Lankan insurance industry to see more M&As - Fitch

Sri Lanka’s overcrowded insurance sector will see market-driven consolidation by way of mergers and acquisitions (M&As) during the next few years as insurers will work towards getting rid of their less profitable non-life businesses, a top rating agency said. According to Fitch Ratings, Sri Lanka’s insurers which have non-life business subsidiaries and the few remaining composite insurers will divest their nonlife businesses as the sector is facing intense competition.

“Fitch sees expected market consolidation in the medium-and long-term as positive, due to the high number of insurers in Sri Lanka,” Fitch said in a recent note on Sri Lanka’s insurance market released last week. Therefore the rating agency expects the industry to concentrate on the more profitable life segment, going forward. It also appears that the duplication of running costs post-segregation since 2015 and the compliance with enhanced minimum regulatory capital requirements are making little financial sense for insurers to engage in business in a highly fragmented market. During the last 18-months alone witnessed three such deals—selling off of non-life units by three insurers. In 2015, Union Assurance PLC divested 78 percent stake in its general business unit, Union Assurance General Limited, to Fairfax Asia Limited for a total consideration of Rs.3.66 billion soon after the group’s general insurance business was spun off in compliance to the regulatory requirement. Thereafter, in October 2015, AIA Insurance Lanka PLC divested its general insurance subsidiary, AIA General Insurance Lanka Limited, in a deal worth Rs.3.2 billion to Janashakthi.

The latest such deal was Softlogic group’s Asian Alliance General Limited being divested to Fairfax Asia for Rs.1.27 billion. Sri Lanka’s insurance market is overcrowded with 30 companies operating at present – 12 life insurers, 15 non-life insurers and 3 composite insurers. Another new local life insurer has also applied for license and waiting to open shop. Meanwhile, the rating agency also sees several insurers to take their companies public during the remainder of 2016 as well as in 2017. According to the regulatory guidelines all composite insurers in Sri Lanka were to split their businesses into life and non-life units by January 2015 and list the companies separately by 2016. However the process is happening at snail pace as so far only one such company—Amana Takaful Life Limited— announced a listing on July 21 via a Rs.75 million-Initial Public Offering. Despite the regulatory deadline was long overdue, there are still three composite insurers to segregate their businesses.

Further delays are also expected in listing some of the segregated companies, Fitch said. Commenting on the sector profitability, Fitch said the higher interest rates would support higher investment income in the second half of 2016 as a section of assets is mandated to invest in gilt-edged securities. Sri Lanka’s life insurance penetration is woefully low at 0.5 percent of the gross domestic product – the lowest in the region based on Gross Written Premiums (GWPs). The non-life insurance penetration is dominated by motor insurance as it accounts for as much as 65 percent of GWPs as motor insurance is mandated by law.