Fitch Ratings has assigned Sri Lanka-based Co-operative Insurance Company Limited (CICL) a National Insurer Financial Strength (IFS) Rating and National Long-Term Rating of ‘BBB+(lka)’. The Outlook is Stable.
KEY RATING DRIVERS
The rating reflects the non-life insurer’s modest domestic business profile, supported by its association with co-operative societies, good capitalisation and a somewhat conservative investment policy. CICL’s rating is also supported by its consistently strong financial performance and earnings.
We view CICL as a niche player in the domestic market with a modest non-life market share by gross written premium (GWP) of 3.2% at end-2017 (2016: 3.0%). The insurer is 99.9% owned by 203 co-operative societies that together represent several multi-purpose co-operative organisations and rural banks. CICL’s rating also factors the insurer’s access to a sizable potential customer base within the co-operative movement and the access to potential customers from using the service centres owned by the co-operative societies. In 2017, almost one-third of the insurer’s policyholders were from the co-operative movement.
Fitch sees CICL’s capitalisation as good. The insurer’s capitalisation, as measured by its risk-based capital (RBC) ratio, was 183% at end-June 2018 (2017: 180%; 2016: 139%) against the 120% regulatory minimum. However, we expect capitalisation to remain constrained around this level over the medium term because of the insurer’s expansion plans, occasional appetite for high-risk investments as well as a possible infusion of capital to its life subsidiary, Cooplife Insurance Limited (Cooplife) should the need arise. Fitch expects the company to maintain the RBC ratios for its non-life and life operations above 180% in the medium term.
CICL maintained strong financial performance and earnings by consistently generating high pre-tax operating return on assets, including realised and unrealised gains (2017: 9.5%, 2016: 5.5%). The company’s modest marketing spend and the use of relatively low-cost distribution channels means its expense ratio of 30% in 2017 (2016: 34%) is lower than that of the industry (2017: 34%, 2016: 35%). The lower expense ratio and disciplined underwriting practices led to a Fitch calculated combined ratio of 95% in 2017 (2016: 101%, 2015: 98%), which compares favourably with the industry.
CICL has a moderately conservative investment policy, with considerable exposure to good credit quality fixed-income securities and a modest exposure to equities. More than 80% of CICL’s invested assets were in fixed-income securities at end-2017; out of which, 37% was invested in fixed deposits, 28% in listed debentures and 23% in government securities. Over 70% of the fixed-income portfolio was invested in assets rated ‘A-(lka)’ and above. Its equity investments were mainly its investment in Cooplife, which accounted for 14% of invested assets at end-2017.
The rating could be downgraded following a weakening of CICL’s combined ratio to above 115% for a sustained period or its RBC ratio is consistently below 165%.
An upgrade could occur if the company continues to expand its market franchise, while sustaining its combined ratio at below 100% and RBC ratio well above 190%.