Investment Highlights

• We maintain NEUTRAL stance on the sector premised on the following:
  
  i. Potentially slower demand for general and life insurance products in 2H23 with a slowdown in economic growth rate while financial markets remain volatile amidst uncertainties in interest rate movements and inflationary pressures in developed economies. Economic uncertainties and volatile markets are likely to lead consumers to defer purchasing longer term insurance plans in the near term.
  
  ii. Pressure persist on higher medical claims of life/family takaful businesses in 2023F. This is due to medical inflation as well as patients seeking treatment in hospitals post-Covid-19.
  
  iii. Pricing pressure on fire is likely to continue amidst gradual liberalisation to progressively shift towards a fully marketbased pricing.
  
  iv. Gradual increase in the intensity of competition with the potential award of digital insurance licenses in 2023.
   
• Gross premium/contribution growth is expected to slow down amidst an anticipated slower economic growth in 2H23. The general insurance/takaful is expected to register a mid-single to low double-digit growth in 2023 driven mainly by growth in fire, motor and the marine, aviation, and transit (MAT) class of business. We continue to see a growth in motor premiums/contributions with the roll out of more new vehicle models in 2023 than 2022 despite the end of SST exemption this year. Meanwhile, gross life/family takaful premium/contribution is anticipated to grow by low-single digits. We foresee challenges will continue with macroeconomic volatility and inflationary pressures resulting in consumers remaining cautious in committing to purchase longer term life insurance plans. For family takaful, growth in contributions will be lower in 2023F. This is attributed to the implementation of FRS 17 on 1 January 2023 which will see only earned contributions recognised as revenue compared to full contributions received which were reported as revenue in the previous year.
   
• Continue to expect pressure on medical claims for life insurance/family takaful in 2H23. With the reopening of the economy post-Covid-19, we expect net claims incurred for general insurance/takaful to normalise to pre-pandemic levels. We continue to expect medical claims to trend higher in 2H23 for life insurance/takaful business with the rise in hospital charges and medications as well as more patients seeking medical treatments post-pandemic. Arising from this, life insurance/takaful companies will continue to gradually reprice premiums/contributions upwards for existing, in-force and new policies to reflect recent claims experience. In contrast, we foresee that overall claim ratio for the general insurance /takaful has already normalised, driven by the normalisation of motor claims after the reopening of the economy. With that, despite some pressures on the claims ratio of fire as well as MAT classes of business seen recently in 1Q23, we do not expect overall net incurred claims ratio for general insurance/takaful to trend higher in 2023 than 2022.

• Investment results for insurance and takaful operators (ITOs) in 2H23 to be supported by a more stable 10-year MGS yield. We expect the 10-year MGS yield to be within 3.7%-3.8% in 2023F. The US Fed Reserve is still hawkish on interest rates and based on the latest DOTs plot, the terminal or peak Fed Rate is projected to be higher at 5.6% compared to 5.1% in Mar 2023, thus implying potential 2 interest rate hikes in the US of up to 50bps cumulatively in 2023.
  
  With the US potentially coming to an end of the rate hike cycle, we see a more stable 10-year MGS yield in 2H23 which will be supportive of ITO’s investment income. This will be unlike life ITOs earnings in 2H22 which were dampened by fair value losses on securities portfolio, contributed by spikes in 10-year MGS yield which was impacted by more aggressive rate hikes in the US.
   
• Pricing for motor and fire insurance likely to remain competitive in 2H23. On 1 July 2023, Phase 2B of detariffication will kick in which will see a greater pricing flexibility for motor products. In Phase 2B, the pricing for both fire-tariff and nontariff 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%. We continue to see the gradual liberalisation to exert pricing pressure on motor and fire insurance. However, the pricing pressure on motor segments, which have already thin margins, will be lower than fire insurance.
   
• Key risks for the sector: i) Any prolonged or worsening of inflationary pressures will impact the pace of economic recovery and consequently affect premium/contribution 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 at a Fair FY23F P/BV of 1.5x.
   
• Top picks are Allianz Malaysia (FV: RM16.70/share) and Syarikat Takaful Malaysia Keluarga (FV: RM4.20/share). We continue to like Allianz Malaysia based on: i) its subsidiary, Allianz General Insurance Company’s (AGIC) commanding and stable market share of 13.3%, ranking no.1 in the general insurance industry. 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 acceleration of profit emergence for life business and lower volatility in interest rate movements after adopting FRS 17. The adoption of FRS 17 will see movement in interest rates on the securities portfolio backing VFA contracts to have a lesser volatility on P&L earnings. This is due to interest rate impact on securities portfolio under FRS 17 being now adjusted from contractual service margin (CSM), which will then be spread out over time through the contracted period of IL policies, and iii) 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 valuation trading at FY23F P/BV of 1.8x with a superior ROE of 20.8%; ii) milder impact than expected from the implementation of FRS 17, and iii) total capital available remains healthy at RM2.1bil, which is still adequate to meet the minimum capital adequacy ratio (CAR) requirement of 130%.

Source: AmInvest Research - 3 Jul 2023