Investment Highlights

• We maintain our BUY call on Allianz Malaysia (Allianz) with a higher FV of RM17.40/share from RM17.10/share. This is based on a revised SOP valuation after factoring in an increase in the embedded value of life insurance business. Our FV reflects an unchanged neutral 3-star ESG rating.

• We have made no changes to our earnings estimates. However, we fine-tuned FY22F/23F/24F DPS after recent guidance from management.

• The stock remains deeply undervalued trading at FY23F P/BV of 0.5x while dividend yields are decent at 5.3% for FY22F and 5.5% for FY23F.

• Recall in 6MFY22, gross written premium (GWP) of life business under Allianz Life Insurance Malaysia (ALIM) grew by 8.2% YoY, supported by growth in premiums from all key distribution channels. The persistency ratio for life business was stable QoQ at 87.4% in 2Q22.

• The life business annualised new business premiums (ANP) fell by 3.2% YoY in 6MFY22 driven by lower volume from the agency business. Nevertheless, it still outperformed the industry, which recorded a contraction of 7% YoY. Generally, sales of life products have been slower for the industry. This was attributed to global economic uncertainties, which led some consumers to defer purchasing longer term insurance plans.

• On agency new business, Allianz Life’s market share has improved modestly to 11%, ranking 5th in the industry as at end of June 22. For new business under the employee benefits (EB) segment, its ranking at 3rd position was sustained while that for bancassurance (Banca) at 7th in the market. Market share for EB/Banca has improved to 10.7%/6.7% with higher growth of ANP for both segments compared to the industry.

• On quarterly comparison, ANP for ALIM increased in 2QFY22 vs. 1QFY22. In July and Aug 2022, ANP for the life insurance business has further picked up pace. With that, we expect 3QFY22 ANP to be modestly better compared to 2QFY22. This is likely to move ALIM’s 9MFY22 ANP closer to the level of the corresponding period last year.

• The 10-year MGS yield has been hovering between 3.9%-4% in the first 2 months of 3Q2022. Recently in Sept 2022, the yield has increased to 4.2%. This stems from a spill over effect of the surge in US treasury yield to 3.5% with market turning more hawkish on Fed rate hikes. Market has now priced in the US Fed rate climb to 4-4.25% vs. 3.5- 3.75% earlier by the end of 2022. Despite higher 10-MGS yield of 4.2% vs. July and Aug 2022, the rate was still lower than the 4.3% (+40bps QoQ) seen as at end 2Q22.

• In 2QFY22, with the much volatile yield movements, the group recorded a net fair value losses on investments (taking into account the impact of the change in contract liabilities (reserves) of RM414mil. Looking at a favorable movement in 10-year MGS yield in 3Q2022 vs. 2Q2022, fair value losses under the life business seen in the preceding quarter are unlikely to be repeated.

• Embedded value for life business now stands at RM3.6bil and the group remains focused on selling investmentlinked products with protection riders which provide higher margins.

• 6MFY22 saw a GWP growth of 13.2% YoY for the general business under Allianz General Insurance Company (AGIC), beating the general insurance industry’s 9.6% YoY growth. The strong momentum is expected to be sustained in 3QFY22 supported by AGIC’s commanding market share of 80% for personal accident (PA) products, which are sold to the B40s under the Perlindungan Tenang Programme. Also, backlog deliveries of new cars from earlier bookings due to the SST exemption is expected to be supportive of growth in motor premiums.

• We expect Allianz’s upcoming 3QFY22 results to be stronger compared to 2QFY22 premised on the non-repeat of substantial fair value losses on investments in the previous quarter and the commendable GWP growth of both the group’s general and life insurance business. Meanwhile, claims for general insurance business have been holding up well while the increase seen in medical claims recently was not surprising as it was expected to normalise after the reopening of economy.

• In 2QFY22, the group declared an interim dividend of 16 sen per ordinary share and 19.2 sen per irredeemable convertible preference share (ICPS). This amounted to RM60.8mil, which were paid out on 5 Aug 2022. Allianz is on track for a payout of a 2nd interim dividend for FY22 which is expected to bring total dividends, including ICPS, to RM240-300mil for the financial year.

• On 29 June 2022, the group extended its bancassurance strategic partnership with HSBC Bank until 2036. The renewal of the Banca partnership with HSBC Bank saw an increase in goodwill of RM90mil recorded by the group, which will gradually be amortised in P&L over 15 years.

• Allianz is our top pick for insurance stock. We like Allianz due to the following reasons:
  i. AGIC has a commanding market share of 13.4%, ranking no.1 in the general insurance industry. Hence, we continue to see that the group to be able to withstand pricing competition from the gradual liberalisation of fire and motor tariffs as well as the consolidation of players in the industry.
  ii. The group’s stronger focus in investment-linked (IL) products with protection riders will put its life insurance business to be less significantly impacted by FRS 17, which will be implemented on 1 Jan 2023. 
  iii. Upon the adoption of FRS 17, the negative revaluation on the group’s life insurance’s investments which dampened the group’s net profit in FY21 and FY22 will no longer have any P&L impact from FY23F onwards. We understand that the marked-to-market changes in valuation of securities portfolio commencing from next year will flow through the comprehensive income. 
  iv. The diversified portfolio and delivery channels for general and life insurance business bodes well for topline growth as well as to increase life insurance’s new business value.

Source: AmInvest Research - 22 Sept 2022