MARC AFFIRMS ITS INSURER FINANCIAL STRENGTH RATING OF AA- ON LUXEMBOURG-BASED ATLANTICLUX LEBENSVERSICHERUNG S.A.

MARC has affirmed its insurer financial strength rating of AA- on Malaysian national rating scale on life insurer Atlanticlux Lebensversicherung S.A. (ATL). The outlook on the rating is stable. The affirmed rating is underpinned by ATL’s focus on underwriting relatively low-risk unit-linked life policies and maintaining a low retention of mortality risk. The rating is moderated by ATL’s relatively small market share in the unit-linked life insurance segment, a lack of product diversity and the challenging environment in Europe.

Luxembourg-based ATL predominantly underwrites unit-linked insurance policies in its key markets of Germany, Austria, France and Italy. The life insurer employs a business strategy of low investment and mortality risks; investment risks from the unit-linked business are borne solely by policyholders while the mortality risk are significantly ceded to large and well-established reinsurers with high security ratings. The approach largely insulates ATL from adverse changes in mortality and the investment environment. ATL’s business model also involves establishing favourable relationships with independent distributors in its key markets to sell its products. The sharp business growth in Italy in recent years was largely due to ATL’s ability to increase its distribution force in that country.

As a 74.9%-owned subsidiary of Munich-based FWU AG, a privately held financial services group, ATL is able to leverage on the expertise of its parent and related companies within the FWU group such as Premium Select Lux S.A. (PSL) and FWU Provisions-Factoring GmbH (FWU PF). ATL’s investment funds are managed by PSL while the financing of ATL’s commissions to independent distributors are provided by FWU PF. In addition, ATL is able to draw on FWU AG’s expertise in insurance product development. MARC views the strong strategic and operational linkages between ATL and FWU group would continue to support the growth of ATL’s unit-linked life policies. These notwithstanding, ATL’s performance would be constrained by relatively small business operations in its key markets and lack of product diversification.

For financial year 2013, ATL’s unit-linked insurance business accounted for approximately 99% of its gross written premium (GWP), which grew by a marginal 0.8% year-on-year to EUR129.5 million (2012: EUR128.5 million). The strong growth in Italy offset the contraction in Germany, Austria and France.

Italy was the main contributor to new business premium, accounting for EUR9.3 million (2012: EUR8.6 million) of total new business premium of EUR12.6 million (2012: EUR15.2 million). However, the growth rate in Italy market is expected to normalise in the next two years. Germany and Austria combined represented ATL’s largest market at 34.6% of total GWP, France at 34.1% and Italy’s share at 30.2% in 2013. The strong growth in the Italian market resulted in a more balanced geographical spread between the three key markets. The geographical diversification will be further enhanced following ATL’s expansion into Spain through an existing pan-European distribution partner in 2014.

ATL’s net profit increased by 79.8% y-o-y to EUR4.5 million in 2013 due to a decline in other technical provision expenses and despite lower net investment income as a result of downward revaluation losses. Return on assets (ROA) and return on equity (ROE) of 2.6% and 22.0% respectively compared to 1.7% and 14.2% respectively in the previous year. Notwithstanding the improved performance, earnings growth is sensitive to the growth of new business volumes, which in turn depends on ATL’s ability to maintain its competitive position as well as economic conditions in Europe, which remains challenging.

ATL’s capitalization levels remain commensurate to its rating level as indicated by its solvency ratio of 214.1% as at end-2013, supported by the insurer’s low retention of mortality and investment risk. As such, MARC does not anticipate the implementation of the more risk-sensitive Solvency II requirement in early 2016 to pose significant regulatory risk. 

The stable outlook on the rating is underpinned by MARC expectation that ATL will maintain its profitability levels and comfortable solvency position amid the tough operating environment in Europe.

Contacts: Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my; Ezra Vendargon, +603-2082 2257/ ezra@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my

January 20, 2015