Fitch Ratings has downgraded the National Insurer Financial Strength (IFS) Ratings of seven Sri Lankan insurers following the recent sovereign downgrade and recalibration of the agency’s Sri Lankan National Rating scale. The seven insurers’ ratings have been maintained on Rating Watch Negative (RWN).
The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch’s downgrade of Sri Lanka’s Long-Term Local Currency Issuer Default Rating (IDR) to ‘CC’ from ‘CCC’ on 1 December 2022. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC+’ or below.
National rating scales are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national rating scale is denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National rating scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales. For details, see Fitch Ratings Recalibrates Sri Lanka’s National Rating Scale, dated 19 December 2022.
The National IFS Ratings of the Sri Lankan insurers take into consideration their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in downgrades of the National IFS Ratings of the following insurers:
– Sri Lanka Insurance Corporation Limited to ‘A(lka)’/RWN from ‘AA(lka)’/RWN;
– National Insurance Trust Fund Board to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;
– People’s Insurance PLC to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;
– HNB Assurance PLC to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;
– HNB General Insurance Limited to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;
– Continental Insurance Lanka Limited to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN; and
– Construction Guarantee Fund to ‘BB(lka)’/RWN from ‘BBB-(lka)’/RWN.
KEY RATING DRIVERS
The downgrades of the National IFS Ratings of the seven insurers are driven by the downgrade of the sovereign’s Long-Term Local-Currency IDR and the recalibration of the national rating scale while also reflecting the relative creditworthiness among Sri Lankan issuers.
We believe that the investment and liquidity risks of insurers have increased due to the weaker credit profile of the sovereign and the subsequent rating action on various financial institutions; see Fitch Downgrades 10 Sri Lankan Banks’ Ratings, dated 12 January 2023.
The rated insurers’ investment portfolios, similar to that of other insurers in the country, are dominated by fixed-income securities issued or guaranteed by the government, deposits and securities issued by local banks, non-bank financial institutions and corporations. Fitch maintains the ratings of all domestic Sri Lankan banks on RWN amid the likelihood of capital and funding stress as the default risk on domestic debt increases while access to foreign-currency funding remains constrained.
We have maintained the insurers’ ratings on RWN to reflect the potential for these insurers’ creditworthiness relative to other entities on the Sri Lankan National Rating scale to further deteriorate amid high investment and liquidity risks, pressure on regulatory capital positions and a weaker financial performance outlook. The heightened investment risks and earnings pressure amid the weak operating environment could affect insurers’ regulatory capital profiles.
RATING SENSITIVITIES
We expect to resolve the RWN when the impact of Sri Lanka’s economic crisis on the insurers’ credit profiles becomes more apparent. This may take longer than six months.
Sri Lanka Insurance Corporation Limited (SLIC)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– inability to access foreign- or local-currency assets to meet SLIC’s liabilities, including any restrictions by the government;
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
– deterioration in the regulatory risk-based capital (RBC) ratio below 350% for life and 200% for non-life for a sustained period;
– deterioration in financial performance, including the non-life combined ratio well above 100% for a sustained period;
– significant weakening in SLIC’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– there is limited scope for upward rating action because of the RWN.
National Insurance Trust Fund Board (NITF)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– inability to access foreign- or local-currency assets to meet NITF’s liabilities, including any restrictions by the government;
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
– deterioration in risk-management practices, for instance, due to persistent delays in renewing reinsurance arrangements;
– deterioration in the regulatory RBC ratio to below 250% for a sustained period;
– deterioration in the combined ratio to above 103% for a sustained period;
– significant weakening in NITF’s company profile, such as a large reduction in government-related business.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– There is limited scope for upward rating action given the RWN.
People’s Insurance PLC
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– inability to access foreign- or local-currency assets to meet the insurer’s liabilities, including any restrictions by the government;
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
– deterioration in the regulatory RBC ratio to below 220% for a sustained period;
– sustained deterioration in financial performance, combined ratio remaining above 103%, or weaker risk management practices;
– weakening in the business profile including restrictions on its distribution channels.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– there is limited scope for upward rating action because of the RWN.
HNB Assurance PLC (HNBA) and HNB General Insurance Limited (HNBGI)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– inability to access foreign- or local-currency assets to meet liabilities, including any restrictions by the government;
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
– deterioration in the regulatory RBC ratios of HNBA and HNBGI to below 260% and 220%, respectively, for a sustained period;
– significant weakening in the group’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile;
– sustained deterioration in financial performance, including the non-life combined ratio remaining above 103%, or weaker risk management practices.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– There is limited scope for upward rating action given the RWN.
Continental Insurance Lanka Limited (CILL)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– inability to access foreign- or local-currency assets to meet CILL’s liabilities, including any restrictions by the government;
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
– deterioration in the regulatory RBC ratio to below 230% for a sustained period;
– sustained deterioration in financial performance, combined ratio remaining above 103% for a sustained period;
– significant weakening in CILL’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is limited scope for upward rating action given the RWN.
Construction Guarantee Fund (CGF)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign
– significant liquidity constraints that impede CGF’s ability to service its guarantee obligations;
– sustained weakness in financial performance, including a deterioration in the combined ratio to above 120% on a sustained basis or weaker risk-management practices;
– a deterioration in the company profile, for instance, due to significant weakening in CGF’s association with the government, or a deterioration in CGF’s business risk profile from worsening conditions in the domestic construction sector.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– There is limited scope for upward rating action given the RWN.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
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