FINANCIAL CHRONICLE – Fitch Ratings has reaffirmed the National Insurer Financial Strength (IFS) Rating of the Construction Guarantee Fund (CGF), based in Sri Lanka, at ‘BB(lka)’, maintaining a stable outlook.
The rating confirmation highlights the challenging operational environment faced by CGF, marked by limited premium growth and increased claim risks. However, these challenges are somewhat mitigated by the fund’s solid capital base, conservative investment strategy, and a gradual recovery in premium revenues, according to the international ratings agency.
Fitch anticipates that the underwriting performance will remain weak in 2026, with only slight improvements expected due to a slow increase in business activity. Over the past three years, the average return on equity stood at 13%.
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The complete announcement is detailed as follows:
Fitch Ratings – Colombo/Sydney: Fitch Ratings has confirmed the National Insurer Financial Strength (IFS) Rating of the Construction Guarantee Fund (CGF) in Sri Lanka at ‘BB(lka)’. The outlook is stable.
This rating affirmation reflects CGF’s ongoing subdued operational conditions, limited premium growth in recent years, and heightened claim risks. Nonetheless, these issues are partially counterbalanced by the fund’s satisfactory capital status, cautious investment portfolio, and a gradual increase in premium income.
Key Factors Influencing the Rating:
Operating Environment: The operational landscape for CGF remained subdued throughout 2025. Government-led construction activities have largely been restricted to small to medium-scale rehabilitation and maintenance efforts, with new large-scale infrastructure projects facing significant constraints. Fitch forecasts a gradual improvement in CGF’s income in 2026, bolstered by reconstruction efforts related to Cyclone Ditwah and various smaller infrastructure initiatives, although claim risks persist due to ongoing contractor challenges and project delays.
Recovery in Premium Income: In 2025, premium income saw a notable recovery, soaring by 284% to LKR38 million from a previously low base, driven by post-flood reconstruction and an uptick in government projects. Employer claims reached LKR23 million in 2025, reflecting a 27% year-on-year decline. Fitch estimates that CGF’s underwriting loss was LKR104 million in 2025, a decrease from LKR140 million the previous year. Still, the agency expects underwriting performance to remain weak in 2026, with only modest gains anticipated as business volumes gradually increase.
High Risk Tolerance: The fund’s risk tolerance is considered high, as it offers guarantees to contractors classified as high-risk without requiring collateral, particularly for small- and medium-sized contractors registered under the Construction Industry Development Authority’s National Registration Scheme. To mitigate this risk, CGF conducts thorough evaluations of contractors’ technical and financial capabilities. Recently, the fund’s board established cash collateral requirements of 10% for performance bonds and 20% for advance payment guarantees.
Satisfactory Capital Position: CGF’s capital status is deemed adequate, with total capital amounting to approximately LKR2.0 billion at the end of 2025, entirely sustained by internally generated surpluses. The ratio of net guarantee-risk exposure to total capital increased to 0.6x by the end of 2025, compared to 0.1x in 2024, as net guarantee liabilities rose to LKR1,155 million. This figure remains significantly below CGF’s internal cap of 10x. Cumulative claims since the fund’s inception have totaled around LKR205 million, or about 9% of the equity at the end of 2025. The government has not provided additional capital beyond the initial LKR55 million grant, and CGF is not distributing dividends or levies to the government, allowing for full retention of earnings to foster capital growth.
Conservative Investment Strategy: CGF maintains a cautious investment approach, with approximately 60% of its invested assets in cash and term deposits at the Bank of Ceylon. The remainder of the portfolio comprises treasury bills.
Moderate Company Profile: The company profile is rated as ‘Moderate’ relative to other insurers in Sri Lanka, reflecting a ‘Moderate’ business profile and ‘Neutral’ corporate governance. CGF is entirely state-owned, with the Treasury Secretary serving as the trust’s settlor. Its competitive position is enhanced by the expertise of trustees from both public and private sectors. As of the end of 2025, CGF had total assets and equity of LKR3.4 billion and LKR2.0 billion, respectively.
RATING SENSITIVITIES:
Potential Factors Leading to a Negative Rating Action:
- A prolonged decline in financial performance or weaker risk management practices.
- A deterioration in the company profile, such as a significant weakening of CGF’s ties to the government or adverse changes in its business risk profile arising from economic downturns affecting the domestic construction sector.
- Increased investment and asset risks, including downgrades of financial institutions or sovereign ratings.
Potential Factors Leading to a Positive Rating Action:
- A sustained enhancement in the company profile, characterized by a larger operational scale and successful diversification into stable, profitable business lines.
