Fitch downgrades Asian Alliance Insurance’s National IFS rating to ‘BBB’

Fitch Ratings Lanka has downgraded Sri Lanka-based Asian Alliance Insurance Plc’s (AAIP) National Insurer Financial Strength Rating and National Long-Term Rating to ‘BBB(lka)’ from ‘BBB+(lka)’ and placed both ratings on Rating Watch Negative(RWN). The agency has also placed AAIP’s Insurer Financial Strength (IFS) Rating of ‘B’ on RWN.
Key rating drivers
The one-notch downgrade of AAIP’s national ratings follows the significant deterioration of its ultimate parent Softlogic Holdings Plc’s (SHL; BBB-(lka)/RWN) credit profile which is reflected by SHL’s two-notch downgrade on 2 October 2014.
SHL’s weaker credit profile reduces its ability to provide AAIP with additional capital to support growth if required, and may also diminish the synergistic benefits the company derives from being a part of the group.
AAIP is regulated by the Insurance Board of Sri Lanka and is subject to rules and regulations, including the maintenance of a minimum regulatory solvency of at least 1x for both life and non-life business. The minority shareholders of AAIP, including Deutsche Investitions- und Entwicklungsgesellschaft (DEG) and Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO, AAA/Stable/F1+) who hold 19% each of the company, are likely to act as a deterrent to excessive dividend payments.
As such, AAIP’s downgrade was limited to a single notch.
The RWN reflects the potential drag of SHL’s weakened liquidity profile on AAIP’s credit profile, for example through high dividend payments to support SHL’s capital and liquidity needs. SHL’s ratings have been placed on Rating Watch Negative (RWN) to reflect concerns on its liquidity, capital structure and financial flexibility.
AAIP’s ratings also reflect its modest but growing market share and the pressure on its capitalisation from rapid top line growth. In additional, the ratings are supported by the synergistic benefits gained from being part of the Softlogic Group based on SHL’s controlling ownership in AAIP. The profile of AAIP has been boosted by DEG and FMO ownership of 19% each in the company.
Established in 1999, AAIP is a composite (life and non-life) insurer accounting for less than 3% of industry assets at end-2013. 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 over 50 branches. AAIP’s combined (life and non-life) gross written premium for 1H14 was LKR2.27Bn, a 14% growth from 1H13.
Rating sensitivities
Rating Watch Negative will be resolved upon demonstration by AAIP of its ability to sustain its credit metrics without any drag from SHL’s weakened liquidity position, and upon resolution of SHL’s RWN without any further downgrade should the company sufficiently address its near-term refinancing requirements.
The ratings may be downgraded if there is sustained weakening in AAIP’s regulatory solvency ratios to below 1.5X for life or non-life, or if there is significant weakening in the credit profile of the controlling shareholders of AAIP.