AIA Taps ‘Protection Gap’ for New Business Growth, But 2011 Net Falls 41%

AIA Group Ltd.'s agency force-dominated life insurance operations drove a 40% rise in new business, to US$932 million net of tax for the financial year ended Nov. 30, 2011. But accounting changes hit the bottom line, as the group posted a 41% drop in net income.

Net profit for the Hong Kong-listed insurer fell to US$1.6 billion from US$2.7 billion in 2010.

New business margin for the year was up 4.6 percentage points to 37.2%. The gain came mainly from substantial market growth in Hong Kong, Thailand, Singapore and China.

Annualized new premiums rose 22% to US$2.5 billion from the previous year.

Asia's multitrillion-dollar "massive" protection gap will continue to be the growth driver of the group, said Mark Tucker, AIA's group chief executive and president, in a press conference in Hong Kong.

"The continuous improvement of agency development and brand-building in China will enhance the profit contributions from this market to AIA, while the Asian insurance group needs to pay more attention to the increasing cost in its overall agency force expansion in the future," said Pandora Leung, a Hong Kong-based equity analyst with KGI Securities.

She noted the change of the accounting management under the international financial reporting standard that requires insurers to book investment performance of equities instead of bonds to their profit and loss accounts "may also have a negative impact" on the net profit of other listed China-based insurers, who are going to announce their 2011 financial results later in March.

Global reinsurer Swiss Re said in a recent report that in the Asia-Pacific region the total mortality protection gap across 12 insurance markets was about US$41 trillion in 2010, which expanded significantly from US$16 trillion in 2000. This gap has been expected to "worth approximately US$124 billion in potential premiums" to the industry.

"The company has capacity to conduct mergers and acquisitions but in a disciplined way," said Tucker, declining to comment on market speculation that AIA may be interesting in acquiring the Asian insurance operations of ING Group. Organic growth will remain the focus of AIA, as he noted "organic growth takes up around 99%" of AIA's overall business expansion. "We will see if it makes business sense to do it [M&As]."

The agency distribution channel contributed the majority of the insurer's new business profit and opportunities for access to existing and new customers during the year, according to AIA. In 2011, its agency channel represented 78% of the group's total value of new business, compared with 77% in 2010, and generated US$811 million, up 40% from the previous year.

In Hong Kong and China, AIA generated year-on-year new business growth of 45% and 50%, respectively, to US$305 million and US$102 million, mainly due to improved agency service and a focus on comprehensive covers for the increasing life and health insurance protection demand. The group's operating profit before tax in Hong Kong was flat at US$792 million, while that in China was up 51% to US$140 million.

"The potential exists for continuing global economic uncertainties to have a negative impact upon Asian economic growth rates and consequently upon AIA's business. In the absence of such external economic shocks having a major impact on Asia, it is our considered view that an immense opportunity exists for AIA given present levels of wealth, the significant protection gap across the region and likely future economic growth to drive the demand and expansion of our products and services," Tucker said.

Embedded value of the insurer as at Nov. 30, 2011 was US$27.2 billion, up 10%. Total assets were about US$114.5 billion.

AIA has more than 24 million individual policies and more than 10 million participating members in group insurance schemes.

(By Rebecca Ng, Hong Kong news editor: [email protected])