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.

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.

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.

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.

Source: OSK