In a Q&A ahead of Great Eastern Holdings’ (GEH) AGM held on April 19, a shareholder pointed out that returns on shareholders’ funds at 5.59% over five years were low. “We would appreciate it if the board did something concrete instead of repeating the same thing (‘we will look into enhancing the shareholders’ value’) over the last few years,” the shareholder asks.
In a reply, GEH said, “We have increased our dividend this year. Dividend per share has risen to 65 cents from 60 cents a year ago. While we acknowledge the shareholder’s concerns, we believe that the headwinds that have surfaced this year warrant a strong and sound capital base. Near term, concerns of higher inflation, rising bond yields and slower economic growth have made the financial markets and business operations extremely challenging and volatile to navigate. A solid capital buffer allows us the confidence to weather financial markets’ volatility, as well as the flexibility to capitalise on internal and external opportunities to deploy capital that will provide the best shareholders’ returns.”
Life insurance - unlike general insurance - is a long-dated business. No surprise then that insurance companies usually hold excess capital to cater to different economic cycles including crises and regulatory changes.
In 2020, there were changes to the regulatory landscape. These include revised regulations on valuation and capital framework which set out requirements under the riskbased capital (RBC2) framework including how assets and liabilities are to be valued. For instance, there are new requirements on the allocation of charges and expenses to the Participating Fund in effect from Jan 1, 2021. In addition, IAC guidelines outline five accountability and conduct outcomes for financial institutions to promote accountability of senior managers took effect from Sept 1, 2021.
In Malaysia, Bank Negara issued guidelines on Risk Management in Technology. In Indonesia, Otoritas Jasa Keuangan issued a circular on guidelines for insurance companies and their distribution partners for the marketing and distribution of insurance products.
Competition continues
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GEH’s major shareholders are Oversea-Chinese Banking Corp (OCBC) with more than 88%, Wong Hong Sun with 0.68% and Wong Hong Yen with 0.42%. The Wongs are grandsons of SQ Wong, one of the founders of GEH some 114 years ago. GEH is not without competitors.
The Life Insurance Association of Singapore counts 25 ordinary members including Singapore Life, now renamed SingLife with Aviva and FWD which started as insurtechs. The insurtechs started by using just a digital channel to sell products but have since modified their business models to add additional sales channels such as financial advisers.
Despite all its challenges, GEH remains one of the largest insurance companies in Singapore and Malaysia where the company counts a large agency business, a bancassurance partnership with OCBC and a small but growing business in life and general insurance in Indonesia.
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“Our real differentiation is our multi-channel distribution. We are strong in both agency and bancassurance, especially in Singapore. We are leaders in both agency and bancassurance and one of the top insurance companies in Singapore and Malaysia. I would like to think our digital affinity is showing strength,” says Khor Hock Seng, group CEO of GEH. Khor has carefully nurtured plans to grow in Indonesia. Digital affinity is part of GEH’s digital strategy.
“Our target is for Indonesia to contribute [around] 10% of new business embedded value or NBEV of the group in five years,” he adds. “I was looking at the Life Insurance Association, and there are 25 members. It is quite crowded. There are a few that are niche players, and some which were big on the general side but which have moved into life insurance. It’s a very competitive landscape. We welcome competitors,” Khor continues.
“Different competitors have different niches. While we look at them, we have to look at our own setup. For us at GEH, we are a multi sales channel company. Because of that, the segments we cover are much wider. We look at what competitors are doing other than pricing, it’s about service as well,” he observes.
SingLife brought in new investors such as Sumitomo Mitsui Banking Corp, private equity investors and Aviva. FWD acquired Metropolitan Life Insurance Company of Hong Kong according to an announcement in July 2020. This has given FWD an agency sales force in Hong Kong, while in Thailand, FWD has a bancassurance partnership. FWD has filed for an IPO.
Digital affinity
“To be fair to the incumbents, everyone is going digital. So there is no real disadvantage. We could go digital as much as we want,” Khor says.
Over some three years, GEH has digitalised its operations and digitally-enabled its sales force so that they have a better customer journey and better access to GEH’s digital affinity network through insurtech and fintech partners. Sales through digital affinity partners are for general insurance, travel and the like rather than for life insurance.
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In Indonesia, GEH has partnered with Qoala and Gojek to launch a Gadget Protection plan on their e-commerce and e-wallet platforms during the year. In addition, GEH has collaborated with Traveloka and Tiket.com to increase its market share in travel insurance. In Singapore, GEH has tied up with Singapore Telecommunications (Singtel) and Axiata in Malaysia.
“In Singapore, we have a tie-up with Singtel. But these partnerships tend to be for general insurance. When it comes to life insurance because of its nature, you need good proper advice before a customer decides. And the advisory channel whether financial advisers, bancassurance or agency, play a key role. During Covid, we were the first company to have our remote sales process so people could go through the whole advisory virtually,” Khor says.
According to him, the Malaysian business was more impacted by Covid and its movement control order (MCO) as people lost their jobs. “Even though we had remote solutions, sentiments were not as good,” Khor says.
Evolving needs, takaful, shariah
Towards the end of 2019, GEH set up a centre for design insights and innovation in what Khor describes as an actionable customer insight lab. “This team goes out, talks to people, looks at our own customer profile. It’s through the insights where we start looking at how we design our products,” Khor says. “Customer insights are a very important aspect and lead to the design of products and services. We look at trends, global and regional products, and competitors.”
For instance, with insights, medical insurance could come with additional coverage including hospitalisation, caregiver and home nursing benefits and demographic trends. With an ageing population, retirement solutions including annuities are in demand.
“We view Malaysia and Singapore as growth markets,” Khor says. In Malaysia, Great Eastern operates several units, Great Eastern Life Assurance Bhd, Great Eastern Takaful and Great Eastern General Insurance. “Our takaful company is 10 years old. There is a lot of demand and it’s growing faster than the conventional side. The population demographics is [65%] Muslim and preference is a takaful insurance product,” Khor says.
Although the profit contribution from takaful is modest to GEH, Great Eastern Takaful is ranked No 4 in the takaful space. In Indonesia, GEH’s licence allows it to offer shariah products despite relatively lower demand for conventional products. GEH is focused on growing its general insurance business with its digital affinity partners.
Inflation, interest rates, embedded value
Products and demand for products are at the core of the company’s growth plans. The type of products, be they regular premium products, or single premium products, shield-type or investment-focused, impact total weighted new sales (TWNS), margins, new business embedded value (NBEV), (NBEV is the equivalent value of new business (VONB) in insurers such as AIA and Prudential) and embedded value (EV).
How do products evolve with customer demand during inflationary phases? “Investment-linked type products have been growing in popularity and this will continue in an inflationary environment. There will also be the introduction of new funds that support investment-linked products that are seen as inflationary,” Khor says. For a life insurance company, inflationary pressures may have a limited impact. Inflation does not impact protection, which is likely to continue.
Medical inflation is often a concern. “Medical inflation is not new and exists for many reasons, e.g. improvement in medical technology which leads to higher costs but better treatment. In general, the cost of treatment has gone up,” Khor says.
The main impact of inflationary pressures on GEH is likely to be via interest rate trends on the insurer’s portfolio. “The group’s main exposure is to the Singapore Government Securities (SGS) yields and the Malaysian Government Securities (MGS) yields, which tend to track the US Treasury yields. Generally, a rise in interest rates along with a steepening of the yield curves result in a positive impact on our profit due to the profile of our assets and liabilities,” GEH says in a Singapore Exchange (SGX) statement.
GEH’s liabilities have a longer duration than its assets, which means that its liabilities are more sensitive to changes in long-term interest rates. When interest rates increase and the yield curves steepen, the value of the liabilities declines more than the value of the assets, resulting in a positive impact on profit after tax. When interest rates increase but the yield curves flatten, short-term interest rates increase more than long-term interest rates.
The positive impact on profit after tax will be dampened, as the value of GEH’s liabilities will not decline as much while the value of its assets will decline more, compared to the impact from a parallel or steepening shift in the yield curves. “If the yield curve moves up, liabilities are valued at higher rates but assets on the bond side will come down so they offset each other,” Khor says.
Since interest rates cause bond and securities portfolio’s to be revalued lower, GEH’s profit attributable to shareholders in 1QFY2022 ended March fell 50% to $220 million. This was due to lower valuation of investments arising from less favourable financial market conditions. in 1QFY2022 compared to 1QFY2021. Operating profit from the insurance business registered an increase of 6% to $191.4 million. TWNS grew 32% y-o-y during the quarter.
Singapore continued its growth momentum, driven by both the agency and bancassurance channels while sales in Malaysia declined on the back of weaker economic sentiments. The group’s NBEV registered a slight 3% decrease to $191.3 million y-o-y due to the lower contribution from Malaysia.
GEH publishes its EV once a year. As at end December 2021, it stood at $38.57 per share. EV is the sum of the present value of the in-force business and shareholders’ funds. The initial years of a life policy may involve accounting losses due to the initial expense of writing new business. EV assesses the long term economic value of a life insurance company. The value of the in-force business is projected from the cash flow after tax less increases in statutory capital. This is done using the cash flows from both assets and liabilities using discount rates, similar to a discounted cash flow.
GEH has a relatively low P/EV compared to a couple of its peers (see table). This could be due to its low free float, market watchers reckon. They suggest that more liquidity in the stock would narrow the discount versus its EV.
