• Reiterate BUY, new MYR18.70 TP from MYR18.20, 18% upside with c.6% FY24F yield. In this report, we outline the impact of the adoption of Malaysia Financial Reporting Standards 9 (MFRS9) and 17 (MFRS17) on Allianz Malaysia, and introduce our forecasts aligned to both standards for FY22-25F (note that FY22 numbers are based on internal estimates for now). ALLZ is still a sector Top Pick, given its market leadership in the domestic insurance industry and strong ESG credentials.

• MFRS17 and MFRS9 impact. Upon transitioning to both standards, ALLZ’s total retained earnings and life non-participating fund was adjusted upwards by 10%, leading to a 8% increase in total equity. 1H22 headline net profit grew 52% to MYR300.6m – the big rise was mainly due to ALLZ reclassifying certain fair value through profit or loss (FVTPL) investments into fair value through other comprehensive income (FVOCI) post-MFRS9, along with faster profit emergence from investment-linked contracts. 1H22 ROE rose to 13.3% (from 9.5%, under MFRS4). A contractual service margin (CSM) of MYR2.7bn was established, which is indicative of future profit inflows. There is no impact on capital adequacy, as calculations are still based on the existing risk-based capital framework. for now.

• 1H23 results recap. Net profit grew 13% YoY on the back of higher insurance revenue (+8% YoY), a lower expense ratio (-0.8ppts YoY) and greater investment return (>100% YoY). However, a higher claims ratio (+3.7ppts YoY) and finance expenses relating to unit-linked life funds dampened the positive impact on PBT (+6% YoY). As at the latest available dates, Allianz General (AGIC) and Allianz Life (ALIM) commanded the first and fourth market positions in the domestic general insurance and life insurance industries.

• Navigating a challenging market. ALLZ will continue to focus on repricing activities and close monitoring of claims cases to contain the elevated medical claims environment. In the meantime, new business growth for ALIM will be focused on the investment-linked protection segment. Notwithstanding the slowdown in new business value booked in 1H23 (-5% YoY), the 4% YoY increase in CSM as at 1H23 is positive for future profit growth. Elsewhere, AGIC will continue to explore new opportunities – particularly in motor insurance – including partnerships with new electric vehicle market entrants (eg BYD) and insurance for second-hand cars.

• Forecasts and TP. We forecast a net profit CAGR of 9% over FY22-25. This comes from a combination of stable investment returns group-wide, and stronger AGIC insurance service results. Post-transition, we continue to use a SOP valuation for ALLZ – price-to-embedded value (P/EV) for ALIM and P/BV for AGIC. Our TP rises to MYR18.70 (from MYR18.20), mostly due to a larger FY24F BVPS assumption for AGIC post-transition. Our TP includes an ESG premium of 6%, given ALLZ’s leadership in the ESG space among domestic insurers.

Source: RHB Securities Research - 27 Oct 2023