Fitch Ratings has affirmed Sri Lanka-based People’s Insurance PLC’s National Insurer Financial Strength (IFS) Rating at ‘A+(lka)’. The Outlook is Stable.
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.