Admiral Group said it could move its European business to Ireland or another country if British insurers lose their right to sell their products across the European Union as a consequence of leaving the bloc.
Admiral also said on Wednesday that tumbling interest rates following Britain’s vote in June to leave the EU had hit its solvency ratio, sending shares in the insurer down 8.5 per cent to 2,062 pence in early trading.
Insurers are making contingency plans after the Brexit vote left them facing the risk they could lose "passporting" rights that allow UK financial services firms to trade in Europe without the need for locally regulated entities.
“If passporting is withdrawn then Dublin would be one of the places within Europe where we might look to base our European underwriting from,” chief financial officer Geraint Jones said, adding there would be no short-term decision.
Continental operations
Admiral, one of Britain’s largest car insurance providers with a market share of more than 11 per cent, also has operations in Spain, Italy and France.
“There is probably more logic in being based in a place where we already have an infrastructure and an operation,” he said.
Dublin is a favoured alternative base to London for insurers due to its proximity and similar regulatory regime, as well as Ireland being an English-speaking country and having low corporate taxes.
The company announced a solvency capital ratio of 180 per cent under new European rules, adding that the ratio was 196 percent when calculated on a “volatility adjusted basis”.
The ratio was 206 per cent in 2015. Solvency II dictates the amount of capital an EU insurer must hold to reduce the risk of insolvency.
Default risk
The lower the ratio, the greater the chances of a company defaulting on its obligations. The rules require Admiral to calculate periodic payment claims liabilities at a “risk-free” interest rate. When interest rates fall, the cost of these liabilities rise.
“What we saw post-Brexit was fairly significant falls in risk-free interest rates. And so, basically, lower interest rates means bigger liability valuation and hence less capital and a lower solvency ratio,” Mr Jones said.
Analysts expect the lower ratio to reduce its ability to return cash to shareholders. Admiral has said that it would return between £150 million and £200 million of surplus capital over two to three years, subject to uncertainties.
"This is now expected to be £100-£150 million because the Solvency II ratio has proven volatile in the wake of UK Leave vote," UBS analysts said.
The company reported a 4 per cent rise in first-half statutory pretax profit, just below analyst estimates. It said it would pay an interim dividend of 62.9 pence per share, up 23 per cent from a year earlier and above a forecast of 59.2 pence. – (Reuters)
