PP 7767/09/2010(025354)

28 June 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

28 June 2010

Insurance Recom : Overweight

Strong Growth Drivers For The Life Insurance (Maintained)
Business

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 0.50 0.74 6.6 7.6 73.7 14.0 7.4 6.5 1.9 0.0 OP
Allianz Dec 4.69 6.68 71.9 86.2 -7.0 19.9 6.5 5.4 1.2 0.4 OP
LPI Capital Dec 15.30 16.70 111.4 128.2 22.5 15.1 13.7 11.9 2.2 7.2 OP
MNRB^ Mar 2.68 2.98 22.8 18.1 6.9 -20.8 11.7 14.8 0.6 3.7 UP
Sector Avg 18.8 11.9 10.0 9.0
^ FY09-10 valuations refer to those of FY10-FY11

♦ Life insurance industry in Malaysia at a glance. As of FY09, there

Relative Performance To FBM KLCI
are 16 life insurance companies operating in Malaysia, including the
composite insurers, with a total 11.9m policies and annual premiums of
RM17.4bn. The major players in Malaysia for life insurance based on Kurnia Asia

total assets are Great Eastern Life, AIA, ING and Prudential. LPI Capital

♦ Growth drivers for life insurance business. We believe that life FBM KLCI Allianz
insurance premiums will grow by 12-13% p.a. for FY10-12, driven MNRB
largely by: 1) the relatively low market penetration rate compared to
other countries in the region; 2) a disciplined savings method for
individuals to supplement their retirement; 3) rising healthcare costs;
and 4) encouragement by the Government in the form of tax relief.

♦ Low penetration rate. The market penetration rate in Malaysia for life
insurance, as expressed in terms of percentage of premiums to GDP, is
3.0%, which is relatively low compared to other more advanced
countries in the region, i.e. Singapore (7.9%), Taiwan (13.9%) and
South Korea (9.1%).

♦ Life insurance doubles as a supplementary savings method. We

believe many individuals seek alternative income streams for retirement
besides EPF. As life insurance premiums are paid monthly and in a
disciplined manner, we believe the growth in life insurance as a savings
plan, on top of providing protection, is another key earnings driver for
insurance companies.

♦ Rising household healthcare costs. As healthcare costs increase, so

does the need for health coverage, in our view. Households’ out-of-
pocket expenditure on healthcare increased at a CAGR of 14.8% for
2000-2008 vs. Malaysia’s GDP which expanded at a CAGR of 5.3% over
the same period. While health insurance policies are sold by both
general and life insurers, medical benefits are usually packaged with a
life insurance product, thus offering additional avenues for cross selling.

♦ Forecasts. Our forecasts for the insurance companies under coverage

do not assume any changes to the motor policies.
Yap Huey Chiang
♦ Insurance sector as a domestic play. In view of the negative (603) 92802641
external factors i.e. European debt crisis, and potentially sharper-than- yap.huey.chiang@rhb.com.my
expected slowdown in the global economy, we believe the insurance
sector, which is largely a domestic play, wicll be relatively resilient. We
thus maintain our Overweight stance on the sector. Our top pick is
Allianz (OP, FV = RM6.68).
Please read important disclosures at the end of this report. Page 1 of 4

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 28 June 2010

Growth Drivers For Life Insurance

♦ Life insurance industry in Malaysia at a glance. As of FY09, there are 16 life insurance companies
operating in Malaysia, including the composite insurers, with a total 11.9m policies and annual premiums of
RM17.4bn. The major players in Malaysia for life insurance based on total assets are Great Eastern Life,
AIA, ING and Prudential. Life insurance policies are usually packaged with other benefits such as
savings/investments and medical benefits and marketed through various channels, i.e. agency, direct
selling, and bancassurance. Despite the various distribution channels, the life insurance penetration rate is
still low compared to other advanced nations in the region.

♦ Low penetration rate. The current penetration rate for life insurance in Malaysia is at 41% based on the
number of policies divided by the total population. We believe the actual market penetration rate in
Malaysia might be lower as some, if not most people have more than one policy per person. Thus our view
is that a better measure for penetration would be life premiums as a percentage of GDP. Table 2 indicates
that Malaysia with 3.0% still has a low penetration rate compared to other more advanced countries in the
region. We opine that one of the reasons for this is that Muslims believe life insurance is “haram” or sinful
thus eliminating a large portion of the population from the market. However, this issue has been addressed
by the availability of Family Takaful, or life insurance that does not conflict with Muslim beliefs.
Nonetheless, the low penetration rate compared to other countries in the region signifies a strong potential
for growth, underpinned by rising awareness of the need for personal and family protection, as well as a
different savings avenue to supplement retirement requirements.

Table 2: Penetration Rate As A Percentage Of GDP

Country Penetration rate (% of GDP)
Hong Kong 9.9
Singapore 7.5
South Korea 9.1
Taiwan 13.9
Malaysia 3.0
Source: Business Monitor International

♦ Life insurance as a supplementary savings. Life insurance can also act as supplementary savings for
the insured. Once endowment policies reach maturity, they pay out dividends/annuity payments to the
insured. In view of rising living costs, we believe that most individuals are already aware that the EPF
payouts will not fully support them after retirement. Although there are many other investment/savings
products offered by mutual funds/unit trusts, life insurance policies can act as a more disciplined method of
savings as premium payments will have to be done on a regular basis to avoid lapsing the policy.

♦ The need to finance medical costs. We believe that a further growth driver stems from the rising
household healthcare expenditure, which has grown at a CAGR of 14.8% since the year 2000, which
compares against the GDP CAGR of 5.4% over the same period. One of the reasons for the rising
healthcare expenditure is attributed to the fact that consumers are leaning more towards private treatment
in view of better quality of service, in our opinion. At the same time, due to the rising healthcare costs (as
a result of higher drug prices and higher costs of services), we believe consumers will likely look for ways
to finance their healthcare expenditures, hence the growth potential for health insurance. While health
insurance policies are sold by both general and life insurers, medical benefits are usually packaged with a
life insurance product, thus offering additional avenues for cross selling.

Chart 1: Private household healthcare expenditure

12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Year

Source : Ministry of Health

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 28 June 2010

♦ Encouragement by the Government. In the 2010 Budget presented by the Prime Minister last year, the
income tax deductible for life insurance with retirement benefits was increased from RM6k to RM7k for
individuals. We view this as a way for the Government to encourage the purchase of life insurance as a
means to supplement retirement benefits and reduce the reliance on social security i.e. EPF and SOCSO, as
mentioned previously. We understand this incentive is also to support the development schemes by life
insurance companies because it is estimated that by the year 2020, approximately 10% of Malaysia’s
population will be aged above 60 years. Thus, it is not too far fetched to assume that the Government will
continue to provide further incentives in the future for life insurance policy holders.

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. Our forecasts for the insurance companies under coverage do not assume any changes to the
motor policies in relation to the Government’s long-awaited decision on the basic motor insurance scheme
for coverage of third party bodily injury and death (TPBID). Even if there is no decision, we have already
assumed losses arising from this segment while approval of a new scheme that limits insurance companies’
liability will likely be earnings-positive.

Valuations And Recommendation

♦ Insurance sector as a domestic play. In view of the negative external factors i.e. European debt crisis,
and potentially sharper-than-expected slowdown in the global economy, we believe the insurance sector,
which is largely a domestic play, will be relatively resilient. We believe that growth in life insurance
premiums will be around 12-13% for FY10-12 for the industry as a whole (12% for Allianz, the only
company in our coverage that has life insurance). We thus maintain our Overweight stance on the sector.
Our top pick is Allianz (OP, FV = RM6.68).

IMPORTANT DISCLOSURES

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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.

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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.

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