Company Analysis: Company Analysis: Caribbean Assurance ...Caribbean Assurance Brokers Limited (CAB) was incorporated on June 13, 2005 and registered as a limited liability company

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Company Analysis: Company Analysis: Company Analysis: Company Analysis: Caribbean Assurance Brokers LimitedCaribbean Assurance Brokers LimitedCaribbean Assurance Brokers LimitedCaribbean Assurance Brokers Limited ((((CABCABCABCAB)))) VMWM Research and Stockbroking | February 12,2020

876-960-5000 [email protected] vmwealth.com 53 Knutsford Boulevard, Kingston 5

Recommendation: MARKETWEIGHTING

Price Target: $2.25

Offer Price: $1.91

ABOUT THE COMPANY

Caribbean Assurance Brokers Limited (CAB) was

incorporated on June 13, 2005 and registered as a limited

liability company under the Companies Act of Jamaica 2004.

In October of the following year the company received the

green light from the Financial Services Commission (FSC) to

operate as a facultative placement broker and to place risks

under the International Comprehensive Health Insurance

Programme (ICHIP) with designated overseas insurance

providers. In the last thirteen years the company has been

distributing ICHIP products exclusively. CAB currently has

four main divisions, which include; International Insurance,

Employee Benefits, General Insurance and Individual Life

Insurance. The company currently has strategic

partnerships with insurance providers and international

brokers in the United States and across Britain which

include London Brokers, Lloyd’s of London and AETNA.

Shares on Offer: 52,500,000 units

Financial Year End: December 31

FINANCIAL PERFORMANCE

(JMD Millions) 2014 2015 2016 2017 2018

Revenue 223.8 252.9 294.2 341.6 385.5

Operating Profit 19.7 12.5 49.7 49.3 45.1

Net Profit 8.6 5.4 31.7 29.1 32.8

Operating Profit

Margin (%) 8.8% 5.0% 16.9% 14.4% 11.7%

Net Profit Margin

(%) 3.8% 2.1% 10.8% 8.5% 8.5%

Projections

and

Valuations

Risks to

Price Target

Outlook Decline in premiums due to more aggressive competition from

new entrants such as Canopy Insurance may lead to a reduction

in insurance premiums, driving an increase in the overall number

of premiums written by insurers. It is also anticipated that the

Global Insurance Brokerage market will grow organically by

around 3-5% for 2020 according to S&P. Also, the addition of a

photovoltaic solar system will help to reduce future energy costs.

A Discounted Cash Flow (DCF) model was used to determine the target price of $2.25 using a cost of equity of 14.2%.

Our price target may not be realized if downward pressure is

placed on commission rates as a result of strong competition.

Also, the target price may not be achieved if the company loses

the stewardship of its Chairman & CEO Mr. Raymond Walker.

Use of

Proceeds

1. Pay IPO & Listing Expenses

2. Expand brokerage operations to other Caribbean

countries

3. Expand the company’s solar photovoltaic system

4. Provide working capital for the company

Dividend

Policy

The company intends to pursue a conservative dividend policy,

focusing on future growth. CAB intends pay out a maximum of

25% of distributable profits after accounting for reinvestment

needs.

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Company Analysis: Company Analysis: Company Analysis: Company Analysis: Caribbean Assurance BrCaribbean Assurance BrCaribbean Assurance BrCaribbean Assurance Brokers Limitedokers Limitedokers Limitedokers Limited ((((CABCABCABCAB)))) VMWM Research and Stockbroking | February 12, 2020

SUMMARY OF KEY TERMS

ISSUER Caribbean Assurance Brokers Limited

SELLING SHAREHOLDER Caribbean Assurance Brokers Limited

ORDINARY SHARES Company Reserved (Directors) – 6,300,000

Company Reserved (Staff) – 5,775,000

Key Partners – 27,037,500

Mayberry Client Reserved – 5,250,000

General Public – 8,137,500

Total- 52,500,000

MINIMUM APPLICATION 1,000 shares with excess in increments of 100 shares.

AMOUNT TO BE RAISED $100,275,000 for listing on the JSE Junior Market (Estimated $90,775,000 net IPO & listing expenses)

KEY DATES Opens February 18, 2020 at 9:00 am

Closes March 3, 2020 at 4:30 pm

LEAD BROKER Mayberry Investments Limited

PAYMENT METHOD i) From cleared funds held with Mayberry in an Investment account

ii) RTGS transfer to Mayberry’s JMD Citibank Chequing Account 18559455

MANAGEMENT AND CORPORATE GOVERNANCE

DIRECTORS

Raymond H. Walker

(Chairman and Chief Executive

Officer)

Mr. Walker has over 36 years of experience in the insurance industry starting as a salesman at the Life of

Jamaica Limited where he went on to become the Vice President of Marketing. He then went on to

become Executive Vice President of Marketing and Services at Blue Cross of Jamaica Limited before

starting CAB in June 2005.

Rion B. Hall

(Non-Executive Director)

Mr. Hall is the former General Manager of Human Resource Development at the Bank of Nova Scotia

Jamaica Limited. Now a retired banker, he has more than 40 years of experience in banking and insurance,

the last 10 of which were at the Scotia Insurance Company.

Norman Minott


Mr. Minott holds a Bachelor of Laws Degree (LLB) with Honors from the University of the West Indies. He

has over 35 years of experience practicing mainly in Real Estate law and is a past Managing Partner of

Myers, Fletcher & Gordon. He currently serves on the Board of several private companies and is a former

member of the Coffee Industry Board and a Past President of the Jamaica Motoring Club.

Jennifer Rajpat


Ms. Rajpat is currently the Vice President, of Mutual of America Life Insurance Company of New York.

After earning a Bachelor of Science in Industrial Management, she acquired a number of insurance

certifications including the; Associate of the Chartered Insurance Institute (ACII), Fellow of the Life

Management Institute (FLMI) and Associate, Insurance Agency Administration (AIAA).

Barrington Whyte


Mr. Whyte served as CEO of C&WJ Co-operative Credit Union for over 22 years and has over 30 years of

experience in economic research, management and finance. He is currently the Lieutenant Governor of

Division 23 East for Kiwanis International and is a Past President and Secretary of the Kiwanis Club in

Kingston. He is currently a Consultant contracted to a Financial Group in the Turks and Caicos.

Tania Waldron-Gooden


Ms. Waldron-Gooden earned a Bachelor of Science degree in Geology from the University of the West

Indies and a Master of Business Administration from the University of Sunderland. She is currently the

Senior Vice President of Investment Banking at Mayberry investments Limited after joining as a trainee

11 years ago. She is a director and mentor of 4 companies listed on the JSE Junior Market and serves on

the board of Chicken Mistress Limited, Island Grill Holdings Limited and Mayberry Investments.

Carlton Barclay


Mr. Barclay has held managerial positions at several regional banks in both Cayman and Jamaica. He is a

Chartered Certified Accountant (ACCA) and a Fellow of the Association of Certified and Chartered

Accountant (FCCA). Currently Mr. Barclay is the Chief Executive Officer of Community & Workers of

Jamaica Co-operative Credit Union Limited.

Janice P. Holness


Ms. Holness is an Attorney-at-Law admitted to practice in New York and Jamaica. She has 12 years of

experience in financial regulation at the Financial Services Commission as Chief Investigator in the Legal

Services and Enforcement Division and then as Director of same. Janice holds a Bachelor of Science degree

and a Juris doctor from St. John’s University.

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SHAREHOLDER DISTRIBUTION

Name of Shareholder Number of Ordinary Shares after Closing Date % of Issued Shares after

Closing Date

Previous Shareholders 210,000,000 80.0%

Company Reserved (Directors) 6,300,000 2.4%

Company Reserved (Staff) 5,775,000 2.2%

Key Partners 27,037,500 10.3%

Lead Broker - Mayberry 5,250,000 2.0%

General Public 8,137,500 3.1%

Total Issued Share Capital following

Invitation 262,500,000 100%

FINANCIAL PERFORMANCE

(JMD Millions) 2014 2015 2016 2017 2018 2018 Q3 2019 Q3

Revenue 223.8 252.9 294.2 341.6 385.5 328.1 336.1

Operating Profit 19.7 12.5 49.7 49.3 45.1 93.4 76.6

Net Profit 8.6 5.4 31.7 29.1 32.8 83.2 56.7

Operating Profit Margin (%) 8.8% 5.0% 16.9% 14.4% 11.7% 28.5% 22.8%

Net Profit Margin (%) 3.8% 2.1% 10.8% 8.5% 8.5% 25.4% 16.9%

Current Ratio (x) 1.05 1.04 1.23 1.41 1.69 - 1.32

Debt to Equity (x) 4.07 4.38 3.31 1.81 1.38 - 1.78

FOR THE LAST FIVE (5) YEARS

The company earns its Revenue from commission gained as a result of writing insurance policies on behalf of insurance companies.

These insurance policies fall within in four segments; international, employee benefits, general insurance and individual life insurance.

During the period 2014- 2018, the company’s Revenue has increased from $223.8 million to $385.5 million or by a compound annual

growth rate (CAGR) of 14.6%. This was attributed to the increase in the number of premiums booked and incremental increases in

commission rates over the period. In June 2015, the company changed its overseas insurance carrier for the major part of its

international health insurance program (ICHIP), which allowed for an increase in commission rates as well as more cost-effective

premiums for clients. Similarly, Other Operating Income grew by a CAGR of 47.5% over the period, due primarily to an increase in

agency fees earned related to the change in the ICHIP underwriter. This culminated in strong overall growth in Operating Income from

$232.4 million to $426.5 million over the review period.

Total Operating Expenses increased from $212.7 million to $381.4 million or by 79.3% over the reviewed period, largely due to

increases in Administrative Expenses. In 2018, additional incentives were provided to agents based on productivity leading to the

17.3% increase in Selling Expenses that year. Additionally, a system upgrade and increased credit card fees led to an increase in

registration and bank fees in 2018.

Operation Profit increased from $19.7 million to $45.1 million over the review period, representing a CAGR of 23%. However, Expenses

grew at a faster pace than Revenue growth, driving a decline in the Operating Profit Margin between 2016 and 2018, from 16.9% to

11.7%. Finance Costs declined by a CAGR of 19.80% over the five-year period mainly due to reductions in Interest Expenses associated

with a reduction in long-term Debt. Net Profits increased from $8.6 million to $32.8 million or by a CAGR of 40.0% attributed to

increases in Operating Profit coupled with a decline in Finance Costs.

The company’s Total Assets increased from J$189 million to J$308 million or by a CAGR of 12.92% between 2014 and 2018. This was

mainly attributed to increases in receivables which was caused by the accrual of deposits.

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Non-Current Assets declined due to decreases in the value of Property, Plant and Equipment and the liquidation of Long-Term

Investments. Total liabilities increased from J$152.3 million to J$178.7 million or by a CAGR of 4.13% due to increases in short Term

Liabilities due to increases in Payables along with increases in Short Term Loans. Overall the company’s liquidity has increased as

measured by the current ratio from 1.05x in 2014 to 1.69x in 2018. This represents an increasing ease with which the company can

finance short term obligations.

Total Equity increased from J$37.4million to J$128.5million or by a CAGR of 36.10% solely due to increases in retained earnings which

was driven by the retention of Net Income over the period. The combination of the reduction in Long-Term Loans, when combined

with increasing Shareholder Equity year-over-year contributed to a steep reduction in the company’s the Debt-to-Equity Ratio from

4.07 times to 1.38 times. Current ratio has increased from 1.05 times to 1.69 times implying that the company’s liquidity position has

improved over the review period.

FOR THE FIRST 9 MONTHS OF 2019

Revenue for the first nine months of 2019 totaled $336.1 million, a 2.4% increase in comparison to the $328.1 million earned in the

similar period in 2018. However, there was a 24% decline in other operating income from $41.0 million to $31.1 million. This caused

a 0.5% decline in total operating income. Operating expenses, on the other hand, increased by 5.4% on the back of a by a 10% increase

in Administrative Expenses partially offset by a slight (1.3%) decline in Selling Expenses. Together this caused an overall 17.9% decline

in Operating Profit from $93.4 million to $76.6 million. Finance costs over the period grew substantially from $1.5 million to $5.3

million mainly due to an increase in loan interest expenses associated with increases in long-term debt as the company took a

mortgage from the Bank of Nova Scotia and a shareholder loan. This culminated in a 31.9% decrease in Net Profit for the period from

$83.2 million to $56.7 million. Notwithstanding, Total Comprehensive Income increased from J$83.2 million to J$104.2 million or by

25.19% in the first 9 months of 2019, due to the revaluation of its newly acquired property leading to a gain of $47.5 million.

Total Assets grew from J$543.5 million to J$639.1 million or by 17.5% mainly due to a $193.3 million addition to PPE representing the

purchase of a property on Old Hope Road in January 2019. Total Equity grew from J$178.8 million to J$230.1 million or by 29.2% solely

due to a J$48.4 million dollar increase in capital reserves created from a capital surplus to be used for contingencies to offset any

future capital losses. Total Liabilities increased from J364.6 million to J$409.1 million or by 12.2% which was mainly due to the company

taking two loans, one from the Bank of Nova Scotia and a Shareholder Loan. The growth in Current Liabilities outpaced the growth in

Current Assets leading to a decline in the Current Ratio to 1.32x, a relatively healthy outturn. Similarly, the Debt-to-Equity ratio

increased to 2.25x due to the additional debt incurred during the period.

Valuation Methodology

An income approach, using a discounted cash flow model was used to assess the value of the company. The Free Cash Flow to Equity

expected to be generated by CAB was forecasted over the next five years along with the terminal continuing value of the business at

the end of the forecast period. These expected cash flows along with the terminal value of the business were discounted using a cost

of equity of 14.2% to arrive at a target value per share of $2.25. When compared to the offer price of $1.91, based on our assessment

of the expected Cash Flow generating capacity of CAB, the offer is undervalued with a 17.8% upside.

When comparing the price to earnings (P/E) ratio of CAB to the P/E of similar local listed companies on the JSE Main market, the

trailing P/E for CAB of 6.63 times earnings is well below the average of JSE Main market listed financial companies of 17.77 times and

also below the average of JSE Junior Market listed financial companies of 23.8 times. However, the price to book value (P/B) for CAB

of 2.76 times more in line with the P/B of listed financial companies of both the JSE Main and Junior Market, which average 2.47 times

and 2.81 times respectively.

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OUTLOOK

Increased competition within local insurance landscape

More aggressive competition from new entrants such as Canopy may put downward pressure on overall insurance premiums and

commission rates. However, this may have a twofold effect, as decreasing in premiums may be offset by an increase in demand. If

price sensitivity is high within the industry then it is likely that this will have a net positive effect for insurance companies as well as

brokers.

Lower Future Utility Costs

The company plans on making an investment of over $12 million dollars in a photovoltaic solar system that will help to reduce energy

costs in the long-term, and by extension improve the Profit Margin.

Global Insurance Brokerage Market

According to Standard and Poor’s, the global insurance brokerage market is expected to demonstrate steady performance in 2020.

Organic growth and EBIDTA margins are anticipated to hold up relative to 2019 on the back of economic growth and a continued

uptick in insurance pricing. The rating agency believes that overall economic growth may support increased exposure to insurance

which when coupled with positive growth rates creates favorable market conditions for insurance brokers. It is also anticipated that

the sector will grow organically by 3%-5% on average for the year 2020.

INVESTMENT POSITIVES

• The company does not have to bear insurance risks as they only render commission from insurance premiums booked by

insurers.

• The company has found a niche market by distributing international coverage to exclusive clientele.

• Commissioned earned from premium has increased steadily year over year for the last five years.

• Company in pursuing regional expansion into other Caribbean countries such as Trinidad and Tobago.

INVESTMENT NEGATIVES

• The company may be adversely affected by changes in regulatory policies.

• The company is subject to liquidity risks as the JSE Junior Market is relatively small.

• There is currently no succession plan in place to mitigate the loss of the company’s brainchild Raymond Walker.

• The company currently operates in a highly competitive environment.

• The company is highly dependent on salesmen who have to be registered by the FSC.

• Increased competition from major players may put downward pressure on commission rates.

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CONCLUSION

Despite the possibilities of a reduction in commission rates due

to downward pressures from the anticipated increase in

competitiveness and rivalry within the insurance market, we

expect the company to continue to experience topline growth

year over year for the in the medium-term. The company’s

intended initiatives to reduce utility costs via a photovoltaic

solar system and to increase its footprint in Caribbean

territories such as Trinidad & Tobago are likely to contribute to

both improvement in the profit margin as well as non-linear

Revenue growth for CAB.

Based on our assessment of the current state of the company

along with our expectations of the future performance of the

company, we have established a price target of $2.25 which

implies a 17.8% upside relative to the offer price. We therefore

recommend equity investors with an appetite for exposure to

insurance and a long-term horizon to OVERWEIGHT this stock.

SOURCES

Caribbean Assurance Brokers Limited Prospectus,

Standard and Poor’s Industry Reports. Standard &

Poor’s Agency. Financial Services Commission (FSC)

DISCLAIMER

This Research Paper is for information purposes only.

The information stated herein may reflect the opinion

and views of VM Wealth Management in relation to

market conditions and does not constitute any

representation or warranties in relation to investment

returns and the credibility of the sources of

information relied upon in the preparation of this

report, without further research and verification.

Before making any investment decision, please

consult a VM Wealth Management Advisor.

Documents

Company Analysis: Company Analysis: Caribbean Assurance ...Caribbean Assurance Brokers Limited (CAB) was incorporated on June 13, 2005 and registered as a limited liability company