ECONOMYNEXT – Sri Lanka-based Construction Guarantee Fund’s National Insurer Financial Strength (IFS) Rating has been affirmed at ‘BB(lka)’ by Fitch Ratings, with a stable outlook.
“The affirmation of CGF’s rating reflects its subdued operating conditions, constrained premium growth in recent years and elevated claim risk, although these pressures are partly offset by the fund’s adequate capital position, conservative investment mix and gradual recovery in premium income,” the global ratings agency said.
Fitch said it expects underwriting performance to remain weak in 2026, improving only modestly amid a gradual rise in business volumes. Return on equity averaged 13% over the past three years.
The full statement is reproduced below:
Fitch Affirms Construction Guarantee Fund’s ‘BB(lka)’ National IFS Rating; Outlook Stable
Fitch Ratings – Colombo/Sydney: Fitch Ratings has affirmed Sri Lanka-based Construction Guarantee Fund’s (CGF) National Insurer Financial Strength (IFS) Rating at ‘BB(lka)’. The Outlook is Stable.
The affirmation of CGF’s rating reflects its subdued operating conditions, constrained premium growth in recent years and elevated claim risk, although these pressures are partly offset by the fund’s adequate capital position, conservative investment mix and gradual recovery in premium income.
Key Rating Drivers
Subdued Operating Conditions: CGF’s operating conditions remained subdued in 2025. Government-led construction activity has been largely limited to small- to medium-scale rehabilitation and maintenance work, while new project origination, particularly large-scale infrastructure, remains constrained. Fitch expects CGF’s income to pick up gradually in 2026, supported by Cyclone Ditwah-related reconstruction work and other small infrastructure projects, although claim risk persists due to ongoing contractor stress and project delays.
Premium Growth Resumed: Premium income rebounded in 2025, rising sharply by 284% to LKR38 million from a low base, with growth supported by post-flood reconstruction and a pick-up in government-led projects. Employer claims totalled LKR23 million in 2025, a decline of 27% yoy. Fitch calculates that CGF’s underwriting loss was LKR104 million in 2025, down from a LKR140 million loss in 2024.
However, Fitch expect underwriting performance to remain weak in 2026, improving only modestly amid a gradual rise in business volumes. Return on equity averaged 13% over the past three years.
High Risk Appetite: We regard the fund’s risk appetite as high, as it provides guarantees to high-risk contractors without requiring collateral, particularly small- and medium-sized contractors registered under the Construction Industry Development Authority’s National Registration Scheme. CGF attempts to mitigate this risk by conducting a comprehensive screening of the contractors’ technical and financial capabilities. CGF’s board of trustees recently set a cash collateral requirement of 10% for performance bonds and 20% for advance payment guarantees.
Adequate Capital: CGF’s capital position remains adequate, supported by total capital of about LKR2.0 billion at end-2025 and sustained entirely through internally generated surplus. Net guarantee-risk exposure to total capital increased to 0.6x by end-2025 (2024: 0.1x), with an increase in net guarantee liabilities to LKR1,155 million in 2025, but remained well below CGF’s internal cap of 10x. Cumulative claims since the fund’s inception were around LKR205 million, equivalent to approximately 9% of end-2025 equity.
The government has not infused additional capital into the fund since its initial grant of LKR55 million and CGF is not paying dividends or levies to the government, allowing earnings to be fully retained to support capital growth.
Conservative Investment Mix: CGF’s investment approach remains conservative, with around 60% of invested assets held in cash and term deposits at the state-owned Bank of Ceylon (Long-Term Foreign-Currency Issuer Default Rating: CCC+, National Long-Term Rating: AA-(lka)/Stable). Treasury bills accounted for the remainder.
Moderate Company Profile: We rank the company profile as ‘Moderate’ compared with that of other insurers in Sri Lanka, reflecting the ‘Moderate’ business profile and ‘Neutral’ corporate governance. CGF is fully owned by the state, with the secretary to the Treasury functioning as the trust’s settlor. Its competitive position is strengthened by the expertise of its trustees, which comprise both public- and private-sector institutions. It has a small operating scale, with total assets and equity of LKR3.4 billion and LKR2.0 billion, respectively, at end-2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
– Sustained deterioration in financial performance or weaker risk-management practices;
– A deterioration in the company profile, for instance, due to a significant weakening in CGF’s association with the government, or a deterioration in its business risk profile due to a decline in the country’s economic conditions that affects the domestic construction sector;
– Rising investment and asset risks, including a downgrade of the ratings of financial institutions or the sovereign.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
– Sustained improvement in the company profile in terms of a larger operating scale and successful diversification into profitable and stable business lines. (Colombo/Apr28/2026)