Fitch affirms Sri Lanka Insurance Corporation at IFS BB- rating

Sep 30, 2015 (LBO) – Fitch Ratings has affirmed Sri Lanka Insurance Corporation Limited's 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 Stable Outlook. KEY RATING DRIVERS SLIC's ratings reflect its well-established franchise and market position in Sri Lanka, 99.9% state ownership, and its importance to the government as the largest state-owned insurer.

SLIC's profit retention dropped to 38% in 2014 (2013: 78%) due to higher dividends to the government. In 2014, total comprehensive income increased to LKR14.

9bn (2013: LKR7.5bn) driven mainly by fair-value gains in available-for-sale financial assets (LKR11.2bn in 2014 and LKR2.8bn in 2013). Net profit in the non-life segment dropped to LKR1.65bn in 2014 (2013: 2.9bn) due to poor underwriting results. This stemmed mainly from a one-time increase in provisions for third-party motor claims.

SLIC's total premiums fell to LKR20.7bn in 2014 from LKR21.35bn in 2013 with the gross written premiums (GWP) in both life and non-life declining slightly. The non-life business's combined ratio deteriorated in 2014 due to higher reserving for third-party motor claims and the competitive environment. SLIC has 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 (RBC). 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 regulatory solvency ratio at end-June 2015 was 13.6x (end-2013:11.5x) for life and 3.4x (end-2013: 4.9x) for non-life. These ratios are well above the regulatory required ratio of 1x for each business and compare well against that of its peers.



RBC, which takes into account the high exposure to equity investments, was 202% for non-life and 448% for life, well above the regulatory minimum of 120%. Fitch expects the RBC for both life and non-life to be maintained above 200% in the medium to long term.

SLIC has an asset base of over LKR150bn. The company is the market leader in non-life insurance in Sri Lanka, accounting for 22% of GWP in the market. In the life segment, the company is the second-largest, accounting for 18% of market GWP in 2014. RATING SENSITIVITIES An upgrade is unlikely in the near term, as SLIC's IFS rating is at the same level as Sri Lanka's Long-Term Local-Currency IDR (BB-/Stable). Conversely, if Sri Lanka's rating is downgraded, SLIC's Insurance Financial Strength rating is likely to be downgraded. SLIC's National Ratings may be upgraded if it is able to maintain sizeable market share, maintain its combined ratio well below 95% (2014: 103.



7%) and significantly reduce its non-core investments. The National and International ratings may be downgraded if there is: - Significant weakening in SLIC's market position, - Deterioration in the non-life combined ratio to above 100% on a sustained basis, - 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.