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Morningstar | AIA Group’s 1Q NBV Growth Slowed Smaller Potential in Margin Improvement

No-moat AIA Group’s first-quarter financial highlights reported first-quarter new business value, or NBV, growth of 18% on a constant-currency basis. Such growth was slower than the 20% increase in the year-ago period and tracking in line with our full-year expectation of 15% in 2019. While a negative change in local currencies against U.S. dollars resulted in a lower NBV growth at 14% on an actual-currency basis. Given lack of further disclosure, we retain our HKD 82 per share fair value estimate for AIA. We also maintain our full-year expectation for a 12% growth in embedded value, versus the 7% growth in 2018. The pickup in growth was primarily attributable to a recovery in investment return, partially offset by slightly slower growth in NBV. Trading at 5% discount to our fair value estimate, AIA is fairly valued. Our long-term thesis is largely intact, as a strong agent force and leading positions in major Asian markets should continue to reward AIA with a higher-than-peer valuation of 2.0 times 2018 price/embedded value, close to the high end of its historical valuation at 2.1 times.

The reignited concerns regarding the U.S.-China trade dispute are likely to add pressures on AIA’s future earnings, including weaker investment returns and slowing premium growth. The potential of Chinese yuan depreciation against U.S. dollars if a trade dispute further escalates should boost sales in Hong Kong market, but we expect it’s not enough to offset weaker sales in mainland China as consumer confidence is getting dim. We expect Chinese yuan depreciation is unlikely to trigger strong surge in mainland Chinese sales as we witnessed during 2012 to 2016 given strict foreign exchange supervision and change in product mix. Sales from mainland Chinese visitors fell 6.4% to HKD 47.6 billion in 2018, representing nearly 30% of total new premium. However, about 96% of premium income was generated from protection-type products including critical illness, medical, whole life, term life and annuity products. Single premium products accounted for less than 1%.

The solid NBV growth was largely attributable to a 6.5 percentage-point increase in NBV margin to 63.6% versus 59.7% in the year-ago period. Margin expansion was attributable to product mix improvement and increasing contribution from high-margin markets including China and Hong Kong. These markets delivered very strong NBV growth over the quarter, driven by continuous agent productivity improvement and headcount expansion. Growth in annualized new premium, or ANP, reached 11% on a constant currency basis, driven by strong growth momentum in China and other markets. Hong Kong delivered double-digit growth in NBV helped by strong agent and bancassurance channels while markets including Singapore and Malaysia faces rising challenges.