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.
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.