EUR 850.00 For Business Accounts Only

Morningstar | AIA Group Achieved More Balanced Growth Across Geographies

Despite moderating growths over the second quarter, no-moat AIA's solid first-half financial results highlighted a more balanced growth momentum across its geographies, rather than increasing reliance on China and Hong Kong markets as the group did in the past three years. This was evidenced by a long-waited pickup in growth in both new business value, or NBV and annualized new premium ANP in Thailand and Singapore, as its long-term efforts of agency transformation bore fruits. We retain our HKD 72 fair value estimate for AIA. Our long-term thesis is largely intact, as leading agent productivity and strong positions in major fast-growing Asian markets should continue to reward AIA with a higher-than-peer valuation of 2 times 2018 price/embedded value, close to the high end of its historical valuation at 2.1 times. Trading at a 7% discount to our fair value estimate, the stock is fairly valued and the above advantages have been partially factored in.

Though growth in embedded value EV came in a bit disappointed at 2% from 2017, hurt by negative investment return variance, we expect AIA is able to achieve about 10% growth in 2018, helped by a pickup in strong operating profits. Weak investment return dragged EV growth by three percentage points, versus a two percentage points increase in the year-ago period. EV contribution from operating expense variance expanded to 0.7% of EV in the first half, versus 0.5% in the year-ago period. We are delighted to see the company deliver steady positive operating variance, contributing to about 1% boost in EV over the past four years and we expect such contribution will gradually increase as business scale further expands. Accordingly, contribution from EV operating profits saw an upward trend over the past four years, representing 19% of beginning balance of EV on annualized base, versus 13% in 2014, leading to our steady near-term outlook for EV growth at around 10%.

Total NBV grew 22% on actual currency basis and 17% on constant currency basis, moderating from a 26% and 28% respectively in the first quarter and 2017. This was mainly attributable to a significant NBV contraction in Hong Kong retail independent financial advisors IFA, which contributed a majority portion of sales to mainland customers in Hong Kong. Excluding this, group-level NBV growth reached 24%. Domestic market in Hong Kong remained strongly supported by long term trends in aging populations and rising penetration. The number of active agents grew at double digits, and there were very strong growths across agency, partnership, and bancassurance channels in Hong Kong.

China maintained the leading growth driver for the company. AIA China expanded its lead against local insurers as most companies are suffering from negative NBV growth as regulation tightened. NBV grew 37% and ANP grew 32% from the year-ago period. NBV margin further expanded to 91% from 88% in mid-2017. This was attributable to its differentiated strategy including high quality agents and very disciplined approach. Nearly 40% of its agents have a bachelor’s degree or higher, which is more than three times the industry average. The company has achieved 100% new policies sales through AIA’s digital platform, and NBV per agent is nearly four times of industry average. Along with the regulator’s announcement that China will allow 100% foreign insurance ownership in 2021, we expect AIA will achieve first-mover advantage as the only 100% foreign owned insurer in China, in terms of geographic expansion which has become an important obstacle for foreign insurers in the past. Currently, AIA operates in about 30% of China’s market where it have licenses and an expansion in geography within China will remain a long-term growth driver for the insurer.