EconomyNext – Fitch Ratings Lanka has affirmed HNB Assurance’s rating at ‘A(lka)’ and assigned HNBA’s subsidiary HNB General Insurance the same rating, both with a Stable Outlook.
The full rating report follows:
Fitch Ratings-Colombo-08 January 2015: Fitch Ratings Lanka has affirmed HNB Assurance PLC’s (HNBA) National Insurer Financial Strength Rating and National Long-Term rating at ‘A(lka)’. Fitch has also assigned HNBA’s subsidiary HNB General Insurance Ltd (HNB GI) a National Insurer Financial Strength Rating and National Long-Term rating of A(lka). All ratings have a Stable Outlook.
The ratings reflect the Sri Lanka-based Insurance group’s comfortable capitalisation in terms of regulatory solvency, its prudent policy towards investment and modest market share. The ratings also reflect Fitch’s expectation that HNBA will receive distributional synergies from parent, Hatton National Bank PLC (HNB, AA-(lka)/Stable), due to HNBA’s importance to the bank in providing additional bancassurance products and HNB’s 60% ownership of the insurance group.
HNBA was established in 2001 and operated as a composite insurer until end 2014. On 1 January 2015, the company transferred its non-life business to HNB GI- HNBA’s fully owned subsidiary. The life business is retained at HNBA. This was done to comply with the regulatory requirement to split the life and non-life businesses by 7th February 2015. The ratings acknowledge the status of HNB GI as a core operating entity of HNBA.
Fitch views the consolidated capital strength of HNBA as strong. At 3Q14, the life regulatory solvency was 2.84X (2013: 2.04x, 2012: 2.28x) and this was 2.67X (2013:3.89x 2012: 3.48x) in non-life, comfortably above the regulatory required level of 1.0x for both life and non-life. From 2016, insurers will be required to report the capital position based on Risk Based Capital (RBC). The company expects to maintain RBC of at least 200% for each of the life and non-life business segments. This compares with an expected regulatory minimum of 120%.
HNBA was established as a composite insurer in 2001 and accounted for 2.25% of industry assets at 2013. The company’s market share of the life and non-life business is about 5.5% for life and 4% for non-life at 3Q14. The non-life combined ratio is above 100% due to intense competition in the segment.
HNB is the fourth-largest commercial bank in Sri Lanka and has an extensive branch network. HNBA has access to this distribution network and it has established bancassurance units in over 175 HNB branches. Management expects this channel to support premium growth in the life business.
Fitch views HNBA’s low exposure to equity investment which was 4% at 3Q14 (2013:3%), positively. This exposure may be increased further due to the falling interest rate environment. In 2014, the company continued to increase its investment in corporate debt, due to attractive returns with the tax benefits for investing in listed debentures.
An increase in market share in both the life and non-life insurance segments while maintaining profitability and capitalization at current levels, will lead to an upgrade of HNBA and HNB GI’s ratings.
Downgrade rating triggers include:
– a weakening of the solvency ratio to below 1.5x in life or non-life
-an increase in the non-life combined ratio to above 110% on a sustained basis
-a reduction in operational synergies with HNB
-a significant weakening of HNB’s credit profile