Steady operation highlights the essence of growth, Prudential is accumulating long-term value through multiple growth drivers

In 2023, the international market is facing challenges of volatility and uncertainty. The rise in US dollar interest rates and increased global market volatility have put pressure on the market operating environment. In such a context, investors urgently need to find high-quality targets with stable growth, growth potential, and certainty in the uncertain market.

As the "leader" in the insurance industry in the Hong Kong market, AIA Group (02378) recently released a "double high" financial report with high value and high growth, sending a strong signal of recovery to the market.

With diversified business, solid financial condition, and sufficient liquidity, AIA Group not only can cope well with uncertainty but also grows against the market volatility. At this stage, the value proposition of AIA Group is extremely prominent. Through this financial report, we have a clearer understanding of AIA Group's future development and growth potential.

Rapid recovery in core markets boosts performance against the trend

As a well-established insurance company operating in the global life insurance market for 175 years, AIA Group provides life insurance solutions to over 18 million customers, covering large and fast-growing markets in Asia and Africa, with a total population of approximately 4 billion in its operating markets. After divesting its European and American businesses and strategically focusing on the Asian and African markets, especially the emerging markets in Asia Pacific, have become the company's most focused development direction in recent years. As of now, the group ranks in the top three in 10 out of 14 Asian life insurance markets and in the top five in 6 out of 8 African markets. Additionally, the group is the top independent insurance company in the Asian bancassurance ranking.

In the volatile market conditions and complex external environment, AIA Group achieved outstanding growth against the trend in 2023. New Business Profit (NBP) surged by 45% to reach USD 3.125 billion, while Annual Premium Equivalent (APE) sales also increased by 37% year-on-year to reach USD 5.876 billion. The company's attributable profit to equity holders reached USD 1.701 billion; basic earnings per share reached 62.1 cents. Full-year dividend per share increased by 9% to 20.47 cents, reaching the upper limit of the company's guidance, continuously bringing stable and generous long-term returns to shareholders.

Behind the "on-paper data," even more commendable is that AIA Group maintained robust operations in major core markets. Among the 22 markets where the company operates, 12 markets achieved double-digit growth in new business profit, continuously solidifying the company's brand influence in the market and laying a foundation for long-term development in the future.

Furthermore, the recovery in the Hong Kong market is undoubtedly the biggest highlight in this financial report. This year, AIA Group's Annual Premium Equivalent sales in the Hong Kong region accounted for one-third of the group's total Annual Premium Equivalent sales, and compared to the period during the epidemic, the strong return of business in the Hong Kong market has laid a solid foundation for the company's performance recovery.

And all of this is thanks to the incremental customers brought by the full customs clearance between Hong Kong and the mainland in 2023: According to data from the Hong Kong Insurance Authority, new individual life insurance premiums from mainland visitors in 2023 amounted to approximately HKD 59 billion, a year-on-year increase of over 27 times. Among them, savings-type and protection-type policies accounted for 60% and 40%, respectively Driven by the insurance needs of mainland visitors, the annual premium equivalent sales and new business profit of Prudential Hong Kong reached 1.966 billion US dollars and 1.411 billion US dollars respectively, representing a significant increase of 2.76 times and 2.67 times compared to the pre-epidemic levels in 2019. In addition, the annual premium equivalent sales of mainland Chinese visitors in Hong Kong have recovered to 1.1 times the pre-epidemic level in 2019, with a significant increase in average premium size. Kelvin Ho, CEO of Prudential Group, stated that the number of mainland visitors is expected to return to or even exceed the levels of 2019 in the future.

In terms of distribution channels, the agency channel contributed 70% of the annual premium equivalent sales in Hong Kong, with most of it coming from local and mainland Chinese customers, showing a growth of 352%. The annual premium equivalent sales through the bank channel also increased by 52%, with the proportion of health and protection products increasing from 5% in 2022 to 13%, driving a 93% increase in new business profit along with the growth in annual premium equivalent sales.

With the comprehensive resumption of customs clearance between Hong Kong and the mainland, it is expected that the number of mainland tourists visiting Hong Kong will gradually increase. At the same time, with the increasing income levels of residents, the demand for wealth management, inheritance, health protection (especially high-end medical care and critical illness), and global asset allocation among mainland residents is expected to gradually increase. Hong Kong insurance companies represented by Prudential are expected to win more trust from mainland customers with their advantages in marketization and specialization, and benefit from policy support, laying a solid foundation for their new development.

In a weak demand and economically pressured environment, Prudential is actively adjusting its business strategy and product structure in the mainland Chinese market to prepare for a new round of growth. The annual premium equivalent sales of CITIC-Prudential Life, a joint venture between Prudential and CITIC, in the mainland reached 534 million US dollars in 2023. Despite being somewhat affected by the life insurance policy rate conversion policy implemented in the mainland, Prudential has responded calmly and shifted its focus to long-term protection, leading to a 27% growth in annual premium equivalent sales for long-term protection.

Furthermore, Prudential remains optimistic about the development of the mainland insurance market. Kelvin Ho believes that sales have begun to recover after completing the product structure adjustment. In December 2023, Prudential and CITIC announced separate capital increases of 1.25 billion RMB each to support the growth and development of CITIC-Prudential in the mainland, and believe that business structure optimization and expansion will bring new increments.

A research report from CICC International Securities shows that further growth in Hong Kong business and a turnaround in the mainland's situation will drive the growth of new business value this year. Based on the continued strong performance of mainland visitors to Hong Kong and the addition of 4,000 new agents last year, it is expected that the strong demand will continue to drive the growth of new business value in the Hong Kong region. CITIC-Prudential Life, a mainland life insurance company, is actively promoting the transformation of the agent channel and capacity enhancement, and it is expected that the shareholder capital increase will effectively support business development In addition to the above-mentioned markets, in recent years, Prudential has achieved higher flexibility by diversifying its market distribution in Asia and Africa, which enables it to more effectively reduce the risk of a single market. At the same time, by focusing on high-growth potential markets in Asia and Africa, Prudential's diversified layout in this region is expected to continue to maintain strong business growth, as reflected in this year's annual report.

Despite the global economic pressure impacting several markets of Prudential's operations, there are still some markets experiencing rapid growth against the trend. In Singapore, Prudential is one of the market leaders in protection, savings, and investment-linked plans. Facing a challenging market environment in Singapore, Prudential achieved annual premium equivalent sales of approximately USD 787 million in 2023, with new business profit of around USD 484 million, maintaining a steady development momentum. Furthermore, as the second largest business segment of the group, the new business profit of life insurance grew by 15% to USD 699 million, while the annual premium equivalent sales increased by 25% to USD 1.928 billion, collectively driving the company's performance steadily forward.

Moreover, in the Indonesian market, annual premium equivalent sales grew by 15% to USD 277 million, with overall new business profit increasing by 16% to USD 142 million; in Malaysia, new business profit grew by 8% to USD 167 million, and annual premium equivalent sales increased by 11% to USD 384 million, mainly due to the growth in sales through bancassurance channels.

Goldman Sachs pointed out that the company's new business profit growth in the second half of last year exceeded expectations, especially in Hong Kong and ASEAN markets. The better-than-expected performance was mainly driven by an increase in profit margin, rising from 49% in the first half of last year to 57% in the second half of last year, with improvements in all major markets. Sales continued to grow in the first two months of this year, and if the profit margin continues to expand, it will drive strong growth in new business profit this year.

It is evident that Prudential's success in the Asian market is attributed to its execution of localization strategies, strengthening distribution networks, and product innovation to meet market demands. Especially in Hong Kong, by optimizing customer experience, introducing technology-driven distribution models, and transforming its health insurance business, Prudential has significantly increased its business volume. Additionally, Prudential has demonstrated outstanding performance in risk management and regulatory compliance, actively responding to various market and legal changes to ensure healthy business development within a strict regulatory framework.

Diversified business builds core development, stable investment achieves long-term returns

For a large enterprise, while "shrinking" and "defending" in a complex situation may be beneficial for achieving defensive goals, it is also important for forward-thinking enterprises to seize the opportunity to refine product services and expand new growth at this time.

Throughout the year, Prudential has achieved strong financial performance, highlighting the diversified value of the group in terms of geography and distribution channels. The group has introduced two new financial targets as an indispensable part of the group's strategy update. In 2023, the group has made significant progress in achieving the 2027 new business profit target and is steadily advancing, striving to achieve the 2027 target related to the operational surplus earned from effective insurance and asset management businesses From a deeper perspective, the ability of Prudential to achieve such a rapid business recovery speed and high customer stickiness is by no means accidental. The continuous deep cultivation of core markets, diversified development strategies, and the continuous enrichment and improvement of product matrices are like gears on a flywheel, interlocking and closely connected, jointly driving Prudential's "growth flywheel" to accelerate.

Over the years, Prudential has implemented a diversified channel development strategy for agencies, bancassurance, and digital sales platforms to promote the growth of insurance business, enhance business expansion flexibility, and risk resistance. Under the multi-channel development strategy, it is conducive for the company to choose the most suitable way to sell to customers according to local conditions, while also enhancing business expansion flexibility to cope with uncertain risks.

This can be glimpsed from its latest financial data - according to the annual report, Prudential's agency and bancassurance channels are both substantial, accounting for 2/3 and 1/4 of new business profits, respectively. Currently, the group has more than 68,000 active agents, with over 9,000 agents qualifying as members of the "Million Dollar Round Table". In terms of agency distribution, the average new business profit growth per active agent is 59%, driving a 75% increase in new business profits for agents.

In the bancassurance channel, Prudential continues to expand its network of bancassurance partners. Prudential currently has over 200 bank partners, with 10 being major strategic partners. The proportion of annual premium equivalent sales of health and protection business through this channel has increased from 6% in 2022 to over 7% in 2023. It is evident that the large-scale agency and bancassurance channels have advantages in reaching customers, demonstrating better performance recovery than peers in the industry during the recovery period.

Furthermore, Prudential continues to offer a variety of insurance products to meet diverse customer needs. Prudential actively tailors insurance products around the entire lifecycle of customer families, customizing insurance products based on the economic levels and consumption preferences of customers in different regions, fully meeting customer needs for wealth management and critical illness claims, opening up broader incremental space.

In particular, new business profit growth in the health business increased by 20% to $330 million, while the overall new business profit of health and protection products increased by 34%, contributing 40% to new business profits. As for savings products, new business profits increased by 54%.

In addition to strong growth in core life insurance business, in 2023, Prudential is prudently managing risks on the investment side and is expected to provide customers with different asset allocation solutions to meet their needs, creating new profit growth points on the investment side.

Specifically, Prudential's asset management sector mainly operates under the brand HanYa Asset Management, which is the internal investment business platform of Prudential Asia. This platform provides customers with diversified asset allocation solutions to meet their needs for asset preservation and appreciation. Currently, HanYa manages over $237 billion in assets, with market share ranking in the top ten in six of the markets it operates in.

Despite the less optimistic investment environment in the past two years, Prudential insists on diversifying its assets and focusing mainly on fixed-income assets such as debt securities. At the same time, Prudential pays close attention to and effectively manages various risks, including but not limited to market volatility, credit, interest rate, liquidity, and cyber risks Especially in dealing with network attacks and data security, Prudential continuously improves its technology systems and data protection measures to cope with the rapidly changing information security environment.

In 2023, the Group's free cash flow remained robust, with intrinsic value steadily increasing, fully validating their strength in growth, operations, investments, and risk management.

Looking ahead, CICC is optimistic about its prospects, believing that in 2023, Prudential will further gain market share in many markets, especially in the Hong Kong market driven by mainland customer business. This is thanks to Prudential's outstanding product development capabilities and channel management capabilities, which will serve as the foundation and driving force for the company to achieve stable organic growth in the future. Currently, the market's valuation of the company does not fully reflect its long-term operational advantages, and CICC is optimistic about the company's long-term value restoration potential.

Overall, Prudential currently demonstrates the brand advantage of a leading insurance company and rapid recovery capabilities with solid performance. The continuously optimized business structure enhances Prudential's market competitiveness and profitability, and it is believed that as the market recovers, the company's value will quickly recover and achieve long-term high-quality development