COMPANY SUMMARY

Spinned off in 2010 from American International Group (AIG) after the 2008 global financial crisis, AIA Group Limited (1299:HK) is one of the largest insurance company in Asia. AIA Group Limited is one of the few insurance companies listed on the Hong Kong Stock Exchange that has operations all over Asia.

TICKER SYMBOL: 1299.HK
MARKET CAP: HKD 599.8 Billion (Updated 31 July 2015)
MARKET PRICE / SHARE: HKD 49.90 (Updated 31 July 2015)
INDUSTRY: Insurance

THE BUSINESS

According to AIA Group Limited, they are the largest publicly listed pan-Asian life insurance group. The company operates in 17 markets, predominately in Hong Kong, Thailand, Singapore, China and Malaysia. From its first-half 2015 earnings result, the company derived 83% of operating income from these 5 markets.

AIA presentation

Source: Company Presentation

Since its IPO in 2010, the company has been able to grow its revenue at 7.87% annually from FY2010 to FY2014. Its earnings per share has grown similarly at 7.15% compounded annually over the same period in term of US dollars.

As an insurance company, book value is one key information investors look at when valuing the company. AIA Group Limited has also been success in increasing its book value from US$1.62 per share in FY2010 to US$2.57 per share. That is a 12.2% annual growth over the past 4 years. Valued at close to HK$600.0 billion, AIA Group Limited is one of the largest company listed on the Hong Kong Stock Exchange (HKEx).

KEY OPPORTUNITIES
  1. Addressable Market

Even with such a large market capitalisation, AIA Group should not be view as a stable recurring business with limited growth. The fact that it is focused in the pan-Asian market, the growth opportunity of the company is far from over. In population in Asia ex-Japan is around 4.0 billion currently compared to the 0.9 billion in North America and the 400 million in Europe, the addressable market for AIA is as least 4 times the North America market and 10 times the European market. Moreover, the population in Asia is projected to be growing much faster than both North America and Europe.

Combining that with the urbanisation process in many developing nations in Asia, the rising wealth and income of the population, more and more people will be needing insurance coverage in the future. At the moment, the Asia ex-Japan population only spends 1/6th in social welfare compared to the G7 nations and private cover penetration is only 1/16th of the G7 nations. All in all, the growth potential for AIA Group is huge.

  1. Strong Branding

The AIA brand is founded in Shanghai since 1919. With close to a century of presence in Asia, AIA is a well-known brand throughout Asia. Given the fact that the product of insurance is essentially a promise to the customer, a strong reputation and branding plays a huge role for an insurance company. Although most countries have their own domestic insurance companies, there are only a handful of reputable pan-Asia insurance company and AIA is one of them, which is going to be an advantage.

  1. Low Insurance Penetration

Combining that with the urbanisation process in many developing nations in Asia, the rising wealth and income of the population, more and more people will be needing insurance coverage in the future. At the moment, the Asia ex-Japan population only spends 1/6th in social welfare compared to the G7 nations and private cover penetration is only 1/16th of the G7 nations. All in all, the growth potential for AIA Group is huge.

KEY RISKS
  1. Financial Crisis and Leverage Ratio

As a financial insituition, there is always a risk that what happened in the 2008 global financial crisis will repeat again. Moreover, at the center of the crisis is American International Group (AIG), which used to be the parent company of AIA Group before they are spinned off in its HKEx listing in 2010.

Investors would need to monitor the leverage ratio of the company and its investment profile. At the moment, the company investment mostly (about 80%) of its portfolio in bonds and has a leverage ratio of 5.4 times. All of these are still reassuring to investors at the moment as they are still within acceptable level. However, if the company begins to move toward riskier investment or increasing its leverage ratio significantly, it might be a cause of concern for investors.

  1. Pricing Discipline and Investment

An insurance company earns its profit from two channels; from the premium it collects for insuring its customers and from the investment profit by investing the float. The float is the premium it received from its customers before paying out its claims. These float can be consider a sort of financing for the company and most insurance company invest them to earn a decent profit from them. It is sort of like banks investing the cash from its depositor, earning a profit from the money that your customers placed in your trust.

If the company started lowering its premium in hope to attract more volume in the short term, it might be a yellow flag for investors. Such practice might increase revenue in the short term by bringing in higher volume of policies but due to the poor pricing, claims might increase significantly over the long term. When an insurance company starts such a practice, investors need to be on high alert.

  1. Valuation

Lastly, valuation plays a big role when investing. Although AIA Group Limited is a company with long history, its listing history is relatively short. Therefore, it is hard for investor to get a good sense of the company’s value.

At the moment, the company is trading at 2.6 times its tangible book value, 19 times its earnings per share and giving only a 1.0% yield to shareholders. These are not very attractive valuation. From its listing history, the company has trading from 1.6 times its tangible book value to 2.8 times. Buying at the wrong valuation might dampen an investor’s return significantly, therefore, investors should spend sometime in this segment.

TOP SHAREHOLDERS (As at 30 Nov 2014)
  1. Citigroup Inc, Banking and Securities Investments – 9.00%
  2. BlackRock Inc – 5.68%
  3. Capital Research and Management Company – 5.23%

Shares Outstanding: 12,045,117,225

FINANCIAL STATEMENTS
 USD 2010-11 2011-11 2012-11 2013-11 2014-11
 Assets
 Cash and cash equivalents       2,595.00       4,303.00       2,948.00       2,228.00       1,835.00
 Deferred policy acquisition costs     12,818.00     15,738.00     16,593.00
 Property and equipment           318.00           359.00           412.00           480.00           541.00
 Goodwill           252.00           276.00     14,433.00       1,321.00       2,152.00
 Other assets   104,700.00     96,705.00   116,646.00   126,818.00   145,798.00
 Total assets   107,865.00   114,461.00   134,439.00   146,585.00   166,919.00
 Liabilities and stockholders’ equity
 Liabilities
 Long-term debt           597.00           559.00           766.00       2,126.00       2,934.00
 Deferred income taxes       1,754.00       1,810.00
 Taxes payable           287.00           290.00           328.00           242.00           198.00
 Other liabilities     85,672.00     90,489.00   106,648.00   119,531.00   132,981.00
 Total liabilities     88,310.00     93,148.00   107,742.00   121,899.00   136,113.00
 Stockholders’ equity
 Additional paid-in capital       1,914.00       1,914.00       1,914.00       1,914.00
 Retained earnings     13,924.00     15,354.00     17,843.00     20,070.00     22,831.00
 Accumulated other comprehensive income       3,717.00       4,045.00       6,940.00       2,702.00       7,975.00
 Total stockholders’ equity     19,555.00     21,313.00     26,697.00     24,686.00     30,806.00
 Total liabilities and stockholders’ equity   107,865.00   114,461.00   134,439.00   146,585.00   166,919.00

Source: Morningstar – Balance Sheet of AIA Group Limited

 USD 2010-11 2011-11 2012-11 2013-11 2014-11
 Revenues
 Premiums   11,079.00   12,301.00   13,054.00   15,707.00   17,052.00
 Investment income, net     7,240.00     1,973.00     7,206.00     6,064.00     8,204.00
 Other income (loss)           75.00         114.00         127.00         155.00         177.00
 Total revenues   18,394.00   14,388.00   20,387.00   21,926.00   25,433.00
 Benefits, claims and expenses
 Selling, general and administrative     1,478.00         233.00     1,577.00
 Interest expense             9.00           12.00           19.00           71.00         103.00
 Merger, acquisition and restructuring           50.00           80.00
 Other expenses   14,836.00   10,692.00   16,336.00   16,754.00   20,999.00
 Total benefits, claims and expenses   14,845.00   12,232.00   16,668.00   18,402.00   21,102.00
 Income before income taxes     3,549.00     2,156.00     3,719.00     3,524.00     4,331.00
 Income tax (expense) benefit      (839.00)      (560.00)      (685.00)      (691.00)      (877.00)
 Other income (expense)           12.00           (5.00)           14.00           14.00
 Net income     2,710.00     1,608.00     3,029.00     2,847.00     3,468.00
 Preferred dividend             9.00             8.00           10.00           25.00           18.00
 Net income available to common shareholders     2,701.00     1,600.00     3,019.00     2,822.00     3,450.00
 Earnings per share
 Basic             0.22             0.13             0.25             0.24             0.29
 Diluted             0.22             0.13             0.25             0.24             0.29
 Weighted average shares outstanding
 Basic   12,044.00   12,031.00   11,997.00   11,974.00   11,968.00
 Diluted   12,044.00   12,032.00   12,008.00   11,974.00   12,009.00

Source: Morningstar – Income Statement of AIA Group Limited
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any company mentioned above.

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