Arpico Insurance PLC Financial Summary and Investment Analysis

Executive Overview

Arpico Insurance PLC is a Sri Lankan listed life insurer focused on individual life, health/protection, savings and group insurance. The Company is repositioning from group business toward higher-quality individual policies while cutting costs, expanding digital distribution and targeting corporate/health segments.

Periods covered: Q3 2023-Q2 2026, CY2023-CY2025, with the latest interim period ending 2026-06-30.

The financial trajectory is mixed. CY2023's LKR 683.8 Mn loss was followed by a strong CY2024 recovery, but audited CY2025 profitability weakened sharply: GWP fell 10.5%, PBT returned to a LKR 97.0 Mn loss and PAT was only LKR 8.0 Mn. H1 2026 remained profitable at LKR 22.9 Mn PAT, but GWP contracted another 18.0% YoY and first-year premiums fell 41.5%, indicating that the principal challenge has shifted from cost control toward restoring new-business growth.

A major analytical issue is profit quality: CY2025 benefited from LKR 235.8 Mn realised investment gains and a LKR 105.0 Mn deferred-tax reversal, while actuarial/life-fund movements materially reduced operating profitability.

Financial Performance

Revenue and Profitability Trends

For a life insurer, conventional gross profit is not particularly meaningful; GWP, net income, PBT and PAT are more useful.

GWP declined at an approximately 11.2% CAGR from CY2023-CY2025. In CY2025, claims paid fell 25.6% to LKR 850.6 Mn, underwriting/acquisition costs fell 18.5% to LKR 433.3 Mn and operating/administrative expenses fell 17.0% to LKR 573.2 Mn. However, the change in life-fund contract liabilities swung from a LKR 181.1 Mn benefit in CY2024 to a LKR 526.2 Mn charge in CY2025.

Total investment-related income including investment income, fair-value gains and realised gains rose to approximately LKR 727.8 Mn, heavily supported by LKR 235.8 Mn realised gains. Management states that exiting NDB Holdings generated more than LKR 257 Mn in profit.

Quarterly Trend

*Q4 2025 uses the audited CY2025 quarterly analysis. The earlier unaudited Q4 release reported CY2025 PAT of LKR 230.8 Mn and PBT of LKR 268.1 Mn; the subsequent audited annual statements revised these to LKR 8.0 Mn PAT and LKR 97.0 Mn PBT loss, principally reflecting substantial year-end actuarial/life-fund and related adjustments. Audited figures therefore supersede the preliminary release.

H1 2026 versus H1 2025:

• GWP -18.0%
• Net income -16.6%
• PBT -51.9%
• PAT -53.5%
• First-year premium -41.5%
• Renewal premium -2.7%
• Group premium -15.5%

Renewals are comparatively resilient, but the sharp decline in first-year premiums signals weak new-business generation.

Balance Sheet Analysis

CY2025 assets grew 8.7%, but liabilities increased 18.5% while equity fell 8.3%. By Q2 2026, insurance liabilities had declined 4.8% from year-end and equity recovered 1.4%.

Financial assets represent roughly 83% of assets. At 2026-06-30 these included LKR 1.95 Bn fixed deposits, LKR 813.6 Mn held-to-maturity Treasury bonds, LKR 740.6 Mn reverse repos and LKR 324.4 Mn available-for-sale Treasury bonds.

A conventional current ratio is not meaningful because the insurer presents assets/liabilities by liquidity and maturity rather than standard current/non-current classification.

Cash Flow Analysis

CY2025 operating cash flow remained negative at LKR 109.1 Mn, although this improved from negative LKR 331.2 Mn in CY2024. Investing activities generated LKR 155.5 Mn, allowing cash to rise to LKR 88.4 Mn.

H1 2026 operating cash flow deteriorated to negative LKR 380.0 Mn versus negative LKR 173.2 Mn in H1 2025. Premium receipts fell while claims cash payments increased. LKR 384.6 Mn of investing inflows, principally investment maturities/sales and investment income, preserved closing cash at LKR 93.0 Mn.

Conventional free cash flow is less informative for an insurer because investment portfolio movements are integral to operations, but persistent negative operating cash generation warrants monitoring.

Key Financial Ratios and Growth Indicators

• CY2025 ROE: 0.48%, versus 13% in CY2024.
• CY2025 asset turnover: approximately 33%-34%, versus 40% in CY2024.
• Acquisition cost/GWP: 25%, improved from 27%.
• Reinsurance expense/GWP: 5%, versus 4%.
• Capital Adequacy Ratio: 259% at 2025-12-31 versus 258% in CY2024 and well above the 120% regulatory minimum.
• Q2 2026 NAV/share: LKR 25.83.
• CY2025 EPS: LKR 0.12; H1 2026 EPS: LKR 0.35.
• Customer retention/persistency reported at approximately 75% in CY2025.
• 7,957 new policies were issued in CY2025.

Economic and Market Context

Management describes Sri Lanka as transitioning from stabilisation toward moderate economic growth, with improving confidence, stable inflation/interest rates and increasing demand for protection and health products. Insurance penetration remains relatively low, creating long-term potential.

Competition remains intense, while digital capability, bancassurance/partnership distribution and customer experience are increasingly important. Key external pressures identified include regulation, investment-market volatility, climate-related events, cybersecurity and consumer affordability.

Future Potential and Outlook

Management's strategy emphasises individual life and health insurance, digitalisation, cloud infrastructure, e-proposals/e-policies, automation and improved customer retention. The SMART Investment Product was launched during CY2025.

Corporate insurance is being developed as a diversification channel, with management targeting approximately 10%-15% of the overall portfolio by end-2026. Hospital/clinic partnerships and broader health-product expansion are also planned, with a longer-term ambition to build a leading health-insurance position.

The principal execution test is whether these initiatives can reverse the current new-business contraction.

Risks and Challenges

• Earnings quality: CY2025 PAT depended on realised investment gains and a LKR 105 Mn deferred-tax benefit despite a pre-tax loss.
• Actuarial risk: life-insurance liabilities are the key audit matter and depend on mortality, morbidity, lapse, surrender and discount-rate assumptions.
• Growth risk: H1 2026 first-year premiums fell 41.5%.
• Cash-flow pressure: H1 2026 operating cash outflow reached LKR 380.0 Mn.
• Tax asset risk: carried-forward tax losses reached LKR 873.5 Mn at CY2025; recognition of deferred-tax assets depends on future taxable profits.
• Accounting transition: the annual report expects SLFRS 17/SLFRS 9 adoption to materially affect equity, insurance liabilities and earnings presentation. The supplied 2026 interims still use the previous GWP/SLFRS 4-style framework, so transition effects remain an important comparability risk.
• Lapse/surrender, competition, interest rates, climate events, cybersecurity and employee retention are additional risks.

Shareholder and Corporate Information

The ownership structure is highly concentrated. At Q2 2026, Kegalle Plantations Limited held 40.29%, Richard Pieris Distributors Limited 26.86% and Richard Pieris and Co Ltd 22.84%—approximately 90% combined. Public holding remained only 10%, while reported directors' holdings were nil.

At 2026-06-30 the share closed at LKR 29.50 with float-adjusted market capitalisation of LKR 195.6 Mn. By 2026-08-14 the price was LKR 27.70, with a 90-session return of -15.29%, a LKR 23.10-33.80 range and median daily turnover of only LKR 20.8K, indicating substantial liquidity risk. Foreign ownership increased to 107,540 shares or 0.16%.

No shareholder dividend payment is reflected in the supplied recent financial statements.

Investment Decision Indicators

Strengths

• Strong 259% regulatory capital adequacy.
• Significant improvement in claims and operating cost discipline.
• Renewal premium base remains relatively resilient.
• Large financial-asset portfolio and strong Richard Pieris Group backing.
• Digitalisation and health/corporate expansion provide identifiable growth avenues.

Weaknesses

• Sustained GWP contraction and particularly weak first-year premiums.
• CY2025 underlying profitability was weak despite positive PAT.
• Negative operating cash flow.
• Material sensitivity to actuarial liability movements.
• Extremely concentrated ownership and limited trading liquidity.

Opportunities

• Low domestic insurance penetration, health/protection demand and underserved markets.
• Corporate-segment expansion, digital distribution and process automation.
• Better persistency and individual-policy mix could improve lifetime economics.

Threats

• Competition, lapses/surrenders, investment-rate volatility and macroeconomic shocks.
• SLFRS 17/9 could materially change reported equity and earnings.
• Climate, cybersecurity and talent-retention risks.

Overall assessment: Arpico Insurance PLC has restored solvency strength and demonstrated meaningful cost discipline, but a durable earnings recovery is not yet established. The most important indicators to monitor are recovery in first-year/GWP growth, sustained profitability without large realised gains or actuarial/tax support, operating cash-flow improvement, persistency, capital adequacy and the eventual SLFRS 17/9 impact on equity and insurance liabilities.