Monday, 7 April 2014 00:00
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Fitch Ratings Lanka has affirmed Sri Lanka-based HNB Assurance PLC’s (HNBA) National Insurer Financial Strength Rating and National Long-Term rating at ‘A(lka)’. The Outlook is Stable.
Key rating drivers
The ratings reflect HNBA’s comfortable capitalisation in terms of regulatory solvency, prudent policy towards investment and its modest market share. The ratings also reflect Fitch’s expectation of support from HNBA’s parent, Hatton National Bank PLC (HNB; AA-(lka)/Stable), if required. HNBA is 60% owned by HNB and is important to the bank because it provides its customers with additional bancassurance products.
HNBA was established as a composite insurer in 2001 and accounts for about 3% of industry assets. The company’s market share of the life and non-life business is expected to be around 5% and 3% at end 2013. Intense competition in the non-life insurance market - especially among the smaller insurers that are striving to achieve critical mass prior to a regulatory required split of life and non-life businesses by 2015 - has kept the combined ratios of many insurers over 100%. HNBA’s combined ratio deteriorated to 105% in 2013 from 102% in 2012 mainly due to an increase in expense ratio stemming from higher operational expenses.
HNBA’s regulatory solvency ratios were at 2.04x in 2013 (2012: 2.28x) in life and 3.89x (2012: 3.48x) in non-life, comfortably above the regulatory required level of 1.0x for both life and non-life). The solvency ratio in the non-life business improved due to a steady increase in profit. Fitch expects solvency ratios for 2014 to remain comfortably within the regulatory requirement, supported by bottom-line profit growth. From 1Q14, all insurers are required to submit their Risk Based Capital (for both life and non-life) to the Insurance Board of Sri Lanka, in addition to the solvency returns.
HNB is the fourth-largest commercial bank in Sri Lanka and it has an extensive branch network. HNBA has access to HNB’s low cost distribution network and it has used this channel effectively. The management expects this channel to support premium growth, especially in the life business. HNBA has bancassurance units at 174 HNB branches.
Fitch views HNBA’s low exposure to equity investments positively. In 2013, the company increased its investment in corporate debt, where returns were attractive and there were tax benefits for investing in listed debentures. At end-2013, investment in government securities accounted for 36% of the life fund, down from 57% at end-2012, and 32% of the non-life fund, compared with 48% a year earlier. Although the exposure to government securities reduced considerably, it remained above the regulatory minimums of 30% of life fund assets and 20% of non-life fund assets.
Rating sensitivities
HNBA’s rating could be upgraded if it is able to increase its market share in both the life and non-life insurance segments, so that each business independently achieves critical mass while maintaining profitability and capitalisation at current levels.
Conversely, a weakening in the solvency ratios to below 1.5x for both the life and non-life businesses or an increase in the combined ratio to above 110% on a sustained basis could result in a downgrade. A weakening in HNBA’s perceived strategic importance to HNB, a significant reduction in the latter’s shareholding in HNBA or a weakening of HNB’s credit profile could also result in a negative rating action.
HNBA’s ratings would also be sensitive to changes in its credit profile from the regulatory required split of its life and non-life businesses by 2015 and any mergers or acquisition that may transpire prior.
