Fitch affirms Sri Lanka Insurance Corporation at IFS ‘B+’/stable

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.

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 Longterm 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 nonlife premium to have accounted for 19.5 percent of the total industry premium (total industry premium includes National Insurance Trust Fund Board’s (Aa(lka)/stable) nonlife premiums) in 2017, up from 19.1 percent 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 percent in 2017 (2016: 18.7 percent).

SLIC’S strong capitalisation is reflected in its life and non-life risked-based capital ratios of 410 percent and 208 percent respectively, as at end-march 2018 (2017: 432 percent , 200 percent); well above the 120 percent regulatory minimum. Management expects to maintain the ratios above 200 percent in the medium to long term.

Fitch believes the insurer’s capitalisation may come under pressure if dividends to the state increase significantly. SLIC declared 22 percent of its after-tax profits as dividends in 2017, from a high of 85 percent in 2016, due to an extraordinary dividend from a subsidiary.

Fitch sees 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 percent, 2016: 8.1 percent). The combined ratio for the non-life business improved to 95 percent in 2017, from 99 percent in 2016 (2015: 93 percent), 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 percent of invested assets in 2017 (2016: 37 percent). 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.