Fitch upgrades Sri Lanka Insurance
long-term rating

Fitch Ratings has recently upgraded Sri Lanka Insurance Corp Ltd’s (SLIC) National Long-term rating to ‘AA-(lka)’ from ‘A+(lka)’. Concurrently, Fitch has affirmed SLIC’s National Insurer Financial Strength (IFS) rating at ‘AA-(lka)’. The Outlook is Stable.
The upgrade of SLIC’s National Long-term rating reflects the company’s recent nationalisation, which, in Fitch’s view, indicates potential for government support, should this be required. On 4 June 2009, the Supreme Court ordered that SLIC’s privatisation in 2003 be annulled on the grounds that the transaction was not properly structured and executed. SLIC is now under government control and its board of directors has been replaced.
“SLIC’s systematic importance to the Sri Lankan economy is underpinned by its position as the largest insurer in the market by total assets,” says Stanley Tsai, Director in Fitch’s insurance team. As at end-
2008, SLIC had a market share of 42.1% by assets, 26.5% by non-life premiums and 19.1% by life premiums. The company’s strong franchise and distribution network are also key rating factors.
Nevertheless, Fitch notes that the Sri Lankan insurance industry is faced with a myriad of cyclical and structural challenges, including a slowing economy, falling interest rates, price competition and a lack of breadth and depth in the capital markets. On the non-life side, Fitch believes the major challenge for SLIC is to maintain appropriate pricing and underwriting standards in the face of rising price competition, where premium rates for certain business lines have fallen dramatically due to detariffication.
In its life insurance business, the challenge for the company is to manage a significant asset-liability duration mismatch. The agency also notes that as interest rates fall, SLIC’s economic capital position may be adversely affected. The company’s reinvestment risk is, however, moderated by the profit participation feature in some of its life insurance policies.
In addition, Fitch is concerned to see SLIC’s relatively high exposure to equity investments. The collapse of the equity market in 2008 placed significant pressure on the company’s risk-based capital, although valuations have recovered strongly from the end-2008 level. Fitch will continue to assess
SLIC’s investment risk appetite, business strategy and operating metrics as the company undergoes this transition period of ownership and management change.