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Fitch Rates Admiral Group Plc's Subordinated Debt 'BBB-(EXP)'
July 9, 2014 / 6:17 AM / in 3 years

Fitch Rates Admiral Group Plc's Subordinated Debt 'BBB-(EXP)'

(The following statement was released by the rating agency) LONDON, July 09 (Fitch) Fitch Ratings has assigned Admiral Group plc's (Admiral) proposed issue of subordinated debt securities an expected rating of 'BBB-(EXP)'. The final rating is contingent on the receipt of final documents conforming to information already received. Concurrently, Fitch has assigned Admiral Group plc an Issuer Default Rating (IDR) of 'A-'. Fitch has also assigned Admiral Insurance (Gibraltar) Limited and UK-based Admiral Insurance Company Limited, the two main operating entities of Admiral, Insurer Financial Strength Ratings (IFS) of 'A+'. The Outlook on all issuer ratings is Stable. The notes are rated three notches below Admiral's IDR of 'A-' to reflect their subordination and loss absorption features, in line with Fitch's notching criteria. KEY RATING DRIVERS The ratings reflect Admiral's solid risk-adjusted capitalisation, strong underwriting margins and prudent reserving. The ratings are constrained by Admiral's medium scale and concentrated business profile. Admiral is a leading insurer in the UK personal motor market and the owner of confused.com, one of four major UK price comparison websites. Admiral has grown rapidly over the last 10 years and now has an estimated 11% share of the UK personal motor market, with total turnover of GBP2.0bn in 2013 (2003: GBP422m). Fitch views Admiral's level of risk-adjusted capitalisation as solid for the rating level. This view is supported by substantial co-insurance and reinsurance arrangements, which provide significant capital relief to the group. Although the reliance of the business model on these arrangements could be regarded as potentially negative, Fitch currently views these structures as neutral to the ratings as the programmes are secured under multi-year contracts until 2016 and 2018, respectively. The proceeds from the subordinated notes are expected to be used to provide an additional capital buffer ahead of Solvency II implementation and to grow Admiral's international operations as part of its strategic plan. The subordinated bond has been structured to qualify as Lower Tier 2 capital under current UK regulations and to count as Tier 2 capital under Solvency II. According to Fitch's methodology, this subordinated bond is classified as 100% capital within Fitch's own capital assessment and is classified as 100% debt for the agency's financial leverage calculations. The securities are expected to be issued with a 10-year bullet maturity and will pay a fixed coupon semi-annually. Fixed-charge coverage is expected to be solid given Admiral's strong track record of earnings generation. Admiral's ratings are further supported by its strong underwriting margins, reflected in a Fitch-calculated combined ratio (CR) of 81.2% in 2013. In addition, the group's co-insurance and reinsurance arrangements allow for profit commissions which vary with the level of underwriting profits on the business. Admiral's CR, including the beneficial effect of profit commissions, was 60%, the lowest within Fitch's rated UK non-life universe. Fitch expects profit commission to remain a strong contributor to technical results given Admiral's robust track record of technical profitability, reflected in a five-year average CR of 89.7% (70.2% including profit commissions). Fitch views Admiral's prudent reserving strategy positively. On average, Admiral's prior year reserve releases over the past 10 years have amounted to 12% 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. RATING SENSITIVITIES An upgrade is unlikely in the medium term given Admiral's concentrated business profile and limited geographical diversification. A downgrade could be triggered by a substantial erosion of capital, equivalent to a sustained increase in net underwriting leverage (premiums/equity) to 1.5x (2013: 0.9x). A marked deterioration in technical and/or overall profitability, particularly compared with peers, could also result in a downgrade. 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. Contact: Primary Analyst Anna Bender Associate Director +44 20 3530 1671 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Martyn Street Senior Director +44 20 3530 1211 Committee Chairperson Harish Gohil Managing Director +44 20 3530 1257 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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