Fitch affirms HNB Assurance at ‘A(lka)’/Stable
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.
The ratings reflect HNBA’s comfortable capitalisation, in terms of
regulatory solvency and Fitch’s risk-based capital computations, 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, providing its
customers with access to an additional product range through
bancassurance.
HNBA was established as a composite insurer in 2001 and accounted for
less than 3% of industry assets at end-2012. As a new entrant to the
domestic insurance industry which is dominated by a few large companies,
HNBA has found it challenging to gain significant increases in market
share. In 2012, its life market share increased marginally to 4% (2011:
3.7%).
Competition in the non-life sector continues to be intense with many
small players striving to achieve critical mass. HNBA defended its
prices and consequently suffered a loss in market share. HNBA intends to
approach non-life pricing more aggressively than in the past year,
without undermining profitability. Fitch expects competition in non-life
to continue, as insurers seek to build up critical mass ahead of the
compulsory segregation in 2015 of the life and non-life businesses.
HNBA’s regulatory solvency ratio for the life business declined to
2.28x (2011: 2.89x) due to a growth in regular premium products but for
the non-life business improved to 3.48x (2011: 3.15x) due to a
significant increase in profit combined with low premium growth. Fitch
expects premium growth to push the ratios down marginally in 2013, yet
remain comfortably within the regulatory requirement, supported by
bottom line profitability and by a conservative policy of maintaining
low credit-risk investments.
The company holds a competitive advantage in tapping the customer
base of HNB, the fourth-largest commercial bank in Sri Lanka with an
extensive branch network across the country. The two companies share the
HNB franchise and HNBA has bancassurance units at 142 HNB branches. As a
low cost distribution network this channel plays a vital role in
management efforts to increase scale while keeping a tight control on
expenses.
HNBA takes a prudent policy towards investments, with government
securities representing 57% and 48% of total investments undertaken by
its life and non-life businesses at end-2012. Fitch takes a positive
view of a further decline in its exposure to equity investments in the
non-life fund to 3% (2011: 4%) and life fund to 4% (2011: 6%).
For 2012 HNBA’s loss ratio improved slightly to 68% (2011: 69%) and
consequently the combined ratio fell to 102% (2011: 103%). Fitch expects
further improvements in the combined ratio to be challenging given the
intense price competition in the non-life business. Profit after tax
increased by 43% in 2012, primarily due to growth in investment income.
HNBA’s rating could be upgraded if it is able to increase its market
share in both life and non-life, whereby each business will have
independently achieved critical mass, while maintaining profitability
and capitalisation at current levels.
Conversely, a weakening in the solvency ratio to below 1.5x in life
and non-life or an increase in the combined ratio 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.
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