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RHB Research PP 7767/09/2012 (030475) 05 Mar 2013

RHB Research | See important disclosures at the end of this report A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from

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MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Sector Update

Insurance

FSA To Spur Further Consolidation?

The proposed Financial Services Act (FSA) and Islamic Financial

Service Act (IFSA), the latest rules aimed at achieving a more stable

financial system, will extend beyond commercial banks to insurance

companies. When enforced, we expect both acts to make a huge

impact on the insurance industry, more so on takaful players like

Syarikat Takaful Malaysia (STMB) and MNRB's Takaful Ikhlas SB, than

ALLIANZ and LPI.

Potential impact from FSA, IFSA. The proposed provisions that will affect

the industry the most are: i) the requirement for composite players to convert

into a single insurance business, ii) the corporatisation of private Islamic

financial services companies, iii) the 50% ownership cap on Financial Holding

Companies (FHCs), and iv) supervision of FHCs. The overall impact will be felt more

intensely by Malaysia’s takaful players than their conventional counterparts.

That said, we expect the industry to react to the new regulations in ways that

may include: i) stakes selldown, ii) capital injection, iii) changes in company

structure, and iv) higher compliance, audit and personnel costs.

Promoting long-term growth. The proposed rules are meant to nurture and

promote the industry's long-term growth. In the near term, we see the FSA

encouraging further sector consolidation as insurance players strive to conform

to the conditions. Moreover, as the industry liberalizes, some players may have

to adapt sooner than others to prepare themselves for a more competitive

landscape.

NEUTRAL on sector. We remain NEUTRAL on the sector given the uncertainties arising from the regulatory changes. We note that in countries like Africa that have such rules in place, some companies’ licences were not renewed due to non-compliance as they had difficulty meeting the conditions of the new law. We are largely maintaining our forecasts as it is too premature to determine the impact from the proposed Acts. We upgrade our call on LPI (BUY, FV: RM15.75) due to its share price correction but downgrade MNRB (TRADING

BUY, FV: RM3.30) due to the uncertainty that will face Takaful Ikhlas in relation to the Islamic Financial Service Act (IFSA). Although STMB is also likely be

affected by the new ruling, we believe its large reserve funds and capital base may buffer the company against regulatory uncertainties compared with the smaller takaful players.

The Research Team +603 9207 7620 [email protected]

NEUTRAL

Stock Price Target Mkt Cap Volume ROE% DY% P/NTA Rating

MYR MYR USDm m Dec-13F Dec-14F Dec-13F Dec-13F 1-mth 3-mth 12-mth Dec-13F

Allianz Malaysia 7.42 8.02 380 0.047 5.3 4.7 12.6 0.9 2.9 15.6 49.8 0.8 NEUTRAL

LPI Capital 13.52 15.75 956 0.018 16.6 15.3 12.7 5.7 0.8 -2.0 -3.2 2.1 BUY

MNRB Holdings 2.72 3.30 187 0.527 4.8 4.5 10.1 9.7 6.6 -4.3 -3.7 0.5 TRADING BUY

Syarikat Takaful 5.68 8.00 299 0.025 8.3 7.5 21.0 6.0 4.9 4.3 167.3 1.7 BUY

PER(x) Rel. Performance (%)

Source: Company data, RHBRI estimates



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TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................ 2

FSA IMPACT ON THE INSURANCE SECTOR ................................................... 3

RECAP: FACTORS SPURRING TRANSACTION .............................................. 13

Will COMPETITION GET SUNNIER? .......................................................... G17

NON-INTEGRATION ANGLE ...................................................................... 19

OUR VIEW ............................................................................................. 21

FINANCIAL ............................................................................................ 22



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FSA IMPACT ON INSURANCE SECTOR

As the Act is yet to be officially enacted and the insurance industry

players are still having closed meetings and discussions with BNM, we

wish to advise that the comments below are our vas well as consensus

views. In addition, the scenarios and resulting market reaction

described below are merely our projections and should not to be taken

as actual facts.

Briefly on FSA/ IFSA. The FSA and IFSA will be the latest Acts aimed at

regulating and monitoring Malaysia's financial system. It will entail stricter

enforcement of group-wide risk and capital management on financial services,

as well as greater regulatory control over financial areas such as shareholder

control and core operations. The IFSA will particularly be the frontrunner of a

consolidated regulatory framework for the global Islamic industry. Both Acts will

serve as omnibus legislations and consolidate several Financial Acts that are to

be repealed upon the enactment of the Acts. The proposed Acts were passed by

the Dewan Rakyat in Nov 2012 and may come into force as early as May 2013

once gazetted.

The two new laws will extend beyond commercial banks by supervising

insurance companies, financial development institutions and companies under

Bank Negara supervision that offer Islamic financial services.

Figure 1 The repealed Acts

Repealed Acts

Repealed as per FSA

Payment Systems Act 2003

Banking and Financial Institution Act 1989

Insurance Act 1986

Exchange Control Act 1953

Repealed as per IFSA

Takaful Act 1984

Islamic Banking Act 1983 Source: Financial Services Act 2012, Islamic Financial Services Act 2012

FSA and IFSA may come into force as early as May 2013

Will the new rules apply to

companies under our coverage?

Allianz No

LPI Capital No

MNRB Yes

Syarikat Takaful Malaysia

Yes

Figure 2 Mandatory conversion of insurance businesses

Source: Financial Services Act 2012



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Segregation of LI/GI businesses. The FSA will prohibit insurers to operate

both life insurance (LI) and general insurance (GI) simultaneously. The same

conditions apply to takaful companies in regards to general and family takaful

operations via the IFSA. This is a direct impact to insurance/ takaful companies

holding composite licenses. The takaful industry will be more affected, as there

are more composite licences issued to takaful players compared to conventional

insurers. The ruling does not apply to the four takaful companies (out of 12)

that have just secured the latest family takaful licences (not composite ones) in

2010, which are AmFamily Takaful, Great Eastern Takaful, AIA-AFG Takaful,

and ING-Public Takaful Ehsan.

Figure 3 List of insurance/ takaful companies with composite licences

Name Ownership

Conventional

American International Assurance Foreign

Etiqa Insurance Local

ING Insurance Foreign

MCIS Zurich Insurance Local

Prudential Assurance Malaysia Foreign

Zurich Insurance Malaysia Foreign

Takaful

CIMB Aviva Takaful Local

Etiqa Takaful Berhad Local

HSBC Amanah Takaful (Malaysia) SB Local

Hong Leong MSIG Takaful Local

MAA Takaful Local

Prudential BSN Takaful Local

Syarikat Takaful Malaysia Local

Takaful Ikhlas SB Local

Source: BNM



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Five-year transition period. The proposed FSA and IFSA will allow affected

composite insurance/ takaful companies to convert into single insurance

businesses within five years from the enactment of the Acts. The Ministry of

Finance (MOF) or BNM may give the affected companies give more time to

comply, but this will be on a case-by-case basis.

Our View: This new laws may prod the affected insurance or takaful players

into setting up entities to manage their general insurance and life insurance

operations separately in order retain those businesses. If so, the composite

licences are likely to be relinquished and replaced with separate licences owned

by the potential subsidiaries. This is akin to Allianz Malaysia’s company

structure, whereby Allianz Life Insurance Malaysia (ALIM) and Allianz General

Insurance (AGIC) are separate entities with their own managements, boards of

directors and operating systems. Meanwhile, there is potentially an increase in

operating expenses to be incurred in setting up new subsidiaries and hiring

separate boards of directors, CEOs and other key management positions to

operate the new entities. There may also be increasing demand for actuarial

expertise. However, these costs can be spread over the five-year timeframe.

Moreover, we believe the separation of insurance/ takaful businesses under

different managements may result in stronger and sharper business focus and

may actually promote industry growth over the longer term. The ruling

governing this was intended to clearly distinguish the GI and LI funds.

We note that the new rules trend pretty much in line with insurance laws

globally. For instance, Africa has rolled out similar insurance rules requiring all

composite companies to have separate entities by 2014. According to news

reports, the new law aims to cut down on instances where composite insurers

divert their long-term life insurance investments to plug short-term cash flow

gaps arising from general business claims, which had adversely affected the life

insurance business. Some companies have reacted to this ruling by merging or

consolidating under a holding company. Examples of this are the merger

between Insurance Company of East Africa (ICEA) and Lion of Kenya, while

some others may be in the midst of selling off their businesses.

The same rules apply in India, which also imposes a condition that insurers

must list on its stock exchange. This is, however, currently not a requirement

under Malaysia's FSA.

The FSA is also likely to spur further industry consolidation moving forward.

Assuming that the affected industry players chose not to wholly pass on the

cost upside to their customers, the smaller players that are unable to absorb

those costs may be forced to consolidate.

BNM is giving companies five years to

adjust to a single insurance business



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Figure 4: BNM has the power to exercise oversight on financial groups


FHC not spared from BNM's purview. Similar to the conditions applied to

banking institutions, financial holding companies (FHC) within the insurance

sector will likewise be subjected to stringent regulatory oversights by BNM. This

also includes entities under the governance of the Labuan Financial Services

Authority. Clause 115 empowers BNM to impose prudential standards on FHCs

as part of its efforts to have greater power in containing systemic risks and

encourage corporate governance. FHCs may be required to fulfil certain

financial requirements, akin to banks and insurance companies, such as capital

adequacy ratios (CAR), liquidity, insurance funds, reserve funds and related

party transactions, amongst others.

Our View: All insurance/takaful companies with FHCs will be affected, but

prudential requirements could be different from those governing the banks/

insurance companies as the regulators may decide on exemptions or

modifications to the FHCs’ compliance requirements. In addition, BNM has

imposed and may impose anytime differentiated prudential requirements on

each insurance company and their FHCs to reflect their group-level risk

exposure. One example is the internal target capital level (ITCL) requirement

which subjects a FHCs’ investments in other corporations engaged in finance-

related services to BNM approval.

Applicability of ruling on companies under our coverage

Allianz Yes

LPI Capital Yes

MNRB Yes

Syarikat Takaful

Malaysia

Yes

Like banks, FHCs in the insurance sector will

be subject to BNM oversight



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Figure 5: FHC requirements


However, a constraint on the degree of control remains. The FSA requires

an entity which has an aggregate interest of 50% or more in the licensed

insurer, or has control over the management of the company's decision-making

process, to apply to BNM for FHC status. This aggregate interest is the sum of

legal, beneficial, direct and indirect interests held. Under Clause 113 of the FSA,

financial institutions are allowed to have more than one holding company

(subject to BNM approval), but the holding company must not be a licensed

holder of a banking or insurance business.

Our View: We believe this will restrict the industry’s M&A options as the size of

acquisition stake is limited if a single buyer does not intend to become a FHC.

BNM may likely impose further "material" requirements on top of the conditions

set out in the Act, judging from the actions of central banks in the region.

For instance, Indonesia's banking rules unveiled in mid-2012 impose a similar

condition, but at a more stringent 40%. It also requires corporations that want

to buy a 40% stake in an Indonesian lender to also hold ownership in the bank

for at least five years.

Malaysia’s insurance industry has gone through major consolidation in the past.

In our opinion, the FSA is also likely to spark off more consolidation, but at a

tangent. The size of the deal could be affected if the single buyer is constrained

by the 50% FHC limit; otherwise, multiple "friendly" buyers could take up the

remaining stakes, but issues of who is to support key decisions by the FHC may

arise, as highlighted in a Focus Malaysia article.

Will this ruling apply to companies

under our coverage?

Allianz Yes

LPI Capital Yes

MNRB Yes

Syarikat Takaful

Malaysia

Yes

Will the FSA change the outlook for M&As in

Malaysia's insurance and financial services sector?



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On FHCs within a financial group, the proposed Act allows multiple FHCs to be

formed within the group, provided that those entities do not conduct financial

services business. Clause 280 allows existing FHCs to retain their status as

FHCs. However, if the FHC-approved status was premised upon the Insurance

Act 1996, they will have to reapply to BNM for FHC approval within a 12 month-

period. Newly-set up FHCs will also have to submit the application to BNM at

the same stipulated time. Overall, the new conditions set upon the FHCs and

their requirements could potentially increase compliance costs.

Figure 6: Individual shareholding requirements


Individual shareholdings capped at 10%. The FSA stated that individuals

can hold a maximum of only a 10% interest of a licensed financial corporation.

The major change is that the FSA stated clearly for computation based on

effective shareholding.

Our View: This is a move that affects all individual shareholding but does not

significantly impact the companies under our coverage. The change of

computation from deemed interest (as per the Company's Act 1965) to

effective interest could result in cases where individuals were deemed not to

have >5% interest based on the Company’s Act 1965, but may exceed 5%

using the effective interest method. In this case, Clause 279 allows the

individual six months to submit documents to be specified by BNM.

If the individual has an effective shareholding of >10% prior to the enactment

of the FSA, Clause 279 allows a maximum of five years (from the enactment of

the FSA) for the individual shareholder to pare down the effective stake to 10%

to comply with Clause 92. This means that should there be a stake pare-down

from the individual shareholders, the five-year period should serve as ample

time to avoid any stock market overhang.

Based on a recent article in Focus Malaysia, this clause may spark off a

selldown of stakes amounting to as high as RM19bn among prominent

individual shareholders in Malaysia’s banking and financial services industry.

The figures singled out are Datuk Khatijah Ahmad, Tengku Datuk Noor Zakiah,

Tan Sri Azman Hashim, Tan Sri Quek Leng Chan, Tan Sri Teh Hong Piow and

Hwang Lip Teik, who are either founders or substantial shareholders of major

banking corporations. We also note that Tan Sri Teh Hong Piow is a substantial

shareholder of LPI Capital, an insurance stock under our coverage. The 10%

cap was in fact introduced under the Banking & Financial Institutional Act 1989

(BAFIA) as a measure to curb the surge in non-performing loans (NPL) due to

the collapse in bank lending and lack of control over individual shareholders,

but was reinforced under the FSA.

Applicability of ruling on companies

under our coverage

Allianz n.a.

LPI Capital n.a.

MNRB n.a.


n.a.

Individual shareholdings are calculated

based on effective interest, capped at 10%



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This is in line with some of the regional changes in central bank regulations.

Bank Indonesia, for example, unveiled its own banking rule for the country in

July 2012 to cap the ownership of individual stakeholders of financial

institutions to 20%-30% from 99% previously.

Africa had similar rulings rolled out much earlier since 2009 at around 25%

individual ownership cap, with a 3-4 year transition. Based on news reports as

at Feb 2013, about 15 out of 47 African-based insurance companies are finding

difficulty to renew their license as the major individual shareholders have failed

to abide to this ruling. The law forced them to either sell the stakes or merge

with others to dilute their shares. Apparently, some of these companies had

failed to attract a group of investors to help comply with this requirement.

Figure 7: Shariah requirements

Source: Islamic Financial Services Act 2012

Power to regulate Shariah committee. The IFSA mandated BNM to regulate

the Shariah committee as well as prescribe standards on Shariah governance.

Furthermore, the Act now imposes the importance of Shariah compliance for

any companies operating a Islamic financial services business.

Our View: While it is already an industry practice to have a mandatory Shariah

board representation for Islamic financial activities, the issue of the conversion

to single takaful businesses as prescribed by Clause 16 may cause

complications for composite takaful companies in terms of setting up separate

Shariah boards within the five-year transitional timeframe. Fortunately, Clause

30 of the IFSA allows provision for the affected takaful companies to maintain a

single Shariah committee, and therefore we view this as a low risk given that

sound takaful companies may unlikely require changes to the composition of

their Shariah boards. However, we would highlight that maintaining a single

Shariah Board will still be subject to approval from BNM.


under our coverage

Allianz No

LPI Capital No

MNRB Yes


Yes

BNM may allow composite takaful

companies to retain a single Shariah

committee even as they convert into single

takaful businesses



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Figure 8: IFSA requirements to corporatization of private takaful players


Corporatising private takaful companies. The IFSA mandates companies

operating Islamic financial services or takaful businesses to become public

companies. Only retakaful operators are exempt from this ruling. Private takaful

companies affected by this ruling will have to convert within 12 months of

IFSA’s commencement.

Our View: Takaful Ikhlas SB and HSBC Amanah Takaful (a non-listed takaful

player) are likely to be impacted from this ruling. Given the short adjustment

period for private takaful companies to abide by this ruling, we believe BNM will

soon issue recommendations on this as the IFSA empowers the central bank to

determine the form of establishments to be undertaken by Islamic financial

companies.

Figure 9: Requirements for appointed actuary solidified at GI and takaful level


Tighter requirements for appointed actuaries. Under the FSA and IFSA,

the requirements for the appointment and cessation of appointed actuaries are

solidified at the level of GI businesses as well as takaful operators.

Our View: This demand for actuarial expertise will rise in tandem with the

separation of insurance businesses, whereby separate actuarial departments

are required to be formed. However, we are concerned whether this will give

rise to a mismatch between the regulator's actions against the availability of

actuaries. As the industry sector is already experiencing an acute shortage of

actuaries, this could negatively impact on the industry moving forward. We note

that there are about slightly more than 100 qualified actuaries in Malaysia, of

whom probably less than 10 are qualified Bumi actuaries.


under our coverage

Allianz No

LPI Capital No

MNRB Yes

Syarikat Takaful

Malaysia

No

The IFSA mandates that private takaful

companies must convert into public company status

We are concerned about whether the pool

of qualified actuaries is sufficient to meet

this demand, along with the single

insurance business ruling.



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Figure 10: New requirement on compensation of claim amount (Family Takaful)


Legislated regulations on claims amount for family takaful. Under the

IFSA, a takaful claim has to be paid by the takaful operator within 60 days of

the notification of a claim. Breaching this ruling will result in the takaful

operator paying a minimum compensation at the rate of the investment yield of

the participants' risk fund (PRF) and an additional 1% paid from the

shareholders' funds, or such other rate specified by BNM.

Our View: We believe that this is already a current industry practice. However,

the fact that this requirement is expected to be legislated under the IFSA may

prompt takaful companies to be more stringent with their claims settlement

processes. Breaching this process may necessitate the need to dip into the

shareholders' fund for compensation when the risk funds could still be in a

surplus position.

Figure 11: Clarity on customer disclosure and misrepresentation


Promoting consumer awareness. One major difference between the FSB and

the repealed Insurance Act 1996 is the enhanced clarity on the duty of pre-

contractual disclosures and misrepresentations. With the FSA, insurance

companies will take on greater responsibility in providing specific questionnaires

to the customer and guiding their decision to accept insurance contract risk or

not. Customers, on their part, are equally responsible to ensure that their

answers do not misrepresent, failing which there are provisions that allow the

insurance company to forfeit the customer’s claim. For example, in the case of

general insurance contacts and life insurance contracts of under two years, if

the customer had deliberately misinformed or neglected to reveal the true facts

that could affect the policy, the FSA allows the insurer to refuse the

policyholder’s claims.

Family takaful claims are legislated.

Breaching this ruling may necessitate the

need to dip into the shareholders' fund for

compensation when the risk funds could still

be in a surplus position.

Insurers are given more responsibility to

guide customer disclosure, but customers

are similarly given more responsibility to

avoid misrepresentation



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Our View: We see this as a positive for insurance companies which prioritize

consumer awareness. Through effective efforts in raising consumer awareness

and guidance in helping them purchase the right product (through quality

agents or bancassurance sales personnel, for instance), customers would be

encouraged to understand their responsibilities in purchasing insurance

contracts that truly reflect their risk profile. As some insurers may be less

prepared than others, the FSA allows the industry time to adjust and we believe

the conditions will come into force only at a later date.

Summary. While BNM may at any time unveil more details or

recommendations on top of the FSA guidelines, we believe the FSA will enhance

liquidity in the sector and promote further consolidation. Thus, we expect to

see: i) stake selldowns, ii) further capital injection, and iii) changes in

companies’ structures to fulfill the single insurance business requirement as

well as the corporatization of private Islamic financial companies.

However, we remain wary on the efficiency with which the regulators will

ensure compliance, as well as the industry's response in adjusting to the

rulings. Similar rules have been implemented in Africa, where insurance players

have encountered difficulties that we believe have to a certain degree adversely

affected the industry's growth.

Also, we remain concerned over the industry's need for human capital,

especially the lack of technical expertise in the takaful sector, actuarial talent,

and Shariah boards, which could affect new hiring costs.



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RECAP: FACTORS SPURRING TRANSACTION

Regulatory changes pave the way for consolidation. We have seen a

surge in M&A activity among insurers and financial institutions in the past few

years. This phenomenon was supported by deregulation effects, which

commenced around 2009, and the subsequent liberalisation of the financial and

insurance industries in line with the recommendations of the Financial Sector

Master Plan.

The regulators have recently been in the midst of amending guidelines on

insurers regarding their operating costs, agency expenses and data processing.

The Competition Act could potentially play a part in restricting certain practices

that the Commission deemed as anti-competitive or disrupting market forces,

such as price-fixing or colluding. The Life Insurance Association Malaysia (LIAM)

recently applied for exemptions from the Act to be able to continue their efforts

to introduce self-regulatory guidelines to promote healthy competition amid the

changing regulatory landscape.

To date, we believe many corporations are still seeking clarity for firm

compliance processes with the new FSA, the Competition Act and the Personal

Data Protection Act (PDPA). What is certain is that the penalty figures imposed

on a corporation breaching any of these guidelines can be substantial, for

instance with a maximum of RM300k imposed from PDPA and an even more

devastating penalty from the Competition Act of a maximum of up to 10% of

group global revenues.

Figure 12: Major regulatory movements

Date Description

2009RBC framework. Insurers must fulfil an individual target capital level (ITCL) which is sufficiently higher

than the 130% minimum CAR requirement

Relaxed foreign shareholding limit from 49% to 70%. There are considerations to allow limit beyond 70%

on a case-by-case basis

Uplifted restriction on branch establishment and bancassurance tie-up imposed on locally-incorporated

foreign insurers

More flexiblity to employ foreign talent

2010 Granting of new licenses

Issued 4 new takaful licenses (GE, AIA AFG, ING Public and AmTakaful)

2011 Mandatory sharing of Malaysian Motor Insurance Pool. MMIP is a pool catered for a high-risked motor

insurance segment that cannot be obtained by insurers. The public would be able to obtain motor cover Improvements in motor claims settlement process, as deemed by the New Motor Cover Framework

2012Planned gradual upward adjustments in motor tariffs effective 16 Jan 2012 over 4 years, as deemed by

the New Motor Cover Framework.

RBC framework for Takaful introduced

Competition Act 2010 came into force

2013 Personal Data Protection Act (PDPA) came into force

Pending FSA and IFSA to be enacted

Phasing out voluntary cession agreements with local reinsurers

Gradual liberalization of operating expenses

Full detariffication expected in 2016 Source: RHBRI, BNM

The Financial Sector Master Plan aims at

promoting healthy competition in the sector



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Figure 13: Consolidation trend of LI and GI insurers 1987 1990 2000 2006 2007 2008 2009 2010 2011 2012

Life 18 18 17 16 16 15 16 15 15 15

General 57 54 46 34 33 33 31 30 28 26

Direct insurers 60 57 53 42 41 41 40 39 37 35 Source: RHBRI Estimates, BNM

Foreign players leveraging on globalisation. Foreign players have

witnessed the potential growth of the insurance markets in the Asian region and

have long expressed strong interest in expanding into the region. Moreover,

some of the international insurance players have recently shed their non-core

operations for various reasons, including boosting their capital along with the

proposed Basel III requirements as well as shoring up reserves for expansion

into profitable businesses. For instance, Aviva and Sun Life sold off their non-

profitable US annuity business units for approximately USD1.8bn and

USD1.35bn respectively. With the recent central banks' regulations governing

the single insurance business ruling and ownership structure of insurance

companies, foreign players may have more incentive to look into M&A in the

emerging markets region.

Figure 14: Global insurance sector’s volume of M&A deals 2011-2012

Title:

Source:

Please fill in the values above to have them entered in your report

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Jan-1

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USDm

Deal value (LHS) No of deals (RHS)

Source: RHBRI, Dealogic

Values insurers look for. Based on our analysis of notable M&A transactions,

we believe that insurers are emphasising on several factors which include i) the

value of the bancassurance channel structure, ii) direct access to a takaful

licence, iii) diversification in product range and geographical reach, iv)

economies of scale and the need for scale, and v) strategic fits to fulfil

regulations, with the role of strengthening the insurance industries in the

region.

Total global insurance deal volumes

in USDm are as follows:-

1H2011 42,668

2H2011 25,366

2011 Total 68,034

1H2012 16,280

2H2012 37,917

2012 Total 54,196

The surge in Dec 2012 was mainly

attributed to Ping An Insurance and

the divestment of US businesses.

Bancassurance synergies, takaful licences

and economies of scale are among key

factors acquirers seek.



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Figure 15: Recent transactions in the insurance industry

Date Acquiror Acquiree Acquisition Cost

(RMm)

PBV Multiple

(x)

Comments

Dec-10 ACE INA Jerneh Insurance 523.2 2.25

May-11 Fairfax Pacific Insurance 216.5 1.71

May-11 Sompo Japan Berjaya Sompo 496.0 3.35

Sep-11

Zurich MAAB 861.0 3.13 Does not include MAA takaful. The transaction

costed about RM345m while Zurich had

planned to inject RM516m into MAA's capital

Sep-12 Tokio Marine MUI Continental Insurance 180.2 1.14

Sep-12 AMMB Kurnia Insurans 1,630.0 2.09

Dec-12 (proposed) Sanlam P&O 270.0 2.46

Dec-12 AIA Group ING Insurance 5,100.0 2.17 Equivalent to 1.8x EV. Has takaful licence

Jan-13 AMMB AmLife (Friends Life) 245.0 1.68 Has takaful licence

Jan-13 Khazanah, Sun Life CIMB Aviva 1,850.0 3.19 Equivalent to 2.4x EV. Has takaful licence

Weighted Average PBV multiple 2.42 Source: RHBRI Estimates, Company

Gaining market share and solidifying brands. Some of the largest

transactions had propelled insurers to the top of the league within the LI or GI

markets in terms of gross written premiums. AIA-ING boasts the largest

combined force of 16,600 agents as well as a 2.6m customer base in the LI

market. Meanwhile, AmG Insurance has just surrendered its GI licence and now

come under Kurnia's existing license. The new entity, renamed as AmGeneral

Insurance effective March 2013, is the biggest GI player in Malaysia, with an

estimated 13% market share by gross premiums.

Figure 16: Changes in market share based on gross premiums written (2011)

Title:

Source:


10.9

%

13.3

%

24.2

%

1.5

%

3.3

%

4.7

%

2.7

%

0.7

% 3.4

%

5.2

% 8.2

%

13.4

%

1.8

% 5.4

%

7.3

%

*Kurnia is now known as AmGeneral Insurance

Source: RHBRI Estimates, BNM 2011 data

Our estimates of the combined entities'

market share in either the LI or GI market

(assuming premiums are unchanged from

BNM's 2011 data) are shown by the gold

bars



www.rhbinvest.com

16


Figure 17: RHBRI estimates of top 10 general insurers by premiums*

Title:

Source:


31.09%

3.77%

3.82%

3.93%

4.71%

5.18%

7.27%

7.55%

9.17%

10.12%

13.39%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Others

CHARTIS

BERJAYA

ZURICH

ACE-JERNEH

LONPAC

TOKIO-MUI

MSIG

ETIQA

AGIC

KURNIA

*Kurnia is now known as AmGeneral Insurance


Figure 18: RHBRI estimates of top 10 life insurers by premiums

Title:

Source:


5.56%

2.13%

2.81%

3.13%

3.45%

4.47%

4.50%

5.80%

16.28%

24.21%

24.55%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Others

MANULIFE

AMLIFE

TOKIO MARINE LIFE

ETIQA

ZURICH

ALLIANZ LIFE

HONG LEONG

PRUDENTIAL

AIA-ING

GREAT EASTERN




www.rhbinvest.com

17


WILL COMPETITION GET SUNNIER?

Sun Life's maiden foray into Malaysia. The latest transaction of CIMB Aviva

will see UK-based Aviva passing the baton to Sun Life, the third-largest

Canadian insurer, which has yet to venture into Malaysia prior to the

transaction. Sun Life and Khazanah joined forces to purchase 98% of the joint

venture at a transaction value of RM1.8bn or USD600m. The transaction entails

a new 20-year exclusive bancassurance agreement that will allow Sun Life to

cross-sell its products via CIMB's strong network of 312 branches with an

estimated reach to 8m customers.

What Sun Life brings in. Sun Life has a long history of providing protection

and retirement-based products, as well as asset management services in North

America. In 1919, it was the first Canadian insurer to offer group insurance. It

subsequently ventured into the health and accident insurance segments in

1956. Sun Life has been ranked among the top insurers for its retirement plans

in North America. Its Asian operations have shown considerable progress, with

its Indonesian venture already picking up pace and it is also ranked top in the

LI market in the Philippines. Assuming Sun Life replicates its core product

offerings in Malaysia, we believe it will be in direct competition with the nation’s

top life insurers, such as instance AIA-ING, which has a leading market foothold

in the employees' benefit business.

AMMB looking for a strategic partner. Earlier this year, AMMB completed a

repurchase of the remaining 30% stake of its life and family takaful business

units from Friends Life FPL Limited. It was given a tight deadline to seek out a

strategic partner for the said insurance units. Appointing Morgan Stanley as its

adviser may help AMMB accomplish the stake sale by June 2013. AMMB has

already fielded interest from several parties. No details have been disclosed,

but we will not be surprised if the interested parties are the same bidders which

did not succeed in the deal for CIMB Aviva, namely Prudential and Manulife. We

note that Manulife Malaysia has yet to own a takaful license.

We see AMMB's deal value as the next wildcard. Although we are of the

view that CIMB Aviva’s total transaction value of RM1.8bn, which is 3.2x PBV, is

relatively expensive, we do not think that will by itself re-rate the industry’s

valuations. We think it could partly influence the pricing in AMMB's selldown.

The latest press reports suggest a deal size as large as RM500m, assuming a

51% stake sale, which will only value the entities at 2.1x BV. However, we

would not be surprised if the deal struck with a strategic partner for AMMB’s LI

unit may be priced closer to CIMB Aviva’s valuation, despite not having the

scale in terms of branch network vs CIMB’s 325 branches.

The deal may be priced along similar terms, which are: i) the ~200 branch

network and a sweetened long-term bancassurance agreement, ii) access to

takaful licences, iii) the added advantage of cross-selling to 500k MBf card

customers, as well as Kurnia’s GI (now AmGeneral Insurance) 4m policyholders

base, and iv) the eventual buyer may also gain an international customer base

via AMMB's strategic partnerships with ANZ in areas of regional connectivity,

overseas distribution and product development. We would also highlight that

AmLife is among the top 10 largest domestic life insurers in terms of gross life

premiums (based on BNM 2011’s data). Also, its takaful license is restricted to

family takaful, which means the potential buyer is likely to face minimal issue

to comply with the new IFSA in terms of single takaful businesses.

Sun Life’s fantastic maiden foray into

Malaysia was via a 20-year exclusive

bancassurance agreement with CIMB.

Sun Life already has an established track

record in its collaboration efforts with CIMB

Niaga, leveraging on the performance of its conventional and takaful businesses in

Indonesia.

We think it is possible that Prudential and Manulife, both of which did not succeed in

the bid for CIMB Aviva, may consider

becoming strategic partners for AmLife and

AmFamily Takaful

The RM500m deal size speculated in the

news suggests that the stake sale of AmLife

and AmTakaful at only 2.1x BV



www.rhbinvest.com

18


Zurich looking to exit MCIS Zurich. Zurich, which is among the top 10

largest insurer in both GI and LI, has yet to publicly announce a confirmation of

a strategic partner to take up its 40% stake in MCIS Zurich following its

acquisition of MAA Assurance in 2011. Under BNM's supervision, insurers are

not allowed to own more than one insurance company. Moreover with the

implementation of the FSB, the pressure to sell to a strategic partner may have

been elevated as we think MCIS Zurich may be affected by the FSA ruling of the

conversion into a single insurance business.

The heat is also strong for GI. Meanwhile, P&O (P&O MK, Non-Rated) is

negotiating with South African financial services group Sanlam to dispose of

about 49% of its GI stake. The most recently arrived deal price amounted to

RM270m, translating to 2.5x BV. P&O will retain 51% ownership and see the

company’s gearing levels improved, assuming this transaction goes through.

This transaction would command a premium slightly higher than Kurnia’s 2.1x.

Based on P&O's circular, Sanlam principally operates LI business in the South

African region but it also specializes in short-term GI products. We are of the

view that valuations for P&O’s transaction may be inclined to be attractive for a

buyer wishing to seek entry into a niche motor insurance segment.

The clock is ticking for Zurich to exit its

40%-owned MCIS Zurich

Will P&O be able to conclude the transaction

with such attractive valuations?



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19


THE NON-INTEGRATION ANGLE

Increasingly focused on bancassurance. Bancassurance can be in the form

of acquisitions, joint ventures or non-integrated partnerships. We believe that

insurers may be more inclined to seek out bancassurance, given that the FSA

implementations may complicate inorganic acquisitions. Bancassurance can

help insurers achieve above-industry growth rates, and provide diversification

to distribution channels, backed by a more reliable cost structure. According to

LIAM, agents will always remain as the principal force to drive meaningful sales.

However, efforts spent on agent recruitment and maintaining a high percentage

of active agents can affect profitability for some insurers. It is also uncertain

how much dependency is being placed on a few top-performing agents.

Potential regulatory changes surrounding the insurers’ operating costs, for

example the proposed removal of a cap on deferred acquisition costs and

incentives given to agents, could significantly change the rules of the game. We

believe reducing the reliance on the agency model is a natural strategy to

protect insurers from such a risk.

Allianz, for example, has expressed interests to have more partners, besides

CIMB and HSBC, in order to achieve its target of having 25% of its LI premiums

sourced from bancassurance channels. At present, 93% of its annualized new

life premiums are sourced from agents, while bancassurance is responsible for

about 11% of its general premiums distribution. Similarly, Zurich had also

expressed an interest to forge relationships with banks to diversify its

distribution channels. In 2H12, its agents contributed 90% of its business while

contributions from bancassurance were almost negligible.

Productivity remains key. We are cautiously optimistic as the quantum of

utilisation level of bancassurance branches for insurance sales is uncertain and

could turn out to be lower than expected. Insurers have to strike the right

balance between managing channel costs and retaining productive channels

rather than aggressively seeking out banks, co-operatives or NGOs that fail to

turn out to be synergistically beneficial. Customers are also increasingly savvy

and sophisticated in their demand for products that are able to cater to multiple

financial needs. We have a positively view on insurers and their banking

partners who can excel at product development/bundling, pricing, marketing as

well as efficiency in claims processing and delivery, potentially boosting sales

via this channel.

Addressing cross-cultural issues. Another important issue is to address

conflicts between managements and to retain qualified human capital. Insurers

have to work hand in hand with their banking partners to avoid mis-selling for

the sake of promoting sales. For foreign insurers lacking close-hand experience

operating in the Malaysian market, retaining key local staff and aligning the

firm’s interests with local customer perceptions will also be crucial for their

survival amid the competition.

Bancassurance is a key driver to survive

competition



www.rhbinvest.com

20


MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Company Update


A Single Takaful Biz?

STMB is among the composite players likely to be impacted by the IFSA

in regards to the single takaful business ruling. The IFSA gives a five-

year timeframe to comply with this requirement. Assuming a decision

to segregate its business, we believe there may be one-off cost

upsides in the initial years though the costs can be spread over the five

years. We make no changes to our forecasts pending further guidance

from both the company and the industry.

No immediate changes to profit forecasts. We leave our forecasts

unchanged as no industry-level announcements have been made and it is too

premature to determine the quantum of the cost upside at this stage, pending

further guidance from both the company and BNM’s directions. However, we

expect any potential impact on profit to be insignificant given: i) any cost

upside arising from the Islamic Financial Service Act (IFSA) can be spread out

over a five-year period, ii) the possibility of maintaining a cost-sharing model

and sharing of certain key management roles, and iii) the separation of income

and reserve funds between the family and general takaful businesses is already

being practiced.

Conservative dividend payout adjustments. However we take the

opportunity to tweak our dividend forecasts more conservatively, to a 40%

payout, to reflect the regulatory uncertainty which may prompt STMB to

preserve more capital. Our BV/share estimates for FY13-14 are thus increased

by 1%-3% while our ROE estimates for FY13-14 are diluted by 20-40bps to

20.9% and 20.6% respectively. We maintain our BUY call on STMB, with our FV

at RM8.00.


Buy Target MYR8.00

Previous MYR8.00

Price MYR5.71

Insurance

Syarikat Takaful Malaysia provides

shariah-compliant general and family

insurance whereby the risk is voluntarily

and collectively shared by a group of

participants.

Stock Statistics

Bloomberg Ticker STMB MK

Market Cap MYR930m

USD299m

52 wk H/L price

(MYR)

6.52 2.11

3m ADT MYR1.45m

YTD Returns (%) 5.0

Beta (x) 0.94

Major Shareholders (%)

BIMB 61.1

EPF 9.1

Share Price Performance (%)

Month Absolute Relative

1m 5.0 4.9

3m 6.1 4.3

6m (11.5) (10.4)

12m 170.6 167.3

6-month Share Price Performance

Source: Bloomberg

Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Net premium revenue (MYRm) 819 952 1,276 1,473 1,684

Net income to ord equity (MYRm) 37 57 97 111 123

Net profit growth 41.2% 2.7% 69.8% 14.9% 10.8%

Recurrent net profit (MYRm) 37 84 102 111 123

Consensus EPS (MYR) 0.23 0.35 0.59 0.68 0.76

EPS (MYR) 0.23 0.35 0.59 0.68 0.76

DPS (MYR) 0.09 0.17 0.25 0.28 0.31

Dividend Yield 1.6% 3.0% 4.4% 4.9% 5.4%

Return on average equity 15.1% 13.6% 20.4% 20.9% 20.6%

Return on average assets 1.1% 1.0% 1.6% 1.6% 1.7%

P/E (x) 25.2 16.3 9.6 8.4 7.5

P/B (x) 2.41 2.07 1.86 1.65 1.47


78

120

161

203

245

286

328

1.6

2.6

3.6

4.6

5.6

6.6

7.6

05

-Mar-

12

04

-May-1

2

05

-Jul-

12

05

-Sep

-12

06

-Nov-1

2

07

-Jan

-13

Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)



www.rhbinvest.com

21


OUR VIEW

STMB: to decide on single takaful business ruling. STMB is among the

composite players likely to be impacted by the IFSA in regards to the single

takaful business ruling. The IFSA gives a five-year timeframe to comply with

this requirement. As mentioned earlier, companies that wish to retain both

businesses may set up separate subsidiaries. However, individual subsidiaries

must still fulfil the minimum RM100m paid-up capital criteria under the existing

takaful regulations. While we have yet to obtain management's guidance on

this aspect, should there be a need to set up new subsidiaries, we think STMB

has room for leverage given its current negligible gearing level. We assume a

maximum leverage scenario if STMB injects RM200m of capital for two new

subsidiaries by way of debt raising. In such a case, we project its debt-to-equity

ratio to rise to 0.29x while the double leverage ratio (at company level) may

increase from 14% to 51%.

Assuming this scenario, we would expect one-off costs in the initial years for

STMB to segregate its infrastructure and appoint new key management teams

and boards of directors for the family takaful subsidiary, the general takaful

subsidiary and, potentially, a holding company. Note that STMB may be able to

maintain a singular Shariah board subject to BNM’s approval.

Figure 19: STMB's double leverage and D/E ratios - company level

RMm FY07 FY08 FY09 FY10 FY11

Double Leverage Ratio (%) 9.1% 8.4% 19.9% 17.9% 14.0%

Investment in Subsidiary 27.0 27.6 72.2 70.7 63.7

Investment in Associate 0.0 0.0 0.0 0.0 0.0

Equity - Co Level 295.6 328.8 363.2 395.7 454.4

Debt - Co level 0.0 0.0 0.0 0.0 0.0

Cash - Co Level 13.0 8.3 6.5 2.3 27.8 Source: RHBRI Estimates, Company

We think STMB will be given ample room to

restructure its business and may be less

affected by the single takaful business

ruling, compared to its smaller competitors.



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22


FINANCIALS

Profit & Loss (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Premium income from insurance policies 1,499.9 1,096.1 1,444.3 1,661.5 1,900.2

Reinsurance ceded (267.3) (143.7) (168.3) (188.8) (216.3)

Net premium revenue 1,232.6 952.4 1,276.0 1,472.7 1,683.9

Total insurance premium revenue 1,232.6 952.4 1,276.0 1,472.7 1,683.9

Gain on securities and other fin assets 287.9 307.3 362.4 382.0 418.7

Net investment income 287.9 307.3 362.4 382.0 418.7

Total other income 325.7 256.1 320.3 465.5 535.6

Total operating income 1,846.2 1,515.8 1,958.7 2,320.2 2,638.2

Claims, maturities & surrenders (755.2) (651.9) (659.1) (903.0) (1,032.1)

Agents' comissions (219) (245) (406) (498) (567)

Management fees (241) (186) (267) (295) (337)

Other operating costs (14) (47) (50) (16) (17)

Cash operating costs ###### ###### ###### ###### ######

Transfer to policyholder reserves (150.8) (63.6) (174.3) (119.7) (137.7)

Depreciation and amortisation 14 14 15 16 17

Total costs (1,367) (1,179) (1,541) (1,815) (2,074)

Operating profit 479 336 418 505 564

Other recurring income (382) (228) (292) (361) (406)

Other exceptional items - (26) (5) - -

Non recurring items - (26) (5) - -

Pre-tax profit 97.1 81.7 121.3 143.6 157.9

Taxation (40) (25) (26) (32) (35)

Minority interests (1) 0 1 (0) 1

Profit after tax & minorities 56 57 97 111 123

Net income to ord equity 56 57 97 111 123

Recurring net profit 56 77 101 111 123




Net premium revenue 1,232.6 952.4 1,276.0 1,472.7 1,683.9

Total insurance premium revenue 1,232.6 952.4 1,276.0 1,472.7 1,683.9



Total other income 325.7 256.1 320.3 465.5 535.6


Claims, maturities & surrenders (755.2) (651.9) (659.1) (903.0) (1,032.1)


Management fees (241) (186) (267) (295) (337)



Transfer to policyholder reserves (150.8) (63.6) (174.3) (119.7) (137.7)


Total costs (1,367) (1,179) (1,541) (1,815) (2,074)



Other exceptional items - (26) (5) - -

Non recurring items - (26) (5) - -

Pre-tax profit 97.1 81.7 121.3 143.6 157.9

Taxation (40) (25) (26) (32) (35)

Minority interests (1) 0 1 (0) 1




Balance Sheet (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Cash at bank 247 375 452 483 517

Short term investments - 268 2 2 2

Total current assets 247 643 454 484 519

Total investments 3,942 3,589 4,737 5,145 5,584

Tangible fixed assets 30 28 30 31 32

Intangible assets 13 16 34 20 20

Embedded value assets 201 195 1 211 231

Premiums receivable 101 109 185 138 178

Debtors & prepayments 555 920 600 652 652

Other assets 277 344 330 493 548

Total other assets 1,134 1,568 1,116 1,494 1,609

Total assets 5,366 5,845 6,371 7,174 7,763

Policyholders' funds 3,560.3 3,934.1 3,988.8 4,799.2 5,166.2

Long-term & retirement funds 3,560.3 3,934.1 3,988.8 4,799.2 5,166.2

General insurance funds 157.4 165.0 (23.4) 263.4 299.7

Total insurance funds 3,717.7 4,099.0 3,965.4 5,062.6 5,465.9

Total current liabilities 340 318 346 335 353

Capital gains smoothing reserve 937.1 978.3 1,386.1 1,067.8 1,175.0

Outstanding claims reserves - - 69 - -

Technical provisions 24.8 19.7 89.5 89.5 89.5

Long term insurance liabilities 961.9 998.1 1,544.1 1,157.3 1,264.5

Total non-current liabilities (41) (22) 15 36 67

Total liabilities 4,978.0 5,392.4 5,869.7 6,590.0 7,150.0

Total reserves 223 287 337 402 470

Shareholders' equity 386 450 499 565 632

Minority interests 27 27 26 29 30

Total equity 413 477 526 594 662

Source: Company data, RHBRI



www.rhbinvest.com

23


Key Ratios Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Reinsurance ratio 17.8% 13.1% 11.7% 11.4% 11.4%

Retention ratio 82.2% 86.9% 88.3% 88.6% 88.6%

Claims ratio 61.3% 68.5% 51.7% 61.3% 61.3%

Commission ratio 17.8% 25.7% 31.8% 33.8% 33.7%

Expense ratio 20.7% 24.5% 24.8% 21.1% 21.0%

Combined ratio 99.8% 118.6% 108.3% 116.2% 116.0%

Underwriting margin 38.9% 35.3% 32.8% 34.3% 33.5%

Investment yield 7.3% 8.6% 7.7% 7.4% 7.5%

Liquidity ratio 72.8% 202.6% 131.4% 144.7% 147.0%



EPS growth 40.7% 2.7% 69.8% 14.9% 10.8%

Bv per share growth 10.4% 16.6% 11.0% 13.2% 11.9%

Operating profit growth 110.2% -29.8% 24.2% 20.8% 11.7%




www.rhbinvest.com

24


MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Company Update

MNRB Holdings

To Decide On Takaful Ikhlas' Future

We think that MNRB’s takaful subsidiary, Takaful Ikhlas SB, is subject

to IFSA rulings to convert to a single business and corporatise a public

company. The IFSA may prompt MNRB to relook at its stake sale of

Takaful Ikhlas SB to a strategic partner, as further internal capital

injections could be complicated. While its takaful business has grown,

the longer-term business direction of the subsidiary is highly

uncertain. Hence, we downgrade our call to a TRADING BUY, with FV

unchanged at RM3.30.

Highly geared already. MNRB's high gearing and double leverage situation

implies that options for capital injections for potential internal restructuring

exercises could be very limited. Its high double leverage ratios and an

increased gearing level to 52% was the result of a revolving RM120m credit

facility taken to inject RM100m capital into Takaful Ikhlas and RM10m into

Malaysian Re. MNRB Holdings had on 10 Dec 2012 announced a refinancing of

the outstanding RM120m credit facility via a five-year Sukuk Mudharabah

programme of up to RM150m (of which RM30m will be allocated to working

capital purposes) and the refinancing of the outstanding RM200m Islamic

Medium-Term Notes (IMTN) via a five-year revolving credit facility of from

Standard Chartered Saaqid.

Downgrade to TRADING BUY. While we make no changes to our forecast,

the Islamic Financial Service Act (IFSA) implementation may prompt MNRB

Holdings to relook into its stake sale options of Takaful Ikhlas SB to a strategic

partner. MNRB Holdings had in 2011 attempted to sell the business but the deal

was called off. Given the uncertain outlook of its takaful business, we

downgrade the stock to a Trading Buy.


Trading Buy Target MYR3.30

Previous MYR3.30

Price MYR2.70

Insurance

MNRB Holdings underwrites all classes of

general reinsurance business. The main

types of general reinsurance business

are proportional and non-proportional

treaty reinsurance, and facultative

reinsurance

Stock Statistics

Bloomberg Ticker MNRB MK

Market Cap MYR575m

USD185m

52 wk H/L price

(MYR)

3.29 2.40

3m ADT MYR0.21m

YTD Returns (%) 1.5

Beta (x) 0.66


Skim Amanah Saham

Bumiputera

48.0

PNB 12.8



1m 6.7 6.6

3m (2.5) (4.3)

6m (17.4) (16.3)

12m (0.4) (3.7)


87

93

99

105

110

116

122

2.3

2.5

2.7

2.9

3.1

3.3

3.5

05

-Mar-

12

04

-May-1

2

05

-Jul-

12

05

-Sep

-12

06

-Nov-1

2

07

-Jan

-13


Source: Bloomberg

Forecasts and Valuations Mar-10 Mar-11 Mar-12 Mar-13F Mar-14F

Net premium revenue (MYRm) 1,088 1,026 972 1,092 1,190


Net profit growth 92.9% 142.4% (31.6%) 38.2% 4.8%



EPS (MYR) 0.24 0.58 0.39 0.55 0.57

DPS (MYR) 0.00 0.20 0.17 0.25 0.27

Dividend Yield 0.0% 7.4% 6.3% 9.4% 9.9%



P/E (x) 11.3 4.7 6.8 5.0 4.7

P/B (x) 0.64 0.58 0.52 0.49 0.46


RHB Research


www.rhbinvest.com

25

OUR VIEW

MNRB: Takaful Ikhlas to be remodeled? We think MNRB’s takaful subsidiary

Takaful Ikhlas SB is subject to the conversion to a single takaful business ruling

within the five-year timeframe. Moreover, the Islamic Financial Service Act

(IFSA) subjects all private takaful companies to convert into public companies

within 12 months upon the enactment of the Act.

While no announcements have been made, assuming Takaful Ikhlas is to set up

separate subsidiaries to operate the general and family takaful businesses

individually, there may be a need for additional capital injection. However,

MNRB's high gearing and double leverage situation implies that options for

capital injections could be very limited. Takaful Ikhlas had just appointed a new

CEO earlier this year but a potential separation of the business may prompt the

company to further increase its management pool.

Figure 20 MNRB Holding's double leverage and D/E ratios - company level





Equity - Co Level 727.8 691.5 633.6 617.1 615.9

Debt - Co level 200.0 200.0 200.0 200.0 320.0

Cash - Co Level 0.0 0.1 0.1 0.1 0.0

D/E Ratio (%) 27.5% 28.9% 31.5% 32.4% 52.0% Source: RHBRI Estimates, Company

Will MRNB’s past capital injection into Takaful Ikhlas be deemed sufficient to meet

the FSA rulings?

RHB Research


www.rhbinvest.com

26

FINANCIALS

Profit & Loss (MYRm) Mar-10 Mar-11 Mar-12 Mar-13F Mar-14F



Net premium revenue 1,088.1 1,025.9 972.4 1,091.9 1,190.1

Total insurance premium revenue 1,088.1 1,025.9 972.4 1,091.9 1,190.1




Claims, maturities & surrenders (736.7) (609.5) (601.5) (666.0) (749.8)


Management fees (158) (173) (154) (164) (167)


Cash operating costs (1,057.5) (981.9) (908.6) (1,017.6) (1,111.1)


Total costs (1,050) (973) (901) (1,009) (1,103)


Income from associates 15 7 (30) 5 5


Pre-tax profit 79.3 164.9 126.2 174.0 181.6

Taxation (29) (42) (42) (58) (60)





Balance Sheet (MYRm) Mar-10 Mar-11 Mar-12 Mar-13F Mar-14F

Cash at bank 6 9 3 10 10

Short term investments 34 57 0 0


Total investments 1046 1227 1400 1500 1548




Loans 1025 1035 1016 1118 1230

Other assets 1480 1904 2416 2683 2976

Total other assets 2653 3077 3582 4031 4496

Total assets 3853 4484 5220 5730 6251

Policyholders' funds 940 1202 1461 1607 1767

Long-term & retirement funds 940 1202 1461 1607 1767

General insurance funds 279 340 336 370 407

Total insurance funds 1219 1542 1797 1977 2174


Outstanding claims reserves 1333 1413 1638 1770 1992

Technical provisions 0 1 0 11 11

Long term insurance liabilities 1334 1413 1639 1781 2003

Total non-current liabilities 150 150 270 350 350

Total liabilities 2859 3266 3842 4262 4690

Total reserves 679 786 883 959 1038

Shareholders' equity 893 999 1096 1172 1251

Other equity 95 204 258 283 312

Total equity 987 1202 1354 1455 1563


RHB Research


www.rhbinvest.com

27

Key Ratios Mar-10 Mar-11 Mar-12 Mar-13F Mar-14F


Retention ratio 88.1% 89.1% 82.5% 85.0% 85.0%

Claims ratio 67.7% 59.4% 61.9% 61.0% 63.0%


Expense ratio 15.8% 20.1% 16.5% 17.2% 15.7%

Combined ratio 97.2% 95.7% 93.4% 93.2% 93.4%



Liquidity ratio 3.8% 27.2% 43.5% 6.4% 6.1%



EPS growth 92.9% 142.4% -31.6% 38.2% 4.8%


Operating profit growth 34.7% 130.8% 2.0% 8.6% 4.2%




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28


MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Company Update

Allianz Malaysia

Unperturbed by FSA

We see Allianz as being able to continue to sustain its organic growth

through its agency force and diversification of its underwriting

channels. We do not expect the company to be significantly impacted

by the FSA given that it operates its LI and GI businesses under

separate licenses and company structures. We do not see the need for

Allianz to restructure its business. However, we are also not ruling out

the possibility that it may reconsider potential M&A opportunities post-

FSA implementation. Maintain NEUTRAL, FV RM8.02.

FSA may present M&A opportunities. Allianz is relatively inactive in M&As

compared to its direct peers, given its strong foothold commanding as much as

10% of the general insurance (GI) market and its focus on organic growth as

opposed to jumping unto the M&A bandwagon. As mentioned in our previous

company update, bancassurance is a key focus for Allianz Malaysia (especially

on the life insurance business). However, opportunities in the industry that

may arise from the Financial Services Act (FSA) may prompt Allianz to keep a

watch out for potential new M&A targets in the conventional or takaful

industries. Note that Allianz has yet to own a takaful license.

No changes to forecast. We do not foresee factors that will render changes

to our valuations. Hence, we retain our NEUTRAL call and FV of RM8.02,

pegged to a sum-of-parts valuation of a 15x FY13 PER for its GI business and a

1x P/EV for its life insurance (LI) business valued at RM700m.


Neutral Target MYR8.02

Previous MYR8.02

Price MYR7.50

Insurance

Allianz is primarily involved in the

underwriting of general insurance, life

insurance and investment holding.

Stock Statistics

Bloomberg Ticker ALLZ MK

Market Cap MYR1,190m

USD383m

52 wk H/L price

(MYR)

8.06 4.49

3m ADT MYR0.64m

YTD Returns (%) 6.4

Beta (x) 0.63


Allianz SE 72.7

EPF 4.8



1m 3.0 2.9

3m 10.5 8.7

6m 14.5 15.6

12m 53.1 49.8


85

94

103

112

121

129

138

147

156

165

4.1

4.6

5.1

5.6

6.1

6.6

7.1

7.6

8.1

8.6

05

-Mar-

12

04

-May-1

2

05

-Jul-

12

05

-Sep

-12

06

-Nov-1

2

07

-Jan

-13


| Source: Bloomberg


Net premium revenue (MYRm) 1,837 2,082 2,323 2,665 3,018





EPS (MYR) 0.73 1.05 1.29 1.41 1.57

DPS (MYR) 0.04 0.05 0.07 0.07 0.08

Dividend Yield 0.5% 0.7% 0.9% 0.9% 1.0%



P/E (x) 10.3 7.1 5.8 5.3 4.8

P/B (x) 1.08 0.81 0.72 0.63 0.55




www.rhbinvest.com

29


OUR VIEW

Allianz: Unperturbed by FSA. We do not expect the company to be impacted

from the FSA and hence moving forward, we think it will not see the need to

restructure its business. We see Allianz as being able to continue to sustain its

organic growth through its agency force and diversification of its underwriting

channels. CEO Jens Reisch had expressed interests for more bancassurance

partners other than the group’s current tie-ups with CIMB and HSBC, with the

aim to have 25% of the group’s life premiums sourced from bancassurance

channels. At present, 93% of the annualized new life premiums are sourced

from its 6.5k agency force while alternative channels account for about <2%.

Bancassurance is responsible for about 11% of their general premiums

distribution.

Figure 21 Allianz Malaysia's double-leverage and D/E Ratios (company level)



Investment in Subsidiary 793.4 793.4 926.6 1,084.5 1,084.5


Equity - Co Level 388.1 381.5 382.2 992.2 989.6

Debt - Co level 490.0 490.0 490.0 0.0 0.0

Cash - Co Level 0.1 0.0 8.0 7.6 5.9

D/E Ratio (%) 126.2% 128.4% 126.1% n.a. n.a. Source: RHBRI Estimates, Company

Allianz is already operating the life and

general businesses separately and is hence

not affected by the single insurance

business ruling.



www.rhbinvest.com

30


FINANCIALS




Net premium revenue 1,836.8 2,082.2 2,322.6 2,664.9 3,017.7

Total insurance premium revenue 1,836.8 2,082.2 2,322.6 2,664.9 3,017.7



Total other income 25.0 6.5 7.7 - 9.0


Claims, maturities & surrenders (1,310.9) (1,495.1) (1,634.3) (1,894.4) (2,161.9)


Management fees (242) (271) (341) (380) (430)




Total costs (1,897) (2,151) (2,366) (2,717) (3,092)


Other exceptional items (18) 44 (4) - -

Non recurring items (18) 44 (4) - -

Pre-tax profit 174.1 248.8 293.5 326.2 364.7

Taxation (62) (85) (90) (103) (116)







Net premium revenue 1,836.8 2,082.2 2,322.6 2,664.9 3,017.7

Total insurance premium revenue 1,836.8 2,082.2 2,322.6 2,664.9 3,017.7



Total other income 25.0 6.5 7.7 - 9.0


Claims, maturities & surrenders (1,310.9) (1,495.1) (1,634.3) (1,894.4) (2,161.9)


Management fees (242) (271) (341) (380) (430)




Total costs (1,897) (2,151) (2,366) (2,717) (3,092)


Other exceptional items (18) 44 (4) - -

Non recurring items (18) 44 (4) - -

Pre-tax profit 174.1 248.8 293.5 326.2 364.7

Taxation (62) (85) (90) (103) (116)






Cash at bank 495 512 458 366 465


Total investments 4,637 5,596 6,831 7,887 8,385




Debtors & prepayments 121 110 116 120 120

Other assets 1,053 1,157 1,175 1,029 1,061

Total other assets 1,274 1,384 1,436 1,445 1,516

Total assets 6,847 7,932 9,191 10,174 10,861

Policyholders' funds 5,019.3 5,628.2 6,563.0 7,402.3 8,218.8

Long-term & retirement funds 5,019.3 5,628.2 6,563.0 7,402.3 8,218.8

Total insurance funds 5,019.3 5,628.2 6,563.0 7,402.3 8,218.8




Share premium account 425 425 425 425 425

Other reserves - 245 279 313 351

Total reserves 913 1,292 1,495 1,728 1,989

Shareholders' equity 1,067 1,448 1,653 1,887 2,147

Preferred shareholders funds 192 190 188 188 188

Total equity 1,260 1,638 1,841 2,075 2,335




www.rhbinvest.com

31




Retention ratio 79.0% 82.7% 80.8% 79.7% 79.7%

Claims ratio 71.4% 71.8% 70.4% 71.1% 71.6%


Expense ratio 14.8% 14.5% 15.9% 15.3% 15.1%

Combined ratio 103.8% 103.9% 102.4% 102.3% 102.8%



Liquidity ratio 101.0% 102.4% 77.4% 64.4% 80.5%



EPS growth 10.3% 45.2% 22.4% 8.9% 11.5%






www.rhbinvest.com

32


MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Company Update

LPI Capital

Resilient Insurance Stock

LPI Capital is expected to be materially impacted by the FSA. However,

with its strong corporate governance and capitalization strength, we

do not expect it to face pertinent issues as a Financial Holding

Company (FHC). In view of its recent share price correction, we upgrade

our call to a BUY. Its resilience against regulatory risks as well as its

strength as one of the top 10 general insurers in Malaysia could be

attractive to risk-averse investors seeking exposure to local insurance

stocks.

May consider M&As. Like Allianz, LPI Capital has been steering clear of any

acquisition drive. We, however, think that it may be open to considerations of

new M&A opportunities among companies that fail to comply with the rulings of

the Financial Services Act (FSA).

Individual ownership of 10%. Based on LPI Capital's Annual Report 2012,

Tan Sri Dato' Sri Dr. Teh Hong Piow has indirect interest in the company

amounting to 44.3% and hence he may likely be subjected to the FSA's five-

year timeframe to comply with the 10% maximum permissible holding

requirement.

Upgrade to BUY. We upgrade our call to a BUY, due to its recent share price

correction, which had also increased the attractiveness of its dividend yield,

now at 5.7%. While LPI Capital lacks exposure to the life insurance (LI) market

and hence we expect its premiums growth to be slightly more moderate

compared to those of Allianz (NEUTRAL, FV: RM8.02), we view LPI Capital as a

resilient insurance stock against regulatory uncertainties and thus attractive to

risk-averse investors.


Buy Target MYR15.75

Previous MYR15.75

Price MYR13.52

Insurance

LPI is primarily involved in the

underwriting of general insurance,

investment holding and financing leases.

Stock Statistics

Bloomberg Ticker LPI MK

Market Cap MYR2,979m

USD959m

52 wk H/L price

(MYR)

14.8 13.2

3m ADT MYR0.37m

YTD Returns (%) (7.0)

Beta (x) 0.76


Selected Holdings SB 16.2

Kepunyaan Chintamani SB 13.6

Nipponkoa Insurance Co Ltd 8.5



1m 0.9 0.8

3m (0.2) (2.0)

6m 0.1 1.2

12m 0.1 (3.2)


94

95

96

98

99

100

101

102

104

105

106

13.0

13.2

13.4

13.6

13.8

14.0

14.2

14.4

14.6

14.8

15.0

05

-Mar-

12

04

-May-1

2

05

-Jul-

12

05

-Sep

-12

06

-Nov-1

2

07

-Jan

-13


Source: Bloomberg


Net premium revenue (MYRm) 465 527 585 662 748




Consensus EPS (MYR) 0.75 0.89 1.00

EPS (MYR) 0.62 0.69 0.75 0.81 0.88

DPS (MYR) 0.55 0.75 0.65 0.77 0.84

Dividend Yield 4.1% 5.5% 4.8% 5.7% 6.2%



P/E (x) 21.9 19.5 17.9 16.7 15.4

P/B (x) 2.58 2.53 2.18 2.06 1.94


RHB Research


www.rhbinvest.com

33

OUR VIEW

LPI: Strong group-level capitalisation. LPI Capital is not subjected to the

single conversion business ruling as it is only involved in the general insurance

(GI) business. At the holding company level, LPI Capital's double leverage

ratios remained intact on the back of strong equity growth at the company level

while its D/E ratios (company level) are nearly negligible. We reiterate our view

that LPI has strong corporate governance and capitalisation strength and hence

we do not expect Bank Negara Malaysia (BNM) to raise any pertinent issues in

regards of LPI Capital as a FHC. However, there may be an uncertainty element

whether the high proportion of equity instruments in LPI Capitals's portfolio will

be deemed risky under BNM's prudential guidelines for the FHCs. Note that a

significant >90% proportion of its equity class comprises Public Bank Shares.

Figure 22 LPI Capital's double leverage and D/E ratios - company level





Equity - Co Level 537.9 746.1 979.9 923.9 1,113.9

Debt - Co level 0.0 72.9 52.9 39.5 32.5

Cash - Co Level 57.8 78.6 186.3 0.3 19.9

D/E Ratio (%) n.a. n.a. n.a. 4.2% 1.1% Source: RHBRI Estimates, Company

Figure 23 LPI Capital's AFS and HTM investment portfolio


Equity 80.7% 76.3% 76.1% 71.5% 74.9%

Unit Trust 0.9% 0.7% 0.6% 0.6% 0.5%

MGS 8.1% 6.4% 4.5% 5.1% 4.0%

GII 0.5% 2.7% 2.3% 2.1% 1.6%

Msian Govt Guaranteed Loans 1.7% 1.2% 2.1% 1.9% 0.8%

Singapore Govt Guaranteed Loans 0.4% 0.3% 0.1% 0.1% 0.1%

PDS 4.1% 9.8% 11.9% 16.4% 15.7% AFS= available for sale; HTM= held to maturity

Source: RHBRI Estimates, Company

LPI Capital has a high proportion of equity

instruments in its portfolio at the FHC level

RHB Research


www.rhbinvest.com

34

FINANCIAL


Premium income from insurance policies 755.9 907.9 1,033.9 1,173.4 1,327.2

Reinsurance income (33.7) (47.6) (55.5) (63.0) (71.3)


Net premium revenue 465.3 526.7 584.5 662.2 747.6

Total insurance premium revenue 465.3 526.7 584.5 662.2 747.6



Total other income - 0.3 - - -

Total operating income 535.5 594.4 652.2 733.4 819.5

Claims, maturities & surrenders (220.8) (257.7) (277.9) (317.4) (356.6)


Management fees (89) (100) (114) (132) (153)


Cash operating costs (355.3) (395.1) (438.9) (501.4) (568.2)

Total costs (355) (395) (439) (501) (568)


Income from associates 1 1 1 1 1

Gains on asset disposals (1) (1) - - -

Non recurring items (1) (1) - - -

Pre-tax profit 180.3 198.9 214.0 232.8 252.0

Taxation (43) (46) (47) (53) (57)





RHB Research


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35


Cash at bank 599 415 420 524 648

Short term investments - - - - 1


Total investments 990 1,082 1,254 1,263 1,273




Loans 190 353 454 515 582

Other assets 353 409 484 559 643

Total other assets 623 867 1,036 1,197 1,380

Total assets 2,246 2,405 2,749 3,027 3,346

Unassigned surplus 89.4 - - - -

Policyholders' funds 868.6 1,007.8 1,149.7 1,304.9 1,475.8

Long-term & retirement funds 958.0 1,007.8 1,149.7 1,304.9 1,475.8

Total insurance funds 958.0 1,007.8 1,149.7 1,304.9 1,475.8




Other reserves (9) (8) (8) (8) (8)

Total reserves 939 960 1,151 1,235 1,325

Shareholders' equity 1,160 1,182 1,373 1,456 1,546

Total equity 1,160 1,182 1,373 1,456 1,546




Retention ratio 61.6% 58.0% 56.5% 56.4% 56.3%

Claims ratio 47.5% 48.9% 47.5% 47.9% 47.7%


Expense ratio 19.8% 19.2% 19.7% 20.3% 20.7%

Combined ratio 76.4% 75.0% 75.1% 75.7% 76.0%



Liquidity ratio 806.8% 236.8% 217.1% 224.9% 224.1%



EPS growth 8.6% 12.0% 8.8% 7.7% 8.3%




RHB Research


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36

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or

otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice to independently evaluate the particular investments and strategies. RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in this research report. RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report. The term “RHB” shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction mentioned specifically herein below and shall refer to RHB Research Institute Sdn Bhd, its holding company, affiliates, subsidiaries and related companies. All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior consent of RHB and RHB accepts no liability whatsoever for the actions of third parties in this respect. Malaysia This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd (233327-M), Level 11, Tower One, RHB Centre, Jalan Tun Razak, 50400 Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. As of 04 Mar 2013, RHBIB does not have proprietary positions in the subject companies, except for: a) - As of 04 Mar 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) - Singapore This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between RHBRI Investment Bank Berhad, Malaysia (“RHBRIIB”) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited and is a subsidiary of RHBRIIB, which in turn is a wholly-owned subsidiary of

RHB Capital Berhad. DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. As of 04 Mar 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positions in the subject companies, except for: a) - As of 04 Mar 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) -

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Special Distribution by RHB Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore, it is only distributed to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd. Hong Kong This report is published and distributed in Hong Kong by RHBRI Securities Hong Kong Limited (“RHBRISHK”), a subsidiary of RHBRI Investment Bank Berhad, Malaysia (“RHBRIIB”), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. RHBRISHK, RHBRIIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. RHBRISHK, RHBRIIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. Risk Disclosure Statements The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBRISHK does not maintain a predetermined schedule for publication of

research and will not necessarily update this report Indonesia This report is published and distributed in Indonesia by PT RHBRI Nusadana Securities Indonesia, a subsidiary of RHBRI Investment Bank Berhad, Malaysia, which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Thailand This report is published and distributed in Thailand by RHBRI Securities (Thailand) PCL, a subsidiary of RHBRI Investment Bank Berhad, Malaysia, which in turn is a wholly-owned subsidiary of RHB Capital Berhad. Other Jurisdictions In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliance with the law and regulations of the jurisdictions.

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Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

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