ECONOMYNEXT – Fitch Ratings has confirmed a ‘BBB(lka)’ insurer rating of Sri Lanka’s National Insurance Trust Fund, with a stable outlook but warned on its inability to get re-insurance cover on time.
The NITF’s major source of revenue is riots, civil commotion and terrorism (SRCCT) premium it gets from other insurers, where claims were not high.
“NITF’s risk-management practices continue to be weak, as evident from its inability to renew reinsurance contracts on time,…” Fitch said.
“We believe facing unforeseen losses without reinsurance cover could result in heightened volatility for NITF’s capital position and earnings.”
NITF’s retrocession cover had expired in January 2023 and reinsurance cover for SRCCT in July 2023, but firm has not been able to renew them, Fitch said.
Fitch said NITF’s gross premiums would surge in 2024 following a after directive requiring primary insurers to remit 100 percent of motor SRCCT premiums to NITF, up from the previous 12 percent.
SRCCT contributes about 42 percent of gross premiums and dominates NITF’s profitability, since claims are modest.
NITF’s net profit rose by 32 percent to 2023 to 9 billion rupees, on higher investment income and return on equity that averaged 36 percent in the past three years.
But Fitch said the concentration of profitability in SRCCT and restricted cash flow between SRCCT and other lines was viewed as a weakness.
The full statement is reproduced below:
Fitch Affirms National Insurance Trust Fund’s ‘BBB(lka)’ National IFS; Outlook Stable
Fitch Ratings – Colombo – 17 Jul 2024: 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.
KEY RATING DRIVERS
‘Moderate’ Company Profile:>/b> 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 LKR9 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 nonSRCCT 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 LocalCurrency 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.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
– Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign
– Deterioration in the RBC ratio to below 250%, or a significant deterioration in the capital positions of non-SRCCT lines, for a sustained period;
– Deterioration in the combined ratio to above 103% for a sustained period;
– Significant weakening in NITF’s company profile, such as a large reduction in government-related business.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
– Improved company profile in terms of better business risk profile and improved riskmanagement practices or broader diversification into stable sources of underwriting profitability.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.