Ceylinco Life Insurance Limited
INTEGRATED ANNUAL REPORT 2016

STEWARDSHIP

Investment Committee Report

The Investment Committee of Ceylinco Life oversees the investments of the Long Term Insurance Fund, which is invested prudently according to diverse investment objectives and varied risk preferences to ensure a return that is secure, smooth and steady.

By crafting investment strategies that add value, continually monitoring the execution of the set strategies to ensure conformity and making timely calls deemed necessary to ensure probity, the Committee ensures that the funds are well-positioned, ideally invested and coherently managed to meet the objectives of various stakeholders such as policyholders, shareholders and regulators.

As at 31 December 2016, the Long Term Insurance Fund of Ceylinco Life stood firm as a pillar of strength to all its policyholders, at Rs. 77.9 Bn, growing steadily at 14.6% over the last year.

YEAR IN REVIEW

I. Global Market – A Roller-Coaster Ride

United States of America (US), single handedly won the award for the most outstanding financial market changer of 2016 though United Kingdom (UK) and Organisation of the Petroleum Exporting Countries (OPEC) gave a good battle to the top.

For US, the largest economy in the world, it was the election year and much of the world’s attention rallied to see who will be crowned as the most powerful person in the world. Beating all odds, Donald John Trump, an American businessman and a television personality became the 45th President of the United States.

Meanwhile, the Federal Reserve, the monetary authority of the US, was haunting the financial markets with a message ‘another rate hike’ throughout the year and finally decided to increase rates in November for the second time through the last decade.

With that volatility, rest of the world, especially emerging markets had to withstand storm after storm.


According to a report released by the Institute for International Finance, global debt had risen to more than USD 217 Tn by the end of October 2016. That is more than 325% of the world’s gross domestic product last year.

From the increase, emerging markets are leading as Government Bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion’s share of the new debt, providing USD 710 Bn of the total USD 855 Bn in
new issuance during the year.

Higher borrowing costs are to be the main concern with other stresses, including an environment of subdued growth and still weak corporate profitability, a stronger US Dollar, rising sovereign bond yields, higher hedging costs and deterioration in corporate creditworthiness presented challenges for emerging and frontier markets such as Sri Lanka in the years to come.

Key Global Highlights in 2016

i. China – Crashing Down

The year began with fresh concerns about the extent of China’s economic slowdown, sending shockwaves through global markets. China’s economy expanded by 6.7% in 2016, recording its lowest growth in 26 years and it is expected fall further next year, in a marked contrast to the expansion of 14% experienced a decade ago. The slowdown was widely expected as China’s economy matures, but the nature of its growth has worried investors. As growth falters, Beijing has turned to debt fueled stimulus. This Government spending drive combined with soaring property prices and record bank lending has prompted warnings about China’s debt mountain.


The year did not start as expected for China’s share market as on 4 January and 7 January, China’s stock market saw a sharp sell-off of about 7% that quickly sent stocks tumbling globally. From 4 January to 15 January, China’s stock market fell nearly 18%. It finally ended 2016 with a negative growth of 12.3%.


ii. Crude Oil – Prices up by 54%

The price of Brent crude tumbled below USD 30 per barrel for the first time in 13 years at the start of 2016 as worries over a supply glut intensified. For the first time since December 2008 – the height of the financial crisis – the Organisation of Petroleum Exporting Countries (OPEC) agreed to limit production to 33 Mn barrels a day in November. The cut, soon followed by Non-OPEC countries such as Russia, helped push oil prices sharply higher sending oil to a 17-month high above USD 57. Though it will brighten the prospects for the energy industry and boost the economies of oil rich countries, for consumers such as Sri Lanka, however, it will mean higher prices and higher inflationary outlook.

This would impact the long term assumptions Life Insurers make on pricing long term insurance contracts, exerting pressure on premiums and revenues.


iii. United Kingdom – Brexit

Britain voted to leave the European Union (EU) in a referendum in June 2016 after 23 years of membership. The pound, (GBP) Official Currency of the United Kingdom, tumbled hitting 31-year low after the referendum results were announced. Britain’s exit from EU pushed capital away from the Eurozone and directed it towards safe markets, including the US Treasuries, resulting in strengthening of USD – and to Japan. Pound ended the year with a depreciation of more than 16% against the US Dollar.


iv. United States – New President, New Path

On 8 November 2016, Donald Trump became the 45 President of the United States, overcoming 8 years of Democratic leadership in the country. With the result of the US Election was announced, US share markets soar to its all-time highs as investors held onto the promises given by the President elect.


With the new administration, the country to be investing more in infrastructure and to boost business confidence, major tax cuts are to be implemented. This means, increase in inflation outlook, which would result in higher interest rates/borrowing costs for investors.

The effect could be daunting to emerging markets such as Sri Lanka where foreign investors could exit due to attractive US investment rates and funding costs being high.

This would exert pressure on domestic interest rates and would have a relatively favorable impact on the investment yields and income.

II. Sri Lankan Economy – Baby Steps

The Gross Domestic Product (GDP) grew by 3.9% during the first half of 2016, amidst challenges on both the domestic and external fronts, compared to the growth of 5.7% recorded during the corresponding period of 2015.

i. Gross Domestic Growth

Though the first half of 2016 showed a decline in growth compared the corresponding year, combined outcome of economic activities picked during the later part to grow the economy around 5.3% for 2016, compared to 4.8% in 2015.


ii. Inflation and Treasury Bill Rates

Supporting the country’s drive for growth, inflation and interest rates, showed maturity as it started to stabilise during the 4 Quarter
of the year.



On the domestic side, if the accelerated credit growth continues, it will fuel inflation and interest rates and we can expect higher levels in 2017.

On the external front, increasing crude oil prices to have an affect on the same.

Rising inflationary outlook and higher borrowing costs will reduce the disposable income levels of the policyholders and prospective policyholders. This would affect the affordability of life insurance which will curtail revenue growth.

iii. Private Sector Credit Growth

Private sector Credit Growth was an indicator Central Bank of Sri Lanka (CBSL) was monitoring closely as Monetary Board decided to link monetary adjustments to curtail excess growth of more than 20%. Though the monetary tightening occurred twice during the year, Credit Growth continued its momentum, closing the year slightly above CBSL target of 20%.


iv. Foreign Direct Investments

For emerging markets, foreign investments are a key driver of economy, as it shows the confidence of foreign investors. The year 2016, saw a significant drop in Foreign Direct Investments (FDI’s) which ended being the lowest for the past decade.


v. Foreign Investments in Government Securities

With the Federal Reserve opting to increase interest rates, which makes borrowing expensive, we saw a high volatility in Foreign Investments in Government Securities throughout the year. Compared to the beginning of 2016, foreign investments in Government Securities have fallen by 43 Bn net at the end of the year.


III. Sri Lankan Economy – Year 2017 and Beyond

2017 promises to be a testing year as it has to ensure political and social consensus for a successful constitutional reform effort. At the same time, it has to deliver economic relief to consumers disaffected by tax induced price increases and tight economic conditions.

Two factors to drive Sri Lankan economy in 2017:
1. IMF Programme
2. Fiscal Consolidation

In June 2016, the International Monetary Fund approved a 36-month Extended Fund Facility arrangement to support Sri Lanka’s economic reform agenda. The main efforts are to boost the tax to GDP ratio, reduce the budget deficit, rebuild foreign exchange reserves and improve public financial management, including of state-owned enterprises.

With the budget proposals for 2017, heaps of tax reforms were introduced. The revenue reforms include a sharp jump in the value-added tax rate from 11% to 15% and new taxes on capital gains and property. Notional tax credit withdrawn, reinstating taxes on corporate debentures are few revenue reforms introduced in the Budget. The tax changes are modestly redistributive, but the risk is that almost everyone will feel worse off.

If Sri Lanka’s Government begins to deliver on reforms in 2017, which is being in line with IMF proposed reforms, in what is expected to be a more conducive macroeconomic environment, there will be incremental progress towards a Sri Lankan economic resurgence.

On the insurance aspect, this would create a favorable climate for long term insurers and policyholders which would drive up the revenues, while extending much needed protection for policyholders.

IV. Ceylinco Life Insurance Limited – Growing Stronger Year by Year

i. Life Fund – Bigger, Better and Bolder

The Long Term Insurance Fund of Ceylinco Life, which is considered as a safe haven for investors, has surged by almost 400% over the last decade, which depicts the superior performance and stability of the investments and the continuous trust and loyalty placed by the policyholders.


ii. Quality of Investments – Quality is Not an Act; it is a Habit

The Investment Division of Ceylinco Life, with the recommendations and guidance of the Investment Committee, manages the Long Term Insurance Fund, which is regarded as one of the largest and thriving portfolios in Sri Lanka.

Risk and Return, although carrying an inherent trade-off, are two aspects which hold paramount importance in crafting an investment strategy.

Ceylinco Life takes utmost responsibility in providing the best investment solutions to maintain an optimum and cautious balance between the two aspects.

In order to emphasise the prudence and diligence of Life Fund investments, the below pie chart elaborates the asset allocation of investments of the Long Term Insurance Fund as at 31 December 2016.


To emphasise the credit quality of Life Fund investments, the below chart elaborates the credit risk profile of Long Term
Insurance Fund as at 31 December 2016.


iii. Investment Income – Going the Distance and Showing the Way

Amidst challenging and volatile market conditions, Investment Division, under the guidance of the Investment Committee, was able to grow the investment income by a thumping 30% over 2015 and over 600% compared to a decade ago.


Investment Committee

The Investment Committee of Ceylinco Life is appointed by the Board of Directors of Ceylinco Life Insurance Limited, which comprises of six members, out of whom four are Executive Directors with expertise and experience in various fronts, which adds value in crafting prudent investment strategies.

Recognising the Long Term nature of life insurance contracts and the subsequent need as well as the benefits that would accrue in reviewing the investment policies and the strategies, the Head of the Actuarial Division is also a member of the Committee. To supplement the collective expertise and to provide in-depth insights, a Non-Executive Director who is a veteran in financial markets, also forms part of the Committee.

The following members served in the Investment Committee during the year,
1. Mr R Renganathan (Managing Director/CEO) – Chairman
2. Mr E T L Ranasinghe (Director/Deputy CEO) – Member
3. Mr Palitha Jayawardena (Director/CFO) – Member
4. Mr Ranga Abeynayake (Director/Deputy CFO) – Member
5. Mr R S W Senanayake (Non-Executive Director) – Member
6. Mr S Kumarapperuma (DGM – Actuarial) – Member

The Committee members contribute immensely and add value to the investment decision-making process through their vast knowledge and diverse experience. In addition, the Committee obtains independent external professional advice on matters within its purview.

Meeting and Attendance

Investment Committee of Ceylinco Life meets weekly, recognising the prominence of the investment decision-making function, to proactively craft investment strategies with a minimum lead time, and to timely face the challenges posed from ever-changing global and domestic macroeconomic landscapes.

The Investment Committee meetings are organised by the following officers of the Investment Division who undertake the responsible for presenting new investment opportunities, financial market update and the performance of the Long Term Insurance Fund of the Company.

  • D M G L Alwis – (Senior Portfolio Manager)
  • C S Kumarasinghe – (Assistant Manager)
  • K V Wickramasuriya – (Assistant Manager)

Managing Director/CEO of Ceylinco Life chairs the meeting and Management representatives from the areas such as Actuarial, Finance, Life Operation, Marketing and Systems attend the meetings on the invitation of the Committee.

On behalf of the Investment Committee,

R Renganathan
Chairman
Investment Committee

23 February 2017
Colombo