An Echelon Media Company
Monday December 5th, 2022

Sri Lanka Insurance, NITF local ratings cut two levels after sovereign downgrade

ECONOMYNEXT – Fitch Ratings has lowered the local Insurer Financial Strength (IFS) ratings of state-run Sri Lanka Insurance to ‘AA(lka)’ from ‘AAA(lka)’ and National Insurance Trust Fund Board to ‘A+(lka)’ from ‘AA-(lka)’.

Fitch has lowered the ratings of state-linked firms and others such as banks that had state assets after sovereign downgrades.

“SLIC’s National IFS Rating continues to mirror its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry,” Fitch said.

“The rating also factors in the insurer’s high exposure to equity investments, non-core subsidiaries as well as sovereign-related investments, which increase its investment and asset risks due to the sovereign’s weakened credit profile.”

SLIC’s regulatory risk-based capital (RBC) ratios of 451 percent for its life and 203 percent for its non-life segments at end-1H20 were well above the industry averages and the 120 percent, regulatory minimum.

NITF’s RBC ratio temporarily increased to 519 percent by end-1H20 (end-2019: 263 percent) along with a temporary improvement in earnings, evident from a reduction in its combined ratio to 48 percent in 1H20 from 89 percent in 2019.

The full statement is reproduced below:

Fitch Revises Two Sri Lankan Insurers’ National IFS Ratings on National Scale Recalibration

Fri 22 Jan, 2021 – 00:55 ET

Fitch Ratings – Sydney/Colombo – 22 Jan 2021: Fitch Ratings has revised the National Insurance Financial Strength Ratings (IFS) of two Sri Lankan insurers following the recalibration of the agency’s Sri Lankan national rating scale. The recalibration reflects changes in the relative creditworthiness among Sri Lankan issuers, following Fitch’s downgrade of the country’s sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020. For details, see “Fitch Ratings Recalibrates its Sri Lankan National Rating Scale”, dated 22 December 2020, at https://www.fitchratings.com/site/pr/10147729.

Rating revisions are used to modify ratings for reasons that are not related to changes in credit quality, but to reflect changes in the national rating scale.

The National IFS Ratings of the two Sri Lankan insurers were revised as follows:

– Sri Lanka Insurance Corporation Limited revised to ‘AA(lka)’/Stable from ‘AAA(lka)’/Stable.

– National Insurance Trust Fund Board revised to ‘A+(lka)’/Stable from ‘AA-(lka)’/Negative.

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. Other Sri Lankan insurers’ National IFS Ratings, which are not mentioned in this commentary, have not been affected by the recalibration exercise because, in our view, the rating relativities of these insurers are unaffected.

KEY RATING DRIVERS

Sri Lanka Insurance Corporation Limited (SLIC)

SLIC’s National IFS Rating continues to mirror its ‘Favourable’ business profile, and capital position and financial performance that are better than that of the industry.

The rating also factors in the insurer’s high exposure to equity investments, non-core subsidiaries as well as sovereign-related investments, which increase its investment and asset risks due to the sovereign’s weakened credit profile.

SLIC’s sovereign investment-to-capital ratio was 125% at end-1H20 (2019: 88%).

Fitch regards SLIC’s business profile as ‘Favourable’ compared with that of other Sri Lankan insurance companies due to its leading business franchise, participation in well-diversified and stable business lines, and large domestic operating scale. SLIC was Sri Lanka’s second-largest life and non-life insurer based on gross premiums in 2019.

SLIC’s regulatory risk-based capital (RBC) ratios of 451% for its life and 203% for its non-life segments at end-1H20 were well above the industry averages and the 120% regulatory minimum.

Fitch expects the potential pressure on earnings from rising price competition, fueled by constrained business growth and softer investment yields, to be somewhat mitigated by lower claims from motor insurance lines due to a drop in traffic accidents following the implementation of pandemic-related travel restrictions. SLIC has consistently maintained its non-life combined ratio below 100% (1H20: 96%; 2019: 95%) for the past five years, buoyed by its scale advantages and prudent underwriting practices.

National Insurance Trust Fund Board (NITF)

NITF’s National IFS Rating reflects its ‘Favourable’ business profile and strong financial performance. The positive factors are offset partly by its inconsistent risk-management practices, which in turn increase the volatility in its capital position and earnings.

NITF’s RBC ratio temporarily increased to 519% by end-1H20 (end-2019: 263%) along with a temporary improvement in earnings, evident from a reduction in its combined ratio to 48% in 1H20 from 89% in 2019.

The improvements were due mainly to increased premium retention and reduced claims during the pandemic-induced lockdown. Fitch believes the insurer’s capitalisation and earnings will normalise in the medium term due to a gradual pick-up in claims and the renewal of its reinsurance arrangements, which will reduce NITF’s premium retention.

Fitch expects the large payment of levies to the state (three-year average payout: 115%) to keep NITF’s capitalisation in check.

We also expect the claims ratio of the Agrahara insurance scheme, which provides medical insurance for public-sector employees and their families and accounted for 29% of NITF’s gross premiums in 1H20, to increase after the government’s decision to expand coverage and benefits, if the additional risks are not adequately priced. However, we expect NITF’s low operating costs and modest claims from the insurer’s strike, riot, civil commotion and terrorism (SRCCT) programme to reinforce profitability.

Fitch believes constant delays in the renewal of NITF’s reinsurance arrangements will weaken the insurer’s risk-mitigation practices and credit profile. Fitch noted some delays in the government’s approval for the renewal of NITF’s reinsurance cover in 2020 and in the past. The insurer purchased reinsurance for its SRCCT programme and inward reinsurance covers in 2H20.

NITF’s portfolio is entirely invested in government securities and its sovereign investment-to-capital ratio was 148% at end-1H20 (2019: 215%).

NITF’s ‘Favourable’ business profile assessment reflects its substantive business franchise, which is supported by its full state ownership and role in implementing government policies. NITF is the only domestic reinsurer and a state mandate requires all domestic non-life operators to cede 30% of their reinsurance to NITF.

RATING SENSITIVITIES

SLIC

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

– 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 to below 350% for the life and 200% for the non-life businesses for a sustained period or a significant increase in non-core investments.

– Deterioration in the non-life combined ratio to well above 100% for a sustained period.

Factors that could, individually or collectively, lead to positive rating action:

– Significant reduction in SLIC’s investment and asset risks on a sustained basis while maintaining its ‘Favourable’ business profile and capitalisation at current levels.
NITF

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

– Deterioration in the RBC ratio to below 250% for a sustained period.

– Deterioration in risk-management practices, for instance, due to persistent delays
in renewing reinsurance arrangements.

– Deterioration in the combined ratio to above 103% for a sustained period.

– Significant weakening in NITF’s business profile, such as a large reduction in government-related business.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Improvements to its risk-management practices, including the timely purchase of adequate reinsurance covers while our assessment of the insurer’s capitalisation and business profile remains unchanged.

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.

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Paris Club proposes 10-year moratorium on Sri Lanka debt, 15 years of debt restructuring

ECONOMYNEXT — The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis, India’s The Hindustan Times reported.

While the Paris Club has yet to formally reach out to India and China, Colombo has yet to initiate a formal dialogue with the Xi Jinping regime, the newspaper reported on Saturday December 03, inferring that the chances of the International Monetary Fund (IMF) approving its 2.9 billion dollar extended fund facility for Sri Lanka in December now ranges from very low to nonexistent.

“This means that Sri Lanka will have to wait for the March IMF meeting of the IMF before any aid is extended by the Bretton Woods institution,” the newspaper reported.

“Fact is that for Sri Lanka to revive, creditors will have to take a huge hair cut with Paris Club clearly hinting that global south should also take the same cut as global north notwithstanding the inequitable distribution of wealth. In the meantime, as Colombo is still to get its act together and initiate a dialogue and debt reconciliation with China, it will need bridge funding to sustain the next three month before the IMF executive board meeting in March 2023. Clearly, things will get much worse for Sri Lanka before they get any better—both economically and politically,” the report said. (Colombo/Dec04/2022)

Continue Reading

Sri Lanka’s Ceylon tea prices up amid low volumes

ECONOMYNEXT – Sri Lanka tea prices picked up at the last auction in November amid low volumes, brokers said.

“Auction offerings continued to record a further decline and totalled 4.2 million Kilograms, of which Ex-Estate offerings comprised of 0.6 million Kilograms. There was good demand,” Forbes and Walker Tea brokers said.

“In the Ex-Estate catalogues, overall quality of teas showed no appreciable change. Here again, there was good demand in the backdrop of extremely low volumes.”

High Growns

BOP Best Westerns were firm to 50 rupees per kg dearer. Below best and plainer types were Rs.50/- per kg easier on last.

Nuwara Eliya’s were firm.

BOPF Best Westerns were firm to selectively dearer. Below best and plainer teas declined by 50 rupees per kg.

Uva/Uda Pussellawas’ were generally firm and price variances were often reflective of quality with the exception of Select Best Uva BOPF’s which were firm and up to 50 rupees per kilogram dearer.

CTC teas, in general, were mostly firm.

“Most regular buyers were active, with perhaps a slightly more forceful trend from the local trade,” brokers said.

Corresponding OP1’s met with improved demand. Well-made OP/OPA’s in general were fully firm, whilst the Below Best varieties and poorer sorts met with improved demand. PEK/PEK1’s, in general, were fully firm to selectively dearer.

In the Tippy catalogues, well-made FBOP/FF1’s sold around last levels, whilst the cleaner Below Best and cleaner teas at the bottom appreciated. Balance too were dearer to a lesser extent.

In the Premium catalogues, very Tippy teas continued to attract good demand. Best were firm to selectively dearer, whilst the Below Best and cleaner teas at the bottom appreciated

Low Growns

Low Growns comprised 1.8 million Kilograms. Market met with improved demand, in general.

In the Leafy & Semi Leafy catalogues, select Best BOP1/OP1’s were fully firm, whilst the Below Best/bolder BOP1’s were barely steady.

Low-grown teas, farmed mainly by smallholders and exported to the Middle East and Central Asia, are the most sought-after and expensive Ceylon Teas.

Low-grown CTC prices have gained this week to 982.80 per kilogram this week from 934.76 per kilogram last week.

Few Select best BOP1s maintained, whilst best and below best were irregularly lower. Poorer types maintained.

BOPF’s in general, firm market.

FBOPF/FBOPF1’s select best and best increased in value, whilst the below best and bottom held firm.

Selected best BOP1’s maintained, whilst best and below best were irregularly lower.Poorer types maintained.

OP1’s selects best together with best and below best were firm to dearer. Poorer sorts were fully firm.

Medium Growns

BOPF’s, select best gained by 50 rupees per kilogram. Others maintained.

BOP1’s select best dearer by 100 rupees per kg whilst all others moved up by 50 rupees per kg.

OP1: select best gained by 100 rupees per kg whilst all others dearer by 100 rupees per kg.

OP/OPA’s in general, dearer by 50 rupees per kg whilst the poorer sorts were firm.

PEK’s Select best gained by 50 rupees per kg whilst all others maintained. PEK1: In general, dearer by 50 rupees per kg. (Colombo/Dec 04/2022)

 

 

Continue Reading

Sri Lanka Ports Authority East Terminal contractor paid: Minister

ECONOMYNEXT – Sri Lanka’s Ports Authority had paid a deposit for a gantry crane and made the required payment for the contractor to complete building the East Container Terminal, Minister Nimal Siripala De Silva said.

The East Container Terminal, a part of which is already built is being completed as a fully SLPA owned terminal at a cost of 480 million dollars Ports and Shipping Minister de Silva said.

“ECT we are funding with money available in the ports authority,” he said.

“Up to now we have paid an advance for the gantry crane. And for the construction we have paid all the money agreed with the contractor. So that is going on well.”

Sri Lanka is undergoing the worst currency crisis in the history of the island’s soft-pegged (flexible exchange rate) central bank which has created difficulties in funding the project.

“Every penny we collect as dollars we are keeping them separately and utilizing that for the Eastern Terminal work,” Minister de Silva said.

“We are confident that the ECT will be completed within the envisaged time. It is a difficult task in view of the dollar problem.

Banks were also not releasing the dollar deposits of the SLPA earlier but are now doing so, he said.

“Our deposits in banks they have utilized for urgent other national purposes,” he said.

“So they are releasing that money slowly. I am happy that they are releasing that money little by little. So with that we will be able to manage that.”

Continue Reading