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.

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.

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