At  ALLZ’s  briefing  yesterday,  we  saw  new  catalysts  in:  i)  stronger potential  in  the  bancassurance  business  with  HSBC,  which  involves rolling out  new products, and ii) higher retention of general insurance (GI)  premiums.  However,  we  remain  cautious  on  regulatory  changes surrounding  its  agency  business.  Maintain  NEUTRAL,  with  our  SOPderived FV higher at MYR12.00 (from MYR10.70).

• Sustained  GI  growth.  At  the  briefing,  Allianz  General  Insurance (AGIC)’s  management  said  that  due  to  its  ability  to  underwrite  good risks,  it  has been able to reduce  its dependence on reinsurance  by 10% (from  20%)  for  motor  insurance  gross  written  premiums  (GWP).  Our FY13F  GWP  growth,  forecast  at  15%,  is  expected  to  accelerate  and overtake the industry's 5-6% growth pace.
• Catalysts from bancassurance. The life insurance (LI) arm, Allianz Life Insurance  Malaysia  (ALIM),  is  confident  that  its  bancassurance  tie-up with  Hong  Kong  and  Shanghai  Banking  Corp  (HSBC)  will  continue  to deliver strong sales. GWP for  LI  jumped  19% YTD (from 14% in 1H13)due to a surge in single premiums  relating  to the  tie-up’s bancassurance debut product. This also led to its total YTD new business (NB) growth of 20%  exceeding  the agency’s  NB growth of 12%  and investment-linked products’  NB  growth  of  8%.  While  sales  may  moderate  in  the  future, ALIM and HSBC plan to launch more products, possibly by 2014.
• Concerns over BNM  concept paper.  Management shared its views on the  BNM  concept  paper  proposing  changes  to  operating  costs  and agency commissions for life insurers. Its concerns are: i) a potential shift to endowment and pure saving products from investm ent-linked products (which  account  for  68%  of  ALIM’s  NB),  ii)  uncertainty in  forming  direct channels, and iii)  the  future  of  investment-linked products, which  ALIM classifies  as  protection  products.  As  it  is  too  early  to  disclose  its strategies, management is still focused on protection products.
• Still  NEUTRAL.  We  lift  our  FY13F/14F  EPS  forecasts  by  8%/9%.  We also  raise  our  SOP-derived FV  to MYR12.00  (vs  MYR10.90), based on 18x FY14F  of  GI profits  and 1.2x of ALIM’s FY14F embedded value of MYR820m  (vs  1.0x  of  MYR760m)  due  to  the  catalysts  mentioned. Despite the strong 3Q13 results, we remain  cautious over the outlook of its agency business (brings in 86% of total LI premiums) and, thus, keep our Neutral call.

Key Takeaways From Analyst Briefing 
AGIC – higher retention
Gradually  weaning off dependence on reinsurance.  At the briefing,  management alluded  that AGIC  will raise its retention ratio (net earned premium/GWP). The motor quota share (ie  reinsurance) agreement with several reinsurers, includ ing Allianz Re, will see its portion of premiums ceded as reinsurance declining to 10% from 20%. According to  the  reinsurance agreement,  AGIC  will  transfer  a  percentage  of  motor premiums written to the reinsurer which, in turn,  pays  it  a  reinsurance commission based on a percentage. This would help ALLZ to sustain the aggressive growth of its motor premiums,  with less  capital  constraints.  On its financials, the reduction of the net earned premium in the denominator  resulted in an  uptick in expense  ratios,  on top  of  the  commission  ratio  being  compressed  -  as  a  result  of  the  netting  off  of commissions received as a result of the quota-sharing agreement.

We are of the view that the plan to reduce the  reinsurance portion bodes well  for the company  since this  demonstrates  its  ability  to underwrite good risks, amid having a large  motor  insurance  portfolio.  While  this  is  likely  to  lead  to  higher  growth  of  net earned premiums  vs GWP growth, management is retaining its combined (claims + expense)  ratio  target at  <90%.  This suggests  that  there is  more  room  for  AGIC  to spend  on  its  distribution  channels  and  infrastructure.  We  also  believe  the  higher retention  is  likely  a  strategy  to  mitigate  the  potential  detariffication  environment  by 2016.

In our Nov 2012 report, Maintaining Premiums Growth Momentum, management said it  will  strive  to  reduce  its  reliance  on  the  motor  quota-sharing  agreement,  which  is subject to an annual review by the company.

GI  forecast  changes.  We  are  keeping  our  GI  forecasts  unchanged,  save  for  an increase  of  FY13F/14F  GWP  growth  to  15%/14%  (from  14%/14%).  We  remain conservative on GI topline growth as it is already expanding faster than the industry’s projected 5-6% growth and historical CAGR of 7.4% since 2008. We remind investors that  Malaysia’s  GI  growth  highly  correlates  with  GDP  growth.  We  also  raise  our FY14F retention ratio by 1ppt.

ALIM awaits more bancassurance catalysts 
HSBC bancassurance sales off to a strong start. The ALIM-HSBC bancassurance venture  commenced  in  2013  and  launched  its  first  product  -  the  HSBC UniversalLegacy,  a  single-premium  whole  life  universal  plan  that  targets  HSBC’s high-income customers for legacy needs. We understand that  sales  of this product had been very successful in the beginning, reaching as high as MYR50m in 3Q alone and could possibly double by year-end. This  resulted in a spike in single premiums and an overall increase in LI GWP growth to 19% (from 14% in 1H13).

While  it  is  uncertain  whether  the  strong  sales  of  this  product  will  continue  at  this juncture,  we understand that ALIM-HSBC is looking to launch more products and/or value  propositions  focusing  on  the  same  retirement  and  legacy  needs, possibly  by 2014.  Therefore,  we  strongly  believe  that  ALIM’s  topline  growth  will  continue  to remain in the high double  digits, supported by the earlier-than-expected contribution from bancassurance products.

Management had guided in the past that it wishes for its bancassurance channel to contribute as much as 20-25% of new business and GWP by 2015, from merely 2% a year ago before the commencement of  the  HSBC bancassurance  tie-up. While it is still  a  long  way  to  go,  we  take  note  that  this  is  already  in  line  with  Bank  Negara Malaysia  (BNM)’s  intention  for  the  LI  and  family  takaful  industry  to achieve  a nonagent channel contribution of 30%.

LI forecast changes. We tweak our LI forecasts by raising both its FY13F/14F GWP growth to 17% (from 14%/16%). Subsequently, we also raise our LI embedded value (EV) to  MYR810m (from MYR760m). Also, we raised its P/EV to 1.2x (from 1.0x) as the catalysts to boost growth  in the bancassurance channel are unfolding on account of  the  strong  results  and  the  rollout  of  new  products  at  such  an  early  stage  was unexpected. We had highlighted the possibility of a higher ascribed P/EV in our 9 Oct update, Expecting a Softer 2H13.

Source: RHB