Investment Highlights

• We Are NEUTRAL on the Insurance Sector and Our Stance Is Premised on the Following:

1. The impending implementation of phase 2 detariffication/liberalization is likely to see further competitive pressure on the pricing of motor and fire products for general insurance and takaful operators (ITO). The 2nd phase of liberalisation is anticipated to commence once the Covid-19 pandemic has been contained with most of the population fully vaccinated;
2. Potentially higher interest rates moving into 2022 which is likely to result in fair value losses on the securities portfolio though partially mitigated by the release in contractual liabilities for life ITOs;
3. Uncertainties surrounding the day 1 impact of FRS 17 which is expected to be implemented on 1 Jan 2023. Day 1 adjustment of the new accounting standard is likely to impact insurance companies’ retained earnings; and
4. Current benefits on the profitability of general and life ITOs from low motor and medical claims are expected to fade away. Mobility restrictions for individuals are likely to be further eased for those fully vaccinated. This, coupled with the potential opening up of more economic sectors for states transitioning to stages 2 and 3 of the National Recovery Plan (NRP) with the adoption of the indicator of new Covid-19 cases with serious symptoms instead of new Covid-19, will see a normalization of motor and medical claims ratios ahead.

• Advocate a selective stance for investment in stocks. We prefer insurance companies with strong market shares that have the scale to withstand competitive pricing pressure that still persists in the general and takaful insurance business. Also, we like ITOs with diversified revenue streams and those with potentially higher embedded value for the life insurance business focusing on better margin products.
  
  We continue to like Allianz Malaysia (fair value RM17.50/share) for its strong market position as the largest insurer for motor, its diversified revenue base, above industry growth in gross written premiums (GWP) for general and life insurance business and the rising embedded value of its life business with the group’s strong focus in investment-linked policies that are higher in margins. We see Allianz Malaysia as a deeply undervalued stock (see valuation matrix in Exhibit 1).
  
  We also like Syarikat Takaful Malaysia Keluarga (STMK) (FV RM6.20/share) for its strong market share and profitable underwriting performance for general and family takaful business.
  
  STMK has multiple banca partnerships with financial institutions where sales of bancassurance products are envisaged to pick up pace once loans or financing of banks gather momentum with the opening up of more economic sectors. Additionally, STMK has healthy surplus funds for both general and family fakaful.
   
• The recovery of insurance and takaful industry’s premium growth and profitability strongly correlates with economic growth. Premium growth of ITOs is expected to improve once herd immunity against Covid-19 through vaccinations is achieved.
   
• In 2H21, the recovery of ITOs’ premium growth remains uneven. Challenges to premium growth in 3Q21 remain. Recovery will be delayed but not derailed with the implementation of the EMCO where stricter measures have been reintroduced in selected states, including those in the central region with high Covid-19 cases.
  
  We see challenges in premium growth of general ITOs in 3Q21 due to temporary impacts of the lockdown restrictions (July– 15th Aug) which will impact car sales. Also, the softer sentiment of potential home buyers in the near term is likely to affect property sales. Motor and fire are the largest segments of general ITOs’ portfolio.
  
  Meanwhile for life ITOs, the ongoing pandemic will also see challenges in sales of life insurance products in the near future. The suspension of face-to-face meetings is expected to lead to slower sales from the bancassurance and agency distribution channels.
   
• Premiums of ITOs expected to improve in 4Q21. The easing of mobility restrictions for those fully vaccinated and the reopening of more economic sectors and higher capacity of operations in tandem with the rising percentage of vaccinated employees in the manufacturing, construction, mining and quarry sectors under various phases of the National Recovery Plan (NRP) starting 16 August 2021 could see stronger premiums for ITOs in 4Q21 vs. 3Q21.
   
• Life ITOs are expected to increase the utilization of digital technologies to reach out to existing policyholders and potential customers. Through digital initiatives, life ITOs are anticipated to maintain their interaction with customers for sales as well as process submissions for new business electronically.
  
  We expect life ITOs to enhance their digital capabilities going forward which will include more straight-through processing for policies. The ongoing digital enhancements will not only improve engagements with customers but also enable agents to manage their dealings more efficiently with the ITOs.
   
• Underwriting profits for ITOs to remain profitable despite the challenging environment. In 2H21, underwriting profits of general ITOs are envisaged to remain positive despite challenges on the top line in 3Q21. This is due to the expectation that claims, especially from motor, will remain low in the near term with lesser traffic on roads due to the movement control order. Travel restrictions will be relaxed only for fully vaccinated individuals.
  
  As for life ITOs, business operations, excluding those impacted by interest rate movements, are anticipated to still be profitable in 2H21. We expect medical claims to stay low for the meantime as policyholders are unlikely to seek hospital treatments unless necessary. 2H21 could see life ITOs setting aside additional provisions conservatively for potential claims on deceased policyholders. This will be based on the National Registration Department’s (JPN) updated list of deceased persons.
   
• We see investment results of ITOs to be challenging in 2H21. MGS yields could trend higher leading to lower valuations on ITOs’ fixed income portfolio on a marked-to-market basis. However, this impact is expected to be mitigated by the release in contractual liabilities of life ITO’s after discounting the insurer’s liabilities with higher yield, thus lowering the overall impact on ITO’s earnings. Meanwhile, for general ITOs, their assets are more closely matched to liabilities, hence interest risk is seen as minimal.
   
• Pricing for motor and fire insurance likely to remain competitive in 2H21. Phase 1 of detariffication in 2016 for general insurance saw motor premiums liberalized to a +10% or -10% cap from the original tariff pricing. For fire insurance, phase 1 has allowed premiums to be adjusted +/- 30% from the tariff rates.
  
  We understand that phase 2 of detariffication/liberalisation has been deferred to 31 December 2021. A further extension of it beyond the end of 2021 is possible due to the prolonged Covid-19 pandemic. Phase 2 will see further relaxation in the pricing of motor and fire premiums.
   
• The vaccination drive for larger population coverage is seen gaining traction. 52.1% of the population have already received their 1st dose of vaccine with 32.2% fully vaccinated as of 14 August 2021. Progress has been seen in factories vaccinating their employees at vaccine dispensing centres (PPVs) under the PIKAS initiative (public-private partnership). Once herd immunity is achieved, more economic sectors will be allowed to operate.
   
• Risk factors. A prolonged cautious sentiment among vehicle and property buyers may lead to slower growth than expected in premiums. Also, the sector could see higher motor and medical claims after the mobility restrictions are eased and more economic sectors have opened up.

• Average acquisition P/B for the general insurance companies stands at 1.7x. Exhibit 2 shows that amongst the pricier acquisitions of general insurance companies in the past was the 40% stake in Berjaya Sompo Insurance acquired by Sompo Japan in 2011 at the P/B of 3.3x.
  
  One of the latest announced deals in 2021 was the proposed acquisition of 53% and 70% stake in Axa Affin General Insurance and Axa Affin Life Insurance respectively for a total consideration of RM688mil. In this deal, we gather that shares in the general insurance business were acquired at a P/BV of 1.6x.
   
• For life insurance companies, the average acquisition P/B is 3.0x. Exhibit 3 shows that among the acquisitions of life insurance companies, was the pricey 30% stake in Hong Leong Assurance (HLA) by MSI Sumitomo Insurance (MSI) in 2010 acquired at a P/B of 6.5x. In this deal, MSI became a strategic partner of HLA in the life insurance business. Besides, HLA also obtained a 30% stake in MSI after merging all its general insurance businesses with the latter.
  
  Another notable acquisition was the disposal of 98% shareholdings in CIMB Aviva Assurance and Takaful to Khazanah Nasional and Sun Life Financial for RM1.8bil in 2013, translating to a P/BV of 3.2x.
   
• Allianz General Insurance Company (Malaysia) (AGIC) remains the market leader in general insurance with the largest market share in terms of conventional operators’ gross written premium (GWP). Based on Exhibit 22, AGIC has a commanding market share of 13.3% based total GWP of conventional general insurance companies. This was followed by Lonpac Insurance and AXA Affin General at 9.0% and 8.9% respectively.
  
  For general takaful operators, Etiqa General Takaful is the largest with a 43.0% market share based on total gross written contributions (GWC) followed by Syarikat Takaful Keluarga Am at 23.8%.
   
• Based on the motor GWP of conventional general insurers, the largest 3 players are AGIC, AmGeneral Insurance and AXA Affin General Insurance with market shares of 19.5%, 14.0% and 9.8% respectively. For general takaful operators, Etiqa General Takaful, Syarikat Takaful Malaysia Am and Takaful Ikhlas General are the biggest with market shares of 41.9%, 18.4% and 14.3% respectively based on the motor gross written contributions (see Exhibits 25 & 26).
   
• Lonpac, AGIC and MSIG Insurance have sizeable market shares for fire based on GWP of conventional general insurance companies. These insurers are leaders in fire insurance with market shares of 18.87%, 10.9% and 9.9% respectively (Exhibit 28). Meanwhile, for general takaful operators, Etiqa General Takaful, Syarikat Takaful Malaysia Am and Takaful Ikhlas General have the biggest chunks with market shares of 41.2%, 33.5% and 15.5% respectively based on gross written contributions for fire (Exhibit 29).

• In terms of GWP for marine, aviation and transit (MAT), Etiqa General Insurance and Etiqa General Takaful lead trge field among conventional and takaful general operators (combined) with dominating market shares of 42.8% and 51.0% respectively based on GWP/GWC. Comparing to the other conventional general insurers, MSIG and Lonpac only have market sharess of 6.9% and 6.4% respectively based on GWP for MAT (Exhibits 31, 32 & 33).

• AIA, GE and Prudential remain the top 3 in market shares of conventional life insurance companies at 23.6%, 23.4% and 19.5% respectively. As for life takaful operators, Prudential BSN Takaful, Syarikat Takaful Malaysia Keluarga and Etiqa Family Takaful are the largest with market shares of 23.4%, 17.5% and 17.1% respectively (Exhibits 38 & 39).

• Potential changes to the risk-based capital (RBC) framework for ITOs in line with FRS 17 to be fully implemented in 2024. BNM has issued a discussion paper on the potential changes to the RBC framework for ITOs. Based on the discussion paper, we gather that the capital adequacy ratio (CAR) of insurance and takaful moving forward will have to take into account additional risks to be more comprehensive in line with FRS 17. The new insurance/takaful risks to be included in the CAR computation are catastrophe and medical payments risk. Additionally, under market risk, insurers will need to take factor in non-default spread risk in determining their capital adequacy. Quantum/weights of the new risks factors to be included in the total capital requirements of insurers have yet to been to be determined. The finalized exposure draft of the changes to the risk-based capital (RBC) framework will be issued in 2022. This will be followed by a parallel run of the new framework with the existing one in 2023 before fully implementing it in 2024.

Source: AmInvest Research - 18 Aug 2021