Fitch confirms Continental Insurance Lanka rating at ‘A-(lka)’

ECONOMYNEXT – Fitch Ratings Lanka said it has confirmed Continental Insurance Lanka Limited’s (CILL) National Insurer Financial Strength Rating and National Long-Term Rating of ‘A-(lka)’ with a stable outlook.

"The ratings reflect CILL’s satisfactory capitalisation in terms of regulatory RBC, relatively short operating history and modest market share,” a statement said.

The ratings also reflect the recent capital infusion by its parent.

The full statement follows:

Fitch Ratings-Colombo/Hong Kong-19 May 2016: Fitch Ratings Lanka has affirmed Sri Lanka-based Continental Insurance Lanka Limited’s (CILL) National Insurer Financial Strength Rating and National Long-Term Rating of ‘A-(lka)’. The Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect CILL’s satisfactory capitalisation in terms of regulatory RBC, relatively short operating history and modest market share. The ratings also reflect the recent capital infusion by its parent, Distilleries Company of Sri Lanka PLC (DCSL; AAA(lka)/Stable). CILL is fully owned by DCSL through holding company Melsta Corp Limited. DCSL is a well-established, leading alcoholic beverage manufacturer in Sri Lanka. CILL benefits from group business and operational synergies.

CILL was established as a non-life insurer in 2010 and, despite intense competition in the non-life industry, accounted for around 4% of the segment’s gross written premiums by 2015. The company has recorded above sector growth of 30% in 2015 and 31% in the previous year. Fitch generally views growth at rates greater than the market or peers cautiously from a ratings perspective, especially during periods of competitive pricing pressure. However, due to good underwriting standards, CILL’s combined ratio continues to improve and was around 99% for 2015. This ratio is satisfactory and compares well with peers, especially given the company’s short operating history. Fitch expects further ratio improvements to be slow, given tough industry competition.

CILL’s capitalisation is commensurate with its rating. From 2016 regulatory reporting is based on a risk-based capital regime, which replaces the previous solvency-based rules. At end-2015, CILL’s RBC ratio stood at 308%, compared to a regulatory minimum of 120%. Management expects to maintain a minimum RBC ratio at around 200%.

In 2014, CILL’s capitalisation was boosted by a capital injection of LKR250m from its parent. Shareholder equity increased to over LKR1bn at end-2015, from LKR898m in the previous year due higher earnings and a modest dividend payout of 5% of net earnings. Shareholder equity is well above the regulatory minimal capital of LKR500m for a single line of business.

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Although Fitch does not expect the Sri Lankan insurance sector’s credit profile to deteriorate materially, Fitch is of the view that operating conditions could become more challenging. Fitch downgraded the Sri Lankan sovereign to ‘B+’ from ‘BB-‘ and assigned a Negative Outlook on 29 February 2016. The operating environment remains a key rating driver for the Sri Lankan insurance sector, given its potential volatility.

RATING SENSITIVITIES

Key rating triggers for a downgrade include a sustained weakening of its combined ratio to above 110% or its RBC ratio below 180%.

A rating upgrade in the short-term is unlikely. In the medium- to long-term, the company’s ratings may be upgraded if it achieves increased scale while maintaining profitability and capitalisation at current levels.
(COLOMBO, May 20 2016)
 

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