Fitch Ratings has affirmed the National Insurer Financial Strength (IFS) Ratings of several Sri Lankan insurers and removed them from Rating Watch Negative (RWN). The outlook is ‘Stable’.

The insurers are:

- Sri Lanka Insurance Corporation Limited (SLIC) at ‘A(lka)’

- Continental Insurance Lanka Limited at ‘A-(lka)’

- HNB Assurance PLC at ‘A-(lka)’

- HNB General Insurance Limited at ‘A-(lka)’

- People’s Insurance PLC at ‘A-(lka)’

- Co-operative Insurance Company PLC at ‘BB(lka)’

- Construction Guarantee Fund at ‘BB(lka)’

Investment and liquidity risks

One factor driving the ratings is easing investment and liquidity risks. The removal of the RWN on the insurers’ national ratings reflects Fitch’s 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. (SLIC’s IFS Rating of ‘CC’ on RWN was not considered in this review.)

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. The investment and liquidity risk profiles of Sri Lankan insurers are closely linked with those 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.

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.

Better operating conditions

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%.

Insurers’ recent underwriting profitability has deteriorated due to higher claim costs and expenses but Fitch does not expect a material worsening over the next 12-18 months as inflationary pressures have started to ease. Insurers have focused on growing non-motor business lines amid continued restrictions on the import of motor vehicles.

NITF

At the same time, Fitch has downgraded National Insurance Trust Fund Board’s (NITF) National IFS Rating to ‘BBB(lka)’ from ‘BBB+(lka)’ and removed it from RWN. The outlook is ‘Stable.’

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 is the sole domestic reinsurer and receives 30% of reinsurance cessations from all domestic non-life operators. It has faced continued delays in renewing its reinsurance contracts and 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.