(Updates share price in fifth paragraph.)
Feb. 24 (Bloomberg) -- AIA Group Ltd., the third-largest Asia-based insurer by market value, posted a 41 percent drop in annual profit as stock investment losses overshadowed growth in new business. The shares advanced to a six-month high.
Net income fell to $1.6 billion, or 13 cents a share, in the 12 months to Nov. 30, from $2.7 billion, or 22 cents a share, a year earlier, the Hong Kong-based company said in a statement to the city’s stock exchange today. Fourteen analysts surveyed by Bloomberg estimated an average profit of $1.66 billion.
Chief Executive Officer Mark Tucker has been trying to rebuild the insurer operating in 15 Asian markets by boosting the profitability of new businesses and agent productivity. The company’s value of new business, the measure of the projected future profitability of new policies that Tucker has focused on, surged 40 percent last year to $932 million.
“Overall this was a very strong set of numbers, on average in-line or ahead of market consensus,” Barclays Plc analysts Mark Kellock and Thomas Wang wrote in a research note today. “We see further operational upside as AIA continues to improve productivity, business quality and profit margins.”
The shares rose 3.3 percent to close at HK$28.30 at the close in Hong Kong, the highest since Aug. 3. They have gained 23 percent since the stock started trading on Oct. 29, 2010, outperforming Hong Kong shares of peers China Life Insurance Co., Ping An Insurance (Group) Co. and Prudential Plc.
AIA’s operating profit after tax, before the investment losses, climbed 13 percent to $1.9 billion. It declared a final dividend of 22 Hong Kong cents per share, bringing full-year dividend to 33 Hong Kong cents.
The growth in the value of new business was ahead of analysts’ consensus estimate of $870 million, driven by a bigger-than-expected 4.6 percentage point expansion in new business margin to 37.2 percent, according to the Barclays note.
“We have continued to deliver strong growth in our key performance measures,” said Tucker, 54, in the statement. “The potential exists for continuing global economic uncertainties to have a negative impact upon Asian economic growth rates and consequently upon AIA’s business.”
Annualized new premiums, a gauge of new business sales, jumped 22 percent to $2.5 billion.
Embedded value of AIA increased 10 percent to $27 billion from a year earlier, according to the statement. The estimate of the economic value of life insurance business using actuarial and investment assumptions is used to value life insurers.
AIA was hurt in 2008 by troubles at its bailed-out biggest shareholder American International Group Inc. and uncertainties surrounding its attempted takeover by Prudential Plc in 2010.
Without external economic shocks having a major impact on Asia, Tucker said that the region’s wealth and low insurance ownership together with future economic growth will drive the demand and expansion of AIA’s products and services.
AIA recognizes all of the fair value changes of its equity investments in the profit and loss account, the Barclays analysts said in a Feb. 22 report. The insurer reported $207 million of net losses from equities after tax, against the $853 million gain the year before.
Insurers like AIA suffered losses on stock market investments as the European debt crisis clouded the global economic outlook and dented investor confidence, sending the MSCI Asia Ex-Japan Index down 19 percent last year.
“Apart from new business contribution, investment return remains the biggest swing factor” for embedded value and profit after tax growth, Goldman Sachs Group Inc. analysts Mancy Sun and Philippa Rogers wrote in a Feb. 8 report.
Its mark-to-market losses on investments will have been “fully reversed” by this morning, Tucker said during a call with reporters today.
American International Group Inc., AIA’s biggest shareholder, posted a $1 billion mark-to-market gain on its AIA stake as it reported a 77 percent jump in fourth-quarter profit yesterday. AIG still owns 33 percent of AIA after selling a majority stake in the Asian insurer in its 2010 initial public offering to repay a 2008 government rescue that totaled $182.3 billion. A lockup on its holdings will be lifted in April, according to the Barclays report.
AIA’s free surplus, a measure of excess capital over what is required to be held by regulators, surged 19 percent to $5.9 billion.
Its solvency ratio, which measures the actual capital against the minimum capital requirement, stood at 311 percent. The insurer plans to maintain a strong balance sheet, capital position and cash level in light of continued market swings in the foreseeable future and conservative regulators, Tucker said.
He declined to comment on reports on its interest to buy ING Groep NV’s Asian business in a deal that may be valued at more than $6 billion.
“If it makes sense, if we find it adds value to shareholders, if it’s financially viable, we will look at opportunities,” he said of potential acquisitions. “But we’re 99 percent focused on organic growth.”
AIA asked investment banks to advise it on the possible bid, two people with knowledge of the matter said last month.
South Korea and Japan, where AIA is weak, contributed 80 percent of ING Asia’s earnings last year and 75 percent of gross written premiums and new business sales, the Credit Suisse analysts wrote in a Feb. 14 report.
--Editors: Andreea Papuc, Linus Chua
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