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United Overseas Insurance Limited Saw A 21% Drop In Net Profit

United Overseas Insurance Limited (SGX: U13) announced its first quarter result for FY2015 on 28 April 2015. This under-the-radar general insurer has been a quiet strong performer for the last 10 years. Since 2005, the company has returned more than 200% for its shareholders with dividend reinvested, working out to be roughly 11.6% return annually.

Such returns is a good thing for investors, but the question on every investor’s mind will be “Do all good things come to an end?” The latest quarterly result from the company certainly brings that question to the forefront.

In the first quarter of 2015, UOI posted a 4.5% decline on its gross premium written year on year to S$29.3 million. Luckily, the lower premium recorded did not translate to a lower underwriting profit. With a much lower net claims incurred, the company achieved a 21.5% growth in its underwriting profit to S$6.88 million.

There’s not much more good news though. Due to a huge increase in losses from the net fair value of its financial derivatives, and a much lower gain on disposal of its investments, the company saw its investment profit drop by 50% year on year to only S$4.26 million for the quarter. Taking both sets of result as a whole, UOI experienced a 20.8% decline in its net profit year on year to just S$9.36 million.

If any shareholders are reading this, you do not have to panic. For now, including its net gains on fair value changes from its available-for-sales investments, UOI only saw a 2.5% drop in its comprehensive net income to S$12.1 million.

Insurance businesses generally extract value from two areas, an underwriting operation and an investment operation. Investment operations typically have more volatile earnings and a huge change in investment income every now and then should not come as a surprise.

The most important thing for a shareholder is to ensure that the company continues to have a strong underwriting policy. Judging by its underwriting profits, UOI seems to fare well in this aspect. Moreover, the insurer also continues to grow its book value by 3.8% from last quarter to S$5.15 per share.

Foolish Summary

United Overseas Insurance Limited is operating in a competitive and saturated market in Singapore. On top of that, the general insurance market in Singapore is not in the best of times. However, even in this environment, UOI continues to be highly profitable in its underwriting and able to steadily grow its book value. To me, these factors indicate the strength of the business. As a shareholder, I am quite pleased.

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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.