This article first appeared in The Edge Financial Daily on November 11, 2019

Hong Leong Financial Group Bhd
(Nov 8, RM17.28)
Maintain buy with an unchanged fair value (FV) of RM19.30: We met the management of Hong Leong Financial Group Bhd (HLFG) recently for updates. The group is staying focused on driving the growth of embedded value (EV) for its insurance business. This will be through changing the product mix by increasing the non-par/par ratio. In general, non-par/investment-linked policies have higher EV margins than ordinary life policies.

Recall in financial year 2019 (FY19), the EV margin for new businesses of Hong Leong Assurance Bhd (HLA) has improved to 38.5% versus 32.3% in FY18, while the EV for the entity grew 6.4% year-on-year to RM2.4 billion. For new businesses, the non-par/par ratio has risen to 93:7. Nevertheless, for the total book (new and existing insurance policies), the ratio is still low at about 30:70.

There are opportunities to lift the non-par/par ratio to the high 90s for the new businesses. Also, there is still room for the non-par/par ratio for the total book to gradually rise to the targeted 60:40 through potentially adding riders to the existing policies.

We gather that digital initiatives are ongoing to reduce costs, consequently improving margins for the lower-yielding margin insurance products/par policies.

Unlike general insurance where more policies can be sold digitally, transactions for HLA life insurance as of now are still largely dependent on agents and bancassurance, with only a small percentage transacted online.

HLA has made positive changes by acquiring longer-term bonds to mitigate itself from the impact of lower interest rates. Efforts have been taken to narrow the difference in the duration gap of its insurance business’ assets and liabilities.

We see an increase in financial assets at FV through profit and loss (FVTPL) securities on HLA’s balance sheet. Owing to this change, any decline in interest rates which will increase the contractual liabilities, will now be mitigated by FV gains on FVTPL securities in profit and loss, thus lowering the interest rate risk.

HLA is ranked seventh in the ordinary life segment in terms of its new business regular premium while it maintains its fourth ranking in the investment-linked space. On bancassurance, HLA will leverage on Hong Leong Bank Bhd’s (HLBB) 254 branches and cross-sell to customers and suppliers of the Hong Leong Group.

The outlook for MSIG Insurance (Malaysia) Bhd, the general insurance arm of which HLFG owns a 30% stake indirectly via HLA Holdings, remains challenging in the near term. This is due to the detariffication for fire and motor insurance impacting the underwriting surplus. Potentially, the upcoming phase of the liberalisation on fire insurance is expected to continue to pressure the pricing for the latter. This will be no different from the challenges faced by other general insurance companies in Malaysia.

On the general insurance business in Hong Kong under Hong Leong Insurance Asia Ltd (HLIA), 100% owned by HLA Holdings, we understand that the protests against the government have impacted the investment income as well as demand for travel insurance there. HLIA’s earnings remain insignificant in terms of contribution to the group. The key driver of earnings for the insurance business remains HLA. — AmInvestment Bank, Nov 8