Fitch rates Sri Lanka-based People’s Insurance A+(lka); outlook stable

Fitch Ratings has assigned Sri Lanka-based People's Insurance PLC a National Insurer Financial Strength (IFS) Rating and National Long-Term Rating of 'A+(lka)'. The Outlook is Stable. KEY RATING DRIVERS The ratings reflect the non-life insurer's strong domestic business profile, which is supported by its association with the People's Bank (Sri Lanka) (PB, AA+(lka)/Stable) group, strong capitalisation and adequate profitability metrics. The company has an operating history of eight years and is focused mainly on the motor segment - 84% of Gross Written Premiums (GWP) in 2017. The company's business profile is supported by the strong "People's" brand name associated with its banking parent. Over 80% of People's Insurance's business was channelled from the group in 2017, mainly by way of referrals from its immediate parent, People's Leasing & Finance PLC (PLF, B/AA-(lka)/Stable), a leading vehicle leasing financier in Sri Lanka. People's Insurance operates predominantly via 124 window offices placed inside PLF and PB branches, which promote cross selling to PLF and PB clients. The group has helped the company achieve a medium non-life market share of 5.2%, as measured by GWP, in 2016. We believe the "People's" brand will also help the company expand its non-group related business. People's Insurance is a 75% subsidiary of PLF, which in turn is a 75% subsidiary of PB. PLF is one of Sri Lanka's largest non-bank financial institutions, while PB is the country's second-largest bank and is fully owned by the government of Sri Lanka (B+/Stable). People's Insurance accounted for 4.6% and 0.5% of PLF's and PB's total assets, respectively, at end-September 2017. Fitch sees People's Insurance's financial performance and earnings as strong. The company's low-cost window-office distribution strategy means its expense ratio of 26% in 2017 (2016: 23%) is lower than that of the industry (9M17: 38%, 2016: 36%), leading to a combined ratio of 95% in 2017 and 94% in 2016, well below that of the industry (9M17: 103%, 2016: 105%). However, we expect the expense ratio to increase as management executes its medium-term expansion plan of expanding non-group related business. Other profitability metrics are also strong, with return on assets of 12.3% and return on equity of 27% in 2017. High volume from PLF helped People's Insurance achieve underwriting profits by its third year of operation. People's Insurance's capitalisation is strong, with a risk-based capital (RBC) ratio of 319% at end-2017, against the 120% regulatory minimum. Total available capital was LKR2.8 billion, compared with a regulatory minimum of LKR0.5 billion. An IPO in 2015 raised LKR0.8 billion, boosting stated capital to LKR1.4 billion. More than 95% of People's Insurance's investment portfolio was in fixed income at end-2017; 43% was invested in fixed deposits at leading banks and non-bank financial institutions, 28% in listed debentures and 23% in government securities. Over 95% of the fixed-income portfolio was invested in assets rated 'A-(lka)' and above. Listed shares accounted for 2% of invested assets and management expects to keep this below 10% in the medium term. RATING SENSITIVITIES People's Insurance's ratings would be downgraded if its RBC ratio remains below 225% or its combined ratio is above 100% for a sustained period or if there is a weakening in its business profile. We would also downgrade the ratings if the linkages between People's Insurance and PLF were to weaken, which includes restrictions to its distribution channels via PLF branches. An increase in People's Insurance's market share, while maintaining its combined ratio consistently below 95% and RBC ratio well above 275%, would lead to a rating upgrade.