Fitch affirms NITF’s IFS at AA-, Outlook Negative

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

The Outlook remains Negative. 

Key rating drivers 

The rating reflects NITF’s ‘Favourable’ business profile, financial performance that is better than that of the industry and conservative investment mix. The Negative Outlook reflects Fitch’s expectation of potential pressure on NITF’s capitalisation and earnings as well as downside risks from its weakened risk-mitigation practices. 

Fitch believes that significant payment of levies to the state as well as high exposure to the risk of losses from some of its key business lines will keep the insurer’s capitalisation in check. 

NITF paid 105% of its net profit as levies to the government in 2019 (three-year average payout: 115%). The insurer’s capital position, measured by the regulatory risk-based capital (RBC) ratio, fell to 180% in September 2019 due to higher claims in its inward reinsurance business and large levy payments, before recovering to 263% at end-2019. 

Fitch views that the continued delay in the renewal of NITF’s reinsurance arrangements has weakened the insurer’s risk-mitigation practices. Fitch believes that the delay will dampen NITF’s profitability and capital position and may increase the pressure on its rating. In 2017, NITF absorbed the entire LKR1.7 billion in disaster-management-related claims because of delays in the government’s approval for the renewal of NITF’s reinsurance cover for the National Natural Disaster Insurance Scheme. 

Fitch expects the potential slowdown in new business growth and softer investment yields due the economic fallout from the coronavirus pandemic to result in some near-term pressure on earnings. A modest rise in claim costs over the medium term in the Agrahara insurance scheme is also expected, which provides medical insurance for public-sector employees and their families, with the Government’s proposal to double benefits to state-sector employees engaged in controlling the spread of the virus.

NITF’s combined ratio gradually increased in the recent years (three-year average: 92%) due to higher claims from catastrophe events and the inward reinsurance business. However, the insurer’s combined ratio was well below the industry average due to the modest claims from the Strike, Riot, Civil Commotion and Terrorism program, which accounted for more than 30% of NITF’s gross premium income, and its low-cost operating model. NITF’s ‘Favourable’ business profile assessment reflects its substantive business franchise, which is supported by its full Government ownership and role in implementing state policies. NITF is the only domestic reinsurer and a state mandate requires all domestic non-life operators to cede 30% of their reinsurance to NITF. 

NITF’s unique product mix, with minimal claim history in some of its business lines, is offset by high exposure to the risk of losses from catastrophes and its reinsurance business. NITF’s investment policy is conservative. It is only permitted to invest in government securities and the equity of hospital projects under its legislation. The insurer maintains liquidity by investing in short-term government securities.