Fitch Ratings has upgraded the National Insurer Financial Strength (IFS) Ratings of four Sri Lankan insurers following the recent sovereign upgrade and recalibration of the agency's Sri Lankan national rating scale. At the same time, Fitch has affirmed the National IFS of three Sri Lankan insurers.
The recalibration reflects changes in the relative creditworthiness of Sri Lankan issuers after Fitch upgraded Sri Lanka's Long-Term Local-Currency Issuer Default Rating (IDR) to 'CCC+' from 'CCC-' on 20 December 2024. Fitch typically does not assign Outlooks to sovereigns with a rating of 'CCC+' or below.
National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka's national scale ratings are denoted by the unique identifier '(lka)'. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National 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", published 16 January 2025.
The following insurers were upgraded:
- Continental Insurance Lanka Limited (CILL) to 'A(lka)'/Positive from 'A-(lka)'/Positive;
- People's Insurance PLC to 'A(lka)'/Stable from 'A-(lka)'/Stable;
- HNB Assurance PLC to 'A(lka)'/Stable from 'A-(lka)'/Stable;
- HNB General Insurance Limited to 'A(lka)'/Stable from 'A-(lka)'/Stable;
Fitch has also affirmed the National IFS Ratings of the following insurers:
- National Insurance Trust Fund Board (NITF) at 'BBB(lka)'/Stable;
- Co-operative Insurance Company PLC (CICPLC) at 'BB(lka)'/Stable;
- Construction Guarantee Fund (CGF) at 'BB(lka)'/Stable.
Key Rating Drivers
The National Rating upgrades are driven by the upgrade of the sovereign's Long-Term Local-Currency IDR and the recalibration of the national rating scale. The ratings reflect the relative creditworthiness of Sri Lankan issuers. We believe the sovereign's credit profile improvement has alleviated the investment and liquidity risks of insurers. The investment and liquidity risk profiles of Sri Lankan insurers are closely linked with that of the sovereign and banks as their investment portfolios are dominated by local-currency fixed-income securities issued by the government, corporate debt and deposits with financial institutions.
The Positive Outlook on CILL reflects its consistently good underwriting performance, improvement in market franchise and maintenance of a satisfactory regulatory capital position.
The affirmation of NITF's rating reflects continued weakness in risk-management practices, evident from its inability to renew the retrocession cover for its reinsurance business. The affirmation also takes into consideration higher earnings from the strike, riot, civil commotion and terrorism (SRCCT) business after a recent government directive requiring primary insurers to remit 100% of motor SRCCT premiums to NITF, up from the previous 12%.
The affirmation of CICPLC's rating reflects the insurer's 'Moderate' company profile and volatile underwriting performance offset by a satisfactory regulatory capital position. The rating also reflects CICPLC's 'Less Favourable' corporate governance.
The affirmation of CGF's rating reflects its operating conditions, which are closely linked to construction activity mandated by the government. The government's weak fiscal position has resulted in fewer new government-led construction contracts, the suspension of existing projects and payment delays to contractors. This has affected CGF through a drop in premium income and a higher risk of claims by employers, which will be partially offset by a reduction in guarantee liabilities due to the slowdown in new construction contracts.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Continental Insurance Lanka Limited
- Deterioration in the risk-based capital (RBC) ratio to below 220% for a sustained period;
- Sustained deterioration in financial performance, or weaker risk-management practices;
- Rising investment and asset risks, including a downgrade of the ratings of Sri Lankan financial institutions or the sovereign.
People's Insurance PLC
- Deterioration in the regulatory RBC ratio to below 220% for a sustained period;
- Sustained deterioration in financial performance or weaker risk-management practices;
- Rising investment and asset risks, including a downgrade of the ratings on financial institutions or the sovereign.
HNB Assurance PLC (HNBA) and HNB General Insurance Limited (HNBGI)
- Deterioration in HNBA's RBC ratio to below 280% or a significant deterioration in HNBGI's capital position for a sustained period;
- Sustained deterioration in financial performance or weaker risk-management practices;
- Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign.
National Insurance Trust Fund Board (NITF)
- Deterioration in the RBC ratio to below 250%, or a significant deterioration in the capital positions of non-strike, riot, civil commotion and terrorism lines, for a sustained period;
-Deterioration in the combined ratio to above 103% for a sustained period;
- Significant weakening in NITF's company profile, such as a large reduction in government-related business;
- Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign.
Co-operative Insurance Company PLC
- Deterioration of the company profile, including a weaker franchise and competitive positioning, or Fitch's perception that the insurer's corporate governance practices have deteriorated;
- Sustained deterioration in financial performance, or weaker risk-management practices;
- Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign.
Construction Guarantee Fund (CGF)
- Sustained deterioration in financial performance or weaker risk-management practices;
- A deterioration in the company profile, for instance, due to significant weakening in CGF's association with the government, or a deterioration in its business risk profile, due to a decline in the country's economic conditions that affects the domestic construction sector;
- Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Continental Insurance Lanka Limited
- Maintaining its combined ratio below 98% for a sustained period, while our assessment of the insurer's capitalisation remains unchanged;
- Sustained improvement in the company profile, including a further expansion in its operating scale and business franchise.
People's Insurance PLC
- Maintaining the combined ratio below 98% and the RBC ratio consistently above 260% for a sustained period
- Improving the business profile in terms of broader diversification of business lines.
HNB Assurance PLC and HNB General Insurance Limited
- An improvement in the RBC ratio to well above 350% at HNBA and 250% at HNBGI, while maintaining the combined ratio below 98% for HNBGI;
- Further improvement in the company profile, for instance, from a stronger business franchise and larger operating scale.
National Insurance Trust Fund Board
- Improved company profile in terms of better business risk profile and improved risk-management practices or broader diversification into stable sources of underwriting profitability.
Co-operative Insurance Company PLC
- Further improvement in the company profile, including a stronger business franchise and greater operating scale;
- Maintaining its combined ratio well below 105% for a sustained period, while our assessment of the insurer's capitalisation remains unchanged.
Construction Guarantee Fund
- Sustained improvement in the company profile in terms of a larger operating scale as well as successful diversification into profitable and stable business lines.
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.
