Sri Lanka Insurers Invest in Listed Firms Propelled by a Booming Stock Market and Falling Interest Rates on Fixed Income Securities

23rd March 2011, www.lankabusinessonline.com

Sri Lankan insurance companies are increasing investments in listed firms, propelled by a booming stock market and falling interest rates on fixed income securities, a report said.

"Equity investments (of insurers) are expected to comprise a larger share of total investments going forward as the stock market remains buoyant," RAM Ratings Lanka said in a report on the sector.

"The shifting of investments into equities is also due to the lower returns from fixed-income securities."

However, the rating agency noted that the growth of investments in equity will be limited by new solvency requirements.

RAM Ratings Lanka said investment income is an important profit element for insurance companies supplementing their main earnings, and being especially important for most general insurers, which tend to incur underwriting losses.

The industry’s investment mix has stayed relatively unchanged, with government securities accounting for most of the investments.

Regulations require all insurance companies to hold 20 percent of their technical reserves and 30 percent of their long-term funds as government debt papers and most firms are well above these requirements, RAM Ratings said.

But the stock market boom that began with the end of the island's 30-year ethnic war in 2009 and falling interest rates have made insurers increase their investments in shares.

"In line with the booming stock market and the environment of declining interest rates, most insurance companies have been increasing their equity investments," the rating agency said.

Equity investments rose to 17 percent of the insurance industry’s total investments as at end-December 2009 from 14 percent at end-December 2008.

RAM Ratings said insurers maintained investment income through equity investments as interest rates fell.

"Previously, insurance companies’ investment portfolios had been dominated by fixed-income securities owing to elevated interest rates.

"However, income from investments has been maintained despite the current scenario of lower interest rates, mainly through investments in equity."

The report said listed insurers’ investment income ratios were rising.

Janashakthi's ratio rose to 24.50 percent in 2010 from 21.09 percent in 2008, Ceylinco's to 25.37 percent from 19.38 percent and HNB Assurance's to 28.02 percent from 23.73 percent over the same period.

Union Assurance's investment income ratio went up to 39.17 percent in 2010 from 27.75 percent in 2008, Aviva NDB's to 57.93 percent from 36.90 percent and Asian Alliance Insurance's ratio to 53.26 percent from 20.97 percent.

RAM ratings said regulations on classification of admissible assets and solvency margins of insurers have been revamped recently.

"The regulations widen the scope of investment products permitted as admissible assets, and place greater emphasis on credit ratings," it said.

"This is expected to encourage insurance companies to diversify their investment avenues." Deposits in investment-grade finance companies are now accepted as admissible assets.

Under the new rules, life insurers' investments in equities have been doubled to 40 percent but that of general insurance firms have been reduced to 30 percent from 35 percent.

RAM Ratings also said the decision to allow insurers to invest 20 percent of their long-term funds and technical reserves overseas will allow them to lock in long-tenured investments that are not available on home shores, "thus better matching their liabilities with their assets."

However, the rating agency said, this will also entail "additional risks for their balance sheets, for example foreign-exchange risk."