Fitch lifts outlook of Sri Lanka’s HNB Assurance to ‘positive’
ECONOMYNEXT – Fitch Ratings has lifted the outlook on National Insurer Strenght (IFS) index on Sri Lanka based HNB Assurance to ‘postive’ from ‘stable’ and confirmed the rating at ‘A(lka)’.
Its fully owned non-life unit, HNB General Insurance was also confirmed at ‘A(lka)’ and its outlook lifted to ‘positive’ from ‘stable"
"The Outlook revision reflects better non-life capitalisation and financial performance while
maintaining satisfactory life capitalization," Fitch said.
"The rating affirmation takes into account the insurers’ favourable business profiles and prudent investment policies."
Fitch Revises Outlook on HNB Assurance and HNB General
Insurance to Positive; Affirms at ‘A(lka)’
Fitch Ratings-Colombo/Hong Kong-28 February 2019: Fitch Ratings revised the Outlook on the
National Insurer Financial Strength (IFS) Ratings of Sri Lanka-based life insurer HNB Assurance
PLC (HNBA) and its fully owned non-life subsidiary, HNB General Insurance Limited (HNBGI), to
Positive from Stable and affirmed the ratings at ‘A(lka)’.
KEY RATING DRIVERS
The Outlook revision reflects better non-life capitalisation and financial performance while
maintaining satisfactory life capitalisation. The rating affirmation takes into account the
insurers’ favourable business profiles and prudent investment policies.
Fitch expects the insurers’ capitalisation, as measured by their risked-based capital (RBC)
adequacy ratios, to remain comfortably above the 120% regulatory minimum in the medium
term. HNBA’s life RBC ratio was strong at 319% at end-2018 (2017: 358%), while the non-life RBC
continued to steadily increase to 200% in 2018, from 178% in 2017, supported by an improved
non-life underwriting performance.
The insurers’ business profile is supported by their substantive business franchise, welldiversified
participation in business lines across life and non-life insurance sectors, a risk
appetite that is on a par with that of domestic peers and moderate operating scale.
believes the insurers’ franchise and competitive position benefit from their association with the
group’s parent, Hatton National Bank PLC (HNB, AA-(lka)/Stable), with whom they share the
‘HNB’ brand name.
The insurers’ ratings also reflect synergies gained from using the wider branch network of the
banking parent. HNBA was Sri Lanka’s sixth-largest among 15 life insurers and ninth-largest
among 14 non-life insurers at end-September 2018.
The non-life combined ratio continued to improve to 102% in 2018 (2017: 104%; 2016: 108%),
helped by better pricing and underwriting practices. Life pre-tax return on assets was 7.6% in
2018, compared with 5.3% in the previous year, owing to a one-off surplus transfer of LKR381
million to shareholders’ fund, in line with a direction issued by the regulator coupled with
HNBA’s improved operating performance.
Fitch expects the insurers to maintain satisfactory financial performance, despite changes
introduced through the new Inland Revenue Act that came into effect in April 2018, including a
higher effective tax liability for life insurers. However, we expect the impact on HNBA’s
profitability to be limited due to its ability to utilise some brought-forward tax losses to offset
its future taxable income. The Inland Revenue Department of Sri Lanka, through a transitional
provision, permits companies to setoff future taxable income using unutilised tax losses for a
period of six years from April 2018.
Fitch sees HNBA’s investment policy as conservative, with a large allocation to high-quality
fixed-income securities and low exposure to equity investments. The investment portfolio was
dominated by fixed-income instruments (94% of invested assets), with 35% invested in fixed
deposits at leading banks and non-bank financial institutions, 21% in listed debentures and 44%
in government securities at end-2018. Allocations to equity were a low 1%.