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.
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KEY RATING DRIVERS
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 our 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. We expect 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. 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.RATING SENSITIVITIES
The IFS Rating remains sensitive to any material change in Fitch’s rating case assumptions on the pandemic. Periodic updates to our 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. For Fitch’s pro forma rating and stress case assumptions, please refer to the previous rating action commentary “Fitch Downgrades Sri Lanka Insurance’s IFS to ‘B’; Outlook Negative”, published 30 April 2020, at https://www.fitchratings.com/site/pr/10119947. Factors that could, individually or collectively, lead to negative rating action/downgrade: IFS Rating – A material adverse change in Fitch’s rating assumptions on the coronavirus impact. – A further increase in its investment and asset risks on a sustained basis. – Deterioration in the Fitch Prism Model score to well below ‘Somewhat Weak’ for a sustained period. – Significant deterioration in financial performance and earnings for a sustained period. – Significant weakening in SLIC’s business profile. National IFS Rating – Significant weakening in SLIC’s business profile. – Deterioration in the RBC ratio to below 350% for the life and 200% for the non-life businesses for a sustained period or a significant increase in non-core investments. – Deterioration in the non-life combined ratio to well above 100% for a sustained period. Factors that could, individually or collectively, lead to positive rating action/upgrade: IFS Rating – Significant reduction in SLIC’s investment and asset risks on a sustained basis will lead to a revision of the rating Outlook to Stable. – A material positive change in Fitch’s rating assumptions on the coronavirus impact. – A positive rating action is prefaced by Fitch’s ability to reliably forecast the impact of the pandemic on the financial profile of both the Sri Lankan insurance industry and SLIC. – Sustained maintenance of SLIC’s ‘Favourable’ business profile; and – Maintenance of the Fitch Prism Model score well into the ‘Adequate’ level on a sustained basis. National IFS Rating – An upgrade is not possible as its ‘AAA(lka)’ National IFS Rating is already the highest score on the National Rating scale.BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.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.The post Fitch Affirms Sri Lanka Insurance Corporation’s IFS Ratings at ‘B’/’AAA(lka)’ appeared first on Adaderana Biz English | Sri Lanka Business News.
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