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Takaful (6139), a listed Islamic insurance company in Malaysia, with dividend yield of approximately 4%, high return of equity (ROE) of more than 25% and track record of double-digit growth over past few years. Islamic insurance sector has enjoyed greater growth than conventional insurance over the past few years. Takaful, being the only pure Islamic insurance listed company in Malaysia, has been the one of the biggest beneficiaries.

(Last update: 30th November 2020 based on quarterly report issued on 24th November 2020. Updates are made in red.)

Background of Takaful

Takaful listed in main market of Bursa back in 1996. Its major shareholder is another listed company BIMB Holding Berhad (owner of Bank Islam). BIMB has approximately 60% of shareholding of Takaful, on the other hand Lembaga Tabung Haji holds more than 50% of BIMB. So you can say Tabung Haji is the biggest shareholder behind the scene.

Note that while Takaful is the name of stock, it also literally means “Islamic Insurance”. According to Bank Negara website here, there are currently 15 licensed Takaful companies in Malaysia. Effective from 2018, Islamic Financial Service Act 2013 requires all Takaful companies to operate under separate license for “Family Takaful” and “General Takaful”. As a result, Takaful has two separate entities doing business for the two different categories, which are

• Syarikat Takaful Malaysia Keluarga Berhad (For Family Takaful)
• Syarikat Takaful Malaysia Am Berhad (For General Takaful)

Although there are 15 licensed Takaful companies in Malaysia, considering the fact that there are few cases of two entities under same holding company due to license separation requirement, this reduces number of players to 11.

Business model of Takaful

Type of Takaful

Based on license type, Takaful is categorized into the following

1. Family Takaful, including life insurance, medical insurance, mortgage insurance, saving plan
2. General Takaful, including fire insurance, motor insurance and some other miscellaneous types

Basics of Takaful / Islamic Insurance

Takaful, or Islamic Insurance, is developed to cater for Muslim market, though non-Muslim can also purchase Takaful. The operating concept of Takaful has to comply with Shariah principles. For myself personally, it was difficult to understand financial statement of Takaful initially before having some basic knowledge about Islamic Insurance. Therefore I decided to summarize what I have learned about basic principles of Takaful here.

• First based on Takaful principle, by contributing money to a common Takaful fund as participant, the participant agree to mutually help each other should any of the participants suffers a loss. There are two funds in financial statement, which are “Family Takaful Fund” and “General Takaful Fund”.

• The company that we can invest in as investor, acts as “Takaful Operator“. Takaful operator does not own the funds, but only responsible to manage the funds in accordance with Shariah Law.

• As a return, the fund will pay a commission to Takaful Operator, known as “Wakalah“. For the funds, this is recognized as “Wakalah fee expense” whereas for Takaful operator, this is recognized as “Wakala fee income”.

• Takaful operator is responsible to invest the fund into a “halal” or Shariah compliant investment to derive investment income. In the event of fund generates a surplus, it is shared among all participants and in some cases with Takaful operator. So for Takaful operator, Takaful Operator Income equals to Wakalah fee income + surplus transfer from funds.

• Based on principles above, all data in financial statements are stated from perspective of “Takaful Operator”, “Family Takaful”, “General Takaful” and also “Group/Company”. The figures stated under “Group/Company” are combined results that are more similar to what can be seen in financial statement of conventional insurance companies. To avoid confusion, especially for investors that are not familiar with Islamic financing, I strongly recommend to focus on figures under “Group/Company” only.

Wakalah fees are recognized based on predetermined percentage of gross contribution. Unfortunately I cannot find any further details. If you have any knowledge on how the Wakalah percentage is determined and willing to share in public, please leave a comment below !

Based on data gathered from financial results of past five years, out of the profit before tax made at “Group” level, after distribution to participant’s funds, the remaining profit is at the range of 40% to 50%.

Takaful Portfolio

Family takaful has been the main contributor to business of the company. Over the past five years, breakdown between family takaful and general takaful has been around 80% and 20% respectively.

As of the latest quarterly period ending September 2020, family takaful and general takaful contributed 78.4% and 21.6% of net earned contribution respectively.

In term of market share, based on disclosure in annual year 2019, management mentioned that it gained 30% of market share for family takaful and 22% for general takaful in 2019, for Malaysia market.

In addition, Takaful has a subsidiary in Indonesia offering family Takaful products, however it does not bear fruit although has been there for few years. Contribution to both topline and bottom line is negligible, so personally I will not take account of it as growth prospect.

Distribution channels

Distribution channel is a key factor impacting business of insurance companies. More distribution channels equal to more business opportunities. According to Takaful website here, available distribution channels include retail and corporate agency forces, banca takaful (i.e. cooperation with banks), corporate direct, brokers and treasury business channel. In addition, Takaful has also been launching more products on its own online sales portal.

Exact contribution by each distribution channel was not disclosed by company.

Banca Takaful, i.e. distribution of products using bank’s distribution network is definitely an important distribution channel. At time of writing, it is partnering with the following banks / financial institution.

1. Bank Islam (sister company)
2. RHB Islamic (from Aug 2015, until 2025)
3. Affin Islamic (from Sep 2017 until 2022)
4. Bank Rakyat (from July 2018 until 2023)
5. Aeon Credit (from August 2019 until 2024)
6. LPPSA “Lembaga Pembiayan Perumahan Sektor Awam” (Public Sector Housing Financing Board). Through LPPSA, Takaful is able to reach out to more civil servants to market mortgage takaful for housing loan provided by LPPSA. However it is not clear whether there is expiry date for cooperation with LPPSA. It might be worthwhile to take note that sales through LPPSA was once temporarily suspended within period of mid-2017 to mid-2018.

Financial of Takaful

Combined ratio

Insurance companies can make profit in two ways

1. Underwriting profit from insurance premium
2. Investment income

Having say that, most insurance companies mainly make money through investment income, i.e. return from investing insurance premium collected from customers. Whether a company is making money just from insurance premium collected, can be verified through combined ratio.

Combined ratio = (net benefits and claims + business expense) / net earned contribution. Combined ratio less than 1 means there is leftover money from contribution after paying for claims and expenses.

As far as I know, not a lot of insurance companies in Malaysia is making underwriting profit, i.e. these companies rely on investment income. Takaful is one of the few that is making underwriting profit, the other one I know is LPI (sister company of Public Bank).

Here is combined ratio of Takaful from year 2015 to year 2019. So not only it is making underwriting profit, the underwriting margin is also improving over years.

Year	Combined Ratio
2015	89.6%
2016	91.2%
2017	87.8%
2018	83.4%
2019	74.5%

(Note that in the calculation of combined ratio above, I’ve considered all the expense incurred by company. I’ve seen report from analyst that only considers management expense, thus resulting in lower combined ratio. Nevertheless the improving trend over the years remain the same)

Net claim incurred rate

Net claim incurred rate = net benefits and claims / net earned contribution. It simply shows claim settled by insurer over premium collected within a period, so lower is better.

Net claim incurred rate is an important metric whether a company is making underwriting profit. Here is data for Takaful for the past five years.

Year	Net claim incurred rate
2015	54.5%
2016	58.2%
2017	53.3%
2018	51.5%
2019	41.9%

So the claim rate shows an improving trend similar to combined ratio.

Investment portfolio and income

Investment income is a major source of income for all insurance companies, Takaful is no exception. Investment held by Takaful includes Islamic debt securities (such as Islamic bond Sukuk), equity (stocks), Malaysian Government Islamic papers, unit trusts, institutional trust account, as well as cash.

Asset allocation strategy of Takaful is to focus on investment that can provide stable and predictable recurring income. Within the investment portfolio excluding cash, Islamic debt securities have the biggest portion at around 75%. It is worthwhile to note that Takaful has been reducing its exposure to equity, from more than 10% back in 2016 to only around 6% in 2019.

For investment income as a whole, Islamic debt securities has the biggest contribution, followed by interest income from cash deposit.

Unfortunately as an investor, I think there is very little we can do in predicting how it would perform in near future. Investment portfolio of insurance companies tend to be lower risk and stable. Over long term. as long as net earned insurance premium contribution is growing, investment income should also grow in tandem.

Tax penalty

In 2017, Takaful received notification from Inland Revenue Board (IRB) for additional tax payable plus penalty amounting to about RM17 million. Company has appealed against it and hearing has been fixed on 1st and 2nd September of 2021.

Although still under appealing, company has already paid for the additional tax in 2017. However in financial account, the money was recognized as tax recoverable. In case of winning the appeal, company should be able to get back some cash. On the other hand, in case of losing, there would need to be recognized in profit & loss, with probably a single-digit impact on the profit.

Dividend payout

Takaful does not have dividend policy, but has been distributing dividend every year. Based on track record from 2016 till date, the dividend payout is within range of 40% to 60%. The dividend payout for the last financial year 2019 was 45%.

Financial highlights (Quarterly Report of 2020 Q3)

• For first 9 months of 2020, compared to the same period in previous year, operating revenue is down by 7%. Net earned contribution declined by 15% whereas other income (mainly investment-related) is approximately unchanged.

• Looking at result of the latest quarter alone, revenue is about the same as last year. Decline of net earned contribution by 8% whereas is mitigated by higher other income (mainly investment-related) by 41%. However, looking at net profit after tax, it is still 27% lower. Why? As mentioned in previous section of this article, the way how Takaful operates is different from conventional insurance. When Takaful makes profit from investment, the profit is to be shared between company and Takaful participants. In the latest quarter, the shared profit from investment is not enough to compensate drop of Wakalah fee income associated with earned contribution. That is the reason of profit drop in the midst of flat revenue.

• Digging into details of lower net earned contribution, it can be seen less contribution from Family Takaful is the reason, whereas General Takaful actually performs slightly better than previous year. Takaful relies a lot on bank partners to sell credit-related insurance to their customers. Since loan business of banks is impacted, it is understandable why its family takaful business is also impacted.

End

• Takaful has a track record of performance from history, double digit compound annual growth rate (CAGR), improving combined ratio, improving claim incurred rate, consistent growth of earning per share (EPS). Really there is nothing to complain about.

• From its peak share price in 2019 at above RM6, share price of Takaful was hammered by two news
  • New market player FWD Takaful launched in July 2019. Before that, there were already more than 10 Takaful players in the market. The reason why FWD gained so much attention, is because it is jointly owned by renowned parties, namely Robert Kuok (Richest man in Malaysia), Richard Li (son of richest man in Hong Kong) and EPF. EPF is also second largest shareholder of Takaful, but its shareholding has reduced from more than 10% in 2018 to around 5% in 2019.
  • News about cease of Bancatakaful relationship with RHB. The previous Bancatakaful agreement with RHB ended in mid of 2020, and there was once a news saying both parties will not continue the relationship. However in July 2020, it’s confirmed that both parties have signed a new agreement.

• It is too early to tell how FWD will compete with existing players. EPF holds 20% of FWD while reducing shareholding of Takaful to 5%, it is understandable why this impacted confidence level of investors on Takaful. Note that FWD only owns Family Takaful license but not General Takaful. Given that Takaful industry as a whole is still growing, market share can be gained by FWD is something I would be interesting to know but personally I’m less pessimistic on its impact on Takaful.

• With BIMB holding almost 60% of the shares, liquidity of Takaful’s shares has been limited. As disclosed in annual report 2019, BIMB has submitted application in Dec 2019 to seek approval from Bank Negara to cease to be shareholder of Takaful. Under the proposal, shareholders of BIMB will obtain shares of Takaful in proportion to their shareholding in BIMB. There is no official announcement yet about materialization of this proposal. While it is not clear how this would impact share price in short term once materializes, in my opinion improved liquidity is a good news over long term.

While dividend yield of Takaful is only moderate at around 4%, it has growth potential. Given its track record and excellent ROE, I think Takaful is still a good company to follow for long term, and can be a good candidate to include in portfolio when the share price is attractive.

In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.

Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.