Fitch Affirms Admiral's IFS Rating at 'A '; Outlook Stable
The upgrade reflects the application of Fitch's recently updated notching criteria for the insurance sector, published on 14 July 2015. This followed the publication of an exposure draft of the criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.
Fitch has simultaneously upgraded Admiral's subordinated debt to 'BBB' from 'BBB-', in line with the upgrade of the issuing entity.
KEY RATING DRIVERS
The affirmation reflects Admiral's very strong capitalisation supported by solid and stable earnings, and prudent reserving practices. The ratings are constrained by Admiral's medium scale and concentrated business profile.
Admiral's capital position is 'extremely strong' as measured by Fitch's Prism FBM capital score, supported by significant use of co-insurance and reinsurance arrangements. These arrangements are secured under multi-year contracts until 2018 and 2016, respectively, providing substantial capital relief to Admiral. Fitch further views the credit quality of Admiral's co-insurance and reinsurance counterparties as very strong.
The ratings also reflect Admiral's strong track record of technical profitability as reflected in a reported combined ratio of 82.7% for 1H15 (1H14: 85.1%). The improvement in the combined ratio was mainly driven by higher reserve releases due to positive prior year claims development in the UK motor segment. Admiral's earnings are further supplemented by profit commissions stemming from its co- and reinsurance arrangements. Fitch expects profit commissions to remain a strong contributor to overall earnings given Admiral's track record of strong underwriting performance.
Fitch takes a positive view of Admiral's prudent reserving strategy. For 1H15, Admiral reported UK motor reserve releases of GBP92.6m (1H14: GBP73.1m), equivalent to 29% of net earned premiums. Over the past 10 years, Admiral's prior year reserve releases, excluding reserve releases on commuted reinsurance, have on average amounted to 13% of premiums earned. Even if market conditions do not improve in the near term, Fitch believes that Admiral's reserving position will leave it better placed than peers.
An upgrade is unlikely in the medium term given Admiral's concentrated business profile and limited geographical diversification.
A marked deterioration in technical and/or overall profitability, particularly compared with peers, could result in a downgrade. A downgrade could also be triggered by a substantial erosion of capital equivalent to a sustained increase in net underwriting leverage (premiums/equity) to 1.5x (2014: 0.8x).
A downgrade may also result from a loss of its co-insurance contract, resulting in an immediate and significant increase in capital requirements and/or significant falls in business volumes.