Fitch Ratings has taken a significant step in the assessment of several Sri Lankan insurers, affirming their National Insurer Financial Strength (IFS) Ratings and removing them from Rating Watch Negative (RWN). The outlook for these insurers has been established as 'Stable.'

The insurers covered by this development include:

• Sri Lanka Insurance Corporation Limited (SLIC) at 'A(lka)'
• Continental Insurance Lanka Limited at 'A-(lka)'
• HNB Assurance PLC at 'A-(lka)'
• HNB General Insurance Limited at 'A-(lka)'
• People’s Insurance PLC at 'A-(lka)'
• Co-operative Insurance Company PLC at 'BB(lka)'
• Construction Guarantee Fund at 'BB(lka)'

One of the primary drivers for these ratings is the alleviation of investment and liquidity risks. The removal of the Rating Watch Negative (RWN) designation reflects Fitch's view that short-term investment and liquidity risks have significantly diminished. This change is evident from the upgrade of Sri Lanka's Long-Term Local-Currency Issuer Default Rating (IDR) from 'RD' to 'CCC-', as well as the subsequent removal of the RWN on Fitch-rated banks. (SLIC's IFS Rating of 'CC' on RWN was not considered in this review.)

The recent successful restructuring of Sri Lanka's local-currency sovereign debt, coupled with the exclusion of holdings of treasury securities of banks and insurers from the domestic debt optimization program, has contributed to the easing of investment and liquidity risk profiles. Notably, the investment portfolios of Sri Lankan insurers are heavily concentrated in local-currency fixed-income securities issued by the government, corporate debt, and deposits with financial institutions.

Furthermore, Fitch expects the regulatory capital profiles of insurers to improve, given the alleviated investment and liquidity risks, along with better operating conditions. While recent underwriting profitability for insurers has faced challenges due to higher claim costs and expenses, it is anticipated that pressure on regulatory capital ratios will ease, as inflationary pressures start to abate.

The one-notch downgrade of the National Insurance Trust Fund Board's (NITF) rating reflects challenges related to the insurer's external reinsurance arrangements and weakened risk-management practices. NITF, the domestic reinsurer, has faced delays in renewing its reinsurance contracts and currently lacks retrocession cover for its inwards reinsurance business, contributing to capital and earnings volatility.