Is Insurance Really Necessary?

Introduction 
Before we start, how do we define 'need' vs 'want'? Need is something you must have in order to survive; food, drink, sleep and sex!? (cause we need to reproduce to survive ma), very basic stuffs. Want is something you would like to have but is not absolutely necessary but still good to have. With this definition it would be honest to say that insurance is not a need but a want. So next time when you go buy an insurance tell the agent it is not that I need but I want and he or she will ughh?

So what do most people want from having insurance? The answer is love (3rd-level in the Maslow hierarachy of the needs and wants of humans). This means that the act of insuring yourself or any of your loved one is purely an act of love. Sounds romantic? Not so right. If anything unfortunate should happen to you, the money obtained from insurance is supposed to adequately shield you and your loved ones from a sudden financial crisis and generate enough time for you to recover from the loss.

To be frank I still really do not understand, maybe I never will, why that some people do not have any insurance coverage at all. Do they think it is a scam? Do they think it is a waste of money? Do they think it is supposed to generate some wealth for them? Are they ignorant? If I am healthy why do I want it? I will try to answer all these later. For now, accept this statement that having no insurance is equivalent to not loving yourself and your loved ones & your life is worth nothing and I mean it. Nothing, kosong! 

Types of Common Insurance Coverage
Personal Accident Insurance: Easily the most affordable of all coverages, it protects you from accidental risk; injury or death caused by accidents. The charge rate is the same from cradle to grave meaning it is fixed. If you are married, get a Family Accident coverage then which is cheaper than by individual. I have a coverage of RM500,000 for RM500/year, which can be increased to a million for double the price but I don't want that much yet.

• "If I am healthy I don't want it" - even if you are superbly healthy with big muscles, can that prevent accidents from happening?
• "Kena accident like hitting Magnum jackpot nia" - then why you buy jackpot in the first place? Because there is a chance that it will happen right. If you kena both also give you money, any difference?

Medical & Hospitalization Insurance: After having met an accident, you could probably end up dead or in most instances land yourself in a hospital and to stay overnight. And this is going to cost you money especially if you are admitted to a private hospital. The coverage includes Room and Board (R&B) usually in RM100, RM150, RM200 and RM300 with some annual & lifetime limit. There is also co-insurance which means you need to pay a certain % from the total claims made, usually 10% with a cap limit. I have R&B RM200/day, Hospital Benefit RM300/day with annual limit of RM75,000 and lifetime limit of RM225,000 which I find adequate.

• "I go to public cheaper than private" - if you have time ok, but what if you don't have time on your side, can you afford to queue and wait?
• "This co-insurances sounds like a scam, why I still need to pay a bit" - it is to ensure that you do not under insure yourself.

Critical Illness Insurance: The moment you are diagnosed with any of the 36 critical illnesses, check it out here you will get a cheque for the full amount of your coverage. Usually both medical & hospitalization insurance and critical illness insurance comes together as a single package, such as whole-life policy or the recently more popular investment-linked policy. I am covered with a RM100,000 insured sum for this. Why RM100,000? I am assuming at worst case I get hit by any one of the below just to name a few (by wallet damage). You can easily see that you need at least a bare minimum of RM100,000 coverage.

Heart Attack: up to RM30,000

Stroke: up to RM75,000

Cancer: up to RM150,000

Kidney Failure: up to RM150,000

Pulmonary Hypertenstion (high blood pressure): up to RM120,000

Alzheimer's Disease: up to RM75,000

Chronic Liver Damage: up to RM120,000

Brain Tumor: up to RM120,000

Bacterial Meningitis: up to RM120,000 

Types of Common Insurance Policies 
Endowment Policy: Structured more towards a savings account than an insurance policy, what I call a forced savings. The savings component, you can opt to save for a certain period of 12, 15, 18, ... 30 years. At the end of the period (policy matured) you will receive a cheque from the insurance company.

As for the insurance component, in the event of death or total permanent disability (TPD) you will be paid the insured amount. If you are diagnosed with a Critical Illness, the premium will be continually paid by the insurance company. Hence endowment is very suitable as a passive retirement fund by forcing you to save to pay for the premium and take back the returns when it matures. If you don't have an EPF account, this is a viable alternative a.k.a. Create Now, Save Later concept.

Example paying RM5,000/year for 30 years period with no withdrawals and getting RM300,000 by the 31st year. You create a paper value of RM300,000 for yourself first and then save later to pay for the premium. It focuses on generating cash value and providing minimal insurance benefit.

Annuity Policy: Almost the same as endowment but does not mature at a specific date. Instead it pays out yearly income throughout your retirement more like a pension fund, not a lump sum. I do not have both these policies because I have my own retirement fund via investing & I would probably get an endowment if I have children one day to show daddy's love to them.

Whole-Life Insurance Policy: An insurance contract that goes on until you have drawn your last breath whether accidental or non-accidental. It also comes with TPD. Riders can be attached such as critical illness & accident coverage. Usually a participating policy which means all premiums are tied together for investment and any returns made are redistributed via cash bonuses. Most whole-life insurance policies do not invest in equity market, therefore the risk is very minimal. 

Term Insurance Policy: Very much like whole-life insurance but does not participate in any investment or income-generating activities. This means that 100% of your premium is used to pay for insurance charges. A good alternative if you are on a tight budget.

• "The returns are so low le" - Cash bonuses generated are supposed to be a method to finance your insurance charges not give you wealth. An insurance is always a risk management tool not an investment tool.

Investment-Linked Insurance Policy: Basically hybrid of a unit trust and the insurance contract. It consists of two major elements - the Policy Contract & Investment Fund. The policy has the usual Basic Sum insured upon death or TPD and can be attached with other riders like Critical Illness or Medical & Hospitalization. At the investment fund element, you have a variety of funds to put your money into; namely Conservative, Balanced or Aggressive. An ILP has very comprehensive coverage at affordable start-up cost. I have this together with my add-ons of Critical Illness and Medical & Hospitalization coverage. The reason I choose is because ILP is very versatile, if I feel that I do not need that much protection, I will funnel some of my premium into the investment fund.

Picking An Insurance Company
You should do a little research on the financial standing of the insurance company before you get a policy from them. Some useful indicators include the financial strengths, company spending and policy claims. All of these can be obtained from BNM Annual Insurance Statistics

• Financial strength: look at more assets than liabilities, look for more cash & deposits in hand so they are more likely to pay claims easier.
• Company spending: how much they spend on agency remuneration, management payouts and day-to-day operations. Must be in tandem with their financial strength.
• Policy claims: amount of claims paid to policy holders in the event that it is claimable. Must be in tandem with their financial strength.

For my view, it does seem that Great Eastern, AIA and Prudential are the sound companies that have strong financial backing. Remember agents are also important not just the company.

"Why some people feel cheated from insurance especially those bought in the 1980s to mid-1990s". This has got to do with Critical Years. What happened was that many agents were convincing people that they only need to contribute to the premium for a number of years (critical years) and after that the policy will be self sustaining. And they said 'guaranteed'. What people don't know is that it is projected and will always be projected and if they have read the policy closely, it never mentions the word guaranteed. If you want a guaranteed return go dump in Fixed Deposit la.

I blame people for listening them 100% and not do research on their own. I will also blame those agents who want to suck in more bad karma and think about their own gains. It is important for you to find a good insurance agent as the turnover rate for this industry is 90%. This is exactly what is happening to unit trust as well, it is the sole reason why large equity funds are so hot yet people still pour in money to get lower than average returns. After another decade, they gonna say they "kena tipu" again but in fact they bluffed themselves. If you are looking for good agents, you can ask me hehe. I cannot stop stressing that you need to do your own research as well or ask your friends opinion who knows investing in and out, remember the 5% kind of people :)

Last Words
The closest reason why I think some people take insurance lightly is because it is a financial tool. Like it or not most people have very little money knowledge, schools don't teach ma. Most people live from paycheck to paycheck, spend more than they make or save too much but don't know how to use it. They don't realize the importance of having it and think that they can always "get it later." Insurance is like the analogy of a parachute: "When you need it and you don't have it, you'll never need it again." People keep on preaching that gambling football or etc is bad, but let me tell you this last statement. Without insurance you are gambling your own life and the protection of your survivors, to me that is the WORST BET that you can gamble and you gamble it every single minute of your life.

Industrial Products: Top Glove Corporation Bhd

Introduction
Malaysia is the world leader (Boleh la!!) in rubber gloves, with a market share of ~60%, followed by Thailand (~25%), Indonesia (~10%), China and Sri Lanka. Following consolidation of the many players in 1980s & 1990s, they are now just a few of them and enjoying an oligopolistic (very dominant) position, this will make it harder for new entrants to achieve economies of scale (make more & sell them cheaper through bulk selling).

Here comes Top Glove Group which was established in 1991, an ambitious and nimble company that has grown to become the world's largest glove manufacturer under founder Tan Sri Dato Sri Lim, Wee-Chai and is still the Chairman. It has 19 factories across Malaysia, Thailand & China (as of August 2009) with 355 production lines making 33 billion pieces per annum. Top Glove alone supplies 23% of the global market, exporting to more than 180 countries especially to USA, Europe and Far East (Japan, HK and Taiwan).

The demand for rubber gloves is expected to grow around 10% pa, owing to better health awareness and standards. Demand for growth is quite recession-proof because a large % of them are being used in healthcare sector. With the increase in fast food consumption (good correlation with health problems), growing aging population, health threats like SARS/H1N1 & emerging developing countries like BIRC (Brazil, India, Russia and China), I find that the 10% pa figure by economists to be optimistic. Good news for Top Glove and other rubber glove companies in Malaysia (which are competitors):

• Supermax Corp Bhd (14 bil pieces per annum)
• Kossan Rubber Industries Bhd (11 bil pieces per annum)
• Hartalega Holdings Bhd (6 bil pieces per annum)
• Latexx Partners Bhd (6 bil pieces per annum). A good friend of mine made this research already here at The Fool Investor

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Being the largest rubber glove company in the world, it can produce high quality gloves with efficient low cost. Economies of scale & its dominant position are Top Glove's competitive advantages.

2. Do you understand how the product/service works?

Rubber gloves are not only used in healthcare but also in the food and services industries for hygiene purposes. As such, it is anticipated that the demand to stay resilient (stable) even with the global economy being sluggish.

3. What is the chance that it will become obsolete (KO) in the next twenty years?

Definitely NO. Ask yourself, is there any substitute for rubber? Is like asking what other material apart from rubber can be used to make condoms :)

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, they are moving forward in a two-prong growth strategy. Vertical strategy on the downstream via overseas marketing offices, upstream via take overs of smaller companies involved in the rubber sector. Horizontal strategy by increasing sales in new flavours via R&D and value added products.

5. What is the company's financial history and status?

• Net Profit Margin is in the 10-15% range. Nothing special as the other competitors have these kind of figures as well, though Top Glove enjoys better average margins most probably due to its economies of scale.
• Return of Equity which means how much shareholders get in return of investment is in the 20-30% range over the last 10 years.
• Revenue Growth Rate saw a tumble since 2007. This is due to the drastic increase in the cost of raw materials of latex and fuel. Also affected slightly by the strengthening of the ringgit vs the greenback (USD). Soon after that, the world was hit with the 2009 financial crisis and further weaken the growth rate.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. If one compares this with the stock price, you can clearly see that the stock price is affected by human emotions (panic & greed) even though the company is growing steadily well. Once again I would like to stress that you should value a company from it's financial ratio/numbers, not just purely from stock price.

6. Is the company conservatively financed?
Yes, with RM185mil in cash and bank balances enabling the company to deal with rising commodity prices like latex and to fund potential expansion plans. They did have do have the occasional short term borrowings but has been paying back effortlessly thanks to a good balance sheet. D/E ratio is at 0.02 (which is negligible) while in the last 5 years has never exceeded my trigger limit of 0.5.

7. Is the company actively buying back its shares?
Amount of treasure shares (buy backs) stands at 6.6 million units. There has also been a 1:2 share split in Year 2005 and also many bonuses. All of these add value to shareholders in terms of equity.

• Year 2002: 3/10 Bonus
• Year 2003: 2/5 Bonus
• Year 2007: 2/5 Bonus

8. Is the company free to raise prices with inflation?
According to Dynaquest, they did pass on the cost increase to its customers in the year 2009. With the increasing thrust & volatility of latex and oil prices, passing cost to the customers is inevitable not just Top Glove but to the rest as well.

9. Are large capital expenditures required to update plant and equipment?

Because it is a manufacturing company, capex are always required to boost production capacity via upgrades or expansion. Top Glove is no different and is investing about RM100mil to increase production of its five plants in Malaysia. This will up the capacity to 41.25 billion from 33 billion by 2011 (looks like company is anticipating at most a 10% growth in demand).

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that TOPGLOV's revenue growth rate is at 10% averagely following demand %, with 85% operating cost margin, 25% corporate tax, 2% re-investment (~RM30mil a year) but a growing working capital in tandem with revenue growth at 10% for the next 5 years. Having computed all these in my opinion it is fair to buy..

TOPGLOV at RM6.90 to RM8.40 for ~15-13% discount rate.

From its listing in 2001 to 2010 the stock would have appreciated by 1200% not accounting dividend reinvestment which would give you more. Is the stock overvalued? I would say Yes based on FCF (free cash flow) & some technical indicators, a value of ~RM12.00 is only appropriate if I did assume the revenue growth rate at 15% but as an optimist and the company's expansion plan, 10% is more sensible. Having bought them during the start of the bull run and sold at ~RM11 this is merely short term profit riding for me on bad times > good times. One would only do this sort of profiting if I find that the underlying fundamentals of the company is good and NOT solely because of stock price as have been explained earlier.

What Do I Think? 

The time to buy is too late, over the last three months has seen the price hovering at RM12.00 level (saturated). Also with this industry being quite competitive and at most times volatile (revenue margins dependent on latex and oil prices), there is a lot of risks at stake and it is in my honesty to say that it only makes it harder to value such company. I do like the fact that Top Glove has consistently being rewarding their shareholders with dividends & bonuses.

TOPGLOV is a good stock if one follows the trend in commodity prices & also to follow the demand of rubber gloves of different categories such as powder-free latex gloves & the increasing demand of nitrile gloves. Plus be on the lookout for the next global pandemic (if you watched Discovery Channel like me) you will know that viruses keep mutating so it is not a matter of will it but when.


Because the rubber glove and plantation sector in Malaysia is one of world-class, their stocks tends to be on the limelight thanks to hot news & bullish analysts. The result? Simply panic & greed. The prices of these stocks will fall hard during bad times and go up high when it is in Disneyland especially the blue chips. 

My strategy is simple, if I need short term funding, buy during bad times and sell at good times. If I look forward for long term then I will need to monitor closely perhaps by quarterly. This stock is not as easy as buy, hold, sleep and wait as they are just too many uncertainties for me to relax.

**I would one day like to compile a grandmother story with a side-by-side comparison of all the major rubber gloves companies as well as plantation companies for they are world-class Malaysian companies. It is wise to know in depth how these companies compare to each other and why they are important to Malaysia. There are many other financial ratios I look at as well but to put them into my usual blog writing will make most people blur blur & zzzz...until I get that long writeup done I feel that a short sharing will interest some people to pick up investing as a life skill & dump the gambling mindset that most people have away as a start.

Day 2: Still Suzhou

Woke up the next day by a morning call at 7am & not by sunshine :( Still in the vicinity of Suzhou (city with a population of 6 million) and heading to the famous Suzhou No.1 Silk Factory Co. Ltd. The tour guide apparently said that Suzhou has the prettiest girls in all of China but I have only seen old women and just OK girls...was Tertipu! Maybe her plan to wake us up.

Anyway no pictures were allowed to be taken inside the factory & production area. Sadly I had to use other pictures (not taken by us) but looks almost identical, just imagine/visualize lor.

• Step 1: To sort and treat the killed cocoons with boiling water to separate the filaments bound together and to easily locate the end of the thread. One cocoon can generate a thread of about 1km!
• Step 2: Combine the threads as one is too thin so workers locate the end of 8 threads and unite them before putting them into the spinning machine.
• Step 3 & 4: These are then weaved before being stretched to be stocked as a pile. The pile can be used to make high quality silk items like beddings, quilts & women underwear. Did I say underwear?

Yes, we did made some grand purchases here but not going to disclose more because it is PnC haha. Lunch was awesome at a place called Zhou Xin where we had some 'very the keat' Ramen with fortified pork belly (see for yourself). Again the ramen is drenched in oily soup, a culture of standard Chinese food in China.

With no time to waste we forged ahead to Ruiguang Pagoda which has the longest history considering it was built during the Three Kingdoms period. At 43.2 meters tall, it is a structure of seven storeys built using bricks and wooden beams. There's also the Tiger Hill; gardens with waterfall near the auspicious Light Pagoda.

The famous historical landmark Pan Gate Scenic Area estimated to be around 2,500 years old. It is part of an ancient city wall that surrounded and protected Suzhou from invaders during the Warring States period.

Outside the water gates, we went for a boat ride on Jing-Hang Yunhe (Beijing-Hangzhou Canal) which is a series of waterways in eastern and northern China that links Hangzhou to Beijing. It is the longest man-made waterway (1,747km) to supply grain to capital cities and large standing armies in the north and was built using raw man swt, no machines! Truly a magnificant second wonder only second to the Great Wall.

The last stop for the day was a shopping district of Guan Qian street, center of Suzhou commerce. Books sold in China were darn cheap, the Chinese seem to have more purchasing power than a standard Malaysian when it comes to reading hence the books are 50% cheaper than ours. This explains why Msia pirated DVD is insanely cheap. Because we like to watch TV more than read le.

Back to the hotel after a boleh boleh dinner, at least it was not Ho Au one.