Philippine Rating Services Corporation has granted the National Reinsurance Corporation of the Philippines (Nat Re) an A rating with a stable outlook. Nat Re is the sole professional reinsurer in the Philippines (PhilRatings).
A PRS 'A' rating indicates that an insurer has good financial security features, but is somewhat more susceptible to unfavorable business situations than insurance businesses with higher ratings. A "Stable" outlook is defined as the likelihood that the rating will be maintained or unaltered throughout the following 12 months.
PhilRatings states in a report that Nat Re's assigned financial strength rating and outlook consider the following factors:
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; the company's reputable shareholders and seasoned management; and Nat Re's status as the Philippines' sole domestic professional reinsurer.
The external headwinds which weigh on and impair the company's performance; the robust investment portfolio of Nat Re which exceeds appropriate capital.
As the sole professional reinsurance company based in the United States, Nat Re is regarded as a market leader. The law grants Nat Re a unique advantage, which is the right to acquire a minimum of 10% of all the external reinsurance business of domestic insurance companies, which would otherwise be ceded abroad. This provides Nat Re with significant access to the business of domestic reinsurers and a greater understanding of their reinsurance needs.
Shareholders
The Government Service Insurance System (GSIS) remained Nat Re's largest stakeholder as of the end of June 2022, with a 25.7% stake in the company. GSIS is a government-owned and -controlled business with the responsibility of providing and administering social security benefits for government employees. The Bank of the Philippine Islands (BPI) and MICO Equities (MEI) were also significant stockholders of the corporation, holding 13.7% and 12.2% stakes, respectively.
The banking subsidiary of the Philippine conglomerate Ayala Corporation, BPI is one of the country's largest and most prominent universal banks, offering traditional commercial banking, investment banking, and consumer banking services. MEI, on the other hand, functions as a holding company for the Yuchengco Group's non-life insurance subsidiary, Malayan Insurance, which was the largest domestic non-life insurer by Gross Premiums Written as of the end of 2021.
Investments
Nat Re's overall investment portfolio was composed of 83.2% and 83.6% low-risk fixed income investments at the end of 2021 and March 2022, respectively. The company's fixed-income investments comprised corporate bonds, government bonds, treasury bills, and short-term investments. In contrast, equity securities represented 16.8% and 16.4% of the company's entire investment portfolio at the end of 2021 and March 2022, respectively.
The majority of equity securities were equities of corporations registered on the Philippine Stock Exchange (PSE).
As of the end of March 2022, Nat Re has $9.1 billion in investment assets. With a net worth of PHP5.7bn as of 31 March 2022, Nat Re was well ahead of the statutory requirement for a minimum net worth of PHP3bn by the end of 2022. Similarly, its risk-based capital (RBC) ratio of 247% as of the end of March 2022 exceeded the Insurance Commission's minimal ratio of 100%.
Challenges
Despite its solid investment portfolio and more than sufficient capital, Nat Re has faced a variety of external obstacles. Over the past three to five years, the increase in catastrophe losses has exceeded the increase in premium rates. The aforementioned was also visible in the company's 2021 and 2022 first-half loss records.
To offset the potential impact of increased catastrophe losses on the company's future performance, Nat Re aims to reduce the volatility of its loss experience by modifying its business mix gradually.
In addition to hindering the company's performance, increasing inflation is also a factor. Management admitted that the inflationary upswing has been a drag on Nat Re's operational income and profitability, as it has directly impacted the input costs incurred by the company's operations.
The corporation also faces a challenge from rising borrowing rates. The Bangko Sentral ng Pilipinas (BSP) has raised its benchmark interest rates by a total of 175 basis points (bps) so far this year: 25 bps on May 19, 25 bps on June 23, 75 bps on July 14, and 50 bps on August 18, 2022. This boosted the policy rate to 3.75 percent, up from a record low of two percent in November of 2020.
While interest rate increases will improve the yield of the company's overall portfolio over the medium to long term, they had a negative impact on the end-June 2022 current value of the company's investment assets. In the first half of 2022, Nat Re recorded an impairment loss of PHP84.8m on its available-for-sale (AFS) equity securities and a fair value loss of PHP24.8m on its held-for-trading (HFT) equity instruments. While Nat Re has taken the appropriate efforts to mitigate the risks connected with the aforementioned obstacles, these factors may continue to have a negative impact on the company's short- to medium-term performance.
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