wsb_investor

AIA FY2022 report:
Overall expected positive impact of IFRS 9 and IFRS 17 compared with IAS 39 and IFRS 4

Under IFRS 4, mark-to-market movements on derivative financial instruments are reflected in net profit but these are not fully offset by the corresponding change in the value of the liabilities. The adoption of IFRS 17 will eliminate this non-economic accounting mismatch that is created between assets and liabilities in the Group’s consolidated financial statements under IFRS 4. Non-operating movements on derivative financial instruments for participating business was negative US$2,003 million in 2022 as shown below. For clarity, this figure would have been zero under IFRS 17. Including this effect, net profit will be at least US$2 billion higher than net profit under IFRS 4.

2 months ago

observatory

@wsb_investor, thanks for the sharing. Does it mean we can look forward to higher IFRS17 profit too for Allianz Malaysia?

I looked up AIA results. AIA's VONB (Value of New Business) in Malaysia grew to USD308m in 2022 from USD283m in 2021, which is 9% YoY growth. The growth has come from higher VONB margin (as ANP actually declined to USD440m from USD491m)

In comparison, Allianz Malaysia NBV declined to RM677m from RM717m.

It looks like AIA Malaysia still outpaces Allianz in terms of growth.

2 months ago

observatory

AmInvestment Bank published an insurance sector report today. It maintains Neutral on the sector. Buy call for Allianz.

It sees “Allianz Malaysia (Allianz) to benefit the most from a reduced volatility of interest rate movements on earnings after adopting FRS 17 commencing 1 Jan 2023.
…
Allianz focusses strongly on investment-linked (IL) products for their life business … more than 90% of the group’s life insurance contracts will be measured under VFA (Variable Fee Approach)
…
The adoption of FRS 17 will see the movement in interest rates on the securities portfolio backing VFA contracts to have lesser volatility on their earnings under the P&L. This is due to interest rate impacts on securities portfolio under FRS 17 being now adjusted from contractual service margin (CSM), which will then be spread out over time through the contracted period of the IL policies. Prior to this under FRS 4, the full impact of fair value changes on securities or investments backing VFA contacts flows through the P&L of Allianz, hence impacting earnings.”


AmInvestment also says
“We stay NEUTRAL on the insurance sector premised on the following considerations:
i. Continued liberalisation which will exert pressure on the pricing for fire and motor products on general insurance and takaful operators (ITOs) moving forward. Also, gradual detarrification could impact the contract liabilities (reserving) of ITOs;
ii. Slower demand for general and life insurance products in line with the slowdown in global growth rate. Economic uncertainties and volatile markets are likely to lead consumers to defer purchasing longer term insurance plans in the near term. We have seen smaller ticket-sized life insurance policies sold by certain insurance companies of late. Our economists have forecast a lower GDP growth of 4.5% in 2023 compared to 8.7% in 2022;
iii. Uncertainties surrounding the day 1 impact of FRS 17 implemented on 1 Jan 2023. These include the changes to revenue recognition and the retrospective adjustments to ITOs’ retained earnings, and
iv. Potentially higher medical claims on life/family takaful businesses in 2023. Cost for medical expenses are expected to rise due to inflationary pressures. “

2 months ago

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

Security LastPr PE DY% Divcts ROE ttm-marg
ALLIANZ (Insurance) 13.88 5.22 6.1 85 11.18 7

2 months ago

wsb_investor

pg164 AR2022:

1. The combined effect on the Group’s consolidated statement of financial position on transition to MFRS 9 and MFRS 17 as at 1 January 2022 is to improve total equity measured under MFRS 17 by approximately 8%

100% Eq @ YE22 = 4.2bil, 8% = 336 mil

2. For insurance contracts issued, the Group intends to adopt the standard using the full retrospective approach for all currently modelled products in annual cohorts 2014 or later. (Generally longer FRA period = higher transition CSM = more future profit)

4 weeks ago

wsb_investor

Great Eastern Holdings G07 0.00% , a member of the OCBC Group, reported earnings of $244.0 million for the 1QFY2023 ended March 31, 10.9% higher than the earnings of $220.0 million in the 1QFY2022.

For the current quarter, the earnings were reported on the SFRS(I) 17 insurance contracts basis while the earnings for the 1QFY2022 were reported based on SFRS(I) 4 insurance contracts principles. The impact of the new method of reporting will be disclosed in the group’s 1HFY2023 results.

*NBEV - 11%, but ifrs17 profit higher 10%

3 weeks ago

observatory

Great Eastern's NBEV in Malaysian market grew at 3%. Meanwhile AIA reported double-digit VONB increase in Malaysia.
Given the Malaysian market has recovered, let's see if Allianz can finally deliver some growths after four quarters of decline.

3 weeks ago

observatory

Maybank published its results today. Not sure if I've missed something. The effects of MFRS17 adoption have been rather muted.

Group insurance & Takaful contributed RM238m to Maybank's total operating profit of RM2,979m (Note A30). The effects of MFRS17 adoption was to increase operating profit by a mere RM2.8m i.e. 1% only (Note A40 i)

Maybank has a balanced insurance portfolio. Based on total operating income, life/ family takaful/ general takaful/ general & others are RM350m/ RM171m/ RM93m/ RM57m respectively (Note 38a)

Does Maybank's experience with MFRS17 has any bearing on other insurers?

5 days ago

wsb_investor

IFRS17 impacts the most on conventional life. Maybank has multiple subsidiaries (conventional/takaful x life/general). By product type, IFRS17 also has different impacts on regular premium/single premium (e.g. STMB), and protection / saving.

Allianz Life has relatively minimal saving products, but this is not the case for Etiqa Life.

5 days ago

wsb_investor

Tuneprotect also released its IFRS17 Q1 result, but nothing to see there, since minimal change to General insurance.

4 days ago

observatory

Manulife just annouced its results. Note 2b shows effects of MFRS9 and 17 adoption, where total shareholders’ equity increased from RM955m to RM1,186m

Note B3 mentions
"Life insurance business – Operating revenue of life insurance business increased by RM13.0 million or 11.6% mainly due to higher contractual service margin (“CSM”) amortisation and risk adjustment release as a result of higher inforced business."

Manulife revenue and profit have been rather stagnant over the years. It seems the company is not doing too well. Any idea why?

3 days ago

wsb_investor

Globally Manulife mainly focus on HNW saving products (e.g. Manulife SG is top 3 ranked by APE), and indeed Manulife also has a HNW subsidiary in Malaysia (one of its kind), but Manulife itself quite limited branding in Malaysia, with poor agency channel and banca channel (Alliance bank).

3 days ago

wsb_investor

Manulife disclosed its CSM = 241mil, RA = 232mil, net tax ~ 360mil, vs its market cap of 420mil (inclusive of asset management business).

3 days ago

wsb_investor

Manulife also "intentionally" set a low CSM, but might also due on its business nature (not sure what's it saving/protection mix). If Allianz (primary protection business) didn't intentionally set a low CSM, spike in operating profit should be very substantial (much higher than Manulife 11.6%)

3 days ago

observatory

I have a question on "intentionally" setting a low CSM.

Based on what I read, for group of profitable contracts,
PV of cash inflows = CSM + RA (risk adjustment) + PV of cash outflows.

Therefore if Manulife, being conservative, sets a low CSM, it will have a correspondingly higher RA to reflect the greater risk perceived.

However, if the risk does not "materialise", the RA will still be "released" along with CSM at the end of period.

Refer Manulife Note A13, the insurance revenue is made up of RM11m of "CSM recognised for service provided", as well as RM8.7m of "Change in risk adjustment for non-financial risk expired"

What I tried to say is, if we suspect Manulife is being "too conservative", can we treat its true CSM as not only the reported CSM of RM241m, but also to include part of its RA of RM232m?

2 days ago

observatory

I've done a simple exercise on Manulife valuation.

The asset management services generated annual PBT of RM18m in both 2021 and 2022 (refer page 177 of 2022 Annual Report). Assume after tax profit of RM14m, and assume 7 times PE, the asset management business is worth about RM100m.

After deducting this RM100m from Manulife market cap of RM420m, the life insurance business is value at about RM320m.

This is more than its CSM of RM241m. RM320m is equal to 100% of CSM (at RM241m) + 34% of RA (=0.34 * RM232m = RM79m).

Is this the way to look at the valuation?

2 days ago

wsb_investor

For old block of business before 2023, you will need to calculate a one-off CSM, assuming IFRS17 always exists. This part got many rooms to play with the number. e.g. some companies will calculate a proper way, go back 10+ years to calculate CSM, or you can just take a shortcut and report a lower CSM.

For Manulife:
"For calculating the contractual service margin (“CSM”), the fair value approach is used for all in-force policies sold before 2021, and the full retrospective approach is used for all policies sold in 2021 onwards."

For this transition CSM (opening balance), it is unrelated to RA.

On your second question, both CSM and RA represent future unearned profit, difference being CSM = 75th percentile, while CSM + RA = best estimate (50th percentile). So it should be 320mil (market cap), vs 241 CSM + 232 RA = 473 gross tax, or 360 net tax.

2 days ago

observatory

Thanks for the explanation. It’s very useful!

How much leeway do insurance companies have in calculating CSM for old block of business? Are we talking about an under estimation by 10% - 20%, or could be a lot more?

2 days ago

observatory

You mentioned that CSM + RA = future unearned profit, before tax (241m + 232m = 473m)
Next, by applying a standard tax rate of 24%, you worked out the sum of future net profits (473m * 0.76 = 360m).

My next question is, will this after-tax unearned profit (i.e. CSM + RA, after tax) be roughly similar to Embedded Value (EV)?
After all, EV is the PV of future profits, after accounting for tax effects.
I wonder whether it is possible to (roughly) cross check the EV based on published CSM and RA figures.

2 days ago

wsb_investor

It depends on product type and other assumptions, transition CSM with fair value approach ("FVA"), the shortcut, or full retrospective approach ("FRA") can have very big difference, even up to 1000% (10x, yes). FVA is just formula based, with optional adjustments, while FRA has a strict process to follow (assuming IFRS17 always exists).

Yes, CSM + RA will roughly similar with EV. EV has additional component (e.g. cost of capital) to be more reflective of actual business, to represent cost of holding reserve/capital, this is not applicable under IFRS17. EV is designed for life insurance, while IFRS17 is for all insurance. Another key difference is the assumptions used. IFRS17 must use market consistent (i.e. risk free rates) for all cashflows projection, while EV (in Asia, but not Allianz) typically will use a real world return (and discounting) for cashflows projection.

2 days ago

observatory

You mentioned "IFRS17 must use market consistent (i.e. risk free rates) for all cashflows projection".

I'm not sure if my interpretation is correct.
From a shareholder's stand point, usually future earnings are discounted based on the cost of equity, which is higher than the risk free rate (10Y MGS yield is ~4%).
If the unearned profits as estimated from CSM + RA are discounted based on risk free rate, the value will be too large (to be used as a proxy of a life insurer's valuation)
Maybe it's still useful as a valuation proxy of general insurers. The discounting effect is smaller for general insurer since their insurance policy tenures are within a year.
Is this a fair comment?

2 days ago

observatory

About EV, as mentioned in Allianz Malaysia 2022 Annual Report,
"ALIM computes the Embedded Value using market consistent embedded value approach whereby the Embedded Value is the present value of future shareholders distributable profits after tax discounted at the risk free yield curve with volatility adjustment plus the Net Assets Value."

I don't understand what it mean by "risk free yield curve with volatility adjustment plus the Net Assets Value". But if future profits are discounted based on risk free rate at about 4%, by similar arguement, the resulting EV will be too large (from a shareholder's valuation point of view).

In this case, is ALIM actually worth less than the RM3.5b (which is the EV as of 31 Dec 2021)? Of course, for simplicity we ignore the extra value associated with NBV growth.

As comparison, I believe AIA uses Traditional EV approach.
As explained in AIA Annual Report, "AIA Group Limited, together with its subsidiaries use a traditional deterministic discounted cash flow methodology for determining its EV and value of new business (VONB) for all entities other than Tata AIA Life Insurance"
AIA's 2022 annual result presentation mentions it uses a risk discount rate of 8.92% for Malaysia business (4.5% of long term 10year government bond + 4.42% risk premium).
AIA Malaysia EV as of 31 Dec 2021 is USD3,274m.
Given that AIA uses a higher discount rate, can I say that the EV presented by AIA is more "prudent" or "conservative" than Allianz Malaysia?

2 days ago

wsb_investor

In theory and conceptually, market consistent and real world should yield the same results.

It is not just the profit that being discounted, but all future cashflows. You cannot assume that all cashflows are same sign (i.e. profit). On top of that, the earning rate is different as well, where for market consistent, you will also use risk free earning rate, which will give you lower absolute amount, before discounting.

For ILP business, due to compounding effect, Allianz's MCEV is more conservative than AIA's TEV.

Imagine your unit value, growing 4% yearly in Allianz, vs AIA 10%. At 10th year, AIA project unit value will be 175% of Allianz (before other lapse/death assumptions). Fund management charge, which is a key source of income for ILP, will different greatly between AIA and Allianz (in absolute amount). Insurance margin will be the same, assuming same sustainability. However, sustainability will not be the same as well. In Allianz projection, policies more likely assumed to be lapse (due to negative unit fund) before age 70, while AIA projection, policies are more likely to sustain to age 100.

1 day ago

observatory

Thanks for the clarification. OK, I didn't know that risk free rate is also used as assumed earning rate. It's reassuring to know that the MCEV does not result in an inflated EV!

I wonder why risk free rate is used in MECV. I asked Chat GPT and this was the response.

"Market Consistent Embedded Value (MCEV) does not necessarily use the risk-free rate as both the discount rate and earning rate. In MCEV calculations, different discount rates and earning rates are often employed to reflect the specific characteristics and risks associated with different cash flow components. However, the use of a risk-free rate as a component of the discount rate in MCEV calculations is not uncommon, and there are several reasons for its inclusion:
1. Risk-Neutral Valuation: The risk-free rate is often used in MCEV calculations as part of the risk-neutral valuation approach. By employing a risk-free rate, MCEV aims to remove the effect of market risk from the valuation and focus on the time value of money alone. This helps in isolating the intrinsic value of the insurance contracts and facilitates comparison across different types of liabilities.
2. Consistency with Market Pricing: The risk-free rate represents the return available from investments considered to have no credit or default risk. By utilizing the risk-free rate, MCEV aligns the valuation of insurance contracts with the pricing of financial instruments in the market. This promotes consistency and comparability between the market value of liabilities and the value attributed to them in MCEV.
3. Long-Term Horizon: Insurance liabilities often have long-term durations, and the risk-free rate is commonly used to discount future cash flows over extended time periods. The risk-free rate reflects the time value of money and is considered a reasonable approximation for long-term risk-free investment returns.
4. Policyholder Security: The use of a risk-free rate as part of the discount rate in MCEV calculations helps ensure that policyholder obligations are appropriately valued and provides a conservative approach to safeguard policyholders' interests. By employing a risk-free rate, MCEV captures the minimum level of return that should be earned on the invested assets to meet future policyholder obligations."

Although I don't fully understand, it seems that comparability is an important objective, and using the same risk free rate makes comparison easier.

1 day ago

observatory

Allianz Malaysia does not disclose its latest EV in the 2022 annual report. I wonder whether it can be estimated.

As disclosed last year, EV for ALIM as of 31 Dec 2021 was about RM3.5b.
NBV for 2022 was RM275m
PBT for life insurance for 2022 was RM287.2m.
Assume a standard tax rate of 24%, net profit released from life in 2022 = 287.2m * 0.76 = RM218m
(The effective tax rate in 2022 was actually 32.8% due to prosperity tax. However I believe the EV has not expected this one off prosperity tax. Therefore I used 24%).
2022 closing EV = 2022 opening EV + NBV - profit released = 3,500m + 275m - 218m = RM3,557m

In other word, 2022 year end EV is more or less unchanged from a year ago. Is this the right way to go about it?

1 day ago

wsb_investor

MCEV/TEV logic actually can trace back to option pricing (i.e. the famous Black–Scholes model). Under TEV/real-world, you are expecting to earn bond spread/illiquidity premium/credit spread/equity risk premium etc, and discount with a weighted average rates that reflect your risk. It is very hard to do it right, to explain and also to compare. For example, Prudential might use 10% equity return, but AIA might use 9% equity return, yet both might use same discount rate. It will get super complex real fast when you have much more assets type, especially the non-traditional assets, across multiple currency/countries etc. MCEV/risk-neutral/market-consistent will resolve it to revert both earn/discount rate to risk free/risk free + IP/MA etc.

PBT is IFRS4 basis, not EV basis. Closing EV = Opening EV + NBV - profit released + unwind impact (discounting). You also need to consider discounting impact.

Example:
Profit 100 yearly, 10% discount rate, 5 years.
PV profit (Y0) = 100/1.1 + 100/1.1^2 + ... 100/1.1^5 = 379
PV profit (Y1) = 100/1.1 + 100/1.1^2 + ... 100/1.1^4 = 317
Cashflow release = 100
A simple closing EV (317) will not same as opening EV (379) - profit release (100).
In this case, the discounting impact is 37.9, i.e. opening EV 379 * 10%.

1 day ago

observatory

Based on your input, can I estimate the 2022 closing EV in this way?

Unwind impact (discounting) = opening EV * discount rate = RM3,500m * 4.5% (assume a long term risk free rate of 4.5% is used, like AIA) = RM158m

After separately account for the unwind impact, can I use PBT (which as you said is based on IFRS4) to estimate the profit released, which is 287.2m * 0.76 = RM218m?

And therefore, Closing EV
= Opening EV + NBV - profit released + unwind impact (discounting)
= 3,500m + 275m - 218m + 158m
= RM3,715m

1 day ago

observatory

Meanwhile, AIA presents its EV Equity calculation in the following way (refer page 18 of its 2022 annual results presentation):

(1)
Opening EV Equity + EV Operating Profit = EV Equity before non-operating variance
where EV Operating Profit = Expected Return on EV + VONB + Operating Variances + Finance Costs
(2)
EV Equity before non-operating variance + Investment Return Variances + Economic Assumption Changes + Exchange Rate and Other Items = EV Equity before Return to Shareholder
(3)
EV Equity before Return to Shareholder - Dividend Paid - Share Buy-Back = Closing EV Equity

Based on its past results, I notice the component "Expected Return on EV" is a large number, about 6% to 7% of opening EV Equity. This expected return is off set by investment return variances, which is a volatile number.

The other major component is the return to shareholder, i.e. dividend paid + share buy-back.

I wonder, conceptually, how can the AIA equation be mapped to equation we use for Allianz (Closing EV = Opening EV + NBV - profit released + unwind impact).

Instead of deducting profit released, AIA equation only deducts dividend paid and share buy-back.

AIA adds "expected return on EV" + "investment return variances" to its EV equity. But Allianz equation does not include such return.

Where are the links?

1 day ago

wsb_investor

expected return on EV = profit release

1 day ago

observatory

However, the signs are different.
"Expected return on EV" increases AIA EV Equity. But "profit released" reduces Allianz EV.

1 day ago

observatory

Refer my EV calculation example above. Can I take the following short cut on EV estimate?
1) Assume unwind impact = opening EV * discount rate (i.e. risk free rate)
2) Assume profit released = PBT (i.e. IFRS4 profit as you said) * (1 - tax rate)

If not, short of depending on Allianz's disclosure, is there any shortcut to estimate closing EV based on P&L data?

1 day ago

wsb_investor

Release future profit because already accounted for in equity.
Imagine equity now = 0, PV profit = 1000.
Next year release 100 profit, PV profit = 900, equity increase to 100.

1 day ago

observatory

A really dumb question. Do EV (as we discussed in Allianz context) and EV Equity (as disclosed by AIA) mean the same thing?
(disregard the fact that they use different EV approaches)

1 day ago

wsb_investor

Yes, just present value of distributable profit + net asset

1 day ago

wsb_investor

Restated YE22 profit higher 31% under IFRS17 basis (life only), total company level, higher 24%.

23 hours ago

wsb_investor

For life, profit before tax lower to 96.5 from 131.5 (IFRS17 basis), Q1 2022 IFRS4 PBT = 67.7 (core profit = 100.7). No more core profit now under IFRS17.

22 hours ago

wsb_investor

For insurance contracts issued, the Group has adopted the standard using the full retrospective approach for all currently modelled products in annual cohorts 2014 or later. For modelled products in annual cohorts prior to 2014, the modified retrospective approach will be applied.

Unlike Manulife, Allianz doesn't go for shortcut!

22 hours ago

wsb_investor

Q1 CSM amortization (key source of profit) = 95mil, full year should be ~400mil. i.e. FY2023 number will be much higher than FY2022 (377.5 IFRS17 basis or 287.2 IFRS4 basis)

22 hours ago

wsb_investor

Market share increases, but NBV drop due to paying more commission. PBT lower vs Q1 2022, it said due to claims, suspect is due to the release in claims reserve (set up during covid to defer profit) in 2022.

22 hours ago

wsb_investor

CSM release rate, annualized 12.4%, much higher than what I expected, but spike in profit is lower than my expectation, was expecting +50%.

Now can wait for STMB's Q1 and its poor result due to focus on single premium product.

22 hours ago

observatory

The new standard is quite a steep learning curve for me. Not just new concepts, but also have to learn how to compare against past standard!

Refer analyst presentation slide #7. Value of New Business (NBV) under MRFS4 is RM275m. Under MRFS 9/17 is RM300m.
I'm confused by the explanation "MFRS 9/17 view is before tax". So is the NBV of RM300m before or after tax?

17 hours ago

wsb_investor

I believe the NBV previous is based on MCEV (post tax), and NBV now directly take from IFRS17 CSM (gross tax). However, RA is also source of profit.

NBV previously is on best estimate basis, but now is on 75th percentile. More accurate way is to compare NBV with NB CSM + RA.

17 hours ago

observatory

Slide #9 shows, based on MRFS17, NBV declined YoY from RM77.6m (3M22) to RM70.1m (3M23)
However, slide #26 shows that ANP increased YoY from RM147.1m (3M22) to RM163.4m (3M23)
NBV margin has declined. Slide #24 explains it's "due mainly to increase in acquisition expenses."

However, slide #27 shows that ILP has grown by 18.5%, whereas traditional products contracted at -23.5%.
Given ILP is said to have higher margin, rightfully margin should have expanded isn't it? The acquistion expenses must have increased quite substantially?

Before the result, I was expecting an increase in NBV since GE Malaysia and AIA Malaysia both registered NBV growth in 1Q23.

17 hours ago

observatory

Just to be clear, you mean the NBV presented now is CSM, which is gross tax?

And to get the old NBV definition, we have to sum up New Business CSM + New Business RA, and deduct the tax?

Where can we get the NB CSM and RA info?

17 hours ago

observatory

But one bright spot is they annouce DPS of 31.5sen (37.8 sen for ICPS). Didn't expect that in first quarter.
Earlier management mentions positive dividend trajectory in the annual report.
While it takes time to learn all these new concepts, one thing very simple and real is dividend.
I just hope that higher dividend does not mean NBV stops growing.

17 hours ago

wsb_investor

Yup, acq exp definitely increases.

Wait for HY23 financial statement for details breakdown.

17 hours ago

observatory

For 3M23, Group PBT is RM232.3m, where GI contributes RM139.8m, and life contributes RM96.5m (slide #9).
CSM release for 3M23 is RM95m (slide 13)
Given that CSM is pre-tax, it should be compared against (IFRS17) PBT right?

Of the RM95m CSM release, any idea how much is from life, and how much is from GI?
What are the other sources of PBT? Investment return?

17 hours ago

observatory

OK, slide 29 shows that for life, CSM release is RM95m. So CSM release is purely for life?

16 hours ago

observatory

Why are there no more core profits under IFRS17? Are all fair value gains/ losses reported under OCI now?

4 hours ago

wsb_investor

Core profit exists previously because market movement will impact P/L a lot under IFRS4. Now it will not impact that much (partly will absorb by CSM, for VFA business), and anyone can easily split out the impact (insurance service results/investment service results) to exclude any market movement impact.

4 hours ago