AIA Group (1299.HK / 1299 HK) Upcoming near-term catalysts

Transcription

1 Asia Pacific/ Equity Research Life Insurance (Financials) Rating OUTPERFORM* Price (27 Jun 12, HK$) 25.9 Target price (HK$) 31.5¹ Upside/downside (%) 21.6 Mkt cap (HK$ mn) 311,94 (US$ 4,27) Enterprise value (US$ mn) 36,655 Number of shares (mn) 12,44. Free float (%) week price range ADTO - 6M (US$ mn) *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance 3 25 Research Analysts Arjan van Veen arjan.vanveen@credit-suisse.com Price (LHS) Frances Feng frances.feng@credit-suisse.com Rebased Rel (RHS) 2 Oct-1 Feb-11 Jun-11 Oct-11 Feb The price relative chart measures performance against the HANG SENG INDEX which closed at on 27/6/12 On 27/6/12 the spot exchange rate was HK$7.76/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) (1299.HK / 1299 HK) CATALYST ALERT Upcoming near-term catalysts We see the 1H12 results and announcement of potential ING Asia acquisition as positive catalysts in July 212. Given many of the key bidders for ING Asia have pulled out (Reuters, 19 June 212), we see AIA s chances of acquiring the (non-japan) assets as substantially improved, with final bids due mid July. We have examined the pros and cons of such a deal and present what the combined company would look like. Positives: (1) Likely significant earnings and book value accretion Given likely transaction multiples, excess capital position at AIA and gearing capacity, we deem such an acquisition to be ~15% accretive in EPS terms and book value per share; (2) Geographical footprint expansion ING has a large Asian operational base, with strong positioning in and Japan, where AIA is weak, and market-share enhancement elsewhere. Negatives: (1) Too high mature market mix? We deem it likely that even if Japan is excluded (a more likely scenario), AIA s business mix will be more skewed to mature markets post such a potential deal. (2) Legacy issues absorption of the back-book of both and/or Japan would increase AIA s interest rate sensitivity and increase investors balance sheet concerns Catalysts: 1H12 results on 27 July 212, announcement on possible ING Asia sale, placement of AIG stake (unlocks 4 September 212). Valuation: Unchanged at HK$31.5, which retains our OUTPERFORM rating. Our valuation takes into account the growth and margin profile of each country and implies 18x FY12E P/E, 1.8x book value, 1.4x embedded value and 13.x value of one-year new business multiplier. Financial and valuation metrics Year 11/11A 11/12E 11/13E 11/14E Life GWP (US$ mn) 12,415 13,659 15,141 16,88 P&C GWP (US$ mn) Net profit (US$ mn) 1,6 2,46 2,778 3,116 EPS (CS adj.) (US$) Change from previous EPS (%) n.a Consensus EPS (US$) n.a EPS growth (%) P/E (x) NTA per share (US$) EV per share (US$) Dividend yield (%) P/B (x) ROE (%) P&C combined ratio (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and tables Figure 1: AIA one of the two super-regional insurers NJA regional company positioning (IF APE US$ mn) 16, Tier 1 Tier 2 Tier 3 Figure 2: and a clear leader including ING Asia NJA regional company positioning (IF APE US$ mn) 2, Tier 1 Tier 2 Tier 3 14, 4.2% 18, 16, 12, 1, 3.1% NJA market share (%) Sold HK / KR, + exited TH jv Life / P&C separation 14, 12, 8, EurAsia spinoff in 212 Mainly minority stakes Only CN / IN 'core' markets 1, 6, 4, 2, 1.6% 1.6% 1.1% 1.% Bought out minorities, sold AU.7%.7%.4%.4%.4% 8, 6, 4, 2, AIA Prudential Allianz ING Manulife Great Eastern AXA Ageas NY Life Aviva Zurich AIA+ING AIA Prudential AXA+ING Allianz ING Manulife Great Eastern AXA Ageas NY Life Taiwan Australia New Zealand China Thailand India Indonesia Philippines Vietnam Taiwan Australia New Zealand China Thailand India Indonesia Philippines Vietnam Figure 3: AIA profit mix currently ~65% mature markets NJA regional profit mix (%) Figure 4: grows to ~7% including ING Asia (ex. Japan) NJA regional profit mix (%) Rest of Asia 29% 4% Rest of Asia 21% 38% 7% 17% 7% 17% 1% 14% Figure 5: AIA has a strong capital position AIA solvency ratio (% minimum capital requirement) 4% F'casts Figure 6: with around 1-2% EPS /BPS accretion AIA accretion from ING Asia (ex-japan) acquisition 35% 3% Solvency margin % EPS accretion BPS accretion % Debt funded 75% 5% 75% 5% Available regulatoty capital (US$mn) 25% 2% 15% 1% 5% MCR Price to book paid.8 19% 22% 2% 15% 1. 18% 2% 18% 12% % 19% 17% 1% % 18% 16% 7% % FY8 FY9 FY1 FY11F FY12F FY13F Tier 1 capital Tier 2 capital Minimum capital required (MCR) Notes (for all charts/tables in this report): *21 data used where available; 29 data used for, Taiwan, Indonesia, Philippines, no inforce data for NZ and Vietnam and no new business data for China. Takaful in-force data split by company estimates by Credit Suisse. Year-end currency cross rates used to convert to US$. APE (Annual Premium Equivalent) used (Annual Premium + 1% Single Premium) except for markets where breakup not available China, Taiwan, Indonesia and the Philippines. Comparative total premiums shown on a net ownership basis. Source for all charts: OCI, MAS, KLIA, TII, Plan for Life, ISI, CIRC, TLAA, LIAM, IRDA, BAPEPAMLK, PIC, Credit Suisse estimates (1299.HK / 1299 HK) 2

3 Table of contents Focus charts and tables 2 Upcoming catalysts 4 1H12 results seen as robust 4 Growth locked-in for 212E 4 Potential ING Asia acquisition 4 Valuation appeal 4 1H12 results likely robust 5 Key market drivers steady 5 AIG s remaining shareholding 6 Growth locked-in for 212E 7 Margins largely in line with peers 7 Premium growth needed to drive 213E 9 Key trends by market 1 11 (3% of AIA value of new business) (15% of AIA value of new business) 12 China 13 (1% of AIA value of new business) (5% of AIA value of new business) 14 Potential ING Asia acquisition 15 Key potential positives: 15 Key potential negatives: 15 ING Asia overview 16 Market position enhanced 17 Combined market shares 17 Likely significantly accretive for AIA 18 Key assumptions: 18 Impact on EPS and price to book: 18 Key risk is mature market weighting 2 Valuations remain attractive 22 Valuation against peers 23 AIA key valuation focus charts 24 Appendix: overview by company 25 AIA (1299.HK) NJA positioning 25 ING (ING.AS) NJA positioning 27 Valuation remains attractive 29 Valuation against peers 3 AIA key valuation focus charts 31 AIA: Key financials 32 Income statement 32 Key operating ratios 33 Balance sheet and solvency position 34 Global life insurance valuation comparison 35 (1299.HK / 1299 HK) 3

4 Upcoming catalysts 1H12 results seen as robust AIA reports its 1H12 result on Friday 27 July 212, where we expect a reasonably solid set of numbers. We highlight that all key value drivers for AIA were quite robust during 1H12E, and 1Q12 value of new business growth was 27%. Equity markets were up 5.5% in 1H12E, 1-year bond yields were down 3 bp and the USD appreciated 1.4% against AIA weighted earnings across Asia. As such, we expect the 1H12 results to provide a probability of negative surprise in our view. Growth locked-in for 212E We highlight that value of new business (VNB) growth for 212E is essentially already locked-in given the trajectory of margin expansion during 211, which was back-ended to the later part of the year. As such, we expect 1H12 growth to be much stronger than 2H12. We highlight that AIA s margins in each country are now in line with or above peers in most key markets that it operates in. As such, we highlight that margin expansion from here may be substantially tougher, hence AIA needs to drive growth in 213E and beyond mainly through new business premium volume. Potential ING Asia acquisition Given the likely purchase price range (based on listed peer comparison), we estimate that AIA s acquisition of the ING (non-japan) Asia business should be around 1-2% earnings per share and book value per share accretive. We estimate AIA has internal funding capacity (excess capital and gearing capacity) of around US$4 bn and has significant gearing capacity. In our view, AIA is unlikely to need to raise any equity capital to fund such a deal, but note that given the pricing gap, would also be accretive should it choose to do so. An AIA acquisition of ING s (non-japan) Asian business would lead to a significant geographical footprint expansion, strengthening currently weak areas (i.e., and Japan) and strengthen its presence in other areas where AIA already has strong position (i.e.,, ). In addition, it would enhance AIA s footprint and skill set in bancassurance. The combined group would put AIA at #4 position in (from #1) in terms of in-force premiums; at #1 position in (from #2) and at #2 position in (from #3). Valuation appeal Given the recent weaker share-price performance, we deem the stock now presents a favourable risk/reward trade-off. Specifically, AIA is now trading on the following multiples (12-month forward): We expect AIA 1H12 to hold little by way of potential negative surprise AIA s value of new business growth is essentially lockedin for 212E through margin expansion in the last 12 months A potential acquisition of ING Asia would be highly accretive and enhance AIA s regional position AIA s valuation attractive, in our view, given the recent share price weakness 6x implied value of new business multiple, almost at the lowest level since listing. 15x price to earnings, relative to 12.5% growth in operating profit in x price to book (relative to 11% return on equity which can be increased to 14-15% through use of its excess capital position such as a potential ING Asia acquisition). (1299.HK / 1299 HK) 4

5 1H12 results likely robust We highlight that all key value drivers for AIA were quite robust during 1H12E, and 1Q12 value of new business growth was 27%. As such, we expect the 1H12 results on 27 July 212 to be solid, with little probability of negative surprise, in our view. Figure 7: Credit Suisse 1H12 expectations US$mn 1H1 2H1 1H11 2H11 1H12F % 1H11 May-1 Nov-1 Nov-11 May-12 May-12 We expect AIA s 1H12 results to be robust Pre-tax operating profit 1, ,21 1,171 1,316 9% Operating NPAT ,82 12% Reported NPAT 1,57 1,644 1, ,262-4% Reported EPS (USD) % Normalised EPS (USD) % EPS growth (%) 1% % 24% % -4% TWPI - weighted premiums 6,22 6,991 6,765 7,677 7, % Annual new business (ANP) 887 1,138 1,94 1,378 1,176 7% Net assets 16,547 19,555 21,141 21,313 22,47 6% Solvency ratio (%) 312% 337% 356% 311% 329% Excess capital (above 15%) 2,689 3,441 4,21 3,192 3,746-7% Value 1yr new business % New business premium (ANP) 887 1,138 1,94 1,378 1,176 7% VNB margin (%) 34.2% 32.% 36.5% 38.7% 42.8% Embedded value 21,978 24,748 27,394 27,239 29,172 6% Source: Company data, Credit Suisse estimates We highlight that our full-year 212E value of new business growth expectations are lower at 21%, given the very strong 2H11 results (which includes one-off group risk scheme wins in Australia) as highlighted above. Key market drivers steady We also highlight that the key market drivers of AIA s income statement and value metrics have been reasonably robust during 1H12E, namely: 1) Equity market returns up 5.5% in its core markets AIA s key drivers of value have held up well in 1H12E Figure 8: AIA equity market returns (%) in core markets HK Thailand China S'pore Other Δ in 2H % -24.% -7.3% -14.9% -14.5% -5.5% -13.8% -12.5% Δ in 1H12E 5.5% 3.6% 14.7% 1.7% 2.6% 7.4% -.2% -1.1% Δ in 2H12E 1.2% 2.9% 2.1% -6.6% 2.5% 1.3% -1.4% -.8% Source: Reuters, Credit Suisse estimates (group number weighted by equity allocation) 2) Average 1-year government bond yield down just 3 bp Figure 9: AIA 1-year government bond yields (%) HK Thailand China S'pore Other Δ in 2H % -.99% -.34% -.22% -.7% -.28% -.46% -1.25% Δ in 1H12E -.28% -.51%.29% -.12% -.22% -.19% -.8% -1.1% Δ in 2H12E -.2%.7% -.2% -.17%.15% -.4% -.8%.13% Source: Reuters, Credit Suisse estimates (Group number weighted by equity allocation), other is Australia (1299.HK / 1299 HK) 5

6 We highlight that disclosed bond yield sensitivity to bond yields is low for AIA, with less than 1% impact for every 5 bp decline (~7.5% if risk discount rates are not adjusted at the same time). 3) USD appreciation impact just 1.4% in 1H12 Figure 1: USD relative to main AIA market currencies (% in half) Currency (% HoH) HKD THB CNY SGD MYR KRW Avg. Δ in 1H11-2.%.2%.5% -2.8% -6.6% -5.% -6.8% -3.4% Δ in 2H11 1.9% -.1% 1.8% -1.6% 3.9% 5.6% 5.8% 2.6% Δ in 1H12E 1.4% -.1% 3.2% -.2%.5% -.2% 3.5% 1.1% Δ in 2H12E -.3%.%.1% -.2% -1.%.7% -2.1% -.4% Source: Company data, Credit Suisse estimates However, we note the year-on-year appreciation in USD is now 3.3%. Figure 11: USD relative to main AIA market currencies (% year-on-year) Currency (% YoY) USD/HKD USDTHB USDCNY USDSGD USDMYR USDKRW Avg. Δ in 2H11 -.1%.% 2.4% -4.3% -2.9%.4% -1.5% -1.% Δ in 1H12E 3.3% -.2% 5.1% -1.7% 4.5% 5.4% 9.4% 3.8% Δ in 2H12E 1.% -.1% 3.2% -.3% -.5%.4% 1.3%.7% Source: Company data, Credit Suisse estimates AIG s remaining shareholding Other than the market weakness, news reports indicate that AIG will sell remaining shares (18.6%/US$7.1 bn) post the lock-up expiry on 4 September 212 (Reuters, 16 May 212). We highlight that this was always likely, given that AIG has been in part underwriting US government sell-downs in its own stock and needs to divest its more liquid investment to continue to do so. We view a full sell-down by AIG as positive in the medium term, and were encouraged by market capacity in the first sell-down in March 212, although we note that a time delay can result in some overhang until then. (1299.HK / 1299 HK) 6

7 Growth locked-in for 212E Margin expansion drove all the value of new business margin growth in 2H11, up 41% YoY. The key drivers of margin expansion were a change in product mix (in part, the closure of lower margin business written historically to keep momentum in the business pre-ipo) and greater focus on risk/protection riders within the current product structures. The key markets that saw strong margin expansion were: China (+58% growth in the value of new business due to margin expansion), (+55%), (+44%) and (+41%). We do highlight that margins continued to increase during 211 (see Figure 12), so we deem it likely that even if margins do not increase from here, there should be continued growth in the value of new business (VNB) into 212E as this flows through an entire year. VNB growth in 212E is effectively locked-in Figure 12: VNB accelerated in 2Q11 Quarterly VNB (US$ mn), VNB margin (% ANP) and growth (%pcp) Value of new business (US$mn) VNB margin (% ANP) 225 VNB growth (%pcp) 59% 12% 11% large new group risk scheme 43% 2% 21% 53% 41% F'casts 25% 1% 27% 24% 6% 5% 4% 3% VNB margin (% ANP) Figure 13: with and China standing out Quarterly VNB margin (% ANP) by country VNB margin (% premiums) 7% 6% 5% 4% 3% 2% 75 2% 1% 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12F 3Q12F 4Q12F 1% % Thailand China Other markets 1H1 2H1 1H11 2H11 Source for both charts: Company data, Credit Suisse estimates As highlighted in Figure 13, and had strong margin expansion in 2H11, but growth was flattered by weaker margins in 2H1. Margins in these countries were more in line with historical levels and were already high at absolute levels. Margins largely in line with peers Whilst we are impressed by the rate of margin increase in the business, we recognise that margin expansion alone cannot continue to drive the value of new business growth in the medium term. We highlight that AIA s margins in each country are in line with or above peers in most key markets that it operates in. As such, we highlight that margin expansion from here may be substantially tougher. Overall group margins still appear low relatively, but we caution investors on this, given that the Australian group risk business is structurally a lower margin (but still a good return) business due to the dynamics of that market. (1299.HK / 1299 HK) 7

8 Figure 14: Margins now in line with peers VNB margins (net of tax)by country and company (VNB % ANP) 8% Figure 15: and above for others VNB margins (net of tax)by country and company (VNB % ANP) 6% China Thailand 6% 5% 4% 4% 3% 2% 2% 1% % AIA Pru AIA GE AIA GE % AIA Pru AIA BLA AIA Pru 2H1 1H11 2H11 2H1 1H11 2H11 Source for both charts: Company data, Credit Suisse estimates, Prudential margins published gross of tax We do highlight that AIA generally has more conservative economic assumptions than Prudential, as highlighted in Figure 16, mainly due to more conservative risk discount rate assumptions. Allowing for this, one could argue that there is further room for margins to expand before they are the same on a like-for-like basis in many markets. However, we do note that bond yields have been falling across the region more recently (see Figure 16) which creates pressure over time for AIA to reduce its bond yield assumptions, with potential downside valuation implications. Figure 16: AIA assumptions below PRU AIA vs Prudential net discount rate assumptions (%) 8.% Figure 17: but bond yields above spot bond yields AIA bond yield assumptions vs spot yields (%) 5.% 7.% 6.% 4.% 5.% 3.% 4.% 3.% 2.% 2.% 1.% 1.%.% China Hong-Kong India Japan Prudential AIA Taiwan Thailand.% HK Thailand China S'pore May-11 Nov-11 May-12 EV assumption Source for both charts: Company data, Credit Suisse estimates, Net risk discount rate is discount rate less govt bond yield (1299.HK / 1299 HK) 8

9 Premium growth needed to drive 213E Whilst AIA reported 21% growth in annual new premiums (ANP) in 2H11, we highlight that AIA had no growth in new business premiums in 2H11 in its six core markets (on a constant currency basis). These six core markets, which AIA reports separately, account for 88% of the group s total new business value. AIA had no new business premium growth in its core markets in 2H11 Figure 18: New premiums were up 21% in 2H11 Annual new premium (ANP) growth (% p.a. US$) ANP 1H1 2H1 1H11 2H11 May-1 Nov-1 May-11 Nov-11 15% 3% 23% 21% 27% 11% 35% 5% Thailand 16% 11% 23% 1% 37% 25% 46% 13% 13% 4% 1% 34% China 16% 5% 18% -7% % -3% 2% -11% Other markets 8% 5% 27% 116% 'Core' markets 16% 3% 23% 3% Figure 19: but none of this came from core markets Annual new premium (ANP) growth (% p.a. constant fx) ANP 1H1 2H1 1H11 2H11 May-1 Nov-1 May-11 Nov-11 8% % 17% 17% 27% 11% 35% 5% Thailand 9% 3% 13% -2% 29% 21% 34% 6% 6% -3% 2% 29% China 16% 3% 14% -9% -13% -32% -4% -16% Other markets 4% 2% 21% 11% 'Core' markets 9% -1% 16% % Notes: Annual new premium (ANP) = annual premium equivalent (APE) = annual premium + 1% single premium Source: Company data, Reuters, Credit Suisse estimates As such, all of the 17% constant currency ANP growth for AIA in 2H11 was growth from its other market divisions (Australia, Indonesia, the Philippines, Taiwan, India, NZ and Brunei). We highlight that this segment had some very large distortions in 2H11 due to some large group risk scheme wins in Australia. When AIA wins a new group risk mandate, all the first-year premiums of the new members of a scheme are counted as new business. As group risk mandates can be very large, the distortion can be very large. Figure 2: Distortion from group risk wins in 2H11 Annual new premium (ANP) mix by country 2H11 Figure 21: possibly adding 1% to premium growth Annual new premium (ANP) mix by country 2H1 Other markets 28% 22% Other markets 16% 25% 12% 9% China 8% 5% 1% Thailand 18% China 1% 5% 11% Thailand 21% Source: Company data, Reuters, Credit Suisse estimates (1299.HK / 1299 HK) 9

10 Key trends by market We highlight that this slowdown is not unique to AIA, with many peers also recently reporting some slowdown in premium growth, but note mixed trends by market: (3% AIA VNB): Manulife 1Q12 new business growth was 3% (4Q11: -3%), whilst Prudential growth was 1% (4Q11 +1%). We note the two-year average growth rate of 34% p.a. is well above the 1-year average of 16% p.a. Many of AIA s key markets are showing signs of a slowdown (15%): Market growth slowed to 4% in 4Q11 relative to the two-year average of 21% p.a. (1-year average 6% p.a.), with Great Eastern slowing but Prudential strong. Thailand (2%): Market growth rate fell 11% in 4Q11 due to floods, with growth in the first three quarters tracking at 18% prior to this (4Q11 Prudential -6%, AIA -9%). China (1%): New business in China remains weak for most companies, with AIA offsetting this through its focus on higher margin products. (5%): Great Eastern s 1Q12 new business growth was +1% (4Q11: flat), with Prudential slow at +2% (4Q11: -3%). (5%): Prudential and AIA continue to struggle to re-build their n franchises, with Pru s growth -25% in 1Q12 (4Q11: -26%) and AIA s -16% in 2H11. Figure 22: Market growth slowing regionally?,, NB APE growth (% p.a.) Figure 23: with China, Thailand and negative China, Thailand, NB APE growth (% p.a.) 5% 5% China Thailand 4% 4% 3% 3% 2% 2% 1% % 1% -1% % AIA Pru Market AIA Pru GE Market AIA Pru GE -2% AIA Pru Market AIA BLA Market AIA Pru 2H1 1H11 2H11 2H1 1H11 2H11 Figure 24: market growth slowing NB APE growth (% p.a.) Figure 25: with as well? NB APE growth (% p.a.) 5% Market 1yr CAGR = 6% p.a. 5% Market 1yr CAGR = 16% p.a. 4% 4% 3% 3% 2% 2% 1% 1% % 1H1 2H1 1H11 2H11 % 1H1 2H1 1H11 2H11 AIA Prudential Great Eastern Market 1yr CAGR (%pa) AIA Prudential Manulife Market 1yr CAGR (%pa) Source for all charts: MAS, OCI, CIRC, TLIA, Company data, Credit Suisse estimates (1299.HK / 1299 HK) 1

11 (3% of AIA value of new business) AIA and Prudential are the second- and third-largest life insurers in, albeit AIA is still substantially larger than Prudential. Given the lack of bancassurance relationships, AIA s growth profile is a little weaker, but has a higher insurance composition and hence higher margin. Figure 26: AIA and Pru are #2 and #3 in life insurance market (in force APE HK$mn) Sept 11 25, 2, 14.2% 13.9% Figure 27: with Pru bigger in new business life insurance market (new business APE HK$mn) 3Q11 9, 8, 7, 18.9% 18.4% 15, 1, 9.7% 9.1% 8.7% 8.9% 7.4% 4.6% 6, 5, 4, 3, 8.8% 9.2% 4.4% 6.2% 5.5% 7.2% 5, 2.9% 2.8% 2, 2.8% 1, 2.4% HSBC AIA Prudential Manulife AXA BOC Hang Seng China Life ING Zurich Other Ind Life (Non-Linked) Ind Life (Linked) Group Retirement Group Risk HSBC AIA Prudential Manulife AXA BOC Hang Seng China Life ING Zurich Other Ind Life (Non-Linked) Ind Life (Linked) Source for both charts: OCI, Credit Suisse estimates We highlight the recent market trends for by quarter below (Figure 28), with Manulife and Prudential having released their 1Q12 results, which highlight continued robust growth rates. We also highlight that the property market appears to be highly correlated to new insurance sales (Figure 29), with the property market slowing recently, and could be a leading indicator. The rationale here is that both require longer term commitment (insurance products often have a 2-3 year length) and property is often an individual s largest asset, hence reducing or uncertain values may reduce an individual s view of his/her own wealth and therefore be less likely to commit to a longer term savings plan. Figure 28: Growth in HK remains robust NB APE growth (% p.a.) 8% 6% Market 1yr CAGR = 16% p.a. Figure 29: with a high correlation to property prices NB APE correlation to property price index 5, 45, 4, % 2% % -2% -4% New business (HK$m) 35, 3, 25, 2, 15, 1, 5, Centa-City Leading Index -6% 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 1Q1 4Q1 3Q2 2Q3 1Q4 4Q4 3Q5 2Q6 1Q7 4Q7 3Q8 2Q9 1Q1 4Q1 3Q11 AIA Prudential Manulife Market 1yr CAGR (%pa) Property index Life new premium (HK$mn) Source for both charts: OCI, Centaline, Credit Suisse estimates We also note that the market has been growing well above its long-term average (16% p.a.) in recent years (two-year average 34% p.a.), and we would naturally expect some slowdown at some stage. (1299.HK / 1299 HK) 11

12 (15% of AIA value of new business) AIA and Prudential are the largest and third-largest life insurers in, respectively. Given the lack of bancassurance relationships, AIA s growth profile is a little weaker, but has a higher insurance composition and hence higher margin. Figure 3: AIA and Pru are #1 and #3 in life insurance market (in force APE S$mn) 21 2,5 2, 24.9% 22.6% 17.3% 16.1% Figure 31: with Pru bigger in new business life insurance market (new business APE S$mn) % 19.4% 2.4% 1, % 1, 5 - AIA 5.9% 4.4% 2.% 2.% 1.4% 3.5% Great Prudential NTUC Aviva Manulife TM Asia HSBC AXA Other Eastern Non-linked Unit-linked Group AIA 5.1% 3.7% 2.7% 2.7% 2.6% 6.1% Great Prudential NTUC Aviva Manulife TM Asia HSBC AXA Other Eastern Annual premium 1% single premium Source for both charts: MAS, LIA, Credit Suisse estimates We highlight the recent market trends for by quarter below (Figure 32), with market growth slowing to 4% in 4Q11, but with Prudential s growth well above the market s. We also highlight that the property market appears to be highly correlated to new insurance sales (Figure 33), with the property market slowing recently, and could be a leading indicator in as well. Figure 32: Growth has slowed in more recently NB APE growth (% p.a.) 8% 6% Market 1yr CAGR = 6% p.a. Figure 33: with a high correlation to property prices NB APE correlation to property price index % 2% % -2% -4% -6% New business (HK$m) Property index -8% 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 3Q94 2Q95 1Q96 4Q96 3Q97 2Q98 1Q99 4Q99 3Q 2Q1 1Q2 4Q2 3Q3 2Q4 1Q5 4Q5 3Q6 2Q7 1Q8 4Q8 3Q9 2Q1 1Q11 4Q11 Prudential Great Eastern Market 1yr CAGR (%pa) Property index Life new premium Source for both charts: MAS, URA, Credit Suisse estimates We also note that the market has been growing well above its long-term average (6% p.a.) in recent years (two-year average 21% p.a.), and we would naturally expect some slowdown at some stage. (1299.HK / 1299 HK) 12

13 China (1% of AIA value of new business) AIA and Prudential are the largest and fourth-largest foreign life insurers in China. AIA is the only 1%-owned foreign insurance company in China, whilst Prudential has a joint venture with Citic in the form of Citic-Prudential. Figure 34: AIA and Pru are #13 and #2 in China China life insurance market (in force premium market share) % Top 5 = 75% Figure 35: and #1 and #4 amongst foreign insurers China life foreign insurers (in force premium Rmb mn) 211 9, 4.% 8, 7, 3.% 31.3% 6, 2.% 1.%.% 18.3% 9.3% China Life Ping An New China Life 9.2% 7.4% 6.7% 3.1%.8% China PICC Tai Kang Tai Ping AIA Others Pacific Dec-4 Dec-7 Dec-1 Dec % 5, 4, 3, 2, 1, - AIA Sun Life Everbright Generali China Life Sino-US MetLife CMB-Xinnuo AVIVA- COFCO Citic- Prudential Manulife- Sinochem AXA- Minmetals CCB life Others Source for both charts: CIRC, Credit Suisse estimates New business volumes in China have fallen in 211 (Figure 36), due to the impact of bancassurance regulation changes and the relative lack of competitiveness of insurance product yields relative to bank deposits or wealth management products. AIA s top-line growth in China has been reasonably stagnant since 27 (Figure 37), but has had strong success re-focusing the business on more protection/insurance business and as such, has been able to grow its value of new business strongly despite negative new business premium growth. Figure 36: Growth in China in 2H11 was particularly weak China NB APE growth (% p.a.) 4% 3% 2% 1% % 2H1 3Q11 4Q11 Figure 37: with AIA headline growth somewhat flat China AIA total premiums (Rmb mn) and growth (%pa) 12, 1, 8, 6, growth (%pa) 4% 3% 2% 1% -1% 4, % -2% 2, -1% -3% China Life Ping An New China Life China Pacific PICC Tai Kang Tai Ping Sino Life Sunshine Life AIA Others Total - Dec-4 Dec-5 Dec-8 Dec-7 Dec-6 Premiums (Rmb mn) Dec-9 Dec-1 Growth (%pa) Dec-11 Apr-12-2% Source for both charts: CIRC, Credit Suisse estimates (1299.HK / 1299 HK) 13

14 (5% of AIA value of new business) AIA and Prudential are the third- and second-largest life insurers in. Given a lack of bancassurance relationships, AIA s growth profile is a little weaker, but has a higher insurance composition and hence higher margin. Figure 38: AIA and Pru are #3 and #2 in life insurance market (in force APE MYR mn) 21 5, 4, 3, 2, 1, 24.4% 18.2% 11.1% 1.7% 8.2% 6.9% 5.2% 3.7% 2.2%.7% 8.4% Figure 39: with Pru bigger in new business life insurance market (new business APE MYR mn) % 18.2% 6.3% 1.3% 12.2% 6.4% 5.8% 5.2% 1.5% 1.8% 15.8% - Great Prudential AIA ING Ageas Eastern (ETIQA) MCIS Zurich Hong Leong Non-linked Unit-linked Takaful Allianz Manulife CIMB Aviva Other - Great Prudential AIA ING Ageas Eastern (ETIQA) MCIS Zurich Hong Leong Non-linked Unit-linked Takaful Allianz Manulife CIMB Aviva Other Source for both charts: LIAM, Bank Negara, Credit Suisse estimates We highlight that the recent market trends for the top-two insurers in (Prudential and Great Eastern) point to slowing market growth (Figure 4), with their growth slowing to -3% and %, respectively, in 4Q11. However, AIA appears to have bucked the trend in 2H11 (Figure 41), with strong new business sales growth, albeit there is potentially some catch-up from underperformance in previous halves. Figure 4: Growth has slowed in more recently NB APE growth (% p.a.) Figure 41: with AIA growth stronger in 2H11 NB APE growth (% p.a.) 8% 5% Market 6yr CAGR = 12% p.a. Market 6yr CAGR = 12% p.a. 6% 4% 4% 3% 2% 2% % 1% -2% -4% 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 % -1% 1H1 2H1 1H11 2H11 Prudential Great Eastern 6yr CAGR (%pa) AIA Prudential Great Eastern 6yr CAGR (%pa) Source for both charts: MAS, URA, Credit Suisse estimates (1299.HK / 1299 HK) 14

15 Potential ING Asia acquisition Given many of the key bidders for ING Asia have pulled out (Reuters, 19 June 212), we see AIA s chances of acquiring the (non-japan) assets are substantially improved, with final bids due mid July. While we would expect that AIA acquiring any part of ING Asia would be accretive, we do note that acquiring either their n or Japan operations would skew the mix of AIA s operations to mature markets, and hence introduce the risk that it may lose its current growth multiple. Key potential positives: (1) Likely accretion: Given the likely purchase price range (based on listed peer comparison), we estimate that AIA s acquisition of the ING (non-japan) Asia business should be around 15% EPS accretive and 1-2% book value per share accretive. (2) Excess capital put to use: We estimate AIA has internal funding capacity (excess capital and gearing capacity) of around US$4 bn and has significant gearing capacity. In our view, AIA is unlikely to need to raise any equity capital to fund such a deal, but note that given the pricing gap, would also be accretive should it choose to do so. (3) Geographical footprint expansion: ING has a large Asian operational base, with strong positioning in and Japan, where AIA is weak. As such, the acquisition of its Asian operations would (1) expand its regional footprint to grow into currently weak areas (i.e., and Japan) and (2) strengthen its presence in other areas where AIA already has strong positions (i.e.,, ). Key potential negatives: However, should the deal include either or Japan, we deem the main negatives to be as follows: (1) Too high mature a market mix? We think it likely that even if Japan is excluded, AIA s business mix will be too skewed to mature markets post such a potential deal. As highlighted in Figure 43 below, the exposure to a mature Asia increases from 57% to 64% in terms of in-force premiums. (2) Legacy issues: Absorption of the back-book of both and/or Japan would increase AIA s interest rate sensitivity and increase investor balance sheet concerns. Again, this increases the potential de-rating risk of the stock, in our view. Key positives are expansion of footprint and scale advantage, using excess capital and likely accretion from deal Key negatives are a potential de-rating due to increased mature Asia exposure and back-book concerns Figure 42: AIA clear NJA leader including ING Asia NJA regional company positioning (IF APE US$ mn) 2, 18, 16, Tier 1 Tier 2 Tier 3 Figure 43: but mature market skew increases NJA regional company positioning (IF APE %) 6% Indonesia 2% Philippines 2% 17% 14, 12, 1, 8, Thailand 17% 9% 6, 4, China 7% 2, AIA+ING AIA Prudential AXA+ING Allianz ING Manulife Great Eastern AXA Ageas NY Life Taiwan Australia New Zealand China Thailand India Indonesia Philippines Vietnam Australia 5% Taiwan 1% 31% Source: OCI, MAS, KLIA, TII, Plan for Life, ISI, CIRC, TLAA, LIAM, IRDA, BAPEPAMLK, PIC, Credit Suisse estimates` (1299.HK / 1299 HK) 15

16 ING Asia overview ING Asia s operations are spread throughout the region, but with the larger exposures being, Japan, and. We highlight that 8% of earnings in 211 came from and Japan and 75% of gross written premium and new business sales. 8% of ING Asia s profit comes from and Japan Figure 44: ING profit profile by country ING Asia - pre-tax profit ( mn) Figure 45: with 8% of earnings from / Japan ING Asia - pre-tax profit ( mn) Growth (%p.a.) 115% 32% 5% 31% 15% 29% Rest of Asia 4% % -17% Japan 35% South 44% Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 South Rest of Asia Japan 17% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates In terms of growth, ING s pre-tax profit has grown at 14% in 211, whilst its total gross written premium grew just 6% due to margin expansion and the rest of Asia no longer reporting a loss. New business annual premium equivalent (APE) growth has been much stronger, increasing at 12% in 211, but mainly driven by the growth in more mature markets such as Japan (+12%) and (+15%). Figure 46: Premiums grew at 6% in 211 ING Asia - gross written premiums ( mn) ,25 2, 1,75 1,5 Figure 47: with new business sales up 12% ING Asia - new business APE ( mn) % 12% 4 Growth (%p.a.) 35% Growth (%p.a.) -16% 1% 8% 27% 13% -1% 18% % 39% % 35 44% 3 19% 14% 1, , Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 South Rest of Asia Japan South Rest of Asia Japan Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, APE = annual premium + 1% single premiums Given the nature of the Japanese market, we deem that AIA would only likely buy the non- Japanese business of ING, and have performed merger scenario on this basis. We note additional complications with bancassurance and other joint ventures (i.e., India, China and bancassurance), where change of ownership clauses may exist, existing partner s interest must be considered. We note that ING Group owns stakes in various bank JV partners such as Bank of Beijing, TMB, etc. As such, they could be sold separately. AIA already has a joint venture partner in India and multiple insurance licenses in China are not allowed. (1299.HK / 1299 HK) 16

17 Market position enhanced ING has a large Asian operational base, with strong positioning in and Japan, where AIA is weak. As such, the acquisition of its Asian operations would: (1) Expand its regional footprint to grow into currently weak areas (i.e., and Japan) and (2) Strengthen its presence in other areas where AIA already has strong positions (i.e.,, ). We deem it likely that should AIA acquire parts of ING Asia, it is unlikely to acquire the Japanese operations. As such, we have only examined the combination of AIA and ING on a Non-Japan Asia basis. As discussed earlier, many parts of these operations (in particular those that are joint ventures or bank partners) may not necessarily be sold or capable of being sold together with the other operations. Combined market shares Based on our calculations, a combined AIA and ING Asia would have #1 market share in (from #2) and #4 in (from #1) assuming the Woori bancassurance business is included. ING s Asian operations would improve AIA s regional footprint Figure 48: Combined group #1 in life insurance market (in force APE HK$mn) 3Q11 3, 25, 2, 16.8% 14.2% 13.9% 17.8% Figure 49: # 4 in life insurance market (in force APE KRW mn) ,5 2, 17,5 15, 27.9% 15, 1, 5, 9.7% 9.1% 8.7% 8.9% 7.4% 4.6% 2.9% 2.8% 12,5 1, 7,5 5, 2,5 14.1% 13.4% 9.% 5.9% 4.1% 3.8% 3.5% 3.3% 3.2% 3.2% 2.9% 14.8% AIA + ING HSBC AIA Prudential Manulife AXA BOC Hang Seng China Life ING Zurich Other Ind Life (Non-Linked) Ind Life (Linked) Group Retirement Group Risk Samsung Life Kyobo AIA + ING ING Shinhan Tong Yang Heungkuk Prudential MetLife AIA Allianz Other Source: OCI, KLIA, Credit Suisse estimates In, the combined group would be #2, from #3 currently. Figure 5: Combined group #2 in life insurance market (in force API MYR mn) 21s 5, 4,5 4, 3,5 3, 2,5 Figure 51: with 3% of in-force premiums 211 in-force premium mix (%) Rest of Asia 35% 18% 9% 2, 1,5 1, 9% 5 Great AIA + ING Prudential AIA ING Ageas Eastern (ETIQA) MCIS Zurich Hong Leong Allianz Manulife CIMB Aviva Other 29% Ind Life (Non-Linked) Ind Life (Linked) Takaful Source: Bank Negara, company data, Credit Suisse estimates (1299.HK / 1299 HK) 17

18 Likely significantly accretive for AIA AIA now has a significant excess capital position (>US$4 bn), with little gearing and a share-price currency well above its regional peers, which gives it significant capacity to outbid its competitors for what it considers to be strategically important assets. We highlight that AIA probably has an organic US$3.5 bn available through net cash (US$2.5 bn) and increased gearing (US$1 bn). Given that solvency may be a little weaker in December 212 due to recent moves in bond yields, we would deem US$3 bn to be a more conservative estimate. In addition, we highlight that ING Asia also has little gearing. Key assumptions: (please contact us or your sales representative if you would like a copy of our interactive AIA + ING Asia merger model) Our detailed AIA and ING Asia (ex-japan) income statement is attached in Figure 53, with key assumptions that need to be made as follows: Break up book value for ING Asia we have broken up the book value of ING by mix of premiums, also highlighting that the segment accounts have not yet been released for 211. We have had to make a number of assumptions to determine the accretion to AIA Solvency position of ING Asia we have assumed that ING ratio of minimum capital to liabilities is 2.5% (compared to AIA s 2.%) and has a solvency ratio of 25%. We also assume that ING Asia is presently ungeared. Maximum gearing capacity we deem the main gearing constraint on AIA is likely to be the retention of its S&P AA- financial strength credit rating. However, we do not know what the key gearing constraints are and whether deferred acquisition cost (DAC) assets can be included. We highlight that if the maximum gearing ratio is 3% debt to debt + equity (incl. DAC), then the transaction is able to be fully debt funded. Amount of equity raised depending on the level of debt, we also need to determine the optimum capital ratios and whether to raise external equity (and at what discount). Synergies we also need to determine how much of the combined cost base the merged entity is able to extract. Given that it is likely to be a reverse merger in, we would caution against being too aggressive on this front. Impact on EPS and price to book: Assuming a 5.5% cost of debt, we calculate the following impact on AIA s profit and book value per share : Figure 52: Impact on AIA s EPS and DPS EPS accretion BPS accretion % Debt funded 75% 5% 75% 5% We highlight the transaction could be 15-2% EPS and BPS accretive.8 19% 22% 2% 15% Price to book paid 1. 18% 2% 18% 12% % 19% 17% 1% % 18% 16% 7% Source: Company data, Credit Suisse estimates (please contact us or your sales representative if you would like a copy of our interactive AIA + ING Asia merger model) (1299.HK / 1299 HK) 18

19 Figure 53: AIA + ING Asian (ex-japan) merger model (assumed 1.2x book paid, 5% debt no new equity raised) AIA ING Asia (ex-japan) AIA + ING US$mn % US$mn US$mn US$mn US$mn US$mn US$mn US$mn US$mn US$mn IF APE 11,632 13,13 14,442 5,789 6,427 6,27 11,632 13,13 2,649 2,861 3,12 3, ,861 3,12 3,73 1,524 1,687 1,949 1,524 1,687 1, , ,95 1,759 1,951 2,29 3,915 4,23 3,927 1,759 1,951 5,956 Rest of Asia 4,781 5,55 6,394 1,35 1, ,781 5,55 7,91 NB APE 2,472 2,472 2,472 1,69 1,168 1,265 2,472 2,472 3, ,36 Rest of Asia 1,475 1,414 1, ,475 1,414 1,437 Pre-tax profit Operating NPAT* 1,438 1,699 1, ,438 1,699 2,36 Capital gains 316 1,2-49 less new debt -18 Reported NPAT 1,754 2,71 1,55 plus synergies 1 16% Rest of Asia Shares 12, 12,44 12,44 12, 12,44 12,44 % EPS (US$) % Assets 17, , ,716 39,94 56,336 57,242 17, , ,398 Liabilites 92,957 94,96 14,43 37,32 51,696 52,4 92,957 94,96 156,443 Net assets 14,98 19,555 21,313 2,62 4,64 5,23 14,98 19,555 24,955 1,561 BVPS (US$) % Net tangible assets 14,675 19,33 21,37 DAC 1,976 12,6 12, ,49 1,95 1,976 12,6 14,768 Inadmissible assets -1,112 1,9 2,51 Available assets 4,811 6,27 6,168 2,331 3,231 3,252 4,811 6,27 7,86 - of which debt ,241 MCR 1,547 1,844 1, ,292 1,31 1,547 1,844 3,285 % liabs 1.7% 1.9% 1.9% 2.5% 2.5% 2.5% 1.7% 1.9% 2.1% Solvency ratio (%) 311% 337% 311% 25% 25% 25% 311% 337% 239% Solvency gearing (%) 13% 9% 8% % % % 13% 9% 4% Debt / debt + equity (%) 4% 3% 3% % % % 4% 3% 17% AIA share price PE (x) 28.8x 24.5x 21.7x 28.8x 24.5x 18.7x P/BV (x) 2.8x 2.1x 1.9x 2.8x 2.1x 1.7x ROE (%) 1% 1% 9% 1% 9% 8% 1% 1% 1% Source: Company data, Credit Suisse estimates (please contact us if you would like a copy of our interactive AIA + ING Asia merger model) (1299.HK / 1299 HK) 19

20 Key risk is mature market weighting However, should the deal include either or Japan, we deem the main negatives to be as follows: Too high mature market mix? Even if Japan is excluded, AIA s business mix skew will increase to mature markets post such a potential deal. As highlighted in Figure 4, the profit exposure to a mature Asia increases from 65% to 7%. Legacy issues: Absorption of the back-book of both and/or Japan would increase AIA s interest rate sensitivity and increase investors balance sheet concerns. Both these concerns have the capacity to de-rate the stock in the medium term, given our view that the current multiple AIA trades on is more applicable to a growth stock. Figure 54: AIA profit mix ~65% mature markets NJA regional profit mix (%) Figure 55: grows to ~7% including ING Asia (ex. Japan) NJA regional profit mix (%) Rest of Asia 29% 4% Rest of Asia 21% 38% 7% 17% 7% 17% 1% 14% Source for both charts: Company data, OCI, Credit Suisse estimates (1299.HK / 1299 HK) 2

21 Figure 56: AIA + ING Asia (ex-japan) mix before and after AIA + ING Asia (ex-japan) mix of earnings, in-force premiums and new business volumes AIA ING Asia (ex-japan) AIA + ING AIA in-force APE mix (%) ING in-force GWP mix (%) AIA + ING in-force APE mix (%) Rest of Asia 44% 23% Rest of Asia 11% 9% 16% + = Rest of Asia 35% 18% 9% 13% 9% 14% 6% 64% 29% Source: Company data Source: Company data, OCI, Credit Suisse estimates Source: Company data, OCI, Credit Suisse estimates AIA new business APE mix (%) ING new business APE mix (%) AIA + ING new business APE mix (%) 24% Rest of Asia 13% 13% Rest of Asia 33% 2% Rest of Asia 46% + 14% = 8% 12% 9% 12% 6% 6% 3% Source: Company data Source: Company data, OCI, Credit Suisse estimates Source: Company data, OCI, Credit Suisse estimates AIA operating NPAT mix (%) ING operating NPAT mix (%) AIA + ING operating NPAT mix (%) Rest of Asia 29% 7% 7% 17% 4% + = 57% Source: Company data Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates 21% 22% Rest of Asia 21% 17% 1% 14% 38% 28 June 212

22 Valuations remain attractive Given the recent weaker share-price performance, we deem the stock now presents favourable risk/reward trade-off. The current share price implies 15x (12-month forward) P/E, 1.6x book value, 1.1x embedded value and 6x value of new business multiplier. Our 12-month forward sum-of-the-parts valuation/target price for AIA is HK$31.5, which implies a 1.5x price to embedded value, 18x P/E and 1.8x price-to-book value, and 14x implied value of new business multiplier. In establishing this range, we have considered AIA s earnings growth outlook on a bottom-up basis and compared this with listed life insurance peers in the region. We value AIA using a sum-of-the-parts approach, applying a new business multiplier to each country s value of new business plus embedded value depending on the growth outlook in each country. AIA s valuations now look attractive again Figure 57: AIA Credit Suisse s sum-of-the-parts valuation summary (213E) (US$ mn, unless otherwise stated) Valuation Earnings PE (x) Alloc Equity NAV P/NAV ROE Net worth EV P/EV VNB Assumption US$ mn FY13F FY14F FY13F FY14F US$ mn US$ mn (x) (%) US$ mn US$ mn (x) US$ mn 17, x 18.8x 5,527 6, x 12.4% 4,547 12, x x VNB multiplier Thailand 12, x 2.6x 4,525 5, x 9.3% 6,98 7, x x VNB multiplier 5, x 12.2x 1,914 2, x 17.3% 1,383 3, x 28 1.x VNB multiplier 2, x 16.2x x 16.% 74 1,37 2.x x VNB multiplier China 4, x 17.1x 1,91 1, x 17.5% 438 2,26 2.x x VNB multiplier 2, x 2.8x 1,75 1,89 1.5x 6.9% 1,44 2,73 1.4x x VNB multiplier Other markets 5, x 17.6x 1,99 2,921 2.x 9.9% 2,78 3, x x VNB multiplier Corporate / other 1, x 6.5x 3,795 3,65.4x 5.6% -4,294 1,472 1.x x EV multiple Minorities x -25.5x x -7.8% 2.x NAV multiple AIA group 52,497 2,778 3, x 16.8x 21,264 25, x 1.9% 13,62 34, x 1, x Shares on issue 12,44 12,44 12,44 per share (USD) USD:HKD per share (HK$) $ $ 1.79 $ x 16.8x $ 13.7 $ x $ 8.41 $ x 13.7x Figure 58: HK, Thailand and S pore 7% of value CS AIA valuation composition (% total) Figure 59: similar to mix of earnings AIA profit composition (% total FY11E) China 9% 5% Other markets 11% 35% 5% China 6% Other markets 13% 35% 5% 6% 11% Thailand 24% 16% Thailand 19% Source: Credit Suisse estimates (1299.HK / 1299 HK) 22

23 Valuation against peers The figures below highlight the difficulty in determining a correct multiple for AIA with a wide spread of valuations among Asian insurance stocks, ranging from the high multiples attached, to the faster-growing Chinese life insurance sector, to the relatively low multiples attached to insurers in the more mature n and Taiwanese markets (which have historically guaranteed product portfolios with negative spreads). Given the more recent de-rating of the Chinese insurers, AIA trades at the top end of the range on implied value of new business multiples, albeit absolute values are low. Figure 6: P/EV comparison (12-month forward) Price to embedded value (x) 18.x Figure 61: VNB multiple (12-month forward) Implied value of one-year new business multiplier (x) 15.x 16.x 14.x 1.x 12.x 1.x 5.x 8.x 6.x.x 4.x 2.x -5.x.x Cathay FHC China Taiping Ping An (H) AIA China Pacific (A) Ping An (A) China Pacific (H) China Life (A) Samsung Life Reliance Capital AMP Bangkok Life China Life (H) Samsung F&M IAG Suncorp Prudential plc QBE Great Eastern Fubon FHC Manulife Tower NZ Life PICC P&C Hyundai M&F Dongbu Shin Kong FHC Tong Yang Life Meritz F&M LIG Insurance -1.x Bangkok Life China Life (A) China Pacific (A) AIA Ping An (H) China Life (H) China Pacific (H) Ping An (A) Shin Kong FHC Tong Yang Life Meritz F&M China Taiping Samsung F&M Fubon FHC Dongbu Great Eastern LIG Insurance Hyundai M&F Samsung Life Life Cathay FHC AMP Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates While headline price to embedded value does not appear too demanding relative to other companies in the region, we do highlight that the return on EV is somewhat lower than others trading on similar multiples as shown below. Figure 62: Price to embedded value (x) vs. return on EV (% p.a.) 2.x Expensive Price / Embedded Value (P / EV x) 1.75x 1.5x 1.25x 1.x.75x.5x.25x New China Life (A) China Life (A) China Pacific (H) Ping An (H) AIA Ping An (A) China Pacific (A) New China Life (H) China Life (H) China Taiping Samsung F&M Cathay FHC Great Eastern Fubon FHC Prudential plc Dongbu AMP Samsung Life Manulife Life Hyundai M&F Tower NZ LIG Insurance Bangkok Life Inexpensive.x 2.5% 5.% 7.5% 1.% 12.5% 15.% Return on EV (EPS / EV %) Source: Reuters, Company data, Credit Suisse estimates (1299.HK / 1299 HK) 23