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Why Investors Shouldn’t Get Too Excited About the 109% Growth In Profit For Great Eastern Holding Limited

great eastern logoGreat Eastern Holding Limited (SGX: G07), one of the most established insurance companies in Singapore, announced its earnings yesterday.

The insurer, which is actually a majority-owned subsidiary of Oversea-Chinese Banking Corp. Limited (SGX: O39), ended the first half of 2014 with a net profit of S$480.4 million, more than double last year’s result of S$230.1 million. However, before you get too excited by the huge jump, read on.

The numbers

Great Eastern suffered an unrealized but significant non-operating loss for its securities during the first half of 2013 when the financial markets first reacted fearfully to the potential tapering of the United States Federal Reserve’s quantitative easing programme (the market value of Great Eastern’s securities had fallen and that had be to be recorded as a mark-to-market loss). That was sort of a one-off event which dragged down the investment profits for Great Eastern in 2013.

In the first half of 2014 however, there was a big jump in non-operating profit due to – you guessed it – mark-to-market gains in Great Eastern’s securities. For instance, in Malaysia (the company has two key geographical markets – Singapore and Malaysia), non-operating profit had improved to S$105.6 million instead of a non-operating loss of S$117.3 million a year ago. It’s the mark-to-market gains that accounted for the bulk of Great Eastern’s net profit growth.

The company’s actual business didn’t grow that much. In fact, total weighted new sales (a metric used to measure the amount of new premiums the company has earned) of S$446 million in the first half of 2014 was 4% lower compared to a year ago. And if we only look at the operating profit from Great Eastern’s insurance business, the company only managed a 0.18% gain to S$286.2 million.

Operational highlights

Great Eastern Holding’s lower total weighted new sales had been due to lower sales in both its agency business and bancassurance platform for its Singapore business. Total weighted new sales in Singapore had also declined by 6% as a result of the latter.

In Malaysia, business continues to grow for the company: total weighted new sales gained 3% year-on-year to S$143.5 million.

Balance sheet

Great Eastern ended the quarter with a net asset per share of S$11.43, up 6.5% from the end of last year. Its leverage ratio (Asset/Equity) is also relatively stable at 11.6 times compared to 11.9 times at the end of 2013.

Foolish Summary

If there aren’t any major surprises for the remaining of the year, we should see a stronger earnings performance by Great Eastern in 2014 as compared to 2013. But bear in mind that most of the profit growth had been due to improved performance in its investments rather than its insurance operations. As we saw last year, anything can happen for Great Eastern’s investments, so investors should keep in mind such a risk when investing in the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.