1 Rajhi Takaful: Growth in GWP, improving market share, however positives priced in, we initiate with a Neutral recommendation Alrajhi Takaful Al Rajhi Company for Co-operative Takaful Insurance was established in 2009, and operates as a Sharia-compliant multi-line insurance provider for individuals and corporations in the Kingdom of Saudi Arabia. Using its 25 branches spread over 14 cities in the Kingdom, Rajhi Takaful caters for its growing client base. From a segmental perspective, ARCCI operates in four broad segments: General Insurance, Motor, Health, and Protection & Saving. Improving Market Share: By the end of 2011, ARRCI s market share stood at 2.7%, growing to 3.7% by the end of 2015, driven by growth in the motor segment which improved from 6% in 2011 to 9% in 2015. The company s share from medical insurance segment stood meager at around 1%. For 2016 we expect ARCCI s overall market share to improve to 5%, where motor segment is expected to grow a staggering 11.8%. NWP rises despite slowdown in sector growth: ARCCI has been largely resilient to the growth slowdown in the insurance market. The company s net premium written (NPW) grew 43.5% YoY in 2015, compared with a sector growth rate of 19.7% YoY, and surged in the 9M 2016 by 54.9% YoY while sector NPW grew only by 1.7% YoY during H1 2016. The net premium earned (NPE) advanced 48.3% YoY in 9M 2016 and 43.3% YoY in 2015, vis-à-vis sector growth of 20.2% in H12016 and 24.9% in 2015. Rising claims a cause of concern: A sharp rise in claims may pressure ARCCI s 2016 performance. Claims growth slowed in 2015, but picked up pace in 9M 2016. Gross claims grew at 27.4% YoY in 2015, compared to 32.9% YoY growth in 2014. As a result, the claims ratio declined to 77.6% from 79.1%. However, gross claims surged over 53.9% in 9M 2016. Net Claims Incurred (NCI) advanced to 40.7% YoY in 2015 (the highest in three years) to reach 59.5% YoY in 9M16. Declining expense ratio, showing sign of improving efficiency: ARCCI s declining expense ratio offers further proof of operational efficiency improvement. The expense ratio contracted to 19.1% YoY in 2015 from 20.4% in 2014, vis-à-vis the past five-year average of 27.7%. The company further rationalized its expense ratio during 9M 2016 to just 13.8% from 19.3% during the same period in 2015. This has resulted in an overall improvement in the combined ratio to 96.4% in 9M 2016 compared to the historical average of 106%. Valuation: Alrajhi Takaful has shown significant improvement in its market share backed by strong growth in its GWP, its Net profit margins and underwriting margins have shown strong improvement on the back of higher GWP. The company is currently trading at a PE and PB of 22.0x and 3.72x respectively. We believe the current share price reflects the positives of the company; hence, we initiate our coverage of ARCCI with a Neutral recommendation with a price target of SAR 39.9/share. Recommendation Neutral Target Price (SAR) 39.9 Current Price* (SAR) 38.6 Upside / (Downside) 3.2% Price Performance 12000 11000 10000 9000 8000 7000 6000 5000 Dec 2013 Mar 2014 Jun 2014 Key Financials SARmn (unless specified) FY15 FY16E FY17E GWP 1,362 1,986 2,444 Growth % 44% 46% 23% Net earned premiums 1,228 1,889 2,343 Growth % 44% 54% 24% Net claims incurred -791-1,220-1,523 Growth % 41% 54% 25% Surplus from takaful Ops 55 89 111 Growth % 183% 62% 25% Net income 38 69 85 Growth % 146% 81% 23% EPS 1.06 1.72 2.12 Key Ratios Sep 2014 Dec 2014 Mar 2015 TASI-LHS Jun 2015 *Prices as of 27 th of December 2016 Sep 2015 Dec 2015 Mar 2016 Jun 2016 Source: Argaam, Aljazira Research FY15 FY16E FY17E Net Profit Margin 2.81% 3.49% 3.49% Underwriting Profit Margin 4.01% 4.46% 4.55% Net Claims/Net Premiums 61% 56% 57% Retention Ratio 90% 95% 96% Management Exp/Net Premiums 81% 77% 77% Underwriting Exp / Net Premiums 64% 65% 65% Underwriting Profit/Gross Premium 4% 4% 5% ROE 11% 17% 17% ROA 2% 3% 3% PE 23.52 22.01 17.89 PB 2.64 3.72 3.12 DPS 0 0 0 Dividend Yield 0.00% 0.00% 0.00% Acting Head of Research Talha Nazar Sep 2016 Source: Aljazira research +966 11 2256250 t.nazar@aljaziracapital.com.sa 40 35 30 25 20 15 Rajhi Takaful-RHS - Source: Bloomberg
Company Overview Al Rajhi Company for Co-operative for Takaful Insurance was established in 2009, and operates as a Sharia-compliant multi-line insurance provider for individuals and corporations in Saudi Arabia. It provides services through 25 branches across 14 cities in the Kingdom. The company s prime services include general, motor, marine cargo, and health insurance. The company is backed by banking major Al Rajhi Group. Figure 1: Shareholding Pattern Al Rajhi Insurance Co. 27% Public 45% Al Rajhi Bank 23% 6% Oman Insurance Source: Bloomberg, AlJazira Capital Business Lines The company operates largely through two business lines namely Individual and Business Solutions. From a segment perspective ARCCI operates in four broad segments: General Insurance, Motor, Health, and Protection & Saving. The Motor segment is the largest segment for ARCCI accounting for more than 80.7% of Gross Premiums Written (GWP) and around 76.0% of the total underwriting profit by the end of 9M 2016. Figure 2: Gross Written Premium 9M 2016 Protection & Saving 1% General Health 11% Motor 81% 7% Figure 2: Gross Written Premium 9M 2016 Individual Business Solutions Health Travel Personal Accident Property Motor Liability Plans Contractor All Risk Marine Cargo Motor Family Plant & Machinery Machinery Breakdown Electronic Equipmen 2
Financial Performance Figure 4: Financial Snapshot and Key Ratios (SAR mn) 2011 2012 2013 2014 2015 Gross Written Premium 493 601 690 945 1,362 Net Written Premium 345 446 556 856 1,228 Retention Ratio (%) 70% 74% 81% 91% 90% Net Claims Incurred 192 316 428 563 791 Claims Ratio (%) * 71% 77% 84% 79% 78% Net underwriting income 55 72 64 127 187 Underwriting margin (%)^ 16% 16% 12% 15% 15% Expense Ratio (%) * 36% 25% 23% 17% 16% Combined Ratio (%) 117% 105% 110% 100% 97% Net profit before Zakat -32 1-21 19 43 EPS (SAR) -1.7-0.0-1.1 0.8 1.0 Source: Company Reports, SAMA, AlJazira Capital; * As a percentage of Net Earned Premium (NEP); ^ As a percentage of Net Written Premium (NWP) Significant growth in spite of challenging market conditions Al Rajhi Company for Cooperative Insurance (ARCCI) recorded 67.5% growth in net profit during 9M 2016 on the back of substantial decline in expenses. In 2015, ARCCI s net profit surged over 145.5% as underwriting revenues jumped 43%. Management fees ascribed to shareholders surged 182.6%. ARRCI s market share stood at 2.7% towards the end of 2011, and improved to 3.7% in 2015, driven by the strong growth in the motor segment. ARRCI improved its share in the motor segment from 6% in 2011 to 9% in 2015. Its share in the medical insurance segment, remained constant at around 1%. For 2016 we expect ARCCI s market share to improve to 5%, propelled by expected growth of 11.8% in the motor segment. The gross premium written (GPW) advanced 44.1% YoY in FY 2015, as the company intensified its focus on the Motor segment. Motor vehicle insurance, which accounted for 72.4% of the gross premium written, expanded 49.9% YoY in 2015. ARCCI continued robust performance in 2016, with the GPW rising 48.2% YoY in 9M 2016 on 71.2% rise in the Motor segment. Meanwhile, the Kingdom s insurance sector GPW grew at a moderate rate of 2.0% during 9M 216. The company s GPW performance increased gradually in other segments, such as General and Protection & Saving, which surged 54.2% YoY and 232.0% YoY, respectively, in 2015. ARCCI was largely unaffected by the growth slowdown in sector. Its net premium written (NPW) grew 43.5% YoY in 2015, compared with a sector growth rate of 19.7% YoY. NPW surged 54.9% YoY in 9M 2016, while sector NPW in comparison just grew 1.7% YoY in H1 2016. The net premium earned (NPE) advanced 48.3% YoY in 9M 2016 and 43.3% YoY in 2015, vis-à-vis sector growth of 20.2% in H12016 and 24.9% in 2015. 3
Ratio Analysis Improved Business Retention In terms of customer retention ratio, ARCCI expanded to 94.8% in 9M 2016 from 90.2% in 2015. Conversely, the sector ratio declined to 82% in 1H 2016 (latest available from SAMA) from 83% in 2015. For full year 2016, retention ratio is expected to stand around 95%. Claims trending higher, profitability under pressure A sharp rise in claims may pressure ARCCI s 2016 performance. Claims growth slowed in 2015, but picked up pace in 9M 2016. Gross claims retreated to 27.4% YoY in 2015, against 32.9% posted in 2014. As a result, the claims ratio declined to 77.6% from 79.1%. However, gross claims surged to more than 53.9% in 9M 2016. Meanwhile, Net Claims Incurred (NCI) advanced 40.7% YoY in 2015 (the highest in three years) and 59.5% YoY in 9M16. This led to marginal decline of 30 bps points to 96.4% in the firm s combined ratio in 9M 2016. Overall, underwriting margins remained depressed at 11% in 9M 16 as against the average 15% during 2011-2015. Figure 5: Retention Ratio Figure 6: Claim Ratio 100% 80% 60% 40% 70% 74% 81% 91% 90% 95% 90% 85% 80% 75% 70% 71% 77% 84% 79% 78% 83% 20% 65% 0% 60% Figure 7: Combined Ratio Figure 8: Underwriting Margin 140% 120% 100% 117% 105% 110% 100% 97% 96% 20% 16% 16% 16% 15% 15% 80% 12% 12% 11% 60% 40% 20% 8% 4% 0% 0% 4
Improving operational efficiency ARCCI s declining expense ratio offers further evidence of its improving operational efficiency. The expense ratio contracted to 19.1% YoY in 2015 from 20.4% in 2014, vis-à-vis average expense ratio over the past five-years of 27.7%. The company further rationalized its expense ratio in 9M 2016 to just 13.8% from 19.3% during the same period in 2015. This resulted in an overall improvement in the combined ratio to 96.4% in 9M 2016 compared to average 106% historically. SWOT Analysis Figure 9: SWOT Analysis Strengths ARCCI is backed by the renowned Al Rajhi Group, which controls around 47% stake in the company. ARCCI has a strong track record of growth. Within six years since inception, the company has achieved success in several profitability parameters. The company provides a wide array of insurance solutions across segments, and is well positioned to compete for future market opportunities. ARCCI has one of the best retention ratios in the market, and has witnessed steady growth in NEP and profit. Weakness ARCCI is heavily dependent on the Motor segment for its profitability. Although the company has increased its non-motor share considerably over the past five years, it still faces challenges in sustaining growth in other segments due to the high level of competition in the market. Trend of higher/increasing claims is threatening the company s profitability outlook. A majority of ARCCI s branches are in the Central region. This hampers its ability to make use of the opportunities in other parts of the kingdom, especially in the Western region Opportunities The Saudi government s Vision 2030 plan, aimed at aiding the country in lowering its dependence on oil through the development of other sectors, presents significant opportunity to insurance companies within the Kingdom. ARCCI dominates the Kingdom s motor segment, due to which it is poised to benefit from the healthy growth anticipated in car sales before the implementation of VAT in 2018. SAMA s regulation that mandates medical and thirdparty liability insurance is expected to significantly improve business opportunities for ARCCI. Threats Volatility in oil prices is a major threat to ARCCI. Lower-than-budgeted oil prices are expected to have a huge impact on economic prospects as most major growth opportunities are heavily reliant on government expenditure. The government s various austerity measures (and plans), such as reduction in public sector salaries and subsidies, is expected to impact consumer spending on the short term. This will likely have adverse effect on auto sales and hence on ARCCI s growth prospects. Source: AlJazira Capital 5
RESEARCH DIVISION Acting Head of Research Talha Nazar +966 11 2256250 t.nazar@aljaziracapital.com.sa Waleed Al-jubayr +966 11 2256146 W.aljubayr@aljaziracapital.com.sa Sultan Al Kadi +966 11 2256374 s.alkadi@aljaziracapital.com.sa Muhanad Al-Odan +966 11 2256115 M.alodan@aljaziracapital.com.sa Jassim Al-Jubran +966 11 2256248 j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager Brokerage Services & sales Alaa Al-Yousef +966 11 2256060 a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa +966 11 2256364 s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa +966 11 2256277 lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit +966 16 3617547 aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Mansour Hamad Al-shuaibi +966 12 6618443 m.alshuaibi@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. 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