Ceylinco Life, the largest life insurance company managing Rs80 billion in premium investment assets, gave shareholders a 13% return during the September quarter of 2016 and is investing for the demographic transition in Sri Lanka.

“We’ve done the research and we are prepared to meet those changes,” says Ceylinco Life Chief Executive Raj Renganathan. By 2030, nearly 20% of Sri Lanka’s population will be over 60, increasing to over a quarter by 2050.

The company is investing Rs40 million building La Serena, a resort at Uswetakeiyawa, a 40-minute drive north from Colombo. The resort includes 44 chalets, a jogging track, gym, medical facilities, an entertainment area and a restaurant serving healthy food.

“There is a huge need for retirement resorts, and our projections look good,” Renganathan says. Ceylinco Insurance will get into hotel management, operating the resort which will cater to active retirees exclusively. The next phase is developing assisted care homes. The life insurer owns 400,000 sq.ft. of real estate and small land plots in several parts of the country, totaling 1,512 perches in extent.

The company also owns a small 16-bed private hospital specialising in OPD cancer and diabetes treatment. “All these businesses are related to our core business, life insurance. We don’t want to expand and become too big or diversify into businesses we know nothing about,” Renganathan says. “It’s a lesson from Ceylinco Group.”

Life insurance penetration here is typical for an emerging economy, where 13.45% of the population has a policy. Another indicator is total premiums to GDP, which is at 0.48% here. In Asia, life insurance penetration averages 3.8% in terms of premiums to GDP and over 5% in developed countries, with some European countries above 15%.

“People naturally don’t think about death, especially the young, and our target market is rural areas where people find it difficult to grasp the concept of insurance,” Renganathan says, explaining the low penetration here and the challenge for Ceylinco Life over the next few years in growing its market share.

Ceylinco Life is using data analytics to uncover and understand demographics and lifestyle trends. It’s also investing in technology to streamline processes. “Digital tech will help in theory, but it wouldn’t make a big difference,” Renganathan says. For growth, Renganathan is going to invest in branch expansion and increase the number of insurance agents. Currently, it deploys 4,000 of them. “This is the fastest way to grow. We can double our business if we double the workforce. The challenge is recruiting, training and retaining them,” Renganathan says.

Insurance agents play a critical role for Ceylinco Life, which is targeting to grow its business by attracting and maintaining new policyholders from rural areas.

From 2011 to 2015, nearly 18% of the industry’s new life policies lapsed annually because premium payments were not maintained. Ceylinco Insurance’s 2015 annual report says policies tend to lapse because people’s experiences differ from expectations.

Ceylinco Life’s data analytics also revealed that insurance agents were not following up on policyholders. A large number of clients had just one life policy. “They could have been offered second or third policies based on their increasing incomes. But this is not happening,” Renganathan says.

[pullquote]Ceylinco Life does not allocate equities, which have greater potential returns in the long term. “I disagree with that,” Renganathan says[/pullquote]

The company’s research shows that young people were willing to take out a life policy provided it included an investment component.

Renganathan insists that insurance policies will change with a slight turn towards investments, “but I don’t see a big change happening,” he says. “If anyone wants to invest, they should go to a bank. We’re in the business of protection.”

To make life insurance attractive, the company has included medical insurance covering critical illnesses and surgery. It also has an annuity, which provides a pension. That fund was around Rs9 billion in September 2016.

Ceylinco Life is controlled by listed Ceylinco Insurance, which also controls a separate business that covers motor vehicle accidents, fires and floods. Both the life and general insurance businesses operated as a single entity until regulation split it into separate firms in 2015, with Ceylinco Insurance as the holding company. The holding company was part of Ceylinco Group of Companies, which disintegrated in 2008 after an authorised deposit-taking firm Golden Key Credit Card Company went bust. Regulators and management quickly ring-fenced the company and prevented loss of business.

In 2014, the Ceylinco Insurance board was targeted for an overhaul by a group of shareholders holding 30% of company shares. Renganathan did not want to discuss the matter. “They were unscrupulous corporate raiders. The matter is over now.”

The board was earlier forced by regulators to sell down shares held by several Ceylinco Insurance employee trusts under the board’s control. This was part of the process of splitting the life and general insurance businesses under a single holding company. The board sold a 25% holding among three investors: an anonymous investor represented by Swiss private bank Banque Pictet & Cie, and two other investors based in India – Shriram City Union Finance and Japan’s Mitsui Sumitomo Insurance Company. Without their support, the board will be vulnerable to removal, which makes it all the more important to deliver market-beating returns to keep these shareholders happy. Many speculate the identity of the Swiss bank investor. “He wishes to remain anonymous, but we know him. He says his investment in Ceylinco Insurance was the best he ever did,” Renganathan says.

Ceylinco Life is a profitable business.

Premium income on average grew 9% annually over 2006-15 to Rs13.4 billion and profits grew 22% on average to Rs2.2 billion during this period. The life fund—excess premium income after benefits and administrative costs—grew 17.3% on average each year during this period to Rs68 billion in 2015, growing 17.6% to Rs80 billion as at September 2016. Earnings per share grew five-fold over 2008-15 to Rs132.

The fund allocates 57% to government securities, 12% to bank savings (usually long-term fixed deposits), 23% to corporate debt and the balance is invested in real estate. These investments returned an income of Rs6.2 billion during the first nine months of 2016.

Income from life fund investments is additional value to shareholders. The challenge for any life insurance firm is finding middle ground between earnings potential and the ability to pay financial obligations. Most life funds have higher exposure to risk-free government bonds easily liquidated to meet policyholder claims.

Ceylinco Life does not allocate equities, which have greater potential returns in the long term. “I disagree with that,” Renganathan says. “If you look at the long run, equity returns here are not high. Our stock market is a casino and there is manipulation.”

Fourteen other life insurance companies together invested 13% of life funds in equities in 2015, according to regulator Insurance Board of Sri Lanka. Industry life fund investments returned 9.54% in 2015, while Ceylino Life, without investments in stocks, returned 9.9%. That year, and in 2016, most fund managers held large fixed income positions with equities in decline. The All Share Index declined 5.5% in 2015 and 10.7% year-to-date (21 December 2016).

Even if equities turnaround, corporate earnings grow, governance improves and regulators succeed in establishing a free and fair market, Renganathan will not change his mind. “I would never risk policy money on the stock market. In any case, there aren’t enough liquid stocks to trade. Every day you see the same stocks trading. Companies are also delisting.” Other insurance companies have larger exposure to equity, some exceeding 20%. Smaller insurance companies are also growing their funds a lot faster, albeit from a low base. But Renganathan is not concerned about them.

“People in urban areas tend to be a bit more sophisticated and compare returns, but this is a niche market. We are interested in rural markets where simple people need simple insurance products,” Renganathan says.