Investment Highlights

• We maintain our NEUTRAL stance on the sector premised on the following: 
  i. Potentially slower demand for general and life insurance products in line with the slowdown in global growth rate. Economic uncertainties and volatile markets are likely to lead consumers to defer purchasing longer term insurance plans in the near term. Our economist has forecast a lower GDP growth of 4.5% in 2023 compared to 9% in 2022.
  ii. Lingering uncertainties surrounding the day 1 impact of FRS 17 which will be implemented on 1 Jan 2023. These include changes to the revenue recognition and retrospective adjustments to insurance and takaful operators’ (ITOs) retained earnings.
  iii. Potentially higher medical claims on life/family takaful businesses in 2023. Cost for medical expenses to rise due to inflationary pressures.
  iv. Expectation of pricing pressure on fire and motor insurance to progressively shift towards a fully market-based pricing mechanism amid the gradual liberalisation of fire and motor tariffs.
  v. Gradual increase in intensity of competition with the potential award of digital insurance licenses in 2023. This comes after the announced digital banking licenses granted to 5 consortiums by the central bank in 2022.
• A mixed bag for gross premium/contribution growth expected for the industry in 2023 with general insurance/takaful expected to register a mid-single to low double-digit growth. Meanwhile, gross life/family takaful premium/contribution is anticipated to contract compared to 2022. This is due to the implementation of FRS 17 on 1 January 2023 which will see only earned life/family takaful premiums/contributions recognised as revenue. As at end-9M2022, general insurance recorded a gross premium growth of 10.8% YoY while general takaful industry’s gross contributions grew 20.6% YoY. Annualised new premiums (ANP) for the life insurance industry fell by 5.6% YoY. In 2023, premium/contribution growth of life/family takaful’s bancassurance products will be impacted by the new accounting standard, FRS 17 coming into force. 2023 will see only earned premiums/contributions recognised as revenue. This compares to the full premiums/contributions received that was reported as revenue in the previous years.
  Growth of premiums/contributions for life/family takaful business is expected to remain challenging amidst inflationary pressures and economic headwinds which are likely to see certain consumers deferring their commitments to purchase longer term insurance plans.
  These expectations on the topline are likely to support a modest earnings growth for general ITOs but a contraction in profits of life ITOs in 2023.
• Stable claims expected for general insurance/takaful but an increase in medical claims for life insurance/family takaful business in 2023. With the reopening of the economy and higher traffic on roads, we have seen claims for motor insurance as already fully normalised, hence we do not expect higher claims for the general insurance/takaful business in 2023. In contrast, 2023 is expected to see an increase in medical claims for life insurance/takaful business with the rise in hospital charges and medications. Arising from this, we do not discount the possibility of life insurance/takaful companies repricing up premiums/contributions of existing, inforce and new policies to reflect recent claims experience.
• An improvement in investment results for insurance and takaful operators (ITOs) in 2023. With the weaker economic data coming out of the US, Federal Reserve is likely to lower the quantum of rate hikes in the near term with the potential end of the rate hike cycle in 1Q2023. Recently, we have seen the 10-year MGS yield trending downwards in tandem with the decline of the US Treasury yield. This will be positive on ITO’s investment income in 2023. Certain ITOs could reposition their investment securities back to longer tenures to benefit from a lower interest rate ahead. Also, with lower interest rate, we do not see life ITO earnings in 2023 to be dampened by fair value losses on their securities portfolio as in 2022.

• Pricing for motor and fire insurance likely to remain competitive in 2023. Effective from 1 October 2022, pricing of products for 2 segments (fire and motor) have been further liberalised under Phase 2A. In Phase 2A, tariff for fire products has been reduced by 15%. Also, the pricing for non-tariff fire products has been amended to a range of up to -30% from the new tariff (revised fire tariff 2.0). This removes the ability to charge a premium of up to +30% from fire tariff. Meanwhile, pricing flexibility for motor has been increased to a range of up +/- 15%, higher compared to up to +/- 10% from the tariff in Phase 2.
  Looking ahead from 1 July 2023, Phase 2B will kick in. This will see a greater pricing flexibility for motor products. In Phase 2B, the pricing for both fire-tariff and non-tariff products will be subjected to no more than -30% from the revised fire tariff 2.0. At the same time, the pricing range for motor products will be increased to up +/-20% for the motor tariff. We continue to expect the gradual liberalisation to exert pressure on the motor and fire insurance pricing.

• Key risks for the sector: i) Potential new wave of pandemics which may impact insurance demand and selling activities of insurance companies, ii) any prolonged or worsening of supply chain disruptions will impact the pace of economic recovery and consequently affect our estimates for premium growth of insurance companies, iii) natural disasters or catastrophes will impact claims of general ITOs, and iv) eroding underwriting margins due to higher pressure on pricing of fire and motor products from the liberalisation of tariffs.

• Progressing on sustainability agenda. With the recognition of the importance of sustainable and responsible business, ESG considerations have been embedded into the underwriting processes of ITOs through policies and frameworks.
  Syarikat Takaful Malaysia has introduced new products to cover the risk of fire, accidental, lightning and storm damage to solar panels as part of their initiatives on climate change. These products are targeted at individuals as well as the industrial and commercial segments. It offers protection for the loss or damage to solar photovoltaic (PV) systems and parts as well as providing hassle-free repairs and installations. Also, as an ESG initiative to reduce dumping of waste, the group is now looking at repairing windscreens for motor vehicles instead of replacing and disposing damaged window glasses.

• Key considerations for upgrading the sector to Overweight: i) stronger than expected growth in gross written premiums/contributions with no significant erosion in underwriting margins from the gradual liberalisation of fire and motor tariffs, ii) milder impact of FRS 17 than expected, and iii) lower than projected claims.

• Sector valuation at 1.6x FY23F PB/V. This is close to the 3-year average P/BV of 1.7x for the stocks under our coverage.

• Top picks on Allianz Malaysia (FV: RM16.40/share) and Syarikat Takaful Malaysia Keluarga (FV: RM3.80/share). We continue to like Allianz Malaysia based on the following: i) Alliance General Insurance Company, the subsidiary of Allianz Malaysia has a commanding market share of 13.3%, ranking no.1 in the general insurance industry. Hence, we continue to see that the group to be able to withstand pricing competition from the gradual liberalisation of fire and motor tariffs as well as the consolidation of players in the industry, ii) the group’s stronger focus in investment-linked (IL) products (with protection riders) will put its life insurance business to be less significantly impacted by FRS 17, iii) upon the adoption of FRS 17, the negative revaluation on the group’s life insurance’s investments, which has dampened the group’s net profit in FY21 and FY22, will no longer have any P&L impact from FY23F onwards. We understand that the mark-to-market changes in valuation of securities portfolio commencing from this year will flow through the comprehensive income, and iv) the diversified portfolio and delivery channels for general and life insurance business bodes well for topline growth as well as to increase life insurance’s new business value. We also like Syarikat Takaful Malaysia Keluarga due to: i) undemanding valuations at FY23F P/BV of 2x with a superior ROE of 19% which has priced in the impact of FRS 17; ii) mild impact expected from further liberalisation in pricing for fire and motor insurance, and iii) healthy unallocated surplus funds of RM1.4bil for family takaful business and RM207mil for general takaful business.

Source: AmInvest Research - 6 Jan 2023