A.M. Best Revises HSBC Ratings - Analyst Blog

On Wednesday, A.M. Best Co. reiterated the ratings for Household Life Insurance Company and its wholly owned subsidiary, First Central National Life Insurance Company. These two form the key insurance operating entities of HSBC Finance Corporation, which is an indirect wholly owned subsidiary of HSBC Holdings plc (HBC). Also, A.M. Best downgraded the ratings for HSBC Insurance Company, which is a property/casualty subsidiary of HSBC, keeping the outlook for all ratings “stable."

Household Life

The rating agency reiterated the financial strength rating (FSR) of “A" (Excellent) and issuer credit ratings (ICR) of "a" for Household Life and its subsidiary First Central.

The ratings of Household Life were based on its favorable statutory operations, strong capital and new marketing initiatives for its term life insurance. Also, the company is also making efforts to enhance its sales within its ordinary life product line due to a significant rise in its ordinary life premiums.

However, Household Life has faced an overall decline in premiums in recent times, as it lost its primary distribution channel, after HSBC declared to stop issuing credit insurance in the United States. This made Household Life’s operations unattractive to the A.M. Best. Moreover, expenses related to the subsidiary's new term life initiative reduced operating gains which, however, will be offset by the earnings generated by the run-off block of credit insurance over the near term, believes A.M. Best.

HSBC Insurance

Further, A.M. Best downgraded the FSR of HSBC Insurance to “A-" (Excellent) from “A" (Excellent) and ICR to "a-" from "a."

The downgrade of HSBC Insurance was due to the company’s recent decision to exclude 50% co-insurance agreement of HSBC Insurance with its affiliate, Household Life, which used to generate majority of the company's premium. The loss increased after HSBC ceased issuing credit insurance.

Outlook

Going forward, any positive rating revisions will be based on how the subsidiaries extend HSBC's customer base and develop new distribution outlets for its life products. We believe that Household Life should be able to generate operating efficiencies in its ordinary life product line over the medium term to continue its rating.

We also expect HSBC Insurance to operate its traditionally profitable core credit businesses to produce sound results. Although HSBC Insurance possesses strong underwriting and operating results, we expect the subsidiary to maintain a level of risk-adjusted capital to support its current ratings.
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