Fitch affirms Sri Lanka Insurance at ‘AA(lka)’/stable
Fitch Ratings Lanka has affirmed Sri Lanka Insurance Corporation
Limited’s (SLIC) National Insurer Financial Strength Rating and National
Long-Term rating at ‘AA(lka)’. The outlook is stable. SLIC’s ratings
reflect its strong franchise and sound capitalization levels, supported
by ongoing high profitability and capital retention. Regulatory solvency
ratios for life and non-life insurance segments improved to 11.55x and
2.21x, respectively, at end-December 2011 from 7.73x and 2.11x in 2010,
and compare well with peers. However, Fitch notes that SLIC’s risk-based
capitalisation is weakened by its high equity exposure due to the
associated market volatility.
The ratings also reflect Fitch’s expectation of support from the
Government of Sri Lanka, given its 99.9% ownership in SLIC and the
company’s strategic importance as the largest state-owned insurer.
However, the agency notes that timeliness of support could be limited
given the state’s own fiscal limitations. Fitch further notes that SLIC
has undertaken key strategic investments in line with government policy
in the past.
SLIC’s somewhat aggressive investment strategy, as evidenced by large
equity exposures, remains a rating concern due to associated profit
volatility on some of these assets. Equity investments (excluding unit
trust investments) accounted for 38% of book value assets in 2011 (2010:
37%) and is likely to increase further in the medium term in line with
SLIC’s investment plans. Although, these investments have been made out
of shareholder funds, Fitch notes that they could place pressure on
capitalization particularly given the illiquid nature of some of its
non-core strategic investments.
Profitability continues to benefit from high investment income and
continued healthy underwriting results in 2011, resulting in a return on
assets ratio of 6.9% (peer group: 4.3%). Also, the company's combined
ratio stood at 87.5% in 2011 (peer group: 97.6%), with the company
maintaining both loss and expense ratios at levels considerably lower
than peers. However, Fitch notes that the company will have to closely
monitor non-life pricing to sustain loss ratios at current levels.
The ratings could be upgraded if SLIC is able to maintain its market
share in the life insurance segment (2011: 19.2%, 2010: 19.3% and 2009:
20.3%) while maintaining recurring underwriting profitability and strong
capitalisation, and gradually reduces its exposure to non-core private
investments. Conversely, deterioration in capitalisation due to profit
volatility or increased equity exposures, including a rising trend in
non-core strategic investments, could result in a rating downgrade.
A weakening in SLIC's importance to the Sri Lankan government or
increased pressures by the state in terms of higher dividend payouts
could also result in negative rating action.
SLIC has been operating for the last 50 years and has a network of
131 branches across the country. |