One of the top performers among UAE equities is Dubai Insurance Company, which has gained a handsome 74.52 per cent this year. The Dh733 million market capitalisation company has a dividend yield of 5.49 per cent and generally pays dividends in March.
That could be one reason why the stock has rallied. Because of the industry's very nature and the region's well-developed insurance sector, Dubai Insurance Company is rated suitable for income investors. Nevertheless, markets always discount the future, and many fundamentals are bullish for the company.
Globally, yields are on the rise, which is a blessing for financial services, especially insurance. Due to the recurring nature of premiums received, insurance companies have a steady cashflow, and a significant chunk of it will have to be deployed into debt.
A higher rate means bond investments yield higher returns. Meanwhile, the yield curve also has steepened with US 2y-30y spread at 187bps, the widest since 2017. If the yield curve steepens, it means that the spread between long and short-term interest rate has increased.
This implies more robust economic activity and rising inflation expectations, and thus, higher interest rates. Insurance companies benefit from this scenario, as they will be able to underwrite more policies.
Strong on fundamentals
Dubai Insurance Company has a financial strength Rating of 'A-' (excellent) and long-term issuer credit rating of 'a' provided by AM Best. The outlook on these ratings is stable and reveal balance-sheet strength, strong operating performance, limited business profile and appropriate enterprise risk management.
The US Securities and Exchange Commission and the National Association of Insurance Commissioners have designated AM Best as a ‘Nationally Recognized Statistical Rating Organization in the US. So the ratings of Dubai Insurance Company are indeed credible.
Last year, Dubai Insurance had Dh919 million in revenues compared with Dh970 million in 2019, while net profit was Dh55 million in contrast with Dh75 million. The decline was majorly due to the general insurance segment, where revenues declined from Dh150 million to Dh118 million.
Understandably, this category declined due to the severe impact of the pandemic on the overall economy. Nevertheless, the medical and life insurance segment cushioned the overall effect by registering an increase to Dh77 million from Dh68 million.
This year is likely to see a sharp bounce back in general insurance business, thereby leading to higher overall Dubai insurance revenues. This could turn out to be rewarding for shareholders…
- Vijay Valecha is Chief Investment Officer at Century Financial.