Aug 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Salam III Limited’s USD100m insurance-linked Sukuk (Islamic bond) programme an expected rating of ‘BBB-(EXP)'. Fitch has also assigned a rating of ‘BBB-(EXP)’ to the proposed first USD20m tranche under the programme. ATLANTICLUX Lebensversicherung S.A. (ATL) acts as ultimate obligor in the programme, which is sponsored by ATL’s parent company FWU AG.
The final rating is contingent on the receipt of final documents confirming the information already received.
The Sukuk programme’s rating is the same as ATL’s Long-term Issuer Default Rating (IDR). This is because despite having some structured elements, Fitch has treated the Sukuk programme as effectively having the same credit characteristics as a senior unsecured corporate obligation of ATL. This is due to its partly recourse nature, and what Fitch views as a lack of bankruptcy remoteness in the structure. Each tranche of the Salam III Sukuk programme will have its final payment date five years after its issuance. The first tranche of USD20m is currently planned to be issued in September 2013.
Salam III Limited is a limited, non-cellular company duly incorporated under The Company (Guernsey) Law 2008 that has been set up specifically to issue the Sukuk programme and enter into a swap agreement with Salam III A IC Limited, an incorporated cell of Salam ATL Re ICC Limited. The cell is 100% owned by AON Services (Guernsey) Limited. Salam III A IC Limited acts as a “transformer vehicle” in this transaction and enters into a reinsurance contract with ATL. Through this reinsurance contract, ATL cedes 90% of the remaining mortality risk to Salam III A IC Limited and part of the lapse risk from a designated block of new business policies. A retrocession contract has been set up between Salam III A IC Limited and Partner Reinsurance Europe Ltd. (IFS ‘AA-'/Stable) for all mortality risk in the designated portfolio and therefore leaves Salam III A IC Limited retaining only lapse risk which is then transferred by the swap agreement to Salam III Limited.
Proceeds from the programme will be used to finance upfront acquisition costs of new business. The Sukuk programme has no material impact on ATL’s credit fundamentals such as financial leverage or capitalisation. Fitch views positively that the programme increases the diversification of ATL’s financing of acquisition costs, which is currently dominated by a factoring agreement with FWU AG.
However, when the programme’s total of USD100m is issued, ATL’s total financing commitments to total available capital (TFC) ratio will increase to 2.4x from 0.8x. Although this is a relatively high ratio it does not currently affect ATL’s ratings, as the programme will be paid back through acquisition fees included in the insurance premiums of the designated block of new business policies and ATL’s contractual agreements with its distribution partners which significantly reduce the insurer’s credit risk arising from lapses.
A change of ATL’s IDR would also lead to a change of the rating of the Salam III Sukuk programme.
Key ratings triggers for an upgrade of ATL’s IDR include continued improvements in ATL’s franchise and scale, and stability in the insurer’s GWP developments in the various countries, while maintaining strong capitalisation.
Fitch views a downgrade of ATL’s IDR in the near term as unlikely. However, a significant and sustained deterioration in profitability resulting in a return on assets below 0.20% over a prolonged period of time could result in a downgrade. Additionally, the TFC ratio increasing to more than 3x could lead to a downgrade.
ATL offers unit-linked and term insurance products, predominantly in Germany, France and Italy. ATL had total assets of EUR588.6m at end-2012 and is owned by FWU AG (74.9%) and by VHV (25.1%), a medium-sized German insurance group. FWU AG is owned by nine partners (95%) and SwissRe Frankona (5%).