Is United Overseas Insurance Limited Worth Looking Into Now?

Billionaire investor Warren Buffett loves the insurance business.

Although he has made comments in the past that insurance is a commodity-like business where insurers have to compete largely on the basis of price, his investments into well-run insurance companies like National Indemnity and GEICO have given him huge returns over the years.

In Singapore, we have only a few publicly-listed insurance companies to choose from and one of them happens to be United Overseas Insurance Limited (SGX: U13).

The insurer, which is majority owned by United Overseas Bank Ltd (SGX: U11), derives most of its underwriting revenue from fire and general accident policies.

Does UOI have what it takes to be a great insurer?

The following are some characteristics that solid insurance companies have:

  • Strong financial strength
  • An ability to underwrite policies in a disciplined manner

UOI comfortably clears the bar with the first characteristic. At the end of 2014, its leverage ratio (total assets over total equity) was only 1.9. This means that UOI has a huge buffer to absorb any unexpectedly large insurance claims or a big drop in the value of its investment portfolio.

As for the second characteristic, here too does UOI shine.

According to the insurer, the general insurance industry in Singapore is currently facing very challenging market conditions. But instead of chasing after market share, UOI has chosen instead to trim off its riskier and unprofitable policies. The refusal to underwrite unprofitable policies is a big sign of UOI’s management’s operational prudence.

In addition, UOI’s ability to produce an underwriting profit despite the tough conditions now is also a sign of the firm’s underwriting discipline.

But despite having the characteristics which define great insurance outfits, UOI does not seem to be able to grow fast.

Even after many years of being in business, UOI is still predominately a Singapore-based insurer; more than four-fifths of the insurer’s revenue comes from Singapore, which is a saturated and limited market. UOI’s limited growth potential is perhaps best exemplified by how its operating profit has been stagnant over the past five years.

In summary, UOI does have great underwriting discipline and a strong balance sheet. But sadly, it seems to lack the ability to grow.

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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 writer Stanley Lim owns United Overseas Insurance Limited.