Another strong quarter. Allianz's annualised earnings for 1HFY12 exceeded our full year earnings estimates by 20.1%. Its 2QFY12's core earnings registered y-o-y growth of 25.3%. Earnings growth would be 29.1% higher y-o-y, if it reflected the transfer of non-participating funds in 1HFY11's earnings in line with the retrospective adoption of MFRS139. Meanwhile, gross written premiums in general insurance grew by 14.2% y-o-y and life insurance by 12.5% y-o-y.

General insurance's overall margins improve. The overall combined ratio improved 1.2pts to 86.2% compared to 1HFY11, mainly due to a sharp compression of commission ratio by 2.4pts to 8.1% from 10.5% in 1HFY11 despite a slight offset by an increase in the management expenses ratio of 1.4pts to 19.1%. Investment performance for general insurance enjoyed stable y-o-y growth of 26.6%, with over half of the portfolio invested in government bonds contributing to an investment yield of 4%.

Growing agency force drives life insurance. With Allianz's 10,500-strong agent base, agency sales continued to drive the growth of Allianz's life insurance products, especially for higher margin IL products which grew over 38% y-o-y in 1H12. Consequently, within its agency product mix, we observed an increase in the ratio of unit-linked segments from 44.9% in 1HFY11 to 61.2% by policy count, compared to traditional products. This is in line with the company's target to leverage on more profitable unit-linked business segments.

Maintain BUY. We continue to find Allianz attractive for its strong market leader position in general insurance as well as its prudent management. Maintain BUY, with an unchanged FV of RM7.09, based on a sum-of-parts valuation attributed to an industry PE of 15x for general insurance, and P/EV of 1x on an embedded value (EV) of RM600m for Allianz' life insurance. Potential re-ratings may come from i) more efficient expansion of multi-distribution capabilities, ii) profit drivers from the new campaigns by end of this year, and iii) potential M&A exercises, especially on the profitable takaful segment which Allianz has yet to venture into.

Source: OSK