RAM Ratings Lanka has reaffirmed Co-operative Insurance Company Limited’s long-term claims-paying ability ratings at BB+; the outlook on the long-term rating is stable. The ratings continue to be constrained by the company’s small size.
On the other hand, the ratings are supported by its extensive branch reach through its links with cooperative societies, as well as its conservative investment policy as well as adequate performance and capitalisation.
CICL has an extensive geographical coverage that mainly reaches the rural masses in Sri Lanka; the company leverages on 80 strategically placed cooperative service centres.
While roughly 50% of CICL’s composite gross written premium comprises premiums stemming from the rural segment, the rest is from the Western Province.
Despite intense competition, CICL has continued to maintain its small market share of 1.31% as at end-December 2010, supported by its links to the cooperative societies in terms of both business generation and branch reach. These societies and their members continue to be the Company’s shareholders.
The company’s composite GWP grew by 17.99% year-on-year during FYE 31 December 2010, primarily supported by the life segment, which grew by 56.32% y-o-y. However, CICL had experienced slower growth in its general segment at 8.60% y-o-y over the same period; this had been due to the intense competition in this segment, which is prone to price undercutting. That said, the company’s GWP continues to be dominated by general premiums, which accounted for 73.90% as at end-December 2010.
Meanwhile, on the back of increased GWP and decreased overall claims, CICL’s total underwriting surplus had improved during fiscal 2010. However, we note that Life segment claims have started to trickle in as the portfolio matures.
Life claims increased to Rs. 19.17 million in FY Dec 2010 (FY Dec 2009: Rs. 11.91 million): this had resulted in an increased Life claims ratio of 8.71% in the same period (FY Dec 2009: 8.57%). Meanwhile, CICL’s general claims ratio improved to 50.52% in FY Dec 2010 (FY Dec 2009: 61.64%) as claims dropped on the back of the discontinuation of two policies which resulted in high levels of claims coupled with an overall reduction in general claims. CICL’s claims ratios in both life and general segments have continuously outperformed its peers.
That said, increased overheads owing to branch expansions pressured the underwriting margins; CICL’s overall expense ratio weakened to 60.55% in FY Dec 2010 (FY Dec 2009: 52.40%). However, supported by the reduced claims, the Company’s combined ratio improved to 99.02% during the same period from 103.30% in the previous year.
On a separate note, the company continued to maintain a conservative stance with regards to investments; this is viewed positively. As such, the majority of its investments are in the form of government bonds and fixed deposits in licensed commercial and specialised banks.
While government securities still accounted for a 77.43% majority as at end-December 2010, CICL had increased its exposure to fixed deposits at 12.94% during the same period (end-December 2009: 7.42%). The company’s investment portfolio grew at a rapid 47.36% y-o-y on the back of premium growth.
Meanwhile, we note that the company’s investment yields have been on a downward trend owing to the receding interest-rate scenario prevailing in the economy.
Furthermore, the company’s liquidity position is considered to be adequate; its ratio on liquid assets to total insurance funds had improved to 1.61 times as at end-Dec 2010 (end-Dec 2009: 1.45 times), which is in line with its peers.
We observed improving trends in CICL’s overall profitability on the back of GWP growth coupled with lower claims.
However, due to branch expansions the company’s overhead costs had escalated; overall pre-tax profit improved only 5.89% to Rs. 76.95 million in FY Dec 2010. We expect profitability to improve when new branches break even.
CICL’s General segment incurred an underwriting loss of Rs. 35.37 million in FY Dec 2010 (FY Dec 2009: 29.33 million). Meanwhile, CICL’s overall profitability eased against the backdrop of receding interest rates as its investment-yield ratio declined to 15.79% in FY Dec 2010 (FY Dec 2009: 20.38%).
On a separate note, CICL’s capitalisation is deemed adequate. The Company had further strengthened its capital base by infusing LKR 203.19 million during FY Dec 2010, which in turn resulted in better capitalisation ratios.
CICL’s shareholders’ funds to total assets and shareholders’ funds to insurance funds ratios improved to 39.60% and 78.36% respectively as at end-December 2010 from 36.31% and 68.14% from previous year; both were better than its peers.
Moreover, CICL’s solvency margins in both the life and general segments had improved during fiscal 2010, and are in line with its peers.