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Thursday July 18th, 2024

Sri Lanka budget new taxes to hurt insurer profits, premiums to go up: Fitch

ECONOMYNEXT – Several new taxes proposed in the budget for 2022, will hurt insurer profits and the impact on a tax on accidents are still unclear, Fitch Ratings has said.

The budget has proposed a 25 percent windfall tax similar to the ‘super gains tax’ proposed in 2015 as well as an increase in a so-called financial VAT and 2.5 percent turnover tax.

“In addition to the tax proposals, the government announced that it plans to impose a fee on vehicles involved in accidents and allowing policyholders to be reimbursed for this fee by insurers,” Fitch said.

“Insurers will likely price the additional risks in their motor insurance policies, although changes to policy terms may be required as penalty charges or fines are generally excluded from the motor insurance policy coverage.

“Still, the penalty charge and the nature of traffic accidents on which a fee will be imposed remain unclear and are yet to be determined.

It was not clear whether insurers will have to pay the one time increase to 18 percent from 15 percent

“Most Sri Lankan insurers previously appealed against paying VAT on financial services with the view that the VAT Act does not specify insurance companies as liable,” Fitch said.

Insurers however had earned higher profits during lockdown due to lower general insurance claims.
The full statement is reproduced below

Sri Lanka’s Budget Proposals Weigh on Insurers’ Near-Term Earnings

Fitch Ratings-Colombo/Sydney-23 November 2021: The Sri Lankan government’s proposal to introduce new one-off as well as recurring taxes on companies will likely constrain the near-term profitability of some insurers, Fitch Ratings says.

However, we expect the proposals to have only a limited impact on most insurers’ capital positions because of their sound capital buffers accumulated before and during the Covid-19-led lockdowns in the country.

The government’s 2022 budget presented on 12 November 2021 introduced a 25% one-off tax on companies with a taxable income over LKR2 billion for the fiscal year ended 31 March 2021.

The agency believes that Sri Lanka Insurance Corporation Limited (CCC+/AA(lka)/Stable) and potentially National Insurance Trust Fund Board (A+(lka)/Stable) may need to pay the one-off tax as they have larger pre-tax profit bases among Fitch-rated Sri Lankan insurers.

Taxable income of the remaining Fitch-rated Sri Lankan insurers will likely fall below the LKR2 billion threshold.

If the authorities decide to use group or consolidated taxable income as the basis to calculate the tax, the taxable income of some insurers that are subsidiaries of larger parent companies could be considered in the calculation of the one-off tax.

Nevertheless, in spite of taxation, we believe that the capital positions of most insurers will remain satisfactory as their capital buffers were strengthened, especially helped by the low motor and medical insurance claims following lockdowns and insurers’ high retention of profits in 2020.

Fitch believes that the government’s proposed introduction of the 2.5% social security contribution on annual turnover exceeding LKR120 million will narrow the profit margins of insurers in the near-term.

However, we think the burden will gradually be transferred to policyholders through price revisions.

It remains unclear if insurers will be liable to pay the value added tax (VAT) on financial services, which is subject to a proposed one-time increase to 18% from 15% under the 2022 budget. Most Sri Lankan insurers previously appealed against paying VAT on financial services with the view that the VAT Act does not specify insurance companies as liable.

If imposed, the impact of this tax on near-term profit margins will be more pronounced as companies are not allowed to pass the increase in the VAT to customers. In addition to the tax proposals, the government announced that it plans to impose a fee on vehicles involved in accidents and allowing policyholders to be reimbursed for this fee by insurers.

Insurers will likely price the additional risks in their motor insurance policies, although changes to policy terms may be required as penalty charges or fines are generally excluded from the motor insurance policy coverage. Still, the penalty charge and the nature of traffic accidents on which a fee will be imposed remain unclear and are yet to be determined.

We also expect the potential influx of new motor vehicles into the market, following the government’s decision to release vehicles that are currently held in customs due to non-payment of taxes, to be insufficient to result in a material recovery in motor insurance policy volumes.

Fitch believes that the government’s ban on motor-vehicle imports will remain, at least in part, over the near term and most insurers are likely to continue to seek opportunities to diversify their products into non-motor insurance lines.

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Sri Lanka to conduct threat assessments for presidential candidates

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has submitted a cabinet paper proposing security measures for presidential candidates and former presidents, following the recent attack on former US President Donald Trump during a campaign rally in the USA.

“This proposal suggests the appointment of a committee to conduct threat assessments and provide necessary security for Presidential candidates as well as former Presidents,” a statement from his media division said.

The committee will include the Secretary of the Ministry of Public Security as Chair, the Chief of Defence Staff, the Inspector General of Police, the Chief of National Intelligence, and the Senior Deputy Inspector General of Police/Elections.

A Deputy Inspector General of Police will be appointed to oversee all security arrangements.

The committee and the designated officer will work closely with the Election Commission to ensure seamless coordination of security arrangements, the PMD said.

After today, July 17, Sri Lanka’s Election Committee is empowered to announce a date for the presidential polls due to be held this year.

Minister of Foreign Affairs M U M Ali Sabry has said the election will be held on October 5 or 12.

Members of the Samagi Jana Balawegaya (SJB) have said that the government should be accountable for the security of Opposition Leader Sajith Premadasa, the SJB’s presidential candidate. (Colombo/Jul17/2024)

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Sri Lanka rupee closes flat at 303.80/304.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed almost flat at 303.80/304.00 to the US dollar on Wednesday, from 303.70/304.00 to the US dollar on Tuesday, dealers said, while bond yields were down.

A bond maturing on 15.12.2026 closed at 10.60/75 percent, down from 10.82/92 percent.

A bond maturing on 15.12.2027 closed at 11.60/38 percent, down from 11.65/75 percent.

A bond maturing on 01.05.2028 closed at 11.72/78 percent, down from 11.80/90 percent.

A bond maturing on 15.09.2029 closed at 12.05/10 percent, down from 12.05/20 percent. (Colombo/Jul17/2024)

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Sri Lanka stocks close down, John Keells, Hemas, Hayleys push turnover

ECONOMYNEXT – The Colombo Stock Exchange closed down on Wednesday, data on its site showed.

The broader All Share Index closed down 0.41 percent, or 48.44 points, at 11,830; while the more liquid S&P SL20 Index closed down 0.52 percent, or 17.91 points, at 3,456.

Turnover was 1.2 million. A big part of this (Rs597mn) came from John Keells Holdings Plc (down at 194.25).

“There was foreign buying interest on John Keells and Hemas,” Softlogic Stockbrokers said.

“We saw foreign interest in selective counters persist.”

Hemas Holdings Plc contributed Rs143mn to the turnover, and the share closed down at 81.10.

Hayleys Plc contributed Rs156mn to the turnover, and the share closed up at 101.50.

The three crossings made up 67 percent of the turnover.

The capital goods counters, with all the bluechips, was the leading sector contributing to the day’s turnover.

With the exception of Hayleys and a couple of other companies, the counter saw most stocks close down or flat.

Sentiment around the banking counters also remained negative.

“The volatility in investor sentiments persisted. There are a lot of spectators in the market over the last few weeks, despite some positive news coming in.”

Treasury bill and bond rates have also dropped.

The top contributors to the ASPI were Melstacorp Plc (up at 86.00), SMB Finance Plc (up at 0.70), and TeeJay Lanka Plc (up at 40.00).

There was a net foreign inflow of 392 million. (Colombo/Jul17/2024)

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