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

RAM Ratings Lanka has reaffirmed Sri Lanka Insurance Corporation Ltd.’s (SLIC) 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 its strong competitive position, financial flexibility derived from state ownership, systemic importance as the country’s second largest premium underwriter, and healthy capitalisation levels

SLIC is the oldest insurer in Sri Lanka and the second-largest in terms of premiums underwritten; the Company accounted for 23% of the industry’s composite gross written premiums as at end-December 2011. Further, it is the largest insurer in terms of assets, accounting for 39% 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. While benefiting from State ownership via insurance provisions for State departments and bancassurance with State banks, the State linkage also exposes SLIC to the risk of investing in businesses which are non-synergistic with its core business, leading to additional risks.

That said, it notes increasing contributions to profitability from non-core segments, with energy and healthcare making up 31.78% and 3.16% of Group pre-tax profit in fiscal 2011, somewhat mitigating its concerns.

SLIC continued to maintain its strong competitive footing, commanding a market share of 25.6% in the General insurance segment in FY Dec 2011 (FY Dec 2010: 24.82%); further strengthening its position as the largest player in the segment. Its share of the Life insurance segment remained relatively unchanged at 19% (fiscal 2010: 19.29%), ranking as the third-largest Life insurance player. Looking ahead, SLIC is expected to maintain its strong competitive position, supported by its brand name, the introduction of new products and channel development initiatives.

Despite a growth in premiums in the general segment, the Company’s General claims ratio deteriorated to 58.95% in fiscal 2011 (fiscal 2010: 47.82%) as claims trickled in from the motor and miscellaneous sub-segments. However, the ratio remained better than that of most peers. Overall, underwriting performance eased on the back of increased claims and overhead costs, resulting in a net underwriting margin of 9.82% in FY Dec 2011 (FY Dec 2010: 17.66%).

The segment’s underwriting performance, however, remained above average. Meanwhile, the life segment recorded a reduction in total claims in fiscal 2011, which resulted in an improved claims ratio of 54.49% (fiscal 2010:83.38%). Underwriting performance returned to the black with a net underwriting margin of 2.48% in FY Dec 2011 (FY Dec 2010: -19.23%), supported by a reduction in maturity and death claims.

The Life segment’s underwriting performance is deemed to be below average. All in all, despite an improvement in underwriting profit, the Company’s overall pre-tax profit dipped to Rs. 7.81 billion in FY Dec 2011 (FY Dec 2010: Rs. 15.03 billion) owing to a shrinking investment income against the lacklustre performance of the equity market.

Elsewhere, SLIC’s investment composition remained unchanged in fiscal 2011, the bulk of which consists of government securities; these accounted for 47.15% of the Company’s investment portfolio as at end-FY Dec 2011. Equity investments accounted for 36.13% of the composition (Rs. 27.6 billion) in fiscal 2011, which was relatively higher than peers’ thus exposing SLIC to volatilities in the share market.

That said, it notes that around 48% of the equity investments are long-term strategic interests. Reflective of its investment in highly liquid government securities, the Company’s liquidity position is deemed good with liquidity ratios remaining better than peers’.

Meanwhile, it views SLIC’s capitalisation to be strong, with its ratio on shareholders’ funds to total assets and the ratio on shareholders’ funds to total insurance funds comparing favourably to most peers’. The company’s solvency margins also remained well above those of its peers in both its General and Life divisions.