This Tiny Insurer is Showing Strength During the Pandemic

Today’s company is one of the 4 listed-insurance companies (other 3 being Great Eastern, Prudential and Sing-Reinsurance) on the Singapore Exchange. We wrote about this last year too.

It’s also a tiny insurer people hardly talk about.

But more specifically, this company is a property & casualty (P&C) insurer. Or commonly known as general insurance – Which provides motor, fire, marine and housing insurance. It also provides casualty insurance, which covers negligence such as hospital malpractice.

Why Insurance is The Best Business Out There

Looking at good insurance companies all comes down to its “underwriting”. 

And underwriting is the company’s ability to accurately forecast and price risk. If an insurer takes in more premiums than the claims it pays out, it earns “underwriting profits”. 

Between you and me, I’d say it’s like “free money” for the insurers. If they know how to correctly price their insurance policies, given the claims they need to potentially payout. 

You see, billionaire investor Warren Buffett knows the power of the insurance business. That’s why he used these companies to build up Berkshire Hathaway’s cash flows.

Now, this insurer I’m looking into its very good underwriting. That’s how it has remained resilient even during this pandemic crisis…

The Tiny, United Overseas Insurance Packs a Punch

United Overseas Insurance (SGX:U13) is a small, $400 million general insurer. And it traces its roots back to February 1971, when its Chairman Mr. Wee Cho Yaw shared a vision for a local general insurer to help develop the financial industry. 

United Overseas Insurance was then listed in 1978 on the Stock Exchange of Singapore. 

Today, United Overseas Insurance is one of the leading general insurers in Singapore. 

You see, as the name suggests, United Overseas Insurance is 58%-owned by the Wee Family, who owns one of the largest banks — United Overseas Bank in Singapore. 

You can say United Overseas Insurance is “well taken care of”. 

United Overseas Insurance sells many insurance products. In 2019, it wrote $106 million of gross premiums. And because they’ve been very profitable, they’ve been paying out dividends consistently year after year. 

As far as the annual reports were published, they’ve been paying dividends over the past 17 years. In 2019, they paid about $5.2 million of dividends. And if you’re a dividend investor in retirement, this is what you want to pay attention to.

United Overseas Insurance is a disciplined underwriter, despite their small size. Their 2018 and 2019 combined ratio was 64% and 68% respectively. Now, the combined ratio is simply adding their adjusted losses and operating expenses, divided by their earned premiums. The lower the ratio, the better. And United Overseas Insurance’s combined ratio is way lower than other general insurers out there, which are usually above 95%.

And since an insurance business doesn’t need heavy Capex upfront, United Overseas Insurance generates a healthy, steady stream of free cash flow. Since 2010, it generated an average $14 million of free cash flow

But it’s only in 2019, its free cash flow dropped because of a tough insurance market during the year. “Although the insurance sector expanded 9.4% in terms of premium growth with offshore business contributing 41.5% of the growth, the market as a whole recorded an underwriting loss of $13.1 million attributable to the continued rate erosion despite worsening claims experience.” Chairman, Yee Cho Yaw. 

Yet United Overseas Insurance showed resilience during this pandemic. In a recent third-quarter 2020 update, the company recorded a net underwriting profit of $12.4 million, which remained the same as a year ago at $12.3 million. Its net claims were also small, of $9.8 million, which remained the same over a year ago. 

Here’s an important point. Because United Overseas Insurance is owned by United Overseas Bank, its parent company can always help support United Overseas Insurance’s business by helping to cross-sell their insurance policies to the bank’s wide customer base. And also provide cheap debt funding to United Overseas Insurance to run their operations. 

Insurance is a Two-Headed Money Beast

You see, the insurance business makes money from 2 key sources – Keeping the underwriting profits, and earning the returns from investments through its float.

Let me explain. 

Because United Overseas Insurance is a profitable underwriter, it ploughs the excess premiums collected into their insurance “float”. Think of it like a money bucket it accumulates over time. This allows them to make even more money through their investment returns.

And the best part? It gets to keep all the dividends, interests and price gains earned from its investments. United Overseas Insurance holds about $400 million in investments. Like a conservative portfolio, 70% of its investments are in bonds, which are considered safe. And if you look deeper into it, these are either government bonds or very high-quality corporate bonds. It makes United Overseas Insurance’s balance sheet resilient to the volatile market. 

Of course, United Overseas Insurance also invests the other 30% in stocks, which makes them vulnerable to the volatile stock market. United Overseas Insurance wasn’t spared from the market volatility earlier in 2020. That’s why its non-underwriting income dropped to $5.8 million, down from $19 million over a year ago. In its recent Annual General Meeting, management mentioned its market losses in the first quarter of 2020 were due to the pandemic.  But for now, this isn’t a huge concern since United Overseas Insurance has always adopted a prudent investing strategy.

Is United Overseas Insurance a Buy?

To value an insurance company, you need to look at 2 things:

Its float and book value. United Overseas Insurance has about $73 million of float. Its book value continued to grow to $418 million, up from $378 million over a year ago. 

This brings its total value to about $491 million. The market cap as of this writing is around $400 million. Which means buying United Overseas Insurance does seem to offer a discount of 20%.

Of course, for dividend investors, you want to be looking at large, stable companies. United Overseas Insurance, though has been a steady dividend payer, is still considered a rather small company. 

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