We attended Allianz’ analyst briefing yesterday. The key takeaways were : i) the current low tax rate was due to a one-off reversal of tax overprovision amounting to RM4.2m, ii) efforts made to sustain the aggressive growth in general insurance, especially motor premiums, and iii) the life insurance will see new growth drivers in bancassurance with HSBC, albeit contributions are likely to be minor. Weupgrade our FY12 and FY13 forecasts by 7.9% and 11.9% respectively. Maintain NEUTRAL, with FV raised to RM8.02 from RM7.53.
Lower effective tax rate arising from a one-off event. From the briefing, we came to understand that there was a one-off reversal of tax overprovision from FY11 of about RM4.2m. Excluding this item would result in Allianz's 9MFY12 core net profit (without the transfer of surplus from non-participating funds) to be at RM129.3m. Regardless, management expects the group's effective tax rate to be in line with its historical average of >30% moving forward.
Motor Quota Share as a mid-term commitment. Allianz General has attributed the hike in the combined ratio of the general insurance business to the motor quota sharing agreement with several reinsurers. The purpose of this agreement is to help Allianz sustain the aggressive growth of its motor premiums by ceding an agreed portion of motor premiums to reinsurers in return for reinsurance commission. While this has resulted in the uptick in expenses ratios, it has also compressed commission ratio due to the netting off of the reinsurance commission received. Management has highlighted that it will strive to reduce reliance on the motor quota sharing agreement over the long-term.
Lower effective tax rate arising from a one-off event. From the briefing, we came to understand that there was a one-off reversal of tax overprovision from FY11 of about RM4.2m. Excluding this item would result in Allianz's 9MFY12 core net profit (without the transfer of surplus from non-participating funds) to be at RM129.3m. Regardless, management expects the group's effective tax rate to be in line with its historical average of >30% moving forward.
Motor Quota Share as a mid-term commitment. Allianz General has attributed the hike in the combined ratio of the general insurance business to the motor quota sharing agreement with several reinsurers. The purpose of this agreement is to help Allianz sustain the aggressive growth of its motor premiums by ceding an agreed portion of motor premiums to reinsurers in return for reinsurance commission. While this has resulted in the uptick in expenses ratios, it has also compressed commission ratio due to the netting off of the reinsurance commission received. Management has highlighted that it will strive to reduce reliance on the motor quota sharing agreement over the long-term.
New growth drivers from HSBC bancassurance tie-up. The Allianz Group had on 26 Oct signed a 10-year exclusive life insurance regional distribution agreement with HSBC. While this is no doubt a positive move for Allianz Malaysia, we are of the opinion that the upside will not likely be significant compared to the contributions from its enlarged agents base – general has close to 6k agents while life insurance has about 6.4k agents.
Valuation adjustment upwards. We have adjusted our core net profit estimates 7.9% and 11.9% higher for FY12 and FY13 respectively. Maintain BUY, with FV raised to RM7.53, based on a sum-of-parts valuation attributed to an industry PE of 15x for general insurance, and P/EV of 1x on an embedded value (EV) of RM650m for Allianz’ life insurance. Note that our ROE and BV indicators take into account the non-participating reserves, but our PE indicators are based on core net profit.
MORE KEY TAKEAWAYS FROM THE BRIEFING
Motor Quota Sharing a mid-term commitment. Allianz General has attributed the hike in the combined ratio of the general insurance business to the motor quota sharing agreement with several reinsurers (which also include Allianz Re). This is a reinsurance agreement whereby Allianz will transfer an agreed percentage of motor premiums written to the reinsurer, who will return to Allianz a reinsurance commission based on a percentage. The purpose of this agreement is to help Allianz sustain the aggressive growth of its motor premiums with less constraint on its capital. While this has resulted in the uptick in expenses ratios due to the reduced earned premiums in the denominator, it has also attributed to the compression in commission ratio due to the netting off of the commission received arising from the quota sharing agreement. Management has highlighted that over the long-term, it will strive to reduce reliance on the motor quota sharing agreement, which is subject to the company's review annually.
Motor Quota Sharing a mid-term commitment. Allianz General has attributed the hike in the combined ratio of the general insurance business to the motor quota sharing agreement with several reinsurers (which also include Allianz Re). This is a reinsurance agreement whereby Allianz will transfer an agreed percentage of motor premiums written to the reinsurer, who will return to Allianz a reinsurance commission based on a percentage. The purpose of this agreement is to help Allianz sustain the aggressive growth of its motor premiums with less constraint on its capital. While this has resulted in the uptick in expenses ratios due to the reduced earned premiums in the denominator, it has also attributed to the compression in commission ratio due to the netting off of the commission received arising from the quota sharing agreement. Management has highlighted that over the long-term, it will strive to reduce reliance on the motor quota sharing agreement, which is subject to the company's review annually.
Motor remains the focus while several initiatives are in place to expand non-motor portfolio. Motor insurance remains key to Allianz, contributing approximately 53% to its general insurance premiums portfolio mix (1HFY12: 54%). Allianz will continue to expand its multi distribution channel to sustain the growth of its motor business with the support of the motor sharing quota. In the non-motor portfolio, Allianz has several small initiatives to drive growth in these segments, such as the recently launched ‘Hotel Shield’ targeting the small-medium customers (SME customers by Allianz’s definition) or business operators of budget hotels, but none of them are expected to contribute significantly to the general business.
Life business profitability yet to gain traction. To recap, the life insurance division recorded a slightly lower profit before tax (-2.2% y-o-y) due to some strain in claims arising from some of the group and health products, as well as uptick in expenses ratio by 0.3pts from 9MFY11 to 8.7%. Also, the lapse and persistency indicators had a slight deterioration but nevertheless remain superior to industry levels. As Allianz Life is still at its early stage of the business, management has reassured us that all indicators are within control. Moving forward, Allianz Life will hope to see about 66% of its policies related to protection (health, education, savings) businesses while the remainder on endowment plans.
Expecting a new growth driver in bancassurance. The Allianz Group had on 26 Oct signed a 10-year exclusive life insurance regional distribution agreement with HSBC, which focuses on key regions in China, Indonesia, Malaysia and other regions outside the Asia-Pacific. In the case of Malaysia, Allianz Malaysia plans to leverage on just the conventional life insurance premiums sales, especially via the health insurance products, which is non-existent in HSBC's current offerings. While this is no doubt a positive move for Allianz to penetrate into new markets and drive annual new premiums growth further, we are of the opinion that the upside will be challenging as i) HSBC will continue to distribute takaful products separately under its HSBC Amanah Takaful wing, and ii) many of HSBC's middle-to-high net worth clients may have already own several insurance policies. However, we highlight that Allianz Life is already doing well, achieving 12.7% growth YTD even without the bancassurance agreement, given the productive agent channel.
Not expecting significant cost for the HSBC bancassurance tie-up. We were made to understand that the Allianz Life Insurance divisions in selected key regions will have to contribute towards the total upfront cash consideration of USD100.5m. While no details have been announced yet as to how much Allianz Malaysia is required to pay, management is of the opinion that it will not come at a significant cost to the company.
Expecting a new growth driver in bancassurance. The Allianz Group had on 26 Oct signed a 10-year exclusive life insurance regional distribution agreement with HSBC, which focuses on key regions in China, Indonesia, Malaysia and other regions outside the Asia-Pacific. In the case of Malaysia, Allianz Malaysia plans to leverage on just the conventional life insurance premiums sales, especially via the health insurance products, which is non-existent in HSBC's current offerings. While this is no doubt a positive move for Allianz to penetrate into new markets and drive annual new premiums growth further, we are of the opinion that the upside will be challenging as i) HSBC will continue to distribute takaful products separately under its HSBC Amanah Takaful wing, and ii) many of HSBC's middle-to-high net worth clients may have already own several insurance policies. However, we highlight that Allianz Life is already doing well, achieving 12.7% growth YTD even without the bancassurance agreement, given the productive agent channel.
Not expecting significant cost for the HSBC bancassurance tie-up. We were made to understand that the Allianz Life Insurance divisions in selected key regions will have to contribute towards the total upfront cash consideration of USD100.5m. While no details have been announced yet as to how much Allianz Malaysia is required to pay, management is of the opinion that it will not come at a significant cost to the company.
Prudent investment strategy. Allianz has remodeled its asset/liability management programme with focus on more longer-term maturity bonds at an average of seven years and above.
Agents base continue to expand strongly. Allianz life insurance division has seen its agents grow to about 6.4k YTD, while the agents base for general insurance is on track to hit 6k end of this year.
CHANGES TO OUR FORECAST
Lower FY12 combined ratio for general insurance. We are adjusting our assumptions for combined ratio downwards to 88.7% to take into account the Motor Quota Sharing effect (commission ratio at 8.2%, expenses ratio at 19.0%). We also factor in a higher general insurance premiums growth of 14% and 13% for FY12 and FY13 respectively.
Higher transfer of non-participating surplus and slightly lower tax rate. We adjust our tax rate for FY12 and FY13 to 32% and 34% respectively, which are still in line with its average historical tax rate, but taking in higher transfer of non-participating surplus.
Upward adjustment to our net profit forecasts. All in, our core net profit adjustments are 7.9% and 11.9% higher for FY12 and FY13 respectively. In terms of net profit with non-participating surplus, the upward adjustments for FY12 and FY13 were 13.2% and 11.2% upwards respectively. Our FY12 core net profit excludes the RM4.2m reversal of overprovision for taxes.
Source: OSK
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