July, 10, 2018
Fitch Rating has affirmed Sri Lanka Insurance Corporation Limited's (SLIC) Insurer Financial Strength Rating (IFS) at 'B+' with a Stable Outlook. Fitch Ratings Lanka has also affirmed SLIC's National Insurer Financial Strength Rating and National Long-Term Rating at 'AA+(lka)' with a Stable Outlook.
KEY RATING DRIVERS
The affirmation reflects the company's very strong domestic business profile, strong and improved financial performance and strong capital position. These strengths are partially offset by significant investments in non-core subsidiaries and high equity exposure. SLIC's IFS Rating is capped by Sri Lanka's Long-Term Local-Currency Issuer Default Rating (B+/Stable).
Fitch believes SLIC has a very strong domestic business profile, supported by its established franchise and leading market positions in the life and non-life insurance segments. SLIC is also the largest state-owned insurer.
Fitch estimates SLIC's non-life premium to have accounted for 19.5% of the total industry premium (total industry premium includes National Insurance Trust Fund Board's (AA-(lka)/Stable) non-life premiums) in 2017, up from 19.1% in the previous year. The improvement was buoyed by steady business growth and significant GWP inflow from a state-sponsored health insurance policy for schoolchildren named 'Suraksha'. The insurer also maintained its market position as the second-largest life insurer, with a GWP market share of 17.5% in 2017 (2016: 18.7%).
SLIC's strong capitalisation is reflected in its life and non-life risked-based capital ratios of 410% and 208%, respectively, as at end-March 2018 (2017: 432%, 200%); well above the 120% regulatory minimum. Management expects to maintain the ratios above 200% in the medium to long term. We believe the insurer's capitalisation may come under pressure if dividends to the state increase significantly. SLIC declared 22% of its after-tax profits as dividends in 2017, from a high of 85% in 2016, due to an extraordinary dividend from a subsidiary.
We see SLIC's financial performance and earnings as strong. The insurer has consistently maintained a high pre-tax operating return on assets, including realised and unrealised gains (2017: 3.2%, 2016: 8.1%). The combined ratio for the non-life business improved to 95% in 2017, from 99% in 2016 (2015: 93%), supported by the company's disciplined approach to underwriting. SLIC comfortably managed the claims that stemmed from the 2017 and 2016 floods as it had adequate reinsurance arrangements in place.
Fitch considers the insurer's investments in non-core subsidiaries and high equity exposure as a rating weakness. SLIC's total equity investments, including non-core subsidiaries, totalled 34% of invested assets in 2017 (2016: 37%). The government has previously announced that it plans to dispose of some of these non-core subsidiaries, which were funded by profit retention and include interests in the gas, healthcare and leisure sectors.
Fitch would consider an upgrade to SLIC's IFS Rating upon an upgrade of the sovereign rating and the lifting of constraints on SLIC's IFS Rating.
Conversely, a downgrade of Sri Lanka's ratings would lead to a downgrade of SLIC's IFS Rating.
SLIC's National Long-Term Rating and National IFS Rating may be upgraded if the company maintains its large market share and significantly reduces non-core investments.
The company's National Long-Term Rating and National IFS Rating may be downgraded if there is:
- significant weakening in SLIC's market position
- deterioration in the non-life combined ratio to well above 100% for a sustained period
- weakening in SLIC's importance to the government, increased state pressure for higher dividend pay-outs that weakens capitalisation or a significant increase in non-core investments.