Investment Highlights

• We maintain our BUY call on Allianz Malaysia (Allianz) with a lower fair value (FV) of RM17.10/share from RM17.90/share based on a revised SOP valuation, pegging the general insurance business to a lower PB multiple of 1.3x. Our FV reflects an unchanged neutral 3- star ESG rating.

• While we make no changes to our FY22F earnings, our core earnings for FY23F/24F have been adjusted lower by 8%/14%, after reducing our estimates for investment and other income.

• 2QFY22 saw the group record a lower core net profit of RM97mil (-11% QoQ). This was contributed by higher fair value losses on investments for the life business due to an increase in interest rates. Also, it was due to lower gross earned premiums (GEP) from the agency and bancassurance channels for the life business.

• For 6MFY22, the group recorded a 30% YoY drop in core earnings to RM206mil after stripping out the one-off tax impact of Cukai Makmur. The decline in earnings was largely attributable to lower profit contribution from life insurance impacted by fair value losses on investments, coupled with higher management expenses from the investment holding segment.

• 6MFY22 core earnings made up 41% of our estimate and 44% of the street forecast. We deem the group’s earnings to be within expectation on anticipation that a portion of the substantial fair value losses of RM594mil in 1HFY22 could be reversed in 2HFY22 with a more favourable movement in interest rates.

• 1HFY22 saw higher volatility in the 10-year MGS yield. Nevertheless, after the aggressive Fed rate hikes of 75bps each in June and July 2022, the 10-year MGS yield has turned more stable, hovering at 4% from a high of 4.5% in May 2022.

• The group’s operating revenue grew 6% YoY in 6MFY22 supported by higher GEP and investment income. Allianz’s 6MFY22 overall combined ratio improved to 84.9% vs. 91% in 6MFY21, underpinned by lower claims ratio from the general insurance business.

• The group’s claims ratio was lower at 59.7% in 6MFY22. The overall claims ratio of Allianz General Insurance Company (AGIC) of 59.6% was higher than the industry’s ratio of 53% for general insurance and 60% for takaful. As a key player in motor insurance with a commanding market share, AGIC’s motor claims ratio of 54.8% was lower compared to the general insurance industry’s 61% as well as the takaful industry’s 74%.

• Gross written premiums (GWP) growth continued to gain momentum, registering a higher growth rate of 10% YoY in 6MFY22. This was supported by the general insurance business under AGIC’s GWP, which expanded by 13% YoY. AGIC’s agency channel posted a higher premium growth from the personal accident and motor business. The general insurance subsidiary’s GWP grew at a faster pace vs. the general insurance industry’s 9.6% YoY growth. The market share of general business was slightly lower at 13.4% as of end-2Q22 vs. 14% in 1Q22.

• Meanwhile, GWP of life business under Allianz Life Insurance Malaysia (ALIM) expanded 8.2% YoY in 6MFY22, supported by growth in premiums from all key distribution channels.

• By profitability, AGIC posted a stronger PBT (after consolidation adjustment) of RM219mil (+5% YoY). This was driven by an improved underwriting profit with better non-motor claims and lower management expenses.

• Meanwhile, PBT of the life insurance business under ALIM of RM76mil fell marginally by 1% YoY for 6MFY22, attributed to lower fair of value losses on investments and higher net change in benefits and claims paid.

• Annualised new business premium (ANP) for life business remained slow, in line with the industry trend. ANP fell by 3% YoY in 6M22. However, this was better than the industry’s decline of 7%. The decline was largely attributable to lower ANP growth from the agency channel of 16% YoY while that for bancassurance rose by 24% YoY. ANP for investment-linked products shrank by 16% YoY. This has resulted in a decline in new business value for the life business by 8% YoY to RM135mil in 6MFY22. The market share for the life business was sustained at 9.4%.

• In 2QFY22, the group declared an interim dividend of 16 sen per ordinary share and 19.2 sen per irredeemable convertible preference share (ICPS). This amounted to RM60.8mil which were paid out on 5 Aug 2022.

• On 29 June 2022, the group extended its bancassurance strategic partnership with HSBC Bank until 2036. This will see them continue leveraging the footprint of the bank to sell their insurance products.

• As the largest general insurer domestically, we continue to see that the group’s ability to withstand pricing competition in the general insurance industry with motor and fire tariffs continuing to be gradually liberalised. Arising from the group’s stronger focus in investment-linked (IL) products with protection riders that will provide higher margins, we do not expect the group’s life insurance business to be significantly impacted by FRS 19 which will be implemented on 1 Jan 2023. Growth in ANP of ALIM continues to be better than the industry’s and this is poised to increase the life business’ embedded value which will be positive on the stock’s valuation.

• The stock remains deeply undervalued based on a P/BV of 0.5x for FY23. Dividend yields remain decent at 5.3% for FY22F and 5.5% for FY23F.

Source: AmInvest Research - 25 Aug 2022