Allianz ... Sep10

S & P Results Review & Earnings Outlook

- Allianz reported 2Q10 net profit of MYR29.6 mln (+93.6% YoY). Cumulative 1H10 net profit amounted to MYR52.8 mln (+48.5% YoY), accounting for 48% of our full-year forecast and was largely within our
expectations. Its 1H10 operating revenue increased 22.1% YoY to MYR1.24 bln, driven by strong gross written premium growth (GWP) at both its general (+14.1% YoY) and life (+30.2% YoY) insurance
divisions.

-  The jump in its earnings was due primarily to higher underwriting profits from its general insurance business and higher investment income (+17.1%). This division recorded a better 1H10 combined ratio of 89.6% (1H09: 93.1%) on the back lower claims and expense ratios.

-  Meanwhile, its life business also recorded a higher net profit of MYR8.0 mln (+35.6% YoY). Annualized new premiums recorded double digit growth and we note that its premiums mix contained mainly of recurring premiums (about 85%). This should keep its business margins high, in our opinion. We expect a higher transfer of MYR17.9 mln (2009: MYR12.0 mln) from the life fund at the end of the year.

-  Our forward earnings forecasts are unchanged. We believe that Allianz’s earnings outlook is positive and the insurance company remains well on track to meet our earnings forecast this year.

Recommendation & Investment Risks
- We maintain our Strong Buy recommendation on Allianz and adjust 12-month target price to MYR5.50 (from MYR6.50), post ICPS issuance. (An adjustment factor of 0.83 was applied to the original target price of MYR6.50 to account for the 1.25 ICPS for 1 share exercise. Each ICPS was issued at MYR3.18)

- Our 12-month target price is derived by applying a 10% discount to our sum-of parts (SOP) valuation of MYR7.20/share. Our SOP valuation is premised on: (i) a target 2010 PER of 11.5x (unchanged) for the
general insurance business and, (ii) a P/EV (embedded value) of 1x on our projected 2010 embedded value (EV) of MYR435 mln for its life insurance business. We apply a 10% discount to our SOP valuation to
reflect the illiquid nature of the stock.

-  We expect its positive earnings growth to be sustained going into 2H10 and 2011, underpinned by strong premiums growth and above industry underwriting performances. Meanwhile, the group’s conservative
investment profile, which consists mainly of fixed income assets, should cushion it from investment market volatility.

-  The risks to our recommendation and target price include a slowdown in the domestic economy that could affect business volumes, claims and investment income and some dilution risk from the conversion of  ICPS after the lock-up period.