27 June 2016
EQUITIES AIA Group (1299 HK) INSURANCE
Buy: Our conviction still high after examining bear case Hong Kong
AIA is our most preferred Asian insurance stock; the ultimate MAINTAIN BUY
‘compounder’ for a quality-biased investor TARGET PRICE (HKD) PREVIOUS TARGET (HKD) We are even more positive on AIA after examining the 10 56.00 54.00 main bear arguments SHARE PRICE (HKD) UPSIDE/DOWNSIDE Reiterate Buy, raise target price to HKD56 (from HKD54), 45.50 +23.1% implying 23% potential share price upside (as of 22 Jun 2016)
MARKET DATA AIA is our most preferred Asian insurance stock. We regard AIA as the ultimate Market cap (HKDm) 542,225 Free float 100% ‘compounder’ stock for a quality-biased investor in the high growth potential Asian Market cap (USDm) 69,880 BBG 1299 HK 3m ADTV (USDm) 121 RIC 1299.HK insurance sector where shareholder returns are not always prioritized (they are at AIA). We have a high conviction Buy rating on AIA for many reasons, not least its FINANCIALS AND RATIOS (HKD) Year to 11/2015a 11/2016e 11/2017e 11/2018e defensive qualities, growth outlook, management quality, high free cash flow generation, IFRS EPS 1.81 2.13 2.91 3.20 attractive valuation (with catalysts), diversified country exposure, conservative risk IFRS EPS (prev) - 2.35 3.04 3.44 Change (%) - -9.6 -4.3 -7.0 management and focused Asian life strategy. Although AIA shares have outperformed Consensus EPS - 2.29 2.79 3.07 the Asian insurance sector by a notable 74% since listing on 29 October 2010 and PE (x) 25.1 21.4 15.6 14.2 Dividend yield (%) 1.5 1.7 2.0 2.2 18% over the past 12 months, we believe AIA shares should have delivered more were it not for several niggling bear concerns, which we address in this report. 52-WEEK PRICE (HKD) 59.00 Ironically, we gain comfort from examining these frequently cited bear 46.50 arguments against AIA. Indeed, in our view (1) AIA is not that sensitive to falling interest rates, (2) AIA shares are not expensive, (3) AIA’s morbidity risk is not a 34.00 Jun 15 Dec 15 Jun 16 significant concern, and (4) AIA is unlikely to be hit hard by the much-talked-about Target price: 56.00 High: 52.85 Low: 37.25 Current: 45.00 clampdown on life sales to mainland Chinese in Hong Kong. In addition, (5) while AIA Source: Thomson Reuters IBES, HSBC estimates is successfully deriving an increasing portion of its business from mainland China, James E Garner*, CFA AIA China has a vastly different risk/quality profile from its listed Chinese peers which Head of Financials Research, Asia Pacific the market is bearish on. Moreover, (6) we believe AIA’s NBV growth can continue to The Hongkong and Shanghai Banking Corporate Limited [email protected] grow at the current impressive rate, (7) we are not concerned about the evolution of +852 2822 4321 the management team, (8) credit spreads are widening in only three of AIA’s 18 Christopher C W Chan* markets, and (9) we see little chance of AIA shares being de-rated owing to a Insurance Analyst The Hongkong and Shanghai Banking Corporate Limited migration to a P/BV approach. Lastly, (10) USD appreciation is likely to abate, [email protected] enabling growth rates to improve against USD-depressed historical numbers. +852 2822 2895 Jianwei Yang* AIA is scheduled to report its interim results on Thursday 28 July at 6am, Hong Insurance Analyst The Hongkong and Shanghai Banking Corporate Limited Kong time. We detail our key expectations in this report, though it is too early to form a [email protected] consensus. We set our HKD56 target price using a 2.2x fair P/EV multiple derived +852 2914 9575 using a Gordon growth model formula where the key inputs are 14.1% ROEV, 3.5% terminal growth, and an 8.4% cost of equity. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Disclaimer & Disclosures Issuer of report: The Hongkong and Shanghai Banking Corporation Limited This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com
EQUITIES INSURANCE 27 June 2016
AIA Group Financials & valuation
P&L summary (USDm) Group valuation metrics Year to Nov 11/2015a 11/2016e 11/2017e 11/2018e Year to Nov 11/2015a 11/2016e 11/2017e 11/2018e TWPI 19,876 21,720 23,678 25,829 P/EV Group 1.8x 1.7x 1.5x 1.3x TWPI growth, % 3% 9% 9% 9% – Group RoEV 5% 12% 15% 16% OPAT margin 18.0% 18.2% 18.5% 18.7% P/ Tangible NAV 2.5x 2.1x 1.9x 1.8x OPAT 3,585 3,953 4,380 4,830 P/ book value 2.4x 2.0x 1.9x 1.7x OPAT growth, % 10% 10% 11% 10% – RoE 9.2% 10.2% 12.4% 12.4% Net gains equities (717) (662) 119 119 – RoE comprehensive -2% 21% 13% 13% Other non-operating (76) 0 0 0 P/E 25.1x 21.4x 15.6x 14.2x Net profit 2,792 3,291 4,499 4,949 Dividend yield 1.5% 1.7% 2.0% 2.2%
Growth, % -24% 18% 37% 10% Per share date (HKD)
Operational metrics Year to Nov 11/2015a 11/2016e 11/2017e 11/2018e Year to Nov 11/2015a 11/2016e 11/2017e 11/2018e EV group 24.71 26.95 30.05 33.78 NBV 2,198 2,815 3,574 4,463 – growth 3% 9% 12% 12% Life NBV growth, % 19% 28% 27% 25% TNAV 18.04 21.32 23.41 25.67 NBV/ APE margin 55% 58% 60% 61% – growth -3% 18% 10% 10% APE 3,991 4,876 5,991 7,352 Book value 19.22 22.50 24.59 26.85 APE growth, % 8% 22% 23% 23% – growth -4% 17% 9% 9% Life RoEV 10.2% 12.2% 14.6% 15.5% EPS 1.81 2.13 2.91 3.20 Life NBV/ Opening Group EV 5.9% 7.4% 8.6% 9.6% – growth -24% 18% 37% 10% HKICO solvency ratio 428% 462% 490% 497% DPS 0.70 0.78 0.90 1.02 – growth 39% 12% 15% 13%
Embedded value (USDm)
Year to Nov 11/2015a 11/2016e 11/2017e 11/2018e Issuer Information ANW 15,189 20,262 23,490 26,983 Market cap (HKDm) 542,225 Value of in force 23,009 21,405 22,969 25,232 Market cap (USDm) 69,880 Embedded value (USDm) 38,198 41,666 46,459 52,215 Free float 100% a EV growth, % 3% 9% 12% 12% Valuation changes New Old Change 2016e ROEV 12.2% 12.9% -0.7% 2017e ROEV 14.6% 14.1% 0.4% 2018e ROEV 15.5% 15.1% 0.4% Average ROEV 2016-18e 14.1% 14.0% 0.1% Sustainable growth 3.5% 3.4% 0.1% Cost of equity 8.4% 8.5% -0.1% Implied multiple (x) 2.2x 2.1x 0.1x EV p/s (HKD) 27.0 27.6 -2.4% Fair value end-2016e 58.2 57.3 1.6% 12-month fair value (HKD) 56.1 54.5 3.0% Valuation discount 0% 0% 0% Price target (HKD) 56.0 54.0 3.7%
Price relative 57.00 57.00
52.00 52.00
47.00 47.00
42.00 42.00
37.00 37.00
32.00 32.00 2014 2015 2016 2017 AIA Group Ltd Rel to HANG SENG INDEX Note: Priced at close of 22 June 2016 Source: HSBC
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Contents
Executive summary 4
Multiple reasons to be positive 12
Addressing the bear concerns 19
What to expect from 1H16 results 38
Valuation and estimates 39
We examine 10 of AIA’s major life markets 41
Disclosure appendix 52
Disclaimer 55
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Executive summary
AIA is our most preferred Asian insurance stock; the ultimate ‘compounder’ for a quality-biased investor We are even more positive on AIA after examining 10 bear arguments Reiterate Buy rating on AIA, raise target price to HKD56 (from HKD54), which implies 23% share price upside
Many reasons to prefer AIA over other Asian insurers
Buy rated AIA remains our most preferred Asian insurance share. We regard AIA as a long-term We regard AIA as a long-term ‘compounder’ stock that has ‘compounder’ stock with many attractive features for a quality-biased investor, especially in the many attractive features for a Asian insurance sector where shareholder returns are not always prioritised. Buy rated AIA quality-biased investor remains our most preferred Asian insurance share for a host a reasons, including the following:
Value-oriented, well-regarded management team, led by CEO Mark Tucker. AIA is one of the few insurers in Asia that is willing to sacrifice volume in its pursuit of value creation. Unique play on high profit growth potential Asian insurance markets. AIA operates in 18 markets, many of which offer among the highest growth potential in the world by virtue of a low life penetration rate, a growing middle class, and a relatively high GDP growth outlook. Even Developed Asia offers a significant ‘protection’ opportunity, which AIA continues to execute on successfully in Hong Kong and Singapore. We separately examine developments in 10 of AIA’s most important markets on pages 41-51 of this report, drawing from a raft of disparate public information. A strong balance sheet (428% versus 150% regulatory requirement). Although the Hong Kong regulator uses a Solvency 1 model, the ratios are nevertheless conservative owing to punitive statutory reserve requirements (the reserve risk discount rate is calibrated to the risk-free rate).
Strong NBV track record and outlook. AIA’s NBV expanded at a 27% CAGR over 2010-15, significantly better than the 9% CAGR achieved by Chinese insurers over the same period. For 2015-18e, we forecast a 27% NBV CAGR for AIA, continuing its strong growth trend versus a 21% estimate for listed Chinese life insurers (in USD terms).
Improving free surplus generation. AIA’s free surplus has ballooned from USD4.9bn at IPO to USD7.5bn at end-FY15 despite paying out an aggregate USD2.8bn in dividends since listing. AIA continues to make significant strides in reducing new business strain (with 47% of APE in 2010 versus 37% of APE in 2015) on the back of expense savings, product re-orientation, and utilization of reinsurance. Further scope for capital repatriation despite welcomed dividend hike. Ballooning free surplus gives AIA increased flexibility to pursue inorganic growth opportunities and/or capital repatriation (e.g. dividend hikes and share buybacks). We note that AIA has USD5.2bn of excess capital above the minimum requirement of 150% solvency ratio, which equates to 4.8x the total dividends declared in FY15.
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Highly diversified operations. AIA’s uniquely diversified operations do not have the baggage of low growth US and UK markets. Geographic diversity has helped AIA deliver strong and stable growth; as and when one country underperforms (e.g. Korea and Thailand), other countries have taken up the slack (e.g. Hong Kong and China). AIA’s largest operations from an NBV perspective are Hong Kong, Thailand and China, which account for 34%, 17% and 15% of group NBV, respectively.
Defensive alternative to Chinese insurers. AIA derives 49% of NBV from Hong Kong and China business which is lower than 100% derived by domestically focused peers. Furthermore, AIA is not exposed to the risks facing Chinese insurers stemming from their pursuit of an ‘integrated financial services’ (e.g. bank + insurer) model and their obligation to perform ‘national service’.
Attractive valuation and some catalysts. At our revised HKD56 target price (was HKD54), AIA shares offer a 23% potential return, which compares favourably with upside offered elsewhere in the sector. Potential positive share price catalysts include (1) potential exit of Korean business given potential Chinese purchasers’ heightened interest in Korean insurance assets; (2) recovery in Thailand operations where unit-linked sales are finally gaining traction, accounting for an estimated 10% of APE versus less than 1% 18 months ago; (3) AIA pursuing value-accretive inorganic growth opportunities; according to Reuters (31 May 2016), AIA is interested in buying SCB Life, which would plug a strategic bancassurance gap in its Thailand operations.
AIA shares have outperformed the Chinese insurers by 22% since the start of 2016, but we believe AIA deserves more. While many investors would freely accept some of the aforementioned and, dare we say it, consensus reasons to buy the stock, a few niggling bear concerns have held back its share price performance. We examine each of these concerns in turn below.
Addressing the bear concerns
#1 Bear concern: “Makes no sense to own AIA if interest rates remain low or continue declining as they would face even lower reinvestment options”. Despite concerns, AIA is not that sensitive to falling interest rates; a 100bp decline only reduces AIA’s EV and NBV by 0.3% and 7.4%, respectively. AIA’s low sensitivity to interest rates is attributable to four main factors. (1) AIA derives less than a quarter of its profits from the interest-rate-sensitive spread business. (2) AIA’s high quality, experienced agent force is able to adapt to low interest rate environment and sell unit-linked and/or protection-oriented products. (3) AIA has a relatively small but carefully managed asset-liability duration mismatch unlike the Chinese insurers where the liabilities can be up to 7 years longer than assets (note long dated assets are in short supply). (4) AIA’s financial account life reserves do not increase as along with interest rates. AIA uses IFRS based life reserve risk discount rate is locked in at inception of policy unlike Chinese insurers par/non-par reserves risk discount rate, which is dynamic.
#2 Bear concern: “AIA shares look expensive” AIA shares are currently trading on 1.7x 2016e EV versus 0.9x EV multiple for listed Chinese insurers. However, in absolute terms, we do not consider AIA shares as expensive for the following three main reasons. (1) AIA shares trade below fundamental fair value; the group’s ROEV merits a 2.2x multiple vs 1.7x current trading multiple. (2) Chinese insurers’ valuation – at a 0.9x 2016e EV – is being depressed by both unwelcome stake purchases in Chinese banks and the extended scope of ‘national service’, neither of which are issues facing AIA. (3) AIA’s current trading multiple is far below the 2.2x peak multiple achieved on 10 April 2015.
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#3 Bear concern: “There is a risk that morbidity reserving and consequently reported NBV margins are wrong on AIA’s critical illness products” We agree that it is very difficult for the best of insurers to accurately estimate morbidity risk and set reserves in a developing market due to an absence of detailed historical data, uncertain development trends, rise in detection rates and limited or no access to customer medical records. While AIA is certainly not immune to these risks, we are relatively relaxed about morbidity reserve risks as: (1) AIA has consistently recorded positive operating experience variances since listing; (2) we believe risk-conscious AIA makes extensive use of critical illness reinsurance; (3) AIA sets its reserves conservatively according to a Gen Re study which compares the morbidity experiences of various insurers in China; and (4) we believe AIA charges more than peers for like-for-like critical illness cover in China, which gives it extra flexibility to reserve conservatively while preserving high margins.
#4 Bear concern: “Clampdown on life insurance sales to mainland Chinese citizens in Hong Kong will hit AIA hard” The highly publicised clampdown on life insurance sales to mainlanders in Hong Kong does superficially pose some risk to AIA, given that it derives c14% of group NBV from products sold to mainlanders in Hong Kong. But we think the noise created and concerns raised were disproportionate to the actual limited impact on AIA. (1) Actions by CIRC and SAFE were either just enforcing pre-existing rules or closing loopholes. (2) AIA’s 100% owned Chinese operation is well placed to capture any business that flows back to mainland China as a result of the clampdown. (3) CIRC’s recent document highlighting risk for mainlanders buying in Hong Kong will have no impact, and ironically underscores the appeal of buying Hong Kong products (e.g. Hong Kong laws, foreign currency exposure). (4) We do not believe that the government will take the clampdown much further.
#5 Bear concern: “AIA derives 15% of its business from the China life insurance market which investors are negative on” It is important to stress that while investors are generally negative on listed Chinese Life insurers, they are relatively constructive on the Chinese life insurance market, which offers significant profitable growth potential. We remain positive on the prospects for AIA’s China operation, which differ from the listed Chinese insurers in a number of important respects: (1) AIA’s China business has no ‘national service’ risk unlike most listed Chinese insurers (e.g. sell high-risk/low-margin commercial health products, supporting the A-share market); (2) we think AIA has no desire to pursue an ‘integrated financial services’ (i.e. banking + insurance) business model unlike most Chinese insurance peers; (3) AIA China operates a quantifiably upscale life agency force in China, generating RMB8,102 NBV per agent versus an average RMB2,389 for Chinese listed peers; (4) AIA China is entirely focused on value creation, unlike Chinese insurers that on occasion can appear overly focused on market share; (5) despite high NBV growth, AIA China is coming from a low base and its 0.8% market share (vs China Life’s 23% and Ping An’s 13%) allows it to cherry-pick higher-quality business in the five metropolises it operates in.
#6 Bear concern: “NBV growth cannot continue at this fast pace” AIA has recorded a 27% CAGR in life NBV since 2010 in USD terms, which compares favourably with Korean (2%) and Chinese insurers (9%) over the same period. We believe AIA can sustain a relatively high 27% CAGR in life NBV over 2015-18e – despite the market’s (in our opinion, unfounded) perception that the low hanging fruit has already been picked – owing to (1) plentiful room to attach high-margin protection riders in a number of key markets, including Thailand, Malaysia, Indonesia and Philippines; (2) despite high historical growth rates, we believe AIA is still operating from a low base in several key markets, most notably China, Indonesia and Philippines; (3) the group’s unit-linked sales are not overly sensitive to equity market volatility owing to regular premium payment structure with protection riders and an agile
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salesforce that promote ‘dollar cost averaging’; (4) the unquantifiable scope to improve agent productivity further from agent reactivation and training initiatives promoted by the ‘Premier Agency’ strategy; (5) the group’s unwavering focus on NBV growth, which pervades all levels of the organisation; not once since its listing have we heard AIA discuss market share, which is unheard of in Asian insurance circles; (6) significantly more to come from bancassurance, which only accounts for 10% of NBV despite major agreements with Citibank, Public Bank, Bank of the Philippine Islands (BPI), and Bank Central Asia (BCA); (7) the aggregated ‘Other Countries’ category containing some of the group’s highest growth potential operations, including Philippines, Indonesia and even Vietnam, which has delivered 100% NBV growth for each of the last three years; and lastly (8) the group’s unique positioning in China, which arguably gives it the highest growth potential in Asia by virtue of its low penetration rate, untapped protection opportunity and increasing support from a government that wants to boost overall insurance (including both life and P&C) penetration from 3.2% in 2014 to 5% by 2020.
#7 Bear concern: “Management evolution” CEO Mark Tucker is extremely well regarded by investors and seen as irreplaceable, having played a central role in the group’s success in recent years. However, we believe the CEO remains very committed to AIA in the near term given that (1) we see no bigger job in the global insurance industry than leading AIA; (2) we believe Mr Tucker is determined to leave a lasting ‘mark’ on AIA, which is still at the start of a long journey, as far as he is concerned; (3) the earliest date that Mr Tucker could exercise all his 13m share options (amount as of November 2015) and potentially receive his awarded shares under AIA’s Restricted Share Unit Scheme (the group may award restricted share units to management and employees based on performance measures) would be 12 March 2018; and (4) Mr Tucker is still only 58. (5) Even if he were to leave, we believe AIA has a deep bench of management talent.
#8 Bear concern: “AIA vulnerable if credit spreads widen” In theory, AIA should be vulnerable to corporate bond spreads widening by virtue of holding USD56bn of corporate bonds, which equate to 52% and 34% of its fixed income and total assets, respectively. We estimate that a 100bp increase in credit spreads would reduce AIA’s book value, embedded value, and solvency ratios by 9%, 8% and 30ppt respectively. Our analysis is conservative as we assume the increase in credit spreads is purely a function of default risks rather than an increase in risk-adjusted returns (note an increase in risk-adjusted returns may lift reserve risk discount rate and EV investment return assumptions). It is also worth noting that India, China and Hong Kong were the only markets that saw a rise in credit spreads (up 21bp, 10bp and 6bp, respectively) while other markets saw a decline.
#9 Bear concern: “Risk that AIA could be de-rated if Chinese insurers are valued on P/BV Chinese insurers are trading at just 0.9x EV in part because some investors are beginning to disregard EV in favour of P/BV methodologies for a variety of reasons (e.g. unrealistically high EV investment return assumptions, sale of negative spread products). Investors are concerned that if Chinese insurers are valued using P/BV, AIA will be de-rated. We are less concerned over AIA’s valuation being de-rated to a P/BV based TP (which incidentally offers 21% downside for AIA shares) given that: (1) AIA’s Chinese EV risk discount rate is a conservative 11.75% which is 2ppt higher than the 9.75% disclosed if we factor in the Hong Kong reserving overlay, (2) upcoming listing of Indian life insurers which may be valued on an EV basis, (3) AIA is not exposed to the ‘national service’ and ‘integrated financial services’ model risks, which we regard as the main factors that have been depressing Chinese insurance share prices rather than fundamental concerns about the EV methodology, (4) AIA’s closest peer, Prudential, is valued on an EV basis, (5) AIA shares have less downside on a P/BV basis (21% downside if wholly valued at P/BV) than its Chinese peers (on average 46% downside) due to high ROE, reflective of its strong renewal premium income from its back book business.
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#10 Bear concern: “AIA vulnerable to USD appreciation” We agree that AIA’s USD denominated headline EV, NBV and net profit would be impacted by appreciation in USD as the group’s businesses all operate in local currency and would need to translate back to the reporting USD currency. However, we stress that these gains/losses are mostly translational and the actual impact of foreign exchange movements on core operations would likely be limited given AIA’s local operations match their asset and liability currency. We estimate that a 10ppt appreciation in USD would reduce AIA’s reported BV, EV and NBV by 4%, 5%, and 7%, respectively. The HSBC FX strategy team believes that USD strength/weakness versus Asian currencies has peaked earlier during the year (except for RMB) and do not expect Asian currencies to return to their recent highs against USD. Assuming HSBC’s FX forecasts are correct, an improvement in Asian currencies would be a tailwind for AIA.
HSBC 1H16e estimates for AIA HSBC 1H16e implied Consensus 1H16e implied HSBC HSBC Consensus FY16e implied USDm unless stated 1H14a 1H15a 1H16e Y-o-y growth 1H16e Y-o-y growth FY16e Implied growth FY16e Y-o-y growth TWPI 9,004 9,633 10,500 9% 21,720 9% OPAT margin 16.2% 16.9% 18.2% 1.3% 18.2% 0.2% OPAT 1,457 1,630 1,911 17% 3,953 10% 3,581 0% Net profit to shareholders 1,546 2,180 1,496 -31% 1,927 -12% 3,291 18% 3,563 28% EPS – HKD 1.00 1.41 0.97 -31% 1.05 -26% 2.13 18% 2.29 27% DPS – HKD 0.16 0.19 0.26 39% 0.78 12% 0.75 8% APE 1,690 1,878 2,295 22% 4,876 22% Margin NBV/APE 46.9% 51.1% 55.2% 4.1% 57.7% 2.6% NBV 792 959 1,266 32% 2,815 28% 2,600 18%
HSBCe 1H16e implied Consensus 1H16e implied HSBC HSBC Consensus FY16e implied USDm unless stated 1H14a 1H15a 1H16e H-o-h growth 1H16e H-o-h growth FY16e Implied growth FY16e Y-o-y growth Shareholders’ funds 31,966 29,716 33,489 13% 34,789 17% 32,587 10% HKICO solvency ratio 453% 428% 421% -7% Free surplus 8,349 7,528 8,008 6% Embedded value 38,598 38,198 40,590 6% 41,666 9% 41,800 9% Source: Company data, HSBC estimates
What to expect from 1H16 results
AIA will release interim results at 6am Hong Kong time on Thursday, 28 July 2016. Our key expectations are y-o-y NBV growth of 32% on an actual exchange rate (AER) basis and 39% on a constant exchange rate (CER) basis in 1H16 (versus 36% AER and 44% CER in 1Q16), 6% EV h-o-h growth, 17% y-o-y operating profit growth, 39% y-o-y dividend growth and 31% net income decline in 1H16e. Our estimates are predicated on a 2.5% fall in equities, a 37bp fall in bond yields, and 7% USD appreciation in 1H16e. At this juncture, it is too early to establish consensus expectations.
We raise our TP to HKD56 (was HKD54)
The 4% increase in our TP is principally driven by the updating of marked-to-market model to The 4% increase in our TP is principally driven by the reflect bond, equity and FX movements since the last model update on 22 April 2016. We also updating of marked-to-market reduce AIA’s cost of equity assumption by 0.1ppt to 8.4% after updating our country weighted model to reflect bond, equity COE calculation in line with our strategist’s latest risk-free rate and equity premium estimates and FX movements and a higher two-year adjusted Bloomberg calculated beta. Interestingly, our FY16e NBV estimate is 8% above consensus, while our EV estimate is in line with consensus.
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We increase our target price slightly, to HKD56 Valuation changes New Old Change 2016e ROEV 12.2% 12.9% -0.7% 2017e ROEV 14.6% 14.1% 0.4% 2018e ROEV 15.5% 15.1% 0.4% Average ROEV 2016-18e 14.1% 14.0% 0.1% Sustainable growth 3.5% 3.4% 0.1% Cost of equity 8.4% 8.5% -0.1% Implied multiple (x) 2.2x 2.1x 0.1x EV p/s (HKD) 27.0 27.6 -2.4% Fair value, end-2016e 58.2 57.3 1.6% 12-month fair value (HKD) 56.1 54.5 3.0% Valuation discount 0% 0% 0% Price target (HKD) 56.0 54.0 3.7% Source: HSBC estimates
Key risks to our Buy rating and valuation for AIA include (1) weaker-than-expected equity market performance; (2) weaker-than-expected NBV growth following a slowdown in life insurance sales to mainland Chinese citizens in Hong Kong; (3) bigger-than-expected credit spread widening hitting the group’s EV, NBV, and BV; (4) potential succession issues in the event of a departure of well-regarded CEO Mark Tucker – which we argue is unlikely, at least in the near term; (5) stronger-than-expected USD appreciation, hitting headline EV and NBV, and (6) the market’s unlikely migration from the P/EV method to the P/BV method (based on which we would estimate AIA has 21% share price downside).
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AIA
AIA investment positives and negatives Investment positives Investment negatives and key risks Share price-focused management team Korea challenges AIA’s highly experienced management team is focused on shareholder returns with The Korean insurance regulator has imposed stringent, wide-ranging regulatory management having large equity stakes in the business. CEO Mr Mark Tucker is the restrictions on all Korean insurers’ outbound direct marketing (DM) activities over beneficial owner of 21.4m shares. AIA runs an elaborate KPI programme that aligns the last 18 months, owing to the misappropriation of customer information. There remuneration (a 33.3% weighting to EV equity, a 33.3% weighting to NBV, and a was a 44% NBV contraction in 2015 with an 18.5% 2015 NBV margin (versus 33.3% weighting to total shareholders return). 26.9% in 2013), AIA was negatively impacted by cost overruns owing to a fixed cost Higher NBV growth potential base (e.g. more than 4,000 employees) and lower budgeted volumes. AIA remains well-positioned to deliver above-peer’s-average NBV growth, helped by Thailand concerns (1) reactivating its agent force, as AIA has grown its number of active agents (more Concerns centre on a marked slowdown in AIA’s Thailand NBV growth (which than one product sale per month) by more than 30% since the IPO; (2) rolling out dipped to 9-13% in 2013-15 from 26-45% in 2010-12), the exit of the AIA Thailand higher-margin products (e.g. the next generation of unit-linked, upgraded riders); and CEO in May 2013 (who was succeeded by Mr Saloon Thai Tham) and a continued (3) increasing agent productivity and recruitment. loss in market share to banks (lost 11ppt since January 2011). More recent Well-capitalised insurer, strong balance sheet and low leverage concerns surround financial market volatility (equities, bonds, currency) and political AIA is well capitalised, with a solvency margin ratio of 428% in 2015. AIA’s debt-to- tensions, which may hamper sales. total equity ratio stands at just 11%, significantly below China Life’s 32%, Prudential’s Malaysia industry issue 39%, and Manulife’s 23%. AIA has been shielding asset values by classifying them as The Malaysian regulator is considering cutting shareholders allocation of first year HTM; 0% of its bonds are HTM versus 65% for Chinese peers. investment-linked premiums from 50% to 20%. This could have a negative impact Mark Tucker has a proven record in Asian insurance on Malaysian NBV margins. CEO Mark Tucker (who joined AIA in July 2010) has a proven track record of building Medical expense inflation concerns emerging out an Asian insurance business. He was previously at Prudential and was CEO of During our field trip in Southeast Asia in 2015, we saw medical expense inflation Prudential plc in 2005-09 and was Group Finance Director of HBOS plc in 2004-05. concerns emerging in Thailand, Malaysia and Indonesia. We understand that He was Chief Executive of Prudential Corporation Asia Ltd in 1994-2003. He was also Malaysia’s operating profits were dampened by a pick-up in medical expenses in the General Manager of Prudential Assurance Co. Ltd (HK) in 1989-92 and joined 2015, which insurers have cited up to 20% inflation. Prudential plc in 1986. ASEAN liquidity squeeze Increased penetration of high margin riders Liquidity squeeze in Indonesia, Thailand and Malaysia could negatively impact An opportunity for further enhancing AIA’s future NBV growth rate is to increase the insurance sales. Customers require higher deposits for mortgages. penetration of high margin riders in customer base. The margins of these riders are Relatively high NBV strain high compared to standalone products as most expenses have already been AIA’s NBV strain measured as a percentage of APE (better measure) and NBV is absorbed by the main product. We understand AIA has significant scope to boost materially higher than Prudential. We believe this is attributable to high Hong Kong protection riders in numerous markets, such as Thailand (attachment rates still low) capital requirements, allocation of group head office expenses to NBV and the and Malaysia (currently has 3-4 attachments per product versus an industry high of 6). geographic business mix (e.g., Prudential benefits from a large UK with-profits Powerful brand means it should be well-placed to generate new sales book, which has no NBV strain). AIA has recently reduced the level of NBV strain Its leadership in many markets, coupled with the fact that it has been operating in due to a structural improvement in efficiency, which is likely to be ongoing. We many Asian countries for a long time, has given it a powerful brand. AIA’s brand believe AIA could accelerate a reduction in NBV strain by using reinsurance attraction means that it should always be in a relatively strong position to retain financing or less onerous cost of solvency capital reserve assumptions. customer loyalty and attract new customers. Losing market share Improved bancassurance distribution could enhance growth AIA has been losing market share, with the pace of market share loss accelerating AIA is getting an unquantifiable lift from Public Bank and Citibank cooperation. AIA after the AIG-related events in 2008 and the failed acquisition attempt by Prudential signed an exclusive 15-year bancassurance partnership with Citibank in 11 Asian in early 2009. markets. The group has also signed bancassurance deals with Public Bank for Large agency network leaves it vulnerable to agency wars and poaching Malaysia and PT Bank Central Asia (BCA) for Indonesia. Overall, the group had about AIA’s large regional agent size leaves it vulnerable to agency wars and hence 60 bancassurance partners and is constantly looking for new partners. agency poaching. One of the few listed insurers that provides diversified exposure to Asia Hard to extract excess capital It is arguable that AIA can command a ‘scarcity premium’ from investors looking for Even though AIA is well capitalised, it is relatively hard to move capital upstream or diversified Asian insurance exposure. downstream between the different countries that AIA operates in. As such, we see Mature in-force business generating sizeable distributable profits difficulties to transfer excess capital from the country operating level to the group level. Due to its long operating history in AIA, it has a large mature in-force business that EV is macro insensitive generates sizeable distributable profits. AIA discloses that the projected after-tax AIA’s EV is relatively insensitive to interest rate and equity market movements distributable earnings (undiscounted) for AIA Group is as follows: USD12,638m for unlike its large Chinese life insurance peers, as it adjusts its EV risk discount rate 2H14-18e; USD12,560m for 2019-23e; USD11,413m for 2024-28e; USD10,157m for and investment return assumptions in line with interest rates. For every 50bp 2029-33e, and USD43,904m for 2034e and thereafter. increase in interest rates, AIA’s EV will only increase by 0.3%. Besides, unlike More disclosure in ‘other markets’ may allow market to see its growth prospects Chinese life insurers, AIA holds most of its fixed income portfolio for sale and rising While overall contribution to the group’s NBV is still small, ‘other markets’ achieved rates should not benefit but hurt its investment performance. 32% NBV growth in 2015 (under constant exchange rates). Further disclosure in Market volatility impedes the ability to sell higher margin products ‘other markets’ such as Philippines and Vietnam may allow investors to realise the AIA makes money in key markets by bolting on high margin protection riders to core potential of these markets and appreciate the strong growth prospects and investment-linked product (e.g. Thailand, the Philippines and Indonesia). There is a contributions that they would likely bring to AIA in the future. risk that equity market volatility may dampen sales of core products and the ability Scope for a capital repatriation story to sell riders. We welcome AIA’s upward rebasing of dividends in FY15 (DPS +39% y-o-y with payout ratio rising from 27% to 34% on operating profit basis). That said, we still see scope for further buybacks given the group’s strong free surplus generation. Source: Company, HSBC estimates
10 EQUITIES INSURANCE 27 June 2016
AIA in pictures
AIA NBV breakdown by country, FY15 AIA’s P/EV trading range Other 2.2x Korea Markets 2% 11%
Malaysia Hong Kong 1.8x 7% 34%
1.4x Singapore 14% 1.0x
Thailand
Jul-12 Jul-15
Oct-10 Apr-11 Apr-14
Feb-12 Feb-15
Dec-12 Nov-13 Dec-15 Sep-14
China Sep-11 May-16 17% May-13 15%
P/EV Mean +1SD -1SD
Source: Company Data, HSBC Source: HSBC estimates
Quarterly NBV y-o-y growth 1Q16 NBV margin was 51.6%
800 40% %
36% % %
700 35% %
%
57.6
57.2
%
%
54.2 %
26% 53.4
600 30% %
51.6
% %
24% 26% %
48.7
48.4 47.3
500 22% 22% 25% 46.8
%
44.7 44.7
26% 43.8 25% 17% 400 24% 20% 23% 38.4 20% 300 15% 18% 200 10% 100 5%
0 0%
1Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15 1Q16
1Q14 2Q15 1Q13 2Q13 3Q13 4Q13 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 Quarterly NBV (USDm) Quarterly NBV margin, %
Source: Company data, HSBC estimates Source: Company data, HSBC estimates
AIA company timeline
AIA , then named INTASCO, was founded by CV Starr in AIA re-established its Shanghai. presence in China INTASCO established a through a branch office in branch office in Hong Kong AIA was registered in Brunei. Shanghai, the first and Singapore. AIA entered Macau. foreign-owned life insurance business to INTASCO moved its Head Office to receive a license in the Hong Kong and changed its name to PRC. AIA was listed in Hong AIA. AIA was assigned a unique role Kong Market. AIA acquired within the group to sell life insurance ING Malaysia. Korean in South-East Asia. Philamlife was AIA Australia was operations began. JV in India was established. AIA Malaysia & Alliance founded in the Philippines. incorporated. Bank Launched Family Takaful JV.
1938 1948 1967 1981 1984 1990 2000 2008 Sep 2012 Dec 2015 Oct 2012 1931 1947 1957 1972 1982 1987 1992 2001 Oct 2010 Jan 2011 AIA increased its shareholding in Tata AIA AIG experienced a liquidity crisis and Life Insurance Cpmpany AIA Malaysia was New Zealand AIA Taiwan was was forced to seek U.S. Government to 49% from 23% registered in operations established as a assistance and implement a INTASCO began operations in Siam, Malaysia. began. branch of ALICO. restructuring that led to the positioning later re-named Thailand. of AIA for a public listing. AIA acquired Leading Sri Lankan Insurance AIA Vietnam became Company. the first wholly U.S.- AIA-B was formed. AIA entered owned life insurer to be Indonesia. granted an operating license. Source: Company data, HKexchangenews
11 EQUITIES INSURANCE 27 June 2016
Multiple reasons to be positive
We have identified nine reasons for investors to remain positive on AIA Defensive qualities such as robust balance sheet, highly diversified operations and improving free surplus generation allows AIA to be viewed as a defensive switch from Chinese insurers AIA also offers a high growth outlook given its strong agency-led franchise, exposure to the fast-growing Asian markets and high quality management to execute an extremely value-focused strategy
#1: Value-oriented, well-regarded management, led by CEO Mark Tucker
AIA is one of the few insurers in Asia that is willing to sacrifice volume in its pursuit of value creation. The group is extremely focused on NBV which accounts for 60% of senior management’s short-term incentive plan and one-third of their long-term incentive plan. In addition, management compensation is linked to the AIA share price (accounts for one-third of KPI), firmly aligning their interests with shareholders. This compares to the listed Chinese insurers, which are mostly state-owned (except for Ping An) and have government appointed management that is not incentivised by share price performance.
#2: Unique play on high profit growth potential of Asian insurance market
AIA operates in 18 markets, many of which offer among the highest growth potential in the world by virtue of low life penetration rate, a growing middle class and relatively high GDP growth outlook. Even developed Asian markets which have superficially higher life penetration rate (i.e. Hong Kong with 12.7% and Singapore with 5.0%) have been a source of NBV growth on policy migration from savings to protection (Hong Kong and Singapore delivered 32% and 14% NBV growth, respectively, in FY15).
#3: A very strong balance sheet (428% vs 150% regulatory requirement)
Although AIA’s 428% end-FY15 Solvency 1 ratio used by the Hong Kong regulator ignores the asset risk insurers run, it is conservative due to a reserve overlay. Under Hong Kong regulations, AIA’s branches (including AIA China, which is classified as a branch) are subject to the higher of the local reserve and capital requirements or Hong Kong requirements. Hong Kong’s reserve rules require insurers to set their reinvestment yields at the risk-free rate of the country in which the currency of the reserve is denominated. This generally results in a lower reserve discount rate than under other countries’ reserving rules. In FY15, the more stringent and conservative Hong Kong requirements had caused the group to make adjustments of USD9.2bn to its adjusted net worth (ANW), bringing the end-FY15 ANW down to USD15.2bn.
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AIA is a unique play on high growth Asian Life insurance markets
Most markets that AIA operates in have relatively low life penetration rates
15.6% 12.7%
8.4% 8.0% 7.2% 5.9% 5.0% 3.8% 3.6% 3.1% 3.1% 3.0% 2.9% 2.6% 1.7% 1.6%
1.1% 0.7%
HK UK US
India
China
Japan
France
Taiwan
Canada
Vietnam
Thailand
Australia
Malaysia
Germany
Indonesia
Singapore Philippines South Korea South
Source: Swiss Re, HSBC
AIA China has generated the fastest NBV CAGR since AIA listed in 2010
50% 40% 40% 35% 31% 30% 27% 27% 20% 18% 20%
10%
0%
-10% -6% China Malaysia Hong Kong Group Singapore Other Markets Thailand Korea average
Source: Company data, HSBC
HSBC 2016e GDP growth forecasts for markets that AIA operates in
6.7% 6.3% 5.9% 5.0% 4.7% 4.0% 3.0% 2.6% 2.4% 2.2% 2.1% 1.8% 1.5% 1.4% 1.4%
0.8%
US HK EU
China
Korea
Japan
Taiwan
Vietnam
Thailand
Australia
Malaysia
Sri Lanka Sri
Philipines
Indonesia Singapore
New Zealand New
Source: HSBC estimates
13 EQUITIES INSURANCE 27 June 2016
#4: Strong NBV track record and outlook
AIA’s NBV grew at a 27% CAGR during 2010-15, significantly above the 9% NBV CAGR reported by Chinese insurers during the same period. We attribute AIA’s outperformance in NBV growth to a number of reasons: (1) strong branding across Asia and agency-focused platform allowing them to push harder-to-sell protection products, penetrating Asian markets which have significant protection gaps; (2) value-oriented management team and hence strategies that aims to generate NBV growth; (3) high NBV margin rider strategy, which has worked for AIA in numerous markets, and (4) improved bancassurance distribution (i.e. exclusive 15-year bancassurance deal with Citibank in 11 Asian markets, targeting high net worth customers). We forecast AIA’s NBV to grow by 27% 2015-18e CAGR, continuing its strong growth trend versus 21% estimate for listed Chinese Life insurers (in USD terms).
We estimate AIA will deliver 27% 2015-18e NBV CAGR, higher than Chinese listed peers 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2010-15 CAGR 2015-18e CAGR China Life 16% 7% 4% 5% 7% 30% 24% 18% 15% 10% 19% China Pacific 26% 16% 6% 9% 14% 32% 28% 13% 16% 15% 19% China Taiping 35% 23% 3% 37% 37% 39% 29% 25% 21% 27% 25% New China Life n.a. -3% -3% 4% 13% 29% 20% 17% 16% 7% 18% Ping An Life 36% 14% -4% 17% 18% 34% 31% 21% 19% 15% 24% PICC Life n.a. n.a. 10% 4% -26% 7% 19% 11% 15% -2% 15% China sector 24% 10% 2% 10% 10% 30% 26% 18% 17% 10% 21% AIA Group 22% 40% 27% 25% 24% 19% 25% 27% 25% 27% 27% *PICC Life is 2011-15 CAGR due to no NBV disclosure for 2010 Source: Company data, HSBC estimates
#5: Improving free surplus generation
AIA’s free surplus movement shows how the group’s free cash flow generation has improved. Free surplus represents excess cash reserves held over and above the required capital; the two components that make up the ANW component of Embedded Value. AIA’s growing free surplus allows more flexibility to self-finance organic and inorganic growth opportunities or return capital. Dividend payments come out of free surplus. AIA’s free surplus has ballooned from USD4.9bn at IPO to USD7.5bn at end-FY15 despite paying out an aggregate USD2.8bn in dividends since listing. In 2015, the group’s free surplus dipped 3% versus 2014 on the back of higher dividends and negative investment return variances of USD1.5bn (negative marked-to-market asset values) which were partly offset by free surplus generation and improved new business strain efficiency (from 45% of ANP in FY14 to 37% in FY15). New business strain includes the initial expenses incurred when a policy is written, such as commissions, admin expenses, and reserves. Since listing, AIA has been improving its efficiency, country mix and product structure to be less capital intensive. AIA has focused its sales in countries where new business strain are lower (i.e. Hong Kong and Malaysia). In addition, AIA has been shifting its traditional sales from non-participating to participating, which consumes less capital and has offset the impact of selling more unit-linked products with high margin riders. The increase in scale of business in some countries, such as China, Philippines and Indonesia, has also helped lower new business strain and will likely continue to improve as business expands. AIA’s free surplus generation may not be as good as the European insurers (Prudential new business strain as % of APE in 2015 was 13%) but we note that the company has more growth opportunities and room to further improve its free surplus generation.
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AIA’s free surplus generation has been improving since listing Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16e Nov-17e Nov-18e Opening free surplus 4,992 5,930 6,643 6,727 7,794 7,528 8,735 9,219 Acquisition -1,431 -800 0 0 0 0 Free surplus generated (incl. 2,485 2,845 3,784 4,397 2,252 4,372 4,067 4,364 investment variances) Free surplus to fund new business -1,140 -1,412 -1,510 -1,655 -1,488 -1,755 -2,097 -2,573 Unallocated Group Office expenses -148 -148 -142 -172 -128 -128 -128 -128 Dividends -170 -530 -595 -689 -814 -1,193 -1,270 -1,456 Other capital movements -89 -42 -18 -14 -88 -88 -88 -88 Closing free surplus 5,930 6,643 6,727 7,794 7,528 8,735 9,219 9,337 Source: Company data, HSBC estimates
#6: Scope for more capital repatriation despite dividend hike
We welcome AIA’s upward rebasing of dividend in FY15. The full-year dividend per share was raised 39% versus FY14, with the payout ratio rising from 27% in FY14 to 34% in FY15 on an operating earnings basis. AIA shares now imply a 1.7% dividend yield for FY16e. That said, we still see scope for further buybacks given the group’s strong free surplus generation. AIA has USD5.2bn excess capital above the minimum requirement of 150% solvency ratio which equates to 4.8x of total dividends declared in FY15.
#7: Highly diversified operations
AIA’s uniquely diversified operations, which do not have the baggage of the low growth in the US and UK markets, leave the group well positioned from a best-practice and product recycling perspective and in terms of operational diversity. Indeed, if one operation underperforms due to country-specific challenges, other country operations will able to take up the slack. This has been evident in recent years, with the multi-year decline in Korea and slowdown in Thailand being offset by strong growth in Hong Kong and China.
#8: Defensive switch as people shy away from China
AIA is seen to be enabling investors to avoid Chinese insurers, which are beset by concerns around declining investment returns, asset risks, increasing bank exposure, miss-selling risks from uncontrolled agent growth, ‘national service’ and high but risky critical illness insurance margins. AIA derives 49% of NBV from Hong Kong and China business whereas its domestically focused Chinese peers derive 100% of their business from these markets.
#9: Attractive valuation and some catalysts
AIA shares offer 23% potential return to our revised HKD56 (was HKD54) target price, and this compares favourably with the upside offered elsewhere in the sector. Potential positive share price catalysts include (1) potential exit of Korean business given potential Chinese purchasers’ heightened interest in Korean insurance assets; (2) recovery in Thailand operations, where unit- linked sales are finally gaining traction, accounting for an estimated 10% of APE versus less than 1% 18 months ago; and (3) AIA pursuing value-accretive inorganic growth opportunities – according to Reuters (31 May 2016), AIA is interested in buying SCB Life, which would plug a strategic bancassurance gap in its Thailand operations.
AIA’s continued share price outperformance reflects many of those strengths recognised by consensus and explains why the shares trade at 1.7x 2016e EV vs a 0.9x China sector average. To gain comfort with buying these shares at current levels, investors must become comfortable with that bear concerns which we seek to address in the report.
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AIA share price has outperformed Chinese insurers H-shares and HSCEI since listed
250
200
150
100
50
0 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 AIA Ping An 'H' China Life 'H' China Pacific 'H' PICC P&C China Taiping HSCEI *Indexed at 100 at the date when AIA was listed Source: Thomson Reuters Datastream, HSBC
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27 2016 June EQUITIES
Overview of Asian life insurance, by region China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Date FY15 FY15 FY14 FY14 FY15 FY15 FY15 FY14 FY15 FY15 FY15
Insurance regulator CIRC OCI IRDA OJK FSC BNM Insurance MAS FSC OIC Ministry of
INSURANCE
Commission Finance FDI restriction 50% 100% allowed 49% 80% 100% allowed 70% 100% allowed 100% allowed 100% allowed 49%. >49% with 100% allowed approval of the Minister of Finance Number of life insurers 66 57 24 50 25 9 30 22 28 24 17 Life penetration as % GDP (2014) 1.7% 12.7% 2.6% 1.1% 7.2% 3.1% 1.6% 5.0% 15.6% 3.6% 0.7%
Life penetration rate change last five years -0.5% 3.1% -2.1% 0.3% 0.2% -0.1% 0.9% 0.4% 1.4% 1.2% 0.1% Life premium tax breaks for policyholder No No Yes No Yes Yes No Yes Yes Yes No Sum assured as % GDP 34%* 200% 63% 25% 152% 112% 35% 180% 289% 93% 30% Life GPW 5 yr CAGR 9% 15% 4% 12% 7% 8% 22% N/A 5% 13% 23% Life FYP 5 yr CAGR N/A 20% 1% 9% 10% 2% N/A 11% N/A 13% N/A Life APE 5 yr CAGR N/A 19% -3% N/A N/A 3% N/A 12% N/A 13% N/A Life premium % Agent 44% 25% 41% 48% 27% N/A N/A 40% 54% 51% 98% Life premium % Bancassurance 48% 50% 9% 31% 72% N/A N/A 37% 39% 43% 2% Life premium % Other 8% 24% 50% 21% 1% N/A N/A 23% 7% 6% 0% Life agent numbers 3,000,000 46,971 2,067,907 414,595 134,745 82,444 97,241 14,669 188,407 273,670 404,607 Number of people per life agent 462 153 606 608 376 371 1051 377 125 252 227 Sum assured 5yr CAGR N/A 12% 12% 14% 6% 7% 16% 8% 2% 18% N/A Number of policies 740,500,000* 11,454,864 25,869,356 49,070,446 79,580,115 12,557,367 4,104,664 13,104,695 55,008,867 19,708,597 5,608,089 Average sum assured per policy (USD) 5,060* 50,622 47,718 4,014 26,892 26,399 25,467 41,140 28,352 18,969 10,449 Life premium % Linked 1% 14% 12% 56% 29% 34% 74% 19% N/A N/A, Negligible 37% Market share of top five 62.5% 60.6% 88.6% 55.0% 61.0% 69.0% 59.0% 83.9% 66.7% 71.4% 75.4% Market rank/ share basis GPW GPW GPW APE GWP GPW GPW GPW GPW GPW GPW – 1) China Life AIA LIC Prudential Samsung Great Eastern Sun Life Prudential Cathay Life AIA Prudential – 2) Ping An Company A ICICI Prudential AXA Mandiri Hanwha AIA AXA AIA Fubon Life Muang Thai Bao Viet Life – 3) NCL Prudential HDFC Life Allianz Life Kyobo Prudential Philam Life Great Eastern Life Nan Shan Thai Life Manulife – 4) China China Life (HK) SBI Life Bumiputera NH Hong Leong BPI Philam NTUC Shin Kong Life Krungthai-AXA AIA Pacific – 5) PICC Life Manulife Max Life Manulife Mirae Asset Allianz Prudential Aviva China Life (TW) SCB Life Dai-ichi Life Solvency model C-ROSS Solvency 1 Solvency 1 RBC RBC RBC RBC RBC RBC RBC Solvency 1 Regulatory requirement 150% -> 100% 150% 150% 120% 150% 130% 100% 120% 200% 140% N/A 10yr gov bond yield 3.55 1.86 7.82 8.56 2.08 4.09 4.35 2.74 1.01 3.03 6.90 Change 10yr gov bond yield y-t-d (bp) -4.0 5.3 -3.5 85.1 -45.0 -0.4 2.7 48.4 -0.8 38.3 -0.5 Equity market index Shanghai Comp Hang Seng BSE Sensex Jakarta Comp KOSPI FBM KLCI Philippines SE Straits Times TAIEX Bangkok SET Ho Chi Minh Change equity index, year to date 58% 13% -2% -6% 1% -1% 2% -1% 4% 0% 5% *As of FY14 due to lack of FY15 disclosure Source: CIRC, the Hong Kong Office of the Commissioner of Insurance (OCI), Insurance Regulatory and Development Authority of India (IRDAI), Otoritas Jasa Keuangan (OJK), Korea Life Insurance Association (KLIA), Bank Negara Malaysia (BNM), MAS, Taiwan Insurance Institute (TII), Thai Life Assurance Association (TLAA), Philippine Insurance Commissions, Vietnam’s MoF, Bloomberg, HSBC
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EQUITIES INSURANCE 27 June 2016
Regional insurance APE and NBV metrics USD terms 2012 2013 2014 2015 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 NBV change, % y-o-y AIA 27.5% 25.4% 23.8% 19.1% 21.6% 23.7% 23.5% 25.5% 20.1% 21.9% 17.9% 17.4% 36.0% AXA 22.4% 17.5% -13.0% -0.8% -15.9% -10.9% 12.1% -32.4% 8.5% 8.8% -12.1% -5.0% -8.7% Great Eastern -4.3% 20.8% -11.9% -5.3% 2.2% -13.8% -20.1% -12.1% -7.5% -17.9% 5.9% -3.0% 0.5% PCA 19.7% 14.5% 7.4% 19.0% 7.9% -0.3% 11.6% 9.5% 16.9% 31.6% 4.4% 22.3% n/a APE change, % y-o-y AIA 9.1% 23.9% 10.7% 7.9% 7.2% 13.9% 12.5% 9.3% 12.0% 10.3% 8.3% 2.3% 23.2% AXA 21.2% -0.8% -4.8% -1.1% -16.3% -2.8% 15.2% -11.2% 25.2% -5.3% -6.8% -12.1% 11.4% Great Eastern 3.7% 25.8% -13.8% -0.7% 6.7% -20.9% -27.3% -9.2% -13.0% -9.7% 21.2% -1.2% 6.8% Manulife 10.1% -25.5% 25.3% 17.9% 14.2% 21.1% 42.5% 23.0% 31.0% 23.0% 7.7% 14.3% 36.1% PCA 13.0% 10.6% 10.8% 18.3% 7.9% 0.1% 12.3% 21.4% 23.5% 30.3% 12.4% 10.5% n/a APE margin, % AIA 44.1% 44.6% 49.9% 55.1% 44.3% 49.2% 49.6% 54.9% 47.5% 54.3% 54.0% 63.0% 52.4% AXA 61.7% 73.2% 66.8% 67.0% 66.4% 60.0% 70.6% 70.0% 57.6% 69.0% 66.5% 75.6% 47.2% Great Eastern 42.2% 40.5% 41.4% 39.5% 38.0% 44.2% 43.7% 40.3% 40.4% 40.2% 38.2% 39.6% 38.0% PCA 51.8% 53.6% 51.9% 52.2% 47.9% 51.3% 51.3% 55.8% 45.4% 51.8% 47.6% 61.8% n/a APE margin change, bp, y-o-y AIA 6.4% 0.5% 5.3% 5.2% 5.2% 3.9% 4.4% 7.1% 3.2% 5.2% 4.4% 8.1% 4.9% AXA 0.6% 11.4% -6.4% 0.2% 0.4% -5.4% -1.9% -21.9% -8.9% 9.0% -4.0% 5.6% -10.4% Great Eastern -3.5% -1.7% 0.9% -1.9% -1.7% 3.6% 4.0% -1.3% 2.4% -4.0% -5.5% -0.7% -2.4% PCA 2.9% 1.8% -1.7% 0.3% 0.0% -0.2% -0.3% -6.1% -2.6% 0.5% -3.6% 5.9% n/a Hong Kong APE, growth % y-o-y 10.2% 13.5% 13.4% 23.4% 5.6% 1.9% 22.7% 24.7% 18.2% 30.5% 14.4% 30.6% 38.6% AIA 15.7% 29.3% 21.9% 32.7% AXA 14.2% 12.2% 16.3% -14.8% 2.0% 8.1% 22.8% 30.6% 26.1% -14.1% -2.1% -53.9% -24.8% Manulife 23.0% -0.4% 14.5% 29.0% 8.0% 1.7% 37.3% 11.4% 29.6% 40.0% 19.8% 29.6% 50.0% PCA 18.2% 21.4% 39.4% 74.4% 26.3% 28.2% 43.5% 52.8% 76.7% 95.5% 22.1% 99.1% n/a Singapore APE, growth % y-o-y 11.9% 23.3% -3.3% -0.5% 9.6% -13.9% -6.5% 0.4% -2.3% 8.5% 9.4% 15.3% 7.9% AIA 28.4% 18.0% 22.3% -3.7% Great Eastern 9.6% 35.4% -16.4% -0.2% 16.2% -24.6% -35.4% -12.6% -19.5% -13.9% 35.5% 1.2% 7.8% PCA 26.5% 18.4% 4.1% -19.6% 14.1% -0.3% 2.7% 1.3% -23.9% -11.4% 16.5% -52.9% n/a Thailand APE growth, % y-o-y 22.3% 14.8% 8.8% 3.4% 3.2% 14.1% 11.5% 8.3% -0.9% 3.8% 0.0% 10.4% -4.7% AIA 14.4% 6.2% 1.2% -9.1% PCA 34.9% 81.4% 28.5% 6.1% 148.3% 24.3% -10.5% 13.2% 3.0% 13.9% 52.0% -32.7% n/a Bangkok Life -26.2% 37.0% -15.4% 40.6% -15.5% -14.9% -13.7% -16.7% -57.8% 42.7% 196.7% 355.8% -0.4% Malaysia APE growth, % y-o-y 1.3% -3.9% 1.6% -12.6% AIA 6.3% 111.3% 0.3% -8.8% Great Eastern -2.6% 10.6% -8.2% -4.2% -10.1% -12.4% -9.2% -3.8% 4.7% -6.2% -4.7% -7.8% 15.0% PCA -3.4% -5.6% 1.5% -2.6% -0.7% -4.1% -4.3% 13.9% 15.5% -0.3% 7.8% -24.8% n/a Indonesia GPW growth, % y-o-y 12.9% Manulife 37.3% 5.3% -5.0% -14.9% 13.0% -21.2% 3.7% -8.1% 0.0% -7.7% -25.0% -23.5% n/a PCA 21.4% 5.6% -15.0% -21.4% -19.4% -19.3% -21.5% -1.6% -0.6% -14.9% 21.9% -69.9% n/a China GWP growth, % y-o-y 6.7% 10.7% 17.9% 22.5% 43.9% -5.8% 12.0% 10.6% 21.4% 22.3% 23.7% 24.9% 45.4% AIA 8.8% 11.1% 12.1% 16.6% 11.5% 12.3% 12.3% 12.2% 18.9% 17.9% 10.5% 18.7% 19.3% China Life 3.9% 3.9% 1.2% 7.7% 17.9% -28.8% -0.3% 20.5% 14.7% 23.9% 0.2% -13.8% 25.3% China Pacific 2.8% 4.4% 3.5% 7.9% 25.1% -15.2% -0.3% -1.9% -2.3% 11.6% 28.8% 2.3% 31.6% China Taiping 18.8% 45.9% 25.3% 20.3% 42.6% -5.8% 4.1% 54.9% 25.0% 20.7% 20.3% 11.6% 12.7% New China Insurance 5.6% 8.8% 5.8% -0.2% 52.6% -7.4% -6.8% -24.8% 6.2% 12.1% 9.8% -29.7% -14.6% PICC Life -6.7% 20.6% 4.3% 11.4% 141.4% -47.8% -40.5% -50.9% 15.5% 7.5% 0.5% 12.7% 15.7% Ping An Life 10.9% 16.4% 18.8% 17.4% 26.4% 12.8% 15.5% 14.4% 13.4% 20.1% 21.3% 20.0% 25.5% Japan APE growth, % y-o-y 2.2% -23.5% 7.2% -10.8% -0.8% -4.4% -3.2% 3.4% -9.5% -9.7% -13.6% -51.6% n/a AXA 19.3% -12.9% -28.3% -3.3% -37.4% -14.6% 11.8% -49.1% -8.9% -5.2% -18.0% 18.6% 32.2% Manulife 11.2% -47.8% 47.3% 8.7% 27.6% 62.9% 73.7% 28.2% 30.4% 7.0% -3.0% 5.0% -3.1% Others APE growth, % y-o-y AIA -0.8% 19.3% 7.1% 5.7% 7.2% 13.9% 12.5% 9.3% 12.0% 10.3% 8.3% 2.3% 23.2% AXA 31.1% 3.3% 0.7% 15.8% -8.3% -2.3% 9.8% 4.1% 52.6% 3.0% -2.9% 16.5% 32.9% Great Eastern -17.9% 13.1% -15.2% 25.7% -24.0% -23.1% -1.3% -9.1% 0.7% 40.0% 21.9% 41.2% -67.3% Manulife -11.5% 5.2% 15.6% 39.0% -3.6% -3.2% 18.2% 49.2% 49.1% 61.7% 29.5% 26.4% n/a PCA 2.6% 3.6% 13.8% 14.6% 4.5% -4.7% 28.7% 27.8% 25.3% 41.8% -9.0% 8.6% n/a *Prudential NBV and NBV margin are before tax Source: Company data, OCI, CIRC, TLAA, BNM, Dewan Asuransi Indonesia (DAI)
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Addressing the bear concerns
Despite having outperformed Chinese peers, AIA shares should have delivered even more if not for bear concerns We systematically examine and address 10 bear concerns that investors have against AIA Ironically, we felt more comfortable after examining these bear arguments
Addressing the bear concerns
Although AIA shares have outperformed the Chinese insurers by 22% since the beginning of A few niggling bear concerns have held back AIA shares 2016, we believe AIA deserves more. While many investors would freely accept some of the from performing even better aforementioned and, dare we say, consensus reasons supporting the shares’ bull case, a few niggling bear concerns have held back the performance of AIA shares. We examine each of these concerns below.
#1 Bear concern: “Makes no sense to own AIA if interest rates remain low or continue declining as they would face even lower reinvestment options” AIA like any other life insurers does have some exposure to falling interest rates. In fact, the group estimates that a 50bp fall in interest rates reduces EV by 0.3% and NBV by 7.4%. That said, we believe AIA has relatively low gearing to interest rates for several reasons:
AIA derives less than a quarter of its profits from spread business. The group only derives 22% of its earnings from spread business, with the rest of its profits coming from protection and fees (64% of earnings from insurance profits and fees in 2015) and return on net worth. Spread business consists of life insurance policies where profits are wholly or in part determined by the investment return AIA earns less the guaranteed rate or crediting rate AIA offers to policyholders. The low profit contribution of spread business, which is sensitive to investment returns, means AIA’s earnings are relatively resilient to low or declining interest rates. By contrast, we believe investment spread business comprises a much higher proportion of earnings for the Chinese life insurers – their 2015 annual reports indicate that 76% of their premiums come from guaranteed participating and non-participating products (spread business) – thus making them more prone to declining interest rates.
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Protection business (insurance and fee-based) accounted for 64% of AIA’s FY15 operating profit
Return on Net Worth 14%
Participating and Spread 22% Insurance and Fee-based 64%
Source: Company data, HSBC
Versatile agency team. AIA’s high quality, experienced agent force is able to adapt to market conditions, allowing them to sell an array of protection products with higher margin rider policies attached. AIA’s better quality agent force is evident through AIA China’s agent productivity (NBV per agent per month) which was RMB8,102 in FY15, substantially higher than Chinese insurers’ average of RMB2,389. In contrast, Chinese life insurers have aggressively grown agent force (on average expanded by 39% in 2015) and we suspect the insurers seek to retain these agents by allowing them to focus on easy-to-sell plain vanilla guaranteed par/non-par products, which have a smaller protection element and are more sensitive to interest rates. Protection orientation. In view of AIA’s earnings bias to protection and fees and its high quality agent force, we believe AIA derives a high proportion of its NBV from protection products. We estimate AIA derives 51% of its NBV from traditional protection on the back of 33% of total ANP being contributed by traditional protection products in FY15. Small asset liability management (ALM) gap versus Chinese peers. AIA uses ALM and in fact has overall liability duration that is only slightly higher than asset duration as evident by the only 0.3% impact to EV in the case of 50bp interest rate fall (in general the lower the impact the less asset liability mismatch). With liability duration only slightly higher than assets, AIA in general will see less reinvestment pressure (i.e. reinvestment returns lower than cost of liabilities) as insurance policies mature shortly after investments mature. In contrast, the Chinese insurers are more exposed to reinvestment risk from a declining interest rate environment given their liability duration is much longer than asset duration (insurers will need to look for assets to reinvest once investments mature to serve the still in-force policies), e.g. China Life (6-7 years mismatch), Ping An (4-7 years mismatch) and New China Life (6 years mismatch). AIA’s financial account life reserves do not increase as interest rates fall unlike the Chinese life insurers. AIA’s financial account reserves are not as sensitive to declining interest rates as Chinese insurers, whose non-par reserve risk discount rate is calibrated to the 750-day moving average China bond yield plus an optional risk margin of up to 150bp. For AIA, which adopts the IFRS accounting method, insurance reserves for accounting purposes are locked in when they are booked and will only be adjusted according to the Liability Adequacy Test, which determines if reserves are sufficient or not. Consequently AIA’s book value tends to rise under a falling interest rate environment as the asset value rises but liabilities value remains static. Separately, it is important to note that AIA’s statutory liabilities (these feed into solvency and adjusted net asset component of EV) do increase when interest rates fall due to the Hong Kong statutory overlay (i.e. the Hong Kong reserve risk discount rate is tied to the risk-free rate).
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#2 Bear concern: “AIA shares look expensive” AIA shares are trading at 1.7x 2016e EV which is at a premium to the 0.9x multiple, which Chinese insurers are trading at. It is important to note that: AIA shares trade below fundamental fair value. AIA shares deserve to trade at a higher multiple of 2.2x EV, given 8.4% COE, 3.5% terminal growth and 14.1% ROEV expectations. See exhibit below for fair value calculation.
We value AIA using Gordon growth model which implies a fair FY16e EV multiple of 2.2x Valuation Average ROEV 2016-18e 14.1% Sustainable growth 3.5% Cost of equity 8.4% Implied multiple (x) 2.2x EV p/s (HKD) 27.0 Fair value end-2016e 58.2 12-month fair value (HKD) 56.1 Valuation discount 0% Price target (HKD) 56.0 Source: HSBC estimates
Chinese insurers current P/EV trading multiples are depressed by their unwelcome foray into Chinese banks. Investors have been unimpressed with Chinese insurance management teams’ decision to buy stakes in Chinese banks (i.e. China Life increasing its stake in China Guangfa Bank from 20% to 44% and PICC P&C increasing its stake in Huaxia Bank from 0% to 20%). This is especially the case because many investors had bought Chinese insurance shares to avoid bad loans risks in the Chinese bank sector. Indeed, many investors now favour Life insurance biased China Pacific by virtue that it does not own a bank and has no ambition to (the China Pacific H-share price is down 17% thus far in 2016, outperforming its peers, which are down by an average 23%).
Chinese insurers have been increasing their stakes in the Chinese banks Company Major bank stakes % of Bank’s shareholding Accounting treatment % of total assets China Life China Guangfa Bank 43.7% Associate, equity method 2.0% China Re China Everbright Bank 4.9% Associate, equity method 3.0% PICC Group Industrial Bank 14.1% Associate, equity method 5.0% PICC P&C Hua Xia Bank 20.0% Associate, equity method 5.5-6.1% Ping An Ping An Bank 58.0% Subsidiary, consolidated n.a. Source: Company data, HSBC
Perceived risk of ‘national service’ is depressing China insurers current P/EV trading multiples. National service includes supporting the A-share market as part of the ‘National Team’, buying NPL ABS and the low-margin/high-risk commercial health insurance products. We believe the Chinese government may use Chinese insurers’ balance sheets as a policy tool to help de-risk the systemically important banking system from NPLs, which pose a risk to depositors and the whole financial system. Chinese insurers’ balance sheets could absorb 2.4x China banks’ recognised NPL exposure through securitised ABS. To plug the health expenses gap, the Chinese government has introduced a tax-advantaged commercial health insurance product that is a one-year medical cost reimbursement product. We believe the new health product is low margin and potentially risk for a number of reasons: (1) product margin is capped by loss ratio floor, (2) insurers cannot refuse sales to individuals that have pre-existing medical conditions, (3) insurers have to offer automatic renewal option, effectively turning the one-year product to long-term which exposes insurers to medical expense inflation and morbidity risks, and (4) government will not back- stop excessive losses.
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AIA shares are trading at 1.7x P/EV which is 23% below its peak 2.2x multiple achieved on 10 April 2015. Current trading multiple of 1.7x P/EV is slightly above historical mean of 1.6x (since listing). In book value terms, AIA is trading at 2.0x FY16e BV which is 29% below peak 2.8x multiple (also 10 April 2015) and is in line with historical mean since listing.
AIA is currently trading at 1.7x FY16e P/EV AIA is currently trading at 2.0x FY16e P/BV
2.2x 2.9x 2.7x 1.8x 2.5x 2.3x 2.1x 1.4x 1.9x 1.7x 1.5x
1.0x 1.3x
Jul-12 Jul-15 Jul-12 Jul-15
Oct-10 Apr-11 Apr-14 Oct-10 Apr-11 Apr-14
Feb-12 Feb-15 Feb-12 Feb-15
Dec-12 Nov-13 Dec-15 Dec-12 Nov-13 Dec-15
Sep-11 Sep-14 Sep-11 Sep-14
May-13 May-16 May-13 May-16
P/EV Mean +1SD -1SD P/B Mean +1SD -1SD
Source: Thomson Reuters Datastream, HSBC estimates Source: Thomson Reuters Datastream, HSBC estimates
#3 Bear concern: “Critical illness reserving and NBV is wrong” We believe that AIA derives a significant proportion of its NBV from selling high margin critical illness protection riders, particularly in Hong Kong, Singapore, Malaysia and increasingly in Thailand (China sells various policies in one packaged plan). A typical critical illness product pays a lump sum to a covered customer upon detection of a pre-defined disease within a set period. Product features vary by market and insurer in a number of respects, including whether multiple payouts are possible and whether payout is inflation linked. The profit recognised by insurer in laymen’s terms is the difference between premiums paid minus expenses and reserves. The reserve calculation is predicated on the ‘important morbidity’ assumption (probability of a person getting ill).
In developing markets which AIA is exposed to, it is relatively difficult for the best of insurers to estimate morbidity risk and set reserves due to data gaps, uncertain development trends, rise in detection rates (e.g. new technology, social media and more check-ups) and limited access to medical records. We have written about these issues extensively in our report, ‘Chinese Health Insurance Primer: A fighting chance”, dated 4 December 2015. While AIA is certainly not immune to this risk, we are relatively relaxed for the following reasons: AIA charges more than peers for like-for-like products. AIA tends to price their products higher in China than peers for like-for-like products (please see table on next page comparing AIA’s critical illness products with those of its Chinese peers) AIA has experienced positive operating experience variances since 2011. We understand that AIA has experienced positive morbidity experiences in China (i.e. actual morbidity rate better than assumed), likely due to their more conservative morbidity assumptions. Positive variances will lift AIA’s embedded value.
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We believe positive variance in 2015 was partly due to positive morbidity experience USDm 2011 2012 2013* 2014 2015 Opening EV 24,748 27,239 31,373 33,818 37,153 Adjusted opening EV 24,748 27,239 30,565 33,018 37,153 Value of new business 932 1,188 1,490 1,845 2,198 Expected return on EV 2,029 2,192 2,389 2,635 2,698 Operating experience variances 165 140 114 188 274 Operating assumption changes -21 -29 10 -80 -26 Finance costs 0 0 -26 -53 -76 EV operating profit 3,105 3,491 3,977 4,535 5,068 Investment return variances -297 933 345 720 -1,804 Effect of changes in economic assumptions -26 -105 429 122 145 Other non-operating variances 18 -113 -154 23 369 Total EV profit 2,800 4,206 4,597 5,400 3,778 Dividends -170 -530 -595 -689 -814 Other capital movements -89 -42 11 -14 -12 Effect of changes in exchange rates -50 535 -760 -562 -1,907 Closing EV 27,239 31,408 33,818 37,153 38,198 *Restated hence could not match closing EV in 2012 Source: Company data, HSBC
Extensive use of critical illness reinsurance. We believe that about half of AIA’s critical illness policies were reinsured. While the type of reinsurance is dependent on AIA’s critical illness product and the risk the group wishes to reinsure, we understand some reinsurance arrangements offer guarantees on long-term morbidity rates, which will further mitigate the risks that the group faces.
Reserves set relatively conservative. We understand that AIA China’s morbidity experience has been better than what they conservatively modelled previously. According to a Gen Re study which compares the morbidity experiences of various insurers in China, AIA was ranked #1 and was estimated to be better than peers.
Critical illness products in China Insurer Product Premiums per month Sum insured Duration Term Diseases coverage AIA China “Quanyouzhizhen” Critical Illness Plan RMB3,740 RMB1.2m Whole Life 19 years pmt, female, 30 age 50 China Life “Kangning” Whole Life Critical Illness RMB2,800 RMB1.2m Whole Life 20 years pmt, male, 25 age 40 PICC Life Life “Ankang” Critical Illness RMB3,640 RMB1.2m Whole Life 20 years pmt, male, 30 age 30 Ping An Life “Zunxiangankang” Critical Illness RMB3,230 RMB1.2m Till 75 years old 10 years pmt, male, 25 age 30 China Pacific Life “Shouhubao” Critical Illness RMB2,518 RMB1.2m Whole Life 20 years pmt, male, 25 age 36 China Taiping Life Health Care Whole Life Critical Illness RMB2,630 RMB1.2m Whole Life 20 years pmt, female, 35 age 55 New China Life Health No Worry C Type RMB2,120 RMB1.2m Whole Life 30 years pmt, female, 30 age 60 Source: Company website, HSBC
#4 Bear concern: “Clampdown on Hong Kong sales will hit AIA hard” The highly publicised clampdown on life insurance sales to mainlanders in Hong Kong does ‘superficially’ pose some risks for AIA, which derives c14% of group NBV from products sold to mainlanders in Hong Kong (Hong Kong accounts for 34% of group NBV and we estimate about 40% of AIA HK’s business comes from mainlanders). That said we are not overly concerned by recent developments for a variety of reasons:
AIA’s 100%-owned Chinese operation is well placed to capture any business that flows back to the mainland. AIA has a wholly owned China business allowing them to capture 100% of the business that flows back to mainland China should there be a full ban on insurance sales to mainland Chinese in Hong Kong. Actions by CIRC and SAFE were either just enforcing pre-existing rules or tightening loopholes. For instance, Union Pay’s USD5,000 cap per transaction has always existed but was not strictly enforced previously (2 February 2016). Furthermore, the regulators’ ban on buying Hong Kong life insurance and investment-type products through electronic payment services was to close off loopholes that allowed mainland Chinese to bypass capital
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restrictions (i.e. USD50,000 per year) with large ticket size policies (14 March 2016). We believe this regulatory activity will have a minimal impact on AIA HK given that (1) most of AIA’s large-size policies have single premiums that are paid through cheques and bank drafts, which are not affected by the rules; (2) Union Pay is still viable as a payment option and multiple ‘swipes’ are still allowed; customers can also switch their payment methods; and (3) we believe the tightening on the e-payment channel maybe referring to a very specific e- payment method with high limits from a specific bank (e.g. All In Pay through Bank of China).
Clampdown is not material for Chinese authorities. Even with the step up in clampdown, only 1% of capital flows were impacted, which is immaterial for China. However, the noise created and concerns raised were much greater than the actual impact.
CIRC’s recent document highlighting risk for mainlanders buying in Hong Kong will have no impact. The CIRC’s document, ‘Notice on the risks of mainland residents purchasing insurance policies in Hong Kong’ published on 22 April 2016 cites five risks including how policies purchased in Hong Kong will not be covered by mainland Chinese government laws, the uncertainty of participating returns, currency risks and the risk of bearing losses when surrendering a policy. The application of Hong Kong laws, which are seen as stricter, is often cited as an attraction for a mainlander buying in Hong Kong.
34% of new premiums in Hong Kong were contributed from Mainland Chinese in 1Q16
40.0% 34.2% 35.0% 30.0% 24.2% 25.0% 21.4% 20.0% 16.1% 15.0% 12.8% 9.0% 7.5% 10.0% 5.3% 6.5% 5.4% 6.4% 5.0% 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16
FYP contributed from mainland tourists as % of total
Source: OCI
Regulatory development on the clamp down of Hong Kong insurance sales to mainland Chinese Date Event Remarks 13-Jun-16 CIRC and its Beijing Bureau have been to AIA Beijing branch, Citic-Prudential We believe CIRC is strictly enforcing the rule that forbids mainland branches of (a JV by Citic and Prudential), other several foreign invested insurers and Hong Kong insurers from selling Hong Kong insurance policies (or products not agencies to investigate illegal selling of overseas policy in Beijing regions. registered with CIRC). 23-May-16 CIRC enforcing a previous rule that prohibits overseas insurers to propagate in (1) Enforcing a previous rule. (2) In response to some insurance brokers who China but underwrite policies in other countries. broke/promoted a product sold by a Hong Kong insurer. 19-May-16 Hong Kong’s Office of the Commissioner of Insurance (OCI) announced that We believe the new rule by Hong Kong insurance regulator is to reduce miss- mainland customers buying insurance policies in Hong Kong are required to selling risks to mainland Chinese, who may be unaware of the differences in sign a statement acknowledging the differences between mainland Chinese regulation and rules. insurance regulations and Hong Kong regulations. 22-Apr-16 CIRC released a notice highlighting five risks of Mainland Chinese buying Hong We believe the Chinese regulator is trying to warn potential mainland Chinese Kong life insurance policies. customers, who may be unaware of the differences in regulation and rules. 12-Mar-16 PBOC will prohibit use of electronic payment services by mainland individuals Closing a loophole that allowed mainland Chinese to bypass capital restrictions for any life insurance and unit-linked products while individuals can still use (i.e. USD50,000 per year) through buying large ticket size policies. those payment systems for insurance on personal accidents, medical and transportation, with a transaction and policy cap of RMB30,000 (USD4,600). 2-Feb-16 Union Pay enforcing a previous rule of USD5,000 cap on every (1) Enforcing a previous rule. (2) Most of AIA’s large size policies are single overseas transactions. premiums that are paid through cheques and bank drafts. (3) Multiple ‘swipes’ possible. (4) There are other payment methods. (5) We estimate no more than 2.2% group NBV potentially impacted. Source: CIRC, Sina News, Caijing News, 21st Century Business Herald, HSBC
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#5 Bear concern: “AIA derives 17% of business from the China life insurance market which consensus is negative on” Negative sentiment towards the Chinese insurance market is not helpful to AIA shares, as the group derives 15% of NBV from China in FY15 which was up from the 10% in FY10. That said, we are not overly concerned as:
AIA has no ‘national service’ risk. Unlike Chinese SOE insurers, AIA’s wholly owned China business has no risk of being required to perform ‘national service’ – e.g. supporting the A- share market, buying NPL ABS from banks and selling low-margin/high-risk health insurance products – in our view. AIA will not pursue an ‘integrated financial services’ model. AIA also does not carry any risk of buying significant bank stakes or going down the path of an ‘integrated finance’ business model, which are not welcomed by investors in Chinese insurance market.
AIA operates a differentiated Chinese operation. AIA China has a dramatically different business comparing to the Chinese insurers as the group focuses on protection-oriented business targeting high net worth individuals in the major metropolis cities. AIA is licensed to operate in Beijing, Shanghai, Shenzhen, Jiangsu and Guangdong, which are all relatively affluent cities and provinces in China and accounted for an aggregate 29% of total gross written premiums in China in 2015. This compares starkly with some Chinese peers which rely heavily on savings/investment-oriented products and pursue scale and market share. AIA operates an upscale life agency force in China. AIA China has a relatively high quality agent force in terms of experience and productivity, generating RMB8,102 NBV per agent per month in FY15 (assuming 90% NBV contributed by agency and an estimated 22,000 agent headcount) versus RMB2,389 for its Chinese peers.
AIA is coming from a very low base in China and is entirely focused on value over volume. AIA maybe the leading foreign insurer in China but its miniscule 0.8% market share means it has the luxury of being able to cherry-pick higher-quality business unlike the largest Chinese insurers which have to write high volumes of low market bancassurance business to defend market share and/or meet surrenders.
AIA China’s business is different from its Chinese peers with significantly higher agent productivity and NBV margin AIA China China Life Ping An New China Life China Pacific PICC Group China Taiping Ownership Publicly listed SOE Publicly listed SOE SOE SOE SOE Management compensation Share price linked Not Share price linked No No No Share price linked Market share (GWP basis), FY15 0.8% 23.0% 13.1% 7.1% 6.8% 5.6% 5.0% Agent productivity (APE basis), RMB 8,807* 4,600 8,463 4,335 5,416 4,206 6,248 Agent productivity (NBV basis), RMB 8,102* 2,792 3,341 2,091 2,320 1,624 2,169 Overall NBV growth (2010-15 CAGR) 40% 10% 15% 7% 15% -2% 27% Overall NBV margin (APE basis) 84% 45% 39% 33% 42% 26% 27% Distribution mix (agent/banc/other) 90%/10%* 68%/30%/2% 97%/3%/1% 65%/34%/1% 94%/6%/0% 46%/49%/5% 73%/25%/2% Product guarantees No Guarantees 2.0%-4.0% 1.8%-4.0% 2.5%-3.5% 2.5%-4.0% 2.5%-4.0% 2.5%-3.0% Geographic focus 5 areas** Nationwide Nationwide Nationwide Nationwide Nationwide Nationwide Source: Company data, HSBC estimates. *HSBC Estimates assuming 90% of China’s business from agency and 10% from partnership including bancassurance. **5 areas are Guangdong, Shanghai, Jiangsu, Beijing and Shenzhen.
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AIA China is different from listed Chinese life insurers
AIA’s minuscule 0.8% market share means it AIA China’s lower NBV means it has ample has luxury to select higher quality business room to further expand its business
25.0% 23.0% 6,000 4,855 4,749 20.0% 5,000 13.1% 4,000 15.0% 3,000 7.1% 6.8% 1,851 10.0% 5.6% 2,000 5.0% 1,020 776 5.0% 0.8% 1,000 533 329 0.0% - China Ping New China PICC China AIA China Ping China New China PICC AIA Life An China Pacific Life Taiping China Life An Pacific China Taiping Life China Life Life Market share, FY15 NBV in USDmn, FY15
Source: CIRC, Company data, HSBC Source: Company data, HSBC
AIA runs an upscale agency force which may AIA’s agent productivity (NBV basis) is be smaller than peers but is higher quality significantly above peers
China Life 979,000 AIA China 8,102 Ping An 869,895 Ping An 3,341 China Pacific 482,000 China Life 2,792 New China Life 301,000 China Pacific 2,320
China Taiping 231,766 China Taiping 2,169 PICC Life 141,672 New China Life 2,091 AIA China 22,000 PICC Life 1,624 - 400,000 800,000 - 2,000 4,000 6,000 8,000 10,000 Agents number, FY15 NBV per agent per month RMB, FY15
Source: Company data, HSBC estimates. *We estimate AIA has 22,000 agents at end-FY15. Source: Company data, HSBC estimates. *We estimate AIA has 22,000 agents at end-FY15.
AIA’s higher NBV margin reflects its focus on We estimate 90% of AIA China’s FY15 NBV protection sales and quality of agents came from its agency channel
100% 84% 97.8% 96.1% 95.6% 94.3% 91.5% 90.0% 80% 66.5% 60% 45% 42% 39% 33% 40% 27% 26% 20% 0% AIA China China Ping New China PICC Ping An New China China China AIA PICC China Life Pacific An China Taiping Life China Pacific Taiping Life China Life Life Life NBV margin (APE basis), FY15 Agency NBV as % total, FY15
Source: Company data, HSBC Source: Company data, HSBC estimates. *HSBC Estimates assuming 90% of China’s business from agency.
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#6 Bear concern: “NBV growth cannot continue at this fast pace” AIA has grown NBV at a 27% CAGR since 2010 on an AER basis, which is remarkable when AIA’s NBV growth is remarkable compared with compared to the CAGRs recorded by Korean (2%) and Chinese insurers (9%) over that period. that of Korean and Chinese Breaking down AIA’s 27% NBV CAGR, 57% were contributed by ANP growth and 43% came insurers from NBV/APE margin expansion. A further positive growth shock came in 1Q16 when AIA’s NBV grew by 44% on a CER basis and 36% on an AER basis on the back of exceptionally strong growth from Hong Kong and China.
AIA delivered remarkable 27% NBV 2010-15 CAGR vs peers in China, Korea and Taiwan
30% 27% 25%
20%
15% 12% 10% 10% 4% 5% 2% 0% AIA PCA China Taiwan Korea
NBV 2010-15 CAGR in USD
Source: Company data, HSBC
Some investors are concerned whether AIA can continue to post strong NBV growth momentum given the slowdown in Asian economic growth and high base effect, as well as the fact that it has already seized the ‘low-hanging’ opportunity to undertake restructuring. We believe AIA still offers significant NBV growth potential despite these issues and forecast 27% NBV CAGR during 2015-18e driven by 23% APE growth and a cumulative 6ppt of NBVAPE margin expansion (from 55% in FY15 to 61% in FY18e). Our bullish NBV forecast, which is 8% above the 2016e consensus NBV estimate, is predicated on the following:
Still plentiful scope to attach high margin protection riders in a number of key markets. AIA has been successful at attaching high margin protection riders to low margin savings products. This strategy has allowed AIA to garner significant NBV growth from developed Asian markets (e.g. Hong Kong, Singapore) where penetration rates appear superficially high. We understand AIA has significant scope to boost protection riders in Thailand (attachment rates still low), Malaysia (will be a particular focus as AIA currently has 3-4 attachments per product versus an industry high of 6 attachments per product in Malaysia), Indonesia and Philippines (Indonesia and Philippines account for less than 19% of group ANP but less than 11% of our estimate of group NBV).
Low base effect. Despite delivering high NBV growth rates since listing, we believe AIA is just scratching the surface of the business opportunity in some key markets, most notably China, Indonesia and Philippines. Life penetration rates in these countries (China at 1.7%, Indonesia at 1.1% and Philippines at 1.6%), which is defined as life premiums over GDP, were below world average of 3.4%. During the catch-up process, AIA will benefit from the overall insurance market growth and continue to generate high NBV growth as the group’s strong branding and agency platform should allow it to capture the higher quality business. Furthermore, protection gaps in Asia were also cited to be significant (the mortality protection gap in Asia widened from USD42trn in 2010 to USD58trn in 2014, according to Swiss Re), meaning that there is still ample room to grow protection policies, which in general carry a higher NBV margin than investment/savings insurance products.
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Unit-linked sales not overly vulnerable to equity market volatility. AIA’s key markets for unit- linked sales are Philippines, Singapore, Malaysia, Thailand and Indonesia. In contrast to the usual unit-linked policies previously seen in Hong Kong that were single-paid and essentially investment type products, AIA’s unit-linked products sold in these markets have a regular-payment structure with protection riders, which are pitched as a long-term savings plan to customers. As such, rather than tempering demand for the group’s unit-linked products, weak equity markets will likely incentivise policyholders who see a ‘dollar cost averaging’ opportunity.
Thailand’s unit linked sales have ample room to grow as it has the lowest linked sales as % of total sales
40% 37% 34% 35% 29% 30% 25% 19% 20% 14% 15% 10% 5% 1% miniscule, <1% 0% Vietnam Malaysia Korea Singapore Hong Kong China Thailand
Source: OCI, CIRC, TLAA, BNM, DAI, LAIJ, CEIC, HSBC
Scope to improve agent productivity further. We believe AIA has further potential to ‘reactivate’ agents and raise productivity of active agents. The company’s definition for active agent varies slightly by market with Hong Kong and Singapore’s definition being the most stringent at selling a minimum of one policy per month (due to highest agent productivity). AIA will continue to execute its premier agency strategy, growing its agent force, especially full-time agents, and providing better training and system to sell more protection products. The group will also focus on selling more protection rider attachments (i.e. trying to lift current 3-4 riders per policy to a target of 6), which will improve agent productivity.
Unwavering focus on NBV. This group is completely focused on growing NBV, a message that pervades all levels of organization. AIA are willing to trade volume for value, which few others insurers in the region are able to do (as those other insurers may have to maintain certain market share rankings). Since it was listed, we have never heard AIA discuss growing market share in any of the markets it operates in. Some of the better-than- expected NBV growth post IPO is attributable to repositioning of the company away from an earnings or volume focus (which was the focus when AIA was under AIG) to an NBV focus. We had under-appreciated the impact of this switch in management focus.
More to come from bancassurance. AIA is getting an unquantifiable lift from Public Bank and Citibank cooperation. In December 2013, AIA signed a 15-year exclusive bancassurance deal with Citibank in 11 Asian markets for an upfront payment of USD800m, targeting high net worth customers. The group has also signed bancassurance deals with Public Bank in Malaysia and PT Bank Central Asia (BCA) in Indonesia. The group is also working closely with the Bank of Philippine Islands to grow their joint venture. Overall, AIA had about 60 bancassurance partners at end-FY15 and is constantly looking for new partners. NBV contributed by bancassurance rose 48% in FY15, accounting for 10% of the group’s total NBV. While contribution to group NBV will likely remain low, we expect AIA’s bancassurance business to continue to grow at a robust rate.
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AIA’s major bancassurance partners mostly exclusive distributors of AIA products Bank partner Market Nature Number of local branches Citibank 11 Asian markets: Hong Kong, Exclusive partner 336 in 11 markets Singapore, Thailand, China, Indonesia, Philippines, Vietnam, Malaysia, Australia, India and Korea. Public Bank Malaysia Exclusive partner 257 PT Bank Central Asia Indonesia Preferred product provider 1,182 Bank of the Philippine Islands Philippines Exclusive partner 823 *No. of branches in their local markets as of end-2015 Source: Company data, HSBC
‘Other Countries’ has significant uncovered potential. AIA’s ‘Other Countries’ unit accounts for 11% of NBV and contains some of the most exciting operations.
Philippines: AIA Philippines has two business units: Philam Life (wholly owned) for its agency business and BPI-Philam Life Assurance (51% owned), a JV with Bank of Philippine Islands that focuses on bancassurance. Philam Life had an 11% market share (on a GWP basis) in 2015 and was ranked third in the overall market, while BPI-Philam was ranked first in bancassurance. Overall, AIA Philippines’ operations saw double-digit growth in NBV per active agent in FY15, supported by both agent headcount growth and improved productivity. The Philippines is one of most attractive markets in Asia by virtue of its low penetration rate (1.6% versus world average of 3.4% in 2014) and forecasted 5.9% 2016e GDP growth (versus Asia-Pacific’s 4.7% growth, based on HSBC estimates). Vietnam: AIA Vietnam (wholly owned) had a 9.1% market share (on a GWP basis) in 2015, ranking fifth in the market. AIA Vietnam has delivered over 100% NBV growth for the last three consecutive years with active new agents growing more than 30% last year, thanks to AIA’s strategy to attract younger and more productive agents. While the contribution to the overall group is likely limited at present, we see great potential in the market given its low penetration rate (0.7% in 2014) and high GDP growth (forecast at 6.3% in 2016e).
Indonesia: AIA Indonesia (wholly owned) had a 6.1% market share (on a GWP basis) in 2014 (which is the latest data), ranking sixth in the market. AIA Indonesia has delivered double-digit NBV growth in both agency and partnership channels in FY15. AIA Indonesia has also partnered with PT Bank of Central Asia, one of the largest banks in Indonesia, and became its preferred product provider. AIA was ranked second in Indonesia in terms of weighted new business sales in 2015. Similar to Philippines and Vietnam, Indonesia also offers high growth potential with its penetration rate remaining low at 1.1% (in 2014) and 2016e GDP growth forecasts relatively high at 5.0%.
The Philippines has the highest population per agent across the region
1,200 1,051 1,000
800 608 606 600 462 377 371 400 252 227 153 200
- Philippines Indonesia India China Singapore Malaysia Thailand Vietnam Hong Kong
Source: CEIC, OCI, OIC, CIRC, LIAA, Insurance Commission (Philippines)
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Uniquely positioned for China. AIA’s China business has expanded from 10% of group NBV in FY10 to 15% in FY15. We believe that AIA China is uniquely positioned to benefit in China in a numbers of respects: (1) it is the only foreign player with 100% ownership, which is a significant plus; (2) it can cherry-pick in major metropolises given its strong brand and agent force; (3) the group has no requirement to perform ‘national services’; (4) it can import best practices from other markets; and (5) there are no tricky partnership agreements, such as foreign insurance tie-ups with Chinese banks that ask their JVs to sell high commission fee-paying bancassurance products carrying low margins (to generate fee income for banks).
Foreign insurers will usually set up JV with local partners to operate in China Company name Name of partner Ownership split Market share ICBC-AXA Life ICBC /AXA / China Minmetals 60%/27.5%/12.5% 1.48% Generali China Life China National Petroleum /Assicurazioni Generali S.P.A. 50%/50% 0.58% Cigna & CMB China Merchants Bank /Cigna 50%/50% 0.49% Sino-US United Metlife Insurance Shanghai Alliance Investment /Metlife 50%/50% 0.48% Citic-Prudential CITIC Group /Prudential 50%/50% 0.39% Manulife-Sinochem Life Manulife /Sinochem Group 51%/49% 0.25% BOC-Samsung Life BOC Insurance /Samsung Life /China National Aviation 51%/25%/24% 0.19% Source: Company data, HSBC. *Market share as of 2015.
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#7 Bear concern: “Management evolution” CEO Mark Tucker is highly regarded and seen as irreplaceable, having played a central role in the group’s success in recent years. However, we believe the CEO remains committed to AIA in the near term given that (1) we see no bigger job in the global insurance industry right now than leading AIA; (2) we believe the extremely motivated Mr Tucker is determined to leave a lasting ‘mark’ on AIA and still has much to do in that respect; (3) the earliest date that Mr Tucker could exercise all his 13m share options (amount as of November 2015) and potentially receive his awarded shares under AIA’s Restricted Share Unit Scheme (the group may award restricted share units to management and employees based on performance measures) would be 12 March 2018; and (4) Mr Tucker is still only 58. (5) Even if he were to leave, we believe AIA has a deep bench of management talent.
AIA’s senior management profile Name Position Age Years at AIA Experience Mark Tucker Executive 58 7 >> Joined the Group in July 2010 and is also Chairman and Chief Executive Officer of AIA Co. and AIA Director and International. Spearheaded AIA’s record- breaking IPO on 29 October 2010 Group Chief >> June 2009 to May 2012: Served as non-executive director of the Court of The Bank of England also serving as a Executive and member of its Financial Stability Committee and Audit and Risk Committee. President >> 2005-2009: Served as Group Chief Executive of Prudential plc >> 2004-2005: Served as Group Finance Director >> 1994-2003: Was the founder and Chief Executive of Prudential Corporation Asia Limited >> 1999-2003: Executive Director of Prudential plc >> Education: Associate of the Institute of Chartered Accountants in England and Wales (ACA), 1985 Garth Jones Group Chief 53 6 >> Group Chief Financial Officer responsible for leading the Group in all aspects of capital and financial Financial Officer management as well as managing external relationships; joined in April 2011 >> Prior to this; Executive Vice President of CPIC Life, the life insurance arm of China Pacific Insurance (Group) >> Held a number of senior management positions during 12 years with Prudential Corporation Asia Limited, including Chief Financial Officer of the Asian life insurance operations >> Prior to joining Prudential he led the development of reinsurer Swiss Re’s Asia life business >> Education: Fellow of the Institute of Actuaries in the United Kingdom Ng Keng Hooi Regional Chief 61 7 >> Regional Chief Executive responsible for the Group’s businesses operating in Thailand, China, Indonesia, Executive Singapore, Brunei and Taiwan as well as Group Agency Distribution and director of various companies within the Group; joined in October 2010 >> Dec 2008-Oct 2010: Group Chief Executive Officer and Director of Great Eastern Holdings Limited >> 1989-2008: Prudential Plc. >> 2005-2008: Managing Director of Insurance of Prudential Corporation Asia Limited from 2005 to 2008 responsible for its operations in Malaysia, Singapore, Indonesia and the Philippines >> Education: Fellow of the Society of Actuaries (U.S.) since 1985 Gordon Regional Chief 52 6 >> Regional Chief Executive responsible for the Group’s businesses operating in Hong Kong, Australia, the Watson Executive Philippines, Vietnam, New Zealand and Macau as well as the Group Corporate Solutions business, Group Partnership Distribution and the AIA Vitality initiative; rejoined in January 2011 >> Worked in various parts of AIG (including within AIA) for over 30 years, during which time he served as Global Vice Chairman of ALICO and Chairman and Chief Executive Officer of ALICO Asia. >> He also served as Global Chief Operating Officer and as Chairman of ALICO Japan. >> Education: Fellow of the Chartered Insurance Institute and Chartered Institute of Marketing William Lisle Regional Chief 50 4 >> Regional Chief Executive responsible for the Group’s businesses operating in Malaysia, Korea, Sri Lanka, India Executive and Cambodia; joined in January 2011 as Chief Distribution Officer >> Dec 2012-May 2015: Chief Executive Officer of AIA’s operation in Malaysia >> May 2009-2010: Managing Director, South Asia for Aviva >> 2008-2009: Prior to joining Aviva, Mr Lisle held a number of senior positions at Prudential Corporation Asia Limited, including Chief Executive Officer in Malaysia, Chief Executive Officer in Korea from 2005 to 2008 >> 2002-2004: Chief Agency Officer for ICICI Prudential and Director of Agency Development, South Asia in 2001 Source: Company data
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AIA has aggressive share-based compensation schemes for CEO and key management ______Share options awarded ______Restricted share unit award ______Exercisable period Mark Tucker, CEO Key management Vesting date Mark Tucker, CEO Key management 4/1/2014 – 5/31/2021 2,149,724 3,220,349 3/11/2016 1,314,873 2,194,253 4/1/2014 – 5/31/2021 2,418,439 4,954,656 4/1/2016* 268,717 1,491,032 3/15/2015 – 3/14/2022 2,152,263 3,243,832 4/14/2016* – 243,619 3/11/2016 – 3/10/2023 2,183,144 3,489,345 3/5/2017 1,261,874 1,901,799 3/5/2017 – 3/4/2024 2,169,274 3,133,429 3/12/2017 – 54,696 4/14/2017 – 4/13/2024 – 332,282 4/14/2017 – 203,016 3/12/2018 – 3/11/2025 2,028,555 3,003,103 9/1/2017* – 509,065 Total cumulative 13,101,399 21,376,996 3/12/2018 1,061,627 1,634,469 9/1/2018* – 169,688 Total cumulative 3,907,091 8,401,637 *Vesting of these shares is service based and does not depend on performance conditions Source: Company data, HSBC
#8 Bear concern: “AIA would be vulnerable if credit spreads widen” AIA is vulnerable to corporate bond spreads by virtue of USD56bn corporate bond holdings, which account for 52% of fixed income and 34% of total assets. The group’s corporate bonds had an average credit rating of A- as of end-FY15 with 1% of total corporate bonds rated AAA-, 12% as AA, 39% as A, and 41% as BBB (the remainder is BB and below). Since 30-Nov-2015, credit spread for the 10 key markets that AIA operates in on average saw 1bp increase. We calculate the credit spread of a particular country by taking the weighted average yields of USD bonds issued by that country and the corporates in it and minus the US treasury yields. It was worth noting that India, China and Hong Kong were the only markets that saw a rise in credit spreads (+21bp, 10bp and 6bp, respectively) while other markets saw declines.
Credit spread for the 10 key markets AIA operates in on average saw 1bp increase since end Nov-2015 (bps) 500
400
300
200
100
0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Vietnam *Credit spread of a market = weighted average yields of USD bonds issued by that market and the corporates in it – US treasury yields Source: Markit iBoxx Asian Dollar Bond Index, HSBC
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India, China and Hong Kong were the only markets that saw credit spread widening since end Nov-2015
30 (bps) 21 20 10 10 6 0 0 -1 -2 -3 -3 -10 -6
-20 -17 India China Hong Kong Malaysia Philippines South Singapore Thailand Vietnam Indonesia Korea Credit Spread change since 30-Nov-2015
Source: Markit iBoxx Asian Dollar Bond Index, HSBC
Rising credit spreads, which boost investment yields, are not positive for life insurers. Any Rising credit spreads hurt insurers’ book value, credit-spread induced increase in headline investment yields does not represent an increase in solvency ratios, embedded risk-adjusted returns and has an adverse impact on insurers’ book value, solvency ratios, value and earnings embedded value and earnings. We think a 100bp widening in the credit spread would impact AIA in several ways:
We estimate that AIA’s FY16e Book Value would fall by 9%. This is because asset values fall but liabilities remain fixed (note the risk discount rate is not linked to credit spread movements as the rate is locked-in at the inception of the policy).
We estimate that AIA’s FY16e Embedded Value would fall by 8%. A rise in credit spread would reduce the Adjusted Net Worth component of EV as there would be a fall in the marked-to-market value of statutory assets against static liabilities. The fall in Adjusted Net Worth may sometimes be offset by a rise in Value In-force, which we do not model as we assume the increase in spread is not indicative of higher risk-adjusted investment returns.
AIA commented during its 2015 results briefing that a 100bp rise in the credit spread would reduce solvency by c30ppt (428% solvency ratio as at end-FY15).
We estimate that AIA’s FY16e earnings would fall by 3.5% in the case of a 100bp increase in the credit spread. Earnings would be hit by a fall in the value of bonds classified as ‘trading’. AIA’s ‘trading’ corporate bonds mostly belong to participating funds, which were mainly owned by policyholders (estimated 84% policyholder participation rate) instead of AIA shareholders. As such, the impact of credit spread widening on earnings would only affect 3% of AIA’s corporate bonds (19% corporate bonds in participating funds multiply by 16% shareholders exposure).
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AIA’s BV, earnings and EV sensitivity to a 100bp widening in credit spread (USD m) Calculation AIA Corporate bond (policyholder and shareholders’ portion, FY15) 56,187 – Participating funds (all trading) A 10,894 – Non-participating funds (>99% AFS) B 45,192 Corporate bond as % total asset, FY15 34% Policyholder participation on par funds, % C 84%
Average duration of Debt Securities D 8.3 Credit spread increase E 1.00% Price change, % F = -D x E -8.3% Tax, % G 20%
Fall in Book Value (USDm) H = (A x (1 – C) + B) x F x (1 – G) -3,125 Book value 2016e I 34,789 Fall in Book Value, % J = H / I -9.0%
Fall in earnings (USDm) K = A x (1 – C) x F x (1 – G) -116 Net income 2016e L 3,291 Fall in earnings, % M = K / L -3.5%
Fall in EV (USDm) N = (A x (1 – C) + B) x F x (1 – G) -3,125 Embedded Value 2016e O 41,666 Fall in EV, % P = N / O -7.5% Source: Company data, HSBC estimates
#9 Bear concern: “AIA could be de-rated if Chinese insurers get valued on P/BV” By way of background, Chinese insurance investors are beginning to disregard EV in favour of We are less concerned about P/BV as current investment return assumption used to calculate EV is seen as too high. In the impact that a switch to P/BV valuation would have addition, sales of negative spread products by some Chinese insurers during the year-opening on AIA’s valuation campaign (offering a 4.025% guaranteed rate when new money investment was close to 4%) are not captured in the current EV calculation methodology given the absence of ‘future cost of options and guarantees’ (FCOG). Investors are concerned that, if Chinese insurers are valued using P/BV, will AIA also be de-rated? We are less concerned about the impact that a switch to P/BV valuation would have on AIA’s valuation because: AIA is not exposed to ‘national service’ / integrated financial services model risks, which is depressing Chinese insurers’ share prices. AIA does not carry some of the risks that are debasing the Chinese insurers’ valuation methodology: (1) AIA does not sell any negative spread products (in fact the group does not offer any guaranteed rates in China) in contrast to some Chinese insurers offering 4.025% guaranteed rate products (new money yields close to 4%) during the year-opening campaign in 2016. Also, (2) we think AIA is not likely to adopt the new Chinese EV calculation that is set to be rolled out in the next 12 months. There is a risk that the new Chinese EV methodology will be overly complicated, too volatile, and not forecastable, and that could push investors away from P/EV to a more simple P/BV valuation methodology. AIA’s EV risk discount rate is 11.75% (not 9.75% as reported) if we factor in a conservative Hong Kong reserve base. Despite AIA’s 9.75% risk discount rate used in China being lower than the 11% risk discount rate used by Chinese insurers, the applied Hong Kong capital overlay requirement on AIA’s China business would translate to a c200bp increase in the discount rate, effectively raising the discount rate for AIA China to 11.75%. The higher ‘adjusted’ discount rate of AIA China supports a more conservative EV calculation than Chinese insurers, which helps defend the credibility of AIA’s EV. Upcoming listing of Indian life insurers which may be valued on an EV basis. The passing of the Indian Insurance Bill in March 2015 has allowed foreign shareholders to raise their respective stakes in Indian life insurers, paving way for potential listings. Many foreign insurers, with the exception of PCA, have taken advantage of this policy change to raise their respective stakes in Indian Life insures at EV multiples of 2.2-2.4x, which appear expensive comparing to AIA’s current 1.7x EV multiple and Chinese insurers 0.9x EV multiple.
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AIA’s closest peer, Prudential, is valued on an EV basis. Prudential is currently trading on 1.1x 2016e EV multiple, lower than AIA’s current 1.7x EV multiple. Despite Prudential’s lower valuation, we believe it has a similar business profile (also a regional insurance provider) and is a closer comparison to AIA than its Chinese peers which focuses on the Chinese market. AIA’s valuation offers less downside using conservative P/BV approach than Chinese Life insurance peers. AIA shares offer less downside on a P/BV basis (21% downside if wholly valued at P/BV) than Chinese peers (on average 46% downside) due to high ROE, reflective of its strong renewal premium income from its back book business. We note that even if the market moves to P/BV valuation, AIA could enhance its ROE through higher leverage and product repositioning, boosting overall valuation.
Upside / downside for EV based valuation versus BV based valuation Company Price at 22/06/2016 P/BV derived TP Upside/ downside P/EV derived TP Upside/ downside AIA 45.5 36.0 -21% 56.0 23% China Life-H 16.8 4.0 -76% 31.0 84% China Pac-H 25.9 7.0 -73% 40.0 54% China Re-H 1.7 1.88 8% 1.80 3% China Taiping 14.4 6.0 -58% 27.0 87% New China-H 27.2 11.0 -60% 33.0 21% PICC Group 3.1 2.6 -16% N.A. N.A. PICC P&C 13.9 16.0 15% N.A. N.A. Ping An-H 34.5 22.0 -36% 52.0 51% China Life-A 20.6 4.0 -81% 26.0 26% China Pac-A 27.0 6.0 -78% 34.0 26% New China-A 40.3 9.0 -78% 28.0 -30% Ping An-A 32.1 18.0 -44% 43.0 34% Sector average -46% 35% Source: HSBC estimates
#10 Bear concern: “AIA vulnerable to USD appreciation” We agree that AIA’s USD denominated headline EV, NBV and net profit would be impacted by Besides the translational impact, USD appreciation appreciation in USD as the group’s businesses all operate in local currency and would need to would likely have a limited translate back to the reporting USD currency. However, we stress that these gains/losses are impact on core operations mostly translational and the actual impact of foreign exchange movements on core operations would likely be limited given AIA’s local operations match their asset and liability currency (i.e. investing insurance funds locally). As such, we believe the market is increasingly looking at the underlying growth of AIA’s operations – growth numbers under CER not AER, stripping out the currency translation impact. Furthermore, it is possible to model the impact of USD appreciation by applying the relevant currency changes to the disclosed EV, BV and NBV country split, which minimizes uncertainties brought on by USD movements. The HSBC FX strategy team believes that USD strength/weakness versus Asian currencies has peaked earlier in the year (except for RMB) and does not expect Asian currencies to return to their recent highs against USD.
AIA EV breakdown by country, FY15 AIA NBV breakdown by country, FY15
Other Other Markets Korea Markets Korea 11% Hong Kong 2% 11% 5% 34% Hong Kong Malaysia Malaysia 34% 6% 7% Singapore 12% Singapore 14%
China Thailand Thailand China 14% 18% 17% 15%
Source: Company data, HSBC Source: Company data, HSBC
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We estimate a 10% appreciation in USD negatively impacts our FY16e BV by 4.3%, EV by 5.2% and NBV by 6.8%
-4.3% -5.2%
-6.8%
Book Value EV NBV
Sensitivity to +10% strengthening of the US dollars
Source: Company data, HSBC estimates
Positive surprises
Potential exit of Korea business. The Chinese private insurer, Anbang, has agreed to buy Allianz Life Insurance Korea (2% market share, ranked #14, BV at USD846m at end-2015) for more than USD3m on 6 April 2016 (Bloomberg, 6 April 2016). There are also reports of seven bidders for ING Korea (deal reported to be over USD3bn), including major Chinese insurers such as China Life, Ping An and China Taiping (Reuters, 30 May 2016). ING Korea was reported to have USD3.6bn BV as of end-2015, which was higher than AIA Korea’s BV and EV of USD2.5bn and USD1.7bn, respectively. Chinese insurers’ move to acquire Korean business may look odd superficially, as Korea insurers have relatively low growth (2015 life premium grew only 4% versus China’s 25%) and are beset with problems. However, we believe the Chinese insurers are interested in Korea life operations due to (1) the desire to transfer funds out of China, which is the most probable explanation given the strict measures that the PBOC and SAFE imposed; (2) diversifying assets and reducing single-country exposure by moving into a neighbouring country life market; and (3) purchasing life insurance expertise, especially given Korean insurers’ experience and expertise in health insurance and investment management, which were acquired through a long period of mismanagement. We believe Chinese insurers’ increasing interest in acquiring a Korea business may provide an opportunity for AIA to exit its problematic Korea operation, which has dragged its overall business (i.e. AIA Korea delivered 6% NBV decline for 2010-15 CAGR versus overall group NBV CAGR of 27%). It is also interesting to note that AIA Korea maybe a higher quality insurer than its peers, as it lacks the back book of negative spread products.
AIA Korea in comparison to Korean life peers FY15 AIA Korea Samsung Life Hanwha Life Premium growth (%) -7.9% -2.9% 9.5% APE growth (%) -34.7% -7.9% 14.4% NBV growth (%) -43.9% -3.1% 2.7% NBV margin (%) 18.5% 33.1% 18.2% Net profit growth (%) 57.5% -9.5% 21.0% Market share 2.1% 23.4% 12.8% Rank (by market share) #12 #1 #2 Source: Company data, FSC, HSBC
36 EQUITIES INSURANCE 27 June 2016
Recovery in Thailand operations. The Thailand operations, which have remained sluggish for the past three years (Thai NBV grew only 9-13% in FY13-15), may start growing again as AIA is restructuring its Thai agency platform, pushing for more full-time agents and more fully licensed agents, which will be able to sell unit-linked products (instead of only life policies). AIA is getting some traction in Thailand’s unit-linked market, having succeeded in getting more agents to pass the exam.
Bancassurance sales have most scope to grow. The Citigroup partnership’s sales to pick up and lift bancassurance NBV contribution (bancassurance NBV rose 48% in FY15, accounting for 10% of group’s total NBV).
Inorganic growth. There have been media reports of AIA and PRU considering bids for a 49% stake in Thai SCB’s insurance unit (Reuters, 31 May 2016), which, if AIA were to make such a purchase, could boost its Thai business by taking advantage of SCB’s extensive bank branch network (the second largest in Thailand with 1,208 branches) and its immense client base. SCB Life was ranked fifth in Thailand’s life market in 2015, with a 10% market share (GWP basis).
37 EQUITIES INSURANCE 27 June 2016
What to expect from 1H16 results
AIA will release interim results at 6am Hong Kong time on Thursday 28 July 2016 We expect AIA to report 32% AER/ 39% y-o-y CER NBV growth, 6% h-o-h EV growth, 39% y-o-y dividend growth and 31% net income decline for its1H16 results It is still too early to establish consensus expectations
1H16 results preview
AIA will release interim results at 6am Hong Kong time on Thursday 28 July 2016. Our key expectations are 32% AER/ 39% CER y-o-y NBV growth (versus 36%/ 44% 1Q16), 6% EV h-o- h growth, 17% y-o-y operating profit growth, 39% y-o-y dividend growth and 31% net income decline in 1H16e. Our estimates are predicated on 2.5% fall in equities, 37bp fall in bond yields and 7% USD appreciation in 1H16e. At this juncture, it is too early to establish consensus expectations for AIA’s 1H16 results.
HSBC 1H16e estimates for AIA HSBC 1H16e implied Consensus 1H16e implied HSBC HSBC Consensus FY16e implied USDm unless stated 1H14a 1H15a 1H16e Y-o-y growth 1H16e Y-o-y growth FY16e Implied growth FY16e Y-o-y growth TWPI 9,004 9,633 10,500 9% 21,720 9% OPAT margin 16.2% 16.9% 18.2% 1.3% 18.2% 0.2% OPAT 1,457 1,630 1,911 17% 3,953 10% 3,581 0% Net profit to shareholders 1,546 2,180 1,496 -31% 1,927 -12% 3,291 18% 3,563 28% EPS – HKD 1.00 1.41 0.97 -31% 1.05 -26% 2.13 18% 2.29 27% DPS – HKD 0.16 0.19 0.26 39% 0.78 12% 0.75 8% APE 1,690 1,878 2,295 22% 4,876 22% Margin NBV/APE 46.9% 51.1% 55.2% 4.1% 57.7% 2.6% NBV 792 959 1,266 32% 2,815 28% 2,600 8%
HSBC 1H16e implied HSBC HSBC Consensus FY16e implied USDm unless stated 1H15a 2H15a 1H16e H-o-h growth FY16e Implied growth FY16e Y-o-y growth Shareholders’ funds 31,966 29,716 33,489 13% 34,789 17% 32,587 10% HKICO solvency ratio 453% 428% 421% -7% Free surplus 8,349 7,528 8,008 6% Embedded value 38,598 38,198 40,590 6% 41,666 9% 41,800 9% Source: Company data, HSBC estimates
AIA quarterly results USDm unless stated 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16e TWPI 4,428 4,576 4,935 5,272 4,775 4,858 4,846 5,397 5,040 5,460 Growth, % 6% 6% 12% 8% 8% 6% -2% 2% 6% 12% APE 799 891 944 1,066 895 983 1,022 1,091 1,103 1,192 Growth 7% 14% 13% 9% 12% 10% 8% 2% 23% 21% NBV/APE 44% 49% 50% 55% 47% 54% 54% 63% 52% 58% NBV 354 438 468 585 425 534 552 687 578 688 Growth, % 22% 24% 23% 26% 20% 22% 18% 17% 36% 29% Source: Company data, HSBC estimates
38 EQUITIES INSURANCE 27 June 2016
Valuation and estimates
We mark to market our model to reflect bond, equity and FX movements since the last update on 22 April 2016 We also reduce AIA’s COE assumption by 0.1% to reflect HSBC’s latest risk-free/equity premium estimates and a higher beta We maintain Buy on AIA with new TP of HKD56 (was HKD54)
Valuation revisited
We raise our target price for AIA from HKD54 to HKD56. The 4% increase in our target price is principally driven by bond, equity and FX movements since the last update to our marked-to- market model on 22 April 2016. We also reduce AIA’s cost of equity assumption by 0.1ppt to 8.4% after updating our country weighted COE calculation for our strategist’s latest risk- free/equity premium estimates and a higher 2-year adjusted Bloomberg calculated beta. It is interesting to note that our FY16e NBV estimate is 8% above consensus while our EV estimate is in line with consensus.
We value AIA using a P/EV Gordon growth model, with an average FY16–18e ROEV of 14.1%, sustainable growth of 3.5% and cost of equity of 8.4%. This generates a target P/EV multiple of 2.2x and a 2016e valuation of HKD58.18 per share, which yields a target price of HKD56 after discounting back to today and rounding to the nearest dollar.
Key downside risks for the shares include market migration to P/BV methodology (an emerging pressure in China), emerging market equity outflows (AIA is a well-owned name), and adverse financial market movements.
We increase slightly our target price for AIA to HKD56 Valuation changes New Old Change 2016e ROEV 12.2% 12.9% -0.7% 2017e ROEV 14.6% 14.1% 0.4% 2018e ROEV 15.5% 15.1% 0.4% Average ROEV 2016-18e 14.1% 14.0% 0.1% Sustainable growth 3.5% 3.4% 0.1% Cost of equity 8.4% 8.5% -0.1% Implied multiple (x) 2.2x 2.1x 0.1x EV p/s (HKD) 27.0 27.6 -2.4% Fair value end-2016e 58.2 57.3 1.6% 12-month fair value (HKD) 56.1 54.5 3.0% Valuation discount 0% 0% 0% Price target (HKD) 56.0 54.0 3.7% Source: HSBC estimates
39 EQUITIES INSURANCE 27 June 2016
Changes in our estimates reflect lower MTM asset values and slight lift in NBV forecast HKD unless stated New Old Revision Rating Buy Buy No change Target Price 56.0 54.0 4% 2016e EPS 2.13 2.35 -10% 2017e EPS 2.91 3.04 -4% 2018e EPS 3.20 3.44 -7% 2016e BVPS 22.50 23.03 -2% 2017e BVPS 24.59 25.25 -3% 2018e BVPS 26.85 27.75 -3% 2016e EV per share 26.95 27.63 -3% 2017e EV per share 30.05 30.71 -2% 2018e EV per share 33.78 34.40 -2% 2016e NBV per share 1.82 1.78 2% 2017e NBV per share 2.31 2.26 2% 2018e NBV per share 2.89 2.82 2% Source: HSBC estimates
Sensitivity to the valuation of AIA TP AIA impact Target price 56.0 Cost of Equity assumption 8.5% -1% 71.0 27% +1% 46.0 -18% Sustainable growth assumption 3.4% +1% 64.0 14% -1% 51.0 -9% Life 3yr NBV 2015-18e CAGR assumption 25.7% +5ppt 60.0 7% -5ppt 52.0 -7% FY16 equity market assumption -2.5% Equity market +10ppt 59.0 5% Equity market -10ppt 53.0 -5% FY16 interest rate assumption -0.37% Interest rates +50bp 58.0 4% Interest rates -50bp 54.0 -4% Currency movements USD depreciates 10% 59.0 5% USD appreciates 10% 53.0 -5% Source: HSBC estimates
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We examine 10 of AIA’s major life markets
41 EQUITIES INSURANCE 27 June 2016
Hong Kong’s life market in pictures (34% of group NBV, 15% GWP market share, rank #2)
Market share trend (APE basis) – China Life Life penetration (= life premium/GDP) in Hong
(HK) is the largest life insurer in Hong Kong Kong has increased to 12.7% in 2014
% %
% (%)
% %
% 14.0
20 22
20
20
19
21 %
% 12.0
14
%
% %
14 12.7
% %
13 12.1
14 16
% 10.0
13
11 %
% 11.0 % 13 10.6
% 10.5
%
%
12 %
11 8.0 10.0 10
% 9.7
8 9.6
10 %
10 9.2
10 %
8 8.6
10
% 9
9 6.0 7.6
4.0 2.0 0.0
China Life Company A Prudential AIA BOC
2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 (HK) 2004 2011 2012 2013 2014 2015 Life penetration (Life premiums/GDP)
Source: OCI Source: Swiss Re
49% FYP distributed via the bank channel Non-linked sales accounted for 92% of new business premiums in 2015 100% 100% 21.5% 14% 8% 22% 21% 24.1% 22.5% 30% 80% 80% 33% 34%
60% 60% 53.9% 50.3% 49.2% 86% 92% 40% 40% 78% 79% 67% 66% 70% 20% 20% 24.2% 25.2% 27.8%
0% 0% 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Agents Banks Brokers Direct Others Non linked Linked
Source: OCI Source: OCI
Life premium growth slowed down slightly in Average sum assured per policy has increased 2015 since 2009
350,000 30% 35% 500 30% 27% 300,000 30% 400 20% 25% 22% 250,000 6% 20% 300 6% 10% 16% 14%13% 200,000 12% 11% 15% 17% 16% 200 0% 150,000 10% 1% 2% 2% 3% 4% 5% 100 -10% 100,000 0% 0 -20% 50,000 -6% -5% -4% 2009 2010 2011 2012 2013 2014 2015 0 -10%
Avg sum assured per policy (HKD'000)
2012 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2004 Avg sum assured per policy growth % (RHS) Life GWP (HKDm) Life GWP growth %
Source: OCI Source: OCI
42 EQUITIES INSURANCE 27 June 2016
China’s life market in pictures (15% of group NBV, 0.8% GWP market share, rank #22)
China Life had the largest market share in Life penetration (= life premium/GDP) in China
China’s life market (GWP basis) still low at 1.7% in 2014
% %
% 3.0%
33
32 30
% 2.5% %
26 2.5% 23
1.8%
%
% %
% 2.3% % 2.0% 2.2%
% 1.7%
%
%
14
%
14
13 13
12 1.6%
%
%
%
10
10
%
10
10
9
%
%
%
9
%
9
%
%
8 %
7 1.8%
7
7
7
6 6 6 1.5% 1.7% 1.7% 1.0%
China Life Ping An Life New China China PICC Life
2008 2009 2007 2010 2011 2012 2013 2014 Life Pacific Life 2006 2011 2012 2013 2014 2015 Life penetration (Life premiums/GDP)
Source: CIRC Source: Swiss Re
Listed sector product mix: Par still the highest Agency accounts for 68% of Chinese listed life accounting for 44% of 2015 GWP insurers’ 2015 GWP
Traditional
3% 5%1% Participating 13% Agent 32% 26% 8% Bancass Universal urance Group 68% Health & 44% Accident Other Other
Source: Company data, HSBC Source: Company data, HSBC
Life premium growth accelerated in 2015 Risky non-standard assets accounted for 11% of assets for Chinese listed sector
2,000,000 48% 60% Cash & cash 25% equivalent 1,500,000 29% 40% Term deposits 22% 18% 2% (>3m) 15% 1,000,000 8% 20% Bonds 30% 4% 11% 11% -9% 500,000 0% Stocks & funds 31% 11% - -20% Non-standard 11%
assets
2012 2015 2007 2008 2009 2010 2011 2013 2014 2006 Others Life premiums, RMBmn Growth %
Source: CIRC Source: Company data, HSBC
43 EQUITIES INSURANCE 27 June 2016
Malaysia’s life market in pictures (7% of group NBV, 20% GWP market share, rank #2)
Great Eastern and AIA had the largest market Life penetration (= life premium/GDP) in Malaysia share in Malaysia’s life market (GWP basis)
4.0
%
%
%
%
% %
% 3.5
23
%
%
22 21
21 3.6
21
21
21
20
20
% %
% 3.5
%
%
17
17 16
16 3.3 16 3.0 3.2 3.2 3.2 3.1 3.0 3.1 3.1
%
% 2.8
%
%
7 %
7 2.5
%
%
6
%
6
6
%
6
6
%
5
5 4
2.0
2007 2005 2006 2008 2009 2010 2011 2012 2013 2014 Great AIA Prudential Hong Leong Allianz 2004 Eastern Life penetration 2011 2012 2013 2014 2015 Source: Company data, HSBC Source: Sigma
Life industry product mix (GPW basis): takaful Linked sales accounted for 34% of life GPW accounted for 20% of total life premium 100% 35% 34% 19% 19% 20% 20% 20% 20% 32% 80% 29% 26% 27% 28% 29% 32% 30% 60% 34% 28% 26% 27% 12% 26% 12% 12% 11% 25% 40% 10% 10% 25% 25% 16% 17% 17% 18% 18% 18% 20% 25% 24% 22% 20% 19% 17% 0% 20% 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 Whole Life Endowment Temporary % of linked business Others Investment Linked Family Takaful Source: BNM Source: BNM
Life premium growth Almost 79% of life asset invested in fixed income, FY15
40,000 16% Cash and deposits 35,000 13% 14% 7% 6% 30,000 10% 13%11% 13% 12% 1% 10%13% Loans 7% 25,000 10% 7% 20,000 8% 8% 6% Fixed income
15,000 7% 6% products 10,000 4% Investment 5,000 2% Properties 79%
0 0% Other assets
2007 2015 2005 2006 2008 2009 2010 2011 2012 2013 2014 Life GPW (RMm) Life GPW growth % (RHS)
Source: BNM Source: BNM
44 EQUITIES INSURANCE 27 June 2016
The Philippines’ life market in pictures (included in ‘Other countries’ accounting for 11% of group NBV, 11% GWP market share, rank #3)
Market share trends Life penetration (= life premium/GDP) in the Philippines 1.8 1.60 1.6 1.42
% 1.4
%
%
19
%
%
% 17
17 1.2
17
16
16
%
%
%
%
%
%
%
% %
% 0.91 0.91 0.90 0.90 0.90
%
13 %
% 0.89
13
%
% 12
% 1.0 12
12 0.84
12
12
11
11
11
11
11
11
% 10
10
10 0.75
%
9 %
8 0.69
7 0.8 0.6 0.4
Sun Life AXA Philam Life BPI Philam Prudential
2007 2011 2004 2005 2006 2008 2009 2010 2012 2013 2014 2011 2012 2013 2014 2015 Life penetration
Source: Company data Source: Sigma
Variable insurance is the dominant type of Variable sales trend (FYP basis) policy in the Philippines 100% 100% 13% 8% 6% 6% 91% 90% 80% 88% 90% 84% 45% 60% 60% 71% 68% 80% 71% 40% 70% 65% 20% 41% 29% 20% 23% 60% 0% 2010 2011 2012 2013 2014 2015 2011 2012 2013 2014 Variable FYP as % of Total FYP Ordinary Variable Group Health & Accident
Source: The Insurance Commission Source: The Insurance Commission
Life premium rose 19% in 2015 37% of life insurance funds were invested in government securities, FY14
200,000 60% 50% 42% 150,000 38% 40% 39% 24% 30% 19% 20% 37% 100,000 18% 22% 10% Gov't. securities 7% 1% 0% Others -8% 63% 50,000 -10% -20% -25%
0 -30%
2008 2011 2005 2006 2007 2009 2010 2012 2013 2014 2015 Life GPW (PHPm) Growth % (RHS) Source: The Insurance Commission Source: The Insurance Commission Source: The Insurance Commission Source: The Insurance Commission
45 EQUITIES INSURANCE 27 June 2016
Singapore’s life market in pictures (14% of group NBV, 18% GWP market share, rank #2)
Prudential is the largest life insurer in Life penetration (= life premium/GDP) in Singapore (APE basis) Singapore rebounded since 2011
7.0 6.0 6.0 6.2
5.4 5.6 % % 6.0 5.1 % 5.0
22 4.8 22 % 4.6 21 4.4 % 4.3
% 5.0
19
%
%
%
18
17
%
%
16
16
16
%
% %
% 4.0
%
%
14
%
14
%
13
%
12
12
12
12
11
%
%
10 10.1
% 3.0
%
9.4 %
8
8
7.3 7.2 6.5 2.0 1.0 0.0 Prudential Great AIA NTUC Aviva
Eastern
2011 2012 2004 2005 2006 2007 2008 2009 2010 2013 2014 2011 2012 2013 2014 2015 Life penetration
Source: Monetary Authority of Singapore (MAS) Source: Sigma
Agent and bancassurance are the major Participating is the major type of product in distributional channels Singapore 100% 100% 16% 17% 17% 19% 19% 14% 16% 16% 18% 19% 80% 80% 28% 26% 32% 28% 28% 34% 35% 34% 60% 36% 37% 60%
40% 40%
49% 56% 56% 51% 53% 53% 20% 46% 46% 43% 40% 20%
0% 0% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Agent Bancassurance Financial Advisers Others Participating Non-participating Investment Linked Source: Monetary Authority of Singapore (MAS) Source: LIA
Life premium growth was strong in the past years Equity investment accounted for 23% of insurance funds in Singapore 15,000 14% 15% 12% 100% 3% 3% 10% 3% 3% 3% 10% 80% 10,000 9% 10% 8% 10% 9% 60% 67% 5% 61% 63% 66% 65% 7% 5,000 5% 40%
20% 0 0% 23% 20% 20% 23% 23%
0%
2006 2010 2014 2007 2008 2009 2011 2012 2013 2005 2010 2011 2012 2013 2014 Industry Life Premium(SGDmn) Equities Debt Land & Buildings Loans Cash & Deposits Others Industry Life Premium Growth % (RHS) Source: Monetary Authority of Singapore (MAS) Source: Monetary Authority of Singapore (MAS)
46 EQUITIES INSURANCE 27 June 2016
Thailand’s life market in pictures (17% of group NBV, 22% GWP market share, rank #1)
Market share trend (APE basis) – Muang Thai Life penetration (= life premium/GDP) in Life is the largest life insurer in Thailand Thailand is increasing fast 4.0 3.6
3.5 3.2
%
% %
22 3.0
21
%
% 19
% 3.0 18
17 2.7
%
16
%
% %
% 2.5
% %
13 2.4
%
13
12
12
12
12
11 %
10 2.5
9 % %
8 2.1
7
%
% %
% 2.0 6
5 1.9 5
5 1.9 2.0 1.8
Muang AIA AXA Thai Life SCB Life Bangkok Allianz 1.5
Thai Life Life
2007 2014 2004 2005 2006 2008 2009 2010 2011 2012 2013 2013 2014 2015 Life Penetration
Source: TLAA Source: Sigma
Life industry distribution mix (GWP basis) – More than 70% of premiums come from Bancassurance keeps increasing ordinary life 100% 100% 7% 7% 6% 6% 6% 8% 9% 10% 8% 8% 80% 80% 12% 12% 11% 11% 11% 52% 51% 61% 57% 55% 60% 60%
40% 40% 73% 73% 73% 75% 76% 20% 42% 43% 33% 37% 39% 20%
0% 0% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Bancassurance Agency Others Ordinary Life Ordinary Rider Group Life Others
Source: TLAA Source: OIC
Life premium growth was weak in 2015 Life funds break-down (2015) 500 30%
400 25% 5%2%1% 16% 20% Bonds 300 15% 19% 14% 10% 17% 13% 15% 10% 11% Equities 200 10% 7% 10% Loans 4% 100 5% Cash & deposits 82%
0 0% Others
2008 2013 2005 2006 2007 2009 2010 2011 2012 2014 2015 Industry Life Premium(THBbn) Industry Life Premium Growth %(RHS)
Source: TLAA Source: OIC
47 EQUITIES INSURANCE 27 June 2016
Vietnam’s life market in pictures (included in ‘Other countries’ accounting for 11% of group NBV, 9% GWP market share, rank #5)
Market share trend (GWP basis) – Bao Viet is Life penetration (= life premium/GDP) in the largest life insurer in Vietnam Vietnam at a low level
1.5 % % 1.4
40%
38
36
%
%
33
32 %
35% %
%
%
% %
29 1.0
28
28 28
27 0.9 30% 27 1.0 0.8 0.7 0.7 0.7 25% 0.6 0.6 0.6 0.7
20%
%
%
% %
% 0.5
12
12 12
15% 11 11 10% 5% 0.0
0%
2009 2011 2013 2005 2006 2007 2008 2010 2012 2014 Prudential Bao Viet Life Manulife 2004 Vietnam life penetration 2011 2012 2013 2014 2015 Source: AVI Source: Swiss Re
Strong growth in agent nos. in 2014 and 2015 Product mix (FYP basis) – Investment-type product is increasingly becoming sales focus 37.3% 100% 500000 40% 30.3% 35% 80% 400000 32% 33% 30% 38% 37% 37% 300000 25% 60% 20% 200000 15% 40% 59% 10% 50% 52% 57% 53% 100000 20% 0.1% 5% 0 0% 0%
2011 2012 2013 2014 2015
2012 2015 2013 2014 No. of agents Growth (%) y-o-y Endowment Investment Others Source: AVI Source: AVI
Life premium growth has been high since the New business quality continued to improve past few years with average APE per policy on the uptrend 10.0 50,000 40% 10.0
40,000 9.0 26% 34% 30% 22% 8.0 30,000 6.9 17% 15% 20% 7.0 6.5 20,000 15% 11% 9% 6.0 15% 10% 10,000 5% 4.7 4.9 5.0 4.1 0 4% 0% 4.0
2010 2011 2012 2013 2014 2015
2007 2015 2005 2006 2008 2009 2010 2011 2012 2013 2014 Life Premium (VNDbn) Life GWP growth % (RHS) Average APE per policy (VNDm)
Source: AVI, CEIC Source:
48 EQUITIES INSURANCE 27 June 2016
Korea’s life market in pictures (2% of group NBV, 2% GWP market share, rank #12)
Samsung had the largest market share in Life penetration (=life premium/GDP) in Korea Korea’s life market (GWP basis) declined slightly to 7.2% in 2014
50% % 9.0% 40 40% 7.5%
% 8.0% % % 8.2%
% 7.0%
27 8.0%
26 26 % 7.9% 7.0% 6.9%
30% 23 %
21 7.0%
%
%
18
%
%
%
% %
% 7.2%
% 14
20% 13
13
13
12
12
%
%
%
11
11 11
%
9 9
9 6.5%
% 8
% 6.0%
%
%
6
5 5
10% 4
% 1 0% 5.0%
Samsung Hanwha Kyobo NH Mirae
2007 2012 2008 2009 2010 2011 2013 2014 Asset 2006 2011 2012 2013 2014 2015 Life penetration (Life premiums/GDP)
Source: FSC Source: Swiss Re
Life industry distribution mix: Bancassurance Term policies accounted for 31% of life GPW accounted for 72% of life premiums in 2015
2015 72% 27% 1% Pure Endowment Term 2014 72% 27% 1% Endowment 17% 21% 2013 72% 26% 1% Group 12% 2012 74% 25% 0% Retirement 01% 2011 71% 28% 1% insurance 18% 31% Retirement 0% 20% 40% 60% 80% 100% 120% Pension Variable Contract
Bancassurance Agent Others
Source: FSC Source: FSC
Life premium growth slowed to 4% in 2015 57% of investments allocated to bonds in 2015
100 60% 45% 43% 2015 2%12% 57% 7% 22% 80 40% 2014 4% 7% 6% 20% 3%11% 56% 7% 22% 60 4% 4% -1% 4% 0% 2013 3%10% 58% 6% 23% 40 -36% -20% 2012 4%11% 56% 7% 22% 20 -40%
0 -60% 2011 4%11% 56% 5% 24%
2014 2015 2007 2008 2009 2010 2011 2012 2013 2006 0% 20% 40% 60% 80% 100% Life premium (KRWtrn) Growth Cash Stocks Bonds Trust Others
Source: FSC Source: FSC
49 EQUITIES INSURANCE 27 June 2016
Indonesia’s life market in pictures (included in ‘Other countries’ accounting for 11% of group NBV, 6% GWP market share, rank #6)
Prudential had the largest market share in Life penetration (= life premium/GDP) in Indonesia Indonesia’s life market (GWP basis)
35% % 1.6 1.5 33 30% 1.4 % 1.2 1.2
25% 22 1.2 1.1 1.1 1.1
20% %
% 0.9
1.0 0.9 13
15% 13 0.8
%
9 %
%
% 0.8
8 %
10% 7
7
6
%
%
%
4 4
4 0.8 5% 0.6 0.6 0% 0.4
Prudential Allianz Axa Indolife Jiwa AIA
2006 2012 2005 2007 2008 2009 2010 2011 2013 2014 Mandiri Sinarmas 2004 2012 2014 Life penetration
Source: OJK Source: Swiss Re
Product mix (FYP basis) – Endowment and Takaful declining as proportion of life GWP linked policies drove more than half of FYP 7% 6.8%
Term 6% Endowment 16%
Whole-life 27% 6% 5.8% Annuity 5.3% Accident & health 7% 43% Linked 10%% 5%
Others
2012 2013 2014
Sharia Life as % of Life GWP Source: CEIC Source: CEIC
Life premium growth trend in Indonesia Sum insured growth rate declining in Indonesia 140,000 66% 70% 3,500 50% 40% 39% 120,000 60% 3,000 40% 100,000 50% 2,500 28% 24% 30% 21% 80,000 33% 40% 2,000 20% 14% 13% 20% 22% 22% 10% 60,000 21% 22%20% 30% 1,500 7% 10% 13% 40,000 11% 10% 20% 1,000 9% -5% 20,000 10% 500 0%
0 0 0 -10%
2009 2006 2007 2008 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2004 2005 2009 2010 2011 2012 2013 2014
Life GWP (IDRbn) Life GWP growth % (RHS) Sum insured (IDRbn) Growth % (RHS) Source: Swiss Re, CEIC Source: CEIC
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India’s life market in pictures (Tata AIA NBV not disclosed, 0.6% GWP market share, rank #11)
Market share trend (APE basis) – government- Life penetration (=life premium/GDP) in India backed LIC is the largest life insurer in India declining to 2.6% in 2014 100% 5.0% 80% 4.4% 40% 37% 4.5% 41% 35% 4.6% 59% 55% 60% 4.0% 3.4% 4.1% 4.0% 3.5% 4.0% 3.2% 3.1% 40% 3.0% 59% 65% 60% 63% 45% 2.5% 20% 41% 2.6% 2.0%
0%
2010 2012 2007 2008 2009 2011 2013 2014 2008 2009 2010 2011 2012 2013 2006 Life penetration (Life premiums/GDP) LIC Private companies
Source: IRDAI Source: Swiss Re
Agency accounted for 71% of sales in 2014 Industry product mix shifting from linked to non-linked 100% 100% 9.8% 7.8% 6.3% 6.3% 6.0% 7.7% 11.9% 12.7% 24.3% 17.0% 10.6% 13.3% 15.0% 16.2% 15.6% 80% 20.8% 80% 43.5% 37.4%
60% 60% 88.1% 87.3% 40% 79.6% 40% 75.7% 83.0% 79.0% 78.7% 77.5% 78.4% 71.4% 56.5% 62.6% 20% 20%
0% 0% 2009 2010 2011 2012 2013 2014 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Agency Bancassurance Others Non-linked Linked
Source: IRDAI Source: IRDAI
Life premium growth rebounded in 2015 Life insurers’ investment mix
80,000 60% 7% 4% 4% 4% 4% 2% 2% 53% 26% 23% 45% 29% 30% 32% 33% 60,000 40% 27% 12% 16% 10% 9% 12% 14% 9% 8% 8% 40,000 6% 20% 14% 16% 17% 20% 22% -1% 18% 19% 20,000 0% -4% -12% -6% 42% 41% 41% 39% 37% 40% 42% 0 -20%
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
2008 2013 2006 2007 2009 2010 2011 2012 2014 Central Govt Securities State Govt & Other Approved Life premiums (USDm) Growth % yoy Infrastructure Invt Approved Invt Others
Source: Swiss Re Source: IRDAI
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Disclosure appendix
Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: James Garner, Christopher Chan, and Jianwei Yang
Important disclosures
Equities: Stock ratings and basis for financial analysis HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts’ views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.
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Rating distribution for long-term investment opportunities As of 24 June 2016, the distribution of all independent ratings published by HSBC is as follows: Buy 45% (26% of these provided with Investment Banking Services) Hold 41% (25% of these provided with Investment Banking Services) Sell 14% (20% of these provided with Investment Banking Services)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
Share price and rating changes for long-term investment opportunities AIA Group (1299.HK) share price performance HKD vs Rating & target price history HSBC rating history From To Date Analyst Overweight Buy 1 Apr 2015 James Garner 59 Target price Value Date Analyst 54 Price 1 39.00 10 Jul 2013 James Garner 49 Price 2 41.00 26 Jul 2013 James Garner 44 Price 3 45.00 12 Sep 2013 James Garner 39 Price 4 46.00 18 Oct 2013 James Garner Price 5 48.00 21 Nov 2013 James Garner 34 Price 6 46.00 14 Jan 2014 James Garner 29 Price 7 47.00 11 Apr 2014 James Garner 24 Price 8 49.00 25 Jun 2014 James Garner Price 9 52.00 25 Jul 2014 James Garner 19 Price 10 55.00 13 Nov 2014 James Garner
Price 11 56.00 26 Feb 2015 James Garner
Jun-11 Jun-14 Jun-13 Jun-15 Jun-16 Jun-12 Price 12 54.00 1 Apr 2015 James Garner Price 13 57.00 9 Apr 2015 James Garner
Price 14 59.00 21 Apr 2015 James Garner Source: HSBC Price 15 54.00 8 Oct 2015 James Garner Price 16 53.00 16 Nov 2015 James Garner Price 17 51.00 14 Jan 2016 James Garner Price 18 54.00 21 Apr 2016 James Garner Source: HSBC To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please see the disclosure page available at www.research.hsbc.com/A/Disclosures.
HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price date Disclosure AIA Group 1299.HK 46.20 23-Jun-2016 1, 4, 5, 6, 7, 11 Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next three months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 May 2016 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services.
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8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenue. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
Additional disclosures 1 This report is dated as at 27 June 2016. 2 All market data included in this report are dated as at close 22 June 2016, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.
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Disclaimer
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Global Financial Institution Group Research Team
Aseem Pant +91 22 3396 0688 Saurabh Jain +91 22 6164 0691 Banks [email protected] [email protected] Global Head of Financial Institutions Research Carlo Digrandi +44 20 7991 6843 Kar Weng Loo +65 6658 0621 Michelle Kwok +852 2996 6918 [email protected] [email protected] [email protected]
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