RAM reaffirms National Insurance Trust Fund’s ratings at ‘AAA/P1’

RAM Ratings Lanka has reaffirmed National Insurance Trust Fund’s long- and short- term claims-paying ability ratings at AAA and P1 respectively; the long-term rating has a stable outlook. NITF’s ratings reflect its status as a statutory body of the Government of Sri Lanka and the Fund’s systemic importance as the sole provider of health insurance coverage to Government employees (known as Agrahara), strike, riot and civil commotion and terrorism cover (SRCC and TR), and reinsurance in Sri Lanka. Meanwhile, the ratings are also upheld by the Fund’s good liquidity and strong capitalisation levels.

Incorporated under the NITF Act No. 28 of 2006, NITF is the only reinsurance company in the country and was formed in line with the State’s objective of reducing foreign currency outflows via reinsurance ceding. The Fund’s strategic direction is broadly aligned with the Government’s macroeconomic objectives.

Almost all of NITF’s gross written premiums (GWP) are generated from the captive businesses derived from state ownership. In addition, it is one of only two entities (the other being Sri Lanka Insurance Corporation, that are allowed to offer insurance cover to Government-owned enterprises. NITF contributes around Rs. 2 billion annually to the State’s Consolidated Fund, rendering it the fourth-largest contributor.

Although NITF’s overall claims ratio weakened to 52.33% during fiscal 2011, it continued to remain lower than most industry players owing to minimal claims stemming from the SRCC and TR fund. Nevertheless, the lower claims ratio for SRCC and TR was offset by higher claims stemming from the Agrahara health-insurance scheme.

Notably, the high claims ratio for Agrahara is due to the relatively low premiums charged relative to the high-risk exposure, as NITF offers this policy as part of the state’s social obligation as well as high claims arising from this segment. Overall, its underwriting performance was upheld by the captive market from state institutions and its low cost operating model as NITF operates with only two branches.

Aided by an improved top line and lower overheads resulting from its low cost operations, its overall expense ratio remained low at 12.76% in FY December 2011 (FY December 2010: 12.66%). The Fund’s combined ratio too remained low at 65.09%, albeit slightly weakening from last year. All in all, the fund recorded a pre-tax profit of Rs. 2.15 billion in fiscal 2012 (fiscal 2011: Rs. 2.33 billion), moderating from last year owing to the relatively lower returns from its investment portfolio amid receding interest rate scenario in 2011.

On a separate note, NITF continued to maintain a conservative stance with regards to investments, with around 75% of investments in the form of Government securities in fiscal 2011. NITF’s investment framework is governed by the NITF Act, which directs that investments should purely be in the form of Government securities or the equity of any company focused on upgrading health-based institutions.

As such, the scenario of falling interest rates had depressed the Fund’s investment income during 2011; this is also reflected in its investment yields, which compared lower than most of the peers’. Looking ahead, we envisage NITF’s investment yield to improve amid the upward trend in interest rates. Meanwhile, reflective of its investment portfolio, NITF’s liquidity position is deemed satisfactory, as underlined by its ratio on liquid assets to total assets of 0.74 times as at end-December 2011, i.e. stronger than those of most of its peers.

As a statutory body, the Fund does not have any share capital. NITF’s capitalisation of Rs. 8.35 billion as at end-December 2011 was made up of accumulated profits since inception, subsequent to deducting the annual payments made to the GOSL. Although, the ratio on accumulated funds to total claims weakened to 4.78 times by end-December 2011 (end-December 2010: 5.07 times), RAM perceives NITF’s capitalisation to be strong. Meanwhile, RAM notes that NITF does not compute solvency ratios as required by other entities under the Insurance Board of Sri Lanka.