SECTION 7.0 Insurance Industry

Transcription

1 SECTION 7.0 Insurance Industry

2 7.0 INSURANCE INDUSTRY 7.1 Global Insurance Overview of the Global Insurance Market In 2013, the global insurance industry encountered a combination of turmoil, economic uncertainty and opportunity that it has never faced before. Although the US congress agreed to a deal that eventually softens the fiscal cliff and with several European countries evading bankruptcy, decline in consumer savings still remains a looming concern in the global insurance industry. Furthermore, prevailing lower interest rates may compel the investment returns to remain relatively weak. At the end of 2013, the global insurance industry size amounts to USD 4.64 Tn in terms of the total premium volume. Life and Non-life Insurance: Slower growth in 2013 Direct premiums written in the global insurance industry grew by 1.4% in 2013 to USD 4,641 Bn, down from 2.5% growth in Emerging markets' premiums grew by 7.4% in 2013, slightly stronger than the previous year, however in the advanced markets the premium growth stagnated at 0.3%. Figure 7.1 Total real premium growth in Advanced and Emerging markets since % Real growth rates 15% 10% 5% Total 0% 5% 10% Emerging markets Emerging markets 10-year moving average Advanced markets: 10-year moving average Advanced markets Source: World Insurance Report 2013 by Swiss Re According to the latest statistics, United States ranks No.1 in the world in terms of the total premium volume, which is USD 1.26 Tn that represents a 27.13% market share in the world. Japan stands second with a total premium volume of USD 531 Bn attributing to a market share of 11.45%. United Kingdom ranks third with total premium of USD 329 Bn and owning a market share of 7.1%. Sri Lanka's rank stands at 79th position with a world market share of 0.02% Global Life Insurance Flat sales in advanced markets slow global growth Global life insurance premiums written were USD 2,608 Bn in 2013 as growth slowed to 0.7% from 2.3% in The slowdown was mainly due to flat sales in advanced markets and stronger but below-trend premium growth in the emerging markets. In terms of Life premium volume, United States ranks No. 1 representing USD Bn. Arpico Insurance Initial Public Offering 22

3 7.0 INSURANCE INDUSTRY Global Non-life Insurance Advanced markets drag on global premium growth Global non-life premium growth slowed to 2.3% in 2013 from 2.7% in Total premiums amounted to USD 2,033 Bn. Premium expansion was weaker in the advanced markets. Growth also slowed in the emerging markets at 8.3%, nevertheless stronger enough. United States ranks No.1 in terms total premium volume in non-life insurance worth of USD Bn. Insurance Penetration and Density Average per capita spending on insurance in emerging markets rose to USD 129 in 2013 from USD 121 in In spending figure of 2013, USD 67 went to life insurance and the remaining USD 62 for non-life compared with USD 64 and USD 57 respectively in At present, Taiwan is the top ranker in terms of the total insurance penetration which is 17.6%. South Africa stands at second with a total penetration of 15.4%. Ranking third, Hong Kong owns a penetration of 13.2%. Figure 7.2 Insurance density and Penetration in Advance markets in 2013 Source: World Insurance Report 2013 by Swiss Re Arpico Insurance Initial Public Offering 23

4 7.0 INSURANCE INDUSTRY Reaching the untapped potential in the emerging markets Low penetration Levels in Insurance Insurers, faced with increased saturation in established markets, are compelled to move into emerging markets in South East Asia, hence, many of the notable insurance providers around the world are in the process of formulating strategies to enter into these markets and develop their direct insurance and reinsurance business and grow premium income. As depicted on the below Table 7.1, Countries such as China, Malaysia, Philippines, Thailand, Vietnam, Indonesia and even Sri Lanka still got potential to tap the unmet demand and to increase the insurance penetration given the current low penetration levels. Table 7.1 Insurance Penetration Levels in Asia Country Population (2013) 'Mn GDP 2013 USD 'Bn Life Insurance penetration 2013 (premium % of GDP) General Insurance penetration 2013 (premium % of GDP) World Ranking as per insurance penetration China 1, , % 1.40% 49 India 1, , % 0.80% 40 Malaysia % 1.70% 30 Thailand % 1.70% 26 Indonesia % 0.50% 58 Philippines % 0.50% 65 Sri Lanka % 0.70% 76 Taiwan % 3.10% 1 Vietnam % 0.70% 72 Source: World Insurance Report 2013 by Swiss Re Current Sri Lankan Economic environment is conducive to Investment Prevailing healthy economic conditions including the low interest rate regime and currency stability coupled with stable political environment highlight Sri Lanka as a favourable investment opportunity to many of the foreign investors. Current low penetration levels in the local insurance industry create significant potential for world's largest insurers to make a strategic entry into Sri Lanka to achieve further growth. This is largely due to the stagnant growth in the developed and matured markets. Recently, it was evident that many of the leading insurance companies such as AIA Insurance and Fairfax Insurance have already made their entry into Sri Lanka through acquisitions and mergers with existing local insurers. This in turn proves the appetite of world insurers to enter into the Sri Lankan market and reap benefits while this might continue to be one of the trends in creating growth in the Sri Lankan insurance industry. Arpico Insurance Initial Public Offering 24

5 7.0 INSURANCE INDUSTRY 7.2 Sri Lankan Insurance Industry Overview of Sri Lankan Insurance Industry Insurance industry in Sri Lanka reflects a highly dynamic business atmosphere with rising competition amongst its member companies and several ongoing regulatory shifts that were intended to make the industry a leading service segment in the country's projected economic development. The industry broadly comprises of two key business sectors, namely; Life and Non-Life insurance, and as at 31st December 2013, there were 21 member companies providing insurance services out of which 12 are composite insurers offering both Life and Non-Life insurance. 06 insurers operate only in General insurance while 03 insurers including AINS operates exclusively in Life insurance. The industry is mainly governed by the provisions of the Regulation of Insurance Industry Act No 43 of 2000 and the rules and guidelines issued thereupon by the Insurance Board of Sri Lanka (IBSL). Figure 7.3 Composition of Insurance Business Figure 7.4 Listed insurance Companies on CSE General Composite Life Non-Listed 63.6% Listed 36.4% Source: IBSL - Performance of the Insurance Industry for the year 2013 Source: CSE Data Of the total 21 insurance companies in the industry, 8 companies are listed on the Colombo Stock Exchange and as a percentage, it is 36.36%. IBSL as the governing body of the local insurance industry has taken a number of measures to encourage all insurance providers to get listed on the CSE to be more transparent, adopt better governance standards and to be more compliant. In order to formalize the process, IBSL has set up a deadline by 2016 for the member companies to complete the listing on the Stock Exchange and have also informed the composite insurers to split their business separately with the view of listing them later on as separate entities. Meanwhile, tax incentives have also been offered under the 2014 budget to encourage companies to expedite the listing process. Apart from the Insurance companies, there are 59 insurance brokers as at the end of year 2013 which has increased from 55 in year Also, 38,635 insurance agents offered insurance services in 2013 compared to 36,801 in Long Term insurance business has mainly relied on insurance agents. As at the end of year 2013, there were 1,379 branches spread across the country and that includes 389 general insurance branches, 466 Long Term insurance branches and 524 composite insurance branches Industry at a Glance Over the last five years, the insurance industry in Sri Lanka has shown a significant growth (growth in Gross Written Premiums GWP), especially in the years of 2010 and 2011, reaching its peak levels largely fuelled by the post war boom and also supported by a sharp increase in the vehicle registrations (2010: 15.12%, 2011: 18.47%) backed by reduced customs duty. However, the growth was slowed down in 2012 (11.03%) and in first half 2013 (9.06%) due to the stock market decline that affected unit-linked life products and increased customs duty along with unfavorable exchange rate movement, hampering the rate of new vehicle registrations (Fitch,2014). Arpico Insurance Initial Public Offering 25

6 7.0 INSURANCE INDUSTRY Table 7.2 Insurance Premiums and Penetration Levels Years (a) 2013(b) Long Term Insurance (LKR. Mn) 24,005 31,152 35,162 37,477 41,306 General Insurance (LKR. Mn) 33,548 35,101 43,329 49,694 53,177 Total Permium Income (LKR. Mn) 57,553 66,253 78,491 87,171 94,483 Growth Rate in Total Premium (%) (1.06) Gross Domestic Production (LKR. Bn) 4,835 5,604 6,544 7,579 8,674 GDP Growth Rate (%) Penetration % (Total Indutry Premium as % of GDP) Penetration % (Premium of Long Term Insurance Business as % of GDP) Penetration % (Premium of General Insurance Business as % of GDP) Insurance Density - (Total Premium Income / Population) (LKR) 2,814 3,208 3,761 4,288 4,613 Mid Year Population 20,450 20,653 20,869 20,328 20,483 No of New Life Policies issued 468, , , , ,436 No of Policies in Force 2,068,548 2,214,976 2,355,449 2,438,340 2,494,899 Source: IBSL - Statistical Review 2013 (a) Reinstated Audited Figures (b) Provisional Figures As depicted in Table 7.1, it appears that the Life insurance penetration in Sri Lanka is very low compared to other Countries in Asia. According to the statistics provided by IBSL as indicated in the Table 7.2, The ratio of Long term insurance GWP as a percentage of GDP was only 0.48% by the end of the first half of 2013, this was mainly due to low per capita income and lack of public understanding about the importance of insurance as an integral part of higher standard of living Total Assets of the Insurance Industry As of the end of the year 2013, Total insurance companies' assets amounted to LKR Bn compared to LKR Bn in This reflected a double digit year-on-year growth of 12.9%. By the end of 2013, the total assets of Life insurance amounted to LKR 217 Bn and the total assets of Non-Life stood at LKR 147 Bn. Figure 7.5 Total Assets of the Insurance Industry LKR Mn 400, , , % 21.02% 19.31% 20.81% 25.00% 20.00% Total assets of Insurance Companies Growth Rate 250, , , % 15.00% 10.00% 100,000 50, % (a) 2013 (b) 0.00% (a) Reinstated Audited Figures (b) Provisional Figures Source: IBSL - Statistical Review 2013 Arpico Insurance Initial Public Offering 26

7 7.0 INSURANCE INDUSTRY Company Wise Analysis of Total Assets As depicted in the Figure 7.6, Sri Lanka Insurance Corporation is the largest insurance provider in the industry, attributing to 40.08% of the total assets in the industry. It is notable that the biggest five insurance companies (Sri Lanka Insurance Corporation, Ceylinco Insurance, AIA Insurance, Union Assurance and Janashakthi Insurance) were dominating the insurance industry by sharing 88.89% of the total assets of the insurance industry. The remaining 16 companies only represented 11.11% of the total assets in the industry. Figure 7.6 Market Share of Long Term Insurers by Total Assets 2.06% 6.80% 40.08% 2.25% SL Insurance 5.12% Ceylinco 8.43% AIA Insurance Union Assurance Janashakthi 12.38% HNB Assurance Asian Alliance Other 22.88% Source: IBSL - Statistical Review Life Insurance At present, there are 15 companies providing life insurance. As shown in the Figure 7.7, Ceylinco Insurance PLC was the Market Leader in the Life Insurance business in the country with a market share of 26.93% in terms of Gross Written Premiums in Top five companies in the Life Insurance business, accounted for 82.53% of the market share, compared to 84.96% in It is distinguished that, the domination of the largest five Insurance companies in the Life insurance is seemed to be losing, with the emergence of small industry players. However, it appears, that there's a massive potential in the Life insurance business given the current penetration levels are very low. This would also mean that the small players has a substantial industry potential to buildup their market share, but would also be subjected to intense competition given the large number of players in the industry. Figure 7.7 Market Share of Long Term Insurers by GWP 7.38% 4.88% 5.21% 6.10% 26.93% Ceylinco SL Insurance AIA Insurance Union Assurance 13.35% Asian Alliance Janashakthi HNB Assurance Other 19.54% 16.62% Source: IBSL - Statistical Review 2013 Arpico Insurance Initial Public Offering 27

8 7.0 INSURANCE INDUSTRY Industry Analysis using Porter's Five Forces Rivalry Among Existing Players High According to the IBSL statistical review for year 2013, the rivalry among the existing industry players is very high and can mainly be seen amongst the five largest insurance providers, who totally own 89% of the total assets of the industry: Also, there is a growing competition among small players to retain their position and to grow. But in light of the facts discussed under the industry analysis, small players have the industry potential to grow and sustain in the industry if they continue to operate while offering innovative products and deploy market penetration strategies. Threat of New Entrants Low The threat of new entrants to the insurance industry is minimal. Since, it is closely supervised by the regulatory authority, IBSL. It is unlike that IBSL would issue any new licenses to new entrants given the financial industry is going through a consolidation plan and insurance industry is subjected to segregation of Life and General insurance business. It is a concern that, with the introduction of minimum capital requirement of LKR 500 Mn, most of the insurance companies might come across mergers and acquisitions in order to sustain operations in the industry. Bargaining Power of Suppliers High Primary suppliers to the insurance industry are reinsurers and their bargaining power is high. IBSL, the regulator for the Sri Lankan insurance industry advices and encourages all insurance companies to join hands with the world's best ranked and rated reinsurance companies. When it comes to the top world ranked reinsurance companies, they have the bargaining power even to change the clauses in the agreements signed with the local insurers. Hence, it could be considered the bargaining power of the suppliers in the industry is high. Bargaining Power of Customers Moderate to High Bargaining power of the customers is considered to be high in both Life and Non-life insurance industry as customers having a wide range of insurance providers to choose from. However, switching costs are involved when existing customers trying to move to new service providers in terms of losing no-claim bonuses on Non-life insurance and commitment periods on Life insurance. This would enhance the strength of insurance providers in securing their client base but won't significantly reduce customer bargaining power. Threat of Substitutes Low For the service of insurance, there are no direct substitutes. But the investment plans, pension schemes, child education plans and other long term financial services offered by non insurance companies can be viewed as indirect substitutes to insurances service. Figure 7.8 Porter's Five Forces Analysis for Insurance Industry Threat of Substitutes Bargaining Power of Customers Rivalry Among Existing Players Threat of New Entrants Bargaining Power of Suppliers Arpico Insurance Initial Public Offering 28

9 7.0 INSURANCE INDUSTRY Regulatory Pressure In 2011, IBSL introduced few changes to its existing regulations. They include: Risk-Based Capital (RBC) regime Segregation of composites into life and Non-life Increase in capital requirement from LKR 100 Mn to LKR 500 Mn Mandatory public listing ruling by 2016 IBSL believes that these regulatory changes would encourage better corporate governance and bring about more transparency into the local insurance industry Demand Side Drivers Growing demand for Healthcare insurance schemes In Sri Lanka, majority of the citizens depend on public healthcare services. However, due to the inadequacy and inefficiency inherent in the public healthcare services, most people are now moving in to private healthcare services given the level of their income and affordability. Hence, there is an increasing demand for healthcare insurance arising as a result of the changing mindset of general public that there is a need to allocate funds to meet any unexpected future healthcare needs. Increasing Ageing population A latest finding of researchers is the increasing ageing population which is becoming a threat in many of the Asian countries. It is estimated that the proportion of the population 65 years and older will increase from 6.7% in 2000 to 13.6% in Hence, it is expected that people would set aside more money given the health risks that they potentially exposed to. Also, there's an increasing trend among the public to invest in pension schemes, especially those who work in the private sector which in turn creates a market for pension schemes offered by life insurance providers. Figure 7.9 Ageing Population Comparison Female Male Female Male Age group Age group Percentage Percentage Source: Capitalizing on the Demographic Transition: Tackling Noncommunicable Diseases in South Asia, The World Bank, February Arpico Insurance Initial Public Offering 29

10 7.0 INSURANCE INDUSTRY Increase in lifestyle related diseases and growing trend in NCDs Researcher advocate that the NCDs (Non Communicable Diseases) in Sri Lanka are growing and a leading cause of deaths occur in low and middle income countries. As per the statistics published by Registrar General of Health Ministry, NCDs have caused 71% of total deaths. It is believed that the risk of NCDs increases with age and could reasonably be expected that NCD levels would increase with the projected growth in the aged population in the country. This too would increase the demand for medical insurance schemes covering such diseases. Rising per capita income to facilitate insurance service industry According to CBSL's recent publications, country's per capita income is expected to reach USD 4,000 by 2015 and the Sri Lankan Government expects it to increase to USD 7,000 in 2020 (as CBSL governor outlined in the presentation at Sri Lanka Economic Summit 2014). Given the rapid increase in the per capita income that would probably improve people's spending power, life insurance providers are expected to benefit. It could be expected that individuals may increase the amount spent on insurance with the increasing income and as a proactive measure. Figure 7.10 Per Capita GDP in Sri Lanka 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, E 2020E E 2020E Source: CBSL Data and CBSL Projections. Arpico Insurance Initial Public Offering 30

11 7.0 INSURANCE INDUSTRY Supply Side Drivers Life Insurance Penetration Compared to similar populated nations in the Asian region, Sri Lankan Life Insurance Penetration in 2013 (As a percentage of GDP) is low as 0.5% leaving a huge market potential to be addressed. Table 7.3 Life Insurance Penetration Levels in Asia Country China India Malaysia Thailand Indonesia Philippines Sri Lanka Taiwan Vietnam Population 2013 (Mn) Life Insurance Penetration (As a percentage of GDP) 1.60% 3.10% 3.20% 3.80% 1.60% 1.50% 0.50% 14.50% 0.60% It is inevitable that Sri Lankan life insurance industry has the capacity to grow compared to its regional peers. Use of superior marketing strategies that will build confidence and trust in the hearts of people will attract growth to the local insurance industry. Source: SwissRE Product diversification strategies At present, many of the local insurance providers are promoting life insurance with a wide variety of products that cater to different lifestyle needs of people. By introducing more and more new customer centered life insurance products such as medical insurance, long term investment plans and retirement plans, insurance providers would probably be able to tap new markets while expanding the prevailing market and industry. Arpico Insurance Initial Public Offering 31

12 SECTION 8.0 Arpico Insurance Limited

13 8.0 ARPICO INSURANCE LIMITED 8.1 Company Overview Arpico Insurance Limited is a subsidiary company of Richard Pieris & Company PLC, (RPC) one of the largest business conglomerates in Sri Lanka with an operating history of 82 years. RPC has diversified business interests across a number of business segments including Retail, Plantation, Tyre, Furniture, Plastics, Rubber and Services. Arpico Insurance is the latest addition to RPC's financial services sector. Arpico Insurance was incorporated in June 2011 with the intention of building up an insurance company with the brand ARPICO under the wings of Richard Pieris Group and to add value to group's financial services sector. Arpico Insurance was also formed to cater to the Sri Lankan community by providing a life insurance service that would deliver long term value and benefits to its customers while adding value while enhancing wealth of its Shareholders. The popularly known concept of Life Insurance in Sri Lanka is believed to be the schemes that provide benefits only at the death of the policyholder. However, Arpico Insurance has identified this expectation gap and came up with the concept Insurance for the Living whereby Arpico Insurance aims to offer benefits so that one can enjoy life whilst living and continue to provide for those who live thereafter. Hence, Arpico Insurance offers a wide variety of customized products that is in line with this motive. Arpico Insurance is proudly associated with World's largest and number 01 re-insurer, the German based Munich Re for risk preclusion along with global entities such as Life Insurance and Market Research Association (LIMRA) and Million Dollar Round Table (MDRT). The Company commenced its commercial operations in January 2012, following the insurance license it obtained in October Ownership Structure of Arpico Insurance Limited is as follows: Richard Pieris & Company PLC 100% 25.38% 77% Richard Pieris Distributors Ltd Arpico Insurance Limited Kegalle Plantations PLC 29.85% 44.77% Arpico Insurance Initial Public Offering 33

14 8.0 ARPICO INSURANCE LIMITED Vision To be the most trusted and innovative solutions provider for life insurance needs Mission Provide unparalleled services to clients through team sprit nourished by passion and developing innovative life insurance solutions, technical expertise, value additions and unique service capability. Values of the Company To serve customers with care, compassion and respect To do the right thing for the right reason Always think to lead in new ways and introduce result oriented solutions to customers Always nurture and value team sprit along with satisfaction Ensure maintenance of high ethical standard in all professional aspects and practices of the Company 8.2 The Icon Tree of Life The icon Tree of Life visual identity symbolizes the wisdom, protection, strength and stability of the Richard Pieris Group which is in the backdrop of the brand. The stretched out tree, is considered to be a powerful symbol to represent the group's 82 years of deep rooted heritage, continuous growth and diversification because tree would be the only living thing that continues to grow throughout its life-time. The colour scheme of the entire logo is a mixture of blue, signifying strength and stability with orange depicting warmth, energy, expansiveness, loyalty and confidence. White is universally accepted as representing purity- thus establishing the company's integrity. The Company has introduced a stylized tree for visual appeal and to make it contemporary. Arpico Insurance Initial Public Offering 34

15 8.0 ARPICO INSURANCE LIMITED 8.3 Business Overview Arpico Insurance operates in the Life Insurance business and currently has 08 products in its product portfolio that are geared to meet and fulfil many life insurance needs prevailing in the market. The Company has reached various parts of Sri Lanka and currently has presence in 04 main provinces including Western, Southern, North East and North Central. At present Arpico Insurance operates with 19 physical branches and 28 virtual branches. The Company expects to increase the number of physical branches to 31 by the end of year 2015 with the addition of another 12 more branches. Arpico Insurance targets to cater to a niche market initially as it is a much younger insurer in the life insurance segment in Sri Lanka who is still in the initiation (introduction) stage of its business cycle who has much larger potential for growth in the years to come. The target market of Arpico Insurance at present is the Sri Lankan population who earns an average monthly income of LKR 40,000 or above in the Western, Southern, North Eastern and North Central Provinces while it expects to move into other provinces too in the near future. 8.4 Key Milestones 2011 JUNE Incorporated as a Public Limited Company under the name Arpico Insurance Limited 2012 DECEMBER Reached LKR 100 Mn GWP in the first year of commercial operations 2013 MARCH Total Assets recorded an increase of LKR 150 Mn, even after the capital infusion of only LKR 60 Mn 2011 OCTOBER IBSL granted the License to Arpico Insurance to act as a Life Insurer primarily conducting Life Insurance business in Sri Lanka 2012 JANUARY Arpico Insurance officially commenced its Operations at Hyde Park Corner Office 2012 JANUARY Launched 5 new Insurance Products 2012 DECEMBER Increased the No. of branches to 4 by the end of DECEMBER Reached market share of 1% on the basis of the First Year s Premium 2012 DECEMBER Introduced 02 new products (School fees and Investment Bond) increasing total number of products to DECEMBER Branches were increased to 11 with the addition of 07 new branches in DECEMBER Doubled the GWP (LKR Mn) as at end of SEPTEMBER Opened up 08 new branches increasing the network to 19 branches Arpico Insurance Initial Public Offering 35

16 8.0 ARPICO INSURANCE LIMITED 8.5 Product Portfolio Arpico Term Assurance Plan Arpico Endowment Plan The Term Assurance plan is designed for the policyholder to enjoy receiving cost effective living benefits. Under this plan, the sum assured will be paid in the case of any unforeseen death during the term of the policy. This could be extended with the additional living benefits that can be added separately, depending on the need of the policyholder. Endowment Plan offers a living benefit where the sum assured is increased by 2.5% every year to accommodate inflation. Although the sum assured will be increased, the original premium will remain the same. The Endowment Plan can be used as a fund, which could be used to fulfil a living need of the policy holder in the future such as an emergency, education, retirement, etc. This could be extended with the additional living benefits that can be added separately, depending on the need of the policy holder. Arpico Investment Plan Arpico Hospitalization Per Day Plan Investment Plan is designed to allow the policyholder investment benefits by providing attractive returns as a living benefit. The rate of return is decided on every year. The policyholder can decide the frequency of premium payments. (e.g. monthly, quarterly, bi-annually or annually) Additionally, the living benefits can be attached to the plan. If a policyholder is hospitalized within Sri Lanka, as a result of an accident or illness, this benefit will pay an amount equal to the stated per day amount, multiplied by the number of completed hospitalized days. In the event of ICU treatment, the benefit will be doubled. The Hospitalization benefit can be obtained up to LKR 10,000 per day. Arpico Hospitalization Reimbursement Plan Arpico Loan Protection Plan The plan covers the policy holder and his family for surgical & hospitalization expenses up to LKR 300,000 per annum. If hospitalization does occur within Sri Lanka, as a result of an accident or illness, this benefit will reimburse the expenses incurred on such treatment up to an agreed amount per policy year. Mortgage protection Plan will ensure that the policyholder's loan balances are paid to the financial institution where borrowed from, in the event of a death. The policy ensures that the policyholder's assets such as house, building, etc, are free from mortgage as a living benefit to his/her dependents. Arpico Insurance Initial Public Offering 36

17 8.0 ARPICO INSURANCE LIMITED Arpico Education / School Fees Plan Arpico Group Assurance Plan School Fees plan is designed to lessen parent's' burden of the children's school fees in the event of an unforeseen circumstance. The monthly amount, which is to be paid to the policyholder's beneficiary, can be decided on at the time of obtaining the policy. Group Insurance Plan Covers a group of people; usually members of a common society, employees of a common employer or professionals in a common group. Additionally, the following living benefits can be attached to this plan. Accidental Death Benefit Permanent &Total Disability Benefit Permanent Partial Disability Benefit Critical illness Benefit Funeral Expense Benefit The difference and the value addition of Arpico Insurance products is that the policyholder has the option to upgrade and customize their products with additional benefits, such as; Accidental Death Benefit Permanent &Total Disability Benefit Permanent Partial Disability Benefit Critical illness Benefit Funeral Expense Benefit Additional term protection Benefit Family Income Benefit Spouse Cover Benefit Child Critical Illness benefit Waiver of Premium Benefit Hospitalization per Day Benefit Hospitalization Reimbursement Benefit Arpico Insurance Initial Public Offering 37

18 8.0 ARPICO INSURANCE LIMITED Branch Network of Arpico Insurance Vavuniya Trincomalee Anuradhapura Kurunegala Batticaloa Negombo Kiribathgoda Panadura Kaluthara Gampaha Maharagama Avissawella Homagama Rathnapura Mathugama Balangoda Embilipitya Galle Matara Arpico Insurance Initial Public Offering 38

19 8.0 ARPICO INSURANCE LIMITED 8.6 Key Strengths of Arpico Insurance Backed by the Strong Brand Name ARPICO ARPICO is a well known brand name among the Sri Lankan community, from Households to Corporates, from young to Old and from Urban to Rural, the ARPICO name is popular and has built trust with its operations for over 82 years. Hence, taking the products of Arpico Insurance to its target market is much easier which in turn enables AINS to build up its customer base quickly and easily. Professional Team AINS strongly believes in the capability and strength of its professional staff that is also well trained to sell the products to its target market. At present, AINS operates with 406 sales employees. AINS' sales staff is also equipped with modern technology that enables them to provide a quick and convenient service to their customers that would facilitate productivity. Distribution Reach Although AINS is a budding life insurer in its 3rd year of commercial operation, the Company has managed to establish a branch network of 19 physical branches and 28 virtual branches across 8 major provinces in Sri Lanka, i.e. Western, Southern, North Central, Northern, North Western, Sabaragamuwa, Eastern and Uva. AINS aims at continuously investing on new branches so as to be in line with its growth targets and objectives. Customer Service and Innovation AINS operates with a range of life insurance products which are also customized and could be arranged to suit the varying needs of the customers. Hence, it provides a customer oriented service that would be a key selling point when attracting new customers as well as retaining the existing customers. Furthermore, AINS have introduced few products that are unique and innovative, for example their Arpico Education / School Fees plan has grabbed customer interest due to its ability to serve evolving customer needs. Use of Modern Technology Technology advancement is of key importance in the insurance industry this is because, use of technology enables insurers to provide a customized service to their clients which is also convenient and efficient. Hence, Arpico Insurance has identified the importance of using technology in their services. AINS' sales staff are equipped with modern technology in their hands thereby replacing the conventional paperwork that definitely adds value to the customer and increase the efficiency of the processes too. In addition to that, AINS also have introduced Short Message Services (SMS) which is a popular means of communication, to send payment acknowledgements, premium payment reminders and other information that create awareness about their benefits and special offers among the policyholders. Arpico Insurance Initial Public Offering 39

20 8.0 ARPICO INSURANCE LIMITED 8.7 Future Direction & 8.8 Assumptions Relating to Strategic Plans Future Plans Arpico Insurance (AINS) aims to achieve LKR 1 Bn in GWP in year 2017, which would be the 6th year of its operations. In addition to that, Arpico Insurance also aims to make profits in 2014 which would be the 3rd year of operations. If achieved, this would be a record that has not been achieved by any life insurer in the history of the Sri Lankan insurance industry. AINS intends to build up a life fund of LKR 1 Bn by the end of year In terms of the premium retention, AINS is planning to increase the first year retention to 75% and 2nd year premium retention to 65% by year 2018 from the current levels of 58% and 45% respectively. Furthermore, the Company is looking at strategically strengthening its branch network to cover all the geographical areas of Sri Lanka. Company's plan is to increase its branch network to 31 by the end of year 2015, from the current branch network of 19. Arpico insurance believes its human resources to be at the heart of its success and is committed towards the continuous improvement of its human capital. Hence, the extensive training modules of the trilingual training department are committed in improving the sales team from all across Sri Lanka. In terms of the sales force, Company is focused on developing the active sales force to 680 by end of AINS expects the macroeconomic conditions of the country would remain favourable to its business or would not become adverse to its ongoing and planned business operations. AINS believes that the prevailing tax legislation in the country that directly or indirectly applicable to its products/services to either remain unchanged or have no adverse change. AINS assumes that its existing staff strength and the productivity of the work force will not significantly reduce as a result of any driving force. AINS believes that the industry regulator IBSL, will not impose any new regulations that would significantly affect the operations and the expected future plans of AINS. AINS expects to be efficient in terms of its operations and would also increase the efficiency of its insurance products that are offered which would ultimately enable it to increase its retention premiums as discussed in the future plans. Arpico Insurance is redefining the landscape of insurance with its novel concept of Insurance for the Living. Hence, the Company is focused at developing innovative and customized insurance solutions to strengthen its current product portfolio. In terms of the regulatory changes, such as the implementation of the Risk-Based Capital (RBC), Arpico Insurance works closely with its Consultant Actuaries to ensure that it complies with all the regulatory requirements when the RBC rule becomes compulsory by Arpico Insurance expects to promote its operations backed by an advanced system and thereby, will continue to actively engage in developing its systems in such a way that its services are provided in a customized way with highest satisfaction for its customers. Arpico Insurance Initial Public Offering 40

21 SECTION 9.0 Corporate Information

22 9.0 CORPORATE INFORMATION 9.1 Corporate Structure The Board of Directors of Arpico Insurance Limited Table 9.1 Details of Board of Directors Name Mr. Viville Perera Mr. Jagath Dissanayake Mrs. Lasinee Serasinhe Mr. S. Sirikananathan Address 33C1, King's Gate, Keells Housing Scheme, Buthgamuwa Road, Kalapaluwawa, Rajagiriya. 264/3, Dewala Road, Koswatte, Battaramulla. 17B, Anura Mawatha, off Anderson Road, Kalubowila. 291/7, Edward Avenue, Havelock Road, Colombo 06. Mr. Viville Perera (Non-Executive Director) Mr. Viville Perera is a Science graduate from Kelaniya University with Second Class Honours and a Fellow Member of the Chartered Institute of Management Accountants and Associate Member of the Chartered Institute of Marketing in United Kingdom. Mr. Perera has over 30 years experience in senior managerial capacity in leading business organizations such as Associated Newspapers of Ceylon Limited, Middleway Ltd (Ceylinco Group) and Amico Group of Companies. He has served as a Treasurer and Vice President of Sri Lanka Institute of Packaging and a member of the lecture panel for SLIM and ABE Sri Lanka Branch for examinations leading to CIM and ABE (UK). Mr. Jagath Dissanayake (Non-Executive Director) He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka with over 27 years of managerial experience in the fields of accounting, auditing & marketing and on operational activities. He has gained extensive experience both overseas and in Sri Lanka. Most of his overseas experience has been in multinationals. He is currently the Group Chief Financial Officer of the Richard Pieris Group. Mrs. Lasinee Serasinhe (Independent Non-Executive Director) The Board of Directors of AINS endeavours to provide entrepreneurial leadership through effective formulation and execution of policies and procedures to attain the objectives of the Company. As at the date of the Prospectus, the Board of Arpico Insurance comprises of Four (04) Directors out of which Two (02) are Non- Executive Directors and two (02) are Independent Directors. Mrs. Serasinhe is a Fellow of the Chartered Institute of Management Accountants (UK), Fellow of the Chartered Global Management Accountants and holds a Diploma in Computer Programming. Mrs. Serasinhe counts over 20 years of regulatory experience serving the Securities and Exchange Commission of Sri Lanka and the Insurance Board of Sri Lanka (IBSL). She took up duties as the Director General of the IBSL at the time that IBSL set up its office independently and worked at the IBSL until her retirement. Whilst being the Director General of the IBSL, she served as a Board Member of the National Insurance Trust Fund in the capacity of an Ex-officio Member. Subsequently, she served the Ministry of Finance in the capacity of an Advisor for a short period of time. Prior to taking up the post of the Director General, IBSL she served the Securities and Exchange Commission as a Director. Mrs. Serasinhe has several years of experience in the field of Finance in the Private Sector prior to her entry into the regulatory arena. Mrs. Serasinhe is currently functioning as a consultant to the private sector and is attached to SSP Corporate Services (Pvt.) Ltd. Mr. S. Sirikananathan (Independent Non-Executive Director) Mr. Sirikananathan is a retired partner of KPMG, an international firm of chartered accountants and is presently a sole practitioner under the firm name Sarasi & Company. He is also on the Board of Bartleet Finance PLC as an Independent Non-Executive Director and the Chairman of the company's Audit Committee. Mr. Sirikananathan counts over 40 years of audit experience with KPMG and had engaged on audits of star class hotels, conglomerates, development organizations, multinational banks, finance companies, insurance companies and several listed companies. He also served as Director / Financial Consultant to the Associated News Papers of Ceylon Ltd. (ANCL) Mr. Sirikananathan is a Fellow Member of The Institute of Chartered Accountants of Sri Lanka (FCA) and is also a Fellow Member of the Institute of Certified Management Accountants of Sri Lanka (FCMA). He holds a Bachelor of Science Honours Degree in Physical Science from the University of Peradeniya and has served on the Accounting Standards and Auditing Standards Committee of The Institute of Chartered Accountants of Sri Lanka for eleven (11) and seven (7) years respectively. Arpico Insurance Initial Public Offering 42

23 9.0 CORPORATE INFORMATION Table 9.2 Directors' other Directorships Name Mr. Viville Perera Mr. Jagath Dissanayake Mrs. Lasinee Serasinhe Mr. S. Sirikananathan Company Name Richard Pieris & Company PLC Richard Pieris Exports PLC Richard Pieris Plantations (Private) Limited R P C Retail Developments (Private) Limited Arpico Insurance Limited Arpico Ataraxia Asset Management (Private) Limited Arpico Warehouse (Private) Limited RPC Logistics Limited Arpimalls Development Company (Private) Limited Arpico Industrial Development Company (Private) Limited Markray Systems (Private) Limited RPC Real Estate Development Company (Private) Limited Arpico Exotica Asiana (Private) Limited Arpico Natural Latexfoams (Private) Limited Arpico Furniture Distributors (Private) Ltd Arpico Hospital (Private) Ltd Arpico Infosys (Private) Ltd Arpico Homes Ltd Arpico Hotel Services (Pvt) Ltd Richard Pieris Financial Services (Pvt) Ltd Arpico Developments (Pvt) Ltd Arpico Furniture Limited RPC Construction Arpico Capital Limited Eastern Brokers Limited N/A Bartleet Finance PLC 9.2 Directors' Interest in Shares 9.5 Directors' Emoluments None of the Directors of AINS owns any Shares of AINS as at 31st October Directors' Interest in Assets The Directors of AINS hold no interest either directly or indirectly in any other assets acquired, disposed or leased by the company during the past two (02) years preceding the date of this Prospectus. Further, it is not proposed that the Directors of AINS will hold any interest in assets to be acquired, disposed or leased by the Company in the two (02) years subsequent to the Issue. 9.4 Directors' Interest in Contracts There are no contracts or arrangements in force as at 31st October 2014, in which the Directors of AINS are materially interested in relation to the business of the company. Aggregate emoluments paid in the form of salaries, bonuses and/or profit sharing payments to the Directors inclusive of Executive Directors are given below. During the FY 2013 AINS has not paid any emoluments to its Directors. However, Directors are expected to be remunerated in the form of salaries, bonuses and/or profit sharing payments during the FY 2014 which is estimated to be LKR 0.88 Mn. 9.6 Statement Board of Directors No Director or person nominated to become a director of the company has been involved in any of the followings; A petition under any bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which he was an executive officer: and Conviction for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers disqualification. Arpico Insurance Initial Public Offering 43

24 9.0 CORPORATE INFORMATION 9.7 Corporate Governance Corporate Governance is undoubtedly one of the most important features of a corporate which distinct it from competitors in the eyes of investors and other key stakeholders. A Corporate entity with high standards of governance would necessarily provide the comfort to stakeholders that the conduct of its business is carried out and maintained at a high ethical and professional standard. The Board of Directors of Arpico Insurance Limited is committed and takes responsibility to maintain the highest standards of Corporate Governance. Arpico Insurance has designed its Corporate Governance policies and practices to ensure that the Company is focused on its responsibilities to its stakeholders and on creating long term Shareholder value. Company's vision is firmly embedded and maintained throughout with principals of transparency and ethical business practices where the Board of Directors and the Senior Management of the Company maintains the philosophy of sound corporate governance by being transparent to all its stakeholders with proper ethics, values and accountability committed to higher standards of corporate governance in the Organization. Frequent reviews are made to ensure smooth and proper functioning of good governance. This is further facilitated by the proper mix of Executive, Non Executive and Independent Directors in the Board of AINS. In fact, the Board of AINS only comprises of Non Executive Directors and Independent Non Executive Directors who do not have any business interest that could materially influence their independent judgment in the decision making process of AINS which demonstrates more transparency and independence in corporate affairs. Arpico Insurance operates with its own Audit Committee and Investment Committee. However, in terms of the remuneration committee, AINS uses its Parent's (Richard Pieris & Company PLC's) remuneration committee. Audit Committee The Audit Committee of AINS comprises of Two (02) Independent Non Executive Directors of the Company. Members of the Audit Committee are as follows: Mr. S. Sirikananathan Independent Non- Executive Director Investment Committee Members of the Investment Committee are as follows: Mr. Viville Perera Mr. Jagath Dissanayake Mrs. Lasinee Serasinhe Remuneration Committee AINS uses the same remuneration committee of its Parent, Richard Pieris & Company PLC. The Remuneration Committee of Richard Pieris & Company PLC comprises of Chairman and three (03) Independent Non Executive Directors. Members of the Remuneration Committee are as follows: Dr. Sena Yaddehige Prof. Lakshman R. Watawala Susantha Pathirana Dr. S. A. B. Ekanayake Non-Executive Director Non-Executive Director Independent Non- Executive Director Chairman Independent Non- Executive Director Independent Non- Executive Director Independent Non- Executive Director In a highly competitive environment, attracting and retaining high calibre executives is a key challenge faced by the Group. Hence, the remuneration policy of the Company intends to retain and attract required human resources in order to ensure the sustainability of its operations while it would also reward the employees based on their performance. In this context, the remuneration committee of the Group takes into account, competition, market information and business performance in declaring the overall remuneration policy of the Group. 9.8 Corporate Management Corporate Management of AINS possesses extensive knowledge and excellent business acumen in functioning of its business operation. Brief profiles of the key management of AINS are provided below. Mrs. Lasinee Serasinhe Independent Non- Executive Director Arpico Insurance Initial Public Offering 44

25 9.0 CORPORATE INFORMATION Mr. D. C. Kevitiyagala (CEO) Mr. Kevitiyagala is an Associate Member of Charted Insurance Institute of UK with experience spanning over 35 years in the insurance industry in both Sri Lanka and in overseas. He is also a holder of Business Development Degree specialized in Banking, finance and insurance from the University of Colombo. He is a member of the Society of Mortgage Professionals as well. CEO's Address: No: 9/2A, 8th Lane, Pagoda Road, Nugegoda. Mr. E. C. Perera (Specified Officer) Mr Perera counts over 30 of experience in the field of Insurance. He is an associate member of Chartered Institute of Insurance (UK) and a Chartered Insurer. Mr. T.S. Kitchilan (AGM-Operation) Mr. Kitchilan counts over 13 years of experience in the field of Insurance. He holds an MSc in information Management from SLIIT and a Postgraduate Diploma in Information Management. He has worked in the capacity of Senior Manager at Janashakthi Insurance PLC for both Life and General Business and was directly accountable for the company's Sales Force Administration and Performance Evaluation. Mr. H. E. T. Sampath (AGM- Sales) Mr. Sampath counts over 21 years in the industry. He has completed AMTC LIMRA, LUTC Diploma in Insurance LIMRA, LUTC Personal insurance Course LIMRA and Management Skills Course IMS. Mr. W. N. C. P. Nishan (AGM- Sales) Mr. Nishan counts over 20 years in the industry. He has completed AMTC LIMRA, LUTC Diploma in Insurance LIMRA, LUTC Personal insurance Course LIMRA and Management Skills Course IMS. Mr. Melanga A. Doolwala (Finance Manager) Mr. Doolwala counts over 12 years of experience in finance and out of which 8 years in the insurance industry. He is an Associate Member of the Chartered Institute of Management Accountants UK. He also holds a Diploma in Computer Studies from National Centre for Computing UK. He has completed the Licentiate Exams from Insurance Institute of India. 9.9 Human Resources Arpico Insurance is driven by a team of highly motivated and technically qualified staff focused on core Company activities. The Company remains committed in developing the skills and knowledge base of its employees at all levels. Training programs are organized on a regular basis and employees have been provided with opportunities for developing their knowledge and skills in keeping with the Company's focus on continuous professional development. Arpico Insurance periodically reviews staff welfare in order to uplift the quality of work life of its staff. Current staff strength of AINS consists of 128 permanent employees. The employees of the Company are not members of any labour union and the Company has not entered into any agreements with any labour union. Table 9.3 Human Resources of AINS Staff Category Management and Professional 38 Operational 79 Clerical 11 Total Key Management's Emoluments Total emoluments paid to the Corporate Management (excluding Directors) in the form of salaries, bonuses and/or profit sharing payments during the FY 2013 amounted to LKR 9.75 Mn. The Corporate Management is expected to be remunerated in the form of salaries, bonuses and/or profit sharing payments during the FY 2014 to an approximate extent of LKR 14.8 Mn Statement CEO Number of Employees The CEO of AINS has not been involved in any of the following: A petition under any bankruptcy laws filed against such person or any partnership in which he was a partner or any corporation of which he was an executive officer; Conviction for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers a disqualification. Arpico Insurance Initial Public Offering 45

26 SECTION 10.0 Other Company Information

27 10.0 OTHER COMPANY INFORMATION 10.1 Relationship with Key Clients and Suppliers Clients AINS approaches its clients through 406 of sales force (Permanent Sale Force 95, Remaining 311 serves as sales agents) and established a good relationship over the years. AINS has an extra advantage of offering a group insurance policy for all employees in the Richard Pieris & Company PLC group. However, it should be noted that there is no significant dependency as a client. Hence, there is no dependency on any single customer that would affect the performance of AINS. Suppliers AINS is affiliated with Munich Re, one of World's leading reinsurance providers. AINS has been maintaining a strong relationship with Munich Re during the last two and a half years Mortgages and Charges on Assets As at 31st October 2014, there are no lease, lease purchase, hire purchase and capital commitments of AINS. As at 31st October 2014, there are no guarantees and other material contingent liabilities outstanding of AINS. As at 31st October 2014, there are no mortgages and charges on the assets of AINS Inter-company Balances Table 10.1 Inter-Company Balances of AINS as at 30th September 2014 Related Company Name Maskeliya Plantation Richard Pieris & Company PLC Due From 2,082,159 Due To 75, Dividend Policy Total 2,082,159 75,470 Details of dividends declared during the preceding financial years have been stated under "Dividends" in the "Accountants' Report" presented in Section 15.1 of the Prospectus Details of Material Indebtedness Could be outlined as follows; 10.4 Working Capital The Board is of the opinion that working capital is sufficient for the purpose of carrying out day-to-day operations of the Company. However, for future business expansions, the Company intends to utilize the proceeds of the Issue contemplated herein, and Company Reserves as set out in Section 5.2 of the Prospectus Debentures As at 31st October 2014, there are no debentures outstanding of AINS Loan Capital As at 31st October 2014, there are no loan capital outstanding of AINS Bank Loans & Other Borrowings As at 31st October 2014, there are no bank loans, term loans, other borrowings, or indebtedness in the nature of borrowings, including bank overdrafts and liabilities under acceptance or acceptance credits outstanding of AINS. Arpico Insurance Initial Public Offering 47

28 10.0 OTHER COMPANY INFORMATION 10.5 Litigation, Disputes and 10.8 Details of Benefits Paid to Contingent Liabilities Promoters As at 31st October 2014, there are no material legal, No benefit has been paid or given within the two (02) arbitration or mediation proceedings pending against the years preceding the Issue and there are no benefits Company that would materially affect the current intended to be paid or given to any promoter. financial position, future operations or profits of the Company. The Company was not involved in any legal, arbitration or mediation proceedings in the recent past 10.9 Details of Management which had any significant effects on the Company's financial position or profitability. Further, there are no Agreements penalties imposed by any regulatory or state authority against the Company. There are no any management agreements presently in As at 31st October 2014, there are no penalties imposed by any regulatory or state authority against the Company. As at 31st October 2014, there are no contingent liabilities that would affect current and future profits of the Company. force or currently being considered as at 31st October Material Contracts As at 31st October 2014, there are no material contracts entered into or any agreements entered into with other parties by the Company other than those contracts entered into as part of the ordinary course of business Details of Commissions Paid No commission has been paid in the two (02) years preceding the issue or payable for subscribing or agreeing to subscribe or procuring or agreeing to procure subscriptions for any Shares of the Company. Arpico Insurance Initial Public Offering 48

29 SECTION 11.0 Capital Structure

30 11.0 CAPITAL STRUCTURE 11.1 An Overview of the Stated Capital An overview of the Stated Capital of AINS as at the date of this Prospectus is set forth below. There has not been any change in the Stated Capital of the Company since the date of this prospectus. Table 11.1 Movements in Stated Capital (January 1, October 31, 2014) Fully Paid Ordinary Shares Balance as at January 1, 2012 Balance as at December 31, 2012 No. of Shares 50,300,007 50,300,007 LKR 503,000, ,000,070 Balance as at January 1, 2013 On March 1, 2013 issue of 6,000,000 Ordinary Voting Shares were issued at LKR 10 per Share Balance as at December 31, 2013 Balance as at January 1, 2014 On February 21, 2014 issue of 3,300,000 Ordinary Voting Shares were issued at LKR 10 per Share Balance as at October 31, ,300,007 6,000,000 56,300,007 56,300,007 3,300,000 59,600, ,000,070 60,000, ,000, ,000,070 33,000, ,000,070 The Company does not have any Subsidiary or any Associate Companies as at date. The Shareholding structure as at 31st October 2014, has remained unchanged up to the date of this Prospectus Details Pertaining to the Locked-in Shares Table 11.2 Details of Shares locked- in (Based on Shares held prior to IPO) Category of Shareholders (Pre- Listing) Locked-in Shares The time period after which the Shares will be available for trading No. of Shares No. of Shares as a percentage of total No. of Shares in issue Non- Public Locked-in 6 months from the date of listing 59,600, % Public N/A N/A - - The Entity hereby confirms that the information furnished herewith shall remain unchanged until the Date of Listing. Arpico Insurance Initial Public Offering 50

31 11.0 CAPITAL STRUCTURE Table 11.3 Details of Shares locked-in subsequent to the IPO Category of Shareholders (Pre- Listing) Locked-in Shares The time period after which the Shares will be available for trading No. of Shares No. of Shares as a percentage of total No. of Shares in issue Non- Public Locked-in 6 months from the date of listing 59,600, % Public Not Locked-in N/A 6,630, % 11.3 Transfer / Gifting of Shares by Major Shareholders There had not been any Shares of the Company, either being transferred or gifted by any Shareholder of the Company during the one (01) year period preceding the date of the Initial Listing Application Shareholders of AINS Tabulated below are the Shareholders of the Company as at the date of the prospectus and subsequent to the Issue, assuming full subscription. Table 11.4 Shareholders of AINS Name of Shareholder Kegalle Plantations PLC Richard Pieris Distributors (Pvt) Ltd. Richard Pieris & Company PLC Richard Pieris Securities (Pvt) Ltd. Richard Pieris Financial Services (Pvt) Ltd. Plastishells Ltd. Arpico Plastics Ltd. Total Number of Shares 26,685,001 17,790,001 15,125, ,600,007 Percentage of Shareholding % 44.77% 29.85% 25.38% 0.00% 0.00% 0.00% 0.00% % Arpico Insurance Initial Public Offering 51

32 11.0 CAPITAL STRUCTURE Table 11.5 Pre IPO Vs Post IPO Shareholding of AINS Name of Shareholder Pre IPO Shareholding Post IPO Shareholding No. of Shares % No. of Shares % Kegalle Plantations PLC 26,685, % 26,685, % Richard Pieris Distributors (Pvt) Ltd. 17,790, % 17,790, % Richard Pieris & Company PLC 15,125, % 15,125, % Richard Pieris Securities (Pvt) Ltd % % Richard Pieris Financial Services (Pvt) Ltd % % Plastishells Ltd % % Arpico Plastics Ltd % % Public - - 6,630, % Total 59,600, % 66,230, % 11.5 Details of Other Changes to Stated Capital The Company has not carried out any redemption or repurchase of Shares or any reduction of Stated Capital in the last two (02) years preceding the date of this Prospectus Details of Convertible Debt Securities The Company has no outstanding convertible debt securities as at the date of this Prospectus Details of Shares Sold Privately in Conjunction with the Issue No Shares are being issued privately in conjunction with this Issue Free Transferability of Shares Other than the 59,600,007 Shares that has to be locked - in for a period of six months from the date of listing of Shares on the Colombo Stock Exchange as per the Section (d) of the CSE Listing Rules and as per the approval granted under Section 28A of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended), there are no restrictions on the transferability of the Shares and Shares shall be freely transferable subsequent to the Shares being listed on the CSE Take-over Offers There have been no take-over offers by third parties in respect of the Company's Shares during the past two (02) years, preceding the date of this Prospectus. The Company has not made any take-over offers in respect of Shares of a third party during the past two (02) years, preceding the date of this Prospectus. Arpico Insurance Initial Public Offering 52

33 11.0 CAPITAL STRUCTURE Taxation Corporate Taxation and Tax on Income AINS is liable for tax at the rate of 28% in terms of the provisions in the Inland Revenue Act No. 10 of 2006 and amendments therto. Ascertainment of Profits and Income of AINS for the purpose of calculating Income Tax will be governed by Section 92 of the Inland Revenue Act No. 10 of 2006 and subsequent amendments Economic Service Charge (ESC) In accordance with the Economic Service Charge Act No. 13 of 2006, as amended, Arpico Insurance is liable at the rate of 0.25% on the premium income, only if the company does not have taxable income for the preceding year of assessment. However, the following shall not to be liable for ESC Life Insurance Premium Insurance premium against damages or destruction by strike, riot, civil commotion or acts of terrorism and paid into the consolidated fund Value Added Tax (VAT) Under the Value Added Tax Act No. 14 of 2002 and its subsequent amendments, Arpico Insurance's Life insurance premium is exempt from VAT Nation Building Tax (NBT) In line with the Nation Building Tax Act No. 9 of 2009, Arpico Insurance's Life insurance premium is exempt from NBT Stamp Duty Stamp Duty is applicable on policy insurance of LKR 1 for every LKR 1,000 or part thereof other than following (a) Policy of life or medical insurance; or (b) Policy of insurance on (i) plant, machinery or equipment used in the construction industry or agriculture; or (ii) any motor vehicle other than any motor vehicle used for private traveling. Arpico Insurance Initial Public Offering 53

34 SECTION 12.0 Management Discussion & Analysis

35 12.0 MANAGEMENT DISCUSSION & ANALYSIS Arpico Insurance Limited started commercial operations in Presented below are the summarized extracts from the financials of AINS for the period since Period under consideration for the Management Discussion & Analysis: Financial year ending 31st December 2012, Financial year ending 31st December 2013 and Q* 2014 Q3* - 09 months ending 30th September Total Revenue Significant growth in revenue Figure 12.1 Revenue Total Revenue of AINS is comprised of revenue sources in the form of Gross Written Premium (GWP), Fee & Commission Income, Investment Income and other Operating Income less Premium ceded to reinsurers. Over the last two and half years, approximately 63% of the Total Revenue of the Company has come from its primary operating income of Net Gross Written Premium (i.e. Gross Written Premium less Premium ceded to reinsurers). Also, during the year 2013, AINS recorded 75% year on year growth in Total Revenue even in a highly competitive environment reflecting the success of the Company's penetration in to the focused market segment Gross Written Premium 300,000, ,000, ,000, ,000, ,000, ,000, Source: Company Financials Q* Highest First Year Gross Written Premium Ever by a Life Insurer Figure 12.2 Gross Written Premium 250,000, Arpico Insurance managed to post LKR Mn in GWP in the FY2012 which is the highest ever First Year GWP recorded by any Life Insurer in Sri Lanka as per IBSL statistics. Further continuing on that the Company was able to record a 103% growth in GWP in the FY13. During the first nine months of FY14, the Company registered total GWP of LKR Mn. 200,000, ,000, ,000, ,000, Source: Company Financials Q* Arpico Insurance Initial Public Offering 55

36 12.0 MANAGEMENT DISCUSSION & ANALYSIS 12.3 Profitability Gradual decrease in Net Losses approaching Break Even AINS is in the introduction stage of its Business Life Cycle and it is operating in losses. It is understandable that an infant organization takes some time to Breaking Even. Past records suggest the Break Even is within four (04) to Five (05) years. AINS believes that the Company will break even by its 4th year of Commercial Operations (2015). Also fueled by the rapid increase in the Revenue and effective cost control mechanism, the Company was able to reduce the net losses. Figure 12.3 Net Profit, ROE, Net Profit Margin Net Loss ROE Net Profit Margin Q* - (5,000,000.00) (10,000,000.00) (15,000,000.00) (20,000,000.00) (25,000,000.00) (30,000,000.00) (35,000,000.00) (40,000,000.00) (45,000,000.00) Source: Company Financials 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% 12.4 Total Assets Overall asset base grew by 11.56% and 25.94% in 2012 and 2013 respectively AINS' Total Asset base has recorded a significant growth in the year This growth has outperformed the average growth of local Life Insurance industry's Total Assets, which amounts to 15.2% and 13.8% in 2012 and 2013 respectively as indicated in the IBSL Annual Report for year Figure 12.4 Total Assets 900,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, Q* Total Assets 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Source: Company Financials Arpico Insurance Initial Public Offering 56

37 12.0 MANAGEMENT DISCUSSION & ANALYSIS 12.5 Solvency Margin For an insurance business, Solvency Margin is one of the basic requirements to be fulfilled. Though Arpico Insurance is an infant to the industry, AINS has duly maintained the solvency ratio up to the level that is required by IBSL. It has been depicted in the Actuary's Valuation report (By M. Poopalanathan) that is been attached in the section xxxx Appendices. In his opinion, AINS has adequate and proper reserves have been provided as at 31 December 2012 and 31 December 2013 for the liabilities in respect of Long Term Insurance business of the Company. As per his opinion, the Long Term Insurance Fund as included in the audited accounts as at 31 December 2013 exceed the required actuarial reserves as at 31 December 2013 by LKR Mn. Figure 12.5 Solvency Margin As at year ended 31 December LKR 000's 25,000 20,000 19,065 15,000 10,000 7,466 5,000 3,006 3, Solvency Margin required by Insurance Industry Act Excess Acturial Reserves by AINS Source: Actuary's Valuation Report (Year 2012 and 2013, M. Poopalanathan) The solvency margin required under the regulation of Insurance Industry Act No. 43 of 2000 is LKR Mn and, is fully provided for. The written consent of Kreston MNS & Company has been obtained to include their Independent Valuation in the Prospectus. Arpico Insurance Initial Public Offering 57

38 SECTION 13.0 Investment Considerations & Associated Risks

39 13.0 INVESTMENT CONSIDERATIONS & ASSOCIATED RISKS 13.1 Associated Risks This Section describes the potential risks associated with AINS' business and risks associated with investing in AINS Shares. It does not purport to list every risk that may be associated with an investment in AINS Shares now or in the future, and the occurrence of consequences of some of the risks described in this Section are partially or completely outside the control of AINS, its Directors and senior management team. The selection of risks has been based on an assessment of a combination of the probability of the risk occurring and impact of the risk if it did occur. The assessment is based on the knowledge of the Directors as at the date of this Prospectus, but there is no guarantee or assurance that the importance of different risks will not change or other risks will not appear. Before applying for Shares, you should satisfy yourself that you have a sufficient understanding of these matters and should consider whether Shares are a suitable investment for you, having regard to your own investment objectives, financial circumstances and taxation position. If you do not understand any part of this Prospectus or are in any doubt as to whether to invest in Shares, it is recommended that you seek professional guidance from your Stockbroker, Solicitor, Accountant, Tax Advisor or other independent and qualified professional advisor before deciding whether to invest. Pricing Risk Pricing risk is associated with the long term nature of a life insurance policy. Unlike other businesses, a life insurance company probably cannot identify all the possible costs certainly for many years inherent to a life insurance policy which is usually projected over a long period of time when setting the policy price. Failing to fully appreciate the risks being taken, not to mention their value can lead to under pricing of the policy itself and ultimately the Company incurring losses. Arpico Insurance keeps this risk under control by proactively valuing the policies and getting the help of a consultant actuary in determining the right price for a particular policy. Insurance Risks Arpico Insurance could be exposed to the following insurance specific risks. They could be outlined as follows: Underwriting Risk AINS could be threatened by an underwriting risk by accepting insurance business that carries unacceptably high exposure to the risk of claims and accepting risks at a rate that do not contain adequate premium to cover the risks. AINS' strategy in keeping this risk under control is through selectively conducting underwriting by considering both risk and return instead of solely focusing on GWP growth. AINS' management also relies on a consultant actuary that reviews business more closely and guide the management to take more informed decisions Re-insurance Risk Retaining risks beyond Arpico Insurance's net retention capacity without having adequate reinsurance or the inability of reinsurers to meet their commitments due to insufficient financial strength may give rise to a reinsurance risk for AINS. However, by maintaining a close professional relationship with reinsurers and reinsurance brokers, AINS keeps this risk under control. AINS is also powered by the World's largest and number 1 re-insurer Munich Re which gives them additional leverage on mitigating this risk. Munich Reinsurance Company is rated A+ by Standard & Poor's, AA- by A.M Best Co. and AA- by Fitch. Credit Risk AINS could possibly be exposed to credit risk due to an uncertainty on the debtors' ability to meet obligations due to the Company. AINS adopts a policy where continuous lapse of premiums for two months and if they weren't settled within 6 months, those policies will be considered as lapsed and agreements would be terminated. In this case, if policyholders have honoured the premium payments for consecutively 3 years, AINS will only return one third of the total premiums paid by the policyholders. Arpico Insurance Initial Public Offering 59

40 13.0 INVESTMENT CONSIDERATIONS & ASSOCIATED RISKS Investment Risks Investment risks arise as a result of the significant portfolio of investments managed by the Company. Following risks could be identified as some of the Investment risks AINS is exposed to; Interest Rate Risk From time to time with the volatility in market interest rates, AINS may be exposed to interest rate risk that would possibly occur from lower interest rates that may not provide adequate returns to cover the liabilities expected to meet by AINS. It could also be a risk when the Company cannot meet its solvency standards as a result of the fall in bond prices at times of rising interest rates. AINS takes timely action to mitigate this risk by having in force an investment committee and the management that closely monitor the macroeconomic conditions and thereby making required changes to the asset allocation and the maturity mix of investments periodically. Concentration Risk Arpico Insurance may suffer from concentration risk due to over-exposure to a particular company or sector and due to lack of diversification in the investment portfolio. AINS manages exposure to this risk by adhering to the target asset allocations decided by the independent investment committee which are in line with IBSL investment guidelines. The Company also conducts frequent review meetings to monitor the state of its investment portfolio and its diversification thereby reducing exposure to a specific sector or company or type of investment. Liquidity Risk Liquidity risk could arise as a result of inability to meet claim settlements and payments to reinsurers and other creditors due to the insufficient availability of cash and other liquid investments. Arpico Insurance takes adequate measures to mitigate this risk by regularly reviewing the maturity mix of the investment portfolio by the management and planning large cash outflows in advance to ensure availability of funds. Regulatory Risk Arpico Insurance is regulated by the Insurance Board of Sri Lanka (IBSL). Hence, throughout its operations AINS has to comply with the laws and regulations enforced by IBSL in conducting Life Insurance business. However, these regulations change from time to time and may require various commitments from the insurer. Failing to conform to these laws and regulations may pose a threat on Arpico Insurance's business operations in that case regulator would even have the right to cancel the license of AINS which would threaten the operations of the Company. Therefore, AINS strictly adheres to the laws and regulation encompassed by IBSL and would continue to conform to any such regulations enforced by IBSL and other regulatory bodies. Operational Risks AINS could be exposed to certain operational risks such as the business continuity risk, information security risk and human resource risk. Business continuity of AINS can be threatened by any unexpected force that could disrupt the continuous operations. However, this risk is mitigated by having a contingency plan to continue operations even under such situation. AINS operates with IT infrastructure and virtual branches that enable the main business operations to continue without any disruption even during an unexpected occurrence. AINS heavily relies on its human resources, especially the sales force that directly influences the main revenue streams of the Company. Therefore, loss or inadequacy of professionally qualified personnel and heavy labor turnover can create a risk on AINS' operations. In order to mitigate this risk, AINS adopts an HR policy that aims at continuous development of personnel through training and development. The Company also ensures their employees are rewarded with industry par benefits, so that they could continue to attract and retain the skillful human resource throughout the organization. Arpico Insurance Initial Public Offering 60

41 13.0 INVESTMENT CONSIDERATIONS & ASSOCIATED RISKS Reputational Risk Arpico Insurance may suffer from reputational risk due to any possible impairment of the corporate image and goodwill of the Company created by an unforeseeable event or behavior. As a budding company in the life insurance industry of Sri Lanka, AINS relies heavily on its parent's brand name ARPICO. Hence, any possible incident that could negatively affect the brand name ARPICO will also have a significant impact on the business operations and sustainability of AINS. Therefore, AINS is very careful on its branding, marketing and also on every aspect of its operations that could possibly carry risks. Price of Shares Once AINS becomes a publicly listed company on CSE it will become subject to general market risks that is inherent in all securities listed on a stock exchange. This may result in fluctuations in the Share price that are not explained by the fundamental operations and activities of AINS. The price at which Shares are traded on CSE may increase or decrease due to a number of factors. These factors may cause the Shares to trade at prices below the Offer Price. There is no assurance that the price of the Shares will increase following the listing on CSE, even if AINS' earnings increase Risks Relating to Future Plans Unfavourable macroeconomic conditions could pose a threat to Company's future plans, especially frequent changes and the volatility in the interest rates could create an interest rate risk and ultimately influence the achievement of AINS' future plans. Inability to find suitable locations and inadequacy of capital required for the expected branch expansion plan of AINS may threaten the achievement of its strategic plan of widening its reach around the country. This could also influence the achievement of other corporate objectives such as the profit and the GWP targets. Arpico Insurance's concept of Insurance for the living is largely built upon the ability of the Company to introduce innovative products from time to time with the ability to customize them according to the prevailing customer needs. Failure to come up with new concepts and inability to introduce customer cantered products could pose a threat on the sustainability of AINS' operations as well as its ability to achieve the future plans outlined. Achievement of the future plans of AINS is dependent upon the ability of AINS to retain and attract productive and talented staff. Failure to do so could threaten the achievement of the said plans. Some of the factors which may affect the price of the Shares include fluctuations in the domestic market for listed stocks, general economic conditions, including interest rates, inflation rates, exchange rates, changes to government fiscal, monetary or regulatory policies, legislation or regulation, the nature of the markets in which AINS operates and general operational and business risks. Please note, that AINS has no impact on the Company as a result of the Central Bank of Sri Lanka Master Plan of Consolidating the Financial Sector Companies. Arpico Insurance Initial Public Offering 61