Great Eastern Holding

[gzbkel]

Hi ghchua

Thank you for sharing your thoughts on this.
The increase in embedded value without improvement in dividends reminds me of certain property companies which has enjoyed increase in property valuation for the past few years (at least precovid) without a corresponding improvement in distribution.

I hope this embedded value will proof to be more tangible than property valuation increase.

Many valuebuddies have talked about how value will not be unlocked, with OCBC being the main shareholder and unlikely to sell or delist. I wonder what would OCBC want to do with the accumulating embedded value in the long term. Since it is not earning a better ROE inside GE, wouldn't OCBC want to extract it in some way, via dividends or some other means?

[CY09]

I do agree that it can be due to property values. GE holds a large property portfolio across Singapore. Hence, some revaluation gains may have been recorded for these with the lowering of cap rates (similar to what Capitaland has done over the past few years).

[ghchua]

Hi ghchua

Thank you for sharing your thoughts on this.
The increase in embedded value without improvement in dividends reminds me of certain property companies which has enjoyed increase in property valuation for the past few years (at least precovid) without a corresponding improvement in distribution.

I hope this embedded value will proof to be more tangible than property valuation increase.

Many valuebuddies have talked about how value will not be unlocked, with OCBC being the main shareholder and unlikely to sell or delist. I wonder what would OCBC want to do with the accumulating embedded value in the long term. Since it is not earning a better ROE inside GE, wouldn't OCBC want to extract it in some way, via dividends or some other means?

As a life insurer, GE has limited scope to increase dividend payout to shareholders. Most of the return has to be retained to set aside for insurance contract liabilities, which of course includes provision for future policyholders' bonus if the life fund is doing well.

So, if their investment is doing well, more bonus goes to policyholders. If investment is not doing well, it hits direct to GE profit and loss statement.

For property companies, although most are trading below book value, they could unlock some of those value by selling some properties or assets. Can GE realize embedded value by selling some of those insurance policies they have underwritten to other insurers to realize value? Very unlikely.

Therefore, the only way I could see GE value to be unlocked is via corporate actions like takeover offer or selling part of their business. Which could happen, but timeline is unknown.

[ghchua]

I do agree that it can be due to property values. GE holds a large property portfolio across Singapore. Hence, some revaluation gains may have been recorded for these with the lowering of cap rates (similar to what Capitaland has done over the past few years).

Hi CY09,

Yes. GE do hold some decent freehold residential and commercial assets in Singapore, Malaysia and Indonesia. I am sure if you travel pass Holland Road, you will see some of those assets. Some of these are freehold residential assets (including some GCBs) which could be valuable.

Having said that, I don't think GE will follow Capitaland's move. After all, they are not a property company and there is no reason to do that.

[CY09]

Hi,

GE does have a few office commercial buildings that they rent out. To meet the valuation, they could be using the cap rate approach which can be adjusted according to market situation. In Capland's case, i noticed over the years; capland has reduced the cap rate to increase the property valuation.

It is just my speculation GE could be doing too as annual adjustment to the value of their portfolio.

In fact if you compare CCT annual report, over the past five years, they have reduced Cap rate by 0.3-0.5% (previously 3.75-5.25%) and discount rate by 0.5% (previously 7.25%)

[gzbkel]

In AR20, investment prop valuation is 1.785b, with prop income of 29.8m, implying cap rate of 1.7%.
In AR19, investment prop valuation is 1.771b, with prop income of 27.1m, implying cap rate of 1.5%.
That seems richly valued, although I don't know what's a reasonable cap rate for GCBs.

Since investment properties are not their core business, they should just sell and realize the value, especially at current rich valuations. Investment prop makes up 20% of equity, significant for a non-core segment.

[¯|_(ツ)_/¯]

GE@21.61
1H2021 Result with 10 cents dividend
https://links.sgx.com/FileOpen/SGX%20Ann...eID=676894

https://drive.google.com/open?id=1x9Odyf...Y50BzydBjQ

Stay home and stay safe, everyone.

[weijian]

Great Eastern has a roughly 60-40% portfolio (60% - fixed income/debt, 40% - equities/funds/REITs), if we were to exclude the ~2% investment properties portfolio for a moment.

My personal policies have had the assumed returns and bonus yields consistently reduced in the low interest rate environment for the last decade. With interesting rates rising, my agent has suggested that there will be better yields coming!

Would that be actually a tail wind for GE and its business (better yields --> more attractive returns for customers --> more sticky policies written). Would GE be a simple low risk "value" bet for rising interest rates?

[Big Toe]

I cant be sure about local insurance companies BUT I do know a bit and do own a very small stake of those listed in the US.
There is a significant portion of Cash that is put aside for statutory requirements. (i.e there needs to be ample cash for claims)
So these are idle unproductive cash, with rising rates, these idle cash are generating "some" income instead of close to 0 during low interest rate envionment. So it is a tail wind for some of the listed US insurance companies.

But this is just one aspect of the business. Insurance companies, especially those offering many products, generally are quite hard to analyse as claims vary greatly and those with medical/hospitalization products will need to factor inflated medical bills and pay-out. To do well, they need extremely strong underwriting team and be very conservative with their assumptions. Even then, things can go very wrong for very long.

[ghchua]

Hi weijian,

It is difficult to say whether rising interest rate is a tail wind for GE. On one hand, raising interest rate means higher yield, but their existing fixed income holdings will have mark to market losses as bond prices came down. Same for equities and REITs as well as stock prices came down.

Having said that, GE will benefit from those non participating single premium policies locked in at lower rates previously. They can now get higher yield from those investments, while still paying them lower rates.