Fitch Ratings Lanka has affirmed Sri Lanka Insurance Corporation Limited's (SLIC) Insurer Financial Strength rating (IFS) at 'BB-' with a Stable Outlook.
The agency has also affirmed the National Insurer Financial Strength Rating and National Long-Term Rating at 'AA(lka)' with a Stable Outlook. KEY RATING DRIVERS SLIC's ratings reflect the company's well-established franchise and market position, 99.9% state ownership, and its importance to the government as the largest state-owned insurer. SLIC's capitalisation, which is supported by sustained profits and satisfactory earnings retention, is commensurate with the rating.
Regulatory solvency at end-2014 was 13.90x (end- 2013:11.48x) in the life business and 3.52x (end-2013: 4.93x) in the non-life business, and they compare well with peers'. SLIC's regulatory solvency ratios are comfortably above the regulatory required minimum of 1x in both life and non-life. These strengths are balanced by its significant investments in non-core subsidiaries that have been made in line with government policy and a high proportion of equities in its investment portfolio, which weaken SLIC's risk-based capital.
The company is also exposed to high interest rate risk due to the asset and liability mismatches in the life business, which stem from the limited availability of long-term investments in the market.
The company is in discussions with the regulator on separating its life and non-life businesses to comply with new regulatory requirements. SLIC's started operations in 1961 and its asset base is now over LKR150bn.
The company is the market leader in non-life insurance, accounting for 24.04% of gross written premiums (GWP) in the market. In the life segment, the company is the second-largest, accounting for 19.54% of market GWP in 2013. SLIC's life segment recorded a net profit of LKR1.72bn and the non-life LKR2.93bn in 2013.
SLIC's total premiums fell to LKR20.6bn in 2014 from LKR21.35bn in 2013 with the GWP in both life and non-life businesses declining slightly. The non-life business's combined ratio is likely to have deteriorated in 2014 due to higher reserving for third-party motor claims and the competitive environment. RATING SENSITIVITIES SLIC's National Ratings may be upgraded if it is able to maintain market share while maintaining strong capitalisation and recurring core profitability.
The National and International IFS Ratings and the National Long-Term Rating could be downgraded if there is a weakening in the risk capital due to profit volatility or higher equity exposure, deterioration in the non-life combined ratio to above 100% on a sustained basis or a drop in the life regulatory solvency margin below 10x.
A weakening in SLIC's importance to the government, increased pressure from the state for higher dividend payouts or a significant increase in non-core investments could also place pressure on the ratings.