SINGAPORE (Feb 25): Great Eastern Holdings, 88%-owned by Oversea-Chinese Banking Corp, reported a set of underwhelming FY2018 earnings compared with that in FY2017. Net profit fell 68% in 4QFY2018 to $136.9 million, from $426.8 million a year ago, mainly due to lower non-operating profit and shareholders' funds profit. FY2018 earnings came in at $740.7 million, 29% lower y-o-y.

Operating profit rose 5% y-o-y to $171.6 million in 4QFY2018 and 4% y-o-y to $625.3 million for FY2018.

The decline in net profit was caused by unrealised fair value and mark-to-market losses in which shareholders’ funds investments fell 77% y-o-y. Great Eastern said: “4Q18 and FY2018 gain/loss on sale of investments and changes in fair value decreased 268% and 183% to a loss of $1,644.7 million and $2,630.8 million respectively, compared with the same periods last year due to unrealised losses in fair value through profit or loss (FVTPL) assets arising from unfavourable market conditions.” Equity and bond markets experienced significant volatility in the final quarter of 2018.

Great Eastern group CEO Khor Hock Seng said in a statement: “2018 was a challenging year. Interest rate hikes, coupled with trade and geopolitical tensions, have resulted in volatile capital and financial markets, which have impacted our Group Profit Attributable to Shareholders.”

Moreover, Khor indicated in a media briefing that FY2017 was an “exceptional” year compared with FY2018. Great Eastern had introduced an attractive single-premium product that sold particularly well.

Hence, total weighted new sales fell 30% during 4QFY2018 and 6% for the full year. The decline in TWNS, calculated using single premiums and new regular premiums, was caused by lower revenue from Singapore. (Great Eastern has the largest market share for life insurance in Singapore and Malaysia. FY2017’s TWNS were boosted by a popular single-premium, special-product campaign.

A better comparison would be to use FY2016 figures, Khor says. Singapore’s TWNS in FY2018 were $842.2 million, which is 21.9% more than FY2016’s. The decrease in 4QFY2018 as compared to 4QFY2017 was mainly attributed to a product campaign in 4QFY2017 which was very well received by the market, he adds.

New business embedded value (NBEV), which is a measure of the long-term profitability of new sales, fell 3% y-o-y to $527.6 million, mainly due to lower contributions from FY2018’s TWNS from Singapore.

Embedded value — which comprises the value of in-force business, which is the economic value of projected distributable profits to shareholders, and adjusted shareholders’ funds — rose marginally y-o-y to $13.4 billion, or $28.40 a share, for FY2018. However, adjusted shareholders’ funds dropped 2.7%, main ly due to less favourable conditions in the financial and capital markets. They include the impact of interest rate hikes last year, which affected the fair value of shareholders’ funds. A total of 65% of Great Eastern’s Singapore and Malaysian portfolios comprise fixed income and debt securities. Equities make up 22% of investments in Singapore and 27% of investments in Malaysia. The remainder comprises a combination of real estate, private equity and cash.

Malaysian shareholding issue solved

In Malaysia, the central bank has given foreign-owned insurance companies until April to outline their plans to comply with local shareholding requirements. Bank Negara Malaysia has a 2009 rule that sets a 70% cap on foreign ownership of local insurance businesses. Great Eastern Life Assurance (Malaysia) has opted to contribute RM2 billion ($659.6 million) to a national health insurance scheme, which finance minister Lim Guan Eng said would exempt it from complying with the ownership cap.

Great Eastern is looking to Indonesia for growth. The insurer acquired a general insurance company, QBE Indonesia, for $38.4 million last December. The acquisition is part of Great Eastern’s plan to deepen its footprint in Indonesia and the Asean region. As Indonesia’s non-life insurance penetration rate is among the lowest in the region, Great Eastern plans to focus more on the general insurance space. In Singapore and Malaysia, Great Eastern’s sales are largely from life insurance products. Parent OCBC has a growing presence in Indonesia through its subsidiary Bank OCBC NISP.

Blue-chip insurers are long-term value plays

Insurance companies, usually highly rated, report steady annuity-type operating profits and distribute steady, often growing dividends. One such insurer is Prudential, which has a secondary listing on the Singapore Exchange. Other listed peers of Great Eastern include Shanghai-listed Ping An Insurance and China Life Insurance and Hong Kong-listed AIA Group. Great Eastern’s total dividend per share paid for FY2018 was 60 cents, which translates into a dividend yield of 2.27%. Chart 1 shows the dividend yields of these companies. The Singapore- listed insurance companies have better yields compared with the risk-free rate, though the difference is marginal. AIA, Ping An and China Life’s dividend yields are unattractive compared with their respective country’s risk-free rate.

https://s3-ap-southeast-1.amazonaws.com/tesuploads/870/Thiv%20chart%201%20%26%202.png

Chart 2 shows the price-to-book ratios of the insurance companies. Insurance companies appear to have high P/B ratios. However, Great Eastern is the safest in this respect, owing to its lowest P/B ratio.

Chart 3 shows the price-to-embedded value per share of the insurance companies. The EVPS reflects the fair value per share and as such, the EVPS should be higher than the trading price of the company for it to be undervalued. Great Eastern, Prudential and China Life are undervalued in this aspect, compared with the benchmark of 1.

https://s3-ap-southeast-1.amazonaws.com/tesuploads/870/Thiv%20chart%203.png

This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe <a href="http://here" target="_blank">here</a>

Great Eastern's FY2018 earnings underwhelm, company eyes Indonesia for growth, stock offers value

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