From Allianz's briefing yesterday, we see its bancassurance tie-up with HSBC and its strategic change in agent sales as the key areas for FY13. Bancassurance, which began in FY2013, is likely to contribute to Allianz Life (ALIM)'s via products focused on protection and savings features. ALIM also plans to tweak its agents profile to draw customers of about ~30 years old. We make no changes to our forecasts. Maintain NEUTRAL, with FV retained at RM8.02, pegged to FY13 PE of 15x for its GI business and a P/EV of 1x on LI's embedded value (EV) of RM700m.
It's full steam ahead for HSBC bancassurance. We expect to see the bancassurance tie-up with HSBC flowing in from FY13 and help to diversify Allianz Life (ALIM)'s distribution stream. ALIM CEO Mr Jens Reisch had said during a press interview that he is targeting for contribution from bancassurance to account for 25% of the company's life insurance (LI) business. At present, the industry average is approximately 20%. The products to be rolled out along with the bancassurance channel will likely focus on a combination of protection and savings policies that can potentially leverage on education and retirement needs.
Agency profile to shift to younger agents. To date, Allianz has about 1.6k employees as well as 6.5k agents in the LI business under ALIM and 5.8k agents in the general insurance (GI) business under Allianz General. The company has announced plans to shift its agent portfolio to younger agents, with an average age of 33 years, in a strategy to attract more customers among new families and the younger generation to purchase smaller ticket unit-linked (UL) policies. The average age of customers who purchase unit-link products are 30-40 years old, while the customer profile for traditional products is estimated at >40 years of age. That said, we are neutral on this move given that the uncertain productivity track record of the young agents vs the older agents may not bring about the intended outcome. Nonetheless, note that Allianz Malaysia already holds a record for superior productivity among agents in the Asia-Pacific region.
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KEY TAKEAWAYS
Maintaining above-industry premiums growth. Allianz aims to sustain double-digit premiums growth, above the industry figures. Recall that the company almost touched the RM3bn mark in its gross written premiums (GWP), with a 12.9% three-year CAGR from its RM2bn GWP mark in FY09. We think it is likely that Allianz Life (ALIM) will continue to see aggressive growth in its life insurance (LI) business, as it is expecting new contributions from its HSBC bancassurance agreements, while Allianz General (AGIC) will continue to aim for general insurance (GI) premiums growth way above GDP.
Full steam ahead for HSBC bancassurance tie-up from Jan. We were told that the bancassurance business commenced early this year and expect to see its contributions to come in from FY13. This channel will also help to diversify ALIM's distribution stream. Management hopes the contribution from bancassurance would account for 25% of the company's life insurance business, vs the industry average of 20%. The products to be rolled out along with the bancassurance channel will likely focus on a combination of protection and savings policies that could also leverage on education and retirement needs. At end-Dec 2012, Allianz had entered into a five-year term loan facility of up to RM54.3m with Allianz SE largely to fund its upfront bancassurance costs. However, as we stated in our results note yesterday, the company had lowered the surplus transfer from its life non-participating fund to its shareholders' funds for FY12 to RM8.4m vs RM18m in FY11. Given that the regional-level agreement is for 10 years, it is possible that Allianz may conservatively retain the non-participating reserves at the same level moving forward.
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Strong growth in agency force. To date the company has about 1.6k employees as well as 6.5k agents in ALIM and 5.8k agents in AGIC. The company has operations in Kota Bharu while the East Coast operations for the ALIM's business is picking up, leveraging on AGIC's existing infrastructure.
AGIC: CONSERVATIVE DIRECTION
Claims ratio better than expected. As we mentioned in our results note yesterday, AGIC saw a substantial compression in its claims ratio (net change in claims incurred and contract liabilities / net earned premiums), which dropped by 3.5pts to 59.3% y-o-y. This has resulted in a 2-ppts compression in its combined ratio to 87.7%. We are sticking to our forecasts, in line with the company's historical combined ratios of 88% and 89% for FY13 and FY 14 respectively.
Staggered recognition of MMIP losses. We believe the company has recognized approximately RM8m in its share of Malaysian Motor Insurance Pool (MMIP) losses (over a five-quarter period), which was smoothened out on a quarterly basis compared with FY11.
Still taking a conservative stance. While AGIC's premiums growth has been aggressive versus the industry, its investment portfolio has been very conservative, with >93% allocated to fixed income, which has brought about yields of 3.8% despite a 14.0% y-o-y growth in net investment income. AGIC is targeting to hold premiums growth above GDP, but is more concerned on improving its claims efficiency, underwriting quality and expenses control to maintain its key indicators as well as to emerge resilient against downturns in the underwriting cycles.
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ALIM: A YOUNGER AGENCY FORCE
Shift in agency profile. ALIM experienced a substantial 18.9% increase in its agency manpower, or about 1.1k agents, from 5,471 agents in FY11 to 6,500 agents in FY12. Moving forward ALIM expressed plans to shift its agent portfolio to younger agents, with an average age of 33 years. This strategy is to enable ALIM to capture more customers from segments in new families or from the younger generation to purchase unit-linked (UL) policies. This is in line with customer profile as the customers who purchase unit-link products were thought to be around the average age of 30-40 years old, while the customer profile for traditional products are estimated to be above 40 years of age. That said, we are neutral on this given that the uncertain productivity track record of the young agents vs the older agents may not translate into the intended results. Regardless, we do want to remind that Allianz Malaysia already boast a track record in terms of superior agents productivity amongst the Asia-Pacific region firm-wide.
Higher claims incurred in medical products. We understand that the decline in ALIM's PBT RM75.3m in FY11 to RM72.4m in FY12 was mainly attributed to higher claims incurred for ALIM's medical portfolio, which is substantially exposed to interest rates risk. ALIM's response to this is to carry out active repricing - it reintroduced new health riders that provide better health benefits at higher premiums charges.
4Q new business boost from Allianz Life Saver. Management shared the reason for the boost in agency new business sales of traditional products from RM25.3m in 3Q to RM59.0m in 4Q was due to a special retirement plan that was rolled out in Nov 2012. The retirement product, called Allianz Life Saver, provides contributors a regular income up to age 88 as well as insurance coverage. It comes in four premium payment options of six, 10, 15, and 20 years, with options for flexibility. We believe the advertisement of the guaranteed cash payment may have helped boosted its sales by about RM30m but may not likely be a persistent trend given that it is a campaign.
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