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

Thursday, 17 October 2013 00:00 -     - {{hitsCtrl.values.hits}}

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. The ratings are upheld by SLIC’s strong competitive position, financial flexibility derived from state ownership, systemic importance as the country’s second largest premium underwriter as well as the healthy capitalisation levels. The company has maintained its strong competitive position as the second-largest premium writer in life (stepping up from being third in 2011) and leading the general segment premiums. The company accounted for 22.51% of the industry’s composite gross written premiums (GWP) as at end-December 2012. 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 (GOSL), RAM Ratings Lanka opines that state support will be readily extended if needed. “We opine that credibility associated with state ownership, the captive business derived from state institutions and SLIC’s aggressive expansion plans will secure its market share over the medium to long term. However, we also note that state linkage exposed SLIC’s investments in non-synergistic ventures, albeit contributing positively to the group’s performance”. While the company maintained strong market position in the general segment, competition from smaller players eroded its footing from 25.61% in 2011 to 24.47% in 2012 in the general segment while the life segment continues to chart robust market standing at 19.78% in 2012 (2011:19.19%). However the RAM noted that this was common among all large players. Going forward, while general insurance segment is expected to continued to be pressured by competitive forces owing to the short-term nature of the policies, life insurance is expected to maintain its strong competitive footing owing to the long-term nature of the product. The company’s composite GWP grew 9.84% year-on-year (“y-o-y”) in FY Dec 2012 following a strong 20.21% y-o-y growth in the previous year owing to a reduction in growth in both general and life segments. General segment growth which spiked to 25.42% in FY Dec 2011 slowed to a moderate 10.17% in FY Dec 2012 following a reduction in vehicle imports following the tax hike. However it was noted that given the increase in vehicle prices owing to the tax hike, the increased GWP levels are sustainable, given its market share is not pressured. However, growth in the life segment is expected to be modest in the near term owing to the increased inflationary conditions and the high interest rates which prevailed in FY Dec 2012. Despite the growth in premiums in the general segment, SLIC’s general claims ratio weakened to 65.29% in fiscal 2012 (fiscal 2011: 56.16%) as claims had trickled in from the motor and miscellaneous sub segments. However, the ratio remains better than most of the similar rated peers. Overall, underwriting performance eased, on the back of increased claims and overhead costs resulting in a net underwriting margin of 7.79% in FY Dec 2012 (FY Dec 2011: 9.82%); overall, the segment’s underwriting performance remained average compared to its larger peers. Meanwhile, the life segment’s claims ratio too weakened marginally with the ratio weakening to 56.16% in FY Dec 2012 from 54.49% last year. This was largely from maturity claims which the company had made provisions for given its relatively mature life insurance portfolio. Along with this, net underwriting performance in life dipped into the red recording a Rs. 43.58 million loss. SLIC’s overall expense ratio remained relatively stable at 34.37% in FY Dec 2012 (FY Dec 2011:35.95%). However the overall combined ratio weakened to 95.79% owing to the weakening in the claims ratios both in the life and general segments. All in all, SLIC’s overall pre-tax profit dipped to Rs. 5.86 billion during FY Dec 2012 (FY Dec 2011: Rs. 7.81 billion) owing to shrinking investment income against the lacklustre performance of the equity market. Elsewhere, SLIC’s investment composition remained unchanged in fiscal 2012. Bulk of the investments consists of government securities accounting for 57.46% of the investment portfolio as at end-FY Dec 2012 (end-FY Dec 2011: 47.15%). Meanwhile, equity investments reduced to for 24.17% of the investments as at end-December 2012 from a higher 36.13% last year amidst the moderate performance of the equity market. Meanwhile, SLIC’s capitalisation is deemed to be strong. The company’s ratio on shareholders’ funds to total assets and the ratio on shareholders’ funds to total insurance funds of 36.48% (end-December 2011:24.10%) compared favourably to most of its peers. Meanwhile, SLIC’s solvency margins remained well above its peers for both divisions.