Insurance companies offer investors protection and investment-linked products, but how do they match up as investments? Just three insurance companies are listed on the Singapore Exchange, Great Eastern Holdings, United Overseas Insurance (UOI) and Prudential. UOI is mainly a general insurer, and as such has the highest margins. In terms of price to net asset value, UOI offers the best value among SGX-listed companies and Asian insurers.
In addition to being undervalued vis-a-vis other Asian insurance companies, UOI won the Best Risk Management Award in 2019 by the Singapore Institute of Directors. What’s more, it probably has one of the highest capital adequacy ratios in Asia, at 449%. Its credit rating is A+ with a stable outlook from A.M. Best, the de facto independent international credit rating agency for the insurance industry.
UOI will be celebrating its 50th Anniversary this year. United Overseas Bank is UOI’s major shareholder with a 58% stake. When UOB celebrated its 80th anniversary, it gave shareholders a special dividend in addition to the usual dividend payout. Market watchers reckon UOI could do likewise this year given its hefty capital adequacy ratio. As at Dec 31, 2020, UOI had shareholders funds of $424.4 million, an increase of 1.4% y-o-y despite FY2020 being a pandemic year, translating into a net asset value per share of $6.9. As at 1QFY2021, NAV per share had risen to $7.22.
In the last 10 years, UOI’s shareholders’ fund grew at a CAGR of more than 7%. In FY2020, UOI paid out a dividend of 21 cents, representing a payout ratio of 53%. UOI is different from the other insurance companies in the table in that it writes mainly general insurance policies which do not require as much capital as life, and they provide heftier returns.
Life insurers different from UOI
For investors riding the post-Covid cycle through insurance companies, insurance, particularly life insurance, is a long-dated business. The insurance companies serving Singaporeans have been around for decades, some for more than a century. As a case in point, companies such as start-up Singapore Life were not able to survive without being acquired.
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Life insurance policies, as the moniker suggests, are long-term policies, where policyholders pay premiums for many years. Hence, the concept of in-force business is quite common in the industry. When a policy is sold, the insurance company does a projection into the future and calculates the cash flow and profits from the policy. A discount rate is applied to the cash flow, taking into consideration taxation and expenses, to obtain the value of the business.
For life insurance companies in Europe and Asia, embedded value (EV) and European embedded value (EEV) are used for valuations, such as P/EV (see table). EV is a commonly used assessment of the economic value of a life insurance company. This is because distributable profits from a profitable insurance policy may involve accounting losses in the initial policy years although higher accounting profits in later years will make the policy profitable overall. The loss in the initial years is due to the initial expenses of writing new business, combined with the need to meet capital requirements. EV is determined using cash flow methodology and comprises the value in the in-force business and the value of the adjusted shareholders’ funds.
The value of the in-force business is the economic value of the projected distributable profits to shareholders, using cash flow and applying a discount rate, much like discounted cash flow (DCF) valuations to obtain a net present value.
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Concepts such as value of new business (VNB), new business embedded value (NBEV), and new business profit (NBP) measure the value of the new business achieved during a particular quarter, half year or 12 months. For Great Eastern, NBEV is a measure of the long-term profitability of new sales.
Prudential uses terms such as annual premium equivalent or APE, which is the sum of the total value of regular or recurring premiums plus 10% of any new single premiums written for the fiscal year. Great Eastern uses total weighted new sales which equals (Single Premium x 10%) + New Regular Premium Sales.
Based on profit margins, AIA comes out strongly in Asia. While its growth is likely to be stronger than Great Eastern and Prudential, AIA appears to be fully valued based on P/EV and P/NAV multiples. Among the Asian life insurers, Prudential appears the most undervalued. This may be due to its planned capital raising in Asia.
What to look out for
UOI will announce its 1HFY2021 ended June results on July 29, while parent UOB’s 1HFY2021 results will be out on Aug 4. Great Eastern announces its 1HFY2021 results on Aug 2 while parent Oversea-Chinese Banking Corp’s results are out on Aug 4.
In an update, UOB Kay Hian reckons that OCBC’s net profit is likely to be nearly $1.2 billion for 2QFY2021, up 64% y-o-y but down 20% q-o-q. “The sequential pullback is likely to be inevitable as 1QFY2021 was exceptionally strong due to solid wealth management fees of $321 million (10% y-o-y and 28% q-o-q), strong net trading income of $316 million (+20% q-o-q), while insurance [from Great Eastern] contributed $470 million (+199% y-o-y and +140% q-o-q) boosted by mark-to-market gains,” UOB Kay Hian says in its report.
