According to 1Q22 presentation, Group Operating Revenue +6.3% Group Gross Written Premium +9.5% Group core profit before tax RM184.8m (versus RM130.7m in 3M21)
Both GI and life have recorded increases.
While the numbers look good, there are areas of concern in Life business. New business value was RM59.1 million, decreased by 28.5% This was mainly due to lower sales from agency, where agency ANP has decreased by 26.9%.
While current year profit has increased, it's the growth in NBV that will deliver the growth of future profits for life.
Is the decline in agency sales a temporary setback?
By the way did you read last week weekend edition of The Edge? There was an article about Great Eastern. According to Bloomberg data it quoted, currently market prices this leading life insurer at only 0.53 times price to EV. Price to book is slightly below 1x.
Do other life insurers in this region also suffer from low valuation? What might be the reason?
Not interested on Sean, but the CFO lineup is really interesting. Did some checks, and apparently right now, GE, AIA, Prudential, Allianz and HLA, all CFO are qualified actuaries. The ex Allianz CFO (now Allianz Life CEO) is just a rather normal accountant.
There are many ways to present results nicely under IFRS17 due to the principle based nature. There are also ways to design products, that is beneficial under IFRS17. Of course it won't be the CFO that do these ground works, but a CFO that can really understand, will always lean towards a better, actuarial sound decision.
What do you mean by product design that is beneficial under IFRS17? By benefit do you mean greater recognition of profits in the earlier years, but at the expense of lesser profit recognition in the later years? That is more like a matter of presentation. Any example?
There are products that might appear to be loss making under IFRS17 reporting (risk neutral basis), but profitable under real world basis. For example NPAR endowment, Participating products (or in general, saving products).
Certain products will also have high profit recognition in earlier years, despite negative net cashflows, for example investment linked products. There are also products with slow profit recognition, but high positive net cashflows, e.g. MRTA.
It is obviously not easy to maintain a good mix (even pre IFRS17), and to meet distributors' requirements, market competitiveness etc. It is just going to get harder and more complex.
Am I right that from shareholders stand point, whether profits are recognized in early or later years does not change the overall profitability? The only challenge is year to year reported profit could be more volatile and obscure, making it difficult if shareholders who value the shares based on reported profit (since Allianz doesn't disclose its EV)
In what way are distributors affected? Isn't profit recognition concern only Allianz and its shareholders, and maybe the tax authorities? Do you mean the distributors are incentivized based on the Allianz's reported annual profit, such that distributors' incentives could be affected if profit recognitions are pushed out to the later years?
In general IFRS17 will make profit emerging more stable and less volatile, but there might be exceptional case on certain product type. Yes, profit over the lifetime will be the same, just timing.
Distributors depend on the commission for living, so say if Allianz stop selling less profitable saving product (despite lower comm%, but bigger premium size, and higher absolute commission), agents will not happy. There are a couple of time where agents in Malaysia protested against the insurance companies due to commission related issue. In some extreme cases, some CEOs stepped down due to this.
I see. There seems to be a lot more considerations than profit alone when insurance companies push their products.
After reading you comment, I checked out the ISM yearbook for new policies issued in 2021. I found Allianz underwrote a lot of endowment policies than whole life policies. However the market leader Great Eastern has slightly more whole life than endowment. Is there a reason for their different emphasis?
The other point is, as you've mentioned in the past, Allianz sells a lot of investment-linked products which offers better margin. This seems to be a common industry practice. For the entire industry, the premium for new ILP was RM6.6 billion versus RM2.2 billion for traditional products.
In fact companies like AIA, Prudential and even Etiqa sold a much higher proportion of ILP. What is holding Allianz back from selling even more high margin ILPs like its peers? Does it have to do with agent commission factor too?
Dont think the classification of whole life/endowment is very straight forward. ILP can be both, and for Allianz, its product strategy previously was to design ILP that only last until age 70 (hence lower price), vs other competitors that design ILP that can last until age 100. Of course right now, regulation changed again and product strategy is slightly different. You can see from ISM yearbook, page 99, AIA ILP almost all classified as whole life, while Allianz ILP almost all classified as endowment.
Not sure where you see Etiqa sold higher proportion of ILP than Allianz. My impression is that Allianz has the highest proportion of ILP (within its inforce policies) among all insurers in Malaysia. Other insurers due to legacy issue, has a big block of traditional business (within inforce business), especially GE and AIA, despite trying to sell more ILP now.
Yeah you're right. Almost all of AIA ILP is classified under whole life, whereas Allianz is under endowment. With your explanation it makes sense now.
When I mentioned Etiqa Life has a high proportion of ILP, I refer to page 98-99 (section on new policies issued - individual). I focus only on new policies issued in 2021. Under the sub-heading of total (for current year), under the Investment-Linked column, total premium = RM175,844,735 (single premiums) + RM520,438,603 (annual premiums) = RM696,283,338. Under the Ordinary Life column (I suppose ordinary life means traditional products, right?), total premium = RM9,146,117 (single premium) + RM82,263,788 = RM91,409,905. This is how I've arrived at the conclusion that Etiqa also sells a very high proportion of new ILP policies (RM696 million premium) as opposed to traditional policies (just RM91m premium)
I also check the section "Policies In Force at End of Year - Individual" under page 122-123. For Allianz Life, the annual premium under "Ordinary Life" is RM1,528,13,953, versus RM2,070,966,065 under "Investment-Linked". Yes, the proportion of Allianz ILP (within in force policies) is higher, but not very much higher. On the other hand, take Prudential for example. Annual premium under "Ordinary Life" is RM2,746,671,221. Under "Investment-Linked" is RM7,515,202,224. Prudential ILP (within in force policies) is almost triple the size of its ordinary life! Even HLA ILP is more than double the size of its ordinary life. It seems that the high proportion ILP is quite common across insurers, where some have a lot higher concentration of ILP. Have I interpreted the data correctly?
Yes you are right. Not sure how those data are being compiled.
Some in force block, you might have products that stop paying premium, especially saving products. Hence can't just look at annual premium. Furthermore saving products with bigger premium size but much lower margin whereas traditional protection products with lower premium size but much higher margin. E.g. HLA is well known for selling saving plans. Its ordinary life maybe is 33% of total, but probably generate less than 10% or even 5% of total profit.
Talking about margin, based on Allianz Malaysia analyst presentation, the 2021 NBV margin was 40% (NBV 275.2m divided by ANP 687.2m) How does it compare to the industry standard? I'm not sure where to get such info.
But I managed to get AIA data. Refer page 49. VONB margin in Malaysia was 57% in 2021, and was even higher at 60% in 2020. Why do AIA products enjoy a far higher margin than Allianz?
AIA uses TEV basis (more aggressive assumptions), Allianz uses MCEV basis. Also, Allianz prices its ILP to age 70 only, to get bigger market share, so lower premium and lower profit, whereas AIA (at least used to, not sure about now) prices its ILP up to 100.
If I understand correctly, it’s is like AIA sells more premium high margin products to a more affluent market, whereas Allianz sells affordable average margin products to the mass market. An imperfect analogy could be Louis Vuitton versus Coach? One is luxury, and the other affordable luxury. Both have similar NBV in 2021 (Allianz 275m versus AIA 283m), but Allianz’s NBV growth slightly outpace AIA over a 3-year period, although AIA grew faster in 2021 (at 26% versus Allianz 15%)
After Affin's AmGeneral Insurance merges with Liberty Insurance, the combined entity will overtake Allianz General to become the largest motor insurer in Malaysia. Do you forsee a lot more competition on the general insurance side? Some years back the industry combined ratio was above 100%. With the ongoing market liberalization, could GI become loss making again, at least in underwriting losses?
Not very familiar with GI business, but AmG/Liberty or AXA/Generali, only AXA is slightly reputable due to online presence, the rest are more or less like local company (Liberty = ex-Uniasia, Generali = ex-MPHB/Magnum) instead of real MNC. Combined entity should have cost saving advantage, but that will take years to materialize. Not foreseeing more competition due to lack of awareness of both Liberty & Generali branding in Malaysia. I aslo don't think UW loss will ever happen again.
As shown in page 70-71 of the Yearbook, some of the GIs' combined ratios are quite close to 100%. Axa Affin General, which should have scale, is 99.82% (98.71% in 2020). The best performer is Loanpac under LPI, where combined ratio is 60% (65% in 2020). I suppose it's helped by its dominance in fire insurance, where industry net claim ratio is only 41%, much lower than motor's 55%. Fire net claim ratio is only 13% for Loanpac! Whereas Allianz General is as high as 70%. Net commission ratio, Loanpac is 6%, versus Allianz General 15%. Any idea why the huge discrepancy in performance? No wonder LPI share price commands a premium despite limited growth prospect in the sector.
AIA/Prudential/Tokio Marine/Zurich might force to IPO/local JV/donation. For some reasons, donation is very unlikely. Regardless if IPO or local JV, there will be public disclosure of price/EV of the transaction (it will be more than 100% for MY market). Hope by then public can notice how deeply undervalue Allianz is.
RM3.5b EV is quite close to RHB's and Am Bank's estimate of RM3.3b.
I don't understand when the minutes say discounted at "risk free rate". Does it mean the future profits are discounted at 10 year MGS, which is about 4%, rather than a higher rate?
If discounted at 4%, the EV will be inflated. As a contrast, in page 69 of the AIA presentation I mentioned earlier, AIA adopted a 8.56% discount rate for Malaysia (4% 10Y gov bonds + 4.56% risk premium).
Based on what I can find, quite a few public listed life insurers in this region, with the exception of AIA, are priced below their EV!
They are not confined to Chinese insurers such as China Life or Ping An, where valuations are depressed. Take for example, The Edge Saturday edition on May 14 had a table extracted from Bloomberg showing Great Eastern and Prudential were sold at 0.53X and 0.88X P/EV respectively.
Why does the market place a huge discount on life insurers? And not just in Malaysia. Have I missed something?
If you only looking at ILP, then yes is discounted with risk free rate, but if you looking at conventional products, at the second half of the policy term, outgo will > income, using risk free discount rate, it is actually more conservative. Another point to add is, for ILP, Allianz also project the fund return with risk free rate, whereas AIA (using TEV basis) project the fund return with high return (much higher than 8.56%). Overall, Allianz's MCEV basis is more conversative, not aggressive.
There are reason why GE and Pru appear to be cheap. For Pru, there are a couple reasons: 1. The EEV tripled in past 3 years (Asia business), but share price didn't catch up 2. There are many corporate activities recently, e.g. spinoff US/UK business, the investor base might change. 3. IFRS profit is on downwards trend for Pru. This shouldn't be a concern due to the flaw of existing IFRS, but again most investors with limited knowledge and only look at IFRS profit.
I see. It's quite counter intuitive. Normally when applying a low discount rate to future cash flows will result in a higher valuation. It seems that a lot of industry specific knowledge is required to get a handle on life insurers' valuation.
Back to the topic of foreign insurers being forced to dispose 30% stake/ donation. Let's explore a bit.
You mentioned AIA/Prudential/Tokio Marine/Zurich. Assume their combined size in Malaysia is double of Allianz. Currently Allianz's market cap is ~RM4.5b (inclusive of ICPS). At a similar valuation, these four foreign insurers' Malaysian business equity value should be around RM10b.
If they are to be valued at say 50% higher, a 30% stake will worth around RM10b * 1.5 * 30% = RM4b to RM5b range. Not a small sum under current market condition, but still doable. For comparison, the twenty odd Bursa IPOs in 2021 including CTOS raised a total of RM2+ billion.
Who could be the buyers? Local banks like Affin and Am Bank have trimmed their insurance arms. Not sure if larger banks, especially the bancassurance partners of these foreign insurers will be willing to pay premium to acquire stakes.
I suppose GLIC like EPF, KWAP, Khazanah have the capacity to take a slice or even as sole partner. But again are they willing to pay premium?
The negotiation over valuation will not be easy. Don't see why these local investors would like to pay premium for insurers given the competitive market, especially listed insurers are currently priced below EVs. On the other hand, the foreign insurers could not justify to their shareholders if they sell on the cheap. Perhaps that was the reason that Great Eastern donated RM2billion?
GE donated the 2bil in a smart way, that's why you don't see a P/L impact of -2bil for GE, and why they opt for this donation. However, the same way is not possible for AIA and Pru. There is no way they will just donate anything. JV is more likely than IPO. Previously in 2018, Pru was exploring JV with KWAP. In term of big GLC, we still got KWSP and PNB. Khazanah already own Sunlife, not sure if will still keen to have a bigger stake.
AIA and Pru are more well established and have been constantly paying dividend, IPO is still OK option. Tokio Marine is much smaller size, and Zurich is still loss making, which make it hardest to fulfill the new regulation.
True. We've discussed this point before. However, usually the full valuation can only be realized during M&A, where the buyers are willing to pay the full value for controlling stake. At normal times rational minority investors like EPF, who has no control over the company, are right to demand a discount as their margin of safety. Similar behavior can be observed in other companies too, for example YTL Power. Based on the recent M&A case in the UK market, the full valuation of its UK asset alone is already a few times over its current market cap. Yet I believe the market is also rational to value the company based only on its dividend yield rather than more elusive asset valuation. Personally, as a patient investor here, knowing the EV, NBV growth etc gives me peace of mind on the downside protection, while hoping for dividend to grow in the future. When that happens share price should follow. But it probably takes time.
LPI has just released Q2 results. Its motor net claims incurred ratio for 2Q22 is 88.8%, as compared to just 60.8% in 2Q21, and 76.3% in 1Q22. The ratio is around low 70% before the pandemic.
According to its press release, "The increase was due to a higher frequency of motor claims reported as most vehicles were back on the road, and due to the increase in average third party bodily injury claims reserve as a result of an increasing trend in court awards."
I wonder if the factor of court catching up with backlog will also show up in Allianz General claim ratio in Q2.
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