Sri Lanka insurer asset risk rise due to sovereign downgrade: Fitch

ECONOMYNEXT – Asset risk of Sri Lanka insurers, who have around 71 percent of their investments in state or state connected investments had risen after a sovereign downgrade though local risk based capital ratios are not affected due to local treatment, Fitch, a rating agency said.

As at end-June 2020 Fitch-rated insurers had invested around 55 percent of their fixed-income portfolios in direct government securities.

“We estimate Fitch-rated insurers have invested around 55% of their fixed-income portfolios in direct government securities such as treasury bills, bonds, Sri Lanka Development Bonds (SLDB), repo and unit trust assets backed by government securities,” Fitch Ratings said in a report.

“The majority of these are denominated in local currency, while the exposure of Fitch-rated insurers to foreign currency-denominated sovereign debt, mainly in SLDBs, was at around 12% of government security investments.

“Insurers also invest in deposits and debt securities issued by state-owned enterprises including banks, non-banking financial institutions and corporations. We estimate investments in these assets represent around 16% of their fixed-income portfolios.”

Fitch downgraded Sri Lanka’s sovereign rating to ‘CCC’, from ‘B-’, in November 2020 due to the country’s increasingly challenging external-debt repayment position over the medium term.

The rating agency then recaliberated the national rating scale resulting in the downward revision or downgrade of the national ratings of some state-owned and private-sector institutions.

“We estimate that around 12 percent of the fixed-income investment portfolios of Fitch-rated insurers, or around 28 percent of deposits and debt instrument portfolios, were invested in these entities,” Fitch said.

“The increased asset risk, however, will not greatly affect the regulatory capital ratios of most Fitch-rated Sri Lankan insurers due to the limited rise in risk charges according to local risk-based capital (RBC) rules.

“The local regulatory RBC rules exempt debt securities issued or guaranteed by the government from charges on credit and concentration risk in the calculation of the regulatory capital ratio.

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“In addition, some of the recent negative national rating actions were within the same national rating category and therefore not subject to additional credit risk charges according to these rules.” (Colombo/Feb16/2021)

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