The Motley Fool

Why Great Eastern Holding Limited Could Be a Great Long-Term Investment

Founded in 1908, Great Eastern Holding Limited (SGX: G07) is the oldest life insurance company in Singapore and Malaysia. It has around four million policyholders and holds S$60 billion in assets. As a subsidiary of Oversea-Chinese Banking Corp Limited (SGX: O39), Great Eastern has distribution channels through the bank’s network of branches around Singapore, giving it an easy platform to market its products.

Great Eastern also has an asset management subsidiary, Lion Global Investors Limited, that is one of the largest private sector asset management companies in the region.

As an insurance company with a large amount of float, Great Eastern could stand to benefit from the rising interest rate environment. With the Fed signalling its intention to raise rates once more this year and three times next year, the company could be in a position to capitalise on the rising interest rate. With that, here are some key things that investors should know about Great Eastern’s track record.

Combined ratio

The combined ratio is a measure of an insurance company’s profitability on its insurance products. It is calculated by dividing incurred claims and expenses by earned premiums. A ratio below one suggests that the company has underwriting profit on its insurance policies.

Great Eastern has done well in this regard over the last five years as it has not had a combined ratio above one.

Below is a table showing the combined ratio from 2013 to 2017:

Source: Author’s compilation and computation from data from annual reports

Great Eastern has been fairly conservative in its insurance business and has maintained an underwriting profit over the last five years.

Gross premiums

The next thing to assess is whether the group has been able to grow its core insurance business. The gross premiums collected will give us a better picture on whether the company has been able to deliver growth during this same time frame.

Source: Author’s compilation and computation from data from annual reports

As you can see, gross premiums have been on the rise in the period under study. Over the time frame, gross premiums collected have risen by an impressive 9.4% yearly.

Investment income

Finally, to determine how well the insurance company manages its float (money collected in premium but not yet paid out as claims), I will take a look at its track record on investment income. Of course, as mentioned earlier, this is affected by interest rates and market climate, but if the company has a history of delivering strong investment income, it could imply that the management is using its float wisely.

Source: Author’s compilation and computation from data from annual reports

Great Eastern has again done well in this regard. Investment income has been on a steady rise, barring 2016, where there was a slight dip. As interest rates continue to rise this year and its float grows, we should expect another year of growth in investment profit.

The Foolish bottom line

Great Eastern has demonstrated that it has the capacity for growth. It has shown steady profitability in its underwriting business and continues to increase it gross premiums collected year after year. On top of that, it has a track record of profitability from its float. With the tailwinds of higher interest rates, I believe Great Eastern can continue to perform well over the next few years.

Great Eastern’s stock price has also been increasing steadily over the years. In the past five years, shares of Great Eastern have risen by 58.2% to its current share price of S$27.30. This is not including any dividends already paid out during this time. At the time of writing, its shares spot a price-to-earnings multiple of 10.5, a dividend yield of 2.3% and a price-to-book ratio of 1.8.

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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. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.