Fitch affirms HNB Assurance and HNB General Insurance ratings

Fitch Ratings Lanka has affirmed HNB Assurance PLC’s (HNBA) National Insurer Financial Strength Rating and National Long-Term Rating at ‘A(lka)’. 
Fitch has also affirmed its subsidiary HNB General Insurance Limited’s (HNB GI) National Insurer Financial Strength Rating and National Long-Term Rating at ‘A(lka)’. The Outlook on the ratings is Stable.
The ratings reflect the Sri Lanka-based insurance group’s satisfactory capitalisation in terms of risk based capital, prudent investment policy and modest market share. 
The ratings also reflect synergies gained from using its parent’s, Hatton National Bank PLC (HNB, AA-(lka)/Stable), wider branch network, HNBA’s importance to the bank in providing bancassurance products and HNB’s 60 percent stake in the insurance group.
Fitch considers HNB GI a core subsidiary of HNBA, due to the significant contribution non-life insurance makes to the top line (49 percent of gross written premiums) and significant operational synergies.
Fitch views HNBA’s consolidated capital strength as satisfactory. In 2015, its life solvency ratio was 2.2x (2014:2.3x), while its non-life ratio weakened to 1.5x (2014:3.1x) due to lower profitability resulting from high competition. 
The regulatory minimum ratio was 1.0x for both life and non-life. In 2015 HNBA’s pretax return on assets reduced to 1.5 percent (2014: 4.9 percent), as the non-life combined ratio deteriorated to 123 percent from 110 percent in 2014. The increase in the ratio was mainly due to the motor insurance claims.
In November 2015, HNBA provided HNB GI with Rs.150 million of capital to support its solvency until HNB GI arrests its weak profitability.
HNBA and HNB GI have been recording above-sector growth in the last couple of years. Fitch generally views growth at rates greater than the market or peers cautiously from a ratings perspective, especially during periods of competitive pricing pressures. From 2016, insurers will be required to report RBC positions. HNBA’s life and non-life RBC ratios were 282 percent and 177 percent respectively at end-2015. HNBA expects its life and non-life business segments to maintain RBC ratios of at least 170 percent. This compares with a regulatory minimum of 120 percent.
Although Fitch does not expect the Sri Lankan insurance sector’s credit profile to deteriorate materially, Fitch is of the view that operating conditions could become more challenging. Fitch downgraded the Sri Lankan sovereign to ‘B+’ from ‘BB-’ and assigned a Negative Outlook on 29 February 2016. 
The operating environment remains a key rating driver for the Sri Lankan insurance sector, given its potential volatility.