OREANDA-NEWS. Fitch Ratings has affirmed Luxembourg-based ATLANTICLUX Lebensversicherung S.A.'s (ATL) Insurer Financial Strength (IFS) rating at 'BBB+' and Long-term Issuer Default Rating (IDR) at 'BBB'. The Outlooks are Stable.

Fitch has also affirmed ATL's SQ ReVita value of business in-force (ViF) transaction and its Salam III Sukuk (Islamic bond) programme at 'BBB'.

KEY RATING DRIVERS
The affirmation reflects ATL's track record of strong profitability, low investment risk and strong capital position. These positive rating factors are partly offset by ATL's dependence on unit-linked products, its small size, and high total financing & commitments (TFC) to total available capital ratio.

SQ ReVita and Salam III Sukuk are rated at the same level as ATL's IDR. This is because, despite their structured features, Fitch treats these 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 structures.

Fitch views ATL's bottom-line profitability as strong. Despite its cost-intensive distribution channels, ATL achieved a return on assets (RoA) of 1.6% in 2014 (2013: 1.1%; 2012: 0.6%) and has continually reported RoAs of more than 0.5% since 2007.

ATL's fee income, and hence earnings, depend on the market value of assets under management, which increased to EUR547m at end-2014 from EUR526m at end-2013, supporting the company's earnings prospects.

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

ATL's Prism factor-based model (Prism FBM) score was 'Extremely Strong' based on year-end 2014 financials. This view is also supported by the company's regulatory solvency ratio of 258% at end-2014 (end-2013: 214%). The quality of capital is also good, as ATL does not rely on subordinated debt. Fitch expects that ATL will maintain its strong solvency levels and will continue to upstream only moderate dividends to its parent companies, FWU AG and VHV. In 1H14, ATL's shareholders used 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 by reducing the distributable proportion.

ATL reported gross written premiums of EUR135.0m in 2014 (2013: EUR129.5m) and new business volume of EUR883.1m (2013: EUR814.7m). ATL's strong new business growth of 8.4% in 2014 compares favourably with the German life insurance market, which reported an increase of 5.5% in new business volume for 2014, and shows the benefits of ATL's diversification by geography.

ATL's TFC ratio increased to 1.9x at end-2014 from 0.9x at end-2013 following the issuance of Salam III's second tranche of USD40m in April 2014 and the issuance of additional USD70m ViF-linked notes via a private placement in December 2014. Although this is a high ratio, it is currently not affecting ATL's ratings, as ATL's ViF notes are paid back through acquisition fees included in the insurance premiums of the designated blocks of business policies. In addition, the provisions included in ATL's contractual agreements with its distribution partners significantly reduce the insurer's credit risk arising from lapses.

ATL's TFC ratio will increase further if and when Salam III's third and final tranche of USD40m is issued. However, Fitch does not expect the TFC ratio to exceed 2.5x (the trigger level for a potential downgrade) for a sustained period as retained earnings and planned repayments of the existing notes will help reduce the TFC ratio. ATL currently does not plan to issue the programme's third tranche, but has the option to do so until October 2018.

ATL offers unit-linked and annuity products in Italy, France, Germany and Spain. The company had total assets of EUR621.6m at end-2014, and is owned by FWU AG (74.9%) and VHV (25.1%). FWU AG is owned by Management Forum International GmbH, Muenchen (10%), a holding-company owned by the Dirrheimer family, Dr Manfred Dirrheimer (85%) and SwissRe Europe S.A. (5%), and VHV is a medium-sized German insurance group.

RATING SENSITIVITIES
An upgrade of ATL's ratings is unlikely in the medium term, due to the insurer's small size. However, over the longer term, key ratings triggers for an upgrade include significant improvements in the company's franchise and scale.

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.