Elite stock: AIA's rising profits from fast-growing Asia lure top backers – citywireselector.com

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Insurer has delivered an assured performance, delivering steadily rising profits despite the impact of Covid on its Asian markets.
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Global Private Banker dives into what makes big financial groups tick, as well as their latest investment decisions and sustainability aspirations
Brace yourself: insurance can be interesting.
In the case of AIA (HK:1299), in fact, it can be positively absorbing. Not only is Asia’s largest life insurer exposed to some of the world’s most dynamic and rapidly growing economies and markets, but its recent history has all the twists and turns of a racy psychological thriller.
AIA has more than trebled in value since its listing in Hong Kong at the end of 2010, a market debut that drew a line under a sustained period of corporate turbulence.
Performance since has been assured, despite the impact of Covid on its Asian markets in the past three years. Operating profit after tax, a key measure of insurers’ financial progress, has continued its upward march, rising 8% to $6.4bn (£5.8bn) last year and up more than threefold from AIA’s debut results as a listed company. That has been powered by the value of new business, which, after taking a Covid hit in 2020, resumed its climb last year, hitting $3.4bn, though still off pre-pandemic levels. Margins on that business remain strong, at 59.3%, nearly double their level in 2010. In insurance terms, these numbers help to make AIA a real page-turner.
It is arguably hardly a surprise, then, that the group has attracted significant interest from some of the world’s smartest investors. AIA shares are held by 57 elite fund managers, many of which are running heavily overweight positions.
Source: Citywire/Morningstar, latest reported holdings
AIA is the third largest holding for Chris Chan, elite manager of the New Capital Asia Future Leaders fund, who has been an investor since the fund was launched in 2018. Chan says he likes the group’s efficiency and profitability as well as the opportunities for growth in its markets.
‘AIA uses its long underwriting history and experience to price products more accurately with less risk, and its high mix of protection insurance offers more stable margins than those with more volatile investment-linked products,’ he says.
In general, protection products include specific cover for loan repayments or loss of income, for example, and are not linked to investment markets.
‘Its longstanding focus on having a well-trained, quality agency force also gives it significant advantages compared with smaller and more domestically focused peers,’ Chan says. ‘AIA also has a presence in Southeast Asian markets, where a growing middle class and low insurance penetration offer a long tail of structural growth.’

The modern-day AIA is the largest life insurer in Asia, selling health and life assurance in 18 markets, including Hong Kong, Singapore, Malaysia and China, as well Australia and New Zealand. The group also has an investments arm, managing assets worth nearly $218bn as at the end of June, the majority of which are invested in bonds.
The company was established in 1919 when the American entrepreneur Cornelius Vander Starr set up an insurance agency in Shanghai, east-central China. Political instability in Asia forced Starr to relocate to the US in 1939 and, five years later, after the end of World War II, he decided to remain in the country overseeing his domestic businesses, later renamed AIG.
For decades, AIG walked tall in the world’s insurance markets, until the financial crisis in 2008 brought it to the brink of collapse when the blow-up of collateralised debt obligations that it had insured left it on the hook for massive payouts. The US government stepped in with a giant bailout that eventually topped $180bn.
AIG was forced to offload AIA as a condition of the bailout. The Asian insurer had been aiming to list in 2010 but the plan was scrapped with the announcement of an agreed deal to be taken over by Prudential, the blue-chip UK-listed insurer. But amid an outcry from Pru shareholders, the deal collapsed, leaving AIA to dust down its listing prospectus and float – to great fanfare – at the end of the same year.
Among several ironies, the market debut was overseen by new boss Mark Tucker, formerly chief executive of the Pru, and the initial listing valued the group at $30.5bn, almost exactly the amount that, when it tried to renegotiate the takeover’s terms, the Pru had tried to pay.
The Asian regions AIA serves are growing, developing and creating wealth at a breakneck pace, often moving from rural to high-tech economies within a matter of decades. Many have little or no state-funded healthcare provision and have been creating a network of financial infrastructure from a standing start.
So not only is AIA positively exposed to emerging prosperity, but it is also directly linked to the creation of insurance-funded healthcare provision, underpinned by the rise of financial services. And what it offers is affordable for the region’s growing middle classes.
The economies of Asia and the Pacific region are on track to grow by 4.2% this year and 4.6% in 2023 according to the most recent forecasts from the International Monetary Fund. By comparison, the IMF estimates that the global economy will grow by a much lower 3.2% and that US GDP will rise by just 2.3% this year and a meagre 1% in 2023.
Harry Schmidt is a sustainability analyst at Janus Henderson and part of the team that supports elite manager Hamish Chamberlayne. He says: ‘While in Western markets insurance is seen as a much more mature industry, penetration for health and life insurance products in Southeast Asia is still relatively low, leaving a significant growth opportunity.
‘As the premier franchise across the region, AIA has consolidated a strong leadership position as the largest insurer in Asia and is still demonstrating its growth potential, compounding the value of net new business at greater than 20% year on year.’

While individual countries in the region can carry specific risks, political or regulatory instability, for example, the broad spread of AIA’s business and its large network of agents helps to dissipate this, Schmidt says.
He also notes that several regions in China, an important growth market for AIA, have opened up to international insurers in recent years, materially increasing the insurer’s addressable markets and its opportunities to grow. ‘Our view is that AIA is well positioned to continue to capitalise on this underserved market,’ he says.
Perhaps surprisingly for a business that is part of a sector often perceived as cumbersome, slow-moving and rooted in the past, AIA is also embracing technology. For example, it has inked partnership or joint-venture deals with WeDoctor, a Chinese online healthcare provider backed by e-commerce giant Tencent, and Discovery Group, the South African financial services group with which it has launched a health insurance technology operator called Amplify Health.
AIA is also investing $1.5bn in developing and expanding its use of technology, digital services and analytics. That’s on top of its use of existing apps such as MyAIA. The company looks at the forefront of tech-driven progress in its markets.
Tidjane Thiam
When Prudential’s audacious $35.5bn takeover of AIA collapsed in acrimony more than a decade ago, some of the blue-chip insurer’s top shareholders were already ruing the outcome. They knew that the rationale for the combination was compelling. But what vexed them was how the process became snared in a tangle of strategic and governance foul-ups amid tensions with the City regulator over the need for additional capital.
The setbacks came thick and fast. While the price tag now seems modest relative to AIA’s $92bn market value, back then shareholders had serious concerns the Pru was overpaying, by as much as $5bn, to gain additional exposure to key Asian growth markets. They also found the savings the insurer was targeting to be light and fretted that it would be three hard-slog years before the tie-up would begin to generate returns.
Tidjane Thiam, the Pru’s charismatic chief executive – who had only been in the job for six months when the deal was announced – infuriated shareholders on a number of occasions. They were initially spooked at his apparently glib talk of fees of roughly $1bn that would be paid to the investment banks brought in to manage a record $21bn rights issue, needed to pay in part for the acquisition.
After a number of institutional investors made clear they would not support the takeover at the agreed price, the Pru also agreed to go back to AIA’s American owner AIG and renegotiate it down to just over $30bn. Ultimately, it was to no avail, though, as AIG rejected the proposal and the Pru was forced to walk away from the acquisition and scrap the rights issue.
By the time the final straw came, when the insurer was forced to pick up a £450m tab to cover the cost of the failed deal, for some shareholders their reservations had turned into hostility. Calls for the resignations of both Thiam and Pru chairman Harvey McGrath began to grow, although neither of them yielded to the pressure. In December the following year, McGrath said he would be going while Thiam stayed until 2015, when he left to take the helm at Credit Suisse.
Sometimes confoundingly, insurance companies – particularly those that sell life cover – come with a set of unique characteristics that can make them both harder to understand and more difficult to value. Customers pay for their policies over lengthy periods, actuarial calculations are involved in setting their price and risk, and, because premiums are invested, their value can fluctuate in line with markets.
The good news is that modern insurers can be highly cash-generative, in two ways. First, the regulatory capital they have to set aside to protect policyholder interests gets freed up as time passes. And, when life policies mature – or, put simply, the policyholder is still alive at the end of the cover – all of the cash a customer has put in over the years is released to the insurer as pure profit.
For these reasons, a couple of insurance-specific measures can come in handy. ‘Embedded value’ is essentially the estimated value of an insurer’s policies over their lifetime. AIA’s performance on this measure shows solid and sustained business growth – embedded value hit $73bn last year, up by nearly three quarters over five years and more than threefold since the business was listed.

Likewise, AIA’s free surplus cash generation – or capital generated internally that doesn’t have to be used elsewhere – has followed a similar trajectory, hitting $6.5bn in 2021, up 60% over five years and leaving the insurer with a total surplus cash pile of $17bn.
This financial strength has led to a consistently rising dividend, which has climbed more than fourfold over 10 years, reaching HK$1.46 in 2021. Brokers are forecasting a HK$2 dividend this year, which places the shares on a 2.9% yield, and AIA has announced plans to return $10bn to shareholders through a programme of buying back its shares over the next three years.

AIA’s shares are not expensive. They trade at 15 times next year’s forecast earnings, according to FactSet, close to a four-year low, with the share price down by more than a third from its 2021 peak. The shares have meanwhile proved relatively resilient in this year’s global stock market selloff, losing 13% while the MSCI World index is down by a quarter.
Although the group is exposed to China, which is in the thick of an unfolding property crisis, its investments in the region’s property developers are limited, giving it an element of insulation.

There’s plenty to like about what insurers do in principle, though try telling that to policyholders who understandably cry foul when their premiums jump, claims are denied, or their pensions and investments wither on the vine of declining markets.
Insurers such as AIA can be seen as offering an extremely useful service, particularly in economies with limited public healthcare. The provision of affordably priced cover can help smooth some of the inequalities created by a system that is entirely driven by patients’ ability or willingness to pay.
Schmidt notes that AIA offers ‘protection against events from which it may be impossible to recover’, arguing that AIA is ‘helping people to live healthier, longer, and better lives’ and thus helping to boost economic growth. Chan adds: ‘Being an insurance company, its life and health products can help protect and support people financially when they need it most.’
It could also be argued that insurers such as AIA are playing an important role in the pursuit of sustainability in that they are increasingly in the business of understanding, quantifying, and pricing climate risk.
The issue is a presence in both their underwriting divisions – which might assess, say, an individual business’s climate risks – and their investment arms, which are having to decarbonise their portfolios, exiting emissions-heavy companies or lobbying them hard to cut back.
At its worst, the increased climate-related sophistication of insurers can mean that they sharply increase their premiums or withdraw cover altogether. At its best, the knowledge and the data they accumulate can help us all better understand the nature of the problem and how it is changing.
For its part, as an investor, AIA is intensifying its engagement over environmental, social and governance issues with its portfolio companies and ramping up its investments in sustainable infrastructure. And it completed its divestment of coal mining and coal fire-powered businesses last year, seven years ahead of schedule.
If insurance can act as a reminder of how unpredictable life can be, the adventures of AIA demonstrate that it is rarely going to be dull.
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