The largest private sector insurance company in Sri Lanka, the company offers insurance, education, hydropower, healthcare and financial services.

The company was included in the S&P SL20 in June 2018.

The share closed flat at 2,500.00. (Colombo/May27/2024)

The segment has generally been highly profitable in recent years due to relatively low claim incidence, though there were significant claims in May 2022 as a result of anti-government protests, Fitch said.

“However, the effect on non-life insurers’ profitability and risk-based capital adequacy ratios could be reduced if they are able to raise premium pricing,” the rating agency said.

“The impact will also depend on the level of commissions motor insurers receive from NITF for providing SRCCT cover.”

The full statement is reproduced below:

Sri Lanka’s Motor Insurance Changes to Hit Non-Life Sector

Fitch Ratings-Hong Kong/Sydney/Colombo-31 January 2024: A new directive that Sri Lankan non-life insurers remit 100% of motor insurance strike, riot, civil commotion and terrorism (SRCCT) premiums to state-owned National Insurance Trust Fund Board (NITF, BBB(lka)/Stable) should benefit NITF while the underwriting profitability of non-life insurers is likely to worsen, says Fitch Ratings.

However, the effect on non-life insurers’ profitability and risk-based capital adequacy ratios could be reduced if they are able to raise premium pricing. The impact will also depend on the level of commissions motor insurers receive from NITF for providing SRCCT cover.

Prior to 2024, industry practice was to remit only 12% of SRCCT premiums to NITF under a reinsurance arrangement, although a 2008 government gazette required full remittance. The SRCCT segment has generally been highly profitable in recent years due to relatively low claim incidence, though there were significant claims in May 2022 as a result of anti-government protests.

NITF has yet to renew its reinsurance cover with international reinsurers for the SRCCT segment following its expiration in July 2023, and we believe unforeseen losses faced by NITF without such cover could result in heightened volatility for its capital position and earnings. This, along with the non-renewal of its retrocession cover for its inwards reinsurance business, was a factor in our decision to downgrade its rating, from ‘BBB+(lka)’, in October 2023. NITF’s combined ratio for SRCCT was 27% during the last five years, against its overall combined ratio of 78%, with ratios below 100% indicating an underwriting profit, which means a rise in premiums should boost profitability. Motor insurers previously had a maximum annual aggregate net retention of LKR10 million before passing on losses to NITF. This will no longer be the case under the new setup and NITF’s exposure will increase as a result.

We expect non-life insurers that have higher exposure to motor insurance to generally be more affected by the directive. The non-life industry’s combined ratio increased to 113% in 3Q23, from 109% in 2022, partly reflecting various factors that have eroded the underwriting profitability and market share of non-life insurers in the motor insurance segment in recent years. We estimate that the new requirements for SRCCT premiums may add 5pp-10pp to the non-life sector’s combined ratio, before accounting for any premium price adjustments and any commissions from NITF. This could weigh on the improvement in the combined ratio that we had expected for Fitch-rated non-life insurers in 2024.

Nonetheless, Fitch expects Sri Lanka’s economic conditions to improve in 2024, with GDP growth recovering, inflation easing and external liquidity metrics improving. These factors should support vehicle demand and motor insurers may be able to raise premiums significantly faster than inflation, on average, over 2024. This would moderate the impact on profitability from full remittance of SRCCT premiums to NITF, although higher prices may dampen demand growth for SRCCT policies. The capacity of many insurers to pass on price increases will still be constrained by competition, and we expect most Fitch-rated non-life insurers’ combined ratios to remain above 100% for 2024.

Investment and liquidity risks will likely remain the key downside risks for most of Fitch-rated Sri Lankan insurers in the near term, but poor profitability and capitalisation metrics could weigh on ratings over time. We revised the Outlooks on most of our rated insurers to Stable, from Rating Watch Negative (RWN), in October 2023 following the upgrade of Sri Lanka’s Long-Term Local-Currency Issuer Default Rating to ‘CCC-‘ from ‘Restricted Default’ (RD) and the subsequent removal of the RWN on Fitch-rated banks.
(Colombo/Jan31/2024)

Two fully-owned subsidiaries named Sri Lanka Insurance Corporation Life Limited and Sri Lanka Insurance Corporation General Limited will be created.

The split is required under the 2011 law on insurance regulation.

SLIC is being privatized by the State Enterprises Restructuring Unit of the Finance Ministry. (Colombo/Dec19/2023)

In an industry marked by fierce competition People’s Insurance showed the highest profit before tax and the best combined ratio, the statement said.

Chairman, Isuru Balpatabendi said the results showed the firms commitment and ability to navigate challenges.

Chief Executive Jeevani Kariyawasam said the operational efficiency of People’s Insurance showed the commitment to prudent financial management and all due claims were paid.

The timely payment showed a commitment to meeting shareholder needs, Kariyawasam said. (Colombo/Dec14/2023)

The DDR plan excluded banks and insurers except for dollar denominated domestic bonds.

“Fitch expects pressure on insurers’ investment and capital profiles to ease as the proposed plan will not have direct impact on the local-currency government debt holdings of insurers, banks and non-banking financial institutions,” Ratings said.

“Insurers’ holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected by the debt restructuring proposal, as we expected.

“However, restructuring of the sovereign’s foreign debt, including international sovereign bonds (ISB), has yet to be finalised.

The full statement is reproduced below:

Sri Lanka’s Debt Restructuring to Ease Insurers’ Investment, Liquidity Pressures

Mon 24 Jul, 2023 – 2:22 AM ET

Fitch Ratings-Colombo/Sydney-24 July 2023: The Sri Lankan government’s debt restructuring plan is likely to reduce investment and liquidity risks for domestic insurers, Fitch Ratings says.

Fitch expects pressure on insurers’ investment and capital profiles to ease as the proposed plan will not have direct impact on the local-currency government debt holdings of insurers, banks and non-banking financial institutions.

Nonetheless, the proposal is only one aspect of the sovereign’s (Long-Term Local-Currency Issuer Default Rating: C) debt sustainability plan.

Ratings on Sri Lankan insurers remain on Rating Watch Negative (RWN) amid high investment and liquidity risks, pressure on regulatory capital positions and a weak financial performance outlook, which could undermine insurers’ credit profiles relative to other entities on the national ratings scale.

Insurers’ holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected by the debt restructuring proposal, as we expected. However, restructuring of the sovereign’s foreign debt, including international sovereign bonds (ISB), has yet to be finalised.

Among Fitch-rated insurers, only a few have exposure to SLDBs or ISBs, which accounted for less than 5% and 0.2%, respectively, of the total invested assets of Fitch-rated insurers at end-March 2023.

The government has presented three treatment options for SLDBs, with the impact of any present-value losses on capital dependent on the treatment each insurer chooses. However, we believe that the satisfactory capital buffers maintained by Fitch-rated insurers would help to cushion any negative impact from the losses.

The investment and liquidity risk profiles of Sri Lankan insurers are closely linked with the sovereign, banks and non-bank financial institutions (NBFI) as their investment portfolios are dominated by fixed-income securities issued or guaranteed by the government (47% of invested assets at end-March 2023), corporate debt (21%) and deposits with local banks and NBFIs (10%).

The government’s domestic debt restructuring proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will ease pressure on banks’ already stressed credit profiles. Fitch continues to maintain all ratings on domestic banks and NBFIs on RWN due to the heightened near-term downside risks to their credit profiles from capital, funding and operating environment risks.

We expect the sparse foreign-currency liquidity in the local banking system to continue to limit insurers’ ability to meet foreign-currency obligations, such as reinsurance payments and claim obligations arising from the small portion of foreign currency-denominated policies. Fitch-rated insurers’ foreign-currency insurance contract obligations are mostly reinsured. Fitch-rated insurers also have foreign-currency deposits with local banks to support their foreign-currency obligations.

State-run National Insurance Trust Fund (NITF) provides Strike, Riot, Civil Commotion and Terrorism (SRCCT) cover on the island which is re-sold by all insurers.

The SRCCT Fund will bear the brunt of the losses with insurers experiencing little impact, Fitch said.

“We believe gross losses from the riots are likely to exceed LKR1 billion,” Fitch said.

“However, NITF’s net loss will be limited to this amount due to the protection provided by its excess of loss reinsurance cover. We expect NITF to have sufficient liquid assets to meet its claim obligations.”

“Rioters set vehicles on fire and destroyed property; including houses belonging to politicians, according to reports. It is too early to estimate losses from the event, although NITF has started to receive claims from primary insurers.

Primary insurers have net retention of 2.5 million rupees for motor claims under SRCCT cover with aggregate losses of over 10 million rupees passed onto the NITF.

Non-motor claims are fully passed on to NITF, subject to any excess borne by the policyholder.

Once total losses exceed LKR1 billion, NITF can recover additional losses under its excess of loss reinsurance cover up to a maximum of LKR10 billion.

NITF’s reinsurance cover for SRCCT, which is placed with international reinsurers, is effective from February 2022 to July 2023.

The full statement is reproduced below:

Losses from Sri Lanka’s Riots Manageable for Insurers

Fitch Ratings-Sydney-26 May 2022: Sri Lanka’s state-owned National Insurance Trust Fund Board’s (NITF, A+(lka)/Rating Watch Negative) Strike, Riot, Civil Commotion and Terrorism (SRCCT) fund will bear the brunt of losses stemming from recent riots in the country, with primary insurers experiencing little impact, says Fitch Ratings.

We believe gross losses from the riots are likely to exceed LKR1 billion. However, NITF’s net loss will be limited to this amount due to the protection provided by its excess loss reinsurance cover. We expect NITF to have sufficient liquid assets to meet its claim obligations.

Widespread riots broke out in Sri Lanka following an attack on anti-government protests in Colombo on 9 May.

Rioters set vehicles on fire and destroyed property; including houses belonging to politicians, according to reports. It is too early to estimate losses from the event, although NITF has started to receive claims from primary insurers.

The SRCCT fund, which is managed by NITF, provides cover against losses to property due to strikes, riots, civil commotion and terrorism. Primary insurers provide such cover as an add-on to their non-life products. Technical advisory and working committees, comprising industry participants, oversee the management of the SRCCT fund. The regulation requires NITF to administer the SRCCT fund separately from its other business lines.

Primary insurers have net retention of LKR2.5 million per policy for motor claims under the SRCCT cover, subject to an aggregate amount of LKR10.0 million, with additional losses passed on to NITF. Non-motor claims are fully passed on to NITF, subject to any excess borne by the policyholder. Once total losses exceed LKR1 billion, NITF can recover additional losses under its excess of loss reinsurance cover up to a maximum of LKR10 billion. NITF’s reinsurance cover for SRCCT, which is placed with international reinsurers, is effective from February 2022 to July 2023.

NITF’s net assets exceeded LKR14 billion in end-2020, while the SRCCT line recorded a net profit of LKR5 billion for the year. The fund’s assets were predominantly invested in local-currency denominated securities issued by the government of Sri Lanka. We affirmed Sri Lanka’s Long-Term Local-Currency Issuer Default Rating at ‘CCC’ on 19 May, as the government has continued to service local-currency debt and we assume this will continue, despite defaulting on its foreign-currency debt obligations.

We believe the SRCCT fund could see elevated losses in the near term as a result of the ongoing civil unrest amid Sri Lanka’s weak economic conditions. Cover provided by the SRCCT fund saw an increased uptake following the Easter Sunday terrorist attacks in 2019, with annual premiums rising to LKR6.1 billion in 2020, from LKR4.6 billion in 2018. SRCCT is NITF’s most profitable business line, with a loss ratio of less than 2% in the past five years, except in 2019, when the loss ratio reached 12%.

We do not expect claims from the recent riots to affect NITF’s capital position. However, weakness in its non-SRCCT business lines could affect the rating, as reflected in the Rating Watch Negative. We recently placed the National Ratings of all rated Sri Lankan insurers, including NITF, on Rating Watch Negative, due to elevated investment and liquidity risks, pressure on regulatory capital positions and a likely worsening in financial performance.

“The downgrade reflects the probability that ceased or interrupted payments could occur on SLIC’s foreign-currency obligations due to weak foreign-currency liquidity in the local banking system,” Fitch said.

“Fitch believes counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.”

Sri Lanka has an intermediate regime central bank which has been triggering currency crises with increasing frequency since the end of a civil war (2011/12, 2015/16, 2018 and 2020/22) which sent the rupee from 113 to 340 so far.

Fitch said counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.

The rating agency said the heightened investment risks and earnings pressure could affect SLIC’s regulatory capital profile.

“SLIC’s Fitch-calculated risky asset ratio is partly driven by the insurer’s large investment in listed and unlisted equities'” Fitch said.

“Fitch believes the recent five-day closure of the Colombo Stock Exchange undermines the liquidity of SLIC’s listed investments, especially if such closures become recurrent,”

Fitch said, it weak operating environment will affect the firm’s earning and growth in motor insurance , the largest contributor to non-life premiums will remain subdued due to the continuation of the government’s ban on auto imports, imposed in 2020 to control currency depreciation is expected.

The full statement is reproduced below

Fitch Downgrades Sri Lanka Insurance Corp’s IFS to’CC’; Places IFS, ‘AA(lka)’ National IFS on RWN

Fitch Ratings – Sydney/Hong Kong – 21 Apr 2022: Fitch Ratings has downgraded Sri Lanka Insurance Corporation Limited’s (SLIC) Insurer Financial Strength (IFS) Rating to’CC’, from ‘CCC+’, and has placed the rating on Rating Watch Negative (RWN).

SLIC’s National IFS Rating of ‘AA(lka)’ has also been placed on RWN.

Fitch has also taken rating action on seven other Sri Lankan insurers; please see FitchPlaces Seven Sri Lankan Insurers on Rating Watch Negative, published 21 April 2022.

KEY RATING DRIVERS

The downgrade reflects the probability that ceased or interrupted payments could occur on SLIC’s foreign-currency obligations due to weak foreign-currency liquidity in the localbanking system.

Fitch believes counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.

The insurer has foreign-currency exposure via investments in SriLanka development bonds and deposits with local banks.

The 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 positionand a weaker financial performance outlook.

The RWN also reflects potential pressure onSLIC’s foreign-currency obligations due to stretched foreign-currency liquidity in thelocal banking system and the uncertain impact from SLIC’s non-insurance subsidiaries.

Fitch believes the recent negative rating action on the Sri Lanka sovereign and various financial institutions underscores SLIC’s investment risks, as its investment portfolio isdominated by fixed-income securities issued or guaranteed by the government.

It also includes deposits and securities issued by local banks, non-bank financial institutions andcorporations; Fitch downgraded the Sri Lankan sovereign’s Long-Term Foreign-CurrencyIssuer Default Rating to ‘C’, from ‘CC’, and had placed the ratings of several financialinstitutions on RWN, see Fitch Places 13 Sri Lankan Banks on Rating WatchNegative and Fitch Places Bank of Ceylon on Rating Watch Negative.

Fitch assumes the Ministry of Finance’s 12 April 2022 announcement that the state andpublic sector borrowers will cease all foreign-currency debt payments on borrowings thatare governed by law other than Sri Lankan law will not apply to SLIC’s policyholderobligations or its subsidiaries’ debt obligations.

SLIC’s insurance operation does not haveany debt in its capital structure. However, one of its non-insurance subsidiaries hasforeign-currency borrowings from a state-owned bank, according to the latest annualreport. It is not clear if the subsidiary will have to stop payment on these borrowings or ifthis would become SLIC’s direct liability should the subsidiary be unable to pay, as theentity is ultimately owned by the state.

SLIC’s foreign-currency denominated insurance contract obligations tend to be small andlimited to certain non-motor classes, according to the company. The insurer, like otherdomestic insurers, relies on access to foreign-currency to make premium payments toforeign reinsurers and meet other costs that are typically sourced from overseas.

SLIC’s Fitch-calculated risky asset ratio (end-2020: 529%) is partly driven by the insurer’slarge investment in listed and unlisted equities. Fitch believes the recent five-day closureof the Colombo Stock Exchange undermines the liquidity of SLIC’s listed investments,especially if such closures become recurrent.

Fitch believes the heightened investment risks and earnings pressure could affect SLIC’sregulatory capital profile. A significant deterioration in the credit profiles of financialinstitutions could lead to lower regulatory risk-based capital (RBC) ratios, as investmentswill be subject to incremental risk charges according to local regulatory RBC rules.SLIC’s Fitch Prism Model score is ‘Somewhat Weak’, based on 2020 results, and is drivenby high asset risk charges.

Fitch expects the weak operating environment to affect SLIC’s earnings, similarly to therest of the industry. Growth in motor insurance – the largest contributor to non-lifepremiums – is likely to remain subdued, as Fitch expects the government’s ban on autoimports, imposed in 2020 to control currency depreciation, to continue. In addition,underwriting profit will be squeezed by rising motor spare-part costs due to currencydevaluation, while overall costs will climb with rising inflation. Insurers, including SLIC,also have limited ability to reprice policies, given the dent in customers’ disposableincomes.

SLIC, like other Sri Lankan non-life insurers, relies on international reinsurers to protectits non-motor businesses. Fitch thinks any material changes to reinsurance structures uponrenewal due to rising reinsurance costs could undermine the insurer’s risk managementpractices and ability to write new business.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch expects to resolve the RWN in the next six months once the impact on the insurer’scredit profile becomes more apparent. Fitch also seeks greater clarity on the government’srestrictions on servicing foreign-currency obligations, including the impact on SLIC’spolicyholder obligations and the debt obligations of its non-insurance subsidiaries.
Potential triggers that could lead to a downgrade include:

– inability to access foreign- or local-currency assets to meet liabilities

– any government restrictions that impede the insurer’s ability, or that of subsidiaries, to
service foreign- or local-currency policyholder or debt obligations

– rising investment and asset risks, including a downgrade of the ratings of financial
institutions

– a sustained drop in the regulatory RBC ratio, with no plans to rectify the situation

– sustained weakness in financial performance and earnings or risk management practices

– a downgrade of the sovereign rating stemming from a default event.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– There is limited scope for upward rating action given the RWN.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond 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 aworst-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 ofbest- 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. Formore 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.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is ascore of ‘3’. This means ESG issues are credit-neutral or have only a minimal creditimpact on the entity, either due to their nature or the way in which they are beingmanaged by the entity.

The budget has proposed a 25 percent windfall tax similar to the ‘super gains tax’ proposed in 2015 as well as an increase in a so-called financial VAT and 2.5 percent turnover tax.

“In addition to the tax proposals, the government announced that it plans to impose a fee on vehicles involved in accidents and allowing policyholders to be reimbursed for this fee by insurers,” Fitch said.

“Insurers will likely price the additional risks in their motor insurance policies, although changes to policy terms may be required as penalty charges or fines are generally excluded from the motor insurance policy coverage.

“Still, the penalty charge and the nature of traffic accidents on which a fee will be imposed remain unclear and are yet to be determined.

It was not clear whether insurers will have to pay the one time increase to 18 percent from 15 percent

“Most Sri Lankan insurers previously appealed against paying VAT on financial services with the view that the VAT Act does not specify insurance companies as liable,” Fitch said.

Insurers however had earned higher profits during lockdown due to lower general insurance claims.
The full statement is reproduced below

Sri Lanka’s Budget Proposals Weigh on Insurers’ Near-Term Earnings

Fitch Ratings-Colombo/Sydney-23 November 2021: The Sri Lankan government’s proposal to introduce new one-off as well as recurring taxes on companies will likely constrain the near-term profitability of some insurers, Fitch Ratings says.

However, we expect the proposals to have only a limited impact on most insurers’ capital positions because of their sound capital buffers accumulated before and during the Covid-19-led lockdowns in the country.

The government’s 2022 budget presented on 12 November 2021 introduced a 25% one-off tax on companies with a taxable income over LKR2 billion for the fiscal year ended 31 March 2021.

The agency believes that Sri Lanka Insurance Corporation Limited (CCC+/AA(lka)/Stable) and potentially National Insurance Trust Fund Board (A+(lka)/Stable) may need to pay the one-off tax as they have larger pre-tax profit bases among Fitch-rated Sri Lankan insurers.

Taxable income of the remaining Fitch-rated Sri Lankan insurers will likely fall below the LKR2 billion threshold.

If the authorities decide to use group or consolidated taxable income as the basis to calculate the tax, the taxable income of some insurers that are subsidiaries of larger parent companies could be considered in the calculation of the one-off tax.

Nevertheless, in spite of taxation, we believe that the capital positions of most insurers will remain satisfactory as their capital buffers were strengthened, especially helped by the low motor and medical insurance claims following lockdowns and insurers’ high retention of profits in 2020.

Fitch believes that the government’s proposed introduction of the 2.5% social security contribution on annual turnover exceeding LKR120 million will narrow the profit margins of insurers in the near-term.

However, we think the burden will gradually be transferred to policyholders through price revisions.

It remains unclear if insurers will be liable to pay the value added tax (VAT) on financial services, which is subject to a proposed one-time increase to 18% from 15% under the 2022 budget. Most Sri Lankan insurers previously appealed against paying VAT on financial services with the view that the VAT Act does not specify insurance companies as liable.

If imposed, the impact of this tax on near-term profit margins will be more pronounced as companies are not allowed to pass the increase in the VAT to customers. In addition to the tax proposals, the government announced that it plans to impose a fee on vehicles involved in accidents and allowing policyholders to be reimbursed for this fee by insurers.

Insurers will likely price the additional risks in their motor insurance policies, although changes to policy terms may be required as penalty charges or fines are generally excluded from the motor insurance policy coverage. Still, the penalty charge and the nature of traffic accidents on which a fee will be imposed remain unclear and are yet to be determined.

We also expect the potential influx of new motor vehicles into the market, following the government’s decision to release vehicles that are currently held in customs due to non-payment of taxes, to be insufficient to result in a material recovery in motor insurance policy volumes.

Fitch believes that the government’s ban on motor-vehicle imports will remain, at least in part, over the near term and most insurers are likely to continue to seek opportunities to diversify their products into non-motor insurance lines.

Sri Lanka Insurance had strong risk based capital (RBC) ratios of of 434 percent for life and 241 percent for non-life which were above industry average and regulatory requirements.

“Fitch believes SLIC’s additional investment of LKR6 billion in the Grand Hyatt project, as directed by the Sri Lankan government, will weaken the RBC ratios,” the rating agency said.

“…[H]owever, the impact will be manageable because of the insurer’s large total available capital base.”

SLIC had invested two billion rupees out of the six by May 2021.

The Grand Hyatt project was one of several private firms expropriated by the government in 2011, undermining Sri Lanka’s investment framework.

Fitch Affirms Sri Lanka Insurance Corporation’s IFS Ratings at ‘CCC+’/’AA(lka)’

Fitch Ratings – Colombo/Sydney – 24 Nov 2021: Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Rating of Sri Lanka Insurance Corporation Limited (SLIC) at ‘CCC+’. Fitch typically does not apply Outlooks to ratings in the ‘CCC’ category or below.

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

KEY RATING DRIVERS

SLIC’s ratings reflect its ‘Favourable’ business profile and its high exposure to sovereign-related investments, equity securities and non-core subsidiaries. The ratings also factor in the insurer’s capital position and financial performance that are better than that of the domestic insurance industry.

Fitch assesses SLIC’s business profile as ‘Favourable’ compared with other Sri Lankan insurance companies because of the leading business franchise, diversified participation and stable business lines across life and non-life insurance sectors, and the large domestic operating scale. SLIC was Sri Lanka’s second-largest life and non-life insurer, based on gross premiums in 1H21 and the largest in terms of total assets. In light of the market rankings, Fitch scores SLIC’s business profile at ‘b-‘ under our credit-factor scoring guidelines on the international rating scale.

SLIC’s high exposure to sovereign and sovereign-related investments caps its investment and asset risk score on the international rating scale at ‘cc’ under Fitch’s credit-factor scoring guidelines. The insurer’s Fitch-calculated risky assets ratio on the international rating scale was 529% in 2020 (2019: 275%), an increase due mainly to the downgrade of the Sri Lankan sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020.

SLIC’s regulatory risk-based capital (RBC) ratios of 434% for life and 241% for non-life at end-1H21 were well above the industry average and the 120% regulatory minimum.

Fitch believes SLIC’s additional investment of LKR6 billion in the Grand Hyatt project, as directed by the Sri Lankan government, will weaken the RBC ratios; however, the impact will be manageable because of the insurer’s large total available capital base. The insurer had already invested LKR2 billion out of the total additional requirement of LKR6 billion in May 2021.

Fitch’s Prism Model score dropped one level to ‘Somewhat Weak’ in 2020, from ‘Adequate’ in 2019, due mainly to the increased investment risks on the international rating scale as a result of the downgrade of the sovereign rating. Fitch views SLIC’s Prism Model score as commensurate with the international IFS Rating.

Fitch expects the government’s proposal on 12 November 2021 to introduce a 25% one-off tax on companies with taxable income over LKR2 billion for the fiscal year ended 31 March 2021, if implemented, may put pressure on near-term earnings and limit capital accumulation.

In addition, the government’s proposed introduction in 2022 of the 2.5% social security contribution on annual turnover exceeding LKR120 million, may affect earnings.

SLIC’s underwriting profitability, however, is supported by its scale advantages and prudent underwriting practices. The insurer has consistently maintained its Fitch-calculated non-life
combined ratio below 100% for the past six years. The ratio improved to 88% in 2020 (2019: 95%) before normalising to 98% in 1H21. The improvement in 2020 was due mainly to reduced non-life insurance claims following Covid-19 lockdowns. SLIC’s three-year average return on equity of 10% was satisfactory.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IFS Rating

– A further increase in SLIC’s investment and asset risks on a sustained basis;

– Significant weakening in SLIC’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile;

– Deterioration in the Fitch Prism Model score to well below ‘Somewhat Weak’ for a sustained period;

– Failure to maintain underwriting profitability for a sustained period.
National IFS Rating

– Significant weakening in SLIC’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile;

– Deterioration in the RBC ratio below 350% for life and 200% for non-life for a sustained period;

– Deterioration in the non-life combined ratio 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;

– Sustained maintenance of SLIC’s ‘Favourable’ business profile;

– Maintenance of the Fitch Prism Model score well into the ‘Somewhat Weak’ level on a sustained basis.
National IFS Rating

– Significant reduction in SLIC’s investment and asset risks on a sustained basis while maintaining its ‘Favourable’ business profile and capitalisation at current levels.

]]> https://economynext.com/sri-lanka-insurance-ccc-rating-confirmed-new-grand-hyatt-investment-to-weaken-rbc-88201/feed/ 0 https://economynext.com/sri-lanka-failed-finance-company-depositors-to-rs9-8bn-extra-after-insurance-increased-79956/ https://economynext.com/sri-lanka-failed-finance-company-depositors-to-rs9-8bn-extra-after-insurance-increased-79956/#comments Fri, 19 Mar 2021 13:35:02 +0000 https://economynext.com/?p=79956 ECONOMYNEXT – Depositors of failed Sri Lanka finance companies will get 9.8 billion rupee more with the ceiling on deposits qualified for insurance being raised by half a million rupees per person, the central bank said.

Compensation from the Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS), run by the Central Bank of Sri Lanka (CBSL) had been raised to 1.1 million rupees from an earlier 600,000 rupees.

“This decision has been taken to provide further relief to the depositors of financial institutions regulated by CBSL in the event of a cancellation or suspension of the licences of such institutions,” the Central Bank said.

“The Resolution and Enforcement Department of CBSL is currently taking necessary measures to commence the payment of additional compensation expeditiously.

“The payment mechanism and the date of commencement of payments under the increased compensation threshold will be notified by CBSL in due course.”

Depositors of six finance companies whose licenses had been cancelled or suspended are in line to get the higher amount.

Central Investments and Finance PLC (CIFL), The Standard Credit Finance Limited (TSCFL), TKS Finance Limited (TKSFL), The Finance Company PLC (TFC), ETI Finance Limited (ETIFL) and Swarnamahal Financial Services PLC (SFSP) are in resolution processes.

At a ceiling of 600,000 rupees 25.8 billion rupees would be paid to 254,484 depositors. Up to now 21.6 billion rupees would be paid.

Further details in this regard may be obtained from the Resolution and Enforcement Department via telephone numbers 0112477261 and 0112398788, the central bank said.

Up to 9.8 billion rupees extra would be paid to depositors at a ceiling of 1.1 million rupees. As a result 94 percent of depositors would be paid. (Colombo/Mar19/2021)

Turnover was 3.3 billion rupees with 136 stocks gaining and 59 falling.

The Colombo benchmark All Share Price Index gained 148.02 points to close at 7,736.36.

The index fell to a daily low at 7,627.89 in the first hour into trading but picked up and continue to increase throughout the day on Volatile Trading.

The S&P SL20 index of more liquid stocks gained 2.30 percent or 69.57 points to close at 3,097.23.

LOLC Holdings of Ishara Nanayakkara gained 45.75 rupees or 13.38 percent to close at 387.75 rupees.

LOLC Finance, gained 40 cents to close at 7.20 rupees, Browns and Company gained 20.25 rupees to close at 199.00 rupees while Browns investments closed 50 cents up at 5.50 rupees.

John Keells Holdings gained 3.75 rupees to close at 160.00 rupees while Vallibel One fell 10 cents to close at 63.90 rupees.

Hayleys Plc closed 4.30 rupees up at 73.10 with key subsidiaries Dipped Products gaining 1.70 to close at 62.90 rupees and Haycarb Plc gaining 7.75 to close at 119.00 rupees.

The Kingsbury Plc closed 20 cents up at 11.70, Singer Industries Ceylon closed 8.30 rupees up at 98.70 and Unisyst Engineering closed 30 cents up at 15.30 rupees.

Ceylon Tobacco Company closed 15.50 rupees down at 1,084.25 Ceylon Cold Stores closed 1.25 rupees down at 662.50 while Piramal Glass Ceylon closed 20 cents up at 10.00.

Expolanka gain 90 cents to close at 47.90 rupees and Melstacorp Holdings closed 1.10 rupees up at 50.90.

Royal Ceramic Lanka closed 1.75 rupees up at 329.75, Lanka Tiles gained 25 cents to close at 233.75 rupees while Lanka Walltiles closed 25 cents down at 237.00 and Lanka Ceramic closed 2.25 rupees down at 134.25 rupees.

Hatton National Bank closed 50 cents down at 136.00 rupees and Commercial Bank of Ceylon closed flat at 88.20 rupees.

DFCC Bank closed 1.60 cents up at 64.70 rupees and Sampath bank flat at 160.00 rupees while Nations Trust Bank fell 10 cents to close at 58.90 rupees.

Seylan Bank closed 1.20 rupees down at 51.70 and Pan Asia Banking Corporation gained 40 cents to close at 17.80 rupees.

Central Finance Company gained 80 cents to close at 97.60 rupees and Citizens Development Business Finance gained 8.25 rupees to close at 123.25 rupees, Alliance Finance Company gained 1.20 rupees to close at 52.50 rupees.

Sinhaputhra Finance closed 10 cents up at 7.50 rupees. Housing Development Finance gained 10 cents to close at 39.80 rupees while Softlogic finance closed 20 cents down at 10.40 rupees.

Cargills Ceylon fell 75 cents to close at 235.00 rupees, Distilleries Company gained 50 cents to close at 20.50, Hemas Holdings fell 20 cents to close at 85.30 rupees and Ceylon Grain Elevators fell 3.50 rupees to close at 136.25 rupees.

In the hotel sector Eden Hotel Lanka closed 20 cents up at 11.20 rupees, Sigiriya Village hotel closed flat at 33.50, Aitken Spence Hotel Holdings gained 1.00 rupee to close at 31.70 and John Keels Hotels closed 30 cents up at 10.60.

Carson Cumberbatch fell 1.00 rupees to close at 299.00 rupees while Access Engineering gained 70 cents to close at 25.20 rupees.

Nestle Lanka closed flat at 1,171.00 rupees while Aitken Spence Plc closed 10 cents down at 63.20 rupees.

Sri Lanka Telecom closed 90 cents down at 35.70 rupees and Richard Pieris and Company closed 1.00 rupee up at 18.00 rupees while Dialog Axiata closed flat at 12.40 rupees.

Net foreign sales for the day is 123.1 million rupees.

The Capital Goods Industry was the most active, gained 2.5 percent today. (Colombo/Feb18/2021)

As at end-June 2020 Fitch-rated insurers had invested around 55 percent of their fixed-income portfolios in direct government securities.

“We estimate Fitch-rated insurers have invested around 55% of their fixed-income portfolios in direct government securities such as treasury bills, bonds, Sri Lanka Development Bonds (SLDB), repo and unit trust assets backed by government securities,” Fitch Ratings said in a report.

“The majority of these are denominated in local currency, while the exposure of Fitch-rated insurers to foreign currency-denominated sovereign debt, mainly in SLDBs, was at around 12% of government security investments.

“Insurers also invest in deposits and debt securities issued by state-owned enterprises including banks, non-banking financial institutions and corporations. We estimate investments in these assets represent around 16% of their fixed-income portfolios.”

Fitch downgraded Sri Lanka’s sovereign rating to ‘CCC’, from ‘B-’, in November 2020 due to the country’s increasingly challenging external-debt repayment position over the medium term.

The rating agency then recaliberated the national rating scale resulting in the downward revision or downgrade of the national ratings of some state-owned and private-sector institutions.

“We estimate that around 12 percent of the fixed-income investment portfolios of Fitch-rated insurers, or around 28 percent of deposits and debt instrument portfolios, were invested in these entities,” Fitch said.

“The increased asset risk, however, will not greatly affect the regulatory capital ratios of most Fitch-rated Sri Lankan insurers due to the limited rise in risk charges according to local risk-based capital (RBC) rules.

“The local regulatory RBC rules exempt debt securities issued or guaranteed by the government from charges on credit and concentration risk in the calculation of the regulatory capital ratio.

“In addition, some of the recent negative national rating actions were within the same national rating category and therefore not subject to additional credit risk charges according to these rules.” (Colombo/Feb16/2021)

Fitch has lowered the ratings of state-linked firms and others such as banks that had state assets after sovereign downgrades.

“SLIC’s National IFS Rating continues to mirror its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry,” Fitch said.

“The rating also factors in the insurer’s high exposure to equity investments, non-core subsidiaries as well as sovereign-related investments, which increase its investment and asset risks due to the sovereign’s weakened credit profile.”

SLIC’s regulatory risk-based capital (RBC) ratios of 451 percent for its life and 203 percent for its non-life segments at end-1H20 were well above the industry averages and the 120 percent, regulatory minimum.

NITF’s RBC ratio temporarily increased to 519 percent by end-1H20 (end-2019: 263 percent) along with a temporary improvement in earnings, evident from a reduction in its combined ratio to 48 percent in 1H20 from 89 percent in 2019.

The full statement is reproduced below:

Fitch Revises Two Sri Lankan Insurers’ National IFS Ratings on National Scale Recalibration