Fitch affirms HNB Assurance at ‘A’/Stable

Fitch Ratings Lanka has affirmed HNB Assurance PLC’s (HNBA) National Insurer Financial Strength Rating and National Long-Term rating at ‘A(lka)’. The Outlook is Stable.

The ratings reflect HNBA’s comfortable capitalisation, both in terms of regulatory solvency and Fitch’s risk-based capital computations, as well as its sustained profitability and modest market share. The ratings also reflect Fitch’s expectation of support from HNBA’s parent – Hatton National Bank PLC (‘AA-(lka)’/Stable), if required. HNBA is 60% owned by HNB and is strategically important to its parent in providing additional product range to its customer base and expanding its bancassurance channel.

Regulatory solvency ratios improved to 2.89x and 3.15x for life and non-life businesses, respectively, in 2011 (2010: 1.13x and 2.01x) following a rights issue during the year.

These ratios are in line with peers and supported by the company’s healthy profitability and conservative investment policies. Although the solvency ratios are likely to decline marginally in 2012 with growth in premium levels, Fitch expects them to be sustained above 2010 levels.

Fitch notes that as HNBA is a relatively new entrant in the local insurance industry which is dominated by a few large companies, increasing its market share has been challenging for the company.

Market share in life and non-life premiums, although increasing, remained below 5% in 2011. The company does nevertheless have a competitive advantage in terms of access to the customer base of its parent. HNB is the fourth-largest commercial bank in Sri Lanka and has an extensive branch network across the country. The two companies share the ‘HNB’ franchise and HNBA has its bancassurance units at 120 HNB branches.

HNBA adopts a fairly conservative investment strategy, with government securities accounting for 58% of life investments and 49% of non-life investments at end-2011 (2010: 71%, 60%). Investments in equity remained well below the company’s internal limit of 10% of investments at end-2011. Also, single premium investments comprised less than 2% of life premiums in 2011 and are matched with investments of a similar yield and tenor.

Non-life underwriting profitability improved in 2011 despite a marginal increase in the loss ratio to 69% (2010: 68%) due to better expense management. HNBA’s combined ratio fell to 102.8% in 2011 (2010: 107.5%), and it is in line with peers. Fitch expects HNBA to maintain its combined ratio at the current levels through controlled expense management.

HNBA’s ratings could be upgraded if it is able to increase its market share while maintaining profitability and capitalisation at the current levels. Conversely, a weakening in solvency to below 1.5x in life and non-life could result in a ratings downgrade. A weakening in HNBA’s perceived strategic importance to HNB, a reduction in the latter’s shareholding in HNBA or a weakening of HNB’s credit profile could also result in negative rating action. .

HNBA was established as a composite insurer in 2001 and accounted for less than 3% of industry assets at end-2011.