AAIGF - AIA Group: A Century-Old Growth Hacker

2023-06-01 05:33:47 ET

Summary

• AIA Group's profitability is yet to recover to pre-pandemic levels, but growth in new business has resumed.
• A leader in traditional distribution, the Group is keeping up with the times through digital and product innovation.
• Despite recent challenges, AIA's long-term prospects remain positive, driven by pent-up domestic demand and economic growth in Asia.

In 2019, AIA ( OTCPK:AAGIY ) turned 100 years old. As the Group celebrated with “ a year-long series of 100-themed physical activities ”, another event, of inauspicious kind, was set in motion: the emergence of a novel disease that would upend businesses everywhere and disrupt AIA’s own.

Three years on, the effects still show. Key performance metrics, Value of New Business (VONB) — the estimated present value of future profits — and Annualized New Premiums (ANP), are yet to recover to pre-pandemic levels.

Earnings have not suffered as much, though 2022 results dipped slightly year-on-year due to weakness in new business. This had a lot to do with the late ending of Covid-19 restrictions in Mainland China (AIA’s fastest growing market) and Hong Kong (its most profitable market, greatly reliant on visitors from Mainland China). Only the second half of 2022 saw an uptick in VONB and ANP; operating ROE for the full year ended at 13.2%.

The first quarter of 2023 carried the momentum from there, delivering a 28% increase in VONB and a 34% increase in ANP, driven by further recovery in China and Hong Kong as well as strong performance in Southeast Asia and India. VONB margin, a measure of profitability, remains high — well over 50% (although it used to be above 60% before the pandemic).

Asia’s Best

Although it originally stood for American International Assurance Company, AIA has always been wholly and completely Asia-focused, which has paid off. It covers 18 markets across the region and ranks in the top echelon in many of them, with 41m individual and 17m group policyholders. By market cap, it is the largest company on the Hong Kong Stock Exchange and the largest life insurer in the world.

However, what really sets AIA apart is the consistent quality of its business. It is known for its Premier Agency model which attracts only the best available talent. For the past eight years, the Group has had the most members with the Million Dollar Round Table (MDRT), a prestigious professional club of wealth managers and insurance professionals. Not even the pandemic upset this dynamic: in the latest year, AIA China recorded a 50% increase in VONB driven by agents. Engaged full-time, they are more productive and earn more.

Bancassurance is a complementary area where AIA has excelled through skillful partnering with leading local banks and brokers. In Southeast Asia, the contribution of bancassurance to VONB in 2022 exceeded the levels reached before 2019; AIA Hong Kong added 21% to VONB through bank distribution. These partnerships, many of which are digitally-enabled, can possibly and eventually double or triple the number of customers for the Group.

Growth Mindset

Cumulatively the markets served by AIA are forecast to reach over $4t in healthcare spending by 2024 , and AIA will be a principal beneficiary. And this still leaves plenty of room for future growth given that insurance penetration throughout most of Asia is remarkably low compared to developed markets in the West. Aging populations, low welfare standards and high private savings are the complementing factors expected to bankroll the expansion for insurance providers.

AIA is leading the pack not only in traditional agency and bancassurance but also in digital distribution. As elsewhere, the thorough shift to online sales was spurred by Covid-19: a $1b investment in technology and analytics produced multiple wellness apps for customers as well as digital tools (and related upskilling courses) for agents, including one with social media prospecting and content sharing capabilities — something uber relevant these days. The latest effort called Amplify Health is an InsurTech venture that combines health insurance and healthcare delivery into a unified digital experience.

Geographically, Mainland China is the largest untapped market. So far AIA has entered nine provinces which include many top Tier cities like Beijing, Shanghai, Guangdong, and Shenzhen where it differentiates itself through Premier Agency. The newest addition is Henan , the third most populous province in China. In addition, the Group has a successful partnership with Postal Savings Bank of China which has branches all over the country and serves mainly rural and low income customers.

Competitors

AIA doesn't face the stiffest of competition since there are only two other providers, Manulife Financial ( MFC ) and Prudential ( PUK ), that have a long-standing pan-Asian presence. But even so they are not quite up to standard. The former is an outsider to the region and does not possess the same single-minded focus on it. The latter transformed into an Asia (plus Africa) pure play just four years ago.

In China though, it is up against none other than the likes of Ping An ( OTCPK:PNGAY ), China Life ( OTCPK:CILJF ) and People’s Insurance Company of China ( OTCPK:PINXY ), the heavyweights both locally and on a global scale . And yet, the addressable market is so big that AIA is still bringing most of its growth from China, more than half of new business together with Hong Kong. The fact that it enjoys the status of a premium brand helps.

Stock

Share performance has been less than stellar. But that is characteristic of the entire Hong Kong market. Compared to it, AIA ( SEHK:1299 ) delivered much higher mid- and long-term returns.

Source: Simply Wall Street ( t otal returns in brackets)

The stock pays a stable but smallish dividend currently at about 2% which is below the industry average in Hong Kong. Dividend payments, however, have increased consistently for the past decade and, well covered by cash flows, are expected to continue their upward trend. Share buybacks are also contributing to returns: of the most recent $10b programme, $3.6b was spent in 2022.

Valuation

At 1.89 times price-to-embedded value (a specialized insurance metric used for valuation), AIA is cheaper right now than before the pandemic, which makes sense given that profitability has not yet fully recovered. Price-to-embedded value operating earnings per share corroborate the thesis.

Source: Annual reports 2020 and 2022

Risks

Rising interest rates have affected the present value of expected profits. AIA’s embedded value at the end of 2022 fell by $4.1b from the previous year. Insurance policies also get harder to sell when set side by side with higher-margin savings products.

Investment returns have been exposed to volatilities in global asset markets. In the first half of 2022, negative variances reached $4.8b but tempered in the better second half of the year.

Since AIA reports in US dollars, the results are also subject to foreign exchange rate movements.

Conclusion

As a body, AIA combines the best features of both Asian and Western insurers. In spite of its age, it has an unrelenting focus on growth. It stands above the competition in traditional channels with probably the most sophisticated salesforce in the region. But it is also building new ways of distribution with the help of data and analytics. Continuous innovation ensures that product offerings stay as relevant as ever for protection and savings for the mass market and high-income customers alike.

The Group has taken a beating recently for several well-known reasons, some universal and others more specific closer to home. But driven by pent-up domestic demand, the prospects for the rest of 2023 and beyond are generally positive, as economic growth in China and Asia Pacific outpaces expectations and the global average.

With its unparalleled century-long pan-regional experience of managing through economic cycles, AIA looks to be a safe long-term bet on insurance in Asia.

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