PP 7767/09/2010(025354)

27 August
Research2010

Malaysia
RHB
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing N ot e
27 August 2010

MARKET DATELINE
Allianz Malaysia Share Price
Fair Value
:
:
RM4.23
RM5.32
Encouraging Fundamentals Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (Allianz; Code: 1163) Bloomberg: ALLZ MK

Net FD FD EPS Net
FYE Turnover profit EPS EPS Growth PER C.EPS* P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009 2,222.7 118.8 77.2 Na Na 5.5 - 1.3 20.0 1.3 0.5
2010f 2,460.8 110.6 71.9 32.0 Na 5.9 59.0 1.8 26.6 1.0 0.5
2011f 2,720.0 132.6 86.2 38.3 20.0 4.9 68.0 1.6 19.7 Net cash 4.2
2012f 2,933.5 153.5 99.7 44.3 15.8 4.2 - 1.4 19.6 Net Cash 4.8
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES

♦ General business does well from top to bottom. General insurance Issued Capital (m shares) 153.8
gross premiums grew by 14.1% yoy in 1H FY12/10, driven by its Market Cap (RMm) 650.9
productive agency force (49%) and bancassurance tie-up with CIMB Daily Trading Vol (m shs) 0.01
(12%). We understand that in the 1H, its motor policy segment growth 52wk Price Range (RM) 3.64-5.56
was driven by its franchise distribution channel (16%) where new car Major Shareholders: (%)
owners buy their policies straight from the car dealers i.e. the franchise Allianz SE 75.0
distributor of Allianz products. Underwriting margin improved by 3.5%-pts
to 89.6% as a result of lower claims ratio of 62.7% vs. 1H09’s 63.4%, FYE Dec FY10 FY11 FY12
lower commission ratio of 8.9% vs. 9.0% in 1H09, and lower management EPS chg (%) - - -
expense ratios of 18% vs. 20.7% in 1H09. Var to Cons (%) 21.9 26.8 -

♦ Life insurance grew although ANP came under pressure. Life PE Band Chart

insurance premiums grew by 27.6% yoy, but Annualised New Premiums

(ANP) grew by only 5.6% vs. 20.9% in 1H09. We understand that the ANP PER = 6x
PER = 5x
was under pressure as Allianz introduced its first universal life product, the PER = 4x
Income Generator. Allianz Life ANP is driven by its agency force (87.7%)
and the reason why the new product caused a weaker ANP growth was the
time taken to educate the agents on the new product features, which
slowed down sales growth. We understand that recent sales show stronger
positive growth and we expect ANP to revert to double-digit growth in the
Relative Performance To FBM KLCI
2H.

♦ Risks to our view. The risks include: 1) lower-than-expected premium FBM KLCI
growth; 2) jump in claims ratios; 3) intense competition from insurance
sector liberalisation. 4) A change in BNM policy that would require AMB to
further increase their Internal Capital Adequacy Ratio (ICAR), in Allianz Malaysia
compliance with RBC requirements.

♦ Maintain forecasts and assumptions. We are leaving our forecasts and

assumptions unchanged.

♦ Maintain Outperform. Allianz remains our preferred pick for the

insurance sector as it continues its strong premium growth while
maintaining its profitability. We believe in the absence of near-term
positive catalysts for the sector such as the proposed revision to Third
Party Bodily Injury and Death (TPBID) policies, Allianz’s share price would
be driven by its strong fundamentals and stable growth. We thus maintain
our Outperform call on the stock with an unchanged SOP-derived fair
value of RM5.32/share.

Yap Huey Chiang

Please read important disclosures at the end of this report. (603) 92802641
yap.huey.chiang@rhb.com.my

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Briefing Highlights

♦ General business does well from top to bottom. General insurance gross premiums grew by 14.1% yoy in
1H FY12/10, driven by its productive agency force (49%) and bancassurance tie-up with CIMB (12%). We
understand that in the 1H, its motor policy segment growth was driven by its franchise distribution channel
(16%) where new car owners buy their policies straight from the car dealers i.e. the franchise distributor of
Allianz products. Underwriting margin improved by 3.5%-pts to 89.6% as a result of lower claims ratio of 62.7%
vs. 1H09’s 63.4%, lower commission ratio of 8.9% vs. 9.0% in 1H09, and lower management expense ratios of
18% vs. 20.7% in 1H09. We note that both the commission ratio and management expense ratios were in line
with our assumptions of 18% and 9% respectively. The improved underwriting margin gave way for a stronger
transfer to the income statement of RM74.1m in 1HFY10 (RM48.8m in 1HFY09).

♦ Life insurance grew although ANP came under pressure. Life insurance premiums grew by 27.6% yoy, but
Annualised New Premiums (ANP) grew by only 5.6% vs. 20.9% in 1H09. We understand that the ANP was under
pressure as Allianz introduced its first universal life product, the Income Generator. Allianz Life ANP is driven by
its agency force (87.7%) and the reason why the new product caused a weaker ANP growth was the time taken
to educate the agents on the new product features, which slowed down sales growth. We understand that recent
sales show stronger positive growth and we expect ANP to revert to double-digit growth in the 2H. Despite the
slight hiccup in ANP growth, Allianz Life continues to show better performance with its general expense ratio
improving by 1%-pts to 8.8% and its lapse ratio improving by 3.9%-pts from 6.5% previously. The lower lapse
ratio indicates Allianz’s improvement in retaining policies. Currently the surplus in the life fund stands at
RM47.7m (+83.5% yoy) as compared to last year’s RM26m. Although the surplus number is encouraging, we
note that it does not provide any indication on the amount to be transferred to the income statement at the end
of the year.

♦ Moving forward. We understand that Allianz will continue to improve its topline growth while also maintaining
its strong profitability for both its businesses. For the general insurance side, although the franchise distribution
channel provides healthy growth for its gross premiums, the renewal rate of such policies is less than 50% as car
dealers are not agents and they sell the policies as an added service, without any intention to promote renewal of
the policies. Management is working with the car dealers to improve the renewal rate of the franchise policies.

Risks And Mitigating Factors

♦ Risks to our view. The risks include: 1) lower-than-expected premium growth; 2) jump in claims ratios; 3)
intense competition from insurance sector liberalisation; and 4) A change in BNM policy that would require AMB to
further increase their Internal Capital Adequacy Ratio (ICAR), in compliance with RBC requirements.

♦ Mitigating factors. The mitigating factors are: 1) excellent track record in above-industry premium growth
backed by support of its parent, highly productive sales force, bancassurance tie-up and new products; and 2) life
insurance profit transfer two FYs ahead of schedule as well as potential of higher life transfer going forward.

Forecasts And Recommendation

♦ Maintain forecasts and assumptions. We are leaving our forecasts and assumptions unchanged.

♦ Maintain Outperform. Allianz remains our preferred pick for the insurance sector as it continues its strong
premium growth while maintaining its profitability. We believe in the absence of near-term positive catalysts for
the sector such as the proposed revision to Third Party Bodily Injury and Death (TPBID) policies, Allianz’s share
price would be driven by its strong fundamentals and stable growth. We thus maintain our Outperform call on
the stock with an unchanged SOP-derived fair value of RM5.32/share.

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Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec (%) FY10F FY11F FY12F

Life premium 868.7 973.0 1,089.7 1,176.9 General

General premium 1,202.4 1,322.6 1,454.9 1,600.4 Premium growth 10.0 10.0 10.0
Other revenues 151.6 165.2 175.4 156.3 Retention ratio 64.0 64.0 64.0
Total Turnover 2,222.7 2,460.8 2,720.0 2,933.5 Claims ratio 60.0 60.0 60.0
Commission ratio 10.0 10.0 10.0
Profit from s/holders (6.5) (6.3) (6.2) (5.2) Mgmt exp ratio 18.0 18.0 18.0
funds
Transfer from 161.0 163.3 179.6 197.5 Combined ratio 88.0 88.0 88.0
general
Transfer from life 12.0 13.4 16.0 26.9 Invt return 4.0 4.0 4.0
Finance cost 0.0 (12.5) 0.0 0.0
Life
Premium growth 12.0 12.0 8.0
Pretax Profit 166.5 158.0 189.4 219.2 Retention ratio 93.0 93.0 93.0
Tax (47.7) (47.4) (56.8) (65.8) Claims ratio 7.0 7.0 7.0
Commission ratio 25.0 25.0 25.0
Net profit 118.8 110.6 132.6 153.5 Mgmt exp ratio 10.0 10.0 10.0
Combined ratio 42.0 42.0 42.0
Invt return 5.0 5.0 5.0

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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