RAM reaffirms National Insurance Trust Funds ratings at AAA/P1

Monday, 5 December 2011 00:00 -     - {{hitsCtrl.values.hits}}

RAM Ratings Lanka has reaffirmed National Insurance Trust Fund’s (NITF) long and short term claims paying ability ratings, at a respective AAA and P1; the long-term rating has a stable outlook.  

NITF’s ratings reflect its status as a statutory body of the Government of Sri Lanka (GOSL) and the Fund’s systemic importance as the sole provider of health-insurance coverage to government servants (known as Agrahara); Strike, Riot and Civil Commotion and Terrorism cover (SRCC and TR), and reinsurance in Sri Lanka.

The Fund’s healthy underwriting performance, good liquidity and strong capitalisation lend further support to its ratings.

NITF was incorporated as a statutory body under the NITF Act No. 28 in 2006. The Fund reports directly to the Ministry of Finance (MOF) and has been under the purview of the Insurance Board of Sri Lanka (IBSL) since 2011.

Almost all of NITF’s gross written premiums (GWPs) are generated from the captive businesses mentioned above. In addition, it is one of only two entities (the other being Sri Lanka Insurance Corporation - SLIC) that are allowed to offer insurance cover to government-owned enterprises (public circular PF/437).

NITF contributes around Rs. 2.0 billion annually to the State’s Consolidated Fund, rendering it the fourth-largest contributor.  

NITF’s overall underwriting performance is deemed healthy. The Fund’s overall claims, expense and combined ratios of a respective 33.45%, 12.42% and 45.87% as at end-FYE 31 December 2010 (end-FY Dec 2010) were the best in the industry.

Nevertheless, Agrahara, which amounted to approximately half of the Fund’s total GWPs, reported high claims ratio of 103.68%. This was due to low premiums charged relative to its substantial risk exposure on Agrahara policies; NITF offers this policy as part of the GOSL social obligation in uplifting the common well-being of civil servants.

However, the GOSL makes a budgetary allocation to Agrahara every year, thereby reducing the risks in this segment. On the other hand, the Fund’s SRCC and TR claims ratio remained low at 3.72% as at end-FY Dec 2010. Going forward, we anticipate SRCC and TR premiums to dip as this is no longer a mandatory cover.

NITF’s profitability is deemed healthy, with a gross underwriting margin of 64.55% as at end-December 2010 (end-December 2009: 60.62%). Meanwhile, we note that NITF’s overheads have remained relatively unchanged as it still operates with the same two branches. On the other hand, its investment income has been depressed by the scenario of falling interest rates as its investments are solely in government securities.

Furthermore, receding interest rates have affected its investment returns, as reflected by its weakening investment yield ratio, which declined from 14.24% to 7.83% y-o-y. As a result, the Fund’s profits shrank from RS. 3.29 billion to Rs. 2.72 billion over the same span.

NITF’s liquidity position is deemed satisfactory, as underlined by its ratio on liquid assets to total assets of 0.82 times as at end-December 2010, i.e. stronger than those of most of its peers.

The Fund maintains a conservative investment stance by maintaining almost all of its investments as government securities.   

As a statutory body, NITF does not have any share capital. As such, its capitalisation is entirely made up of accumulated profits from inception, after offsetting payments made to the GOSL’s Consolidated Fund. Its contribution to the Consolidated Fund amounted to Rs.  2.0 billion in FY Dec 2010 (FY Dec 2009: Rs. 2.25 billion).

As at end-December 2010, the ratio of NITF’s accumulated funds to total claims came up to six times. As such, the Fund’s capitalisation is deemed strong. Effective January 2012, NITF will be required to report to the IBSL on solvency ratios, as required of all the entities regulated by the latter.