Home / Financial Services/ Fitch affirms National Insurance Trust Fund at ‘AA-’

Fitch affirms National Insurance Trust Fund at ‘AA-’


Comments / {{hitsCtrl.values.hits}} Views / Tuesday, 31 October 2017 00:00


Fitch Ratings has affirmed the Sri Lanka-based National Insurance Trust Fund Board’s (NITF) National Insurer Financial Strength Rating (IFS) and National Long-Term Rating at ‘AA-(lka)’. 

The Outlook is Stable. NITF’s ratings reflect strong ties with the Sri Lankan Government (B+/Stable), a strong business profile as the country’s only reinsurer and a conservative investment policy. This is counterbalanced by weakened capitalisation due to natural disasters in 2016 and 2017 and high dividend payments.



Key rating drivers

NITF’s ratings reflect its 100% ownership by the Sri Lankan Government, its role as the country’s only reinsurer and its function as an arm of the State in implementing some policies, such as serving segments that are not covered by commercial insurers.

The company’s combined ratio rose to 134% in 1H17 and 76% in 2016 (2015: 53%) following floods in May 2016 and May 2017 and a prolonged drought in several parts of the country. This led to losses in NITF’s reinsurance, disaster management and crop insurance classes. Net profit dropped to Rs. 3.1 billion in 2016 (2015: Rs. 4.3 billion), while 1H17 recorded a Rs. 1 billion loss. Profitability is likely to recover in 2H17, if there are no further catastrophic events, as NITF’s core profitability remains strong.

The regulatory risk-based capital (RBC) ratio dropped to 178% by end-June 2017 from 558% at end-March 2017 due to disaster-related losses incurred in 2Q17 and an interim dividend payment to the State. 

Capitalisation is likely to recover alongside improving profit in 2H17, but could come under further pressure if NITF continues paying high dividends. NITF paid out 103% of profits in 2016 and 70% in 2015.

NITF has increased retention of excess-of-loss reinsurance contracts, which cover the reinsurance and natural disaster classes, to Rs. 1.5 billion and Rs. 1 billion respectively, from Rs. 1 billion and Rs. 0.5 billion in 2016. As such, the company is exposed to a high catastrophe-event risk that could threaten its capital position.

Flood-related claims in 2016 of Rs. 8.6 billion on NITF’s reinsurance and disaster-management classes were limited to Rs. 2.2 billion due to reinsurance cover. However, losses stemming from the May 2017 floods increased to an estimated Rs. 2.6 billion, as NITF will have to bear the entire Rs. 1.6 billion in disaster management-related claims. This was due to a delay in government approval, which resulted in NITF’s 2017-2018 reinsurance cover for this class coming into effect only after the floods.

NITF’s ratings also reflect the company’s strong business profile, which is underpinned by its role as Sri Lanka’s only reinsurer and its established products, which include Agrahara, the country’s largest health insurance scheme covering all state sector employees and their families. 

NITF also manages the Strike, Riot, Civil Commotion and Terrorism Fund (SRCCT), which is available to all insurers in Sri Lanka. Local regulation requires all non-life operators to cede 30% of their reinsurance to NITF.

We believe NITF’s reserves lack sophistication but there have been some improvements such as obtaining external certification for the first time in 2016. According to management, NITF’s liabilities are mainly short-tail in nature and estimated by the company to be less than one year.

The NITF Act only permits the company to invest funds in government securities and equity of hospital projects. NITF’s entire investment portfolio is fully invested in government securities.



Rating sensitivities

NITF’s ratings would be downgraded if its RBC ratio remains below 250% or its combined ratio is above 100% for a sustained period or if there is a weakening in its business profile. Ratings could also be downgraded if NITF’s importance to the State weakens. This could be reflected in a reduction in government-related business.

An increase in NITF’s market share, together with strong profitability and capitalisation as well as better risk management, will lead to a rating upgrade.


Share This Article


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

More of the same

Tuesday, 20 February 2018

Those of you who’ve read what I have written over the years could, justifiably, experience a sense of déjà vu as you read what follows. That said, I will make no apology for the burden of this piece because it will, again, state the eternal verit


Looking beyond the current political gridlock: Future of Tamil nationalist politics

Tuesday, 20 February 2018

The landslide victory of the Sri Lanka Podujana Peramuna (SLPP) in the recently concluded local government (LG) elections naturally attracted much attention to assessing the future trajectory of the domestic political landscape. The heavy focus on th


Liberal democracy is dead. Long live liberal democracy.

Tuesday, 20 February 2018

Liberal democracy as propounded and practiced by the UNP is dead. Beating up the statistics of the recent local election will not bring it back, but the UNP still remains the best vehicle for reviving liberal democratic ideals. Pohottuwa or the Sri L


Navigating a nuclearised Asia for smaller states: Reviving Sri Lanka’s commitments to disarmament

Tuesday, 20 February 2018

Throughout its diplomatic history, Sri Lanka has maintained a strong anti-nuclear stance. Given the perceived need to avoid antagonising nuclear powers in the region, Sri Lanka has communicated this stance as a general normative and ethical position,


Columnists More