EV is calculated by Allianz actuaries, not estimated by analysts. All else equal, then yes, Jun 2021 EV = Jun 2020 EV + NBV - profit release, including discounting effect. However, there is medical repricing going on, and will also increase the EV.
@wsb_investor, thanks for the feedback. What are the examples of profit release?
For medical repricing, aren't the projected higher premiums in future years meant offset by the higher expected medical cost, such that the net effect to EV is about zero? Would regulator intervene if insurance companies increase their profits by charging higher premium than necessary (to contain medical cost inflation)?
typically medical repricing will only lead to higher EV, many insurers get away by saying they target a similar level of margin (in %), but withhold the information that they earning higher in absolute amount (hence higher EV).
Affin Hwang has published a report on insurance sector on 8 Nov. Among others, it has touched on the transition from MFRS4 to MFRS17. The subject is very technical for me. But I summarize my key learnings for your comments.
(1) Life and Takaful players will be most affected. The upfront recognition of premiums received for longer duration contracts as income is no longer permitted under MFRS 17.
(2) Insurance liabilities will be measured at a ‘current fulfilment value’, (the current estimates of amounts the company expects to collect from insurance premiums and payout for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts) along with the ‘contractual service margin’ (CSM) - that is, the expected profit for providing insurance coverage.
(3) The formats of income statement and balance sheet will change drastically.
(4) Embedded value (not required to be disclosed by Malaysia’s life insurers) may be eliminated under IFRS17.
(5) Affin has slashed its TP for Syarikat Takaful from RM5.60 to RM3.80. It expects “contractual service margin impact of 30% from 2023E retained earnings as the Day-1 impact of the MFRS 17 adoption.”.
Given Syarikat Takaful has ~RM1.2 billion retained earning as of 2020, does Affin expect a one time charge of ~RM400 million on 1 Jan 2023? Given the annual PBT is only about RM400 million, does it mean an entire year of profit get wiped out?
(6) Affin also assumes a 20% reduction in the Allianz Malaysia's estimated EV of RM3 billion. TP is reduced from RM16.40 to RM14.00. Downgraded from Buy to Hold.
A RM600m Day 1 charge on Allianz?
Even though this is just reshuffling of accounting numbers, the magnitude is still mind boggling. Could it be that large for both firms? Do I miss out something?
Point 4 & 6 seem contradictory? (4) Embedded value (not required to be disclosed by Malaysia’s life insurers) may be eliminated under IFRS17. (6) Affin also assumes a 20% reduction in the Allianz Malaysia's estimated EV of RM3 billion.
If EV is eliminated, why Affin assumes 20% reduction of EV?? I am confused
I recall the long discussion. There seem to be some forumers with good knowledge here. Hope they can share their view.
(4) and (6) are not contradictory. EV is the current way of valuing life insurers, though the disclosure is not required in Malaysia. According to Affin, in the future EV may be eliminated (but no final decision yet; still under debate).
So there are two sets of valuation method. Currently analysts use old valuation method. Maybank, Affin, Am and RHB all value Allianz Life by assigning EV to it. What Affin does is to assume the MFRS17 impact under the old valuation framework.
Quite poorly written, and she seems just clueless about IFRS17. For the medical inflation and ability to reprice, yes that will be a key concern, but wont be a big issue. Insurers will just exit if not allow to reprice when combine ratio > 100%, and no one will allow this to happen. Recently, Singapore mandatory all insurers abolish cashless medical plan and that's more likely will be the approach BNM is going to take. *Premium for 5% co-pay plan can be 20-30% cheaper vs cashless plan.
Thanks for the input. Hong Leong has recently met with Syarikat Takaful management. This is their opinion today on MRFS17.
"Less concern with the adoption of MFRS17. We estimate the transition to MFRS17 accounting standard in 2023 would see earnings shrink by 11% (guidance: -15-20%) vs MFRS4 disclosure; that said, it will be applied retrospectively and the restatement of comparative financial information is required. Also, there will be a day 1 downward adjustment to retained profit for accounting modification on legacy single contribution certificates (book value is estimated to decrease by 20%). As such, MFRS17 ROE is anticipated to higher vs MFRS4 (+2ppt) but capital adequacy ratio (CAR) is poised to drop; however, the latter should stay above the 130% regulatory minimum and cash call risk is limited. In any case, the change in accounting standard does not alter the business nature and cash flow of single contribution products. Thus, we are now less concern with the adoption of MFRS17."
In other words, management guided that earning shrunk by 15% to 20% (HL expects 11%). The book value is estimated to decrease by 20% (versus Affin's estimate of 30%).
Although smaller figure but still sizeable. Not sure how much has been priced in by the market.
Insurance liability will change to BEL + CSM. For STMB (heavily on single premium), BEL will almost similar with existing, but additional component for CSM (can only be positive), hence downward adjustment for book Value. Basically undo day 1 gain previously, and release it over time in future. For Allianz, heavily on ILP, the contract liability currently (floored at 0) will change to negative BEL + positive CSM. It will be positive adjustment instead (release profit faster).
It’s quite technical, but let me try to rephrase to see if I get your points.
Under IFRS17, insurance liability = Contractual Service Margin (CSM) + Best Estimate Liability (BEL, which is equal to PV of cash flows)
Moving from IRFS4 to IIFRS17, BEL is (almost) unchanged for existing contracts. But CSM should have a positive value as it represents profits to be released in future years over the life of those contracts.
However, for single premium products sold before 2023, their profits have already recognized on Day 1. These profits have been booked under the retained earnings on the equity side.
To “restore” a positive value in CSM for products already sold before 2023, there should be a corresponding reduction in equity.
This is because in accounting, (a) equity + (b) insurance liabilities + (c) non-insurance related liabilities = (d) asset. Given that (c) and (d) are unchanged, the sum of (a) and (b) must be constant. When (b) is increased, (a) must be reduced accordingly.
Given STMB has higher single premium products, the effect will be larger.
But no such problems for ILPs where premiums are paid annually.
In fact you mentioned before, under today practice, costs are booked up front for ILPs. As a result, newly sold ILPs have the effect of causing losses rather than profits in the first year. Under IFRS17, will these costs be distributed over the contract lifetime too? If yes, would there be an opposite effect where cost before 2023 gets reversed under IFRS17?
That cost impact is minimal. Operationally, that will depend on how you want to set the transition CSM (there are multiple approaches). You can set it to super high, normal, or super low. For STMB, since the BEL & CSM both always positive, so doesn't matter how they set CSM, confirm will be a hit to equity. For Allianz, BEL for ILPs almost always negative. Unless the CSM is set to be artificially super high (unlikely), otherwise BEL+CSM will still be a negative for Allianz, and hence higher equity value. Typically, conventional insurers aim to just be balance.
While there is a one time reduction in STMB equity, I wonder what is the implication of ROE post IFRS 17.
Granted ROE may not be a useful indicator under IFRS4 since the definition of profit is misleading. But with a more realistic definition of profit under IRFS 17, can I say that after 2023, ROE becomes a true indicator on return on shareholders’ capital?
Given ROE = net profit/ equity, as long as STMB’s one-time equity reduction is larger than the fall in profit under IFRS17 (will profit fall much?), ROE will actually increase.
Currently STMB already has the highest ROE among insurers. What does it mean if it has an even higher ROE under IRFS17?
In future civil servants can "purchase motor vehicle takaful coverage together with road tax renewal by way of an interest free Shariah compliant Qard loan facility that enables instalment payments via a salary deduction plan of up to 10 months"
Hi, can anyone pls advise on the investment holding segment of Allianz Malaysia? Investment income 3 million, but PBT is -11.9mil !! I think this is the highest recorded loss before tax reported for investment holding segment of AMB since the past 8 quarters. The Management told that it is due to larger management expenses. Can anyone please explain how they work out the figure? Any impact of IFRS17 on this segment?
Hi observatory, I am wondering, what's the use of all this growing ANP and NBV of Life Segment, and meanwhile all the life's profit is dragged by the fluctuating bond interest % (fair value loss)? I am bit puzzled in fact. Reporting increasing premium y-o-y, but once interest % goes up, all the profit masuk longkang.. What's the rationale behind all this number game and I am wondering whether there is a more effective way to understand the whole picture on whether an insurance company is doing well or not?
Besides, I think it was explained here before that interest rate changes also have an offsetting effect on liability. Just that I don’t know how to pin point the change in the liability side. Can anyone elaborate on that?
I like to think NBV as addition of future profits to the "profit reservoir". So it's important.
Of course these future profits are calculated by actuarists based on methodology and their assumptions. Not sure if BNM dictates the parameters in NBV computation. But Allianz being a subsidiary of Allianz SE it believe has to follow its parent’s way, and somehow comply to a “global standard”?
Just wonder historically how often that insurance firms find their calculations made by actuarists in an earlier age turn out to be very different at a later age. Any such example @wsb_investor?
@wsb_investor, it seems that paying too much attention to life insurance quarterly core PBT could be a distraction. Not to mention PBT that incorporates fluctuation in investment gain/ loss.
Would you agree with this view?
My reasoning is this. On the revenue side, other than single premium products (account for only 17% of GWP in 9M21), other policies have been written years before. Their quarterly revenue contribution should be predictable right? For example, ALIM quarterly gross earned premium for the last 4 quarters are within the range of RM753m to RM826m, a variation of less than 10%.
I suppose on the cost side they are exposed to the rise and fall of claims, management expenses etc. Core PBT in the last 4 quarters vary between RM43m and RM69m. However the quarterly cost are rather stable in the low RM700 million range. The seemingly larger swing in core PBT is due to the relatively thin (<10%) PBT margin.
When you look at the life insurance core PBT, what are the factors you will look at to gauge the performance?
No one will care about PBT margin, that doesn't reflect anything remotely close with how life insurance operates, and hence this PBT margin will be gone in IFRS17. For core PBT, yes that will be helpful, however as mentioned before, new business sold will incur losses in early period. Say a profit pattern of -100, 20, 20, 20, 20, 20, 20...., stack up for multiple years of new business, it will be -100, -80, -60, -40, -20, 0, 20, 40, 60, 80..... Say on the year where the profit = 60, the profit coming from existing block is actually 160, but drag down to 60 due to first year acquisition cost of new business. This is still on the assumption that new business volume doesn't increase. In reality, new business typically grow with 10% a year.
Based on what you've said, IFRS17 should have been implemented long ago. It will save everyone from major misunderstanding. For example Affin assigned a RM8.4 TP to STMB in late 2019 based on 4.75X book value. Now it's RM3.8. Despite the pandemic the impact to insurance sector isn't that great. May be this can explain the constant share disposal by STMB insiders!
The fair value you typically saw in analyst briefing slides coming from the assets side. For core PBT, some insurers (not sure with allianz) will assume a long term interest rate/no change in interest rate when calculate the liability. The impact is generally relatively minimal.
hi @wsb_investor, rgd. the impact of covid on Allianz Malaysia's business, am I right to say that the impact is not so much as the net earned premum is still increasing despite covid?
From what I observed (pls correct me if I am wrong), the main reason the profit is dragged is the fair value loss in Life segment. So, can I say that their investment team is not doing a good job in this regard (buy bond at wrong timing)? Nothing to do with covid I believe?
I come across this advertisement by Allianz General. There is a section talking about its stance on online sales.
This coming year, Wang says Allianz General will continue to use Covid-19 as a backdrop to design its products and listen very carefully to the voices on the ground to ensure it produces the right kind of solutions. The one thing it won’t do, he says, is sell them directly to customers online.
While it has over 40 digital partners, the insurer still prefers a hybrid business model that sees its agents personally dealing with customers. That might sound unusual in a time where businesses are increasingly digitalising their products and services.
Wang explains that this is because he is not convinced that the company can be as effective at delivering its services via an online portal.
“You can get a quote and key in some details; it’s just that the last mile of buying, you can’t buy. I want to route you to our intermediaries so that they can provide you with the service. As a responsible insurance company, we don’t want to get a whole bunch of customers that I don’t even know how to service — that’s not our business model,” he stresses
Despite what the new CEO has said about online sales, I suspect the main reason is the company does not want to alienate its agents.
Does it mean other players selling direct to customers can eventually eat into its market share through the offering of more competitive products?
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