Fitch Ratings has upgraded the National Insurer Financial Strength (IFS) Ratings of Sri Lanka-based life insurer, HNB Assurance PLC (HNBA), and its fully owned non-life subsidiary, HNB General Insurance Limited (HNBGI), to 'A+(lka)', from 'A(lka)'. The Outlooks are Stable.
KEY RATING DRIVERS
The upgrade reflects the insurers' improved capital position, as measured by strong regulatory risk-based capital (RBC) ratios. The ratings also take into account the insurers' 'Favourable' business profiles and a sustained improvement in their non-life underwriting performance, while maintaining satisfactory earnings in its life insurance operation.
HNBA has comfortably maintained its life RBC ratio at above 300% since the implementation of the RBC rules by the regulator in 2016 (1Q21: 326%, 2020: 338%), which is well above the 120% regulatory minimum.
Meanwhile, HNBGI has improved its non-life RBC ratio to above 200% in a sustained manner, to reach 253% in 1Q21 (2020: 255%, 2019: 226%), supported by a better non-life underwriting performance. We believe the improved non-life RBC ratio in 2020 was partly due to low motor and medical insurance claims induced by the pandemic-led lockdowns and, as such, we expect the ratio to normalise in the near-term as claims pick up.
The reduced claims saw HNBGI's non-life combined ratio improve to 95% in 2020, from 101% in 2019, despite a slowdown in gross premium growth; however, we expect the ratio to normalise alongside capitalisation in the near term. A potential depreciation of the rupee against the hard currencies may also increase claim costs, but we believe HNBGI's prudent pricing and claim control efforts will support non-life underwriting profitability in the medium term. HNBA's life profitability stayed solid, with a return on equity of 11% in 2020 (2019: 14%).
Fitch regards the insurers' business profiles as 'Favourable', buoyed by their substantive business franchises, which benefit from an association with the group's parent, Hatton National Bank PLC (HNB, AA-(lka)/Stable), with whom they share the 'HNB' brand name. The insurers' franchises are also strengthened by the synergies gained from using HNB's wider branch network. Our business profile assessment also factors in the insurers' diversified participation in business lines across the life and non-life 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, with a combined gross premium base in excess of LKR10 billion.
Nonetheless, we believe HNBGI's motor insurance premiums, which accounted for over 70% of its total non-life gross premiums, will be kept in check by government restrictions on motor-vehicle imports to preserve foreign-currency reserves. In addition, new business generation for life insurance is likely to remain subdued over the near-term due to constraints on consumer spending and renewed travel restrictions to fight the resurgence of the coronavirus in the country. We expect the insurers' increased use of digital platforms for distributions, along with rising demand for medical insurance products, to partly mitigate the slowdown in business growth.
HNBA and HNBGI continue to invest heavily in domestic fixed-income securities. Term deposits at leading banks and non-bank financial institutions formed 36% of their investment portfolio in 2020, domestic corporate bonds made up 20% and government securities made up 36%. Less than 1% of the portfolio comprised equities.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-- Deterioration in the RBC ratios of HNBA and HNBGI to below 300% and 200%, respectively, for a sustained period.
-- Deterioration in the non-life combined ratio above 103% 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 the RBC ratio of HNBA and HNBGI to well above 350% and 250%, respectively, while maintaining the combined ratio below 98% on a sustained basis.
-- Further improvement in the business profile, for instance, supported by a stronger business franchise and operating scale.