Softlogic Life Insurance PLC

ICRA Lanka reaffirms the Insurance Financial Strength rating of Softlogic Life Insurance PLC

InstrumentRated Amount                   (LKR Mn)Outstanding Amount            (LKR Mn)Rating Action
Insurance Financial Strength ratingN/AN/A[SL]A (Stable); reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the insurance financial strength rating of [SL]A (pronounced SL A) for Softlogic Life Insurance PLC (SLI or the Company). The outlook on the rating continues to be Stable.


The rating factors in the Company’s position as the third largest life insurance company in Sri Lanka, steady increase in market share (16.4% in June 2021 from 15.2% in December 2020) and its healthy business performance indicators. The rating also factors in the expected operational and managerial support from the Softlogic group. Softlogic Capital PLC (rated [SL]BBB+(stable outlook), a subsidiary holding company of Softlogic Holdings PLC (SHL), owns a 51.69% shareholding in SLI as on June 2021. The rating also takes into account SLI’s strong profitability metrics with a return on equity (RoE) of 16.8% in FY2020 driven mainly by a rise in underwriting surplus due to an improvement in the combined ratio (74.9% in FY2020 vis-à-vis 81.0% in FY2019). The RoE further rose to 23.4% in H1 FY2021, aided by its strong growth during the period. The rating also factors in the improvement in SLI’s capital adequacy ratio (CAR) to 307% as of March 2021 vis-à-vis 182% in December 2019. The solvency is envisaged to remain adequate going forward to support the Company’s growth plan (around 20-25% YoY GWP growth).

The pandemic is expected to elevate GWP growth in the near term, as it has heightened the awareness and need for protection related insurance products; in Q1 CY2021 and CY2020 the overall industry grew by 34% and 16%, respectively, vis-à-vis 10% in CY2019. However, , due to the pick-up in the spread of the Coronavirus since April 2021, ICRA Lanka also expects a higher amount of life and healthcare claims in CY2021, which have the potential to impact SLI’s profitability indicators. ICRA Lanka is also cognizant of the large capital expenditure, high leverage and near term liquidity needs of the Softlogic group, which limits SHL (rated [SL] BBB (Negative)) from extending any significant financial support over the medium term. SLI, however is expected to continue to leverage on the operational synergies with the Softlogic group. Going forward, the ability of SLI to overcome the challenges posed by the pandemic and continue to maintain a healthy earnings and capital profile would be crucial from a rating’s perspective.

Outlook: Stable

ICRA Lanka believes that SLI’s earnings profile may be impacted by the effects of the Covid-19 pandemic and lacklustre macro outlook in the near term. The outlook may be revised to ‘Positive’ in case of steady improvement in the earnings and capitalization of the Company, going forward. The outlook may be revised to ‘Negative’ in case of a deterioration in the Softlogic group’s credit risk profile requiring higher dividends to be upstreamed by SLI or a significant weakening in the profitability and solvency of the Company.

Key rating drivers

Credit strengths

Low life insurance penetration provides opportunity for business growth: The life insurance industry in Sri Lanka recorded a penetration ratio of 0.6% in CY2020. However, the penetration rates in peer countries such as India (3.2%), Philippines (1.2%), Indonesia (1.4%), and Vietnam (1.6%) remain higher, reflecting the potential for upside in the Sri Lankan market. In the near term, the life insurance industry is expected to  benefit from the positive growth effects due  to the Covid-19 pandemic. Over the medium term, the industry is expected to  benefit from favourable macro factors such as increasing consumer disposable income and rise in the demand for protection products.

SLI’s market share continues to improve – SLI’s gross written premium (GWP) grew at a healthy pace of 25% YoY to LKR 15,660 Mn in FY2020 vis-à-vis  a growth of 25% YoY in FY2019. In H1 FY2021, the GWP grew by 43% YoY to LKR 9,183 Mn (LKR 6,433 Mn in H1 FY2020), due to demand driven by the pandemic. ICRA Lanka is cognizant that the Company has been able to maintain an above industry average growth rate (industry growth stood at 16% YoY and 10% YoY in CY2020 and CY2019, respectively), resulting in an expansion of market share to 16.4% in June 2021 (15.2% in December 2020 and 14.1% in Dec-19). The Company is the third largest life insurer in Sri Lanka, and its healthy performance is driven by its business model which focuses on niche customer segments along with a differentiated product range, digital disruptiveness and operational efficiency.

Healthy business performance indicators: SLI’s first year persistency rate was 83% in FY2020 and 85% in FY2019, at a higher level than the industry average (about 60-70%). This was on account of its focused target marketing and customer retention strategies. The average premium per policy was LKR 136,852 in FY2020, at a higher level than peers (industry average is between LKR 35,000- 60,000). The higher premium per policy is due to the target customer segment in the mid to high income categories, and has supported the Company’s underwriting surplus.

Strong profitability supported by an underwriting surplus: The underwriting surplus (including management expenses) grew by 57.2% YoY to LKR 3,626 Mn in FY2020 compared to LKR 2,307 Mn in FY2019, largely driven by an improvement in the combined ratio. The net investment income grew to LKR 2,270 Mn in FY2020 compared with LKR 1,575 Mn in FY2019, primarily due to growth in the investment portfolio. Overall, the Company was able to report a PAT of LKR 1,521 Mn in FY2020 vis-à-vis LKR 2,173 Mn in FY2019. The reported RoE and RoA  stood at 16.8% and 5.6%, respectively in FY2020 (29.2% and 11.4%, respectively in FY2019). The reduction in net profit in FY2020 was largely due to the higher expensing of insurance contract liabilities. In H1 FY2021, the Company reported a PAT of LKR 920 Mn (LKR 533 Mn in H1 FY2020) led by robust GWP growth; the RoE and RoA (adjusted for one-off deferred taxes) stood at 23.4% and 6.6%, respectively (on an annualized basis). ICRA Lanka expects the healthy profitability indicators to underpin the Company’s future growth and expansion through internal generation.

Experienced management team, with operational and managerial support from the Softlogic group: As part of the Softlogic group, the parent company provides support from the group entities; and the ability to leverage synergies between different business units, including the healthcare segment comprising of the Asiri Hospital Chain. However, ICRA Lanka notes that support towards other entities in the group limits Softlogic Holdings PLC (SHL, rated [SL] BBB/negative) from extending any significant financial support in the medium term. SLI also has a professional and well-experienced management team, and a healthy governance structure with 7 of the 8 board directors being non-executive and 3 directors being independent.

Improvement in capital profile: In Q1 FY2020, the Company received external funding of LKR 2.8 Bn in terms of a Financial Re-insurance from Munich Re, one of its re-insurance partners and was able to boost its Tier 1 capital. It further received a sum of LKR 2.8 Bn via a sub-debt transaction from development agencies Norfund and Finnfund during FY2020. Consequently, the Risk Based capital adequacy ratio (CAR) increased to 307% in March 2021 from 182% in Dec-19. ICRA Lanka is cognizant that the aggressive growth plan of SLI may pressure its capitalization and further notes that the Fin-Re transaction requires periodic repayments subject to the emergence/sufficiency of future surplus. Nonetheless, the solvency is expected to remain adequate, supported by the envisaged internal accruals.

Credit challenges

Expected rise in Covid-19 claims is likely to adversely impact profitability:  The total amount of Covid related claims in Q4 FY2020 stood at LKR 15 Mn.  However, due to sharp increase in Covid cases, the Covid claims increased to around LKR 247 Mn in H1 FY2021. Consequently, SLI’s claims ratio (as a percentage of NPE) increased to 28.6% in H1 FY2021 from 25.9% in FY2020. SLI maintains a prudence margin with its mortality assumption and has not held any additional reserves in relation to Covid up to now. However, the reserving assumptions will be reassessed at regular intervals.  ICRA Lanka estimates that with the current pandemic trend in the country, SLI’s Covid claims could range from LKR 400 Mn – LKR 800 Mn in H2 FY2021, resulting in a higher claims ratio of 29.5% – 31.5% in FY2021. Nonetheless, ICRA Lanka will re-look at its claims estimate for SLI once further performance numbers are available.

Analytical approach: For arriving at the ratings, ICRA has applied its ratings methodologies as indicated below:

Links to applicable criteria:  ICRA Lanka’s Insurance Financial Strength Rating Methodology

About the Company:

Softlogic Life Insurance PLC, formally known as Asian Alliance Insurance PLC commenced operations in December 1999 and had evolved into a composite insurance solutions provider with a sizeable market share in the life insurance segment. The Company catered to a clientele that consisted of corporates and individuals both in Life and Non-life businesses through an extensive network of regional distribution offices located throughout Sri Lanka. The Company was acquired by the diversified conglomerate, the Softlogic Group in 2011. Owing to a change in the regulations in 2014, the general insurance and the life insurance businesses were segregated with the former becoming a step-down subsidiary of the latter. In October 2016, Company divested its entire stake in the general insurance business and the life insurance company was renamed as Softlogic Life Insurance PLC. As in June 2021, Dalvik Inclusion Private Limited, a subsidiary of Leapfrog Investments (an institutional investor with exposure to the financial services and healthcare sectors) and Milford Ceylon (a Mauritius-based fund) have invested in a significant minority (about 19% each) in the Company.

During the financial year ended December 31, 2020, SLI reported a net profit of LKR 1.5 Bn on a Gross Written Premium of LKR 15.7 Bn compared to a net profit of LKR 2.2 Bn on a Gross Written Premium of LKR 12.5 Bn for the corresponding period of the previous fiscal year. In H1 FY2021, SLI reported a net profit of LKR 920 Mn on a Gross Written Premium of LKR 9.2 Bn compared to a net profit LKR 533 Mn on a Gross Written Premium of LKR 6.4 Bn in H1 FY2020.

Key financial indicators (Audited)
LKR Mn FY2019FY2020H1 FY2020*H1 FY2021
Gross Written Premium (GWP) 12,53115,6606,4339,183
Net  Earned Premium (NEP) 11,54013,7885,5648,302
Underwriting Surplus^ 2,3073,6268332,261
Profit After Tax 2,1731,521533920
Reported Net Worth 8,2199,9368,8969,791
Claims Ratio 26.0%25.9%26.8%28.6%
Total Expense ratio 55.1%49.1%59.8%44.1%
Combined Ratio** 81.0%74.9%86.6%72.7%
Capital Adequacy Ratio 182%302%NANA
Return on Equity – Reported 29.2%16.8%12.5%23.4%

* Unaudited  **Combined ratio is calculated inclusive of maturities and surrenders *** RoE is annualized in H1 FY2020 and H1 FY2021; same is also adjusted for one-off deferred taxes of LKR 232 Mn in H1 FY2021 ^Underwriting surplus includes management expenses

Rating history for last three years:
Apsara Thurairetnam
Senior Analyst

Niraj Jalan
Assistant Vice President
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