AIA Group Ltd

HKEX:1299

Earnings Call Transcript 2022-Q4

[Lee Yuan Siong, President and Chief Executive Officer]

Good morning from Hong Kong and a warm welcome to AIA’s Annual Results Presentation for 2022. As you have seen from this morning’s announcement, we have delivered a resilient performance with strong growth momentum returning in the second half. We have successfully navigated through a challenging year for the region given the impacts of COVID-19 restrictions and I firmly believe that the long-term prospects for AIA’s business remain as clear and strong as ever. I have full confidence that the execution of our growth strategy, combined with our unmatched financial flexibility, will enable AIA to capture the immense opportunities ahead as our markets rebound from the pandemic.

I will now take you through the highlights. New business momentum improved strongly in the second half of 2022 as the effects of the initial Omicron wave subsided and normal activities resumed. VONB for the Group was up by 6% in the second half with positive growth in our five largest markets. For the full year, VONB exceeded $3 billion and EV equity was $77 billion before returning more than $5.8 billion to shareholders through dividends and our share buyback during the year. Operating profit after tax increased by 5% per share supported by our large and diversified in-force portfolio and our operating return on equity increased by 40 basis points to 13.2%.

The Group’s capital position remained very strong despite significant capital market volatility over the year. Free surplus was higher at $23.7 billion and the Board has recommended an increase of 5% in the final dividend, bringing the total dividend for the year to HKD153.68 per share, up 5.3%. In the first 10 months of our ongoing $10 billion buyback program, we have already returned $3.6 billion, reflecting the power of AIA’s business model that enables us to capture the growth opportunities across Asia and deliver cash returns to shareholders.

In Mainland China, our largest market, we saw a return of double-digit VONB growth in the second half of 2022 before a surge of COVID-19 infections affected sales in December. As cases subsided, we have seen new business momentum recover and a return to positive VONB growth in the first two months of 2023. Traditional protection products remained the largest contributor to VONB for AIA China in 2022. And in November, we began sales of a new product, Ru Yi You Xiang, which supported a double-digit increase in sales of critical illness products in the fourth quarter. The strength of our Premier Agency model continues to differentiate AIA and we have significantly outperformed the industry once again.

While the market continued to see a large reduction in agent numbers, our headcount grew over the year with recruitment broadly in line with 2021 levels and we maintained our high-quality standards. In July, AIA China was named the largest MDRT company globally, helping AIA Group become the number one MDRT multinational for a record eighth time. We successfully launched our Hubei operation and are preparing to launch our newest branch in Zhengzhou, Henan, the third most populous province in Mainland China with close to 100 million people. Our geographical expansion has delivered excellent results with agency VONB growth of 50%. In Hong Kong, VONB was up compared to 2021 with strong momentum building through the second half of the year. We achieved growth across all channels and Mainland Chinese visitor business more than trebled in 2022, underscoring the continued demand for our products from this segment.

AIA’s Premier Agency remains the clear leader in both Hong Kong and Macau and we grew our market share in a very competitive environment. New recruits were also up over the year, with an 11% increase in the fourth quarter and we maintained our focus on reinforcing the strengths of our agency platform. Through our partnerships channel, we delivered more than 20% growth. This was supported by a material contribution from our new relationship with The Bank of East Asia and an excellent performance in the IFA channel. With the border reopening, we are well-positioned to capture future growth opportunities by meeting the needs of both domestic and Mainland customers across all our distribution channels.

ASEAN is a major driver of growth for the Group and accounted for 44% of total VONB in the second half. Our markets returned to strong growth in the second half with broad-based performances across Thailand, Singapore, Malaysia, and the Philippines. We have a powerful multi-channel distribution platform, which drives substantial scale in each of our markets. Over the course of the year, VONB momentum from agency also increased progressively and was up by 14% in the fourth quarter. Our agency is the number one for MDRT in ASEAN, demonstrating the quality of our leading platform.

AIA’s long-term strategic partnerships are a key asset and achieved 16% VONB growth in the second half of the year. By increasing our reach to tens of millions of active users, our partnerships with digital platforms are a valuable source of leads, especially for new customers in younger demographics.

Turning to India, our joint venture TATA-AIA continued its excellent track record with VONB up by 52%. Our strong growth has moved us up to the number three ranked private life insurer and we are the market leader in retail protection. We are also the number one MDRT life insurer in India and our focus on scaling and enhancing our leading Premier Agency has delivered a very strong increase in new recruits. Our fast growing business is also supported by high-quality bank partners with the potential to reach more than 150 million existing customers through over 5,000 insurance specialists. Together with our key brokers, where we have the number one share of wallet, our digitally-enabled partnerships have driven superior growth.

Our resilient results in 2022 could not have been delivered without the significant progress we have made in technology, digital and analytics and AIA was once again named the Digital Insurer of the Year. Back in 2020, we said that a step change in TDA would be at the heart of our new strategy and we set out ambitious transformation goals. Our transition to cloud is already very close to our target of 90% adoption and we are generating significant cost efficiencies compared to legacy infrastructure and 70% of our customer service transactions across the group are now fully automated from end-to-end, supporting faster turnaround times and leading customer experience.

We have invested in more than 230 high-impact AI and analytics projects since we began our TDA program with over 110 delivered in 2022 far exceeding our original targets. Integrating social media marketing into our digital tools is a compelling way to reach customers. Across our distribution channels, the enhanced quality of these targeted leads has generated more than $0.5 billion in annualized new premiums for the Group in 2022. As you can see, our significant investments in our TDA transformation are achieving strong results for customers, distributors and AIA, accelerating our profitable growth strategy.

AIA is the market leader in health insurance in the region and in 2022, over 40% of VONB came from products with health benefits including medical and critical illness. At our interim results, we announced our new Integrated Health Strategy which reinforces our core life insurance business and makes health insurance and healthcare more accessible, more affordable and more effective for our customers. This in turn leads to greater customer lifetime value as satisfied policyholders stay with us for longer and our premier agents and partners have a broader product suite, reaching new customer segments with increased interactions, resulting in higher sales and productivity.

Amplify Health, our new Health InsurTech business, powers the delivery of our strategy. Since its launch in early 2022, we have made strong progress with our local businesses to transform how customers experience health insurance and healthcare. We are also advancing the Group’s capabilities through targeted acquisitions, bringing new assets and know-how across product, distribution and network management. In AIA’s markets, annual healthcare expenditure is expected to exceed $4 trillion in 2030, presenting another significant opportunity to accelerate AIA’s profitable growth strategy. This is the right time for us to play a leading role in transforming health insurance and healthcare delivery across the region. We also have a substantial responsibility to contribute to the sustainable development of Asia. Our business is multi-generational in nature and so sustainability is naturally at the forefront of how we operate.

We are committed to achieving net-zero by 2050 and are setting ambitious emissions reduction targets that are expected to be validated by SBTi, the Science Based Targets initiative. The sustainable deployment of our investment portfolio is critical to delivering our ESG ambitions. Following our full divestment from coal, we have implemented an ESG rating scorecard across our investee companies in all our directly managed asset classes. Across our markets, we are committed to a better, more sustainable future. I know there is much more we can do as we help more people live healthier, longer, better lives.

In summary, AIA has the ambition, scale and financial strength to capture the enormous opportunities across all our markets. We saw a strong return of VONB growth momentum in the second half for the Group. In Mainland China, our premier agency has outperformed the industry and our differentiated strategy ensures we are able to capture the full potential of this market as it reopens. AIA Hong Kong delivered VONB growth across all channels. Our number one agency is gaining market share and we have leading partners and strong IFA relationships.

With the border now reopened, we are very well positioned for the recovery of MCV business across our unrivalled distribution. Our ASEAN markets swiftly regained momentum to grow strongly in the second half and are a material engine of VONB growth for AIA. Our fast growing, industry leading business at TATA-AIA has achieved another excellent result with VONB, up by more than 50%.

AIA’s strong, resilient balance sheet is an important differentiator, particularly during times of capital market volatility. Our multiple engines of growth, combined with our unmatched financial flexibility, has resulted in a strong recovery and ensures AIA is exceptionally well-placed as Asia rapidly opens up for further growth. Garth will now take you through the details of our financial performance.

[Garth Jones, Chief Financial Officer]

Thanks, Yuan Siong and good morning everyone. As you have just heard, new business momentum improved strongly and the group returned to positive VONB growth in the second half. Our consistent financial discipline and focus on AIA’s high-quality business supported continued growth in OPAT. Free surplus was up over the year despite significant capital market volatility and we returned $5.8 billion of capital to shareholders through dividends and our ongoing share buyback program. Our robust financial results demonstrate not only the resilience of our business, but also underpin our confidence in the outlook for AIA in 2023 and beyond. We have the financial strength to capture the tremendous growth opportunities across all of our markets as they rebound from the effects of the pandemic.

Let me now take you through the financials in more detail. After a resilient performance in the first half, the Group delivered VONB growth of 6% to more than $1.5 billion in the second half of 2022. AIA China grew by 3%, reflecting the resilience of our high-quality professional agency force and powerful differentiated business model. As you heard from Yuan Siong, VONB in the second half recovered strongly with double-digit year-on-year growth, before increased COVID infections affected sales in December.

As normal activity resumed, we saw a return to positive VONB growth over the first 2 months of 2023. AIA Hong Kong grew by 5% driven by a strong performance from the Mainland Chinese Visitor segment, particularly in Macau, as momentum gathered pace through the second half. Our leading premier agency in Hong Kong continued to outperform the market and our partnership channel achieved double-digit VONB growth over the full year driven by very strong performances in the IFA channel and our partnership with BEA.

AIA Thailand delivered growth of 19% in the second half, reflecting a strong performance from our agency channel and AIA remained the market leader in unit-linked sales. In Singapore, our strategic initiatives delivered improved agency productivity and a strong performance from our partnership channel as cross-border travel restrictions eased, leading to 7% growth overall.

AIA Malaysia delivered excellent growth of 26%, supported by strong performances from both our agency channel and our partnership with Public Bank. VONB for other markets was lower by 8% with strong double-digit growth from India, New Zealand and the Philippines in particular, mainly offset by reductions in Australia and South Korea. Overall, the group delivered a broad-based return to growth with a positive increase across all of our five largest markets.

AIA focuses on riding high-quality, profitable new business that generates attractive returns over time. Growth in the second half was supported by a stable VONB margin at 58.8%. PVNBP margin increased to 10% overall, reflecting higher protection and unit-linked margins. Our ability to meet the full range of customer needs across protection, long-term savings and retirement products is a key differentiator for AIA and a major factor in our confidence in the Group’s future growth. EV Equity increased to $77 billion before dividends and additional capital returns to shareholders. An uplift of $3.1 billion, after the acquisition of Blue Cross, was from the early adoption of the Hong Kong RBC regime and release of resilience margins as I previously reported.

Together with operating profit of $6.8 billion, EV Equity grew by 13% to $85 billion. Negative investment return variances were primarily from capital market movements in the first half with the impact in the second half significantly lower at $599 million. Economic assumption changes were a small negative of $300 million from increased risk discount rates, offsetting higher long-term investment return assumptions as I highlighted at the half year results. Foreign exchange rate movements from the strength of the U.S. dollar were relatively unchanged from the first half of the year. Closing EV Equity was $71.2 billion after returning $3.6 billion through the share buyback that began in March and $2.3 billion for shareholder dividends.

Our EV methodology uses spot market yields and trends over time to our long-term assumptions, which aim to smooth out short-term volatility in markets. The interest rate sensitivity shown here applies a 50 basis points movement from current spot government bond yields and our long-term assumptions including equity returns and risk discount rates. While AIA is not immune to exceptional movements in interest rates, you can see from the sensitivities that our financial results remain highly resilient to short-term market volatility. We have a substantial allowance for risk in our discount rates with a risk premium of more than 500 basis points for the Group, consistent with the levels used since IPO.

While EV declines slightly as interest rates rise as higher discount rates offset increased earnings and cash flows, you can see that VONB increases overall. AIA’s strong track record of positive operating experience demonstrates the prudence in our embedded value assumptions and the quality of our in-force business. We continued to benefit from favorable claims experience compared with our assumptions and our persistency and other variances were positive. Overall, consistently favorable operating variances have added close to $3.9 billion to EV operating profit and embedded value since our IPO.

EV Equity has grown by 12% per annum compound since 2010 to $90 billion before the return of $18.8 billion of capital to shareholders. EV operating profit included more than $68 billion from the addition of profitable new business and return from our in-force portfolio. As you can see, net cumulative operating and investment return variances over this period are small and the effects of foreign exchange movements and other items averaged out over time, clearly demonstrating the appropriateness of our EV assumptions and methodology.

Now moving to IFRS earnings. The Group’s operating profit after tax increased to $6.4 billion. OPAT grew in all of our reportable segments except Thailand, where in contrast to our markets elsewhere, many customers were treated for COVID in private hospitals during the initial Omicron wave, as we reported in the first half. As infections subsided, OPAT for Thailand returned to positive growth in the second half.

AIA Hong Kong grew by 4% to more than $2.2 billion. AIA China also increased by 8%, with a 12% growth in the second half, supported by our growing in-force portfolio and favorable claims experience. Singapore and Malaysia both delivered 6% growth and other markets increased by 11% with very strong growth in the second half supported by more favorable claims experience.

Operating margin remained very strong and stable at 17.7% and operating ROE increased by 40 basis points to 13.2%. Earnings are predominantly insurance and fee-based, accounting for 56% of operating profit. Together with our geographically diverse portfolio across the region, this demonstrates both the quality and sustainability of our earnings.

Shareholders’ allocated equity provides a clearer reflection of the underlying drivers of the change in equity before the IFRS accounting treatment of bonds. Before dividends and the share buyback, allocated equity was relatively stable at just over $50 billion. Operating profit of $6.4 billion was offset by short-term mark-to-market movements on equities and real estate, other non-operating items and the effects of foreign exchange translation. After the payment of shareholder dividends and the share buyback of $5.8 billion, shareholders’ allocated equity was $44.8 billion at the end of 2022.

Our high-quality investment portfolio is constructed to match our insurance liabilities as closely as possible. As a result, 77% of total invested assets are fixed income, the vast majority of which are government bonds and investment grade corporate bonds. The corporate bond portfolio is well diversified with more than 1,900 issuers and the average credit rating of A minus remains unchanged. There were no material impairments in 2022 and total impairments since IPO have been just $105 million in total. This demonstrates the strength of our investment process and portfolio quality. Our exposures to real estate, banks and local government financing vehicles in Mainland China remain small and 60% of our equity and real estate portfolios are held in participating funds to match liabilities.

I will now take you through a brief update on our IFRS 17 progress. As you know we are adopting IFRS 9 and IFRS 17 in our Group financial statements from January 1, 2023. In June, we will provide updated financials for the first half and full year 2022 on the new bases. And in August, we report our results on the new accounting standards for the first time. As previously highlighted, this change in accounting does not affect the underlying economics of our business. There is no change to our VONB, embedded value, cash flows, solvency or capital metrics. Our strategic priorities, capital management framework and dividend policy also remain unchanged. We will continue to report OPAT and shareholders’ allocated equity as non-GAAP measures as they better reflect the long-term economics of our business.

Overall, the adoption of the new reporting standards is expected to be positive for the group as at the end of 2022. The effect on OPAT will be minimal for the full year. Net profit will be significantly higher by at least $2 billion. This is mainly because of the treatment of derivatives used for hedging purposes. Fair value movements on derivatives are offset by the corresponding changes in liabilities under IFRS 17, which is not the case under IFRS 4. Therefore the fair value losses currently shown in net profit in the IFRS 4 accounts do not exist under IFRS 17 as the new accounting treatment is better aligned with the underlying economics of the business.

On transition at 1 January 2022, the contractual service margin, which represents the discounted value of expected future profits from the in-force business, was $55 billion. Shareholders’ allocated equity and shareholders’ equity are expected to be higher at the end of 2022 compared with the corresponding IFRS 4 numbers.

Moving on to balance sheet metrics. Shareholders’ allocated equity will continue to be our key measure of equity deployed in the business. This is also consistent with our definition of operating ROE. A new measure under IFRS17, Comprehensive Equity, is the sum of shareholders’ equity plus net CSM and represents the aggregate value of historical and expected future profits from the in-force business. As you can see, Comprehensive Equity is more than $100 billion. The inclusion of net CSM in our financial leverage calculation reduces our ratio by 5 percentage points to 8.6% as at 1 January 2022. The corresponding financial leverage ratio at the end of 2022 is expected to also reduce by at least this amount.

Here we show a reconciliation of Comprehensive Equity to EV Equity. As at transition on 1 January 2022, Comprehensive Equity was 1.3x EV Equity. This is mainly driven by higher discount rates within our embedded value, which include additional margins for risk as well as allowing for the cost of capital. We expect a similar ratio for new business CSM to VONB. As I said earlier, the change in accounting standards does not affect the underlying economics of our business. We will continue to focus on delivering growth, earnings and cash.

Finally, capital and dividends. The Local Capital Summation Method cover ratio is the Group’s principal regulatory solvency measure taking a fully consolidated view of local business requirements. As we disclosed at the interim results, we now report the LCSM position on a prescribed capital requirement basis. This replaces the previously disclosed minimum capital requirement basis. While the new basis is more consistent with the capital requirements used within EV, free surplus continues to be more representative of our capital position for shareholders. AIA remains very well-capitalized with group available capital of $70.7 billion and a very strong LCSM cover ratio of 283%, an increase on last year before the effect of the share buyback. The sensitivity of our LCSM cover ratio to both equity and interest rate movements is small, reflecting the resilience of our balance sheet and our robust risk management.

The Group’s financial position remained very strong with free surplus increasing to $23.7 billion before dividends and capital return to shareholders. Underlying free surplus generation was $6 billion, an increase of 7% per share on a comparable basis. We reinvested a further $1.3 billion in growing our new business to generate attractive long-term returns. This figure reduced from the prior year as a result of increased capital efficiency on new products under the new Hong Kong RBC regime. Non-operating items reflected the mark-to-market impact of higher bond yields and lower equity markets, mainly in the first half. This was more than offset by the increase from the early adoption of the Hong Kong RBC regime and the release of resilience margins. Overall, free surplus increased to $17.9 billion after the payment of shareholder dividends and share buyback of $5.8 billion in total.

The consistent execution of our profitable growth strategy and our financial discipline have generated close to $61 billion of additional free surplus since IPO. We have invested $17.5 billion in new business to drive recurring and sustainable long-term value creation. While our focus continues to be on organic growth, we have the financial flexibility to take advantage of inorganic opportunities that create additional value for shareholders. Since IPO, we have deployed more than $6 billion of strategic investments into acquisitions and partnerships to accelerate our growth and strengthen our market-leading positions. Our unique business model and financial discipline have enabled us to do all of this and return $18.8 billion of capital to shareholders while growing free surplus 3.6x to $17.9 billion at the end of 2022.

The Board has recommended an increase of 5% in the final dividend, bringing the total dividend for the year to HKD153.68 per share, up 5.3%. The Board follows AIA’s established prudent, sustainable and progressive dividend policy, allowing for future growth opportunities and the financial flexibility of the Group. Since commencing our ongoing $10 billion share buyback in March, we have returned an additional $3.6 billion by the end of December, bringing the total capital returned to shareholders during 2022 including dividends to $5.8 billion.

In conclusion, the Group has delivered resilient financial results for 2022 across growth, earnings and cash. We delivered strong new business momentum in the second half of the year and VONB grew by 6%. Over the year, operating profit per share increased and our cash generation was very strong, with free surplus up by $6.7 billion to $23.7 billion before returning $5.8 billion to shareholders.

AIA’s robust balance sheet is a key competitive advantage, ensuring we retain our unmatched financial flexibility to invest in the enormous potential for profitable new business growth in the region, fully harnessing the exceptional qualities of AIA.

I will now hand back to Yuan Siong.

[Lee Yuan Siong, President and Chief Executive Officer]

Thank you, Garth. I will now take you through what makes AIA exceptional, how we will extend our market leading positions and enhance our substantial competitive advantages. First of all, we are 100% focused on the most attractive markets for life and health insurance in the world. The last 3 years have been challenging for the region, but Asia’s long-term prospects are robust and undeniable and as we enter the post-COVID world, we are confident that they will only get stronger over time. The pandemic has underscored the importance of life and health insurance in providing peace of mind in uncertain times. High levels of private savings growing, yet ageing populations, low levels of insurance penetration and limited welfare coverage create an urgent need for AIA’s personalized products and high-quality advice. The potential for our business is immense, our strategy is aligned to these long-term structural trends and we have the superior financial strength to capture the full economics of growth for all our stakeholders.

Let me now take you through how we are doing this across our multiple growth engines, starting with Mainland China. With a population of 1.4 billion and a very low life insurance penetration rate, Mainland China presents an exceptional long-term opportunity as the country reopens. AIA Group has a unique advantage in capturing the full growth potential of the Chinese life and health insurance market. We have a complementary strategy across distribution channels and customer segments. AIA China, our 100% subsidiary, caters to the middle-class and more affluent segments, offering comprehensive protection and long-term savings products through its differentiated Premier Agency. AIA Group also holds a 24.99% strategic stake in China Post Life, the leading bank-affiliated life insurer, focusing on bringing financial protection to the under-penetrated mass market through the largest retail financial distribution network in the country. Taken together, this brings AIA full exposure to the most attractive life insurance market in the world.

Our core strategy is our Premier Agency model, which meets customer preferences for high-quality products backed by professional advice from our full-time agents and AIA China has significant headroom to grow as we continue to expand geographically. By deepening our presence in existing geographies and entering new provinces, our potential target market increases 5x. In our existing footprint, we have a very strong track record yet we have only just covered 3% of our target market that’s 4 million people out of a projected 226 million by 2030.

Our recently established new operations bring 100 million potential customers to AIA China, with a further 300 million to come as we enter new provinces and we delivered 50% agency VONB growth in 2022. Undoubtedly, we have the most professional agency in Mainland China. While the rest of the industry was disrupted over the last 3 years, our agency headcount remained stable and the resilience of our Premier Agency model has kept us well-positioned and ready to capture China’s reopening. Our full-time agents are 4x more productive than the industry and earn more than double the average local income. And we are building selective partnerships with banks, including Postal Savings Bank of China and BEA, to create long-term relationships with aligned values that bring new sources of profitable growth. For all these reasons I am confident that our differentiated business is primed to deliver strong and sustainable results well into the future.

Our strategic investment in China Post Life has continued to go from strength-to-strength. Given its significant reach through PSBC’s distribution network of 33,000 retail financial outlets and more than 600 million customers, the potential for China Post Life is enormous. We have a joint Technical Assistance Advisory team with dedicated experts from AIA Group Office, helping China Post Life advance its strategic priorities. Since we announced our investment, value of new business has increased by 3.8x and in 2022 it exceeded $1 billion for the first time. This investment is highly complementary to our strategy at AIA China and enables the Group to capture significant upside from additional distribution channels and customer segments.

In Hong Kong and Macau, AIA has unparalleled capabilities and multiple opportunities to meet the growing needs for life and health insurance. We are the clear leader in Agency distribution and continue to outperform the industry. We also rank in the top three for agency new business in the GBA cities in Guangdong province. Our partnerships are a material contributor to VONB in 2022 and we maintain excellent relationships with IFAs. Historically, Mainland Chinese Visitors were a significant source of profitable new business for AIA Hong Kong. It is still early days but visitors to Hong Kong are progressively on the rise since the border reopened. As we showed earlier, MCV VONB more than trebled in 2022 and strong momentum has continued into the first 2 months of 2023. We are exceptionally well-placed for a sustainable recovery in this customer segment.

Our infrastructure is intact. We have close to 7,000 agents that service Mainland Chinese Visitors, three-quarters of whom have been AIA Premier Agents since before 2020 with the rest recruited during the pandemic. Importantly, our Macau license and our domestic Hong Kong business ensured that the vast majority remained engaged and active. In short, as the market gears up, AIA Hong Kong is fully ready to service the needs of both domestic customers and the returning demand of Mainland Chinese Visitors.

In ASEAN, AIA ranks number one by total ANP and there is huge growth potential for us in this market. We have built significant scale over our long history as well as leading health businesses in Thailand, Singapore and Malaysia and the region contributed 44% of the Group’s total VONB in the second half. Our multi-channel distribution platform is unrivalled, powered by technology, digital and analytics which allows us to drive the proven execution of our strategy. AIA’s Premier Agency is of the highest quality and since the beginning of the pandemic, new recruits have grown by more than 20% and MDRT members are up by 39%. Our industry leading partnerships with strategic banks and digital platforms bring access to more than 100 million potential new customers and in 2022 our bancassurance VONB exceeded 2019 levels. This region is already a major driver of diversified growth for AIA and will continue to offer enormous potential with its huge protection gap and growing affluent population of more than 500 million people.

And finally, TATA AIA has a strong track record of delivery in India. VONB has grown consistently over the last 5 years, increasing by 3.5x. We are the fastest growing life insurer at almost double the growth rate of the number two player. TATA AIA is also the number one player in the retail protection market and ahead of the next competitor by nearly 2x. We are rapidly scaling our Premier Agency with an additional 100 digitally-enabled agency offices launched in 2022. Our business is also supported by key broker partners and six high-quality banks and as the industry opens up further, we are the partner of choice.

In this exciting market, we are seeing a progressive and evolving regulatory environment, that is creating a more dynamic sector, allowing for greater growth and innovation. By 2030, the middle-class population will double in size to more than 1billion and protection coverage is very low. The scale and power of India’s compounding economic growth and increasing life insurance demand is clear. Our protection-focused strategy, quality distribution and proven execution ensures that TATA AIA is well on

its way to capturing India’s massive potential.

In conclusion, AIA’s long-term prospects remain clear and strong. We operate in the fastest growing and most attractive region for life and health insurance in the world. Our ambitious strategy aligns our scale, position and influence with the powerful structural drivers of growth in Asia. We have substantial competitive advantages across all our markets and our proven execution will extend our strong track record of superior profitable growth, earnings, free surplus generation and cash returns to shareholders. I have full confidence that the combination of our multiple growth engines and unmatched financial flexibility ensures AIA is uniquely positioned for future growth.

Thank you for listening.

[Feon Lee, Director, Investor Relations]

Good morning. Welcome to AIA 2022 Annual Results Q&A. I am Feon Lee, Director of Investor Relations for AIA Group. Today with me in Hong Kong are Lee Yuan Siong, our Group Chief Executive Officer and President; and Garth Jones, our Group Chief Financial Officer.

We also have our regional chief executives and other members of our group executive committee with us in the room. I hope you have had a chance to watch the video presentation, which we post to our corporate website earlier this morning. Before we start our Q&A, Lee Yuan Siong will make some opening remarks. Lee Yuan Siong, please.

[Lee Yuan Siong, President and Chief Executive Officer]

Thank you, Feon. Good morning from Hong Kong and welcome. AIA has delivered a resilient performance with new business momentum improving strongly in the second half of 2022 as the effects of the initial Omicron wave subsided and normal activities resume. VONB for the group was up by 6% in the second half with positive growth in all our five largest markets. VONB exceeded $3 billion for the full year and EV Equity was $77 billion before returning more than $5.8 billion to shareholders through dividends and our share buyback.

Our large and growing in-force portfolio supported increased operating profit after tax and the group’s capital position remained very strong despite significant capital market volatility. Free surplus was substantially higher at $23.7 billion before dividends and buyback. The Board has declared an increase of 5% in the final dividend bringing a total dividend for the year to HKD153.68 per share, up 5.3%. In Mainland China, we saw a return of double-digit VONB growth in the second half of 2022 before COVID-19 restrictions – infections affected sales in December. As cases subsided, we have seen new business recover and a return to positive VONB growth in the first 2 months of 2023. In Hong Kong, VONB was up compared with 2021. We achieved growth across all distribution channels and Mainland Chinese visitor business more than in 2022, and strong momentum has continued into the first 2 months of 2023.

ASEAN is a major driver of growth for the group, and in 2022, accounted for 44% of total VONB. Our markets returned to strong growth in the second half with broad-based performances across Thailand, Singapore, Malaysia and the Philippines. And our joint venture with TATA AIA in India continued its excellent track record with VONB up by 52% in 2022. In summary, AIA’s multiple engines of growth compare – combined with our unmatched financial flexibility has resulted in a strong recovery and ensures AIA is exceptionally well placed as Asia rapidly opens up for further growth.

Now over to you for questions. Thank you.

[Feon Lee, Director, Investor Relations]

Thank you, Yuan Siong. We now begin our Q&A session. Over to you, operator.

[Operator]

[Operator Instructions] And our first question comes from MW Kim of JPMorgan Securities. MW, please press unmute button showing on your screen and ask your question.

[MW Kim, JPMorgan Securities]

Good morning. Can you hear me?

[Feon Lee, Director, Investor Relations]

Yes, loud and clear, MW.

[MW Kim, JPMorgan Securities]

Thank you. This is MW Kim from JPMorgan. I have two questions. The first one is about – it’s more the conceptual question how to value your company moving forward. Thank you for sharing the CSM from $55 billion as of January ‘22. As the financial numbers look clear to the economic capital on the IFRS 17 would it fair to say that AIA is comprehensive the equity, which was $101 billion as of January ‘22 is better proxy measuring the corporate value of the import score compared to the embedded buyer. So that’s my first question. The second one is about the India. So it seems that the company is successfully building the big franchise in India, and post the recent tax regulation change, we are observing the low valuation multiple for private insurance compared to the year ago. So at this stage, I’m just wondering what was the most challenging part to the increase that ownership in India. Thank you.

[Unidentified Company Representative]

Thanks, MW. Yes, clearly, the IFRS 17 accounts are an improvement on the IFRS 4 accounts. The IFRS 4 accounts are non-economic as you know. And the IFRS 17 accounts are more economic. We continue to believe that the embedded value provides a better basis for looking at the valuation of the company as it clearly reflects free surplus and the margins we have in our risk discount rates and so on for risk. So that’s where I’d point you in terms of valuation.

I think on the India question, we had good strong growth in India, 52% growth in VONB. We’ve seen that business go from strength to strength and is now number three, in the market. It’s the leader in retail protection by a long way. And we’ve seen actually in terms of the regulations, progressive regulations and I’ve just come back from India certainly, the mood on the ground there is very positive. Clearly, there are some tax changes, but we believe fundamentally the basis for going forward in India is very bright. We have a growing middle-class population and we will seek to do what we can to improve the penetration, which is low in the market at present.

[Unidentified Company Representative]

Just a supplement on India. I think India is an exciting long-term opportunity for us. We have an outstanding partner in TATA, and we are fully aligned with our partners take advantage of the opportunities that India presents to us together. Our joint venture, TATA AIA has continued its excellent track record with VONB up by 52%. In fact, we are very happy with our ability to execute in this very highly attractive market. VONB has grown consistently and very strong growth over the last 5 years in each and every one of the last 5 years, increasing by 3.5x over this 5-year period. That demonstrates our ability to execute, and we have the highest persistency in terms of the quality of business in India.

I personally, I’ve visited India twice last year, and I’m quite excited by what I see on the ground. Thanks.

[Feon Lee, Director, Investor Relations]

Thanks. Next question please.

[Operator]

The next question comes from Charles Zhou of Credit Suisse. Charles, please press unmute button showing on your screen and ask your question.

[Charles Zhou, Credit Suisse]

Okay. Can you hear me?

[Feon Lee, Director, Investor Relations]

Yes, Charles.

[Charles Zhou, Credit Suisse]

Okay, thank you. I have two questions. I think we’re very happy to see that you mentioned the MCV delivered positive – strong momentum in Hong Kong in the first 2 months. So could you please maybe give us a little bit more color on how strong it is. And also, I want to understand about the sustainability of your MCV business maybe from three perspectives. First is about the deposit rate. As you know, the expected return for insurance product is about maybe 5%, 6%. So when deposit rate is about 1% to 2%, I think it’s quite competitive. But in the current environment, where a bank already offers 3% to 4%. So how do you see the competitiveness?

And secondly, we also know that the overall capital market was quite challenging last year and also probably will continue to do so. So on the asset side, it probably will be difficult for insurance company to generate a decent return. So how do you see going forward from a fulfillment ratio that you see to make sure that your product remain to be very competitive and your customer is satisfied. And the third perspective is we talk about the capital control for the MCV. So how do you see this? And also, I would have to understand maybe like how much is from the general size policy and how much they below $5,000 for the MCV so far that you observe?

And my second question is about Mainland China. I think you received the regulatory approval to establish branch in May, I think, last year. So can you maybe share with us like how is the progress so far for Henan branch? And what’s your plan going forward to open a new branch in China? So is this still like one branch per year? Thank you.

[Lee Yuan Siong, President and Chief Executive Officer]

Okay. I hand over to Jacky to answer the questions on MCV, maybe Garth can take the question about the asset performances and Jacky, then to circle back on the China. Yes. Thank you.

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. Thank you, Lee Siong. Thank you, Charles. Let me give you some more highlights on the MCV momentum in Hong Kong and Macau. As you have seen in last year 2022, our MCV business mainly from Macau tripled compared to 2021. And this momentum continues strongly in the first 2 months across Hong Kong and Macau. And in terms of your sustainability question about fee front, let me give you highlight because here in AIA Hong Kong and Macau, we focus on selling life and health insurance and long-term savings. And in our recent customer survey for Mainland Chinese Visitors, the interest remains very strong to come to Hong Kong to consider buying long-term life insurance, health insurance and long-term saving. The soft trend is deposit rate, we don’t see any impact on this purchase of long-term protection and long-term saving in Hong Kong and Macau. As to the fulfillment rate or, I will leave it to Garth, I give you a slight highlight. You can see that we enhanced our fulfillment ratio year-by-year. And in fact, I will also recommend you to look at our total cash flow ratio. In fact, in the majority of our participating products, total cash flow ratio is over 90% in the past number of years.

In terms of the capital control, after that, I will pass it to Garth on the asset side. You know that Mainland Chinese resets has been a business in Hong Kong and Macau for almost 2 decades. And AIA Hong Kong and Macau, we are very clear in our requirement in accepting the business. The Mainland Chinese Visitors has to come to Hong Kong, Macau in person. And we see that majority, 95% of the MCV business, their regular premium paying business and the average premium size is roughly $1,000 per month. So this remains unchanged. And we continue to apply a very stringent compliance requirement on all these MCV business, and we have control in place, and we are confident in the quality of our MCV business in Hong Kong and Macau. So let me pass Garth on the asset side.

[Garth Jones, Chief Financial Officer]

Yes. Thanks, Charles. I think the important thing to remember with our long-term savings products is their long-term – often policyholders will be with us for a 15 years and more. And the objective of our participating products, in particular, is to revise stable returns over the long run through a combination of dividends and similar bonuses – those obviously depend on a number of factors. Clearly, the market movements will be the greatest impact over time, and they will shape bonuses. But we smooth those tough that our policyholders don’t need to worry about stock markets this week or next week. We’re invested for the long-term. And as people continue to pay their premiums each month, then we’ll continue to invest those assets and take a long-term view and smooth the returns to policyholders. We believe the returns are very attractive. And we aim to meet the reasonable expectations of our policyholders over time.

[Lee Yuan Siong, President and Chief Executive Officer]

Yes. Let me take the second question on the Mainland China expansion. As we have said in the past, we are aimed at opening one to two new branch per year. In fact, in 2022, we are able to open our Hubei branch and that was in January. And at the same time, in 2022, we are able to upgrade our Tianjin and Shijiazhuang branch. And we are also able to open our Hankou SSE in the Hubei. And in fact, as to Henan on last November, we just submitted opening application to the Henan CBLC Bureau. We see that we are, in fact, making good progress in our expansion in the new provinces and cities in Mainland China.

[Feon Lee, Director, Investor Relations]

Thank you, next question please.

[Operator]

The next question comes from Thomas Wang of Goldman Sachs. Thomas, please press unmute button showing on your screen and ask your question.

[Thomas Wang, Goldman Sachs]

Thank you. Good morning, everyone. Thomas Wang from Goldman Sachs. A couple of questions. Firstly, focusing on MCV. We’re seeing some of the banks talking about a very strong return of the Mainland Chinese residents coming to Hong Kong opening a bank account, putting deposits. I’m sorry Yuan, you talked about strong momentum carrying into January and February. Just a little bit more color on how are you thinking versus what the bank is talking about versus 2018, 2019 levels? How do we think about that? Just on Jacky’s comment there, total average premium of $1,000 per month. That’s what translates about $12,000 per annum. I remember a few years back, we were talking about average ticket size from Mainland Chinese Visitors was 5000 is as per annum. Has there been an increase in the average ticket size there? And then the second question is on the asset side. We’ve seen – so we have a large BBB corporate bond portfolio. Can you give a little bit of color in terms of which industry that – I’m assuming that’s mostly U.S. dollar bond a little bit more color on which industry or industry distribution for that portfolio. And then we talked about $100 million or so impairment since IPO just which industry – is there any sort of – which industry will start impairment in. Thank you.

[Lee Yuan Siong, President and Chief Executive Officer]

Okay. Thank you. Again, I’ll ask Jacky to answer this very popular question on MCV. And Mark, to take the question on the – on our bond portfolio. Yes.

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. Thank you, Lee Siong. On the average ticket size of MCV business, perhaps that 5,000 is the number before their pandemic – before the pandemic is almost a few years ago. And you may also emerge and as I just mentioned that in our survey on the MCV customer, they are really interested to come to Hong Kong to buy long-term life and health and long-term saving product and perhaps the demand is also pent-up [indiscernible] a while. But we still observe this kind of premium is still well within the capital control in. Now in terms of the MCV momentum, I want to give you some more highlights about our Hong Kong account readiness. And in fact, we are fully ready. We have a robust plan and as you see, once the border open, you already see a big, big billboard across the MTR station across the border because Hong Kong and Macau well prepared for all this opening of the border. And in terms of our agency force, we have about 6,800 MCV focused data, and this number is largely intact compared to 2018 and almost 75% of them that have been with us before the pandemic, and we are able to recruit the new MCV focused agent during the last 3 years.

And I’ll give you more color. In fact, almost 67% of this 6,800 MCV-focused agent, they are active in last year, making use of our Macau branch for referral business or MCV as well as doing domestic business and almost 50% of this 6,800 MCV-focused agent, they were at least qualified has MDRT once in the last 5 years. So we are really fully ready and able to capture the full potential of the return of the MCV business in Hong Kong and Macau.

[Mark Konyn, Chief Investment Officer, AIA Company Limited]

Thomas, it’s Mark Konyn here. Thank you for the question. Our bond portfolio is high quality, it’s well diversified, and we tend to invest across all sectors. We have a slight bias historically for sectors that issue long-dated bonds given our liability structure. And over the last several years and going forward, probably, we are underweight those sectors that are more carbon-intensive given our ESG and climate objectives. Than kyou.

[Feon Lee, Director, Investor Relations]

Thank you. Next question please.

[Operator]

The next question comes from Kailesh Mistry of HSBC. Kailesh, please press unmute button showing on your screen and ask you question.

[Kailesh Mistry, HSBC]

Hi. Good morning, thank you for taking my questions. A few questions. The first one is on the expected return on the EV. This was lower than I’ve been expecting. And reading through the comments, one of the reasons mentioned is higher unallocated expenses. Could you tell me what the dollar value of this is? And what activities it relates to? And as you – because it’s in the operating number, should I assume this is recurring going forward? So that’s the first one. The second one is on China. So on Slide 9 – sorry, Slide 6, if you put together January and February 2023, would the VONB growth be double digit? And also, can you make a comment on whether the business mix is now reverting back to pre-pandemic levels now face-to-face meetings are resuming, etcetera, etcetera. And then – no, that was it. Sorry. Go ahead.

[Lee Yuan Siong, President and Chief Executive Officer]

Okay. Thanks. I think the EV question goes to Garth and the China question goes to Jacky.

[Garth Jones, Chief Financial Officer]

Yes. Thanks, Kailesh. In terms of the unwind, there are three items that you should think about there. The first is the Hong Kong RBC, we obviously had an improvement in the embedded value because of the Hong Kong RBC accelerating the recognition of future profits into free surplus as we discussed at the half year. And then that has a lower unwind on the value of in-force as a result. Also in the second half, there will be a lot of unwind because of the capital mark-to-market movements in the first half. So, if you look at the closing embedded value at the end of the first half, that would have given you some indication. The third is this increase in capitalized and allocated expenses. One thing about our embedded value is that it accounts for every dollar of expense in the business and fully reflects the present value of all unallocated expenses. We think this is a very prudent approach. We think it’s conservative, not that everybody does this. And what you will see is that the value in the accounts is about 500, but that’s capitalized. It’s a one-off capitalization in that sense and represents operating expenses that are expected to continue in the future, but are unallocated to the business. Most of those are related to our TDA, our technology, digital and analytics, additional headcount that we have put on.

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. As to the China result in January and February, I think I need to bring you to the understanding that especially last year in 2022 since December there is a redefinition of COVID-19 into a Class B, Category B infectious disease. And the country is under, I think widely spread of this Category B infectious disease. And this impact, in fact continue from December to January, well before Chinese New Year or during Chinese New Year. So, you can imagine with this impact many of the agent or customers, they are sick. And therefore, you see that in January, which is a very important month, which is a biggest month of AIA China, it was down because of that. But you can see that our February really has a very, very strong momentum because the Category B infectious disease really went through the whole country quickly and people also quickly recover and business momentum resumed to normal strongly. And we can see that our agents predominantly doing a lot of face-to-face meeting with the customers. And the customers’ intention and the need to have long-term life and health insurance and also long-term saving model actually come back very strongly. So, we can see that February really has a strong momentum and as a result, February plus – January plus February combined, we returned to positive growth. I will say this is a quite unprecedented kind of results showing the strength of our premium agency. And I want to add color about the product mix, that you also talked about. You also saw strong in focusing on the potential sales. I have to be very proud to tell you that AIA China launched innovative whole life critical illness product launched in the fourth quarter of last year, and that come up with a strong protection product growth in the fourth quarter, and that continued in our jump-start in January and February. And in fact, protection product in 2022 remained our largest contributor to VONB. So, I want to give you this favor about our continued focus on the protection mix product. But of course, you also know that as we already talked to you a few times ago, the attractiveness of long-term saving continued to come up strongly. And therefore, as a result, we are now seeing a more balanced mix of protection and long-term saving product.

[Lee Yuan Siong, President and Chief Executive Officer]

Just supplement, I think over the last 3 years of the pandemic, I have made a point to visit China twice a year, for which I have had to spend many days in quarantine by just to say that in the first two months of this year, I have really been back to Mainland China twice. And from what I see on the ground, there is a strong recovery in economic activity in China.

[Feon Lee, Director, Investor Relations]

Thank you. Next question please.

[Operator]

The next question comes from Jenny Jiang of Morgan Stanley. Jenny, please press un-mute button shown on your screen and ask your question.

[Lee Yuan Siong, President and Chief Executive Officer]

Jenny, we can’t hear you.

[Feon Lee, Director, Investor Relations]

Jenny, you are un-mute. You can speak now. I think we need to go to the next one, Jenny, please. Hope you can come back to later.

[Operator]

The next question comes from Edwin Liu of CLSA. Edwin, please un-mute your mic and ask your question.

[Edwin Liu, CLSA]

Hello. Can you hear me?

[Feon Lee, Director, Investor Relations]

Yes, Edwin.

[Edwin Liu, CLSA]

Yes. Thanks for taking my question. So, two questions from me. First question is in terms of your partnership with PSBC in China. I know it’s still early days, but can you give us some early indication in terms of what kind of margin you are generating? Because I think in general, I think people expect that most likely you are mainly selling savings-type product from your channel at PSBC. So, it would be helpful if you can provide some color in terms of what kind of margin in terms of VONB that you can generate from that partnership? And just second question, a bit more technical. Thanks for the CSM disclosure, very helpful. I guess I want to try to understand what kind of discount rate that you apply when you calculate your CSM. I guess the way to think about it is you would apply a liquidity premium over the risk-free rate. So, I think similar to what you have provided for your risk premium. Sorry.

[Feon Lee, Director, Investor Relations]

Edwin, just continue.

[Edwin Liu, CLSA]

Okay. So yes, similar to what you have provided for your EV disclosure, you have provided a risk premium. So, similarly for CSM, is it possible that you could provide some color in terms of what kind of liquidity premium that you did use sort of a blended one for our reference? Thank you.

[Lee Yuan Siong, President and Chief Executive Officer]

Okay. Jacky, if you could take the question on PSBC and Garth, technical questions.

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. Thank you, Lee Siong. Yes, we are very happy to be able to partner with PSBC, China Post Life Group. They really has a very unique distribution, point of sales across Mainland China over 40,000 point of sales. And in fact, we launched a number of products with our partnership with PSBC. We have short-term – we have a mid-term saving on our product, and we have annuity long-term safe annuity product, and we also have a high-end medical product together with increasing savings for our whole life. You know we are always very disciplined in our product and our financial and pricing. And in fact, we see that, in fact, the bancassurance market in China is also coming back to generate more quality growth because the whole country direction is driving quality growth. So, we see the bancassurance is also coming to that terms. And we are very happy to continue to work with PSBC.

[Garth Jones, Chief Financial Officer]

Yes. Thanks. And you are quite right, Edwin. In terms of the discount rate, we have used the risk-free plus and a liquidity premium. That’s considerably less than the risk premium we have in our embedded value. And I think on the slides, you will see that there is a sort of indication of the impact of that to the difference between embedded value and CSM effectively. We used the top-down approach and blended that in. We will come back with more details on the precise basis in June when we publish the full set of accounts for 2022.

[Feon Lee, Director, Investor Relations]

Thank you. Next question please.

[Operator]

The next question comes from Sam Tan of UBS. Sam, please press un-mute button shown on your screen and ask your question.

[Unidentified Analyst]

Hi. Good morning. Can you hear me?

[Feon Lee, Director, Investor Relations]

Yes, sir, we can hear you.

[Unidentified Analyst]

Thanks for taking my questions. Actually, I have two questions. The first one is on Malaysia. I noticed that there as quite big margin increase in Malaysia in the second half. So, I just wonder what’s kind of a driver for that. And the second question is on China. So, just wondering what kind of expectation of the newly announced on the regulatory side, the new regulatory body that announced a couple of days ago? And what kind of indications on the pace of new province expansion? Thanks.

[Lee Yuan Siong, President and Chief Executive Officer]

Okay. Hak Leh can you take the Malaysia question?

[Unidentified Company Representative]

Thanks Lee Siong. Thanks Sam for the question. Malaysia achieved very strong growth in 2022, especially in the second half where the VONB grew by 26%. In fact, the growth came from both the agency and PD China with greater focus on protection for both channels. Our agency China’s growth for 2022, both in terms of VONB as well as new recruits were actually substantially higher than the pre-COVID level. And that’s the reflection of the successful execution of our agency transformation strategy in 2022, especially in the second half into our agency successfully increased the percentage of businesses from protection business, particularly CI and medical business compared to the same period in the prior year. Likewise, for our bancassurance partnership with the Public Bank that we achieved another year of very significant uplift in productivity, resulting in another excellent year in VONB growth. In 2022, the percentage of credit life business increased as a result of the increase in the overall banking activities. In addition to that, we also saw the non-lending book business from Public Bank increased significantly in 2022. And our success with Public Bank is a reflection of the close collaboration between the two organizations that enable us to put in place a very structured sales generation program supported by some enhancement in the digital tools that were rolled out last year.

[Jacky Chan, Chief Executive Officer, AIA China]

On your question regarding the new regulatory changes in Mainland China, I would like to first start by saying that we have always have a very, very good relationship with the regulators in China and in other markets that we operate in. We engage in a lot of constructive dialogue with the regulators. And I can say that AIA is a very, very well regarded by the Chinese government. Now, in terms of the new regulatory agency, it is still early days because has just been announced. But based on my understanding, this new agency will take on the existing responsibilities of CBIRC and some additional responsibilities that will be transferred from PBOC and CSRC. And I think the same thing is to make this much more streamlined, much more efficient in terms of the regulation of the financial services industry. Just for example, the supervision, one of the responsibilities that will be transferred from PBOC to the new agency is the supervision of financial holding groups like Citi and Everbright and other financial services groups. Where in the past, these financial services groups were regulated by the PBOC as opposed to financial services groups like Ping An Insurance Group, which was regulated by CBIRC and this obviously creates a requirement for coordination in the old structure when it comes to regulating financial services group. So, by bringing it together under one agency makes it much more streamlined. But like I said, it’s still early days as to what the exact implications are and how this agency will be formed and what it looks like. But I think what I shared with you is based on my personal understanding. But in terms of our geographical expansion plans for AIA China and our targets going forward in terms of our expansion, I think they remain unchanged.

[Operator]

We will have Jenny Jiang from Morgan Stanley. Jenny, can you please see if you can ask the question now.

[Jenny Jiang, Morgan Stanley]

Yes. Hi everyone. Can you hear me now?

[Feon Lee, Director, Investor Relations]

Yes. Thank you. Please go ahead.

[Jenny Jiang, Morgan Stanley]

Okay. Great. So, the two parts of the question. One is more on China. I think I have a little bit of echo here. So, one is on China, whether we will see more material channel mix going forward, given China has some yield curve shift, and we have done some expansion with China Post Life. And I think some analysts asked about the product mix part and we are a little bit shifting towards savings. But it seems like banssurance is really taking off in China. Would that be some new driver for China, say 5 years down the road? We also know that China Post Life is doing very well. How come we are expanding the relationship with China Post Saving Bank sort of helping AIA China to grow? The second question is one on technology. AIA seems to have made a very big breakthrough this year and whether that will change our sort of strategic planning on our tech upgrade, I know we have done a lot, but is that enough? Are we done – fast enough and how we are going to integrate this new AIA technology into our business model or how will kind of tailor – adjust our business model to the sort of very different future technology. Those are the two questions. Thank you.

[Lee Yuan Siong, President and Chief Executive Officer]

Thank you, Jenny. I will let Jacky take the question on China and products in China. And then Biswa, our Chief Technology Officer will take AIA question.

[Jacky Chan, Chief Executive Officer, AIA China]

Thank you, Lee Siong. For AIA China, our most differentiated premium agency remained the most important channel for AIA in Mainland China. As we continue to expand into new province, new cities, we will continue to focus on building a Premier Agency force. We believe this is our clear and core differentiation in the Mainland China market and quality growth and using professional high-quality agency to give high-quality advice to the customers is the key for success in Mainland China. So, we don’t foresee so-called or a big change in the material mix in China, etcetera. But we are very happy to work with PSBC. As I have said, they have a unique POS outlet across Mainland China, and it is also complementary to our focus on PMA agency on those affluent and above customer sentiment. And as I have said, AIA China continued to be very disciplined in our product price and financial. And we focus on long-term protection and long-term saving product. So, this is what I would like to let you know. And in terms of product mix, I believe everyone also observed that nowadays, more and more Mainland Chinese customers, they really see that long-term saving product is an alternative wealth management solution. So, we do see this is – actually is good for life insurance industry in Mainland China and especially for AIA China. And as I have said, we continue to drive the focus on protection. In fact, the penetration in Mainland China is still really low. And we will continue to turn up with innovative proposition, coupled with our Premier Agency force we believe we will continue to drive the very healthy, more balanced product mix across AIA China.

[Lee Yuan Siong, President and Chief Executive Officer]

In terms of bancassurance, I will just add that we will continue to be very selective in terms of our partnerships with banks and we want to find partners that are very aligned with us in terms of the values and in terms of one thing to work with us for long-term. And we have an extensive experience working with this kind of bank partners across all our markets. And these partnerships have been very complementary to our Premier Agency strategy in all our Asian markets.

[Biswa Misra]

Hi. Sorry. Thank you for your question. As you would have seen on Slide 10, we have been the Digital Insurer of the Year for the second year and running. So, you are right that we made fast strides in the last 3 years of our TDA program. As a part of this program 1.5 years ago, we put in AIA’s artificial intelligence strategy. As a part of this strategy, we continued to take a look at emerging technologies around areas of cognitive computing, natural language processing and computer vision, including evolving technologies that become available like ChatGPT to look at the vast amounts of data that we have and further turbocharge our already maturing technology platform. So, if you go back to Slide 10, you will see that we finished about 200-odd use cases last year on artificial intelligence and data analytics. What that’s doing is turbocharging different areas of our business value chain, from distribution to operations to finance to really build intelligence into these performing platforms. And as we go forward into this journey, we almost think of it as being at the base camp and as more and more artificial intelligence technologies mature, in an ethical manner we will continue to integrate that into our base technology stack and make sure that we use it to harness the power that is out there to fast track our business propositions across the value chain. Thank you.

[Feon Lee, Director, Investor Relations]

Thank you. Next question, please.

[Operator]

The next question comes from Michael Chang of CGS CIMB Securities. Michael, please press un-mute button shown on your screen and ask your question.

[Michael Chang, CGS CIMB Securities]

Hi. Can you hear me right now?

[Feon Lee, Director, Investor Relations]

Yes, Michael.

[Michael Chang, CGS CIMB Securities]

Okay. Hi. I have got two questions. First one, again, back to MCV. On the MCV, I noticed that the brokers channel, the IFA channel did see quite strong growth last year. And there was specific mention of Hong Kong. Could you perhaps shed some lights on the relative VONB margin dynamics between the broker source MCV versus the agent source MCV. And then maybe related to that, the fact that you can refer from Hong Kong to Macau is a big strategic advantage. Maybe you can shed some light on the portion of the MCV business that was referred from Hong Kong last year and the portion that actually came from Macau standalone regions. And then one final thing on the MCV. Could you shed some light on the geographic mix. Last year, MCV rebounded back to 10% of the VONB. What part of that is from Guangdong versus the rest of China? And how does that compare to 2018? And then moving on to the China business. I think over the last couple of years, the Mainland China business has been very much maybe a bit more tilted towards increasing cross-selling or upselling into existing customers. So, for the month of February, given the post-pandemic live, what portion of the business is coming from new customers versus old customers? Thanks.

[Lee Yuan Siong, President and Chief Executive Officer]

Yes. Jacky?

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. Thank you, Lee Siong. Now firstly, on the MCV business, I can see a lot of interests in the MCV segment and give you a bit more color. Yes, we also have a strong channel of MCVs from the brokers. And in last year, brokers in Macau is also getting quite a number of these MCV business. So, that triple growth of MCV in last year actually contributed by both agency and also the broker channel in Macau. And in terms of the strong momentum coming into the first two months has the Hong Kong and Mainland China border be opened. We also see the same actually, the MCV momentum coming strongly from both the agency channel and the brokers channel in AIA Hong Kong and Macau. So, I would say this is really coming back to normalize to the pre-pandemic level. In terms of geographic mix, I would say imagine, right, in the last few years, is the Macau border open with the Guangdong province. So, we do see that roughly 40% of the business in the MCV Macau come from Guangdong, but compared to the pre-pandemic level, in fact during the pandemic time while the Hong Kong border and Mainland China are open, we see a wide spread of MCV customer from coming across north to south, east or west from Mainland China. So, this just gives you some favor or color in terms of the geographic mix. Now in terms of the AIA China, I have to say that, as I said, the Mainland Chinese customer, they really see long-term saving has an alternative wealth management. So, we see a picking up of a long-term saving product and therefore the product mix become more balanced. But in fact, we continue to see a strong momentum and need for potential product, especially when AIA China, we continue to innovate in our protection product proposition and protection product will remain the largest contributor to AIA China in terms of VONB. We see that roughly 92% of customers who buy our long-term saving product. In fact, they already bought protection product. And we always keep training our agent to sell protection product as the first product to the customers. And we see that this will continue. And we continue to add new customers to – we continue to grow our overall number of customer base in Mainland China. So, the new customer growth continues, as I said, the penetration rate for insurance remained very low in Mainland China.

[Feon Lee, Director, Investor Relations]

Thank you, Jacky. We have time for one final question.

[Operator]

The last question comes from Leon Qi of Daiwa. Leon, please press un-mute button shown on your screen and ask your question.

[Leon Qi, Daiwa]

Hi. Thanks for having me to wrap up the questions again. This is Leon Qi from Daiwa. I have three questions today. First, there is a technical question on solvency capital. And then on Thailand, finally, it’s winning back to Hong Kong again. Firstly, on your LCSM cover ratio. I appreciate it’s still very steady. It went up excluding the buyback, even in very challenging capital markets. Just wondering, given our product mix is actually having a little bit of diversification towards savings both in Mainland China and Hong Kong, where we actually enjoy more diversification benefit under the calculation of LCSM ratios under the PCR message. And also, I do notice that in the past few years in the legislative console documents, related to PCR ratio, there has been mentioning about switching from standardized approach to internal approach. Just wondering if we have any process on that front, which could actually potentially help us save a little bit more capital. And – well, sorry, a sub-question under that is that do we have a comfortable level of PCR ratio given we mentioned our capital management framework last year at this time. Just wondering from a buyback perspective, if we have a comfortable ratio on LCSM PCR-based ratio for our reference. And secondly, on Thailand, basically we have seen a quite strong rebound of our VONB margin in the second half of last year. Just wondering what was the reason behind was the margin of our unit-linked protection is even higher because we do understand that has been a major driver for the margin in Thailand a few years ago, if they are coming back or it’s driven by other types of products? And lastly, on Hong Kong MCV, I appreciate if management can give us any color in terms of our agents, the number of agents who used to be specialized in MTV customers. What was the number by the end of last year, which was effectively right before the full border reopening of Hong Kong and what has the momentum so far this year been to give us a sense of the pace of recovery. So, thanks a lot.

[Lee Yuan Siong, President and Chief Executive Officer]

Thanks. And Garth, you take the LCSM question. The Thailand margin question and Jacky, the MCV. Thanks.

[Garth Jones, Chief Financial Officer]

Yes. Thanks Leon. The LCSM ratio is high, as you say, it’s close to 300%. And I think that reflects the resilience, the strength the financial flexibility that we have. We have a very strong balance sheet. And you can see that, as you quite really pointed out, that it’s remained very stable and, in fact increased before the buyback. When you look at the PCRs of each of the businesses that we operate and they are all very strong. We meet all the requirements clearly. And obviously, we look at stresses and strains to make sure that, that will continue to be the case. The LCSM is then a summation of all of those different PCR requirements. And it does not allow for any diversification between countries, for example. Obviously, within country, there may be some diversification between products and so on. But I think the critical point to note is that it’s stable. You look at the sensitivities that they are very small and that enables us to take all the opportunities that are available to us. We have the capital to do that. We have the financial flexibility to do it. And it enables us to continue our $10 billion buyback program.

[Unidentified Company Representative]

Thanks Leon for the questions. Our business in Thailand recovered very strongly in second half with 19% VONB growth from both agency and bancassurance China in Thailand. The agency business grew in both productivity and margin in the second half, supported by very strong sales momentum as well as a highly successful launch of our new multi-pay CI rider in addition to the continued success of our unit-linked business. And in second half of last year, we also achieved a very strong increase in number of new recruits compared to the prior year. And on the bancassurance front, our bancassurance channel grew strongly in both credit life business as well as the new regular premium unit-linked products that were distributed by our bank partners. So, as you can see, the margin increase. In fact, the growth in second half wasn’t just in margin, but also in overall production and the margin was very much supported by CI, unit-linked mostly from an agency force and also some from the bancassurance channel. Thank you.

[Jacky Chan, Chief Executive Officer, AIA China]

Yes. Again, interest on the MCV, I want to add that a very simple direct answer is that our MCV agencies capability remains intact. This is what I really want to say, across that 6,800 as I described before. And AIA Hong Kong, Macau has the number one agency in the market in Hong Kong and Macau. And I also want to add that, as you see Hong Kong reopen and the government has the camping Hong Kong is back, etcetera, everything is coming back to normal and the mass is now in no longer required. I also wanted to add a color that while MCV momentum grows strongly, continued in the first two months, the domestic sales also rebounded strongly. So, it’s not just MCV, our domestic customer segment with our high-quality agency across Hong Kong and Macau is supporting a very strong rebar.

[Lee Yuan Siong, President and Chief Executive Officer]

Thank you for your questions. And I think in closing, I would just like to say that the last 3 years, the operating environment has been challenging and volatile, especially in 2020 – especially in 2022. But AIA’s proven operating model and execution has helped us to deliver a very resilient set of results. I think as operating conditions improved in the second half, we saw a very strong rebound in momentum, recovery momentum. And we believe that AIA is multiple engines of growth combined with our unmatched financial flexibility ensures that AIA is exceptionally well placed as Asia rapidly opens up for further growth in 2023. Thank you very much.

[Feon Lee, Director, Investor Relations]

Thanks, Lee Yuan Siong. Thanks everyone for listening. If you have any follow-up questions, please come through to us at AIA Investor Relations. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes AIA’s analyst briefing. Thank you for your participation.