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."

Sri Lanka’s Equity & Capital Market Sees $459mn Net Inflow in 2010 from Total Inflow of $1.91bn

04th March 2011, www.island.lk

Sri Lanka’s equity and capital market recorded a net inflow of investments amounting to US$ 459 million in 2010, the Central Bank announced yesterday (4). "In 2010, there was an inflow of funds in to the equity and capital market amounting to Rs. 215.9 billion, approximately US$ 1.91 billion.

The outflow on account of repatriation of investments and as well as dividends and income amounted to Rs. 164.1 billion, approximately US$ 1.45 billion," the Central Bank said. "Accordingly, a net inflow of foreign investments was recorded in 2010 amounting to Rs. 51.8 billion, approximately US$ 459 million," the bank said.

In terms of exchange control regulations, foreign investments in the equity and capital market are routed through Securities Investment Accounts (SIA) maintained in licensed commercial banks, which were analysed by the Central Bank to obtain the data presented above.

However, this year the equity and capital market has seen a net outflow of foreign investments from the Colombo Stock Exchange, but the Director General of the Securities and Exchange Commission said these funds were not leaving the country.

Securities and Exchange Commission (SEC) Director General Malik Cader told journalists recently that foreign investors were net sellers in the Colombo Stock Exchange as they were realising profits by selling their shares.

Last year, foreign investors were net sellers amounting to Rs. 26 billion (about US$ 236 million and this year up to February 23, foreign investors had been net sellers amounting to Rs. 6.7 billion (about US$ 60 million).

"We have discussed this with the Central Bank and they said these net foreign sales did not mean funds were leaving the country but are being invested in other areas of the economy. So these correspond only to an outflow from the capital market but not the country," Cader said. "Foreigners exiting the stock exchange maybe investing in government securities."

Cader said this analysis was possible by monitoring the SIAs.

Related Info :

• Securities Investment Accounts (SIA) Replace SIERA & TIERA Accounts

Sri Lanka Tops Returns for Equity Markets around the World in 2010

3rd January 2011, www.themarketfinancial.com

Below we highlight the 2010 returns (in local currencies) for equity markets around the world. As shown, the average country saw its major equity market index gain 15.33% in 2010. Sri Lanka's stock market gained the most at 96.01%, while Bermuda declined the most at -44.87%.

Six other countries along with Sri Lanka gained more than 50% in 2010 -- Bangladesh (82.79%), Estonia (72.62%), Ukraine (70.20%), Peru (64.99%), Lithuania (56.49%), and Argentina (51.83%).

Looking at just the G-7 countries, Germany did the best at 16.06%, followed by Canada (14.45%), the US (12.78%), and the UK (9%). The three other G-7 countries -- France, Japan, and Italy -- all declined last year.

Of the BRICs, Russia gained the most at 22.70%, followed by India (17.43%), Brazil (1.04%), and China (-14.31%). While some are calling for developed markets to start outperforming emerging markets in 2011, the results below show that trend beginning to unfold in 2010.

Related Info :

• Colombo Stock Exchange Becomes Best Performing Capital Market in the World Recording 111.14pct Growth

Securities Investment Accounts (SIA) Replace SIERA & TIERA Accounts - For Investment in Sri Lankan Equity, Debt and Unit Trusts

SIA is a Sri Lankan Rupee (LKR) Account which eligible investors could open to invest in Government Securities (Treasury Bills and Treasury Bonds), Equity Capital of Companies incorporated in Sri Lanka and Units of Unit Trusts in Sri Lanka.

NOTE: Following LKR Accounts which were already opened for investment purposes will be re-named Securities Investment Accounts (SIA):

• Share Investment External Rupee Account (SIERA)
• Treasury Bond Investment External Rupee Account (TIERA 1)
• Treasury Bills Investment External Rupee Account (TIERA 2)
• Treasury Bonds and Bills Investment External Rupee Account – Deshabhimani for Sri Lankan Diaspora and Migrant Workers (TIERA-D)

Features and Benefits of Securities Investment Accounts (SIA)

• Remittances to the SIA would automatically be converted at the prevailing exchange rate to Sri Lankan Rupees (LKR) for investment.
• Not subjected to further taxation when investing in Government Securities, since a withholding tax of 10 percent of interest is charged at source.
• No exchange control regulations to repatriate original investment and any income realized (interest, maturity proceeds, sales proceeds of shares, dividend payments, liquidation proceeds of companies and proceeds of redemption of units) in any designated foreign currency to your overseas account.
• Ability to forward book foreign exchange to mitigate potential exchange rate risk.
• Transfer of funds between SIA of the same account holder is permitted.
• SIA maybe held jointly by eligible investors.
• Eligible investors who invest in Treasury Bonds/Treasure Bills are permitted to enter into Repurchase (Repo) and Reverse Repurchase (Reverse Repo) transactions using Treasury Bonds/Treasure Bills purchased under this scheme as collateral.
Who Can Open a SIA Account?
• Foreign institutional investors such as country funds, regional funds or mutual funds.
• Corporate bodies incorporated outside Sri Lanka.
• Citizens of foreign states, whether resident in Sri Lanka or outside Sri Lanka
• Non-resident Sri Lankans.
• Sri Lankan professionals living in Sri Lanka who receive inward remittances.
• Dual citizens who receive inward remittances.

What Deposits are Permitted to a SIA Account?

• Inward remittances received from abroad through banking channels.
• Transfer of funds from NRFC/FCBU/RNNFC accounts of the same account holder.
• Sale proceeds realised out of sale/transfer/maturity proceeds of Treasury Bonds/Treasury Bills or any income realised by way of capital gain thereof.
• Sale proceeds of share supported by documentary evidence (Broker's Contract Notes and evidence of tax payments, etc) and dividends.
• Dividend income on units of unit trusts net of tax supported by documentary evidence.
• Proceeds on redemption of units net of tax supported by documentary evidence.
• Commissions relating to share transactions with supporting evidence.
• Liquidations proceeds of companies.
• Interest received on Treasury Bonds held by the account holder.
• All other credits permitted on shares in terms of operating instructions No.06/02/12/2001 dated 06/11/2001 in respect of stock borrowings and lending (SBL) transactions.
• Local expenses incurred by account holder.
• Inward remittances for investments in debentures.
• Proceeds realized out of sale or transfer or maturity of debentures.
• Interest accrued on debentures.

What Withdrawals Can be Made to a SIA Account?

• Payments for investments in shares/units of unit trusts/Treasury Bonds/Treasury Bills.
• Outward remittances of sale/redemption/maturity/liquidation proceeds of shares/units/Treasury Bonds/Treasury Bills and dividends of shares or units.
• Payments to brokers, primary dealers, lead managers, management company of a unit trust and bank charges.
• Local expense payments in LKR of the account holder.
• Transfer of funds to the accounts maintained by the account holder at FCBU.
• All debits permitted in the operating instructions No.06/02/12/2001 dated 06/11/2001 in respect of SBL transactions on shares.
• Payments for investments in debentures.

Documents Required to Open a SIA Account?

For Individual Investors:
• Relevant mandate (duly completed).
• Photocopy of passport (relevant pages where photograph and personal details are available).
• Letter of introduction from your Banker overseas (required only from citizens of foreign states).
• Declaration from the customer.
• Central Depository System (CDS) Account Opening Form duly completed.

For Corporate Investors:
• A certified copy of the Certificate of Incorporation.
• Copy of Memorandum (as appropriate) and Articles of Association duly certified by the Chairman and Secretary.
• Certified extract of Resolution of the Board of Directors as stated in the Account Opening Form.
• Certified list of the Directors issued by the Registrar of Companies of the country where the Company is incorporated.
• Specimen signature cards of officials who are authorized to operate the account and copies of their passports duly witnessed by the Chairman/Secretary of the Company.
• Letter of Introduction from Institutions Banker overseas.
• Central Depository System (CDS) Account Opening Form duly completed.

See Also:
• How to Invest in Sri Lanka Government Securities - Treasury Bills and Bonds
• How to Invest in Sri Lanka Equity Market - Colombo Stock Exchange, the Best Performing Capital Market of the World

Sri Lanka Limits Equity Warrants in Line with International Benchmarks

29th September 2010, www.lankabusinessonline.com

Sri Lanka is capping equity warrants to 15 percent of a company's capital, limiting the term to two years ahead and would also require firms to maintain a minimum public float, a top regulatory official said.

"These rules are in line with international benchmarks and is similar to rules in India and Malaysia," deputy director general of the Securities and Exchange Commission Malik Cader said after addressing a group of senior business executives at the LBR- LBO chief executive officers forum in Colombo.

An equity warrant gives a holder the right to buy a new share in a company (exercised) at a future date at a specific price and is similar to a derivative contract.

Crudely valued, a warrant is worth at least the difference between the current price of an ordinary share and the specified price at which it is exercised. But any exercised warrants would dilute the value of the ordinary share.

If the market price of the ordinary share is lower than exercise price at the exercise date, the warrants would expire without diluting the capital. The uncertainty makes warrants, which are similar to a derivative contract, highly speculative.

Unless a firm is on track to make increasingly higher profits every year, a warrant would be worthless.

Warrants are usually give free as a sweetner when companies issues fresh shares to existing shareholder to raise additional capital through a 'rights' issue.

Though warrants have been issued in Sri Lanka for years, amid the current boom, warrant issues have increased with Environmental Resources Investments, a firm which has bought into several other operating businesses, being a prolific issuer.

The market valuation of warrants can be skewed in a firm which is closely held by insiders, whose underlying shares can also be suffering the same fate, compounding the problem. Illiquid companies are favourite targets of price manipulators.

Cader said firms in the main board of the Colombo Stock Exchange would have to maintain a 25 percent public float to issue warrants and those on the second board would have to maintain at least 10 percent.

The regulator will also shortly release a consultation paper on devising minimum public floats, which though required at the time of listing are not maintained later.

Sri Lanka’s First Private Equity Fund to be Set up by Calamander Group with a Targeted Internal Rate of Return of 30pct

08th May 2010, www.e-bizsrilanka.com

Calamander Group Pte, a Singapore-based investment company, has plans to create the first private equity fund in Sri Lanka. The private equity fund is designed to achieve high capital growth (with a targeted internal rate of return of 30%) by buying companies that ride the commodity boom, Calamander posted in its website.

Calamander plans to invest US $50 million which would comprise a major 40 percent in tea, 25 percent in rubber, 20 percent in ceramic and the balance 15 percent in coconut businesses.

‘An export-oriented commodity based private fund is the most risk averse play on the Sri Lanka growth story. The group believes that although the security political risks remain, the macroeconomic backbone of the Sri Lankan economy remains fundamentally attractive for the next five to ten years,’ the company said.

In the tea and rubber industries, Calamander plans to buy a number of tea/rubber factories in a specific district to gain economies of scale and also buy a tea trading house to distribute production. In the ceramic and coconut sector Calamander will develop new strategies for growth and operate as a medium sized player, the company outlined in its website.

‘Calamander selects investments by applying well tested investment models. We focus on companies that have strong growth prospects, with a special emphasis on sectors where Sri Lanka has a global competitive advantage,’ the website added.