Profits Head Southwards At Great Eastern Holdings

Last Friday, Great Eastern Holdings Limited (SGX: G07), an insurance group that’s 87.2% owned by Oversea-Chinese Banking Corporation Limited (SGX: O39), announced its financial results for the fourth quarter of 2013.

Great Eastern is one of the more well-recognized insurance companies in Singapore, along with other established insurance providers like Prudential PLC (SGX: K6S), AIA and NTUC income.

For the 12 months ended 31 Dec 2013, Great Eastern posted a remarkable improvement in gross premiums (analogous to ‘revenue’ or ‘sales’ for companies from other industries) with a 21% year-on-year rise to S$7.98b.

The annual operating profit from the insurance business was S$559.6m, a 12% improvement from S$501.5m a year ago. The growth was due to better underwriting performance and higher net investment income across all insurance funds.

Nonetheless, quarterly operating profit from the insurance business had registered a slip of 20%  to S$135.3m from S$169.2m in the corresponding period a year ago. This was mainly attributed to the lack of tax provisions that were pushing up the results in the fourth quarter of 2012  and a negative impact from a change in the timing of terminal bonus recognition for the Malaysia Participating Fund.

Meanwhile, Great Eastern’s quarterly net profit for the fourth quarter of 2013 fell 26% year-on-year to S$165.9m. The company’s profits for the whole of 2013 fared worse, as the figure slumped 43% to S$675m.There were two key reasons for the profit decline:

1) The full year results in 2013 did not have the one-off gain of S$421.6m booked from the sale of shares in Asia Pacific Breweries (APB) and Fraser and Neave (SGX:  F99) that occurred in the third quarter of 2012.

2) Non-operating profit from the insurance business fell from S$161.1m in 2012 to a loss of S$10.9m in 2013 primarily due to the significant narrowing of credit and swap spreads that occurred with the tapering of the United States Federal Reserve’s Quantitative Easing program. It led to a significant un-realized mark-to-market non-operating loss of S$155.6m for the Group.

Despite the decline in profits, the underlying fundamentals of the insurance business remain sound. Great Eastern recorded an increase of 27% in total weighted new sales with strong performance in both Singapore and Malaysia. On the other hand, many new life policies were cancelled due to high-pressure sales tactics.

Given the occurrence of cancelled policies, it is thus important to take a look at the metric called “New Business Embedded Value” (NBEV) – a common benchmark used to measure long term profitability of new sales for life insurance companies. Great Eastern has performed well with its NBEV improving 22% year-on-year to S$422.7m in 2013 on strong sales performance.

Great Eastern’s Chief Executive Officer, Chris Wei, commented on the results: “We are pleased to present a strong set of operating results for the full year. Besides sales that crossed the billion dollar mark, we also registered a steadily improving NBEV and growth in operating profit across all our life assurance funds”.

Wei added, “We are aware of the challenges posed by upcoming regulatory developments and increasingly intense competition. As such, we continue to invest in expertise, systems and processes to ensure the transition into the new regulatory environment occurs smoothly, while actively exploring new ways to engage consumers and meet their evolving needs.”

The insurer has proposed a final tax exempt dividend of S$0.40 per ordinary share and special dividend of S$0.05, bringing the full-year payout to S$0.90, a 40.63% increase from last year. At its current price of $17.67, Great Eastern is now selling for 12 times its trailing earnings and offers a dividend yield of 5.1%.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

Like us on Facebook  to keep up-to-date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.