Tag Archives: robotics

Artificial Insurance

The digital transformation of existing business models is a theme of our age. Robotic process automation (RPA) is one of the many acronyms to have found its way into the terminology of businesses today. I highlighted the potential for telecoms to digitalise their business models in this post. Klaus Schwab of the World Economic Forum in his book “Fourth Industrial Revolution” refers to the current era as one whereby “new technologies that are fusing the physical, digital and biological worlds, impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human”.

The financial services business is one that is regularly touted as been rife for transformation with fintech being the much-hyped buzz word. I last posted here and here on fintech and insurtech, the use of technology innovations designed to squeeze out savings and efficiency from existing insurance business models.

Artificial intelligence (AI) is used as an umbrella term for everything from process automation, to robotics and to machine learning. As referred to in this post on equity markets, the Financial Stability Board (FSB) released a report called “Artificial Intelligence and Machine Learning in Financial Services” in November 2017. In relation to insurance, the FSB report highlights that “some insurance companies are actively using machine learning to improve the pricing or marketing of insurance products by incorporating real-time, highly granular data, such as online shopping behaviour or telemetrics (sensors in connected devices, such as car odometers)”. Other areas highlighted include machine learning techniques in claims processing and the preventative benefits of remote sensors connected through the internet of things. Consultants are falling over themselves to get on the bandwagon as reports from the likes of Deloitte, EY, PwC, Capgemini, and Accenture illustrate.

One of the better recent reports on the topic is this one from the reinsurer SCOR. CEO Denis Kessler states that “information is becoming a commodity, and AI will enable us to process all of it” and that “AI and data will take us into a world of ex-ante predictability and ex-post monitoring, which will change the way risks are observed, carried, realized and settled”. Kessler believes that AI will impact the insurance sector in 3 ways:

  • Reducing information asymmetry and bringing comprehensive and dynamic observability in the insurance transaction,
  • Improving efficiencies and insurance product innovation, and
  • Creating new “intrinsic“ AI risks.

I found one article in the SCOR report by Nicolas Miailhe of the Future Society at the Harvard Kennedy School particularly interesting. Whilst talking about the overall AI market, Miailhe states that “the general consensus remains that the market is on the brink of a revolution, which will be characterized by an asymmetric global oligopoly” and the “market is qualified as oligopolistic because of the association between the scale effects and network effects which drive concentration”.  When referring to an oligopoly, Miailhe highlights two global blocks – GAFA (Google/Apple/Facebook/Amazon) and BATX (Baidu/Alibaba/Tencent/Xiaomi). In the insurance context, Miailhe states that “more often than not, this will mean that the insured must relinquish control, and at times, the ownership of data” and that “the delivery of these new services will intrude heavily on privacy”.

At a more mundane level, Miailhe highlights the difficulty for stakeholders such as auditors and regulators to understand the business models of the future which “delegate the risk-profiling process to computer systems that run software based on “black box” algorithms”. Miailhe also cautions that bias can infiltrate algorithms as “algorithms are written by people, and machine-learning algorithms adjust what they do according to people’s behaviour”.

In a statement that seems particularly relevant today in terms of the current issue around Facebook and data privacy, Miailhe warns that “the issues of auditability, certification and tension between transparency and competitive dynamics are becoming apparent and will play a key role in facilitating or hindering the dissemination of AI systems”.

Now, that’s not something you’ll hear from the usual cheer leaders.

To Apple, or not to Apple (AAPL)

My household may be somewhat unusual in that we do not own any Apple products. It’s not that we do not understand the attraction; we have family and friends that are Apple fanatics. It has more being a case of not wanting to get sucked into the Apple eco-system and the contrarian in me going against the hype (plus no teenagers in the house!). We have laptops, smart-phones, MP3 players – you name it – all excellent products with brand names across the spectrum but no Apple.

That said, the recent drop in Apple’s share price has got my attention. I recently asked a friend who manages a fund whether Apple was worth considering. An Apple bear, he said that no electronics consumer firm could maintain operating margins in excess of 20% for ever and that Apple’s time had come. Although that made sense to me, Apple is hardly any consumer electronics company. I decided Apple was worth a closer look.

The first thing to highlight is that given Apple is the most analysed company in the world, this post may seem naive to many who are familiar with the company. Monthly sales, component orders, consumer surveys and the like are all analysed by legions of analysts and commentators prior to each quarter’s results. This post simply illustrates what I saw when I had a little dig around into AAPL’s historical results and is likely all old news to AAPL followers. As the graph below shows, a quick look at the past 10 years shows just what an impressive story AAPL has been. Impressive may become an overused word in this post!

From net margins of 1% in 2003, AAPL had an incredible net margin of 27% in 2012 with gross margins over 40%.  Revenues grew from $6.2B in 2003 to $156.5B in 2012. The P/E ratio, using market values in early November (AAPL’s year end is end September) & the trailing annual EPS, which have been adjusted for AAPL’s cash & liquid assets (at approx $110 per share at year end 2012) has decreased from 60 in 2003 to just below 10, at 9.88, for 2012 (a figure not seen since the depths of the financial crisis). To say that AAPL’s balance sheet is a fortress with net assets consistently over 60% of total assets is an understatement!

AAPL 2003 to 2004 Revenue & Net Income

Switching over to the quarterly results from Q1 2009 to Q1 2013, AAPL’s revenue by region (and retail unit) are in the graph below. Its strength in the Americas, Europe and China (as of Q1 2013, its 2nd largest market) can be clearly seen. What is also interesting is that the operating margins across each region, with the exception of the retail unit at 25%, are all over 40% for the 2012 year (with Japan at an astonishing 56%!). It will be interesting to see the exact China margins in future AAPL reports although the 2012 figures suggest that AAPL is maintaining pricing discipline in each of its major markets.

One of the reasons for the drop in AAPL’s share price is the uncertainty over its next block buster product. The iPod was introduced in 2001, the iTunes store in 2003, the Apple retail store in 2004, the iPhone in 2007 and the iPad in 2010.  Fierce competition in the smartphone market from players such as Samsung has led to commentators fretting over Apple’s next move. The graph below, showing revenue by major product line, shows the importance of the iPhone to Apple.

Revenue Split by Product 2009 to Q1 2013

The graph below of average revenue by product also shows how the iPad is under pressure, with the introduction of the iPad mini likely to continue the trend. The relative consistency from the other main products should be highlighted as yet another strength.

AAPL Average Revenue by Product 2009 to Q12013

Recent concerns about AAPL include the lack of success of the iPhone 5, the price declines in the iPad range, and the possibility of new launches later in 2013 of a low cost iPhone impacting average revenues of their core product. Speculation about a 2013 launch 0f the iWatch (with a retail price around $220) or the long awaited iTV keeps the hope of a new blockbuster product. Other press reports speculate on what Apple’ recent hiring of robotic expertise could mean and on the next steps in its ongoing battle with Samsung as both a supplier and a competitor. Some reports even conclude that Apple has lost its cool amongst the younger generation and is now a brand associated with thirty somethings and above. Blasphemy to any self respecting Apple worshipper!

All of these concerns have led to AAPL’s current valuation. The graph below shows the quarterly PE ratio from Q4 2009 to Q1 2013 (Q2 2013 on the graph represents the position as at the 2nd of April). The market values are taken a month after quarter end (i.e. after quarterly results) with the cash value deducted. The blue line shows the trailing four quarters EPS whereas the red line shows the current quarter and the following 3 quarters (for Q2 to Q4 2013, I have used average analysts estimates). The graph illustrates how much the market is worried about future growth at Apple with both metrics for Q1 2013 in a 8.0 to 8.30 range. My estimates as of end Q2 2013 (assuming EPS of 10.15, 9.38 and 9.0 for Q2 to Q4) put that multiple around 7.0 (that’s even below the relative valuation seen at the depths of the financial crisis!).

AAPL Valuation Multiples April 2013

So, in conclusion, is Apple undervalued? I don’t know because I don’t know if Apple has peaked. But I do know that this incredible company is at an attractive valuation if the concerns about it’s future growth path can be addressed. I will play with some projections and give the issue further thought (and hopefully post any enlightenments!). One thing is certain though, AAPL trades on current sentiment rather than on its incredible history. My gut tells me that they deserve much more respect than they are currently getting.