Kuwait Financial Centre “Markaz” R E S E A R C H
Qatar Insurance Company S.A.Q. DSM Code: QATI | Bloomberg Code: QATI QD| Reuters Code: QINS.QA Current Market Price: QAR 111.2 (As of 09 November 08)
Expected Return November 2008 Low Medium High
Low
Stock Medium
Volatility High
On YTD basis, Qatar Insurance Company S.A.Q. (QIC)’s stock fell 35%, broadly in line with the DSM index’s decline of 27%. However, in 2007, the stock rose 52%, outperforming the index’s gain of 34%. Capitalizing on its dominance in the domestic insurance market, QIC’s gross premium written increased 29% YoY to USD 449 Mn in 9M08. In addition, Markaz Research is decline in premium paid for reinsurance (as a percentage of gross premium available on Bloomberg written) and gross claims (as a percentage of net premium earned) led to a Type “MRKZ”
Kuwait Financial Centre “Markaz” R E S E A R C H November 2008
Analyst Discussion Notes Underwriting business expanded in 3Q08 as well as 9M08 Figure 1: Net Income and Combined Ratio Trend
80 Net Income (USD Mn) Combined Ratio (%) 90% Combined Ratio (%) Ratio Combined
60 80%
40 70%
20 60% Net Income (USD Mn) (USD Income Net
0 50% 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Source: QIC
On YoY basis, QIC’s net profit rose 19% to USD 30 Mn in 3Q08 owing to Net profit rose 19% YoY to 33% increase in underwriting profit to USD 21 Mn and 18% growth in USD 30 Mn in 3Q08; it grew investment income to USD 18 Mn (figure 1). However, the net profit for 54% YoY on 9M basis 3Q08 is lower by 35% compared to 2Q08 and declined 56% compared to 1Q08. The strong growth in gross premium written (52% YoY to USD 131 Mn) boosted the net underwriting profit. However, combined ratio1 increased by 56 bps YoY to 76% in the quarter mainly due to higher premium paid on reinsurance.
QIC offers a wide range of insurance services—construction & project engineering, property, marine & aviation, onshore and offshore energy, motor and group health insurance. We believe the rising demand for these insurance services in end markets is fueling the growth in the company’s underwriting business. In 9M08, gross premium written increased 29% YoY to USD 449 Mn. In addition, reinsurance premium paid in 9M08 declined 309 bps YoY to 53% of gross premium written. These two factors led to a 40% YoY rise in QIC’s net premium earned to USD 181 Mn. Moreover, gross claims paid declined by 211 bps YoY to 71% of net premium earned in 9M08. Consequently, combined ratio improved by 237 bps to 72% and the net underwriting income increased 50% YoY to USD 71 Mn in 9M08. Investment income also rose 61% YoY to USD 98 Mn, enabling the company to register a 54% YoY growth in bottom line to USD 142 Mn in 9M08.
At the end of 9M08, QIC’s total capital base grew 4% YoY to reach USD 827 Mn and increased 30% YoY to USD 934 Mn in 2007. The expanding capital base, in turn, has increased the company’s underwriting capacity.
As indicated in table 1, the company’s gross premium written is mainly QIC’s asset portfolio is mainly contributed by its underwriting business in Qatar (61% in 2007), while the concentrated in Qatar International segment comprising operations in the UAE, Saudi Arabia, Oman and Kuwait accounts for the remaining. The loss ratio in the International segment (49% in 2007) is relatively better than that of Qatar
1 Combined ratio has been calculated as sum of loss ratio ((Gross claims paid + Reinsurance and other recoveries + Movement in outstanding claims) / Net premium earned) and expense ratio ((Net commission + G&A expenses) / Net Premium).
Kuwait Financial Centre “Markaz” 2 R E S E A R C H November 2008
(69% in 2007). Consequently, International segment’s contribution to QIC’s total underwriting income was 43% in 2007.
Table 1: Geographical Segmentation - 2007 Gross Net Net Loss Total Geographical Written Premium Underwriting Ratio Assets Segment Premium Earned Income (%) (USD Mn) (USD Mn) (USD Mn) (USD Mn) Qatar 253 91 35 69% 1,330 As % of total 61% 54% 57% 83% International 164 78 26 49% 280 As % of total 39% 46% 43% 17% Total 417 170 61 60% 1,611 Source: QIC
On basis of the nature of business, QIC classifies its underwriting business under two segments – Marine & aviation and Fire & general. As indicated in table 2, Fire & general segment accounted for majority of its underwriting income in 6M08.
Table 2: Segmental Breakdown of Underwriting Activities – 6M08 Net Gross Written Net Premium Loss Underwriting Segments Premium Earned Ratio Income (USD Mn) (USD Mn) (%) (USD Mn) Marine and Aviation 36 14 3 72% As % of total 11% 11% 6% Fire and General 281 110 47 51% As % of total 89% 89% 94% Total 318 124 50 53% Source: QIC
QIC to benefit from rising demand for insurance services in Qatar QIC holds the dominant As indicated in figure 2, QIC dominates the domestic market and captured 60% of total gross premium earned by national insurance companies in position in Qatar, with 60% of 2 market share of national 9M08 . insurance companies Figure 2: Gross Premium Share of National Insurance Companies 100% 10% 9% 8% 8% 10% 10% 9% 9% 80% 24% 27% 28% 29% 60%
40% 53% 53% 53% 60% 20%
0% 2005 2006 2007 9M08 Qatar Insurance Co. Qatar General Insurance and Reins. Co. Doha Insurance Co. Al Khaleej Insurance and Reins. Co. Source: Zawya
Moreover, Qatar, QIC’s primary end market, has a low insurance penetration rate of 0.9% of GDP compared to the 7.5% world average in 2007 (Source: Swiss Re, Sigma No. 3/2008). Qatar Financial Centre (QFC)
2 We have excluded Qatar Islamic Insurance Co. while calculating the total gross premium as it is mainly into Islamic insurance.
Kuwait Financial Centre “Markaz” 3 R E S E A R C H November 2008
expects non-life insurance premiums in Qatar to reach USD 640 Mn in 2009 from USD 538 Mn in 2007.
Qatar witnessed an increase in business development activities driven by Demand for insurance service high hydrocarbon prices. Moreover, the Qatari government’s aim to emerge likely to increase across all as the leading global LNG producer also fuelled development in the oil & sectors in Qatar gas sector and increased marine activities in the country. Accordingly, the demand for property, construction & project engineering, onshore and offshore energy and marine insurance services also increased in Qatar historically. However, current financial market conditions and falling oil & gas prices might limit the capital expenditure by the government and other organizations in Qatar. Given this, we believe QIC’s underwriting business might observe slow growth in the near term. Nevertheless, mandatory motor insurance and government’s emphasis on group health covers is set to increase demand for QIC’s services going forward.
However, competition in the financial services sector is expected to rise in the country, particularly with the establishment of QFC. Several international companies plan to enter the high-growth insurance market of Qatar. Nevertheless, considering QIC’s domestic dominance and high profile clientele such as Qatar Gas, RasGas and Qatar Petroleum, we do not foresee any significant competitive threat to the company.
Peer comparison – QIC posts better underwriting results Apart from domestic dominance, QIC holds prominent position in the MENA insurance sector. In 2007, the company recorded the second-highest gross Best combined ratio among the premium in the region (table 3). QIC also has the best combined ratio top five insurance companies among the top five insurance companies in the MENA region. This clearly in MENA region indicates the company’s ability to generate better results from its underwriting business.
Table 3: Top Five Insurance Companies in MENA Region by Gross Premium (2007) Gross Net Expense Loss Written Premium Combined Company Name Ratio Ratio Premium Earned Ratio (%) (%) (%) (USD Mn) (USD Mn) Company for Cooperative Insurance - Saudi Arabia 510 292 35.7 66.3 102.0 Qatar Insurance Company 417 170 16.8 59.6 76.5 Oman Insurance Company 412 192 31.4 52.5 83.9 Abu Dhabi National Insurance Company 315 90 24.4 68.6 93.1 Gulf Insurance Company 279 143 43.3 65.9 109.2 Average 30.3 62.6 92.9 Source: Zawya Industry Insight
Kuwait Financial Centre “Markaz” 4 R E S E A R C H November 2008
Valuation At the current price of QAR 111.2, the stock trades at 9.24x and 6.83x 2007 earnings and LTM earnings, respectively (figure 4). QIC’s dominance in the domestic market and better underwriting results relative to regional peers is expected to fuel net income growth going forward. However, anticipated slowdown in business activities on account of current credit crisis and decline in oil & gas prices might dent demand for insurance services in the near term. Given this scenario and QIC’s strong performance in 9M08, we expect QIC’s net income to increase 34% YoY in FY2008.
According to our estimate, the stock is trading at 6.90x 2008E earnings. At our fair value PE of 9.00x, we expect the stock to offer high returns, which however, might not be realized in short term given the turmoil in global financial markets. According to the Markaz Volatility Index, QIC depicts a high-risk profile compared to the benchmark (figure 5). The stock has witnessed increased volatility during the past two months and reached a high on 19 October 2008. On the liquidity front, the volume of trade in the company’s stock rose 36% YoY in 2007 compared to a decline of 9% YoY in 2006. The stock’s turnover velocity was 15% in 2007 implying low liquidity.
Figure 3: Share Price & Traded Volume Figure 4: Stock PE Trend QIC Traded Volume ('000) QIC PE Fair Value PE QIC Stock Price Rebased 175 1000 16
DSM Index Rebased '000) (in Volume Traded 150 800
12 125 600
100 400 PE (TTM) 8 Price (rebased) Price 75 200
50 0 4 1-Nov-07 6-Feb-08 6-May-08 4-Aug-08 5-Nov-08 1-Nov-07 6-Feb-08 6-May-08 4-Aug-08 5-Nov-08 Source: Bloomberg and Markaz Research Source: Bloomberg
Figure 5: Markaz Volatility Index (November 2008) High 15000 Low Current Value 13914 12891 13,399 12000
9,509 9000
6000
3000 1,000 581 0 MVX-DSM MVX-QIC Source: Markaz Research
Kuwait Financial Centre “Markaz” 5 Kuwait Financial Centre “Markaz” R E S E A R C H
Appendix 1: Key Statistics
All Figures in USD Mn 2003 2004 2005 2006 2007 Income Statement Gross Premium Written 112 151 202 328 417 Net premiums earned N/A 32 51 102 170 Net underwriting results 14 18 25 44 61 Net Income 27 34 78 107 141 Balance Sheet Assets Cash and cash equivalents 60 86 203 211 381 Insurance and other receivables 9 30 35 60 111 Reinsurance contract assets 11 92 140 179 197 Investments N/A 353 684 607 841 Total Assets 361 575 1,088 1,105 1,611 Liabilities & Equity Insurance contract liabilities N/A 123 192 274 357 Total Liabilities 62 179 259 385 677 Total Shareholder's Equity 298 395 829 720 934 Key Ratios ROE % 10.58 9.83 12.76 13.77 17.00 ROA % 8.59 7.28 9.42 9.73 10.58 Gross Premium Growth % N/A 35% 34% 63% 27% Underwriting Income Growth % N/A 32% 38% 78% 39% Net Profit Growth % N/A 26% 129% 37% 32% Hist. EV (USD Mn) 525 1,524 1,757 1,126 1,654 P/E (LFY) 19.32 41.91 25.02 12.25 14.13 P/B (LFI) 1.75 3.61 2.36 1.81 2.13 EPS (USD) 0.64 0.80 1.84 2.51 3.31 DPS (USD) 0.96 1.10 1.37 2.75 2.75 Dividend Yield % 6.98 2.91 2.99 8.77 5.81 Market Price (QAR) 44.70 122.40 167.33 111.90 170.10 Market Cap. (USD Mn) 586 1,604 1,954 1,331 2,008 Book Value per share (USD) 7.03 9.31 19.51 16.95 21.99 Traded Volume ('000) 1,439 4,405 6,032 5,490 7,490 Traded Value (USD Mn) 15 101 233 175 249 Turnover Velocity % N/A 9% 13% 11% 15% Source: Reuters Knowledge, Company Accounts, Bloomberg; Per share data is calculated using number of shares outstanding as on 31 December 2007.
Kuwait Financial Centre “Markaz” Kuwait Financial Centre “Markaz” R E S E A R C H
Markaz Research Process
Markaz Expected Return & Risk
Markaz Volatility Index (MVX) – Analyst Call On Projected Stock Return Company in relation to Benchmark
Identification of Positive/Negative Drivers to the stock price from its current level Business Management Analyst Calls Journals Analyzing Analysis Meet (Optional, where ever providing International analyst tracking the (Company (Optional, where ever forecasts on & Macro company are broken interest is shown by Industry economic available) down to both parties – Markaz (price of trends impact various & Company Analyzed) commodity the company segments for forecasts/intere in-depth st rate analysis and forecasts/trend identification forecasts etc) of growth drivers) Preliminary Model Building
Annual Report Quantitative Simulations Screening
Indicative Growth Guidance Probable Extent of PE Expansion /PE Contraction
Earnings Growth P/E
Weight Short Term Profile (Last Weight Short Term Profile (Last four quarters average 25 – 50% 12 Month average PE) growth rate) 60%
Medium Term Profile Medium Term Profile 10 – 25% (Last three years average (Last 24 Month Average 40% growth rate) PE)
25 – 50% Analyst Consensus estimates
Kuwait Financial Centre “Markaz” R E S E A R C H
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Definitions – Volatility (Risk) High Where the Current MVX and band width of stock is more than benchmark Medium Where the current MVX is lower than benchmark and band width higher than or lower than benchmark Low Where the current MVX is lower than the benchmark and the band width lower than the benchmark MVX refers to Markaz Volatility Index calculated by Markaz based on in-house proprietary model
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