 to 2002 underwriting years, the Group’s retained share of the motor business was
underwritten through the Group’s Syndicate (Syndicate 2004) at Lloyd’s of London. During early
July 2006, the Group achieved the release of a significant proportion of the profits earned by
the Group’s Syndicate – amounting to around £24m, net of amounts retained to meet corporation
tax liabilities.

2 0 f I N A N C I A L R e v I e W

New co-insurance and reinsurance arrangements, 2007 onwards
During 2007, the Group concluded the successful renegotiation of the long-term UK motor
reinsurance treaty with Great Lakes, and also put in place new quota share reinsurance
arrangements for 2007 and beyond. The new Great Lakes contract will run until the end of 2014
at the earliest, and the percentage of business underwritten under the contract will decline by
5% per annum until 2011, so that in that year and beyond, Great Lakes will underwrite 40% of the
total.

The declining share passed to Great Lakes allows the Group to position itself for an upturn in the
cycle and retain more of the profitable business it has historically generated. Flexible use of quota
share reinsurance allows the Group to reduce its own retention (to a minimum of 25% after 2007)
where this is appropriate.

The new contract is also on improved terms – most notably:
•

A more flexible growth cap, allowing the Group to vary the speed of policy growth in
response to cyclical changes in underwriting profitability

•

Revision of the profit commission structure: Although these new terms are not expected
to have a material impact on the results from 2007 to 2009, they could potentially lead to
substantial increases in the level of profit commission earned in 2010 and beyond, should the
cycle turn as expected

The new quota share contracts (with Swiss Re and Partner Re) provide protection against a
negative insurance result. Whilst there is a cap on the extent of protection provided by the Swiss
Re contract, cover exists throughout the range of probable loss ratio outcomes.

The profit commission arrangements under these two contracts allow Admiral a greater share of
the underwriting result than the 2006 quota share contracts with Swiss Re and Axis Re.

The potential split of the net UK motor business over the next three years is as follows:

Great Lakes

Swiss Re 10.0%

Partner Re

Maximum available to Admiral

2007

60.0%

10.0%

7.5%

22.5%

2008

55.0%

10.0%

7.5%

27.5%

2009

50.0%

10.0%

40.0%

100.0%

The Group retains 35% of the Spanish motor risks, with 65% being reinsured by Munich Re under a
long term treaty on similar terms to the UK contract.

A D M I R A L G R O U P p l c 2 1

Underwriting results
Total premiums increased by 6% from £534m to £567m, and all Group brands again increased in size.
Premium growth was somewhat lower than policy count growth, due primarily to lower average
premiums resulting from a mix effect. Premium rates were again broadly flat across the year. The
Group’s Spanish motor insurance business generated around £0.6m of premium during 2006, in two
months of trading.

The number of quotes the UK direct brands gave showed another large increase in 2006 – up almost
60% from 9.7m to 15.4m. Continued and substantial growth in Confused.com (further detail below) and
other aggregator volume were the principal reasons.

Net insurance premium revenue increased by around 4% from £139.5m to £145.0m. This increase was
lower than the rise in written premiums due to the reduction in the retention of premium from 30% in
2005 to 25% in 2006.

The reported loss ratio increased by around 2 points from 70% to 72%. Reserve releases continued to
form a significant part of the underwriting result, rising from £17.3m to £20.9m in 2006 (refer to note 19).
In relative terms, the 2006 release improves the loss ratio by around 14 points, whereas 2005’s release
contributed 12 points. This means the pure year loss ratio has worsened by around 4 points, from 82%
to 86%. This increase is broadly in line with claims inflation experience. Movements in loss ratios are
further discussed in the Chief Executive’s statement.

120

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The motor expense ratio increased from 15.1% to 15.8% in 2006, reflecting expense inflation with little
movement in premium rates. Excluding regulatory levies, the figures are 12.3% in 2005 and 12.9% in 2006.

100

The expense ratio is reconciled to the figures included in the income statement in note 9 below, whilst
the underwriting result is reconciled later in this review.

40
Combined ratio development
The Group’s combined ratio (being the aggregation of the loss and expense ratios above) has
risen by around 2 points, from 85% to 87%. This compares to an expected combined ratio for
the overall UK motor market in 2006 of around 109% (source – Deloitte) - an outperformance
consistent with previous years of around 20 points. Further detail on market results is set out in
the Chief Executive’s statement.

120%

100%

80%

60%

40%

20%

Combined ratio development

120%

100%

80%

60%

40%

20%

Combined ratio Loss ratio Expense ratio

2000

2001

2002

2003

2004

2005

2006

2 2 f I N A N C I A L R e v I e W

The underwriting result (including investment income) fell by £4m in 2006 (£28.4m v £32.4m). This
was due to the increased combined ratio (87% v 85%) and also a fall in investment income.

Some additional ratios are noted in the Chief Executive’s statement – firstly the ratio of total
outgoings to net income at 58% (2005: 60%) and secondly the ratio of profit to net income at 53%
(2005: 51%). Reconciliations to the figures in the accounts are set out at the end of this review.

Profit commission
The Group earns profit commission through its co-insurance and reinsurance arrangements.
The amount receivable is dependent on the volume and profitability of the insurance business,
measured by reference to loss and expense ratios.

Profit commission – co-insurance
The principal source of profit commission is the long-term co-insurance contract with Great
Lakes. £15.4m has been recognised in 2006, compared to £11.1m in 2005. The increase compared
to last year reflects additional income recognised resulting from improvements in reported loss
ratios on earlier underwriting years (predominantly 2003 and 2004).

A further £2.0m of profit commission (2005: £0.5m) relating to earlier underwriting years (2000
– 2002) contracts with Hibernian Re has also been recognised in these results. No further
material amounts are anticipated relating to these contracts due to the relative maturity of the
underwriting results of these years.

Profit commission – quota share reinsurance
A total of £2.5m has been recognised during 2006 (2005: £3.1m) from quota share profit
commission arrangements.

As noted above, the new quota share deals for 2007 and beyond include scope for the Group to
earn a larger share of the underwriting result than the 2006 and earlier contracts.

Ancillary and other net income
This figure can be broken down as follows:

Ancillary profit

Interest income

Instalment income

Gladiator profit

Other expenses and share scheme costs

2006

£000

67,022

4,539

5,676

2,025

(3,277)

2005

£000

59,092

4,176

3,768

1,871

(3,391)

Ancillary and other net income

75,985

65,516

Ancillary profit and instalment income
This primarily involves commissions and fees earned on sales of insurance products and
services complementing the motor policy, but which are underwritten by external parties. Net
contribution from these sales grew by 13% in 2006 – from £59.1m to £67.0m. Average gross income
per motor policy sold in the UK increased from £56 in 2005 to just under £58 in 2006. Ancillary
income per average active vehicle rose from £68.5 to £69.3.

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A D M I R A L G R O U P p l c 2

Gladiator
Gladiator enjoyed another good year, contributing £2.0m to the Group, up from £1.9m in 2005. 2006
was a transitional year for Gladiator as the commercial vehicle market shifted towards a predominately
internet based distribution channel. This has predictably led to increased competition within the sector,
which has in turn led to increases in acquisition costs and softening of premium rates.

Gladiator successfully managed this change and increased new business volumes by 27% whilst
maintaining its expense ratio. During 2006, Gladiator also grew its overall active policy base by 16% and
returned a 34% net operating margin (36% in 2005).

Confused.com

Confused.com profit

2006

£000

2005

£000

23,080

6,882*

*Confused.com earns a proportion of its revenue from Group brands in the form of commission charged at normal

commercial rates. The 2006 Confused result includes these transactions, with a corresponding reduction in the

underwriting profit. Previously an adjustment was made for these intra-group sales. The impact of this adjustment on the

2005 figures was to decrease Confused profit by £1.9m.

Confused enjoyed a year of substantial growth in 2006. Increased media activity led to an increase
in the number of quotes provided by Confused of almost 120%, from 4.1m in 2005 to 9.0m in
2006. Revenue (including payments from Admiral Group brands) increased by around 150% to
£38.5m.

Profit (including intra-Group sales) rose 162% to £23.1m from £8.8m in 2005. The 2005 figure differs
from that in the table due to the £1.9m adjustment referred to above.

Despite a number of new entrants entering the market during 2006, Confused has successfully
maintained its share of total motor sales generated by aggregators and remains the market leader
in motor insurance aggregation.

In addition to its core motor insurance offering, Confused’s home insurance product also grew
significantly in 2006 – quotes rising almost fivefold to 0.5m. New price comparison solutions for
breakdown, travel insurance and utilities were also added to the Confused website.

Balumba.es
At the end of October 2006, the Group successfully launched its first operation outside of the
UK. Balumba.es, a direct motor insurer based on the Group’s UK model, is located in Seville,
Spain and generated around £0.6m of premium in the short period before the year-end, making
a pre-tax loss (including start-up costs) of around £0.6m. Balumba trades via two branches of UK
companies – EUI Limited and Admiral Insurance Company Limited.

Whilst it is still very early days for Balumba, management are encouraged by the results to date,
and hope to replicate the model in other markets in the future.

2 4 f I N A N C I A L R e v I e W

Earnings per share (EPS)
Earnings per share rose 22% from 32.7p to 39.8p in 2006, broadly in line with the increase
in profits.

Taxation
The total taxation charge reported in the income statement is £43.6m (2005: £34.8m), representing
29.6% (2005: 29.1%) of pre-tax profit. The lower effective rate in 2005 arose from utilisation of
losses brought forward.

Refer to note 13 to the accounts for further detail on taxation.

Investments and cash
The Group continues to generate significant amounts of cash from all aspects of its operations.
At the end of the year, the Group held a total of £448.9m in cash and investments – an increase
of 11% on the £406.1m held at the end of 2005. This increase is after distributions to shareholders
of £70.1m during 2006 (£49.2m in 2005).

The balances making up this total can be analysed as follows:

Liquid funds in underwriting companies:

Money market funds

Government and sovereign bond holdings

Corporate bonds and similar instruments

Deposits with credit institutions

Cash at bank

Liquid funds held outside underwriting companies:

Cash at bank

2006

£000

257,634

26,253

63,337

2005

£000

83,071

172,866

40,646

39,824

347,224

336,407

101,652

69,682

448,876

406,089

During the last quarter of 2006, the Group changed its investment strategy, moving away from
fixed income mandates and into money market funds. This decision was motivated by the
disappointing and volatile returns generated by the bond portfolios during 2006 and a desire
for stable, relatively risk free returns in 2007 as the UK motor market cycle potentially hits its
worst point.

To this end, a number of money market fund accounts have been set up, into which the existing
funds were transferred and future cashflows will be invested. The bond portfolios were fully
liquidated before the year-end.

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Dividends
There has been no change in dividend policy, which is based on the principle of returning excess
cash to shareholders. The Directors expect to make a normal distribution of at least 45% of post-
tax profits each half-year, and will regularly review the Group’s available resources to determine
whether it is appropriate for the Company to pay further special dividends.

Having regard to this policy, as outlined in the Chairman’s statement, the Directors have declared
a final dividend for 2006 of 24.0p per share, which is made up of 9.6p per share normal element,
plus 14.4p per share special distribution based on the Group’s resources at the end of the year.

The distribution includes £13.5m (5.2p) relating to the release of capital previously held at Lloyd’s,
which was achieved during the second half of the year. £10m of this release has been retained in
order to assess the potential need for additional capital to support growth over the short term.

Taken together with the interim dividend (12.1p), this final payment results in a total distribution for
2006 of 36.1p (2005: 24.6p) per share.

Employee share schemes
The Board continues to take the view that actual or prospective share ownership plays a vital
role in staff incentivisation across all levels of employee. The Group has two share schemes – an
Inland Revenue approved Share Incentive Plan (the SIP) and the Senior Executive Restricted Share
Plan - The ‘Unapproved Free Share Scheme’.

1. The Approved Share Incentive Plan (SIP)
This SIP is open to all staff of Admiral Group plc (Henry Engelhardt and David Stevens have
declined to be included in the plan).

The maximum award under the SIP is £3,000 per employee per annum, those shares being
forfeited if staff leave within three years of the award. As the scheme is Inland Revenue approved,
awards will be free of income tax after five years. The £3,000 limit is based on the market value of
the shares at the date of award.

Awards are made twice a year, based on the results of each half-year. During 2005 and 2006, the
Group’s results have meant that qualifying staff have received maximum awards in both years.

Inland Revenue rules dictate that staff must hold the shares for three years before being able to
sell them, but dividends will be payable during the vesting period. If a member of staff leaves the
Group before the end of the three year period, without being a ‘good leaver’, they get no benefit
from the shares not yet vested.

Further details of the awards - actual and anticipated - are included in note 26 below.

2 6 f I N A N C I A L R e v I e W

2 – The Unapproved Free Share Scheme (UFSS)
The UFSS is not Inland Revenue approved. Awards under the plan are made at the discretion of
the Chief Executive and Senior Managers, with approval being obtained from the Remuneration
Committee. Awards under the plan are distributed on a wider basis than most plans of this type.
The Board believes that as the UFSS develops and awards begin to vest in 2008, it will have the
effect of reducing staff attrition and creating a definite alignment of the interests of staff and
shareholders. Of the Group’s current Executive Directors, only Kevin Chidwick participates in this
scheme.

The main performance criterion in determining awards under the Unapproved Plan will be the
growth in earnings per share (EPS) in excess of a risk free return, defined as average 3-month
LIBOR, over a three year period. The Board feels that this is a good indicator of long-term
shareholder return with which to align staff incentivisation.

Although no shares have yet vested under the UFSS, awards totalling 685,000 shares were
made in 2005 and 681,000 in 2006. This represents 0.5% of the Group’s issued share capital over
the two years.

The EPS targets are such that for full vesting of shares to occur, the average EPS growth over the
three year performance period would have to be approximately 16% per annum, assuming LIBOR
averages 5%. Only 10% of shares vest for matching LIBOR over the three year period.

The Board is conscious of the maximum allowable awards under both schemes and controls are
in place to ensure that neither scheme issues shares in excess of 5% of the Group’s issued share
capital over the 10 year period from 1 January 2005.

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Reconciliation of underwriting profit

Net insurance premium revenue

Net insurance claims

Net expenses related to insurance contracts

Investment return (see note 8)

Underwriting profit

Reconciliation of loss ratios reported

Net insurance claims

Deduct: claims handling costs

Adjusted net insurance claims

Net premium revenue

2006

£000

144,955

(107,145)

(19,384)

9,925

2005

£000

139,454

(100,526)

(17,909)

11,342

28,351

32,361

2006

£000

107,145

(3,538)

103,607

144,955

2005

£000

100,526

(3,202)

97,324

139,454

Loss ratio

71.5%

69.8%

Reconciliation of alternative operating ratios

Outgoings:

Net insurance claims

Insurance contract expenses

Ancillary / Confused / Gladiator expenses

Income:

Net insurance premium revenue

Other revenue

Outgoings to income

Profit before tax to income

2006

£000

107,145

19,384

33,818

2005

£000

100,526

17,909

21,792

160,347

140,227

144,955

131,621

139,454

93,405

276,576

232,859

58%

53%

60%

51%

2 8 C O R P O R At e G O v e R N A N C e

Corporate governance

The Combined Code on
Corporate Governance
This report explains key features of the Group’s
governance structure, how it applies the
principles in the revised Combined Code on
Corporate Governance (the ‘Code’), and the
extent to which the Company has complied
with the provisions of the Code.

In September 2006 the Group announced
the appointment of two new independent
Non-executive Directors. This brings the total
number of independent Directors to five and
makes the Board fully compliant with Code
A.3.2. The appointments were made on 4
September 2006. Throughout 2006 up to this
date the Audit, Nominations and Remuneration
Committees did not comply with the
Combined Code requirements with respect
to their membership (Codes A.3.2 C.3.1, A.4.1
and B.2.1).

The Group has now put in place specified
terms for its independent Non-executive
Directors. Details are contained within the
remuneration report. All Non-executive
Directors are appointed for fixed terms of
three years.

Code D.1.1 requires that the Senior Independent
Director should attend meetings with a
range of shareholders. The Company has a
comprehensive programme of meetings and
dialogue with institutional investors. The
views of investors expressed through this
dialogue are communicated to the Board
as a whole through the investor relations
report. All Directors can, therefore, develop
an understanding of any issues or concerns
of major shareholders should any be raised.
Feedback from shareholders suggests that
these arrangements for communication
between the Company and its shareholders
continue to be satisfactory and effective.

The Senior Independent Director is always
available to meet with individual shareholders
on request to ensure the Board is aware of any
shareholder concerns that cannot be resolved
through the routine mechanisms for investor
communications.

The Admiral Group Board
The Board has a formal schedule of matters
specifically reserved to it for decision, including
corporate strategy, approval of budgets and
financial results, new Board appointments,
proposals for dividend payments and the
approval of all major transactions. This
schedule is reviewed on an annual basis and
was last reviewed on 5 March 2007.

The Board met on nine occasions in 2006. In
addition the Board held a strategy day and
also visited its operations in Spain. Agendas
and papers are circulated to the Board in
a timely manner in preparation for Board
and Committee meetings. These papers are
supplemented by information specifically
requested by the Directors from time to time.
All Directors are, therefore, able to bring
independent judgement to bear on issues
such as strategy, performance, and resources.
Additional meetings are called when required
and there is frequent contact between
meetings, where necessary, to progress the
Company’s business.

During the year the Board carried out an
evaluation of itself and its Committees. In
2005 the evaluation consisted of detailed
questionnaires completed by all Directors.
The Board has decided that given the results
of the process carried out in 2005, the 2006
evaluation would consist of one-to-one
discussions between the Chairman and all
Directors and a meeting between the Chairman
and the Non-executive Directors without the
Executive Directors being present.

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A meeting was held in November 2006 under
the Chairmanship of John Sussens to discuss
the results of this review. John Sussens also
gave individual feedback to the Chairman and
was able to confirm that the performance of
the Chairman continues to be effective, and
that the Chairman continues to demonstrate
commitment to his role.

The number of full Board meetings and
Committee meetings attended by each Director
during 2006 is provided in the table below.
The figures in brackets show the number
of meetings that the Director could have
attended.

The results of the evaluation were discussed
at a Board meeting in November 2006 at
which the Chairman presented his findings
and the Board had an open discussion on the
performance of the Board resulting in a number
of recommendations. No major issues were
identified during the process but some changes
have been made to the structure of the Board
meetings and the amount of time devoted to
meeting senior managers within the Group.

The performance of the individual Executive
Directors is appraised annually by the Chief
Executive, to whom they report. The Chairman,
taking into account the views of the other
Directors conducts the performance appraisal
of the Chief Executive. The performance of the
Chairman is reviewed by the Non-executive
Directors, led by the Senior Independent Non-
executive Director (John Sussens), taking into
account the views of the Executive Directors.

Scheduled
Board
meetings

Audit
Committee
meetings

Nominations
Committee
meetings

Remuneration
Committee
meetings

Total meetings held

Alastair Lyons (Chairman)

Henry Engelhardt
(Chief Executive)

David Stevens
(Chief operating Officer)

Kevin Chidwick**
(Finance Director)

Andrew Probert *

Manfred Aldag

Martin Jackson

Keith James

Margaret Johnson**

Lucy Kellaway**

John Sussens

Gillian Wilmot *

9 (9)

3 (3)

6 (7)

9 (9)

3 (3)

8 (9)

3 (4)

3 (3)

4 (4)

1 (1)

3 (3)

1 (1)

4 (4)

1 (1)

4 (4)

2 (2)

*Gillian Wilmot and Andrew Probert resigned from the Board on 18 May 2006 and 4 September 2006 respectively.

**Kevin Chidwick, Margaret Johnson and Lucy Kellaway were appointed to the Board on 4 September 2006.

0 C O R P O R At e G O v e R N A N C e

The roles of the Chairman and
Chief Executive
The Board has approved a statement of
the division of responsibilities between
the Chairman and the Chief Executive. The
Chairman is primarily responsible for the
workings of the Board and is not involved in
the day-to-day aspects of the business. Save
for matters reserved for decision by the Board,
the Chief Executive, with the support of the
other Executive Directors, is responsible for
the running of the business, carrying out the
agreed strategy adopted by the Board and
implementing specific Board decisions relating
to the operation of the Group.

Directors and Directors’
independence
The Board currently comprises the Chairman,
five independent Non-executive Directors, one
Non-executive Director who is employed by
a significant shareholder and is not, therefore,
independent, and three Executive Directors.

Independent Non-executive Directors are
currently appointed for fixed periods of three
years, subject to election by shareholders. The
initial three-year period may be extended for
one further three-year period and the Board
may invite the Non-executive Director to
serve for a further three-year period, subject
to re-election by shareholders. Their letters
of appointment may be inspected at the
Company’s registered office or can be obtained
on request from the Company Secretary.

The independent Non-executive Directors
are of sufficient calibre and number that their
views carry significant weight in the Board’s
decision making.

Details of the Chairman’s other commitments
are included in the Chairman’s biography. The
Chairman does perform a number of other
Non-executive roles outside of the Group but
the Board is satisfied that these are not such
as to interfere with the performance of the
Chairman’s duties within the Group.

John Sussens has been appointed as the Senior
Independent Non-executive Director. He is
available to shareholders if they have concerns
which contact through the normal channels of
Chairman, Chief Executive or Finance Director
has failed to resolve or for which such contact
is inappropriate.

In accordance with the Company’s Articles,
which provide that a set number of Directors
retire by rotation and stand for re-election at
each AGM, Martin Jackson, and Keith James
will retire by rotation and seek re-election
by shareholders at the forthcoming AGM. In
addition Kevin Chidwick, Lucy Kellaway and
Margaret Johnson will also stand for re-election
due to their appointments occurring after the
last AGM.

The Directors are given access to independent
professional advice at the Group’s expense,
should they deem it necessary, to carry out
their responsibilities.

Professional development
On appointment, Directors take part in
a comprehensive induction programme
where they receive financial and operational
information about the Group, details
concerning their responsibilities and duties,
as well as an introduction to the Group’s
governance and control environment.

The induction is supplemented by visits to the
Group’s head office in Cardiff and meetings
with members of the senior management
team and their departments. Throughout their
period in office the Directors are continually
updated on the Group’s business, legal
matters concerning their role and duties, the
competitive environments in which the Group
operates and any other significant changes
affecting the Group and the industry in which
it operates.

The Board receives presentations from
senior managers from within the Group on a
regular basis as a component of the ongoing
development of the Non-executive Directors.

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Relations with shareholders
The Investor Relations team has day-to-
day primary responsibility for managing
communications with institutional shareholders
through a combination of briefings to analysts
and institutional shareholders, both at the
half-year and full-year results. Site visits and
individual discussions with the Executive
Directors are also arranged throughout the year
with individual shareholders. Regular dialogue
with shareholders helps to ensure that the
Company’s strategy is understood and that any
issues are addressed in a constructive way.

In fulfilment of the Chairman’s obligations
under the new Combined Code, the Chairman
would give feedback to the Board on issues
raised with him by major shareholders,
although to date there have been no such
issues. This is supplemented by monthly
feedback to the Board on meetings between
management and investors. External analyst
reports are circulated to all the Directors. In
December 2006 major investors were given
the opportunity to meet with the Chairman
and a number of Non-executive Directors. A
number of investors took part in the meeting.
It is intended to carry out a similar meeting in
September 2007.

The Chairmen of the Audit, Remuneration
and Nomination Committees attend the
Company’s Annual General Meeting along with
other Directors, and are available to answer
shareholders’ questions on the activities of the
Committees they chair.

The Group maintains a corporate website
(www.admiralgroup.co.uk) containing a wide
range of information of interest to institutional
and private investors.

Board Committees
The terms of reference of the principal
Committees of the Board - Audit,
Remuneration and Nominations - are available
on the corporate website. Those terms of
reference are reviewed annually.

The Audit Committee
Constitution and membership
The membership at the year-end was Martin
Jackson (Chairman), Keith James, and Margaret
Johnson (appointed 4 September 2006). The
Company Secretary acts as Secretary to the
Committee. For the period between 18 May
2006 and 4 September 2006 the Committee
comprised of Martin Jackson and Keith James.
Two meetings were held between those dates.
There have been a total of four meetings during
2006.

The Board considers that the members of the
Committee have the appropriate competence
and experience to carry out their duties
and further considers that Martin Jackson
(Committee Chairman) has the appropriate
recent and relevant financial experience having
held the position of Group Finance Director of
Friends Provident Plc between 2001 and 2003
and being a fellow of the Institute of Chartered
Accountants, which imposes requirements for
Continuing Professional Development. Ongoing
training is provided to all members, and this
is intended to cover relevant developments
in financial reporting, company law and the
various regulatory frameworks. The Terms of
Reference of the Audit Committee include all
matters suggested by the Code.

Summary of key activities during 2006
During the year the Committee reviewed the
interim and audited final year-end Report
and Accounts prior to approval by the Board.
The external auditors were present at both
meetings and the external actuaries attended
the meeting in February 2007 at which the
2006 Report and Accounts were reviewed.

The Committee also reviewed the performance
and independence of the Group’s relationship
with the external auditor both through its
own assessment of the relationship and also
the controls in place within the external
auditors business. The Committee has reviewed
the nature and extent of non-audit work
services provided by the external auditor. The
Committee has in place a policy that, amongst
other things, requires that the Committee

2 C O R P O R At e G O v e R N A N C e

approve all proposals for expenditure of over
£30,000 on non-audit services. The policy
was last reviewed on 5 December 2006. The
Group’s auditors, KPMG Audit plc, provide
some non-audit services, the majority of which
comprise compliance services on the various
taxation issues within the Group, and are not
considered by the Committee to compromise
their independence as auditors. The level of
non-audit fees is reviewed at each Committee
meeting and details are included in note 10 to
the Report and Accounts.

The Head of Internal Audit is invited to all
Committee meetings and provides a range of
presentations and papers to the Committee,
through which the Committee monitors the
effectiveness of the Group’s internal controls.
Committee members receive copies of all
internal audit reports and are given the
opportunity to raise questions on the content
and recommendations contained within the
reports. The Committee approves the internal
audit programme at the start of each calendar
year and monitors the progress made in
achieving the plan.

The Committee receives reports from
the Group’s Company Secretary who has
responsibility for the Compliance and Risk
management functions to enable it to monitor
the risk management policies and systems.

The Executive Directors, Head of Internal Audit,
and external auditors are invited to all meetings
The Non-executive Directors are entitled to
attend any meeting. At least once a year the
Committee meets with the external auditor
without any Executive Directors present.

The Nominations Committee
The membership at the year-end was Keith
James (Chairman), Lucy Kellaway and Alastair
Lyons. The Company Secretary acts as
Secretary to the Committee.

2006 and resignation from the Committee of
Manfred Aldag, the Committee as required by
the Code contains a majority of independent
Non-executive Directors.

The Committee leads the process for making
appointments to the Board or where the
appointee is likely to become a Board
member. The Committee ensures there is a
formal, rigorous and transparent procedure
for the appointment of new Directors to the
Board through a full evaluation of the skills,
knowledge and experience of Directors. The
Committee also ensures plans are in place for
orderly succession for appointments to the
Board, and reviews the plans for other senior
management positions. Responsibility for
making senior management appointments rests
with the Chief Executive.

During 2006, the Committee instructed
external search consultants to provide support
in relation to the appointment of two Non-
executive Directors. Detailed role specifications
were drawn up with reference to the mix
of skills, knowledge and experience of the
existing Directors and the requirements of
the Board. Interviews were carried out with a
range of potential candidates, by the external
agency, members of the Committee, and other
members of the Board. As a result of the
process, the Committee recommended to the
Board, and the Board agreed, that Margaret
Johnson and Lucy Kellaway be appointed to
the Board as Non-executive Directors with
effect from 4 September 2006. The anticipated
time commitments for the role were discussed
and agreed with both candidates.

The Committee also reviewed the progress
of the Deputy Finance Director, recruited in
September 2005 and following the retirement
of Andrew Probert on 4 September 2006
recommended that the Board appoint Kevin
Chidwick as Finance Director.

The Committee has formal terms of reference,
which were last reviewed on 19 October 2006.
The Committee met on three occasions during
2006. From 19 October 2006, following the
appointment of Lucy Kellaway on 4 September

The Committee reviewed the current Board
size, taking into account the changes noted
above, structure and composition and
confirmed that no further changes were
required and that the leadership of the

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organisation was such that the Company
could continue to compete effectively in the
marketplace in which it operates.

Remuneration Committee
The membership at the year-end was John
Sussens (Chairman), Martin Jackson and
Margaret Johnson (appointed 4 September
2006). The Company Secretary acts as
Secretary to the Committee.

The Committee has formal terms of
reference, which were last reviewed on 4
September 2006. The Committee met four
times during 2006.

During the year the Committee carried out the
following tasks:
•

reviewed the Group’s overall remuneration
policy and strategy

•

recommended for approval individual
remuneration packages for Executive
Directors, Chairman, and Company
Secretary

reviewed the rules and performance
measures of the Group share schemes and
the grant, award, allocation or issue of
shares under such schemes

The Committee did not use the services of any
external consultants during the year but did
receive reports produced by various external
agencies to enable it to make judgments on the
levels of remuneration for the Directors and to
review the remuneration of the Group's senior
executives.

Internal control and
risk management
The Board is responsible for the Group’s
system of internal control and for reviewing
its effectiveness. Such a system is designed to
manage rather than eliminate the risk of failure
to achieve business objectives and can only
provide reasonable and not absolute assurance
against material misstatement or loss.

The Board is of the view that there is an
ongoing process for identifying, evaluating

and managing the Group’s internal controls,
that it has been in place for the year ended 31
December 2006 and that, up to the date of
approval of the annual report and accounts, it
is regularly reviewed by the Board and accords
with the internal control guidance for Directors
provided in the Code.

A key element of the control system is that
the Board meets regularly with a formal
schedule of matters reserved to it for decision
and has put in place an organisational structure
with clearly defined lines of responsibility.
In order to ensure these responsibilities are
properly discharged, the Board has delegated
the task of supervising risk management and
internal control to the Risk Management
Committee (RMC).

There are several key elements to the risk
management environment throughout
the Group. These include the setting of
risk management policy at Board level,
enforcement of that policy by the Chief
Executive, delivery of the policy by the RMC
via the Group’s systems of internal control and
risk management and the overall assurance
provided by the Audit Committee that the
systems operate effectively.

The Board recognises that the day-to-day
responsibility for implementing these policies
must lie with the management team, whose
operational decisions must take into account
risk and how this can be effectively controlled.
The Company Secretary and Risk Officer take
responsibility for ensuring management are
aware of their risk management obligations,
providing them with support and advice and
ensuring that the risk management strategy
is properly communicated. The head of each
business unit or business area is required to
undertake a full assessment process to identify
and quantify the risks that their areas face or
pose to the Group and the adequacy of the
controls in place to mitigate or reduce those
risks. Reports are produced showing the most
significant risks identified and the controls in
place. Internal Audit uses the risk registers to
plan its programme of audits to ensure that the
controls described are actually in place.

4 C O R P O R At e G O v e R N A N C e

One of the Committee’s principal
responsibilities is to ensure that the risk
management policy approved by the Board
is implemented throughout the Group. The
Committee has formal terms of reference
and is required to manage regulatory issues,
assess and monitor reinsurance protection
and to ensure that a risk management strategy
is effectively employed by the Group. The
Committee meets approximately eight times
a year and each Committee member receives
an agenda and papers in a timely manner
allowing the Committee to make informed
decisions and actions.

The Committee develops policies to ensure
compliance with regulation and ensures that
appropriate action is taken by the management
team to implement compliant systems and
procedures.

Internal Audit
The Internal Audit function assists management
by providing it with timely, independent
assurance that the controls established are
operating effectively. This includes regular
reviews of internal control systems and
business processes, including compliance
systems and procedures and identification of
control weakness and recommendations to
management on improvements.

Going concern
The Directors are satisfied that the Group has
adequate resources to continue in operation
for the foreseeable future and therefore
consider it appropriate to prepare the financial
statements on the going concern basis.

The RMC receives reports setting out key
performance and risk indicators and considers
possible control issues brought to their
attention by early warning mechanisms, which
are embedded within the operational units. The
RMC and the Audit Committee also receive
regular reports from Internal Audit, which
include recommendations for improvement
in the control and operational environment.
The Audit Committee’s role in this area is
primarily confined to a high-level review of the
arrangements for internal control although at
its discretion the Committee may well request
more detailed information on specific issues
should they arise. The Board’s agenda includes
a regular item for consideration of risk and
control and receives reports thereon from the
RMC and the Audit Committee. The emphasis
is on obtaining the relevant degree of assurance
and not merely reporting by exception. At its
March 2007 meeting, the Board carried out
the annual assessment for the 2006 year by
considering documentation from the Audit
Committee, taking account of events since 31
December 2006.

The Audit Committee’s ability to provide the
appropriate assurance to the Board depends
on the provision of periodic and independent
confirmation, primarily by Internal Audit, that
the controls established by management are
operating effectively. The Audit Committee
reviews the wider aspects of internal control
and risk management, providing a high
level challenge to the steps being taken to
implement the risk management strategy.

The Board confirms that there were no
significant issues arising during the year under
review.

The Risk Management Committee
The Committee’s members include the three
Executive Directors, the Group Company
Secretary (who chairs the meetings), the
Deputy Compliance Officer the Risk Officer
and senior management representatives.

A D M I R A L G R O U P p l c 5

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Remuneration report

The following report has been approved by the Remuneration Committee (the Committee) and
the Board for submission to shareholders.

Section 1: Information not subject to audit
The Remuneration Committee
The Committee is chaired by John Sussens, the Senior Independent Non-executive Director, with
the other members being Martin Jackson and Margaret Johnson. Margaret Johnson was appointed
to the Committee on 4 September 2006. Gillian Wilmot who resigned from the Committee
and Board on 18 May 2006 had previously been the third Non-executive member. None of
the Committee has any personal financial interest in the matters to be decided other than as
shareholders. The Chairman and Chief Executive are invited to meetings where the Committee
considers it appropriate to obtain their advice on the matters under review.

The Committee determines the Admiral Group Executive Board Directors' remuneration. The
Committee also reviews and approves the fees of the Chairman of the Board. The Committee also
reviews and recommends any changes proposed to the Group’s share plans, as well as having an
overview of shares awarded under the terms of the Group’s Senior Executive Restricted Share Plan
(The “Unapproved Free Share Plan”).

During the year the Committee did not purchase any consultancy services.

Policy on Executive Directors’ remuneration
Two of the three Executive Directors (Henry Engelhardt and David Stevens) are founding Directors.
They and the Committee continue to hold the view that the significant shareholdings held by
them provide a sufficient alignment of their interest in the performance of the Group with the
interests of other shareholders.

In light of this, their remuneration packages consist of base salary (reviewed against market rates
by the Committee) and benefits such as private medical cover, permanent health insurance and
death in service cover. The Group does not contribute to any pension arrangements on behalf
of these Executive Directors, and it is not intended that they will participate in any Group share
schemes. Their remuneration was reviewed in May 2006 and Henry Engelhardt was awarded a rise
of 5.5% taking his salary to £290,000. David Stevens declined to accept a rise in his remuneration,
which stayed at £250,000.

There is only one other Executive Director. Kevin Chidwick joined the Board on 4 September 2006
as the Finance Director, replacing the retiring Andrew Probert. The Committee aims to ensure that
the remuneration of the Finance Director is fair and in line with market rates and is designed to
provide rewards for achieving increases in shareholder value.

6 R e M U N e R At I O N R e P O R t

There are two main elements to the Finance Director’s remuneration package:

• Basic annual salary
• Awards under the Unapproved Free Share Plan.

It is the Committee’s general strategy to pay salaries at or slightly below median levels with
increased remuneration coming from the value of the awards under the Unapproved Free Share
Plan. In addition to his salary of £200,000 Kevin Chidwick received an award of 21,186 shares on
18 April 2006 and a further 18,480 on 5 September 2006 on his appointment to the Board. The
awards are the maximum number of shares that could vest after a three year period and are
subject to performance criteria. Maximum awards vest if the Group’s earnings per share growth
over the three year period is significantly better than a LIBOR return. Further details of the
Unapproved Free Share Plan are set out in the Financial Review.

Awards to staff under the Unapproved Free Share Plan are made upon the advice of the Chief
Executive. The Committee reviews the approach taken and approves any awards greater than
100% of salary. The actual number of shares that vest under the scheme is dependent upon
meeting the performance criteria with regard to earnings per share growth.

The remuneration of the Chairman is decided by the Remuneration Committee and that of the
Non-executive Directors by the full Board. The Non-executive Directors do not participate in
meetings when Non-executive Director fees are discussed.

A summary of their contracts and remuneration is shown in the following section.

There is no minimum shareholding requirement for any Director, although the Board encourages
directors to buy shares in the Company should they wish to.

Directors’ service contracts
The following table summarises the notice periods relating to the service contracts of the
Executive Directors serving at 31 December 2006:

Kevin Chidwick

Henry Engelhardt

David Stevens

Notice – Director (months)

Notice – Company (months)

There is no provision in the Executive Directors’ contracts for compensation to be payable on
early termination of their contract over and above the notice period element.

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A D M I R A L G R O U P p l c 7

The Company has entered into letters of appointment with its Non-executive Directors. Summary
details of terms and notice are included below.

Term and notice

Alastair Lyons

Manfred Aldag

Martin Jackson

Keith James

Margaret Johnson
(appointed 4 September 2006)

Lucy Kellaway
(appointed 4 September 2006)

John Sussens

Indefinite (terminable on three months’ notice from
either party)

Indefinite (terminable on one month’s notice from either
party) – automatically terminates should he cease
employment with Munich

3 years commencing 1 December 2006, terminable by
either party giving one month’s written notice

3 years commencing 4 September 2006, terminable by
either party giving one month’s written notice

3 years commencing 1 December 2006, terminable by
either party giving one month’s written notice

Given the short notice periods applicable, mitigation issues are unlikely to arise.

The following table sets out the results of a review of Non-executive fees and expected time
commitments.

Expected time commitment (in days) for the Board and Committees:

Audit

Remuneration

Nominations

Member

Chairman

Other

4-5

2-3

2-4

Senior
Independent
Director

1-3

Board

As required

Fees payable (£’000) with respect to Board and Committee membership are as follows:

Audit

Remuneration

Nominations

Member

Chairman

Other

Senior
Independent
Director

Board

120

8 R e M U N e R At I O N R e P O R t

Total Shareholder Return (TSR)

The following graph sets out a comparison of Total Shareholder Return for Admiral Group
plc shares with that of the FTSE 350 Index, of which the Company is a constituent. The graph
measures the period from the commencement of conditional trading on 23 September 2004
up to 31 December 2006. TSR is defined as the percentage change over the period, assuming
reinvestment of income.

The Directors consider this to be the most appropriate index against which the Company should
be compared.

(cid:43)(cid:43)(cid:39)

(cid:43)(cid:39)(cid:39)

(cid:42)(cid:45)(cid:39)

(cid:42)(cid:41)(cid:39)

(cid:41)(cid:47)(cid:39)

(cid:41)(cid:43)(cid:39)

(cid:41)(cid:39)(cid:39)

(cid:40)(cid:45)(cid:39)

(cid:40)(cid:41)(cid:39)

(cid:74)(cid:92)(cid:103)(cid:23)(cid:39)(cid:43)

(cid:59)(cid:92)(cid:90)(cid:23)(cid:39)(cid:43)

(cid:68)(cid:88)(cid:105)(cid:23)(cid:39)(cid:43)

(cid:65)(cid:108)(cid:101)(cid:23)(cid:39)(cid:43)

(cid:74)(cid:92)(cid:103)(cid:23)(cid:39)(cid:44)

(cid:59)(cid:92)(cid:90)(cid:23)(cid:39)(cid:44)

(cid:68)(cid:88)(cid:105)(cid:23)(cid:39)(cid:45)

(cid:65)(cid:108)(cid:101)(cid:23)(cid:39)(cid:45)

(cid:74)(cid:92)(cid:103)(cid:23)(cid:39)(cid:45)

(cid:59)(cid:92)(cid:90)(cid:23)(cid:39)(cid:45)

Source: Datastream

(cid:56)(cid:91)(cid:100)(cid:96)(cid:105)(cid:88)(cid:99)(cid:23)(cid:62)(cid:105)(cid:102)(cid:108)(cid:103)(cid:23)(cid:71)(cid:67)(cid:58)

(cid:61)(cid:75)(cid:74)(cid:60)

Directors’ shareholdings
Directors’ interests in the ordinary shares of the Company are set out below:

Executive Directors

Kevin Chidwick

Henry Engelhardt *

David Stevens *

Non-executive Directors

Alastair Lyons

Manfred Aldag

Martin Jackson

Keith James *

Margaret Johnson

Lucy Kellaway

John Sussens

Ordinary shares of 0.1p

31 December 2006

31 December 2005

250

40,466,720

19,768,000

250

40,466,720

19,768,000

615,600

715,600

44,500

8,000

44,500

8,000

* Include amounts held by family members and in trusts settled by family members

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A D M I R A L G R O U P p l c 9

Section 2: Information subject to audit
Directors’ emoluments

Remuneration for the year ended 31 December 2006 was as follows:

Executive Directors

Kevin Chidwick
(appointed 4 September 2006)

Henry Engelhardt

Andrew Probert
(resigned 4 September 2006)

David Stevens

Non-executive Directors

Alastair Lyons *

Manfred Aldag

Martin Jackson

Keith James

Margaret Johnson
(appointed 4 September 2006)

Lucy Kellaway
(appointed 4 September 2006)

John Sussens

Gillian Wilmot
(resigned 18 May 2006)

Totals

Base salary
and fees
(£000)

Bonuses
and other
(£000)

Benefits

(£000)

285

159

250

979

2006
Total
(£000)

285

159

250

2005
Total
(£000)

268

224

240

989

929

*Alastair Lyons waives 25% of his annual fee, which is currently £120,000.

For details of Directors’ responsibilities, please refer to the biographies section.

This report was approved by the Board of Directors on 5 March 2007 and is signed on its behalf
by the Committee Chairman:

John Sussens
Remuneration Committee Chairman

Corporate responsibility

The Admiral Group is committed to
dealing fairly and with a high level
of integrity with all its stakeholders.
This includes its actions and policies
towards staff, the local communities in
which both the business operates and
our staff live, and the environment.

This initiative is supported by “Henry’s
Pot”. This fund started in 1999 and
allows staff to apply for a donation or
sponsorship toward an organisation of
their choice. In 2006, 109 awards were
made from this fund to all kinds of
different interests.

Workplace
We believe the happier our staff
are, the better they will do their
job. This means that we constantly
work to improve our staff’s working
environment. During 2006 the Group
relocated 650 people to brand new
offices in Swansea Bay from offices
within the town centre. We also try to
make sure that the working day for our
staff is as fun and rewarding as we can
make it.

We are one of the leading employers
in the South Wales region, and
employ people from a wide range of
communities. The Group encourages
staff to get involved in local
communities and projects that are
important to both them and their
families. This can range from the local
football club to an amateur dramatics
society.

We also believe that it is important
for our staff to understand what
are the Company’s goals and
objectives: consequently we work
to communicate this in as many
ways as possible. As an example, we
encourage staff to attend our Annual
Staff General Meeting (SGM). The SGM
is arranged to enable staff to hear the
views of the Executive Directors and
some of the Non-executive Directors
on a wide range of subjects including
the performance of the Group and
the market within which we operate;
the experiences of Non-executive
Directors within and outside of the
Group; and the Group’s share plans.
We believe that employing well-
informed staff will provide the best
possible service to our customers.

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Top Departments Award Winners

Born Free & Childline Recycling

4 2 C O R P O R At e R e S P O N S I B I L I t y

Admiral Sponsored Festival of Sport

Restricted Share Plan, although the
name is somewhat misleading as
awards approved by the Board in 2006
amounted to over 681,000 free shares,
which were distributed amongst 380
staff, including those in our Spanish
operation. Both schemes have
overall Group performance criteria
applied to them.

Further detail on these schemes is set
out in the Financial Review.

Disability
The Group gives fair consideration
to all applicants. The abilities and
aptitudes of the applicant will
be considered with regard to the
requirement of the job for which he or
she has applied. Employees who find
themselves no longer able to carry out
the job for which they are employed
will be given individual consideration.
Depending on the nature, severity, and
duration of the disability, they may
be considered for an alternative post
within the Group. Admiral continues
to train and encourage the career
development of all disabled persons in
its employment.

The best measures of our staff’s
assessment of their working
environment are the surveys that
they have completed. Following
independent measurement by the
organisations involved Admiral has
received the following awards:

The Sunday Times 100 Best Companies
to Work For – Admiral has been
included in all seven years of the
publication and was ranked 21st overall in
the last list published.

The Financial Times 100 Best Workplaces
in the UK – we have been included in all
four years of the publication

100 Best Workplaces in the EU –
again Admiral has been included in all
four years.

Staff share schemes
The Group operates two share schemes
that give staff actual and prospective
share ownership. All staff are eligible
to receive shares under the Approved
Share Incentive Plan (SIP) as long as
they commenced their employment at
the start of the relevant performance
period. Staff who were working for
the Group at the start of 2005 have
received £6,000 worth of free shares
under the SIP, which had a value of
£11,252 at 9 March 2007. The Group
also operates a Senior Executive

Tusk expedition to South Africa

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Admiral Sponsored Champion Child
of Courage Award

External sponsorship
Admiral has also sponsored a number
of high profile local events in 2006.

•

Wales National Waterfront
Museum

• Swansea Bay Festival 2006
• The Swansea Jazz Festival 2006
• The 2006 Swansea 10K
•

The Admiral Cardiff Big Weekend
2006

• Admiral Calenning Family Fireshow
• The Welsh Business Awards
•

The 2006 South Wales Echo
Champion Child of Courage Award

Charitable contributions
In addition to sponsoring these local
initiatives, we have continued to
support several larger charities:

•

WellBeing of Women through the
Diamond Brand. This charity is the
only national charity that funds
obstetric and gynaelogical research
by supporting research projects.
Wellbeing of Women’s mission is to
bring an end to fear and suffering
caused by reproductive health
problems.

Born Free Foundation and Tusk
through elephant.co.uk. Born Free
Foundation is an international
wildlife charity that works to
reduce animal suffering and to
encourage people to treat animals
with respect.

It is involved in campaigns against
cruelty in zoos, and dedicated to
aiding conservation of elephants,
big cats, wolfs, dolphins, primates
and bears.

Over the last fifteen years Tusk has
supported more than 30 projects in
15 African countries. Last year alone
Tusk supported 21 different projects
in 11 African countries. Tusk’s support
comes in many different guises such
as provision of 4x4 vehicles, wildlife
clinics, rhino and cheetah sanctuaries,
and chimpanzee enclosures.

Environment
The Group’s impact on the
environment stems from its use of
resources to run its offices in Cardiff
and Swansea and its communications
with customers. The Group does not
own the properties that it occupies
and is, therefore, reliant upon the
cooperation of the managing agents
of the properties to make changes
that could reduce the consumption of
energy and water.

The Group Company Secretary has
taken responsibility for the Group’s
approach to its impact upon the
environment and has set up a project
team to take forward a more robust
approach to environmental reporting.
2006 is the first year the Group has
focussed its attention on measuring
its environmental footprint and the
table below provides the initial data
gathered for that year.

The Project Team will review the
Group’s processes with a view to
consuming less natural resource per
employee; recycle more of the waste
produced; and ensure that waste that
cannot be recycled is disposed of in
compliance with relevant legislation.
The Group is committed to improving
its performance in the following areas:

•

Minimising consumption of natural
resources, including energy, water
and other raw materials

4 4 C O R P O R At e R e S P O N S I B I L I t y

Admiral Sponsored Swansea Pantomime

•

Reducing the waste produced,
encouraging recycling and
minimising the use of landfill sites,
whilst ensuring compliance with all
relevant legislation

Achieving the most efficient
means of travel to business
meetings in the UK and abroad
with the objective of reducing
the environmental impact of the
resulting journeys

Encouraging staff to support
initiatives that positively impact
the local, national and global
environments

Raising and maintaining staff
awareness of this policy and
ensuring that employees are
actively engaged in supporting the
resulting practices

Measuring, monitoring and
reporting on the key aspects of the
Group’s environmental performance
and regularly reviewing progress to
reduce the amount of resources
consumed per employee

We have not been able to accurately
assess the CO2 emissions generated by
the Group’s direct activities. Improved
measurement of resource usage will
enable the Project Team to provide
estimated CO2 emissions for 2007.

Energy
We have based our energy usage on
our head offices in Cardiff, built in
the 1960’s and housing just over 1,200
people. Measures to reduce resource
consumption have to be discussed and
agreed with the building’s managing
agent and other tenants. Up until the
end of 2006 our Swansea staff were
located in an ageing building with
inefficient electricity and water supply.

As noted above, the Group has
taken a long-term lease on a newly
constructed building on a brownfield
site in Swansea Bay. Future reporting
on energy usage will combine both
buildings.

Within the Group we have worked
hard with our staff and our managing
agents to reduce the use of energy and
have introduced a number of measures
to help lower energy usage such as:

•

All the lights in the building go off
after working hours
• Screen savers on all PCs
•

Communicating the advantages of
switching PCs off each evening

Impact Area

Energy

Water

Measure

Electricity

Water consumption

Performance
280 KWh/m2
11.2 m3 per person

Waste management

Total waste generated

77,180 Kg

Wastage recycled by weight

57,993Kg

Waste to landfill

19,187Kg

Resource management

Paper use

Travel

Cartridges

Mileage by rail

Mileage by air

5,732 sheets per person

0.4 cartridges per person

213,900

621,240

* As the Group moved its Swansea workforce to new offices in quarter two of 2006, the figures are

shown based on the resources used for Cardiff office only and where usage per employee is stated, is

based on an average of 1,200 employees working in the Cardiff office. Both offices will be included in

the 2007 calculation.

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Henry’s Pot supports Penarth
Badminton Club

Water consumption
As noted above, the Group is reliant
on the co-operation of the managing
agent with respect to any changes to
its use of water. In future years, water
consumption per employee will be
measured and compared to similar
office environments to ensure that
consumption within our offices is
within reasonable limits.

Waste management
We have run a recycling programme for
a number of years, to which our staff
have shown considerable commitment.
Throughout the Company we advertise
our recycling facilities and every floor
has an area for recycling. As a result,
we currently only send 25% of our
waste to landfill.

We are currently in the process of
trialling the use of recycled paper
within photocopiers and printers as
this is the source of the vast majority
of the Group’s internal printing.
The Project Team will also review the
current printing usage to seek ways to
reduce the amount of internal printing.

Policyholder documentation is not
currently printed on recycled paper.
The Project Team will revisit the
sourcing of recycled paper and will
test its use for communications with
customers.

Travel
We have based our offices centrally in
Cardiff and Swansea to enable staff to
take advantage of public transport.

We also provide all staff with the
benefit of an interest free loan for
public transport passes.

The Group only operates two
company cars for its engineers and has
no plans to increase this.

A central booking facility is provided
for staff to request train and airline
tickets, avoiding the need for them
to fund the costs up front and to
encourage staff to use the service.

Monitoring systems are being put in
place to more accurately measure
business travel by employees.

Environmental risks
The Group has reviewed the risks
facing its business operations as a
result of climate change. The volume
of motor insurance claims for any
given portfolio of business is to a
large degree dependent upon weather
conditions. The risk associated
with climate change is the potential
change to claims frequency through
the impact of more extreme weather
patterns. It is virtually impossible
to model the potential impact of
climate change on claims frequency
as the actual climate change induced
outcome for the UK is unknown.
However, the Group does assess
the potential costs associated with
a number of disaster scenarios such
as a major storm in the South East,
major flood on the East Coast, and
a complete flooding of the Thames
in the London area. The Group
maintains sufficient reinsurance cover
to provide protection in the event of
catastrophes of this nature.

The Board of Directors

4 6 B O A R D O f D I R e C t O R S

Directors (names from left to right)

Manfred Aldag

Stuart Clarke (Company Secretary)

Margaret Johnson

Keith James

Kevin Chidwick

Alastair Lyons

Henry Engelhardt

Lucy Kellaway

David Stevens

Martin Jackson

John Sussens

Alastair Lyons CBE (53)
Chairman (N)
Alastair was appointed Chairman of the Company

Kevin Chidwick, (43)
Finance Director
Kevin is responsible for finance, information

in July 2000. He is also Executive Chairman of

technology, facilities and investments. He

Partners for Finance Limited, and Non-executive

joined Admiral in 2005, becoming a Director in

Chairman of Buy-as-you-View Holdings Limited,

September 2006.

and of Higham Dunnett Shaw plc.

Prior to Admiral, Kevin has been in UK financial

He has previously been Chief Executive of the

services for over 20 years. He has held a number

National Provident Institution and the National

of senior roles in other insurance organisations

& Provincial Building Society, Managing Director

including, most recently, Finance Director of

of the Insurance Division of Abbey National plc,

Engage Mutual Assurance and Cigna UK.

and Director of Corporate Projects at National

Westminster Bank plc. Alastair has also been a

Non-executive Director of the Department for

Transport and of the Department for Work and

Pensions.

A Fellow of the Institute of Chartered

Accountants, he was awarded the CBE in the 2001

Birthday Honours for services to social security.

Henry Engelhardt, (49)
Chief Executive Officer
Henry is a founder Director of Admiral and was

He is a fellow of the Chartered Institute of

Certified Accountants and has an MBA from

London Business School.

David Stevens (45)
Chief Operating Officer

David is a founder Director of Admiral. Initially

the Marketing Director, he was appointed

Director responsible for pricing in 1996 and

claims and pricing in 1999. He was appointed as

Chief Operating Officer in 2004.

recruited by the Brockbank Group in 1991 to set

He joined Admiral in 1991 from McKinsey & Co.

up the Admiral business.

He was part of the management team that led
the MBO in 1999. Prior to joining Admiral, he
was Marketing and Sales Manager for Churchill

where he worked in the Financial Interest Group,

London office. Prior to working for McKinsey &

Co, he worked for Cadbury Schweppes in the

United Kingdom and the United States.

Insurance.

David has an MBA from Insead.

He has substantial experience in direct response

financial services in the United Kingdom, United

States and France. He has an MBA from Insead.

KEY A - Audit Committee member

R - Remuneration Committee member

N - Nominations Committee member

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Manfred Aldag (56)
Non-executive Director (N)
Manfred was appointed a Non-executive Director of

Margaret Johnson (47)
Non-executive Director (A,R)
Margaret was appointed Non-executive Director of

Lucy Kellaway (46)
Non-executive Director (N)
Lucy joined the Board as a Non-executive

the Company in 2003 as a representative of Munich

the Company in September 2006. She is currently

Director in September 2006. She is the

Re. He graduated from University of Essen and

Group Managing Director of the international

management columnist on the Financial Times

has a degree in Economics/Business Management

advertising agency Leagas Delaney and has been with

and author of various books. In 20 years on

(Diplom-Kaufmann).

that Company for the past 11 years.

the FT she has been oil correspondent, a Lex

He has worked for Munich Re since September

Margaret joined the Group’s Audit and Remuneration

columnist and Brussels correspondent.

1981 and is currently the Senior Executive Manager

Committees on appointment to the Board.

Lucy also joined the Nominations Committee on

responsible for Northern Europe (United Kingdom,

Ireland, Netherlands and the Nordic countries).

appointment to the Board.

Martin Jackson (58)
Non-executive Director (A, R)
Martin was appointed Non-executive Director and

Keith James OBE (62)
Non-executive Director (A, N)
Keith was appointed a Non-executive Director

John Sussens (61)
Non-executive Director (R)
John was appointed the Senior Independent Non-

Chairman of the Audit Committee in August 2004.

He was the Group Finance Director of Friends

Provident plc between 2001 and 2003 and

Friends’ Provident Life Office between 1999 and

in December 2002. He is Chairman of the
Nominations Committee and is also the

executive Director in August 2004, and is Chairman

of the Remuneration Committee. He is also a Non-

Independent Chairman of Admiral Insurance

executive Director of Cookson plc, Phoenix IT Group

Company Limited and Inspop.com Limited.

Plc, and Anglo & Overseas Trust Plc.

2001. Prior to that he was the Group Finance

He is also a Non-executive Director of Julian

He was the Group Managing Director of Misys plc

Director at London & Manchester Group

Hodge Bank Limited and is Non-executive

between 1998 and May 2004 having been on the

plc from 1992 to 1998, up to the date of its

Chairman of Atlantic Venture Capital Limited and

Board of the Company since 1989. Prior to joining

acquisition by Friends’ Provident Life Office.

International Greetings plc.

Martin is also a Non-executive Director of IG

Holdings plc.

He is a fellow of the Institute of Chartered
Accountants.

He is a solicitor and was the Chairman of

Eversheds LLP from June 1995 to April 2004. He

was a Non-executive Director of Bank of Wales

plc between 1988 and 2001 and AXA Insurance

Company Limited between 1992 and 2000. Keith

was awarded an OBE in 2005 for services to

business and the community in Wales.

Misys, he was Manufacturing Director at JC Bamford

Excavators Limited. He was a Non-executive Director

at Chubb plc between 2001 and 2003.

4 8 f I N A N C I A L S tAt e M e N t S

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A D M I R A L G R O U P p l c 4 9

Financial statements

50-51

Directors’ report

52-5

Independent auditor’s report

Consolidated income statement

Consolidated balance sheet

Consolidated statement of recognised
income and expense

Consolidated cash flow statement

58-90

Notes to the financial statements

Consolidated financial summary

92-97

Admiral Group plc Company financial statements

5 0 f I N A N C I A L S tAt e M e N t S

Director’s report

The Directors present their Annual Report and
the audited financial statements for the year
ended 31 December 2006.

Business review
The Company is the holding Company for
the Admiral Group of companies. The Group’s
principal activity continues to be the selling
and administration of private motor insurance
and related products.

Detailed descriptions of the Group’s activities,
results and prospects are contained in the
Chairman’s statement, the Chief Executive’s
statement and the financial review.

Group results and dividends
The profit for the year, after tax but before
dividends, amounted to £103.7m (2005: £84.7m).

The Directors declared and paid dividends of
£70.1m during 2006 (2005: £49.2m) – refer to
note 14 for further details.

The Directors are proposing a final dividend of
£62.3m (24.0p per share), payable on 25 May
2007.

Share capital
Other than the holdings of the Directors as
disclosed in the remuneration report, so far as
the Directors are aware, or have been notified
pursuant to section 198 of the Companies Act
1985, the following shareholders have interests
in 3% or more of the ordinary share capital of
the Company at 28 February 2007:

Munich Re

Capital Group
Companies Inc

Jupiter Asset
Management

Number of
shares

37,540,469

14.36%

12,766,870

4.88%

12,361,774

4.73%

Fidelity Investments

12,244,822

4.68%

College Retirement
Equities Fund

10,438,937

4.00%

Directors and their interests
The present Directors of the Company are
shown on the inside cover of this report, whilst
Directors’ interests in the share capital of the
Company are set out in the remuneration
report.

Charitable and political donations
During the year the Group donated £38,000
(2005: £108,000) to various local and national
charities. The Group has never made political
donations. Refer to the corporate responsibility
report for further detail.

Employee policies
Detailed information on the Group’s
employment practices is set out in the
corporate responsibility report.

The Group purchases appropriate liability
insurance for all staff and Directors.

Creditor payment policy
It is the policy of the Group to pay all purchase
invoices by their due date, and appropriate
quality measures are in place to monitor
and encourage this. At the end of the year
outstanding invoices represented 28 days
purchases (2005: 30).

Annual General Meeting
It is proposed that the next AGM be held
at The St David’s Hotel and Spa, Cardiff on
Wednesday 16 May 2007, at 3.00 pm, notice of
which will be sent to shareholders with
the Annual Report.

Directors’ responsibilities
The Directors are responsible for preparing
the Annual Report and the Group and Parent
Company financial statements, in accordance
with applicable law and regulations.

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A D M I R A L G R O U P p l c 5 1

Company law requires the Directors to
prepare Group and Parent Company financial
statements for each financial year. Under that
law they are required to prepare the Group
financial statements in accordance with
International Financial Reporting Standards
(IFRS) as adopted by the EU and applicable
law and have elected to prepare the Parent
Company financial statements in accordance
with UK Accounting Standards and applicable
law (UK Generally Accepted Accounting
Practice).

The Group financial statements are required by
law and IFRS as adopted by the EU to present
fairly the financial position and performance of
the Group; the Companies Act 1985 provides
in relation to such financial statements that
references in the relevant part of that Act
to financial statements giving a true and fair
view are references to their achieving a fair
presentation.

The Parent Company financial statements are
required by law to give a true and fair view of
the state of affairs of the Parent Company.

In preparing each of the Group and Parent
Company financial statements, the Directors
are required to:

•

select suitable accounting policies and then
apply them consistently
make judgments and estimates that are
reasonable and prudent
for the Group financial statements, state
whether they have been prepared in
accordance with IFRS as adopted by the EU
for the Parent Company financial
statements, state whether applicable UK
Accounting Standards have been followed,
subject to any material departures disclosed
and explained in the Parent Company
financial statements; and
prepare the financial statements on the
going concern basis unless it is inappropriate
to presume that the Group and the Parent
Company will continue in business

position of the Parent Company and enable
them to ensure that its financial statements
comply with the Companies Act 1985. They
have general responsibility for taking such steps
as are reasonably open to them to safeguard
the assets of the Group and to prevent and
detect fraud and other irregularities.

Under applicable law and regulations, the
Directors are also responsible for preparing
a Directors’ report, Directors’ remuneration
report and corporate governance statement
that comply with that law and those
regulations.

The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination of
financial statements may differ from legislation
in other jurisdictions.

Disclosure of information to auditors
The Directors who held office at the date
of approval of this Directors’ report confirm
that, so far as they are each aware, there is
no relevant audit information of which the
Company’s auditor is unaware; and each
Director has taken all the steps that he ought
to have taken as a Director to make himself
aware of any relevant audit information and to
establish that the Company’s auditor is aware
of that information.

Auditor
The Company’s auditor, KPMG Audit Plc, has
indicated willingness to continue in office and
resolutions to reappoint it and to authorise
the Directors to fix its remuneration will be
proposed at the Annual General Meeting.

By order of the Board,

The Directors are responsible for keeping
proper accounting records that disclose with
reasonable accuracy at any time the financial

Stuart Clarke
Company Secretary
5 March 2007

5 2 f I N A N C I A L S tAt e M e N t S

Independent auditor’s report
to the members of Admiral Group plc

We have audited the Group and Parent
Company financial statements (the ‘financial
statements’) of Admiral Group plc for the year
ended 31 December 2006 which comprise
the Group Income Statement, the Group and
Parent Company Balance Sheets, the Group
Cash Flow Statement, the Group Statement
of Recognised Income and Expense and the
related notes. These financial statements have
been prepared under the accounting policies
set out therein. We have also audited the
information in the Directors’ remuneration
report that is described as having been audited.

This report is made solely to the Company’s
members, as a body, in accordance with section
235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state
to the Company’s members those matters we
are required to state to them in an auditor’s
report and for no other purpose. To the fullest
extent permitted by law, we do not accept or
assume responsibility to anyone other than the
Company and the Company’s members as a
body, for our audit work, for this report, or for
the opinions we have formed.

Respective responsibilities of
Directors and auditors
The Directors’ responsibilities for preparing
the Annual Report and the Group financial
statements in accordance with applicable
law and International Financial Reporting
Standards (IFRS) as adopted by the EU, and
for preparing the Parent Company financial
statements and the Directors’ remuneration
report in accordance with applicable law
and UK Accounting Standards (UK Generally
Accepted Accounting Practice) are set out in
the Statement of Directors’ Responsibilities
above.

Our responsibility is to audit the financial
statements and the part of the Directors’
remuneration report to be audited in
accordance with relevant legal and regulatory
requirements and International Standards on
Auditing (UK and Ireland).

We report to you our opinion as to whether
the financial statements give a true and fair
view and whether the financial statements and
the part of the Directors’ remuneration report
to be audited have been properly prepared
in accordance with the Companies Act 1985
and, as regards the Group financial statements,
Article 4 of the IAS Regulation. We also report
to you whether in our opinion the information
given in the Directors’ report is consistent with
the financial statements. The information given
in the Directors’ Report includes that specific
information presented in the Chairman’s
statements, the Chief Executive’s statement and
the financial review that is cross referred from
the business review section of the Directors’
Report.

In addition we report to you if, in our opinion,
the Company has not kept proper accounting
records, if we have not received all the
information and explanations we require for
our audit, or if information specified by law
regarding Directors’ remuneration and other
transactions is not disclosed.

We review whether the corporate governance
statement reflects the Company’s compliance
with the nine provisions of the 2003 Combined
Code specified for our review by the Listing
Rules of the Financial Services Authority, and
we report if it does not. We are not required
to consider whether the Board’s statements on
internal control cover all risks and controls, or
form an opinion on the effectiveness of the
Group’s corporate governance procedures or its
risk and control procedures.

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A D M I R A L G R O U P p l c 5

Opinion
In our opinion:

•

the Group financial statements give a true
and fair view, in accordance with IFRS as
adopted by the EU, of the state of the
Group’s affairs as at 31 December 2006 and
of its profit for the year then ended;
the Group financial statements have been
properly prepared in accordance with the
Companies Act 1985 and Article 4 of the
IAS Regulation;
the Parent Company financial statements
give a true and fair view, in accordance with
UK Generally Accepted Accounting Practice,
of the state of the Parent Company’s affairs
as at 31 December 2006;
the Parent Company financial statements
and the part of the Directors’ remuneration
report to be audited have been properly
prepared in accordance with the Companies
Act 1985; and
the information given in the Directors’
report is consistent with the financial
statements.

KPMG Audit Plc
Chartered Accountants
Registered Auditor
Cardiff
5 March 2007

We read the other information contained
in the Annual Report and consider whether
it is consistent with the audited financial
statements. We consider the implications for
our report if we become aware of any apparent
misstatements or material inconsistencies with
the financial statements. Our responsibilities do
not extend to any other information.

Basis of audit opinion
We conducted our audit in accordance with
International Standards on Auditing (UK and
Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis,
of evidence relevant to the amounts and
disclosures in the financial statements and
the part of the Directors’ remuneration report
to be audited. It also includes an assessment
of the significant estimates and judgments
made by the Directors in the preparation
of the financial statements, and of whether
the accounting policies are appropriate to
the Group’s and Company’s circumstances,
consistently applied and adequately disclosed.

We planned and performed our audit so as to
obtain all the information and explanations
which we considered necessary in order
to provide us with sufficient evidence to
give reasonable assurance that the financial
statements and the part of the Directors’
remuneration report to be audited are free
from material misstatement, whether caused by
fraud or other irregularity or error. In forming
our opinion we also evaluated the overall
adequacy of the presentation of information
in the financial statements and the part of the
Directors’ remuneration report to be audited.

5 4 f I N A N C I A L S tAt e M e N t S

Consolidated income statement

Insurance premium revenue

Insurance premium ceded to reinsurers

Net insurance premium revenue

Other revenue

Profit commission

Investment and interest income

Note

Year ended:

31 December 2006

31 December 2005

£000

188,288

(43,333)

144,955

131,621

19,926

14,464

£000

176,214

(36,760)

139,454

93,405

14,735

15,518

Net revenue

310,966

263,112

Insurance claims and claims handling
expenses

Insurance claims and claims handling
expenses recovered from reinsurers

(136,472)

29,327

(121,123)

20,597

Net insurance claims

(107,145)

(100,526)

Expenses

Share scheme charges

Total expenses

Operating profit

Finance charges

Profit before tax

Taxation expense

Profit after tax attributable to equity
holders of the Company

Earnings per share:

Basic

Diluted

Dividends declared (total)

Dividends declared (per share)

9, 26

(54,528)

(933)

(162,606)

148,360

(1,018)

(40,492)

(438)

(141,456)

121,656

(2,162)

147,342

119,494

(43,620)

(34,774)

103,722

84,720

39.8p

70,104

27.0p

32.7p

49,190

19.0p

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A D M I R A L G R O U P p l c 5 5

Consolidated balance sheet

As at:

31 December 2006

31 December 2005

Note

£000

ASSETS
Property, plant and equipment

Intangible assets

Financial assets

Reinsurance assets

Trade and other receivables

Cash and cash equivalents

Total assets

EQUITY
Share capital

Share premium account

Retained earnings

Other reserves

Total equity

LIABILITIES
Insurance contracts

Financial liabilities

Deferred income tax

Trade and other payables

Current tax liabilities

Total liabilities

7,448

66,757

395,938

74,689

16,931

191,242

4,636

66,490

378,747

54,166

9,392

150,152

753,005

663,583

261

13,145

205,682

(33)

219,055

294,425

981

215,137

23,407

533,950

260

13,145

167,990

181,412

254,130

22,000

3,550

182,935

19,556

482,171

Total equity and total liabilities

753,005

663,583

These financial statements were approved by the Board of Directors on 5 March 2007 and were
signed on its behalf by:

Kevin Chidwick
Director

5 6 f I N A N C I A L S tAt e M e N t S

Consolidated statement of recognised income and expense

As at:

31 December 2006

31 December 2005

£000

Exchange differences on translation of foreign
operations

Net expense recognised directly in equity

(50)

Profit for the period

103,722

84,720

Total recognised income and expense for the
period

103,672

84,720

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Consolidated cash flow statement

A D M I R A L G R O U P p l c 5 7

Profit after tax
Adjustments for non-cash items:
- Depreciation
- Amortisation of software
- Unrealised (gains) / losses on investments
- Share scheme charge
Loss on disposal of property, plant and
equipment and software
Change in gross insurance contract liabilities
Change in reinsurance assets
Change in trade and other receivables,
including from policyholders
Change in trade and other payables,
including tax and social security
Interest expense
Taxation expense
Cash flows from operating activities,
before movements in investments
Net cash flow into investments held at
fair value
Cash flows from operating activities, net
of movements in investments
Interest payments
Taxation payments

Net cash flow from operating activities
Cash flows from investing activities:
Purchases of property, plant and
equipment and software

Net cash used in investing activities
Cash flows from financing activities:
Repayments of borrowings
Capital element of new finance leases
Repayment of finance lease liabilities
Equity dividends paid

Net cash used in financing activities
Net increase in cash and cash
equivalents
Cash and cash equivalents at 1 January
Effects of changes in foreign exchange rates

Note

31 December 2006
£000
103,722

31 December 2005
£000
84,720

2,489
446
(624)
2,667

151
40,295
(20,523)

(23,150)

33,652
1,018
43,620

183,763

(1,073)

182,690
(1,018)
(40,931)

140,741

(6,046)

(22,000)
(1,451)
-
(70,104)

(93,555)

41,140
150,152
(50)

1,824
896
893
1,247

503
38,023
11,971

(18,693)

18,041
2,162
34,774

176,361

(53,413)

122,948
(2,617)
(26,090)

94,241

(3,999)

(10,667)
1,201
(635)
(49,190)

(59,291)

30,951
119,201
-

Cash and cash equivalents at end of
period

191,242

150,152

5 8 f I N A N C I A L S tAt e M e N t S

Notes to the financial statements

1. General information and basis of

preparation

Admiral Group plc is a Company incorporated
in England and Wales. Its registered office is
at Capital Tower, Greyfriars Road, Cardiff CF10
3AZ and its shares are listed on the London
Stock Exchange.

The financial statements comprise the
results and balances of the Company and its
subsidiaries (together referred to as the Group)
for the two years ended 31 December 2005
and 2006. The financial statements of the
Company’s subsidiaries are consolidated in
the Group financial statements. The Company
controls 100% of the voting share capital of all
its subsidiaries. The Parent Company financial
statements present information about the
Company as a separate entity and not about
its Group. In accordance with International
Accounting Standard (IAS) 24, transactions
or balances between Group companies that
have been eliminated on consolidation are not
reported as related party transactions.

The consolidated financial statements have
been prepared and approved by the Directors
in accordance with International Financial
Reporting Standards (IFRS) as adopted by
the European Union (EU). The Company has
elected to prepare its Parent Company financial
statements in accordance with UK Generally
Accepted Accounting Practice (GAAP).

Other than those listed below, the Group has
applied all adopted IFRS and interpretations
adopted by the EU at 31 December 2006,
including all amendments to extant standards
that are not effective until later accounting
periods.

The following IFRS adopted by the EU were
available for early adoption but have not
been applied by the Group in these financial
statements:

•

IFRS 7 (Financial instruments: Disclosure)
– applicable for years commencing on or
after 1 January 2007; and

•

Proposed amendment to IAS 1 (Capital
disclosures)

The application of IFRS 7 and the proposed
amendment to IAS 1 in the current year
would not have affected the balance sheet
or the income statement as the standards are
concerned only with disclosure. The Group
plans to adopt these in 2007.

The accounting policies set out below
have, unless otherwise stated, been applied
consistently to all periods presented in these
Group financial statements.

The financial statements are prepared on the
historical cost basis, except for the revaluation
of financial assets classified as at fair value
through profit or loss.

Subsidiaries are entities controlled by the
Group. Control exists when the Group has
the power, directly or indirectly, to govern the
financial and operating policies of an entity
so as to obtain benefits from its activities. In
assessing control, potential voting rights that
are currently exercisable or convertible are
taken into account. The financial statements of
subsidiaries are included in the consolidated
financial statements from the date that control
commences until the date that control ceases.

The preparation of financial statements
in conformity with adopted IFRS requires
management to make judgements, estimates
and assumptions that affect the application of
policies and reported amounts of assets and
liabilities, income and expenses. The estimates
and associated assumptions are based on
historical experience and various other factors
that are believed to be reasonable under the
circumstances, the results of which form the
basis of making the judgements about carrying
values of assets and liabilities that are not
readily apparent from other sources.

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A D M I R A L G R O U P p l c 5 9

The estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the
year in which the estimate is reviewed if this
revision affects only that year, or in the year
of the revision and future years if the revision
affects both current and future years.

2. Significant estimates
Estimation techniques used in calculation of
claims provisions:
Estimation techniques are used in the
calculation of the provisions for claims
outstanding, which represents a projection of
the ultimate cost of settling claims that have
occurred prior to the balance sheet date and
remain unsettled at the balance sheet date.

The key area where these techniques are used
relates to the ultimate cost of reported claims.
A secondary area relates to the emergence of
claims that occurred prior to the balance sheet
date, but had not been reported at that date.

The estimates of the ultimate cost of reported
claims are based on the setting of claim
provisions on a case-by-case basis, for all but
the simplest of claims.

The sum of these provisions are compared
with projected ultimate costs using a variety
of different projection techniques (including
incurred and paid chain ladder and an average
cost of claim approach) to allow an actuarial
assessment of their likely accuracy and to
include allowance for unreported claims.

The most significant sensitivity in the use of
the projection techniques arises from any
future step change in claims costs, which
would cause future claim cost inflation to
deviate from historic trends. This is most
likely to arise from a change in the regulatory
or judicial regime that leads to an increase
in awards or legal costs for bodily injury
claims that is significantly above or below the
historical trend.

The claims provisions are subject to
independent review by the Group’s actuarial
advisors.

3. Significant accounting policies
a) Revenue recognition
Premiums, ancillary income and profit
commission:

Premiums relating to insurance contracts are
recognised as revenue proportionally over the
period of cover.

Income earned on the sale of ancillary
products and income from policies paid
by instalments is credited to the income
statement over the period matching the
Group’s obligations to provide services. Where
the Group has no remaining contractual
obligations, the income is recognised
immediately. An allowance is made for
expected cancellations where the customer
may be entitled to a refund of ancillary
amounts charged.

Under some of the co-insurance and
reinsurance contracts under which motor
premiums are shared or ceded, profit
commission may be earned on a particular
year of account, which is usually subject to
performance criteria such as loss ratios and
expense ratios. The commission is dependent
on the ultimate outcome of any year, with
income being recognised based on loss and
expense ratios used in the preparation of the
financial statements.

Income is allocated to profit commission
in the income statement when the right to
consideration is achieved, and is capable of
reliable measurement.

Revenue from Gladiator and Confused.com:
Commission from these activities is credited to
income on the sale of the underlying insurance
policy.

6 0 f I N A N C I A L S tAt e M e N t S

Investment income:
Investment income from financial assets
comprises interest income and net gains (both
realised and unrealised) on financial assets
classified as fair value through profit and loss.

Translation differences on non-monetary items,
such as equities held at fair value through
profit or loss, are reported as part of the fair
value gain or loss. Translation differences on
non-monetary items are included in the fair
value reserve in equity.

b) Segment reporting
The Group’s primary format for segment
reporting is business segments. There is no
secondary segment. A business segment is
defined as a group of assets and operations
engaged in providing products and services
that are subject to risks and returns that are
different from other business segments.

For the Group, the risks and returns of its
insurance broking activities, namely Gladiator
Commercial and Confused.com, are clearly
distinguishable from its motor insurance
segment. This is reflected in the Group’s
management and organisation structure and
internal financial reporting systems.

c) Foreign currency translation
Functional and presentation currency:
Items included in the financial statements
of each of the Group’s entities are measured
using the currency of the primary economic
environment in which the entity operates
(‘the functional currency’). The consolidated
financial statements are presented in thousands
of pounds sterling, which is the Group’s
presentation currency.

Transactions and balances:
Foreign currency transactions are translated
into the functional currency using the exchange
rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting
from the settlement of such transactions, and
from the translation at year end exchange rates
of monetary assets and liabilities denominated
in foreign currencies are recognised in the
income statement.

Translation of financial statements of
foreign branches
The financial statements of foreign branches
whose functional currency is not pounds
sterling are translated into the Group
presentation currency (sterling) as follows:

(i) Assets and liabilities for each balance sheet
presented are translated at the closing rate
at the date of that balance sheet;

(ii) Income and expenses for each income
statement are translated at average
exchange rates (unless this average is not a
reasonable approximation of the cumulative
effect of the rates prevailing on the
transaction dates, in which case income and
expenses are translated at the date of the
transaction); and

(iii) All resulting exchange differences are

recognised as a separate component of
equity.

d) Insurance contracts and reinsurance assets
Premium:
The proportion of premium receivable on
in-force policies relating to unexpired risks is
reported in insurance contract liabilities and
reinsurance assets as the unearned premium
provision – gross and reinsurers’ share
respectively.

Claims:
Claims and claims handling expenses are
charged as incurred, based on the estimated
direct and indirect costs of settling all liabilities
arising on events occurring up to the balance
sheet date.

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A D M I R A L G R O U P p l c 6 1

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.

e) Intangible assets
Goodwill:
All business combinations are accounted for
using the purchase method. Goodwill has been
recognised in acquisitions of subsidiaries, and
represents the difference between the cost of
the acquisition and the fair value of the net
identifiable assets acquired.

The classification and accounting treatment of
acquisitions occurring before 1 January 2004
have not been reconsidered in preparing the
Group’s opening IFRS balance sheet at 1 January
2004 due to the exemption available in IFRS 1
(First time adoption).

Adjustments to the amounts of claims
provisions established in prior years are
reflected in the income statement for the
period in which the adjustments are made and
disclosed separately if material. The methods
used, and the estimates made, are reviewed
regularly.

In respect of acquisitions prior to 1 January
2004, goodwill is included at the transition
date on the basis of its deemed cost, which
represents the amount recorded under UK
GAAP, which was tested for impairment at the
transition date. On transition, amortisation of
goodwill has ceased as required by IFRS 1.

Provision for unexpired risks is made where
necessary for the estimated amount required
over and above unearned premiums to meet
future claims and related expenses.

Reinsurance assets:
Contracts entered into by the Group
with reinsurers under which the Group is
compensated for losses on the insurance
contracts issued by the Group are classified
as reinsurance contracts. A contract is only
accounted for as an insurance or reinsurance
contract where there is significant insurance
risk transfer between the insured and the
insurer.

The benefits to which the Group is entitled under
these contracts are held as reinsurance assets.

The Group assesses its reinsurance assets for
impairment on a regular basis, and in detail every
six months. If there is objective evidence that the
asset is impaired, then the carrying value will be
written down to its recoverable amount.

Goodwill is stated at cost less any accumulated
impairment losses. Goodwill is allocated to
cash generating units (CGU’s) according to
business segment and is reviewed annually for
impairment.

The Goodwill held on the balance sheet at
31 December 2006 is allocated solely to the
private motor insurance segment.

Impairment of goodwill:
The annual impairment review involves
comparing the carrying amount to the
estimated recoverable amount (by allocating
the goodwill to CGU’s) and recognising an
impairment loss if the recoverable amount
is lower. Impairment losses are recognised
through the income statement and are not
subsequently reversed.

The recoverable amount is the greater of the net
realisable value and the value in use of the CGU.

The value in use calculations use cash flow
projections based on financial budgets
approved by management covering a three
year period. Cash flows beyond this period are
considered, but not included in the calculation.

6 2 f I N A N C I A L S tAt e M e N t S

The key assumptions used in the value in use
calculations are those regarding growth rates
and expected changes in pricing and expenses
incurred during the period. Management
estimates growth rates and changes in pricing
based on past practices and expected future
changes in the market.

Deferred acquisition costs:
Acquisition costs comprise all direct and
indirect costs arising from the conclusion of
insurance contracts. Deferred acquisition costs
represent the proportion of acquisition costs
incurred that corresponds to the unearned
premiums provision at the balance sheet date.
This balance is held as an intangible asset. It
is amortised over the term of the contract as
premium is earned.

Software:
Purchased software is recognised as an
intangible asset and amortised over its
expected useful life (generally between two
and four years). The carrying value is reviewed
every six months for evidence of impairment,
with the value being written down if any
impairment exists. Impairment may be reversed
if conditions subsequently improve.

f) Property, plant and equipment and
depreciation
All property, plant and equipment is stated
at cost less accumulated depreciation.
Depreciation is calculated using the straight-
line method to write off the cost less residual
values of the assets over their useful economic
lives. These useful economic lives are as
follows:

Motor vehicles

4 years

Fixtures, fittings and equipment

4 years

Computer equipment

Improvements to short
leasehold properties

2 to 4
years

4 years

Impairment of property, plant and equipment:
In the case of property, plant and equipment,
carrying values are reviewed at each balance
sheet date to determine whether there are
any indications of impairment. If any such
indications exist, the asset’s recoverable
amount is estimated and compared to the
carrying value. The carrying value is the higher
of the net realisable value and the asset’s
value in use. Impairment losses are recognised
through the income statement.

g) Leased assets
The rental costs relating to assets held under
operating leases are charged to the income
statement on a straight-line basis over the life
of the lease.

Leases under the terms of which the Group
assumes substantially all of the risks and
rewards of ownership are classed as finance
leases. Assets acquired under finance leases are
included in property, plant and equipment at
fair value on acquisition and are depreciated in
the same manner as equivalent owned assets.
Finance lease and hire purchase obligations
are included in creditors, and the finance costs
are spread over the periods of the agreements
based on the net amount outstanding.

h) Financial assets – investments and
receivables
Financial assets are classified according to the
purpose for which they were acquired. The
Group’s investments in quoted fixed income
and other debt securities are classified as
financial assets at fair value through profit or
loss at inception.

Financial assets classified as fair value through
profit and loss are initially recorded at cost
(which equates to fair value) and subsequently
carried at fair value (based on closing bid
prices on the balance sheet date, or the last
trading day before the balance sheet date) with
changes in the fair value of these investments
being recognised through the income
statement.

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Trade and other receivables are stated at their
historic cost (discounted if material) unless they
are impaired. Impairment losses are recognised
through the income statement.

Non-market conditions such as profitability
targets as well as staff attrition rates are
included in assumptions over the number
of free shares to vest under the applicable
scheme.

i) Cash and cash equivalents
Cash and cash equivalents includes cash
in hand, deposits held at call with banks,
and other short-term deposits with original
maturities of three months or less.

At each balance sheet date, the Group revises
its assumptions on the number of shares to be
granted with the impact of any change in the
assumptions recognised through income.

j) Share capital
Shares are classified as equity when there is no
obligation to transfer cash or other assets.

Refer to note 26 for further details on share
schemes.

m) Taxation
Income tax on the profit or loss for the periods
presented comprises current and deferred tax.

Current tax:
Current tax is the expected tax payable on the
taxable income for the period, using tax rates in
effect at the balance sheet date, and includes
any adjustment to tax payable in respect of
previous periods.

Deferred tax:
Deferred tax is provided in full using the
balance sheet liability method, providing for
temporary differences arising between the
carrying amount of assets and liabilities for
accounting purposes, and the amounts used for
taxation purposes.

The principal temporary differences arise from
depreciation of property and equipment, share
scheme charges and the tax treatment of
Lloyd’s profits.

A deferred tax asset is recognised only to the
extent that it is probable that future taxable
profits will be available against which the asset
can be utilised.

k) Loans and borrowings
Interest bearing loans and borrowings
are recognised initially at fair value less
attributable transaction costs. Subsequent to
initial recognition, interest bearing loans and
borrowings are stated at amortised cost with
any difference between cost and redemption
value being recognised in the income statement
over the life of the borrowings on an effective
interest basis.

l) Employee benefits
Pensions:
The Group contributes to a number of defined
contribution personal pension plans for its
employees. The contributions payable to these
schemes are charged in the accounting period
to which they relate.

Employee share schemes:
The Group operates a number of equity settled
compensation schemes for its employees. For
schemes commencing 1 January 2004 and after,
the fair value of the employee services received
in exchange for the grant of free shares under
the schemes is recognised as an expense, with a
corresponding increase in equity.

The total charge expensed over the vesting
period is determined by reference to the fair
value of the free shares granted (excluding the
impact of non-market vesting conditions).

6 4 f I N A N C I A L S tAt e M e N t S

4. Segment reporting
Revenue and results for the year ended 31 December 2006, split by business segment are shown
below. Consolidation adjustments represent the elimination of inter-segment trading, specifically
interest charged on inter-company loans.

As noted above, the Directors consider there to be two business segments. These are private
motor insurance and insurance broking (Confused.com and Gladiator Commercial). No
geographical business split has been presented as the results of the Group’s Spanish operation are
not material to the 2006 figures.

Private motor
insurance

£000

Insurance
broking

£000

Net revenue

266,168

45,069

Profit after tax

85,699

18,023

Other segment items :

Depreciation

Amortisation

2,366

6,508

123

31 December 2006

Consolidation
adjustment

£000

(271)

Group

£000

310,966

103,722

2,489

6,508

The segment assets and liabilities at 31 December 2006 and capital expenditure for the year are as
follows. Consolidation adjustments represent the elimination of inter-company balances.

Private motor
insurance

£000

Insurance
broking

£000

Consolidation
adjustment

£000

Group

£000

31 December 2006

Total assets

736,160

18,780

(1,935)

753,005

Total liabilities

525,932

9,953

(1,935)

533,950

Capital expenditure:

Intangible assets

Plant, property and
equipment

6,764

5,088

364

6,764

5,452

Revenue and results for the corresponding business segments for the year ended 31 December
2005 are reported below.

A D M I R A L G R O U P p l c 6 5

Private motor
insurance

£000

Insurance
broking

£000

Consolidation
adjustment

£000

Group

£000

31 December 2005

Net revenue

245,854

20,732

(3,474)

263,112

Profit after tax

76,773

7,947

Other segment items:

Depreciation

Amortisation

1,739

7,769

84,720

1,824

7,769

The segment assets and liabilities at 31 December 2005 and capital expenditure for the year are as
follows.

Private motor
insurance

£000

Insurance
broking

£000

Consolidation
adjustment

£000

Group

£000

31 December 2005

Total assets

Total liabilities

Capital expenditure:

Intangible assets

Plant, property and
equipment

657,390

485,782

7,792

3,475

15,672

5,868

139

(9,479)

663,583

(9,479)

482,171

7,792

3,614

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5. Net insurance premium revenue

Total motor insurance premiums
before co-insurance

Group gross premiums written
after co-insurance

Outwards reinsurance premiums

Net insurance premiums written

Change in gross unearned
premium provision

Change in reinsurers’ share of
unearned premium provision

Net insurance premium revenue

31 December 2006

31 December 2005

£000

566,608

196,378

(57,731)

138,647

(8,090)

14,398

144,955

£000

533,616

186,989

(28,052)

158,937

(10,775)

(8,708)

139,454

The Group’s share of the UK and Spanish private motor insurance business was underwritten by
Admiral Insurance (Gibraltar) Limited (AIGL) and Admiral Insurance Company Limited (AICL). All
contracts are short-term in duration, lasting for 10 or 12 months.

6. Other revenue

Ancillary revenue

Revenue from Confused.com

Instalment income earned

Revenue from Gladiator

Total other revenue

31 December 2006

31 December 2005

£000

81,527

38,517

5,676

5,901

131,621

£000

72,470

12,044

3,768

5,123

93,405

Ancillary revenue primarily constitutes commission from sales of insurance products that
complement the motor policy, but which are underwritten by external parties.

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A D M I R A L G R O U P p l c 6 7

7. Profit commission

Total profit commission

31 December 2006

31 December 2005

£000

19,926

£000

14,735

8. Investment and interest income

Net investment return

Interest receivable

Total investment and interest income

31 December 2006

31 December 2005

£000

9,925

4,539

14,464

£000

11,342

4,176

15,518

9. Expenses and share scheme charges

31 December 2006

Other

Total

Insurance
contracts

31 December 2005

Other

Total

£000

7,375

6,888

12,009

35,144

47,153

11,021

22,583

33,604

Acquisition of
insurance contracts

Administration and
other marketing
costs

Expenses

19,384

35,144

54,528

17,909

22,583

40,492

Share scheme
charges

Total expenses and
share scheme
charges

933

438

19,384

36,077

55,461

17,909

23,021

40,930

6 8 f I N A N C I A L S tAt e M e N t S

Analysis of other administration and other marketing costs:

31 December 2006

31 December 2005

Ancillary sales expenses

Confused.com operating expenses

Gladiator operating expenses

Central overheads

Total

£000

14,505

15,437

3,876

1,326

35,144

£000

13,378

5,162

3,252

791

22,583

The £12,009,000 (2005: £11,021,000) administration and marketing costs allocated to insurance
contracts is principally made up of salary costs.

Reconciliation of expenses related to insurance contracts to reported expense ratio:

31 December 2006

31 December 2005

Insurance contract expenses from
above

Add: claims handling expenses

Adjusted expenses

Net insurance premium revenue

Reported expense ratio

£000

19,384

3,538

22,922

144,955

15.8%

£000

17,909

3,202

21,111

139,454

15.1%

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10. Staff costs and other expenses

Included in profit, before co-insurance arrangements are the following:

31 December 2006

31 December 2005

Salaries

Social security charges

Pension costs

Share scheme charges
(see note 26)

Total staff expenses

Depreciation charge:

- Owned assets

- Leased assets

Amortisation charge:

- Software

- Deferred acquisition costs

Operating lease rentals:

- Buildings

Auditor’s remuneration:

- Fees payable for the audit of the
Company’s annual accounts

- Fees payable for the audit of the
Company’s subsidiary accounts

- Fees payable for other services

Loss on disposal of property, plant
and equipment

Analysis of fees paid to the
auditor for other services:

Tax services

Other services

Total as above

£000

36,083

3,337

517

2,667

42,604

1,009

1,480

446

6,062

3,292

154

151

£000

29,955

2,782

490

1,247

34,474

446

1,378

896

6,873

2,969

189

109

503

109

The amortisation of software and deferred acquisition cost assets is charged to expenses in the
income statement.

There were no net exchange differences credited or charged to the income statement during the year.

7 0 f I N A N C I A L S tAt e M e N t S

11. Staff numbers (including Directors)

2006

Number

1,593

404

1,997

Average for the year

2005

Number

1,377

339

1,716

31 December 2006

31 December 2005

£000

166

481

221

150

1,018

£000

1,520

388

221

2,162

Direct customer contact staff

Support staff

Total

12. Finance charges

Term loan interest

Finance lease interest

Letter of credit charges

Other interest payable

Total finance charges

13. Taxation

UK Corporation tax

Current charge at 30%

(Over) / under provision relating to prior
periods – corporation tax

Current tax charge

Deferred tax

Current period deferred taxation
movement

Under / (over) provision relating to prior
periods – deferred tax

Total tax charge per income statement

31 December 2006

31 December 2005

£000

45,430

(648)

44,782

(1,249)

43,620

36,051

36,062

(654)

(634)

34,774

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A D M I R A L G R O U P p l c 7 1

Factors affecting the tax charge are:

Profit before taxation

Corporation tax thereon at 30%

Utilisation of brought forward tax
losses

Adjustments in respect of prior
year insurance technical
provisions

Expenses and provisions not
deductible for tax purposes

Other differences

Adjustments relating to prior
periods

31 December 2006

31 December 2005

£000

147,342

44,203

114

(153)

(561)

£000

119,494

35,848

(421)

(161)

152

(21)

(623)

Tax charge for the period as above

43,620

34,774

14. Dividends

Dividends were declared and paid as follows.

March 2005 (9.3p per share, paid
May 2005)

September 2005 (9.7p per share,
paid October 2005)

March 2006 (14.9p per share, paid
May 2006)

September 2006 (12.1p per share,
paid October 2006)

Total dividends

31 December 2006

31 December 2005

£000

38,667

31,437

70,104

£000

24,049

25,141

49,190

The dividends declared in March represent the final dividends paid in respect of the 2005 and
2004 financial years. Dividends declared in September are interim distributions in respect of 2006
and 2005.

A final dividend of 24.0p per share has been proposed in respect of the 2006 financial year. Refer
to the Chairman’s statement and financial review for further detail.

7 2 f I N A N C I A L S tAt e M e N t S

15. Earnings per share

31 December 2006

31 December 2005

Profit for the financial year after taxation (£000s)

103,722

84,720

Weighted average number of shares – basic

260,632,740

258,987,515

Unadjusted earnings per share – basic

39.8p

32.7p

Weighted average number of shares – diluted

Unadjusted earnings per share – diluted

260,906,740

39.8p

259,387,515

32.7p

The difference between the basic and diluted number of shares at the end of 2006 (being 274,000)
relates to awards committed, but not yet issued under the Group’s share schemes. Refer to note
26 for further detail.

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16. Property, plant and equipment

Computer
equipment

Office
equipment

Furniture and
fittings

Motor
vehicles

Total

Improvements
to short
leasehold
buildings

Cost

At 1 January 2005

Additions

Disposals

£000

1,931

567

(1,818)

6,792

2,742

2,978

155

(510)

1,627

150

(405)

13,340

3,614

(2,733)

At 31 December 2005

680

9,534

2,623

1,372

14,221

Depreciation

At 1 January 2005

Charge for the year

Disposals

1,554

226

(1,352)

4,424

1,179

2,467

355

(502)

1,545

(376)

At 31 December 2005

428

5,603

2,320

1,230

9,991

1,824

(2,230)

9,585

Net book amount

At 31 December 2005

252

3,931

303

142

4,636

Cost

At 1 January 2006

Additions

Disposals

680

1,655

(2)

9,534

1,672

(15)

2,623

1,684

(138)

1,372

441

(1)

14,221

5,452

(156)

At 31 December 2006

2,333

11,191

4,169

1,812

19,517

Depreciation

At 1 January 2006

Charge for the year

Disposals

At 31 December 2006

Net book amount

428

220

648

5,603

1,750

(5)

2,320

396

7,348

2,716

1,230

120

1,350

9,585

2,489

(5)

12,069

At 31 December 2006

1,685

3,843

1,453

462

7,448

7 4 f I N A N C I A L S tAt e M e N t S

The net book value of assets held under finance leases is as follows:

31 December 2006

31 December 2005

£000

2,996

Computer equipment

Office equipment

17. Intangible assets

Goodwill

Deferred
acquisition costs

Software

£000

Carrying amount:

At 1 January 2005

Additions

Amortisation charge

62,354

2,794

7,407

(6,873)

At 31 December 2005

62,354

3,328

Additions

Amortisation charge

6,179

(6,062)

At 31 December 2006

62,354

3,445

1,319

385

(896)

808

596

(446)

958

£000

2,380

767

3,147

Total

£000

66,467

7,792

(7,769)

66,490

6,775

(6,508)

66,757

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18. Financial assets

The Group’s financial assets can be analysed as follows:

Investments held at fair value

Receivables – amounts owed by
policyholders

Total financial assets

31 December 2006

31 December 2005

£000

257,634

138,304

395,938

£000

255,937

122,810

378,747

All receivables from policyholders are due within 12 months of the balance sheet date.

Analysis of investments held at fair value:

31 December 2006

31 December 2005

Money market funds

Fixed income securities:

Government bonds

Other listed securities

Variable interest securities:

Other listed securities

£000

257,634

£000

83,071

156,071

16,795

255,937

Management of credit and market risk
Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, the
Group only conducts business with companies with specified financial strength ratings.

The other primary form of credit risk is in respect of amounts due from policyholders. Credit risk
arises due to the potential for default on credit card payments. The impact of this is mitigated
by the large customer base and the low level of the average balance recoverable. This risk is
also mitigated by the operation of controls over this area including the automated cancellation
procedures for those policies in default, resulting in minimal financial impact.

The Group switched investment strategy during the second half of 2006, away from short
duration fixed income securities and into money market cash funds or cash deposits. Prior to this
change, the Group was exposed to market risk in terms of the impact of movements in market
interest rates on the carrying value of the investment funds. This risk has now been virtually
eliminated, as the money market funds are designed to achieve stable net asset values.

The Group’s investment returns should now directly track underlying market interest rates and
hence will rise or fall in line with this benchmark. At 31 December 2006, the Group had fully
liquidated the fixed income portfolios.

7 6 f I N A N C I A L S tAt e M e N t S

19. Reinsurance assets and insurance contract liabilities
A) Management of insurance risk:
The Group is involved in issuing motor insurance contracts that transfer risk from policyholders to
the Group and its underwriting partners.

Insurance risk primarily involves uncertainty over the occurrence, amount and timing of claims
arising on insurance contracts issued. The key risk is that the frequency and / or value of the
claims arising exceeds expectation and the value of insurance liabilities established.

There are a number of elements forming part of the Group’s strategy to manage insurance risk.
These include:

i) Co-insurance and reinsurance:
As noted in the underwriting structure section of the financial review above, the Group passes out
a significant amount of the motor insurance business written to external underwriters. In 2006,
65% of the risk was shared under a co-insurance contract, under which the primary risk is borne
by the co-insurer.

A further 10% was ceded under quota share reinsurance contracts.

As well as these proportional arrangements, an excess of loss reinsurance programme is also
purchased to protect the Group against very large individual claims and catastrophe losses.

ii) Data driven pricing:
The Group’s underwriting philosophy is focused on a sophisticated data-driven approach to
pricing and underwriting and on exploiting the competitive advantages direct insurers enjoy over
traditional insurers through:

• Collating and analysing more comprehensive data from customers;
• Tight control over the pricing guidelines in order to target profitable business sectors; and
• Fast and flexible responsiveness to data analysis and market trends.

The Group is committed to establishing premium rates that appropriately price the underwriting
risk and exposure. Rates are set utilising a larger than average number of underwriting criteria.

The Directors believe that there is a strong link between the increase in depth of data that the
Group has been able to collate over time and the lower than average historic reported loss ratios
enjoyed by the Group.

A D M I R A L G R O U P p l c 7 7

iii) Effective claims management:
The Group adopts various claims management strategies designed to ensure that claims are paid
at an appropriate level and to minimise the expenses associated with claims management. These
include:

•

An effective, computerised workflow system (which along with the appropriate level of
resources employed helps reduce the scope for error and avoids significant backlogs);
Use of an outbound telephone team to contact third parties aiming to minimise the potential
claims costs and to ensure that more third parties utilise the Group approved repairers;

• Use of sophisticated and innovative methods to check for fraudulent claims.

Concentration of insurance risk:
The Directors do not believe there are significant concentrations of insurance risk.

B) Sensitivity of recognised amounts to changes in assumptions:
The following table sets out the impact on equity at 31 December 2006 that would result from a
1 per cent change in the loss ratios used for each underwriting year for which material amounts
remain outstanding.

UNDERWRITING YEAR

TOTAL

2002

2003

2004

2005

2006

Loss ratio

54.5%

59.5%

69.0%

82.0%

89.5%

Impact of 1% change (£000s)

465

1,214

1,552

1,798

529

5,558

The impact is stated net of reinsurance and includes the change in net insurance claims along with
the associated profit commission movements that result from changes in loss ratios. The figures
are stated net of tax at the current rate.

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C) Analysis of recognised amounts:

Gross:

Claims outstanding

Unearned premium provision

Total gross insurance liabilities

Recoverable from reinsurers:

Claims outstanding

Unearned premium provision

Total reinsurers’ share of insurance
liabilities

Net:

Claims outstanding

Unearned premium provision

Total net insurance liabilities

31 December 2006

31 December 2005

£000

202,421

92,004

294,425

47,710

26,979

74,689

154,711

65,025

219,736

170,216

83,914

254,130

41,585

12,581

54,166

128,631

71,333

199,964

A D M I R A L G R O U P p l c 7 9

D) Analysis of re-estimation of claims provisions:

The following tables set out the cumulative impact, to 31 December 2006, of the retrospective re-
estimation of claims provisions initially established at the end of the financial years stated. Figures
are shown gross and net of reinsurance. These tables present data on an accident year basis.

Gross amounts:

Gross claims provision as originally
estimated

Provision re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Financial year ended 31 December

2002

£000

2003

£000

2004

£000

2005

£000

2006

£000

124,478

115,169

142,968

170,216

202,421

114,051

109,490

101,910

98,904

111,599

105,748

100,880

137,075

127,613

162,205

As re-estimated at 31 December 2006

98,904

100,880

127,613

162,205

Gross cumulative overprovision

(25,574)

(14,289)

(15,355)

(8,011)

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Net Amounts

Net claims provision as originally
estimated

Provision re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Financial year ended 31 December

2002

£000

2003

£000

2004

£000

2005

£000

2006

£000

71,071

75,549

98,120

128,631

154,711

64,325

61,167

55,974

53,857

72,579

67,726

63,954

93,910

87,761

122,423

As re-estimated at 31 December 2006

53,857

63,954

87,761

122,423

Net cumulative overprovision

(17,214)

(11,595)

(10,359)

(6,208)

E) Analysis of net claims provision releases:
The following table analyses the impact of movements in prior year claims provisions, in terms
of their net value, and their impact on the reported loss ratio. This data is presented on an
underwriting year basis.

Underwriting year:

2000

2001

2002

2003

2004

2005

Financial year ended 31 December

2003

£000

5,176

7,938

2,975

2004

£000

1,480

2,967

3,229

1,513

2005

£000

370

5,043

5,166

4,622

2,076

2006

£000

1,110

1,879

2,260

5,084

7,948

2,623

2002

£000

6,188

2,490

Total net release

8,678

16,089

9,189

17,277

20,904

Net premium revenue

81,336

79,327

107,501

139,454

144,955

Release as % of net premium
revenue

10.7%

20.3%

8.5%

12.4%

14.4%

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A D M I R A L G R O U P p l c 8 1

F) Reconciliation of movement in net claims provision:

Net claims provision at start of
period

Net claims incurred

Net claims paid

Net claims provision at end of period

31 December 2006

31 December 2005

£000

128,631

103,607

(77,527)

154,711

98,120

97,325

(66,814)

128,631

G) Reconciliation of movement in net unearned premium provision:

31 December 2006

31 December 2005

£000

71,333

138,647

(144,955)

£000

51,850

160,244

(140,761)

65,025

71,333

Net unearned premium provision
at start of period

Written in the period

Earned in the period

Net unearned premium provision
at end of period

20. Trade and other receivables

Trade debtors

Prepayments and accrued income

Total trade and other receivables

31 December 2006

31 December 2005

£000

14,982

1,949

16,931

£000

6,905

2,487

9,392

8 2 f I N A N C I A L S tAt e M e N t S

21. Cash and cash equivalents

Cash at bank and in hand

Cash on short term deposit

Total cash and cash equivalents

31 December 2006

31 December 2005

£000

164,989

26,253

191,242

£000

109,506

40,646

150,152

Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-
term deposits with original maturities of three months or less.

22. Financial liabilities

Interest bearing bank loans

Analysis of borrowings:

Repayments falling due within
12 months

Repayments falling due after
12 months

31 December 2006

31 December 2005

£000

22,000

31 December 2006

31 December 2005

£000

22,000

Interest continues to be charged on amounts drawn down based on LIBOR plus a margin.

23. Trade and other payables

Trade payables

Amounts owed to co-insurers and
reinsurers

Finance leases due within 12
months

Finance leases due after 12 months

Other taxation and social security
liabilities

Other payables

Accruals and deferred income
(see below)

Total trade and other payables

A D M I R A L G R O U P p l c 8

31 December 2006

31 December 2005

£000

4,601

124,238

1,337

4,742

13,708

66,450

215,137

£000

4,423

98,054

1,963

886

4,174

10,066

63,369

182,935

Analysis of accruals and deferred income:

31 December 2006

31 December 2005

Premium receivable in advance of
policy inception

Accrued expenses

Deferred income

Total accruals and deferred
income as above

£000

31,772

25,456

9,222

66,450

£000

30,471

24,559

8,339

63,369

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24. Obligations under finance leases

Analysis of finance lease liabilities:

31 At December 2006

Minimum
lease
payments

Interest

Principal Minimum
lease
payments

31 At December 2005

Interest

Principal

£000

Less than one year

Between one and five years

More than five years

1,383

1,446

1,337

2,171

921

208

1,963

886

1,398

3,092

243

2,849

It is the Group’s policy to lease certain of its IT equipment under finance leases. The average
lease term is two years. All leases are on a fixed repayment basis and no arrangements have been
entered into for contingent rental payments.

The fair value of the Group’s lease obligations approximates their carrying amount.

25. Deferred income tax liability

Brought forward at start of period

Movement in period

Carried forward at end of period

31 December 2006

31 December 2005

£000

3,550

(2,569)

981

£000

4,838

(1,288)

3,550

The net balance provided at the end of the year is made up as follows:

31 December 2006

31 December 2005

A D M I R A L G R O U P p l c 8 5

Tax treatment of Lloyd’s Syndicates

Tax treatment of share scheme
charges

Capital allowances

Other differences

Deferred tax liability at end of period

26. Share capital

Authorised:

500,000,000 ordinary shares of 0.1p

Issued, called up and fully paid:

261,186,599 ordinary shares of 0.1p

259,861,965 ordinary shares of 0.1p

£000

1,936

(853)

149

(251)

981

£000

3,816

315

(392)

(189)

3,550

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31 December 2006

31 December 2005

£000

500

261

500

260

During 2006, 1,324,634 new ordinary shares of 0.1p were issued to the trusts administering the
Group’s share schemes.

646,634 of these were issued to the Admiral Group Share Incentive Plan Trust for the purposes of
this share scheme. These shares are entitled to receive dividends.

678,000 were issued to the Admiral Group Employee Benefit Trust for the purposes of the
Admiral Group Senior Executive Restricted Share Plan. The Trustees have waived the right to
dividend payments, other than to the extent of 0.001p per share, unless and to the extent
otherwise directed by the Company from time to time.

8 6 f I N A N C I A L S tAt e M e N t S

Staff share schemes:
Analysis of share scheme costs (per income statement):

SIP charge (note i)

UFSS charge (note ii)

Total share scheme charges

31 December 2006

31 December 2005

£000

495

438

933

£000

263

175

438

(i) The Approved Share Incentive Plan (the SIP)
Eligible employees qualify for awards under the SIP based upon the performance of the Group
in each half-year against budget. The current maximum award for each half-year amounts to
600,000 shares (or a maximum annual award of £3,000 per employee if smaller). For the 2006
financial year, a maximum of 916,328 shares (2005: 1,181,565 shares) will vest under this scheme.

The awards are made with reference to the Group’s performance against its budget. Employees
must remain in employment until the vesting date (three years from the date of award), otherwise
the shares will be forfeited.

The fair value of shares awarded is either the share price at the date of award, or is estimated at
the latest share price available when drawing up the financial statements for awards not yet made
(and later adjusted to reflect the actual share price on the award date). Awards under the SIP are
entitled to receive dividends, and hence no adjustment has been made to this fair value.

(ii) The Unapproved Free Share Scheme (the UFSS)
This scheme is open to managers and exceptional performers within the Group (Henry Engelhardt
and David Stevens have elected not to participate) with variable awards available.

Under the scheme, individuals receive an award of free shares at no charge. A total of 380
employees received awards under this scheme during 2006. Staff must remain in employment
until the vesting date in order for the shares to vest. The maximum number of shares that can vest
relating to the 2006 scheme is 681,375.

In the 2005 scheme, for an award to vest, the total shareholder return (TSR) of Admiral Group
plc shares over the three years 2005 to 2007 must be at least equal to the TSR of the FTSE 350
index, of which the Company is a constituent. If the Company’s TSR does not meet this target, no
awards will vest under the 2005 UFSS scheme.

This initial hurdle has been removed for the 2006 scheme.

Individual awards are calculated based on the growth in the Company’s earnings per share (EPS)
relative to a risk free return (RFR), for which LIBOR has been selected as a benchmark. This
performance is measured over the same three-year period.

A D M I R A L G R O U P p l c 8 7

The range of awards is as follows:
If the growth in EPS is less than the RFR, no awards vest
•
• EPS growth is equal to RFR – 10% of maximum award vests
•

To achieve the maximum award, EPS growth has to be 36 points higher than RFR over the three
year period

Between 10% and 100% of the maximum awards, a linear relationship exists.

Awards under the UFSS are not eligible for dividends and hence the fair value of free shares to be
awarded under this scheme has been revised downwards to take account of these distributions.
The unadjusted fair value is based on the share price at the date on which awards were made
(being £3.62 for the 2005 scheme and £6.71 for the 2006 scheme).

Number of free share awards committed at 31 December 2006:

SIP H105 scheme

SIP H205 scheme

SIP H106 scheme

SIP H206 scheme

UFSS 2005 scheme

UFSS 2006 scheme
1st Award

UFSS 2006 scheme
2nd Award

Awards outstanding*1
581,565

330,306

316,328

274,000

685,000

604,187

77,248

Vesting date

September 2008

March 2009

September 2009

April 2010

June 2008

April 2009

September 2009

Total awards committed

2,868,634

*1 – being the maximum number of awards expected to be made before accounting for expected
staff attrition. Of the 2,868,634 share awards outstanding above, 2,591,199 have been issued to the
trusts administering the schemes, and are included in the issued share capital figures above.

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27. Analysis of movements in capital and reserves

Share
capital

Share
premium
account

Capital
redemption
reserve

Foreign
exchange
reserve

Retained
profit and
loss

Total
equity

£000

As at 1 January 2005

259

13,145

Retained profit for the
period

Dividends

Issues of share capital

Share scheme charges

As at 31 December 2005

260

13,145

Retained profit for the
period

Dividends

Issues of share capital

Currency translation
differences

Share scheme charges

Deferred tax credit on
share scheme charges

(50)

131,213

144,634

84,720

(49,190)

1,247

84,720

(49,190)

1,247

167,990

181,412

103,722

(70,104)

2,667

103,722

(70,104)

(50)

2,667

1,407

As at 31 December 2006

261

13,145

(50)

205,682

219,055

The capital redemption reserve arose in 2002 on the redemption of shares previously in issue at
below par.

The foreign exchange reserve represents the net gains or losses on translation of the Group’s net
investment in foreign operations.

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A D M I R A L G R O U P p l c 8 9

28. Financial commitments
The Group was committed to total minimum obligations under operating leases on land and
buildings as follows:

Operating leases expiring:

Within one year

Within two to five years

Over five years

Total commitments

31 December 2006

31 December 2005

£000

33,425

£000

434

29,523

29,957

Operating lease payments represent rentals payable by the Group for its office properties.

In addition, the Group had contracted to spend the following on property, plant and equipment
at the end of each period:

Expenditure contracted to

31 December 2006

31 December 2005

£000

1,539

£000

1,342

29. Group subsidiary companies
The Parent Company’s principal subsidiaries (all of which are 100% directly owned) are as follows:

Subsidiary

Country of
incorporation

Class of shares held

Principal activity

EUI Limited

England and Wales

Ordinary

General insurance
intermediary

Admiral Insurance
Company Limited

Admiral Insurance
(Gibraltar) Limited

Admiral Syndicate
Limited

Admiral Syndicate
Management Limited

Able Insurance
Services Limited

England and Wales

Ordinary

Insurance Company

Gibraltar

Ordinary

Insurance Company

England and Wales

Ordinary

England and Wales

Ordinary

Lloyd’s corporate
capital vehicle

Lloyd’s managing
agency

England and Wales

Ordinary

Intermediary

Inspop.com Limited

England and Wales

Ordinary

Internet insurance
intermediary

9 0 f I N A N C I A L S tAt e M e N t S

30. Related party transactions
There were no related party transactions occurring during 2006 that require disclosure. Details
relating to the remuneration and shareholdings of key management personnel are set out in the
remuneration report, above. Key management personnel are able to obtain discounted motor
insurance at the same rates as all other Group staff, typically at a reduction of 15%.

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A D M I R A L G R O U P p l c 9 1

Consolidated financial summary
Basis of preparation:
The 2006, 2005 and 2004 figures below are as stated in the financial statements preceding this
financial summary and issued previously. Only selected lines from the income statement and balance
sheet have been included.

Figures for 2002 and 2003 have not been restated under IFRS, although have been reclassified into
the formats used in these financial statements.

Income statement

Total motor premiums

Net insurance premium revenue

Other revenue

Profit commission

Investment and interest income

Net revenue

Net insurance claims

Total expenses

Operating profit

Balance sheet

Property, plant and equipment

Intangible assets

Financial assets

Reinsurance assets

Trade and other receivables

Cash and cash equivalents

Total assets

Equity

Insurance contracts

Financial liabilities

Provisions for other liabilities
and
charges

Deferred income tax

Trade and other payables

Current tax liabilities

Total liabilities

IFRS

2005

£m

533.6

139.5

93.4

14.7

15.5

263.1

(100.5)

(40.9)

121.7

2004

£m

470.4

107.5

69.5

21.7

11.9

210.6

(74.3)

(28.9)

107.4

UK GAAP

2003

£m

371.6

79.3

50.8

1.4

6.8

2002

£m

333.0

81.4

40.1

7.4

138.3

128.9

(43.5)

(34.4)

60.4

(52.6)

(28.5)

47.8

IFRS

UK GAAP

2005

£m

4.6

66.5

378.7

54.2

9.4

150.2

663.6

181.4

254.1

22.0

2004

£m

3.3

66.5

300.7

66.1

16.7

119.3

572.6

144.6

216.1

33.1

2003

£m

5.8

62.4

241.6

56.7

12.5

70.1

449.1

108.1

174.8

35.4

2002

£m

6.7

66.3

179.1

53.4

8.9

63.0

377.4

68.9

155.1

47.8

11.7

3.6

182.9

19.6

663.6

4.8

164.3

9.7

572.6

6.4

104.0

8.7

449.1

3.4

98.1

4.1

377.4

2006

£m

566.6

145.0

131.6

19.9

14.5

311.0

(107.1)

(55.5)

148.4

2006

£m

7.5

66.8

395.9

74.7

16.9

191.2

753.0

219.1

294.4

1.0

215.1

23.4

753.0

9 2 f I N A N C I A L S tAt e M e N t S

A D M I R A L G R O U P p l c 9

Parent Company financial
statements contents

Balance sheet

Basis of preparation

Accounting policies

96-97

Notes to the accounts

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Parent Company
financial statements

Parent Company balance sheet

Note

Fixed asset investments

Current assets

Debtors

Cash at bank and in hand

Creditors – falling due within one
year

Other creditors

Accruals and deferred income

Net current assets

Total assets less current liabilities

Creditors – falling due after one
year

Loans

Net assets

Capital and reserves

Called up share capital

Share premium account

Capital redemption reserve

Profit and loss account

Year ended:

31 December 2006

31 December 2005

£000

103,804

55,616

55,707

(6,857)

(183)

(7,040)

48,667

152,471

£000

103,804

59,808

59,812

(17,709)

(216)

(17,925)

41,887

145,691

(22,000)

152,471

123,691

261

13,145

139,048

152,471

260

13,145

110,269

123,691

These financial statements were approved by the Board of Directors on 5 March 2007 and were
signed on its behalf by:

Kevin Chidwick
Director

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A D M I R A L G R O U P p l c 9 5

Parent Company accounting policies
The following accounting policies have been applied consistently in dealing with items which are
considered material in relation to the financial statements:

1. Basis of preparation
In these financial statements the following new standards have been adopted for the first time:

• FRS 20 ‘Share-based payments’;
•
• FRS 28 ‘Corresponding amounts’.

the presentation requirements of FRS 25 ‘Financial instruments: presentation and disclosure’; and

The adoption of all three new standards did not have a material impact on either the current year
or comparative figures.

The Admiral Group plc Company financial statements have been prepared in accordance with
applicable accounting standards, under the historical cost convention and in accordance with the
provisions of Section 226 of, and Schedule 4 to, the Companies Act 1985.

As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Parent
Company is not presented. Under FRS 1 (Cash flow statements) the Company is exempt from
having to present a cash flow statement on the grounds that its cash flows are included in the
Group’s published consolidated financial statements.

The Company has taken advantage of the exemption in FRS 8 not to disclose transactions or
balances with its 90% or more owned subsidiary undertakings on the basis that the consolidated
accounts are publicly available.

The Parent Company audit fee is not disclosed in these accounts as it is disclosed in the
consolidated Group accounts which precede them at note 10.

2. Investments
Investments in subsidiary undertakings are valued at cost less any provision for impairment in value.

3. 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 sufficient taxable profits from which the future
reversal of the underlying timing differences can be deducted.

9 6 f I N A N C I A L S tAt e M e N t S

Notes to the Parent Company financial statements
4. Fixed asset investments

Investments in subsidiary undertakings

31 December 2006

31 December 2005

£000

103,804

£000

103,804

The Company’s principal subsidiaries (all of which are 100% directly owned) are disclosed in note
29 of the Group financial statements.

5. Debtors

Amounts owed by subsidiary
undertakings

Deferred tax asset

31 December 2006

31 December 2005

£000

6. Loans
Full details of the Company’s debt are included in the consolidated financial statements above.
The note, whilst prepared under IFRS also conforms to UK GAAP.

7. Other creditors – due within one year

Corporation tax payable

Amounts owed to subsidiary
undertakings

Other creditors

31 December 2006

31 December 2005

£000

6,775

6,857

£000

2,738

14,971

17,709

A D M I R A L G R O U P p l c 9 7

8. Reconciliation of movements in shareholders’ funds

Share
capital

£000

Share
premium
account

£000

Capital
redemption
reserve

Retained
profit and
loss

Total
equity

£000

At 1 January 2005

259

13,145

79,812

93,233

Retained profit for the period

Dividends

Issues of share capital

Share scheme charges

78,400

(49,190)

1,247

As at 31 December 2005

260

13,145

110,269

123,691

Retained profit for the period

Dividends

Issues of share capital

Share scheme charges

96,216

(70,104)

2,667

As at 31 December 2006

261

13,145

139,048

152,471

9. Share capital
Full details of the Company’s share capital are included in the consolidated financial statements above.

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9 8 N O t e S

Notes

D I R E C T O R S A N D A D V I S O R S

A D M I R A L G R O U P p l c

Directors and advisors

Notes

Company Secretary
Stuart Clarke

Registered Office
Capital Tower
Greyfriars Road
Cardiff CF10 3AZ

Bankers
Bank of Scotland
Corporate Banking
55 Temple Row
Birmingham B2 5LS

Joint Corporate Brokers

Actuarial advisors
Ernst & Young
1 More Place
London SE1 2AF

HSBC Business Banking
97 Bute Street
Cardiff CF10 5NA

Citigroup Financial Markets
UK Equity Limited
Citigroup Centre
33 Canada Square
London E14 5LB

Solicitor
Norton Rose
Kempson House
Camomile Street
London EC3A 7AN

Auditor
KPMG Audit Plc
Marlborough House
Fitzalan Court
Cardiff CF24 0TE

Lloyds TSB Bank Plc
City Office
Bailey Drive
Gillingham Business Park
Kent ME08 0LS

Merrill Lynch International
2 King Edward Street
London EC1A 1HQ

Registrar
Capita IRG Plc
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU

A year of success

Annual Report 2005

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Registered Number: 03849958. Admiral Group plc, Capital Tower, Greyfriars Road, Cardiff CF10 3AZ