Embed Size (px)
Citation preview
Insurance Industry - Sri Lanka Yet to realize full potential
For Disclaimer refer to pg. 74.
Sector Report March 2017
Lead Analyst : Hiruni Perera+94 115889809
Executive Summary
Insurance industry in Sri Lanka (SL) is still at early stage ofthe life cycle despite the growth momentum in recent times.The industry can be segregated into Life Insurance andGeneral (non-life) Insurance, where we see life insurance tolead general insurance in terms of GWP growth.
We project life insurance to show strong GWP CAGR(Compound Annual Growth Rate) of 21% for next 3 years,mainly due to 3 factors. Life insurance is significantlyunderpenetrated compared to peer countries giving strongupside potential, Sri Lanka’s demographical factors providesignificant impetus for the growth of life insurance andcountry’s stage of economic growth gives strong empiricalcase for rapid growth of life insurance.
Comparatively general insurance has lesser upside as it hasalready been fairly penetrated with regulatory driven motorinsurance (motor insurance accounts to 62% of non-lifeGWP) and there is significant price competition in theindustry with 16 players striving for market share.Furthermore, the growth of motor insurance can be cyclicalcorrelated with the cyclical motor industry.
Compared to motor industry we see stronger potential inhealth insurance whilst other main segments of generalinsurance, marine and fire insurance is expected to continuewith moderate growth.
2
“ Life insurance to lead general insurance in terms of GWP growth.
Executive Summary
Insurance industry’s potential bodes well for the insurancecompanies, which is also reflected by higher PBV multiplescompared to region, despite CSE is trading at lowermultiples. We believe the insurance industry’s potential hasyet not fully priced in and there are strong investment casesin the insurance sector. It is also reflected in higher pricingin M&A space. Insurance industry has generally been activein M&A with few transactions taking place in recent times.
The life industry in particular has strong bottom linepotential with GWP growth as well as favorable taximplications. Non-life industry potential mainly lies oninvestment return potential with GWP being squeezed byhigh combined ratios.
Our picks in the Colombo bourse are AAIC, CINS, PINS andHASU.
3
“Our picks are AAIC, CINS, PINS and HASU .”
Insurance Industry – Sri Lanka
Contents
Insurance Industry is underpenetrated despite recent growth
Pg.05
Positive outlook for Life Insurance Business Pg.8
Non- Life Business to lag behind Pg.17
Regulatory changes imposed by IBSL a positive for the industry
Pg.31
Potential business channels Pg.47
Industry Valuations Pg.52
Company Picks Pg.57
Appendices Pg. 69
4
5
Insurance Industry is underpenetrated despite recent growth
Insurance Industry Source: IBSL
02468
101214161820
2011 2012 2013 2014 2015
Growth Rate in Total Premium income- Insurance Business (%) GDP Growth Rate (%)
Total Insurance premium income has witnessed a higher growth rate relative to GDP growth of the country
Total Assets of insurance companies have grown at a 14% CAGR since 2011 to 2015
497,868
6
Insurance industry has witnessed a higher growth compared to economic growth Industry
However still SL remains underpenetrated compared to other economies
Insurance Industry
1.15
1.571.73
1.9
3.44
7.29
5.055.34 5.49
6.89
43 32 58 55 55
4,007
472312 319
1,634
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Insu
ran
ce D
ensi
ty-
To
tal P
rem
ium
s p
er c
apit
a in
US
D
Insu
ran
ce P
enet
rati
on
-T
ota
l pre
miu
ms
in %
of
GD
P
Insurance Penetration- Total Premiums in % of GDP Insurance Density- Total Premiums per capita in USD
Industry
7Source: Swiss Re sigma No 3/2016
8
Life Industry to record LKR 115 Bn GWP by 2019with 21% GAGR for next 3 years as opposed to 11%growth historically.
Penetration is estimated to be0.65% premium / GDP by 2019.
Positive outlook for Life Insurance Business
0.49%
0.83%
1.28% 1.37%
2.72%
3.06%
3.37%3.59%
3.70%
4.16%
19 17 43 40 43
1685
316
210 215
987
0
200
400
600
800
1000
1200
1400
1600
1800
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Insurance penetration - Life premiums in % of GDP (LHS)
Insurance density - Life premiums per capita in USD (RHS)
Sri Lanka being a country largely characterized by the collectivism and dependency where the need for a life insurance policy is yet to be realized, industry still remains underpenetrated compared to regional peers.
Low penetration to leave room for upside
Insurance Industry
Life
9Source: Swiss Re sigma No 3/2016
Life insurance industry has seen a higher growth compared to GDP growth of the country.
We estimate 7.3% CAGR of nominal GDP per capita over next 3 years while achieving USD 5200 level by 2019 giving a strong impetus to life business.
0%
5%
10%
15%
20%
25%
30%
2009 2010 2011 2012 2013 2014 2015
GDP growth Life GWP growth Life Insurance Asset growth
2054690
385 222 259 243 71 286307
3305201
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Higher industry growth compared to economic growth
Nominal GDP per capita to record 7.3% CAGR
GDP per capita to reach USD 5200 by 2019
Insurance Industry
Life
10Source: IBSL,CBSL, LOLC SEC Estimates
Ongoing housing market boom and low unemployment rate will be poised well for urban living, creating an opportunity for the industry growth as the need to have a life insurance policy increases with more urbanization.
13.1% 18.2% 18.4% 30%
2001 2012 2015 2030
Urban population as a % of the total population
Increasing urbanization to drive the Life industry growth
Insurance Industry
Life
11Source: World Bank, CBSL
SL's population is one of the oldest and fastest ageing in the world.
SL’s total population at the age of 65+, surpasses most of the South Asian regional peers.
By 2041 it is expected to increase up to 18% and people are expected set aside more money for health risk that they would potentially expose to.
4.3
6.37.9
10.9
14.5
17.1
0
2
4
6
8
10
12
14
16
18
1981 2001 2012 2021 2031 (F) 2041 (F)
Eld
erly
in t
he
po
pu
lati
on
(%
)
4.97
9.3
5.62 5.89 5.17 5.554.49
10.47 9.55
26.34
0
5
10
15
20
25
30
Bangladesh Sri Lanka India Malaysia Indonesia Nepal Pakistan Thailand China Japan
Rapid growth of ageing population 65+ years
Population ages 65 and above (% )
Demographical changes are conducive for Life insurance business
Insurance Industry
Life
12Source: Sri Lanka Paradigm shifts in population, W. Indralal De Silva, World Bank
NCDs have shown an increasing trend with 71% of all annual deaths are attributed to chronic NCDs.
Compared to past, people have become more aware of the risks of NCDs and thereby looking for life/health covers which will augur well the industry growth.
05001,0001,5002,0002,5003,0003,5004,0004,500
0
2
4
6
8
10
2004 2005 2006 2007 2008 2009 2010 2011* 2012 2013 2014*
GD
P P
er c
apit
a (U
SD
)
Nu
mb
er o
f d
eath
s (0
00
’)
Cancer Heart diseases Diabetes GDP per capita
Increasing trend in deaths due to NCDs in line with GDP
Demographical changes are conducive for Life insurance business
Insurance Industry
30
40
50
60
70
80
90
India Singapore Bangladesh China Japan Malaysia Sri Lanka Vietnam
%
Cause of deaths by NCDs as a % of total (2012)
Life
13Source: Health Ministry and the World Bank
We expect moderate penetration of 0.65% by 2019 while recording 21% GWP GAGR for next 3 years as opposed to 11% growth historically.
21% growth is a derivation of estimated GDP per capita growth, estimated population growth, premium added on higher industry growth over per capita GDP growth and premium added for higher urbanization and ageing population.
Life Industry to be LKR 115 Bn GWP by 2019 compared to LKR 53 Bn in 2015
Insurance Industry
Ukraine
Nigeria KuwaitOmanRussiaBulgariaSerbia
Sri LankaNepal
BangladeshBahrainPakistan UAE
ColombiaVietnamGreeceMexicoMoroccoKenya
PolandIndonesiaHungary
PhilippinesMacao
CyprusChina
Brazil
India
Israel
GermanyChileUnited States
CanadaMalaysia
AustraliaThailand Norway
SwedenSwitzerland
Singapore
France
ItalyDenmark
South KoreaUnited Kingdom
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
3.6
4.0
4.4
4.8
5.2
5.6
6.0
6.4
6.8
7.2
7.6
8.0
500 5000 5000010000
% (life premium per capita as % of GDP per capita)
GDP per capita USD
Life
14Source: Swiss Re Sigma No 3/2016, CBSL, LOLC SEC Estimates
SL's Gen. Y is more interested for risk based insurance products compared to Gen. X due to complexities in their lifestyle.
Gen Y will find it difficult to accumulate wealth to finance emerging needs, especially with decreasing real interest rates. Accordingly, new life policies have grown at a faster phase of 5% CAGR than population growth of 0.9%
To support this industry growth, distribution channels have also seen a strong growth.
0%
5%
10%
15%
20%
25%
30%
35%
2010 2011 2012 2013 2014 2015
No. of Life Policies in Force as % of the total population
No. of Life Policies in Force as % of the labour force
New policies grow at 5% CAGR
1016 1872
32651
61263
2011 2015
No of Branches No of Employes & Agents
Branch, Agent and Employee growth
Insurance Industry
Increasing demand for life insurance as a risk based financial product Life
15Source: IBSL, LOLC SEC Estimates
Life insurance industry currently enjoys an appealing income tax advantage based on its taxable profitcalculation.
Inland Revenue Act directs life businesses to calculate taxable profit based only on investment incomeminus management expenses, but excluding premium income.
This augurs well especially for relatively new companies, as they opt to incur higher managementexpenses over investment income resulting in zero taxable profits. The larger entities with sizableinvestment portfolios may have higher portion of high yielding investment income which is liable for28% tax rate.
We expect industry to continue with the prevailing tax benefit in the medium term, with life insuranceindustry still at early stage of life cycle and thereby benefitting insurance players in bottom line.
However, any negative change to the current policy will have a significant impact to the industryearnings.
Insurance Industry
Life insurance business to benefit on zero taxable profit Life
16
17
Amid impending challenges and the competition,Non-Life sector to record LKR 96 Bn GWP by 2019with 9% CAGR and 0.55% premium/GDPpenetration thus lagging behind the Lifepenetration.
Non Life Business to lag behind
Non-Life industry penetration is in par with regional peers and we expect intense price competition and slow growth of respective insured segments of the country to hinder the expansion of general insurance business compared to life insurance.
Insurance Industry
Non Life industry penetration is in par with regional peers Non Life
0.66 0.74
0.45 0.530.72
4.22
1.68 1.74 1.79
2.73
24.5 15.1 15.2 15.3 11.5
2322
156.7102 103.9
647.2
0
500
1000
1500
2000
2500
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Insu
ran
ce D
ensi
ty
Insu
ran
ce P
enet
rati
on
Insurance Penetration- General Premiums in % of GDP
Insurance density- General Premiums per capita in USD
18Source: Swiss Re Sigma No 03/2016
Sri Lanka’s Non-Life sector is driven by motor insurance premium income due to the regulatory requirement and it accounts for 62% of general GWP.
10% 11% 10% 10%
4% 3% 3% 3%
60% 57% 59% 62%
10%10%
12%12%
17% 19% 16% 14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014 2015
Fire Marine Motor Health and Surgical Other
Insurance Industry
Regulatory driven motor Insurance leads the Non Life with 62% of GWP Non Life
Composition of Non Life GWP
19Source: IBSL
Out of total motor insurance policies issued, majority is dominated with the Third-party only insurance reflecting that people are seeking the minimum level of protection rather than as a risk based product and is willing to pay a cheaper premium.
63%57% 56% 56% 54%
37%43% 44% 44% 46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015
Number of Motor Insurance policies representing General GWP
3rd party only Comprehensive
Insurance Industry
Motor Insurance is dominated with the Third Party Insurance accounting for 54% Non Life
20Source: IBSL
Motor insurance in Sri Lanka is currently faced with intense price competition while existing playersundercut premium charges to increase their market share as there is lower “switching cost” for the policyholders.
This was further fueled by the fact that there is no “floor price” for motor premiums in Sri Lanka byregulatory authorities to control premium charges.
As the new registration of motor vehicles and vehicle population of the country are highly dependent onthe vehicle leases and hire purchases, prevailing tightening monetary conditions are expected to result inslow down of finance facilities resulting in limited growth in motor sector.
Thus we expect motor premium CAGR to slow down to 7% for next 3 years as opposed to 12%historically. Further, we expect motor premium contribution to Non Life GWP to be limited to 58% in linewith limited growth in motor sector and considering the price competition in the motor insurance sector.
Insurance Industry
Motor contribution to Non Life GWP to be limited to 58% by 2019F Non Life
21
Despite expected stabilization of interest rates within next 2 years limited growth in motor sector is expected due to restricted finance facilities and higher duty structure for vehicles.
Accordingly, motor segment contribution to Non Life GWP will be limited in line with limited growth in the new vehicles registration coupled with price competition in the motor insurance sector.
Insurance Industry
Motor contribution to Non Life GWP to be limited to 58% by 2019F Non Life
22Source: Department of Motor Traffic, CBSL and LOLC SEC Research
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0
20
40
60
80
100
120
140
160
180
200
2011 2012 2013 2014 2015 2016 E 2017F 2018F 2019F
AW
LR
(%
)
Co
mm
erci
al B
ank
s L
easi
ng
and
hir
e p
urc
has
es (
LK
R B
illi
on
s)
Commercial banks leasing and hire purchase agreements AWLR
54%
55%
56%
57%
58%
59%
60%
61%
62%
63%
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F
motor contribution to general GWP New vehicle registration
New Vehicle registrations to slow down resulting lower motor insurance premium
Leases and hire purchases disbursement to slow down in the short term with high interest rates
Further Sri Lankan Non Life insurers experience higher combined ratios (net expense and net claims ratio) relative to regional peers due to high cost of motor claims relative to lower motor GWP income.
Higher combined ratios are expected to put pressure on the financial performance of Non Life
companies.
62% 61% 58% 61% 63%
35% 36% 38%
48%
36%
97% 97% 96%
109%99%
0%
20%
40%
60%
80%
100%
120%
2011 2012 2013 2014 2015
Net Claims Ratio Net expense Net combined ratio
Non Life Net combined ratios
Insurance Industry
Sri Lanka’s Non Life insurers to incur higher cost relative to their GWP income Non Life
83% 79%67%
80%
94%99%
0%
20%
40%
60%
80%
100%
120%
Indonesia Hongkong,China
Singapore Malaysia Australia Sri Lanka
Sri Lanka has high Non Life combined ratios relative to regional peers (2015)
23Source: IBSL and OECD Stats
As opposed to other countries Sri Lankan Non -Life sector led by motor industry is increasingly dependent on investment income for bottom line with less focus on combined ratio due to increased competition.
Such business model results in respective companies being more exposed to investment risk than the risk factors inherent to insurance industry. 1.35%
5.22%
8.89%
7.10%
1.37%
13.12% 5.21%
7.89%
7.09%
8.64%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Sri Lanka Singapore Malaysia Australia Japan
Underwrting Profit/ Net Earned Premium Investment income/Net Earned Premium
Insurance Industry
SL Non life insurers’ bottom line increasingly dependent on investment income Non Life
Underwriting Profits and Investment Income as a % of Net Earned Premium
24Source: IBSL and LOLC SEC Research
SL health spend per capita has seen a rapid growth of 11% CAGR during last decade and expected to continue the same growth phase.
Accordingly, we expect health contribution to Non- Life GWP to increase in line with the expected rise in health spend per capita.
Health contribution to Non Life GWP is expected to reach 16% by 2019 with a CAGR of 17% over next 3 years.
Insurance Industry
However Health Premium contribution to GWP to increase with rising health spend Non Life
SL health spend per capita has seen a rapid growth of 11% CAGR during last decade
Health segment contribution to Non Life GWP
9% 12% 12% 13% 14% 15% 16%0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2013 2014 2015E 2016E 2017F 2018F 2019F
25Source: World Bank, CBSL,IBSL and LOLC SEC Estimates
25 26 27 32 31 33 32 35 39 46 51 58 6170 71
8496 93
120127139
154171
190211
0
50
100
150
200
250
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
E
20
16
F
20
17
F
20
18
F
20
19
F
Hea
lth
Sp
end
Per
cap
ita
USD
With demand mainly coming from increase of apartments and residential units we expect fire insurance contribution to GWP to be 9% by 2019F with a CAGR of 6% as opposed to 5% historically.
Insurance Industry
Fire premium contribution to Non Life GWP to remain at 9% Non Life
11%
10%11% 10%
10% 9% 9% 9% 9%
0%
5%
10%
15%
20%
25%
2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F
Fire Contribution to GWPReal estate activities, including ownership of dwelling growthFire Insurance GWP growth
26Source: IBSL, CBSL and LOLC SEC Estimates
We expect marine GWP tocontinue its growth at 5%CAGR amidst moderategrowth expected in theworld trade.
Insurance Industry
Marine contribution to Non Life GWP to remain at 3% Non Life
27Source: IBSL, CBSL and LOLC SEC Estimates and WTO
4% 4%
3% 3%3% 3%
3%3%
3%
-10%
-5%
0%
5%
10%
15%
20%
0%
1%
1%
2%
2%
3%
3%
4%
4%
2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F
Marine contribution to GWP Marine GWP Growth
Based on S-Curve Non-Life penetration is expected to move from 0.66% to ~1.2% as country crosses USD 5000 per capita.
However, with impending challenges mainly related to the motor industry GWP growth is expected to lag behind with 0.55% penetration by 2019 thus recording 9% GWP GAGR for next 3 years as opposed to 10% growth historically.
Insurance Industry
Total non Life industry to be USD 96 Bn by 2019 vs LKR 69 Bn in 2015
Bangladesh Nigeria
Macao
Sri LankaIndia Vietnam Kuwait
GreeceRussiaUkraine Turkey Oman
SerbiaMalaysia Singapore
UAEThailand ChileKenya SwedenBahrainMorocco
ItalyFinland Norway
Lebanon Cyprus United KingdomIsrael
Denmark
France
Germany
South KoreaUnited StatesCanada
New Zealand
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
500 5000 50000
Non Life
GDP Per Capita USD
% (non life premium per capita as % of GDP per capita)
28Source: Swiss Re Sigma No 3/2016, CBSL, LOLC SEC Estimates
S-Curve projects country to move from 1.15% to ~2.2% total insurance premium penetration as country crosses USD 5000 per capita.
However, with more conservative estimate based on historical figures and impending industry challenges, we estimate 1.20% by 2019. Life penetration is expected to reach 0.65% while Non Life penetration to be lagged behind with 0.55% due to impending industry challenges.
Insurance Industry
Total Insurance industry to record GWP of LKR 210 Bn by 2019
NigeriaBangladeshPakistan Kuwait
Sri Lanka RussiaTurkey OmanVietnam Indonesia Macao
Serbia GreeceUAEHungary Bahrain
ColombiaPolandKenya Morocco
India ChinaBrazil
Cyprus
ChileMalaysia
IsraelThailandAustralia
NorwayGermany
SwedenSingapore
Canada
Italy
SwitzerlandFrance
United Kingdom
Japan
South KoreaFinland
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
500 5000 50000
Industry
% (total premium per capita as % of GDP per capita)
GDP Per Capita USD
29Source: Swiss Re Sigma No 03/2016, CBSL, LOLC SEC Estimates
We expect Life GWP for2019E to reach 56% vs46% in 2015 thusaccelerating towards theworld’s standard of Lifeleading the Non-Life GWP.
Insurance Industry
Ultimately contribution from Life to accelerate towards world standard Industry
57% 59% 58% 58% 56% 54%52%
49%46% 44%
43% 41% 42% 42% 44% 46%48%
51%54% 56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F WorldAvarage
Non Life Life
30Source: IBSL, LOLC SEC Estimates and Swiss Re Sigma
31
Regulatory changes to bring more transparencyand policy holder protection and eventually lead toa gradual consolidation as small players willstruggle to survive due to weakening capital baseand low earnings of general insurance sector.
Regulatory changes imposed by IBSL a positive for the industry
Solvency capital to Risk-Based Capital (RBC)
Increase in capital requirement from LKR 100 Mn to LKR 500 Mn
Segregation of composites into Life and Non-life
Mandatory public listing ruling by February 2016
Insurance Industry
IBSL introduced few changes to its existing regulations
32
Regulatory
Before 2016, Sri Lankan insurance companies followed Solvency margin rule.
As at end 2015 all Life insurance companies have complied with the solvency requirement by recording ratio above 1.0.
However, in the Non-Life sector, Amana general, Cooperative general and MBSL have not been complied with the required solvency ratio of 1.0 as at end of 2015.
0.0
1.0
2.0
3.0
4.0
5.0Solvency Ratio- General Insurance Business
Solvency Ratio Required solvency ratio
0.02.04.06.08.0
10.012.014.016.0
Solvency Ratio- Long Term Insurance
Solvency Ratio Required solvency ratio
Insurance Industry
Solvency capital to Risk-Based Capital (RBC) Regulatory
33Source: IBSL
From 2016, solvency framework was replaced by Risk Based Capital (RBC) and all insurancecompanies are required to report their capital adequacy under RBC framework quarterly.
Furthermore, insurance companies are required to have a stated capital not less than LKR 500 Mn.
Transitioning from the rules based regime rule to the risk based regime forces companies to befinancially secure and compels companies to be more liquid.
However smaller companies are continually struggling to remain abreast of competition and complywithin the regulatory requirements.
Insurance Industry
Solvency capital to Risk-Based Capital (RBC) Regulatory
34
Majority of the countries in the South Asian region have complied with risk based regime to become more aligned with international best practices.
Minimum Capital requirement for insurers in other Asian countries remains high relative to SL’s minimum capital requirement of USD 3.33 Mn.
Country Avg. Minimum Capital Requirement (USD Mn)*
Type
Australia 6.64 Risk Based Capital
China 29.05 Risk Based Capital
Hong Kong 2.57 Solvency Margin
India 14.68 Solvency Margin
Indonesia 7.49 Risk Based Capital
Japan 8.69 Risk Based Capital
Korea (Republic of) 14.94 Risk Based Capital
Macau 1.88 Solvency Margin
New Zealand 4.14 Risk Based Capital
Pakistan 4.31 Solvency Margin
Philippines 11.03 Risk Based Capital
Singapore 7.01 Risk Based Capital
Thailand 8.57 Risk Based Capital
Vietnam 13.28 Solvency Margin
* Subject to further restrictions
Insurance Industry
Solvency capital to Risk-Based Capital (RBC) Regulatory
35Source: Asia Pacific Solvency Regulation by Aon Benfield as at September 2016
This required composite insurers to separate the two classes of insurance business-life and general into two separate companies by 11th February 2015.
3 more companies namely MBSL Insurance, Sanasa Insurance and Sri Lanka Insurance Corporation (SLIC) are yet to segregate their business.
Life Insurance3
General Insurance
612
Life Insurance12
General Insurance
133
Industry structure prior to the segregation rule
Industry structure after the segregation rule
Insurance Industry
Segregation of composite insurers into Life and Non life Regulatory
Total of 21 Total of 28
36Source: Sri Lanka’s Insurance Industry: Emerging Trends and New opportunities by CCC
Life Insurance (3) Composite companies (12) General Insurance (6)
1. Arpico Insurance Limited 1.AIA Insurance Lanka PLC 1. Continental Insurance
2. Life Insurance Corporation Ltd 2. Amana Takaful PLC 2. National Insurance Trust Fund
3. Allianz Life Insurance Lanka Ltd 3. Asian Alliance Insurance PLC 3. Orient Insurance Limited
4. Ceylinco Insurance PLC 4. People’s Insurance Limited
5. Cooperative Insurance Company Limited 5. AIG Insurance Limited
6. HNB Assurance PLC 6. Allianz Insurance Lanka Ltd.
7. Janashakthi Insurance PLC
8. LOLC Insurance Company Limited
9. MBSL Insurance Company Limited
10. Sanasa Rakshana Samagama
11. Sri Lanka Insurance Corporation Limited
12. Union Assurance PLC
Industry structure prior to the segregation rule (As at end 2014)
Insurance Industry
Segregation of composites into Life and Non life Regulatory
37Source: IBSL
Life Insurance (12) Composite companies (3) General Insurance (13)
1. AIA Insurance Lanka PLC 1. Sanasa Rakshana Samagama 1. Allianz Insurance Lanka Ltd
2. Allianz Life Insurance Lanka Ltd. 2. MBSL Insurance 2. Amana Takaful PLC
3. Amana Takaful Life Ltd 3. Sri Lanka Insurance Corporation Ltd 3.Asian Alliance General Insurance Ltd
4. Arpico Insurance PLC 4.Ceylinco General Insurance Limited
5. Asian Alliance Insurance PLC 5. Continental Insurance Lanka Ltd
6. Ceylinco Life Insurance Limited 6. Cooperative Insurance Company Ltd
7. Cooplife Insurance Limited 7. HNB General Insurance Ltd.
8. HNB Assurance PLC 8. Janashakthi General Insurance Ltd
9. Janashakthi Insurance PLC 9. LOLC General Insurance Ltd
10. Life Insurance Corporation Ltd 10. National Insurance Trust Fund
11. LOLC Life Assurance Limited 11 Orient Insurance Limited
12. Union Assurance PLC 12. People’s Insurance Limited
13. Union Assurance General Limited
Industry structure after the segregation rule
Insurance Industry
Segregation of composites into Life and Non life Regulatory
38Source: IBSL
Larger players consider the change positively as it creates an opportunity to pay strong focus on each entity separately.
Small players with weak general insurance businesses will view the segregation as detrimental as they can no longer depend on profits of life insurance business to keep the general business afloat.
Subsequent to the implementation of the new act as well as heightened competition, general business in particular has found it challenging to maintain profit margins. Therefore, these dynamics are leading to a gradual consolidation of the industry.
As insurance companies adjust to changes in the market following the segregation, divesting their general insurance business has become an emerging trend in the industry.
During the last 2 years, the industry witnessed a series of acquisitions, as parent companies sold off their general businesses.
On the other hand, larger general insurance players such as Fairfax and Janashakthi looks to dominate the industry through expanding their portfolios.
Insurance Industry
Segregation to result in consolidation Regulatory
39
Consolidations took place since 2011 to
2016
AIA Group Limited, acquired Aviva NDB Insurance PLC (CTCE) as the company acquired 92.3% of the firm in a US$ 109 million deal that was announced in September.
• In June 2016 Asian Alliance Insurance PLC sold of Non- Life operations to Fairfax Asia Limited.
• JKH divested 78% of Union Assurance’s general business to Fairfax Asia Ltd for LKR 3.6 Bn.
• AIG completely exited the Sri Lankan market.
• Softlogic Group bought 73.5% stake of AAIC for LKR 3.3 billion from controlling shareholder Asia Capital and related parties.
DEG, a German investment corporation and FMO, a Netherlands development finance company, invested in Asian Alliance Insurance Plc, purchasing 38% stake for LKR 1.8 billion on the basis of 14.2 million shares at LKR 128 each.
2011 2012 2013 2014 2015 2016
• AIA sells general insurance business to Janashakthi Insurance PLC.
Insurance Industry
Consolidations took place since 2011 to 2016 Regulatory
40Source: LOLC SEC Research
Consolidations took place since 2011 to
2016
Acquiree Acquirer Segment Year Seller Stake Sold
Deal Amount
(LKR Mn)
Total Value(LKR Mn)
Net Asset Value(LKR Mn)
PBV (Value/
NetAssets)
Asian Alliance Insurance
Softlogic Holdings
Life and Non Life
2011 Asia Capital and related
parties
73.5% 3,300 4,490 1276 3.6
Aviva NDB AIA Insurance Life and NonLife
2012 Aviva Asia Holdings Private
Limited and NDB Capital
Holdings PLC
92.3% 13,909 15,069 4,064 3.72
Asian Alliance Insurance
DEG and FMO Life and Non Life
2013 Softlogic Holdings
38% 1,820 4,789 1,461 3.24
UnionAssurance
Fairfax Asia Non Life 2014 JKH 78% 3,600 4,500 3,133 1.5
AIG 2014 AIG entered Sri Lanka in 2000 via a joint venture with Hayleys Ltd. In 2005, Hayleys AIGstopped selling Life or long-term insurance business after divesting it to Sri LankaInsurance Corporation in 2009. In late 2012, AIG was re-launched yet again afterfunctioning as Chartis Insurance and completely closed business in Sri Lanka in 2014.
AIA JanashakthiInsurance
Non Life 2015 AIA Insurance Lanka PLC
100% 3,200 3,200 1,883 1.7
AsianAlliance Insurance
Fairfax Asia Non Life 2016 Softlogic Holdings
100% 1,267 1,267 745 1.7
Insurance Industry
Consolidations took place since 2011 to 2016 Regulatory
41Source: LOLC SEC Research
Life sector is heavily concentrated with over 80% of the GWP accounted by the top five firms.
CINS and CTCE has lost the market share while AAIC, HASU and other market players have gained it.
However, industry statistics demonstrate that it would be a tight battle for survival for small players and will be subjected to take over as insurance giants try and consolidate to sustain growth in the coming years.
Company wise market share based on GWP- Life Insurance (%)- 2015
27.91 28.9 26.69 26.92 25.12
22.32 17.3316.47 16.29
15.74
19.1819.66
20.15 18.21 19.35
12.7213.63
13.23 13.33 13.00
5.325.41
5.26 4.87 4.73
4.495.43
6.05 6.84 7.64
3.67 44.83 5.25 5.21
4.39 5.64 7.32 8.29 9.21
0
10
20
30
40
50
60
70
80
90
100
2011 2012 2013 2014 2015
Ceylinco Life AIA Life SLIC Union Life
Janashakthi Life Asian Life HNB Life Others
Insurance Industry
Consolidation to result in industry concentration among top players Regulatory
42Source: IBSL
Non-Life sector has been dominated by top 5 players and has recently been significantly competitive with small players capturing the market share.
In the Non-Life sector SLIC, CINS has lost the market share while other small players have gained it.
However, the industry statistics demonstrate that it would be a tight battle for survival for small players and will be subjected to take over as insurance giants try and consolidate to sustain growth in the coming years.
Company wise market share based on GWP- Non Life Sector (%)- 2015
Insurance Industry
Consolidation to result in industry concentration among top players Regulatory
23.73 23.23 21.53 19.92 19.77
20.37 19.6117.69 18.80 18.78
10.84 10.8510.84 10.68
15.5
8.64 8.348.78 8.14
8.08
7.676.61
8.53 8.056.6
28.75 31.36 32.63 34.41 31.27
0
10
20
30
40
50
60
70
80
90
100
2011 2012 2013 2014 2015
SLIC Ceylinco Gen Janashakthi Gen Union Gen NITF others
43Source: IBSL
Insurers to be listed on a stock exchange by Feb 2016 with a 3-year grace period given to newly formed companies consequent to the segregation.
Exemptions have been granted if, its parent company is listed on a foreign stock exchange or the parent company of a local insurer is listed on the CSE.
Listed Companies (As at 06.02.16)
Exempted Companies Possible listings
1. Amana Takaful PLC 1. Allianz Insurance (Parent company is listed on the Euro Stoxx 50 stock Market Index)
1. Cooperative Insurance Company Ltd
2.Amana Takaful Life PLC 2. LOLC Insurance (Parent company “LankaORIX Leasing Company PLC’’ is listed on the CSE
2. Orient Insurance
3. Arpico Insurance PLC 3. Continental Insurance Lanka Ltd (Parent Company “Melstacrop Group is listed on the CSE”)
3. Sanasa RakshanaSamagama
4. Asian Alliance Insurance PLC
4. Sri Lanka Insurance Corporation Ltd (SLIC will get a special approval from listing being a fully owned government entity)
5. Ceylinco Insurance PLC
5. Life Insurance Corporation Ltd (LIC of India is a fully owned by the Government of India)
6. HNB Insurance 6. MBSL Insurance (license is suspended due to capital issue and it is now available for sale)
7. Janashakthi InsuranceCompany PLC
7. National Insurance Trust Fund ( Exempted due to being a government entity)
8. Union Assurance PLC
9. People’s Insurance PLC
10. AIA Insurance Lanka PLC
Insurance Industry
Mandatory public listing rule by February 2016 Regulatory
44Source: LOLC SEC Research
Gvt securities represents the main investment due to the regulatory requirement to invest minimum of 30% of the life fund assets.
Balance of the fund after investing minimum 30% can be invested in mentioned investments, subjected to particular threshold.
Investment in equities has been volatile depending on the performance of the stock market.
Allocations for corporate debts and unit trusts could be reduced in near term due to removal of tax exemptions from budget 2017.
2011 2012 2013 2014 2015 Maximum Threshold*
Government Debt securities
51.20% 53.54% 43.25% 44.99% 44.73% 100%
Equities 13.96% 10.47% 11.38% 12.57% 13.27% 5%
Corporate Debt 6.46% 7.09% 15.23% 16.49% 16.96% 10%
Land and Buildings 3.55% 3.23% 2.83% 2.39% 2.86% 5%
Deposits 15.61% 17.40% 18.87% 15.17% 12.63% 10%
Unit Trusts 0.78% 0.56% 1.06% 0.90% 0.78% 7.5%
Policy Loans 2.57% 2.64% 2.42% 2.31% 1.80%
Other Assets 4.87% 4.24% 4.27% 4.30% 5.99% 100%
Cash and Cash equivalents
1.00% 0.83% 0.68% 0.88% 0.98%
* - For single investment. Note: Threshold is subject to further restrictions as per Determination #1 as issued by IBSL.
Insurance Industry
Restrictions on investing the Life Fund Regulatory
45Source: IBSL
Similar to the Life fund, minimum 20% of the Technical Reserve should be invested in the Gvt securities and balance can be invested in investments subjected to a particular threshold.
Further investment in equity has been given prominence to generate a higher return as investment income in order to improve the bottom line of the business.
Insurance Industry
46Source: IBSL
Restrictions on investing the Non Life Fund Regulatory
* - For single investment. Note: Threshold is subject to further restrictions as per Determination #1 as issued by IBSL.
2011 2012 2013 2014 2015 Maximum Threshold*
Government Debt securities
24.64% 22.56% 18.79% 18.26% 24.23% 100%
Equities 27.39% 25.76% 23.52% 27.52% 29.49% 5%
Corporate Debt 3.68% 2.93% 4.07% 4.58% 5.84% 10%
Land and Buildings 7.85% 9.07% 7.54% 6.90% 6.83% 5%
Deposits 6.76% 9.70% 12.81% 11.93% 9.38% 10%
Unit Trusts 1.02% 0.93% 1.39% 1.36% 1.17% 7.5%
Cash and Cash equivalents
1.14% 1.08% 0.97% 1.44% 1.58%
Other Assets 27.52% 27.97% 30.91% 28.01% 21.48%
47
SL has a higher potential in micro insurancebusiness and to utilize bancassurance channel andtelecommunication development for furtherexpansion of the industry.
Potential Business channel
Despite low poverty level compared to South Asian countries, still 6.7% of population living on less than USD 2 a day.
In SL Samurdhi Authority is involved in micro insurance while number of registered micro insurance policies increased from 0.35 Mn to 1.4 Mn in 2015 with a significant growth.
Although rural population is covered with samurdhi scheme, SME segment is not covered from samurdhi indicating a strong growth potential in this sector for which private sector can tap into.
31.5%
25.2%
21.9%
15.0%12.0%
6.7%
0%
5%
10%
15%
20%
25%
30%
35%
Bangladesh Nepal India Maldives Bhutan Sri Lanka
358
697
1462
0
200
400
600
800
1000
1200
1400
1600
2013 2014 2015
Nu
mb
er o
f p
oli
cies
in
tho
usa
nd
s
Share of population below the national poverty line (%)
Number of Micro insurance policies issued in the 2013-2015 period
Insurance Industry
Sri Lanka has a higher potential for Micro insurance Potential
48Source: ADB and The Landscape of Micro Insurance in Sri Lanka, 2016
Still the industry isrunning as an agentmodel.
Accordingly, insurance agents are paid high commissions diminishing profitability of industry players.
90
0 5 4 1
2817
27
4
23
0
20
40
60
80
100
Agents Brokers Direct Bancassurance Other
Long term General
Policy Year
Life maximum commissionpayable
1 30%
2 20%
3 15%
4 10%
5 5%
6-10 5%
11 0%
General Max agent commission
Max broker commission
Motor 15% 20%
Fire 15% 20%
Miscellaneous
15% 20%
Marine 10% 15%
Distribution channels’ contribution to GWP (%) Policy year
Maximum Commission/Incentive payable (Life)
AAIC SLIC CINS CTCE JINS HASU UAL
1* Up to
75%30% 30% 30%
* Up to 65%
30% 30%
2 5% 20% 14.5% 15% 5% 20% 20%
3 0% 15% 10% 8% 0% 5% 10%
4 0% 15% 7.5% 8% 0% 2% 7.5%
5 0% 10% 5% 8% 0% 2% 5%
6-10 0% 5% 5% 0% 0% 2% 3.5%
Insurance Industry
Insurance providers to seek for underutilized channels Potential
49Source: IBSL and LOLC SEC Research
Bancassurance in SL is currently underutilized compared to other regions of the world despite strong banking sector due to high dependency on agents.
With over 5,600 LicencedCommercial Bank branches with one of the highest bank branch density, insurers can optimize the channel to boost premiums and reduce and acquisition costs.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Asia Europe America Sri Lanka
Global Bancassurance Contribution to GWP (%)
0
2
4
6
8
10
12
14
16
18
20
2010 2011 2012 2013 2014
Co
mm
erci
al B
ank
bra
nch
den
sity
fo
r 1
00
,00
0 p
eop
le
Sri Lanka Vietnam Singapore Malaysia Indonesia Thailand Philippines
SL’s Bank Branch network has deeper penetration over peers
Insurance Industry
Insurance providers to seek for underutilized channels Potential
50Source: AAIC Annual Report, 2015 and CBSL Annual Report
Insurers find it challenging to provide their products for the low-income segment using traditional channels due to high admin cost.
Thus insurers increasingly partner with mobile network operators to use their platforms to conveniently approach a large pool of mobile phone subscribers.
93
79
144132
125
67
113
126
0
20
40
60
80
100
120
140
160
China India Malaysia Indonesia Japan Pakistan Sri Lanka Thailand
Mo
bil
e ce
llu
lar
sub
scri
pti
on
s p
er
10
0 p
eop
leHigher mobile penetration level in Sri Lanka (2015)
Mobile Penetration levels are are increasing
Insurance Industry
Insurance industry partnering with telecom. industry Potential
1727
39
54
7984 88 92 95
103113
0
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Mo
bil
e ce
llu
lar
sub
scri
pti
on
s (p
er 1
00
peo
ple
)
51Source: World Bank
52
SL insurers are currently trading at a higher PBV of1.77x compared to regional average of 1.65x
Avg. Peer country MA (Mergers and Acquisitions)multiples have taken at 1.78X of PBV.
Industry Valuations
Ticker CompanyMarket cap
(USD Mn) PE (X) EPS(LKR) PBV(X) ROE(%)
Dividend yield(%)
ATL Amana Takaful Plc 8.36 N/A -0.19 0.76 -20.26 -
AINS Arpico Insurance Ltd 5.32 31.03 0.39 1.24 4.06 -
AAIC Softlogic Life Insurance Plc 53.75 7.21 2.98 3.98 50.06 2.47
CINS Ceylinco Insurance Co Plc 193.51 8.06 151.84 1.35 17.72 1.84
HASU Hnb Assurance Plc 17.32 7.32 7.13 1.14 16.34 3.83
JINS Janashakthi Insurance Co Plc 76.12 5.17 3.06 1.07 22.23 4.75
UAL Union Assurance Plc 55.06 7.75 18.16 2.61 37.51 6.04
PINS People‘s Insurance Plc 25.22 6.15 3.09 1.27 25.36 3.95
CTCE AIA Insurance Lanka Plc 61.21 24.77 12.11 1.83 31.93 16.77
Average PBV 1.77
Insurance Industry
Insurance companies in SL currently trading at avg. 1.77X PBV Valuations
53Source: Bloomberg
SL insurers trading at the PBV of 1.77X times compared to the regional average PBV of 1.65X timesreflecting the higher potential in the sector.
Insurance Industry
0.49
0.85
1.50
1.771.84
2.492.60
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Indonesia South Korea Singapore Sri Lanka China Malaysia Thailand
PBV Regional Avarage
54Source: Bloomberg
SL insurers are trading above the regional average of 1.65X of PBV Valuations
TransactionYear
Acquirer Target CompanyDeal Amount
(USD Mn)PBV
2011 Siam Commercial BankSiam Commercial NewYork Life
274 4.31x
2011 Chartis Japan Capital Fuji Fire and Marine 565 0.95x
2010 ACE INA intl Hldgs Jerneh Insurance 211 2.00x
2010Manulife Century Hldgs (Netherlands) B.V
Maulife Hldgs 108 1.19x
2010 Vogo Fund Tong Yang Life 46.5 1.34x
2010 ACE Ltd New York Life’s HK and Korea units
425 0.71x
2010 The Dai- Ichi Life TOWER Australia 1432 1.94x
Average 1.78X
Recent M&A PBV of regional peers during 2010- 2011 have averaged at 1.78X.
Insurance Industry
55Source: M&A trends in insurance by KPMG
M&A multiples of 2010-11 of Asian regional peers have averaged at 1.78X PBV Valuations
Transaction Date Acquirer Target Company Deal Amount(USD Mn)
Aug 16 HDFC Standard Life (India) Max Financial Services – Life Insurance Business (India)
3190
June 16 Everwin Enterprises (HongKong)
Dah Sing Life Insurance (Hong Kong)
1002
March 16 Hubei Biocause Pharm (China) Tianping Auto Insurance (China) 732
June 16 Caisse de Depot et Placement (Canada)
Greenstone (Australia) 371
June 16 Fairfax Asia (Canada) PT Asuransi Multi Artha Guna (Indonesia)
163
M&A activity in 9M of 2016 was characterized by a smaller transactions compared to 2015 due to the slowdown in the Chinese M&A activities as acquirers digest the largest acquisitions made in 2015, and assess next steps.
Insurance Industry
56Source: Global Insurance M&A activity by Ernst and Young
Top Five M&A in Asia Pacific region since Jan- Sep 2016 Valuations
57
We are optimistic for a strong growth of lifeinsurance industry in Sri Lanka and AAIC is ourleading pick in life sector. We additionally pickCINS, PINS and HASU as prospective counters of
local insurance industry.
Company Picks
AAIC has been the fastest growing life insuranceprovider in terms of GWP and life fund growth and italso has reached amongst top 5 life insurers in terms ofGWP within 16 years.
It operated as a composite insurance provider andsince October 2016 it operates as a life insuranceprovider after divestment of its General business toFairfax Asia Limited.
Company's growth has been accelerated after SoftlogicGroup, a leading conglomerate in the country acquiring59% stake in 2011.
AAIC has managed to record superior net profitabilityby indicating the highest industry ROE among listedpeers led by higher profit margins and better revenuegeneration on their assets.
We have valued a share at LKR 28.80 with a Buyrecommendation for AAIC (for more details, please refer our initiation report of AAIC http://www.lolcsecurities.com/research/companies-research-
report-for-investors.html).
Valuation of AAIC
LOLC SEC Valuation LKR 28.80
12M Tgt Price( excl. dividend) LKR 24.20
Share Price LKR 21.10
Risk Level Medium
Market Cap. (LKR Bn) 7.91
Shares Outstanding Mn 375
52W high LKR 24.90
52W Low LKR 12.00
PE (X) 7.21
PBV (X) 3.98
Div.Yield (%) 2.47
ROE (%) 50.06
Insurance Industry
Softlogic Life Insurance PLC (AAIC)- “Highest profitability in the industry” Company Picks
58
-400
-200
0
200
400
600
800
1000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011 2012 2013 2014 2015
Revenue & Net profit (LKR Mn)
Revenue Profit Attributable to shareholders
Insurance Industry
0
5
10
15
20
25
30
35
40
LK
R
Price Movements
59Source: Bloomberg, Annual Reports, IBSL
-30
-20
-10
0
10
20
30
40
50
60
ATL AINS AAIC CINS HASU JINS UAL PINS CTCE
AAIC has highest ROEs among the listed peers (%)
ROE Industry Avarage ROE
Softlogic Life Insurance PLC (AAIC)- “Highest profitability in the industry” Company Picks
0%
10%
20%
30%
40%
50%
AAIC CTCE CINS HASU UAL JINS SLIC
AAIC has high new business premium growth
Annualised new business premium CAGR-6 yrs
Average CAGR - 6 yrs
CINS is the market leader in life business with 25%GWP market share and has been second to Sri LankaInsurance (SLIC) in non-life sector.
It has the largest branch network of over 150 branchesisland wide and the highest brand value in insurancesector (As per brands annual 2016).
Being the largest Life player CINS is expected to gainfrom the industry upside, especially with its wide reachwithin the country.
CINS’s general business also has continued to trimdown the combined ratio thus increasing theprofitability.
Price LKR 1490
Mkt Cap. (LKR Bn) LKR 29.79
Shares Outstanding (Mn) 26.41
52W high LKR 1650
52W Low LKR 1200
PE (X) 8.06
PBV (X) 1.35
Div. Yield (%) 1.84
ROE (%) 17.72
Top 5 Shareholders %
Global Rubber Industries (Private) Limited
22.25
Banque Pictet & Cie SA 12.73
Ceylinco Insurance PLC A/c. No. 03 (Employees' Gratuity Trust Fund)
9.33
Shriram City Union Finance Limited
6.32
Mitsui Sumitomo Insurance 6.00
Insurance Industry
60
Ceylinco Insurance PLC (CINS)- “Market Leader” Company Picks
0
500
1000
1500
2000
2500
3000
3500
4000
0
10,000
20,000
30,000
40,000
2010 2011 2012 2013 2014 2015
Revenue & Net Profit (LKR Mn)
Revenue Profit Attibutable to shareholders
Insurance Industry
Ceylinco Insurance PLC (CINS)- “Market Leader” Company Picks
0200400600800
100012001400160018002000
LK
R
Price Movements
61
0
20
40
60
80
100
120
140
160
AAIC CINS HASU JINS UAL CTCE SLIC
CINS has the highest branch network island wide
94
96
98
100
102
104
106
108
0
5
10
15
20
2010 2011 2012 2013 2014 2015
ROEs are trending higher with declined Non Life combined ratios
Return on equity Non Life net combined ratio
Source: Bloomberg, Annual Reports, IBSL
PINS, the 6th largest Non Life insurance provider in SLand has shown robust growth while capturing morethan 5% market share in just 6 years of operations.
PINS has significantly low cost operation due to its lowcost market expansion via parent’s branch network(People’s Leasing & Finance Company PLC) and strongcaptive business derived from the parent.
Accordingly, company has the lowest combined ratio inthe industry mainly due to very low expense ratiosabout half the industry average despite the higherclaims. Low combined ratios will result in highprofitability for PIL allowing more aggressiveexpansion into non-captive businesses.
Further despite current challenging performance of theoverall leasing industry demand for commercialvehicles are expected to remain steady thus positivelyaffecting the PINS as PLC is main specializing incommercial vehicles.
Price LKR
Mkt Cap. (LKR Bn) 4.0
Shares outstanding (Mn) 200
52W high 20.5
52W Low 16.00
PE (X) 6.15
PBV (X) 3.09
Div.Yield (%) 3,95
ROE (%) 25.36
Top 5 Shareholders %
People's Leasing & Finance PLC 75.00
J.B. Cocoshell (Pvt) Ltd 2.38
Mr. Kulappu Arachchige Don Anurada Perera
1.58
Deutsche Bank AG as Trustee for JB Vantage Value Equity Fund
1.47
NDB Capital Holdings PLC 1.44
Insurance Industry
People’s Insurance PLC (PINS) -“Low cost operations on captive business” Company Picks
62
Insurance Industry
63
People’s Insurance PLC (PINS) -“Low cost operation on captive business” Company Picks
80%
10%
90%
GWP Contribution from Captive / Non Captive business (YTD 10M FY 2015)
Non Captive Captive PLC PB
Source: Bloomberg, Annual Reports, IBSL
-100
0
100
200
300
400
500
0
500
1000
1500
2000
2500
3000
3500
4000
2010 2011 2012 2013 2014 2015
Revenue and Net profit ( LKR Mn)
Revenue Profit attributable to shareholders
14
15
16
17
18
19
20
21
LK
R
Price Movements
0
20
40
60
80
100
120
140
ATL CINS HASU JINS PINS AINS SLIC
PINS has the lowest Net combined ratio in the Non Life sector (%)
Non Life Net combined ratios Industry avarage
HASU is a fully owned subsidiary of Hatton National Bank (second largest private bank in terms of the asset base) with 54 branches.
HASU has the lowest combined ratio in the Life sector due to low rate of policy maturing due to its short business history in comparison to others creating a competitive advantage(Lowest claim ratio in the Non Life sector).
HNB has strengthened the market share by leveraging on the strength of the parent’s branch network (249 branches) especially via the Bancassurance channel.
Accordingly capitalizing on the bancassurance will enable HASU to further reduce their expense ratio in addition to current lowest claim ratio in the industry thus further bringing down their combined ratios relative to industry peers.
Price LKR 57
Mkt Cap. (LKR Bn) 2.94
Shares Outstanding (Mn) 50
52W high LKR 72.90
52W Low LKR 53.00
PE (X) 7.32
PBV (X) 1.14
Div. Yield (%) 3.83
ROE (%) 16.34
Top 5 Shareholders %
Hatton National Bank PLC 59.99
The Ceylon Guardian Investment Trust PLC
4.00
Mercantile Merchant Bank Ltd1.83
Janashakthi General Insurance Limited
1.65
Bank of Ceylon A/c Ceybank Century Growth Fund
1.30
Insurance Industry
HNB Assurance PLC (HASU)- “Leveraging on the bancassurance” Company Picks
64
0
50
100
150
200
250
300
350
400
450
0
1000
2000
3000
4000
5000
6000
7000
2010 2011 2012 2013 2014 2015
Revenue & Net profit (Mn)
Revenue Profit Attributable to shareholders
2010 2011 2012 2013 2014 2015
Return on equity (%)
Insurance Industry
0102030405060708090
100
LK
R
Price Movements
65
HNB Assurance PLC (HASU)- “Leveraging on the bancassurance” Company Picks
0%
20%
40%
60%
80%
100%
120%
140%
AAIC CTCE CINS HASU UAL JINS SLIC
Lowest combined ratio in the Life industry (%)
Source: Bloomberg, Annual Reports, IBSL
Reinsurer partners play a key role in the insurance industry and therefore they have a significant power. However, reinsurers are willing to enter to Sri Lanka and therefore power of reinsurers could reduce to certain extent leading to a moderate power.
Bargaining power of suppliers (Moderate)
Switching cost is high as there is no surrender value for the first three years. Therefore, bargaining power of policy holders is low.
Bargaining power of policy holders
(Low)
Threat from substitutes
(Moderate)
Entry barriers are moderate with an inclusion of a minimum capital requirement of LKR 500 Mn and registration under IBSL. No restrictions on foreign ownership will create a threat of new entrants.
Threat of new entrants
(Moderate)
Competition in the life industry is low as demand is expected to grow with the disposable income and ageing population.
Existing Rivalry
(Low)
Less substitution products are available for life insurance. i.e. pension products and savings in Sri Lanka. However, there can be some indirect competition from banking products. However, they don’t carry out the protective coverage provided by insurance companies. Therefore, threat of substitutes for life is moderate.
Insurance Industry
Five Forces Analysis- Life Five Forces
66
Reinsurer partners play a key role in the insurance industry and therefore they have a significant power. However, reinsurers are willing to enter to Sri Lanka and therefore power of reinsurers could reduce to certain extent leading to a moderate power.
Bargaining power of suppliers (Moderate)
Low switching cost which leads for high bargaining power of policyholders and price undercutting among companies.
Bargaining power of policy holders
(High)
Threat from substitutes
(Low)
Entry barriers are moderate with an inclusion of a minimum capital requirement of LKR 500 Mn and registration under IBSL. No restrictions on foreign ownership will create a threat of new entrants.
Threat of new entrants
(Moderate)
Low product differentiation, low margins and low growth in the industry has resulted in a higher competition among the existing players.
Existing Rivalry
(High)
No substitute products for motor, fire, burglary and personal accident insurance. Purchase of a Third party motor insurance is a mandatory requirement in Sri Lanka. Thus it leads to a low threat from substitutes.
Insurance Industry
Five Forces Analysis- Non Life Five Forces
67
68
Appendices
Overview of the General Insurance
industry
Fire
Fire
General Fire
Engineering
Electronic equipment
Machinery
Marine
Goods in transit
Export
Import
By Land
Sea/ Air
Freight forward liability
Hull
Hull and machinery
Motor
Comprehensive coverage
Comprehensive
Third Party
Liability Coverage
Body Injury+
property damage
General accidents / Miscellaneous
Liability
Public Liability
Product Liability
Professional Liability
Completed Operation Insurance
Accidents
Personal accident
Fidelity
Medical
Burglary
shop
Insurance Industry
Non Life Insurance Industry in Sri Lanka Appendices
69Source: LOLC SEC Research
Insurance Board of Sri Lanka (IBSL)
28 Insurance Companies
3 Composite companies
12 Life Insurers
13 General Insurers
57 Insurance brokering companies
Act No 43. of 2000
IBSL is the regulatorybody established tosafeguard policy holdersthrough supervision ofInsurance Companieswhile the InsuranceIndustry Act, No. 43 of2000 , provides therelevant legal frameworkfor the regulation. TheAct has amended as theNos. 27 of 2007 and 03 of2011.
Insurance Industry
Regulatory Environment of the industry Appendices
70Source: IBSL
Pre 1962 era 1962 1980 1986 1989 1990 2000
• Insurance commenced with the advent of coffee and tea industry and sector mainly comprised of several foreign companies.
• Sri Lankan insurance companies were established after passing the companies act of 1938 and community became more aware after the promulgation of the motor traffic act in 1938 which made third party insurance compulsory.
• Insurance industry was nationalized in line with the policy of the Gvt.
• Subsequently to the promulgation of acts, ICSL was established as the sole insurer to transact in life and general insurance business.
In1980 ,another state insurer, the National Insurance Corporation was incorporated with the objective of creating competition after 18 years of monopoly by ICSL. However, Sate monopoly still continued.
Insurance industry was opened for direct equity participation by individuals /bodies outside Sri Lanka since March 2000.
Insurance Association was established in
1989.
In 1986 insurance industry was
privatized.
Sri Lanka Insurance Broker’s Association
was formed in 1990.
Insurance Industry
History of the Insurance industry in Sri Lanka Appendices
71Source: Publications from the Sri Lanka Insurance Institute
Insurance Industry
Industry Performance Appendices
72
0%
2%
4%
6%
8%
10%
12%
14%
ATL CINS HASU JINS PINS SLIC
5 year CAGR of Non Life GWP
5 year CAGR Industry
80
90
100
110
120
130
140
2011 2012 2013 2014 2015
Net combined ratios- Non Life (%)
ATL CINS HASU JINS PINS SLIC
50%60%70%80%90%
100%110%120%130%140%150%160%170%
2010 2011 2012 2013 2014 2015
Combined Ratio- Life
AAIC CTCE CINS HASU UAL JINS SLIC
0%
5%
10%
15%
20%
25%
30%
AAIC CTCE CINS HASU UAL JINS SLIC
5 year CAGR of Life GWP
5 Year CAGR Industry
Gross Written premium (GWP)The total premium written by an insurer before deductions for reinsurance and ceding commissions. Written does not implycollected, but the gross policy premium to be collected as of the issue date of the policy, regardless of the payment plan.
Reinsurance CededA reinsurance ceded is the portion of risk that a primary insurer passes to a reinsurer. Reinsurance ceded allows the primary
insurer (the ceding company) to reduce its risk exposure to an insurance policy by passing that risk onto another company (theaccepting company), with the accepting company receiving a premium for taking on the risk.
UnderwritingUnderwriting is a term used by insurers to describe the process of assessing risk of a property, a situation or an individual todetermine if it is profitable for the insurance company to take on the risk and accept responsibility on behalf of the insurancecompany by means of providing insurance for a set price.
Acquisition CostDirect costs an insurer incurs to "acquire" the premium—for example, commissions paid to a broker or fronting company.These costs are required to be expensed in the same ratio as the premiums to which they relate are earned.
Solvency MarginsThe solvency margin which reflects an insurance company’s ability to meet the obligations arising from its insurance contractsis the main indicator to measure the soundness of insurance companies.
Third Party motor insuranceIn the insurance world, the “first party” is the driver, the “second party” is the motor insurance company and the “third party” isbasically everyone else. A Third Party Cover insures against any injuries or deaths caused to another person, as well as loss ordamage to a third party property caused by your vehicle.
Comprehensive motor insuranceA Comprehensive Car Insurance package covers a wider range of protection, notably to both first and third parties.
Insurance Industry
Glossary Appendices
73
LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a
stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from
sources that LOLC Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the
research, LOLC Securities Limited does not give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on
investment decisions taken based on the information provided by the research and hence LOLC Securities Limited nor its employees accepts any liability
whatsoever for any loss arising from investments decisions taken using the information provided in this paper. The reader also should note this paper does not
give recommendations to any particular category of investors and investor should consult investment advisors for further clarifications regarding risks
involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant
volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any
transaction. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided
in the research should not be construed as a buy or sell instruction for any securities mentioned in the research, unless otherwise specifically mentioned. This
research is intended for general use for clients of LOLC Securities Limited and must not be copied in whole or in part or distributed to any third party for
commercial use without permission from LOLC Securities Limited. If the reader is not the intended recipient please inform LOLC Securities Limited
immediately by return email to [email protected]. LOLC Securities Limited’s other staff including sales people, traders and other professionals may
provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions expressed in this
research which may be influenced by different circumstances.
Insurance Industry
Disclaimer
74
Head Office
No. 481, T B Jayah Mawatha,Colombo 10, Sri Lanka.Sri LankaTel: +94 11 5889889 Fax: +94 11 2662883
Kurunegala BranchNo 06, 1st Floor,Union Assurance Building,Rajapilla MawathaKurunegala,Sri LankaTel: +94 377 201221Fax: +94 372 225511
Tel : +94 773 409243
Matara Branch1st floor,E.H. Cooray Towers,No 24,Anagarika Dharmapala Mw.Matara, Sri LankaTel: +94 414 936079
Sriyan Gurusinghe CEO/Managing Director 011 5889888/ 077 7891871 [email protected]
Manjula
KumarasingheCOO- Sales & Marketing 011 5889808/ 077 7874310 [email protected]
Head Office
Maniesh Rodrigo Assistant General Manager -Sales 011 5889805/ 077 7896064 [email protected]
Samadhi Jayasinghe Manager Institutional Sales 011 5889806 / 077 3954993 [email protected]
Imesh Fernando Assistant Manager -Sales 011 5889814 / 077 3954992 [email protected]
Naleen Sadeesh Investment Advisor 011 5889839 / 077 2383209 [email protected]
Damith Chaminda Investment Advisor 011 5889819 / 077 3367313 [email protected]
Dushan Rajaguru Investment Advisor 011 5889834 / 077 9090511 [email protected]
Niraj Jayamanne Investment Advisor 011 5889813 / 077 5965645 [email protected]
Dinuka Niwantha Investment Advisor 011 5889838 / 077 7769461 [email protected]
Ushan De Silva Investment Advisor 011 5889813/ 077 1927998 [email protected]
John Ravindu Trainee investment advisor 011 5889833 / 0717101805 [email protected]
Isuri Ruwanka Business Development Associate 011 5889842/ 076 8545047 [email protected]
Kurunegala Branch
Rohana Chandrasiri Assistant General Manager 037 7201221 / 077 3623001 rohanac@ lolcsecurities.com
Anurudda
RajakarunaInvestment Advisor 037 7201221 / 077 3409464 anuruddhar@ lolcsecurities.com
Nuwan Fernando Investment Advisor 037 7201221 / 077 8365921 nuwanfe@ lolcsecurities.com
Bandula Senarathne Investment Advisor 037 7201221 / 076 8743157 [email protected]
Matara BranchBimal Malinda Branch Head 041 4936079/ 077 3409243 [email protected]
Ahamed Aadil Investment Advisor 041 4936079 / 077 7538986 [email protected]
Thilina Sameera Investment Advisor 041 4936079 / 077 8894698 [email protected]
Research
Shehan
BartholomeuzHead of Research 011 5889835 / 077 7699148 [email protected]
Gayan Rajakaruna Senior research Analyst 011 5889837 / 0774469070 [email protected]
Hiruni Perera Associate Research Analyst 011 5889809 / 077 4805784 [email protected]
Insurance Industry
Contact Us
75
76LOLC Securities Limited
