Key Rating Drivers
AAIP's ratings reflect Fitch's expectation of operational assistance and synergistic benefits from its ultimate parent, Softlogic Holdings Plc (SHP; A-(lka)/Stable) based on its 41.54% effective ownership. The ratings also reflect AAIP's modest but growing market share and its somewhat weak capitalisation due to aggressive top line growth.
The company has a competitive advantage in tapping SHP's customer base in healthcare and vehicle leasing and in accessing its retail outlets and branches across the country. AAIP has 36 branches and supplements non-life distribution by leveraging off 19 SHP outlets. The company expects to enhance its reach in Sri Lanka with a further 30 to 50 outlets by 2015.
AAIP's regulatory solvency for the life segment at end-H113 improved to 2.44x from 1.88x in 2012, following an allocation of LKR500m of AAIP's total capital to the life business. This has supported premium growth and will also facilitate the anticipated split of life and non-life businesses as required by regulation. For non-life the solvency ratio deteriorated to 1.4x at end-H113 from 2.37x in 2012, mainly due to aggressive top line growth. Both ratios currently meet the regulatory requirement and the company has expressed its commitment to improve the non-life solvency ratio to above 3x by end-2013.
In 2012, gross written premium (GWP) in life grew 28.8%, supported by new business, and non-life GWP grew 89.8% on account of rapid growth in motor and health insurance. These compare with an industry GWP growth of 6.6% and 14.7% for life and non-life, respectively. Fitch expects the aggressive top line growth to continue to put pressure on AAIP's solvency ratios.
AAIP's investment portfolio remains heavily exposed to equity at 26.6% of total invested assets, albeit reduced from 37.6% in 2011.
Improvements in the loss ratio (2012: 75.4%, 2011: 78.1%) and expense ratio (2012: 44.3%, 2011:50.8%) resulted in a drop of the combined ratio to 128.3% (2011: 136.6%). Nevertheless, this is still high compared with an industry average of 105%. Management intends to concentrate on group-related businesses to reduce the loss ratio. Fitch expects improvements in the combined ratio to be slow given its rapid business growth and intense price competition in the non-life business.
Established in 1999, AAIP is a composite insurer accounting for less than 3% of industry assets at end-2012. 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 upgraded on more stable contribution from AAIP's life and non-life operations, resulting in more sustained pre-tax income while strengthening its market share.
The National Ratings could be downgraded if AAIP's regulatory solvency ratios weaken and remain below its management-committed internal thresholds of 2x for life and 3x for non-life.
A weakening of AAIP's strategic importance to SHP, a significant reduction in parent ownership or a weakening of SHP's credit profile could also result in a downgrade of AAIP's ratings.