Jun 19, 2020 (LBO) – 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 capitalisation, 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 realised and unrealised 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 minimise capital volatility. The insurer's non-life risk-based capital (RBC) adequacy ratio decreased to 195% in 1Q20 from 223% at end-2019, counterbalanced 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 rating action/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 rating action/upgrade:
- An improvement in HNBGI's RBC ratio above 200% while maintaining HNBA's RBC ratio well above 300% on a sustained basis.
- Maintenance of the insurers' 'Favourable' business profiles in terms of sustaining their business franchise and distribution sources.