OREANDA-NEWS. Fitch Ratings has affirmed Admiral Insurance (Gibraltar) Limited's and UK-based Admiral Insurance Company Limited's - the two main operating entities of Admiral Group plc (Admiral) - Insurer Financial Strength (IFS) ratings at 'A+'. The agency has also affirmed Admiral's Issuer Default Rating (IDR) at 'A' and its subordinated notes at 'BBB'. The Outlook on the IFS ratings and IDR is Stable.

KEY RATING DRIVERS

The affirmation reflects Admiral's leading position in the UK motor insurance market, 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. The insurer's financial profile, including capitalisation benefits from significant use of co-insurance and reinsurance arrangements, with Admiral sharing 40% of all its UK insurance risks with Great Lakes, a subsidiary of Munich Re (IFS AA/Stable). These arrangements are secured under multi-year contracts until 2018, providing substantial capital relief to Admiral. Fitch views the credit quality of Admiral's co-insurance and reinsurance counterparties as very strong.

The affirmation also reflects Fitch's expectation that Admiral will maintain its robust underwriting performance and benefit from continued increases in motor insurance premiums in 2016. Admiral's strong track record of technical profitability is reflected in a reported combined ratio of 85.6% for 2015 (2014: 86.5%).

Fitch views Admiral's prudent reserving strategy positively. For YE15, Admiral reported UK motor reserve releases of GBP173.4m (2014: GBP137.4m) driven by a positive development of prior years' claims. Over the past 10 years, Admiral's prior year reserve releases, excluding reserve releases on commuted reinsurance, have on average amounted to 14% of premiums earned. The agency also expects rising motor insurance premiums to reduce some of the reliance on prior year reserve development to supplement earnings.

RATING SENSITIVITIES

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 (2015: 0.8x).

A downgrade may also result from a loss of Admiral's co-insurance contract, resulting in an immediate and significant increase in capital requirements and/or significant falls in business volumes.