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Sri Lanka insurance claims to fall on Covid-19 curfews, money printing to hit premium growth

CURFEW CLAIMS: The strict coronavirus curfews which kept vehicles at home will keep general insurance claims in Sri Lanka down, Fitch Ratings said

ECONOMYNEXT – Sri Lanka’s motor insurance claims will fall due to Coronavirus curfews but import controls on vehicles to stop currency depreciation will hit premium growth, Fitch Ratings said confirming an ‘A(lka) rating of HNB Assurance Plc and its subsidiary HNB General Insurance Ltd.

But the outlook was lowered to ‘stable’ from ‘positive’ on the fallout of a Coronavirus crisis.

“The Outlook revision reflects the agency’s expectation of near-term volatility in earnings and capital due to the potential slowdown in business growth and financial market variability caused by the coronavirus pandemic.” Fitch said.

“We expect new business generation for life insurance to be subdued over the near term due to the potential reduction in consumer spending and the industry’s dependency on agency networks that rely on human interaction for distribution.

“In addition, we expect non-life business growth to slow in light of the government’s temporary restriction on the import of motor vehicles to control currency depreciation.”

Sri Lanka’s central bank printed unprecedented volumes of money in March and April 2020, and the rupee fell from 182 to around 195 to the US dollars before gaining after interventions and a fall in credit and consumer demand from April.

Sri Lanka also slapped sweeping imports controls on cars and other imports not seen since the 1970s. There have been calls to reform the central bank so that its domestic operation department cannot trigger monetary instability.

Fitch said premiums will slow in the near term and while lower interest rates will also reduce investment yields.

“The pressure in earnings will be somewhat offset by lower claims from motor insurance lines due to fewer traffic accidents following restrictions on travel to contain the spread of the Coronavirus,” Fitch said.

HNB Assurance’s under writing performance had consistently improved by good practices, Fitch said.

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“The non-life combined ratio improved to 101 percent in 2019 from 102 percent in 2018 (2017: 104%; 2016: 108%).

“The life insurance operations’ pretax return on assets – excluding realized and unrealized gains – averaged close to 6% over the last three years.”

The full statement is produced below-;

Fitch Affirms HNB Assurance, HNB General Insurance at IFS ‘A(lka)’; Outlook Revised to Stable

Fitch Ratings – Colombo/Sydney – 18 Jun 2020: Fitch Ratings has revised the rating Outlooks of Sri Lanka-based life insurer HNB Assurance PLC (HNBA) and its fully owned non-life subsidiary, HNB General Insurance Limited (HNBGI), to Stable from Positive.

In addition, Fitch has affirmed the National Insurer Financial Strength (IFS) Ratings of HNBA and HNBGI at ‘A(lka)’.

KEY RATING DRIVERS

The Outlook revision reflects the agency’s expectation of near-term volatility in earnings and capital due to the potential slowdown in business growth and financial market variability caused by the coronavirus pandemic.

The insurers’ ratings continue to mirror their ‘Favourable’ business profiles, good financial performance and capitalization, as well as prudent investment policies.

Fitch believes the fallout in economic activity due to the pandemic will hamper the industry’s new business growth.

We expect new business generation for life insurance to be subdued over the near term due to the potential reduction in consumer spending and the industry’s dependency on agency networks that rely on human interaction for distribution.

In addition, we expect non-life business growth to slow in light of the government’s temporary restriction on the import of motor vehicles to control currency depreciation.

Fitch expects the insurers’ earnings to face near-term volatility from the slowdown in premiums and softer investment yields. The pressure in earnings will be somewhat offset by lower claims from motor insurance lines due to fewer traffic accidents following restrictions on travel to contain the spread of the coronavirus.

The insurers’ underwriting performance has consistently improved over the years,helped by prudent pricing and underwriting practices. The non-life combined ratio improved to 101% in 2019 from 102% in 2018 (2017: 104%; 2016: 108%). The life insurance operations’ pretax return on assets – excluding realized and unrealized gains – averaged close to 6% over the last three years.

Fitch believes that some of the potential risks to the insurers’ capital position due to the pandemic will be partially mitigated by their sufficient life insurance capital buffers and low exposure to equity investments. The insurers’ investment portfolios were dominated by investments in good credit quality domestic fixed-income securities.

In addition, the directive issued by the Insurance Regulatory Commission of Sri Lanka requiring all insurers to suspend dividend distributions until further notice is likely to minimize capital volatility. The insurer’s non-life risk-based capital (RBC) adequacy ratio decreased to 195% in 1Q20 from 223% atend-2019, counter balanced by a strong life RBC ratio of 309% in 1Q20 (2019:309%). The RBC ratios were well above the 120% regulatory minimum.

The insurers’ business profiles are buoyed by their substantive business franchise, which benefits from their association with the group’s parent, Hatton National Bank PLC (HNB, AA+(lka)/Negative), with whom they share the ‘HNB’ brand name. The insurers’ franchise is also strengthened by the synergies gained from using HNB’s wider branch network.

Fitch’s business profile assessment also factors in the insurers’ diversified participation in business lines across the life and non-life insurance sectors, a risk appetite that is on a par with that of domestic peers and their moderate operating scale. HNBA is the sixth-largest among Sri Lanka’s 15 life insurers and HNBGI is the ninth-largest among 14 non- life insurers.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative ratingaction/downgrade:

– Deterioration in the RBC ratio of HNBA and HNBGI to below 250% and 160%,respectively, for a sustained period.

– Deterioration in the business profile in terms of a weakening business franchise and distribution capabilities, for instance due to weaker association with the banking parent.

Factors that could, individually or collectively, lead to positive ratingaction/upgrade:

– An improvement in HNBGI’s RBC ratio above 200% while maintaining HNBA’sRBC ratio well above 300% on a sustained basis.

– Maintenance of the insurers’ ‘Favourable’ business profiles in terms ofsustaining their business franchise and distribution sources.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions,measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.

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