AIA Group: A Century-Old Growth Hacker (OTCMKTS:AAGIY)

In 2019, AIA (OTCPK:AAGIY) turned 100 years previous. Because the Group celebrated with “a year-long series of 100-themed physical activities”, one other occasion, of inauspicious variety, was set in movement: the emergence of a novel illness that may upend companies in every single place and disrupt AIA’s personal.

Three years on, the results nonetheless present. Key efficiency metrics, Worth of New Enterprise (VONB) — the estimated current worth of future earnings — and Annualized New Premiums (ANP), are but to get better to pre-pandemic ranges.

Earnings haven’t suffered as a lot, although 2022 outcomes dipped barely year-on-year as a result of weak point in new enterprise. This had so much to do with the late ending of Covid-19 restrictions in Mainland China (AIA’s quickest rising market) and Hong Kong (its most worthwhile market, enormously reliant on guests from Mainland China). Solely the second half of 2022 noticed an uptick in VONB and ANP; working ROE for the complete 12 months ended at 13.2%.

The first quarter of 2023 carried the momentum from there, delivering a 28% improve in VONB and a 34% improve in ANP, pushed by additional restoration in China and Hong Kong in addition to robust efficiency in Southeast Asia and India. VONB margin, a measure of profitability, stays excessive — properly over 50% (though it was once above 60% earlier than the pandemic).

Asia’s Greatest

Though it initially stood for American Worldwide Assurance Firm, AIA has at all times been wholly and utterly Asia-focused, which has paid off. It covers 18 markets throughout the area and ranks within the prime echelon in lots of them, with 41m particular person and 17m group policyholders. By market cap, it’s the largest firm on the Hong Kong Inventory Trade and the most important life insurer on the planet.

Nonetheless, what actually units AIA aside is the constant high quality of its enterprise. It’s identified for its Premier Company mannequin which attracts solely the most effective obtainable expertise. For the previous eight years, the Group has had probably the most members with the Million Greenback Spherical Desk (MDRT), a prestigious skilled membership of wealth managers and insurance coverage professionals. Not even the pandemic upset this dynamic: within the newest 12 months, AIA China recorded a 50% improve in VONB pushed by brokers. Engaged full-time, they’re extra productive and earn extra.

Bancassurance is a complementary space the place AIA has excelled by means of skillful partnering with main native banks and brokers. In Southeast Asia, the contribution of bancassurance to VONB in 2022 exceeded the degrees reached earlier than 2019; AIA Hong Kong added 21% to VONB by means of financial institution distribution. These partnerships, lots of that are digitally-enabled, can presumably and finally double or triple the variety of clients for the Group.

Progress Mindset

Cumulatively the markets served by AIA are forecast to succeed in over $4t in healthcare spending by 2024, and AIA will probably be a principal beneficiary. And this nonetheless leaves loads of room for future development provided that insurance coverage penetration all through most of Asia is remarkably low in comparison with developed markets within the West. Growing older populations, low welfare requirements and excessive non-public financial savings are the complementing components anticipated to bankroll the enlargement for insurance coverage suppliers.

AIA is main the pack not solely in conventional company and bancassurance but additionally in digital distribution. As elsewhere, the thorough shift to on-line gross sales was spurred by Covid-19: a $1b investment in know-how and analytics produced a number of wellness apps for patrons in addition to digital instruments (and associated upskilling programs) for brokers, together with one with social media prospecting and content sharing capabilities — one thing uber related lately. The most recent effort known as Amplify Health is an InsurTech enterprise that mixes medical insurance and healthcare supply right into a unified digital expertise.

Geographically, Mainland China is the most important untapped market. Up to now AIA has entered 9 provinces which embody many prime Tier cities like Beijing, Shanghai, Guangdong, and Shenzhen the place it differentiates itself by means of Premier Company. The latest addition is Henan, the third most populous province in China. As well as, the Group has a profitable partnership with Postal Financial savings Financial institution of China which has branches all around the nation and serves primarily rural and low revenue clients.

Opponents

AIA does not face the stiffest of competitors since there are solely two different suppliers, Manulife Financial (MFC) and Prudential (PUK), which have a long-standing pan-Asian presence. Besides they don’t seem to be fairly as much as normal. The previous is an outsider to the area and doesn’t possess the identical single-minded give attention to it. The latter reworked into an Asia (plus Africa) pure play simply 4 years in the past.

In China although, it’s up in opposition to none aside from the likes of Ping An (OTCPK:PNGAY), China Life (OTCPK:CILJF) and Individuals’s Insurance coverage Firm of China (OTCPK:PINXY), the heavyweights each regionally and on a global scale. And but, the addressable market is so large that AIA continues to be bringing most of its development from China, greater than half of recent enterprise along with Hong Kong. The truth that it enjoys the standing of a premium model helps.

Inventory

Share efficiency has been lower than stellar. However that’s attribute of all the Hong Kong market. In comparison with it, AIA (SEHK:1299) delivered a lot larger mid- and long-term returns.

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Supply: Merely Wall Road (total returns in brackets)

The inventory pays a secure however smallish dividend presently at about 2% which is under the trade common in Hong Kong. Dividend funds, nonetheless, have elevated persistently for the previous decade and, properly lined by money flows, are anticipated to proceed their upward pattern. Share buybacks are additionally contributing to returns: of the newest $10b programme, $3.6b was spent in 2022.

Valuation

At 1.89 occasions price-to-embedded worth (a specialised insurance coverage metric used for valuation), AIA is cheaper proper now than earlier than the pandemic, which is smart provided that profitability has not but absolutely recovered. Worth-to-embedded worth working earnings per share corroborate the thesis.

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Supply: Annual experiences 2020 and 2022

Dangers

Rising rates of interest have affected the current worth of anticipated earnings. AIA’s embedded worth on the finish of 2022 fell by $4.1b from the earlier 12 months. Insurance coverage insurance policies additionally get more durable to promote when set facet by facet with higher-margin financial savings merchandise.

Funding returns have been uncovered to volatilities in international asset markets. Within the first half of 2022, destructive variances reached $4.8b however tempered within the higher second half of the 12 months.

Since AIA experiences in US {dollars}, the outcomes are additionally topic to international trade charge actions.

Conclusion

As a physique, AIA combines the most effective options of each Asian and Western insurers. Regardless of its age, it has an unrelenting give attention to development. It stands above the competitors in conventional channels with in all probability probably the most refined salesforce within the area. However it is usually constructing new methods of distribution with the assistance of knowledge and analytics. Steady innovation ensures that product choices keep as related as ever for cover and financial savings for the mass market and high-income clients alike.

The Group has taken a beating not too long ago for a number of well-known causes, some common and others extra particular nearer to dwelling. However pushed by pent-up home demand, the prospects for the remainder of 2023 and past are typically optimistic, as financial development in China and Asia Pacific outpaces expectations and the worldwide common.

With its unparalleled century-long pan-regional expertise of managing by means of financial cycles, AIA seems to be to be a secure long-term wager on insurance coverage in Asia.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.