Fitch downgrades National IFS Ratings of seven Sri Lankan insurers; maintains watch negative

COLOMBO/SYDNEY – Fitch Ratings has downgraded the National Insurer Financial Strength (IFS) Ratings of seven Sri Lankan insurers following the recent sovereign downgrade and recalibration of the agency’s Sri Lankan National Rating scale. The seven insurers’ ratings have been maintained on Rating Watch Negative (RWN).

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 December 1, 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.

The National IFS Ratings of the Sri Lankan insurers take into consideration their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in downgrades of the National IFS Ratings of the following insurers:

– Sri Lanka Insurance Corporation Limited to ‘A(lka)’/RWN from ‘AA(lka)’/RWN;

– National Insurance Trust Fund Board to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;

– People’s Insurance PLC to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;

– HNB Assurance PLC to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;

– HNB General Insurance Limited to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN;

– Continental Insurance Lanka Limited to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN; and

– Construction Guarantee Fund to ‘BB(lka)’/RWN from ‘BBB-(lka)’/RWN.

The downgrades of the National IFS Ratings of the seven insurers are driven by the downgrade of the sovereign’s Long-Term Local-Currency IDR and the recalibration of the national rating scale while also reflecting the relative creditworthiness among Sri Lankan issuers.

We believe that the investment and liquidity risks of insurers have increased due to the weaker credit profile of the sovereign and the subsequent rating action on various financial institutions; see Fitch Downgrades 10 Sri Lankan Banks’ Ratings, dated 12 January 2023.

The rated insurers’ investment portfolios, similar to that of other insurers in the country, are dominated by fixed-income securities issued or guaranteed by the government, 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 the insurers’ ratings on RWN to reflect the potential for these insurers’ creditworthiness relative to other entities on the Sri Lankan National Rating scale to further deteriorate amid high investment and liquidity risks, pressure on regulatory capital positions and a weaker financial performance outlook. The heightened investment risks and earnings pressure amid the weak operating environment could affect insurers’ regulatory capital profiles.

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

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