Non-core investments by Sri Lanka Insurance (SLC) in healthcare, LPG and leisure is a source of concern to the group as they are outside the core operating business and have little synergies, Fitch Ratings said in a report.
The company in 2010 acquired the Sri Lankan operations of Shell Gas Terminal Lanka (Pvt) Ltd, and 51% of Shell Gas Lanka Ltd for a combined investment of Rs 7 billion. "Nevertheless, Fitch notes that Litro Gas Lanka Ltd. holds a majority market share in the LPG market, with further growth potential given current low levels of gas usage. As such, profitability is expected to be robust," the statement said.
SLIC set up a subsidiary, Sri Lanka Insurance Resorts and Spas (Pvt) Ltd- through which it plans to invest in a luxury hotel in Hambantota. The company also has a strategic stake in the health sector via a 58.2% holding in Lanka Hospitals Corporation PLC. "Although these investments have been carried out through shareholder funds, they are a concern to the agency as they are outside the company's core operating business - and have little synergistic benefits," it said.
It said while SLIC benefits from state support, its investments in non-core industries - driven in turn by government - are a concern. While pointing out that these are profitable ventures, these could impede profitability if operating performance weakens at these entities. Fitch said,
The rating agency said that despite large realised capital gains in 2010, SLIC is susceptible to market volatility due to its large equity portfolio - and that risk management would require further strengthening.
"SLIC's ratings could be further upgraded if the group is able to arrest the gradual decline of its market share while increasing recurring income and reducing profit volatility," it said, adding that, "the company would also have to maintain a non-life combined ratio below 100% and current capital adequacy ratios on a sustained basis for such an upgrade." Fitch said the company plans to list its shares on the Colombo Stock Exchange subsequent to splitting its life and general insurance business tentatively in 2012 in line with the regulatory deadline of 2015 for existing companies. |
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