Six questions to ask about your insurance.

My dad bought for me my first life insurance policy when I was just 18 years old. When I started life as a working adult, of course, it was only right that I took on the responsibility of paying the quarterly premium. It costs me slightly more than $1,000 a year for what I now know is a miserable $50,000 sum assured on my life plus coverage for critical illnesses till age 50.

My dad bought the policy for me from a friend who said that he should get a policy for his teenage son because because it was cheaper to buy whole life policies at a younger age. This, I know now, is quite a standard sales pitch. The fact that his friend was a high achiever (ahem, made a lot of money) who led a team of agents meant that he must be dishing out advice that was right for us.

If I had known the stuff I know today, I would have stopped my dad from buying that proposed insurance product for me. $1,000 a year was a lot of money almost 30 years ago. I know that my dad bought the policy for me because he loved me but, really, all my dad had to get for me was Hospitalisation and Surgical (H&S) insurance in case I was hospitalised.

See what I mean?
Taken from DIYInsurance on Life Stage Planning.

Anyway, I am glad to say that things have changed over the years and for the better too. Matters regarding personal finance which were once regarded as esoteric have become clearer as the internet removed barriers, making information readily available to the general public. Many who are in the know willingly share their knowledge and experience in cyberspace. This is a good thing because, till today, I still hear horror stories from people regarding insurance agents.

To be fair, there are good insurance agents out there who are ethical and genuinely care about their clients' welfare. Hard to find but not impossible. If we have to rely on someone, make sure that someone is trustworthy. This, of course, requires us to take a leap of faith.

So, the best thing to do is still to be educated. With education, we will know very clearly what are the options available to us and which options will best serve our needs at different stages of our lives. Then, the next thing to do is to go online and buy the insurance products we need at lower prices. What? Is this possible? Sounds too good to be true?

When I read about DIYInsurance, I thought that this service should have been available sooner. They aim to educate the public, helping them make better choices and save money in the process. What's there not to like?

The good people at DIYInsurance start by asking us to ask ourselves 6 questions:

6 questions you MUST ask yourself about your insurance.

1. Did you purchase Term insurance instead of Whole-life insurance?

The only way to be sufficiently covered by insurance is to purchase Term insurance.  Term insurance is a low-cost insurance in which you only pay for the amount of coverage you require, providing maximum protection at a minimum cost. Most of us will require at least $500,000 and up to $1million when we have a family with kids.

Purchasing term insurance means we are able to sufficiently provide for our dependents livelihood on our unfortunate demise. Not having sufficient coverage means our dependents may have trouble paying off our housing loan, education fees and to maintain their lifestyle. Having $1million coverage would cost less than $200 per month with term insurance. Find out how much life insurance coverage you need here. Compare term insurance products from different insurers here.

2. What is break-even point?

The “Break-even point” is widely referred to in Whole Life and Endowment Insurance (Savings) plans as a point of time in future (Eg. 20 years) when the:

Total amount of premiums paid = Cash value which can be obtained if the policy is surrendered.

While this may seem that we are getting “free” insurance coverage at the break-even point which could be in 20 years time, it is vital to note that the same amount of money now will differ significantly in value in 20 years due to inflation. Which means the value of us paying $10,000 in insurance coverage over 10 years cannot be compared to the value of $10,000 which you only receive in 20 years time. The value of $10,000 is much smaller in year 2035. Our chicken rice used to cost $1 and the same plate may cost $6 in 20 years time. Hence, we have not “broken-even” and are in fact paying for additional commissions, insurer’s costs, insurance coverage and savings element from the loss in insurance coverage in whole-life insurance plans.

3. Have you compared?

Comparing allows you to purchase an insurance product at the best value. The cost savings can be significantly higher.  Insurance web aggregators are popular and widely used in the United Kingdom and Australia. Singapore’s 1^st Life Insurance Comparison Web Portal, DIYInsurance, allows you to compare products for your Protection, Savings and Retirement needs from a wide range of companies. Learn more about using web aggregators, there is a complimentary event by DIYInsurance, Plan, Compare & Save on Insurance: Using Web Aggregators on 25 April 2015. Register here.

4. Have you received commission rebates?

Insurance agents are paid a handsome sum of commissions for insurance products they sell. Up to 1.5 years of the cost (premiums) you pay may have contributed to the fees of your insurance agent. This means you are insufficiently insured for the large sums you may be paying. DIYInsurance rebates 30% of the agent’s commissions back to you in cash, providing greater cost savings to you.

5. Do you know how is your insurance agent paid?

Singapore’s insurance industry is predominantly remunerated by commissions. Earning by commissions for a living means your financial planner may have a greater tendency to sell you products which provide them with higher commissions. This means you may be exposed to products which you may not need and pay a higher cost for them. A large part for what you are paying for is channeled to the fees for your financial planner. Buying through DIYInsurance and for you to receive 30% commission rebates means you will know how much DIYInsurance is paid.  DIYInsurance is transparent with every product's commission’s structure so that you know exactly what you are paying for.

6. Do you know how independent your insurance agent is?

To ensure there is no conflict of interest, it is important to ensure that your financial planner is paid on a fixed fee and not by commissions based on their product sales to you. All staff from DIYInsurance are paid a fixed salary and do not participate in sales-based compensation or incentives of any kind. Not being remunerated on a commission-basis means the staff at DIYInsurance are independent and are able to focus on doing their best to fulfill your needs. There is no hard-selling and no over-selling.

Pay less for your insurance today.

AK agrees.

Perennial Real Estate Holdings (PREH): A nibble?

Regular readers would remember how I once bought units in Perennial China Retail Trust (PCRT), how I sold a part of my investment when its unit price moved up and how I sold my entire investment a couple of years later in 2014.

What motivated me to invest in PCRT in 2012 was the much lower unit price it was trading at the time compared to its price at IPO and while it made progress in its business, its income distributions were largely unchanged. However, when it was clear to me that the income distributions were not going to be sustainable, I made my exit.

Of course, we know that PCRT was eventually delisted and its assets are now part of a larger entity, Perennial Real Estate Holdings (PREH). Backing PREH are big names in the corporate world, Mr. Kuok Khoon Hong, Mr. Ron Sim and Mr. Pua Seck Guan. Together, they hold a combined interest of about 70% in PREH. Some of us might have noticed some persistent insider buying in PREH and that was the reason why a friend recently told me that I should go take a look.

Well, I vaguely remember that PREH owns some Singapore assets as well. So, it is a more complicated creature compared to PCRT. It could be a daunting task to analyse and also because so many of its assets in China are still being developed. Anyway, I decided to start by looking at its financial results dated 13 Feb 2015 and see if I could cut short the process by looking at the numbers which could matter more. See financial results: here.

From 28 Oct 2014 to 31 Dec 2014, revenue was reported as $14.966 million. Just to make it easier for me, I will think of this as 2 months' worth of revenue. Assuming nothing changes, revenue would be $89.796 million for the full year. Now, I try to derive the earnings.

Administrative expenses ballooned due to the offer to buy over PCRT. Removing that non-recurring portion, we could see expenses at $40 million for the full year. Finance costs could be about $60 million for the full year.

Associates' contributions (disregarding fair value gains) would amount to about $8 million for the whole year, all else remaining equal. Similarly, I have ignored fair value gains on PREH's fully owned investment properties to the tune of some $46 million.

Now, if we put all these together, we will get:

Revenue $89.796 million
+ Associates' contributions $8 million
- Expenses $100 million
= A small full year loss of about $2 million

Whether PREH is able to become profitable would depend on their ability to increase asking rents for their investment properties in Singapore and China. It would also depend on whether they are able to sell some percentage of their investment properties to realise capital gains which was suggested by Mr. Pua Seck Guan when he was still running PCRT then in order to fund income distributions to unit holders. That would really have been a partial return of capital but it would also have been a useful exercise to see if the valuation of PCRT's assets was actually realistic.

Since the release of its financial results dated 13 Feb 2015, PREH also acquired stakes in House of Tan Yeok Nee and smallish stakes in Chinatown Point and 112 Katong. It also recently announced the purchase of AXA Tower in Singapore. We could see revenue receiving a boost as these are investment properties that would be generating rental revenue.

Of course, we won't be wrong to suspect that there will also be more debt on its balance sheet and that finance expense should increase. How much of an impact would these have? At the moment, I simply don't know.

What is known is that PREH inherited PCRT's Chinese portfolio and the challenges have not changed. There are still many development projects which are yet to be completed and these have to be paid for.

The funds required for the various projects are estimated to be about S$1.5 billion. That is a lot of money. If we look at the liabilities section of the balance sheet, PREH is already heavily geared. Having said this, they are well located projects situated on transportation nodes.

There are many assumptions for PREH to do better. Mr. Pua Seck Guan has a very good track record in his career and now he has the backing of Mr. Kuok and Mr. Sim. Having strong backers definitely helps especially when circumstances for real estate either in Singapore or China are somewhat challenging now. Could PREH have bitten off more than they could chew?

There are some calls to buy into PREH now because it is trading at a big discount to RNAV. Well, PCRT was also trading at a big discount to RNAV. A big difference is that PREH now owns, in part, some investment properties in Singapore which are generating recurring income but these are also bought with borrowed funds.

There is an estimate that the RNAV per share is $1.83. So, at $1.05, the stock is trading at a 43% discount to RNAV. RNAV is what an analyst thinks the stock should be worth in future based on revaluation exercises. Is it realistic? I read a 19 page report dated 4 February 2015 by PhilipCapital and I feel that they have been pretty realistic with valuing PREH's assets in Singapore.

As for the assets in China, PhilipCapital made assumptions as to percentages of certain development properties which would be sold by PREH and they seem to have opted for more conservative estimates with regards to asset values too. Read PhilipCapital's analysis: here.

Now, assuming that the RNAV of $1.83 per share is realistic, we would then have to ask ourselves if a 43% discount to RNAV is good enough for us to buy into PREH. If we are buying this in the hope that Mr. Market would pay a price closer to its RNAV in future, are we prepared to wait? For how long must we wait? I don't know. Will there be dividends in future as we wait? There could be, especially, if they sell bits (or chunks) of their investment properties although they could also very well opt to pare down borrowings. There is no certainty of a dividend.

I have bought into OUE Limited at slightly more than 50% discount to valuation. I have bought into Wing Tai Holdings at about 56% discount to valuation. Will I now buy some PREH at a 43% discount to valuation? I have a feeling that if not for the persistent insider buying, PREH's stock price would have declined to a much lower level by now. Will insider buying let up? Again, I don't know.

PREH is definitely not an investment for income and I don't think that they are likely to pay a dividend anytime soon. PREH is still very much in its growth phase, just like how PCRT was in its growth phase. PREH might have stronger backing compared to PCRT but there are still many unknowns.

Of course, we could choose to put our faith in Mr. Pua Seck Guan's judgement like Mr. Kuok and Mr. Sim have done and invest in PREH. Why get headaches from trying to analyse the business? Truly, I got a mild headache after my amateurish attempt which lasted several hours.

In conclusion, I probably don't have the kind of vision that these esteemed gentlemen have and I know for a fact that I do not have the deep pockets that they have. If I should invest in PREH, I would make sure it is a smallish position similar in size to my investments in OUE Limited and Wing Tai Holdings.

A nibble? Maybe.

Related post:
PCRT: Full divestment.