Fitch publishes Sri Lanka Insurance Corporation at IFS ‘BB-’/Stable

Fitch Ratings Lanka has published Sri Lanka Insurance Corporation Limited’s (SLIC) Insurer Financial Strength rating (IFS) at ‘BB-’ with a Stable Outlook. The agency has also affirmed the National Insurer Financial Strength Rating and National Long-Term rating at ‘AA(lka)’ with a Stable Outlook.

Key Rating Drivers

The ratings reflect SLIC’s strong franchise and capitalisation, supported by sustained profitability and high capital retention. Regulatory solvency at end-2012 was 11x (2011:11.6x) in life and 3.4x (2011: 2.2x) in non-life and compare well with peers. Fitch expects support from the Government of Sri Lanka, if required, due to its 99.9% ownership and SLIC’s strategic importance as the largest state-owned insurer.

Offsetting the strengths are significant investments in non-core subsidiaries, which are made in line with government policy and a high equity exposure which weakens risk-based capital.

SLIC has been in operation for over 50 years and has a network of 135 branches/ customer service centres across the country. The company has an asset base of around LKR132.5bn, making it the largest insurer in Sri Lanka accounting for about 40% of the sector assets. In 2012, the company continued to be a market leader in non-life and had the second-largest share of gross written premium (GWP) in the life business.

Competition in the non-life business continued to be intense, with smaller insurers striving to achieve critical mass ahead of the compulsory segregation of life and non-life by 2015. In this context SLIC’s non-life premium growth in 2012 of 10.2%, fell behind the industry’s 14%. Fitch notes that certain new entrants have been successful in capturing market share at the expense of competitors, including well-established insurers.

Increase in the loss ratio and an offsetting decrease in the expense ratio improved SLIC’s non-life combined ratio to 90.9% (2011: 93.1%) in 2012. The company recorded a profit of LKR8.2bn against a restated loss of LKR16bn in 2011, as it benefited from high investment income and a one-off property revaluation of LKR4.7bn. These resulted in a return on assets of 6.5%

SLIC’s investment portfolio is heavily exposed to equities, albeit reduced to 43% at end-2012, from 51% in 2011. However, total equity investments still remain higher than total shareholders’ equity. There is also a mismatch in the asset and liabilities of the life business, exposing the company to interest rate risk. This is mainly due to the limited availability of long-term investment opportunities in the Sri Lankan market.

Rating Sensitivities

SLIC’s National ratings may be upgraded if it is able to hold onto its market share while maintaining strong capitalisation and recurring core profitability. Upgrade of the International IFS rating is not possible unless Sri Lanka’s country ceiling of ‘BB-’ is also upgraded.

The National and International IFS and the National Long-Term ratings could be downgraded if there is a weakening in the risk capital due to profit volatility or higher equity exposure, deterioration in the non-life combined ratio to above 100% on a sustained basis or a drop in the life regulatory solvency margin below 10x. A weakening in SLIC’s importance to the government, increased pressure from the state for higher dividend pay-outs or a significant increase in non-core investments could also place downward pressure on the ratings.