ECONOMYNEXT – Fitch Ratings has downgraded Co-operative Insurance Company Plc from BBB (lka) to BB (lka) and place the firm on rating watch negative, following recent regulatory action.
The Insurance Regulatory Commission of Sri Lanka had suspended its license to carry out business.
“The multiple-notch downgrade reflects our ‘Least Favourable’ corporate governance ranking for CICPLC following the recent restrictions on the insurer’s business activities after the regulator found governance shortcoming,” Fitch said.
“Our assessment of CICPLC’s governance structure and corporate transparency is now weaker, and we believe that this development may affect the insurer’s franchise and competitive positioning, which may then result in a weaker business profile.”
The full statement is reproduced below:
Fitch Downgrades Co-operative Insurance’s National IFS to ‘BB(lka)’; Maintains Watch Negative
Fitch Ratings – Colombo – 21 Apr 2023: Fitch Ratings has downgraded Co-operative Insurance Company PLC’s (CICPLC) National Insurer Financial Strength (IFS) Rating to ‘BB(lka)’ from BBB(lka)’ and maintained the Rating Watch Negative (RWN). The downgrade follows the recent restrictions imposed by the Insurance Regulatory Commission of Sri Lanka (IRCSL) limiting CICPLC’s ability to carry out insurance
operations.
KEY RATING DRIVERS
The multiple-notch downgrade reflects our ‘Least Favourable’ corporate governance ranking for CICPLC following the recent restrictions on the insurer’s business activities after the regulator found governance shortcomings. Our assessment of CICPLC’s governance structure and corporate transparency is now weaker, and we believe that this development may affect the insurer’s franchise and competitive positioning, which may then result in a weaker business profile.
On 11 April 2023, the IRCSL suspended CICPLC’s registration to carry out insurance business as the insurer failed to maintain the composition of the board of directors in accordance with the company’s articles of association. CICPLC’s announcement says the suspension will in force until 2 May 2023, during which it will not be able to acquire or renew business. The company says that it will be able to continue servicing its existing customers.
Trading of CICPLC’s shares on the Colombo Stock Exchange was suspended on 18 April 2023 as the company failed to comply with the listing rules that require the chairman or one member of the audit committee to be a member of a professional accounting body.
The RWN reflects the uncertainty regarding the resolution of the governance issues and restrictions as well as the potential impact on the CICPLC’s franchise and business volume. The RWN also continues to reflect the potential for the insurer’s creditworthiness to deteriorate relative to other entities on the Sri Lankan National Rating scale amid high investment and liquidity risks, pressure on its regulatory capital position and a weaker financial performance outlook. The heightened investment risks and earnings pressure amid the weak operating environment could affect the insurer’s regulatory capital profile.
RATING SENSITIVITIES
We expect to resolve the RWN once we have more clarity on the resolution of CICPLC’s corporate governance shortcomings as well as when the impact of Sri Lanka’s economic crisis on CICPLC’s credit profile becomes more apparent. This may take longer than six months.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Fitch’s perception that CICPLC’s corporate governance practices have deteriorated, including a weaker governance structure and financial transparency limitations
– Weakening in CICPLC’s company profile, for instance, due to a weaker franchise, operating scale, business risk profile
– Inability to access foreign- or local-currency assets to meet the insurer’s liabilities, including any restrictions by the government
– Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign
– Deterioration in the risk-based capitalisation ratio to below 190% for a sustained period (9M22: 204%).
– Sustained deterioration in financial performance, including the combined ratio remaining above 110% (1H22: 101%), or weaker risk management practices
-Factors that could, individually or collectively, lead to positive rating action/upgrade:
– There is limited scope for upward rating action given the RWN
– Fitch’s perception that there is a sustained improvement in CICPLC’s corporate governance practices