• We maintain NEUTRAL on the sector premised on the following:
  
  i. Potentially modest growth in demand for life and general insurance/takaful in 1H24 premised on uncertainties of interest rate movements and inflationary pressures in developed economies. Economic uncertainties and volatile markets are likely to cause consumers to be cautious in committing to purchase long term insurance policies. This could lead to demand for more affordable insurance protections in the near term until the macroeconomic headwind eases. 
  
  ii. Claims to remain elevated due the effects of weaker domestic currency. We foresee medical inflation to continue to trend upwards in 1H24 due to a rise in hospital claims from the new Covid-19 wave. For general insurance/takaful, motor claims will remain elevated due to the weaker ringgit impacting cost of parts replacement while fire claims are likely to be affected by adverse weather conditions such as floods.
  
  iii. Pricing pressure on fire is likely to continue amidst the gradual liberalisation to progressively shift towards a fully market-based pricing.

• Gross written premiums/contributions growth are expected to be modest in 2024 amidst elevated household debt and pressures on cost of living with the potential upside risk to inflation from extension of subsidy rationalisation to RON 95. Our economist expects inflation in 2024 to fall within the range of 2.5% to 3.5%, taking into account the effects of subsidy rationalisation and the impact of the services tax increase. Nevertheless, we see upside risk to this projection in the event the scope of subsidy rationalisation is extended to RON95 fuel. The combined general insurance/takaful gross written premiums/contributions registered a 9.7% YoY growth in 9M23 driven mainly by growth in fire, motor, marine, aviation and transit (MAT), contractors all-risk engineering, liabilities, medical and health class of business.
  
  We expect gross written premiums/contributions of general insurance/takaful players to register a high single-to-low double-digit growth in 2024. In 2024, we expect growth in motor premiums/contributions to be lower in line with lower TIV anticipated after the end of SST exemption. Meanwhile, gross life/family takaful premium/contribution is anticipated to grow by mid-single to 10% in 2024. We continue to see challenges from macro headwinds and inflationary pressures resulting in consumers remaining cautious in committing to the purchase of longer-term life insurance plans.

• Claims to stay elevated in 1H24 due to inflation and weaker Ringgit. As of end-9M23, net claims incurred ratio (combined general insurance and takaful) rose to 59.3% vs. 55.6% in 9M22. The increase was contributed by higher net claims incurred ratios of fire/motor/medical and health segments to 33.9%/69.7%/65.6% in 9M23 from 26%/67%/63.2% in 9M22. We continue to expect medical claims to trend higher amid inflationary pressures. This should continue to see life insurance/takaful companies pricing up premiums/contributions to mitigate pressures from rising medical claims. As for general insurance/takaful, we anticipate motor claims to stay elevated due to the weaker domestic currency which will cause prices for parts replacement to increase. Meanwhile, we expect adverse weather conditions to impact fire claims resulting in net claims incurred ratio for this segment to be higher than pre-pandemic level of 25%.

• Key risks for the sector: i) Any prolonged or worsening of inflationary pressures will impact the pace of economic recovery and consequently affect premiums/contributions growth expectations of insurance/takaful companies, ii) natural disasters or catastrophes could impact claims of general ITOs, and iii) eroding underwriting margins due to higher pricing pressure on fire and motor products with the liberalisation of tariffs.

• Key considerations for upgrading the sector to Overweight: i) stronger-than-expected insurance service results with higher-than-expected growth in premiums/contributions, lower pressure on pricing and underwriting margins from the gradual liberalisation of fire and motor tariffs, and ii) lower than expected net incurred claims.

• Sector valuation is fair at FY24 PB/V of 1.6x.

• We have BUY call on Syarikat Takaful Malaysia Keluarga (FV: RM4.80/share). We like Syarikat Takaful Malaysia Keluarga premised on: i) superior ROE of 21.5% for FY24F, which is higher than its peers under coverage; ii) healthy contractual service margin (CSM) of RM1.3bil which will be supportive of insurance revenue ahead, and iii) stronger growth in bancatakaful business going forward, underpinned by new bancatakaful partnerships with Agrobank and Bank Muamalat as well as the successful retention of existing key partners, Affin Islamic Bank and Bank Rakyat.

Source: AmInvest Research - 3 Jan 2024