Fitch affirms Sri Lanka Insurance Corporation’s IFS Ratings at ‘B’/’AAA’

Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Rating of Sri Lanka Insurance Corporation Limited (SLIC) at ‘B’. The Outlook is Negative. 

The agency has simultaneously affirmed SLIC’s National IFS Rating at ‘AAA(lka)’ with a Stable Outlook.

SLIC’s ratings reflect its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry. These strengths are partially offset by its high exposure to sovereign-related investments, which caps its investment and asset risk score on the international rating scale at ‘ccc+’ under Fitch’s credit-factor scoring guidelines.

The Negative Outlook on SLIC’s international IFS Rating reflects the agency’s expectations of a further increase in the insurer’s investment-related risks, which are heightened in the international rating scale because of its sizeable exposure to assets linked to the Sri Lankan sovereign (B-/Negative).

Fitch assesses SLIC’s business profile as ‘Favourable’ compared with other Sri Lankan insurance companies due to its leading business franchise, diversified participation and stable business lines across life and non-life insurance sectors, and its large domestic operating scale. 

In light of this ranking, Fitch scores SLIC’s business profile at ‘b+’ under its credit-factor scoring guidelines on the international rating scale. SLIC is Sri Lanka’s second-largest life insurer and third largest non-life insurer based on gross written premiums.

SLIC’s risk-based capital (RBC) ratios of 434% for its life and 208% for its non-life segments, which measure its capital position, were well above the industry average and the 120% regulatory minimum. 

Fitch expects the insurer’s sufficient capital buffers, strengthened partly by its large unallocated participating surpluses, to somewhat mitigate the impact from any potential investment losses stemming from volatile financial markets as a result of the coronavirus pandemic.

Fitch believes the fallout in economic activity due to the pandemic will hamper the industry’s new business growth. “We expect new business generation for life insurance to be subdued over the near term as most insurers 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 the import of motor vehicles to control currency depreciation,” it added.

Fitch expects the potential pressure on earnings from the slowdown in premiums and softer investment yields to be somewhat mitigated by lower claims from motor insurance lines due to fewer traffic accidents following restrictions on travel to contain the spread of the coronavirus. SLIC has consistently maintained its non-life combined ratio below 100% (2019: 95%) for the previous five years, buoyed by its scale advantages and prudent underwriting practices.

The IFS Rating remains sensitive to any material change in Fitch’s rating case assumptions on the pandemic. Periodic updates to these assumptions are possible in light of the rapid pace of changes in government action in response to the pandemic, and the speed with which new information is available on the medical aspects of the outbreak.