Fitch assigns Sri Lanka Insurance Corp General ‘CCC+’ IFS and ‘A+(lka)’ National IFS Ratings

Fitch Ratings has assigned Sri Lanka Insurance Corporation General Limited (SLIC General) a ‘CCC+’ Insurer Financial Strength (IFS) Rating and an ‘A+(lka)’ National IFS Rating. The Outlook is Stable.

The ratings reflect the insurer’s ‘Favourable’ company profile and high investment and asset risk, driven by exposure to sovereign-related investments. The ratings also factor in the insurer’s adequate capital position and weak underwriting performance in recent periods.

Fitch said it regards SLIC General’s company profile as ‘Favourable’, based on a ‘Favourable’ business profile and ‘Neutral’ corporate governance compared with that of other Sri Lankan insurers. SLIC General’s business profile is supported by its substantive business franchise, large domestic operations and wide distribution network. SLIC General is the country’s second-largest non-life insurer, with a gross written premium market share of 18 percent as of end-2023 (end-2022: 16 percent) based on the latest industry data by the Insurance Regulatory Commission.

Fitch considers SLIC General’s ownership as neutral to its ratings. In February 2024, the parent, Sri Lanka Insurance Corporation Limited (SLIC) - ultimately owned by the Sri Lanka (CCC+) state - legally separated its life and non-life segments into two fully-owned subsidiaries: SLIC General and Sri Lanka Insurance Corporation Life Limited (SLIC Life). This followed regulatory approval. Prior to the legal split, SLIC had been operating its life and non-life businesses separately, since the regulator first mandated composite insurers to segregate their operations in 2015.

Fitch said it expects near-term pressure on underwriting profitability to persist, due to rising exposure to the higher-claim health segment and new directive to remit 100 percent of motor insurance, strike, riot, civil commotion and terrorism premiums to the National Insurance Trust Fund Board (BBB(lka)/Stable). However, profitability should eventually improve, supported by enhanced claim management and growth in the motor segment, which accounted for 58 percent of 2023 gross written premium, following the government’s recent relaxation of vehicle import restrictions, it said.

Non-life underwriting has been weak since 2022, driven by inflationary pressure, rising administrative costs and increased claim costs due to higher spare part prices and medical costs from the depreciation of the Sri Lankan rupee. The insurer’s combined ratio improved to around 101 percent for 11M24 (February-June 2024: 107 percent; 2023: 106 percent). The three-year average (2021-2023) combined ratio before the split was 102 percent and compared favourably against the industry average of 105 percent.

Fitch noted the investment and liquidity risks have eased for SLIC General, in line with other domestic insurers, due to an improved sovereign credit profile. It upgraded Sri Lanka’s Long-Term Foreign and Local-Currency Issuer Default Ratings to ‘CCC+’ in December 2024, following the completion of its international sovereign bond restructuring and an improved economic outlook. It scores SLIC General’s investment and asset risk at ‘ccc’ on the international scale, reflecting its high exposure to sovereign and sovereign-related assets.

Risky asset exposure also decreased following the transfer of large non-core equity investments from the general insurance business to SLIC after the separation of the life and non-life segments. SLIC General’s Fitch-calculated risky-asset ratio was a high 439 percent at end-June 2024, indicating vulnerability to weakening in the sovereign’s credit quality. In addition, foreign-currency assets, mostly bank deposits and unit trust investments, were about 17 percent of invested assets.

The regulatory risk-based capital ratio stands well above the regulatory minimum of 120 percent, at 223 percent at end-June 2024 and 226 percent at end-2023 but this is still below the average of Fitch-rated domestic non-life insurers (June 2024: 295 percent, 2023: 288 percent). The ratio improved to 266 percent by end-2024, boosted by higher retained earnings. SLIC General’s Fitch Prism Global score was ‘Weak’ at end-June 2024, due to its high investment risks.