Investment Highlights

• We maintain BUY call on Allianz Malaysia (Allianz) with a  slightly higher fair value (FV) of RM16.70/share  (previously: RM16.50/share) based on our revised SOP  valuation. Our FV reflects an unchanged neutral 3-star  ESG rating. 

• We raise core earnings estimate for FY23F/24F/25F by  13%/13.6%/15% to incorporate changes to P&L lines after  the implementation of MFRS 17.

• The group adopted MFRS 17 on 1 Jan 2023. The  implementation of the new accounting standard saw  shareholders’ funds as at 31 December 2022 increased by  RM447mil to RM4.68bil. This was supported by the  acceleration in recognition of profits under life insurance  business as well as higher retained earnings from general  insurance business under Allianz General Insurance  Company (AGIC) following the discounting of reserving  claims and deferment of acquisition cost.

• 1Q23 core earnings of RM173mil (+14.7% YoY) were above expectations, accounting for 31% of our FY23F net profit and 41% of consensus estimates. The variance to our  earnings estimate was due to higher-than-expected  investment gains.

• The improved 1Q23 earnings were contributed by higher  insurance revenue and investment returns (+>100%). The  stronger investment results were driven by fair value  gains through P&L (FVTPL) investments. 

• The group’s insurance revenue grew by 9.2% YoY in 1Q23.  This was supported by improved insurance revenue from  the general insurance business, AGIC (+8.1% YoY) and life business under Allianz Life Insurance Malaysia (ALIM) (+10.8% YoY).

• Insurance service results at group level rose strongly by  36.3% YoY to RM260mil in 1Q23, underpinned by stronger  insurance business performance of AGIC and ALIM. 
   
• Allianz’s Gross Written Premium (GWP) Grew by 4.6% YoY  in 1Q23.
   
• AGIC’s GWP grew 4.7% YoY while ALIM’s GWP expanded by 4.5% YoY. AGIC’s GWP growth would have been 10.8%  YoY, slightly outpacing the industry’s 10.1% YoY growth if the premium contributions from the Perlindungan Tenang  vouchers in the previous year had been excluded. 

• In terms of profitability, AGIC posted a stronger PBT (after consolidation adjustment) of RM140mil (+50.3% YoY).  This was driven by higher insurance service results and fair value gains on investments. AGIC’s claims declined by  12.9% YoY to RM294mil in 1Q23, contributed by one-off claims reviews. As a result, the claims ratio of AGIC in 1Q23  improved to 59.4% vs. 60.7%. Net combined ratio for the general insurance segment was lower at 84.5% in 1Q23  (1Q22: 88.9%), attributable to the decline in claims ratio and lower expense ratio of 25.1% as result of timing  variances in expense spending. AGIC’s market share remained stable at 13.3% at the end of 1Q23.

• PBT of the life insurance business under ALIM of RM97mil decreased by 26.6% YoY in 1Q23. This was attributed to higher net insurance finance expenses (>100%) which offset an increase in insurance service results and investment  income.

• The contractual service margin (CSM) of the life business segment grew by 2.1% YoY to RM2.97bil while new  business value slipped 9.7% YoY to RM70.1mil in 1Q23 owing to higher acquisition expenses. RM95mil of the CSM  was released in 1Q23 (+5% YoY).

• Annualised new business premium (ANP) for life business rose by 11.1% YoY in 1Q23, better than the industry’s 3% YoY growth. This was supported by ANP growth from the agency channel of 1.1% YoY while that for bancassurance rose by 23.8% YoY. ANP growth for investment linked products improved to 24.4% YoY.

• A First Interim Dividend of 31.5 Sen/per Ordinary Share and 37.8 Sen/per ICPS Have Been Declared.

• The stock remains deeply undervalued based on a FY23F P/BV of 0.5x and offers an attractive dividend yield of  8.2%.

• We Continue to Like Allianz Due To:

  • i. AGIC has a commanding and stable market share of 13.3%, ranking no.1 in the general insurance industry.  Hence, we continue to see that the group may be able to withstand pricing competition from the gradual  liberalisation of fire and motor tariffs as well as the consolidation of players in the industry. 
     
  • ii. The acceleration of profit emergence for life business and lower volatility in interest rate movements after  adopting FRS 17. The adoption of FRS 17 will see movement in interest rates on the securities portfolio backing  VFA contracts to have a lesser volatility on earnings under the P&L. This is due to interest rate impacts on  securities portfolio under FRS 17 being now adjusted from contractual service margin (CSM), which will then be spread out over time through the contracted period of IL policies.
     
  • iii. 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 - 30 May 2023