Fitch Ratings has affirmed Sri Lanka-based National Insurance Trust Fund Board's (NITF) National Insurer Financial Strength (IFS) Rating and National Long-Term Rating at 'AA-(lka)'. The Outlook is Stable.

KEY RATING DRIVERS

The affirmation reflects the company's strong domestic business profile, conservative investment mix as well as strong financial performance and capitalisation. This is partly offset by volatility in profitability and capitalisation over the previous 15 months due to back-to-back natural disasters and high claims. 

Fitch believes NITF has a strong domestic business profile, which is underpinned by its role as the country's only reinsurer, its well-established exclusive product lines, its function as an arm of the state in implementing policies, its full government ownership and a mandate requiring all domestic non-life operators to cede 30% of their reinsurance to NITF.

NITF's strong capitalisation is reflected in its risked-based capital (RBC) ratio of 314% as at end-June 2018 (2017: 255%, 2016: 385%), which is well above the 120% regulatory minimum. However, capitalisation has been highly volatile since mid-2017 due to natural disaster-related losses and large dividend payments to the state. We believe the insurer's capital position may come under pressure if it continues to pay high dividends during periods of increasing frequency of large natural catastrophes. NITF paid out 146% and 113% of profits as dividends to the state in 2017 and 2016, respectively.

NITF has a strong financial performance and earnings. Its combined ratio improved to 74% in 1H18, after temporarily deteriorating to 100% in 2017 (2016: 79%), owing to high net claims from floods in May 2016 and May 2017 and a prolonged drought in several parts of the country. The higher net claims in 2017 were due to a delay in government approval to renew NITF's reinsurance cover for the National Natural Disaster Insurance Scheme, which resulted in NITF having to bear the entire LKR1.7 billion in disaster-management-related claims. Fitch believes any further delays of this nature, which could significantly dampen NITF's profitability, may increase downside pressure on its ratings. Nevertheless, NITF's 1H18 pre-tax operating return on assets recovered to 23.4%, from 5.6% in 2017 (2016: 17.9%), due to the moderation of claims and strong core profitability.

Fitch sees some improvement in NITF's reserving following the adoption of external actuarial certification from 2016. The insurer also started providing for incurred but not reported claim reserves at end-2016. Management reports that NITF's liabilities are mainly short-tail in nature and estimated to be less than one year. 

NITF has a conservative investment policy; its entire portfolio is invested in government securities. The company is only permitted to invest in government securities and equity of hospital projects under the NITF Act.

RATING SENSITIVITIES

Key downgrade triggers:
- If NITF's RBC ratio remains below 250% or its combined ratio is above 100% for a sustained period, or if there is a weakening in its business profile, such as a large reduction in government-related business.

Key upgrade triggers: 
- An increase in NITF's market share, together with strong profitability and capitalisation, as well as better risk management.