PP 7767/09/2010(025354)

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

10 May 2010

Insurance Recom : Overweight

BNM Seeks Feedback From The Public (Maintained)

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 Jun 0.52 0.74 6.8 7.6 76.5 12.1 7.7 6.9 2.0 0.0 OP
Allianz Dec 5.20 6.68 71.9 86.2 -7.0 19.9 7.2 6.0 1.3 0.4 OP
LPI Capital Dec 15.10 16.65 111.0 125.7 22.2 13.2 13.6 12.0 2.2 7.3 OP
MNRB^ Mar 2.89 2.94 34.3 35.7 15.1 4.0 8.4 8.1 0.6 3.5 MP
Sector Avg 19.9 13.1 9.7 8.6
^ FY09-10 valuations refer to those of FY10-FY11

♦ Feedback time. The public consultation for BNM’s proposed motor Relative Performance To FBM KLCI
insurance schemes has been underway since 23 Apr. The discussion
paper is posted on BNM’s website. We believe there are significant Kurnia Asia
differences of opinion towards the two scenarios. After receiving public
Allianz
feedback, BNM would again engage in consultation with the industry
LPI Capital
players, bar council and other stakeholders, thereafter finalising the FBM KLCI
terms of the new scheme and tabling it to Parliament for approval. We
MNRB
expect the announcement for the changes will be made around 3Q
2010 or earlier.

♦ Two scenarios and a NEWCO. Details of the scenarios are provided in

Table 2. A key proposal includes the setting up of a New Company
(NEWCO) to take on the industry’s third party bodily injury and death
(TPBID) insurance scheme. The NEWCO will be jointly owned by
industry players and the Government where the players will act as
agents and collect premiums to fund the NEWCO. Losses will also be
borne by both the Government and the insurers.

♦ Outcome could be a third scenario. We believe that there is a

possibility that the actual scheme could be entirely different from the
two scenarios proposed after BNM receives feedback from all relevant
stakeholders. We opine that the current proposals are not sufficient to
address the losses stemming from TPBID claims which will likely
continue to escalate.

♦ 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 as we

believe the feedback session is a step towards ultimately implementing
a viable scheme to replace the old scheme. Our top pick is still Allianz
(OP, FV = RM6.68) due to its ability to maintain above-industry
premium growth and below-industry combined ratio.
Yap Huey Chiang
(603) 92802641
Please read important disclosures at the end of this report. yap.huey.chiang@rhb.com.my

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♦ Feedback time. The public consultation for BNM’s proposed motor insurance schemes has been underway
since 23 Apr. The discussion paper is posted on BNM’s website. The key objectives for the proposed
framework is to: 1) Ensure accessibility of basic protection to motorists; 2) Provide basic protection at
reasonable premiums; 3) Additional cover on top-up of basic protection will continue to be available; and
4) Faster settlement of claims. The discussion provided two proposed scenarios, A and B, based on
compensation, legal recourse, speed of settlement and premium collection.

♦ Setting up a NEWCO. One of the key proposals is the setting up of a New Company (NEWCO) to take on
the industry’s third party bodily injury and death (TPBID) insurance scheme. The NEWCO will be jointly
owned by industry players and the Government where the players will act as agents and collect premiums
to fund the NEWCO. Claims paid out are limited to RM2m per claim. However, individuals are allowed to
purchase a voluntary top-up cover from insurance companies. The top-up cover is for claims that exceed
the limit in case of litigation (Scenario B). Third party property damage (TPPD) claims and premiums will be
under the insurance company. Depending on the actual structure of the NEWCO, we believe that it will not
fully remove the TPBID liabilities from the insurance companies’ balance sheets.

♦ Speedier claims could increase fraud cases. Scenario A proposed a claims settlement period of 2-4
weeks, while limiting legal action, with the exception of some cases which might have to be taken to court.
We note that the quick settlement is based on the fixed scale of claims and the total limit of RM2m. The
faster claims settlement period will benefit both insurers and customers, though we believe it opens up an
avenue for more fraud cases. Due to the quick and fixed nature of the settlement, there may not be
enough time to undertake onsite investigations into the nature of claims thus limiting evidence to only
medical documents and police reports which can be forged.

♦ No full de-tariff. As with Scenario A, the tariff remains unchanged due to the fixed scale of compensation
and limited legal recourse available for claimants. Scenario B on the other hand proposes to increase the
tariff at a yet-to-be confirmed rate due to the unlimited legal recourse available for claimants. The tariff
system would provide an imbalance for the insurance companies as they are still unable to price their
products under a risk-based system, despite being required to maintain a risk-based capital structure. We
opine that this imbalance will continue to make the insurers’ motor portfolio to be unprofitable as the
premiums collected will not be sufficient to cover risks.

♦ A third scenario? We believe that the two proposed scenarios are not sufficient to address the current
issues of escalating claims for the insurance companies. Our opinion is that: 1) The NEWCO will not entirely
remove the liability of TPBID from insurers’ balance sheets as the losses from the NEWCO will still be
shared by the insurers. 2) The proposed speedy settlement of claims might open the door for more fraud
cases; and 3) The underlying tariff system will be maintained, albeit at a higher rate, and thus will not
address the current imbalance for insurers. As such, we believe the outcome of BNM’s discussion may lead
to a scheme entirely different from that proposed, which will cap the losses borne by the insurers, and
ensure adequate coverage for the public.

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.

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 potential improvement in the sector’s prospects. We believe the BNM feedback
session is a step towards implementing a viable motor insurance framework, and ultimately full
liberalisation of the local insurance industry. Growth in the industry 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(OP, FV = RM6.68) because we believe it is relatively

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 10 May 2010

undervalued due to its ability to maintain above-industry premium growth but below-industry combined
ratio.

Table 2. Proposed features under TPBID schemes

Current Scenario A Scenario B
Compensation No limit Fixed Scale As currently determined
Limits on heads of damages Limits on heads of
damages
Overall liability limit capped at Overall liability limit
RM2m per person capped at RM2m per
person
Legal Recourse Full access to courts Limited legal recourse Full access to courts
Set-up of independent dispute Increased utilisation of
resolution process courts mediation

Speed of settlement Average 1-3 years Estimated 2-4 weeks upon Expected to improve but
receipt of full documentation only with the cooperation
of all parties involved in
the claims settlement
chain
Tariffed premium No change to current Increase in tariff
TPBID Premium premiums premiums

NEWCO Proposed NEWCO. Losses Proposed NEWCO. Losses

under the scheme will be born under the scheme will be
by NEWCO i.e the government born by NEWCO i.e the
and insurers government and insurers
Source: Bank Negara

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Stock Ratings

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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%
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