(The following statement was released by the rating agency)
COLOMBO/HONG KONG, October 27 (Fitch) 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)'. The agency also affirmed AAIP's Insurer Financial Strength (IFS) Rating at 'B'. All ratings have been placed on Rating Watch Negative (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.
Contacts:
Primary Analyst (International Ratings) Jeffrey Liew Senior Director +852 2263 9939 Fitch(Hong Kong) Limited 2801, Tower Two, Lippo Centre, 89 Queensway Hong Kong Secondary Analyst (International Ratings) Nayantara Bandaranayake Analyst +94 112541900 Primary Analyst (National Ratings) Nayantara Bandaranayake Analyst +94 112541900 Fitch Ratings Lanka Limited Level15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst (National Ratings) Jeffrey Liew Senior Director +852 2263 9939 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable.
Additional information is available at www.fitchratings.com Applicable criteria, 'Insurance Rating Methodology ', dated 4 September 2014, and 'National Scale Ratings Criteria', dated 19 January 2011, are available at www.fitchratings.com.
Applicable Criteria and Related Research: Insurance Rating Methodology here
National Scale Ratings Criteria here
Additional Disclosure Solicitation Status here
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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