ALLIANZ (FV RM7.09 - BUY) Company Update: Better Year Ahead

We attended Allianz’s analyst briefing last Friday to obtain a clearer understanding of the impact of Bank Negara Malaysia’s (BNM) revised guidelines on Financial Reporting Guidelines for Insurers on Allianz’s profitability. All in all, our valuation method  – embedded value (EBV)  – for its life insurance business has already incorporated  the treatment of its non-participating fund as equity. Thereby, we are maintaining our BUY call on Allianz with a revised FV of RM7.09 to factor in a more profitable general insurance business as well as a higher EV for its life insurance business. Maintain BUY.

Non-participating funds surplus now recognized as earnings.  As a result of BNM new guidelines, the non-participating surplus of the life insurance business, which was retained within the life insurance fund and not transferred to shareholder’s fund, is now recognized as income in the profit and loss statement, and  retained earnings in the statement of changes in equity.  The non-participating funds, which are parked as retained earnings, represent income that could be distributed to the shareholders’ fund. This is provided that the appointed actuary makes such a recommendation, in order to ensure that the company’s solvency ratio remains intact. If the appointed actuary decides to do so,  the surplus funds will be taxed at the corporate tax rate. Hence,management will choose to transfer these surplus funds only if the need arises.

Minor changes to FV.  We are introducing our net profit forecast  to reflect the accounting profit for the non-participating funds surplus and only make minor changes to our fair value to factor in our forecast of a more profitable general insurance business as our sum-of-the-parts valuation method  (which values Allianz’s life insurance business using the EBV method) already accounts for the value of the unallocated surplus of the non-participating funds as value to shareholders. We are also revising our embedded valuation upwards to RM600m as we anticipate both its participating and nonparticipating funds will continue to generate surpluses of some RM30m-RM35m this year. The profitability of life insurance, which will contribute to the surpluses, is expected to increase over time despite the premium remaining flat  since up-front costs such as commission and management fees will decrease over time.

Maintain BUY. All in all, the fundamentals of the company remain strong in our view. We also think that there is room for an upward re-rating in recurring dividend payout as the surpluses can be transferred out to reward shareholders, provided that its solvency ratio remains intact. We are raising our FV from RM6.97 to RM7.09 based on our sumof-the-parts valuation which values the profit of its general insurance at 15x PER and P/EBV of 1x on an  EBV of RM600m for its life insurance which includes the nonparticipating surplus funds that were disclosed. Maintain BUY.

Source: OSK