RPT-Fitch Upgrades ATLANTICLUX's IFS to 'BBB+'; Outlook Stable

Thu Jul 3, 2014 4:24am EDT

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July 3 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded Luxembourg-based ATLANTICLUX Lebensversicherung S.A.'s (ATL) Insurer Financial Strength (IFS) rating to 'BBB+' from 'BBB' and its Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. The Outlook is Stable.

At the same time Fitch has upgraded ATL's SQ ReVita Value of Business In-Force transaction and its Salam III Sukuk (Islamic bond) programme to 'BBB' from 'BBB-'.

KEY RATING DRIVERS

The upgrade reflects ATL's track record of strong profitability. The rating reflects the life insurer's low investment risk and its strong capital position. These positive rating factors are partly offset by ATL's dependence on unit-linked products and its fairly small size.

SQ ReVita and Salam III are rated at the same level as ATL's IDR. This is because despite their structured features, Fitch treats both transactions as effectively having the same credit characteristics as a senior unsecured corporate obligation of ATL. This is due to their partly recourse nature, and what Fitch views as a lack of bankruptcy remoteness in the structure.

Fitch views ATL's bottom-line profitability as strong. Despite its cost-intensive distribution channels ATL achieved a return on assets (ROA) of 1.08% in 2013 (2012: 0.56%) and has continually reported ROAs above 0.5% since 2007. ATL's earnings also depend on the market value of assets under management (AuM). The company achieved a 2.1% yoy increase of AuM to EUR526.1m at end-2013, which supports its earnings prospects.

ATL faces only limited direct investment risks as policyholders or other external parties that provide guarantees offered within ATL's products carry the risk of falling equity markets. The remaining mortality and disability risks are largely reinsured.

ATL's capitalisation, based on Fitch's risk-based capital assessment, is strong as is the company's regulatory solvency ratio of 214% at end-2013 (2012: 178%). It should be noted that ATL has achieved its strong capitalisation without issuing subordinated debt. Fitch expects that ATL will maintain its strong solvency levels, assuming that the insurer will continue to upstream only moderate dividends to its parent companies, FWU AG and VHV. In 2014, ATL's shareholders decided to use EUR14.9m of retained earnings to increase the company's paid-in capital. Fitch views this as positive as it improves the quality of ATL's capital.

ATL's gross written premiums (GWP) rose in 2013 as premium income increased 0.8% to EUR129.5m and the company's new business volume increased 6% to EUR815m. In 2012 and 2011 ATL showed strong GWP growth of 11.8% and 5.6% respectively. This compares favourably with the German life insurance market, which reported a 11.6% decline of new business volume in 2013 (2012: -2.4%) and shows the benefits of ATL's diversification by geography over product. Fitch will continue to monitor ATL's premium development as customer demand for unit-linked insurance products tends to decrease when uncertainty about capital markets increases. In terms of product diversification Fitch views positively that ATL introduced takaful (Islamic insurance) life insurance products in Germany and France in 2013. ATL's new business development is expected to benefit from the company introducing a single-premium product in Italy, new distribution co-operations in France and ATL entering the Spanish market in collaboration with one of its existing distribution partners during 2014.

When Salam III's entire USD100m has been issued, ATL's total financing commitments to total available capital (TFC) ratio will increase to 2.1x from 0.9x at end-2013 (including the programme's first tranche of USD20m issued in October 2013). Although this is a fairly high ratio, it does not currently affect ATL's ratings. This is because the programme will be paid back through acquisition fees included in the insurance premiums of the designated block of new business policies and because of the provisions included in ATL's contractual agreements with its distribution partners, which significantly reduce the insurer's credit risk arising from lapses.

ATL offers unit-linked and annuity products, predominantly in Italy, France and Germany. The insurer had total assets of EUR599.1m at end-2013 and is owned by FWU AG (74.9%) and VHV (25.1%), a medium-sized German insurance group. FWU AG is owned by nine partners (95%) and SwissRe Europe S.A. (5%).

RATING SENSITIVITIES

An upgrade of ATL's ratings is unlikely in the medium term. However, over the longer term key ratings triggers for an upgrade include significant improvements in the company's franchise and scale, with levels of both GWP and capitalisation maintained or increased.

A significant and sustained deterioration in profitability resulting in a ROA below 0.4% over a prolonged period could result in a downgrade. Additionally, an increase in the TFC ratio to more than 2.5x could lead to a downgrade.

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