MBSL to divest loss-making insurance subsidiary

Merchant Bank of Sri Lanka (MBSL) has decided to sell its loss-making insurance subsidiary.A decision to this effect was made by the MBSL Board of Directors at a meeting last week. 

MBSL holds an 84.12% stake in the subsidiary MBSL Insurance Company Ltd. At cost the investment in the loss-making subsidiary has been stated at Rs. 516 million while the directors’ valuation was Rs. 311 million. 

MBSL invested Rs. 198 million in the voting shares of the insurance subsidiary.MBSL said it would be divested to a prospective investor or investors subject to compliance with the requisite regulatory requirements.

MBSL’s insurance business has been loss-making. In the first half of this year, the loss amounted to Rs. 54.5 million, up from Rs. 17.5 million a year earlier. Revenue amounted to Rs. 610 million, marginally down from Rs. 622.4 million during the first half of last year. 

The MBSL Insurance Company Ltd. incurred a loss of Rs. 109 million in 2015 as against a loss of Rs. 53 million and accumulated losses of Rs. 743 million as at 31 December 2015.

MBSL Insurance’s assets stood at Rs. 2 billion, as against Rs. 1.8 billion as at June 2015.

Last year, MBSL auditors SJMS Associates raised concerns over the viability of the insurance subsidiary. 

It flagged off MBSL Insurance’s non-compliance with the Solvency Margin (Non-life insurance), segregation of life and non-life business and the listing requirements as per the Insurance Industry Act No. 43 of 2000.

In 2015, MBSL Insurance’s premium income was Rs. 904 million, down from Rs. 1.3 billion in the previous year. General insurance was the bulk of its business, amounting to Rs. 1.19 billion. 

In their note to accounts, the auditors said at the end of the reporting period the company and the group assessed the recoverable amount of the investment in subsidiary MBSL Insurance Company Ltd. as Rs. 516.1 million and the recoverable amount of the goodwill as Rs.18.2 million respectively.

The recoverable amount of the 84.12% investment in the subsidiary was determined as Rs. 310.2 million and an impairment allowance of Rs. 205.9 million (2014:nil) was made in the company’s financial statements. The group determined that the goodwill associated with its investment in the subsidiary was fully impaired by Rs. 18.2 million (2014: nil). 

The main indicator that was considered for the assessment of impairment of the investment in the subsidiary was the continuous losses in the current and previous years resulting in the carrying value of the investment in the company’s financial statements exceeding the subsidiary’s net assets.

The recoverable amount of the investment in the subsidiary was assessed using the fair value less cost to sell value method. The fair value of the investment was determined using a market-based approach. The company determined a level 2 fair value by reference to the price to book value approach (PBV) using the PBV multiples of similar companies in the industry which amounted to 1.51 times. 

Furthermore, the PBV determined using industry data, was discounted by 30% due to the fact that the shares in the subsidiary were not listed and noncompliance with the regulatory requirements with regards to the capital requirements of the Insurance Board of Sri Lanka.

The value in use model was not considered for the purpose of determination of the recoverable value of the investment due to the uncertainty involved in the estimation of future cash flows due to the insurance and financial risks faced by the subsidiary.