United Overseas Insurance: A Quietly Soaring Insurance Outfit


United Overseas Insurance Limited (SGX: U13) is the insurance arm of United Overseas Bank Ltd (SGX:U11). This insurer generally gets very little attention in the investment community.

As the insurer provides its services mainly through the network of UOB, investors might feel that its growth prospects would be limited to where UOB is at. That might be true, but UOI announced its second quarter results yesterday and reminded investors of its formidable strength despite its “limited” growth areas.

Underwriting growth

For the first half of this year, UOI’s top-line (known as Gross premiums written) slipped slightly by 1.4% year-on-year to S$62.8 million. However, it seems that the insurer’s underwriting standards have improved judging from the 1.1% improvement in net earned premiums to S$22.3 million..

After deducting the relevant expenses, UOI had increased its underwriting profit by 4.2% year-on-year to S$8.6 million.

Interestingly, something striking pops up if we review UOI’s underwriting performance using the combined ratio. The combined ratio is a measure of the profitability of an insurance company and shows the quality of the insurer’s underwriting standards.

A ratio below 100% would mean that the company is making a profit from its underwriting activities and is a hallmark of it having good underwriting standards. Meanwhile, a ratio above 100% is a sign that the insurer underwrites policies loosely and is making a loss on aggregate with its insurance policies. In this saturated and competitive industry, it’s already a commendable effort for an insurer to achieve a combined ratio of 100%.

Given the above, UOI’s combined ratio of 86.3% for the first half of 2014 is stellar. In terms of dollars and cents, the insurer has made a profit of S$13.70 per S$100 of premium collected.

Investment growth

Insurers very often hold investment portfolios that consist of bonds and equities which are purchased using the premiums collected – it’s no different with UOI. For the first half of 2014, UOI’s investment portfolio had shown a dynamic very similar to that of fellow local insurer Great Eastern Holdings Limited (SGX: G07). Due to losses experienced in the first half of 2013 as the financial markets were rattled by fears of the US Federal Reserve tapering its Quantitative Easing programme, UOI’s investment operations had turned in a profit of only S$9.3 million in that period. For the first half of 2014, a reversal had occurred and the insurer’s investment operations enjoyed a 60% jump in profit to S$15 million.

All told, the growth in underwriting profit and investment-related profit had resulted in UOI experiencing a 31.8% year-on-year increase in net profit to S$19.4 million.

Foolish Summary

The company has not only turned in a solid profit performance, but its balance sheet remains very strong as well with a leverage ratio of only 1.96; that’s a very conservative figure for a financial institution.

Although things seem to be going well with UOI, investors should temper their expectations for its investment operations. That’s because the insurer’s performance with the investment side of its business can fluctuate greatly from year to year. Investors should look at the insurer’s investment performance over multi-year periods of time in order to better understand the company’s true investing ability.

At its current price of S$4.66 per share, UOI is valued at its book value and 9 times trailing earnings.

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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 owns United Overseas Insurance.