CREDIT ANALYSIS REPORT

Atlanticlux Lebensversicherung S.A. - 2011

Report ID 4056 Popularity 1744 views 27 downloads 
Report Date Oct 2011 Product  
Company / Issuer Atlanticlux Lebensversicherung S.A Sector Insurance Company
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Rationale

MARC has assigned an insurer financial strength of AA- on Malaysia’s national rating scale to Luxembourg-based Atlanticlux Lebensversicherung S.A. (ATL). ATL's insurer financial strength rating incorporates its satisfactory operating performance and comfortable solvency position that is supported by its focus on low capital-intensity investment-linked life insurance business and significant reinsurance protection for mortality risks. Moderating rating considerations include the prospects of subdued investment-linked insurance sales under continued challenging market conditions, competition from larger and more established players in the investment-linked insurance sector in ATL's key markets, and its lack of product diversification. The outlook on the rating is stable.

ATL is 74.9% owned by privately-held Munich-based financial services group FWU Group; the remaining 25.1% is held by German insurance group VHV Holdings. The Luxembourg-based ATL predominantly writes investment-linked life insurance in its key markets of Germany, Austria, France and Italy. The investment risk of unit-linked insurance policies with no guaranteed returns is borne solely by policyholders while the investment risk associated with peak value guarantees provided on nearly 80% of its unit-linked insurance policies is allocated to an external party. MARC notes significant strategic and operational linkages between ATL and related entities within the FWU Group, in particular asset management company Premium Select Lux S.A. (PSL) and commission factoring company FWU Provisions-Factoring GmbH (FWU PF). PSL manages ATL's investment funds while FWU PF supports the commission-based financing provided by ATL to its distributors. MARC believes that the aforementioned strategic and operational linkages create ongoing reputation and performance dependencies among group entities with broad credit implications for ATL.

Unit-linked insurance business accounted for 96.6% of ATL's gross premiums of EUR108.8 million for the twelve months ended December 31, 2010 (FY2010). The declining popularity of investment-linked products in Germany resulted in declining premium income from Germany in 2009 and 2010. The contraction in premium income from Germany and France in the last two financial years was, however, partly offset by strong growth in the Italian market. While premiums have declined at a more modest pace of 4.6% in 2010 compared to a decrease of 8.7% in 2009, ATL appears to be lagging behind the German and French life insurance markets in terms of recovery. The German life sector posted an 8.0% growth in gross premiums in 2010 while the French life sector recorded a 4.9% growth in gross premiums. The combined markets of Germany/Austria were ATL’s largest markets, accounting for 47.2% of ATL's gross written premiums (GWP) in 2010, down from 49.5% in 2009. France contributed 41.4% of ATL's GWP in 2010, while Italy contributed 11.4%.

While ATL's focus on fee-based unit-linked products has helped protect its profitability in the context of difficult financial market conditions, it has also increased the company's exposure to changes in demand away from unit-linked products toward non-capital guaranteed and equity backed products. ATL's average return on assets (ROA) and return on equity (ROE) of 1.65% and 10.6% respectively for the three-year period, 2008 to 2010, have remained adequate, albeit significantly down from pre-financial crisis levels. The firm posted a net profit of EUR1.8 million in 2010, an improvement from the EUR1.4 million reported in 2009, although this is lower than historical pre-financial crisis levels. Given the decline in premium income, the firm’s bottom line was mainly driven by an increase in investment income and unrealised gains on investments. ATL's technical results were also weighed down by a 50% increase in acquisition costs which was largely due to initial start-up costs to increase the distributorship in Italy. MARC believes that prospects for premium growth and further earnings improvement are likely to be constrained by low investment yields, increased volatility in equity markets as well as the clouded economic outlook for its key markets.

ATL's capitalisation remains supportive of its rating level, as indicated by its reported solvency ratio of 184.8% as at end-2010. The insurer's capital position is supported by its focus on low-risk unit-linked products and sound reinsurance protection for mortality risks.

The stable outlook on the rating assumes sustained underlying profitability on ATL's return on asset and equity measures and the maintenance of its comfortable solvency position while acknowledging the uncertainties around the economic environment in its key markets.

Strengths

  • Low insurance and investment risks retention strategy;
  • Low regulatory capital requirements of its investment-linked business; and
  • Company’s reinsurance is placed with leading global reinsurers.

Challenges

  • Narrow product offerings;
  • Competitive landscape and sluggish economic outlook in key markets poses challenges to growth; and
  • Lack of economies of scale as a result of small size and limited operational track record.
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