Sri Lanka’s largest state-owned insurer Sri Lanka Insurance Corporation Limited (SLIC) is expected to see further weakening in investment-related risks because of its sizeable exposure to the sovereign-related assets and any near-term volatility in earnings caused by the COVID-19 pandemic, says Fitch Ratings.
The international credit rating agency has downgraded SLIC’s Insurer Financial Strength (IFS) Rating to ‘B’ from ‘B+’. The outlook is negative. SLIC’s National IFS Rating was not covered in the review.
The rating action follows Fitch’s annual review of SLIC that took into consideration Fitch’s current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of rating assumptions.
Fitch says that the downgrade reflects the rising pressures in the operating environment and in the insurer’s business profile as well as heightened investment and asset risks, all of which are caused mainly by the deterioration in the sovereign’s credit profile.
Fitch downgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings to ‘B-‘ from ‘B’ on 24 April 2020 (Outlook Negative).
Fitch believes that the sovereign’s downgrade underscores SLIC’s investment risks as all the insurer’s invested assets are in Sri Lanka. Under Fitch’s credit-factor scoring guidelines, the insurer’s investment and asset risk score is capped at ‘ccc+’ due to its high exposure to sovereign-related investments. SLIC’s risky asset ratio was 219% in 2019 (2018: 203%).
Fitch has lowered SLIC’s business profile score to ‘b+’ from ‘bb-‘ due to the agency’s view of a weakened operating environment.
The agency continues to rank SLIC’s business profile as ‘Favourable’ compared with that of other Sri Lankan insurance companies due to the leading business franchise, participation in well-diversified and stable business-lines and large domestic operating scale. SLIC is Sri Lanka’s second largest life insurer and third largest non-life insurer based on gross written premiums.
Fitch says it continues to factor in SLIC’s above-industry capital position in the IFS Rating.
SLIC’s capitalisation—measured by Fitch’s Prism Factor-Based Capital Model (Prism FBM)—was ‘Strong’ at end-2019. Under Fitch’s coronavirus rating case, the pro forma Prism FBM score drops to ‘Somewhat Weak’, which is commensurate with the guideline for ‘BB’ rated insurers.
Fitch expects the insurer’s sufficient capital buffers, strengthened partly by its large unallocated participating surpluses, to mitigate the impact from any potential investment losses stemming from volatile financial markets.
SLIC’s life and non-life risk-based capital (RBC) ratios were 434% and 208%, respectively, at end-2019 (2018: 437%, 200%), well above the industry average and the 120% regulatory minimum.
Fitch thinks government measures to contain the spread of the virus, and the subsequent halt in economic activities, could hamper new-business growth. For life insurance, the agency expects new business generation to be subdued over the near-term as most insurers, including SLIC, predominantly use agency networks that rely on human interaction for distribution.
In addition, Fitch expects non-life business growth to slow in light of the government’s temporary restriction on non-essential goods imports, including motor vehicles, to control currency depreciation.
SLIC’s three-year average combined ratio was 95%, comfortably beating industry averages. The combined ratio increases to 97% under the agency’s pro forma rating case.