ECONOMYNEXT – Fitch has downgraded Sri Lanka Insurance Corporation Limited’s (SLIC) insurer’s financial strength rating (IFS) to ‘CC’, from ‘CCC+’, and placed the rating on watch due to shortage risk currency from a broken soft- ankle.
“The downgrade reflects the likelihood of payments ceasing or halting on SLIC’s foreign currency obligations due to low foreign currency liquidity in the local banking system,” Fitch said.
“Fitch believes that the counterparty risk of SLIC’s foreign currency assets has increased following the recent negative rating action on the Sri Lankan sovereign and various financial institutions.”
Sri Lanka has a middle-tier central bank that has been triggering increasingly frequent currency crises since the end of a civil war (2011/12, 2015/16, 2018 and 2020/22) that pushed the rupee from 113 to 340 so far.
Fitch said the counterparty risk of SLIC’s foreign currency assets had increased following the recent negative rating action on the Sri Lankan sovereign and various financial institutions.
The rating agency said increased investment risks and earnings pressure could affect SLIC’s regulatory capital profile.
“The risky asset ratio calculated by Fitch of SLIC is partly driven by the insurer’s significant investment in listed and unlisted stocks,” Fitch said.
“Fitch believes that the recent five-day closure of the Colombo Stock Exchange undermines the liquidity of SLIC’s listed investments, especially if such closures become recurring,”
Fitch said the weak operating environment will affect profits and business growth in motor insurance, the largest contributor to non-life premiums will remain subdued due to the continued government ban on imports cars, imposed in 2020 to control the depreciation of the currency. .
The full statement is reproduced below.
Fitch downgrades Sri Lanka Insurance Corp’s IFS to ‘CC’; Place IFS, ‘AA(lka)’ National IFS on RWN
Fitch Ratings – Sydney/Hong Kong – 21 April 2022: Fitch Ratings has downgraded the Insurer Financial Strength (IFS) rating of Sri Lanka Insurance Corporation Limited (SLIC) to “CC”, from “CCC+”, and placed the rating on Rating Watch Negative (RWN).
SLIC’s national IFS rating of “AA(lka)” was also placed on RWN.
Fitch also took rating action on seven other Sri Lankan insurers; please see FitchPlaces Seven Sri Lankan Insurers on Rating Watch Negative, published 21 April 2022.
KEY SCORING FACTORS
The downgrade reflects the likelihood of payments ceasing or halting on SLIC’s foreign currency obligations due to low foreign currency liquidity in the local banking system.
Fitch believes that the counterparty risk of SLIC’s foreign currency assets has increased following the recent negative rating action on the Sri Lankan sovereign and various financial institutions.
The insurer is exposed to foreign currencies through investments in Sri Lankan development bonds and deposits with local banks.
RWN is driven by heightened near-term downside risks to the insurer’s credit profile, including elevated investment and liquidity risk, pressure on its regulatory capital position, and weaker financial performance prospects. weak.
The RWN also reflects potential pressure on SLIC’s foreign currency obligations due to tight foreign currency liquidity in the local banking system and the uncertain impact of non-insurance SLIC subsidiaries.
Fitch believes that the recent negative sovereign rating measurement of Sri Lanka and various financial institutions underscores SLIC’s investment risks, as its investment portfolio is dominated by government-issued or government-guaranteed fixed income securities.
It also includes deposits and securities issued by local banks, non-banking financial institutions and corporations; Fitch lowered the default rating of the Sri Lankan sovereign’s long-term foreign currency issuers to “C”, from “CC”, and placed the ratings of several financial institutions on RWN, see Fitch Places 13 Sri Lankan Banks on Rating Watch Negative and Fitch Places Bank of Ceylan under Rating Watch Negative.
Fitch assumes that the announcement by the Ministry of Finance on April 12, 2022 that state and public sector borrowers will cease all foreign currency debt payments on borrowings governed by law other than Sri Lankan law does not will not apply to the obligations of the policyholders of SLIC or the obligations of its subsidiaries.
SLIC’s insurance business has no debt in its capital structure. However, one of its non-insurance subsidiaries took out foreign currency loans from a public bank, according to the latest annual report. It is unclear whether the subsidiary will have to stop payment of these loans or whether it would become the direct responsibility of the SLIC if the subsidiary is unable to pay, as the entity is ultimately owned by the state.
According to the company, SLIC’s currency-denominated insurance contract obligations are generally low and limited to certain non-automotive categories. The insurer, like other domestic insurers, depends on access to foreign currency to make premium payments to foreign reinsurers and to cover other costs that typically originate abroad.
SLIC’s risky asset ratio calculated by Fitch (end 2020: 529%) is partly driven by the insurer’s significant investment in listed and unlisted equities. Fitch believes the recent five-day closure of the Colombo Stock Exchange undermines the liquidity of SLIC-listed investments, especially if such closures become recurring.
Fitch believes that increased investment risks and earnings pressure could affect SLIC’s regulatory capital profile. A significant deterioration in the credit profiles of financial institutions could result in lower risk-based regulatory capital (RBC) ratios, as investments will be subject to additional risk charges in accordance with local RBC regulatory rules. on the 2020 results, and is driven by high asset risk charges.
Fitch expects the weak operating environment to affect SLIC’s earnings, similar to the rest of the industry. Growth in motor insurance – the largest contributor to non-life premiums – is expected to remain subdued as Fitch expects the government’s ban on car imports, imposed in 2020 to control the depreciation of currency, continues. In addition, underwriting profits will be squeezed by rising auto parts costs due to currency devaluation, while overall costs will rise with rising inflation. Insurers, including SLIC, also have limited ability to reprice policies, given declining customer disposable income.
SLIC, like other Sri Lankan non-life insurers, relies on international reinsurers to protect its non-motor business. Fitch believes that any material changes to reinsurance structures at renewal due to rising reinsurance costs could undermine the insurer’s risk management practices and ability to write new business.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
Fitch expects to resolve the RWN within the next six months once the impact on the insurer’s credit profile becomes more apparent. Fitch is also asking for more clarity on government restrictions on servicing foreign currency obligations, including the impact on the obligations of SLIC policyholders and the obligations of its non-insurance subsidiaries.
Potential triggers that could lead to a demotion include:
– inability to access foreign or local currency assets to meet debts
– any governmental restriction that impedes the ability of the insurer or its subsidiaries to
service policyholder or debt securities in foreign or local currency
– increased investment and asset risks, including a downgrade in the ratings of the
– a lasting drop in the RBC regulatory ratio, with no recovery plan
– persistently weak financial performance and earnings or risk management practices
– a downgrading of the sovereign rating following an event of default.
Factors that could, individually or collectively, lead to positive rating action/improvement:
– Possibilities for upside action are limited given the RWN.
BEST/WORST CASE EVALUATION SCENARIO
Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best- and worst-case scenario credit ratings for all rating categories ranges from “AAA” to “D”. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine sector-specific best and worst-case credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR
The main sources of information used in the analysis are described in the
Unless otherwise specified in this section, the highest level of ESG credit relevance is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on the entity’s credit, either because of their nature or the way they are managed by the entity.