LOLC SEC Valuation12M Tgt Price (excl.dividend)Share PriceUpside/(Downside)Risk Level(refer page 30 for recommendation guidance)
Investment ConsiderationsShare DetailsBloomberg Ticker AAIC SL
GICS Sector Financials
Market Cap (LKR Mn) 7,050
Issued Quantity (Mn) 375
30-day avg T/O (LKR Mn) 0.17
Beta (6 months) 1.34
Investment FundamentalsLKR Bn 12M Trail FY16(E) FY17(F) FY18(F)
Net Income 6.02 6.00 8.24 11.03
Net Profit 1.16 1.02 1.42 2.02
S/H's Equity 2.21 3.04 4.18 5.79
Total Assets 12.81 11.98 15.55 20.32
ROA (%) 9.1% 8.7% 10.3% 11.3%
ROE (%) 52.7% 38.8% 39.5% 40.5%
Investment RatiosPE (X) 6.1
PBV (X) 3.2
Price to Sales (X) 1.0
Divdend Yield (%) 2.4%
Price Behaviour
Per Share Details as at 30.09.2016 (LKR)
Earnings per share (trailing 12m) 3.11
Net Asset Value per share 5.90
Dividend Per Share (trailing 12m) 5.33
Business Nature
Shareholder Details as at 30.09.2016Softlogic Capital Ltd 59.2%
Nederlandse Financierings (FMO) 19.0%
State Street Munich (DEG) 19.0%
Sandwave Ltd 0.4%
Shareholders below 5% 2.8%
Source:CSE, Bloomberg, LOLC SEC Research
Analyst: Gayan Rajakaruna
+94 115 889837 | [email protected]
15 December 16
Recommendation Guidance, Important Disclosures and Analyst Certification: Page 30
Salient Sections of the Report
Low insurance penetration along with GDP per capita rise (pg.2)| Life insurance business to
benefit on zero taxable profit (pg.5)| Company will grow over peers (pg.6)| Aggressive
business model (pg.8)| High yielding investment portfolio (pg.10)| High profitability to
continue (pg.12)| Strenght in group's value chain (pg.14)| Valuation (pg.15)| Sensitivity
(pg.16)| Earnings risk comment (pg.17)| Appendices (pg.18 )
Note: AAIC's public holding is 3% and it is to be increased to
10% by the end of 2016 as per directions given by CSE.
Companies listed in DiriSavi board should maintain minimum
10% public float if float adjusted market is less than LKR 1bn.
Valuation
We believe Sri Lanka’s insurance sector to have strong growth momentum and AAIC
continue to increase market share. We have valued the counter using Residual Income
Valuation model and derived a value of a share at LKR 28.80. Accordingly the counter is
trading at discount to our valuation. We give Buy recommendation for AAIC.
Softlogic Life Insurance PLC Equity Research
Initiation Coverage
LKR 24.20LKR 18.80
LKR 28.80
53.22%Medium
Low insurance penetration along with GDP per capita rise and demographic changes
to drive industry growth: Sri Lanka's life insurance industry is expected to have a
promising growth with low penetration. Considering targeted GDP per capita rise,
affordability will improve and more people will spend on life insurance products. Certain
demographic changes will also provide an impetus for the industry growth. Accordingly, we
expect country to reach LKR 115 billion (USD 720 mn) GWP with 21% CAGR and 0.65%
penetration by 2019 where AAIC being a growing life insurer will be positioned well to
capture the industry growth potential.
Life insurance business to benefit on zero taxable profit: Prevailing tax policy has
enabled most of life insurers to operate with no income tax as opposed to standard rate of
28%. We expect the policy to remain same benefiting, AAIC as well.
Company will grow over peers in a growing industry: AAIC has been the fastest growing
life insurer in terms of GWP and life fund growth. Its new business premium growth also
has been the highest resulting a consistent growth in the market share since 2010 and we
expect company to capture 11% market share by 2019 from 8% in 2015.
Aggressive business model to create a competitive advantage: Company will leverage
its aggressive business model in achieving strong new business growth and superior policy
persistency while maintaining a modest cost base with higher expenses to leverage on low
claim cost.
High yielding investment portfolio: We expect AAIC to beat industry benchmark yields
through an aggressive investment strategy with a focus on high yielding long term assets.
High profitability to continue on aggressive business strategy: AAIC has one of the
industry highest EBITDA margin and profitability ratios based on its strong topline
performance and modest cost base in comparison to premiums.
Strength in Group's value chain to benefit AAIC: Support of Softlogic Group being a
leading conglomerate will augur well with growth prospects of AAIC while corporate
governance will be strengthened with strategic foreign partnerships.
AAIC is a life insurance service provider with an island-wide
customer reach. It is a Softlogic Group company which is a
leading conglomerate in Sri Lanka.
Aggressive player with growing market share
Sri Lanka's life insurance penetration remains very low compared to peer countries
enabling companies to operate aggressively with low industry competition despite robust
growth seen in last seven years with total assets growing by 17% CAGR. While industry is
equipped with strong growth drivers AAIC, one of highest growth life insurer, is well
positioned to capture industry rise and outperform the peers. With its aggressive business
model AAIC is expected to show strong bottom-line growth.
BUY
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AAIC Share Price ASI movement (adjusted to AAIC base price)
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Graph 01: Low life insurance penetration and density compared to peers will drive the industry growth
Source:Swiss Re sigma No3/2016
Graph 02: Higher industry growth compared to economic growth Graph 03: GDP per capita to record 7.3% CAGR for 2015-19
Source:CSE, Bloomberg, LOLC SEC Research
Source: IBSL Source: CBSL, LOLC SEC Estimates
2 | LOLC Securities Limited
Low insurance penetration along with GDP per-capita rise and demographic changes to drive industry growth
Industry has grown above the economic growth (GDP) due to rise in demand for life covers led by personal income
growth and pushy sales tactics especially with low penetration. Although low per capita income which is common for a
developing country like Sri Lanka and higher cost of living have historically been deterrent factors in obtaining life
insurance policies, its present direction of achieving upper middle income status by 2018 is likely to give a convenient
phase for more people to spend on life policies. Accordingly we expect increase in per capita GDP to mainly lead the
demand for life insurance in coming years.
We estimate country to record moderate 5.3% real GDP growth over next 4 years and resulting 7.3% nominal GDP per
capita CAGR to achieve USD 5200 by 2019. Accordingly with greater spending power and excess income, industry
penetration is expected to be improved (estimated: 0.65% by 2019) benefiting life insurers.
GDP per capita to reach
USD 5200 by 2019
Low penetration to augur
well with industry growth
Sri Lankan life insurance industry has been growing steadily with a total asset CAGR of 17% since 2009. But Sri Lanka
being a country largely characterised by the collectivism and dependency where the need for a life insurance policy is
yet to be realised, industry still remains to be a small sub sector accounting less than 3% of total financial sector assets
by 2015. Accordingly industry is heavily under-penetrated compared to regional peers who have comparable GDP per
capita (Vietnam, Indonesia and Philippines) giving a strong impetus for a steady growth along with GDP per capita rise
(level of income growth) while industry becoming attractive for life insurers due to low competition.
19 17 43 40 43
1685
316210 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%
Sri Lanka Vietnam Indonesia Philippines India NorthAmerica avg.
Malysia Asia avg. Thailand Europe avg.
USD
Insurance penetration - Life premiums in % of GDP (LHS) Insurance density - Life premiums per capita in USD (RHS)
2054
690
385222
259243 71
286
307330
5201
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Per capita GDP
USD
0%
5%
10%
15%
20%
25%
30%
0%
5%
10%
15%
20%
25%
30%
2009 2010 2011 2012 2013 2014 2015
GDP growth Life GWP growth Life Insurance Asset growth
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Graph 04: Life insurance penetration to reach 0.65% by 2019 from 0.49% in 2015
Source:Swiss Re sigma No3/2016
Source:Swiss Re sigma No3/2016, CBSL, LOLC SEC Estimates
Graph 05: Trend of urbanisation in Sri Lanka and forecast for 2030
Source: CBSL, LOLC SEC Estimates
Source: World Bank, CBSL
2 | LOLC Securities Limited 3 | LOLC Securities Limited
Increasing urbanisation and urban living to drive industry growth
Country is expected to see rapid urbanisation with 3.3% annual growth rate over next 15 years giving an impetus for
the industry growth. As families relocate to cities, their ability to depend on a village support and other means of
localized security diminishes. Thus sustaining an urban family, should the breadwinner of the family face a tragedy
that affects the household's income, spurs the desire to have life insurance coverage. Additionally, housing market
boom and low unemployment rate is also poised well for urban living, creating an opportunity for life industry growth.
3.3% annual rate of
urbanization over next 15
years
Low insurance penetration along with GDP per-capita rise and demographic changes to drive industry growth (cont…)
Industry to record LKR
115 bn GWP by 2019
As per the projected S-Curve below, Sri Lankas' life insurance industry is poised for a steep growth after USD 5000.
Based on the S-curve and GDP per capita estimates, we forecast a moderate penetration of 0.65% by 2019 and thus
recording 21% GWP CAGR for next 4 years as opposed to 11% growth historically. This forecasted growth consists of
estimated GDP per capita growth, estimated population growth, premium added on higher industry growth over per
capita GDP growth due to increasing demand for life products at a higher rate as income rises and premium added for
demographic changes (see graph 05,06 & 07). With 0.65% penetration, we forecast industry GWP to be LKR 115
billion by 2019 compared to LKR 54 billion in 2015.
In a medium to long run target (5-15 years) of USD 5000 - 10000, we expect industry to record a steeper growth with
penetration level increasing from 0.65% to 1.6% as country will then be into high middle income countries' (such as
Thailand and Malaysia) income level bracket and thus emanating similar level of penetration. However at high income
level (USD 15000), the industry operates in a manner that the income elasticity of demand for life insurance reaches
maximum resulting a flat industry growth.
Ukraine
Nigeria KuwaitOmanRussia
TurkeyBulgariaSerbiaSri LankaNepal
BangladeshBahrainPakistan UAE
ColombiaVietnam GreeceMexicoLebanon
MoroccoKenya PolandIndonesiaHungary
PhilippinesMacao
CyprusChinaBrazil
IndiaIsrael
GermanyChile United StatesCanadaMalaysia Australia
Thailand Norway
SwedenSwitzerland
SingaporeNew Zealand
France
Italy Denmark
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
Our S-Curve projection suggests country to move from 0.49% to ~0.9% premium penetration as country crosses USD 5000 per capita. However with a more conservative estimate based on historical figures and impending industry challenges, we estimate 0.65% by 2019. Here insurance penetration implies the life insurance premium per capita as a % of GDP per capita.
13.1% 18.2% 18.4% 30%
2001 2012 2015 2030
Urban population as % of total population
life premium per capita as % of GDP per capita
GDP per capita USD
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Graph 06: Rapid expected growth of ageing population Graph 07: Increasing trend in deaths due to NCDs
Source: Sri Lanka Paradigm shifts in population, W.Indralal De Silva Source:Health Ministry, World Bank
Source:Swiss Re sigma No3/2016, CBSL, LOLC SEC Estimates
Graph 08: New policies grow at 5% CAGR Graph 09: Branch, Agent and Employee growth
Source: IBSL Source: IBSL, LOLC SEC Estimates
3 | LOLC Securities Limited 4 | LOLC Securities Limited
Gen Y to drive the
demand of life products
Expanding ageing population and increasing Non Communicable Diseases (NCDs)
Sri Lanka's population is one of the fastest ageing populations in the world. As per estimates, above 65 years old will
increase to 17.1% of total population by 2041 from 7.9% in 2012. Accordingly people would set aside more money for
health risk that they would potentially expose to. In recent times, rapid growth of NCDs due to demographic changes
and growing ageing population was also witnessed (NCDs account 71% of annual deaths). Therefore compared to few
decades back, we believe that people have become more aware of the risks associated with NCDs and thereby looking
for life/health covers providing an impetus for the industry.
Growth of ageing
population and NCDs
Low insurance penetration along with GDP per-capita rise and demographic changes to drive industry growth (cont…)
Increasing demand for life insurance as a risk based financial product
We believe that Sri Lanka's Generation Y (born in 1980-2000) is more interested for risk based insurance products
compared to Gen. X as Gen. Y seeks more financial security and stability for their families due to complexities in their
lifestyle. Furthermore, Gen Y will find it difficult to accumulate wealth to finance emerging needs, especially with
decreasing real interest rates. The statistics also suggest that the industry is heading north with new life polices
recording 5% CAGR since 2010 (at a faster phase than population growth of 0.9% due to low penetration). With the
development in IT and mobile technology along with high mobile phone penetration (107%), industry could
conveniently reach to more and new customers. To support this growth, distribution channels have also seen a strong
growth of 17% CAGR over last 5 years. Thus we believe that the industry is positioned in a clear growth trajectory
benefiting its players to record higher profitability.
4.3
6.3
7.9
10.9
14.5
17.1
0
2
4
6
8
10
12
14
16
18
1981 2001 2012 2021 2031 (F) 2041 (F)
%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0
2,000
4,000
6,000
8,000
10,000
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
Cancer Heart diseasesDiabetes GDP per capita
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
1016 1872
32651
61263
2011 2015
No of Branches No of Employees & Agents
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Life insurance business to benefit on zero taxable profit
Source:Health Ministry, World Bank
The sensitivity of statutory and effective tax rate changes on AAIC valuation is as follows:
Table 01: Valuations will have a material impact on tax policy changes
Est. Effective tax rate 0% 20% 28% 40%
Impact on valuation - -19.7% -27.5% -39.3%
Source: LOLC SEC Estimates, Annual Reports
Source: IBSL, LOLC SEC Estimates
4 | LOLC Securities Limited 5 | LOLC Securities Limited
Life insurance industry currently enjoys an appealing income tax advantage based on its taxable profit calculation
method as opposed to standard tax rate of 28% of financial services creating a competitive landscape over other
sectors. Over the years most of life companies apart from top 3 players (SLIC, CINS and CTCE) have been enjoying zero
income tax due to taxable losses impacting their profitability substantially. Inland Revenue Act suggests that life
businesses to calculate taxable profit based on only investment income minus management expenses but excluding
premium income which has resulted companies to make continuous taxable losses with zero income tax.
The section 92 of the Inland Revenue Act No.10 of 2006 states the ascertainment of taxable profit of life insurance
companies for income tax as: "The profits of a company whether mutual or proprietary, from the business of life
insurance, shall be the investment income of the Life Insurance Fund, less the management expenses (including
commission) attributable to that business".
As new and growing life company, AAIC is opt to incur higher management expenses over investment income
generating from shareholder and policy holder funds resulting zero taxable profits. Therefore company has made
heavy carried forward tax losses resulting no income tax payment. However larger industry players with their sizable
investment portfolios generate excess investment income over expenses creating a taxable profit subject to 28% rate.
LKR 4540 mn carried
forward tax loss
AAIC has zero income tax
for life business
Taxable profit =
Investment income -
management expenses
While such tax polices make the industry very attractive, Gvt at any time could change them as part of ongoing fiscal
consolidation process through tax tightening. Further Budget 2017 has suggested WHT and income tax increases on
dividends and interest of government securities impacting life businesses in coming years. However we believe that
Gvt will not implement a drastic tax policy change as industry requires a steady growth to increase penetration level
and Gvt's helping hands will be essential for life insurers to aggressively expand their premium base and to improve
assets and profitability.
Accordingly, we expect industry to continue with existing tax mechanism in short and medium term and thereby
benefiting AAIC as well in maintaining its profitability. AAIC's carried forward tax loss as of 31.12.2015 stands at LKR
4540 mn and it is unlikely that additional significant tax liability will arise in next 4 years. However any negative
change to the same will have a material impact to the industry including AAIC while affecting its valuations.
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Company will grow over peers in a growing industry
Graph 10: AAIC GWP growth is well above the peers Graph 11: AAIC life fund CAGR is 29%, industry highest
Source: Annual Reports, IBSL Source: Annual Reports, IBSL
Graph 13: AAIC has high new business premium growth
Source: LOLC SEC Estimates, Annual Reports
Source: Annual Reports, IBSL Source: Annual Reports, IBSL
5 | LOLC Securities Limited 6 | LOLC Securities Limited
Graph 12: AAIC's GWP market share has been heading north
registering 8% by 2015 (5th place)
With aggressive GWP growth, AAIC recorded a GWP market share of 8% and ranked 5th by 2015. It has been the only
company amongst selected peers to see a consistent market share growth since 2010 while market leaders (SLIC,
CINS) losing the market. Based on our expectation of company's high growth rates over industry, we estimate AAIC to
reach 11% GWP market share by 2019.
Compared to competitors, AAIC's GWP growth has been largely supported by higher new business premium growth
registering 44% CAGR. This clearly reflects its strengths in new business acquisition over peers and signals a proven
growth potential in the near term. However AAIC's growth rates of new policy issues are not overly high (4.3%) which
suggests that company is selective with their clients and look for a sustainable GWP growth through a sound mix
between new policy acquisitions and their premiums which are generally at a higher rate as opposed to low premium
strategy followed by certain competitors.
GWP market share will
increase to 11% by 2019
Highest new business
premium growth
27% GWP CAGR since
2010
Being in a growing industry, AAIC has been the fastest growing life insurer in terms of GWP and the life fund size since
2010. With a relatively short span in business since 1999, company has been successful in acquiring businesses based
on its aggressive business model (see pg. 08) and product innovation along with group synergies (see pg. 14) which
have resulted it to record 27% GWP CAGR and 29% life fund CAGR over last 6 years surpassing comparable peers well
above. We expect company will continue to leverage the same to capture industry upside (as discussed in pg. 02-04)
and to record higher 'new business premium (see graph:13)' and 'total GWP' growth for next 4 years compared to that
was witnessed historically. Accordingly we forecast 33% GWP CAGR of AAIC for 2015-2019.
0%
5%
10%
15%
20%
25%
30%
AAIC CTCE CINS HASU UAL JINS SLIC
CAGR of GWP Industry GWP CAGR
0%
3%
5%
8%
10%
13%
15%
18%
20%
23%
25%
28%
30%
33%
35%
2010 2011 2012 2013 2014 2015
HASU AAICCTCE CINSUAL JINSSLIC AAIC life fund-CAGR
4% 4% 5% 6% 7% 8%
25% 22% 17% 16% 16% 16%
28% 28%29% 27% 27% 25%
3% 4%4% 5% 5% 5%
11% 13% 14% 13% 13% 13%
5% 5% 5% 5% 5% 5%
19% 19% 20% 20% 18% 19%
2010 2011 2012 2013 2014 2015
AAIC CTCE CINS HASU UAL JINS SLIC
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
AAIC CTCE CINS HASU UAL JINS SLIC
Annualised new business premium CAGR-6 yrs
Average CAGR - 6 yrs
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Company will grow over peers in a growing industry (cont…)
Graph 14: AAIC has a sound mix between new business acquisition and premiums charged
Source: IBSL, LOLC SEC Estimates
Source: Annual Reports, IBSL
Source: Annual Reports, IBSL
6 | LOLC Securities Limited 7 | LOLC Securities Limited
Accordingly, AAIC has been able to maintain a sound mix between attracting new businesses (new policy issued) and
simultaneously offering clients relative higher premiums (LKR 78,000 per new policy as of 2014) through their
aggressive business model (see pg. 08) while competitors have mismatch in their mix as illustrated above. We expect
company to maintain the same strategy of looking through a sustainable premium growth with low lapses while
capturing a selected client base.
Sound mix between new
policy issues and
premium charge
4.3%
9.2%
-2.1%
4.1% 4.0%
-12.5%
-3.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
AAIC CTCE CINS HASU UAL JINS SLIC
LK
R
Avg premium per new policy issued (LHS) Annual growth of new policies issued (RHS)
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Aggressive business model to create a competitive advantage
Table 02: High first year agents' commissions will bring more new policies to AAIC
Policy yearSource: IBSL, LOLC SEC Estimates 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%
Source: LOLC SEC Research
Source: Annual Reports, IBSL, LOLC SEC Estimates Source: Annual Reports, IBSL
7 | LOLC Securities Limited 8 | LOLC Securities Limited
However, company registers the highest expense ratio (Agent commissions + Operational & Admin. expenses (Opex))
reflecting its high cost base (see graph 17) due to superior sales commissions and expansion in terms of physical and
IT infrastructure. Amongst top 7 companies, AAIC has been the last market entrant and expanded rapidly specially
after Softlogic acquisition incurring higher sales and operational cost relative to premiums. But high expenses have
helped company to build-up taxable losses minimising negative impact on its bottom-line.
Graph 15: AAIC has a better policy persistency enabling to
maintain healthy GWP
High persistency
Attractive agent
commissions surpassing
peers
Company's strategic focus on high premium charge along with low rate of policy maturing due to its short business
history in comparison to others have enabled company to consistently record the lowest claim ratio amongst peers
creating a competitive advantage.
AAIC has the lowest claim
ratio
Maximum Commission/Incentive payable
Graph 16: AAIC records the lowest claim ratio due to high
average policy premium value
AAIC has the highest
expense ratio, but
declining
Aggressive business
model
AAIC continues to have an aggressive expansion with higher operational expenses (see graph:17) compared to peers
which is supported by low claim cost (see graph:16). Accordingly AAIC has been able to record a high new premium
growth (see pg: 06) backed by high commission structures, specialised unit being responsible for premium renewal
from 2nd year resulting high persistency and targeting a niche customer segment resulting high premiums and low
lapses. Our survey has identified that company has been offering first year commission/incentives upto 75%,
motivating agents for new businesses. Agents are thus thrived for getting new policies on a yearly basis and securing
clients' premium for the first year to enjoy high commissions. (*Maximum commission payable for year 1 is capped at
30% of premium as per IBSL)
Their meticulous customer selection seems to attract policy holders with capacity of undertaking relatively high
premium policies resulting AAIC to enjoy higher GWP growth and persistency over peers (see graph:15). The
specialised unit to collect premiums will provide greater and flexible customer service resulting premium persistency
exceeding industry.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2010 2011 2012 2013 2014 2015
AAIC - first year premium persistency
Industry - first year premium persistency
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015
Cla
im R
atio
AAIC CTCE CINS HASU
UAL JINS SLIC
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Aggressive business model to create a competitive advantage (cont…)
Source: Annual Reports, IBSL, LOLC SEC Estimates Source: Annual Reports, IBSL, LOLC SEC Estimates
Source: Annual Reports, IBSL
8 | LOLC Securities Limited 9 | LOLC Securities Limited
Graph 17: AAIC has higher sales and operational expenses,
but gradually declining towards industry average
AAIC maintains modest
total cost base
Despite negativity on high expense ratio, company's total expenses (claim cost + sales cost + operational cost)
compared to premiums continue to remain at the lower end of the industry which suggests that company is positioned
well with a modest cost base to record strong profits in coming years. We expect company to see an increase in claim
ratio in medium to long term as more policies will require maturity and benefit payments by then, but given that the
company being able to manage its other Opex, AAIC to maintain a cost advantage in the future while strengthening its
profitability.
But Expense Ratio has been in a declining trend which is likely due to greater use of Group strengths such as sales
through Softlogic outlets (see pg.14) thus reducing expenses. We expect Softlogic outlets to increase its contribution on
AAIC's branch expansion strategy in short and medium term and thereby controlling Opex and Capex growth rates in
comparison to its topline growth.
While strong agency force and Softlogic network providing convenient access to AAIC products and services, we expect
company to move in to alternate channels specially Bancassurance based on highly penetrated bank branch network
and thereby curtailing Opex ratio gradually over next 4 years to record 27% by 2019 from 30% in 2015 improving
operational margins. However we expect 'Commission Expense ratio' to remain at the same level to enforce agents for
more new businesses.
Graph 18: AAIC's total cost base is at the lower end of the
industry
Expense ratio will decline
based on Opex decline
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
2010 2011 2012 2013 2014 2015
Exp
ense
Rat
io
AAIC CTCE CINS HASUUAL JINS SLIC
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
2010 2011 2012 2013 2014 2015
Co
mb
ined
Rat
io
AAIC CTCE CINS HASU
UAL JINS SLIC
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
High yielding investment portfolio
Source: Annual Reports, IBSL, LOLC SEC Estimates Source: Annual Reports, Bloomberg, LOLC SEC Estimates
Source: Annual Reports, IBSL, LOLC SEC Estimates
Graph 21: AAIC has allocated higher % of financial assets in long term tenor compared to peers
Source: Annual Reports, Bloomberg
9 | LOLC Securities Limited 10 | LOLC Securities Limited
With a focus on an aggressive investment strategy, AAIC has allocated a higher % for long term financial assets (> 3/5
years) compared to peers resulting high yields to cover long term liabilities. As a new entrant to the industry with very
low claim cost (see pg: 08), AAIC has yet to experience more short term liabilities and thus currently booked their
assets for more long term tenors with high yields relative to peers. With expected low claim ratio in coming years
company could conveniently leverage the same for generating high yields and strengthening its bottom-line.
Further, while the industry invests avg. 48% of its financial assets under Gvt debt securities and avg. 13% of financial
assets in equity to minimise investment risk on market volatility, AAIC has been successful executing a different
investment mix with 31% exposure to equity and relatively low exposure to Gvt securities (see graph:22).
Higher investment
returns historically
Greater allocation for
long term high yielding
assets
Apart from 2011, company has been able to generate higher investment yields compared to the industry (see graph:
19) through an aggressive investment strategy by investing in high yielding long term assets (see graph:21) and
translating them to a superior profitability. Further, its equity portfolio was restructured in 2011 after company
acquisition by Softlogic Group by selling off underperforming equities at losses and reinvesting in fundamentally
sound stocks, but with relatively high exposure to shares of NDB Bank PLC (NDB) which has resulted company equity
returns to beat ASPI during last 4 years (see graph:23).
Graph 19: AAIC has been able to generate an investment
return above the industry except 2011
Graph 20: Superior investment return over last 3 years
compared to selected peers, but 2011 had a lag
0%
5%
10%
15%
20%
25%
30%
2011 2012 2013 2014 2015
Overall investment yield of life industry AAIC overall investment yield
0%
5%
10%
15%
20%
25%
30%
2009 2010 2011 2012 2013 2014 2015 2016(Trail)
AAIC CTCE CINS HASU UAL JINS
0%
10%
20%
30%
40%
50%
60%
70%
2015 2014 2015 2014 2015 2014
>1yr 1-3 yr or 1-5 yr >3 yr or >5 yr
% o
f fi
nan
cial
ass
et a
llo
cati
on
bas
ed o
n 3
m
atu
rity
bra
cket
s
AAIC HASU CTCE UAL JINS
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
High yielding investment portfolio (cont…)
Source: Annual Reports, IBSL, LOLC SEC Estimates Source: Annual Reports, LOLC SEC Estimates
Source: Annual Reports, Bloomberg, LOLC SEC Estimates
Source: Annual Reports, Bloomberg
10 | LOLC Securities Limited 11 | LOLC Securities Limited
However company's equity exposure to a single counter is still fairly significant with ~58% of total equity assets being
invested in NDB Bank PLC by end of December 2015 amid position reduction of 1.04mn shares since then. Thus
company will be exposed to a considerable risk of price volatility where 1% change in current market price (LKR 160)
will create c. +/- LKR 11.3 mn fair value impact to existing investment portfolio.
High exposure to single
counter
Graph 22: AAIC's high equity exposure has enabled it to
generate greater investment yield
Graph 23: AAIC's equity portfolio has outperformed the
industry benchmark, except 2011
0%
10%
20%
30%
40%
50%
60%
2010 2011 2012 2013 2014 2015
AAIC T-Bonds AAIC-Equity
Industry-Gvt debt securities Industry-Equity
189%
-22%
2%
39%
63%
0.2%
-50%
0%
50%
100%
150%
200%
2010 2011 2012 2013 2014 2015
AAIC Equity return Total ASPI return
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
High profitability to continue on aggressive business strategy
Graph 24: AAIC has higher EBITDA margins in their life business compared to peers
Source: Annual Reports, LOLC SEC Estimates
Source: Annual Reports, Bloomberg
Source: Annual Reports, Bloomberg Source: Annual Reports, Bloomberg
11 | LOLC Securities Limited 12 | LOLC Securities Limited
Thus AAIC has managed to record superior net profitability by indicating one of the highest industry ROE and ROA
levels. Company's higher profit margins and better revenue generation on their assets have helped them to record high
ROEs despite company having a relatively high financial leverage (more liabilities on policy holders compared to
equity contribution), putting pressure on policy holders at unforeseen exigencies. But AAIC has been maintaining a
sufficient solvency margin (see graph:27) above regulatory requirement, albeit lower than larger peers. However
interms of business risk, sound reinsurance cover will safeguard policy holders at major unforeseen events.
Graph 25: AAIC outperforms the sector profitability (ROE)
Graph 26: AAIC generates the highest return from its assets
(ROA) compared to selected peers
Higher profitability
compared to industry
peers
AAIC's operational profitability (EBITDA margin) is superior to peers and growing due to modest cost structure
supported by low claim cost and modest Opex (see pg. 09) while topline being backed by higher growth in GWP (see
pg. 06) and investment yields (see pg. 10). AAIC being a relatively new entrant, company will continue to enjoy a low
cost on policy claims and maturing benefits in short term strengthening its profits.
Superior EBITDA margins
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
AAIC HASU CTCE CINS UAL JINS SLIC
2013 2014 2015 Average
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
AAIC HASU CTCE CINS UAL JINS SLIC
2013 2014 2015 Average
0%
5%
10%
15%
20%
25%
AAIC HASU CTCE CINS UAL JINS SLIC
2014 2015 Average
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
High profitability to continue on aggressive business strategy (cont…)
Graph 27: AAIC's low solvency reflecting aggressive business model
Source: Annual Reports, Bloomberg
Source: Annual Reports, Bloomberg
Source: Annual Reports, Bloomberg
12 | LOLC Securities Limited 13 | LOLC Securities Limited
Satisfactory solvency
position
Company maintains the minimum regulatory requirement of solvency (solvency ratio should be greater than 1),
reflecting its prudent risk management. However company's solvency position hovers at a lower end due to thin equity
base relative to peers.
0
2
4
6
8
10
12
14
2012 2013 2014 2015
Solv
ency
rat
io (
Ava
ilab
le s
olv
ency
m
argi
n/R
equ
ired
so
lven
cy m
argi
n)
AAIC CTCE CINS HASU UAL JINS SLIC
Regulatory requirement = 1
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Strength in Group's value chain to benefit AAIC
Graph 28: Out of pocket expenditure vs. private prepaid plans
Source: Annual Reports, Bloomberg
Source: World Health Statistics,2015
Table 03: Comparison of branch network and future potentialCompany
AAIC 79 -CTCE 112 7%CINS 150 *HASU 54 24% (with 200 bancassurence units)UAL 107 5%JINS 109 *SLIC 115 *
* Data is not publicly available Source: Annual Reports
13 | LOLC Securities Limited 14 | LOLC Securities Limited
Leverage on Softlogic
retail network
Softlogic Group owns one of the largest retail channels in the country with 232 Softlogic showrooms islandwide and
AAIC can conveniently utilise them to establish window offices creating a wider outreach to its customers. Given that
AAIC to utilise at least 50% of such showrooms in future years, company can easily build up a large branch network in
life insurance business with ~195 branches to compete with peers who have higher bancassurance presence based on
the support of their Group network.
German Investment and Development Corporation (DEG) and Netherland Development Financing Company (FMO)
that are rated 'AAA" jointly account 38% stake in AAIC along with a board representation which will bring the
company a strong corporate governance structure, diverse experience and technical know-how of global life insurance
business, benefiting AAIC. DEG and FMO have undertaken similar investments in emerging markets and account
wealth of experience in insurance industry which we believe as a key driver in company's aggrieve growth.
Further we expect that the leadership of Softlogic Group and AAIC chairman as a leading entrepreneur and capital
market expert will essentially lead the growth momentum and business expansion in the future.
Strengths of foreign
funding partners
Bancassurence % contribution to total
GWP
Further Sri Lanka's health spending financed by pre-paid plans remains low compared to upper middle income
countries. Therefore with expected growth in health spending as country reaches to upper-middle income status which
also will result a growth of prepaid health plans, we expect AAIC to leverage on Asiri Hospital chain to capture this
market development.
AAIC to leverage on
ASIR's strengths
# of existing branches
AAIC has a competitive advantage due to its parent Softlogic Group, which is Sri Lanka's one of most diversified
conglomerate operating largely in Retail and Health Sectors. Through Asiri Hospital Chain (ASIR) which is the market
leader in private health care industry with 60% market share, AAIC has been able to gain synergies in its processes
and financial performance in terms of cost savings in claims and service level improvements in customer care.
74
17
83
4
87
4
0
10
20
30
40
50
60
70
80
90
100
Out-of-pocketexpenditure as % of
private expenditure onhealth
Private prepaidplans as % of private
expenditure on health
%
Upper middle income countries Sri Lanka Lower middle income countries
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Key assumptions of Residual Income valuation methodology are as follows:Risk free rate = 3 year secondary bond market yield of 11.62%Risk premium including illiquidity risk = 7%Illiquidity risk premium = 2%Persistence factor = 0.6Medium term residual income growth (5 - 7 years)
Table 04: Valuation Sensitivity Matrix
16.6% 17.6% 18.6% 19.6% 20.6%
18% 29.97 29.10 28.27 27.50 26.77
19% 30.26 29.38 28.54 27.75 27.00
20% 30.56 29.66 28.80 28.00 27.24
21% 30.87 29.94 29.07 28.26 27.48
22% 31.17 30.23 29.35 28.52 27.73
Source:CSE, Bloomberg, LOLC SEC Research
Table 05: Peer Comparison
Name
Softlogic Life Insurance Plc (Sri Lanka) 18.80 47.20 9.62 50.06 7.33 6.31 3.47 2.84
Hnb Assurance Plc (Sri Lanka) 56.50 18.92 2.86 16.34 17.58 7.92 1.23 3.54
Aia Insurance Lanka Plc (Sri Lanka) 278.50 57.34 3.38 31.93 16.95 23.00 1.70 -
Ceylinco Insurance Co Plc (Sri Lanka) 1250.00 199.00 3.41 17.72 22.48 8.23 1.38 1.83
Union Assurance Plc (Sri Lanka) 154.50 60.96 3.32 37.51 5.64 8.51 2.86 5.52
Janashakthi Insurance Co Plc (Sri Lanka) 16.10 78.26 4.96 22.23 24.97 5.27 1.09 4.66
Sri Lanka Insurance Sector Average 7.28 1.91 3.02
Fidelity & Guaranty Life (United States) 23.50 1385.42 0.37 5.65 23.42 8.97 0.72 1.11
Tune Protect Group Bhd (Malaysia) 1.41 237.34 7.07 19.19 51.80 12.20 2.22 3.55
Jubilee Life Insurance Co Lt (Pakistan) 550.01 378.40 2.73 2.86 45.06 24.47 0.60 2.45
Bangkok Life Assurance Pcl (Thailand) 54.25 2589.99 2.10 18.81 19.85 17.11 2.88 1.31
Mirae Asset Life Insurance (South Korea) 5290.00 650.85 0.41 6.02 24.84 6.12 0.37 1.04
Panin Financial Tbk Pt (Indonesia) 173.00 414.35 5.36 7.17 22.04 4.50 0.31 -
Source:CSE, Bloomberg, LOLC SEC Research
14 | LOLC Securities Limited 15 | LOLC Securities Limited
Div Yield (%)
Counter is currently trading at a discount to market cap weighted insurance sector average PE of 7.28X and at a
premium to sector PBV of 1.91X.
= 20% (Based on a 7% premium added to avg. life insurance
GWP 5yr CAGR of selected upper-middle income countries)
PBV (X)ROA (%)Price PER (X)Net Assets
Growth-5yrs
(%)
We have used Residual Income (RI) valuation in deriving the valuation for AAIC. Accordingly we estimate total
valuation for the company at LKR 10.8 billion. AAIC’s current book value (as at 30.09.2016) stands at LKR 2.21 billion
and we estimate additional 388% value to be generated from value drivers we have discussed above. The market
(CSE) has priced the company at LKR 7.05 billion which is still at a 53% discount for LOLC SEC valuation. Accordingly,
we value the share at LKR 28.80 and give BUY recommendation. We have taken Cost of Equity at 18.62% which is 7%
premium to 3 year Sri Lanka Govt Treasury Bond Yield.
We have added an illiquidity premium of 2% as the counter is not sufficiently liquid with an average 644 day holding
period. However AAIC should increase its public holding upto 10% from 3% by end of 2016 as per CSE directives on
minimum public holding. Accordingly we expect counter to have more trading volumes from 2017 onwards (refer pg.
30: Recommendation Guidance for calculation criteria of illiquidity risk premium).
We have applied a multi stage RI valuation model and forecasted the long-term residual income (over 6 years) by
applying a persistence factor with the assumption of RI declining to a constant level. We expect company's current
very high ROEs to revert downward in the long run and to maintain a low dividend pay-out for more reinvestments
and thus estimate moderate persistence factor of 0.6.
Sensitivity of valuation for 'Medium Term Growth' and 'Cost of Equity' is indicated below and sensitivity of key
underlying assumptions are evaluated separately in proceeding section.
Share price in LKR
Med
ium
Ter
m
Gro
wth
Rat
e
ROE (%)Market Cap
(USD Mn)
Cost of Equity
Valuation
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Summarised Sensitivity Assumptions
Graph 29: Growth of surplus fund transfer to shareholders: High Graph 30: Real GDP Growth: Medium
Source:LOLC SEC Research Source:LOLC SEC Research
Graph 31: Investment Income Yield: High Graph 32: Insurance Benefits & Claim Expenses: Medium
Source:LOLC SEC Research Source:LOLC SEC Research
Graph 33: Agent Commission Expenses: Medium Graph 34: Renewal Persistency Level: Medium
Source:LOLC SEC Research Source:LOLC SEC Research
Source:CSE, Bloomberg, LOLC SEC Research
15 | LOLC Securities Limited 16 | LOLC Securities Limited
0
5
10
15
20
25
30
35
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Growth forecast of surplus fund transfer to shareholders
-12%+12
20
21
22
23
24
25
26
27
28
29
30
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Real GDP growth forecast
-1.2% +1.2%.
20
22
24
26
28
30
32
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Investment income yield forecast
-3.2%
+3.2%.
20
21
22
23
24
25
26
27
28
29
30
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Insurance benefits & claim expenses forecast
+2%-2%
20
21
22
23
24
25
26
27
28
29
30
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Underwriting and net acquisition cost forecast
-2%
+2%
20
21
22
23
24
25
26
27
28
29
30
-1% 0% +1%
Val
uat
ion
(L
KR
per
sh
are)
Renewal persistency growth forecast
-1%+1%.
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Earnings Risk Comment
Source:LOLC SEC Research
Source:LOLC SEC Research
Graph 35: Movement of Interest rate and investment yield
Source:LOLC SEC Research
Source:Bloomberg, Annual Reports
16 | LOLC Securities Limited 17 | LOLC Securities Limited
If Gvt expands its capacity of free health services and pension programmes for private sector employees which are
currently available only to public sector employees will create a significant threat to the industry as such services may
eliminate the need for pre-paid plans. However with prolonging fiscal issues, such expansion is highly unlikely.
Local life insurance industry is highly vulnerable to credit risk due to high rate of lapses. However AAIC currently
maintains above the industry policy persistency levels (low lapse rate) and also have adopted stringent company
policies to mitigate the credit risk stemming from lapses and surrenders.
Volatility in interest rates creates a significant risk to value of company's financial assets and the liability level. Despite
value of trading bond portfolio to come down and equity becoming less attractive at rising interest rates, local
insurance industry has witnessed otherwise with high investment returns at rising interest rates and vise versa (see
graph: 35). Though AAIC is expected to benefit on prevailing interest rate rise in short term, impact will be more
cyclical with country's economic cycle. However on a negative note, customers may swift towards high yielding
deposits instead of insurance products at high interest rate scenario.
Despite company being reinsured by reputed reinsurers, AAIC could still expose to a liquidity risk of not been able to
settle a bulk of claims which may arise at once due to unexpected disasters such as floods, Tsunamis that have been
frequent in recent times. But strong growth of company's premium base will reduce the dependence on reinsurers and
mitigate the liquidity risk to a certain extent.
AAIC may suffer from reputational risk due to any possible impairment of the corporate image and goodwill created by
an unforeseeable event. As AAIC heavily depending on its parent's brand name "Softlogic", any possible incident that
could negatively affect the Group will be spilled over to AAIC. Further recent corporate name change to 'Softlogic Life'
from 'Asian Alliance Insurance' may lead to a brand dilution negatively affecting its future business growth. However
we expect that such slowdown to be temporally and any negativity to be settled down through an effective brand
building strategy.
In summary, We don't see a much risk of losing a substantial market share of AAIC in short to medium term other than
the impact on bottom-line due to possible regulatory or tax policy change. Therefore with expected growth of the life
insurance industry with low competition, we are confident that AAIC will not run into significant risks in short to
medium term.
The main risk for AAIC
stems from the country
remaining to be at low
per-capita GDP
AAIC’s valuation is dependent on the overall economic growth and increase in per capita income. We have assumed
GDP per capita growth of USD 5200 by 2019 (country will be at upper-middle status) which will gradually result life
insurance penetration to be inline with comparable countries. Thus any broader economic slowdown declining GDP
per capita will diminish the affordability of protection based and savings related insurance products. But even with a
low GDP growth than expected, industry could grow relatively at a higher rate due to low penetration, growing
awareness and pushy sales tactics, while limiting possible industry decline. But continuous upside growth trajectory
will attract new entrants negatively affecting AAIC's earnings.
Changes in regulatory framework or corporate tax policy of insurance industry brings uncertainties for companies'
future plans, impacting topline and bottom-line performance. Despite zero taxable profit currently, any change to the
tax policy will thus have a material impact to earnings. However with recent regulatory changes made through
Insurance Industry Act No.3 of 2011, we would not expect further major changes in short and medium term, benefiting
AAIC to set their direction concretely.
0
2
4
6
8
10
12
14
16
18
20
2008 2009 2010 2011 2012 2013 2014 2015 2016(Trail)
%
Average investment yield of selected insurers Avg 1 yr T-Bill rate
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Appendices
Table 06: Return comparison
3 months -14.93 -2.93 -1.04 -7.83
6 months -3.59 -3.35 3.33 -8.13
YTD 17.50 -8.87 -2.35 -24.26
1 year 17.50 -7.89 -1.61 -19.29Source:CSE, Bloomberg
Graph 36: Share Price Movement
Source:CSE, Bloomberg
Graph 37: AAIC PE Chart Graph 38: AAIC PBV Chart
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 39: AAIC Price per Sales Graph 40: AAIC Dividend Yield
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 41: CSE PE Chart Graph 42: CSE PBV Chart
Source:CSE, Bloomberg Source:CSE, Bloomberg
17 | LOLC Securities Limited 18 | LOLC Securities Limited
HASUS&P SL 20
Index%AAIC ASPI Index
0255075
100
12/14/13 6/14/14 12/14/14 6/14/15 12/14/15 6/14/16 12/14/16
RSI (14)
0
2
4
6
8
10
12
14
12/31/14 6/30/15 12/31/15 6/30/16
PE ratio Highest Average Lowest
0.0
1.0
2.0
3.0
4.0
5.0
6.0
12/14/13 06/14/14 12/14/14 06/14/15 12/14/15 06/14/16 12/14/16
PBV ratio Highest Average Lowest
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
12/31/14 6/30/15 12/31/15 6/30/16
Price to Sales ratio Highest Average Lowest
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
12/14/13 06/14/14 12/14/14 06/14/15 12/14/15 06/14/16 12/14/16
ASI PE ratio Highest Average Lowest
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
12/14/13 6/14/14 12/14/14 6/14/15 12/14/15 6/14/16 12/14/16
ASI PBV ratio Highest Average Lowest
0.0
1.0
2.0
3.0
4.0
5.0
12/31/14 6/30/15 12/31/15 6/30/16
AAIC dividend yield Highest Average Lowest
0
5
10
15
20
25
30
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Rs
Vo
lum
e
Volume Price SMAVG (50) SMAVG (100) Highest price as at 02.08.2016: LKR 23.90Lowest price as at 06.12.2013: LKR 8.00
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Table 07: Financial Summary Forecast
Figures in LKR Mn (31st December) FY 15 FY 16 (9M) FY 16 (E) FY 17 (F) FY 18 (F) FY 19 (F)
Income Statement
Gross Written Premium 5,922 4,146 5,390 7,176 9,503 12,744
Premiums Ceded to Reinsurers (749) (434) (629) (837) (1,013) (1,359)
Net Earned Premium 5,173 3,712 4,761 6,339 8,490 11,385
Other Revenue 1,064 517 1,238 1,903 2,542 3,194
Net Income 6,237 4,230 5,999 8,243 11,032 14,579
Net Insurance Benefits & Claims Paid (1,629) (762) (857) (1,204) (1,698) (2,391)
Underwriting and Net Acquisition Cost (1,149) (1,205) (1,303) (1,735) (2,298) (3,081)
Other Opperating & Admin Ex. (1,599) (1,148) (1,422) (1,838) (2,377) (3,074)
Total Benefits, Claims and Ex. (4,377) (3,116) (3,582) (4,778) (6,373) (8,546)
Change in Insurance Contract - Life Fund (966) (205) (1,086) (2,040) (2,641) (3,193)
Profit Before Taxation 893 909 1,331 1,425 2,019 2,839
Income Tax Reversal / (Expense) 31 - - - - -
Profit/Loss from Discontinued Operations - (310) (310) - - -
Net Profit 924 599 1,021 1,425 2,019 2,839
Balance Sheet
Assets
Cash & Near Cash Items * 224 *3227 99 513 1,096 1,969
Reinsurance and Premium Receivables 673 362 169 220 285 371
Total Investments *** 9,411 8,350 10,595 13,251 16,722 20,933
Deferred Policy Acquisition Costs 126 - - - - -
Net Fixed Assets 519 470 556 723 939 1,221
Other Assets 519 402 566 849 1,274 1,911
Total Assets 11,472 12,809 11,985 15,555 20,316 26,404
Liabilities & Shareholders' Equity
Insurance Contract Liability - Life 6,193 6,491 7,322 9,412 12,145 15,458
Insurance Contract Liabilities - General 1,322 - - - - -
Short Term Borrowings 1,003 839 946 1,136 1,363 1,635
Other short-term liabilities ** 152 **2712 162 211 274 356
Other long term liabilities 579 556 514 617 741 889
Total Liabilities 9,249 10,598 8,945 11,375 14,522 18,338
Share Capital & APIC 1,063 1,063 1,063 1,063 1,063 1,063
Retained Earnings & Other Equity 1,161 1,149 1,977 3,117 4,732 7,004
Total Equity 2,223 2,211 3,040 4,180 5,794 8,066
Total Liabilities & Equity 11,472 12,809 11,985 15,555 20,316 26,404
Source:CSE, Bloomberg, LOLC SEC Estimates
* Cash & Near Cash Items as at 30.09.2016 includes LKR 2965.56 mn 'Assets Held for Sale' which is the total assets of general insurance business to be disposed.
** Short-term liabilities as at 30.09.2016 includes LKR 1945.22 mn 'Liabilities Held for Sale' which is the total liabilities of general business to be disposed.
*** Closing balance of the line item "total investments" as at 31.12.2016 (FY16 E) includes LKR 1266.5 Mn cash proceeds received from the disposal of AAIG.
18 | LOLC Securities Limited 19 | LOLC Securities Limited
Note: AAIC has disposed 100% of its General Insurance business (AAGI) to Fairfax Asia Limited (Union Assurance General Limited) for a consideration of LKR 1266.5 mn which is a value
equivalent to 1.7X of NAV of AAGI. We have factored the impact of divestment on our forecasted financial statements.
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Table 08: Forecast Ratios
FY 15 FY 16 (9M) FY 16 (E) FY 17 (F) FY 18 (F) FY 19 (F)
Life Insurance Industry Ratios
Net Earned Premium Margin 87.4% 88.5% 88.3% 88.3% 89.3% 89.3%
NP Margin 14.8% 19.3% 17.0% 17.3% 18.3% 19.5%
Return on Assets 8.5% 9.1% 8.7% 10.3% 11.3% 12.2%
Return on Common Equity 40.2% 52.6% 38.8% 39.5% 40.5% 41.0%
Net Claims Ratio 31.5% 20.5% 18.0% 19.0% 20.0% 21.0%
Expense Ratio 53.1% 63.4% 57.2% 56.4% 55.1% 54.1%
Combined Ratio 84.6% 83.9% 75.2% 75.4% 75.1% 75.1%
Net Acquisition Cost Ratio 19.4% 29.1% 24.2% 24.2% 24.2% 24.2%
Reinsurance Ratio 12.6% 10.4% 11.7% 11.7% 10.7% 10.7%
Common Equity/Total Assets 19.4% 17.3% 25.4% 26.9% 28.5% 30.5%
Growth Ratios
GWP Growth 27.0% -5.4% -9.0% 33.1% 32.4% 34.1%
Net Earned Premium Growth 24.9% -0.7% -8.0% 33.1% 33.9% 34.1%
Investment Income Growth -45.9% -26.8% 16.3% 53.8% 33.6% 25.6%
Net Income Growth 2.1% -4.9% -3.8% 37.4% 33.8% 32.2%
Claims Growth 5.2% -40.1% -47.4% 40.5% 41.0% 40.8%
Underwriting & Acquisition Cost Growth 37.9% 52.7% 13.4% 33.1% 32.4% 34.1%
Operating & Admin Cost Growth -6.1% -0.3% -11.1% 29.3% 29.3% 29.3%
Earnings (Net Profit) Growth 22.4% 67.0% 10.4% 39.6% 41.7% 40.7%
Earning Assets Growth 20.3% 19.4% 10.5% 19.2% 25.7% 25.6%
Total Assets Growth 11.3% 20.0% 4.5% 29.8% 30.6% 30.0%
Insurance Contract Liability Growth 18.1% 9.0% -2.6% 28.5% 29.0% 27.3%
Net Worth Growth -6.3% 18.6% 36.7% 37.5% 38.6% 39.2%
Investment Ratios
Earnings per share (LKR) 2.01 1.59 2.46 2.72 3.80 5.38
Book value per share (LKR) 6.33 5.90 5.93 8.11 11.15 15.45
PE Ratio (X) 6.48 11.82 7.63 6.91 4.95 3.49
Price to Book Value (X) 2.70 3.19 3.17 2.32 1.69 1.22
Dividend Yield (%) 0.0% 2.6% 2.9% 4.0% 5.7% 8.1%
Source:CSE, Bloomberg, LOLC SEC Estimates
Table 09: Dividend ForecastSource:CSE, Bloomberg, LOLC SEC Estimates FY Frequency Declared Date XD Date Type Amount (LKR)
2010 Final 2/15/2011 3/28/2011 Cash 3.00
2011 Final 2/22/2012 3/27/2012 Cash 2.00
2013 Final 2/17/2014 2/26/2014 Cash 4.80
2014 Interim 11/14/2014 11/25/2014 Cash 5.00
Final 2/13/2015 2/25/2015 Cash 5.00
2016 Interim 9/7/2016 9/20/2016 Cash 0.48
2016 (E) Final Feb-March 2017 Feb-March 2017 Cash 0.06
2017 (F) Interim Sep-Oct 2017 Sep-Oct 2017 Cash 0.50
Final Feb-March 2018 Feb-March 2018 Cash 0.26
2018 (F) Interim Sep-Oct 2018 Sep-Oct 2018 Cash 0.50
Final Feb-March 2019 Feb-March 2019 Cash 0.58
2019 (F) Interim Sep-Oct 2019 Sep-Oct 2019 Cash 0.50
Final Feb-March 2020 Feb-March 2020 Cash 1.01Source:CSE, LOLC SEC Estimates
19 | LOLC Securities Limited 20 | LOLC Securities Limited
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Company
Source:CSE, Bloomberg, LOLC SEC Estimates
* DEG - Deutsche Investitions-und Entwicklungsgsellschaft mbH of Germany
* FMO - Nethelands Financeirings - Maatschappij voor Ontwikkelingslanden N.V of Netherlands Source:Annual Report
Source:Annual Report
20 | LOLC Securities Limited 21 | LOLC Securities Limited
Company History
Ownership Structure
Softlogic Life Insurance PLC (earlier Asian Alliance Insurance PLC (AAIC)) is a fast growing life insurance solution
provider and has reached amongst top six life insurers within a period of 16 years. AAIC holds the 5th place with 8%
market share of total GWP and 6th place by total assets by 2015. It used to operate as a composite insurance solution
provider and since October 2016 it operates as a life insurance service provider after the divestment of its General
Insurance business to Fairfax Asia Limited for LKR 1266.5 Mn. The company's growth has been accelerated after
Softlogic Group, a leading conglomerate in the country acquiring 59% stake in 2011. AAIC records a market
capitalisation of LKR 7050 million amongst 7 listed insurance companies in the Colombo Stock Exchange.
Softlogic Capital PLC
59%
Softlogic Holdings
PLC 74%
AAIC
DEG* 19%
FMO* 19%
Public 3%
Companyincorporation with non life insurance operations
Company unveils USD 1Mn Health Cover an all-time first by a Sri Lankan insurance company
Life business acquired the 5th position in the market surpassing atraditional market leader
Acquisition of the company by Softlogic Group a diversified conglomerate in strategic growth sectors
Commencement of life insurance operations
Company declared bonus for the first time for life policy holders
LIFE GWP reached LKR 1 bn mark
Acquisition of company shares by Development Financial Institutions, DEG and FMO
Companysegregated Life and General Insurance operations
Introduction of new innovation such as DRIVE THRU insurance & 365 DAY INSURANCE for the 1st time in Sri Lanka
1999 2000 2005 2009 2011 2012 2013 2014 2015 2016
Divestment of its general insurance business to Fairfax Asia Limited for a consideration of LKR 1.26 Bn in October 2016
Company name was changed to "Softlogic Life PLC"
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
AAIC Shareholding Distribution - (as at 30.09.2016)
Softlogic Capital Ltd - 9/30/2016 59.19 Sri Lanka
Nederlandse Financierings-Maa 71,250,000 - 9/30/2016 19 Netherlands
State Street Munich 71,250,000 - 9/30/2016 19 Germany
Sandwave Limited 1,428,889 - 9/30/2016 0.38 Sri Lanka
Palihena S N P 1,000,000 - 9/30/2016 0.27 Sri Lanka
Goonetilleke G C 775,500 - 9/30/2016 0.21 Sri Lanka
Ananda Rajapaksha 615,950 - 9/30/2016 0.16 Sri Lanka
United Motors Lanka PLC 394,030 - 9/30/2016 0.11 Sri Lanka
Wickramarathne Don S J 350,000 +30,000 9/30/2016 0.09 Sri Lanka
Ekanayaka Nahimala 205,000 - 9/30/2016 0.05 Sri Lanka
D M P Dissanayake 200,003 9/30/2016 0.05 Sri Lanka
Kumara G H S 200,000 - 9/30/2016 0.05 Sri Lanka
Softlogic Holdings Plc 175,550 - 9/30/2016 0.05 Sri Lanka
Wafi M Z M 156,190 - 9/30/2016 0.04 n/a
Md Fuad Mushtaq 141,251 +17,663 9/30/2016 0.04 n/a
Mrs. Hanifa 123,237 - 9/30/2016 0.03 n/a
Mr. Kandegedara 101,000 - 9/30/2016 0.03 Sri Lanka
Union Investment 100,000 - 9/30/2016 0.03 Sri Lanka
Gunathunga Edgar 100,000 - 9/30/2016 0.03 Sri Lanka
Elgin Investments Ltd - -123,247 9/30/2016 Switzerland
Total 370,519,410 98.81Source: Bloomberg
Graph 43: Shareholder Structure-Domain (as at 31.12.2015) Graph 44: Shareholder Structure-Institution type (as at 31.12.2015)
Source:Annual Report Source:Annual Report
21 | LOLC Securities Limited 22 | LOLC Securities Limited
Corporation
Investor
Investor
Investor
Investor
Investor
Corporation
221,952,810 Holding Company
Corporation
Investment Advisor
Investment Advisor
Last Qtr.
Position
Change
Filing Date % Institution Type Country# of SharesShareholder
Investor
Investor
Investor
Other
AAIC is controlled by Softlogic Group owned by Mr. Ashok Pathirage etel. Softlogic Group exerts significant influence
on AAIC and recently name was changed to 'Softlogic Life Insurance' bringing AAIC under Softlogic brand umbrella.
Softlogic represents 7 board seats of the company. AAIC has 6 non-executive directors and 5 independent non-
executive directors. Board represents sufficient independence and non-executive director representation to
strengthen the corporate governance. Further board representation of two foreign strategic partners limits the
absolute control Softlogic Group has over AAIC, strengthening the case for Minority investors.
In LMD ranking for 2016, AAIC has been ranked just below the two insurance giants 'Sri Lanka Insurance' and
'Ceylinco' while its parent "Softlogic Holdings" has been amongst top 20 most respected entities. Recognising its
excellence in financial reporting, company was awarded the Gold Award in the insurance category for its annual report
at CA annual report awards 2016. AAIC operations are subjected to regulations of various governing bodies including
Insurance Board of Sri Lanka, CBSL, CSE & SEC.
Corporate Governance Structure
Investor
Investor
Investor
Investor
Bank
62%
38%
Local Foreign
2%
98%
Individual Institutional
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Key Management of AAIC
Name & Designation
Graph 45: Composition of the Board
Source:Annual Report 2015
22 | LOLC Securities Limited 23 | LOLC Securities Limited
Jatinder Mukhi
Independent Non-Executive
Director
Profile
Johannes Richters
Independent Non-Executive
Director
Mr. Johannes W. H. Richters has garnered international management experience in markets as varied
as South America, the Caribbean and Asia. He holds a Masters Degree in Law from the Free University
of Amsterdam and underwent further corporate management training at ING Insurance, Netherlands.
He has functioned as Chairman and CEO of ING Mexico and CEO and Managing Director of ING
Argentina in the past. He has almost 40 years experience in the global insurance field and is affiliated to
government committees in Suriname and other global insurance bodies.
Mr. Jatinder Mukhi is currently the CEO of Asia Insurance 1950 Pte Ltd.,a fully registered Insurance
Company in Thailand, dealing mainly in Non-Life Insurance. He has spent the whole of his working
career in the Insurance industry and has over 40 years of Insurance experience of which 20 years have
been in Asia. He has provided advice to insurance companies in Asia in order to improve operations
and sales distribution.
Sujeewa Rajapakshe
Independent Non-Executive
Director
A Fellow of the Institute of Chartered Accountants of Sri Lanka and the Society of Certified
Management Accountants of Sri Lanka, Mr. Sujeewa Rajapakse is the Managing Partner of BDO
Partners a Firm of Chartered Accountants. He holds a MBA from the Postgraduate Institute of
Management, University of Sri Jayewardenepura. Mr. Rajapakse is a Past President of the Institute of
Chartered Accountants of Sri Lanka. He was the Technical Advisor of the South Asian Federation of
Accountants (SAFA). Ray Abeywardena
Independent Non-Executive
Director
Mr. Abeywardena holds an MBA from the University of Wales and a Post Graduate Diploma in
Marketing from the Chartered Institute of Marketing, UK (CIM). He serves as the Group Managing
Director/ CEO of Acuity Partners (Pvt) Ltd; a Joint Venture Investment Banking firm equally owned by
the DFCC Bank and Hatton National Bank PLC. He has over 29 years of work experience in the Capital
markets in Sri Lanka, of which 23 years were spent in stockbroking.
Mr. Iftikar Ahamed was appointed Managing Director of Asian Alliance Insurance PLC in January 2014.
He counts over 30 years of experience in a wide range of métiers within the financial services industry
and has extensive banking experience both in Sri Lanka and overseas, having held senior management
positions as Deputy Chief Executive Officer at Nations Trust Bank PLC and Senior Associate Director at
Deutsche Bank AG. He holds an MBA from University of Wales, UK.
Iftikar Ahamed
Managing Director
Paul Rathnayake
Deputy Chairman/
Independent Non-Executive
Director
Mr. Paul Ratnayeke is a leading commercial lawyer and a Senior Partner and Founder of Paul
Ratnayeke Associates, an established law firm in Sri Lanka. He graduated with Honours from the
University of Ceylon (Colombo) and has also been awarded a Masters Degree in Law by the University
of London. He is a Solicitor of the Supreme Court of England and Wales and an Attorney-at-Law of the
Supreme Court of Sri Lanka. Currently, he holds directorships in several companies, in some of which
he has been appointed Deputy Chairman or Chairman.
Mr. Pathirage is one of the co-founders of Softlogic and was appointed Chairman of Softlogic in 2000.
He serves as Chairman/ Managing Director of the Asiri Hospital chain, Softlogic Capital PLC, Softlogic
Finance PLC, Asian Alliance Insurance PLC and Odel PLC, all listed entities, in addition to the private
companies of the group operating in Leisure & Restaurants, Retail, Automobile and ICT industries. He
is Deputy Chairman of the National Development Bank PLC and Chairman of NDB Capital Holdings PLC.
Considering his wealth of business acumen and corporate leadership, he is one of the leading business
leaders in the country.
Ashok Pathirage
Chairman/Non-Executive
Director
1
1
5
Executive DirectorsNon-Executive DirectorsIndependent Non-Executive Directors
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Life Insurance Industry Sri Lanka
Graph 46: Life insurance industry asset growth at 17% CAGR Graph 47: Life insurance GWP records 11% CAGR for 7 years
Source:IBSL Annual Report Source:IBSL Annual Report
Graph 48: Insurance industry breakdown
Source: IBSL
23 | LOLC Securities Limited 24 | LOLC Securities Limited
Insurance business in Sri Lanka commenced with the introduction of commodities such as coffee and tea during the
period of British rule. After passing the Companies Act of 1938, the first Sri Lankan Insurance company the "Ceylon
Insurance company Ltd" was established which was followed by many like Oriental Life Insurance Co., Pearl Assurance
Co., etc. Subsequently, the Insurance industry was nationalized in line with the prevailing economic policy of the
Government in 1961 and the Sri Lanka Insurance Corporation (ICSL) was set up as the sole authorized Insurer to
transact Life insurance business initially and from 1964 both Life & General Insurance. After over 20 years of industry
monopoly by ICSL, in 1986 the amendment of the Control of Insurance Act No.25 of 1962 opened doors for the private
sector to venture into the field of insurance.
History
Today, country has LKR 465 billion insurance industry in terms of total assets while life insurance industry accounts
LKR 306 billion (65%). 12 insurers solely operate in life insurance business along with another 3 composite insurers
including ICSL. Government's direction on regulating the industry was prominent in recent times with the introduction
of Insurance Industry Act No.43 of 2000 which led the creation of the Insurance Board of Sri Lanka as the regulator
and supervisory body of the Insurance industry. Landmark changes were introduced to the industry in the year of
2011 with the passing of the amendment to the Regulation of Insurance Industry Act No.3 of 2011. Accordingly most of
the composite insurers were segregated to separate life and general insurance companies and became listed.
Accordingly 7 insurers are currently listed in CSE.
Industry size and growth
Insurance Sector
Insurance brokers
57
General
18
Long Term & General
39
Insurance Agents
45,429
Insurance Companies
28
Composite
03
Long term
12
General Insurance
13
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
2009 2010 2011 2012 2013 2014 2015
LK
R B
illi
on
s
Life Insurance GWP (LHS) YoY Growth
0
50
100
150
200
250
300
350
2009 2010 2011 2012 2013 2014 2015
LK
R B
illi
on
s
Total life insurance assets
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Life Insurance Industry Sri Lanka (cont…)
Graph 49: GDP per capita growth and life insurance penetration
Source:CBSL, IBSL, Swiss Re, LOLC SEC Estimates
Source:IBSL Annual Report
Graph 50: Company wise market share of GWP - 2015 Table 10: Key industry ratios2014 2015
Source:IBSL Annual Report Source:CBSL, IBSL, LOLC SEC Research
24 | LOLC Securities Limited 25 | LOLC Securities Limited
Accordingly, we expect key industry drivers such as rising per capita GDP, steady rising in people living in urban
areas and greater complexity of their lifestyle needs, and growing awareness of the benefits of, and need for
insurance to augur well with the industry growth. However, country's disposable income levels remain relatively
low despite steady growth, which in our view could not still conveniently absorb additional recurrent expenses as
insurance premiums. Further, free health services and pension programs available for public sector employees
eliminate the need for certain insurance products. However, we are optimistic of the industry growth along with
country moving towards upper-middle income status and expect 21% GWP CAGR for next four years.
New isurance policies lapsed as % of new
policies issued
100.1%
19.0%
GWP YoY Growth
Solvency Margin ratio
Total investment yield 11.7%
Claim ratio
Return on Assets (ROA) 1.9%
Combined ratio
Life insurance industry in Sri Lanka saw a rapid growth in recent times based on Income level growth, increase in
urbanization rate and urban living along with aggressive promotional campaigns and innovative product offerings
carried out by insurers. Despite this recent strong growth momentum, industry is still heavily underpenetrated
compared to regional peers giving it a space for a firm growth. Gvt's focus on strengthening regulatory
environment has also helped improving public confidence towards the industry.
48.4%
9.7%
20.1%
97.1%
40.7%
96.2%
7.0%
Industry consolidation
9.5%
7.6%
14.2%
2.7%
86.5%
Retention ratio
Despite industry being crowded with 15 life insurers, it is dominated by 5 large players (CINS, SLIC, CTCE, UAL &
AAIC) covering 80% of industry insurance premium recorded in 2015. While two leading players 'Sri Lanka
Insurance' and 'Ceylinco Insurance' holding a significant market share due to their long history in the market, new
players like AAIC and HASU have been very successful in gaining market share through aggressive pricing and
product innovation along with strong sales force. With regulatory changes, industry is looking for a consolidation
where established insurers tend to expand their profitable life businesses through mergers & acquisitions
compared to loss making general insurance businesses due to intense price competition and high claim ratio.
According we expect more consolidated, transparent and properly governed industry in medium to long term and
thereby improving policy holder protection.
Growth prospects and
challenges
Key industry drivers
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0
1000
2000
3000
4000
5000
6000
2009 2010 2011 2012 2013 2014 2015 2019 (F)
US
D
GDP per capita (LHS) Life premium as % of GDP (RHS)
8%
16%
25%
13%
19%
19%
AAIC
CTCE
CINS
UAL
SLIC
Other
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Life Insurance Industry Sri Lanka (cont…)
Graph 51: Distribution channels' contribution to GWP Graph 52: Global bancassurance contribution to GWP
Source: IBSL Source: IBSL, AAIC Annual Report
Source:CBSL, IBSL, Swiss Re, LOLC SEC Estimates
Graph 53: Asset concentration of life insurance business
Source:CBSL, IBSL, LOLC SEC Research Source: IBSL
25 | LOLC Securities Limited 26 | LOLC Securities Limited
Main distribution channel adopted by long term (life) insurers to reach their customers is the insurance agent. Over
last 5 years, more than 90% of life insurance GWP was generated by such agents reflecting their dominance in the
industry. Thus, insurers have incurred substantial expenses as acquisition costs (agent commissions) and training &
development to reduce high agent turnover rates (avg. 50%-60%). Insurers generally pay out 19% of annual Net
Earned Premium as their agents' commission. However to mitigate the dependence on them, direct marketing and
bancassurance are currently being given prominence by insurers. But bancassurance is yet underutilised compared to
other regions of the world despite a strong banking sector. Sri Lankan commercial bank branch density (18 branches
per 100,000 people) is much greater than its peers and therefore insurers can conveniently utilise the same to boost
premiums and reduce acquisition costs.
Financial assets of Sri Lankan life insurance industry are mainly invested in three forms of instruments: Gvt securities,
listed equities and corporate debentures. Due to regulatory requirement of investing minimum 30% of life insurance
fund in Gvt securities, average 48% of life fund assets of insurers have currently been invested in Gvt securities.
However due to significant and frequent fluctuation of country's interest rates, insurers' investment allocations and
returns based on fixed income securities are volatile, making their investment returns uncertain to cover long term
liabilities as opposed to typical insurance funds generating stable and high returns.
In the context of equity, exposure accounts about 13% of life assets. Most of the insurers have been benefiting on
strong stock market performance during immediate post-war period, however turned into low returns in last two
years due to the slowdown of global and local equity markets. Investment in corporate debt market also saw a gradual
growth since 2013 due to tax benefit, but with removal of tax exemptions from budget 2017, investment allocations
and returns are likely to be reduced, negatively impacting insurers.
Distribution channels
Asset concentration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014 2015
Agents Brokers Direct Bancassurance Other
46%
32%
25%
8%
Asia Europe America Sri Lanka
0%
2%
4%
6%
8%
10%
12%
14%
0
20000
40000
60000
80000
100000
120000
140000
160000
2010 2011 2012 2013 2014 2015
1 y
r T
-Bil
l R
ate
Fin
anci
al A
sset
s L
KR
Mn
Gvt Debt securities Equities Corporate Debt Deposits Other 1 yr T-Bill rates
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Life Insurance Industry Sri Lanka (cont…) - Regulatory Environment
Source: IBSL, AAIC Annual Report
Source:Annual Report, IBSL
26 | LOLC Securities Limited 27 | LOLC Securities Limited
CSE rule on minimum
public holding
CSE requires companies listed in Diri
Savi board to increase its public
holding carrying voting rights to 7.5%
if company's float adjusted market cap
exceeds LKR 1bn and if not 10% by
end of December 2016.
AAIC's public float adjusted market
cap is below LKR 1 bn and it should be
increased to 10% by end of 2016.
Other insurance companies listed in
Diri Savi board maintain above 10%
public float
Claim settlement Direction #6(A) issued by IBSL
requires insurance companies to settle
claims within 14 days of the quantum
being established and receipts of the
discharge documents from the
claimant.
AAIC complies with this and has a
process to make settlements advanced
to this stipulated period
Most of life insurers seem to be
complied with the guideline.
Amendment of Act no. 3 of 2011
mandated the compulsory listing of
insurance companies. Accordingly, a
new insurance company will be
permitted to carry on, only one class of
insurance business and such company
will have to list itself in CSE under SEC
Act no.36 of 1987 within a period of 3
years from the date of registration as
an insurer.
However exemptions have been
granted if- company is foreign owned
and its parent company is listed on a
foreign stock exchange or parent
company of a local insurer is listed on
the CSE
AAIC operates as a listed entityListing of insurance
companies
Regulation
Accordingly following companies are
yet to be listed:
-Corporative Insurance
-MBSL Insurance
-Orient Insurance
-Sanasa Rakshana
-Sri Lanka Insurance Corporation-
Exception has been given for SLIC for
listing requirement
-National Insurance Trust Fund - This
is a Gvt owned reinsurance fund for
long term insurance and thus exception
will be given for listing
-MBSL Insurance - Company is
currently planning to divest 84.12%
shareholding and seeking for investors
Description Industry ContextCompliance of AAIC
Segregation of composite
company
Risk Based Capital (RBC) This is a mandatory requirement and
all insurance companies should follow
RBC framework
3 insurance companies are yet to
segregate their life and non-life
business: MBSL Insurance, Sanasa
Rakshana Samagama and SLIC (SLIC
has exemption by IBSL)
AAIC follows the RBC from stipulated
time line
From 1 Jan 2015, AAIC's General
Insurance was transferred to wholly
owned subsidiary Asian Alliance
General Insurance Limited (AAGI)
Companies carrying both classes of
insurance businesses were required to
segregate their businesses into two
separate companies by 2015
From 1 Jan 2016, solvency framework
was replaced by RBC and all insurance
companies are required to report their
capital adequacy to IBSL under RBC
framework quarterly
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
SWOT Analysis
Strenghts- Strong brandname of the Group and well known across the country- High profitability and growth over peers- Group synergises stemming from Softlogic Group as a leading conglomerate in the country- Presence of foreign funding partners who could bring financing, technical and market knowledge- Strong leadership where Chairman being a prominent entrepreneur and capital market expert
Weaknesses- Relatively high sales commission and operational expenses- Low product diversity compared to industry leaders- Heavy reliance on insurance agents- Low number of branches relative to industry leaders
Opportunites- Steady growth of personal income levels- Low penetration of Life insurance industry- Increasing ageing population providing greater demand for life insurance- Increasing usage of online insurance solution enabling a greater customer reach and operational cost reduction- Insurance sector consolidation could drive for inorganic growth- Increase in urbanisation rate and greater complexities in life style creating demand for life insurance
Threats- Escalating interest rates making substitutes such as banking products more competitive and attractive- High exit barrier due to regulated industry- Steady industry growth attracting new entrants- Equity market crashes
Source:Annual Report, IBSL
27 | LOLC Securities Limited 28 | LOLC Securities Limited
Industry Analysis
• Reinsurance partners are key suppliers in insurance industry and they exercise significant power as most of them are multinational firms. However large no. of reinsurance providers are available which will reduce their bargaining power
• No alternative solution for reinsurance exists in the industry
Bargaining power of suppliers
(Moderate)
• Switching cost is high in life insurance as there is no surrender value for first 3 years and surrender charges are significant
• Fair product differentiation leads customers to stick with the product• Life policy holders are individual customers and their capacity to
purchase is low
Bargaining power of policy holders
(Low)
• Less substitution options are available for life insurance (ex: pension, savings products, in-house management of health insurance funds)
Threat from substitutes
(Moderate)
• LKR 500 mn minimum capital and registration requirement from IBSL will create barrier for new entrants
Threat of new entrants
(Moderate)
• Life insurance industry is underpenetrated and demand for such products grow as much as the disposal income and ageing population enabling companies to exploit a large market share
• Availability of fairly differentiated products will soften the competition
Existing Rivalry
(Low)
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Insurance Industry Definitions
Net Written Premium (NWP) = Gross Written premium less deductions for commissions and ceded reinsurance.
Policy lapses - This is the termination of policies due to non-payment of premiums
Policy surrenders - Surrenders relates to the voluntary termination of policies by policy holders
Claim ratio - This is the % of total amount payable under a contract of insurance arising from the occurrence of an insured event to the total premium earned from policy holders.
Maturity - The time at which payment of the sum insured under a life policy falls due to at the end of its term.
Life fund - This is Net Assets kept to meet the obligation towards life policy holders.
Reinsurance - This refers the transfer of all or part of the risk assumed by an insurer under one or more insurances to another insurer, called the reinsurer.
Retention ratio - That part of the risk assumed which the insurer/reinsurer does not reinsurer/retroced
Broker - A sale and service representative who handles insurance for clients, generally selling insurance of various kinds and for several companies.
Endowment - Life insurance payable to the policy holder if living on the maturity date stated in the policy or to a beneficiary if the insured dies before the date.
Commission - The part of an insurance premium paid by the insurer to an agent or broker for his services in procuring and servicing the insurance.
28 | LOLC Securities Limited 29 | LOLC Securities Limited
Combined Ratio - This is a measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. The combined ratio is calculated by taking the
sum of incurred losses including claim and acquisition costs and admin. expenses and then dividing them by earned premium.
Expense ratio - This is a measure of profitability calculated by dividing the expenses associated with acquiring, underwriting and servicing premiums by the net premiums earned by the
insurance
Underwriting - This is a term used by life insurers to describe the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual
concerned. People with the same or similar risk pay the same or similar premium rates.
Risk-based capital - This is a method to measure the minimum amount of capital that an insurance company needs to support its overall business operations. Risk-based capital is used to
set capital requirements considering the size and degree of risk taken by the insurer.
Composite insurer - It refers to an insurance company which sells both casualty insurance and life insurance against damage to household contents, automobiles, and travel plans
Liability Adequacy Test (LAT) = This is used to measure whether recognised life insurance liabilities are adequate. The liability value is adjusted to the extent that it is insufficient to meet
future benefits and expenses. Any deficiency shall be recognised in the Income Statement by setting up a provision for liability adequacy.
Acquisition Expenses - All expenses, which vary with, and are primarily related to, the acquisition of new insurance contracts and the renewal of existing insurance contracts (eg:
commissions)
Gross Written Premium (GWP) = The total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. This includes additional
and/or return premiums. Written does not imply collected, but the gross policy premium to be collected as of the issue date of the policy, regardless of the payment plan.
Solvency Margin = This ration reflects an insurance company's ability to meet the obligations arising from its insurance contracts. Insurance regulation requires all insurance companies to
maintain a minimum solvency margin for each class of insurance business any time.
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
Recommendation Guidance
LOLC SEC Valuation
BUY – expected return > 10% in excess of benchmark return
SELL – expected return less than benchmark return
HOLD – expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years
12 months target price (12M Tgt Price) is based on the expected capital appreciation of the share excluding dividend.
Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.
Risk Level Evaluation
High: Maximum price volatility to be up or down more than 50% monthly
Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.
Financial Glossary / Acronyms
EPS = Earnings per Share AAIC = Softlogic Life Insurance PLC LHS = Left Hand Side
ROA = Return on Assets (net profit/average total assets) CTCE = AIA Insurance Lanka PLC RSH = Right Hand Side
ROE = Return on Equity (net profit/average total equity) HASU = HNB Assurance PLC Opex = Operational Expenditure
CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1) UAL = Union Assurance PLC Capex = Capital Expenditure
GP= Gross Profit JINS = Janashakthi Insurance Company PLC LOLC SEC = LOLC Securities Ltd.
EBITDA= Earnings before interest, tax, depreciation and amortization CINS = Ceylinco Insurance PLC
PBT= Profit before tax SLIC = Sri Lanka Insurance Corporation
PAT= Profit after tax IBSL = Insurance Board, Sri Lanka
NP= Net Profit CBSL = Central Bank, Sri Lanka
PBV= Price to book value ratio SEC = Securities & Exchange Commision
PE= Price to earnings ratio CSE = Colombo Stock Exchange
Illiquidity Risk Premium
Average Time Between Liquidity Events (or Average Turnover) Illiquidity Risk Premium
10 Years 6.0%
5 Years 4.3%
2 Years 2.0%
1 Years 0.9%
1/2 Years 0.7%
Continuous Trading 0.0%
29 | LOLC Securities Limited 30 | LOLC Securities Limited
Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the views
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Illiquidity Risk Premium calculates how much does an investor need to be compensated for the average duration of the investor's possession after making buy/sell decision. Illiquidity Risk
Premium has been calculated by considering 6 months CSE Average Daily Turnover and Company Average Daily Turnover and allocating appropriate illiquidity risk premium as per the
following schedule.
Initiation Coverage: Softlogic Life Insurance PLC | 15 December 16
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