Fitch downgrades Co-operative Insurance’s National IFS to ‘BBB(lka)’; Maintains negative watch

Fitch Ratings has downgraded Co-operative Insurance Company PLC’s (CICPL) National Insurer Financial Strength (IFS) Rating to ‘BBB(lka)’ from ‘A-(lka)’ and maintained the Rating Watch Negative (RWN) following the recent sovereign downgrade and recalibration of the agency’s Sri Lankan
national rating scale.

The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch’s downgrade of Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CC’ from ‘CCC’ on 1 December 2022. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC+’ or below.

National rating scales are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national rating scale is denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan
national scale.

National rating scales are not comparable with Fitch’s international rating
scales or with other countries’ national rating scales. For details, see Fitch Ratings Recalibrates Sri Lanka’s National Rating Scale, dated 19 December 2022.

The National IFS Ratings of Sri Lankan insurers take into consideration their creditworthiness relative to other issuers in the country.

KEY RATING DRIVERS

The two-notch downgrade of CICPL’s National IFS Rating reflects the downgrade of the sovereign’s Long-Term Local-Currency IDR, the recalibration of the national rating scale and its relative creditworthiness among Sri Lankan issuers.

We believe CICPL’s investment and liquidity risks have increased due to the weaker credit profile of the sovereign and the subsequent rating action on various financial institutions.

CICPL’s investment portfolio, similar to that of other insurers in the country, is dominated by fixed-income securities issued or guaranteed by the government, and deposits and securities issued by local banks, non-bank financial institutions and corporations.

Fitch maintains the ratings of all domestic Sri Lankan banks on RWN amid the likelihood of capital and funding stress as the default risk on domestic debt increases while access to foreign-currency funding remains constrained.

We have maintained CICPL’s rating on RWN to reflect the potential for the insurer’s creditworthiness relative to other entities on the Sri Lankan National Rating scale to further deteriorate amid high investment and liquidity risks, pressure on its regulatory capital position and a weaker financial performance outlook.

The heightened investment risks and earnings pressure amid the weak operating environment could affect the insurer’s regulatory capital profile.

The rating reflects CICPL’s ‘Moderate’ company profile compared with that of other insurers in Sri Lanka, which is buoyed by its ownership by co-operative societies, modest operating scale as well as an average risk appetite.

The insurer’s regulatory risk-based capital (RBC) ratio has historically been lower than that of most Fitch-rated peers in Sri Lanka. The ratio dropped to 207% by end-1H22 due to increased market risks and concentration risk charge after improving to 292% by end-2021 (2020: 249%) because of a LKR600 million IPO in December 2021.

RATING SENSITIVITIES

We expect to resolve the RWN once the impact of Sri Lanka’s economic crisis on the insurer’s credit profile becomes more apparent. This may take longer than six months.

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

  • inability to access foreign- or local-currency assets to meet CICPL’s liabilities, including any restrictions by the government;
  • rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign;
  • deterioration in the regulatory RBC ratio to below 190% for a sustained period; sustained deterioration in financial performance, including the combined ratio remaining above 110%, or weaker risk-management practices;
  • significant weakening in CICPL’s business profile, for instance, due to a weaker
    franchise, operating scale or business risk profile.
    Factors that could, individually or collectively, lead to positive rating action/upgrade:
  • there is limited scope for upward rating action because of the RWN.
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