Qatar General Insurance and Reinsurance Company Financial Analysis - Case Study Example

May 15, Qatar general insurance and reinsurance company financial analysis Growth and Performance of Qatar Insurance Industry A steady growth rate has been observed in Qatari insurance market over the past few years and is expected to outperform majority of its neighboring countries in the upcoming years. Infrastructure expenditure due to strong economic development is considered as the biggest reason for insurance demand. In the region of GCC, Qatar has third largest insurance market after Saudi Arabia and United Arab Emirates. The insurance market of Qatar has grown from nearly QAR 2.5 billion in 2006 to 2011 at the compound growth rate of 10%. Yet, insurance premium stood at 0.6% of gross domestic product, which is one of the lowest rates in the region of GCC. It highlights both challenges and growth potential of Qatari insurance market (Markets.ft.com). Over the past few years, the economy of Qatar has experienced rapid growth. The GDP increased by 6.3% in 2012, 14.1% in 2011 and 16.7% in 2010. Economic growth rate was said to stay moderate at 4.9% in 2013, though investments on infrastructure continues to occur. Furthermore, the economic development of Qatar is expected to be accelerated by FIFA World Cup Qatar 2022 (Barchart.com). Similar to majority of its neighbours, the revenue is primarily generated through energy commodities as key drivers. Most of the GCC countries generate revenues from plentiful oil reserves; Qatar owns world’s largest liquefied natural gas reserves. The government of the country is finding ways to continue capital spending by building infrastructure, which will discern the economic base of the country away from energy sector. Complexities to Qatar’s Insurers The biggest challenge for insurers is competition. As compared to 20 bodies in 2010, now there is single reinsurer and 26 insurers licensed to operate in Qatar. The insurance sector of Qatar is dominated by Qatar Insurance Company (QIC). For domestic insurers, the most important risk is to manage effectively the concentration and accumulation of risks. Due to having high-value energy risk, it is imperative that companies acknowledge the exposures and mitigate the prevalent risks in an effective manner. Although Qatar has not undergone political unrest yet, regional instability might affect the prospects of the country. Moreover, Qatar is unlikely to be hit by any severe natural catastrophe, though the growing number of such events in the region poses concern. The overall performance of Qatar’s insurance sector can be traced by examining top six players of the industry. They represent more than 80% of the entire premiums and reveal the companies and market is in profitable position. These companies include Al Koot, QIC, Qatar Islamic Insurance Company, Al Khaleej Takaful Group, Qatar General Insurance and Reinsurance Company, and Doha Insurance Company. The data reveals that combined ratio of market has increased consistently in the past few years and remained at profitable levels from 2006 to 2011 that is below 84%. Expenses heightened from 16% in 2006 to 26% in 2011 although they were counterpoised by negative acquisition cost. Therefore, there can be major challenges to the industry if the market is not managed properly. Financial Ratio Analysis The financial analysis of Qatar General Insurance and Reinsurance Company (QGIR) mainly contains various categories of financial ratio analysis. Financial ratio analysis is the technique used for making comparative analysis of company’s performance with respect to any other firm in the industry or with its own performance of the previous years. Under the existing scenario, the financial performance of QGIR is compared with its own performance of the previous year. There are five categories of financial ratios, which provide reasonableness of conducting financial analysis. Dividend Ratios Dividend ratios are mainly conducted in order to check whether the company has paid enough returns to the shareholders on their investments in the company. Returns in the form of dividend are mainly computed through dividend yield. The dividend yield describes the percentage of dividends earned on the particular investment in the form of share price. If the past 6-years performance of QGIR in respect of dividend yield is taken into consideration, it can be noted that in the early years, dividend yield was quite high i.e. between 8.5% and 19.59%. however, in the past 3 years it fallen substantially to 3% which shows that the company has not paid enough returns to the shareholders in the form of dividends given the amount of investments that they have made. Dividend payout ratio is the percentage of earnings that have been transformed into payment of dividends. During 2009 and 2010, the company was paying more than 50% of their earnings in the form of dividends to their shareholders. However, the trend stated to decline and in 2013, the company paid merely 2% of the earnings in the form of dividends to the shareholders. The following table shows the performance of QGIR in respect of dividend ratios: Dividend ratios 2013 2012 2011 2010 2009 2008 Dividend yield 2.18% 3.03% 3.00% 9.74% 19.59% 8.50% Dividend payout ratio 2.35% 33.16% 28.20% 53.48% 56.34% 15.07% Profitability Ratios Profitability ratios analyse the performance of the company’s profitability with respect to certain benchmarks i.e. revenues, total assets, total equity, etc. net profit margin of the company assess the percentage of revenues that are converted into the net income. Net profit margin has remained on a higher side since 2008 when it was around 93%. After the debacle of global financial industry across the global, QGIR also witnessed the effect into its financial statements due to which the ratio dropped to around 59% in 2010. However, in the later years the company performed substantially well in gaining even higher level of net profit margin, which crossed 100% level. The major reason behind such an increase in net income is the increase in fair value gains. Return on assets of the company was quite high in 2008 i.e. nearly 6.7% but it dropped to half in the next 4 years until 2013 in which return on assets was nearly 30%. Same reason is witnessed for the increase in this ratio as that of net profit margin. Return on equity establishes the percentage of total equity, which is converted into net income. During 2008, the company earned double-digit ROE but since then the company was loosening its grip and revolved around 6% ROA level. However, due to increase in fair value gains, the company reported ROE of around 44%, which has been the highest during last 6 years. The following table highlights the profitability performance of QGIR in previous 6 years: Profitability ratios 2013 2012 2011 2010 2009 2008 Net profit margin 1034.51% 86.68% 91.49% 59.28% 65.03% 93.59% Return on assets 29.91% 3.72% 3.98% 3.08% 3.93% 6.75% Return on equity 44.59% 6.81% 6.68% 4.80% 6.06% 10.28% Liquidity Ratios Liquidity ratios are mainly computed in order to check the performance of the company relating to liquidity or cash conversion. Current ratio describes the amount of current assets available to pay the current liability amounting to $1. The performance of QGIR has remained quite satisfactory especially in respect of current ratios. The least amount of current ratio that company has ever booked in last 6 years is 1.55 times in 2009. On the contrary in 2011, the company recorded the current ratio of around 2.89 times which has been the highest of all times. This ratio shows that the company had $2.89 available in the form of current assets to pay off $1 of current liabilities. Liquid to total assets ratio provides the percentage of total assets which are in the form of highly liquid assets such cash and cash equivalents. In 2008, the company had the highest ratio in respect of liquid to total assets, which was around 4.85%. Since then, the ratio moved into a haphazard manner i.e. showing higher as well as lower ratios in past 6 years. The company showed the lowest percentage of liquid assets to total assets in 2012 in which the company had only 1.17% of its total assets in the form of cash and related liquid assets. The following table provides a brief analysis of liquidity performance of QGIR: Liquidity ratios 2013 2012 2011 2010 2009 2008 Current ratio 1.78 2.49 2.89 1.65 1.55 1.66 Liquid to Total assets 2.12% 1.17% 3.50% 1.40% 3.18% 4.85% Solvency Ratios Solvency ratios are computed in order to check the capital structure of the company into various manners. Capital structure of the company plays a key role in defining the overall riskiness of the company. The higher the level of debt included in the capital structure of the company, the riskier will be its financial position. Debt/Equity ratio estimates the proportion of debt with respect to equity. For every $1 of equity, it shows how much debt is associated with it. The higher the ratio, the greater will be the risk involved in the capital structure. The capital structure of QGIR shows that the company had the ratio of around 0.55:1 during 2008-10. Since 2011, the ratio increased tremendously which finally dropped last year with the proportion of 0.49:1. In this way, the debt/equity ratio of the company remained relatively stable in past 6 years. Equity/Assets ratio describes the percentage of equity involved in financing the total assets of the company. It is quite evident from the past performance of the company in this regard that equity portion makes financing of nearly 60% in total assets of the company. Besides the fact that the ratio fluctuated a bit during the concerned period but it stayed within the range of 54% to 67%. Leverage ratio involves the use of debt as a percentage of total assets in its financing. The highest level of leverage ratio was around 45% in 2012 but the ration has remained at around 35%. This shows that the company has relatively lower scale of debt in financing its assets as well as the capital structure has remained quite steady during the year. Solvency ratios 2013 2012 2011 2010 2009 2008 Debt/Equity 49.06% 83.00% 68.08% 55.90% 54.15% 52.15% Equity/Assets 67.09% 54.65% 59.49% 64.15% 64.87% 66% Leverage 32.91% 45.35% 40.51% 35.85% 35.13% 34% Stock market ratios Stock market ratios are of prime importance especially for the equity investors. With the help of these ratios, the investors assess the performance of the company especially in respect of the yield that they might obtain by investing in stocks of those companies. P/E ratio of Price to Earnings multiple shows the times the price of the stock is prevailing given its earnings level. QGIR had P/E ratio of around 2 time during 2008-09 but increased exceptionally in the next 3 years. However, the multiple shrunk again in 2013 just because the company reported extra-ordinary level of net income (quotenet.com). Price/Book value determines the existing share price of the company given the book value per share of the assets of the company. The company always had a series of low price/book value ratios, which shows that the existing market share price of the company is under-priced given the book value of its assets. Price/Cash flow shows the times the share price of the company given the level of cash flows that it generates from its main business operations. The company had very volatile performance in this regard, as at time the company had made cash outflows instead of inflows due to which the ratio become negative in those years. The last ratio highlights the earnings yield, which shows the earnings made by the investor upon his level of investment. In 2008, the ratio was quite high as earnings were half of share price of the company. As the profitability declined in next four years, the ratio is also declined but in 2013, the net income of the company increased substantially which caused an increase in earnings yield of the company too. The following table highlights the stock market performance of QGIR in a concise manner. Stock market ratios 2013 2012 2011 2010 2009 2008 P/E Ratio 1.08 10.95 9.39 5.49 2.88 1.77 Price/Book value 0.32 0.41 0.37 0.17 0.09 0.12 Price/cash flow 13.09 (61.29) 19.82 (10.58) (3.89) 1.87 Earnings yield 92.63% 9.13% 10.64% 18.22% 34.78% 56.40% Share Price Movement The following table provides the share price movements of QGIR is the past 6 years. During 2009, the share price of the company slumped a lot and it reached to around QR12.25 due to global financial crunch. Since then, it increased and reached at QR35.70 in 2011. Due to better financial results and stability in the financial position of the company, the stock price reached to its highest level of around QR39.90 in 2013. Overall, the share price of QGIR has showed stable growth during the period (investing.com). 2013 2012 2011 2010 2009 2008 39.90 38.33 35.70 20.53 12.25 19.61 Capital Asset Pricing Model (CAPM) CAPM is a tool to assess the expected rate of return that can be generated from a particular stock. The following formula shows the expected rate of return for QGIR during 2013: Re = Rf + (Rm – Rf) x β Where; Re= Expected rate of return Rf = Risk-free Rate Rm = Market return Β = Beta (Risk of particular stock with respect to market) Therefore; Re = 0.03% + (28.46% - 0.03%) x 0.14 Re = 6.56% Ratios Formulae 2013 2012 2011 2010 2009 2008 Dividend yield Dividend 0.87 2.18% 1.16 3.03% 1.07 3.00% 2.00 9.74% 2.40 19.59% 1.67 8.50% Share price 39.90 38.33 35.70 20.53 12.25 19.61 Dividend payout Dividend per share 0.87 2.35% 1.16 33.16% 1.07 28.20% 2.00 53.48% 2.40 56.34% 1.67 15.07% EPS 36.96 3.50 3.80 3.74 4.26 11.06 Net profit margin Net income 2,130,985 1034.51% 175,560 86.68% 170,322 91.49% 119,444 59.28% 136,222 65.03% 226,267 93.59% Revenues 205,989 202,534 186,169 201,493 209,483 241,758 Current ratio Current assets 2,390,876 1.78 1,998,766 2.49 1,991,857 2.89 1,855,621 1.65 1,533,927 1.55 1,570,288 1.66 Current Liabilities 1,346,737 801,611 690,342 1,128,037 988,786 943,424 Liquid/Total assets Liquid assets 151,083 2.12% 55,055 1.17% 149,790 3.50% 54,402 1.40% 110,007 3.18% 162,328 4.85% Total assets 7,124,067 4,718,031 4,282,968 3,875,878 3,463,355 3,350,051 Debt/Equity Debt 2,344,637 49.06% 2,139,857 83.00% 1,734,832 68.08% 1,389,685 55.90% 1,216,572 54.15% 1,148,306 52.15% Equity 4,779,430 2,578,174 2,548,136 2,486,193 2,246,783 2,201,745 Equity/Assets Total Equity 4,779,430 67.09% 2,578,174 54.65% 2,548,136 59.49% 2,486,193 64.15% 2,246,783 64.87% 2,201,745 0.66 Total assets 7,124,067 4,718,031 4,282,968 3,875,878 3,463,355 3,350,051 Leverage Total Liabilities 2,344,637 32.91% 2,139,857 45.35% 1,734,832 40.51% 1,389,685 35.85% 1,216,572 35.13% 1,148,306 0.34 Total assets 7,124,067 4,718,031 4,282,968 3,875,878 3,463,355 3,350,051 P/E Ratio Share price 39.90 1.08 38.33 10.95 35.70 9.39 20.53 5.49 12.25 2.88 19.61 1.77 EPS 36.96 3.50 3.80 3.74 4.26 11.06 Price/Book value Share price 39.90 0.32 38.33 0.41 35.70 0.37 20.53 0.17 12.25 0.09 19.61 0.12 BV per share 123.58 94.12 95.70 121.24 135.42 163.74 Price/cash flow Share price 39.90 13.09 38.33 (61.29) 35.70 19.82 20.53 (10.58) 12.25 (3.89) 19.61 1.87 CF per share 3.05 (0.63) 1.80 (1.94) (3.15) 10.51 Earnings yield EPS 36.96 92.63% 3.50 9.13% 3.80 10.64% 3.74 18.22% 4.26 34.78% 11.06 56.40% Share price 39.90 38.33 35.70 20.53 12.25 19.61 Return on assets Net income 2,130,985 29.91% 175,560 3.72% 170,322 3.98% 119,444 3.08% 136,222 3.93% 226,267 6.75% Total assets 7,124,067 4,718,031 4,282,968 3,875,878 3,463,355 3,350,051 Return on equity Net income 2,130,985 44.59% 175,560 6.81% 170,322 6.68% 119,444 4.80% 136,222 6.06% 226,267 10.28% Total equity 4,779,430 2,578,174 2,548,136 2,486,193 2,246,783 2,201,745 Works Cited Barchart.com,. Treasuries Interest Rates - Treasury Rates And Treasury Bill Rates. N. p., 2014. Web. 15 May. 2014. investing.com,. QE All Shares Historical Data | QE All Shares Historical Rates. N. p., 2014. Web. 15 May. 2014. Markets.ft.com,. Qatar General Insurance And Reinsurance Co SAQ, QGRI:DSM Profile - FT.Com. N. p., 2014. Web. 15 May. 2014. quotenet.com,. Qatar General Insurance & Reinsurance Price History |Quotenet.Com. N. p., 2014. Web. 15 May. 2014. Read More