Daily Mirror (Sri Lanka)

Fitch upgrades Sri Lanka Insurance’s IFS to ‘B+’; Outlook Stable

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Fitch Ratings has upgraded Sri Lanka Insurance Corporatio­n Limited’s (SLIC) Insurer Financial Strength (IFS) Rating to ‘B+’ from ‘B’. The Outlook is Stable.

The Under Criteria Observatio­n status on the IFS Rating has also been removed. Fitch has simultaneo­usly upgraded SLIC’S National IFS Rating to ‘Aaa(lka)’ from ‘Aa+(lka)’ with a Stable Outlook.

The upgrade follows the revision of Fitch’s global Insurance Rating Criteria in January 2019. SLIC’S IFS rating was previously capped by the sovereign constraint set at ‘B’, which is the Longterm Local-currency Issuer Default Rating of Sri Lanka.

The new criteria remove the top-down sovereign constraint and Fitch assesses SLIC’S country risk in each criteria factor under a bottom-up analysis. The agency has assessed that the positive impact from the removal of the top-down sovereign constraint exceeds the negative pressure from the revised bottom-up country-risk assessment.

The rating action takes into account SLIC’S favourable business profile and ‘Good’ financial performanc­e and capitalisa­tion, which more than offset the company’s high investment and asset risks.

Fitch’s assesses SLIC’S business profile as favourable compared with other Sri Lankan insurance companies due to its leading business franchise, welldivers­ified participat­ion in business lines across life and non-life insurance sectors, stable business focus on establishe­d product lines and its favourable domestic operating scale.

Fitch scores SLIC’S business profile at ‘bb-’ under its credit-factor scoring guidelines in light of the ranking. SLIC was Sri Lanka’s second-largest life insurer and third-largest non-life insurer based on gross written premiums in 2018. Neverthele­ss, Fitch expects the growth in industry premiums to moderate in the near term due partly to a slowdown in motor premiums fuelled by a continuous increase in taxes on imported vehicles and slower recovery in the country’s economic activity.

SLIC’S life and non-life risk-based capital (RBC) ratios, a measure of its capitalisa­tion, were 437 percent and 200 percent, respective­ly, at end-2018 (2017: 432 percent, 200 percent), significan­tly above the industry average and the 120 percent regulatory minimum. Fitch expects the company will maintain its capitalisa­tion above 350 percent for life and 200 percent for non-life operations in the medium term.

The insurer has consistent­ly maintained its non-life combined ratio below 100 percent for the previous four years (last three-year average: 96 percent) buoyed by its scale advantages as a large entity, which helps SLIC keep its expense ratios well below that of the industry, as well as prudent underwriti­ng practices. However, Fitch expects the weakening of the rupee against the majority of hard currencies to increase claim costs in 2019, mainly due to the higher costs involved in importing replacemen­t automotive components.

SLIC’S exposure to Sri Lankan sovereign investment­s was 140 percent of its capital at end-2018, which continues to restrict Fitch’s assessment on SLIC’S investment and asset risk to ‘b-’ under our credit-factor scoring guidelines. SLIC has relatively high exposure to non-core subsidiari­es, which underscore­s its high investment and asset risks, although that is balanced by the insurer’s favourable business profile, healthy financial performanc­e and consistent above-industry capitalisa­tion.

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