Fitch Ratings has affirmed Irish Life Assurance plc’s (Irish Life) Insurer Financial Strength (IFS) rating at ‘BBB+’ and Long-term Issuer Default Rating (IDR) at ‘BBB’ and assigned both ratings a Negative Outlook. Irish Life’s subordinated debt has also been affirmed at ‘BB+’ and all three ratings have been removed from Rating Watch Negative (RWN).
Irish Life is the main insurance subsidiary of Irish Life & Permanent Plc (ILP). ILP’s Individual Rating was today affirmed at ‘E’ and its Support Rating maintained at ‘2’. Both ratings were removed from RWN. The Irish sovereign’s rating of ‘BBB+’ was yesterday assigned a Negative Outlook and removed from RWN. (See ‘Fitch Affirms Irish Banks on Sovereign Action’, dated 15 April 2011, and ‘Fitch affirms Ireland at ‘BBB+’, Outlook Negative’, dated 14 April 2011, at www.fitchratings.com.)
Irish Life is exposed to the Irish sovereign through material shareholder exposure (relative to regulatory capital) to Irish government debt. Any further downgrade to the sovereign rating may result in a downgrade of Irish Life. However, Fitch notes that this sovereign exposure is unlikely to directly decrease security for policyholders of unit-linked policies, which form 94% of the business measured by reserves.
Irish Life’s ratings reflect the strong link between its business and the Irish economy. Irish Life’s ratings could be downgraded if the macro-economic environment has a greater than expected impact on persistency or new business, or if the company does not remain profitable. The impact of the Irish government’s austerity package, high unemployment, reduced consumer confidence and lower than expected GDP could trigger higher policyholder lapse rates and lower sales volumes, threatening Irish Life’s profitability.
Irish Life is due to be sold through an initial public offering (IPO) in 2011 to raise capital for the bank to cover its recent EUR4bn increase in capital requirements, resulting from the regulator’s stress test of Irish banks. Although Fitch views the bank as a drag on the insurer’s ratings due to its weak capitalisation, the IPO will not trigger an upgrade of Irish Life’s ratings as they are closely linked to the sovereign rating and the economic environment in Ireland.
Despite the Negative Outlook, Irish Life’s ratings continue to reflect the positive rating factors of its strong standalone capitalisation (regulatory solvency ratio of 175% at end-2010), comparatively low-risk business and strong market position. It reported operating profits of EUR163m in 2010 and has a total embedded value of EUR1.6bn. However, Fitch expects profit margins and earnings to remain under pressure for a number of years.
Source : Fitch Press Release
