• Allianz’s 2Q20 net profit of RM167.7m (+42.5% yoy; >100% qoq) was largely driven by robust investment fair value gains as well as lower claims (during the MCO/CMCO period). 1H20 results was above our and consensus estimates.
• Should there be more interest rate cuts in 2H20, we expect Allianz to benefit from fair value gains. Nonetheless, weak returns from markets may dampen overall portfolio returns in the long run.
• Upgrade Our Rating From Hold to BUY on Valuation Grounds

1H20 Net Profit Rose 14.2% Yoy, 2Q20 Earnings Rebound >100%

Allianz saw stronger results in 2Q20 as net profit recovered by>100% to RM167m (>100% qoq; +42.5% yoy), as the quarter was saw overall lower net claims incurred as well as a significant fair value gain, of which swung from a loss of RM486m in 1Q20 to RM368m fain in 2Q20 (largely related to the Life’s portfolio). Meanwhile, at the topline, gross written premium (GWP) shrank 12% qoq while net earned premium (NEP) declined 7% qoq for both the General and Life business segments attributable to disruptions caused by the MCO and CMCO. However, 1H20 continued to see GWP rising 7.3% yoy (General +6.3% yoy; Life +8.2% yoy). Based on management’s guidance, the 1H20 core pre-tax profit at the Life segment (ex-fair value gains and tax impact) remains robust, as it actually expanded by 32.8% yoy. Meanwhile, the General segment’s 1H20 pre-tax profit grew by +9.4% yoy. Meanwhile, 1H20 net profit rose 14.2% yoy (due to a higher tax effect in 1H19) while 1H20 pre-tax profit was up by a marginal 3.5% yoy.

Revising 2020E Net Earnings by 22%

We raise our 202E earnings forecasts by 22% largely to account for stronger investment income and fair value gains. We maintain our topline net earned premium assumptions, i.e. relatively flat in 2020, followed by +6% yoy and +4% yoy growth in 2021-22E.

Upgrade to BUY from HOLD on valuation grounds. PT unchanged at RM16.40

We upgrade Allianz from Hold to BUY (on valuation grounds) based on an unchanged SOTP-based target price of RM16.40 (key assumptions: target 2021E P/BV of 1.55x for its General operations and target 2021E P/EV of 1x for its Life operations). Downside risks: i) high inflation costs; ii) theft and fraud cases; and iii) more competitive rates from peers. Downside/upside risks: weaker/stronger Takaful sales; improved claims ratio.

Source: Affin Hwang Research - 28 Aug 2020