Banking & Finance

AIA boosts dividend 17 per cent as first-half profit beats estimates; CEO upbeat on China’s middle class

PUBLISHED : Thursday, 28 July, 2016, 8:14am
UPDATED : Thursday, 28 July, 2016, 10:45pm

AIA Group expects to see robust growth from China and Hong Kong markets in coming years, fuelled by rising affluence among China’s middle class, AIA’s chief executive said, after Asia’s third-largest insurer by market value posted better-than-expected profit in the first half and hiked its dividend by 17 per cent.

AIA reported Thursday that its net profit dropped 6 per cent year on year to US$2.065 billion in the six months ended May 31 on an actual exchange rate basis. On a constant exchange rate basis, net profit dropped 2 per cent from the same period a year earlier. The figures are well above the range of market expectations of US$1.49 billion to US$1.88 billion, representing a year-on-year fall of 14 per cent to 31 per cent, as strong growth in new business in Hong Kong and China helped offset losses on equity investments.

Asia is the most attractive and dynamic region in the world for life insurance

AIA said it would increase its interim dividend to 21.9 Hong Kong cents per share, compared with the 18.72 Hong Kong cents per share a year ago.

“Hong Kong and China are two big growth drivers in the value of new business,” said Mark Tucker, chief executive of AIA, in an interview with the Post.

“In Hong Kong, it’s a mix of local Hong Kong Chinese and mainland customers [driving sales]. In China, the economic headline growth is still strong and there is a big protection gap between what people need and what people have in insurance, thus there is a great potential for us to grow our business,” he said.

Tucker said the insurance coverage gap could be more than US$50 trillion.

The value of new business (VONB), a key gauge of the company’s profitability that measures expected profits from new premiums, jumped 37 per cent year on year to US$1.26 billion on a constant exchange rate basis, top of the market expectations range.

In particular, Hong Kong and mainland China reported the biggest year-on-year increases in VONB, up 60 per cent and 56 per cent respectively.

However, there are concerns whether the strong momentum in Hong Kong’s volume growth driven by mainland customers is sustainable.

Chinese regulators and state-run card company UnionPay have tightened restrictions on mainlanders’ buying of Hong Kong insurance products since February, a move seen as likely to curb capital outflows which have surged since the yuan’s surprise depreciation last August.

“It may be quite difficult for China and Hong Kong markets to maintain an annualised growth rate for value of new business above 25 per cent in the next two to three years,” said Jerry Li, an analyst for China Merchants Securities, in a phone interview.

Goldman Sachs analysts also expressed doubts whether the new business would be sustainable in the long term.

“This should normalise at some point, thus we do not think it is realistic to expect continued approximately 40 per cent VONB growth for the long run,” said Goldman analysts in a recent note.

Nonetheless, Tucker believes the trend of insurance growth in China and H

ong Kong will continue, driven by factors such as rising disposable incomes, demographic changes and urbanisation.

“All of these factors mean more people will come into the middle class, and more people will need protection,” he said.

“The speed of that [change] is rapid. And the market is big enough,” he said. “We are confident in the future outlook of the company.”

AIA’s embedded value also increased 5 per cent year on year to US$40.07 billion in the first half, in line with market expectations. Earnings per share were 17.25 US cents, lower than 18.41 US cents in the same period a year earlier.

Tucker also said the company’s investments were mostly shielded from currency volatility.

“We don’t have a big portfolio of interest-sensitive products,” he said. “We are focused on the protection side of the business. Therefore, we are not that exposed.”