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Fitch Ratings has downgraded Sri Lanka-based Sri Lanka Insurance Corporation Ltd.’s (SLIC) Insurer Financial Strength (IFS) Rating to ‘B’ from ‘B+’. The Outlook is Negative. SLIC’s National IFS Rating was not covered in this review.
The rating action follows Fitch’s annual review of SLIC. The review took into consideration Fitch’s current assessment of the impact of the COVID-19 pandemic, including its economic impact, under a set of rating assumptions described below.
These assumptions were used by Fitch to develop pro forma financial metrics for SLIC that Fitch compared with both the rating guidelines in its criteria and with previously established rating sensitivities for SLIC.
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 (IDRs) to ‘B-’ from ‘B’ on 24 April.
The Negative Outlook on SLIC reflects the agency’s expectations of further weakening in the insurer’s investment-related risks because of its sizeable exposure to the sovereign related assets and any near-term volatility in earnings caused by the pandemic.
Fitch continues to factor in SLIC’s above-industry capital position in the IFS Rating. 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 under our credit-factor scoring guidelines to ‘b+’ from ‘bb-’ due to the agency’s view of a weakened operating environment. “We continue 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,” the agency said. SLIC is Sri Lanka’s second-largest life insurer and third-largest non-life insurer based on gross written premiums.
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. “We expect 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 the Government’s measures to contain the spread of the virus, and the subsequent halt in economic activities, could hamper the industry’s new business growth.
“For life insurance, we expect 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, we expect 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,” the agency stated.
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.
Assumptions for COVID-19 impact (rating case)
Fitch used the following key assumptions in support of the pro forma ratings analysis discussed above:
