Stronger Results in 2Q18

Allianz Malaysia’s (AllianzM) 2Q18 net profit jumped by 36.7% yoy on the back of stronger net earned premium growth (general +4.1% yoy; life +18.6% yoy) and a reversal in net change in contract liabilities. Overall 1H18 results was above our and market expectations. Our forecasts are under review pending a meeting with management. In any case, we expect a much better earnings outlook in 2H18 due to the absence of impairments and potential sale of higher-margin investment-linked products (recurring premium). Maintain BUY on AllianzM with a sum-of-the parts PT of RM17.60.

2Q18 Net Profit +36.7% Yoy – Stronger NEP Growth, Lower Liabilities

AllianzM’s 2Q18 net profit grew by 36.7% yoy while 1H18 net profit remained robust, up 33.2% yoy. The key drivers to 1H18 results were: i) stronger net earned premium (NEP) growth, +9.4% yoy; ii) a lower net change in contract liabilities (77.3% yoy); iii) lower management expense due to absence of receivables impairment. Nonetheless, this was offset by higher net claims (given a higher retention rate) and mark-to-market losses for its trading book. Overall results came in above our and consensus estimates.

General and Life Segments Saw PBT Up 11.2% Yoy and 22.6% Yoy

AllianzM’s general business contributed to the bulk of the group’s pre-tax profit, accounting for approximately 67% while the life segment was at 33%. The general business’ pre-tax profit was RM165.4m in 1H18 (+11.2% yoy) with higher underwriting profit from a lower expense ratio while NEP was up 5.7% yoy (motor remains the largest contributor at 62% to GWP). The 1H18 PBT for life business was up 22.6% yoy to RM82m largely due to sharply lower net chage in contract liabilities, though offset by a fair-value loss of its financial assets held-for-trading.

Maintain BUY Rating, Price Target Raised to RM17.60

Maintain BUY at An Unchanged Sum-of-the-parts (SOTP) Price Target of RM17.60 (key assumptions: 1.7x 2019E P/BV target for its general operations and 1x 2019E P/EV for its life operations). We expect AllianzM to see improvements in its 2018-20E earnings in the absence of any huge receivables impairment, increased sale of higher-margin investmentlinked products and a repricing exercise of the life/medical policies.

Key downside risks: i) industry penetration and density rate continues to remain low; ii) stiffer-than-expected competition from detariffication; iii) rising threat of high claims costs at both the general and life business; iv) theft/fraud cases or an unexpected economic downturn; v) adverse experience, or variance in embedded-value calculations; and vi) adverse results of investment activities against its insurance contract liabilities.

Source: Affin Hwang Research - 21 Aug 2018