Fitch upgrades HNB Assurance’s National Long-term Rating to ‘A’; Outlook Stable

Fitch Ratings has recently upgraded HNB Assurance Plc’s (HNBA) National Long-term rating to ‘A(lka)’ from ‘A-(lka)’. Concurrently, Fitch has affirmed HNBA’s National Insurer Financial Strength (IFS) rating at ‘A(lka)’. The Outlooks on both the National Long-term and the National IFS ratings are Stable.
The upgrade of HNBA’s National Long-term rating reflects mainly the implicit capital, franchise and distribution support from Hatton National Bank (HNB, National Long-term rating ‘AA-(lka)’). HNBA’s major shareholders are HNB (59.99%) and Alliance Finance Co Plc (9.97%), while the remaining 30.04% of the company’s shares are widely held. With total assets of LKR2.8bn, HNBA was Sri Lanka’s sixth largest insurer at end-2008.
“Although parental support has always been a critical element of HNBA’s credit profile, Fitch believes the company’s strategic importance to the bank has grown since its incorporation in 2001,” says Stanley Tsai, Director in Fitch’s insurance team. Fitch expects HNBA to further increase its distribution synergies with its parent through on-going product development, brand-building and cross-selling initiatives.
In addition, the ratings reflect HNBA’s adequate risk-based capital position, relative to the rating level, and conservative investment strategy. Fitch notes that HNBA’s credit profile has largely been resilient to the impact of the global economic downturn. In particular, HNBA’s ROAE and ROAA of 26.8% and 6.8% in 2008 compare very favourably with the peer group average. Fitch attributes this to the company’s low exposure to the equity market and the profit participation feature of the bulk of its life business.
“While HNBA’s equity-to-asset ratio declined in H109 and will likely remain under pressure in the remainder of 2009 and 2010, Fitch expects the company’s risk-based capital to remain commensurate with its ratings over this period, barring any material increase in risk appetite,” says Tsai.
That said, Fitch notes that HNBA’s credit strengths are somewhat constrained by its modest, albeit improving, scale of operation. The company is also highly exposed to sovereign credit and macroeconomic risks. The re-investment risk associated with potentially lower recurring yields is exacerbated by the lack of depth and breath in the domestic capital market. Fitch will also monitor any deterioration in non-life underwriting profitability, which is driven by intense price competition in a detariffed environment.