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 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 small size, a high total financing commitments-to-total available capital ratio (TFC ratio) and its dependence on unit-linked products.

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 1.0% in 2015 (2014: 1.5%) and has continually reported RoA 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 EUR628m at end-2015, from EUR554m at end-2014, 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 score in Fitch's Prism factor-based model (Prism FBM) is 'Extremely Strong' based on year-end 2015 financials. This view is also supported by the company's regulatory Solvency I ratio of 271% at end-2015. Fitch expects ATL's Solvency II margin to be much lower, but to be higher than 125% even without transitional measures.

The quality of capital is also sound, as ATL does not rely on subordinated debt. Fitch expects that ATL will maintain a strong solvency position and will continue to upstream only moderate dividends to its parent company, FWU AG.

ATL's TFC ratio was high at 2.6x at end-2015, due to the issuance of several VIF notes guaranteed by ATL. 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. In addition, the provisions included in ATL's contractual agreements with its distribution partners significantly reduce the insurer's credit risk arising from lapses. Fitch estimates that ATL's TFC ratio improved to 2.3x at end-June 2016 and expects it to decline further to about 2.0x at end-2016.

However, ATL's TFC ratio will increase again if and when Salam III's third and final tranche of USD40m is issued. Fitch does not expect the TFC ratio to exceed 2.5x (the trigger level for a possible downgrade) for a sustained period as retained earnings and planned repayments of the existing notes will help reduce the TFC ratio.

ATL is fully-owned by FWU AG, which in turn is owned by Dr Manfred Dirrheimer (85%), Management Forum International GmbH, Muenchen (10%), a holding-company owned by the Dirrheimer family, and SwissRe Europe S. A. (5%).

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 for a sustained period could lead to a downgrade.