Investment Highlights

• We maintain our BUY call on Allianz Malaysia (Allianz) with a lower FV of RM16.40/share from RM17.40/share based on a revised SOP valuation. This follows the lower the valuation accorded for its general insurance business. Our FV reflects an unchanged neutral 3-star ESG rating.

• We trim FY22F/23F/24F core earnings by 15%/14%/9% to factor in lower estimates for net investment income.

• 9MFY22 core earnings were below expectations accounting for 64% of our estimate but within consensus, making up 71% of street’s. The variance to our forecast was mainly attributed to higher than expected fair value losses on investments.

• For 9MFY22, the group recorded a drop in core earnings by 25% YoY to RM327mil after stripping out the one-off tax impact of Cukai Makmur. The decline in earnings was largely attributable to lower profit contribution from the life insurance, impacted by fair value losses on investments and higher management expenses from investment holding.

• The group’s operating revenue grew 6.5% YoY in 9MFY22, supported by higher gross earned premium (GEP) and investment income. Allianz’s 9MFY22 overall combined ratio improved to 89.2% vs. 95% in 9MFY21, underpinned by lower claims, commission and management expense ratios.

• The group’s claims ratio was lower at 63.2% in 9MFY22. The overall claims ratio of Allianz General Insurance Company (AGIC) of 58.6% was higher than the general insurance’s 54% but lower than the takaful industry’s ratio of 62%. As a key player in motor insurance with a commanding market share, AGIC’s motor claims ratio of 58% continued to be lower than the general insurance industry’s 64% and takaful’s 77%.

• 3QFY22 saw the group record higher core net profit of RM127mil (+31% QoQ). This was contributed by lower fair value losses on investments for life business from an increase in interest rates and higher GEP, partially offset by increased net claims, commission and management expenses.

• 
  Gross written premiums (GWP) growth eased slightly to 9.4% YoY for 9MFY22 compared to 10% YoY in 6MFY22. This was contributed by the moderation of the GWP growth of its general insurance business to 12.3% YoY. Meanwhile, the GWP growth of life business under Allianz Life Insurance Malaysia (ALIM) eased to 7.2% YoY in 9MFY22 with a slower pace for both single and regular premiums.

• By profitability, AGIC posted a stronger PBT (after consolidation adjustment) of RM332mil (+2.8% YoY). This was driven by an improved underwriting profit with better non-motor claims and lower management expenses.

• PBT of the life insurance business under ALIM of RM142mil climbed by 7.6% YoY for 9M22 attributed to higher net earned premium partially offset by higher fair of value losses on investments, net change in benefits, claims paid and increase in management expenses.

• Annualised new business premium (ANP) for life business remained slow in tandem with industry trend. ANP fell by 0.6% YoY in 9MFY22. However, this was better than the industry’s contraction of 5.6% YoY. The decline was largely attributable to lower ANP growth from agency channel of 3.4% YoY, while that for bancassurance rose by 15.8% YoY. ANP for investment-linked products increased by 3.6% YoY. Nevertheless, owing to lower business volume from the agency channel, 9MFY22 saw a decline in new business value for life business by 1.9% YoY to RM208mil. Market share for the life business increased slightly to 9.6% from 9.4% in the preceding quarter.

• The stock remains deeply undervalued based on FY23F P/BV of 0.5x and offers decent dividend yields of 5.3% for FY22F and 5.5% for FY23F.

• We like Allianz due to:
  i. AGIC has a commanding market share of 13.3%, ranking no.1 in the general insurance industry. Hence, we continue to see that the group will be able to withstand pricing competition from the gradual liberalisation of fire and motor tariffs as well as consolidation of players in the industry. 
  ii. The group’s stronger focus in investment-linked (IL) products with protection riders will put its life insurance business to be less significantly impacted by FRS 17, which will be implemented on 1 Jan 2023. Upon the adoption of FRS 17, the negative revaluation on the group’s life insurance investments, which has dampened the group’s net profit in FY21 and FY22, will no longer have any P&L impact from FY23F 
  iii. onwards. We understand that the marked-to-market changes in valuation of securities portfolio commencing from next year will be accounted under comprehensive income. 
  iv. The diversified portfolio and delivery channels for general and life insurance business bodes well for topline growth as well as to increase life insurance’s new business value.

Source: AmInvest Research - 24 Nov 2022