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China Outflows Fuel Insurance Giant’s Engine
AIA isn’t a bargain, but the company remains on stable footing with or without China’s vacillating capital outflows
By ANJANI TRIVEDI
July 28, 2016 4:35 a.m. ET
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If there’s a winner in China’s capital outflows, insurance giant AIA might be it. Looking forward, the company will likely do well regardless whether mainland Chinese investors continue to try to move their money abroad.
AIA’s value of new business in semiautonomous Hong Kong, where it is based, rose 60% in the first half of the year on strong demand from mainland Chinese tourists who took out policies. Hong Kong sales to mainland Chinese visitors account for approximately 10% of the insurer’s sales, Sanford Bernstein analysts estimate.
This was despite warnings from mainland insurance regulators in late April against people taking out policies in Hong Kong, which act as a form of capital outflow from yuan into Hong Kong dollars, which are pegged to U.S. dollars.
In any case, AIA’s business within mainland China remains robust, with new business rising almost 50% in the first half. This bodes well for the insurer, as China is becoming a more significant part of AIA’s profits.
Key, AIA was able to boost margins without spending more for new business: after dividend payments, free surplus generation, a measure of the insurer’s ability to generate capital and cash, was up 12%.
Crackdowns on mainlanders buying insurance policies in Hong Kong may yet have an impact, though AIA management didn’t sound any alarm bells over the issue in a conference call. And AIA’s broader business should keep earnings afloat. More than 60% of AIA’s operating profits come from its core and relatively stable insurance business and are fee-based. New business margins have been steadily rising.
AIA’s stock price has rebounded 32% since its February low, and now trades at 2.2 times analysts forward estimated book value, above its 1.9 times long-term average. That certainly doesn’t make AIA a bargain, but the company remains on stable footing with or without China’s vacillating capital outflows.
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