Finance

Sri Lanka Insurance ‘CCC+’ rating confirmed, new Grand Hyatt investment to weaken RBC

Thursday November 25, 2021 6:08 am

ECONOMYNEXT – Fitch Ratings has confirmed a ‘CCC+’ rating of state-run Sri Lanka Insurance Corporation saying proposed ‘super gains tax’ will reduce profits and a 6 billion rupee investment in Grand Hyatt will reduce risk based capital ratios.

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.

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Weather and Climate

Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Monday June 3, 2024 2:17 pm

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

Politics

UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

Monday June 3, 2024 1:59 pm

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

Accidents

300 of 100,000 trees in Colombo considered high risk: state minister

Monday June 3, 2024 1:05 pm

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)