When interest rates rise, stocks suffer as investors move their investment dollar to high-yielding bonds. Leveraged companies also end up having higher borrowing cost, squeezing its bottom line.
However, against the broader trend, some industries tend to thrive on high interest rate environments. Insurance companies and banks, for instance, do better in such environments. Banks can charge higher interest on their loans, widening their net interest margins and profits from interest income.
Insurance companies’ profitability also rises and falls in concert with interest rates. Insurance companies typically invest a proportion of their float (premiums collected) on interest-yielding instruments such as bonds. Generally, when interest rates rise, the return on these investment increase in tandem.
With the Fed reaffirming its stance on increasing interest rates once more this year and three times next year, insurance companies could stand to benefit. With that, here are three insurance groups listed in Singapore that could benefit from the rising interest rate environment.
Great Eastern Holding Limited (SGX: G07) is a subsidiary of Oversea-Chinese Banking Corp Limited (SGX: O39). Great Eastern was founded in 1908 and is the oldest life insurance group in Singapore and Malaysia. It has around S$60 billion in assets and four million policyholders. Besides its core markets in Singapore and Malaysia, the group also operates in Indonesia, Brunei, Myanmar and China. The company has maintained a credit rating of AA since 2010, one of the highest ratings among Asian life insurance companies.
The bank sells its insurance plans through OCBC’s network of branches and also has its own financial advisory firm and agency force.
Great Eastern had a good second quarter of 2018 as total weighted new sales increased 28%. Profit from shareholder fund investments rose 40% during the quarter, with profit attributable to shareholders up 3%.
At the time of writing, its shares are trading at S$27.20 per piece, which translates to a price-to-earnings multiple of 10.8, price-to-book ratio of 1.8 and dividend yield of 2.2%.
Singapore Reinsurance Corporation Ltd (SGX: S49) was founded in 1973 and eventually listed on the Singapore stock market in 1987. Through its roots in Singapore, the group has expanded to become a regional reinsurance player, with its geographical footprint expanding to the Middle East and the Indian subcontinent.
For the first six months of the year, the group’s profit attributable to equity holders declined by 6.8%. This was mainly due to lower profit from its reinsurance business on the back of higher claims and lower net premiums earned.
Shares in Singapore Reinsurance Corporation last changed hands at S$0.315 per piece. This gives a price-to-earnings ratio of 15.6, price-to-book of 0.75 and a dividend yield of 4.1%.
United Overseas Insurance Limited (SGX: U13) is a subsidiary of United Overseas Bank (SGX: U11). UOI focuses on reinsurance and general insurance market. With its links to UOB, UOI has access to a network of sales branches that can help distribute its product at a relatively lower cost than other insurance companies. The group has maintained a low combined ratio of between 77% and 83% between 2006 and 2016. The combined ratio is a comparison between the claims paid out and the premiums received. Generally, any ratio below 100% means the insurance company has an underwriting profit.
In the most recent quarter, underwriting profits fell by 0.9%, but the group maintained a healthy combined ratio of 84%. Right now, shares of United Overseas Insurance have a price-to-earnings multiple of 13.4, price-to-book ratio of 1.0 and dividend yield of 3.5%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Oversea-Chinese Banking Corp Limited and United Overseas Insurance. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.