ECONOMYNEXT – Sri Lanka Insurance Corporation General Limited (SLIC General) has been assigned a ‘CCC+’ Insurer Financial Strength (IFS) Rating and an ‘A+(lka)’ National IFS Rating by Fitch, with a stable outlook.
The ratings factor in the insurer’s adequate capital position and weak underwriting performance in recent periods, Fitch said.
“We expect near-term pressure on underwriting profitability to persist, due to rising exposure to the higher-claim health segment and new directive to remit 100% of motor insurance, strike, riot, civil commotion and terrorism premiums to the National Insurance Trust Fund Board.
“However, profitability should eventually improve, supported by enhanced claim management and growth in the motor segment, which accounted for 58% of 2023 gross written premium, following the government’s recent relaxation of vehicle import restrictions.”
Fitch Assigns Sri Lanka Insurance Corp General ‘CCC+’ IFS and ‘A+(lka)’ National IFS Ratings
Fitch Ratings – Sydney/Colombo – 28 Feb 2025: Fitch Ratings has assigned Sri Lanka Insurance Corporation General Limited (SLIC General) a ‘CCC+’ Insurer Financial Strength (IFS) Rating and an ‘A+(lka)’ National IFS Rating. The Outlook is Stable.
The ratings reflect the insurer’s ‘Favourable’ company profile and high investment and asset risk, driven by exposure to sovereign-related investments. The ratings also factor in the insurer’s adequate capital position and weak underwriting performance in recent periods.
Key Rating Drivers
‘Favourable’ Company Profile: We regard SLIC General’s company profile as ‘Favourable’, based on a ‘Favourable’ business profile and ‘Neutral’ corporate governance compared with that of other Sri Lankan insurers. SLIC General’s business profile is supported by its substantive business franchise, large domestic operations and wide distribution network. SLIC General is the country’s second-largest non-life insurer, with a gross written premium market share of 18% as of end-2023 (end-2022: 16%) based on the latest industry data by the Insurance Regulatory Commission.
Neutral Ownership; Non-Life Focus: We consider SLIC General’s ownership as neutral to its ratings. In February 2024, the parent, Sri Lanka Insurance Corporation Limited (SLIC) – ultimately owned by the Sri Lanka (CCC+) state – legally separated its life and non-life segments into two fully owned subsidiaries: SLIC General and Sri Lanka Insurance Corporation Life Limited (SLIC Life). This followed regulatory approval. Prior to the legal split, SLIC had been operating its life and non-life businesses separately, since the regulator first mandated composite insurers to segregate their operations in 2015.
Temporary Pressure on Underwriting: We expect near-term pressure on underwriting profitability to persist, due to rising exposure to the higher-claim health segment and new directive to remit 100% of motor insurance, strike, riot, civil commotion and terrorism premiums to the National Insurance Trust Fund Board (BBB(lka)/Stable). However, profitability should eventually improve, supported by enhanced claim management and growth in the motor segment, which accounted for 58% of 2023 gross written premium, following the government’s recent relaxation of vehicle import restrictions.
Non-life underwriting has been weak since 2022, driven by inflationary pressure, rising administrative costs and increased claim costs due to higher spare part prices and medical costs from the depreciation of the Sri Lankan rupee. The insurer’s combined ratio improved to around 101% for 11M24 (February-June 2024: 107%; 2023: 106%). The three-year average (2021-2023) combined ratio before the split was 102% and compared favourably against the industry average of 105%.
Reduced Investment and Liquidity Risks: We believe investment and liquidity risks have eased for SLIC General, in line with other domestic insurers, due to an improved sovereign credit profile. We upgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings to ‘CCC+’ in December 2024, following the completion of its international sovereign bond restructuring and an improved economic outlook. We score SLIC General’s investment and asset risk at ‘ccc’ on the international scale, reflecting its high exposure to sovereign and sovereign-related assets.
Risky asset exposure also decreased following the transfer of large non-core equity investments from the general insurance business to SLIC after the separation of the life and non-life segments. SLIC General’s Fitch-calculated risky-asset ratio was a high 439% at end-June 2024, indicating vulnerability to weakening in the sovereign’s credit quality. In addition, foreign-currency assets, mostly bank deposits and unit trust investments, were about 17% of invested assets.
Adequate Capitalisation: The regulatory risk-based capital ratio stands well above the regulatory minimum of 120%, at 223% at end-June 2024 and 226% at end-2023, but this is still below the average of Fitch-rated domestic non-life insurers (June 2024: 295%, 2023: 288%). The ratio improved to 266% by end-2024, boosted by higher retained earnings. SLIC General’s Fitch Prism Global score was ‘Weak’ at end-June 2024 due to its high investment risks.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IFS Rating
– Significant weakening in SLIC General’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile
– Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign, which account for a large share of SLIC General’s investment portfolio
National IFS Rating
– Sustained weakness in financial performance
– Deterioration in the risk-based capital ratio below 200% for a sustained period
– Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign, which account for a large share of SLIC General’s investment portfolio
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IFS Rating
– Further improvement in the company profile, including a greater operating scale and a stronger market positioning
– Significant reduction in SLIC General’s investment and asset risks for a sustained period
National IFS Rating
– An improvement in the risk-based capital ratio to well above 260% while maintaining the combined ratio at below 98%.
– Further improvement in the company profile, including a greater operating scale and a stronger market positioning.
– Significant reduction in SLIC General’s investment and asset risks for a sustained period
Date of Relevant Committee
18-Feb-2025
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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