PP 7767/09/2010(025354)

Malaysia
RHB Research
2 March 2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

2 March 2010
MARKET DATELINE

Allianz Malaysia Share Price

Fair Value
:
:
RM4.98
RM6.68
To Grow Both Life and General Business Recom : Outperform
(Maintained)

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

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing DY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009f 2,222.7 118.8 77.2 68.0 10.3 51.0 1.9 10.3 20.0 1.3 0.4
2010f 2,460.8 102.2 66.4 -14.0 6.2 59.0 1.4 6.2 26.6 1.0 0.4
2011f 2,720.0 115.4 75.0 13.0 7.2 68.0 1.2 7.2 18.3 0.8 0.4
2012f 2,933.5 136.3 88.6 18.1 6.3 1.0 6.3 17.2 0.7 0.4
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES

Issued Capital (m shares) 153.8

♦ General insurance. In FY09, Allianz has been aggressively growing its Market Cap (RMm) 738.6
motor segment but this trend is expected to reverse in FY10, as it looks for Daily Trading Vol (m shs) 0.03
healthier premium portfolio mix. In fact, this strategy has commenced in 52wk Price Range (RM) 2.7 – 5.0
4Q09, as gross premium in the quarter declined by 27.9% qoq, as it has Major Shareholders: (%)
Allianz SE 75
put more stringent underwriting policy in containing motor premium
growth. Thus, claims ratio is expected to remain below industry average at FYE Dec FY10 FY11 FY12
circa 60% p.a.. EPS chg (%) 14.5 14.1 14.0
Var to Cons (%) 12.5 10.3 n.a
♦ Life insurance. Management attributed the higher life profit transfer in
FY09 of RM12m vs. RM5.3m to a more balanced portfolio mix with 82.8% PE Band Chart
regular premium business vs. 17.2% single premium, a favourable life
business experience, judging from the stable low lapse ratio and good PER = 7x
mortality experience and its highly capable risk management team. Going PER = 6x
PER = 5x
forward, should this continue, we believe higher profit transfer from life
business is achievable.

♦ Capital raising and dividend. We were told that no firm action plan has
been made on the need to raise capital for life business capital
requirement and repayment on soft loan from its parent. Thus, this will Relative Performance To FBM KLCI
continue to affect its dividend payout going forward as it needs to conserve
capital in order to minimise potential dilution from the above action.

♦ Risks. The risks include: 1) lower-than-expected premium growth; 2)

jump in claims ratios; 3) potential dilution and interest charge from the Allianz Malaysia
need to raise cash to repay shareholder loan; 4) RBC implementation from
1 Jan 09 – general business already complied with the 75% confidence
FBM KLCI
level for IBNR but it is still uncertain on the capital requirement for the life
business; and 5) intense competition from insurance sector liberalisation.

♦ Forecasts. Our FY10-12 earnings were raised by 14-14.5%, as we have:

1) raised our investment return assumption to 4.0% to 3.4% p.a., in line
with its FY09 return; and 2) cut our claims ratio assumptions to 60% from
61% p.a. previously.

♦ Investment case. We continue to like the stock given that we believe it is

relatively undervalued due to its ability to maintain above-industry
premium growth but below-industry combined ratio. In addition, Allianz is
supported by its highly productive agency force, bancassurance tie-up with
CIMB and strong backing by parent. Thus, we are maintaining our
Low Yee Huap, CFA
Outperform recommendation on the stock. SOP based fair value has been
(603) 92802641
increased to RM6.68 (from RM5.83 previously), following the earnings low.yee.huap@rhb.com.my
revisions.
Please read important disclosures at the end of this report.

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♦ General insurance. In FY09, Allianz has aggressively expanded its motor segment, resulting in motor premium
accounting for 43% of total portfolio vs. 38.3% in FY08. However, in order to maintain a healthy portfolio mix
going forward, management said that it will shift its focus to grow the non-motor segment aggressively,
especially on retail and SME markets. In fact, this strategy has commenced in 4Q09, as gross premium in the
quarter declined by 27.9% qoq, as it has put more stringent underwriting policy in containing motor premium
growth. On the exceptionally low claims ratio in 4Q09 of 47.2%, we note that this was mainly because of a
writeback on IBNR reserve initially made in early FY09. Going forward, we believe it will be able to maintain its
below industry claims ratio, albeit we are taking a more conservative approach by cutting our claims ratio
assumption to 60% from 61% previously, vs. its FY09 claims experience performance of 58.1%.

♦ Life insurance. Management attributed the higher life profit transfer in FY09 of RM12m vs. RM5.3m to: 1)
25.5% yoy and 30.8% yoy growth in gross premiums and annualised new premium; 2) a balanced portfolio mix
with 82.8% regular premium business vs. 17.2% single premium (the former usually has a higher premium due
to the attached riders); 3) a favourable life business experience, which has stable low lapse ratio and good
mortality experience; and 4) highly capable risk management team. Going forward, should this continue, coupled
with its highly productive agency force (of 4,500 agents) and healthy premium growth, we believe higher profit
transfer from life business is achievable.

♦ Capital raising and dividend. We were told that no firm action plan has been made on the need to raise capital
for life business capital requirement and repayment on soft loan from its parent. Thus, this will continue to affect
its dividend payout going forward as it needs to conserve capital in order to minimise potential dilution from the above
action.

Risks

♦ Risks to our view. The risks include: 1) lower-than-expected premium growth; 2) jump in claims ratios; 3)
potential dilution and interest charge from the need to raise cash to repay shareholder loan; 4) RBC
implementation from 1 Jan 09 – general business already complied with the 75% confidence level for IBNR but it
is still uncertain on the capital requirement for the life business; and 5) intense competition from insurance sector
liberalisation.

♦ 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 Assumptions

♦ Forecasts. Our FY10-12 earnings were raised by 14-14.5%, as we have: 1) raised our investment return
assumption to 4% from 3.4% p.a., in line with its FY09 return; and 2) cut our claims ratio assumptions to 60%
from 61% p.a. previously, albeit higher than FY09 claims ratio of 58.1%.

♦ Assumptions. Our earnings assumptions are based on above-industry premium growth for both the general and
life insurance businesses (see Table 3).

Valuations And Recommendation

♦ Deep value. We continue to like the stock given that we believe it is relatively undervalued due to its ability to
maintain above-industry premium growth but below-industry combined ratio. In addition, Allianz is supported by
its highly productive agency force, bancassurance tie-up with CIMB and strong backing by parent. Thus, we are
maintaining our Outperform recommendation on the stock. SOP based fair value has been increased to RM6.68
(from RM5.83 previously), following the earnings revisions.

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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 general 161.0 163.3 179.6 197.5 Combined ratio 88.0 88.0 88.0
Transfer from life 12.0 13.4 16.0 26.9 Invt return 4.0 4.0 4.0
Finance cost 0.0 (24.5) (24.5) (24.5)
Life
Pretax Profit Premium growth 12.0 12.0 8.0
Tax 166.5 146.0 164.9 194.7 Retention ratio 93.0 93.0 93.0
Minority interest (47.7) (43.8) (49.5) (58.4) Claims ratio 7.0 7.0 7.0
Commission ratio 25.0 25.0 25.0
Net profit 118.8 102.2 115.4 136.3 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

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IMPORTANT DISCLOSURES

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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.

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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