Sri Lanka Equities Corporate Update

Ceylinco Insurance PLC (CINS)

Rs. 78.00
CINS.N - Rs. 205.00 BUY
CINS VOTING - ADJUSTED PRICE / VOLUME GRAPH Financial Net PAT EPS EPS PER (x) - PER (x) - Non NAV Per Dividend DPS
ROE % P/BV
Year Income (Rs.mn) (Rs.) Growth Voting Voting Share Yield % Rs.
250.00 1,600,000
2003 (Rs.mn) %
Volume
Adjusted Price
1,951 267 10.11 25.34 20.28 14.84 19.7% 67.31 3.05 0.98% 2.00
1,400,000
2004 2,601 385 14.57 44.11 14.07 10.30 22.7% 84.88 2.42 0.98% 2.00
2005 3,667 624 23.61 62.06 8.68 6.35 22.4% 138.92 1.48 1.07% 2.20
200.00
2006 4,732 819 30.99 31.26 6.62 4.84 23.9% 171.12 1.20 1.22% 2.50
1,200,000
2007 5,868 1,013 38.34 23.72 5.35 3.91 22.6% 223.96 0.92 1.22% 2.50
2008E 7,216 1,283 48.56 26.66 4.22 3.09 21.7% 224.04 0.92 1.22% 2.50
1,000,000
150.00 2009E 8,748 1,535 58.11 19.66 3.53 2.58 20.5% 283.81 0.72 1.22% 2.50
2010E 10,727 1,907 72.21 24.27 2.84 2.08 20.2% 357.68 0.57 1.22% 2.50
800,000

100.00 Profile
600,000

a Ceylinco Insurance PLC commenced its operations back in 1939 as an

50.00
400,000
underwriter in Motor insurance and gradually moved into Fire and Fidelity
200,000
insurance, followed by Life and Marine insurance. Since inception, the
company has grown to be the leading insurance provider with the largest
0.00 0
network of branches and agents set up across the country while establishing
02-Jun-03

02-Feb-05

02-Jun-08
02-Sep-04

02-Dec-05
02-May-06

02-Aug-07
02-Jan-03

02-Apr-04

02-Jul-05

02-Jan-08
02-Nov-03

02-Nov-08
02-Oct-06
02-Mar-07

branches in the region.

CINS NON VOTING - PRICE / VOLUME GRAPH
Rs. Volume

200.00 Volume 60,000

Global Insurance Industry
Price
180.00

160.00
50,000 a In 2007, the Global Insurance Industry witnessed 3.3% real growth in
140.00
Insurance Premium with the largest contribution seen from the Emerging
40,000

120.00 markets with a growth of 11.8%. Worldwide insurance premium climbed

100.00 30,000 to US $ 4,061 billion in 2007. The Life segment accounted for US $ 2,393
80.00 billion while the Non – Life segment accounted for the remaining US $
20,000
60.00
1,668 billion. Global insurance penetration was recorded at 7.5% for 2007
40.00
10,000 while Premium from Emerging markets reached 2.8% of GDP.
20.00

- 0
Local Insurance Industry
14/08/2008
21/08/2008
28/08/2008
04/09/2008

18/09/2008
25/09/2008
02/10/2008
09/10/2008
16/10/2008
23/10/2008
30/10/2008
11/09/2008

06/11/2008
13/11/2008
20/11/2008

a The local insurance industry providing both General and Long term
insurance enjoyed a combined CAGR of 21% in insurance premium.
Jeewanthi Malagala Insurance penetration continued to hover around 1.46% of GDP, indicating
jeewanthi@jkstock.keells.com
high levels of potential for growth in the country. Total Gross Written
Premium (GWP) reached Rs. 51,885 million in 2007 from Rs. 43,035
John Keells Stock Brokers (Pvt) Ltd.
million in 2006 indicating a growth of 20.56%.

Company No. PV 89 a In 2007, the total assets of insurance companies stood at Rs. 135 billion
130, Glennie Street, reflecting a 14.6% growth from 2006. Further, assets of Long Term
Colombo 2, Insurance segment grew to Rs. 84.8 billion, accounting for 63% of total
Sri Lanka.
assets.
Tel: 94 11 242 1101-9 (Gen.)
94 11 234 2066/7 a Despite the existence of large number of players, the industry seems to be
94 11 243 9047/8 highly concentrated among the top 5 players with a concentration ratio of
Fax: 94 11 234 2068
approximately 88% in terms of GWP.
Page 1 of 5

94 11 232 6863

December 2008

A JKSB Research Publication

 General and Life Insurance
Rs. million Insurance Premium
35,000
Long term Insurance a The General Insurance segment consisting of 15 players witnessed a CAGR
30,000 General Insurance

25,000
of 22% during the last 5 years. The premium from this segment amounted
20,000 to 60% of total premium with a yoy growth of 20%.
15,000

10,000 a Motor Insurance, categorized under General Insurance, continued to

5,000 account for over 50% of GWP in 2007 while experiencing a growth of
-
2002 2003 2004 2005 2006 2007
22%. Yoy growth for the Motor insurance segment has slowed down since
2004 due to the decline in new motor vehicle registration coupled with
Rs. Breakdown of GWP for General Insurance %
heavy price competition by the insurance providers.
18,000,000 40.00%

16,000,000

14,000,000
35.00%
a In 2007, Fire and Marine Insurance accounting to 18% and 5% of General
30.00%
12,000,000
25.00%
Insurance GWP, witnessed growth of 23.7% and 5.3% respectively.
10,000,000
20.00%
8,000,000

6,000,000
15.00%
a The Long term Insurance segment witnessed a CAGR of 19% in premium,
4,000,000
10.00%
growing at 21% in 2007 while contributing to 40% of industry GWP.
2,000,000 5.00%

- 0.00%
Penetration of Long term Insurance business as a percentage of the total
2002 2003 2004 2005 2006 2007
Fire Marine Motor Miscellaneous % Growth in Motor Insurance population and the total labour force grew to 9.6% and 25.3% from 8.8%
and 24.3% in 2006, respectively.

a The growth in life insurance business has been hindered by lack of public
awareness on life insurance along with deteriorating real income with the
ongoing double digit inflation. However, prospects for the future still remain
positive due to rising per capita GDP along with a possible decline in
inflation in the country.

CINS - Life Insurance

a Since 2004, CINS has taken over the position of being the market leader
from Sri Lanka Insurance Corporation (SLIC) and as of 2007, CINS
sustained its position with a market share of 33.03% calculated based on
the Premium generated. CINS has enjoyed a CAGR of 24% in premium
over a period of 5 years, above the growth rate of the industry as a whole.
GWP grew by 20% from 2006 reaching Rs. 6,847 million, while adding
165,796 new policies at an average of more than 13,800 new policies a
month. According to the latest results released by the company, GWP
grew by 19% for the 1-3Q2008 over the comparative period.

a CINS offers 19 different Life Insurance products each being aimed at

different market segments ranging from the low income household to the
high while offering a great deal of benefits for the policyholders. The
company is continuously seeking for new and innovative products to cater
different individual needs. Further, the company currently has the largest
network with 126 branch offices spread across the country for Life
Insurance operation and is expected to increase in the future. Given the
above, we expect Life Insurance premium to grow by a CAGR of 19%
over the next 2 years.

a The successful growth of CINS is also seen by a CAGR of 19.6% in the

Life fund over the last 5 years, reaching Rs. 16.8 billion in 2007 and
further growing by 20.7% in 1-3Q2008 reaching Rs. 20.3 billion. The Life
Insurance segment has witnessed a steady growth in profits since 2004
Page 2 of 5

while CAGR stands at 26.6% during the last 5 years. In 2007, the Life
Insurance segment generated Rs. 391 million in earnings accounting to a

A JKSB Research Publication

 Life Insurance - Market Share 39% of group earnings. We expect this trend to continue into the future
40.0%

35.0%
Ceylinco Insurance
Union Assurance
Sri Lanka Insurance
Janashakthi Insurance
Eagle Insurance
as the company expands more aggressively.
30.0%

25.0%
a Surpluses in the Life fund and profitability in individual product classes
20.0% depend on the quality of the insurance written, and is best ascertained by
15.0%
an actuary. Therefore any forecast of possible surpluses in the Life Fund
10.0%
and consequent transfers to the P & L are arbitrary in nature. However
5.0%

0.0%
for purposes of valuations we have conservatively assumed a transfer to
2002 2003 2004 2005 2006 2007 the Profit and Loss account of Rs. 479mn in FY08E which includes
investment income earned from high Treasury Bills and Bond yields.
Rs Life Surplus and Fund Rs
450,000,000 18,000,000,000
Life Insurance Surplus
400,000,000 Life Insurance Fund 16,000,000,000
350,000,000 14,000,000,000
300,000,000 12,000,000,000 CINS - General Insurance
250,000,000 10,000,000,000
200,000,000
150,000,000
8,000,000,000
6,000,000,000
a CINS continued to be the market leader in the General Insurance segment
100,000,000 4,000,000,000 with a market share of 33.2% in 2007 although this was a 3.68% decline
50,000,000 2,000,000,000
- - from 2006. This was mainly due to a decline in its Motor Insurance segment
2002 2003 2004 2005 2006 2007
which is currently under threat from heavy price competition.

a The segment enjoyed aggressive growth of 32% over a period of 5 years

with its premium reaching Rs. 10.35 billion, a growth of 8% from 2006.
General Insurance - Market Share
45.0% Ceylinco Insurance Sri Lanka Insurance Eagle Insurance Non - Life premium grew by 15% during 1-3Q2008 compared to the
40.0%
Union Assurance Janashakthi Insurance
35.0% same period in 2007, despite unfavourable economic conditions. Motor
30.0%
Insurance which accounted to approximately 60% of General Insurance
25.0%
20.0% premium witnessed a growth of 8.5% in 2007 despite a decline in new
15.0%
10.0%
vehicle registration while grabbing a hefty 36% of the industry Motor
5.0% Insurance premium. The Non Motor segment saw a yoy growth of 7.8%
0.0%
2002 2003 2004 2005 2006 2007 in 2007 with insurance premium amounting to Rs. 4.1 billion.

a Over the years, CINS has successfully managed to keep its Combined
ratio under 100% which has enabled it to be one of the few profit making
General Insurance providers. In 2007, its Claims Ratio amounted to 52%
while the Expense ratio stood at 46%.

a The introduction of “On the Spot” claim settlement to cover the gamut
of insurance products in 2007 transformed the local insurance industry
enabling CINS to become the first in the world to offer such a product to
the public. We expect the GWP from the General Insurance segment to
grow by a CAGR of 16.5% during the next 2 years.

a Since inception, CINS has expanded significantly with over 240 branch
offices all being Vehicle Insurance Policy (VIP) offices spread across the
country. The company also expects to utilize the funds raised from a Non
Voting share issue in expanding its health insurance products, thereby
increasing penetration levels.

Global Presence
a Over the years, CINS has strengthened its position as a regional player
expanding into countries such as Nepal, Bangladesh, Mauritius, Maldives
and Middle East through joint ventures and strategic alliances. CINS obtained
a government license to operate as a registered insurance company in
Page 3 of 5

Maldives and has witnessed a yoy growth of 60%.

A JKSB Research Publication

 Earnings and Valuations
a CINS has seen continuous growth in its bottom line and in 2007 its earnings
surpassed Rs. 1 billion representing a yoy growth of 24%. Earnings for the
3Q2008 dipped 26% due to higher claims (net) and transfers to the Life
Fund which grew by 10% and 27% respectively. However, cumulative
earnings to 3Q2008 grew marginally by 3% to Rs. 336 million.

a Although majority of the premium is generated by the General Insurance

segment which is expected to face severe price competition, we believe
that CINS will be in a position to sustain its past growth levels. Further,
CINS has undertaken investments in unquoted entities involved in
generating power which are currently yielding very high returns. We expect
CINS to post Rs. 1.283 billion in earnings for FY2008E, representing a
growth of 27% from 2007.

a Through an issue of 8.5 million Non Voting shares of which only 6.4
million shares were subscribed to, the company raised an amount equaling
to Rs. 1.12 billion. This is expected to be utilized in expanding its product
portfolio along with an increase in its island-wide branch network to penetrate
into rural areas with greater growth potential. The fresh issue of shares
has enabled the company to meet regulatory requirements on capital of
Rs. 500 million in respect of each class of insurance business by the end
of December 2010.

a With the recent issue of Non Voting Ordinary shares, the company’s
expected EPS will be diluted at Rs. 48.57. The voting share, at a price of
Rs. 205/- trades at a PE of 4.22x FY2008E earnings. Voting counter
trades at a discount of 44% to the market. The NAV per share stood at
Rs. 223.53 as per the latest financials in 3Q2008. Given the potential
growth opportunities available to CINS, we believe that the counter is
heavily undervalued, therefore, recommend BUY.

CINS
Reuters Code CINS.CM
Bloomberg Code CINS.SL
Share Price - Voting LKR 205.00
Share Price - Non - Voting LKR 150.00
Issued Share Capital (Shares)
Voting 20,000,000
Non - Voting 6,414,480
12 mth High/Low - Voting (Rs.) 227.00 / 175.00
Average Daily Volume (Shares) - Voting 27,619
Market Capitalisation - Voting Rs. mn 4,100
Market Capitalisation - Non-Voting Rs. mn 962
Price Performance (%) - Voting
1 mth 6 mth 12 mth
ASPI (12.14) (35.75) (35.69)
CINS 0.61 (3.30) 13.89
Page 4 of 5

A JKSB Research Publication

 Income Statement 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Gross Written Premium
Non Life 2,607 3,721 5,581 8,033 9,561 10,351 12,106 14,063 16,421
Life 2,360 3,043 3,961 4,794 5,718 6,844 8,108 9,625 11,538
4,967 6,764 9,542 12,827 15,279 17,195 20,214 23,688 27,959
Reinsurance Premium (874) (999) (1,127) (1,605) (2,289) (2,350) (2,682) (3,081) (3,537)
Net Written Premium 4,093 5,764 8,415 11,222 12,990 14,845 17,532 20,606 24,422
Increase in Unearned Premium (351) (521) (907) (1,023) (463) (426) (510) (550) (550)
Net Earned Premium 3,742 5,244 7,508 10,199 12,527 14,419 17,022 20,056 23,872
Reinsurance Commisions 169 240 202 173 - - - - -
Investment and other Income 1,007 1,225 1,082 1,362 1,686 2,150 3,138 3,864 4,733
Total Revenue 4,919 6,709 8,792 11,733 14,213 16,568 20,160 23,921 28,605

Benefits Losses & Expenses (3,380) (4,758) (6,191) (8,066) (9,481) (10,700) (12,944) (15,172) (17,878)
Operating Income 1,539 1,951 2,601 3,667 4,732 5,868 7,216 8,748 10,727

Staff Expenses (527) (720) (920) (1,213) (1,554) (1,889) (2,305) (2,801) (3,419)
Operating Expenses (418) (577) (803) (1,133) (1,456) (1,762) (2,160) (2,632) (3,212)
Selling Expenses (221) (229) (317) (450) (568) (692) (845) (1,028) (1,255)
Depreciation (79) (101) (126) (180) (273) (346) (439) (557) (707)
Other Expenses (54) (50) (16) (27) (31) (47) (52) (57) (64)
Amortization of Negative Goodwill (27) 4 1 - - - - - -
(1,326) (1,674) (2,182) (3,004) (3,882) (4,736) (5,802) (7,076) (8,657)
Profit from Operations 213 276 419 664 850 1,132 1,414 1,672 2,070

Finance Cost - (33) (34) (47) (36) (82) (42) (42) (42)
Income from Associates - 24 (3) 7 13 (3) - - -
Profit before taxation 213 266 383 624 826 1,046 1,372 1,630 2,028
Income Tax Expenses 0 (0) (1) - - (34) (90) (96) (120)
Profit After Taxation 213 266 382 624 826 1,013 1,283 1,535 1,907
Minority Interest 0 1 3 (0) (8) - - - -
Net Profit for the year 213 267 385 624 819 1,013 1,283 1,535 1,907
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Balance Sheet Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn Rs. 'mn
As at 31st December Share Long Share Long Share Long Share Long Share Long Share Share Share Long Share Long
holders Term holders Term holders Term holders Term holders Term holders Long Term holders Long Term holders Term holders Term
ASSETS
Property, Plant and Equipment 967 770 1,011 856 1,250 1,063 1,795 1,494 2,456 1,889 2,457 1,946 2,951 2,072 3,296 2,302 3,756 2,640
Investment Property 4 11 64 - 64 - 90 - 109 233 119 - 135 - 155 - 155 -
Investment Pertaining to Shareholders 476 729 1,207 1,492 1,923 2,424
Other Assets Pertainnig to Shareholders 62 65 70 75 85 95
Investment in Associates - - 96 - 111 - 118 - 118 - - - - - - - - -
Other Investments 903 7,531 1,216 7,782 1,903 8,982 3,996 10,668 3,730 12,057 4,450 14,843 5,304 17,950 6,348 21,718 7,548 26,350
Loans to Policy Holders - - - 83 - 144 - 193 - 228 - 375 - 610 - 720 - 850
Reinsurance Receivables - - 111 51 1,956 48 784 41 1,360 145 1,474 97 1,584 115 1,743 135 1,943 160
Trade Receivables 503 - 667 - 1,056 - 1,717 - 1,760 - 1,898 - 2,118 - 2,274 - 2,274 -
Other Assets 406 627 424 487 669 636 581 641 1,065 873 1,670 1,071 2,282 1,354 2,987 1,600 4,427 1,900
Cash and Cash Equivalents 110 5 39 22 107 11 259 40 263 17 166 - 251 - 307 - 307 -
Total Assets 2,894 8,945 3,629 9,283 7,116 10,885 9,340 13,615 10,860 16,236 12,234 19,609 14,625 23,667 17,110 28,483 20,410 34,419
EQUITY AND LIABILITIES
CAPITAL AND RESERVES
Share Capital 166 - 166 - 200 - 200 - 200 - 200 - 200 - 200 - 200 -
Non Voting Share capital - - - - - - - - - - - - 6 - 6 - 6 -
Share premium on non voting issue - - - - - - - - - - - - 106 - 106 - 106 -
Share Premium 14 - 14 - - - 2 - - - - - - - - - - -
Revaluation Reserve 81 - 81 - 81 - 579 279 357 273 357 273 357 273 357 273 357 273
Policyholders' Benefit Reserve - - 50 - 38 - 38 - 38 - 38 - 38 - 38 - 38 -
Tsunami Relief Reserve - - - - 550 - - - - - - - - - - - - -
General Reserve 590 - 740 - 170 - 1,070 - 1,070 - 1,070 - 1,070 - 1,070 - 1,070 -
Retained Earnings 220 - 295 - 659 - 888 538 1,757 794 2,813 1,161 4,140 1,615 5,719 2,068 7,670 2,759
Shareholders' Funds 1,071 - 1,346 - 1,698 - 2,778 817 3,422 1,067 4,479 1,434 5,918 1,888 7,497 2,342 9,448 3,033
Minority Interest 3 - 10 - 12 - 19
1,074 - 1,356 - 1,710 - 2,797 817 3,422 1,067 4,479 1,434 5,918 1,888 7,497 2,342 9,448 3,033
LIABILITIES
Long Term Insurance Funds - 6,871 - 8,676 - 10,045 - 11,900 - 13,897 - 16,830 - 20,295 - 24,500 - 29,500
Non - Life Insurance Resrves 1,008 - 1,599 - 4,375 - 3,841 - 4,432 - 4,736 - 5,106 - 5,851 - 6,800 -
Re-Valuation Reserve - - - - - - - - - - - - - - - - - -
Obligation to Repurchase Securities 80 1,601 - 3 146 0 1,303 408 1,150 332 755 245 1,119 270 1,067 300 1,227 275
Other Payables 422 264 429 297 542 522 912 153 1,186 331 1,591 467 1,664 514 1,809 567 1,909 647
Reinsurance Payable 226 76 142 121 182 109 230 129 325 359 375 420 454 465 534 515 634 640
Agency Commission Payable 83 65 103 105 161 104 258 93 345 76 297 213 398 236 442 260 512 324
Page 5 of 5

Income Tax Payable - 69 - - 1 - - - - - - - (34) - (90) - (120) -

Policyholders Advance Payments - - - 82 - 105 - 114 0 173 - - - - - - - -
Total Liabilities 1,820 8,945 2,273 9,283 5,407 10,885 6,543 12,797 7,437 15,168 7,755 18,175 8,707 21,779 9,613 26,142 10,961 31,386
Total Equity and Liabilties 2,894 8,945 3,629 9,283 7,116 10,885 9,340 13,615 10,860 16,236 12,234 19,609 14,625 23,667 17,110 28,483 20,410 34,419

This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from
available documentation and JKSB’s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this
issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.