This article first appeared in The Edge Financial Daily on September 7, 2017

Insurance sector
Maintain overweight: General insurance-sector premiums fell by 0.9% year-on-year (y-o-y) for the first half of 2017 (1H17), while life insurance performed better with a 5.9% y-o-y growth as consumers prioritised protection over consumption. We remain positive about the long-term outlook for the insurance sector given Malaysia’s favourable demographic patterns, but note that more efforts and measures are likely needed to boost the stagnating penetration rate. We maintain our “overweight” sector view. 

For 1H17, general insurance-sector premiums fell by 1.8% y-o-y, while the general takaful sector’s contribution rose 5.9% y-o-y. Nonetheless, the general sector’s gross direct premiums and contribution fell by a combined 0.9% y-o-y.

This represented the second half-yearly period y-o-y fall since 2H16, mainly driven by a drop in the marine, aviation and transit segments, and continued weakness seen in motor and fire insurance segment growth.

For 1H17, the life insurance sector and family takaful sector’s annualised new premium (ANP)/contribution grew y-o-y by 5.5% and 7.3% respectively. Combined, they rose by 5.9% y-o-y. The life segment has been witnessing a relatively stronger ANP growth compared to the general segment since 2015.

Companies within our coverage continued to outpace industry growth. We believe that such industry outperformance was due to the respective companies’ established distribution network, well-planned strategy and/or niche offerings. We believe that industry consolidation is inevitable in the long run as an insurer’s size remains crucial for long-term competitiveness, in terms of economies of scale for costs and investments, meeting capital requirements, branding and even risk management.

Our market research of insurance companies reveals that regulatory reforms, be it de-tariffication for general insurance or the LIFE framework for life insurance, are progressing smoothly without any significant disruptions observed thus far. News of potential listings of insurers such as Etiqa Insurance and Takaful, Great Eastern and such could also generate more interest and awareness of the sector.

We continue to like Allianz Malaysia Bhd as our top sector pick for its meaningful exposure to the general and life insurance segments, as well as its attractive valuation where we believe its life insurance business remains undervalued and misunderstood by investors. 

Malaysia’s favourable demographics, including a young population and growing middle class, remain supportive of a long-term structural growth for both general and life insurance. However, the penetration rate has stagnated in recent years. We believe the government has a bigger role to play alongside industry players and regulators. Ensuring proper financial education for the public and providing relevant tax incentives for policy purchases are among measures that should be considered to avoid the social costs of an underinsured population.

While we believe the general insurance and general takaful segments are likely to take a back seat compared to life insurance and family takaful counterparts in the short term due to subdued spending patterns, the potential for an overall under-penetrated insurance industry in Malaysia remains very strong. Favourable demographic trends and ongoing reforms will likely continue to drive sector growth, while potential catalysts such as tax incentives and public listings could drive investors’ interest and understanding of the sector.

We also like LPI Capital Bhd and Tune Protect Group Bhd due to their niches in fire and travel insurance respectively. Key downside risks to our sector call include a slowdown in household income growth, and continued lack of financial education and awareness of the need of insurance. — Affin Hwang Capital Research, Sept 6