annual report 2007 - the Admiral Group plc

ADMIRAL GROUP plc 73demand. Any such borrowings would be subject to variable interest rate changes, at LIBOR plus amargin. However the Group has not held any drawn down amounts on this facility since 2005.Credit riskThe Group defines credit risk as the risk of loss if another party fails to perform its obligations orfails to perform them in a timely fashion.Amounts recoverable from reinsurers expose the Group to credit risk. To mitigate this risk, theGroup only conducts business with companies of specified financial strength ratings. In addition,management also contract with certain reinsurers on a funds withheld basis, which substantiallyreduces credit risk.The other principal form of credit risk is in respect of amounts due from policyholders due tothe potential for default on credit card payments. The impact of this is mitigated by the largecustomer base and low average level of balance recoverable. There is also mitigation by theoperation of numerous high and low level controls in this area, including payment on policyacceptance as opposed to inception and automated cancellation procedures for policies indefault.Financial statements 43 - 94The fair value of receivables from policyholders represents the maximum exposure to creditrisk. The Group does not use credit derivatives or similar instruments to mitigate exposure. Theamount of bad debt expense relating to policyholder debt charged to the income statement in2006 and 2007 is insignificant.There are no specific concentrations of credit risk with respect to investment counterparties dueto the structure of the liquidity funds which invest in a wide range of very short duration, highquality securities.There were no significant financial assets that were past due at the close of either 2007 or 2006.Foreign exchange risksForeign exchange risks arise from unfavourable movements in foreign exchange rates that couldadversely impact the valuation of overseas assets.The Group may be exposed to foreign exchange risk through its expanding operations in Europe.However, given the relative size of the European operations, the risks are relatively small. Assetsheld to fund insurance liabilities are held in the currency of the liabilities.A sensitivity analysis based on fluctuations in foreign exchange risk has not been presented onmateriality grounds.