Insurer was seen as flagbearer for Gibraltar-based firms in dispute with HMRC

Admiral has dropped its fight with HM Revenue and Customs to claim back VAT, which means other Gibraltarian insurers in a similar position face an uphill task in clawing back money from the tax man.

The news comes amid growing concern that Admiral has little excess in claims reserves to deal with a potential surge in prior-year claims, with Oriel Securities analyst Marcus Barnard warning that the insurer is under-capitalised by £99m and will need to raise prices and cut volume.

Admiral vigorously rejects the allegation, stressing that it is well-capitalised and that capital buffers remain strong.

The tax dispute centred on Admiral’s underwriting links to Gibraltar, which meant it was allowed to claim back certain VAT charges from HM Revenue & Customs (HMRC).

An Admiral spokesman said this week: “We have pulled out of that process, partly because it was taking so long and partly because we saw that our chances of success dropped below 50%. We will see what happens with the other cases.”

Admiral has declined to reveal the amount of money involved, but Hastings previously stated that the VAT reclaim was worth £8.6m and Zenith marked down £2m.

Admiral, the largest insurer with an underwriting base in Gibraltar, was seen as a flag bearer in the fight with HMRC. Nonetheless, Hastings - which places business into Gibraltarian carrier Advantage - said it would continue discussions with the tax office. Markerstudy, which owns Gibraltar-based Zenith, was unavailable for comment.

Meanwhile, in the UK, Admiral is facing a fresh battle to convince the City that it can withstand a sting from prior-year claims,
without taking a hit in profit and dividends.

Barnard believes Admiral’s negative incurred but not reported (IBNR) figures are a problem, because there is little excess in claims reserves.

The negative IBNR is the difference between what Admiral’s claims department reserves for claims and the independent actuarial assessment combined with Admiral’s own internal view.

Management takes this into account to decide what should be reserved in the statutory accounts.

Admiral argues that the claims reserves are higher than the actuarial assessment of the ultimate outcome. This effectively means there is excess capital, which can be used for reserve releases if desired.

However, Barnard believes the negative IBNR indicates that Admiral has accelerated reserve releases, bringing forward profit from future accounting periods into current accounting periods.

He points to Admiral having to adjust its ultimate loss projections for 2009 because of worsening bodily injury data.

The company’s net reserves released were £4m in the first half of 2011, compared with £17m in the same period last year, owing to claims coming in from earlier years being worse than Admiral expected.

Barnard said: “The real problem is that bodily injury claims in the tail are now rising and, from our paid claims analysis, it appears that there is little excess in the claims reserves.”

Shore Capital’s Eamonn Flanagan said: “Negative IBNR is OK, provided that the claims experience is stable and not subject to big change. The problem for Admiral is that if the bodily injury claims kick in, then its claims experience deteriorates and then the negative IBNR causes a problem.”

Admiral said: “Our point, and our view on the world, is that we are actually over-capitalised and over-reserved, very much not under-capitalised and under-reserved.”

Talking points …

● Admiral is determined to prove the analysts wrong. The next 12 months will be crucial in determining the extent to which prior-year claims have or have not eaten up reserves, with a possible impact on profits and dividends.

● Now Admiral has dropped its fight against HMRC over the VAT reclaim, will other Gibraltarian insurers follow suit?

● The AA British Premium Index, an average basket of a range of insurers’ cheapest three quotes, shows prices fell 0.3% in the three months to September. How will motor insurers, battling double-digit claims inflation, cope now premium rises are slowing or decreasing?