We  believe  the  sector’s  higher  market  valuations  post  the  General Elections  may  be  due  more  to  its  solid  fundamentals  than  market speculation.  The  GI  industry ,  now  enjoying  the  best  underwriting margins  in  years,  is  set  to  maintain  those  margins  over  the  next  two years.  Despite  a  hazy  investment  income  outlook,  we  still  see  strong earnings potential  for  general  insurers.  We  upgrade  ALLZ  to  BUY  but downgrade LPI to NEUTRAL given the latter’s recent share price run-up. STMB is our Top Buy. 

- Best  GI  underwriting margin in seven  years.  The  general insurance (GI)  industry  achieved  an  underwriting  margin  of  12.9%  in  2012,  the highest in the  past seven years. This is due to:  i) improved claims ratios across  most  product  segments,  ii)  an  improved  72.8%  claims  ratio  for motor  insurance  from  common  insured  events such as  thefts, property damage  and  injury,  and  iii)  an  enhanced  database  and  administration efficiency  in the industry.  Going forward, the  GI business is expected to grow  in  line  with  2012's  8%-9%,  but  we  see  the  industry  maintaining robust  margins  over  the  next  two  years  on  the  back  of  better  cost controls among insurers and a robust regulatory framework.

- Hazy  investment  income  outlook  not  a  concern.  Recent  concerns over  the  tapering  in  the  US  Federal  Reserve’s  stimulus  measures,  as well  as  heightening  concerns  over  China's  potential  slowdown,  could give rise to  more  uncertainties in  global growth projections.  We believe general  insurers  are  likely  to  be  able  to  shift  their  fixed-income allocations  to  shorter  duration  bonds  in  order  to  mitigate  interest  rate risks.  However,  based  on  historical  trends,  investment  income  growth had  always  lagged  behind  underwriting  profit  growth  and  may  remain flattish moving forward.  While we think insurers’  investment returns  are likely  to  be  unimpressive  in  the  near  future,  their  overall  earnings potential remain compelling due to their stronger underwriting profits.

- Still  offering  buckets  of  opportunities.  We  believe  the  sector's  rerating was due to  the  upward  climb  in  the industry’s underwriting cycle and  stronger  industry  fundamentals  rather  than  market  speculation. While  we  keep  our  NEUTRAL recommendation  on  the  sector,  we  still see  buckets  of  opportunities  and  advocate  that  investors  accumulate stocks  of insurers  with  superior  underwriting  strength,  assuming  the market remains  volatile moving forward. Malaysia’s general  insurers  are domestic-centric  and  thus  partially  shielded  from  global  economic slowdowns.  We  like  Allianz  Malaysia  (ALLZ,  FV:  MYR10.60)  and Syarikat  Takaful  Malaysia  (STMB,  FV:  MYR9.70)  for  their  improving margins. We  also  like  LPI  Capital  (LPI,  FV:  MYR15.75)  and  Tune  Ins Holdings (TIH, FV: MYR2.15) for their unique exposure to  the low-claims product  segment,  although  we  are  maintaining  our  NEUTRAL  call  on both stocks.

Source: RHB