Fitch affirms People’s Insurance at ’A+’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based People's Insurance PLC's National Insurer Financial Strength (IFS) Rating at 'A+(lka)'. The Outlook is Stable.

The affirmation reflects the insurer's 'Moderate' business profile compared with other Fitch-rated insurers in Sri Lanka and its satisfactory capital position as well as financial performance. The Stable Outlook reflects our expectation of normalisation in the insurer's capital and earnings metrics after benefiting from low insurance claims due to mobility restrictions caused by the COVID-19 pandemic.

People's Insurance's regulatory risk-based capital (RBC) adequacy ratio strengthened to 282% in 1H21 and 304% in 2020, from 248% in 2019 (2018: 237%), buoyed mainly by the low motor insurance claims following COVID lockdowns. 

The agency expects People's Insurance to maintain the RBC ratio above 220%, well above the regulatory minimum of 120%. Even so, the ratio will moderate gradually from current levels over the medium term as insurance claims recover from the atypically low levels in 2020.

Financial performance, measured by the combined ratio, improved to 83% in 2020 from 97% in 2019 (2018: 96%), resulting mainly from the reduced motor claims following COVID lockdowns. The combined ratio moderated gradually to around 91% in 1H21, and we expect a further normalisation in the near term, as the frequency of motor claims is likely to increase with the relaxation of travel restrictions.

Fitch expects People's Insurance to maintain the combined ratio below that of the industry in the medium term, helped by a low-cost window-office distribution strategy that keeps the expense ratio well under control. People's Insurance operates mainly through more than 140 window offices placed inside the branches of its immediate parent, People's Leasing & Finance PLC (PLC, A+(lka)/Stable), and its ultimate parent, People's Bank (Sri Lanka) (AA-(lka)/Stable).

Fitch views People's Insurance's business profile as 'Moderate' compared with that of other domestic non-life insurers due to a substantive business franchise and competitive position, helped by association with the well-established People's Bank, and a moderate operating scale and business risk profile.

This is somewhat counterbalanced by its limited business diversification, where a large share of its premiums come from the motor insurance segment. The insurer is gradually diversifying its business sources into non-group channels, although the majority of its gross premiums come from the group, mainly through referrals from its immediate parent, PLC.

The agency expects the growth in the insurer's motor insurance premiums, which account for over 80% of its gross premiums, to be limited by the Government's curbs on motor-vehicle imports to preserve foreign-currency reserves. Fitch expects the curbs, at least in part, to continue over the near term. The insurer is gradually increasing the contribution from non-motor insurance lines to mitigate the slowdown in premium growth.

People's Insurance continued to invest heavily in domestic fixed-income securities, with over 85% of invested assets in government securities, corporate bonds and term deposits at financial institutions at end-2020. The insurer has increased its allocation to unit trust securities for higher returns and liquidity while moving out of equity investments.

Factors that could, individually or collectively, lead to positive rating action/upgrade: maintaining the RBC ratio consistently above 260% and the combined ratio below 98% on a sustained basis; and improving the business profile in terms of broader diversification of business lines.

Factors that could, individually or collectively, lead to negative rating action/downgrade: the RBC ratio remaining below 220% or the combined ratio above 103% for a sustained period; and a weakening in the business profile due to weaker linkages between People's Insurance and PLC, including restrictions to its distribution channels via PLC branches.