Admiral Group plc Results for the 6 months ended 30 June 2008

30 July 2008

Admiral announces another record half-year profit and continued strong growth. Profit before tax at £100.3 million was 16% ahead of H1 2007, whilst turnover rose 13% to £472.5 million.  The Board is therefore declaring a record dividend payment of 26.0p per share.

H1 2008 Highlights

*    Turnover is defined as total premiums written (including co-insurers' share), other revenue and net investment return. It is reconciled in the interim management report below.

Comment from Henry Engelhardt, Group Chief Executive

"When people in an organisation work together like people do at Admiral it makes my job very easy. I'm really proud of the results we've achieved in the first half of 2008. We set an all-time record for profits, the business grew in excess of 10%, and we will be paying a record dividend.  

"The growth in our UK business of 12% from the end of June last year (up 8% from January 1!) is down to competitive prices coupled with great service. Ours is very much a people business: people communicating with people and the team at Admiral try to treat every customer as someone special. Not only did the core business grow, but we increased our ancillary income per vehicle to £71, up from £68 a year ago.  

"We also continued to invest in our long-term future by developing our operations outside the UK. We now have 60,000 customers in Spain, more than 10,000 in Germany and saw the on-time, under-budget launch of our Italian operation at the end of May. Overall the business outside the UK contributed £15m in turnover in the first six months of the year.  

"It's a great set of numbers for the Group and as a result of this effort I'm very pleased to say that every member of staff who was here for the entire period (January 1 to June 30) will get £1,500 of free shares in the Group, with more than £3 million in shares being given out in total."  

Comment from David Stevens, Chief Operating Officer 

"Rises in market premiums and a relatively benign claims experience over the last 18 months mean that, for the first time in seven years, we see a real prospect of falling underlying loss ratios in our core UK business.

"Our high level of underwriting profitability, combined with the evidence of the market turning, have allowed us to negotiate new quota share reinsurance contracts for 2009 to 2011, which are more remunerative than any previous reinsurance contracts and are broadly comparable in cost to the use of subordinated debt to fund our growth.

"The prospect of higher underwriting margins and continued volume growth, combined with our improved reinsurance terms create a particularly positive environment for Admiral to improve its underwriting returns over the coming years."

Comment from Alastair Lyons, Group Chairman

"Our business has continued strongly profitable and cash generative over the last six months, with profit before tax up 16%. We are, therefore, very pleased to be able to declare a dividend of 26.0p, which is 26% higher than at the same point last year.

 "Our policy remains only to retain within the business what funds we need to provide a prudent contingency and support our plans for growth. In total our interim dividend will represent 95% of first-half earnings."

Interim management report

Key financial highlights

Profit before tax increased by 16% to £100.3m from £86.3m in H1 2007. Earnings per share grew by 19% to 27.3p per share (H1 2007: 23.0p).  

Group profit before tax is broken down as follows:

Most parts of the Group returned strong profit growth during the period. Another positive performance (including further positive reserve development) from the UK car insurance business contributed significantly to growth in underwriting profit of around 36% to just over £20m. This result led to higher profit commission income, which grew by over 50% to £14.3m.

Profit from ancillary products and services increased by 20% to £54.6m. Ancillary income per vehicle in the UK increased to £71, from £68 in H1 2007.

Confused.com, the Group's insurance price comparison business, gave a record number of motor quotes in the period and grew revenue compared to H1 2007. Having spent heavily on marketing to defend its market position, operating profit fell from £19.7m to £15.6m.

The number of customers serviced across the Group grew by 16% at 30 June 2008 compared to 30 June 2007 (and was up 9% on the position at 31 December 2007). Customer numbers are broken down as follows:

The UK motor book increased by 11% v H1 2007 and was up 7.4% on 31 December 2007. 

Balumba's (the Group's Spanish car insurer) vehicle count at 30 June 2008 was substantially higher than at 30 June 2007, though the business only really started to grow significantly around the half year point last year. Growth since 31 December 2007 was 27%. The management team's focus on improving the loss ratio is bearing fruit, with a significant improvement in the 2008 underwriting year loss ratio at month six compared to 2007 at the same point.

Commercial vehicle insurance broker Gladiator grew its business by over 45% since the middle of 2007 and served in excess of 20% more customers at 30 June 2008 compared to 31 December 2007.  

Turnover, comprising total premiums written (including premium underwritten by co-insurers), gross other income and net investment return (as a measure of the combined size of the Group's businesses) again grew strongly:

The overall growth of 13% includes growth in total premiums written of 12%, other revenue of 17% and net investment return of 24%.  

The Group's European businesses generated turnover of around £15m - approaching what was achieved in the whole of 2007.  

Geographical split of profit

A more detailed split of Group profit, including geographical analysis follows below. Each element is discussed in the notes following.

Underwriting 

Underwriting arrangements - 2008

As reported previously, Admiral increased its retention of UK motor premium to 27.5% in 2008 (from 22.5% in 2007). 55% of the UK total is underwritten by the Munich Re Group (specifically Great Lakes Reinsurance (UK) Plc) through a co-insurance agreement, and 17.5% is reinsured with Swiss Re and Partner Re.

The nature of the co-insurance arrangement is such that 55% of all motor premium and claims for the 2008 year accrues directly to Great Lakes and does not appear in the Group's income statement. Similarly, Great Lakes reimburses the Group for its proportional share of expenses incurred in acquiring and administering the motor business.

In Spain, Germany and Italy, the Group retains 35% of the premium generated, with 65% co-insured or reinsured by the Munich Re Group.

New arrangements - 2009 and beyond

The Group has reviewed its premium retention options going forward and in particular has considered the alternatives of further reinsurance against raising subordinated debt to fund its own retention. The costs of each are broadly similar. However, reinsurance offers significant advantages over subordinated debt. It offers risk protection. It does not include any carrying cost in advance of the risks for which it is required. It also offers the certainty of execution that recent debt markets cannot guarantee

Consequently, the Group has decided to put in place new reinsurance agreements for the period 2009-2011. Under the terms of the new quota share reinsurance contracts, Hannover Re and New Re (a subsidiary of Munich Re) will each reinsure 6.25% of Admiral's UK premiums for 2009 under new quota share reinsurance agreements. 

The new agreements run for a minimum of 3 years and include profit commission terms that allow for almost all of the underwriting profits to be rebated to Admiral. The after tax cost of the contracts to Admiral is projected to be approximately 1.2% of premium ceded. The new contracts allow for increased allocations to Hannover Re and New Re in 2010 and 2011, but also give Admiral an option to allocate further proportions of reinsurance to both for these years. 

Admiral will continue to underwrite 27.5% of its premiums for its own account next year.

The premium proportions for 2009-2011 are as follows:

* this amount includes Admiral's options on the new contracts (these options allow Admiral to allocate up to 5% additional reinsurance in 2010 and up to 10% in 2011 to be shared equally between Hannover Re and New Re).

Underwriting results - UK motor

UK motor premium written grew by just over 9% to £350m, whilst the number of UK cars insured grew by over 11% to 1.48m. Slightly lower average premium accounted for the difference in growth rates.

Our premiums are around 3% higher than a year ago at 30 June, which is 2 to 3 percentage points lower than the increases reported by the overall market. Our conversion data and market surveys suggest that our price increases were roughly in line with those for the market as a whole for the 9 months to end March 2008. We did not match the apparently substantial price increases reported for the market in April/May, which contributed to the robust growth in vehicle count in the first half of 2008.

The combined operating ratio improved substantially on H1 2007 - moving to 80.1% from 88.7%. Within this total, the reported loss ratio fell by almost 11 points to 62.0% whilst the expense ratio moved up to 18.1% from 15.8%.  

Reserve releases of £18.4m in H1 2008 positively impacted the reported UK motor loss ratio by 25%. This compares to £12.3m and 17% in H1 2007. There has been no change to the Group's reserving strategy over the period. 

The increase in the expense ratio primarily reflects the mathematical result of increased premium retention in 2008. On a like-for-like retention basis, the UK motor expense ratio was in line with the 16.7% reported for 2007 as a whole.

Underwriting results - European businesses

In Spain, Balumba generated total premium of £10.7m in the first half of 2008 and ended the period with just under 60,000 policyholders. Comparisons to 30 June 2007 are not meaningful, as the business had only just started to grow at the same point last year.  

As a result of rate increases along with other claims initiatives, the loss ratio has decreased from 141% at 31 December 2007 to 129% at the end of June 2008, whilst the combined operating ratio fell from over 230% for 2007 as a whole, to 175% at 30 June 2008 (the expense ratio fell from 91% to 47% primarily due to significant growth in earned premium).  

On an underwriting year basis, the 2008 loss ratio stood at 107% at month six, 42 points lower than 2007 at the same point in time. Management at Balumba continue to focus on the claims aspect of the business and are encouraged with the progress made.  

Elsewhere in Europe, AdmiralDirekt in Germany continues to improve its systems and prepare for the next renewal season, which takes place in the fourth quarter. Policies sold in late 2007 that came onto cover in January 2008 totalled around £2.5m. Since then, and until Q4 2008, volumes are expected be very small.

ConTe.it - the Group's new Italian car insurer launched successfully at the end of May and is working on marketing tests and continued improvements to systems. As with other launches, volumes will be small in the immediate future.

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.

During the first half of 2008 the Group has recognised £14.3m of income, which is over 50% up on the £9.4m in H1 2007. This is largely due to the impact of the increased reserve release recognised in this period.  

The Group has signed new reinsurance deals for 2009, which are substantially more remunerative to Admiral than the existing deals in place. These are covered in further detail above.

The reinsurance and co-insurance contracts entered into with Munich Re in Spain, Germany and Italy also contain profit commission clauses, though these require the underwriting results to move into cumulative profitability before any commission will be earned.  

Ancillary and other net income

Ancillary profit

This is primarily made up of commissions and fees earned on sales of insurance products (underwritten by external parties) and services complementing the motor policy. It continues to be a major component of Group profit.  

Net ancillary profit in the UK increased by 19% during the first half of 2008 to £44.2m.  

UK ancillary income per vehicle has increased over the past year and stood at £71 in the year to 30 June 2008 (up from £68 in the year to June 2007 and £69 to December 2007). 

Balumba continues to enjoy strong results in the sale of ancillary products, and in the six months to June 2008 has achieved average income per new business policy sold of around £59. We reported £45 in 2007 as a whole, and whilst currency movements account for part of the increase, there has also been a good underlying improvement.  

Gladiator 

Gladiator had a very positive first half of 2008, growing operating profit by over 50% from just under £1m to over £1.5m.  

The number of quotes provided grew by 63% to reach 184,000 (comparing favourably to 230,000 in the whole of 2007). Revenue also grew strongly to reach £4.9m in H1 2008, around a third up on last year.

The number of customers Gladiator services increased by around 46% year-on-year, and also increased by over 20% on 31 December 2007.

Confused.com

Confused gave nearly 6.4m motor quotes in the first half of the year - up from 6.1m in the same period last year and well up on the 5.3m in the second half of 2007. Total revenue also grew - by around 7% on H1 2007 to £36.6m.  

It has been Confused's strategy to spend heavily on marketing to defend its position in the price comparison market and as a result there has been a decrease in its operating margin.  

Confused achieved an operating profit of £15.6m, a decrease of a