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Research Update: Hallmark Life Insurance, Hallmark General Insurance Downgraded To 'BBB' From 'BBB+'; Outlooks Stable

Overview

  • St Andrew's Australia (not rated) is close to completing its acquisition of Hallmark Life Insurance Co. Ltd. (HLIC) and Hallmark General Insurance Co. Ltd. (HGIC).
  • We believe HLIC and HGIC, currently trading together as Latitude Insurance, are closed for new business, which weakens our view of their business risk position. The insurers are unlikely to improve this position post the acquisition.
  • We lowered our financial strength and issuer credit ratings on HLIC and HGIC to 'BBB' from 'BBB+'. We removed the ratings from CreditWatch with negative implications.
  • The rating outlooks are stable reflecting Latitude Insurance's solid capital metrics and run-off profile.

Rating Action

On April 4, 2023, S&P Global Ratings lowered its long-term issuer credit and financial strength ratings on HLIC and HGIC to 'BBB' from 'BBB+'. We also lowered the financial strength ratings on the companies' New Zealand branches. The rating outlooks are stable.

We removed the ratings from CreditWatch, where they were placed with negative implications on Aug. 16, 2022.

Rationale

We believe the proposed sale of Latitude Insurance to St Andrew's Australia is now closer to finalization. We understand Latitude Insurance is closed for new business and has been running off its portfolio.

Meanwhile, the completion of the pending transaction and amalgamation with St Andrew's Australia is unlikely to improve Latitude Insurance's business and financial risk profile. We believe the insurer's competitive position has weakened and its absolute capital size will decline under the new ownership. Therefore, we have revised down our anchor to 'bbb' from 'bbb+'.

Latitude Insurance's capital adequacy is a relative strength and will benefit from the ongoing business run-off as the book seasons and risks mature. The solid capital position will allow for the proposed distribution of excess capital to Latitude Financial Services Australia Holdings Pty Ltd. (LFS; not rated) prior to the completion of the sale. As of Dec. 31, 2021, HGIC's and HLIC's regulatory capital adequacy was robust at 5.4x and 2.6x, respectively. However, this will likely reduce under the terms of the sale.

The addition of the St Andrew's Australia portfolio is neutral to Latitude Insurance's revised credit profile, in our view. St Andrew's Australia is a consumer credit and life insurer with a regional bank-owned background. It is currently owned by a consortium of private investors led by Farmcove Investment Holdings Pty Ltd. Latitude Insurance's products complement St Andrew's Australia's existing accident and sickness insurance products. Like Latitude Insurance, St Andrew's Australia is in run-off and is actively servicing its existing business.

We view the recent Latitude cyber incident as primarily linked to LFS platforms and customer base. Latitude Insurance operates with some autonomy from LFS, although its customer base is largely sourced from LFS. While the extent and implications of this issue are developing, we view it as neutral to Latitude Insurance's revised credit profile as a run-off entity.

Outlook

The stable outlooks on HLIC and HGIC reflect our expectation that Latitude Insurance will maintain solid capital metrics at least over the next two years under the new ownership. Under its current business model, the insurer is likely to be closed to new business and run off its existing portfolio.

Downside scenario

We could lower the ratings if Latitude Insurance's capital position deteriorates relative to its risk position.

Upside scenario

Stronger ratings on HLIC and HGIC are unlikely. Latitude Insurance's business risk position is constrained as a run-off. Similarly, a stronger capital position is unlikely under the current business model and pending ownership change.

Ratings Score Snapshot

RSS Table
To From
Financial strength rating BBB BBB+
Anchor bbb bbb+
Business risk Fair Fair
IICRA Low Low
Competitive position Fair Fair
Financial risk Strong Strong
Capital and earnings Strong Strong
Risk exposure Moderately low Moderately low
Funding structure Neutral Neutral
Modifiers 0 0
Governance Neutral Neutral
Liquidity Exceptional Exceptional
Comparable ratings analysis 0 0
Support 0 0
Group support 0 0
Government support 0 0
IICRA--Insurance Industry And Country Risk Assessment.
ESG credit indicators: E-2, S-2, G-2

Related Criteria

Ratings List

Downgraded; CreditWatch/Outlook Action
To From

Hallmark Life Insurance Co. Ltd.

Hallmark General Insurance Co. Ltd.

Issuer Credit Rating
Local Currency BBB/Stable/-- BBB+/Watch Neg/--

Hallmark Life Insurance Co. Ltd.

Hallmark Life Insurance Co. Ltd. (New Zealand Branch)

Hallmark General Insurance Co. Ltd. (New Zealand Branch)

Hallmark General Insurance Co. Ltd.

Financial Strength Rating
Local Currency BBB/Stable/-- BBB+/Watch Neg/--

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Angela Zhou, Melbourne + 61.2.9255.9841;
angela.zhou@spglobal.com
Secondary Contact:Michael J Vine, Melbourne + 61 3 9631 2013;
Michael.Vine@spglobal.com

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