Fitch Affirms SLIC: Outlook changed to positive

Fitch Ratings has affirmed Sri Lanka Insurance Corporation Ltd's (SLIC) National Insurer Financial Strength (IFS) rating at 'AA-(AA minus)(lka)' and National Long-term rating at 'A+(lka)'. The Outlooks for both ratings have been changed to Positive from Stable.

The Positive Outlooks reflect SLIC's progress in reforming the company since privatisation in 2003. Fitch believes that the changes made to company's systems, products, controls and management during this time have allowed SLIC to better exploit its good market position in Sri Lanka. Should SLIC leverage this improvement to revive its market share while maintaining profitability, a ratings upgrade could be considered in 2008 or 2009.

Fitch has been tracking management's attempts to improve SLIC's internal systems and efficiency since March 2004. The agency considers that premiums and claims processes and management have improved over this period, as have accounting systems and controls, management structures and corporate efficiency.

The impact of these improvements on results has, however, been mixed. Recent profitability has been consistent, but market share in both life and non-life continued to decline during 2006, from 24% to 23% and 30% to 26% respectively, although the non-life market share revived to 29% in the period from Q1 to Q3 2007.

Fitch views SLIC's reinsurance programme as comprehensive and a major strength of the rating. The dilution of the Sri Lankan regulator's proposals for a national reinsurance fund have considerably reduced Fitch's concern as to the future security offered by SLIC's reinsurance programme.

According to Fitch's calculations, SLIC's capitalisation has declined in relative terms since December 2005, due in large part to a shift towards higher investments, especially equities, relative to other balance sheet items.

Nevertheless, the capital level at September 2007 remained supportive of the ratings and superior to that of many of its rivals, both relatively and absolutely.

The life investment portfolio remains prudent, with 76% of investment in long-term debt; the non-life portfolio included 33% equities and 21% real estate at September 2007.