Fitch Ratings has maintained the Rating Watch Negative (RWN) on Sri Lanka-based Co-operative Insurance Company PLC's (CICPL) 'A-(lka)' National Insurer Financial Strength (IFS) Rating.

Key Rating Drivers

Elevated Risks: The RWN reflects the heightened near-term downside risks to the insurer's credit profile as a result of Sri Lanka's ongoing economic crisis. These include elevated investment and liquidity risks, pressure on the insurer's regulatory capital position and a weaker financial performance outlook.

High Investment Risk: Fitch believes the weak credit profile of the Sri Lankan sovereign - which recently defaulted on its foreign-currency obligations - and the ongoing stress in the domestic banking system, reflected in the RWN on most Fitch-rated financial institutions, underscore the insurer's investment risks. CICPL's investment portfolio, similar to that of other insurers in the country, is dominated by government securities, corporate bonds and term deposits with domestic financial institutions.

Stretched Foreign-Currency Liquidity: We believe the weak foreign-currency liquidity in the local banking system could limit CICPL's ability to meet its foreign-currency obligations, such as premium payments to foreign reinsurers, and claim obligations arising from foreign-currency policies. However, business lines with foreign-currency obligations remain small and are mostly reinsured.

Pressure on Capitalisation: CICPL's regulatory risk-based capital (RBC) adequacy ratio dropped to 207% by end-1H22 (end-2021: 294%) due to an increased market risk charge, driven by higher interest rates and a larger concentration risk charge. We believe that a further rise in interest rates or a significant deterioration in the credit quality of its investments will add pressure on the ratio.

The capital position of CICPL's fully owned life subsidiary, Cooplife Insurance Limited, was satisfactory at end-2021, but we believe any significant capital infusion into the subsidiary may keep CICPL's capital buffers in check.

Pressure on Underwriting Profitability: We expect CICPL's underwriting profit to come under pressure due to rising motor spare-part costs due to currency devaluation, while overall costs will climb with rising inflation. CICPL, similar to other insurers in Sri Lanka, will have limited ability to reprice policies due to the reduction in customers' disposable incomes. The rupee depreciated by about 81% year-to-date against the US dollar while headline inflation was 70% in September 2022.

CICPL's Fitch-calculated non-life combined ratio deteriorated to 101% in 1H22 from 92% in 2021 due to higher claims in the motor segment. Return on equity averaged 16% in the past three years, supported by lower claim costs during 2020-2021 and steady investment income.

Moderate Company Profile: Fitch regards CICPL's company profile as 'Moderate' compared with that of other insurers in Sri Lanka because of a 'Moderate' business profile and 'Moderate/Favourable' corporate governance. CICPL's business profile reflects its adequate franchise, which is buoyed by its ownership by co-operative societies, modest operating scale as well as an average risk appetite. CICPL accounted for 4.1% of the non-life sector's gross premiums in 2020.

RATING SENSITIVITIES

We expect to resolve the RWN once the impact of Sri Lanka's economic crisis on CICPL'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:

Inability to access foreign- or local-currency assets to meet the insurers' 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 RBC ratio to below 190% for a sustained period.

Sustained deterioration in financial performance, including the combined ratio remaining above 110%, or weaker risk management practices

Significant weakening in CICPL's business profile, for instance, due to a weaker franchise, operating scale or business risk profile

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

There is limited scope for upward rating action given the RWN.

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.

RATING ACTIONS

Entity / Debt

Rating

Prior

Co-operative Insurance Company PLC

Natl Ins Fin Str

A-(lka)

Rating Watch Maintained

A-(lka)

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire