LKR 91.00: HOLD

HNB Assurance Plc (HASU) is the sixth largest insurance company in the country with a market share of around 4.1%. Company’s parent entity, Hatton National Bank Plc is the fourth largest commercial bank and allows HASU to enjoy the benefits of having one of the strongest bancassurance channels among insurance companies. On a conservative estimate, we forecast three-year CAGR of 19.8% in GWP for FY2014E-FY 2016E. Our relative based valuation suggests a share price of LKR 148.00 compared with the current share price of LKR 92.00.

Trading Snapshot

Equity Research Report

Market cap (LKR Mn)4,600
Market cap/Total market cap0.15%
Public Holding (%) – Sep’1439.14%
52-week High/Low (LKR)94.70-50.00
Average Daily Volume (52 weeks)29,318
YTD ASPI return (%)24.3%
YTD Stock return (%)73.6%
Share Price Movement
Summary Financials – Year end 31st December
LKR Mn20132014E2015E
Net Earned Premium3,269.23,771.04,515.2
Total Other Revenue937.41,227.11,482.6
Net Income4,206.64,998.15,997.8
EPS (LKR)7.788.7710.31

Growth and profitability prospects of the Insurance sector of the country is strong, given significant under penetration in both life and general sectors

Total insurance penetration in Sri Lanka at 1.09% and Insurance density of LKR 4,613, are significantly lower than the regional peers. According to World Bank’s Aging Study, Sri Lanka has the fastest aging population in South Asia. A rising demand for health insurance and a source of income in retirement are key market factors that the life insurance industry can encompass for sustainable profitability. On the other hand, reduction in taxes levied on vehicle imports and lower interest rate would accelerate the demand for motor insurance while overall expansion in economic activities generate demand for other classes of general insurance like fire, engineering and marine.

Investment in new technology to support cost reduction and to gain competitive edge over peer companies

HASU is continuously investing in technological advancements to provide enhanced customer service while reducing operational expenditure. The automation of the key function as well as initiatives to introduce web based products and electronics sales medium will bring superior results in the medium to long term.

Extensive distribution network supported by strong bancassurance channel

HASU has adopted a multi-channel distribution network while its bancassuance channel assumes high importance as it bridges HASU with its parent, HNB. Company has 174 bancassuance units located at HNB branches with 53 branches located in all the provinces in the country. Company has strong presence in rural and sub urban areas and expects to expand all of its distribution networks.


HASU is currently trading at the P/E of 11.70. According to our estimates HASU will incur EPS of LKR 8.77, LKR 10.31 and LKR 12.65 in FY2014E, FY2015E and FY2016E respectively. We establish a valuation of LKR 148.00 based on FY2016E earnings, which is 62.6% higher than the current share price. We also projected average dividend payout of 40.1% in our forecasted period.


HNB Assurance Plc is a composite insurer and provides both life and non-life insurance solutions. The parent company of the HASU is Hatton National Bank Plc (HNB) with a 59.99% stake and therefore HASU acts as the insurance providing arm of the HNB group. In compliance with the amendments to the Insurance Industry Act, HASU has incorporated a new company, namely “HNB General Insurance Ltd” as a fully-owned subsidiary of HASU, and intends to transfer the existing Non-Life Insurance business to this new subsidiary.

Group Structure


As at 31st December 2013, the total assets of the company stood at LKR 8,974.5 Mn and as per the assets base, HNB is the sixth largest player in the insurance sector representing 2.25% of insurance industry assets. Total assets of the company recorded 14.6% growth in FY2013 driven by the increase in investment portfolio. Financial investments account for 82.6% of the total assets in FY2013 and depicted 16.7% growth.

Total Assets – HASU

HASU claims for 2.25% of Insurance Industry assets of the country

Source: HASU


In FY2013, HASU generated total premium income of LKR 3,877.73 Mn compared to LKR 3,211.23 Mn in 2012. From General Insurance HASU earned LKR 1,863.18 Mn premium income and acquired 3.32% market share while being the eighth largest player.

Motor Insurance managed to maintain its dominant position as the majority contributor towards the General Insurance business and claims for 3.9% of the Motor Insurance business in the country. Motor Insurance recorded a satisfactory growth of 6.85% in FY2013 compared to industry growth of 4.56%.


Gross Written Premium – General Insurance Business Company wise market share – General Insurance Business



Source: Insurance Board of Sri Lanka

Source : HASU

In Long term Insurance business HASU is the sixth largest player with 4.88% market share. In FY2013 company doubled the growth rate recorded in FY2012 and recorded 34.3% growth in Gross written premium from Long term insurance business to LKR 2,014.5 Mn. This significant growth outperformed the market growth which stood at 10% and enabled the company to improve its market share in a noticeable manner.

In FY2013 company recorded 34.3% growth in Long term Insurance business

Gross Written Premium – Long term Insurance Business Company wise market share – Long term Insurance Business

Source : HASU

Source: Insurance Board of Sri Lanka


Company’s PAT was recorded at LKR 389.12 Mn in FY2013 representing YoY growth of 10.8%. The greater contribution to the PAT was from General insurance business, with a profit of LKR 207.63 Mn, at 53.4% of total PAT. The balance 46.6% was received from Long term insurance, which recorded 9.8% growth to LKR 181.49 Mn.

Profit after Tax

Source: HASU


The investment portfolio of the company recorded five years CAGR of 19.6% and stood at LKR 6,656.44 Mn as at 31st December 2013. The investment return of the company increased to 14.9% in FY2013 compared to 13.5% in FY2012. Accordingly, the investment income of HASU was stood at LKR 851.69 Mn in FY2013 compared to LKR 661.76 Mn in FY2012.

Financial Investments

Source: HASU- Annual Reports & Quarterly data

Source: HASU


Majority of HASU’s investment were in government securities and is well above the minimum regulatory limits for both Life and Non-life funds. However, company’s holding of government securities declined while investment in corporate debt instruments increased by 106.6%. Investment in equity shares and unit trusts were also reduced in FY2013 following the management‘s decision to trim down the exposure on equity due to the volatile performance in the stock market.

HASU’s investment in corporate debt securities increased significantly during FY2013



Sri Lanka’s current insurance industry is composite of twenty one insurance companies of which twelve companies are composite insurers that provide both Life and Non-Life insurance solutions. Six engage in only in the provision of Non-Life Insurance solutions, while the remaining three cater only to Life Insurance customers. As at 31st December 2013 Insurance industry had the total assets of LKR 356.57 Bn representing 3.5% of the financial sector assets of the country.

As per the amendments to the Insurance Industry Act composite insurance companies have to segregate Life and Non-Life businesses into two separate companies by January 2015. And also these insurance companies have to be listed in the Colombo Stock Exchange by 2016. The amendments to the Act require insurance companies to maintain a minimum stated capital of LKR 500 Mn for each line of business. Therefore the paid up share capital of an insurance company which is registered before June 2011 has to be increased to a minimum of LKR 500 Mn before 11th February 2015. In line with these changes Insurance Board of Sri Lanka (IBSL) has decided to implement the Risk Based Capital model (RBC) to monitor the insurance companies in tandem with the existing solvency regime and the deadline for such implementation is set as January 2016.

The existing insurance companies have to increase their Stated Capital to a minimum of LKR 500 Mn by February 2016

The post segregation of the insurance industry will end up with over 30 insurance companies instead of 21 companies currently in operation. Since each company will have to maintain minimum stated capital of LKR 500 Mn, there will be a need for a consolidation of insurance companies after 2016.


Insurance Penetration in Sri Lanka Insurance Penetration in Asian Countries – 2012

Source: World Bank

Source: Insurance Board of Sri Lanka

Sri Lanka remains heavily under penetrated by insurance, with a total premium income/GDP ratio of 1.09% in 2013 compared to 1.15% in 2012. Insurance penetration for both Long term Insurance and General Insurance recorded a decline in recent two years with the slow growth in Premium income.

Source: Insurance Board of Sri Lanka


Gross Written Premium – Insurance Industry

Source: Insurance Board of Sri Lanka

Sri Lanka’s current Insurance density is LKR 4,613

The Gross Written Premium (GWP) generated by the insurance companies amounted to LKR 94,483 Mn in 2013 compared to GWP of LKR 87,171 Mn in 2012. The growth rate in GWP slowed down to 8.4% in 2013 from 11.1% in 2012 and 18.5% growth in 2011. General Insurance business led the insurance market with a share of 56.3% of the total GWP while recording a growth of 7.01% in 2013.

General Insurance business lead the country’s insurance industry with a market share of 56.3%

Insurance density, which is stated as the ratio of GWP to total population has continuously increased during last five years. In 2013, insurance density was recorded as LKR 4,613 compared to LKR 4,288 recorded in 2012.


Total assets belonging to the insurance industry amounted to LKR 356, 566 Mn as at end of 2013 compared to LKR 315,817 Mn recorded in 2012. However, growth rate of insurance industry assets has considerably reduce to 12.9% compared to 20.81% growth recorded in 2012.

SLIC owns 40.08% of total insurance sector assets followed by CINS

Sri Lanka Insurance Corporation (SLIC) remains in the top position by holding 40.08% of total insurance sector assets. SLIC represents 36.98% of assets of Long term insurance business and 42.69% assets of General insurance business. Ceylinco Insurance Company Plc is the second largest owner of assets by owning 22.88% of assets followed by AIA Insurance Plc (12.38%), Union Assurance Plc (8.43%) and Janashakthi Insurance Company Plc (5.12%).

Assets distribution of Insurance Industry

Source: Insurance Board of Sri Lanka



HASU recorded GWP growth in both Long term and General businesses well above industry averages in FY2012 and FY2013. We expect HASU to show GWP growth at 19.8% CAGR during FY2014E-2016E. The segregation of Long term and General insurance businesses from January 2015 will allow HASU to give more focus on its businesses and therefore we expect premium growth to increase from FY2015E. We further believe that both Long term insurance and General insurance to show a similar growth pattern with the favorable changes in the economic landscape of the country.

We expect HASU to record a combined GWP of LKR 4,580.24 Mn in FY2014E, recording a 18.1% growth

Combined Gross Written Premium to exceed LKR 6.6 Bn by FY2016E

Source: HASU & SMB estimates


We expect Motor insurance market to expand with the government decision to reduce the vehicle import taxes from its budget proposal for 2015 as it will improve the vehicle imports in the short term. However, motor segment will further be competitive, with competition mainly in the form of price. This unhealthy price competition will put pressure on underwriting profitability while insurance companies have to struggle to control the overall costs The expansion in economic activities of the country led by the industry sector will increase the demand for fire, marine & engineering classes of insurance. According to our projections General insurance business would record an average growth rate of 18.7% in our forecasted period.

The reduction in vehicle import taxes and interest rates will affect favorably towards the growth in General Insurance Business

According to World Bank’s Aging Study Sri Lanka is said to have the fastest aging population in South Asia and those over 60 years estimated to constitute over 21% of the population by 2031. The rising demand, for health insurance for the

elderly and a source of income in retirement are key market factors that the insurance players can encompass for sustainable profitability. The demographic changes in the country suggest a higher demand for long term life insurance policies. Therefore, we projected the rising demand for health insurance and other pension based insurance products to increase HASU’s GWP from Life insurance while continuously being as the largest contributor towards the group GWP. We expect Life insurance to contribute around 52.6% of HASU GWP in our forecasted period. According to our estimates GWP from Life Insurance will record 18.3% growth in FY2014E to LKR 2,384.02 Mn.

Parent Company’s support in developing bancassurance channel to contribute heavily on business developments

HASU’s association with HNB would continue to increase its business volumes, with business generated through the bank remaining the biggest contributor to GWP. Company’s advantage to increase its bancassuance units by locating its offices within HNB branches would amply contribute to the growth of its customer base.

Channel wise GWP – 2013

Source: HASU & SMB estimates


With the significant growth in the business operation of the company, a simultaneous improvement in the investment funds can be expected. According to our projections company’s total financial investments under management will reach to LKR 8,356.26 Mn in FY2014E, by recording 25.5% YoY growth. We expect investments under the Life fund to record at LKR 1,515.13 Mn at the end of FY2014E while investment under General fund to stand at LKR 2,841.13 Mn.

We expect the current low interest rate environment to prevail in the short to medium term and therefore, insurance companies have to allocate their funds in an optimum way in order to deliver superior returns on investments. HASU has recently increased its exposure to corporate debt instruments since investment in corporate debts offers higher tax advantages. Therefore we expect HASU to

increase its exposure to corporate debts and equity investments while keeping the investment in government securities well above the minimum regulatory limits.

Investment Income – LKR Mn

Source: HASU & SMB estimates

We expect HASU to further increase its investment in corporate debts and equity

We projected the cumulative investment income of the company to record at LKR 1,123.38 Mn in FY2014E, which is 31.9% higher than LKR 851.69 Mn recorded in FY2013. The increase in investment income will receive from both life and general aspects and Life fund will account for majority. We further assumed that investment income from Life fund to record an average growth rate of 28.2% while investment income from General insurance fund to record an average growth of 20.5% in our forecasted period.


The intense price competition in the General Insurance business, particularly in the motor segment hold combined ratio of most of the General Insurers above 100% while putting pressure on the financial performance. In HASU the net claim ratio reduced to 65.5% in FY2013 from 67.4% in FY2012. However, the combined ratio increased to 108.5% from 106% due to 4.3% increase in expense ratio.

Measures to escalate vehicle imports are likely to result in healthy growth in vehicle imports and new vehicle registration in the short to medium term allowing motor insurance to expand. However, companies are compelled to reduce expenses while reducing net claims to reduce underwriting losses. Our projections indicate that HASU to incur average claim ratio of 65.6% in General

insurance for the period FY2014E-2016E while average expense ratio to maintain at 43.1% resulting a combined ratio of 108.6%.

Claim ratio, Expense ratio and Combined Ratio


Source: HASU & SMB estimates

We expect HASU to incur average claim ratio of 31.8% for life insurance in our forecasted period. We further predicted the expense ratio to increase to average of 48% from current level of 47.4% mainly due to the increase in operating and administration expenses. Our predictions of reduction in claims ratio and marginal increase in expense ratio over the years suggest HASU to maintain average combined ratio of 79.8% which will be below the current level 82.9%.



We are on the view that segregation of Life and General Insurance businesses into two separate entities to facilitate future business development opportunities. And also the requirement to manage expenses separately force companies to find strategies to reduce operational costs.

We expect both life and general insurance sectors to expand business operations and to show a similar contribution towards the profitability of the company. However, managing expenses especially in General insurance business will be a challenge due to high competition among insurers. Our projections indicate that HASU to post PBT of LKR 481.45 Mn in FY2014E recording a 13.3% healthy growth over LKR 425.09 Mn achieved in FY2013. The PBT of the group would record 17.6% and 22.7% growth rates in FY2015E and FY2016E respectively.

We expect PAT growth in General Insurance business to increase to 17.1% in FY2014E. We projected the growth in Motor segment to pick up from FY2015E and to record higher growth rates in HASU’s bottom line. We forecasted HASU’s PAT in General insurance to record a 19.3% and 24% growth in FY2015E and FY2016E respectively.

We target combined PAT to record 12.7% growth to LKR 438 .56 Mn in FY2014E

Our projections indicate that PAT in Life Insurance to record CAGR of 14.6% over FY2014E-FY2016E. We expect the underwriting profitability of the Life sector to increase with the proper management of claims and expenses. The increase in investment income from life insurance fund would further strengthen the profitability of the sector.

We target combined PAT of LKR 481.45 Mn for FY2014E compared to LKR 389.12 Mn in FY2013, recording a 12.7% growth. We forecasted LKR 515.70 Mn and LKR 632.56 Mn of PAT for FY2015E and FY2016E respectively. Company would maintain average dividend payout of 40.1% in our forecasted period.


Our estimates of HNB Assurance Plc’s earnings are predicted on company to segregate its operations as Life and General Insurance and to continue these two sectors as two entities while HNB General Insurance Pvt Ltd to be consolidated as a fully owned subsidiary. However, the listing of new company by 2016 is required and dilution of the ownership of the company can be expected. Further, under the new regulatory requirements each company has to maintain minimum share capital of LKR 500 Mn and this will make amalgamations/acquisition among insurance company in the long term. As HASU has the capability to meet minimum capital requirement from its internally generated funds as well as the being the sixth largest insurance company in the country, we are in the view that it would be in a position to acquire another smaller insurance company/companies.

The insurance penetration and insurance density in the country should grow with the growth in the economy and associated increase in per capita income and as well as with the changes in the demography. As a result of this we projected insurance sector to grow well in excess of 15% over the next five years. HASU’s current price multiple of 11.70x is at discount to the current market multiple of 19.68x and Bank Finance and Insurance sector multiple of 13.50x. According to our projections HASU will incur basic EPS of LKR 8.77, LKR 10.31 and LKR 12.65 for FY2014E, FY2015E and FY2016 respectively. With these EPS projections HSAU will incur forward P/E multiple of 10.37x, 8.82x and 7.19x in above years. The current dividend yield is at 2.99% and we expect HASU to declare dividend of LKR 3.25, LKR 3.50 and LKR 4.00 in FY2014E, FY2015E and FY2016E respectively. We recommend HOLD.

Appendix 01 – Financial Data

Statement of Comprehensive Income
Non-Life Insurance
Gross Written Premium1,7111,8632,1962,6053,116
Premium Ceded to Reinsurers(392)(424)(503)(646)(776)
Net Written Premium1,3201,4391,6931,9592,340
Net Change in Reserves for Unearned Premium6(83)(199)(185)(195)
Net Earned Premium1,3251,3561,4941,7742,145
Other Revenue
Interest and Dividend Income231273315380465
Net Realised Gains713182235
Net Fair Value Gains / (Losses)109121416
Fee and Commission Income5751596777
Other Income313101215
Net Income1,6331,7151,9082,2702,753
Net Benefits, Claims and Expenses
Net Insurance Benefits and Claims Paid(862)(892)(961)(1,141)(1,376)
Net Change in Insurance Claims Outstanding(31)3(20)(22)(29)
Other Operating and Administration Expenses(451)(515)(571)(677)(810)
Underwriting and Net Acquisition Costs(54)(53)(55)(68)(87)
Other Insurance Related Costs(7)(14)(15)(21)(28)
Total Benefits, Claims and Expenses(1,405)(1,471)(1,622)(1,929)(2,330)
Profit Before Taxation229244286341423
Income Tax Expenses(43)(36)(43)(51)(63)
Profit for the Year186208243290359
Statement of Comprehensive Income
Life Insurance
Gross Written Premium1,5002,0152,3842,8853,550
Premium Ceded to Reinsurers(128)(102)(107)(144)(195)
Net Earned Premium1,3721,9132,2772,7413,354
Other Revenue
Interest and Dividend Income4245126788171,011
Net Realised Gains41557280
Net Fair Value Gains / (Losses)(10)4456075
Fee and Commission Income1522353843
Net Income1,8012,4923,0903,7284,563
Net Benefits, Claims and Expenses
Net Insurance Benefits and Claims Paid(229)(667)(724)(852)(1,022)
Net Change in Insurance Claims Outstanding(33)(13)(12)(20)(30)
Change in Contract Liabilities – Life Fund(556)(725)(1,108)(1,306)(1,581)
Other Operating and Administration Expenses(516)(569)(679)(837)(1,065)
Underwriting and Net Acquisition Costs(294)(328)(358)(462)(575)
Other Insurance Related Costs(7)(10)(14)(26)(18)
Total Benefits, Claims and Expenses(1,635)(2,310)(2,895)(3,502)(4,290)
Profit for the Year165181196226273
Statement of Comprehensive Income
Gross Written Premium3,211.23,877.74,580.25,489.96,665.9
Premium Ceded to Reinsurers(519.7)(526.0)(610.2)(790.2)(971.2)
Net Written Premium2,691.53,351.73,970.04,699.75,694.8
Net Change in Reserves for Unearned Premium5.5(82.5)(199.0)(184.5)(195.0)
Net Earned Premium2,697.03,269.23,771.04,515.25,499.8
Other Revenue
Interest and Dividend Income654.6785.2993.71,197.41,475.8
Net Realised Gains7.353.473.094.0115.0
Net Fair Value Gains / (Losses)(0.1)13.156.774.090.9
Fee and Commission Income71.772.993.7105.2119.9
Other Income3.412.810.012.015.0
Net Income3,433.84,206.64,998.15,997.87,316.3
Net Benefits, Claims and Expenses
Net Insurance Benefits and Claims Paid(1,090.7)(1,558.7)(1,684.5)(1,992.6)(2,398.1)
Net Change in Insurance Claims Outstanding(63.8)(9.5)(32.0)(42.0)(58.5)
Change in Contract Liabilities – Life Fund(555.9)(724.8)(1,107.5)(1,306.3)(1,580.6)
Other Operating and Administration Expenses(966.6)(1,084.1)(1,250.5)(1,513.9)(1,875.1)
Underwriting and Net Acquisition Costs(348.1)(381.3)(412.5)(529.4)(662.3)
Other Insurance Related Costs(14.9)(23.1)(29.7)(46.8)(45.8)
Total Benefits, Claims and Expenses(3,040.0)(3,781.5)(4,516.6)(5,431.0)(6,620.4)
Profit Before Taxation393.9425.1481.5566.9696.0
Income Tax Expenses(42.7)(36.0)(42.9)(51.2)(63.4)
Profit for the Year351.1389.1438.6515.7632.6
Statement of Financial Position – LKR Mn
Intangible Assets6154525361
Property, Plant and Equipment118137144165199
Financial Investments5,7046,6568,3569,90211,784
Loans to Life Policyholders305477103130
Reinsurance Receivables163105147231280
Premium Receivables247301366439567
Other Assets482575702818956
Insurance Contract – Deferred Expenses2033446276
Cash and Cash Equivalents209144120147221
Total Assets7,0358,06010,00811,91914,273
Equity and Liabilities
Stated Capital1,1721,1721,1721,1721,172
Retained Earnings6909421,2181,5591,991
Available for Sale Reserves61234
Other Reserves2244
Life Policyholders’ Reserve Fund(1)(4)1252527
Total Equity1,8672,1132,5192,7623,198
Insurance Contract Liabilities – Life3,6264,3485,5006,8758,456
Insurance Contract Liabilities – Non Life9691,0111,3001,5501,835
Employee Benefits42577497128
Current Tax Liabilities4335505456
Reinsurance Creditors83101175180190
Other Liabilities404394390400410
Total Liabilities5,1685,9477,4899,15711,076
Total Equity and Liabilities7,0358,06010,00811,91914,273

Key Ratios

GWP Growth7.6%20.8%18.1%19.9%21.4%
NWP Growth8.0%24.5%18.4%18.4%21.2%
NEP Growth14.8%21.2%15.4%19.7%21.8%
Investment Income Growth62.1%28.7%31.9%21.5%23.2%
Net Income Growth21.9%22.5%18.8%20.0%22.0%
PBT Growth44.9%7.9%13.3%17.7%22.8%
PAT Growth42.7%10.8%12.7%17.6%22.7%
Margins & Profitability
General Insurance
Net Claims Ratio67.4%65.5%65.6%65.5%65.5%
Expense Ratio38.6%42.9%42.9%43.2%43.1%
Combined Ratio106.0%108.5%108.6%108.7%108.6%
Life Insurance
Net Claims Ratio19.1%35.5%32.3%31.8%31.4%
Expense Ratio59.6%47.4%46.2%48.3%49.4%
Combined Ratio78.7%82.9%78.5%80.1%80.8%
Per Share Data (LKR)
Dividend Yield4.3%5.2%3.6%3.8%4.4%

Appendix 02 – Shareholders & Directors

The stated capital of HNB Assurance Plc is LKR 1,171.86 Mn representing 50,000,000 voting ordinary shares. Hatton National Bank Plc (HNB) is the main shareholder of HASU, with a 59.99% (29,993,000of shares) stake, while the top 20 shareholders account for 77.56% of the total shareholding. HASU’s directors hold nearly 0.45% (224,778 shares) of the company’s shares as at 30th September 2014. The Public holding of the company is 39.14% (19,570,222 shares).

Top five shareholders – As at 30th September 2014

Name of the ShareholderNo of Shares% Holding
Hatton National Bank PLC A/C No.1129,993,00059.99%
The Ceylon Guardian Investment Trust PLC A/C No.222,000,0004.00%
Mercantile Merchant Bank Ltd.913,2651.83%
Bank of Ceylon A/C Ceybank Century Growth Fund582,7031.17%
Mr. Mohamed Faizer Hashim530,5341.06%


Board of Directors

Dr. Ranee JayamahaChairperson
Manjula de SilvaManaging Director
Jonathan AllesDirector
M U de SilvaDirector
Pratapkumar de SilvaDirector
Sarath RatwatteDirector
Mahendra JayasekeraDirector
Ms. Siromi WickramasingheDirector
Dilshan RodrigoDirector
K BalasundaramDirector
Ms. Shiromi HalloluwaCompany Secretary