Fitch affirms SLIC at IFS ‘B+’/Negative

Fitch Ratings has affirmed Sri Lanka Insurance Corporation Limited’s (SLIC) insurer financial strength (IFS) rating at ‘B+’ with a negative outlook. The agency has also affirmed the national IFS rating and national long-term rating at ‘AA(lka)’ with a stable outlook.

SLIC’s IFS rating is capped by Sri Lanka’s long-term local­currency issuer default rating (IDR) and the negative outlook reflects Fitch’s negative outlook on Sri Lanka’s IDR. Fitch downgraded SLIC’s IFS rating on March 2, 2016, following the downgrade of Sri Lanka’s long­term local­currency IDR to ‘B+’ from ‘BB­‘ and the assignment of a 
negative outlook. 

SLIC’s ratings reflect its established franchise and market position in Sri Lanka, 99.9 percent state ownership and importance to the government as the largest state­owned insurer. Offsetting these strengths are significant investments in non­core subsidiaries and a high equity exposure, which weighs on its risk-based capital. SLIC’s total gross written premium (GWP) increased by 14 percent in 1H16, following a 19 percent increase in 2015. The non­life business’s combined ratio deteriorated to 108 percent (2015: 94 percent) due to higher claims stemming from a severe tropical storm in May 2016 that caused flooding and landslides in several parts of the country. Gross claims rose 63 percent to Rs.5.5 billion (1H15: Rs.3.4 billion), but net claims rose by only 32 percent due to recoveries from reinsurance. 

SLIC has the highest market share in the non­life business (20 percent in 2015) and the second highest share in life (19 percent in 2015) as measured by GWP. The company’s asset base of Rs.167 billion at end­2015 accounted for 36 percent of the insurance sector’s assets. The company is currently operating as a composite business and is awaiting a government decision on separating its life and non­life businesses. SLIC’s dividend payout increased to 58 percent in 2015 due to higher dividend expectations from the government. Profits before tax in the life segment declined to Rs.1.8 billion in 2015, from Rs.2.5 billion in 2014, as the investment income fell due to low interest rates and poor equity returns. Fitch expects rising interest rates to improve the investment income 
in 2016.

SLIC has significant investments in non­core subsidiaries, made in line with government policy, which are negative for its rating. However, the government plans to dispose of some of these non­core investments. Asset and liability mismatches also expose the company to high interest rate risk from its life business, due to limited market availability of long­term investments. 
SLIC’s regulatory risk­based capital ratio for life was 419 percent at end­March 2016 and 200 percent for non­life. These ratios exceed the regulatory required minimum of 120 percent for each business and compare well against peers. Fitch expects SLIC to maintain these ratios above 200 percent in the medium to long term.