Fitch Ratings has affirmed Sri Lanka-based National Insurance Trust Fund Board’s (NITF) ‘BBB(lka)’ National Insurer Financial Strength (IFS) Rating. The Outlook is Stable.
Fitch issued the following key rating drivers:
- ‘Moderate’ company profile: We regard the insurer’s company profile as ‘Moderate’ compared with other domestic insurers, based on a ‘Favourable’ business profile and ‘Less Favourable’ corporate governance. NITF’s business profile is supported by its large domestic operating scale and substantive business franchise, which benefits from its full State ownership and role in implementing Government policies. Our ‘Less Favourable’ corporate governance assessment is driven by the weak governance structure and limited financial transparency.
- No reinsurance cover: NITF’s risk-management practices continue to be weak, as evident from its inability to renew reinsurance contracts on time, following the expiration of NITF’s retrocession cover from January 2023 and reinsurance cover for strikes, riots, civil commotion and terrorism (SRCCT) from July 2023. We believe facing unforeseen losses without reinsurance cover could result in heightened volatility for NITF’s capital position and earnings.
- SRCCT to drive growth: We expect NITF’s gross premiums to surge in 2024 due to a recent directive requiring primary insurers to remit 100% of motor SRCCT premiums to NITF, up from the previous 12%. SRCCT contributes about 42% of gross premiums and dominates NITF’s profitability, since claims are modest. NITF’s net profit rose by 32% in 2023 to Rs. 9 billion, on higher investment income and return on equity that averaged 36% in the past three years. However, Fitch views the concentration of profitability in SRCCT and restricted cash flow between SRCCT and other lines as a credit weakness. The combined ratios for NITF’s reinsurance, motor, and health segments surpass 100%, indicating weak underwriting returns due to less flexibility in price revisions in its non-SRCCT segments. In contrast, the consolidated combined ratio improved to 72% in 2023 (2022: 83%), due mainly to a reversal of incurred but not reported (IBNR) claims and claim provisions in the ‘agrahara’ (health) and SRCCT segments. The three-year consolidated combined ratio stood at a favourable 77% compared to non-life peers, bolstered by modest claims from the SRCCT fund and the insurer’s low-cost operating model.
- Weak capital in non-SRCCT segments: The insurer’s regulatory capital positions are weak in non-SRCCT lines, such as reinsurance and other general insurance segments, with limited ability to transfer capital between business lines. Nonetheless, its consolidated regulatory risk-based capital (RBC) ratio remains robust, largely due to the SRCCT segment, and compares well against the industry average. The RBC ratio rose to 613% by end-2023 (2022: 430%, 2021: 600%) on higher earnings.
- Reduced investment and liquidity risks: Fitch believes investment and liquidity risks have eased following the positive rating action on the Sri Lankan sovereign’s Local-Currency Long-Term and Short-Term Issuer Default Ratings to ‘CCC-’ and ‘C’, respectively, as well as on Fitch-rated Sri Lankan bank and non-banking financial institutions in late 2023. NITF’s investments are entirely in Government securities, with 97% of the invested assets allocated to sovereign assets such as Treasury bonds, Treasury bills and repo investments, while the remaining 3% is held in cash and cash equivalents.
