The coronal epidemic has made Hong Kong's insurance industry, which has already fallen sharply, even worse.

Affected by the movement in the second half of the year, Hong Kong's insurance market changed from the booming situation of the first half of the year, and the decline intensified from the third quarter. In the third quarter of 2019, gross premiums fell 4.11% quarter-on-quarter to HK $141.052 billion, of which office premiums, which accounted for 82.78% of the long-term individual life business, fell 12.31% to HK $116.758 billion in the third quarter.

The sharp decline in new office premiums for long-term business may be the main reason for dragging down the overall performance. In the third quarter of 2019, new office premiums for long-term business decreased by 22.49% compared with the previous quarter, of which new office premiums for life products fell by 22.69% to HK $39.747 billion, as shown in the figure below.

Going back to the source, the sharp decline in mainland tourists may be the most crucial reason. Judging from past records, mainland visitors are the main force in the growth of new policies for Hong Kong's long-term individual Life products. From 2017 to the third quarter of 2019, new office premiums for mainland visitors purchasing individual Life products accounted for between 24.28% and 45.08% of new individual Life premiums.

In the third quarter of 2019, the new office premiums of mainland visitors' life insurance products were less than 10 billion yuan, down 18.1% from the same period last year and 28.82% from the previous month to HK $9.652 billion, as shown in the figure below.

The decline in the third quarter is just the beginning. The number of visitors to Hong Kong dropped further in the fourth quarter, and the coronal epidemic broke out at the beginning of this year, and the original peak season of the Spring Festival became off-season. In early February, the SAR Government announced that some entry and exit ports would be closed and people entering the country had to be forcibly quarantined. Not to mention going to Hong Kong to buy insurance, even shopping has become a problem. It is conceivable that the amount of new policy premiums for mainland visitors' life insurance products will only fall further in the first two months of 2020.

Some people in the insurance industry pointed out that if the epidemic is not under control in March, the number of new insurance policies issued in the first quarter of this year may be sharply reduced by 70%. This may mean that winter is coming for Hong Kong insurance companies.

The influence on AIA Group Limited

As the largest company listed on the Hong Kong Stock Exchange (00388-HK), registered in Hong Kong and headquartered in Hong Kong, AIA Group Limited plays an important role in Hong Kong's life insurance market. Therefore, the decline in income from new life insurance policies in Hong Kong has also borne the brunt of AIA.

In the third quarter of 2019, AIA Group Limited's new business value rose 1 per cent to US $980 million, and excluding Hong Kong business, the new business value increased by 14 per cent. The new annualized premium fell 8% to $1.444 billion. According to the announcement of the insurance company, the new business value of its Hong Kong business recorded a double-digit decline, and the double-digit growth in the new business value of local customers was offset by the decline in the new business value of mainland customers visiting Hong Kong. From this we can see that the results of the Hong Kong business in the fourth quarter and the first quarter of this year are likely to be miserable.

Dragged down by the decline in the value of new business in Hong Kong in the third quarter, the growth of new business value slowed in the first three quarters of 2019, falling to 10.98% from 23.36% in 2018, and the annual growth rate of annualized new premiums also dropped to 1.10% from 15.75% in 2018. See the picture below.

One can't make bricks without straw

In terms of the ratio of new policies to commission and fee expenses, AIA Group Limited's composite ratio of covering all regional market segments in the first half of 2019 was 1.68 times, while that of its peer China Life Insurance Company Limited (02628-HK) was only 0.758 times (interim report prepared in accordance with international accounting standards), reflecting that AIA Group Limited's expenditure efficiency is better than the latter.

Interim results prepared in accordance with international accounting standards also reflect the same conclusion. According to the author's estimate, the net interest rate attributable to shareholders of AIA Group Limited in the first half of 2019 was 15.92 per cent, while China Life Insurance Company Limited was 8.34 per cent. AIA Group Limited's ROE (return on equity) was 13.84 per cent, compared with China Life Insurance Company Limited's 9.31 per cent, according to exam earnings for the 12 months ended June 30, 2019.

In other words, compared with domestic counterparts, AIA Group Limited's operating efficiency and profit margins are better. However, the Hong Kong market, which accounts for nearly 35 per cent of its after-tax profits, has declined, and the pan-Asian independently listed life insurance group, which claims to be the largest, may not be able to make bricks without rice.

Hong Kong is AIA Group Limited's most important market. In terms of new annualized premiums in the first half of 2019, Hong Kong accounts for 39.7%. In terms of shareholders' after-tax profit, Hong Kong accounts for 34.40%, making it the largest source of profit. Mainland tourists have contributed a lot.

Hong Kong's insurance industry has been affected by social events and the epidemic, and the blow to AIA Group Limited is self-evident. Although tax-deductible MPF contributions, voluntary health insurance and extended annuity schemes in Hong Kong and Macao may provide a boost so far this year, the effect is estimated to be limited.

Look to the north of China

As can be seen from the picture below, after the influx of mainland tourists to Hong Kong to buy insurance in 2016, the mainland introduced restrictions to dissuade mainland residents from buying insurance blindly, while gradually relaxing restrictions on the operation of foreign insurance institutions in the mainland. The growth rate of new annualized premiums in Hong Kong has declined in recent years, while the mainland has become AIA Group Limited's fastest-growing market.

In the first half of 2019, the value of new business in mainland business increased by 34 per cent to US $702 million, and annualized new premiums increased by 31 per cent to US $753 million (at fixed exchange rates).

After-tax profit attributable to shareholders in the mainland division rose from just $70 million in 2010 to $939 million in 2018 and rose a further 6.34 per cent to $537 million in the first half of 2019.

As can be seen from the chart below, the contribution of the mainland business is gradually increasing.

It is worth noting that the profit margin of the new business value of the mainland business is the highest among AIA Group Limited's regional markets. in the first half of 2019, the profit margin was as high as 93.2%, reflecting changes in China's tax laws and regulations. the tax deduction for higher commission expenses has had a positive impact, offsetting the negative impact of the promotion of its protection products on the protection of policyholders. So the after-tax operating profit of the mainland division rose 32 per cent to $537 million in the first half.

Looking to the future, the Bancassurance Regulatory Commission is studying and formulating ways for Hong Kong insurance institutions to set up insurance after-sales service organizations in Guangdong-Hong Kong-Macau Greater Bay Area, which can facilitate Hong Kong insurance institutions to conduct business in the mainland. The facilitation of after-sales service will be conducive to the optimization of its insurance services in Hong Kong and attract more mainland customers to Hong Kong and Hong Kong customers who often travel to and from the mainland.

On the other hand, after the restriction on the shareholding ratio of foreign insurance companies in the mainland has been relaxed, all foreign companies have rubbed their hands to be the first wholly-owned foreign company in the subdivision of the field, in order to seize the market. AIA Group Limited also transformed the Shanghai branch into a wholly-owned life insurance subsidiary at the end of 2019, which is expected to become the first foreign life insurance company to set up a wholly-owned subsidiary in the mainland.

As the world's largest life insurance company, AIA Group Limited will benefit from further opening up the domestic life insurance market, the mainland market is so profitable, and AIA Group Limited's current operating efficiency is better than that of his mainland counterparts, and future profit growth is expected.

Summary

The vision is beautiful, but we have to return to reality. The impact of the campaign and the epidemic on its largest market, Hong Kong, will no doubt be reflected in the results in the fourth quarter of 2019 and the first half of 2020. However, many life insurance companies have been waiting for an opportunity to launch relevant life insurance products to expand the scope of protection for their customers. is this an opportunity?

When the spring blossoms, the epidemic moderates and the mainland further opens up the life insurance market, AIA Group Limited may be able to take advantage of the situation.