Singapore Reinsurance

[pianist]

Hi anyone owns this reinsurance counter? care to share your view thanks..
I saw today announcement UOI became a new substantial shareholder of spre.

[Jon-san]

i did take a brief look at it previously, but didn't quite understand the business nature of insurance, so didn't progress beyond reading their web page.

[pianist]

i feel they may have a gd investment team there?

[pianist]

today announcement: Market acquisition by First Capital Insurance Limited of 3,470,000 shares in Singapore Reinsurance Corporation Limited.

[mikh]

That's 3mil out of 600mil total company shares.

[D123]

Let me dust off this thread with some general observations of this company:

1. Quality owners (Fairfax Financial, UOI, Great Eastern).
2. Long-term record of profitable underwriting.
3. Relatively conservative gearing of 230% (Liabilities/Equities).
4. Adequate long-term ROE of 9% - 10%.
5. Current low interest environment means interest rates have lots of room to rise in future. As interest rates rise, profitability should increase since most of its investments are in corporate and public agency debt. Basically, it's a leveraged play on rates.
6. Above average growth depends on how successful the company is at expanding its overseas business.

I thought that in light of these, the company's intrinsic value should be close to book value instead of its current 25%-30% discount. Any views on this?

[d.o.g.]

It may be helpful to understand the history of Singapore Re. In 1973, the local insurers all got together and created Singapore Re as a co-operative. It was listed on SGX in 1987. My oldest annual report is for 2001, it shows that at that time over 50% of it was still held by local insurers.

I do not have the annual reports going back to 1973 - those interested can presumably dig them up from the library or ask the company directly.

I do have data going back to 2000 and the numbers are not encouraging as far as underwriting is concerned.

Below is a table of gross insurance premiums and underwriting results from 2000-2011:

(SGD '000)
2000 63,388 1,504
2001 67,584 448
2002 75,645 220
2003 90,497 -1,676
2004 98,106 303
2005 75,309 2,562
2006 81,338 1,818
2007 79,333 2,969
2008 86,190 -1,663
2009 88,121 1,698
2010 102,464 984
2011 108,607 -14,170

Adding up all the gross premiums, for 2000-2011 the company received $1,017m of premiums. In the same period it had a cumulative underwriting loss of 5.0m.

2011 was arguably unusual because of the Thai floods. If we exclude it, for 2000-2010, the company received $908m on which it had a cumulative underwriting profit of $9.2m.

Neither time series looks impressive. I would say that from 2000 onwards their underwriting record suggests that excluding investment profits they were not profitable in any meaningful sense.

Perhaps the ownership by its customers is part of the answer - the customers may prefer to have cheap reinsurance rather than a profitable reinsurer. In fact, until the end of 2004 Singapore Reinsurance had a collective agreement with the motor insurers, where the company had to cover an entire block of policies in exchange for an agreed premium.

(Presumably these policies were unprofitable to retain, and in fact we know from various media articles that motor insurance has been a headache for the insurers here due to extremely high rates of fraud.)

So, cynically speaking, Singapore Re is a dumping ground for the policies that the local insurers feel obliged to offer but are unable to price profitably. Motor insurance is one obvious example. There may be other types of insurance they have to offer as "national service" to stay on good terms with the regulators. I am quite sure they will not bother to reinsure the highly profitable policies like residential fire, consumer travel, mortgage insurance etc. UOI's fire insurance for example is obscenely profitable. No way they would cede that business to any reinsurer.

Should Singapore Re trade at book value?

Considering that its policies probably contain a large proportion of poor-quality policies (underscored by its poor underwriting record over the last decade), with little prospect of improving pricing against its customer-owners, I am not sure.

To play Devil's Advocate, one might then ask:

If Singapore Re is such a poor business, why does Fairfax own 27% of it?

Fairfax is run by Prem Watsa, widely regarded as Canada's Warren Buffett. Prem has generated tremendous value for Fairfax shareholders since inception in 1985 and undoubtedly knows what he is doing.

One possible answer is that Singapore Re is a relatively small investment for Fairfax, and so it might not be getting Prem's full attention. At 31 Dec 2011, Fairfax Financial's investment portfolio was USD 23.5bn. The stake in Singapore Re (165m shares at SGD 0.245) is worth SGD 40m or USD 32m.

So Singapore Re is about 0.14% of Fairfax's investment portfolio. I do not know if Prem has spent a meaningful amount of time looking at it.

[pianist]

i got the impression that the investment team in singapore reinsurance is quite good..wonder who is heading the team there?

[cif5000]

their underwriting record suggests that excluding investment profits they were not profitable in any meaningful sense.

I have another way to look at their underwriting performance, much like the way bookies transfer their poor-odds bets to other bookies. Lousy bookies will eventually wind up.

The gross premium represents all bets collected. SingRe passes some of these risks to other reinsurers. You can see that they are doing that more often in recent years compared to the earlier years (before 2005). What they left with are supposed to be bets with better odds. When the claims come in, at the end of 90min, they know whether they have won or lost.

The way to decide is to see if you have transferred out the losing bets successfully, and over the long run. Insurers can't decide when a flood will hit, just like bookies can't decide the outcome of the football game (or can they?), but a good underwriter/bookie makes sure that the bad bets (poor odds/payout ratio) are out of their books. SingRe has done quite well in my opinion. From 2005, cummulatively, they collected more from their reinsurers than what their customers claimed from them - an average spread of about 2.7% arising mostly from 2011 underwriting.

There is a second spread which the insurer can earn - commission.

Should Singapore Re trade at book value?

Considering that its policies probably contain a large proportion of poor-quality policies (underscored by its poor underwriting record over the last decade), with little prospect of improving pricing against its customer-owners, I am not sure.

To play Devil's Advocate, one might then ask:

If Singapore Re is such a poor business, why does Fairfax own 27% of it?

Fairfax is run by Prem Watsa, widely regarded as Canada's Warren Buffett. Prem has generated tremendous value for Fairfax shareholders since inception in 1985 and undoubtedly knows what he is doing.

One possible answer is that Singapore Re is a relatively small investment for Fairfax, and so it might not be getting Prem's full attention. At 31 Dec 2011, Fairfax Financial's investment portfolio was USD 23.5bn. The stake in Singapore Re (165m shares at SGD 0.245) is worth SGD 40m or USD 32m.

So Singapore Re is about 0.14% of Fairfax's investment portfolio. I do not know if Prem has spent a meaningful amount of time looking at it.

Not me, but Buffett, said that the attractiveness of an insurance company lies in its "float", especially when it comes free. To have an underwriting profit means that the float comes with a negative cost. Add in what's available on the books and we can estimate the worth of the company.

To me, SingRe is not aggressive at all in pursuing the insurance business. It operates more like a close-end fund than underwriting insurance with its available capital. More than 40% of their investment returns are allocated as "non insurance".

If the market price is significantly discounting the book assets, it can justify an investment case. i.e. if the price is right.

[D123]

Thank you cif5000 and d.o.g. for your comments. Let me give some more thoughts:

Underwriting discipline
I have a similar view with cif5000 in that I'm not so concerned about fat profits from underwriting policies. To me, having underwriting profits means that you have a negative cost of float, which allows you to borrow for better than free and reinvest the premiums received. This is why insurance and reinsurance are nice businesses. I'm not too worried about low overall profits (yet) as long as there are profits, as this would allow them to maintain their leverage profitably.

I managed to obtain records of SingRe's financial performance back till 1989. I'm still going through everything but there are a few interesting bits. In 1994, the company reported that they have achieved underwriting profits for the first time since 1977, due presumably to a shift towards more disciplined and judicious underwriting in the years before. Starting from 1994, they have achieved underwriting profits for 14 out of the next 18 years, for a cumulative underwriting profit of about $19M. So it seems like they have been able to maintain a long period of underwriting discipline and achieve leverage for free.

MAS maintains a database of insurance statistics going back to 1999. It is a treasure trove for data-junkies. Those interested can check out http://www.mas.gov.sg/en/Statistics/Insu...stics.aspx

One of the data that MAS provides is a breakdown of operating profits for all insurers, local and foreign, for their Singapore and offshore businesses. From what I gathered, out of the 22 reinsurers in operation last year, SingRe was one of ten reinsurers who managed to achieve underwriting profits for the Singapore market. In fact, going back through the last 10 years, SingRe is one out of only two reinsurers that have reported underwriting profits every year. However, the less encouraging part is that their cumulative profits for the last 10 years are not that great (~$33M) and are dwarfed by those of Munich RE (~$85M) and Swiss RE (~$152M!). Clearly there is room for improvement in underwriting.

As for the concern on an unprofitable motor insurance line, I can verify that at least from 1999 till now, motor insurance is still the largest sector of their total net underwritten premiums for their Singapore business and as at 2011, formed about 25% of their total portfolio. This figure changes quite drastically from year to year. Anyway, as pointed out earlier, the underwriting profits for the past 10 years for their Singapore business should allay fears about the local business being unprofitable. Of course, the motor insurance could ultimately be unprofitable and its poor performance could have been and is being masked by the other more profitable lines, but I think I would rather give the company the benefit of the doubt that it knows what it is doing, especially for the Singapore market.

Given this, the disappointing part of SingRe's overall performance in recent years can be attributed to their offshore business, and for last year, especially to the Thai floods. While I believe that other insurers are also similarly affected, a skeptical interpretation would be that the whole industry got that one wrong, rather than every one did okay since "nobody could have predicted it". But at the end of the day, I think one bad call doesn't make a bad poker player. Insurance is a really long-term business and companies should be judged by their long-term performance. One thing to note about their offshore business is that from 1999 to 2010, it formed a low to mid single digit percentage of their net premiums underwritten. Only in 2011 did it spike to 12%. I guess they are still finding their way around the offshore markets, and expect them to continue looking for new business overseas. If they can translate their underwriting discipline in the Singapore market to their offshore business, then the company should be able to turn things around and get to an overall underwriting profit again soon.

Management
Personally, I still see having UOI, First Capital and OCBC as significant shareholders of SingRe as a plus rather than a minus. I think the local reinsurance business is competitive enough to prevent any dumping of bad policies on SingRe. If UOI wants to dump bad policies on SingRe, I think OCBC would probably make some noise since it is out of the general insurance industry now and there would be nothing in it for them. If First Capital wants to dump bad policies on SingRe, then I don't think it would have accumulated a more than 27% stake in the company. Surely something like 15%-20% would have sufficed and given it sufficient control?

While Fairfax indirectly holds the 27% stake in SingRe, I doubt Prem had much input or insight into this investment. First, like d.o.g. said, the investment sum is probably too small for him to pay much attention. Secondly, the stake is held not directly by Fairfax, but rather, by the Singaporean subsidiary, First Capital Ltd. Just like how Buffett let Lou Simpson run the GEICO investment portfolio without interference, I would assume that Prem is letting his CIO at First Capital run the investment portfolio himself.

Hwang Soo Jin has been with the company since its inception, and was Chairman of the Board for almost quarter of a century before handing over the reins to Ramaswamy Athappan at the end of 2007 (talk about quitting at the top!). He stays on now as Chairman Emeritus and I would wager that SingRe's underwriting and investment canvases still bear his strokes.

Valuation
SingRe's long-term ROE of 9%-10% for the past 22 years suggests that the company is not a star in the league of Swiss RE or Munich RE. However, I feel that 9%-10% is still quite a commendable long-term performance. The sacrifice of market share for underwriting profits in recent years in the Singapore market, while encouraging for letting the company maintain its leverage at a cheap cost, also means that the company might have problems growing its float substantially. For these reasons, I don't think the company's valuation deserves a premium to book value.

However, given the conservative leverage (Swiss RE and Munich RE are leveraged much more at about 400% to 600% [Liabilities/Equity ratio]) and historical underwriting profits, it lends weight to the argument that the book values do not need a significant discount. The fact that a majority of their investment portfolio is in corporate and public agency debt does put a cap on investment returns, but at least the return of capital is likely to be assured, and as I said in the earlier post, there might be added upside to come in future as rates revert to long-term averages, and the company is able to reinvest their sums at higher coupon rates.

One thing that still bugs me though is that I do not really understand how to differentiate insurance policies from one to another. Let's say I need fire insurance for my factory or warehouse, wouldn't I just go for the cheapest underwriter? If I work through an insurance broker, I can see the rates of different insurers and I can just pick the cheapest one right? Doesn't that force the whole industry to very similar rates of return? How can some companies generate so much underwriting profits, while others are barely profitable? Can't the weaker ones just copy the rates of the stronger ones?

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P.S. Out of the primary general insurers, only UOI, Liberty and HSBC have generated underwriting profits every year for the past 10 years. And this is in a highly competitive field with more than 60 players in the last 10 years. One curious thing I noted about UOI is that MAS records show that they have had negative distribution expenses! Glancing through their income statement, it seems this is due to their highly profitable retrocession to reinsurers of their policies. The commissions that reinsurers pay for their half of UOI's total gross premiums earned is greater than the total commission that UOI pays for the total gross premium that they obtain! Anybody knows if this is because reinsurers are paying a high price to obtain those ceded policies, or is UOI just able to pay a very low commission for their policies?