Fitch affirms HNB Assurance and HNB General Insurance ratings

Fitch Ratings Lanka has affirmed Sri Lanka-based HNB Assurance PLC’s (HNBA) National Insurer Financial Strength (IFS) rating and National Long-Term Rating of ‘A(lka).’ Fitch has also affirmed its 100% owned subsidiary HNB General Insurance Limited’s (HNBGI) National IFS rating and National Long-Term rating at ‘A(lka)’. The outlook on the ratings is ‘stable.’

Key rating drivers

The ratings reflect the insurance group’s strong capitalisation, strong domestic business profile, good financial performance and earnings as well as prudent investment policy.

HNBA, a life operator and its non-life subsidiary, HNBGI, is considered as having strong domestic business profiles, supported by association with the group’s parent, Hatton National Bank PLC (HNB, AA-(lka)/Stable), with whom the insurance group shares the ‘HNB’ brand name. The ratings also reflect synergies gained from using the wider branch network of HNB as well as the insurance group’s importance to the bank in providing bancassurance products and HNB’s 60% stake in the insurance group.

The agency expects the capitalisation of HNBA and HNBGI to remain satisfactorily above the regulatory minimum risk-based capital (RBC) ratio of 120%. HNBA’s RBC ratio was 358% at end-2017, while HNBGI’s was 178%. Management expects to maintain HNBA’s RBC ratio at over 300% and HNBGI’s at over 170% in the medium term.

Changes in the Inland Revenue Act – which come into effect from 1 April 2018 – are likely to lower HNBA’s profitability, as its life operations will be liable to pay an effective 28% tax rate on its life business surplus. This is a shift from the investment income minus management fees method, under which the company recorded losses and hence was not liable for tax. HNBA, along with other life insurers, will have limited ability to increase premiums to support after-tax profits in light of the country’s highly competitive insurance industry. Despite the tax changes, Fitch views HNBA’s financial performance and earnings as good. The insurance group maintained its consolidated pre-tax return on assets at 5.7% in 2017 (2016: 5.5%), buoyed by a 31% growth in the group’s consolidated pre-tax income. The non-life segment’s combined ratio improved to 104% in 2017 (2016: 108%), helped by better pricing and underwriting practices.

HNBA maintained its market position in both its life and non-life businesses. Its gross written premiums (GWP) in the life segment increased by 11.5% in 2017 to account for 5.6% of the market (2016: 5.6%). Non-life GWPs rose by 24.4% to account for 4.4% of the market (2016: 4.1%).

Fitch views HNBA’s investment policy as being conservative, with a large allocation to highly rated fixed-income securities and low exposure to equity investments (1% at end-2017). Expectations are that the mix of fixed-income securities would be influenced by the new Inland Revenue Act.

Effective taxes on investment income will increase, as tax exemptions on debentures and notional tax credits on government securities will be removed for both life and non-life operations. In response, the insurer has lowered its investment exposure to government securities to 41% (2016: 48%) and corporate bonds to 18% (2016: 25%) of invested assets, while increasing its allocation to term deposits to 33% (2016: 13%) due to higher net yields.

Rating sensitivities

Downward rating triggers include deterioration in the RBC ratio of HNBA and HNBGI to below 250% and 160%, respectively, for a sustained period or a weakening in the perceived strategic importance of HNBA or HNBGI to HNB.

Upgrade rating triggers include improvements in the market shares of HNBA and HNBGI, while maintaining sound capitalisation levels, with HNBA’s RBC ratio staying above 300% and HNBGI’s above 200%, on a sustained basis.