Fitch downgrades Co-operative Insurance’s National IFS to ‘BBB(lka)’; maintains Watch Negative

Fitch Ratings yesterday downgraded Co-operative Insurance Company PLC’s (CICPL) National Insurer Financial Strength (IFS) Rating to ‘BBB(lka)’, from ‘A-(lka)’ and maintained the Rating Watch Negative (RWN), following the recent sovereign downgrade and recalibration of the agency’s Sri Lankan national rating scale. 

The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers, following Fitch’s downgrade of Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’ on December 1, 2022. 

Fitch said the two-notch downgrade of CICPL’s National IFS Rating reflects the downgrade of the sovereign’s Long-Term Local-Currency IDR, the recalibration of the national rating scale and its relative creditworthiness among Sri Lankan issuers. 

“We believe CICPL’s investment and liquidity risks have increased due to the weaker credit profile of the sovereign and the subsequent rating action on various financial institutions,” Fitch noted.

The rating agency pointed out that CICPL’s investment portfolio, similar to that of other insurers in the country, is dominated by fixed-income securities issued or guaranteed by the government and deposits and securities issued by local banks, non-bank financial institutions and corporations. 

“Fitch maintains the ratings of all domestic Sri Lankan banks on RWN amid the likelihood of capital and funding stress as the default risk on domestic debt increases while access to foreign-currency funding remains constrained. 

We have maintained CICPL’s rating on RWN to reflect the potential for the insurer’s creditworthiness relative to other entities on the Sri Lankan National Rating scale to further deteriorate 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,” Fitch said.

“The rating reflects CICPL’s ‘Moderate’ company profile compared with that of other insurers in Sri Lanka, which is buoyed by its ownership by co-operative societies, modest operating scale as well as an average risk appetite. The insurer’s regulatory risk-based capital (RBC) ratio has historically been lower than that of most Fitch-rated peers in Sri Lanka. The ratio dropped to 207 percent by end-1H22 due to increased market risks and concentration risk charge after improving to 292 percent by end-2021 (2020: 249 percent) because of a Rs.600 million IPO in December 2021,” it further said.