CREDIT ANALYSIS REPORT

ATLANTICLUX LEBENSVERSICHERUNG S.A. - 2015

Report ID 5174 Popularity 1296 views 4 downloads 
Report Date Jan 2016 Product  
Company / Issuer Atlanticlux Lebensversicherung S.A Sector Insurance Company
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Rationale

MARC has affirmed its insurer financial strength rating of AA- on Luxembourg-based Atlanticlux Lebensversicherung S.A. (ATL). The rating is based on the Malaysian national rating scale. The affirmed rating reflects ATL’s low business risk of primarily underwriting unit-linked life insurances, its low retention of mortality risk and steady profitability track record. These positive factors are moderated by its relatively small market share in the unit-linked life insurance segment and a lack of product diversity. The outlook is revised from stable to developing pending the outcome of a planned merger between ATL and Skandia Lebensversicherungs AG (Skandia Life), which offers unit-linked life insurance products in Austria and Slovenia. Skandia Life is a unit of Skandia Austria Holdings AG (Skandia Austria) which is being fully acquired by ATL’s parent company FWU AG.

ATL predominantly underwrites unit-linked insurance policies in Italy, France, Germany, Austria and Spain; of these, Italy continues to drive ATL’s growth, accounting for 36.4% of the gross written premium (GWP) amounting to EUR135.0 million in 2014. The fast-growing Italian market, which has offset the contraction in its more matured and traditional markets in Germany/Austria (30.8% of GWP) and France (31.2%), has benefitted from ATL’s improved distribution network of independent distributors. Nonetheless, as organic growth has been slow, ATL has opted to grow through acquisitions. In addition to the potential merger with Skandia Life, the insurer acquired a unit-linked portfolio amounting to EUR67 million from Kaupthing Pension and Life in August 2015.

MARC notes that ATL has remained focused on a low-risk business strategy; the insurer is insulated from adverse changes in mortality by significantly ceding mortality risk to reinsurers with high security ratings, while investment risks from the unit-linked business are borne solely by policyholders. ATL is now a wholly-owned subsidiary of FWU AG and continues to benefit from strong strategic and operational linkages with its parent and related companies within the FWU group, in particular on its investment funds management and insurance product development.

For 1H2015, ATL’s net profit increased by 22.6% y-o-y to EUR3.0 million (1H2014: EUR2.4 million) on the back of higher GWP of EUR68.9 million (1H2014: EUR67.0 million). The near-term prospects for ATL’s performance remain challenging given the economic conditions in Europe, although the group is strengthening its presence in newer markets. In addition to Italy where it has a strong distribution network of more than 1,200 distributors, ATL’s new market in Spain with 185 distributors has demonstrated strong growth with GWP of nearly EUR1.0 million in 1H2015 (2014: EUR325,000). Given its low economic capital intensity business model, ATL’s capitalisation levels remain strong with a solvency ratio of 257.6% as at end-2014. At this level, MARC does not anticipate the expected implementation of the more risk-sensitive Solvency II requirement in early 2016 to pose regulatory risk.

MARC will resolve the developing outlook upon assessment of the transaction and funding structures as well as the insurance portfolio profile once the merger is finalised. MARC believes that an upgrade could happen if the merger results in an improvement in ATL’s financial prospects. Conversely, pressure on the rating would arise if the merger results in a potential increase in ATL’s insurance portfolio and business risks.

Major Rating Factors

Strengths

  • Low insurance and investment risk-retention strategy;
  • Low regulatory capital requirements of its investment-linked business;
  • Reinsurance placed with leading global reinsurers; and
  • Technical expertise of parent company.

Challenges

  • Narrow product offerings;
  • Competitive landscape and challenging market environment in key markets; and
  • Execution risk of the merger.
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