Insurance/Takaful Sector - Lloyd’s landing onshore

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1. 21 September 2016 | Sector Update Insurance/Takaful Sector Maintain POSITIVE Lloyd’s landing onshore INVESTMENT HIGHLIGHTS • Lloyd’s of London to expand its business onshore • We foresee healthy competitive boost to the local reinsurance sector • May help to reduce overall retention ratio, i.e. better risk control • We reiterate our POSITIVE stance on the sector NEWS Lloyd’s to expand its business onshore. It was reported in the media yesterday that Lloyd's of London, a specialist insurance and reinsurance player, is eyeing an onshore Tier-1 reinsurance license in Malaysia. Its chairman, John Nelson, is hopeful that Bank Negara Malaysia will approve the application for the license within two months. Operations are likely to begin in the first quarter of 2017. Lloyd's currently serves as a Tier-2 reinsurer through its nine Labuan Service Companies and as a cross-border reinsurer from London and Singapore. An onshore Tier-1 reinsurance license will enable it to contribute with greater capacity and offer specialist underwriting expertise in emerging and complex risks to serve the growing demands of the domestic insurance sector. Lloyd's will build on its marine, energy, construction, engineering and liability offering in Malaysia, working in partnership with local brokers to deliver solutions for many new infrastructure projects driven by the government's ETP initiatives. Lloyd's also sees the potential for Malaysia to develop as a commercial retakaful market. OUR VIEW Competitive boost in reinsurance market… The admission of a new foreign entrant into the onshore reinsurance market is not unexpected as BNM has opened up the reinsurance industry fully to foreign competition. On this score, the entrance of Lloyd’s may in fact help to generate healthy competitive boost to the local reinsurance sector. …shall promote better financial stability. We are of the view that this will play an important role to insurance industry as a whole, offering financial strength to the ceding companies by reducing volatility of underwriting profit and sophisticated risk management. In addition, Lloyd’s is rated A (excellent) by A.M. Best, AA- (very strong) by Fitch and A+ (strong) by Standard & Poor’s reflecting its robust financial position. As Lloyd’s is keen on reinsuring abovementioned insurance classes, this may benefit related-insurers (see table 1) to spread their risks against large deviations from expected losses (claims). Historically high retention ratio and volatile retention levels. For the overall general insurance and takaful sector, insurers are retaining the premium rather than transfer the risks to reinsurers. This is evident from the increased retention ratio for general insurance and takaful from 91.8% and 92.1% respectively in 1H09 to 93% and 99.0% respectively in 1H16. It was largely contributed by (1) medical expenses and personal accident, (2) motor, and (3) workmen's compensation and employers' liability. Zooming into insurance classes, reinsurers have been instrumental in supporting insurers in controlling the risks in marine, contractor’s all risk and engineering and liability classes. The retention levels have been volatile (see chart 1 and 2) over the last few years as they had different scale of risks. KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES
2. MIDF EQUITY BEAT Wednesday , 21 September 2016 Chart 1: Net Retention Ratio for General Insurance Chart 2: Retention Ratio for General Takaful Source: BNM, MIDFR Source: BNM, MIDFR Recommendation. We opine the entrance of Lloyd’s of London is a net positive development to the local insurance/takaful industry. Hence, we maintain our POSITIVE stance on the sector. We reiterate our BUY calls for all insurance/takaful companies under our coverage universe, namely Syarikat Takaful Malaysia (TP: RM4.65), LPI Capital (TP: RM17.84), and Tune Protect (TP: RM2.28). Risks. Downside risks to the sector includes: (1) Unfavourable regulatory changes, (2) unanticipated profit margin compression due to intense competition, (3) higher-than-expected claims, and (4) interest rate movements that could impact industry players’ investment returns. Table 1: Among Beneficiaries Based On 2015 Market Share Contractor’s All Marine Company Company Risks & Hull Engineering Etiqa 20.60% MSIG 12.20% Pacific 14.30% Allianz General 11.60% QBE 13.80% Lonpac 9.80% AXA Affin General 9.90% Pacific 8.90% Tune 7.90% QBE 6.20% Company Liability Allianz General AIG Lonpac Ace Jerneh QBE 18.80% 11.10% 9.20% 8.10% 6.30% Source: ISM Insurance Services, MIDFR Table 2: Peer Comparison Last Stock price Recom. (RM) STMB 4.13 BUY LPI Capital 16.80 BUY Tune Protect 1.62 BUY EPS (sen) PER (x) Div. yield (%) PBV (x) TP (RM) FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F 4.65 17.84 2.28 21.3 78.1 13.1 23.7 87.1 14.7 19.4 21.5 12.4 17.4 19.3 11.0 2.2 4.2 2.6 2.9 4.2 2.7 4.8 2.9 2.2 4.6 2.8 2.0 Source: MIDFR Hafiz Hassan mohd.hafiz@midf.com.my 03-2772 1668 2
3. MIDF EQUITY BEAT Wednesday , 21 September 2016 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE The sector is expected to outperform the overall market over the next 12 months. NEUTRAL The sector is to perform in line with the overall market over the next 12 months. NEGATIVE The sector is expected to underperform the overall market over the next 12 months. 3