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Morningstar | AIA Group Delivered Stronger than Expected NBV Growth in 2018, Other Markets' Growth Recovered

No-moat AIA Group's 2018 results reported a 22% year-on-year growth in new business value, or NBV, beating our expectation for a 15% growth. The strong NBV growth was broad-based, with all major markets delivering double-digit increases. Embedded value, or EV, growth came in line with our expectation at 10% from end of November 2017, or 7.2% from end of December 2017, the new ending date after the change in its financial year-end in 2018. In light of increasing boost from NBV and operating variances, we increase our fair value estimate for AIA to HKD 82 from HKD 72 per share after we factored in lower expense ratio and claim ratio assumptions in the near term. Over the past eight years, AIA has delivered EV growth at 11% CAGR and we expect average growth will accelerate to 12% over our five-year forecast period, thanks to increasing contribution from China and Hong Kong markets. Our new fair value estimate still implies two times forward P/EV, as its strong management execution to deliver steady growth should reward AIA with higher-than-peer valuation. There remains plenty of uncertainty on whether AIA will achieve similar growth and profitability in new territories in China.

The past results highlight increasing contribution to EV growth from NBV and expense efficiency since IPO in 2010. NBV grew robustly at 25% CAGR over the past eight years, thanks to strong momentum in China and Hong Kong markets. AIA delivered continuous positive operating variances driven by growing scale and increasing technology adoption. As a result, EV contribution from NBV and operating variance expanded to 7.8% and 1.2% from 3.8% and 0.7%, respectively, in 2010.

The 22% NBV growth was led by China (at 30%), Hong Kong (at 24%) and Singapore (at 18%) on a constant currency exchange basis. China and Hong Kong market continued to outperform, with NBV margin expanded by seven and eight percentage points to 91% and 62%, respectively. While growth in annualized new premium or ANP for these two markets fell to 22% and 8% respectively, versus 41% and 9% in 2017. Hong Kong market saw strong growths in both agent and partnership with Citibank, and among domestic customers and mainland China visitors. AIA China’s differentiated strategy in quality recruitment and best-in-class training worked well, as witnessed by double-digit growth in both number of active agents and new agent productivity despite a negative growth in agent recruitment for the whole industry. It has recently formed a strategic partnership with WeDoctor, one of leading healthcare Internet platforms in China. It’s currently in the stage of customer research and codevelop products to provide protection-focus insurance contracts via the platform.

AIA China was also approved to establish two branches in northern China, Tianjin, and Shijiazhuang. And by 2022, China is expected to open insurance market to wholly-owned foreign insurers, which is positive to AIA China’s further expansion for the long run. However, given AIA’s strict agent recruitment and focus in training, we believe such expansion will take significant time to ramp up to achieve economic scale. Furthermore, as AIA China already entered most affluent markets including Beijing, Shanghai, Shenzhen, Guangzhou and Jiangsu Province, accounted for nearly 30% of national GDP. These areas are concentrated with private-business owners and well-educated white-collar workers which are major customers for long-term protection products. However, inland cities are less economically open and customers tend to have stronger faith in SOE brands. In light of such uncertainties, we don’t expect the regulatory approval on AIA’s further expansion will trigger further upward revaluation for AIA. Rather, we expect its gradual expansion should be able to offset potential slowdown in existing markets, helping the firm to deliver strong and steady for the long run.

Other markets including Thailand, Singapore, and Malaysia posted strong recoveries in ANP to 18%, 28% and 12% from 10%, 0% and 0% respectively in 2017. NBV margin remained relatively steady at high level of 64% to 73%. AIA Vitality programs were gaining increasing traction among these markets, and we expect this ongoing agent transformation and local banks partnership will bring in steady growth in the near term.