AIA Group (1299.HK / 1299 HK) FORECAST REDUCTION

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1 Asia Pacific/Hong Kong Equity Research Life Insurance (Financials) Rating OUTPERFORM* Price (05 Feb 14, HK$) Target price (HK$) 44.00¹ Upside/downside (%) 23.4 Mkt cap (HK$ mn) 429,369 (US$ 55,312) Enterprise value (US$ mn) 58,470 Number of shares (mn) 12, 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 Research Analysts Arjan van Veen arjan.vanveen@credit-suisse.com Frances Feng frances.feng@credit-suisse.com 60 Price (LHS) Rebased Rel (RHS) Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct The price relative chart measures performance against the HANG SENG INDEX which closed at on 05/02/14 On 05/02/14 the spot exchange rate was HK$7.76/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) (1299.HK / 1299 HK) FORECAST REDUCTION 4Q13 regional trends: Underlying momentum robust; valuation appeal returning We lower our forecasts for AIA by 2- following marking-tomarket of its earnings due to movements of equity markets and currencies in 4Q13 and 1Q14. We highlight that while rising interest rates are positive for AIA in the medium term (positive for EV and solvency), this will reduce book value in the short term due to HK's statutory accounting rules. We have also reviewed the latest industry data and peer results, which point to a continued robust market growth accentuated by the recently announced Citibank deal. Weaker areas are likely to be: Thailand (given political turmoil), Australia (issues with group risk) and Korean recovery which is likely to be delayed given current telemarketing ban for insurers. Investment case. AIA is the only pure regional Asian life insurer with an unrivalled footprint. Management continues to execute extremely well on its key strategies of margin enhancement and agent productivity, with much room for progress on both counts, in our view. The strong (ungeared) balance sheet gives it additional flexibility in terms of M&A and/or capital management, with new product capital strain reducing over time. Catalyst. Full-year 2013 results on 21 February Target price unchanged at HK$44.00 as currency impact is offset by roll-forward and impact of rising yields. We maintain our OUTPERFORM rating, with the stock being back at more attractive valuations, which it has not sustained for long since listing. As such, we would encourage investors to have a closer look at these levels. Financial and valuation metrics Year 11/12A 11/13E 11/14E 11/15E Life GWP (US$ mn) 13,181 14,738 15,719 17,547 P&C GWP (US$ mn) Net profit (US$ mn) 3,020 2,892 3,104 3,802 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 AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US 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 table Figure 1: AIA is one of the top super-regional insurers NJA regional company positioning (IF APE US$ mn) ,000 16,000 14,000 12,000 10,000 8, % Tier 1 Tier 2 Tier 3 2.7% Asia market share (%) 2.4% 1.8% 1.6% 1.5% 1.3% Figure 2: with strong positions across many countries NJA regional positioning (IF APE US$ mn, market share, positioning) 3,500 3,000 2,500 2,000 1, Developed Developing Emerging , % 0.7% 4, % 2, % 0.2% 0 AIA Pru Fin Metlife Prudential AXA ING Manulife Allianz HSBC Great Eastern Ageas Zurich Aviva Singapore Korea Taiwan Australia New Zealand China Thailand Malaysia India Indonesia Philippines Vietnam Hong Kong Japan 1, Hong Kong Singapore Korea 10 Taiwan Australia 8 NZ China Thailand Malaysia 8 India 8 Indonesia 1 Philippines 4 Vietnam IF APE (US$mn LHS) Market share (% RHS) Figure 3: AIA's VNB was ~5 in mature markets NJA regional VNB mix (%) 2012 Figure 4: but reducing after ING Malaysia acquisition NJA regional VNB mix (%) 1H13 Korea 5% Other 13% Hong Kong 28% Korea 6% Other 16% Hong Kong 24% China 1 Malaysia 5% Singapore 17% Thailand 22% China 11% Malaysia 8% Singapore 15% Thailand Figure 5: AIA's mix (%) and NB APE growth (% p.a.) by market / market NB APE growth (% p.a.) AIA % of group 1H13 AIA ANP growth AIA VNB growth Market growth 1H13 1H13 1H H12 1H H12 1H13 10yr Q13 2Q13 3Q13 4Q13 ANP VNB VNB ANP ANP ANP VNB VNB VNB CAGR % US$mn % % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. Hong Kong 21% % 16% 21% 34% 23% 16% 5% 14% 21% 21% Singapore % 28% 3-3% 9% 48% 11% 9% 11% 12% 37% 27% Thailand 17% % 14% 19% 9% 12% 24% 11% 13% 23% 36% -23% 11% Malaysia % 6% 10 11% 3% 74% 1 7% na na na na China 8% 76 11% 1% 11% 22% 1 27% -6% na 3% na Korea 12% 45 6% -12% 1 75% 4% 9% 36% 16% -4% 63% 18% 1% -8% Other markets 22% % 4% -8% 29% 41% 41% % 1 29% 27% 27% 26% 9% 37% 21% 21% - excl Group Risk one-off 14% 1 29% 17% 34% 26% Notes (for all charts/tables in this report): * 2012 data used where available. Year-end currency cross rates used to convert to USD. APE (Annual Premium Equivalent) used (Annual Premium + 1 Single Premium) except for markets where breakup not available. Comparative total premiums shown on a net ownership basis. Source for all charts: Company data, 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 table 2 4Q13 regional trends: Underlying momentum robust; valuation appeal returning 4 4Q13/1Q14 mark-to-market currency a drag again 4 Growth in core markets strong, few isolated issues 4 Strong balance sheet provides flexibility 4 Valuation appeal returning with recent pull-back 4 4Q13/1Q14 mark-to-market currency a drag again 5 (1) Equity market returns are down 7% in its core markets in 1Q14 so far 5 2) USD movement impact: Negative ~4% 5 3) Average 10-year government bond yield up 64 bp in 2H13 6 Growth in core markets strong, few isolated issues 7 Hong Kong 10 (25% of AIA's value of new business) 10 Hong Kong new business mainly participating 11 AIA Hong Kong's mix improving 11 Singapore 12 (15% of AIA's value of new business) 12 Singapore new business skewed to participating 13 AIA Singapore's business mix steady 13 Thailand 14 (25% of AIA's value of new business) 14 Malaysia 15 (1 of AIA's value of new business) 15 China 16 (1 of AIA's value of new business) 16 Agency premium growth momentum improving 17 Margins no longer the key driver of growth 18 Strong balance sheet provides flexibility 19 Valuation appeal returning in recent pull-back 20 Valuation against peers 21 AIA's key valuation focus charts 22 AIA: Key financials 23 Income statement 23 Key operating ratios 24 Balance sheet and solvency position 25 Global life insurance Valuation comparison 26 (1299.HK / 1299 HK) 3

4 4Q13 regional trends: Underlying momentum robust; valuation appeal returning 4Q13/1Q14 mark-to-market currency a drag again We lower our forecasts of AIA by 2- following marking-to-market of its earnings due to large movements in regional currencies over the past few months as well as due to weaker equity markets. We highlight that the ~80 bp improvement in bond yields in 2013-to-date has reversed most of the cumulative reduction in average bond yields since listing. Combined with the reductions taken to date in its embedded value assumptions, we see little pressure on AIA to move its assumptions further in the near term and in fact can revise them upwards. Growth in core markets strong, few isolated issues Following a review of peer results and industry data, we see near-term growth as robust in the region, with main markets (such as Hong Kong and Singapore) showing strong momentum China looks like it continues to improve, whilst Malaysia remains challenging. Thailand's growth risks are stalling in the current political turmoil, whilst the Korean recovery could be impacted by the current telemarketing ban applied to all financial companies due to data leakage from credit card companies. Finally, whilst AIA is growing strongly in Australia, group risk profitability is likely to be an issue for some time. We also highlight that AIA s growth through margin enhancement has probably come to an end given its margins in its core markets are close to peers margins. Going forward, the value of new business growth will largely come from volume growth which we saw occurring in 2H12 and improving further in 1H13. Strong balance sheet provides flexibility AIA s solvency position is very strong, with excess capital (above the minimum 15 solvency) totalling US$4.9 bn including the US$1 bn of debt, with further gearing capacity. AIA generated a free surplus of US$1.9 bn in 1H13, while the new business strain was US$0.7 bn, highlighting its capital generation capacity. As its new generation investmentlinked products get rolled out, this should reduce the new business strain further. As such, coupled with plenty of debt capacity, AIA is in a strong position to undertake further M&A opportunities when it deems fit (over and above the recent ING Malaysia acquisition and Citibank regional distribution deal). Valuation appeal returning with recent pull-back Given the recent share price weakness due mainly to emerging market macroeconomic concerns, we see some valuation appeal returning to the stock at these levels. We maintain our view that AIA can continue to deliver higher-than-peer growth given its positioning, balance sheet and initiatives, which are difficult to quantify fully. Specifically, AIA is now trading at the following multiples (12-month forward): We lower our E earnings by 2- due to currency and equity market movements We are seeing continued strength in growth rates in many of its core markets AIA s strong balance sheet strength gives its further inorganic growth opportunities We see the recent pull-back as a good entry point in AIA 11x implied value of new business multiple, close to the average level since listing. 16x price-to-earnings, relative to 17% growth in operating profit in 1H x price-to-book (relative to 12% return on equity which can be increased to 14-15% through use of its excess capital). (1299.HK / 1299 HK) 4

5 4Q13/1Q14 mark-to-market currency a drag again We highlight that the key market drivers of AIA s income statement and value metrics are negative in 4Q13E and 1Q14E, namely: Equity markets (negative): Equity markets on an average are flat in 2H13E and down 7% in 1H14E so far. Currency mayhem (negative): In USD terms, AIA-blended currencies have fallen ~4% on a P&L basis (spot) and ~5% on a balance sheet basis. Bond yields (positive): 10-year government bond yields are up 64 bp in 2H13E and 81 bp in AIA s key value drivers are negative in 4Q13/1Q14 so far, with equity markets being down and there are large currency movements (1) Equity market returns are down 7% in its core markets in 1Q14 so far Figure 6: AIA's equity market returns (%) in key markets Equity HK Thailand China S'pore Malaysia Korea Australia Indonesia Philippine s Δ in % 22.5% % 13.6% 9.4% 4.6% 9.4% 15.1% 9.8% Δ in 1H % 1.6% % 7.9% 9.8% 3.5% 9.3% 18.5% 8.9% Δ in 2H13E -2.5% 6.7% -12.2% -3.5% -4.1% 2.5% 2.2% % Δ in 1H14E -7.1% -11.1% -6.5% -8.5% -6.6% -1.6% -7.5% -4.7% 2.7% -1.7% Source: Reuters, Credit Suisse estimates (group number weighted by equity allocation). Equity markets have been somewhat weaker in both 4Q13 and 1Q14 in AIA's key markets (noting AIA has a November YE), which have impacted AIA's income statement directly (below operating profit line). 2) USD movement impact: Negative ~4% Many of the currencies in markets AIA operates have moved materially relative to its USD reporting currency in 2H13E and 1Q14 so far especially in Malaysia, Australia, Indonesia and the Philippines (Indian exposure very low). We highlight that the impact on income statement and value metrics is on an averaging basis, so will flow through fully in 2014E and beyond. Figure 7: USD relative to main AIA market currencies (% YoY) weighted by P&L mix % YoY HKD THB CNY SGD MYR KRW AUD IDR PHP Δ in % % -4.3% -2.9% 0.4% -1.5% -6.8% 0.8% -1. Δ in % -0.2% -0.6% -2.4% -4.8% -4.3% -5.1% -1.4% 5.3% -6.6% Δ in 1H13-2.1% % -3.7% -1.9% -2.3% -4.2% 1.6% 4.3% -2.5% Δ in 2H13E 3.4% % -2.2% 2.8% 6.1% -2.2% 14.4% 24.7% 7.2% Δ in 1H14E 3.9% % -1.2% 0.4% 7.2% -4.5% 7.7% 24.3% 7. Weighting 27.7% 29.7% 9.6% 10.6% 7.5% % 3.9% 2. Source: Company data, Credit Suisse estimates, Other market split assumed to be 40:40:20 for AUD:IDR:PHP. Given a higher weighting to "other markets", the currency impact on the balance sheet is higher and closer to 5% so far in 1H14E. (1299.HK / 1299 HK) 5

6 3) Average 10-year government bond yield up 64 bp in 2H13 Figure 8: AIA's ten-year government bond yields (%) HK Thailand China S'pore Malaysia Korea Other Δ in % 0.04% -0.05% -0.38% -0.25% -0.75% -0.8 Δ in 1H % 0.52% -0.16% -0.12% 0.49% -0.06% 0.08% 0.21% Δ in 2H13E 0.64% 0.59% % % 0.52% 0.68% Δ in 1H14E -0.08% -0.12% -0.14% 0.15% -0.01% 0.14% -0.13% -0.16% Source: Reuters, Credit Suisse estimates (Group number weighted by equity allocation), other is Australia Long bond yields were up around 17 bp in 1H13 for AIA on an average, with a further 64 bp improvement in 2H13E, with main movements of note being in China, Malaysia and Singapore (although up strongly in all core markets). We highlight that higher bond yields are positive for AIA in the medium to long term, with disclosed bond yield sensitivity being low for AIA, with less than 1% impact for every 50 bp decline. However, this sensitivity rises to ~7.5% if the risk discount rates are not adjusted at the same time. We highlight that the ~80 bp improvement in bond yields in 2013 to date has reversed most of the cumulative reduction in average bond yields since listing. Combined with the reductions taken to date in its embedded value assumptions, we see little pressure on AIA to move its assumptions further in the near term and in fact can revise them upwards. Figure 9: Most government bond yields are now above AIA assumptions AIA embedded value bond yield assumptions relative to 10-year govt bond spot rate 5.0 AIA s bond yield assumption now largely in line or below spot yields HK Thailand China S'pore Malaysia Korea Nov-10 Nov-11 May-13 Feb-14 EV assumption Source: Reuters, Company data In addition, a rising bond yield curve generally makes insurance products more competitive relative to other competing products as they tend to have a long-term savings component in them in Asia. (1299.HK / 1299 HK) 6

7 Growth in core markets strong, few isolated issues We have reviewed the recent market trends throughout AIA s key markets, examining market data and peer disclosures (which are more detailed than AIA on a quarterly basis), which highlight some slowdown in premium growth in more developed markets, but remains reasonably solid overall. In addition, we also show that AIA has been executing on its protection focus strategy in markets where we can observe this data, with growth in sum insured exceeding premium growth. Key trends by markets were as follows: Market growth in AIA s key markets remains robust in 3Q13 and 4Q13. Hong Kong (25% AIA's VNB): Market growth in individual life picked up again, with new business market growth being 21% in 3Q13, relative to a p.a. three-year average growth rate and 16% p.a. 10-year average. We highlight AIA's growth rate of sum insured has picked up dramatically since listing and is now well above historical averages, highlighting strong focus on higher-margin protection products. Singapore (15%): Market growth has picked up again over the past few quarters (27% in 3Q13), having being somewhat in the middle of Singapore s long-term (10-year) average growth rate is around 1 p.a. Thailand (): The market growth rate was a robust 13% in 1H13 (with a strong 1Q13, weak 2Q13 with some distortion due to the flood impact), with 3Q13 growth being 11%. AIA's growth has been weaker in low single digit (noting recent change of CEO) and recent political turmoil may slow things further. Malaysia (1): Market growth appears tougher in Malaysia, with both Prudential and Great Eastern s growth being weaker in recent quarters. We do note that some company-specific factors are at work, with Prudential actively re-positioning its portfolio to focus more on protection. AIA s underlying growth is difficult to ascertain given the inclusion of ING acquisition from 1Q13. China (1): We have seen new business growth in China picking up in recent quarters, with company feedback being that 2014 'open year' sales have also been strong. AIA's volume growth was very strong in 1H13, which we would expect to continue. New bancassurance rules are also likely to help margin in the medium term. Korea (5%): AIA s Korean franchise appears to have turned the corner, with strong growth in new business in the past few quarters. However, overall market momentum has slowed more recently with ban on all telemarketing of financial institutions following data leaks by credit card companies (Asia Insurance Review, 7 Feb 13). (1299.HK / 1299 HK) 7

8 Figure 10: AIA's mix (%) and NB APE growth (% p.a.) by market / market NB APE growth (% p.a.) AIA % of group 1H13 AIA ANP growth AIA VNB growth Market growth 1H13 1H13 1H H12 1H H12 1H13 10yr Q13 2Q13 3Q13 4Q13 ANP VNB VNB ANP ANP ANP VNB VNB VNB CAGR % US$mn % % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. Hong Kong 21% % 16% 21% 34% 23% 16% 5% 14% 21% 21% Singapore % 28% 3-3% 9% 48% 11% 9% 11% 12% 37% 27% Thailand 17% % 14% 19% 9% 12% 24% 11% 13% 23% 36% -23% 11% Malaysia % 6% 10 11% 3% 74% 1 7% na na na na China 8% 76 11% 1% 11% 22% 1 27% -6% 3% Korea 12% 45 6% -12% 1 75% 4% 9% 36% 16% -4% 63% 18% 1% -8% Other markets 22% % 4% -8% 29% 41% 41% % 1 29% 27% 27% 26% - excl Group Risk one-off 14% 1 29% 17% 34% 26% Source: Company data, OCI, TLAA, MAS, BN, KLIA, CIRC (AIA growth in USD, others in local currency), *Margin growth is VNB growth less ANP growth (VNB = value of new business, ANP = annualised new premium) Figure 11: Growth in HK strong in past four quarters Hong Kong NB APE growth (% p.a.) 8 Figure 12: with Singapore growth being also strong recently Singapore NB APE growth (% p.a.) 8 6 Market 10yr CAGR = 16% p.a. 6 Market 10yr CAGR = 10.% p.a. 4 Market growth recovering 4-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 AIA Prudential Manulife (C$) Market 10yr CAGR (%pa) Prudential Great Eastern Market 10yr CAGR (%pa) Source for both charts: OCI, MAS Figure 13: Thailand market growth strong Thailand NB APE growth (% p.a.) 5 Figure 14: with Malaysia growth being more mixed Malaysia NB APE growth (% p.a.) Market 10yr CAGR = 13% p.a. 4 3 Market 6yr CAGR = 12% p.a Bancassurance driven -1-3 Thai flood impact 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 AIA Market 10yr CAGR (%pa) - 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Prudential Great Eastern Allianz 6yr CAGR (%pa) Source for both charts: OCI, MAS (1299.HK / 1299 HK) 8

9 Figure 15: Growth in Korea is strong in past three quarters Korea NB APE growth (% p.a.) 6 5 Figure 16: with China growth starting to return China NB APE growth (% p.a.) Market 8yr CAGR = 8% p.a Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 AIA Market 8yr CAGR (%pa) -3 1H10 2H10 1H11 2H11 1H12 2H12 1H13 AIA Prudential Market Ping An 10yr GAGR (%pa) Source for both charts: Company data, OCI, MAS, TLAA, KLIA, CIRC (1299.HK / 1299 HK) 9

10 Life new business (HK$m) Centa-City Leading Index 06 February 2014 Hong Kong (25% of AIA's value of new business) AIA is the second-largest life insurer in Hong Kong in terms of in-force business, with the bancassurers being the main gainers of market share over the past ten years. Given the lack of key bancassurance relationships in Hong Kong, AIA s growth profile is a little weaker, but has a higher insurance composition and hence higher margins. Figure 17: AIA #2 in HK in terms of in-force Hong Kong life insurance market (in force APE HK$ mn) 30 Sep 13 35,000 30,000 25,000 20,000 15,000 10,000 5, % 12.9% 11.2% 9.1% 8.9% 8.8% 7.4% 5.5% 2.6% 2.3% 1.9% 15.1% HSBC AIA Prudential China Life AXA Manulife BOC Hang Seng FWD Zurich Sun Life Other Ind Life (Non-Linked) Ind Life (Linked) Group Retirement Group Risk Figure 18: but #6 in terms of new business Hong Kong life insurance market (new business APE HK$ mn) 3Q13 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, % 10.2% 10.7% 17.5% 10.3% 3.9% Ind Life (Non-Linked) 12.6% 5. HSBC AIA Prudential China Life AXA Manulife BOC Hang Seng 3.1% Ind Life (Linked) 1.5% 1.4% 9.7% FWD Zurich Sun Life Other Source for both charts: OCI We highlight recent market trends for Hong Kong by quarter below (Figure 19), which highlights that growth rates have recovered recently, with overall market growth returning to mid-to-high teens in recent quarters (relative to 10-year average of 16% p.a.). We also highlight that the property market appears to be highly correlated to new insurance sales (Figure 20), 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 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. Hong Kong market growth recovered recently Figure 19: Growth in HK picking up strongly Hong Kong NB APE growth (% p.a.) 8 Figure 20: with a high correlation to property prices Hong Kong NB APE correlation to property price index 52, Market 10yr CAGR = 16% p.a. 45, , Market growth recovering 30, , , , Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 AIA Prudential Manulife (C$) Market 10yr CAGR (%pa) 0 3Q13 1Q13 3Q12 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 1Q09 3Q08 1Q08 3Q07 1Q07 3Q06 1Q06 3Q05 1Q05 3Q04 1Q04 3Q03 1Q03 3Q02 1Q02 3Q01 1Q01 Property price index Life new business 20 Source for both charts: OCI, Centaline, Credit Suisse estimates (1299.HK / 1299 HK) 10

11 Growthj rate (% p.a.) Sum Insured (HK$bn) New Business Premiums (HK$m) Growth (% p.a.) New Business Premiums (HK$m) Growth (%) 06 February 2014 Hong Kong new business mainly participating The new business percentage of the unit-linked business rose to around 6 before the global financial crisis as investors risk appetite was higher (and equity markets were doing well), but has since reduced to around 17% overall. For AIA, the difference was even more extreme, with unit-linked falling from 85% of new business, to 1 in 3Q13. Unit-linked sales remain low in Hong Kong In our view, this is a key reason why AIA has not yet launched its next generation ILP product in its largest market, as consumer demand for this type of product remains low at this point in time. Figure 21: HK new business mix more participating Hong Kong NB APE (HK$ mn) and growth (% p.a.) Figure 22: which is more pronounced at AIA AIA Hong Kong NB APE (HK$ mn) and growth (% p.a.) 60, , ,000 5yr CAGR (%p.a.): , , ,000 30,000 3,000 20,000 2,000-10,000-1, Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10 Mar-10 Sep-09 Mar-09 Sep-08 Individual Life Non-Linked Individual Life Linked Growth (% p.a.) 5yr CAGR (%p.a.) Individual Life Non-Linked Individual Life Linked Growth (%pa) Source for both charts: OCI, Centaline, Credit Suisse estimates AIA Hong Kong's mix improving While it is AIA s stated strategy to increase the amount of protection riders on its policies and improve margins, it has not given much disclosure on this since listing. As such, we have examined AIA s growth and market share in Hong Kong in terms of sum insured. We highlight that this is not a perfect measure as death cover has higher sums insured, lower premium and likely lower profitability than critical illness or accident and health covers. As highlighted below in Figure 23, the growth rate of sums insured has picked up dramatically since listing and is now well above historical averages, and just slightly below premium growth rates recently. In addition, AIA s market share of sum insured has been pretty constant at around (Figure 24), reinforcing that the market share gains of the bancassurers have little to do with insurance, and more to do with deposit stripping. AIA s protection component growing faster than premium since listing Figure 23: Protection growth in line with premium AIA HK individual life premium and sum insured growth (%pa) Figure 24: with protection market share constant AIA HK individual life premium and sum insured market share (%) 25% 15% Premium Sum insured Sum insured 1 15% 5% IF premium 1 NB premium -5% 5% -1 Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 Sep-06 Sep-05 Sep-04 Sep-03 Sum insured growth (% p.a.) SI10yr CAGR (% p.a.) Premium growth (% p.a.) Prem 10yr CAGR (% p.a.) Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Sum insured NB Premium IF premium Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Source for both charts: OCI, Centaline, Credit Suisse estimates (1299.HK / 1299 HK) 11

12 New business (HK$m) Property index 06 February 2014 Singapore (15% of AIA's value of new business) AIA is the second largest life insurer in Singapore, just surpassed by Great Eastern. The ten-year average growth rate has been around 1 p.a., with AIA s growth profile being a little weaker than the average over that period, but picked up a lot more recently. Figure 25: AIA and Pru are #2 and #3 in Singapore Singapore life insurance market (in force APE S$ mn) ,000 2,500 2,000 1,500 1, % 24.9% 17.3% 16.1% 5.9% 4.4% % 3.5% Figure 26: with Pru bigger in new business Singapore life insurance market (new business APE S$ mn) % 11.4% 20.9% 18.1% % 2.8% 4.3% 2.1% 16.9% - Great Eastern AIA Prudential NTUC Aviva Manulife TM Asia HSBC AXA Other Non-linked Unit-linked Group - Great Eastern AIA Prudential NTUC Aviva Manulife TM Asia HSBC AXA Other New business annual premium 1 single premium Source for both charts: MAS, LIA, Credit Suisse estimates We highlight recent market trends for Singapore by quarter below in Figure 27, with market growth picking up again strongly in 2Q13 and 3Q13 well above its long-term average (1) after falling behind this growth rate for several quarters. As with Hong Kong, we also highlight that the property market here appears to be highly correlated to new insurance sales (Figure 28), with the property market slowing recently, and could be a leading indicator for slowing new business momentum. Figure 27: Growth has picked up recently in Singapore Singapore NB APE growth (% p.a.) 8 Figure 28: with a high correlation to property prices Singapore NB APE correlation to property price index 1, Market 10yr CAGR = 10.% p.a Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 0 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 25 Prudential Great Eastern Market 10yr CAGR (%pa) Property price index Life insurance new sales Source for both charts: MAS, URA, Credit Suisse estimates (1299.HK / 1299 HK) 12

13 Growthj rate (% p.a.) Growthj rate (% p.a.) 06 February 2014 Singapore new business skewed to participating The new business percentage of unit-linked business rose to around 5 before the global financial crisis as investors risk appetite was higher (and equity markets were doing well), but had since reduced to around 17% overall in Unit-linked sales remain low in Singapore However, some companies do sell more ILP and we note that Singapore was the first market where AIA launched its next generation ILP product. Figure 29: Singapore NB mix more participating Singapore NB APE (S$ mn) and growth (% p.a.) 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1, yr CAGR 10.2% 1.8% 28.5% -1.1% -11.9% % Non linked Unit linked 12.6% Figure 30: with AIA NB market share increasing AIA Singapore NB APE (S$ mn) and market share (% p.a.) % 13.9% 28.7% -31.9% 27.8% 0.5% 29.1% Annual premium 1 single premium Market share (%) 22.5% % % % 5. Source for both charts: OCI, Centaline, Credit Suisse estimates AIA Singapore's business mix steady As highlighted below in Figure 31, the growth rate of AIA Singapore picked up recently and growing above market share with similar growth in sums insured and premiums. Singapore's margin improvement has been strong, but led to some extent by the single premium business, which is more difficult to sustain. AIA s protection component growing faster than premium since listing As highlighted in Figure 32, AIA s market shares of sum insured and premiums have been fairly similar; hence, the margin improvement is likely to be led by a better mix of protection business as well as higher margins on the savings components. Figure 31: AIA growth rates picked up in 2012 AIA S pore individual life premium and sum insured growth (%pa) 12% Figure 32: but similar in protection vs. savings AIA S pore ind life premium and sum insured market share (%) 35% 1 8% Premium 3 25% Premium 6% 4% Sum insured 2% Sum insured 15% 1-2% 5% Sum insured growth (% p.a.) SI 9yr CAGR (% p.a.) Sum insured Premium Source for both charts: OCI, Centaline, Credit Suisse estimates (1299.HK / 1299 HK) 13

14 Growthj rate (% p.a.) 06 February 2014 Thailand (25% of AIA's value of new business) AIA is the largest insurer in Thailand by some margin, with most of the business being generated through its agency channel. Given the lack of bancassurance relationships, AIA s growth profile has been a bit weaker than peers, but has a higher insurance composition and hence higher margins. Figure 33: AIA #1 in Thailand by some margin Thailand life insurance market (in force APE S$ mn) ,000 90,000 75,000 60,000 45,000 30,000 15, Market share (%) 12.3% 10.6% AIA Thai Life Muang Thai 8.9% % Siam Comm Bangkok Life Krungthai AXA 6.7% Ayudhya Allianz 2.5% 3.2% Series3 Industrial Group PA 9.2% Prudential ING Other Figure 34: AIA also leads in terms of new business Thailand life insurance market (new business APE S$ mn) ,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, % AIA 15.2% Muang Thai 14.3% Thai Life 11.3% 10.8% Siam Comm Market share (%) Krungthai AXA 6.1% 5.6% Bangkok Life Ayudhya Allianz 4.8% Ordinary Industrial Group PA 2.8% 8.5% Prudential ING Other Source for both charts: TLAA We highlight recent market trends for Thailand by quarter below (Figure 35), with market growth running in the low teens on average in 2013 due to the Thailand flood impact. 1H13 growth was +13%, with 1Q13 very strong and 2Q13 weaker, with bancassurers weaker in 2Q13 with 3Q13 growth at 11%. Given the demographic profile and historical growth rates (10-year new business premium growth rate averaging 13% p.a.), we expect Thailand growth to continue to be strong although growth could be weaker near term given the recent political unrest. Figure 35: Thailand running at low teens in2013 Thailand NB APE growth (% p.a.) 5 Figure 36: with AIA s market share reducing AIA Thailand market share (%)of premium and sum insured Market 10yr CAGR = 13% p.a. 6 5 Sum insured Premium Bancassurance driven -3 Thai flood impact 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q Sum insured In-force premium AIA Market 10yr CAGR (%pa) Source for both charts: TLAA Given the pick-up in its growth rate in more recent years, AIA s market share in terms of in-force premiums has been stabilising. However, we do note that a lot of market share has been ceded to bancassurers, shown through a lot lower reduction in market share of sum insured, as shown in Figure 36. (1299.HK / 1299 HK) 14

15 Malaysia (1 of AIA's value of new business) AIA was the fourth-largest life insurer in Malaysia and has become the second largest after the acquisition of ING in 1Q13. Given the acquisition and the strong relationship with a large local bank, Public Bank, we expect AIA to deliver rapid growth. Figure 37: AIA + ING become #2 in Malaysia Malaysia life insurance market (in force APE RM mn) ,000 5,000 4,000 3,000 2,000 1, % Great Eastern 21.2% 16.5% AIA Prudential Hong Leong 6.9% 6.5% MCIS Zurich 5.8% Ageas (ETIQA) % Non-linked Unit-linked Takaful 17.2% 15.8% 4.4% 2.1% 1.4% 0.4% Allianz Manulife AM Life CIMB Sun Life 11.4% Other Figure 38: and Top 3 in new business Malaysia life insurance market (new business APE RM mn) Great Eastern 10.4% AIA Prudential Hong Leong Non-linked Unit-linked Takaful 6.6% 6.3% MCIS Zurich Ageas (ETIQA) 4.6% 1.3% 2.2% 1.1% Allianz Manulife AM Life CIMB Sun Life 18. Other Source for both charts: LIAM, Bank Negara, Credit Suisse estimates We highlight that recent market trends for the Top 2 insurers in Malaysia (Prudential and Great Eastern) point to slowing market growth (Figure 39), with their growth being negative to low teens over the past two years. AIA also experienced a similar trend in 2H12, with slow new business sales growth in 2H12, after outperforming its peers in the previous 12 months. Figure 39: Growth mixed in Malaysia more recently Malaysia NB APE growth (% p.a.) 5 Figure 40: and AIA s growth slowed in 2H12 Malaysia NB APE growth (% p.a.) 3 4 Market 6yr CAGR = 12% p.a. 25% Market 6yr CAGR = 12% p.a. 3 15% 1 1 5% -1-5% -1-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13-15% 1H10 2H10 1H11 2H11 1H12 2H12 1H13 Prudential Great Eastern Allianz 6yr CAGR (%pa) AIA Prudential Great Eastern Allianz 6yr CAGR (%pa) Source for both charts: MAS, URA, Credit Suisse estimates The main risk for AIA is whether the integration of AIA and ING in Malaysia poses any challenge to momentum in either business, and whether the momentum in ING has slowed at all given the uncertainty around its future. However, we are unlikely to see these trends until next year as AIA is only showing combined numbers from here. (1299.HK / 1299 HK) 15

16 VNB margin (% NB APE) 06 February 2014 China (1 of AIA's value of new business) AIA is the largest foreign life insurer in China with a market share of <1%. AIA is the only 10-owned foreign insurance company in China, with licences in five provinces which account for one-third of Chinese GDP. Figure 41: AIA has less than 1% market share in China China life insurance market (in force premium market share) 50. Top 5 = 71% Figure 42: with market share eroding over time China AIA total premiums (Rmb mn) and growth (%pa) 10,000 9, % 40. 8, % 7, % % 18.5% 9.1% 8.4% 6.6% 5.4% 4.6% 14.7% 6,000 5,000 4,000 3,000 2,000 1, % % 0.6% 0.4% 0.2% 0. China Life Ping An Life New China Life China Pacific 0.8% PICC Life Tai Kang Tai Ping Life AIA Others Dec-06 Dec-09 Dec-12 Dec-13 - Dec-04 Dec-05 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Premiums (Rmb mn) Market share (%) Dec-12 Dec Source for both charts: CIRC, Credit Suisse estimates New business volumes in China have fallen since 2011 (Figure 43) to more recently, due to the impact of bancassurance regulation changes and the lack of competitiveness in insurance product yields relative to bank deposits or wealth management products. AIA s top-line growth in China has been reasonably stagnant since 2007, but has had strong success in 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 (with strong margin expansion as shown in Figure 44). Pleasingly, volume growth also returned in 1H13 as highlighted below in Figure 43, with our channel checks generally showing improving momentum in 2H13 and strong start to 2014 'open year' sales for many companies. Figure 43: Growth in China returning recently China NB APE growth (% p.a.) 6 5 Figure 44: with AIA China margins expanding China VNB margins by company (% NB APE) 7 6 AIA China F'casts China Pacific 4 Ping An 1 3 China Life New China Life China Taiping H10 2H10 1H11 2H11 1H12 2H12 1H13 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13F Jun-14F AIA Prudential Market Ping An 10yr GAGR (%pa) Source for both charts: Company data, CIRC, Credit Suisse estimates (1299.HK / 1299 HK) 16

17 Agency premium growth momentum improving The key standout from 1H13 results in our view was the continued strong growth in value of new business (VNB), which was up 26% in 1H13. Importantly, momentum was maintained in 2Q13, with 25% growth in 1Q13 and 26% 2Q13. Pleasingly, we saw a continued pick-up in premium growth momentum, with annual new premiums (ANP) being up 29%, particularly in the first quarter (37% growth, 2Q13: 21%). As highlighted in Figure 45, growth margins generally went up for most of the countries, highlighting that margin reduction was mainly due to country mix changes. While AIA's margin improvement has been impressive, we highlight that this cannot continue to be the main driver of growth in the long term (having now largely closed the gap with peers). As such, we find the continuing improvement in premium growth comforting, especially the continuing momentum in agency sales which we believe also demonstrates that the agency re-activation/premier agency strategy is starting to deliver. As this takes time to build momentum, AIA should continue to benefit from this for some time. Figure 45: Composition of VNB and ANP growth by channel US$ mn 1H11 2H11 1H12 2H12 1H13 % YoY Agency VNB VNB margin 44.7% 53.7% 52.1% 55.5% 49.9% -2.2% ANP % Agency ANP growth improved continued to improve in 1H13 Partnerships VNB % (profitable) VNB margin 31.3% 23.5% 36.3% 36.5% 38.9% 2.6% ANP % Total VNB % VNB margin 36.5% 38.7% 43.1% 44.8% 42.2% -0.9% ANP 1,094 1,378 1,187 1,509 1,527 29% % agency VNB 88% 86% 79% 79% 76% -3.5% ANP 72% 62% 66% 63% 64% -1.5% Growth (%p.a.) 1H12 2H12 1H13 Agency VNB 16% 15% ANP 12% 26% Partnerships VNB 52% 65% 44% ANP 31% 6% 35% Source: Company data, Credit Suisse estimates AIA has now doubled its VNB since IPO, which cumulatively can be broken down as follows between volume and margin: Volume growth (+83%) driven by a mixture of recruitment and re-activating dormant agents with agency growth contributing 49%. Partnerships contributed 23% (much higher growth, but off lower base). Margin improved (+) while product mix contributed 37% to the growth; this was negatively impacted by: (1) -5% from channel mix, geographic mix (including acquisitions) and (2) -8% from changes in assumption. (1299.HK / 1299 HK) 17

18 Margins no longer the key driver of growth While we are impressed by the rate of margin improvement 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. 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. Figure 46: Margins in core mkt now in line with peers VNB margins (net of tax)by country and company (VNB % ANP) Figure 47: and above for others VNB margins (net of tax)by country and company (VNB % ANP) 8 Hong Kong Singapore Malaysia 7 China Thailand Korea AIA Pru AIA GE AIA GE AIA Pru AIA BLA AIA Pru 2H10 1H11 2H11 1H12 2H12 1H13 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 48, mainly due to the more conservative risk discount rate assumption. 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. We do note that bond yields have been falling across the region (Figure 49) which had created pressure over time for AIA to reduce its bond yield assumptions, with potential downside valuation implications. However, we highlight that given the recent recovery in bond yields, this is no longer necessary and one could in fact argue the reverse. 2H10 1H11 2H11 1H12 2H12 1H13 Figure 48: AIA equity risk premium higher than PRU AIA vs. Prudential net discount rate assumptions (%) 14. Figure 49: with bond yields above spot bond yields AIA bond yield assumptions vs. spot yields (%) China Hong-Kong India Japan Korea Malaysia Singapore Taiwan Thailand Prudential AIA 0.0 HK Thailand China S'pore Malaysia Korea Nov-10 Nov-11 Nov-12 Sep-13 EV assumption Note: Net risk discount rate is discount rate less govt bond yield Source for both charts: Company data, Credit Suisse estimates (1299.HK / 1299 HK) 18

19 NB APE ( mn) Growth (%pa) NB APE ( mn) Growth (%pa) Available regulatoty capital (US$mn) Solvency margin (%) 06 February 2014 Strong balance sheet provides flexibility AIA s capital position remains very strong even after the ING Malaysia acquisition and likely upfront payment of Citibank distribution deal. AIA's excess capital position improved by US$1.2 bn to US$3.9 bn (rising to US$4.9 bn including the US$1 bn in debt raised) in 1H13. Figure 50: Solvency position very strong Group excess capital (US$ mn and % MCR) Figure 51: with US$3.9 bn in excess capital (excl debt) Key balance sheet / solvency metrics (US$ mn) 8,000 7,000 6,000 5,000 Solvency margin % (RHS) F'casts Balance sheet 2H10 1H11 2H11 1H12 2H12 1H13 %1H Net assets 19,555 21,141 21,313 23,012 26,697 27,172 2% Minority interests % Shareholders' Equity 19,475 21,052 21,211 22,901 26,566 27,023 2% Net tangible assets 19,303 20,876 21,037 22,715 26,425 25,863-2% 4, Solvency 2H10 1H11 2H11 1H12 2H12 1H13 %1H 3,000 2,000 1,000 0 Minimum capital requirement (LHS) 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13F 1H14F Inadmissible assets (incl DAC) 13,096 13,921 14,869 16,982 21,614 19,743-9% Regulatory capital held 6,207 6,955 6,168 5,733 4,811 6,120 27% Min capital required (MCR) 1,844 1,956 1,984 1,256 1,362 1,434 5% Solvency ratio (%) 337% 356% 311% 456% 353% 427% Including debt 497% Excess capital (above 15) 3,441 4,021 3,192 3,849 2,768 3,969 3% Including debt 4,969 Tier 1 capital Tier 2 capital Minimum capital required (MCR) Solvency ratio (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates AIA generated free surplus of US$1.9 bn in 1H13, while the new business strain was just US$0.7 bn, highlighting its capital generation capacity. Its new generation investmentlinked product (lower capital required) roll-out continues and had very strong momentum in 1H13 (VNB up 8), which should reduce the new business strain further. As such, coupled with a plenty of debt capacity, AIA is in a strong position to undertake capital management and/or M&A opportunities when it deems fit.. Whilst it is not likely to be cheap, we believe that this deal will effectively lock in new business growth for AIA for the next couple of years and has the ability to add 1+ each year. As such, we see the risk of stock multiple de-rating being lowered post this deal. Figure 52: UOB deal key drive of Prudential growth Prudential Singapore - new business APE ( mn, %pa) Figure 53: Thanachart now adding around 4% Prudential Thailand - new business APE ( mn, %pa) UOB deal Jan Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Singapore Growth (%pcp) 5yr CAGR (%pa) 1Q13 3Q13 Thailand Growth (%pcp) 5yr CAGR (%pa) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates (1299.HK / 1299 HK) 19

20 Valuation appeal returning in recent pull-back Given the recent share price weakness, AIA's valuation is looking more attractive again, but still not inexpensive by any stretch of imagination. Our 12-month forward sum-of-the-parts valuation/target price for AIA is HK$44.00, which implies a 1.7x price to embedded value, 19x P/E and 2.0x price-to-book value, and 15.7x implied value of new business multiplier. In establishing this range, we have considered AIA s earnings growth outlook on a bottomup basis and compared this with listed life insurance peers in the region. We value AIA using a sum-of-the-parts approach, applying a new business multiplier to each country s value of new business plus embedded value depending on the growth outlook in each country. AIA s valuation now looks more attractive again Figure 54: AIA Credit Suisse s sum-of-the-parts valuation summary (2014E) (US$ mn, unless otherwise stated) Valuation Earnings PE (x) Alloc Equity NAV P/NAV ROE Net worth EV P/EV VNB Assumption US$ mn FY14F FY15F FY14F FY15F US$ mn US$ mn (x) (%) US$ mn US$ mn (x) US$ mn Hong Kong 18, x 19.4x 4,565 6, x 12.8% 3,995 11, x x VNB multiplier Thailand 14, x 25.5x 4,487 5, x 8.1% 6,352 8, x x VNB multiplier Singapore 7, x 16.7x 2,269 2, x 14.7% 1,806 4, x x VNB multiplier Malaysia 4, x 11.4x 2,810 2, x 13.4% 1,294 2, x x VNB multiplier China 5, x 16.9x 1,414 1, x 16.8% 834 2, x x VNB multiplier Korea 3, x 19.6x 1,885 2, x 7.6% 1,531 2, x x VNB multiplier Other markets 9, x 24.5x 2,223 3, x 7.9% 3,778 5, x x VNB multiplier Corporate / other x 0.0x 5,108 2, x 7.5% -5, x x EV multiple Minorities x -21.3x x -9.4% 2.0x NAV multiple AIA group 64,279 3,104 3, x 16.9x 24,760 28, x 10.8% 14,066 36, x 1, x Shares on issue 12,044 12,044 12,044 per share (USD) USD:HKD per share (HK$) $ $ 2.00 $ x 16.9x $ $ x $ 9.07 $ x 15.7x Figure 55: HK, Thailand and S pore ~65% of value CS AIA valuation composition (% total) Figure 56: similar to the mix of earnings AIA profit composition (% total FY13E) Korea 6% China 9% Other markets 15% Hong Kong 29% Korea 6% China 9% Other markets 13% Hong Kong 29% Malaysia 7% Singapore 12% Thailand 22% Malaysia 13% Singapore 14% Thailand 16% Source: Credit Suisse estimates (1299.HK / 1299 HK) 20

21 Price / Embedded Value (P / EV x) 06 February 2014 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 Korean 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 57: P/EV comparison (12-month forward) Price to embedded value (x) 1.75x 1.50x 1.25x 1.00x 0.75x 0.50x 0.25x Figure 58: VNB multiple (12-month forward) Implied value of one-year new business multiplier (x) 12.5x 10.0x 7.5x 5.0x 2.5x 0.0x -2.5x -5.0x 0.00x Bangkok Life AIA Fubon FHC China Pacific (H) AMP China Taiping China Life (H) Prudential plc Ping An (H) New China Life (A) Great Eastern China Pacific (A) China Life (A) Cathay FHC Ping An (A) New China Life (H) Max India Dongbu China Life TW Samsung Life Korea Life Sony Financial Samsung F&M Hyundai M&F T&D Holdings -7.5x Bangkok Life AIA Prudential plc Fubon FHC AMP China Pacific (H) Reliance Capital Max India China Taiping China Life (H) Ping An (H) Great Eastern China Life TW Cathay FHC China Pacific (A) China Life (A) New China Life (H) Ping An (A) Dongbu Hyundai M&F Samsung F&M Sony Financial Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates While the 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 59: Price-to-embedded value (x) vs. return on EV (% p.a.) 1.80x 1.60x Expensive Bangkok Life 1.40x AIA Prudential plc Fubon FHC 1.20x Pru Asia 1.00x 0.80x 0.60x 0.40x Dai-Ichi Life China Pacific (H) AMP China Taiping Manulife Ping An (H) China Life (H) New China Life (A) Great Eastern China Pacific (A) China Life (A) Cathay FHC Ping An (A) New China Life (H) Dongbu Samsung Life China Life TW Sony Financial Samsung F&M Hanwha Life Hyundai M&F Tower T&D Holdings Shin Kong FHC PICC Group 0.20x Inexpensive 0.00x Return on EV (EPS / EV %) Source: Reuters, Company data, Credit Suisse estimates (1299.HK / 1299 HK) 21