The Monetary Authority of Singapore has set two capital requirements: the prescribed capital requirement (PCR) and the minimum capital requirement (MCR). Market observers indicate that the regulator would like life insurance companies to have a (PCR) CAR of more than 200%.
In 2024, when Great Eastern Holdings (GEH) published its CAR for FY2023 in a prospectus of its perpetual securities, the CAR was 204.9%.
Capital and TAC are important metrics in the valuation of life insurers. Prior to 2023, when life insurers in Asia moved to IFRS 17, investors would use a ratio of price/EV. According to GEH’s FY2024 annual report, embedded value is “determined using the traditional deterministic cash flow methodology comprising the sum of the value of in-force business and the value of the adjusted shareholders’ funds”.
To put it into perspective, the shift to IFRS 17 had a significant impact on insurers worldwide, including Great Eastern Holdings, because it fundamentally changed how insurance contracts are measured and reported, and this affected shareholders’ equity.
See also: Is there a place for insurance in your portfolio?
For instance, GEH’s reported shareholders’ equity in FY2022 was $9.431 billion under IFRS 4 (the previous reporting standard). This dipped to $7.886 billion in FY2023 following the move to IFRS 17. GEH’s shareholders’ equity has since rebounded to $8.6857 billion. One of the reasons for the drop was that profits were deferred into the contractual service margin, and reserves were reclassified, causing a dip in the retained earnings portion of shareholders’ equity. Under IFRS 4, profits (and hence retained profits) were recognised upfront. Under IFRS 17, profits were deferred into the CSM and released gradually as services are provided.
IFRS 17 also requires discounting future cash flows using current market rates. In a higher interest rate environment, liabilities may shrink, but in low-rate environments they expand. GEH’s equity moved because liabilities rose as they were recalculated using these updated assumptions. In addition, certain reserves, such as prudential margins that were previously part of equity, were reclassified under insurance liabilities.
Up to 2024, P/EV was used to value life insurance companies in Asia.
See also: Lessons I learned from my insurance journey
GEH started reporting comprehensive equity, which is defined as the total of shareholders’ equity plus net CSM, where CSM is net of reinsurance, non-controlling interest and tax, according to GEH’s FY2024 annual report. Similarly, AIA and Prudential PLC, GEH’s most relevant listed peers, also reported their comprehensive equity in their FY2024 annual reports.
“The valuation process can be challenging at times. Essentially, we look at numbers reported by the companies, and we need to compare the assumptions to industry peers. The purpose is to assess if the assumptions are more aggressive or conservative than their peers, to better assess what adjustments are needed. And the process requires plenty of judgment or guesswork,” says Ong Chin Woo, one of the minority investors in GEH, who tracks its CAR and embedded value. Valuations of the in-force business depend on discount rates, and different life insurers use different discount rates. In his view, AIA and GEH are the gold standard in life insurance.
Based on the accompanying table, GEH stands out with the lowest price/NAV, price/EV and price to comprehensive equity, but with the highest yield. According to Bloomberg, GEH’s payout ratio is 40%, AIA’s is 35.7%, and Prudential PLC’s is 27%.
