HDFC International Life and Re Company Ltd. Assigned 'BBB' Rating; Outlook Stable

  • 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. 
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