Initiation Coverage · 2017. 2. 27. · Initiation Coverage: Softlogic Life Insurance PLC | 15...

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: 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 1743 40 43

1685

316210 215

987

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0.0%

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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%

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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


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

ColombiaVietnamGreeceMexico

LebanonMoroccoKenya

PolandIndonesiaHungary

PhilippinesMacao

CyprusChinaBrazil

IndiaIsrael

GermanyChileUnited StatesCanada

Malaysia AustraliaThailand 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

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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


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


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

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1981 2001 2012 2021 2031 (F) 2041 (F)

%

0

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2004 2005 2006 2007 2008 2009 2010 2011* 2012 2013 2014*

GD

P P

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apit

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SD)

Nu

mb

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f d

eath

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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


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


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.


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


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


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


Annualised new business premium CAGR-6 yrs

Average CAGR - 6 yrs


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



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%

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15.0%

-

10,000

20,000

30,000

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50,000

60,000

70,000

80,000

90,000

100,000


LK

R

Avg premium per new policy issued (LHS) Annual growth of new policies issued (RHS)


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


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%

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50%

60%

70%

80%

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2010 2011 2012 2013 2014 2015

Cla

im R

atio

AAIC CTCE CINS HASU

UAL JINS SLIC


Aggressive business model to create a competitive advantage (cont…)

Source: Annual Reports, IBSL, LOLC SEC Estimates Source: Annual Reports, IBSL, LOLC SEC Estimates



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%

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140%

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170%

2010 2011 2012 2013 2014 2015

Co

mb

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Rat

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AAIC CTCE CINS HASU

UAL JINS SLIC


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


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


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



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


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


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%


2013 2014 2015 Average

0%

5%

10%

15%

20%

25%


2014 2015 Average


High profitability to continue on aggressive business strategy (cont…)

Graph 27: AAIC's low solvency reflecting aggressive business model





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)


Regulatory requirement = 1


Strength in Group's value chain to benefit AAIC

Graph 28: Out of pocket expenditure vs. private prepaid plans


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


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


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


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 -



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


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


Graph 33: Agent Commission Expenses: Medium Graph 34: Renewal Persistency Level: Medium




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%.


Earnings Risk Comment

Source:LOLC SEC Research


Graph 35: Movement of Interest rate and investment yield


Source:Bloomberg, Annual Reports


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


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


Graph 41: CSE PE Chart Graph 42: CSE PBV Chart



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


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.


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.


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%


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


Final Feb-March 2019 Feb-March 2019 Cash 0.58


Final Feb-March 2020 Feb-March 2020 Cash 1.01Source:CSE, LOLC SEC Estimates



Company


* DEG - Deutsche Investitions-und Entwicklungsgsellschaft mbH of Germany

* FMO - Nethelands Financeirings - Maatschappij voor Ontwikkelingslanden N.V of Netherlands Source:Annual Report

Source:Annual Report


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"


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


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


Key Management of AAIC

Name & Designation

Graph 45: Composition of the Board

Source:Annual Report 2015


Jatinder Mukhi

Independent Non-Executive

Director

Profile

Johannes Richters


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


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


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/


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


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


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


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


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


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


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


Life Insurance Industry Sri Lanka (cont…) - Regulatory Environment

Source: IBSL, AAIC Annual Report

Source:Annual Report, IBSL


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 20

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