Insurance/Takaful Sector All hands to the pump, disruption is coming

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Leonard Williams
5 years ago
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06 September 2017 Sector Update research@midf.com.

poised to benefit via digitalization The cumulative earnings of insurance companies under coverage is expected to be stable in the next 12 months We maintain our POSITIVE stance on the sector A.

1 06 September 2017 Sector Update Insurance/Takaful Sector All hands to the pump, disruption is coming Maintain POSITIVE INVESTMENT HIGHLIGHTS Second phase of motor detarriffication started on 1 st July 2017 The motor business is poised to benefit via digitalization The cumulative earnings of insurance companies under coverage is expected to be stable in the next 12 months We maintain our POSITIVE stance on the sector A. State of Industry Motor comprised of 46.2% of the general insurance market, a majority segment in the RM20b industry. On 1 July 2017, it embarked on a structural change whereby free-pricing mechanism was fully implemented. The only exception is the approval required for 10% in price deviation. Following the second phase of liberalization, the new mechanism will provide a better methodology in premium pricing with the objective of promoting innovation and competition among insurers and takaful operators. After 2 months of implementation, we have seen several new initiatives being rolled out in order to leverage on the new opportunities. Interestingly, some of the potential tie-ups have been in a non-conventional manner where insurers are adopting more inventive strategy to expand or/and protect its market share. Exhibit 1: Phased Liberalisation of Motor Exhibit 2: Expected Outcomes KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

Exhibit 3: Free-pricing mechanism B. Collaborative effort to develop new platform Notably, some insurers have been aggressive in innovating.

For example, Tune Protect Group (TIH) has started a partnership with Digi to develop the implementation of telematics in vehicles (Refer Exhibit 5).

This will not only make its data collection more reliable, with real-time driver data collection, but the platform will also provide competitive advantage to the company as it will enhance its

2 Exhibit 3: Free-pricing mechanism B. Collaborative effort to develop new platform Notably, some insurers have been aggressive in innovating. We observed tie-ups between telco providers and insurance players have emerged on a notable scale, taking advantage of any technological synergy. For example, Tune Protect Group (TIH) has started a partnership with Digi to develop the implementation of telematics in vehicles (Refer Exhibit 5). We view that this collaboration will enable panel insurers such as Tune Protect gaining access to driver analytics through an advance platform. This will not only make its data collection more reliable, with real-time driver data collection, but the platform will also provide competitive advantage to the company as it will enhance its capability to provide better pricing. As such, we believe that its early move to telematics technology is well-timed, giving it the first mover s advantage. Notably, we understand that most insurance and takaful providers have started to embrace telematics and are currently exploring the technology given its disruptive nature. As of this writing, note that Pixelated Sdn Bhd s Katsana just signed memorandums of understanding with several insurance and takaful players such as Allianz Malaysia, Etiqa Insurance and Etiqa Takaful to develop the use of this technology via usage-based insurance. Exhibit 4: Digitalization Strategy Exhibit 5: ifleet UBI Platform Source: Tune Protect Group Source: ifleet 2

The use of telematics will encourage safer driving habits, while reducing insurance claims loss ratios and risks for insurers.

3 Exhibit 6: Telematics Device Exhibit 7: Mobile Telematics Source: Rewire Security Source: MIT News Offering attractive premium. Moving forward, we believe that the use of technology will become more prevalent especially to provide the important function of data collection. The use of telematics will encourage safer driving habits, while reducing insurance claims loss ratios and risks for insurers. In regards to the claims loss ratio, we expect it will be downtrending due to the ability to track and locate lost cars using the telematics technology (Refer Exhibit 10). However, for now, this technology is largely used to provide discounts as a reward to motorists with good driving behaviour. Exhibit 8: Top 10 Private Car-theft Claim Records in 2016 Exhibit 9: Breakdown by type Source: VTREC, MIDFR Source: VTREC, MIDFR Exhibit 10: Recover stolen cars via telematics 96% Stolen car recovery Source: Katsana 3

Comparatively, the use of telematics has been widely spread across Europe since 2014. Out of 28 countries that make up the Eurozone; the technology have a strong presence in Italy and UK.

4 Comparatively, the use of telematics has been widely spread across Europe since Out of 28 countries that make up the Eurozone; the technology have a strong presence in Italy and UK. In Italy, almost 2.5m cars have been fitted with telematics. The overall penetration level was 5% as at 2016, which was assumed to be the tipping point to accelerate the growth further. Based on a study concluded late last year by Deloitte, Belgium was acknowledged to be a favourable ground for telematics development. This is premised on the growing interest among Belgian insurers to develop telematics offerings, with major players launching the telematics proof of concepts. Interestingly, the country s digitally-enabled motor insurance market size was forecasted to reach EUD0.5b by 2020, accounting for 16% of the total Belgian motor insurance market. We noted that 40% of Belgian respondents are very likely to share data with their insurers compared to the average European rate of 28%. We view that the high willingness will serve as a defining factor to fuel further advancement of the motor insurance market. The study also showed that the potential market size for digitally-enabled motor insurance market is to exceed EUD15b by 2020, in 11 European countries surveyed. The current state of the market can be referred below in Exhibit 11. Exhibit 11: Research on motor insurance market in Europe Source: Deloitte Analytics 4

However, should similar survey is to be conducted in Malaysia, we believe the rate will mirror that from the Eurozone.

5 We expect an uptick in the data-sharing willingness rate over time. Our expectation is based on the back of improving security system as insurer continues to strengthen the reliability of its products and services. Such data is yet to be available in Malaysia. However, should similar survey is to be conducted in Malaysia, we believe the rate will mirror that from the Eurozone. This is due to the fact that Malaysian digital consumption is nearing maturity, with 65% of internet penetration rate. In addition, we are confident that data-sharing will be a less critical issue in Malaysia; with various securities protection and policies are being enforced to preserve privacy. Statistically, insurance companies stood as the third most trusted entity to share data with, after employer (Refer Exhibit 12). Also, few services (as illustrated in exhibit 12) have been identified as pulling factors for consumers to share their data more willingly. Exhibit 12: Who are you comfortable sharing your data with? Source: Deloitte Analytics In the survey, few services were identified to convince customers to share more data with insurers. Refer Exhibit 13. Exhibit 13: 17 different offerings to convince data sharing from customers Source: Deloitte Analytics 5

6 Given the benefits coming from the use of technology, we opine that more innovative products will be introduced as the motor insurance market evolves in parallel with technological growth. Technology will play a pivotal role in shaping up the local motor insurance industry, considering its impact in other developed regions. Insurers and takaful operators who are at the forefront of using this technology are poised to benefit. C. Digitalisation move to set the pace Against the backdrop of motor detarriffication, we notice insurers and takaful operators are becoming more technology centric. Despite the belief that competition will be minimal stemming from the phased changes, it seems the big insurance and takaful players are becoming more aggressive in coming up with numerous initiatives. We are comforted that companies under our coverage are fundamentally equipped to embrace liberalisation, namely Tune Protect, Syarikat Takaful and LPI Capital with some of its initiatives already underway based on our latest discussion with the various managements. Few noticeable changes were seen on the online insurance portals and introduction of smartphone applications (soon to be launched), with user-friendly features. We opine that the long term strategic initiatives by these insurers will solidify its presence in the industry providing the best-in class protection product. The digitalization strategy will set the tone for general insurance industry for years to come, taking advantage of consumers evolving behaviour. This includes the positive growth of smartphone and internet users population over the years. Statistically, the number of smartphone users in Malaysia has grown steadily with an expected 5-year CAGR ( ) of +6.2%. (Refer Exhibit 14) Exhibit 14 showed a projection of smartphone users in Malaysia from Exhibit 14: Growth of smartphone users Exhibit 15: Smartphone ownership in Malaysia 71% Of adult population in Malaysia owns smartphone Source: The Statistics Portal, MIDFR Source: Google s Our Mobile Planet Report 6

We expect the introduction of new distribution channel such as via online will create higher accessibility to products and services.

7 Exhibit 16: Takaful Malaysia Digital Trans. Journey Source: Syarikat Takaful D. Products offerings via new channel It is noted that consumers are now more digitally-savvy making the introduction of an innovative platform easier. We expect the introduction of new distribution channel such as via online will create higher accessibility to products and services. The shift to online channel was further fuelled by Bank Negara regulatory enforcement which requires every insurance company in Malaysia to have products be sold on the internet by This means that insurance companies will be able to further upsell its protection products through its online portal and mobile application. It will also ease the process of notifying customers of any new products, promotions and services. Exhibit 17: Malaysia Population Pyramid Exhibit 18: GenY pop. accounts the highest percentage Source: United Nations Source: United Nations, MIDFR 7

8 Exhibit 19: Smartphone usage in Malaysia Smartphone users searching for local information via their phone 94% Exhibit 20: Smartphone usage in Malaysia 91% Smartphone users researching product via their phone Source: Google s Our Mobile Planet Report Source: Google s Our Mobile Planet Report It is worth noting that the creation of online channel may cannibalise the sale from bancassurance and agency. Despite this, we believe that this transformation is a step in the right direction as online is proven to be a more costefficient channel as exemplified in other regions such as Europe. It will expedite the claims process, reducing unnecessary operational cost. We believe this will mitigate the impact from compression in margin caused by the potential price war. Exhibit 21: Distribution channels Given the heavier focus to improve operational efficiency, we view that the use of agency by insurers and takaful operators will gradually decline. In light of the rapid technological development, we believe that there are more opportunities to reduce expenses like commission and agency fees. With the high levels of internet and smartphone penetration rate, we opine that online channel will be widely utilized. 8

9 E. Zooming into the current state At this juncture, the earnings of insurance and takaful companies are still stable. Despite the positive industry growth over the years, we noted that it is tapering. However, we are firm in our belief that there will be a pick-up in growth following detarriffication. Considering that motor insurance will remain as the dominant class of business underwritten, we foresee liberalisation as an impetus that will generate significant impact on the overall insurance industry. This is premised on the fact that insurers and takaful operators will ramp up its efforts in retaining existing customers and concurrently acquiring new ones, as evident by the new initiatives being planned out. This will ensure sustainability in growth for the foreseeable future. Exhibit 22: Motor prem. written/gross contribution Exhibit 23: Motor net premium/net contribution Exhibit 24: Cum. net income of listed company Exhibit 25: Cum. net inc. of stocks under coverage Source: Bursa Malaysia, MIDFR Source: Bursa Malaysia, MIDFR F.Conclusion General insurance is undergoing a transformation phase affecting insurers, consumers and associated entities. Following the liberalised market, we view that it could be a driver for a more innovative industry. With the detarriffication effects to fully kick in soon, insurers and takaful operators are prompted to transform their business strategy in order to stay competitive. 9

10 Technology will play a pivotal role in shaping the industry moving forward. The impact to insurers and takaful operators are substantial, making it virtually indispensable for the business to stay idle. The development of real-time analytics will be a conduit to offer more innovative products. This is premised on the latest study conducted in the Eurozone, where the use of technology was proven to be the enabler for more products and services offering. Telematics, as we have seen widely used in the Eurozone, is the means for usage-based insurance product. The use of such device is expected to bring various benefits to the motor business, taking advantage of its capability to track important data points. Besides reducing the risk bore by the insurers, it helps to provide a more comprehensive mechanism to price premiums. It is also important to highlight the potential to reduce operational cost, resulting from the use of telematics technology. In terms of the potential impact, we opine that the free-pricing structure will promote a healthy competition among insurers and takaful operators. Digitalization initiatives are seen to be a prominent approach in shaping the overall insurance landscape. Notably, the overall development in motor insurance is believed to improve the current and future product offerings, fuelling the enhancement in customer loyalty. D. Valuation and recommendation All in, we are positive on the ongoing development of the local insurance industry. The introduction of digitalization and online channel will be synergistic while creating sustainable benefits for the long-run. At this juncture, it is still too early to give a definitive impact on how the local insurance industry, especially for motor is going to pan out. However, we note that the current development in Eurozone serves as palpable indicator to identify its potential. We are confident that the liberalised local market will create a positive tone for the industry, focusing more on consumers satisfaction. As such, we maintain our POSITIVE stance on the sector. As for now we have a BUY call on Syarikat Takaful with TP of RM4.90. Tune Protect remains as our top pick for small-cap stock with a TP of RM1.47. We are NEUTRAL on LPI Capital with TP of RM18.91, as we do not see any further upside to the stock from a valuation standpoint. Table 1: Peer Comparison Stock Last TP EPS (sen) PER (x) Div. yield (%) PBV (x) price Recom. (RM) (RM) FY17F FY18F FY17F FY18F FY17F FY18F FY17F FY18F Insurer/Takaful STMB 3.90 BUY Tune Protect 1.08 BUY LPI Capital NEUTRAL Allianz Malaysia NR MPHB Capital 1.46 NR Manulife Holdgs 3.15 NR Pacific & Orient 1.26 NR Reinsurer MNRB Holdings 2.63 NR Source: MIDFR 10

11 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( 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 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. SELL TRADING SELL 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 NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 11

Syarikat Takaful Malaysia Berhad Family Takaful leader

21 November 2013 Initiating Coverage Syarikat Takaful Malaysia Berhad Family Takaful leader BUY Target Price (TP): RM10.90 INVESTMENT HIGHLIGHTS Leader in the group Family Takaful business, with a 40%