Fitch Ratings has affirmed PrismaLife’s (PL) Insurer Financial Strength (IFS) rating at ‘BBB+’, Long-term Issuer Default Rating (IDR) at ‘BBB’ and senior bond rating at ‘BBB’. The Outlooks on the IDR and IFS ratings are Stable.
PL’s ratings reflect the unit-liked life insurer’s risk-averse insurance approach with limited insurance and investment risks as the policyholder carries the risk of falling equity markets. Remaining mortality and disability risk is largely reinsured, which Fitch views positively.
PL’s business approach has little regulatory capital requirement under the Solvency I regime, which resulted in a regulatory solvency position of over 1000% over the past years. However, Fitch expects that with the introduction of Solvency II, PL’s regulatory solvency margin will decrease significantly as the new regime reflects other sources of risk besides insurance risk, such as operational risk, asset risk and foreign exchange risk. Fitch views the company’s capitalisation as strong and recognises that PL’s capital position shows resilience in Fitch’s stress tests.
Fitch notes that concerns of decreasing new business as well as rising lapse rates did not materialise in the years after the financial crisis for PL, and gross premiums remained at EUR180m in 2009. At Q3 2010, gross premiums had increased by 9%, which reflects the recovering customer demand for unit-linked products.
Fitch notes that PL’s distribution mix is gradually moving away from its strongest distribution channel, AFA International AG, which is owned by Sky Tower Holding, which also majority owns PL. Fitch views this as credit neutral to date since a more widespread sales channel mix reduces dependencies. However, PL is able to exert greater control over the AFA channel than over independent brokers.
From 2008, PL changed the financing of acquisition costs. Acquisition costs were excluded from insurance premiums and their payment is governed by a separate contract among policyholders and their advisors. This changed PL’s earnings profile and led to a period of subdued earnings in 2009 and 2010. However, 2010 showed a trend of recovery of earnings generation and Fitch expects this to continue in 2011 and beyond.
Fitch notes that financial leverage remains high, although with a decreasing trend since PL’s capital increases as a result of retained earnings and limited dividends to date. Furthermore, the company reduced its amount of outstanding senior debt to EUR16.1m in 2010 from EUR20m, which positively affected debt leverage. Interest coverage dropped significantly in 2009/2010 as earnings decreased but show signs of improvements.
Other offsetting factors include PL’s dependency on unit-linked products and the lack of geographic diversification since 98% of the company’s revenues are within Germany. The rating is also constrained by the company’s limited scale and relatively short track record.
Continued improvement in franchise, diversification and scale of the company in conjunction with a decrease in financial leverage could lead to an upgrade. Significant and prolonged reduction in demand for PL’s unit-linked insurance policies leading to a deterioration of the company’s business profile would lead to a downgrade. An increase in leverage or a decrease in interest coverage would also lead to downward pressure on the ratings.
Source : Fitch Ratings Press Release