12 th December 2018 Sri Lankan Insurance Sector R e s i l i e n t g r o w t h t o c o n t i n u e a m i d s t c h a l l e n g e s Analysts: Gayan Rajakaruna, Sahan Rathnayake Tel: +94 11 588 9889 email: research@lolcsecurities.com
Executive Summary Insurance industry in Sri Lanka (SL) still remains at early stages of the life cycle despite promising growth performances in recent years. The industry is mainly twofold, Life Insurance and General Insurance (Non- Life) where we expect Life sector to proliferate rapidly in terms of GWP growth while Non-Life sector GWP growth is expected to remain moderate in the medium to long term. Favorable outlook for Life sector while growth in Health insurance to boost Non-Life sector. Significant under penetration relative to regional peer countries coupled with favorable demographic factors are expected to fuel the growth of Life business. However, factors such as public sector pension schemes, sluggish real wage growth and the public consensus that Life insurance is a non-necessity (causing lack of persistency) along with historical growth rates were considered in downgrading the Life Insurance growth to a 3 year CAGR of 15% (previously estimated at 21%). Comparatively, we forecast a lesser upside for General insurance due to expected slowdown in the motor segment with recently revised vehicle duties and other vehicle import restrictions which will lead to a decline in new vehicle registrations. Health insurance is expected to lead the Non-Life sector in terms of GWP growth, driven by rising health spend in the country stimulated by increased health awareness. Thus, we expect GWP CAGR to be 12% over the next 3 years and reach LKR 129Bn in 2020. Nevertheless, this is an upgrade from the previous CAGR forecast of 9%. Although demographic and other fundamentals are in favor of the Life industry, we believe that surpassing Non-Life sector in terms of absolute GWP value is more of a long term phenomenon due to strong growth in Health segment and the presence of mandatory Motor insurance. Page: 02
Executive Summary Health, Marine and Fire insurance segments remain relatively unexploited as opposed to Motor Vehicle insurance in the Non-Life sector. Health segment GWP grew at 46% in 2017 with high growth potential in the up coming years. Our Insurance sector picks in the Colombo bourse are HASU and PINS. Insurance industry is yet to realize its full potential which is depicted by PBVs lower than peer average levels and therefore, provides a strong investment case. However, the negative sentiment prevalent in the Sri Lankan equity market at present has also affected the industry price multiples. Insurance industry has been active in M&A space with several transactions taking place at higher pricing in recent times, reflecting its future potential. However, the new inland revenue act (April 2018) will impact the earnings of Life industry with the revision of the taxable profit calculation methodology. Profits of Non-Life industry largely depends on investment income with GWP being squeezed by high combined ratios. In our view, there exist a favourable outlook for the Life sector while growth in Health insurance to boost Non-Life sector. Hence, SL insurance industry is expected to grow at a 3 year CAGR of 13% to reach a GWP of LKR 238Bn by 2020 ( we expect Life and Non-Life contribution to total GWP to stand at 46% and 54% respectively by 2020. (currently 43% to 57%). Our insurance sector top picks in the Colombo bourse are HASU and PINS. We have dropped AAIC which was in our top picks in the previous report. Page: 03
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