AIA Group (1299 HK) AIA Gr Oup

Hong Kong Financials 15 July 2016

AIA Group (1299 HK) AIA Gr oup

Target price: HKD55.00 Share price (15 Jul): HKD48.05 | Up/downside: +14.5%

Initiation: Upside resides in Hong Kong/China Leon Qi, CFA (852) 2532 4381  Hong Kong/China operations to drive VNB growth and valuation upside [email protected]  EV and profit less affected by low/falling yields than for China peers Ailsa He (852) 2773 8745  Initiating with an Outperform (2) rating and target price of HKD55 [email protected]

Investment case: Hong Kong and China driving VNB growth. We Share price performance expect AIA’s regional operations to be characterised by strong volume (HKD) (%) growth in Hong Kong and China, and VNB margin expansion in Thailand, 55 115 China, Singapore and Malaysia. In Hong Kong, we look for local customers’ 50 109 46 103 increasing demand on protection and Mainland customers’ combined 41 96 appetite for protection, investment, and currency hedges to drive its VNB. 36 90 In China, we expect AIA’s commitment to high-margin critical illness Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 products, together with a robust underwriting environment nationally, to AIA Group (LHS) Relative to HSI (RHS) result in its VNB being more than double that of FY15 in FY18 (year-end 30 Nov) on constant exchange rate (CER) basis. We believe these 2 regions 12-month range 37.25-51.45 will contribute c.66% of the Group’s VNB by FY18, from 49% in FY15. Market cap (USDbn) 74.64 3m avg daily turnover (USDm) 117.91 Shares outstanding (m) 12,048 should be supported by: 1) its VNB gradually Dividend upside Major shareholder Citigroup Inc. (9.0%) generating a larger underwriting profit, 2) improving expense ratio, particularly in China, 3) only 1.1x leverage currently, and 4) its in-force Financial summary (USD) business providing decent and predictable distributable profit. Hence, we Year to 30 Nov 16E 17E 18E forecast AIA’s average dividend yield over FY16-18 to be more than Net premiums (m) 21,732 24,210 26,938 Net investment income (m) 6,023 6,193 6,371 double that of FY13-15 (2.7% vs. 1.2%). Net profit (m) 3,339 4,187 4,426 Core EPS (fully-diluted) 0.277 0.348 0.367 Decoding the embedded values (EV) of AIA and China insurers. We EPS change (%) 23.6 25.4 5.7 devote a section of this report to compare AIA and China insurers’ EV Daiwa vs Cons. EPS (%) (6.1) (2.4) (5.8) PER (x) 22.4 17.8 16.9 assumptions and calculations, as well as the varying impact from low Dividend yield (%) 2.2 2.8 3.0 interest rates. Our conclusion is that AIA’s EV is less affected by a low DPS 0.139 0.174 0.184 yield at this stage, and that further declines in interest rates would be PBR (x) 2.1 1.8 1.6 positive for AIA’s bottom line but negative for the China insurers’. ROE (%) 10.4 11.0 10.0 Source: FactSet, Daiwa forecasts Catalysts: We believe AIA’s share price is driven mainly by the execution of its underwriting business, as reflected in its VNB (CER), which it announces on a quarterly basis, whereas the China insurers’ share prices are more likely to be driven by monthly premium and short-term investment trends. Premium data points from its top-3 markets (monthly for China and Thailand, quarterly for Hong Kong), and currency and equity market trends are other indicators that investors may want to look at (see page 7 for a summary of the major catalysts we see over next 12 months).

Valuation: We believe AIA’s Hong Kong and China operations will drive its valuation upside. As these 2 regions feature high growth in annualised new premiums (ANP) and VNB, their growing contributions to the group’s valuation should mean a higher overall blended P/EV. We derive our TP of HKD55 using a blended 2017E P/EV of 2.0x.

Risks: 1) competition from improving agency forces at China insurers and bank-led insurers in Thailand and Malaysia, and 2) continued currency- and equity-market volatility across Asia.

See important disclosures, including any required research certifications, beginning on page 59

AIA Group (1299 HK): 15 July 2016

Table of contents

Summary of company and sector catalysts ...... 7

AIA’s strategy: where, what and how? ...... 8

Geographical breakdown of portfolio across Asia ...... 13 Regional summary ...... 13 Hong Kong: a city of 2 markets ...... 15 China: commitment to premier agency model ...... 20 Thailand: resilient margin despite losing market share ...... 24 Singapore: VNB margin is key ...... 27 Malaysia: margin upside from product mix optimisation ...... 29 Korea: orderly retreat from a challenging market ...... 32 Other markets ...... 34 Financial position and macro sensitivities ...... 36 Well capitalised financial position poised for dividend upside ...... 36 Double-digit VNB growth driven by country mix and product mix changes ...... 39 Sensitivity to currencies, equity markets and interest rates ...... 41 Decoding the black box (EV and reserves): comparison of AIA and the China insurers ... 44 Valuation and risks ...... 48 Valuation methodology ...... 48 Contextualising Hong Kong/China in AIA’s valuation ...... 49 Valuation comparison ...... 50 Risks ...... 51 Appendix: Glossary of terms ...... 53

AIA Group (1299 HK): 15 July 2016

Please also see:

China Insurance Sector: China Insurance Sector: El Niño approaching A new dawn: 2016 about rising productivity 29 June 2015 5 January 2016 Leon Qi, CFA (852) 2532 4381 ([email protected]) Leon Qi, CFA (852) 2532 4381 ([email protected]) Ailsa He (852) 2773 8745 ([email protected]) Ailsa He (852) 2773 8745 ([email protected])

AIA Group (1299 HK): 15 July 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook AIA: VNB growth by markets (CER) We forecast AIA’s VNB to grow by 27% YoY (CER) in 60% FY16, 21% YoY in FY17 and 18% YoY in FY18. We expect 50% the growth to be driven by positive changes in the 40% 30% geographic mix (higher VNB and ANP growth in 20% China/Hong Kong) and product mix (increasing premiums 10% from critical illness products in Hong Kong/China and unit- 0% linked products with protection riders in Malaysia, Thailand (10%) and Singapore). (20%) (30%) (40%) Geographically, China, Hong Kong and Malaysia are likely FY14 FY15 FY16E FY17E FY18E to be AIA’s fastest-growing markets; we forecast they will HK TH SG MY CH KR show c.25-30% CAGRs in VNB over FY16-18. Source: Company, Daiwa estimates

Valuation AIA: target P/EV of key regional operations (FY17E) We value AIA’s businesses in each of its major markets (x) 4.0 using P/EV based on their respective ROEVs, and then 3.5 sum them up to reach our target price and implied target 3.5 2.8 multiple. Our 12-month target price of HKD55 implies a 3.0 blended 2017E P/EV of 2.0x. We assign the highest 2.5 2.1 2.0 multiple to AIA China, given its strong growth momentum 2.0 1.6 and positive margin trend (see the Valuation section of 1.5 this report for full details of our regional valuation 1.0 1.0 0.7 multiples and assumptions). 0.5 0.0 0.0 HK TH SG MY CH KR Others Group Source: Daiwa

Earnings revisions AIA: Bloomberg consensus earnings revisions The Bloomberg consensus earnings forecasts of AIA’s (Rebased to 100) 120 FY16 and FY17 earnings were largely flat during 2015, but saw 8-10% downward revisions in February 2016 when 110

AIA’s FY15 bottom line fell short of expectations. 100

70 Jul-15 Jul-16 Apr-15 Oct-15 Apr-16 Jan-15 Jun-15 Jan-16 Jun-16 Feb-15 Mar-15 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 May-15 May-16 2016E Net Income 2017E Net Income

Source: Bloomberg, Daiwa Note: rebased to 100 on 1 Jan 2015.

AIA Group (1299 HK): 15 July 2016

Financial summary Key assumptions Year to 30 Nov 2011 2012 2013 2014 2015 2016E 2017E 2018E ANP growth (%) (CER) n.a. n.a. n.a. n.a. 14.0 18.2 17.3 15.5 ANP growth (%) (AER) 22.1 9.1 23.9 10.7 7.9 14.9 14.3 13.0 VNB growth (%) (CER) n.a. n.a. n.a. n.a. 26.0 27.1 20.6 18.2 VNB growth (%) (AER) 39.7 27.5 25.4 23.8 19.1 22.8 17.0 15.1 Net investment yield (%) 5.0 4.8 4.8 4.7 4.6 4.4 4.3 4.2 Embedded Value growth (%) 10.1 15.3 7.7 9.9 2.8 6.2 5.5 8.2 Solvency ratio - Group (%) 311 353 433 427 428 438 439 439 Payout ratio (%) 31.8 19.0 23.3 22.4 40.0 50.0 50.0 50.0

Profit and loss (USDm) Year to 30 Nov 2011 2012 2013 2014 2015 2016E 2017E 2018E Net written prem. & policy fees 12,301 13,054 15,707 17,052 18,616 21,732 24,210 26,938 Net earned premiums 12,301 13,054 15,707 17,052 18,616 21,732 24,210 26,938 Net claims incurred (9,072) (13,374) (14,483) (16,804) (15,192) (17,589) (21,569) (23,659) Deferred policy acq. cost amort. 0 0 0 0 0 0 0 0 Underwriting & policy acq. cost (1,649) (1,641) (1,934) (2,139) (2,468) (2,853) (3,175) (3,542) G&A expenses (1,253) (1,340) (1,537) (1,636) (1,658) (1,828) (1,998) (2,184) P'holders' div. & profit particip. 0 0 0 0 0 0 0 0 Other underwriting inc./(exp.) (144) (207) (256) (346) (410) (439) (493) (555) Underwriting profit/(loss) 183 (3,508) (2,503) (3,873) (1,112) (977) (3,026) (3,001) Net investment inc./(exp.) 4,150 4,463 5,160 5,570 5,851 6,023 6,193 6,371 Net realised & unrealised gains/(losses) (2,177) 2,743 870 2,634 (1,389) (932) 1,873 1,961 on inv. Associates' profits 12 16 14 14 0 0 0 0 Other inc./(expenses) 0 0 0 0 0 0 0 0 Profit before tax 2,168 3,714 3,541 4,345 3,350 4,114 5,039 5,330 Tax (560) (685) (692) (877) (636) (757) (822) (872) Min. int./pref. div./others (8) (10) (25) (18) (23) (18) (30) (33) Net profit (reported) 1,600 3,019 2,824 3,450 2,691 3,339 4,187 4,426 Net profit (adjusted) 1,600 3,019 2,824 3,450 2,691 3,339 4,187 4,426 EPS (reported) (USD) 0.133 0.252 0.236 0.288 0.225 0.277 0.348 0.367 EPS (adjusted) (USD) 0.133 0.252 0.236 0.288 0.225 0.277 0.348 0.367 EPS (adjusted, fully-diluted)) (USD) 0.133 0.251 0.235 0.287 0.224 0.277 0.348 0.367 DPS (USD) 0.042 0.048 0.055 0.065 0.090 0.139 0.174 0.184 EV/share (USD) 2.262 2.608 2.808 3.085 3.170 3.367 3.552 3.845

Change (YoY %) and margins (%) Year to 30 Nov 2011 2012 2013 2014 2015 2016E 2017E 2018E Gross premium growth 11.9 6.8 20.6 9.4 8.5 12.5 11.4 11.2 Net premium growth 11.0 6.1 20.3 8.6 9.2 16.7 11.4 11.3 Net claims incurred n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Underwriting profit/(loss) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net investment income 16.7 7.5 15.6 7.9 5.0 2.9 2.8 2.9 Net profit (reported) (40.8) 88.7 (6.5) 22.2 (22.0) 24.1 25.4 5.7 Net profit (adjusted) (40.8) 88.7 (6.5) 22.2 (22.0) 24.1 25.4 5.7 EPS (reported) (40.7) 89.2 (6.3) 22.2 (22.0) 23.3 25.4 5.7 EPS (adjusted) (40.7) 89.2 (6.3) 22.2 (22.0) 23.3 25.4 5.7 EPS (adjusted, fully-diluted) (40.7) 89.1 (6.4) 22.1 (22.0) 23.6 25.4 5.7 DPS n.a. 12.9 14.9 17.6 39.5 54.0 25.4 5.7 EV/share 10.1 15.3 7.7 9.9 2.8 6.2 5.5 8.2 Underwriting margin (%) 1.5 (26.9) (15.9) (22.7) (6.0) (4.5) (12.5) (11.1) PBT margin (%) 17.6 28.5 22.5 25.5 18.0 18.9 20.8 19.8 Net-profit margin (%) 13.0 23.1 18.0 20.2 14.5 15.4 17.3 16.4 Source: FactSet, Daiwa forecasts

AIA Group (1299 HK): 15 July 2016

Financial summary continued … Balance sheet (USDm) As at 30 Nov 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & bank balances 4,303 2,948 2,316 1,835 1,992 2,092 2,196 2,306 Total investment 93,150 112,616 122,482 140,193 140,469 146,014 153,315 160,980 Loans and advances 0 0 0 0 0 0 0 0 Deferred acquisition costs 12,818 14,161 15,738 16,593 17,092 21,146 23,554 26,183 Investment in associates 61 91 93 131 137 151 166 182 Net fixed assets 359 412 480 541 500 560 627 702 Goodwill & other intangibles 276 272 1,321 2,152 1,834 1,834 1,834 1,834 Assets under management 0 0 0 0 0 0 0 0 Reins. recov. on unpaid losses 858 1,153 1,379 1,657 1,652 1,475 1,593 1,721 Receivables 0 0 0 0 0 0 0 0 Other assets 2,636 2,786 3,593 3,817 3,946 11,113 15,850 21,157 Total assets 114,461 134,439 147,402 166,919 167,622 184,384 199,135 215,066 Customer deposits 0 0 0 0 0 0 0 0 Technical reserves 87,112 99,439 112,134 121,034 122,986 131,368 141,576 152,893 Unearned premium reserves 0 0 0 0 0 0 0 0 Payables 0 0 0 0 0 0 0 0 Borrowing 559 766 1,950 2,934 3,195 3,515 3,866 4,253 Other liabilities 5,375 7,406 8,491 11,996 11,901 14,246 12,634 10,416 Total liabilities 93,046 107,611 122,575 135,964 138,082 149,129 158,076 167,561 Share capital 12,044 12,044 12,044 13,962 13,971 13,971 13,971 13,971 Reserves & others 9,269 14,653 12,638 16,844 15,430 21,127 26,900 33,313 Shareholders' equity 21,313 26,697 24,682 30,806 29,401 35,098 40,871 47,284 Minority interests 102 131 145 149 139 157 188 221 Total equity & liabilities 114,461 134,439 147,402 166,919 167,622 184,384 199,135 215,066

Key ratios (%) Year to 30 Nov 2011 2012 2013 2014 2015 2016E 2017E 2018E ROAE (adjusted) 7.8 12.6 11.0 12.4 8.9 10.4 11.0 10.0 Net earned premium/equity 57.7 48.9 63.6 55.4 63.3 61.9 59.2 57.0 Total investment return 4.4 6.7 4.9 6.0 4.1 3.7 5.6 5.5 Net debt to equity net cash net cash net cash 3.6 4.1 4.0 4.1 4.1 Effective tax rate 25.8 18.4 19.5 20.2 19.0 18.4 16.3 16.4 Dividend payout 31.8 19.0 23.3 22.4 40.0 50.0 50.0 50.0 Source: FactSet, Daiwa forecasts

Company profile

AIA Group is the largest listed Pan-Asia life insurance group, with a presence in 18 markets including Hong Kong, Thailand, Singapore, Malaysia, China and Korea. The company offers a range of products and services including life insurance, accident and health insurance and savings plans.

AIA Group (1299 HK): 15 July 2016

Summary of company and sector catalysts

We summarise below some of the key events that we believe could drive AIA’s share price over the next 12 months. Some are scheduled or regular events; others are unscheduled events that we think could be big determinants of AIA’s operating outlook.

AIA: company and sector catalysts over next 12 months Company level Sector / Macro level Timing Event What to watch Event What to watch Whether AIA Thailand is able to maintain its AIA China’s and AIA Thailand’s market share; AIA China’s premium growth Regular - monthly premium growth trend should be read together with its product mix / VNB margin VNB growth (CER) for AIA Group, whether AIA interim results AIA HK’s premium and VNB growth is 28 July 2016 announcement sustainable after Chinese regulators’ tightening in Feb/March 2016 HK insurance sector 2Q16 Aug 2016 AIA HK’s premium growth and breakdown data release AIA 3Q FY16 new business VNB growth (CER), qualitative operating Mid-Oct 2016 highlights trends in key markets HK insurance sector 3Q16 Nov 2016 AIA HK’s premium growth and breakdown data release Whether bond yields in AIA’s key markets 4Q16 Fed rate decision / outlook stop declining China expand / optimise its tax Whether AIA China is able to tap into this Late-2016 incentives for health insurance growing market products “New Year Sales” period for the Whether AIA would launch new products in Jan 2017 China life insurance industry addition to its “All-in-one” product HK insurance sector 2016 data Feb 2017 AIA HK’s premium growth and breakdown release VNB growth (CER), final dividend, Late Feb 2017 AIA FY16 results announcement redeployment in capital, potentially more . disclosure on “other markets” AIA 1Q FY17 new business VNB growth (CER), qualitative operating Late Apr 2017 highlights trends in key markets HK insurance sector 1Q17 May 2017 AIA HK’s premium growth and breakdown data release China’s regulatory tightening Sentiment likely to be dampened. But need Unscheduled / on overseas insurance to look at the details to determine the unpredictable timing purchase or capital control impact on AIA Capital repatriation from AIA Some mid-sized Chinese insurers showing Unscheduled / Korea / Exit from Korean interest in buying mid-sized Korean life unpredictable timing business insurers Unscheduled / Inorganic growth in ASEAN Thailand and India unpredictable timing Currency- or equity-market Unscheduled / Mainly China, Thailand, Malaysia, and movements in the economies unpredictable timing Singapore. Run sensitivity on AIA’s EV in which AIA operates Source: Company, Daiwa

AIA Group (1299 HK): 15 July 2016

AIA’s strategy: where, what and how?

Offering life insurance In our view, AIA articulates its overall strategy in the answers to the questions of where, protection through what and how, with its market strategy, distribution strategy and product strategy. And premier agency in these three questions summarize AIA’s overall strategy. developing Asia AIA: overall market, product and distribution strategy

Source: Company, Daiwa

Market strategy: tap growth of developing Asia and cash flow from developed Asia Where? Developing Asia In our view, AIA stands out for offering a combination of exposure in both developed and developing (including emerging) Asia. It derives around half of its ANP from developed Asia (mainly Hong Kong, Singapore and Korea), 42% from developing Asia (mainly Thailand, China and Malaysia), and the remainder from emerging Asia (mainly the Philippines and Indonesia).

Stability of developed markets plus growth in developing markets. On the one hand, while developed markets are highly penetrated and lack rapid growth, AIA’s exposure to developing and emerging markets looks to be delivering decent ANP and VNB growth. On the other hand, developed markets feature stable business environments and sustained cash flow, providing a cushion against market volatility and inherently greater regulatory risks in the developing markets where AIA operates.

AIA Group (1299 HK): 15 July 2016

Asia-Pacific life insurance: penetration, density and size of premiums (2015) Penetratioin(%) 20% Hong Kong

Singapore

15% Taiwan Australia

Korea 10% China

India 5% Thailand

Malaysia

0% New Zealand

Indonesia

-5% Density (USD) Vietnam (1,000) - 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Source: Sigma report Note: 1) Malaysia, India and Korea financial year ends in March, year ends for other countries in December, 2) the size of bubbles is based on the size of premiums in USD

Geographical exposure From a growth perspective, developing and emerging Asia contributes around half of AIA’s in developing and ANP and VNB, and we expect this to be the key driver for the long-term delivery of developed Asia is shareholder value through Embedded Value (EV). From a cash-flow and dividend complementary perspective, developed markets contributed c.53% of AIA’s total weighted premium income (TWPI) and c.55% of its EV in 2015, enabling it to offer a progressively higher dividend while sustaining a healthy financial position. In sum, we believe AIA’s market exposure should allow it to enjoy the stability of developed markets while tapping into growth in developing and emerging markets.

Asian regions in different stages of life insurance development: life premium penetration (2015) Life insurance penetration(%) 18% Developed Developing Emerging 16% 14% 12% 10% 8% 6% 4% 2% 0% TW HK KR SG AU TH MY IN CH PH ID NZ VN Source: Sigma report, Daiwa Note: 1) the classification of developed, developing and emerging markets is based on Daiwa’s definition, 2) Malaysia, India and Korea financial year ends in March, December year ends for other countries

Life insurance in developing and emerging Asia is relatively under-penetrated, especially in Thailand, Malaysia, India, China and Indonesia. All these markets have life insurance penetration rates of less than 4% and insurance density of less than USD350 in terms of premiums per capita. Given rising household incomes and awareness of insurance among consumers, we believe there is ample room for growth in penetration and density in these markets. At the same time, the lack of a social safety net for the population in emerging and developing markets also underpins the need for health and pension products. Conversely, in developed markets, the ageing population is driving life insurance penetration as individuals spend larger proportions of their wealth on protection and health.

AIA Group (1299 HK): 15 July 2016

Asian regions in different stages of life insurance development: life premium growth (2015) Life insurance premium growth (YoY %) 25% Developed Developing Emerging 20%

15%

10%

(5%)

(10%) TW HK KR SG AU TH MY IN CH PH ID NZ VN Source: Sigma report, Daiwa Note: 1) the classification of developed, developing and emerging markets is based on Daiwa’s definition, 2) Malaysia, India and Korea financial year ends in March, year ends for other countries in December, 3) premium growth based on local currency.

AIA: ANP mix by region (FY15) AIA: VNB mix by region (FY15) Others Others Korea 19% 11% 2% Hong Kong 32% Hong Kong 34% China Korea 15% 6%

China 11% Malaysia 7% Thailand Malaysia 13% 7% Singapore Singapore Thailand 12% 14% 17% Source: Company Source: Company Note: ANP represents 100% of annualised first year premiums and 10% of single premiums, before reinsurance ceded.

AIA: TWPI mix by region (FY15) AIA: EV mix by region (FY15) Others Hong Kong 16% Others, 24% Hong Kong , 26% 30%

Korea 10% Korea, 4%

China 10% Thailand China, 12% 17% Thailand, 16% Malaysia Malaysia, 5% 9% Singapore Singapore, 11% 12% Source: Company Source: Company Note: TWPI consists of 100% of renewal premiums, 100% of first year premiums Note: “Others” includes Other markets and Group Corporate Centre. and 10% of single premiums, before reinsurance ceded.

AIA Group (1299 HK): 15 July 2016

Product strategy: protection products that can enhance margins What? Production AIA has developed a comprehensive range of products designed to meet changing products customer needs for financial protection and efficient long-term regular savings. This focus on protection in its product strategy brought about a 4.9pp YoY increase in AIA’s VNB margin in FY15, with 2.7pp of the increase being driven by a positive shift in its product mix, according to the company.

Incrementally, we understand that in recent years, AIA has been increasing the sales of its VNB margin unit-linked products with protection riders with the goal of bolstering its VNB margin. enhancement likely due to positive shift in As AIA’s key markets feature low and in some cases declining interest rates (especially product mix Hong Kong, Singapore, Korea and Thailand), we believe there is growing consumer demand for unit-linked products, which offer potential upside from investment gains. However, unit-linked products themselves tend to be low-margin products for insurers. Hence, while it is pushing unit-linked products in some of its key markets, such as Malaysia, Thailand, and Singapore, AIA has been increasing the protection riders attached to these products in order to expand its VNB margin. We believe AIA’s strong distribution franchise is key to educating customers on the protection features (riders) of its products.

AIA: VNB margin improvement (FY15) AIA: ANP mix by products (FY15) 60% Others 12% Traditional 55% +2.2pp -0.7pp +0.7pp 54.0% protection +2.7pp 33% Unit-linked 49.1% 50% 19%

45%

40% 2014 VNB Product mix Geographical Channel mix Economic 2015 VNB margin mix and others assumption margin Participating changes 36% Source: Company Source: Company

AIA’s protection-focused product strategy also involves engaging customers through a wellness programme, AIA Vitality, whereby holders of selected AIA life and health policies are entitled to lower premiums as well as certain health bonuses. AIA Vitality uses the principles of behavioral economics to promote healthy habits, rewarding members with benefits and discounts to improve their health and well-being.

After the successful implementation of its existing programmes in Australia and Singapore, AIA Vitality was rolled out in Hong Kong and the Philippines in 2015, and most recently in Thailand (July 2016).

AIA: AIA Vitality programme AIA: broad-based wellness offerings

Source: Company Source: Company

AIA Group (1299 HK): 15 July 2016

Distribution strategy: Premier Agency How? Premier Agency We believe AIA’s distribution strategy is characterised by strong execution of its Premier Agency strategy, with company’s proprietary agency network at the heart of its distribution platform. This distribution strategy echoes its product strategy focused on protection products.

The agency channel dominates AIA’s distribution, especially for protection product sales. Some 64% of AIA’s ANP was delivered through this channel in FY15. AIA has a leading sales force of over 300,000 agents across the Asia Pacific region, and the company plans to recruit more highly educated people to join its sales force in developing and emerging markets such as China, Indonesia and Vietnam. This approach will enable AIA to tap long- term structural growth opportunities in developing and emerging markets, in our view.

High-quality agency Compared with local insurance peers in developing Asia, AIA has been more team targeting high-end selective in recruiting highly educated people to its sales force, and targeting higher-end customers, as domestic clientele, in our opinion. We believe it can target the high-end protection segment because insurance risk it has a diversified regional portfolio across more than 10 Asia-Pacific markets, ie, diversification is less insurance risk diversification is achieved at the group level rather than the country level. In important to AIA contrast, most of the local life insurers in developing markets have to reach a certain amount of premiums to ensure insurance risk diversification, which means they cannot pursue a strategy that focuses on the high-end protection segment.

The chart below shows AIA’s geographical diversification in terms of annual gross premiums compared with the major China life insurers.

AIA vs. major China life insurers: annual gross premium AIA: ANP distribution channel mix geographical comparison (FY15) (USDm) 100% 60,000 90% 80% 34% 36% 35% 37% 36% 50,000 70% 40,000 60% 50% 30,000 40% 20,000 30% 66% 64% 65% 63% 64% 20% 10,000 10% 0 0% AIA China Life Ping An Life China Pacific Life FY11 FY12 FY13 FY14 FY15 Hong Kong China Thailand Singapore Malaysia Korea Others Agency Partnerships

Source: Companies, Daiwa Source: Company, Daiwa estimates Note: "Others" is composed of Australia, Indonesia, New Zealand, Philippines, Sri Lanka, Note: Partnerships includes Bancassurance, IFA & brokerage, Direct marketing and others. Taiwan, and Vietnam

AIA Group (1299 HK): 15 July 2016

Geographical breakdown of portfolio across Asia Regional summary To get a snapshot of the key operating trends in AIA’s major markets, we summarise the ANP and VNB margin trends in each of major markets in the table below.

We expect AIA Hong Kong and AIA China to deliver the highest ANP volume growth in 2016-18, with AIA Thailand leading the way in VNB margin expansion. AIA is facing increased competition from bank-led insurers in a few ASEAN markets, as reflected in our conservative expectations of its volume growth in Thailand, Singapore and Malaysia. We expect AIA Korea to face continued challenges due to weaknesses in its agency force, which has been adversely affected by the regulatory changes.

AIA: summary of key metrics in major markets % of premium (FY15) % of VNB (FY15) ANP volume growth VNB margin

Hong Kong 32 34 + + flat China 11 15 + + + Thailand 13 17 - + + Singapore 12 14 - + Malaysia 7 7 + + Korea 6 2 - - -

Source: Company, Daiwa

As Hong Kong and China combined contributed 43% of AIA’s overall ANP and 49% overall VNB in FY15, and their contributions continue to rise, we believe AIA’s overall VNB momentum will be increasingly determined by operational trends in the Hong Kong and China markets.

AIA: ANP mix by region (FY15) AIA: ANP growth of key markets Others 120% 19% 100% Hong Kong 32% 80% 60% Korea 40% 6% 20% 0% China (20%) 11% (40%) Thailand (60%) Malaysia 13% Hong Kong Thailand Singapore Malaysia China Korea 7% Singapore FY12 FY13 FY14 FY15 12% Source: Company Source: Company Note: ANP represents 100% of annualised first year premiums and 10% of single premiums, Note: growth rate on AER basis. before reinsurance ceded.

AIA: VNB mix by region (FY15) AIA: VNB growth of key market Others 80% Korea 11% 2% 60% Hong Kong 40% 34% China 15% 20%

(20%) Malaysia 7% (40%) (60%) Hong Kong Thailand Singapore Malaysia China Korea Singapore Thailand FY12 FY13 FY14 FY15 14% 17% Source: Company Source: Company Note: growth rate on AER basis

AIA Group (1299 HK): 15 July 2016

AIA: ANP growth momentum comparison in key markets (FY15) AIA: TWPI growth momentum comparison in key markets (FY15)

Hong Kong Hong Kong

Korea Thailand Korea Thailand

China Singapore China Singapore

Malaysia Malaysia

Source: Company. Daiwa Source: Company. Daiwa Note: growth on AER basis. Note: growth on AER basis.

AIA: VNB growth momentum comparison in key markets (FY15) AIA: VNB margin trend comparison in key markets (FY15)

Hong Kong Hong Kong

Korea Thailand Korea Thailand

China Singapore China Singapore

Malaysia Malaysia

Source: Company. Daiwa Source: Company, Daiwa Note: growth on AER basis. Note: VNB trend refers to the VNB margin growth YoY in FY15 here.

AIA: OPAT growth momentum comparison in key markets (FY15) AIA: EV growth momentum comparison in key markets (FY15)

Hong Kong Hong Kong

Korea Thailand Korea Thailand

China Singapore China Singapore

Malaysia Malaysia

Source: Company, Daiwa Source: Company, Daiwa Note: growth on AER basis. Note: growth on AER basis.

AIA Group (1299 HK): 15 July 2016

Hong Kong: a city of 2 markets Hong Kong life insurance market: growth driven by Mainland visitors Hong Kong’s life The Hong Kong life insurance market is the sixth largest in Asia in terms of premiums. In insurance sector has 2015, premiums in the Hong Kong life insurance sector amounted to some USD41bn, with seen acceleration in penetration rate of 13.3% and density of USD5,655. With the highest life insurance premium growth in penetration rates and density in Asia, Hong Kong is regarded as a one of the most mature recent years life insurance markets in the world.

Despite its mature status, the insurance sector in Hong Kong has realised double-digit growth in premiums over the past 5 years, likely driven by the life insurance needs of Mainland visitors. Mainland visitors accounted for 24.2% of FYP in Hong Kong in 2015, and the proportion increased to 34.2% in 1Q16.

Hong Kong’s life insurance market is highly open and competitive, with the 2 largest players being Prudential and AIA. In 2015, Prudential accounted for 15% of direct new business premiums in the market, followed by AIA with 14%.

The past few quarters have shown a rise in Mainland visitors purchasing insurance from Hong Kong insurers. This trend has become a significant driver of the Hong Kong insurers’ ANP and VNB growth, and hence we believe AIA Hong Kong’s growth should be assessed separately, ie, in terms of the Mainland visitor and local resident segments.

Hong Kong: macro and life insurance market statistics Hong Kong life insurance sector: premiums and growth 2011 2012 2013 2014 2015 CAGR (2011-15) (HKDbn) GDP (HKDbn) 1,934 2,037 2,138 2,258 2,397 6.2% 550 50% 500 Population (m) 7.1 7.2 7.2 7.2 7.3 40% 450 GDP per capita (HKD) 273,549 284,720 297,462 311,834 328,508 5.4% 400 Premiums (HKDbn) 199 224 258 286* 320* 13.0% 30% 350 YoY (%) 14% 13% 15% 11% 12% 20% 300 Penetration (%) 10.3% 11.0% 12.1% 12.7% 13.3% 250 10% Density (USD) 3,622 4,042 4,624 5,090 5,655 200 150 0% 100 (10%) 50 0 (20%) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Premiums YoY (RHS)

Source: CEIC, HK OCI, Bloomberg, Daiwa Source: CEIC, HK OCI, Daiwa Note: *premiums in 2014 and 2015 are estimated from the HK OCI quarterly data. Note: premiums in 2014 and 2015 are estimated from the HK OCI quarterly data.

Hong Kong life insurance sector: market share by direct in-force Hong Kong life insurance sector: market share by direct new business (2015) business (2015) Others, 9% Others, 16% Prudential, 16% Prudential, 15% Manulife, 3% Transamerica Hang Seng, 4% Life, 3% FWD Life, 3% FWD Life, 5%

Hang Seng, 4% AIA, 15% Transamerica AIA, 14% Life, 5% AXA, 6% AXA, 5%

Manulife, 6% HSBC Life, 12% HSBC Life, 14% BOC Group Life BOC Group Life, , 12% 8% China Life, 11% China Life, 12%

Source: HK OIC, Daiwa Source: HK OIC, Daiwa Note: only include individual businesses. Note: only include individual businesses

AIA Group (1299 HK): 15 July 2016

AIA Hong Kong: well placed to seize Mainland visitor market Mainland buyers is main In 1Q16, mainland visitors accounted for 34.2% of new premiums sold in Hong Kong, growth driver. They buy according to data from Hong Kong’s Office of Commissioner of Insurance (HK OCI). As insurance in Hong Kong we see it, there are 4 major reasons for Mainland visitors to buy insurance products in for 4 reasons in our view Hong Kong:

1) Pricing competitiveness. (to be further elaborated below);

2) Conservative pricing regulations in China. The guarantee rate cap of 2.5% was only fully lifted in China in October 2015 for participating products, whereas in Hong Kong there is no explicit regulatory cap on the guarantee rate;

3) Global protection coverage and claim flexibility are offered by Hong Kong insurance products, whereas China insurance products, given their historical and legal limitations, sometimes provide narrower coverage in terms of jurisdiction;

4) Chinese investors’ search for USD assets. Some 98% of insurance policies sold in Hong Kong in 1Q16 were denominated in USD or HKD. We believe this is the key catalyst for the growth. (this point will also be elaborated further)

Hong Kong life insurance sector: individual FYP from mainland Hong Kong life insurance sector: individual FYP mix by visitors distribution channels (1Q16) 100% (HKDbn) 9% 9% 10% 1% 14 40% 23% 17% 25% 80% 42% 12 35% 12% 14% 10 30% 60% 16% 25% 89% 91% 89% 99% 55% 8 40% 20% 65% 69% 6 20% 42% 15% 20% 3% 1% 4 10% 0% 2 5% 0 0% FWDLife ChinaLife HSBCLife 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Manulife(Int'l) BOCGroup Life Individual FYP from mainland visitors AIAInternational

Prudential (HK) Life Agent Bancassurance Others % of indicidual FYP from mainland visitors as of total individual FYP (RHS) Hang Seng Insurance Source: HK OCI, Daiwa Source: HK OCI, Daiwa

Pricing competitiveness. We analyse 3 components in the pricing of a long-term life insurance product one by one: 1) risk premium (ie, expected claims), 2) expenses, and 3) investment return. First, insurance companies’ actuarial assumptions rely on morbidity and mortality tables for key demographics. Given that Hong Kong has a much longer life expectancy and lower morbidity rate for major illnesses than Mainland China, actuaries price in lower expected claims within a given period (note: the reverse is true for annuity products).

Second, the sales expense per policy is lower in Hong Kong than China, as Hong Kong is typified by relatively mature customer knowledge and less moral hazard. Also, the operating expense in Hong Kong is lower due to the city’s high insurance density and limited geographic spread, as well as its greater managerial and technological efficiency (the number of back-office staff vs. sales staff is much lower in Hong Kong). Finally, on investment returns, Hong Kong and China insurers have similar investment yield expectations.

Hong Kong insurance products are a reasonable asset class for Mainland investors seeking USD assets, in our view. Given the limited history of Chinese residents being able to invest abroad (and their even limited interest in investing abroad in the past, given the sustained expectation of CNY appreciation that persisted for a decade until 2015), most asset classes and jurisdictions are unexplored territories for Mainland residents.

AIA Group (1299 HK): 15 July 2016

From an asset class perspective, fixed-income assets seems to be a good choice, as they seldom see big price volatility and typically require little due diligence compared with equities or derivatives or property. For most investors, the investment threshold for fixed income, if through an indirect investment, is lower than property or project investments. From a jurisdictional perspective, Hong Kong is naturally the most familiar overseas investment for Mainland Chinese, given all the geographic, economic, and cultural factors. All of these factors can put Hong Kong insurance products into the shopping carts of Mainland Chinese who are eagerly searching for overseas assets in which to park their funds. We see multi-year growth in this market being CNY exchange rate expectation should be the catalyst. We believe that while the driven by diversification trend of Mainland consumers purchasing Hong Kong insurance products is likely to of asset allocation from persist for many years, monthly/quarterly growth rates will be catalysed by sudden Chinese residents, fuelled rapid depreciations of CNY. in the short term by CNY depreciation expectations On the one hand, on a long-term view, we think the rising demand for a diversification of asset allocation by China’s rising affluent class is irreversible. On the other hand, as we expect multi-year CNY depreciation (against the USD), the pace of overseas/USD- denominated asset allocation could be stimulated by the short-term pace of CNY depreciation over weeks or even days.

Hong Kong life insurance sector: Individual FYP from Mainland Hong Kong life insurance sector: growth of new business from visitors vs. exchange rate Mainland visitors vs. exchange rate (HKDbn) 80% 6.6 20 6.6 6.5 60% 6.5 6.4 40% 15 6.4 6.3 6.3 20% 6.2 10 6.2 6.1 0% 6.1 6 -20% 5 6 5.9 5.9 -40% 5.8 0 5.8 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 QoQ growth of new premiums purchased by mainland visitors in HK Individual new premium from mainland visitors USD/CNY exchange rate (RHS) USD/CNY exchange rate (RHS) Source: Hong Kong Office of Commissioner of Insurance, Bloomberg, Daiwa Source: Hong Kong Office of Commissioner of Insurance, Bloomberg, Daiwa

AIA Hong Kong: analysis of regulatory tightening from China China regulators on the Since February 2016, various regulators in China have made a series of tightening moves watch aimed at Mainland visitors buying insurance in Hong Kong. The most notable of these moves are the Unionpay restriction (announced on 4 February) and the “All in Pay” restriction (announced on 12 March).

Union Pay restriction on premium payment for Hong Kong insurance Date Details Our remarks 4 Feb 2016 Payment through Unionpay for overseas insurance capped at USD5,000 per transaction. No daily This was a clarification of a previous regulation or interpreted as limit on the number of transactions. signalling a tougher enforcement. Previously, overseas insurance purchases were not clearly defined under the capital account or current account, but in reality they were treated as current account transactions and hence no payment limits were enforced. 12 March 2016 Payment through "All in Pay"(通联支付), an electronic payment platform for cross border payment, Payments made through the “All in Pay” system as a proportion of all is prohibited for investment-type participating insurance products overseas. Payment through “All in cross-border insurance payments from China to Hong Kong are less Pay” for short-term accident and medical insurance is capped at CNY30,000. than 2%, according to major Hong Kong insurers. 22 April 2016 CIRC published a notice highlighting 4 risks of Mainland residents purchasing insurance in Hong This was a reminder from the regulator on the general insurance and Kong. legal risks involved in dealing with insurance contracts and overseas contracts. 19 May 2016 The Hong Kong Office of the Commissioner of Insurance said that Mainland residents buying A reminder from the local regulator on risk to avoid mis-selling. insurance products in Hong Kong are required to sign an acknowledgement on the differences in insurance products between China and Hong Kong. 13 June 2016 CIRC sent teams to AIA’s Beijing branch and other JV insurance firms to investigate allegations of Offshore insurance products have never been permitted to be sold illegal selling of overseas insurance policies onshore. onshore. Source: local news reports, Daiwa

AIA Group (1299 HK): 15 July 2016

Less than 1% of AIA Hong Kong’s ANP involve a per-transaction amount of more than USD5,000. AIA Hong Kong derives around 35% of its ANP from Mainland visitors, according to management. Of this proportion, around 90% are regular-premium products. Within the remaining 10% single-premium products, around 80% involve payment amounts of no more than USD5,000, the single-transaction limit since 4 February 2016.

The actual impact of Indeed, according to our on-the-ground checks, the premium size of most single-premium regulatory tightening so products is USD10-100k. Hence, a customer can easily make the payment using multiple far is insignificant… (2-20) transactions through Unionpay. For large single-premium payments, most customers already have offshore bank accounts. Moreover, coming to Hong Kong to make the payment is an insignificant issue for them, as they are keen to allocate their assets overseas.

… though headlines Our view on the regulatory stance: more capital controls when capital outflows could hurt investor accelerate. Although we Mainlanders’ purchase of Hong Kong insurance products is sentiment so far largely unaffected by the above-mentioned tightening, we think these regulatory moves suggest a more conservative attitude and that the regulators have started to make a joint effort to control cross-border capital flows through the purchase of offshore insurance products.

For example, when the 4 February 2016 restriction was introduced, the market soon realised that online payments were not being regulated and that this was a loophole. Then another regulation was announced a month later targeting that loophole.

We believe more restrictions to curb capital outflows are likely, especially if the CNY exchange rate becomes volatile and the amount of capital outflow becomes larger than expected in a short period of time. Further regulatory headwinds could depress Mainland-driven premium growth.

Every time CNY Overall, we expect Mainland purchases to remain as a sustained premium growth depreciation concerns catalyst over the next few years. Every time there are renewed concerns in the are reignited, we are markets of CNY depreciation, we are likely to see AIA Hong Kong’s premiums likely to see AIA Hong suddenly rising for a few weeks after. And once the regulators see an acceleration in Kong’s premiums being capital outflows through this channel, further moves to tighten capital flows are likely a suddenly fuelled for a few weeks later. few weeks after AIA Hong Kong: increasing protection penetration in the local market Illness protection for the aging population. As a developed economy with a rapidly ageing population, Hong Kong’s demand for protection, in the form of critical illness insurance products, is still far from saturation. AIA sells long-term savings and protection products to meet such demand. Around 90% of AIA Hong Kong’s new business is in the form of regular-premium products with payment terms of at least 5 years. This is in contrast to the local market average, where short-term products make up more than half of the regular-premium business. Even before Mainland visitors started buying more products in 2015, AIA Hong Kong saw more than 20% YoY ANP growth in both 2013 and 2014. With a stronger focus on product margins in 2014, its higher proportion of critical illness product sales helped to lift the VNB margin.

Agency force quality gives AIA Hong Kong a major competitive edge. Selling high- margin critical illness products requires an efficient and well-educated salesforce. On the distribution side, AIA Hong Kong is seeking to improve the quality of new recruits and drive the productivity of existing agents through its Premier Agency strategy. It is targeting high- potential and well-educated young agents. These agents receive structured training combined with new business incentives such as commissions to boost productivity. In FY15, the number of AIA Hong Kong’s active new agents rose by 21% YoY and its active agent productivity rose by 21% YoY.

AIA Group (1299 HK): 15 July 2016

We expect AIA’s illness-protection-focused product strategy in Hong Kong to provide VNB margin upside, while its products catering to the demands of Mainland visitors should provide additional ANP growth, albeit at a slightly lower VNB margin. Hence, overall we forecast AIA Hong Kong’s VNB margin to be flat YoY and its ANP to grow by 21-40% over FY16-18, translating into 21-40% VNB growth over the same period. In 1Q16, AIA Hong Kong saw 64% YoY new business premium growth, based on data from Hong Kong’s Office of the Commissioner of Insurance (HK OCI).

AIA Hong Kong: VNB and growth AIA Hong Kong: VNB margin 63% (USDm) 62.3% 62.0% 600 70% 62% 60% 500 61% 50% 400 40% 60% 30% 59% 58.4% 300 20% 57.6% 58% 200 10% 0% 57% 56.1% 100 (10%) 56% 0 (20%) 55% 54%

1H FY111H FY112H FY121H FY122H FY131H FY132H FY141H FY14 2H FY151H FY152H 53% VNB YoY (RHS) FY11 FY12 FY13 FY14 FY15 Source: Company, Daiwa Source: Company Note: 1) half year end in May and November; 2) growth on AER basis

AIA Group (1299 HK): 15 July 2016

China: commitment to premier agency model China life insurance market: an emerging sector in China China is the fourth- The China life insurance market is the second-largest in Asia and the fourth-largest in the largest life insurance world. Life insurance premiums reached approximately USD250bn in 2015. However, in market in the world and 2015 its life insurance penetration was only 2.4% and density was only USD183, has been witnessing a suggesting significant growth potential. premium growth turnaround since 2015 We believe the China life insurance sector could see continuing rapid premium and VNB growth in the following years, due to, in the long run: 1) supportive government policy, 2) the country’s low life insurance penetration and density, 3) demographic changes with a growing ageing population; and in the near term, 4) strong agency force and productivity growth, and 5) the weaker relative attractiveness of competitive products, such as wealth management products (WMPs) and trusts (for more on our view on the sector, see A new dawn).

China’s life insurance market is mainly dominated by domestic insurers such as China Life, Ping An Life, China Pacific Life and New China Life. Foreign/JV life insurers in China accounted only for a 6.2% market share in terms of gross premiums in 2015. In 2015, AIA was the largest 100% foreign-owned life insurer and the second-largest foreign/JV life insurer in terms of premiums in China, with a 13% market share among the foreign/JV life insurers’ gross premium income. In 6M FY16, AIA China saw 25% gross premium growth, according to CIRC data.

China: macro and life insurance market statistics China life insurance sector: market share by gross premiums (2015) CAGR 2011 2012 2013 2014 2015 (2011-15) Others China Life GDP (CNYbn) 48,086 53,475 58,974 64,080 67,671 10.7% 24% 23% Population (m) 1,344 1,351 1,357 1,364 1,371

GDP per capita (CNY) 35,775 39,590 43,447 46,970 49,364 10.2% Premiums (CNYbn) 972 1,016 1,101 1,303 1,629 8.9% Sunshine Life YoY (%) -9% 4% 8% 18% 25% 2%

Penetration (%) 2.0% 1.9% 1.9% 2.0% 2.4% Anbang Life Density (USD) 115 121 134 154 183 3% Ping An Life

Taikang Life 13% 5% Funde Sino Life 5% New China Life Taiping Life 7% 5% PICC Life CPIC Life 6% 7% Source: CEIC, National Bureau of Statistics of PRC, Daiwa Source: CIRC, Daiwa

AIA’s status as the only AIA China: leader in agency model wholly owned foreign The only 100% foreign-owned life insurer in China. AIA China is currently the only insurer in China means it wholly owned foreign life insurer operating in China. It currently has 5 provincial-level can smoothly execute its branch licences, in Beijing, Guangdong, Shanghai, Shenzhen and Jiangsu. It appears to strategy, but this might us that, on the one hand, AIA is reluctant to open more branches as customer demand is be a constraint on already sufficient for the company (we understand that these 5 branches cover around geographical expansion one-third of the life insurance premiums in China), but on the other hand, the local regulator’s cautious attitude towards foreign insurers has also contributed to this limited number. AIA has not opened any new branches in the past 14 years since it upgraded its Jiangsu sub-branch to branch status in 2002.

AIA Group (1299 HK): 15 July 2016

China life insurance sector: market share by gross premiums of AIA China: VNB margin the foreign/JV insurers (2015) 90% 83.1% 83.5% BOC- 80% SAMSUNG Life ICBC-AXA Life 66.4% 3% Others 24% 70% 17% Manulife- 57.5% Sinochem 60% 4% 47.2% 50% BoComm Life 4% 40% AIA Aviva-Cofco 30% 4% 13% 20% Citic-Prudential 6% 10% Metlife Generali China Cigna&CMB 0% 8% 9% 8% FY11 FY12 FY13 FY14 FY15 Source: CIRC, Daiwa Source: Company

Successful execution of strategy in existing markets. We think AIA China’s operation can be characterised by the consistent execution of a protection-focused (and VNB- margin-focused) product strategy, delivered through high-quality insurance agents. AIA China combines selective recruitment with strict validation standards, residential induction programmes and recruitment-focused training for agency leaders, to increase the number of new recruits.

Average monthly income Its focus on quality recruitment and training nurtures a productive team of agents, and of AIA China’s agents is these agents in turn earn higher-than-peers compensation. According to AIA, the average more than 3 times that of monthly income of its agents in China was CNY5,865 in 2014. We estimate that the an average life insurance average monthly income of life insurance agents in China was around CNY1,800 in 2014, agent in the country based on data from the Insurance Association of China.

In a developing market such as China’s, AIA’s strong brand name is not only a critical factor to influence customer’s purchasing decisions, but also a key factor in attracting high- quality agents, which helps to strengthen AIA’s distribution. Such a virtuous cycle has been fuelling AIA’s sustainable VNB growth in China, in our view.

On the product side, the past few years have seen AIA China putting more focus on critical-illness products, which usually means high VNB margins. This has been reflected in rising VNB margins, which climbed to 83.5% in FY15. Albeit off a high base, we expect AIA China’s VNB margin to see mild expansion going forward given its strengthening focus on high-margin products.

Premium volume growth riding on the wave of a sector turnaround. Similar to the sector trend, AIA China recorded 33% YoY growth in active agent headcount in FY15, which bodes well for ANP growth in FY16. AIA China saw 25% YoY gross premium growth for 6M FY16, according to CIRC data. Its “all-in-one” (全佑) critical illness product has been its key product since 2H FY15. The product offers comprehensive coverage for the middle- income group. The annual premium for this product is around CNY60,000.

Operating efficiency used to be low, given the special operating model. AIA is the only foreign insurer in China to own its business 100%. In order to avoid contravening local regulations, each of AIA China’s 5 branches is financially independent, which has resulted in low operating efficiency. We believe this is one of the key reasons why AIA China’s operating expense ratio used to be much higher than that for all the other key markets it operates in, and also higher than that for its major China peers.

AIA Group (1299 HK): 15 July 2016

AIA China: expense ratios AIA China: VNB and growth (USDm) (USDm) 3,000 17.8% 20% 200 70% 16.2% 60% 2,500 150 50% 13.6% 15% 12.4% 12.1% 11.0% 40% 2,000 11.8% 30% 100 1,500 10% 20% 10% 1,000 50 0% 5% (10%) 500 0 (20%)

0 0%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY111H FY112H FY121H FY122H FY131H FY132H FY141H FY14 2H FY151H FY152H TWPI Expense ratios (RHS) VNB YoY (RHS)

Source: Company Source: Company, Daiwa Note: 1) half year end in May and November; 2) growth on AER basis

AIA China: competition intensifying Competition in agency channel from domestic competitors. AIA introduced the agency insurance model to China when the sector was in its primitive stages in 1992. And its leading position in terms of agent quality and VNB margin has largely been unchallenged by domestic peers over the past 2 decades.

Over most of the past 2 decades, AIA China has been focused on its own strategy, namely quality and VNB margin, while its domestic competitors have chosen scale over margins when there were significant growth opportunities in the industry. For the China life insurers that were in the early stages of development, a larger scale of in- force business not only provided the opportunity to earn an investment spread, but also helped them accumulate relevant data and build up their experience in operating a life insurance business.

This situation started to change gradually since 2011, when China Pacific Life announced a strategic shift from premium volume to value creation (ie. VNB growth), and was soon followed by Ping An Life.

We see rising Currently, most of the listed China life insurers are paying more attention to VNB competition from local generation rather than premium growth. We believe such a shift in KPIs is the peers in the agency combined result of: 1) large China insurers having already reached scale efficiency in channel as large China their operations so they are now putting less emphasis on premium growth, 2) they insurers are also trying having already accumulated a sufficiently large investment book after 2 decades of to improve VNB margins rapid growth, 3) a low-yield environment, which is putting pressure on the china life insurers new-money yield, which is dragging down the yield of overall investment assets, and 4) favourable government policies encouraging protection products.

In terms of distribution channels, such a strategic shift in KPIs is reflected in channel- mix shifts from bancassurance to the agency channel. Most of the large China insurers nowadays allocate more resources to the recruitment of new agents and training existing agents. The successful experiences of the foreign players, AIA in particular, have long been a model for the China houses to learn from.

While on the bancassurance front, though the China market is still growing rapidly, the large insurers have been retreating in this channel (ie, lower or even negative YoY annual premiums and lower market share) and giving way to a few medium-sized insurers that appear to be keen to see premium growth, such as Anbang Life (not listed), Foresea Life (not listed), Sunshine Life (not listed), and Funde Sino Life (not listed). Most of the large China life insurance companies nowadays derive around 90% of their premiums from the agency channel.

AIA Group (1299 HK): 15 July 2016

In the near term, the The improvement in the quality of the major China insurers’ agency forces is reflected market is still big in their productivity and income. Notably, Ping An Life’s agent productivity (in terms of enough to absorb most agency regular FYP) improved over 50% between 2010 and 2015. The average of the competition, but in monthly base salary of Ping An Life’s agents also more than doubled over this period, the long term local reaching c.CNY3,400, on our estimates. competitors have an edge

Ping An Life: premium mix by channel Ping An Life: monthly productivity and agent income 100% 5% 5% 5% 5% 6% (CNY) 90% 13% 10% 7% 8% 6% 7,000 80% 6,000 70% 5,000 60% 50% 4,000 88% 87% 88% 40% 83% 85% 3,000 30% 2,000 20% 1,000 10% 0% 0 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Individual Bancassurance Group Agent income Productivity

Source: Company, Daiwa Source: Daiwa estimates Note: productivity is regular FYP per capita per month

AIA Group (1299 HK): 15 July 2016

Thailand: resilient margin despite losing market share Thailand is the eighth-largest life insurance market in Asia. In 2015, life insurance premiums in Thailand amounted to around USD15bn, leading to a penetration rate of 3.9% and density of its life insurance of USD218.

The life insurance sector saw a premium CAGR of c.12% over 2006-15. We note that the sector’s life insurance premium growth dropped from 13% YoY in 2013 and 2014 to 7% YoY in 2015, and 1Q16 saw only 6% YoY growth. We believe the major reasons for the slowdown in premium growth are the previous political instability and the current weakening macroeconomic growth, which lowered customer purchasing power. Thailand’s GDP growth slowed to 3.1% YoY in 2015 and 3.2% in 1Q16 (from a 6.8% CAGR in 2011-14).

Despite current soft premium growth, Thailand is still one of the developing insurance markets in Asia. And its ageing population and low life insurance density could still boost the growth of its life insurance sector.

Thailand: life insurance market statistics Thailand life insurance sector: premium growth CAGR (THBbn) 2011 2012 2013 2014 2015 (2011-15) 800 20% GDP (THBbn) 10,539 12,349 12,902 13,132 13,538 6.0% 700 Population (m) 67 67 67 68 68 600 15% GDP per capita (THB) 157,533 183,863 191,271 193,902 199,201 5.6% Premiums (THBbn) 329 390 441 499 533 12.5% 500 YoY (%) 11% 19% 13% 13% 7% 400 10%

Penetration (%) 3.1% 3.2% 3.4% 3.8% 3.9% 300 Density (USD) 156 190 200 224 218 200 5% 100 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Gross life insurance premiums YoY (RHS)

Source: CEIC, Bloomberg, Daiwa Source: CEIC, Daiwa

The country has 24 registered life insurers, of which there are 13 foreign insurers. Combined market share (by total premiums) of the top 5 life insurers in Thailand was 71% in 2015. AIA, with the largest market share in terms of gross premiums, accounted for a 22.2% share of the market in 2015, followed by Muang Thai Life (16.3%) and Thai Life (12.7%).

Thailand life insurance sector: market share by total premiums Thailand life insurance sector: market share by new business (2015) premiums (2015) OLIC Others Others DLA AIA FWD 2.6% 5.9% 2.2% 9.0% PLT AIA 15.3% 3.2% FWD 3.2% 22.2% AZAY 3.7% AZAY 3.7% 5.4% PLT 4.8% BLA 8.3% MTL BLA 22.1% MTL 7.9% 16.3% SCB Life KTAL KTAL TLI 9.9% TLI 10.7% 10.2% 12.7% SCB Life 10.3% 10.2%

Source: The Thai Life Assurance Association, Daiwa Source: The Thai Life Assurance Association, Daiwa Note: MTL: Muang Thai Life; TLI: Thai Life; KTAL: Krungthai AXA Life; SCB Life: Siam Note: MTL: Muang Thai Life; TLI: Thai Life; KTAL: Krungthai AXA Life; SCB Life: Siam Commercial Bank Life; BLA: Bangkok Life; AZAY: Allianz Ayudhya Assurance Public; PLT: Commercial Bank Life; BLA: Bangkok Life; AZAY: Allianz Ayudhya Assurance Public; PLT: Prudential Life; OLIC: Ocean Life. Prudential Life; OLIC: Ocean Life.

AIA Group (1299 HK): 15 July 2016

AIA Thailand: VNB margin expansion vs. muted premium growth momentum AIA is the largest life insurance company in Thailand. AIA Thailand saw its VNB margin rise by 12.6pp on a CER basis to 75.8% in 2015, likely the result of: 1) a high-quality product mix shift, and 2) over 96% of new business premium contributions being derived from regular premium products, the VNB margin for which is usually higher for single-premium products.

AIA Thailand’s VNB Margin upside from unit-linked products with protection riders. As a backdrop to the margin should see low interest rate environment, the life insurance sector in Thailand has seen a boom in upside on improved unit-linked products with protection riders, as this kind of long-term saving product offers product mix and insurers flexibility, and is less capital-intensive and with less negative spread risks. We corporate tax rate cut understand that the VNB margin of this kind of product is high because of the high protection level embedded into such products. We believe AIA has been well prepared for this trend. The number of licensed AIA agents qualified to distribute unit-linked products increased by 77% YoY in 2015, accounting for c.80% of the total number of industry agents licensed to distribute these products in Thailand. AIA’s VNB for its unit-linked business more than doubled YoY in Thailand in 2015.

Margin upside from corporate income tax break. In addition, the Thailand government announced that the corporate tax rate would stay at low level of 20% from 1 January 2016. This should bode well for AIA Thailand’s VNB margin expansion in 2016.

AIA Thailand: key operational data AIA Thailand: VNB margin (USDm) 2011 2012 2013 2014 2015 CAGR (2011-15) 80% 75.8% TWPI 2,976 3,119 3,364 3,334 3,324 3.9% ANP 465 532 565 572 520 4.4% 70% 63.2% VNB 227 287 319 361 395 17.8% VNB margin 48.8% 53.9% 56.3% 63.2% 75.8% 60% 56.3% 53.9% Operating profit 395 471 528 544 551 4.1% after tax 48.8% 50% 41.4% 40%

30%

20% FY10 FY11 FY12 FY13 FY14 FY15 Source: Company Source: Company

However, AIA Thailand’s top-line growth has overshadowed its VNB growth. AIA Thailand’s VNB grew by 9% YoY on an AER basis vs.19% YoY for the AIA Group in FY15. Despite the significant VNB margin improvement, the VNB growth of AIA Thailand was less exciting last year due to the slowing top-line growth of the past few years. AIA Thailand’s ANP declined by 9% AER YoY in FY15. We think its top-line growth, especially its new business volume growth, could see pressure in FY16.

AIA Thailand: ANP and growth AIA Thailand: 12-month rolling FYP growth (Bahybn) (USDm) 14% 26 0% 1,200 15% 11% 26 (1%) 1,000 6% 10% 26 26 (2%) 800 1% 5% 26 (3%) 600 0% 25 25 (4%) 400 -9% (5%) 25 200 (10%) (5%) 25 0 (15%) 25 (6%) FY11 FY12 FY13 FY14 FY15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 ANP YoY (RHS) 12M rolling FYP YoY (RHS)

Source: Company Source: The Thai Life Assurance Association, Daiwa Note: YoY growth is on an AER basis

AIA Group (1299 HK): 15 July 2016

ANP growth could be Market share losses. In addition to the sector-wide premium growth slowdown, we see challenged by growing AIA Thailand’s leading position being challenged by a few bank-led life insurers now. AIA competition, mainly from has been the largest player in Thailand’s life insurance market in terms of gross premiums bank-led local insurers for the past 10 years. Currently, Thailand’s life insurance market is witnessing increasing competition from aggressive bank-led insurers, such as Muang Thai Life (MTL) (not listed) and Krungthai AXA Life (KTAL) (not listed). AIA’s new premium market share dropped from 19.8% in 2011 to 15.3% in 2015, while MTL’s increased from 16.6% in 2011 to 22.1% in 2015. In 4M15, AIA’s new premium market share decline to 14.5%, with its 12- month rolling premium growth entering negative territory.

AIA Thailand disadvantaged in partnership distribution channel and by low-rate environment. We understand that the company’s agency channel is the major distribution channel for AIA in Thailand, accounting for more than 90% of its total premiums in 2015. In contrast, more than 70% of MTL’s premium income was derived from its bancassurance channel. In 1Q16, the bancassurance channel accounted for 48% of Thailand’s total life premiums, while the agency channel accounted for 45%. This is the first time that the bancassurance channel took over from the agency channel as the major distribution channel in Thailand.

We think bank-led insurers have a competitive edge as: 1) the banks have their own customers and have a distribution advantage because they have much more frequent interactions with customers, 2) banks also control the fund flows of these customers, 3) banks usually have higher cost efficiency due to the scale of their operations, and 4) a low interest rate environment increases demand for savings-replacement products, which banks sell better than do insurers.

The local banks also have the motivation to allocate more resources to their insurance business in their domestic markets. If interest rates decline further, local bank NIMs could be squeezed. Hence, they have to find a way to grow their non-interest-income businesses.

We expect AIA Thailand’s VNB margin to hold up at the expense of smaller market share and slower ANP growth. In 5M16, it saw new business premium growth of -6.6% YoY.

Thailand life insurance sector: market share in new premiums Thailand life insurance sector: gross premium by channel 30% 70%

25% 60%

20% 50%

15% 40%

10% 30%

5% 20%

0% 10% 2011 2012 2013 2014 2015 1Q16 0% AIA MTL TLI 2011 2012 2013 2014 2015 1Q16 BLA KTAL SCB Life Agency Bancassurance Others PLT

Source: The Thai Life Assurance Association Source: The Thai Life Assurance Association Note: MTL: Muang Thai Life; TLI: Thai Life; BLA: Bangkok Life; SCB Life: Siam Commercial Bank Life; KTAL: Krungthai AXA Life; PLT: Prudential Life

AIA Group (1299 HK): 15 July 2016

Singapore: VNB margin is key Singapore life insurance: a developed market with stable growth The Singapore life Singapore’s life insurance market is the seventh-largest in Asia in terms of premiums. In insurance market is 2014, the island’s life insurance premiums amounted to approximately USD15bn, vs. developed, with stable USD14bn in 2013. As a developed life insurance market, Singapore’s life insurance growth penetration was 5.0% and density was USD2,717 in 2014.

Despite its high insurance density, we believe the Singapore life insurance market is still poised for stable premium growth due to its high (and ultra-high) personal wealth, rapidly ageing population, and the widening uncovered protection gap (the difference between a person’s income to maintain one’s standard of living and his or her savings/life insurance). According to Swiss Re’s report, the mortality protection gap in Singapore was USD402bn in 2014, a CAGR of 9% in 2004-14.

AIA is the biggest life The life insurance market is highly concentrated in Singapore. Though a total of 21 life insurer in Singapore insurers are registered in Singapore, the top-5 players accounted for a 76% combined share of the market in 2014. AIA, with a 22% share of the market in terms of premiums, was the largest player in 2014.

Singapore: macro and life insurance market statistics Singapore: life insurers market share (2014) CAGR AXA Life Others 2010 2011 2012 2013 2014 (2010-14) Manulife HSBC 2% 5% GDP (SGDbn) 322 346 362 378 390 6.9% 3% AIA 4% Population (m) 5.1 5.2 5.3 5.4 5.5 22% OAC GDP per capita (SGD) 63,498 66,816 68,204 70,048 71,318 4.9% 5% Premiums (SGDm) 12,740 14,587 15,488 17,813 19,694 10.4% Tokio Marine YoY (%) 6% 14% 6% 15% 11% Life Penetration (%) 4.0% 4.2% 4.3% 4.7% 5.0% 5% Density (USD) 1,955 2,170 2,387 2,613 2,717 AVIVA 7% Prudential 20% NTUC Great Eastern 10% 17%

Source: CEIC, Sigma reports, Bloomberg, Daiwa Source: MAS, Daiwa

AIA Singapore: VNB margin improvement is the key to VNB growth Having established itself in Singapore in 1931, AIA is now the biggest life insurer on the island. AIA Singapore accounted for 14% of AIA’s total VNB in 2015, the fourth-largest VNB contributor for the company.

Product-mix improvement driving VNB margin upside. In 2015, AIA Singapore recorded 24% YoY VNB growth (CER), with a decent VNB margin of 72.4% (2014: 61.2%), despite a slowdown in premium growth. We understand that AIA continued to improve its product mix with more protection-type products in 2015, which lifted the VNB margin by 11pp YoY in 2015. It cut the bonus on single-premium products in 2015, leading to a slowdown in single-premium growth. We see the VNB margin as the key driver of VNB growth in AIA Singapore.

AIA Singapore: key operating data (USD m) 2011 2012 2013 2014 2015 CAGR (2011-15) Total weighted premium income (TWPI) 1,949 2,035 2,150 2,339 2,283 6.2% Annualized new premium (ANP) 264 339 400 489 471 17.5% VNB 164 220 269 299 341 26.8% VNB margin 62.3% 65.1% 67.3% 61.2% 72.4% Operating profit after tax 336 345 396 429 430 5.7%

Source: Company

AIA Group (1299 HK): 15 July 2016

Volume growth Volume growth challenged due to weak equity market. We understand that AIA challenged due to Singapore’s high VNB margin is attributable to both the protection riders on its unit-linked bancassurance and products and standalone protection products. While we are comfortable with its VNB weak equity market margin, we think its volume growth might be weak in FY16. Given the weak equity market, there has been little appetite for unit-linked products recently.

Bancassurance competition intensifying. The importance of the bancassurance channel has been growing in Singapore in recent years. The bancassurance channel accounted for 37% of new business for the Singapore life insurance sector in 2015, compared with 36% in 2014 and 34% in 2013. And competition in the bancassurance channel is becoming more intense in Singapore. A few bancassurance alliances have been established in Singapore in recent years, for example, AIA and Citigroup, Prudential and Standard Chartered, Great Eastern with ICBC, and Manulife with DBS. All of these arrangements are exclusive.

Agency channel high- Agency is the key channel for AIA Singapore. The agency channel is still the major margin products are the distribution channel for AIA Singapore. In 2015, AIA Singapore saw the number of its key to driving AIA Million Dollar Round Table (MDRT) qualifiers grow by 17% YoY, and these are agents with Singapore’s VNB significantly high productivity. In addition, AIA’s special Vitality programme is helping it differentiate itself from its competitors and enhance its customer relationships, and hence VNB growth. AIA saw excellent VNB growth of 43% YoY in FY15 from products that are tied into the Vitality Wellness programme.

AIA Singapore: VNB and growth AIA Singapore: VNB margin (USDm) 74% 72.4% 300 60% 72% 50% 250 70% 40% 67.3% 68% 200 30% 65.1% 150 20% 66% 64% 100 10% 62.3% 61.2% 0% 62% 50 (10%) 60% 0 (20%) 58% 56%

1H FY111H FY112H FY121H FY122H FY131H FY13 2H FY141H FY142H FY151H FY152H 54% VNB YoY (RHS) FY11 FY12 FY13 FY14 FY15 Source: Company, Daiwa Source: Company Note: 1) half year end in May and November; 2) growth on an AER basis

AIA Group (1299 HK): 15 July 2016

Malaysia: margin upside from product mix optimisation Malaysia life insurance: Takaful insurance growing rapidly As the ninth-largest life insurance market in Asia, Malaysia’s life insurance market delivered premiums of approximately USD7bn in 2015, with respective penetration of 2.6% and density of USD229. We see several factors suggesting long-term growth potential for Malaysia’s life insurance market:

1) The rapid expansion of the Takaful insurance market. With over 60% of its population being Muslim, Malaysia has one of the largest Takaful insurance markets in the world. However, we understand that less than 20% of Malaysia’s Muslim population has Takaful insurance coverage at present. In the past 5 years, the country’s Takaful insurance premium CAGR was c.20%, much higher than the c.7% CAGR for its overall life insurance premiums in Malaysia. We believe the growth of Takaful insurance would be a key driver of the overall insurance market in Malaysia;

2) Personal income growth and low insurance density. Malaysia saw its GDP per capita reach USD10,861 in 2014, suggesting that Malaysia is gradually growing into a high-income economy from a medium-income economy. According to the Department of Statistics of Malaysia, the median monthly household income for Malaysia in 2014 increased to MYR4,585 (c.USD1,308) from MYR3,626 (c.USD1,186) in 2012, representing a CAGR of 12.4%. The life insurance density was only USD229 in Malaysia in 2015.

3) Government support. Under the Economic Transformation Programme of Malaysia (ETP) announced in 2011, the Malaysian government has set a target of 75% of the population being insured by 2020 (2014: 54%). The government has mapped out various initiatives to enhance the role of insurance in economic development, such as creating an employee insurance scheme and improving the tax treatment for life insurance.

Malaysia’s life insurance market is concentrated and open to foreign life insurers. There are 14 life insurance players in the market, of which 7 are JVs or foreign insurers. The top- 5 life insurers had a combined market share of c.80% in 2013. AIA has the second-largest market share in Malaysia since it purchased ING Malaysia in 2012. In 2013, its market share was 24.5%, which was close to the 25.5% market share of the largest life insurer in Malaysia, Great Eastern.

Besides the growth in Unit-linked insurance took over from traditional insurance as being the most important household incomes, contributor to the sector’s premiums in 2013. In 2014, the proportion of unit-linked demand for Takaful insurance accounted for 43% of the sector’s total life premiums. insurance is another growth driver in Takaful insurance is a type of Islamic insurance. It is perceived by the market as being a Malaysia’s life insurance type of cooperative or mutual insurance, where members contribute a certain amount of market money to a pool. Commercial insurance is strictly disallowed for Muslims because it contains the following elements: uncertainty, gambling and usury. The principles of Takaful are:

1. Policyholders cooperate among themselves for their common good. 2. Policyholder contributions are considered donations to the fund (pool). 3. Every policyholder pays his subscription to help those who need assistance. 4. Losses are divided and liabilities spread according to the community pooling system. 5. Uncertainty is eliminated concerning subscription and compensation. 6. The members do not derive advantage at the cost of others.

AIA Group (1299 HK): 15 July 2016

Malaysia: life insurance market statistics Malaysia: life insurance market share (2013) CAGR Others 2011 2012 2013 2014 2015 (2011-15) 19.9% Great Eastern

GDP (MYRbn) 912 971 1,019 1,106 1,157 7.1% 25.5% Population (m) 29 29 29 30 30

GDP per capita (MYR) 31,909 33,466 34,570 37,003 38,150 5.5% Premiums (MYRm) 22,816 24,929 26,369 28,725 29,892 6.5% AXA YoY (%) 5% 9% 6% 9% 4% 4.8%

Penetration (%) 2.5% 2.6% 2.6% 2.6% 2.6%

Density (USD) 252 281 273 274 229 Hong Leong Life 7.2%

AIA Prudential 24.5% 18.1% Source: CEIC, Bloomberg, Daiwa Source: Sino insurance

AIA Malaysia: protection riders should result in resilient VNB margin AIA is the second-largest life insurer in Malaysia. In FY15, because of the 20% YoY depreciation in the MYR against the USD, AIA Malaysia’s top-line premiums declined on an AER basis. However, AIA Malaysia still delivered 7% YoY VNB growth on an AER basis (or 27% YoY on a CER basis) in FY15, on VNB margin expansion.

Improving product mix through unit-linked products with protection riders. AIA Malaysia is promoting its regular-premium unit-linked products with protection riders, which effectively improve the VNB margin due to the high protection level of the products. We understand the protection riders grew by 25% YoY in 1Q16 for AIA Malaysia.

AIA Malaysia is Seizing the Takaful insurance growth opportunity. AIA’s business in Malaysia began in optimising its product 1948. In 2008, it became the first foreign life insurer to receive an international Takaful mix by increasing the operator licence in Malaysia. Currently, there are only 3 Takaful operators for family Takaful protection riders business, including AIA, AmMetlife and Great Eastern. Also, we understand that the attached to unit-linked agency channel is the primary distribution for Takaful insurance. With the agency channel products, and tapping as the key distribution channel, AIA Malaysia saw its number of active Takaful-producing into demand for Takaful agents grow by more than 40% YoY in 2H FY15. With first-mover advantages and a strong insurance agency force in Malaysia, we see strong potential for AIA Malaysia’s Takaful insurance business.

Strategic bancassurance partnerships. AIA Malaysia has 2 major bancassurance partnerships, Citigroup and Public Bank. For its partnership with Citi, AIA Malaysia’s key strategy is to promote products catering to the needs of the credit card customers. When it comes to the partnership with Public Bank, a leading retail banking group, this is a platform for AIA Malaysia to connect with local potential retail customers. Note that the VNB margin of the products sold via Public Bank increased by 12.4pp YoY as AIA expanded its product range to target the savings and protection needs of Public Bank’s more than 6m customers. We think AIA Malaysia’s clear strategies for its different bank partnership will help it maintain a stable VNB growth.

AIA Malaysia: key operational data (USD m) 2011 2012 2013 2014 2015 CAGR (2011-2015) Total weighted premium income (TWPI) 928 964 2,036 2,084 1,825 17.6% Annualized new premium (ANP) 142 151 319 320 292 20.1% VNB 58 69 120 161 172 34.6% VNB margin 40.7% 46.0% 37.8% 50.1% 57.9% Operating profit after tax 133 150 250 280 259 17.2%

Source: Company

AIA Group (1299 HK): 15 July 2016

AIA Malaysia: VNB and growth AIA Malaysia: VNB margin (USDm) 70% 200 90% 57.9% 60% 70% 50.1% 150 50% 46.0% 50% 40.7% 37.8% 100 40% 30% 30% 50 10% 20% 0 (10%) 10%

1H FY111H FY112H FY121H FY122H FY131H FY132H FY141H FY14 2H FY151H FY152H 0% VNB YoY (RHS) FY11 FY12 FY13 FY14 FY15 Source: Company, Daiwa Source: Company Note: 1) half year end in May and November; 2) growth on AER basis

AIA Group (1299 HK): 15 July 2016

Korea: orderly retreat from a challenging market Korea life insurance market: challenging conditions for foreign players Korea’s life insurance market is the third-largest in Asia and the seventh-largest globally in terms of annual premiums. It recorded premiums of USD100bn in 2015, albeit up only by 6% YoY. The life insurance penetration was 7.5% and density was USD1,968 in 2015, suggesting a relatively saturated market for new business growth compared with the ASEAN markets.

Unfavourable, and Although there are some long-term drivers for Korea’s life insurance sector, such as its sometimes inconsistent, ageing population, we see few profitable premium growth opportunities in this market as regulations exacerbating the challenging underwriting environment could persist for many years, especially for a mature market foreign players.

1) Limited access for foreign players. A total of 17 domestic and 8 foreign life insurers compete in the Korea life insurance market. The top-3 players are all local, namely, Samsung Life, Hanwha Life and Kyobo Life (accounting for around half of the market share combined in 2015). The 8 foreign players had only a 12% combined market share in 2015. AIA was the second-largest foreign life insurer, with 2.1% market share in 2015.

2) Unfavourable regulatory challenges and growing financial prudence, especially for direct marketing channel. Korea’s insurance regulator imposed more stringent and wide-ranging restrictions on telemarketing sales in 2014, due to large-scale information leaks and in order to ensure customer protection. This directly led to new sales declining for the sector, particularly in response to limitations on advertising.

3) Prolonged low interest rate climate. The early 2000s saw a high-interest-rate period in Korea, with policy rates staying at over 4.0% in 1999-2003. The policy rates fell briefly to 3.25-3.75% in 2003-05, climbing to over 4.0% in early 2006. Korea’s policy rate peaked in September 2008, at 5.25%, but quickly dropped to 2.0% in the following 12 months. It is now 1.25%. During the prolonged high-rate environment of 1999-2008, Korean life insurers moved to underwrite high-guarantee-rate products, while the persistent current low-rate environment is likely to lead to negative spreads for the Korean life insurers (the current policy rate is over 200bps lower than average policy rate over 2000-08).

Korea: life insurance market fact sheet Korea life insurance sector: market share by gross premium income (2015) CAGR 2011 2012 2013 2014 2015 (2011-15) Others Samsung 19% 23% GDP (KRWtn) 1,333 1,377 1,429 1,486 1,559 4.3% Population (m) 50 50 50 50 51

GDP per capita (KRWm) 27 28 28 29 31 3.7% Metlife Premiums (KRW bn) 88,588 115,309 77,237 110,575 117,214 7.1% 3% Tongyang YoY (%) 7% 30% -33% 43% 6% 4% Penetration (%) 6.6% 8.4% 5.4% 7.4% 7.5% ING Density (USD) 1,534 2,168 1,461 2,005 1,968 4% Hanwha

Shinhan 13% 4% Heungkuk 5% Mirae Asset Kyobo Nonghyup 5% 11% 9% Source: CEIC, Korea life insurance association, Bloomberg, Daiwa Source: Korea life insurance associate, Daiwa

AIA Group (1299 HK): 15 July 2016

AIA Korea: orderly retreat AIA Korea commenced operations in 1987 as a branch of ALICO initially. In 2015, AIA was the second-largest foreign life insurer in the country, but its total market share was only 2.1% in terms of annual premiums. In FY15, AIA Korea’s VNB declined by 44% AER YoY to USD46m, accounting for only 2% of AIA’s overall VNB. The VNB margin for the Korea operation dropped by 3pp YoY in FY15, and the ANP also fell by 35% YoY AER in FY15.

Compared with local Ban on telemarketing exposes AIA’s disadvantage in agency sales. As the Korean players, we see AIA insurance regulator imposed more stringent regulations on telesales in 2014, Korean life Korea disadvantaged by insurers switched to the agency channel, which is not AIA’s strong point. Though AIA is its: 1) agency force, and also trying to build up its agency force, the main local life insurers have their exclusive 2) limited economies of agents selling similar products. Thus, AIA is at a disadvantage due to its relatively smaller scale scale of operations compared with the Korean domestic players, and because of its high fixed-cost investments.

Disciplined approach and orderly retreat. Given the challenging market conditions, AIA Korea has adopted a disciplined approach and is being selective in its new business underwriting, with extra attention being paid to the profitability of new business. In addition, AIA is taking capital out of Korea and redeploying it to more profitable regions. We view this as a viable way of optimising AIA’s overall capital allocation.

AIA Korea: key operational data (USD m) 2011 2012 2013 2014 2015 CAGR (2011-2015) Total weighted premium income (TWPI) 2,029 1,942 2,049 2,205 2,031 0.8% Annualized new premium (ANP) 270 237 338 380 248 -2.5% VNB 74 68 91 82 46 -6.4% VNB margin 27.3% 28.5% 26.8% 21.7% 18.8% Operating profit after tax 124 125 150 165 179 4.9%

Source: Company

Korea life insurance sector: market share by gross premium AIA KR: VNB and growth income of foreign insurers (2015) (USDm) Others Metlife 19% 23% 100 50%

80 30% 10% 60 Prudential (10%) 13% 40 (30%)

AIA 20 (50%) 17% Allianz 0 (70%) LINA 15% 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 13% VNB YoY (RHS)

Source: Korea Life Insurance Association, Daiwa Source: Company, Daiwa Note: 1) half year end in May and November; 2) growth on AER basis

AIA KR: VNB margin AIA KR: expense ratio trend 30% 7.2% 27.3% 28.5% 26.8% 7.0% 7.1% 7.0% 25% 21.7% 6.7% 6.8% 18.8% 20% 6.5% 6.6%

15% 6.4% 6.2% 6.2% 10% 6.0% 5% 5.8%

0% 5.6% FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15 Source: Company Source: Company

AIA Group (1299 HK): 15 July 2016

Other markets Growth potential in Southeast Asia countries AIA’s “Other markets” AIA’s other markets mainly include Australia, Indonesia, New Zealand, the Philippines, Sri mainly feature growth Lanka, Taiwan and Vietnam, which accounted for c.10% of AIA’s VNB and c.11% of its opportunities in OPAT in FY15. We believe the Southeast Asia markets, including Indonesia, the emerging markets Philippines and Vietnam, will see the most growth among these markets.

AIA other markets: key operational data (USD m) 2011 2012 2013 2014 2015 CAGR (2011-2015) Total weighted premium income (TWPI) 2,105 2,482 2,840 3,133 3,270 14.4% Annualized new premium (ANP) 594 618 689 676 759 17.4% VNB 112 167 220 212 250 20.4% VNB margin 18.8% 27.0% 32.0% 31.3% 32.9% Operating profit after tax 165 207 239 314 359 22.2%

Source: Company

Australia. Australia has a developed life insurance market, supported by: 1) a developed economy and regulatory framework, 2) compulsory employer contributions to a pension system, and 3) favourable tax treatment for individuals purchasing life insurance products through group insurance. As the thirteenth-largest life insurance market in the world, Australia saw its life insurance premiums amount to approximately USD44bn in 2015. The penetration rate was 3.5% and density was USD1,830 in 2015. There were 28 life insurers in Australia as at the end of June 2014. According to the Australia Prudential Regulation Authority, the largest 5 players accounted for 85% of the sector’s total assets as at end- June 2014.

AIA Australia was founded in 1970. Its Independent Financial Adviser (IFA) and group insurance channels are the two most important distribution channels for new sales and value contribution. AIA Australia ranked No.1 in the IFA individual life market in 2015. Its strong new business sales of both retail IFA and group insurance, and positive shift in product mix, led to double-digit VNB growth for AIA Australia in 2015. Also, the Vitality programme has strengthened AIA’s brand and has helped it to improve the persistency ratio of its policies in Australia.

Indonesia. Indonesia’s life insurance sector registered c.USD11bn premium income in 2015, with penetration of 1.3% and density of only USD43. There were 49 life insurers in the market as at end-2014, with the largest 5 life insurers all foreign. AIA ranked second overall by weighted new business premiums in 2015. Unit-linked insurance has been the most important type of product since 2008 in the country.

AIA entered Indonesia in 1984, where it has a multi-channel distribution strategy. Its agency and bancassurance channels are major distribution channels, both of which saw double-digit VNB growth in FY15 vs. FY14. Its Premier Agency strategy delivered agency VNB growth of 37% YoY in 2HFY15, while its Premier Bank Consultant programme, launched in early 2015, has helped it to deliver a significant increase in productivity and profitability, supported by close to 100% adoption of iPoS.

New Zealand. New Zealand’s life insurance premiums for the sector amounted to c.USD2bn in 2015, with the penetration of 1.0% and density of USD353. Unlike its P&C insurance, the life insurance sector has a much smaller premium scale in New Zealand.

AIA New Zealand commenced business in 1981, initially as a branch of ALICO. AIA New Zealand’s IFA channel has historically dominated AIA New Zealand’s sales production, with its bancassurance channel as a supplementary distribution channel.

The Philippines. In 2015, the Philippines realised life premium income of c.USD4bn, up 16% YoY – penetration of 1.4% and density of USD40. There were 31 life insurance companies operating in the Philippines, among which the 10 foreign life insurers, including

AIA Group (1299 HK): 15 July 2016

JVs, accounted for 74% of the total market share in 2013. AIA ranked the second-largest in the Philippines, following Sunlife, with a market share of 11.7% in 2013. With the rapid population growth in Philippines in recent years, we expect favourable demographic trends, together with the current low density and penetration of life insurance, to bring opportunities to the country’s life insurance sector.

AIA’s operations in the Philippines started with the acquisition of Philamlife, a local life insurer that started its business in the Philippines in 1947. The agency and bancassurance channel (ie, its exclusive bank partnership with Bank of Philippine Islands [BPI]), are its major distribution channels. Its ANP production per BPI branch more than doubled in FY15 compared with FY14, making AIA’s JV with BPI the largest bancassurance player in the life insurance market in terms of new business premiums. We believe AIA is in a good position to seize upon the life insurance sector growth opportunities that we see for the Philippines.

Taiwan. Taiwan has a developed life insurance market. Its life insurance density was USD3,397 (ranked No.10 globally, according to Swiss Re) and penetration was 15.7% (ranked No.2) in 2015. As the island’s life insurance market is stable and mature, we see less long-term growth momentum going forward. Also, the mortality protection gap declined by a CAGR of 3% over 2004-14, the only city to see a decline in the protection gap among the 13 main life insurance markets in the Asia-Pacific region, according to Swiss Re’s research. In addition, Taiwan’s life insurance sector offers only limited access to foreign players. As at end-2014, there were a total of 27 life insurers in Taiwan, of which only 4 were foreign. The foreign life insurers had a combined market share of only 3% in 2014.

AIA’s branch in Taiwan started its business in 1990. AIA Taiwan adopted a multi-channel distribution strategy, including agency, bancassurance and direct channel. In FY15, its Premier Agency strategy achieved a significant improvement in agent productivity, with ANP per capita up by more than 30% YoY, while the VNB margin remained stable.

Sri Lanka and Vietnam. The Sri Lanka and Vietnam life insurance markets are relatively small. In 2015, the two countries saw premiums amount to USD0.4bn and USD 1.6bn, respectively. Their life insurance density was USD22 and USD16, respectively, while penetration was 0.5% and 0.8%, respectively. Their growing economies and populations, and huge protection gap are the major long-term premium drivers of both markets.

AIA Vietnam started its business in 2000, with its agency channel as its major distribution channel for new sales and its bancassurance channel as a supplementary channel. In 2013, AIA Sri Lanka started its business in Sri Lanka through the acquisition of Aviva NDB Insurance. The VNB growth in both Sri Lanka and Vietnam more than doubled in FY15, compared with FY14.

Asia insurance market statistics (2015) Life premiums Life insurance density Life insurance penetration (2015) (USDbn) Global rank Asia Pacific rank (USD) (%) Hong Kong 41.3 14 7 5,655 13.3% Thailand 14.6 26 9 215 3.7% Singapore 16.3 25 8 2,932 5.6% Malaysia* 9.6 30 11 316 3.4% China 310.8 4 2 153 2.0% Korea* 98.2 7 3 1,940 7.3% Philippines 4.0 36 12 40 1.4% Indonesia 11.0 29 10 43 1.3% Vietnam 1.6 47 16 17 0.8% Australia 43.7 13 6 1,830 3.5% New Zealand 1.6 46 15 353 1.0% Taiwan 79.6 9 4 3,397 15.7% Sri Lanka 0.4 66 22 19 0.5%

Source: Sigma report Note: *year-end is March. Data may have minor discrepancies to that presented in regional discussions due to exchange rates

AIA Group (1299 HK): 15 July 2016

Financial position and macro sensitivities Well capitalised financial position poised for dividend upside Dividend upside due to adequate solvency position, large in-force business We see dividend upside Progressive dividend policy. We are comfortable with AIA management’s commitment to due to AIA’s high capital a progressive dividend policy (in terms of DPS) because: 1) AIA’s declining expense ratio position, sizable implies improving profitability when it comes to the bottom line, 2) AIA’s balance sheet is distributable profits from currently largely unlevered, given its high solvency ratios, and 3) AIA’s large in-force its in-force businesses, businesses generates distributable profit, which should equate to a sustainable dividend. and improving cost efficiency Adequate solvency position. AIA’s solvency ratio stood at 428% as at end-FY15, well above the 150% minimum requirement. Its stable solvency ratio is a combined result of strong retained earnings partially offset by mark-to-market movements on the investment portfolio and dividends. From its underwriting business, AIA’s strong underlying free surplus generation has led to continued growth in its free surplus.

AIA’s individual branches and subsidiaries are also subject to supervision in the jurisdictions in which they operate. This means that local operating units, including branches and subsidiaries, must meet the regulatory capital requirements of their local prudential regulators.

AIA: solvency level AIA: capital requirement of regulators in different markets (USDbn) Business Unit Required Capital 10 433% 427% 428% 500% AIA Australia 100% of regulatory capital adequacy requirement AIA China 100% of required minimum solvency margin* 8 353% 400% 311% AIA Hong Kong 150% of required minimum solvency margin** 6 300% AIA Indonesia 120% of regulatory Risk-Based Capital requirement AIA Korea 150% of regulatory Risk-Based Capital requirement 4 200% AIA Malaysia 170% of regulatory Risk-Based Capital requirement AIA New Zealand 100% of local regulatory requirement 2 100% Philam Life 100% of regulatory Risk-Based Capital requirement AIA Singapore 180% of regulatory Risk-Based Capital requirement 0 0% AIA Sri Lanka 120% of proposed Risk-Based Capital requirement FY11 FY12 FY13 FY14 FY15 AIA Taiwan 250% of regulatory Risk-Based Capital requirement Regulatory minimum capital Actual capital above minimum capital AIA Thailand 140% of regulatory Risk-Based Capital requirement Solvency margin ratio (RHS) AIA Vietnam 100% of required minimum solvency margin

Source: Company, Daiwa Source: Company Note: Solvency ratio on HKICO basis for AIA Co. Note: * The China Risk Oriented Solvency System, which was not implemented at the valuation date, has not been applied; ** The assumed level of required capital for AIA Hong Kong is also used for the branches of AIA Co. and AIA International in the calculation of the consolidated EV Results.

AIA: DPS and dividend payout ratio (HKD cents) 80 40.0% 45% 70 40% 31.8% 60 35% 30% 50 23.3% 22.4% 25% 40 19.0% 20% 30 15% 20 10% 10 5% 0 0% FY11 FY12 FY13 FY14 FY15 Interim (per share) Final (per share) Dividend payout ratio (RHS)

Source: Company, Daiwa Note: dividend payout ratio calculated based on net profit

AIA Group (1299 HK): 15 July 2016

Distributable profit from Distributable profit. Based on AIA and Willis Towers Watson’s calculations, AIA would be regulatory capital was able to generate USD11.7bn in after-tax distributable earnings from the assets backing the 28x total DPS in FY15 statutory reserves and required capital of the in-force business that are expected to emerge in 2016-20. And, on the same basis over the lifetime of its currently in-force business, these assets backing the statutory reserves and required capital of the in-force business could generate USD30.7bn in after-tax distributable earnings.

In layman’s terms, if AIA stops underwriting any new business, its regulatory capital could generate USD11.7bn in dividends in 2016-2020 (USD30.7bn in total). These numbers correspond to HKD7.51 DPS in 2016-2020, or HKD19.75 DPS in total, which is 28 times its FY15 total DPS.

For reconciliation purposes, the discounted value of after-tax distributable earnings of USD30,670m plus free surplus of USD7,528m is equal to an EV of USD38,198 at end- FY15. These distributable earnings are also equivalent to more than 40% of AIA’s current market cap.

AIA: profile of expected after-tax distributable earnings for group’s in-force business As at 30 Nov 2015 (USDm) Undiscounted Discounted FY16-20 14,143 11,664 FY21-25 13,114 7,187 FY26-30 12,340 4,600 FY31-35 11,250 2,878 FY36 and thereafter 56,866 4,341 Total 107,713 30,670

Source: Company

Expense ratio declining due to scale efficiencies In recent years, AIA’s operating scale has gradually realised scale economies in some of its key markets following multi-year expansion in its operations. Some formerly small markets, including China, Hong Kong and Singapore, have gradually achieved scale economies and contributed to AIA’s enhanced cost efficiency.

We see significant room In China, AIA’s expense ratio (defined as operating expenses as a percentage of TWPI) for AIA China to improve has declined for 6 consecutive years, going from 17.8% in FY09 to 11.0% in FY15 as the its expense ratio and size local operation has expanded strongly. Hence, during this period, AIA China’s TWPI hence deliver bottom- almost doubled and its allocated equity quadrupled. line/dividend upside for the group However, in FY15, AIA China had the highest expense ratio among the company’s key markets. We see scope for AIA China’s expense ratio to decline, based on the currently high base and the operation’s rapidly expanding business scale there. Besides, as AIA China’s significance to the group increases (as it delivers some of the highest ANP and VNB growth rates), improvement in AIA China’s expense ratio should show in the group’s overall operating efficiency. As a result, we see further bottom-line and dividend upside for the group.

We forecast AIA’s expense ratio at the group level to improve from 8.3% in FY15 to 7.7% by FY18. By way of comparison, the top 3 China life insurers saw expense ratios of 8-14% in 2015, and are looking for around 6-14% in 2018, on our forecasts.

AIA Group (1299 HK): 15 July 2016

AIA: expense ratios of key markets (FY15) AIA China: expense ratios 14% 11.0% (USDm) 3,000 17.8% 20% 12% 8.9% 16.2% 2,500 10% 13.6% 15% 7.1% 12.4% 12.1% 11.0% 6.9% 2,000 11.8% 8% 4.9% 5.4% 1,500 10% 6% 1,000 4% 5% 500 2% 0 0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 0% 0 HK1 TH2 SG3 MY4 CH5 KR6 7 TWPI Expense ratios (RHS)

Source: Company Source: Company Note: size of the bubbles represent equity allocation to the region

AIA Group: TWPI and expense ratios (USDbn) 40 9.0% 8.7% 8.7% 8.6% 8.8% 35 8.5% 8.6% 30 8.3% 8.4% 25 7.9% 8.2% 20 7.8% 8.0% 7.7% 15 7.8% 7.6% 10 7.4% 5 7.2% 0 7.0% FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E TWPI Expense ratio (RHS)

Source: Company

AIA’s ROE is lower than Lower ROE partly explained by lower financial leverage. AIA’s ROE is relatively low its China peers in when compared with those of the major China life insurers. AIA’s ROE averaged 10.6% general, which can be from FY11-15, compared with China Life’s 9.9%, Ping An Life’s 26.7%, China Pacific Life’s partly explained by its 13.7% in 2011-15. lower leverage We understand that AIA’s financial leverage is lower than its China peers, as it was initially listed as a company without debt in its IPO in 2010. As at end-FY15, AIA had financial leverage of 1.11x, compared with an average of 1.24x for the major China life insurers at end-2015 (China Life: 1.21x, Ping An Life: 1.29x, China Pacific Life: 1.23x).

AIA and major China life insurers: ROE comparison 40% 35% 30% 25% 20% 15% 10% 5% 0% FY11 FY12 FY13 FY14 FY15 AIA China Life Ping An Life China Pacific Life

Source: Companies, Daiwa Note: financial year covers Dec -Nov for AIA; Jan -Dec for China insurers.

AIA Group (1299 HK): 15 July 2016

Double-digit VNB growth driven by country mix and product mix changes Hong Kong and China forecast to contribute most VNB growth We have examined the ANP and VNB margin trends in each market that AIA operates in, and then forecast VNB growth in each of these markets. The ANP, VNB margin, and VNB growth at the group level is an output aggregating the operating results from all the markets in which AIA operates, after considering the exchange-rate impact. We present the aggregate VNB growth in both CER and AER (Actual Exchange Rate) terms, though we believe that CER is a better way to reflect the operating performance of the company as it excludes the impact of exchange-rate fluctuations in various Asian markets.

We have established our view that Hong Kong and China present the best VNB growth opportunities for AIA, taking into account both volume and margin factors. We forecast the 2 regions to respectively contribute 50% and 26% of the group’s VNB growth over FY16-18 (CER basis) or 61% and 19% in the same period (AER basis). We expect their combined contribution to group VNB to increase from 49% in FY15 to 66% in FY18 (AER).

We believe VNB growth in Thailand is likely to be dampened by ANP market-share losses, in addition to an overall weak life insurance market in the country. Hence, we forecast Thailand’s contribution to group VNB to decline from 17% in FY15 to 12% in FY18 (AER). Malaysia, though delivering decent VNB growth in CER terms currently, is likely to see its contribution to VNB stay largely flat (7%), due to the quickly depreciating MYR that we see over our forecast horizon. Singapore, as a relatively mature market, is likely to see its contribution diluted by faster growth rates in Hong Kong and China; we forecast Singapore’s VNB contribution to gradually come down from 14% in FY15 to 10% in FY18 (AER). Korea is becoming less significant to the group, and we forecast its contribution to dip below 1.5% over FY16-18 as AIA Korea is repatriating capital back to the group.

AIA: VNB and growth in key markets AIA: VNB growth (USDm) 45% +40% 40% 1,400 40% 1,147 35% 1,200 30% 26% 27% 1,000 820 +42% 25% 21% +18% 27% +8% 25% 18% 800 20% 24% +28% 22% 23% 600 467 518 344 15% 19% 341 369 366 -11% 17% 400 10% 15% 172 220 200 46 41 5% 0 0% Hong Kong Thailand Singapore Malaysia China Korea FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY15 FY16E(CER) AER CER

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Note: growth on CER basis. Note: VNB growth on CER basis before FY14 is not provided by the company

Geographic mix leading to slight rises in VNB margin We see VNB margin We expect the higher growth rates in high-VNB-margin markets to help AIA’s group-level upside being driven by VNB margin over our forecast horizon. We expect changes in AIA’s geographic mix, chiefly geographic mix change in the form of higher ANP contributions from China and Hong Kong, to drive a c.3pp YoY and product mix change increase in the group-level VNB margin in FY16 (FY15: up 2.2pp YoY).

AIA Group (1299 HK): 15 July 2016

AIA: VNB margin in key markets AIA: ANP mix by regions 90% 82% 84% 86% 100% 76% 76% 80% 72% 90% 70% 80% 62% 62% 62% 12% 58% 70% 11% 60% 8% 7% 8% 60% 50% 50% 40% 40% 30% 30% 19% 17% 20% 20% 38% 32% 10% 10% 22% 23% 26% 0% 0% Hong Kong Thailand Singapore Malaysia China Korea FY12 FY13 FY14 FY15 FY16E FY15 FY16E Hong Kong Thailand Singapore Malaysia China Korea Others

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Product-mix improvements to drive VNB margins in Thailand, Singapore and Malaysia We expect AIA’s local operations in Thailand, Singapore and Malaysia to focus on VNB margin improvement against the backdrop of muted growth opportunities in these markets. Hence, we look for AIA to enhance the product mix with the goal of increasing VNB margins and driving VNB in these markets.

At the group level, we expect enhancements to the product mix to drive another c.2pp YoY (FY15:+2.7ppt YoY) increase in the VNB margin in FY16, contributing to total VNB margin expansion of c.5pp YoY in FY16 from all factors.

AIA: VNB margin change (FY16) AIA Group: VNB margin 65% 70% 61.4% 58.9% 60.2% 60% 54.0% 58.9% 60% +1.9pp 49.1% 50% 44.1% +3.0pp 43.6% 37.2% 40% 54.0% 32.6% 55% 30%

20% 50% 10%

45% 0% 2015 VNB margin Geographical mix Product mix 2016 VNB margin FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: Daiwa forecasts Source: Company, Daiwa forecasts

AIA Group (1299 HK): 15 July 2016

Sensitivity to currencies, equity markets and interest rates Currency movements The reporting currency for AIA is USD and hence, in general, the depreciation of most Asian currencies negatively affects AIA, and vice-versa.

Economic impact is Minimal economic impact due to currency match locally. From an operational generally hedged locally perspective, AIA matches the currency of its assets with the currency of its liabilities locally. Hence, the economic impact of exchange-rate fluctuations is minimised. Assets, liabilities, and capital in each local unit are generally currency-matched. Foreign bond holdings are commonly hedged with cross-currency swaps or foreign exchange forward contracts. Foreign equities or any expected capital movements due within one year may be hedged at the discretion of management.

In AIA’s Hong Kong operation, this approach applies to the matching of USD and HKD assets and liabilities. AIA HK has 89% of its assets (and 86% of its liabilities) denominated in USD as at end-FY15.

In addition to its local operations, at Group Corporate Centre the financial resources are normally held in USD. At end-FY15, USD7.8bn (c.26% of its shareholders’ equity) funds sit at its Group Corporate Centre, 90% of which was denominated in USD.

Currency translation impact is due to unhedged capital at each local unit. Currency translation As AIA reports in USD, the currency translation impact does hit its financial statements due impact is likely – a 5% to unhedged allocated equity capital at each local unit and the minority non-USD assets fall in local currencies held at its Group Corporate Center. against the USD would result in 2.6%/3.4% On exchange-rate sensitivity, according to AIA a 5% fall in local market currencies (except declines in EV/VNB, for the HKD, which is assumed to be pegged to the USD) vs. the USD would result in a according to AIA 2.6% negative impact on AIA’s EV (as at end-FY15) or a 3.4% negative impact on its VNB (for FY15). We believe AIA’s currency sensitivity is becoming less and less significant as Hong Kong is contributing a larger proportion of the Group’s EV and VNB (from 34% VNB in FY15 to 45% in FY18E). We assume no currency risk between the HKD and USD.

AIA is less sensitive to currency movements than the China insurers as: 1) around one- third of its business comes from Hong Kong, whose currency is assumed to remain pegged to the USD. This implies that around one-third of VIF in its EV is unaffected by currency movements, and 2) around half of its ANW (Adjusted Net Worth), or c.20% of its EV, resides at the Group Corporate Centre in Hong Kong and 90% of such capital is denominated in USD.

AIA: EV and VNB currency sensitivity AIA and major China life insurers: comparison on EV and VNB currency sensitivity (5% depreciation in local-market currencies; all metrics translate into USD)(FY15) 4.0% 3.8% 0% 3.8% 3.6% (1%) 3.6% 3.4% 3.4% (2%) 3.2% 3.0% 2.8% (3%) -2.6% 2.7% 2.8% 2.6% (4%) -3.4% 2.6% 2.4% (5%) -4.8% -4.6% 2.2% -5.0% -5.0% -4.9% -5.0% 2.0% (6%) FY13 FY14 FY15 AIA China Life Ping An CPIC EV VNB EV VNB

Source: Company Source: Company, Daiwa estimates Note: assuming 5% appreciation in local market currencies vs. USD (except for HKD, which is Note: 1) assuming 5% local market currencies depreciation (except for HKD, which is assumed to assumed to be pegged with USD) be pegged with USD) against USD. Numbers shown in this chart compares the companies’ EV or VNB % changes if all of them are denominated in USD; 2) all sensitivity estimates are based on Group level; 3) financial year end in November for AIA, and December for China insurers.

AIA Group (1299 HK): 15 July 2016

Mark-to-market. So far since end-FY15, our blended exchange rate index for AIA suggests a 1.4% appreciation of local currencies against USD.

Equity markets Equity-price sensitivity – Equity-price sensitivity. AIA invests in local equities in most of the markets in which it a 10% increase in equity operates and hence is subject to equity price risk. In terms of its sensitivity, if equity prices prices would result in a increase proportionally by 10%, AIA’s EV (as at end-FY15) would rise by 1.9%, according 1.9% positive impact on to AIA. EV, according to AIA AIA is less sensitive to currency movements than the China insurers as the majority (64% in FY15) of its operating profit is insurance and fee-based, compared with the China insurers, which generate the majority of their operating profit from investment spread. Besides, given the geographic diversification of AIA’s equity portfolio, fluctuations in AIA’s blended equity-price movement are less volatile than for the China insurers whose equity portfolio is mostly in a single domestic market.

AIA and major China insurers: comparison of EV equity market sensitivity (a 10% increase in equity market prices) 4.0% 3.4% 3.5% 3.1% 3.0% 2.8%

2.5% 1.9% 2.0%

1.5%

1.0%

0.5%

0.0% AIA China Life Ping An CPIC Source: Company, Daiwa Note: 1) all in reporting currency of respective companies; after considering the corresponding impact allocation of returns to participating product policy holders; 2) assets held to support unit-linked contracts have been excluded on the basis that changes in fair value are wholly borne by policyholders; 3) all sensitivity estimates are based on Group level.

AIA: total investment assets by type (end-FY15) AIA: type of equity securities investments (end-FY15)

(USDm)

Equities, 10% 12,211

Fixed income, Cash and cash 14,944 85% equivalents, 1%

Investment property and property held for own use, 4% Policy holder and shareholder FVTPL Unit-linked FVTPL

Source: Company Source: Company

Mark-to-market. So far since end-FY15, our blended equity market index for AIA suggests a slight 0.1% fall in the prices of its equity portfolio.

AIA Group (1299 HK): 15 July 2016

Interest rates Interest-rate sensitivity – Interest-rate sensitivity. According to AIA, a 50bps decline in the interest rate (assuming a 50bps parallel a parallel shift in the yield curve) would have a 0.3% negative impact on AIA’s EV (as at downward shift in the end-FY15). yield curve would result in 0.3% lower EV, We argue that AIA’s EV is insensitive to interest rates as it has an explicit mechanism to according to AIA ensure that both the EV investment return assumption and the RDR (Risk discount rate) is adjusted in line with interest-rate movements, and thus the changes from these 2 metrics largely offset each other. Specifically, all the major components of AIA’s investment return assumption, (ie, the government bond yield, corporate bond yield, and equity return) have an element of treasury yield in the calculation, while its RDRs are also based on risk-free rates. Implications of EV investment return assumption changes and RDR changes are discussed in detail in the next section.

AIA: total fixed income assets by type (end-FY15) AIA: total bonds by rating (end-FY15) Loans and BB & Below*, AAA, 5% deposits, 7% 6% Structured securities, 1% Government & AA, 23% government agency bonds, BBB, 28% 40%

Corporate bonds, 52%

A, 38%

Source: Company Source: Company Note: Note: 1) average rating is A-; 2) * including not rated bonds.

AIA: government and agency bonds by geography (end-FY15) AIA: total bonds by accounting classification (end-FY15)

Others, 8%

Philippines, 7% Thailand, 25% 1% 19% Malaysia, 8% Other Policyholder & shareholder (AFS) Participating Funds (FVTPL) Singapore, 12% Other Policyholder & shareholder (FVTPL) 80% China, 23%

Korea, 17%

Source: Company Source: Company

Mark-to-market. So far, since end-FY15, our blended 10-year bond yield index for AIA suggests a 63bps decline. Korea, Singapore, and Thailand treasury yields have seen the most substantial declines, by 88bps, 78bps, and 73bps, respectively, since end-FY15.

AIA Group (1299 HK): 15 July 2016

Decoding the black box (EV and reserves): comparison of AIA and the China insurers We understand many investors are always wary about EV given its complex calculation and the involvement of actuarial assumptions. And for Asian insurance investors, this fact is exacerbated by the use of different EV calculation methods by AIA and the China insurers. In this report, we provide a dedicated section comparing AIA and China insurers’ methods to derive EV.

Comparison of EV assumptions and RDR adjustment mechanism AIA’s formula to adjust rate-sensitive EV assumptions. Unlike the China insurers, AIA provides an explicit formula to automatically adjust its investment return assumptions and risk discount rate (RDR) in EV with bond yield changes.

AIA sets its assumed long-term future returns for its fixed-income assets to reflect its view of expected returns with regards to historical returns, estimates of long-term forward rates from yields available on government bonds and current bond yields. In determining returns on fixed-income assets, it allows for the risk of default, and this allowance varies according to the credit rating of the underlying asset. Where long- term views of the investment return assumptions differ from current market yields on existing fixed-income assets such that there would be a significant impact on value, an adjustment is made to make some allowance for current market yields.

AIA has set its equity return assumptions with reference to the return on 10-year government bonds, allowing for an internal assessment of equity risk premia that varies by territory.

AIA discloses the The risk discount rates for each business unit can be considered as the sum of the mechanism used to appropriate risk-free interest rate, to reflect the time value of money, and a risk margin revise its EV to make allowance for the risk profile of the business. AIA generally sets the risk assumptions discount rates to be equal to the estimated cost of equity capital for each local unit. The cost of equity capital is derived using an estimated long-term risk-free interest rate, an equity risk premium and a market risk factor.

AIA’s methodology to determine its key EV assumptions EV assumption Asset Category Reference rate or methodology Government bonds Current treasury yield Investment return assumption Corporate bonds Current corporate bond yield (may allow for default risk) Equity return 10-year government bond yield + local equity risk premium Risk-free rate + risk margin Risk Discount Rate (RDR) N/A AIA generally set its RDR to be equal to the estimated cost of equity for each local unit

Source: Company

AIA: risk discount rates and long-term investment return assumptions by business unit (%) Risk discount rates 10-year government bonds Local equities

Business Unit As at 30 Nov 2015 As at 30 Nov 2014 As at 30 Nov 2015 As at 30 Nov 2014 As at 30 Nov 2015 As at 30 Nov 2014 AIA Australia 7.75 7.75 3.4 3.37 7.5 7.15 AIA China 9.75 9.75 3.7 3.74 9.5 9.49 AIA Hong Kong * 7 7 2.5 2.5 7.55 7.55 AIA Indonesia 13.5 13 8 7.5 12.8 12.25 AIA Korea 9.1 9.5 3.2 3.6 7.2 6.94 AIA Malaysia 8.75 8.75 4.2 4.2 8.75 8.75 AIA New Zealand 8.25 8.25 4 3.99 n/a ** n/a** Philam Life 10.5 10.5 4 4 9.2 9.16 AIA Singapore 6.9 6.75 2.5 2.23 7 7 AIA Sri Lanka 15.7 18 10 12.33 11.7 14 AIA Taiwan 7.85 7.75 1.6 1.48 6.6 6.62 AIA Thailand 8.8 9 3.4 3.62 9.2 9.37 AIA Vietnam 13.8 13.8 8 8 13.8 13.8

Source: Company Note: * The majority of AIA Hong Kong’s assets and liabilities are denominated in US dollars. The 10-year government bond assumption is for US dollar-denominated bonds; ** The assumed asset allocations do not include equities.

AIA Group (1299 HK): 15 July 2016

AIA: simultaneous adjustments of investment return and risk discount rate AIA’s investment return (RDR). Compared with its China peers, we believe AIA’s EV is insensitive to interest and RDR assumptions are rates as it has an explicit mechanism that makes sure both the EV investment return revised simultaneously assumptions and the RDR is adjusted in line with interest-rate movements, and the changes from these two metrics largely offset each other. Specifically, all the major components of AIA’s investment-return assumption, (ie, the government bond yield, corporate bond yield, and equity return), have an element of treasury yield in the calculation, while its RDR calculation is also based on the risk-free rate.

China insurers: fixed investment return and RDR (or an opaque adjustment mechanism). China insurers publish their investment return and RDR assumptions semi-annually. Although the rationale for setting these assumptions is similar to AIA, unfortunately they have not disclosed a detailed mechanism. We understand that the China insurers’ RDR is normally adjusted together with their long-term investment return assumptions. We see their currently conservative (high) RDRs (10.0-11.5%) as largely a hedge against their aggressive (also high) investment return assumptions (4.75-5.5%). Namely, if low yield persists in China, necessitating a downward revision of their investment assumptions, we think the China insurers will have the flexibility to lower their risk discount rates.

China Life insurers’ EV assumptions: investment yield (2015) 2016 2017 2018 2019 2020 2021 China Life 5.10% 5.20% 5.30% 5.40% 5.50% 5.50% Ping An Life 4.75% 5.00% 5.25% 5.50% 5.50% 5.50% CPIC Life 5.20% 5.20% 5.20% 5.20% 5.20% 5.20% PICC Life 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% New China Life 5.00% 5.10% 5.20% 5.20% 5.20% 5.20% Taiping Life 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%

Source: Companies, Daiwa Note: investment yield assumption for New China Life refers to that for its traditional products.

China life insurers’ EV assumptions: risk discount rate (2015) For Value-in-Force business For new business China Life 11.0% 11.0% Ping An Life 11.0% 11.0% CPIC Life 11.0% 11.0% PICC Life 10.0% 10.0% New China Life 11.5% 11.5% Taiping Life 11.0% 11.0%

Source: Companies, Daiwa

Our conclusion is that, in comparison with the China insurers, AIA’s EV is less sensitive to interest rates because: 1) when investors look at the sensitivities provided by these companies, they may overlook the mitigating impact from RDR changes, which AIA automatically embeds in its EV sensitivity calculation, and 2) even after incorporating the above factor, China insurers’ EVs are still more sensitive than AIA’s EV due to their greater reliance on investment spreads and the larger impact in on net asset changes from their bond portfolio due to different accounting methods for MTM fair-value changes.

AIA and major China life insurers: EV sensitivity to 50bps fall in investment return assumptions (assuming RDRs unchanged together with investment return; FY15) 0% -0.3% (2%)

(4%)

(6%)

(8%) -7.4% -8.1% (10%) -9.6%

(12%) AIA China Life Ping An Life China Pacific Life Source: Company, Daiwa

AIA Group (1299 HK): 15 July 2016

AIA and major China life insurers: EV sensitivity to 50bps fall in investment return assumptions (assuming RDRs change together with investment return; FY15) 0%

(1%) -0.3%

(2%)

(3%)

(4%)

(5%) -4.3%

(6%) -5.5% (7%) -6.7% (8%) AIA China Life Ping An Life China Pacific Life Source: Company, Daiwa

Reserve valuation rate revision and accounting profit impact AIA’s reserve valuation rate. As for insurance contract reserve liabilities, AIA sets its reserve valuation rate in each region with reference to the risk-free rate for that region plus its asset return. In other words, AIA’s valuation rate is a floating rate, which moves together with market rates (risk-free rates) in each region.

China insurers’ reserve valuation rate. China life insurers use the 750-day average of treasury yield plus a liquidity premium as the valuation rate to discount their insurance contract liabilities. However, such a valuation rate may not reflect the changes in the market yield because of the time lag of the average yield (the 750-day average yield is a reflection of the yield over the past 3 years, rather than the current market yield).

Different accounting treatment for bond holdings on the asset side. Unlike China insurers, AIA holds most fixed-income investments as AFS and books a larger proportion as FVPL. At end-FY15, AIA booked 20% of its bonds as FVPL and 80% as AFS; the China insurers on average book 4% of their bonds as FVPL and 30% as AFS. The remaining 66% of the China insurers’ bond investments are classified as hold-to- maturity (HTM) investments, whose fair-value changes are neither reflected on their P&L nor in net asset changes.

Due to these different classifications, AIA’s assets are more sensitive to interest-rate movements from MTM fair-value changes than the China insurers’.

AIA and major China life insurers: financial impact of movements in interest rates Balance sheet P&L Asset: Bond investment Liability: Contract reserve (fair value goes up when (present value goes up when Bottom line impact market yield falls) valuation rate falls) Slight positive. Because MTM gains from large Valuation rate is risk-free rate proportion of FVPL bond holdings more than offset 20% classified as FVPL, plus asset return. Valuation AIA the higher contract reserves due to lower valuation 80% d as AFS rate moves together with rate. Contract reserve valuation rate moves along market yield with the market yield. Valuation rate is 750-day Negative. Because only 4% of bond holdings are 4% classified as FVPL, average treasury yield. May booked as FVPL and MTM, but the entire contract China life insurers 30% as AFS, 66% as not move together with reserve liability is discounted at a lower valuation HTM market yield due to time-lag rate. Contract reserve valuation rate may not move of the average yield along with the market yield.

Source: Companies, Daiwa

AIA Group (1299 HK): 15 July 2016

AIA and major China life insurers: bond investment accounting China: 10-year and 5-year treasury yield and 750-day average classification (end-FY15) 100% (%) 90% 5.0 80% 4.5 70% 4.0 60% 80% 3.5 50% 40% 3.0 30% 40% 2.5 20% 24% 2.0 10% 17% Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Mar-13 Mar-14 Mar-15 Mar-16

0% Nov-12 Nov-13 Nov-14 Nov-15 AIA China Life Ping An CPIC 5-year treasury yield 5-year 750-day average FVTPL AFS HTM 10-year treasury yield 10-year 750-day average Source: Company, Daiwa Source: WIND, Daiwa Note: financial year end in November for AIA, and December for China insurers.

Our conclusion is that the interest-rate impact on AIA is determined mainly by the Interest rate impact on asset side, while it varies for the China life insurers. As a result, for AIA, the interest- AIA is determined mainly rate impacts on its bottom line and net assets are mostly determined by the impact on the by the asset side, while asset side. By contrast, for the China life insurers, it is a mixed impact given the time lag in on China varies interest-rate movement as their liabilities are discounted at the 750-day average rate. (currently it is on the Currently, the China life insurers are more affected by the negatives on their liabilities from liability side) the low interest rate rather than the positive MTM gains on the asset side.

For a detailed analysis of the low-interest-rate impact on the China insurers, see our sector report on China Insurance Sector: A new dawn, dated 5 January 2016)

AIA: illustration of interest-rate impact China insurers: illustration of interest-rate impact

Source: Companies, Daiwa Source: Companies, Daiwa

AIA Group (1299 HK): 15 July 2016

Valuation and risks Valuation methodology Price to Embedded Value (EV) method We believe Price/Embedded Value (P/EV) is the most suitable method to value Asian life insurers for the following reasons: 1) conventional metrics such as PBR or PER fail to capture the future cash flow of these companies’ current in-force businesses, 2) as premium growth is usually strong, current-year underwriting profit is distorted by the strain from new business, and 3) the current-year account profit is distorted by short-term movements in the equity market and sometimes currency movements.

However, since lots of actuarial assumptions are involved in the EV calculation, sometimes the EVs disclosed by various insurers are not directly comparable. To help investors better compare the EVs disclosed by AIA and China insurers, we provide a dedicated section in this report earlier.

Target blended 2017E P/EV of 2.0x We have valued AIA’s business in each of its major markets using P/EV based on their respective ROEV, and have summed them up to reach our target price and target multiple. Our target price implies a blended 2017E P/EV of 2.0x.

ROEV. Our ROEV is based on the average ROEVs in these respective regions over our Rationales of ROEV, forecast period. We forecast the EV movements in each of AIA’s major markets mainly by terminal growth, cost of the VNB, expected return, and investment variances in these markets, and reach our capital assumptions in ROEV forecasts. our P/EV valuation Terminal growth. We use a terminal growth rate of 3.0% for the developed markets where AIA operates and 5.0% for the developing markets. The definitions of developed and developing life insurance markets are consistent with our discussion in the Strategy section of this report. Specifically in the valuation, developed markets include Hong Kong, Singapore and Korea; developing markets include China, Thailand, Malaysia and others. Besides, our 5.0% terminal growth assumption is consistent with our valuation of the China life insurers under our coverage.

Cost of capital. We take into account AIA Group as a whole when determining our cost of capital assumption. We use an 8.0% cost of capital assumption, which is lower than the 11.0-13.0% we use for China life insurers. We think this is a reflection of: 1) AIA’s large market cap and index weighting, and its low share-price volatility, 2) AIA’s geographic diversification, which lowers volatility in its earnings due to diversification of insurance and investment risks, and 3) reasonable management KPIs and incentives, and the fact that AIA is less affected by the window guidance from local regulators.

AIA: valuation details Region ROEV Terminal growth Cost of capital EV per share (USD) Target P/EV (x) HK 13.5% 3.0% 8.0% 1.15 2.1 TH 8.0% 5.0% 8.0% 0.57 1.0 SG 11.0% 3.0% 8.0% 0.49 1.6 MY 13.5% 5.0% 8.0% 0.20 2.8 CH 15.6% 5.0% 8.0% 0.58 3.5 KR 3.0% 3.0% 8.0% 0.05 0.0 Others 7.0% 5.0% 8.0% 0.63 0.7 Blended P/EV (x) 2.0

Source: Daiwa

AIA Group (1299 HK): 15 July 2016

Contextualising Hong Kong/China in AIA’s valuation Hong Kong and China together contribute two-thirds of our valuation Hong Kong and China On our calculations, AIA Hong Kong and AIA China together account for c.66% of its target are the major valuation. Hong Kong, undoubtedly, is the largest region from where AIA’s ANP comes and components in our where the Group allocates its capital, and accounts for c.36% of its valuation. China, valuation of AIA and whose ANP will likely overtake Malaysia in FY16 and Thailand in FY17 to become AIA’s together contribute second largest market, is forecasted to see sustained high VNB margin together with c.66% of the valuation >25% annual ANP growth (CER) over FY16-FY18E, and hence rapid VNB expansion. China contributes c.30% to our valuation for the Group.

AIA’s valuation hinges Valuation hinges upon successful execution in Hong Kong/China. We believe AIA’s upon its delivery of VNB valuation hinges upon its delivery of VNB and EV growth in Hong Kong and China and EV growth in Hong markets, which is supported by the execution of its distribution and product strategies. Kong and China for 3 This is because: reasons…  These 2 markets contributed c.49% of AIA’s VNB in FY15, and we expect their contributions to rise significantly to 60% in FY16 and 66% in FY18.

 Growth (in terms of ANP, VNB, and EV) in these 2 markets is significantly higher in than other markets; hence we assign “above-average” valuation multiples to them. In our target multiples, AIA Hong Kong is valued at 2.1x P/EV and AIA China at 3.5x P/EV, while all other markets are valued at 0.7-1.6x P/EV (except for Malaysia at 2.8x and Korea at zero).

 In our view, AIA has the biggest opportunities for both premium growth and VNB margin upside in the Hong Kong and China markets, while in most of the other major markets volume growth is likely to be contained during FY16-18. Thus, in most of the other major markets AIA prioritises VNB margin growth over volume growth. This looks to us like a conservative business strategy which will likely deliver stable results. In other words, as China is a developing insurance market with economic, regulatory, and investment related upside and downside risks, AIA has a different strategy for it (high growth dynamics). For low-growth markets, it has a conservative strategy in order to give investors greater clarity.

AIA: VNB mix by regions AIA: regional contribution to Group valuation (FY17E) 100% Others 90% 6% Korea 80% 15% 16% 10% 10% 10% 13% 0% 70% Hong Kong 60% 36% 50% China 30% 40% 30% 20% 39% 29% 28% 28% 31% 34% 10% 0% FY11 FY12 FY13 FY14 FY15 FY16E Hong Kong Thailand Singapore Malaysia China Korea Others Malaysia Thailand 9% Singapore 8% 11% Source: Company, Daiwa Source: Daiwa

AIA Group (1299 HK): 15 July 2016

AIA: target P/EV of key markets and Group (FY17E) (x) 4.0 3.5 3.5 2.8 3.0 2.5 2.1 2.0 2.0 1.6 1.5 1.0 1.0 0.7 0.5 0.0 0.0 HK TH SG MY CH KR Others Group Source: Daiwa

Valuation comparison Historical comparison AIA is currently trading at a 1.8x 2017E P/EV. It has been traded between 1.3x and 2.1x one-year forward P/EV since its IPO in 2010. We believe its Hong Kong and China operation will drive valuation upside over our investment horizon. And as these 2 regions are also characterised by high ANP and VNB growth, their large contribution to the group’s valuation should mean a higher overall blended P/EV for the company. That said, increasing competition from improving agency force at China insurers and bank-led insurers in Thailand and Malaysia may cap its valuation multiple upside.

AIA: 12-month rolling forward P/EV AIA: 12-month rolling forward PBR Rolling P/EV (x) Price (HKD) Rolling PBR (x) Price (HKD) 2.5 60 3.0 60 50 50 2.5 2.0 40 40 30 2.0 30 1.5 20 20 1.5 10 10 1.0 0 1.0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Rolling P/EV Average P/EV +1SD Rolling PBR Average PBR +1SD -1SD Price -1SD Price Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts Note: priced as at 15 July 2016; average of past 5 years. Note: priced as at 15 July 2016; average of past 5 years.:

Comparison with global insurance companies Unfortunately most of the US and European insurance companies do not provide their EV; hence, we are unable to compare AIA’s P/EV with most of its global peers. In terms of PBR, however, AIA’s FY17E PBR currently stands at 1.8x, much higher than the 1.0x of global insurers and 0.7x/1.2x of Asian/China insurers. Arguably, AIA delivers much higher premium growth than most of its global and Asian peers, and has lower balance-sheet risk than its China peers. Also, AIA’s ROE is higher than its global peers, providing some justification to its higher PBR. Besides, there is a scarcity value to AIA’s unique geographic exposure and business strategy.

AIA Group (1299 HK): 15 July 2016

Global insurance companies: valuation comparison Company Ticker Market cap Rating Current PBR PER ROE (%) ROA (%) Leverage (x) (USD bn) price FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E

CHINA / HK - H SHARE

China Life 2628 HK 85 Hold 17.68 1.2 1.0 24.4 11.6 5.1 9.5 0.7 1.3 7.5 7.3 Ping An 2318 HK 88 Buy 36.60 1.5 1.3 11.3 9.3 14.1 14.9 1.0 1.0 14.2 14.2 CPIC 2601 HK 36 Buy 28.55 1.6 1.4 16.7 11.3 9.8 13.3 1.4 1.8 7.1 7.3 PICC Group 1339 HK 17 Buy 3.04 0.9 0.8 8.5 6.6 10.6 12.3 1.5 1.7 7.2 7.2 PICC P&C 2328 HK 24 Hold 12.44 1.3 1.1 10.6 9.2 13.0 13.1 3.4 3.5 3.8 3.7 New China Life 1336 HK 17 Outperform 28.45 1.2 1.1 14.8 5.7 8.5 20.0 0.7 1.8 11.4 11.4 Taiping 966 HK 7 Buy 15.58 0.8 0.7 12.1 7.7 7.1 9.5 0.9 1.2 8.1 8.0 AIA Group 1299 HK 75 Outperform 48.05 2.1 1.8 22.4 17.8 10.4 11.0 1.9 2.2 5.5 5.0 Sector 358 1.5 1.3 17.2 11.5 10.0 12.4 1.3 1.7 7.4 7.3

CHINA - A SHARE

China Life 601628 CH 85 N/A 21.69 1.9 1.7 20.3 17.0 9.1 10.3 1.2 1.4 7.8 7.4 Ping An 601318 CH 88 N/A 32.59 1.5 1.3 10.8 9.7 15.7 15.8 1.0 1.0 15.3 14.2 CPIC 601601 CH 36 N/A 27.44 1.8 1.7 16.1 14.2 11.5 11.8 1.5 1.6 7.6 7.3 New China Life 601336 CH 17 N/A 42.14 2.1 1.9 17.6 15.1 13.0 13.5 1.2 1.2 10.8 11.4 Sector 226 1.7 1.6 15.7 13.6 12.4 12.9 1.2 1.3 10.6 10.3

Regional

Tokio Marine 8766 JP 27 Buy 3,808 0.8 0.7 10.5 9.8 7.7 8.0 1.4 1.5 5.5 5.2 Dai-ichi Life 8750 JP 14 Outperform 1,253 0.4 0.4 7.0 6.8 6.6 6.3 0.4 0.4 15.5 15.3 Samsung Life 032830 KS 17 N/A 98,000 0.7 0.6 8.9 13.0 8.4 5.1 0.8 0.5 10.1 9.3 MS&AD Holdings 8725 JT 17 N/A 2,790 0.6 0.6 8.9 8.4 6.7 6.8 0.9 1.0 7.2 7.1 Cathay Financial 2882 TT 14 Buy 36.5 1.0 0.9 10.4 9.9 9.5 9.7 0.6 0.6 15.6 15.2 Fubon Financial 2881 TT 13 Outperform 39.0 1.0 0.9 8.6 8.3 11.9 11.8 0.8 0.8 14.7 14.2 Sector 102 0.7 0.7 9.3 9.5 8.3 7.8 0.9 0.9 9.1 8.6

GLOBAL

Berkshire Hathaway BRK/B US 359 N/A 145.7 1.3 1.2 19.8 17.8 6.9 7.2 n.a n.a n.a n.a Allianz ALV GR 66 N/A 128.6 0.9 0.9 8.7 8.3 10.5 10.4 0.9 0.8 11.9 13.7 Chubb CB US 60 N/A 129.9 1.2 1.2 13.4 12.4 10.1 10.0 3.0 3.0 3.4 3.4 AXA CS FP 49 N/A 18.3 0.6 0.6 7.6 7.3 9.0 8.8 0.6 0.7 14.1 13.3 MetLife Inc. MET US 47 N/A 42.4 0.6 0.6 7.9 7.2 9.3 9.3 n.a. n.a n.a n.a Zurich Insurance ZURN VX 36 N/A 235.8 1.1 1.1 11.1 10.1 10.2 11.1 0.8 0.9 12.4 12.4 The Travelers TRV US 35 N/A 118.7 1.4 1.3 12.6 12.0 11.8 11.7 2.8 2.9 4.3 4.0 Prudential Financial PRU US 33 N/A 75.0 0.7 0.6 7.9 7.3 11.9 11.6 0.8 0.8 14.8 14.5 Swiss RE SREN VX 32 N/A 84.1 0.9 0.8 8.9 9.5 9.6 8.6 1.5 1.3 6.4 6.6 Munich RE MUV2 GR 27 N/A 149.3 0.8 0.7 10.2 9.3 7.6 7.8 0.9 0.9 8.6 8.9 Allstate ALL US 26 N/A 69.3 1.3 1.3 15.6 11.2 9.1 11.7 1.5 2.2 6.2 5.2 Generali G IM 20 N/A 11.4 0.7 0.7 7.6 7.2 9.5 9.5 0.4 0.4 24.3 22.2 Hannover RE HNR1 GR 11 N/A 91.8 1.3 1.2 10.7 10.8 12.7 11.7 1.7 1.6 7.6 7.4 Sector 801 1.1 1.0 14.4 13.1 8.6 8.8 0.7 0.7 12.3 12.3

Source: Bloomberg, Daiwa Note: Daiwa forecasts for China Life, Ping An, China Pacific, PICC Group, PICC P&C, New China Life and Taiping H-share; Bloomberg consensus for other stocks. Priced as of 15 July 2016.

Risks Intensifying competition from local players (key risk) Growing agency channel competition from domestic players in China. When AIA first brought its agency insurance model to China in 1992, China life insurers were focusing on premiums instead of value growth. China life insurers were at the early stages of development at that time, and the premium scale growth could provide them the opportunities to earn investment spread, the data and experience required for doing life insurance business and to establish their brand names.

However, after decades of growth in experience and scale, China life insurers have been shifting their attention to VNB growth from pure volume growth since 2011, when China Pacific Life made its strategic shift from premium growth to VNB growth. Now most of the large life insurers, such as China Life, Ping An Life and China Pacific Life are witnessing the distribution-channel-mix improvement with more contribution from agency channels. For example, for China Pacific Life, the premium contribution from agency force to total premiums rose from 40% in 2010 to 84% in 2015.

Although the China life insurance market is big enough to absorb most of the competition in the near term, in the long run AIA is losing its edge in agency channel as the local players have been joining the competition. Usually, the local competitors have more advantages, such as policy support.

AIA Group (1299 HK): 15 July 2016

Bank-led insurers are challenging AIA’s leading position in Thailand and Malaysia. Bancassurance expansion has been a key trend across the Thailand and Malaysian life insurance markets. Indeed, in 1Q16, the bancassurance channel’s contribution to total life premiums in Thailand increased to 48%, compared with 45% for the agency channel, making it a major life insurance distribution channel in Thailand for the first time. We think the trend observed in these 2 countries could continue in the coming years.

For AIA, agency is still the key distribution channel in Thailand and Malaysia. Although it is trying to enhance its cooperation with banks, it has lost significant market share in Thailand in the past few years. Given AIA’s disadvantage in bancassurance distribution, we expect it to see more premium growth pressure in these 2 regions.

Continued currency and equity market volatility across Asia Currency risk. As AIA’s reporting currency is USD, the depreciation of most Asian currency would have negative impact on AIA. Although we believe the economic impact on AIA’s financials should be limited as AIA has a sound local currency match mechanism, it will almost certainly see the translation impact on its financial statements because of the unhedged equity at its local units.

As for the exchange-rate sensitivity, AIA estimates a 5% fall in local-market currencies (except for the HKD, which is assumed to remain pegged to the USD) vs. the USD which would have a 2.6% negative impact on AIA’s EV (as of end-FY15) or a 3.4% negative impact on its VNB (for FY15).

Equity price risk. AIA invests in local equities in most of the markets it operates in, and hence is subject to equity-price risk. In terms of sensitivity, AIA estimates if equity prices rise or fall proportionally by 10%, AIA’s EV (as of end-FY15) would rise or fall by 1.9%.

Nevertheless, we think AIA is less sensitive to currency movements than the China insurers as: 1) insurance and fee-based profit contributes the majority of its operating profit, compared with China insurers which mainly rely on the investment spread to generate most of their operating profit, and 2) its equity portfolio is geographically diversified.

Also see our sensitivity to currencies, equity markets, and interest rates section for quantitative details.

AIA: EV and VNB currency sensitivity AIA and major China insurers: comparison of EV equity market sensitivity (10% increase in equity market prices) 4.0% 3.8% 4.0% 3.4% 3.8% 3.6% 3.5% 3.1% 3.6% 3.4% 2.8% 3.4% 3.0% 3.2% 2.5% 3.0% 2.8% 1.9% 2.7% 2.0% 2.8% 2.6% 2.6% 1.5% 2.4% 1.0% 2.2% 2.0% 0.5% FY13 FY14 FY15 0.0% EV VNB AIA China Life Ping An CPIC Source: Company Source: Company, Daiwa Note: assuming 5% appreciation in local market currencies vs. USD (except for HKD, which is Note: 1) all in reporting currency of respective companies; after considering the corresponding assumed to be pegged with USD): impact allocation of returns to participating product policy holders; 2) assets held to support unit-linked contracts have been excluded on the basis that changes in fair value are wholly borne by policyholders; 3) all sensitivity estimates are based on Group level

AIA Group (1299 HK): 15 July 2016

Appendix: Glossary of terms

On premiums Annualised Premium Equivalent (APE): premiums measured on an annualised basis. The international practice is to divide single premiums by 10 and add the regular premiums.

Annualised new premiums (ANP): ANP represents 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. It is an internally used measure of new business sales or activity for all entities within AIA. ANP excludes new business of pension business, personal lines and motor insurance.

First-Year Premiums (FYP): the sum of the single premiums and the first-year regular premiums.

Renewal Premiums: regular premiums collected in the period from in-force policies.

Flexible premiums: usually found in universal life products which allow policyholders to stop paying for a certain period with the policy remaining valid.

Regular premiums: policyholders make regular premium payments. Policy durations vary from three years to more than 20 years.

Single premiums: policyholders only need to pay a single premium payment at the beginning.

Total weighted premium income (TWPI): TWPI consists of 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums, before reinsurance ceded. As such it provides an indication of AIA’s longer-term business volumes as it smoothes the peaks and troughs in single premiums.

On products Annuities: products that provide for periodic payments to an annuitant for a specified period of time, often until the annuitant’s death.

Critical illness insurance plan: a policy that pays out a lump sum on the diagnosis of life threatening illnesses indicated in the terms of the plan.

Endowment life insurance: products that provide a guaranteed benefit upon the death of the insured within a specific period or a guaranteed benefit to the insured if the individual is still alive at the end of the term.

Investment-linked insurance: products that provide an investment return linked to an investment option selected by the policyholder. Policyholders enjoy 100% of the return generated by the underlying investment option, which can be positive or negative.

Participating policy or annuity: policies or annuity contracts under which the owner is eligible to share in a portion of the distributable earnings from participating products of the insurer through policyholder dividends, whether or not such dividends are currently payable.

Riders: endorsements to life-insurance policies that provide additional benefits with a top- up premium payment.

Savings insurance: products that are similar to term deposits to a large extent and provide a fixed return over a predetermined period.

AIA Group (1299 HK): 15 July 2016

Term life insurance: products that provide a guaranteed benefit upon the death of the insured within a specific period.

Traditional Non-PAR: policyholders enjoy a guaranteed rate of no more than 2.5%.

Traditional PAR: policyholders enjoy a guaranteed rate of no more than 2.5% plus at least 70% of the mortality gain, expense gain and investment gain of the underlying investment assets.

Unit-linked products: Unit-linked products are insurance products where the policy value is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investment or indices. Investment risk associated with the product is usually borne by the policyholder. Insurance coverage, investment and administration services are provided for which the charges are deducted from the investment fund assets. Benefits payable will depend on the price of the units prevailing at the time of death of the insured or surrender or maturity of the policy, subject to surrender charges.

Universal Life: policyholders enjoy a guaranteed return of no more than 2.5% plus profit of the underlying investment assets based on the insurers’ assumptions.

Variable life: life insurance products for which the reserves and/or benefits may vary in amount with the market value of a specified group of assets held in a segregated fund.

Variable annuity pensions: these are investment-linked insurance products with a guaranteed return, of which premium payments are to be paid annually. The guaranteed return can be made in terms of a: minimum death payment, minimum maturity return, minimum annual benefit or minimum accumulated return.

Whole life insurance: products that provide a guaranteed benefit, predetermined by the contract, upon the death of the insured, in return for the periodic payment of a fixed premium over a predetermined period.

On distribution Bancassurance: products sold through the insurer’s bank partners.

Direct sales – telesales marketing/online sales: products sold through newly-developed phone or online channels.

Group insurance: usually corporate pensions or health products sold to state-owned enterprises and large private enterprises.

Individual/ Agency channel: products sold through the insurer’s tied-agency team.

IFA: independent financial adviser.

On embedded value Adjusted Net Worth (ANW): value of an insurer that consist of capital, surplus and an estimated value for the business on the company’s books. For the Chinese insurers, this should be close to the shareholders’ equity with all investment assets marked-to-market.

Appraisal value: the sum of the embedded value and the value of future new sales.

Embedded Value (EV): an actuarially-determined estimate of the economic value of life insurance operations of an insurer based on a particular set of assumptions as to future experience, excluding any value attributable to any future new business. It is calculated as: EV = VIF + ANW

AIA Group (1299 HK): 15 July 2016

New Business Multiple (NBM): a multiple which measures the premium one is willing to pay for the growth of an insurer’s new business strain. In determining the NBM for valuing the Chinese insurers, we consider the premium-growth factor, the margins factor and the discount rate factor.

Value of in-force (VIF): present value attributed to shareholders in respect of the future profits projected to arise from the portfolio of life-insurance business in-force based on a particular set of assumptions as to future experience.

Value of New Business (VNB): present value attributed to shareholders in respect of the future profits projected to arise from one year’s sales based on a particular set of assumptions as to future experience. It is calculated as: VNB = FYP APE × VNB Margin

Value of New Business Margin (VNB Margin): the margin of an insurer’s one-year sales, which is determined by: product mix, distribution-channel mix, premium payment structure, and expense management, etc.

Investment variance: the difference between the investment assumption and the actual investment experience, which can be positive or negative.

Operating/ Experience variance: the difference between the operating experience assumption (eg, mortality and morbidity, persistency, policyholder dividend payout, expenses, etc.) and the actual operating experience, which can be positive or negative.

Others AER: actual exchange rates.

Cash value: the amount of money, before adjustments for factors such as surrender charges, loans and interest, that the policyholder will receive upon surrendering a policy.

Cede, ceded or ceding: the reinsurance of all or a portion of an insurer’s risk with another insurer.

CER: Constant exchange rates. Change on constant exchange rates is calculated using constant average exchange rates for current year and prior year.

Cooling-off period: the period during which the policyholder has the right to cancel the policy at no/minimal punitive charge. It gives buyers a chance to re-think their decisions as life insurance is a long-term commitment.

Free surplus: ANW in excess of the required capital.

Maturity date: time at which life-insurance death proceeds or endowments are paid, either on the death of an insured or at the end of the endowment period.

Million Dollar Round Table (MDRT): MDRT is a global professional trade association of life insurance and financial services professionals that recognises significant sales achievements and high service standards.

Morbidity: incidence rates and duration of disability used in pricing and computing liabilities for disability insurance. Morbidity varies by such parameters as age, gender and duration since disability.

Mortality: rates of death, varying by such parameters as age, gender and health, used in pricing and computing liabilities for future policyholder benefits for life and annuity products which contain significant mortality risk.

AIA Group (1299 HK): 15 July 2016

Negative spread: common legacy seen in many Asia markets including China caused by life insurance policies with guaranteed rates higher than the investment return of the insurer.

Persistency ratio: the percentage of life insurance policies that have not lapsed – an important measure of an insurer’s retention ability.

Protection gap: the difference between the resources needed and resources available to maintain dependants’ living standards after the death of the primary wage-earner.

Reinstate: the reinstatement of a life insurance policy that has lapsed, through the payment by the policyholder of unpaid premiums and interests.

Regulatory minimum capital: net assets held to meet the minimum solvency margin requirement set by the HKICO that an insurer must meet in order to be authorised to carry on insurance business in or from Hong Kong.

Separate accounts: investment accounts maintained by an insurer to which funds have been allocated for certain policies under provisions of the PRC insurance laws. The investments in each separate account are maintained separately from those in other separate accounts and an insurer’s general account and generally are not subject to the general liabilities of the insurer. The investment results of the separate account assets generally pass through to the separate account policyholders and contractholders, less management fees, so that an insurer bears limited or no investment risk on such assets.

Solvency ratio: the ratio of the total available capital to the regulatory minimum capital applicable to the insurer pursuant to relevant regulations.

Surrender: action by a policyholder to relinquish a life-insurance policy for its cash value.

Source: Companies, compiled by Daiwa

AIA Group (1299 HK): 15 July 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; John HETHERINGTON (852) 2773 8787 [email protected] Shipbuilding; Steel Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Banking; Capital Goods (Construction and Machinery) Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Jonas KAN (852) 2848 4439 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Property (China) Kevin JIN (82) 2 787 9168 [email protected] Leon QI (852) 2532 4381 [email protected] Small/Mid Cap

Banking (Hong Kong/China); Broker (China); Insurance (China) TAIWAN Yan LI (852) 2773 8822 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Banking (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Anson CHAN (852) 2532 4350 [email protected] (Regional) Consumer (Hong Kong/China) Christie CHIEN (886) 2 8758 6257 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Transportation – Railway; Construction and Engineering (China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Thomas HO (852) 2773 8716 [email protected] Head of India Research; Strategy; Banking/Finance Custom Products Group Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities PHILIPPINES Patricia Tamase (63) 2 797 3024 [email protected] SINGAPORE Banking Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India) Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Banking; Property and REITs Shane GOH (65) 64996546 [email protected] Property and REITs; Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

AIA Group (1299 HK): 15 July 2016

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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AIA Group (1299 HK): 15 July 2016

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

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There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

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United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at

AIA Group (1299 HK): 15 July 2016

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 65.8% Hold** 21.8% Sell*** 12.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association