Insurance companies typically make money in two ways.
Firstly, it can earn underwriting profits from its core insurance business. Secondly, the insurance firm can use the money it collects from premiums (called “float”) to generate investment income.
As interest rates rise, insurance companies can profit from higher investment income from its float. With that in mind, I have decided to take a look at the three insurance companies listed in Singapore, namely United Overseas Insurance Limited (SGX: U13), Great Eastern Holding Limited (SGX: G07), and Singapore Reinsurance Corporation Ltd (SGX: S49) to see which insurance firm has the most profitable insurance business.
The combined ratio
The combined ratio is a commonly used metric to assess whether an insurance company is making underwriting losses or profits. The ratio is calculated by dividing claims and expenses by premiums collected. As such, a ratio below one suggests that the insurance company has made an underwriting profit.
Of course, the total amount of claims each year can vary tremendously. Therefore, it is important to compare the combined ratio across a few years to get a better idea of profitability and consistency.
The table below illustrates the combined ratio for the three insurance companies over the past five years.
Source: Author’s compilation of data from Annual Reports
We can see that out of the three companies, United Overseas Insurance has maintained the lowest combined ratio with an average of 0.81. That could be because of its shared distribution network with United Overseas Bank Ltd (SGX: U11) branches in Singapore which help to lower costs. UOB is the parent company of United Overseas Insurance.
At the other end, Singapore Reinsurance Corporation has the highest combined ratio which suggests that its insurance business is not as profitable, compared to the other two companies.
The Foolish bottom line
The combined ratio is a quick and simple tool in assessing how profitable an insurance underwriting business it.
However, there are other important areas to look at in insurance companies. Investors should monitor an insurance business’ retention ratio, ability to attract new customers, the growth of its underwriting premiums written and its investment income. By looking at all these aspects of an insurance firm’s business, we will have a better picture of the sustainability and profitability of its business.
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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 Jeremy Chia doesn’t own shares in any companies mentioned. Motley Fool has a recommendation for United Overseas Insurance and United Overseas Bank.