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Fitch Affirms People’s Insurance at ‘A+(lka)’; Outlook Stable

Financial News Update: The affirmation reflects the insurer’s ‘Moderate’ business profile, satisfactory financial performance and earnings as well as a conservative investment policy. It also factors in our expectation of a recovery in the insurer’s regulatory capital position, which had somewhat weakened during 2019.

Fitch sees People’s Insurance’s ownership as neutral to its rating. Fitch believes that Sri Lanka’s regulatory framework, under which People’s Insurance operates, ring-fences the insurer’s capitalisation and policyholders through implementation of a minimum risk-based capital requirement.

Fitch believes People’s Insurance will maintain its regulatory capitalisation, as measured by its risk-based capital (RBC) ratio, above 225% in the medium term, helped by its profitability and changes in investment allocation. The RBC ratio declined to 214% by end-September 2019, from 237% in 2018, due to the adoption of SLFRS 16 Leases and some asset allocation decisions during the year.

The new lease accounting standard – the local equivalent of IFRS 16 – removes the distinction between operating and finance leases. Most contracts classified as operating leases, which were previously off balance sheet, are now recognised on the balance sheet as right-of-use (RoU) assets, along with a corresponding lease liability. The local RBC regime regards RoU assets as inadmissible and deducts them from total available capital – the numerator of the regulatory RBC ratio. RoU assets are also subject to a 1% operational-risk charge in calculating the regulatory RBC ratio. Fitch estimates the insurer’s RBC ratio was 13pp lower at end-September 2019 under SLFRS 16 than what it would have been under the previous standard.

Management intends to amend its short-term investment strategy to move some investments from term deposits to government securities and quality domestic corporate bonds. Fitch believes that this should support the company’s initiative to improve its RBC ratio to above 225% in the near term.

Fitch assesses the insurer’s business profile as ‘Moderate’ compared with that of other domestic non-life insurers due to its substantive business franchise and competitive advantages, which are supported by its association with the strong ‘People’s’ brand. This is somewhat counterbalanced by its moderate operating scale, business risk profile and diversification.

Almost 70% of the insurer’s business was directed from the group during 9M19 (2018: 77%), mainly through referrals from its immediate parent, People’s Leasing & Finance PLC (PLC, B-/AA-(lka)/Stable). People’s Insurance expanded its non-group business exposure to almost 30% of gross written premiums (GWP) in 9M19, from around 23% in 2018. This, along with its resilient group business, helped the company maintain its position as Sri Lanka’s sixth-largest non-life insurer.

The insurer’s combined ratio of 97% in 9M19 was below that of the industry due to its low-cost window-office distribution strategy. People’s Insurance operates predominantly via 139 window offices placed inside the branches of PLC and its ultimate parent, People’s Bank (Sri Lanka) (AA+(lka)/Stable), which helps keep its expense ratio lower than that of the industry at 29%. However, the expense ratio has increased in line with the costs involved in expanding the insurer’s non-group-related businesses. Fitch expects People’s Insurance to continue to benefit from the group business and its distribution strategy, which should keep the overall combined ratio below 100% in the medium term.

People’s Insurance continued to invest heavily in fixed-income securities, of which more than 95% had a credit rating of at least ‘A-(lka)’. Its investment portfolio was dominated by term deposits at 41%, followed by corporate bonds (34%) and government securities (20%) at end-September 2019. It had no exposure to equity investments.

RATING SENSITIVITIES
Downgrade rating sensitivities:

– The RBC ratio remaining below 220% or the combined ratio above 100% for a sustained period.

– A weakening in the business profile due to weaker linkages between People’s Insurance and PLC, including restrictions to its distribution channels via PLC branches.

Upgrade rating sensitivities:

– An improvement in the RBC ratio to consistently above 260%, while improving the business profile in terms of broader diversification of business lines and keeping the combined ratio below 98% on a sustained basis.