Admiral Regulatory News (ADM)

7 Dec 2006 07:01

Admiral Group PLC07 December 2006 Coinsurance and Reinsurance Arrangements Admiral Group ("Admiral") announces that it has extended its long-termcoinsurance arrangement with Great Lakes Reinsurance (UK) PLC (Great Lakes), asubsidiary of Munich Re Group. Admiral has also signed new reinsurance contractswith Swiss Re and Partner Re. Proportional support by Munich Re and other leading reinsurers has been animportant part of Admiral's business model since its formation in late 1999.Admiral's first long-term proportional reinsurance contract was with Munich Reand provided support from January 2000. This was superceded by a new coinsurancecontract effective from January 2002 through Great Lakes . This contract was dueto lapse in December 2008. It has now been agreed that Great Lakes will continueto support Admiral's business beyond the end of the current agreement. The newextended agreement is a continuous contract. However, both parties have a rightto cancel with two years notice, exercisable no earlier than 31 December 2012. Admiral has also signed a five-year quota share contract with Swiss Re and atwo-year quota share contract with Partner Re. Swiss Re will reinsure 10% ofAdmiral's UK car insurance premium in 2007 to 2009 inclusive, and have an optionto reinsure 7.5% and 5% in 2010 and 2011. Partner Re will reinsure 7.5% ofAdmiral's UK car insurance premium in 2007 and 2008. Great Lakes Coinsurance Contract Great Lakes currently underwrites 65% of Admiral's UK private motor business.This percentage will decline by 5 percentage points each year from 2007 to 2011inclusive, so that in 2011 and thereafter 40% of Admiral's UK car insurancepremiums will be underwritten by Great Lakes . Admiral will be required, underthe terms of the contract, to underwrite for its own account at least 25% (22.5%for 2007 only) of its UK private motor business. The balance of the premium canbe underwritten by Admiral or reinsured elsewhere at Admiral's discretion. The current agreement with Great Lakes requires Admiral to seek Great Lakes'permission if Admiral wants to grow the number of policyholders in any onecalendar year by more than 11%. The new agreement includes a new, more flexible,growth cap, which allows Admiral to vary the speed of policy growth in responseto cyclical changes in underwriting profitability. Admiral does not believe thatthe new growth cap will have a material impact on the company's growth patternunless and until substantial premium inflation returns to the UK private carinsurance market. The contract also includes a revision of the profit commission structure. Aswith the existing contract, the level of profit commission paid by Great Lakesto the Group will continue to vary depending on the underwriting marginachieved. The revised commission arrangements are not expected to have amaterial impact on Admiral's reported profits in 2007 and 2008, mainly due todelayed recognition of underwriting profit (and hence profit commission)resulting from Admiral's conservative reserving policy. The profit commissionarrangement for 2010 onwards will potentially lead to substantially increasedprofit commission payments to Admiral per pound of premium ceded. Swiss Re and Partner Re Quota Share Contracts The Swiss Re and Partner Re quota share contracts provide additional andflexible protection against a negative insurance result (being the underwritingresult plus investment income). Protection is provided throughout the range ofprobable loss ratio outcomes and there is a cap on the extent of protectionprovided by these contracts. However, the profit commission arrangements allowAdmiral a greater share of the underwriting result than the current quota sharecontracts with Swiss Re and Axis. Admiral's Share of Premium The new quota share arrangements and the re-negotiation of the coinsurancecontract gives Admiral the following flexibility with respect to how much of itsUK car insurance premium it can underwrite itself: +------------------+---------------+---------------------+------------------+|Underwriting Year |Minimum Admiral|Committed to |Share that Admiral|| |share |Co-insurance and |has option to || | |Quota share contracts|insure or reinsure|+------------------+---------------+---------------------+------------------+|2007 | 22.5% | 77.5% | 0% |+------------------+---------------+---------------------+------------------+|2008 | 25.0% | 72.5% | 2.5% |+------------------+---------------+---------------------+------------------+|2009 | 25.0% | 60.0% | 15.0% |+------------------+---------------+---------------------+------------------+|2010 | 25.0% | 52.5% | 22.5% |+------------------+---------------+---------------------+------------------+|2011 | 25.0% | 45.0% | 30.0% |+------------------+---------------+---------------------+------------------+|2012 onwards | 25.0% | 40.0% | 35.0% |+------------------+---------------+---------------------+------------------+ Commenting on the extended contract, Admiral's Chief Executive Henry Engelhardt,said, "Admiral's use of coinsurance and reinsurance support has helped uscombine rapid growth with cash generation and significant dividend payments. Inaddition, it has helped us to provide our shareholders with a higher quality,lower risk profit stream by providing some protection against the underwritingcycle. "However, our consistent track record of outperformance versus the UK motormarket means that our underlying insurance business continues to generatereturns on capital significantly above our cost of capital. It makes sense forus to position ourselves for the next up-turn and to look to generate profitgrowth, not only through improved combined ratios, but also through the optionof keeping a larger share of the premium written for our own account. "Considering where we are in the UK car insurance underwriting cycle, we feel itis prudent to delay any substantial increase in Admiral's retained share atleast until 2009, especially given the availability of support from reinsurersof the calibre of Swiss Re and Partner Re." Henry Engelhardt goes on to say that, "Munich Re and its subsidiary, Great Lakeshave been fantastic partners for Admiral and we look forward to a long andmutually beneficial relationship for years to come. We are also glad to deepenour reinsurance relationships with Swiss Re and Partner Re. These contracts giveus a firm foundation for the growth of our UK business over the coming years." ANALYSTS: There will be a conference call today for analysts at 0830 GMT.Participants are invited to email Rob Bailhache at Financial Dynamics onrobert.bailhache@fd.com for the conference call details. For further information please contact: Financial Dynamics +44 (0)20 7269 7200 robert.bailhache@fd.comRob BailhacheNick Henderson www.admiralgroup.co.uk This information is provided by RNS The company news service from the London Stock Exchange