The rating watch is expected to resolve upon the completion of the merger and the release of consolidated financial statements, which Fitch will review to determine if HDI Seguros Colombia’s performance aligns with the current rating or merits an upgrade. Fitch indicates that the process may extend beyond the usual six-month timeline required for a Positive Rating Watch resolution.

Key Factors in Rating Decision

Ongoing Merger with HDI Seguros S.A.
Following its acquisition by Germany’s Talanx Group in February 2024, HDI Seguros Colombia initiated a merger with HDI Seguros S.A., changing its corporate name and submitting a legal merger approval request to Colombian regulators. Once approved, HDI Seguros Colombia will absorb HDI Seguros S.A.’s operations. Fitch views this consolidation as potentially enhancing HDI Seguros Colombia’s business profile and operational results.

Support from Talanx Group
HDI Seguros Colombia now benefits from financial and strategic backing from Talanx Group, which has been designated as the new parent company. Fitch considers Talanx’s support significant, as Colombia is an essential growth market for the group, providing brand, operational, and technical synergies, along with capital support if needed.

Medium-Sized Company with a Strong Market Position
At the close of 2023, HDI Seguros Colombia ranked as the tenth-largest general insurance provider in Colombia, holding a 4.4% market share. The company maintains a notable presence in the auto insurance sector, accounting for 8.7% of premiums in this segment. Fitch notes that the merger with HDI Seguros S.A. is likely to strengthen HDI Seguros Colombia’s market position and facilitate the adoption of best practices within its operations.

Performance Improvements and Risk Exposure
The company’s operating performance has seen improvements, with favorable loss ratios across its main business lines. This performance has been supported by reserve releases within compliance and liability lines, though Fitch expects this effect to be temporary as HDI Seguros Colombia phases out underwriting in these lines. The company reported a combined ratio of 96.7% at the end of 2023 and 95.5% by mid-2024, though these metrics remain influenced by recent reserve releases. Fitch will monitor future loss ratios for further clarity.

Reduced Leverage Levels
In 2023, HDI Seguros Colombia reversed a previous trend of declining equity, recording a 32.5% increase in equity that continued into 2024 with 24.6% growth by mid-year. Internal resource generation and modest retained premium growth contributed to improved leverage ratios. Between the end of 2022 and 2023, the company’s retained premium-to-equity ratio decreased from 1.62x to 1x, while net leverage dropped from 2.51x to 2.14x. As of mid-2024, these indicators stood at 1.25x and 2.17x, respectively. The company maintains a solvency margin of 237% and will assess its dividend policy following the merger’s completion.

Conservative Investment Portfolio
HDI Seguros Colombia’s investment portfolio remains conservative, with a focus on fixed income assets and limited exposure to riskier investments. As the merger progresses, Fitch expects adjustments to the investment guidelines to standardize the policies of both companies. The agency will monitor how these changes impact portfolio performance.

Rating Sensitivities

Potential for Rating Downgrade
Fitch may remove the Positive Rating Watch and affirm the current rating with a Stable Outlook if the combined entity’s profitability and leverage metrics show a decline relative to the 2023 and 2024 levels.

Potential for Rating Upgrade
The Positive Rating Watch could be resolved with an upgrade if consolidated financial results continue to demonstrate improved performance, with a combined ratio near 100%, comparable to peers in higher rating categories, and leverage levels in line with averages from the past three years.

Regulatory Information

HDI Seguros Colombia S.A. requested this rating assessment, which followed a periodic review by Fitch Ratings on November 6, 2024. The rating decision was made by a committee led by Carolina Triat, Carolina Ocaranza, and Miguel Martínez. Additional information about the committee members and their profiles can be found on Fitch Ratings’ Colombia page.

Fitch clarifies that its ratings reflect professional assessments and do not serve as buy, hold, or sell recommendations. The credit rating criteria applied in this assessment include the Insurance Rating Methodology (April 3, 2024) and the National Scale Rating Criteria (December 22, 2020).

In announcing the acquisition last month, Talanx said that this increase its HDI International brand’s gross written premiums in Latin America by about €1.7 billion. The Hanover-based company also noted that while the deal includes Liberty Specialty Markets direct insurance business in Brazil, Chile, and Colombia, it “does not include Liberty Specialty Markets facultative reinsurance, Liberty Mutual Reinsurance treaty reinsurance, and Liberty Mutual Surety businesses, which will continue to operate in Brazil, Chile and Colombia.”

The acquisition of these Liberty holdings, which Talanx said it expects to close in the first quarter of 2024 pending governmental and regulatory approval, will make the HDI one of the largest operators in the Latin American retail insurance sector and marks a continuation of the company’s “success story” in the region, according to Torsten Leue, chairman of the board of Talanx Group.

“Alongside Europe, Latin America is one of our core regions in the retail business,” said Leue in a statement. “We are therefore pleased to be among the top three in Latin America with this acquisition. The acquisition will improve our group net income and our return on equity in the first year after the expected closing in 2024. The acquisition will further strengthen our primary insurance business and our diversification across business lines.”

In addition to its retail-focused HDI brand, Talanx Group operates reinsurance giant Hannover Re and asset management firm Ampeg, among other financial services companies.

Tim Sweeney, president and CEO of Liberty Mutual, praised his company’s ability to adapt to an evolving marketplace.

“In a world that is rapidly changing, sharpened operational focus across our channels, products, and markets is becoming increasingly important for long-term success and will ensure we deliver exceptional value to our customers, brokers, agents, partners, employees, and the communities we serve,” stated Sweeney.

(Photo credit: Talanx Group)

In the transaction, the Italian insurance giant will be offloading its stake in both Generali Colombia Seguros Generales S.A. and its subsidiary Generali Colombia Vida Compañia de Seguros S.A. pending regulatory approval. Talanx Group, which is based in Hanover and owns the HDI brand in Latin America, said that it expects the sale to close before 2018.

The deal represents a transfer of a 91.3% holding in Generali Seguros, which has a property insurance focus, and a 93.3% holding of life insurer Generali Vida to the Talanx Group, the Trieste-based company said in a statement.

The sale highlights the differing strategies of the two European companies. While Generali, whose Colombian business had total premium income of around €59 million in 2016, or less than 1% of the local insurance market, no longer sees Latin America as a core segment, Talanx is eager to grow in the region. The German firm already operates in six Latin American nations with its HDI arm.

“For Talanx, the acquisition of Generali Colombia is a strategic step to open up the fifth largest Latin American market,” said Torsten Leue, chairman of the board of management at Talanx International AG. “For us, this means further strengthening our position in the target region. The companies are well positioned and have strong management.”

The Bogotá-based Generali Colombia has been operating since 1952 and has eight branches throughout Colombia. About 70% of the portfolio that Talanx is acquiring is made up of property business with the remaining 30% being on the life side.

“With a young population and a growing middle class, the country is an interesting emerging market, particularly for the retail division,” said Talanx in a statement. “From a fronting perspective, the new companies will also help Talanx underwrite business with the industrial lines division in Colombia.”

For Generali, the small scale of the operations in Colombia meant that it feels the company will be better served by focusing on other markets. “These transactions are another step forward in the rebalancing of Generali Group geographical presence across the world,” said Frédéric de Courtois, CEO of the company’s global business lines and international group. “We are making good progress in the rationalization of our geographical footprint pursuing our strategy to make Generali a simpler and smarter company.”

Along the same lines, Generali has completed its previously announced plan to sell its business in Guatemala. The insurer sold Aseguradora General S.A., a Guatemala City-based firm primarily working in property and casualty lines, to the Neutze family, who the company described as “long-term trusted local partners.”

The Generali Group stated that it will “remain active in Guatemala with its international business lines,” however. The ongoing work will be in relation to Generali Employee Benefits, Generali Global Corporate and Commercial, and Europ Assistance, according to the firm.

Photo: The office of Genearli Colombia in Bogotá. (Credit: Jared Wade)