SINGAPORE (Oct 21): A quick glance at the price-to-embedded values of a couple of life insurance companies shows that they are undervalued versus their historical ratios. In particular, the P/EV ratios of Great Eastern Holdings (GEH) and Prudential are at multi-year lows (see Charts 1 and 2). This is due to the twin effects of rising EV levels, and falling or stable share prices.
EV comprises the value of in-force business, which is the economic value of projected distributable profits to shareholders, and adjusted shareholders’ funds.
Their valuations appear cheap but each insurer has to grapple with its own opportunities and weaknesses. For instance, there are questions over GEH’s ability to grow its operating profit, total weighted new sales and new business embedded value.
Prudential — which has 17% of Indonesia’s life insurance market — appears to be in a more advantageous position, but demand in Hong Kong could be affected. In recent months, the 171-year-old insurer has been looking to further growth in Asean, in economies such as Thailand and Indonesia. “In the case of United Overseas Bank, we renewed that partnership. It is not only the 400-plus branches they have in five markets, but we are working with them on TMRW, their new digital bank platform,” says Mike Wells, CEO of Prudential. UOB launched TMRW in Thailand in February.
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Earnings boost at GEH from the Fed
Since the Federal Reserve Open Market Committee announced in December 2013 it would be tapering back QE3, or the third round of quantitative easing, at a rate of US$10 billion at each of its meetings, GEH’s earnings have been a source of volatility for parent Oversea-Chinese Banking Corp (OCBC).
A quick look at its earnings per share over the past 10 years (see Chart 3) shows EPS has fluctuated. This is because GEH’s performance comprises operating profit and non-operating items such as fair value loss or gain, depending on market conditions. Part of fair value adjustments is also from profit from shareholders’ funds.
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At its FY2018 results briefing in February this year, OCBC CEO Samuel Tsien pointed out that, as a result of a change in the Singapore and international Financial Reporting Standards, volatility is likely to be lower.
Interestingly, despite the volatility of its earnings, GEH’s embedded value and embedded value per share have been on a rising trend for more than 15 years. In the past 10 years alone, embedded value per share more than doubled from $12.23 to $28.39.
In 1HFY2019, GEH’s operating profit fell 2% y-o-y to $311.7 million but net profit including non-operating profit from the insurance business and profit from shareholders’ funds rose 31% y-o-y to $511.7 million. With an all-round easier interest-rate environment, GEH could easily book positive fair value changes for its non-operating segment from its insurance business and shareholders’ funds.
Some 68% of its Singapore portfolio valued at $52.1 billion as at June 30 was in fixed income and debt securities, 22% was in equities, 5% in cash and 5% in real estate. In Malaysia, GEH’s portfolio — valued at $24.5 billion — comprises 63% in debt securities or fixed income, 28% in equities, 5% in cash and 4% in real estate.
Dividends have been less volatile than earnings. As a rough estimate, GEH pays out around 30% to 40% of earnings. In years when its shareholders’ funds did particularly well, such as in 2017, dividend was lifted to 70 cents per share. In F2018, GEH paid out 60 cents per share.
Less volatile earnings profile at Prudential
According to Nic Nicandrou, Asia CEO of Prudential, the company is less affected by the fair value changes in its portfolio. “Our focus on quality, which provides low correlation to investment markets, is evident through the high regular premium content of our sales at 93% [in 1HFY2019], strong customer retention rate of 95% and continued emphasis on driving health and protection, where new business profit was up 8%, premiums received were up 12% and IFRS insurance margin was up 14%,” he recounts. Moreover, Prudential’s revenue base is benefitting from the addition of regular premium products and sustained high customer retention.
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“The compounding nature of this growth delivered through thick and thin over many years also brings us considerable earnings resilience to go along with our capital resilience, with the aggregate local solvency position of our policyholder and shareholder funds at June 30 staying roughly level at 312% relative to the equivalent position at end-2018,” Nicandrou says.
In August, Prudential launched an artificial intelligence-powered digital health platform, Pulse, in Kuala Lumpur. Nicandrou says Pulse already has 20,000 registered users. The platform offers health services, alongside telemedicine, wellness and other bespoke services, to Malaysians. In 4QCY2019, Pulse will be available in Singapore, Hong Kong and Indonesia. It will help in developing new prevention solutions at Prudential.
In Indonesia, Prudential is partnering OVO, a mobile payments platform to offer savings and protection products to OVO’s 115 million customers.
Mark FitzPatrick, chief financial officer of Prudential, says Prudential renewed its bancassurance alliance with UOB for “a total initial fee of £662 million [$1.14 billion]”. The bancassurance agreement seems to be paying off for Prudential. “On distribution, our renewal of UOB for another 15 years across five markets in our region has re-energised this partnership, delivering our best ever performance for a six-month period, with sales up 27%. Our joint teams are hard at work to make our offering accessible to a wider UOB customer set both in branch and digitally,” Nicandrou says.
Separately, FitzPatrick has committed to maintaining Prudential’s dividend policy. “Our dividend policy will remain unchanged until the demerger; as in previous years, the first interim dividend has been set equal to a third of the preceding full-year ordinary dividend. This equates to a mechanical increase of 5%,” FitzPatrick says. Prudential announced an interim dividend of 16.45 pence per share in 1HFY2019, and is expected to pay a second interim dividend of 19.6 pence per share. Shareholders will also be entitled to a dividend of 15.77 pence following a restructuring.
In 4QCY2019, M&GPrudential — the UK business — will be demerged from Prudential and listed on the London Stock Exchange as a separate entity. Asia and the US will be Prudential’s main geographic contributors. According to Prudential, new business profits will amount to £1.6 billion excluding UK, and the bulk of this will be from Asia.
AIA de-rated as protests continue
CGS-CIMB has just cut AIA Group’s price target to HK$84 from HK$94. The protests in Hong Kong could negatively impact the company’s value of new business (VONB), according to CGS-CIMB. “Many investors are uncertain as to (i) how badly VONB y-o-y growth has been hit, as well as (ii) how long these protests will last. Investors’ main concern is the impact on the mainland Chinese visitor segment of AIA Group, with tourism data indicating a significant fall in MCV arrivals since the protests started in June 2019,” it adds.
Both AIA and Prudential are likely to be impacted. CSG-CIMB points out that AIA’s market share of annualised new premiums in Hong Kong is 25% while Prudential’s is 23.5%. AIA Hong Kong’s proportion of ANP by MCVs is 65% and Prudential’s is 66%.
“Of [particular] interest to us is the comment by the CEO of Prudential HK Derek Yung, who stated on Sept 24, 2019 that he expected a double-digit decline in new insurance premiums in 3Q2019, and he believes that other competitors in the industry will show a similar fall,” CGS-CIMB says.
In a briefing on Sept 26, Prudential’s management said there was “no change in purchase intention and it is simply that the number of visits (by MCVs) are being postponed. Domestic demand in Hong Kong remained strong, with sales in July and August up y-o-y helped by new annuity and health offerings, Prudential’s management said.
Still, the ongoing disruption to MCVs to Hong Kong may have caused Prudential’s share price to underperform, based on its historical ratios, and the stock is at its lowest level vis-à-vis its EV, which has doubled in five years. Similarly, GEH’s share price is at its lowest level since the global financial crisis in relation to its EV, which doubled over a 10-year period. Both companies have a stated dividend policy that could cushion share price.
Prudential is listed in London, Hong Kong and Singapore, and GEH is listed in Singapore.
