TAKAFUL and Al Ain Ahlia - Assets, Equity, and Liabilities - Example

Background of the Company Abu Dhabi National Takaful Company (ADNTC) Company The company was established in the year 2003 with the main objective being to provide Takaful insurance solutions. The headquarter of Takaful is in Abu Dhabi, however, it has its operations in the entire United Arab Emirates (UAE) and has offices in Al Ain, Abu Dhabi and Dubai. It was listed in the stock exchange of Abu Dhabi (ADX) in year 2005 and its stock symbol is TKFL. The company deals in wide array of general insurance products ranging from motor insurance to medical insurance. Alain Ahlia Insurance Company (AAIC) Company AAIC is a publicly traded company that is incorporated in Abu Dhabi and registered under the federal law of UAE. It is principally engaged in underwriting of various classes of insurance business in line with the law and regulations of insurance operations in UAE. Its stocks are listed on the Abu Dhabi stocks and securities exchange. Services and products Takaful insurance deals only in general insurance business whereas Al Ain Ahlia insurance is also in the business of health and life insurance. Takaful insurance deals in the following insurance products; property, engineering, marine cargo, general accidents, personal accidents, money insurance, liability and public liability insurance, professional indemnity, WIBA, professional indemnity (PI), directors and officers cover and medical insurance. On the other hand, Al Ain Ahlia insurance deals in the following insurance products; property, engineering, marine cargo, general accidents, personal accidents, motor, energy, aviation, health and life insurance. Al Ain Ahlia insurance also accepts reinsurance business. Takaful insurance does not offer aviation and energy insurance like it does its counterpart. Financial position The statement of financial position of the two companies have been prepared as at 31st December 2012. According to Kothari & Barone (2006), this makes it easier for comparing the financial positions of the two companies since it relates to the same financial period. In addition, the financial elements in the financial position of the two companies have been measured using the same currency, AED. The table below shows extracts of items in the financial position of the two companies and a vertical analysis of these items to aid in effective comparison. TAKAFUL Al Ain Ahlia TAKAFUL Al Ain Ahlia AED AED Vertical Analysis ASSETS Cash & bank balances 177,023,841 307,429,000 38% 20% Investments carried at fair value through other comprehensive income 69,604,153 237,751,000 15% 15% Property, Furniture & equipment 1,201,408 3,039,000 0% 0% Total assets 462,048,632 1,551,948,000 100% 100% Equity & Liabilities Shareholders' equity Share capital 100,000,000 150,000,000 22% 10% General reserve 35,000,000 600,000,000 8% 39% Retained earnings 17,774,693 83,058,000 4% 5% Total Shareholders' equity 165,480,611 986,002,000 36% 64% Liabilities Provision for end of service benefits 3,589,950 26,294,000 1% 2% Total Liabilities 296,568,021 565,946,000 64% 36% Total Equity & Liabilities 462,048,632 1,551,948,000 100% 100% Property, furniture and equipment of the two companies forms an insignificant proportion of the total assets of the companies. Hence it can be said that most assets of these companies are of short term nature. Takaful has maintained a high proportion of its Cash & bank balances (38%) compared to Al Ain Ahlia (20%). Both companies have maintained low levels of retained earnings. Income statement The income statement of the two companies have been prepared for the year ended 31st December 2012. This makes it easier for comparing the financial performance of the two companies since it relates to the same reporting period. In addition, the financial elements in the income statement of the two companies have been measured using the same currency, AED. The table below shows extracts of items in the income statement of the two companies and a vertical analysis of these items to aid in effective comparison. TAKAFUL Al Ain Ahlia TAKAFUL Al Ain Ahlia AED AED Vertical Analysis Underwriting Income Gross premium written 195,228,497 462,202,000 100% 100% Less: Reinsurance Premium ceded 111,474,593 266,132,000 57% 58% Net premium written 83,753,904 196,070,000 43% 42% Underwriting Expenses Gross claims paid 101,491,908 324,241,000 52% 70% Less: claims recovered from reinsurers 80,893,773 184,454,000 41% 40% Net claims paid 20,598,135 139,787,000 11% 30% Net underwriting profit (Loss) -3,799,533 58,446,000 -2% 13% Net investment and other income 2,892,687 24,397,000 1% 5% Administrative expenses 23,522,139 39,874,000 12% 9% Profit for the year 27,122,639 50,249,000 14% 11% Earnings per share 0.27 3.35 Gross Loss ratio 52% 70% Net Loss ratio 25% 71% The vertical analysis has used the gross premium written as the denominator for all items in the income statement. Both companies have relatively the same proportion of reinsurance level whereby Takaful insurance has ceded 57% of its gross premium written whereas Al Ain Ahlia has ceded 58% of its gross premium written. This means that both companies are not overly exposed since they have not retained much of the risk insured which is a good risk management policy (Lama, 2013). However, based on the net loss ratio of the two companies, Al Ain Ahlia should cede more of its business with the reisurer since its net loss ratio is at a high of 71% compared the net loss ratio of Takaful insurance which has stood at 25%. In proportion, Al Ain Ahlia insurance is incurring high claims when compared to Takaful insurance since their proportion of net claims paid against gross premium written are 30% and 11% respectively. Takaful insurance has undergone a net underwriting loss of AED 3,799,533 whereas Al Ain Ahlia insurance has made an net underwriting profit of AED 58,446,000. Nevertheless, Takaful insurance has made a good profit in the year under comparison of AED 27,122,639. This is purely due to income obtained from its other investments. However, it is notable that Takaful insurance has a high proportion of administrative expenses which accounts for 12% of the gross premium written. This is very high compared to the 9% of Al Ain Ahlia insurance. This might be another reason why the company has an underwriting loss. Liabilities Liabilities are claims against the assets of the company. In insurance companies these liabilities will include claims that are payable in case the insured event materializes. This is usually done by creating a provision for these eventualities. However, not all liabilities against the insured event attaches to the insurer since it has ceded some of the businesses with a reinsurer. Al Ain Ahlia insurance has high liabilities in value terms compared to Takaful insurance. This is because of the fact that Al Ain Ahlia insurance is a bigger company than Takaful insurance. Therefore, their liabilities can best be compared in terms of its proportion to the total assets of the company since liabilities attaches to the assets. The proportion for Takaful insurance is 64% whereas for Al Ain Ahlia insurance is 36%. This can be interpreted to mean that Takaful insurance is likely to enter into financial problem should a major liability become due for settlement. References Kothari, J. & Barone, E. 2006. Financial Accounting – an International Approach. Harlow, England: FT Prentice Hall. Lama, T. B., 2013. Empirical evidence on the link between compliance with governance of best practice firms’ operating results, Australasian Accounting Business and Finance Journal, 6 (5), pp. 20. Read More