- HDFC International Life and Re Company Ltd. (HDFC Life Re) is a life reinsurance startup based in the Dubai International Financial Centre and regulated by the Dubai Financial Services Authority.
- While HDFC Life Re's franchise is still in the early stages of development, the company has extremely strong risk-based capital adequacy, albeit constrained by a relatively small capital base in absolute terms.
- HDFC Life Re has a low risk tolerance in terms of its investment portfolio, with 100% of its assets invested in government bonds and bank deposits, resulting in exceptional liquidity.
- We are assigning our 'BBB' long-term insurer financial strength rating to HDFC Life Re.
- The stable outlook reflects our view that HDFC Life Re will maintain its extremely strong capital adequacy and low risk tolerance while gradually increasing its premium base, in both United Arab Emirates and the wider Middle East and North Africa region, and start reporting profitable results on a technical as well as on an overall basis.
DUBAI (S&P Global Ratings) Dec. 10, 2018--S&P Global Ratings today assigned its 'BBB' long-term insurer financial strength rating to HDFC International Life and Re Company Ltd. (HDFC Life Re). The outlook is stable. The rating reflects our assessment of the company as a startup reinsurer, albeit one operating in the relatively low-risk life reinsurance space, supported by extremely strong capital adequacy and abundant liquidity. Being a new startup, HDFC Life Re primarily writes life reinsurance business only in Gulf Cooperation Council (GCC) countries. However, we expect the company's exposure will spread across the Middle East and North Africa (MENA) region, with some business coming from the parent, HDFC Standard Life Insurance Company Ltd., in India. The life insurance market in the GCC is still in the early stages of development. While this presents an opportunity for HDFC Life Re, it adds an element of uncertainty regarding its business profile's development. The company's business model targets strategic partnerships, with a small number of high-profile insurers in each market, which may lead to dependence on these insurers in the initial years of operation. Our assessment of HDFC Life Re's competitive position factors in this concentration, as well as the company's small size in terms of total assets and gross premiums. We assess HDFC Life Re's capital adequacy as extremely strong and sufficient to support its current business volume and risk profile. Our assessment also incorporates our expectations for the future, including rapid premium growth in the next three years. However, our assessment is moderated by the absolute size of HDFC's capital base, with shareholder's equity of about $28.3 million that could potentially be sensitive to a single major event. In our view, HDFC Life Re has a low risk tolerance, supported by its extremely conservative investment strategy, with 100% of the investment portfolio invested in cash, bank deposits, and government bonds of high credit quality. There is no exposure to high-risk assets (equities, real estate, or speculative-grade instruments) and no foreign-exchange exposure, because all assets and liabilities are denominated in either U.S. dollar or UAE dirham (AED), which is pegged to the U.S. dollar. Our assessment for enterprise risk management (ERM) reflects our view that HDFC Life Re has a well embedded risk management culture across the company and has established risk controls for almost all areas of risk. The level of underwriting risk is still limited, since HDFC Life Re is a startup. However, we expect the company's ERM practices will evolve as it increases its size, geographic spread, and the complexity of assumed risks. Our assessment of the company's management and governance, reflects a limited track record of reaching targets to achieve satisfactory profitability. This is partly offset by our positive view of the company's risk tolerances and the senior management's strong background in terms of their expertise and experience, with many senior executives having worked within the wider group for a long time. HDFC Life Re maintains exceptional levels of liquidity by global standards, supported by its diverse investments in liquid assets, which are generally invested in highly rated instruments. HDFC Life Re's investment strategy remained largely cash-oriented, with no bank borrowings or confidence sensitive liabilities. As of March 31, 2018, total invested assets of $12.9 million were 7.5x net life reserves of $1.7 million. We expect the company will maintain at least strong liquidity under all realistic scenarios. Our ratings on HDFC Life Re are based on its stand-alone credit profile because we consider it as insulated from its parent, HDFC Standard Life Insurance Company Ltd. (unrated). In our opinion, there are currently limited operational and financial dependencies between the two entities. The parent is fully committed to preserving the credit strength of the company and we do not expect any upstreaming of the already injected capital, even if the parent is under stress. Indeed, the capital contained within HDFC Life Re is immaterial to the parent. Furthermore, the parent and the subsidiary are conducting regulated activities under the supervision of two separate regulators, each of which is monitoring the regulatory capital adequacy of the respective companies under their supervision. As a result, we think that HDFC Life Re's creditworthiness would remain somewhat resilient even if the parent's creditworthiness weakened. The stable outlook reflects our view that HDFC Life Re will maintain its extremely strong capital adequacy and low risk tolerance, while gradually increasing its premium base in both the United Arab Emirates and the wider Middle East and North Africa region, and start reporting profitable results on a technical as well as on an overall basis. We could lower the rating on HDFC Life Re if:
- Business growth and geographical diversification does not materialize, contrary to the company's forecasts and our expectations;
- The company's reliance on single counterparties for revenue generation does not gradually diminish;
- The company's operational and financial dependence on the parent increases to a level where we believe that a weakness in the parent's creditworthiness could adversely affect the company's financial strength; or
- Capital adequacy deteriorates below extremely strong levels as a result of earnings volatility, stronger-than-expected premium growth, or the failure of the parent to provide timely capital support when required.
We consider an upgrade unlikely over the next two years because of HDFC Life Re's limited scale both in terms of premiums written and capital base.
