Fitch upgrades Sri Lanka Insurance to ‘AA’; Outlook Stable

Fitch Ratings Lanka said yesterday it has upgraded Sri Lanka Insurance Corp Ltd.’s (SLIC) National Long-Term rating and National Insurer Financial Strength (IFS) rating to ‘AA(lka)’ from ‘AA-(lka)’. The Outlooks are Stable.

The ratings reflect SLIC’s improved risk-based capital position over the last two years, benefited by the improved operating and macro-economic environment as well as its improved profitability in 2010. The ratings further reflect SLIC’s large asset base, strong presence in life and non-life markets and expected future equity gains.

The ratings factor in Fitch’s expectations of continued support from the Sri Lankan Government (GOSL), specifically in the event of capital requirement, given its 99.9% ownership in SLIC and SLIC’s perceived strategic importance.

The Stable Outlook reflects Fitch’s expectation that SLIC will maintain its strong operational and financial performance with emphasis on profitability, as well as the company’s ability to gradually crystallise the unrealised equity gains on its balance sheet over the medium term while maintaining market share.

GOSL’s directive to all State-owned entities to use only state-owned insurers provides the more established SLIC a captive state non-life customer base with limited competition. While GOSL support is a clear benefit, SLIC’s investments into subsidiaries in non-core industries and other strategic equity investments can become a risk concern for its rating, if operating performance at these entities decline.

Overall, high equity investments indicate a higher risk appetite, which will be continuously monitored by Fitch. The agency highlights that SLIC’s risk management will require further strengthening. SLIC while benefiting from its high realised capital gains in 2010 is susceptible to market volatility due to its high equity portfolio. An increasing trend in non-core strategic investments could place downward pressure on the ratings.

SLIC’s local solvency position is strong as at 31 December 2010. Fitch notes SLIC’s reinsurance programme is comprehensive, with a high credit quality panel of reinsures. Further, the feature of profit participation in the majority of SLIC’s life policies tends to moderate the investment risk.

Its strategic tie-ups with other state institutions allow the company greater channel access, while Fitch also notes the growth in its new policy premiums. In 2010, SLIC’s profitability (return on equity: 87% and return on assets: 16%) increased well above its historical average. Fitch notes that sustainability of these measures over the medium term would drive SLIC’s future ratings.

SLIC’s ratings may be further upgraded if it can arrest the gradual decline of its market share while increasing reliability of earnings by reducing profit volatility. Stabilisation of the non-life combined ratio at below 100% with capital adequacy maintained on a sustained basis will also be a requirement for such an upgrade.

However, Fitch does not foresee an upgrade for SLIC in the near term due to increased competition within the industry and the resulting pressure on operating profitability industry wide.

The ratings may be downgraded if SLIC faces reduced capital adequacy through volatility in equity investment values or higher dividend payouts, or there is a steeper loss of market share or lower operating profitability measured as SLIC’s non-life combined ratio being greater than 105% on a sustained basis.

Additionally, a weakening of SLIC’s importance to GOSL with a reduction of ownership might also result in a negative rating action.

SLIC has an operating track record of over 48 years and commands 25% and 19% of the non-life and life insurance markets, respectively. The company accounted for 40% of total industry assets at end-2010.