PP 7767/09/2010(025354)

29 March 2010
Malaysia
Corporate Highlights RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M
Sector Upda te
MARKET DATELINE

29 March 2010

Insurance Recom : Overweight

Gearing Up For Liberalisation And Improving Earnings (Maintain)
Prospects

Table 1 : Insurance Sector Valuations

FYE Price Fair Value EPS EPS growth PER P/NTA GDY Rec
(sen) (%) (x) (x) (%)
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10
Kurnia Asia Dec 0.56 0.74 6.8 7.6 76.5 12.1 8.3 7.4 2.1 0.0 OP
Allianz Dec 5.35 6.68 66.4 75.0 -14.0 13.0 8.1 7.1 1.3 0.4 OP
LPI Capital Dec 13.72 16.65 111.0 125.7 22.2 13.2 12.4 10.9 2.0 8.0 OP
MNRB^ Mar 3.06 2.94 34.3 35.7 15.1 4.0 8.9 8.6 0.6 3.3 MP
Sector Avg 17.6 11.3 9.8 8.8
^ FY09-10 valuations refer to those of FY10-FY11

♦ Four factors to shape the sector’s growth. The insurance industry’s Relative Performance To FBM KLCI
prospects are improving, with growth driven by four major factors: 1)
Kurnia Asia
4.5% GDP growth in 2010; 2) rising public awareness on insurance
protection; 3) low penetration rate; and 4) further liberalisation on the
sector.
Allianz
♦ Riding on 4.5% GDP growth, rising awareness and low FBM KLCI LPI
penetration rate. RHBRI’s economic team forecasts Malaysian MNRB
economy to expand by 4.5% in 2010, underpinned by recovery in
exports and pick-up in domestic demand which is supported by an
increase in consumer and business spending (on the back of
improvement in the job market). This would benefit both life and
general insurers in our universe, i.e. Allianz, LPI Capital and Kurnia
Asia, as well as MNRB a general reinsurer as demand will improve
accordingly.

♦ New liberalisation move in the pipeline. Further liberalisation will

be imminent to the general insurance sector. Even though preparing
insurers and public on a full de-tariff market will take another 2-3
years, we reiterate our opinion that a gradual change is imminent in the
near term. Assuming Malaysia follows India’s move in a gradual de-
tariff of the insurance market, TP (third party) premiums collected by
all insurers will be channeled out to a TP pool which will be used to pay
any TP claims. The transferred TP responsibility to the pool will improve
the general insurers’ claims ratio, which in turn, will ease the combined
ratios, thus result in better underwriting profit.

♦ Risks. 1) Lower-than-expected premium growth; 2) jump in claims

ratios; and 3) more intense competition from insurance sector
liberalisation.

♦ Forecasts. Unchanged.

♦ Investment case. We are maintaining our Overweight stance after

taking into account the above-mentioned catalysts. Our top pick is
Allianz because we believe it is relatively undervalued due to its ability
to maintain above-industry premium growth but below-industry Low Yee Huap, CFA
(603) 92802641
combined ratio. Moreover, its life business has achieved critical mass low.yee.huap@rhb.com.my
and has been growing rapidly, resulting in rising profit transfer.

Please read important disclosures at the end of this report.

Page 1 of 4
A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 29 March 2010

♦ Four factors to shape the sector’s growth. The insurance industry’s prospects are improving, with
growth driven by four major factors: 1) 4.5% GDP growth in 2010; 2) rising public awareness on insurance
protection; 3) low penetration rate; and 4) further liberalisation on the sector

♦ Riding on 4.5% GDP growth, rising awareness and low penetration rate. RHBRI’s economic team
forecasts Malaysian economy to expand by 4.5% in 2010, underpinned by recovery in exports and pick-up
in domestic demand which is supported by increase in consumer and business spending (on the back of
improvement in the job market). This would benefit both life and general insurers in our universe, i.e.
Allianz, LPI Capital and Kurnia Asia, as well as MNRB a general reinsurer as demand will improve
accordingly. To be specific, we anticipate general insurance demand to be underpinned by: 1) improvement
in the property market which in turn provides rising demand for various related insurance policies; 2)
increase demand for motor insurance coverage as motor TIV recovers in 2010 with 8.5% growth (according
to RHBRI forecasts); and 3) increase in overall business activities, resulting in better demand for general
insurance products. As for life insurance products, rising disposable incomes and additional personal tax
relief for annuity premiums will spur the sector growth for the quarters ahead. In addition, rising awareness
on insurance cover as protection cum savings will also help the sector growth. Moreover, given the low
penetration rate as compared to other developed and developing countries (see Charts 1 and 2), we
believe there is room for growth in the sector.

Chart 1: Life Insurance Penetration (premiums as % of 2008 GDP)

%
16.0
13.5
14.0
12.0 10.7
9.7
10.0
7.7
8.0
5.6
6.0 4.3 4.2 4.0
4.0 2.8
2.2 2.1
2.0 0.9

0.0
Australia

India

Malaysia

Indonesia
Japan

PR China
Taiwan

Singapore
Hong

United

Thailand
Kingdom

States
Kong
United

Source: Swiss Re

Chart 2: General Insurance Penetration (premiums as % of 2008 GDP)

%
5.0 4.6
4.5
4.0
3.5 2.9 2.9 2.9
3.0
2.5 2.1
2.0 1.6 1.6 1.5
1.3
1.5 1.0
1.0 0.6 0.4
0.5
0.0
Australia

Malaysia

India

Indonesia
Japan

PR China
Taiwan

Singapore
United

Thailand

Hong
Kingdom
States

Kong
United

Source: Swiss Re

Page 2 of 4
A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 29 March 2010

♦ New liberalisation move in the pipeline. Further liberalisation will be imminent to the general insurance
sector. Even though preparing insurers and public on a full de-tariff of market will take another 2-3 years,
we reiterate our opinion that a gradual change is imminent in the near term. We believe the introduction of
new basic insurance and takaful schemes for mandatory basic protection (third party bodily injury and
death) by mid-2010 will address the industry’s main concern on high claims ratio for third party (TP)
claims. Assuming Malaysia follows India’s move in a gradual de-tariff of the insurance market, TP premiums
collected by all insurers will be channeled out to a TP pool which will be used to pay any TP claims. This
mechanism will ensure higher accessibility to basic motor insurance coverage to the public vs. current
mechanism of which TP coverage from MMIP (Malaysia Motor Insurance Pool) can only be obtained from a
few channels. However, given that TP coverage generally are loss-making business, we opine the premium
charged may potentially be higher, after taking into consideration more risk-based motor premium
structure. As an example, in India, TP premium for private car increased by 33-257.1% post de-tariff.

♦ TP removal will ease pressure on underwriting experience. Given that the increase in TP premium
will directly be channeled to the pool, this will potentially result in lower gross premium growth for the
sector. However, we are more excited about the impact to the bottom line, as we expect general insurers’
claims ratios to improve, which in turn, will ease the combined ratios, and thus result in better underwriting
profit. This includes all general insurance stocks in our universe. Chart 3 shows the sector’s historical
combined ratio (claims + management expense + commission ratios) experience for motor portfolio, which
has been unfavourable since 2000-2008.

Chart 3: 2000-2008 Motor Insurance Combined Ratio (Claims + Management Expense + Commission)

350

300

250

200
%

150

100

50

-
2002 2003 2004 2005 2006 2007 2008

Act' Cover Others Total

Source: PIAM
Note:
1) TP cover consists of Act cover and third party property damage.

2) “Act" cover refers to third party death or bodily injury risks as stipulated under Road Transport Act, 1987.

3) Others" cover refers to risks other than those insured under "Act" cover including accidental property
damage and theft.

♦ Fire premium may potentially be reduced in a full de-tariffed market. However, in a full de-tariffed
market, LPI Capital as a niche player in fire insurance is likely to be adversely affected by the reduction in
fire gross premium. This is because current premium charged under fire tariff is higher than the risk-based
premium. Thus, to compensate for the potential reduction in fire premium, we believe LPI will likely
leverage on its miscellaneous insurance (second biggest portfolio), such as workmen compensation, which
is in higher demand due to increase in commercial buildings and improvement in property market.

Risks.

♦ Risks to our view. The risks include: 1) lower-than-expected premium growth; 2) jump in claims ratios;
and 3) more intense competition from insurance sector liberalisation.

Page 3 of 4
A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 29 March 2010

Forecasts And Assumptions

♦ Forecasts. Unchanged.

Valuations And Recommendation

♦ Maintain Overweight, top pick is Allianz. We are maintaining our Overweight stance on the sector,
after taking into account the improving sector’s prospects and growth which will be driven by: 1) 4.5% GDP
growth in 2010; 2) rising public awareness on insurance protections; 3) low penetration rate; and 4)
further liberalisation on the sector. Our top pick is Allianz because we believe it is relatively undervalued
due to its ability to maintain above-industry premium growth but below-industry combined ratio. In
addition, Allianz has a highly-productive agency force, strong bancassurance tie-up with CIMB and backing
by parent. Moreover, its life business has achieved critical mass and has been growing rapidly, resulting in
rising profit transfer.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by
applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change
without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions
and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the
accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever
against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and
objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors
independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a
particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates,
employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as
providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any
member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of
customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective
directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment
banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not
reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation
based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15%
or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing
to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever
for the actions of third parties in this respect.

Page 4 of 4
A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com