BNM’s 2014 insurance/takaful report showed margins and capitalisation remained  healthy  despite  challenges  in  growing  topline.  Maintain OVERWEIGHT  as  we  expect  strong  GI  underwriting  margins  and  LI growth  supported  by  low  penetration.  We  understand  that  GI detariffication  will  be  gradual  with  preventive  measures  for  irrational under-pricing, thus removing severe industry margins erosion risks.

General  insurance  (GI)  &  general  takaful  (GT):  2014  margins  still healthy.  Both saw  marginal dips  in underwriting (UW) margins to 12.5% (2013:  13.1%)  and  investment  gains.  The  margins  are  deemed  high (past nine years:  7-13%), owing  to  improved  claims risks  and expense control.  Premium growth  (+6.8%, 2013:  +7.3%) was aided by strong  GT performance,  albeit  achieving  1.1-1.2x  of  GDP  growth  (5-year  range: 1.1-2.1x), while premium portfolio  was  unchanged for the motor (48%), fire (17%) and personal accident (PA) (13%).

Life insurance (LI) & family takaful (FT):  2014  penetration still low. Both  booked  positive  bottomline  growth  on  better  investment performances  vis-à-vis  2013. Investment-linked  policies  remain  a  highgrowth segment, ie  42%/36% of new business premiums/total premiums (2013: 39%/33%)  respectively.  Based on our  Bank Negara (BNM) data calculation,  insurance  penetration  here  remains  low  with  54.9%  of  the population  insured  in  2014  (2013:  54.5%)  vs  the  Government’s  2020 target  of  75%. LI  and  FT penetration to GDP  was  unchanged  (historical average:  3.1%,  Government’s  2020  target:  4%).  Sum  insured  over GNI/capita was 1.59x, below the LI Association of Malaysia’s (LIAM)  10x ideal ratio, suggesting room to improve consumer awareness.

Industry  capital  adequacy  ratio  (CAR)  improved  to  254%  (2013: 246%). GI CAR was 274% (2013:235%) while LI CAR stayed at 262%.

Outlook/forecasts.  We now  opine  GI  detariffication  will be  “partial”  as there  will  be  premium  bands  to  prevent  the  risk  of  under-pricing premiums  relative  to  risk.  Hence,  the  risk of  severe  GI  margin erosion due to irrational competition is eliminated. We forecast 6-9% FY15 gross premium growth for GI  and  GT insurers (at 1.2-1.8x of our  in-house 5% real GDP forecast),  in line with  the softened  economic  growth (similar to FY14’s).  Yet, we  still  forecast  strong UW margins at 18-30%.  LI’s  longterm  growth  is  dictated  by  a  low  penetration  rate  and  a  rising  middleincome population  –  the United Nations sees Malaysia reaching ageing population status (>15% population age >60 years old) by 2030.

OVERWEIGHT  maintained  at  13-24x  sector  P/E  valuations.  In  the current bear environment, we noticed  insurer  P/E valuations vs earnings growth  (8-9%, lowered  from double-digit)  showing  less correlation. Yet, the sector is still  trading at  2x P/BV, with positive correlation to ROE (ie high  ROE  leads  to  high  P/BV),  implying  that  insurance  stocks  have defensive,  long-term  qualities.  Valuations  could  correlate  again  once earnings  pick  up  in  an  economy  recovery.  Allianz  appeals  for  the strength  of  its  GI  and  maturity  of  its  LI  wing.  Tune  Ins  remains  a  top growth stock as it benefits from global airline passenger growth.

Source: RHB Research - 20 Mar 2015