State-owned reinsurer National Insurance Trust Fund (NITF) Board is building capital buffers which will help in dealing with increasing frequencies of natural disasters, ratings agency Fitch Ratings Lanka has said.
The agency has affirmed NITF's National Insurer Financial Strength (IFS) Rating at 'AA-(lka)'. The outlook is stable. The affirmation reflects NITF's 'Favourable' business profile, meaningful recovery in its financial performance, satisfactory regulatory capital position as well as its conservative investment mix. Under the law, NITF reinsures 30% of all domestic non-life insurance policies. These positives are somewhat counterbalanced by the insurer's exposure to catastrophe risks which bring some volatility to its operating performance and capital position.
Fitch expects the insurer to maintain its risk-based capital (RBC) ratio above 250%, well above the regulatory minimum of 120%, in the medium term. NITF's capitalisation, as measured by its RBC ratio, was 257% at end-2018 before rising to 381% by end-March 2019, supported by improved underwriting profitability.
However, Fitch expects the RBC ratio to normalise towards the end of 2019 due to dividend payments to the state. NITF paid out 86% of its net profit as dividends to the state in 2018, easing from 154% and 113% in 2017 and 2016, respectively.
Fitch believes that significant dividend outflows will constrain NITF's capitalisation, particularly during periods of increasing frequency of large natural calamities.
The government's decision to increase its premium contribution to the NITF-managed National Natural Disaster Insurance Scheme to LKR1.5bn ($8.5m) in March 2019, from LKR500m, will help sustain the insurer's financial performance while supporting the long-term viability of the scheme, says Fitch.
Cost
Lower catastrophe claims in 2018 helped NITF's underwriting profitability recover.
The insurer's combined ratio moderated to 86% in 2018, after increasing to 100% in 2017 due to high net claims from floods in May of that year and in 2016, as well as a prolonged drought in several parts of the country.
NITF's low operating costs due to its smaller scale— the majority of NITF's businesses are state directed— support the industry-beating combined ratio.
Terrorism
Modest claims from the insurer's Strike, Riot, Civil Commotion and Terrorism (SRCCT) programme also reinforce the combined ratio.
Fitch believes that the claims from the tragic terror attacks and the subsequent violence in April 2019 will not significantly deteriorate NITF's financial performance. Management said the claims from the terror attacks would amount to around LKR500m, which is within the reinsurance deductible of LKR1bn for the SRCCT insurance cover.