Fitch Ratings has affirmed the National Insurer Financial Strength (IFS) Ratings of seven Sri Lankan insurers, removed them from Rating Watch Negative (RWN), and assigned them a stable outlook.
This rating move includes Sri Lanka Insurance Corporation Limited (SLIC), at ‘A(lka)’; Continental Insurance Lanka Limited, at ‘A-(lka)’; HNB Assurance PLC, at ‘A-(lka)’; and HNB General Insurance Limited, at ‘A-(lka)’.
As well as People’s Insurance PLC, at ‘A-(lka)’; Co-operative Insurance Company PLC, at ‘BB(lka)’; and Construction Guarantee Fund at ‘BB(lka)’.
Fitch has also downgraded National Insurance Trust Fund Board’s (NITF) National IFS Rating to ‘BBB(lka)’ from ‘BBB+(lka)’. It has also removed it from RWN and given it a stable outlook.
SLIC’s IFS Rating of ‘CC’ on RWN was not considered in this review, the rating agency noted.
“The removal of the RWN on the insurers’ national ratings reflects our view that near-term investment and liquidity risks have been reduced substantially, evident from the upgrade of Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CCC-‘ from ‘RD’ and the subsequent removal of the RWN on Fitch-rated banks,” Fitch stated.
According to analysts, the “one-notch downgrade of NITF’s rating reflects the insurer’s inability to renew its external reinsurance arrangements, resulting in weaker risk-management practices.”
NITF – the sole domestic reinsurer and receives 30% of reinsurance cessations from all domestic non-life operators – has faced continued delays in renewing its reinsurance contracts, Fitch explains.
In addition to this, it currently does not have any retrocession cover for its inwards reinsurance business. This, alongside continued capital weakness in certain business lines, exposes NITF’s capital and earnings to greater volatility, the rating agency warned.
Fitch’s rating move on Sri Lankan insurers was also influenced by the country’s government debt restructuring.
“The government has successfully restructured its local-currency sovereign debt while the holdings of treasury securities of banks and insurers have been excluded from the domestic debt optimisation programme,” analysts explain.
“The investment and liquidity risk profiles of Sri Lankan insurers are closely linked with that of the sovereign and banks as their investment portfolios are dominated by local-currency fixed-income securities issued by the government, corporate debt and deposits with financial institutions.”
Fitch continues: “The restructuring of Sri Lanka’s foreign-currency debt, including defaulted sovereign bonds, has not been completed, but we believe that incremental risks to Fitch-rated insurers’ capital from the restructuring are likely to be manageable, given their limited exposure to these bonds (0.5% of invested assets at end-March 2023).
“The domestic banking system’s foreign-currency liquidity has improved from the crisis period and should support insurers’ foreign-currency obligations such as premium payments to foreign reinsurers and claim obligations arising from foreign-currency policies.”
Fitch expects the pressure on insurers’ regulatory capital profiles to ease alongside the alleviated investment and liquidity risks. Fitch-rated insurers’ regulatory capital ratios have been well above the regulatory minimum of 120%.
Additionally, despite insurers’ recent underwriting profitability has deteriorated due to higher claim costs and expenses, the rating agency does not expect a material worsening over the next 12-18 months as inflationary pressures have started to ease.
Analysts also noted that insurers have focused on growing non-motor business lines amid continued restrictions on the import of motor vehicles.
