Key Rating Drivers
The ratings reflect HNBA's comfortable capitalisation, in terms of regulatory solvency and Fitch's risk-based capital computations, its sustained profitability and modest market share. The ratings also reflect Fitch's expectation of support from HNBA's parent, Hatton National Bank PLC (AA-(lka)/Stable), if required. HNBA is 60% owned by HNB and is strategically important to its parent, providing its customers with access to an additional product range through bancassurance.
HNBA was established as a composite insurer in 2001 and accounted for less than 3% of industry assets at end-2012. As a new entrant to the domestic insurance industry which is dominated by a few large companies, HNBA has found it challenging to gain significant increases in market share. In 2012, its life market share increased marginally to 4% (2011: 3.7%).
Competition in the non-life sector continues to be intense with many small players striving to achieve critical mass. HNBA defended its prices and consequently suffered a loss in market share. HNBA intends to approach non-life pricing more aggressively than in the past year, without undermining profitability. Fitch expects competition in non-life to continue, as insurers seek to build up critical mass ahead of the compulsory segregation in 2015 of the life and non-life businesses.
HNBA's regulatory solvency ratio for the life business declined to 2.28x (2011: 2.89x) due to a growth in regular premium products but for the non-life business improved to 3.48x (2011: 3.15x) due to a significant increase in profit combined with low premium growth. Fitch expects premium growth to push the ratios down marginally in 2013, yet remain comfortably within the regulatory requirement, supported by bottom line profitability and by a conservative policy of maintaining low credit-risk investments.
The company holds a competitive advantage in tapping the customer base of HNB, the fourth-largest commercial bank in Sri Lanka with an extensive branch network across the country. The two companies share the HNB franchise and HNBA has bancassurance units at 142 HNB branches. As a low cost distribution network this channel plays a vital role in management efforts to increase scale while keeping a tight control on expenses.
HNBA takes a prudent policy towards investments, with government securities representing 57% and 48% of total investments undertaken by its life and non-life businesses at end-2012. Fitch takes a positive view of a further decline in its exposure to equity investments in the non-life fund to 3% (2011: 4%) and life fund to 4% (2011: 6%).
For 2012 HNBA's loss ratio improved slightly to 68% (2011: 69%) and consequently the combined ratio fell to 102% (2011: 103%). Fitch expects further improvements in the combined ratio to be challenging given the intense price competition in the non-life business. Profit after tax increased by 43% in 2012, primarily due to growth in investment income.
HNBA's rating could be upgraded if it is able to increase its market share in both life and non-life, whereby each business will have independently achieved critical mass, while maintaining profitability and capitalisation at current levels.
Conversely, a weakening in the solvency ratio to below 1.5x in life and non-life or an increase in the combined ratio above 110% on a sustained basis could result in a downgrade. A weakening in HNBA's perceived strategic importance to HNB, a significant reduction in the latter's shareholding in HNBA or a weakening of HNB's credit profile could also result in a negative rating action.