The National Reinsurance Corporation of the Philippines (Nat Re), the Philippines' sole professional reinsurer, has been assigned a financial strength rating of PRS 'A', with a 'Stable' outlook, by Philippine Rating Services Corporation (PhilRatings).
A PRS 'A' rating means that an insurer has strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions compared to higher-rated insurance companies. A 'Stable' outlook is defined as the rating is likely to be maintained or to remain unchanged in the next 12 months.
In a report, PhilRatings says that Nat Re's assigned financial strength rating and outlook take into consideration the following:
Nat Re’s solid market franchise;
the important role it plays in the development of the domestic and regional insurance industry, given its status as the Philippines’ sole domestic professional reinsurer
its shareholders of good standing
the company’s experienced management
Nat Re’s sound investment portfolio
more than adequate capital;
the external headwinds which weigh down and affect the company’s performance.
As the only domestic professional reinsurance firm in the country, Nat Re is considered to have a solid market franchise. Nat Re has a unique advantage granted by the law, which is that of being entitled to take up a minimum 10% share of all the outward reinsurance business of domestic insurance companies, and which would otherwise be ceded abroad. This gives Nat Re significant access to domestic reinsurers’ business, and also a broader view of their reinsurance requirements.
As of end-June 2022, the Government Service Insurance System (GSIS) remained as Nat Re’s largest shareholder, with a 25.7% ownership stake in the company. GSIS is a government-owned and controlled corporation mandated to provide and administer social security benefits for government employees. The Bank of the Philippine Islands (BPI) and MICO Equities (MEI) were the company’s other large shareholders, with ownership interests of 13.7% and 12.9%, respectively.
BPI, the banking arm of Philippine conglomerate Ayala Corporation, is one of the country’s largest and leading universal banks, with services encompassing traditional commercial banking, as well as investment and consumer banking. MEI, on the other hand, operates as a holding company for the Yuchengco Group’s non-life insurance business, Malayan Insurance, which was the largest domestic non-life insurance company in terms of Gross Premiums Written as of end-2021.
As of end-2021 and as of end-March 2022, low-risk fixed income investments made up 83.2% and 83.6%, respectively, of Nat Re’s total investment portfolio. Fixed income investments of the company included: corporate bonds, government bonds, treasury bills and short-term investments. Equity securities, on the other hand, accounted for 16.8% and 16.4% of the company's total investment portfolio as of end-2021 and end-March 2022, respectively.
Equity securities consisted mainly of shares of stocks in companies listed in the Philippine Stock Exchange (PSE).
Nat Re had PHP9.1bn ($157m) in investment assets, as of end-March 2022. With a net worth of PHP5.7bn as of 31 March 2022, Nat Re was substantially ahead of the end-2022 regulatory deadline for a minimum net worth of PHP3bn. Similarly, its risk-based capital (RBC) ratio of 247% as of end-March 2022 was more than double the minimum ratio of 100% required by the Insurance Commission.
Notwithstanding its sound investment portfolio and more than adequate capital, Nat Re has been facing a number of external headwinds. Over the last 3-5 years, the industry has seen that growth in catastrophe losses has outpaced the growth in premium rates. The foregoing was also evident in the company’s loss experience in 2021 and in the first half of 2022.
To mitigate the potential impact of higher catastrophe losses on the company's performance moving forward, Nat Re seeks to lower the volatility in its loss experience by gradually revising its business mix.
Also weighing down on the company’s performance is accelerating inflation. Management acknowledged that the inflation surge has become a headwind to Nat Re’s operating income and profitability as it directly affected the input costs incurred by the businesses of the company.
The other headwind that the company faces is rising interest rates. The Bangko Sentral ng Pilipinas (BSP) has increased its benchmark interest rates by a total of 175 basis points (bps) so far this year — 25 bps on 19 May 2022, another 25 bps on 23 June 2022, 75 bps on 14 July 2022, and 50 bps on August 18, 2022. The foregoing brought the policy rate to 3.75%, up from a record low of 2% in November 2020.
While interest rate hikes will improve the yield of the company’s overall portfolio in the medium- to long-term, they adversely affected the present value of the company's investment assets as of end-June 2022. In the first six months of 2022, Nat Re recognized an impairment loss on its available-for-sale (AFS) equity securities amounting to PHP84.8m and a fair value loss on its held-for-trading (HFT) equity securities amounting to PHP24.8m. While Nat Re has taken the necessary steps to mitigate the risks associated with the above-mentioned challenges, these factors may continue to affect the company's performance in the short- to medium-term.