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Fitch Upgrades Sri Lanka Insurance Corp's National Ratings
August 11, 2017 / 9:37 AM / a month ago

Fitch Upgrades Sri Lanka Insurance Corp's National Ratings

(The following statement was released by the rating agency) COLOMBO/HONG KONG, August 11 (Fitch) Fitch Ratings has upgraded Sri Lanka Insurance Corporation Limited's (SLIC) National Insurer Financial Strength (IFS) rating and National Long-Term Rating to 'AA+(lka)' from 'AA(lka)' and assigned a Stable Outlook The agency has also affirmed SLIC's international IFS rating at 'B+' with a Stable Outlook. KEY RATING DRIVERS The one-notch upgrade of SLIC's National Long-Term Rating and National IFS rating reflects Fitch's more positive view of the state's 99.9% ownership in the company following a recent proposal to exempt SLIC from the regulatory requirement that all insurers must be listed. As a result, there will be no dilution of the state's ownership. The ratings are also supported by its sound profitability and healthy capitalisation. SLIC's ratings also reflect its established franchise and market position in Sri Lanka. Offsetting these strengths are significant investments in non-core subsidiaries and a high equity exposure, which weighs on its risk-based capital. The IFS rating was affirmed as the rating remains constrained by Sri Lanka's sovereign rating (B+/Stable). Fitch views SLIC as being important to the government of Sri Lanka due to its ownership and the company's strategic importance as the largest state-owned insurer. The strategic investments that SLIC undertake in line with government policy are a rating weakness. The company continues to operate as a composite insurer. SLIC's regulatory risk-based capital (RBC) ratios improved to 434% for life and 198% for non-life by end-March 2017 from 427% and 186% at end-2016, respectively. These ratios were well above the regulatory minimum of 120% for each business and compared well against those of its peers. Management expects to maintain RBC ratios above 200% in the medium to long term. Pre-tax operating ROA including realised and unrealised gains (2016: 8.1%, 2015: 2.9%) has been consistently high even after adjusting for dividends received from subsidiaries. The combined ratio for the non-life business improved to 96% in 1H17 after worsening to around 99% in 2016 (2015: 93%) due to high competition. Losses stemming from a severe tropical storm in May 2016 were largely manageable as a result of sound reinsurance arrangements in place. The country faced a similar flood in May 2017, but losses were much lower than in 2016 because the 2016 flooding affected mainly industrial zones in the island. SLIC has a high risk appetite, which is evident from its large equity investment that exposes the company to market volatility. SLIC's total investment in equities (including non-core subsidiaries) was 93% of shareholders' equity at end-2016 (end-2015: 96%). The government has announced that it plans to dispose some of these non-core investments, which were funded by profit retention, and include interests in the gas, healthcare, leisure and banking sectors. The company's dividend payout ratio increased to 79% in 2016, largely due to a high extraordinary dividend received from SLIC's subsidiary Litro Gas Lanka Ltd. However, excluding subsidiary dividends, SLIC's dividend payouts have increased due to higher dividend expectations from the government. SLIC is the oldest operating insurer in the country and is supported by an extensive network of branches and strategic business units. The company's asset base of LKR175 billion at end-2016 accounted for around 35% of the insurance sector's assets. SLIC has the second-highest market share in life and non-life businesses as measured by gross written premiums (GWP). RATING SENSITIVITIES If the sovereign ratings are upgraded in the future, and the constraints on SLIC's IFS rating are relieved, Fitch would take similar rating action on SLIC's IFS rating. Conversely, a downgrade of Sri Lanka's ratings will lead to downgrade of SLIC's IFS rating. SLIC's National Long-Term Rating and National IFS rating may be further upgraded if it is able to maintain sizeable market share and significantly reduce its non-core investments. The company's National Ratings and IFS may be downgraded if there is: - significant weakening in SLIC's market position - deterioration in the non-life combined ratio to well above 100% on a sustained basis - weakening in SLIC's importance to the government, increased state pressure for higher dividend payouts leading to weaker capitalisation, or a significant increase in non-core investments. Contact: Primary Analyst Jeffrey Liew (International Ratings) Senior Director +852 2263 9939 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Kanishka de Silva (National Ratings) Analyst +94 112541900 Fitch Ratings Lanka Limited Level15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst Kanishka de Silva (International Ratings) Analyst +94 112541900 Jeffrey Liew (National Ratings) Senior Director +852 2263 9939 Committee Chairperson Siew Wai Wan Senior Director +65 6796 7217 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com. Additional information is available on www.fitchratings.com SLIC has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd. Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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