We attended Allianz' analyst briefing yesterday.  The  key  takeaways  were  :  i)  the current low tax rate was due to a one-off reversal of tax overprovision amounting to RM4.2m, ii) efforts made to sustain the aggressive growth in general insurance, especially motor premiums, and iii) the life insurance will see new growth drivers in  bancassurance  with  HSBC,  albeit  contributions  are  likely  to  be  minor.  Weupgrade  our  FY12  and  FY13  forecasts  by  7.9%  and  11.9%  respectively.  Maintain NEUTRAL, with FV raised to RM8.02 from RM7.53.
 
Lower effective tax rate arising from a one-off event. From the briefing, we came to understand  that  there  was  a  one-off  reversal  of  tax  overprovision  from  FY11  of  about RM4.2m.  Excluding  this  item  would  result  in  Allianz's  9MFY12  core  net  profit  (without the  transfer  of  surplus  from  non-participating  funds)  to  be  at  RM129.3m.  Regardless, management  expects  the  group's  effective  tax  rate  to  be  in  line  with  its  historical average of >30% moving forward. 

Motor  Quota  Share  as  a  mid-term  commitment.  Allianz  General  has  attributed  the hike in the combined ratio of the general insurance business to the motor quota sharing agreement  with  several  reinsurers.  The  purpose  of  this  agreement  is  to  help  Allianz sustain  the  aggressive  growth  of  its  motor  premiums  by  ceding  an  agreed  portion  of motor  premiums  to  reinsurers  in  return  for  reinsurance  commission.  While  this  has resulted in the uptick in expenses ratios, it has also compressed commission ratio due to the netting off of the reinsurance commission received. Management has highlighted that  it  will  strive  to  reduce  reliance  on  the  motor  quota  sharing  agreement  over  the long-term.

New  growth  drivers  from  HSBC  bancassurance  tie-up.  The  Allianz  Group  had  on 26  Oct  signed  a  10-year  exclusive  life  insurance  regional  distribution  agreement  with HSBC.  While  this  is  no  doubt  a  positive  move  for  Allianz  Malaysia,  we  are  of  the opinion that the upside will not likely be significant compared to the contributions  from its  enlarged  agents  base  '  general  has  close  to  6k  agents  while  life  insurance  has about 6.4k agents.  

Valuation adjustment upwards. We have adjusted our core net profit estimates 7.9% and  11.9%  higher  for  FY12  and  FY13  respectively.  Maintain  BUY,  with  FV  raised  to RM7.53,  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 RM650m for Allianz' life  insurance.  Note  that  our  ROE  and  BV  indicators take  into  account  the  non-participating reserves, but our PE indicators are based on core net profit.

MORE KEY TAKEAWAYS FROM THE BRIEFING
   
Motor Quota Sharing a mid-term commitment. Allianz General has attributed the hike in the combined ratio  of  the  general  insurance  business  to  the  motor  quota  sharing  agreement  with  several  reinsurers (which also include Allianz Re). This is a reinsurance agreement whereby Allianz will transfer an agreed percentage  of  motor  premiums  written  to  the  reinsurer,  who  will  return  to  Allianz  a  reinsurance commission  based  on  a  percentage.  The  purpose  of  this  agreement  is  to  help  Allianz  sustain  the aggressive growth of its motor premiums with less constraint on its capital. While this has resulted in the uptick in expenses ratios due to the reduced earned premiums in the denominator,  it has also attributed to the compression in commission ratio due to the netting off of the commission received arising from the quota  sharing  agreement.  Management  has  highlighted  that  over  the  long-term,  it  will  strive  to  reduce reliance on the motor quota sharing agreement, which is subject to the company's review annually.

Motor remains the focus while several initiatives are in place to expand non-motor portfolio. Motor insurance  remains  key  to  Allianz,  contributing  approximately  53%  to  its  general  insurance  premiums portfolio  mix  (1HFY12:  54%).  Allianz  will  continue  to  expand  its  multi  distribution  channel  to  sustain  the growth of its motor business with the support of the motor sharing quota. In the non-motor portfolio, Allianz has  several  small  initiatives  to  drive  growth  in  these  segments,  such  as  the recently launched 'Hotel Shield'  targeting  the  small-medium  customers  (SME  customers  by  Allianz's  definition)  or  business operators  of  budget  hotels,  but  none  of  them  are  expected  to  contribute  significantly  to  the  general business.

Life business profitability  yet to gain traction.  To recap, the life insurance division recorded a slightly lower  profit  before  tax  (-2.2%  y-o-y)  due  to  some  strain  in  claims  arising  from  some  of  the  group  and health products, as well as uptick in expenses ratio by 0.3pts from 9MFY11 to 8.7%. Also, the lapse and persistency  indicators  had  a  slight  deterioration  but  nevertheless  remain  superior  to  industry  levels.  As Allianz Life is still at its early stage of the business, management has reassured us that all indicators are within control. Moving forward, Allianz Life will hope to see about 66% of its policies related to protection (health, education, savings) businesses while the remainder on endowment plans.

Expecting a new growth driver in bancassurance. The Allianz Group had on 26 Oct signed a 10-year exclusive  life  insurance  regional  distribution  agreement  with  HSBC,  which  focuses  on  key  regions  in China,  Indonesia,  Malaysia  and  other  regions  outside  the  Asia-Pacific.  In  the  case  of  Malaysia,  Allianz Malaysia  plans  to  leverage  on  just  the  conventional  life  insurance  premiums  sales,  especially  via  the health  insurance  products,  which  is  non-existent  in  HSBC's  current  offerings.  While  this  is  no  doubt  a positive move for Allianz to penetrate into new markets and drive annual new premiums growth further, we are of the opinion that the upside will be challenging as i) HSBC will continue to distribute takaful products separately under its HSBC Amanah Takaful wing, and ii) many of HSBC's middle-to-high net worth clients may have already own several insurance policies. However, we highlight that Allianz Life is already doing well,  achieving  12.7%  growth  YTD  even  without  the  bancassurance  agreement,  given  the  productive agent channel.

Not  expecting  significant  cost  for  the  HSBC  bancassurance  tie-up.  We  were  made  to  understand that the Allianz Life Insurance divisions in selected key regions will have to  contribute towards the total upfront cash consideration of USD100.5m. While no details have been announced yet as to how much Allianz Malaysia is required to pay, management is of the opinion that it will not come at a significant cost to the company.

Prudent  investment  strategy.  Allianz  has  remodeled  its  asset/liability  management  programme  with focus on more longer-term maturity bonds at an average of seven years and above.  

Agents base continue to expand strongly. Allianz life insurance division has seen  its agents grow to about 6.4k YTD, while the agents base for general insurance is on track to hit 6k end of this year.

 
CHANGES TO OUR FORECAST

Lower  FY12  combined  ratio  for  general  insurance.  We  are  adjusting  our  assumptions  for  combined ratio downwards to 88.7% to take into account the Motor Quota Sharing effect (commission ratio at 8.2%, expenses ratio at 19.0%). We also factor in a higher general insurance premiums growth of 14% and 13% for FY12 and FY13 respectively.

Higher  transfer  of  non-participating  surplus  and  slightly  lower  tax  rate.  We  adjust  our  tax  rate  for FY12 and FY13 to 32% and 34% respectively, which are still in line with its average historical tax rate, but taking in higher transfer of non-participating surplus.

Upward  adjustment  to  our  net  profit  forecasts.  All  in,  our  core  net  profit  adjustments  are  7.9%  and 11.9%  higher  for  FY12  and  FY13  respectively.  In  terms  of  net  profit  with  non-participating  surplus,  the upward adjustments for FY12 and FY13 were 13.2% and 11.2% upwards respectively. Our FY12 core net profit excludes the RM4.2m reversal of overprovision for taxes.

Source: OSK