Fitch assigns Co-operative Insurance first-time ‘BBB+’ rating; Outlook Stable

Fitch Ratings has assigned Sri Lanka-based Cooperative Insurance Company Limited (CICL) a National Insurer Financial Strength (IFS) Rating and National Longterm Rating of ‘Bbb+(lka)’. The Outlook is Stable.

The rating reflects the nonlife insurer’s modest domestic business profile, supported by its association with co-operative societies, good capitalisation and a somewhat conservative investment policy. CICL’S rating is also supported by its consistently strong financial performance and earnings.

We view CICL as a niche player in the domestic market with a modest nonlife market share by gross written premium (GWP) of 3.2 percent at end-2017 (2016: 3.0 percent). The insurer is 99.9 percent owned by 203 co-operative societies that together represent several multi-purpose co-operative organisations and rural banks.

CICL’S rating also factors the insurer’s access to a sizable potential customer base within the co-operative movement and the access to potential customers from using the service centres owned by the co-operative societies. In 2017, almost one-third of the insurer’s policyholders were from the co-operative movement.

Fitch sees CICL’S capitalisation as good. The insurer’s capitalisation, as measured by its risk-based capital (RBC) ratio, was 183 percent at end-june 2018 (2017: 180 percent; 2016: 139 percent) against the 120 percent regulatory minimum. However, we expect capitalisation to remain constrained around this level over the medium term because of the insurer’s expansion plans, occasional appetite for high risk investments as well as a possible infusion of capital to its life subsidiary, Cooplife Insurance Limited (Cooplife) should the need arise. Fitch expects the company to maintain the RBC ratios for its non-life and life operations above 180 percent in the medium term.

CICL maintained strong financial performance and earnings by consistently generating high pre tax operating return on assets, including realised and unrealised gains (2017: 9.5 percent, 2016: 5.5 percent). The company’s modest marketing spend and the use of relatively low-cost distribution channels means its expense ratio of 30 percent in 2017 (2016: 34 percent) is lower than that of the industry (2017: 34 percent, 2016: 35 percent). The lower expense ratio and disciplined underwriting practices led to a Fitch calculated combined ratio of 95 percent in 2017 (2016: 101 percent, 2015: 98 percent), which compares favourably with the industry.

CICL has a moderately conservative investment policy, with considerable exposure to good credit quality fixed-income securities and a modest exposure to equities. More than 80 percent of CICL’S invested assets were in fixedincome securities at end-2017; out of which, 37 percent was invested in fixed deposits, 28 percent in listed debentures and 23 percent in government securities. Over 70 percent of the fixed-income portfolio was invested in assets rated ‘A-(lka)’ and above. Its equity investments were mainly its investment in Cooplife, which accounted for 14 percent of invested assets at end-2017.