Fitch Affirms Asian Alliance Insurance's IFS Rating at 'B'

Fitch Ratings Lanka has affirmed Sri Lanka-based Asian Alliance Insurance PLC's (AAIP) Insurer Financial Strength (IFS) Rating at 'B'. The agency has also affirmed the National Insurer Financial Strength Rating and the National Long-Term Rating at 'BBB+(lka)', respectively. The ratings are on Stable Outlook.

AAIP's ratings reflect the synergistic benefits from its ultimate parent, Softlogic Holdings Plc (SHP; BBB+(lka)/Stable) based on its 47.2% effective ownership.

The ratings also reflect AAIP's modest but growing market share and the pressure on its capitalisation from aggressive top line growth. AAIP has operational synergies with the group due to its presence in healthcare and financial services. The company also has access to the group's branches and retail outlets across the country. The company has 53 branches.

AAIP's regulatory solvency for the life segment at March 31, 2014 was 2.89x (end-2013: 2.48x and end-2012: 1.88x). Non-life solvency deteriorated to 2.02x (end-2013: 2.21x and end-2012: 2.37x) mainly due to premium growth.

The management has committed to maintain the life solvency above 2x and improve the non-life solvency to 3x by end-2014.

In 2013, gross written premium (GWP) in life grew 24%, supported by new business, and the non-life GWP moderated to 31% after aggressive growth of 90% in 2012. AAIP's investment portfolio remains heavily exposed to equity at 25.7% of total invested assets. The non-life combined ratio was very high at 129% and compares with an industry average of 105%. Management intends to improve this ratio through a more disciplined approach to pricing and by concentrating on profitable business lines. Fitch expects any improvement to the combined ratio to be slow given the intense price competition in the non-life business.

Established in 1999, AAIP is a composite (life and non-life) insurer accounting for less than 3% of industry assets at end-2013. In 2011, the company became a part of SHP, a diversified conglomerate. In early 2013, strategic investors, Deutsche Investitions- und Entwicklungsgesellschaft and Financierings-Maatschappij voor Ontwikkelingslanden N.V. bought 38% of AAIP from Soft Logic Capital.

The ratings may be downgraded if there is a sustained weakening in AAIP's regulatory solvency ratios to below its management-committed internal thresholds of above 2x for life and 3x for non-life. Any significant weakening in SHP's credit profile will result in a downgrade.

A stable contribution from AAIP's life and non-life operations, resulting in more sustained pre-tax income while strengthening its market share, is a trigger for an upgrade. 

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