• Maintain OVERWEIGHT. In this report, we outline the key impacts of the adoption of Malaysia Financial Reporting Standards 17 (MFRS17) on Allianz Malaysia (ALLZ) and Syarikat Takaful Malaysia (STMB). We also introduce our maiden MFRS17 forecasts in accompanying company update notes. Post-transition, insurers remain our Top Picks within the non-bank financial institutions (NBFI) space.

• MFRS17 impact. The impact of MFRS17 adoption varied directionally between the two insurers – ALLZ had its retained earnings and net profits restated upwards, whereas STMB’s were revised downwards. We believe the difference lies in the types of insurance/takaful contracts that make up their respective in-force books, along with the accounting processes undertaken pre-transition. Post-transition, profits from insurance/takaful contracts are to be recognised over time, across the lifespan of the contracts. This would have a greater impact on the profit recognition timing of the longer-tailed life insurance contracts. Additionally, MFRS17 requires the establishment of a contractual service margin (CSM) account, which records the yet-to-be recognised profits from in-force contracts, ie expected future profits. Despite the changes to shareholders’ equity, there is no impact on capital adequacy and dividend payout capacity for both insurers, as calculations are still made based on the existing risk-based capital framework for now.

• Forecasts. Our new MFRS17 FY22-25 forecasts for Allianz reflect a >20% increase from our previous MFRS4 estimates – this is mainly premised on ALLZ’s enlarged restatement of its historical numbers post-transition (1H22 net profit was restated upwards by 52%). On the other hand, our forecasts for STMB remain more or less flat post-transition, as downward revisions from the transition were mitigated or offset by its strong YTD performance and positive outlook.

• Valuation. For now, we maintain our valuation methods for both insurers – changes to TP, if any, are a reflection of forecast revisions and BVPS/ROE adjustments from transition. Valuations for our insurers have de-rated since the MFRS17 effective date announcement in early 2020. Post-transition, given the greater earnings visibility – and to a certain extent, accessibility of the numbers – we reckon a re-rating is warranted, especially as both insurers remain in fundamentally sound positions in our view.

• Still OVERWEIGHT. We reiterate that the insurers are our Top Picks among the NBFI stocks. Both ALLZ and STMB are respected market leaders in the domestic insurance and takaful industries, occupying the pole positions in the general insurance and family takaful fields respectively. While claims – especially on the life insurance/family takaful side – are expected to remain elevated, both groups have initiated repricing activities and closer monitoring of claims cases to mitigate the impact. In the meantime, sturdy growth in general insurance results, along with improving investment returns, could help the insurers weather the challenging market conditions.

• Key downside risks to our call include weaker-than-expected insurance or takaful sales, adverse fixed income movements affecting investment yields, and higher-than-expected claims.

Source: RHB Securities Research - 27 Oct 2023