Fitch affirms Sri Lanka’s Continental Insurance at A(lka); outlook stable

Fitch Ratings Lanka has affirmed Sri Lanka-based Continental Insurance Lanka Limited’s (CILL) National Insurer Financial Strength (IFS) Rating and National Long-Term Rating at ‘A(lka)’. The Outlook is Stable.

KEY RATING DRIVERS

The affirmation reflects the non-life insurer’s good domestic business profile, strong capitalisation, strong financial performance and earnings as well as its prudent investment policy.

Fitch sees CILL’s domestic business profile as good, supported by an expanding branch network and association with its corporate group – Melstacorp PLC and Distilleries Company of Sri Lanka PLC (AAA(lka)/Rating Watch Negative).

CILL’s market share by gross written premiums improved to 4.6% at end-2017, from 4.2% in the previous year, and its branch network increased to 49 branches, from 45 in 2016 and 37 in 2015.

We expect CILL to maintain strong capitalisation, supported by continued profitability and a conservative investment policy. The insurer’s capitalisation, as measured by its risk-based capital (RBC) ratio, was 281% (2016: 274%) against the 120% regulatory minimum. Management expects to maintain the RBC above 225% in the medium term.

We see CILL’s financial performance and earnings as strong. The insurer’s pre-tax return on assets improved to 8.3% in 2017, from 6.8% in 2016, supported by a 52% increase in pre-tax income. CILL has consistently maintained its non-life combined ratio below 100% for the previous three years with a disciplined underwriting approach. The ratio improved to 98% in 2017 (2016: 99%) owing to a lower claims ratio (2017: 60%, 2016: 62%).

CILL has a conservative investment policy, with a large exposure to high credit quality fixed-income securities and a small exposure to equities. Corporate debentures and government securities accounted for 33% and 22% of invested assets, respectively, as at end-2017 (2016: 38% and 28%). The new Inland Revenue Act, which will come into effect from 1 April 2018, will increase effective taxes on investment income due to the removal of tax exemptions on debentures and notional tax credits on government securities. In response, management expects to improve net yields by increasing the duration of its fixed-income investments.

RATING SENSITIVITIES

The rating could be downgraded following a weakening of CILL’s combined ratio to above 110% for a sustained period or its RBC ratio being consistently below 200%.

An upgrade could occur if the company continues to expand its market franchise, while consistently improving its combined ratio to below 95% and maintaining its RBC ratio well above 250%.