Allied Cooperative Insurance Group: Financial Analysis

Introduction

Allied Cooperative Insurance Group (ACIG) is a joint-stock insurance public company, registered with Saudi Stock Exchange “Tadawul” as of the year 2007. It primarily offers financial services, it is situated in Riyadh, Saudi Arabia, and it is part of the Brokerages business and Insurance activities which links the potential customers with the company to enhance negotiable terms of the deal. Agents connect with the clients and source useful details that will be applied in the contract between the involved parties.

ACIG offers several protection options, including personal medical assurance, marine coverage, general property indemnity, vehicles. It serves its customers in Riyadh and those based in Jeddah, Moshait, plus other places having openings. The organization enjoys the reputation of being one of the biggest group assurance companies in that region while strictly observes the principles and teachings of Islamic sharia.

Vision

The organization’s main aim is to offer favorable and accommodating indemnity facilities in the region that promotes safety to customers and deliver worth to workforces and shareholders applying the highest international principles.

Mission

Their short-term goal is to venture into the activity by offering high valued services for their merchandise to meet customers’ desires.

Ownership structure

ACIG company is owned by prestigious individuals that have big shares, Islamic Development Bank, and other shareholders comprising of investors from the Saudi firms and individual with good financial and excellent commercial reputation.

Organizational Structure

Organizational Structure

Significant Achievements in the History

In the early stages, a lack of developed technology lowered the performance and quality of service delivery; most of the operations used to be done through the Give-and-take approach, which made it cumbersome, time-consuming, and complicated because there were a lot of paperwork involved. When the processes in the industry were made online, investors had an easy time in the transaction by depositing their physical-certificate stocks into electronic portfolios in the market kept under their personal names.

The company has been working hard to increase the level of self-assurance and transparency concerning stockholders’ ownerships and rights. This has been achieved through encouraging investors and permitting them to appropriately exercise their voting privileges, inquire on their dividend titles, receive alerts and statements on certain important deeds that are happening or are planned to be undertaken by the firm. By reducing the gap between registered corporations and their owners, as well as improving announcement and information exchange among them, is also key power that fosters a relationship that enhances the good performance of the firm.

Following the advancement in electronic development, the Saudi Stock Exchange collaborates with its clients such as information providers and member are now capable of providing reliable and useful market information and data that can be easily used by the shareholders, investors, and even the government to evaluate and find the best performing sector to invest in for future gains as they aim at advancing the capital market coverage in Saudi Arabia in order to attain high level of returns and good relation with both the shareholders and investors.

Financial reports of the last three years (2020, 2019, 2018).

BALANCE SHEET 2020-12-31 2019-12-31 2018-12-31
Policyholders (Ph) Assets:
Investments and Cash at Banks 192,056 204,240 221,665
Receivables, Net 98,638 88,140 93,978
Other Assets 156,328 115,658 91,782
Total Ph Assets 447,022 408,038 407,425
Shareholders (Sh) Assets:
Investments and Cash at Banks SH 154,510 102,033 136,803
Other Assets SH 5,878 52,759 7,988
Total Sh Assets 160,388 154,792 144,791
Total Assets 607,410 562,830 552,216
Policy Liabilities :
Reinsurers Balances Payable 16,661 16,470 11,505
Technical Reserves 372,630 357,140 355,277
Other Liabilities 57,731 34,428 41,003
Total Ph Liabilities 447,022 408,038 407,785
Sh Liabilities and Equity:
Sh Liabilities 13,693 10,333 6,783
Sh Equity 146,695 144,459 137,648
Total Sh Liabilities and Equity 160,388 154,792 144,431
Total Liabilities 607,410 562,830 552,216
All figures are in Thousands Thousands Thousands
Currency SAR SAR SAR
STATEMENT OF INCOME 2020-12-31 2019-12-31 2018-12-31
St. of Ins. Operation and Surplus:
Gross Premium Written 515,117 529,352 500,013
Net Premium Earned 445,421 467,099 437,021
Reinsurance Commission 4,112 3,751 2,175
Other Underwriting Income 6,260 2,251 11,109
Investment Income and Other Income 2,150 4,605 4,157
Total Revenues 457,943 477,706 454,462
Gross Claim Paid 382,842 399,682 346,972
Net Claim Incurred 339,932 361,228 324,871
Policy Acquisition Costs 30,632 25,288 29,621
Excess of Loss Expenses
Other Expenses 82,821 85,942 91,477
Total Costs and Expenses 453,385 472,458 445,969
Net Surplus after Sh. Appropriation 456 525 849
Accum. Ph.Surplus End of Period
St. of Sh Operations:
Investment and Management Fee Income 2,566 4,657 -3,182
Other Income
Sh. Appropriation From Net Surplus 4,102 4,723 7,644
General and Administrative Expenses 3,122 2,265 2,104
Net Income ( Loss ) for the Period 3,546 7,115 2,358
St. of Changes in Retained Earnings: 143,628
Beginning Balance 137,648 137,934
Net Income ( Loss ) for the Period. 3,546 7,115 2,358
Transfer to reserves
Dividends Proposed
Other Dividends 1,543 1,135 2,644
Ending Balance 145,631 143,628 137,648
All figures are in Thousands Thousands Thousands
Currency SAR SAR SAR
CASH FLOW STATEMENT 2020-12-31 2019-12-31 2018-12-31
Policyholder Cash flows
Net cash from operating activities -5,487 -10,965 35,306
Net cash from investing activities 15,327 -19,081 3,820
Net cash from Financing activities -2,435
Increase (Decrease) in Cash 7,405 -30,046 39,126
Cash Balance , Beginning 65,320 83,409 44,283
Cash Balance, Ending 72,725 53,363 83,409
Shareholder Cash Flows:
Net cash from operating activities SH 2,429 315 2,586
Net cash from investing activities SH 60,663 13,715 -25,815
Net cash from Financing activities SH
Increase (Decrease) in Cash SH 63,092 14,030 -23,229
Cash Balance , Beginning SH 12,159 10,086 33,315
Cash Balance, Ending SH 75,251 24,116 10,086

Financial Ratios

These ratios show the relationship between one number (unit) and a second number. They help the managers, creditors, investors to evaluate the viability of a given company. The ratios enable the identification of trends of performance over a given period of time.

Financial ratio analysis for the year ended 31/12/2018.

No. Liquidity Ratios Formulas Ratio
1 Current ratio Current assets/Current liabilities 3.36
2 Working capital Current assets-Current liabilities 81,230
Profitability Ratios
1 Return on assets Net income/Average total assets 0.015643237
2 Profit margin Net income/Sales 0.49185668
Leverage Ratios
1 Debt ratio Total liabilities/Total assets 1.00
2 Total Debt ratio Total Assets-Total Equity/Total Assets 0.93
3 Debt-to-Equity ratio Total liabilities/ Shareholders equity 14.9803542
Turnover Ratios
1 Assets Turnover ratio Net sales/Average total Assets 3.263034305

Financial ratios for the period ended 31/12/2019.

No. Liquidity Ratios Formulas Ratio
1 Current ratio Current assets/Current liabilities 1.00
2 Working capital Current assets-Current liabilities 0
Profitability Ratios
1 Return on assets Net income/Average total assets 0.025282945
2 Profit margin Net income/Sales 0.01489410
Leverage Ratios
1 Debt ratio Total liabilities/Total assets 1.00
2 Total Debt ratio Total Assets-Total Equity/Total Assets 0.74
3 Debt-to-Equity ratio Total liabilities/ Shareholders equity 3.896122775
Turnover Ratios
1 Assets Turnover ratio Net sales/Average total Assets 0.001865572

Financial ratios for the year ended 31/12/2020.

No. Liquidity Ratios Formulas Ratio
1 Current ratio Current assets/Current liabilities 1.00
2 Working capital Current assets-Current liabilities 0
Profitability Ratios
1 Return on assets Net income/Average total assets 0.011675804
2 Profit margin Net income/Sales 0.00774332
Leverage Ratios
1 Debt ratio Total liabilities/Total assets 1.00
2 Total Debt ratio Total Assets-Total Equity/Total Assets 0.76
3 Debt-to-Equity ratio Total liabilities/ Shareholders equity 4.140631923
Turnover Ratios
1 Assets Turnover ratio Net sales/Average total Assets 0.001501457

DuPont analysis

DuPont is an expression that breakdowns return on equity into three detailed parts. It was derived from the DuPont company that has been using it since the 1920s (Eveleth et al., 2020). The analysis is used to evaluate the component parts of an enterprise’s return on equity. To allow an investor, managers to define and locate the most performing indicators in the organization. This criterion quickly shows the industry’s rate of return from the products sold (Eveleth et al. 2020). It helps examine the net profit margin of an organization, financial leverage, and asset turnover. It highlights the ability of business and identifies the that needs adjustment.

Return On Equity = Net Income/ Revenue *Revenue/ Average Total Assets * Average Total Assets/Average Total Equity

DuPont analysis for the financial statement for the period ended: 31/12/2018.

ROE = Net Income/ Revenue *Revenue/ Average Total Assets * Average Total Assets/ Average Total Equity

Year DuPont Analysis Formula Rate
2018 ROE Net Income/Revenue*Revenue/Av. Total Assets*Av. Total Assets/Av. Total Equity 3.43%
2019 ROE Net Income/Revenue*Revenue/Av. Total Assets*Av. Total Assets/Av. Total Equity 9.85%
2020 ROE Net Income/Revenue*Revenue/Av. Total Assets*Av. Total Assets/Av. Total Equity 4.83%

Note, ROE is Return on Equity and Av is Average.

A return on equity is a measure of management’s ability to generate income and profit from the equity available in the company (Eveleth et al., 2020). Historically return of equity of about 15–20% is generally considered good for the firm as this indicates good performance in almost all aspects. It is upon every company to analyze and find its range in return on equity because without this analysis, it might appear vague for the firms to establish the weak points and make some positive change on them (Saus-Sala et al., 2020). A rate below 10% is also good for the industry of which some organizations tend to keep functioning with the low rate; this affects the return on equity since it solely depends on the patterns or movements of the interest rates; if interest rates reduce the return on equity reduces too and when it increases the return on equity does likewise.

Based on the DuPont study for the ACIG companies, it is evident that in the year 2018, the rate was low (3.43%). This might be as a result of the low performance of the industry or the interest rates dropped that made the return on equity yield low or the company was operating safely not taking into account several factors that would have led to rising in return on equity. In the year 2019, it is possible to see a positive increase in the capital gain recorded by the business implying that a firm may have evaluated areas of weakness and did improve on them, thus yielding a good return or the interest was high that year, making a good return on the investments of the company.

The Weighted Average Cost of Capital (WACC)

WACC refers to the calculation of a company’s cost of assets in which every group of capital is weighted respectively. In other words, it is the normal rate at which a corporation is expected to settle financial assets (Barbier, 2020). Its helps the investor to decide whether to invest in a particular industry; it denotes the lowest rate of a firm to yield income for the owners. The ratio also assists in valuing cash flows for the whole firm.

The weighted average cost of capital of Allied Cooperative Insurance Group company is given by the formula:

calculate the cost of debt
2020 2019 2018
1 Short term debt 447,022 408,038 407,785
2 Long term debt 160,388 154,792 144,431
3 Total debt 607,410 562,830 552,216
4 Interest paid 82,821 85,942 91,477
Av.interest rate 14% 15% 17%
Rd 15%
calculate the tax rate
Av. Tax rate 24%
calculate WACC
1 cost of equity Re 37%
2 cost of debt Rd 15%
3 no. of shares outstanding 14100
4 current share price 47.9
5 market value of share 675390
6 value of debt 607,410
7 total equity + debt 1,282,800
8 percentage of equity 53%
9 percentage of debt 47%
10 tax rate 24%
11 WACC 24.9%

Dividends

A dividend is the benefits corporation owners are entitled to at the end of its operating cycle. When a company receives a profit, it is able to pay a proportion of the benefit as a dividend to shareholders (Battisti et al., 2020). If some amounts are not distributed, they are taken back to be re-invested in the operation activities. At the end of every trading period, the net income is being divided at a given ratio amongst the shareholders of the company (Raimo et al., 2020). The profit income on equity instruments categorized under available for sale investments is recognized when the right to receive payment is established.

ACIG is not offering good bonuses, and this might affect the level at which investors and shareholders value its products. Every investor and stockholder needs motivation, and that comes majorly from the profits.

Future Perspective

Following the International Financial Reporting Standards additional data requirements, the company has the majority of data available and is of late coming up with a warehouse to accommodate any extra data requirements and put the data in one place coming from its various systems.

The company has also made changes in the Information Technology system that give the department more control. Further improvements will have to be made in the IT department in order for the company to meet the needs of the international financial reporting standards 17 particulars.

The Process impact will be determined as part of the ongoing Operation Impact Analysis in accordance with the instructions of the Regulator. Good number of the company’s business is predicted to reduce under Premium Allocation Approach that is believed will be moderated by the process impact.

Based on the requirements of the international financial reporting standards 17, the company is planning to change and updates its policies and procedures in order to be meet the requirements.

Conclusion

The undertaken research analysis of Allied Cooperative Insurance Group reported a net profit before Zakat of SAR 3.6 million in 2020, which shows a drop by 50% as compared to SAR 7.1 million in 2019. This might have been brought about by; lower uncultured written payments, net written premiums, and net earned rewards, in addition to a decrease in the profit of policyholders’ investments and the profit of shareholders’ investments. The firm also saw an increase in policy acquisition costs. The firm should, therefore, formulate productive policies guiding its operations in order to improve its performance and recover the losses made the previous season. The Allied Cooperative Insurance Group company has a higher weighted average cost of capital of 24.9%; it suggests that the company is paying more to service their debt or the capital they are raising. As a result, the company’s valuation has decreased, thus lowering the returns to investors. Lower returns in the business will make the company suffer financial support as most of the creditors and investors will not risk investing in such firms.

The Allied Cooperative Insurance Group should ensure that they review their market performance from every trading period using the appropriate financial ratios, DuPont analysis, and the weighted average cost of capital; this will enable them to highlight possible causes of the low performance and to take measures to correct the loopholes. By doing that, they will revive the viability and build the shareholders’ confidence, thus will source more equity in the business. For the company to realize good returns, it has to weigh between the ratios to find the best performing and continue with it. The date ratio should be caped to minimize on financial expenses associated with it. On the other hand, the equity ratio should be increased as this will ensure the company has more assets that it can use to earn more profit and also finance its liabilities without running bankrupt.

Reference List

Barbier, P.J.A. (2020) ‘Financial return on equity: a new extended Dupont approach’, Academy of Accounting and Financial Studies Journal, 24(2), pp. 1-8.

Battisti, E. et al. (2020) ‘The impact of leverage on the cost of capital and market value’, Management Research Review.

Eveleth, D.M., Baker‐Eveleth, L.J. and Stone, R.W. (2020) ‘Increasing student accounting self‐efficacy, interest, and knowledge using the DuPont model’, Decision Sciences Journal of Innovative Education, 18(2), pp. 224-248.

Raimo, N. et al. (2020) ‘Non-financial information and cost of equity capital: an empirical analysis in the food and beverage industry’, British Food Journal.

Saus-Sala, E. et al. (2020) ‘Compositional DuPont analysis: a visual tool for strategic financial performance assessment’, Research Gate Preprint.

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