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

KEY RATING DRIVERS

SLIC’s IFS rating is capped by Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) and the Negative Outlook reflects Fitch’s Negative Outlook on Sri Lanka’s IDR. Fitch downgraded SLIC’s IFS rating on 2 March 2016 following the downgrade of Sri Lanka’s Long-Term Local-Currency IDR to ‘B+’ from ‘BB-‘ and the assignment of a Negative Outlook.

SLIC’s ratings reflect its established franchise and market position in Sri Lanka, 99.9%-state ownership and importance to the government as the largest state-owned insurer. Offsetting these strengths are significant investments in non-core subsidiaries and a high equity exposure, which weighs on its risk-based capital.

SLIC’s total gross written premiums (GWP) increased by 14% in 1H16, following a 19% increase in 2015. The non-life business’s combined ratio deteriorated to 108% (2015: 94%) due to higher claims stemming from a severe tropical storm in May 2016 that caused flooding and landslides in several parts of the country. Gross claims rose 63% to LKR5.5bn (1H15: LKR3.4bn), but net claims rose by only 32% due to recoveries from reinsurance.

SLIC has the highest market share in the non-life business (20% in 2015) and the second-highest share in life (19% in 2015) as measured by GWP. The company’s asset-base of LKR167bn at end-2015 accounted for 36% of the insurance sector’s assets. The company is currently operating as a composite business and is awaiting a government decision on separating its life and non-life businesses.

SLIC’s dividend payout increased to 58% in 2015 due to higher dividend expectations from the government. Profits before tax in the life segment declined to LKR1.8bn in 2015, from LKR2.5bn in 2014, as investment income fell due to low interest-rates and poor equity returns. Fitch expects rising interest-rates to improve investment income in 2016.

SLIC has significant investments in non-core subsidiaries, made in line with government policy, which are negative for its rating. However, the government plans to dispose of some of these non-core investments. Asset and liability mismatches also expose the company to high-interest-rate risk from its life business, due to limited market availability of long-term investments.

SLIC’s regulatory risk-based capital ratio for life was 419% at end-March 2016 and 200% for non-life. These ratios exceed the regulatory required minimum of 120% for each business and compare well against peers. Fitch expects SLIC to maintain these ratios above 200% in the medium to long term.

RATING SENSITIVITIES

A downgrade of Sri Lanka’s Long-Term Local-Currency IDR will lead to a downgrade of SLIC’s Insurer Financial Strength rating.

SLIC’s National Ratings may be upgraded if it maintains its large market share, keeps its combined ratio well below 95% and significantly reduces its non-core investments.

The company’s National Ratings and IFS may be downgraded if there is:

– significant weakening in SLIC’s market position

– deterioration in the non-life combined ratio to above 100% on a sustained basis

– weakening in SLIC’s importance to the government, increased state pressure for higher dividend payouts or a significant increase in non-core investments.