RAM reaffirms Sri Lanka Insurance Corporation’s AAA/P1 ratings

RAM Ratings Lanka has reaffirmed Sri Lanka Insurance Corporation Ltd.’s long- and short-term claims-paying ability ratings at AAA and P1 respectively; the outlook on the long-term rating is stable.

SLIC’s ratings are upheld by the company’s strong competitive position, financial flexibility derived from state ownership and systemic importance as the country’s second largest premium underwriter. The ratings are also supported by SLIC’s healthy capitalisation.

SLIC is the oldest insurer in Sri Lanka and the second-largest in terms of premiums underwritten; the company accounted for 22.30% of the industry’s composite gross written premiums as at end-December 2010.

Further, it is the largest insurer in terms of assets, accounting for 40.04% of the industry’s asset base at the same date.

Given SLIC’s systemic importance and its ownership by the Government of Sri Lanka, RAM Ratings Lanka opines that state support will be readily extended if needed.

Meanwhile, SLIC’s strategic direction will be broadly in line with the government’s long-term economic development plans, particularly with regards to investments.

While this emphasises SLIC’s importance to the Government, it also exposes SLIC to the risk of investing in businesses which are non-synergistic with SLIC’s business. During 2010 SLIC acquired controlling stakes in two entities operating in the energy industry for a total consideration of Rs. 7.04 billion.

SLIC has maintained its strong competitive position, albeit with a slight decline in market share against the backdrop of intense competition from smaller players.

The company commanded a market share of 24.82% in the General segment during fiscal 2010 (fiscal 2009: 26.17%), emerging as the largest player in the segment.

In the Life insurance segment, SLIC’s market share dipped to 19.29% (fiscal 2009: 20.19%) ranking as the third largest Life insurance underwriter in the country.

Looking ahead, SLIC is expected to maintain its strong competitive footing, supported by its brand name, the introduction of new products and channel development initiatives.

Elsewhere, SLIC’s investment portfolio amounted to Rs. 56.89 billion as at FYE 31 December 2010, the largest in the domestic industry.

 In line with the unprecedented upturn in the Sri Lankan stock market, the company had adopted a more aggressive stance with regards to equity investments; SLIC’s total exposure to equity securities increased to 40.53% as at end-December 2010 (end-December 2009: 29.87%).

That said, RAM Ratings Lanka’s concerns were mitigated given that the current market value of the portfolio is almost three times the cost (the portfolio is valued at lower of cost or market value).

Meanwhile, the company’s liquidity position is considered to be adequate; its ratio on liquid assets to total insurance funds had amounted to 0.88 times as at end-December 2010, which is in line with its peers.

On a separate note, the company’s claims ratio in the general segment improved during the year, resulting in a turnaround in the division’s core performance; the division recorded an underwriting profit of Rs. 1.23 billion compared with a loss of Rs. 974.51 million in 2009.

Elsewhere, the life segment’s core performance eased with underwriting losses increasing from Rs. 927.52 million in fiscal 2009 to Rs. 1.14 billion during FY Dec 2010.

This is primarily attributed to the high incidence of maturity claims, in line with the company’s relatively old life insurance portfolio.

Overall, however, the company’s underwriting performance recorded a turnaround to post a technical profit of Rs. 87.15 million in fiscal 2010 compared with an underwriting loss of Rs. 1.86 billion in 2009.

Furthermore, SLIC’s overall performance was boosted by massive gains of Rs. 22.54 billion on its investment portfolio. The company’s pre-tax profit surged to an unprecedented Rs. 15.03 billion during FY Dec 2010 (FY Dec 2009: Rs. 2.83 billion).

In line with the strong profit generation during the year, SLIC’s capital position strengthened further; the company’s shareholders funds increased to Rs. 18.03 billion as at end-Dec 2010.

SLIC’s ratios on shareholders’ funds (excluding revaluation reserves) to total assets and insurance funds compared favourably with most of its peers.