PP 7767/09/2010(025354)

31 May 2010

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

B r ief ing Not e

31 May 2010
MARKET DATELINE

Allianz Malaysia Share Price

Fair Value
:
:
RM4.82
RM6.68
Strong Premium Growth For 1QFY12/10 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 GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 2,222.7 118.8 77.2 68.0 11.7 - 2.1 11.7 20.0 1.3 0.4
2010f 2,460.8 110.6 71.9 -7.0 6.9 59.0 1.6 6.2 26.6 1.0 0.4
2011f 2,720.0 132.6 86.2 29.7 7.1 68.0 1.3 7.1 19.7 Net cash 3.2
2012f 2,933.5 153.5 99.7 15.8 6.2 - 1.1 6.2 19.6 Net Cash 3.7
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES

♦ Strong premium growth for both general and life. For 1QFY12/10, Issued Capital (m shares) 153.8
Allianz posted strong yoy growth of 29.0% and 35.6% in gross premiums Market Cap (RMm) 741.7
for its general and life businesses respectively. For its general business, Daily Trading Vol (m shs) 0.03
gross premiums grew to RM361.7m from RM280.4m in 1QFY12/09. Its 52wk Price Range (RM) 3.80 – 5.56
general insurance agency force contributed 53% of gross written Major Shareholders: (%)
premiums, while for its life business, premium growth was driven by Allianz SE 75.0
increased agency manpower, which contributed 86.9% of annualised new
premiums (ANP). FYE Dec FY10 FY11 FY12
EPS chg (%) - - -
♦ General insurance combined ratio maintained. Combined ratio of Var to Cons (%) 21.9 26.8 -
91.4% remained unchanged as at 1QFY12/09 despite a higher claims ratio.
PE Band Chart
The higher claims ratio of 63.6% (vs. 56.0% in 1Q FY12/09) was mitigated
by lower management expense ratio and commission ratio of 19.2% and
8.6% respectively. We understand that management is targeting full-year PER = 7x
PER = 6x
FY10 claims ratio to be around 60-65%, and will continue to control its risk PER = 5x
portfolio through selective underwriting policies.

♦ Proposed ICPS issue on track. Allianz recently proposed to issue

192.3m new Irreedeemable Convertible Preference Shares (ICPS) at an
issue price of RM3.18. We understand that Bank Negara Malaysia (BNM)
has allowed Allianz SE to subscribe for up to 100% of the ICPS, assuming Relative Performance To FBM KLCI
no minority shareholders take up the issue. That said, we believe the
proposed ICPS issue is on track to be completed by 3QFY12/10. We
reiterate our view that shareholders should subscribe for the ICPS as it will FBM KLCI
pay 1.2x the dividend rate of Allianz ordinary shares.

♦ Risks to our view. The risks include: 1) lower-than-expected premium Allianz Malaysia

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
compliance with RBC requirements.

♦ Forecasts and assumptions unchanged. We are leaving our forecasts

and assumptions unchanged, pending further announcements with regards
to 1) new motor Third Party Bodily Injury and Death (TPBID) scheme; and
2) the award of family takaful license.

♦ Maintain Outperform. We continue to like the stock in view of its strong

premium growth and continued underwriting surplus in both its general
and life insurance businesses. Once the ICPS issue is completed, Allianz
will remove the inter-company loan from parent Allianz SE and strengthen
Yap Huey Chiang
its capital strucuture. We also expect Allianz to be able to increase its (603) 92802641
dividend payout in FY11. We thus maintain our Outperform call on the yap.huey.chiang@rhb.com.my
stock and our SOP-based fair value of RM6.68/share.

Please read important disclosures at the end of this report. Page 1 of 4

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 31 May 2010

Briefing Highlights

♦ Strong premium growth for both general and life. For 1QFY12/10, Allianz posted strong yoy growth of
29.0% and 35.6% in gross premiums for its general and life businesses respectively. For its general business,
gross premiums grew to RM361.7m from RM280.4m in 1QFY12/09. Its general insurance agency force
contributed 53% of gross written premiums, followed by brokers (18%), franchise (16%) and bancassurance
(13%). Contribution from its franchise division increased 4%-pts from the same period last year as 1QFY12/10
saw higher new car sales. Despite the strong growth in gross premiums for 1QFY12/10, we understand that
management is targeting a much lower premium growth for its general business of 9-10% p.a., as the 29%
growth in 1QFY12/10 was exceptional. For its life insurance business, premium growth was driven by increased
agency manpower, which contributed 86.9% to annualised new premiums (ANP).

♦ General insurance portfolio mix. Like FY09, portfolio mix continued to be dominated by motor premiums,
albeit at a higher contribution (48% vs. 43% FY09) followed by fire (21%), miscellaneous (17%), marine (9%)
and personal accident and health (5%). We understand that Allianz no longer writes new standalone Third Party
Bodily Injury and Death policies, in line with other general insurers, in view of the loss-making nature of the
business. We believe management will continue to be very selective for this business even if the Government
approves changes to the motor tariff, which includes a limit on claims.

♦ General insurance combined ratio maintained. Combined ratio of 91.4% remained unchanged vs.
1QFY12/09 despite higher claims ratio. The higher claims ratio of 63.6% (vs. 56.0% in 1Q FY12/09) was
mitigated by lower management expense ratio and commission ratio of 19.2% and 8.6% respectively. We
understand that management targets full-year FY10 claims ratio to be around 60-65%, and will continue to
control its risk portfolio through selective underwriting policies. Management expense ratio has improved
significantly yoy from 24.6%, an effect of continuous cost-reduction activities. We understand that management
is targeting an expense ratio of 18-19% for FY10, and is on track to achieve it.

♦ Growth in surplus general insurance. Underwriting surplus for its general insurance business grew by 19.2%
yoy to RM18m from RM15.1m, underpinned by strong growth in gross premiums, while combined ratio was
maintained. For its life business, growth in gross premiums was offset by higher benefits and claims paid as a
percentage of earned premiums (30.8% vs. 18.6%) resulting in a decline of 28.9% in its surplus before tax.
However, as mentioned in our Results Note on 27 May, the surplus transfer from the life account to the income
statement will happen at the end of the year, and we are maintaining our assumptions of a transfer of RM13.4m
at the end of the year (vs. RM12.0m for FY09).

♦ Proposed ICPS issue on track. Allianz recently proposed to issue 192.3m new Irreedeemable Convertible
Preference Shares (ICPS) at an issue price of RM3.18. We understand that Bank Negara Malaysia (BNM) has
allowed Allianz SE to subscribe for up to 100% of the ICPS, assuming no minority shareholders take up the issue.
Recall that Allianz SE has given its irrevocable undertaking to subscribe for all ICPS not taken up by minority
shareholders. That being said, we believe the ICPS issue is on track to be completed by 3QFY12/10. We reiterate
our view that shareholders should subscribe for the ICPS as it will pay 1.2x the dividend rate of Allianz ordinary
shares.

♦ Takaful licence. We understand that BNM will announce two new takaful licences by Jun 2010 and Allianz has a
chance of obtaining one of the licences. Assuming Allianz is awarded the family takaful license, we believe it
would be positive for Allianz due to: 1) further diversification of its business portfolio; 2) strong growth of the
takaful industry; and 3) more choices of products for its customers. We will continue to monitor the
developments with regards to the awarding of the licences.

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.

Page 2 of 4

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 31 May 2010

Forecasts And Recommendation

♦ Maintain forecasts and assumptions. We are leaving our forecasts and assumptions unchanged, pending
further announcements with regards to: 1) new motor Third Party Bodily Injury and Death (TPBID) scheme; and
2) the award of family takaful licence.

♦ Maintain Outperform. We continue to like the stock in view of its strong premium growth and continued
underwriting surplus for both its general and life insurance businesses. Once the ICPS issue is completed, Allianz
will remove the inter-company loan from parent Allianz SE and strengthen its capital strucuture. We also expect
Allianz to be able to increase its dividend payout in FY11. We thus maintain our Outperform call on the stock
and our SOP-based fair value of RM6.68/share.

Table 2. Sum of Parts

General business (10x) 1,143.40
Life business (DCF) 373.2
Cash 0.0
Less : Debt 490.0
RNAV 1,026.60
Share capital 153.8
Fair value 6.68

Source : RHBRI Estimates

Table 3. Earnings Forecasts Table 4. 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 161.0 164.9 181.4 199.5 Combined ratio 87.8 87.8 87.8
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) - -
Life
Pretax Profit 166.5 158.0 189.4 219.2 Premium growth 12.0 12.0 8.0
Tax (47.7) (47.4) (56.8) (65.8) Retention ratio 93.0 93.0 93.0
Claims ratio 7.0 7.0 7.0
Net profit 118.8 110.6 132.6 153.5 Commission ratio 25.0 25.0 25.0
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

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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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