The gross premiums of Sri Lanka-based National Insurance Trust Fund Board's (NITF) are expected to surge this year due to a recent directive requiring primary insurers to remit 100% of motor strikes, riots, civil commotion and terrorism (SRCCT) premiums to NITF, up from the previous 12%, says Fitch Ratings.
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 LKR9bn ($29.8m), 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.
Rating affirmed
Fitch has affirmed NITF’s 'BBB(lka)' National Insurer Financial Strength (IFS) rating. The outlook is ‘Stable’.
Apart from premium growth, other key factors driving NITF’s rating include:
'Moderate' Company Profile: Fitch regards 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. Fitch’s '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 by its inability to renew reinsurance contracts on time, following the expiration of NITF's retrocession cover from January 2023 and reinsurance cover for SRCCT from July 2023. Fitch believes facing unforeseen losses without reinsurance cover could result in heightened volatility for NITF's capital position and earnings.
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.
According to information on NITF’s website, the Fund provides reinsurance, SRCCT insurance, Agrahara medical insurance, health insurance, and other general insurance lines including crop insurance. The Agrahara medical insurance scheme was introduced in 1997 and placed under the NITF with effect from January 2006. Its objective is to lift the living standards of public servants and their families.