Insurance Sector – Robust 1Q24

To recap, the Malaysian economy grew 4.2% in 1Q24, boosted by stronger private expenditure and a positive turnaround in exports. Fuelling sentiments, the general insurance industry posted a premium growth of 10.0% YoY, while the life insurance industry's annualised new business increased by 22.4% YoY. The decent growth was attributed to higher contributions from the motor and investment-linked protection businesses.

Combined, the net profit of companies under our coverage grew by 6.7% YoY to RM186.3mn in 1Q24, mainly due to Allianz. Allianz’s 1Q24 net profit rose 9.9% YoY to RM189.8mn, boosted by higher profit contributions from the life insurance segment. As for Tune Protect, the group posted a core net loss of RM3.5mn in 1Q24 (vs. a profit of RM2.0mn in 1Q23) due to a higher combined ratio of 14.5 pts to 109.8%.

In terms of YTD share price performance, Allianz (+11.1%) outperformed, but Tune Protect (-20.0%) underperformed the KLCI index.

2H24 Sector Preview

We highlight 3 major factors to watch out for as we go into 2H24 that would affect sector earnings and share price performance:

1. Minor headwinds for the general segment;

2. Medical claims inflation;

3. Higher demand for leisure and air travel.

Minor Headwinds for the General Segment

Despite a positive gross written premiums growth of 7.8% in the general insurance industry in 2023, underwriting profit declined by 26% due to lower profitability for motor and fire lines of business. Since the phased detariffication, the non-life segment has faced some margin compression owing to greater competition in the market, volatile weather events and rising reinsurance costs.

Into 2H24, the motor segment will continue to be the top premium contributor (45% market share in the general insurance industry). We foresee headwinds coming from the lower TIV moving forward as some consumers might hold back car purchases following the reduction of fuel subsidy announcements. As such, we expect the general industry premium to grow by 8% in 2024 (vs. 10.0% in 3M24). Positively, we expect Allianz’s claims ratio to remain stable amid repricing activities and its stance on focusing on technical pricing.

Medical Claims Inflation

As per global trends, healthcare costs in Malaysia have been increasing due to the high medical inflation rate, leading to a growing demand for health insurance, thus adding pressure on premium increases in the future. Note that medical claims pay-out increased by 26% in 2023. Positively, we understand that 90% of Allianz Malaysia’s customers will remain despite the hike in premiums as policyholders are provided options to manage the cost of their insurance premiums, including lowering their premium by converting it to a cost-sharing plan and altering their policy benefits to fit their circumstances.

Moving forward, BNM, with insurer’s operators, will promote new insurance plans with cost-sharing provisions, which may lead to lower overall claims costs and premiums. Overall, we believe the life insurance segment is poised to maintain its growth momentum of 5-8% in 2024. Growth will be driven by: i) an increasing awareness of the importance of insurance coverage among Malaysians, ii) repricing activities and iii) higher demand for comprehensive coverage in the corporate employee benefits market. Moreover, policies per capita remain relatively low at c. 60%, which would benefit insurance players over the medium to longer term.

For Allianz, the strong growth in bancassurance is expected to remain strong (1Q24 grew 79.5% YoY), driven by its emphasis on insurance with the proposition of savings business. Meanwhile, the agency channel would also improve, aided by intensified recruitment and investment-linked products. Allianz targets to double its agency sales force to 10,000 by 2028. Overall, we forecast Allianz's annualised new premiums to improve by 25.3% in 2024.

Higher Demand for Leisure and Air Travel

To recap, Malaysia recorded 20.1mn foreign tourist arrivals last year, with Singaporeans making up the bulk of the number with 8.3mn, followed by Indonesia (3.1mn), Thailand (1.55mn) and China (1.47mn). A target of 27.3mn foreign tourists has been set for 2024. Thus, we are optimistic about the travel segment, buoyed by the 30-day visa-free arrangement for Chinese and Indian visitors to Malaysia. Moreover, international travel ended 2023 at 88% of prepandemic levels and is expected to surpass the pre-pandemic level in 2024.

With that, we believe that Tune Protect will benefit from the higher demand for travel as travel makes up about one-third of its revenue. This belief is further strengthened by the fact that the group’s key partners, AirAsia Group and AAX Group, are expected to expand their operational aircraft by 8% to 249 by the end of 2024. Meanwhile, Vietjet and Air Arabia also have ambitious targets to increase their operational aircraft by 17% and 11% in 2024, respectively, indicating a positive trend in the travel industry.

Recommendation

All in all, we maintain a Neutral stance on the insurance sector, given its defensive qualities. Dividend remains decent, with forward yields at 4.9% to 6.1% in FY25F.

Our top pick in the sector, Tune Protect (TP: RM0.48 based on 0.6x CY25 PB), is backed by promising growth in the air travel sector as demand for air travel continues to surge and airlines are expanding their routes and capacity. More importantly, we believe that the group would turnaround in 2024. Meanwhile, we maintain a Hold recommendation on Allianz (TP: RM23.27) due to its significant share price surge of more than 50% in a year, thus narrowing its riskreward potential.

Source: TA Research - 2 Jul 2024