Poised for prosperity

As wealthy mainlanders return to the city after a three-year border closure, the fortunes of Hong Kong's insurers are expected shine once more, making their stocks a good bet for investors.

The market share of new business premiums bought by mainlanders in the city shrank from 25.8 percent to a mere 0.9 percent for the first three quarters of 2019 and 2022 respectively with the total amount plunging 97 percent from HK$36 billion to HK$1 billion over the same period.

"The pent-up demand from the mainland for insurance built up over the last three years will be unleashed," says Kelvin Chu Hiu-wai, executive director of Asian Insurance and Diversified Financials at UBS Securities.

A UBS Evidence Lab study last year revealed that two-thirds of 1,000 surveyed mainland residents planned to buy insurance in Hong Kong within one year of the border reopening.

Based on this, Chu estimates new business annual premium equivalent in Hong Kong will record double-digit growth over the next two years, adding that it might reach or even exceed the record of nearly HK$40 billion hit during the second quarter of 2019.

Shares on a roll

Analysts and investment banks are particularly positive about AIA (1299) and Prudential (2378) as they foresee the two multinational insurers regaining most of their long-lost mainland clients now that the border's fully open.

Prices for both stocks have rebounded from last year's October low amid a market rally ahead of the reopening over the last few months, with AIA having risen 41 percent to HK$81.20 from HK$57.25 and Prudential rocketing 70 percent to HK$117 from HK$68.75 as of last Friday.

KGI Asia's head of investment strategy at in Hong Kong Kenny Wen Kit says AIA will benefit more from the reopening as a higher proportion of its profit comes from Hong Kong.

More than 30 percent of AIA's operating profit comes from Hong Kong compared to 25 percent of Prudential's, Wen explains, adding that in terms of business growth, AIA is more likely to benefit given its higher market share in Hong Kong.

Multinationals such as AIA and Prudential are predicted to be the winners in the race for new business as they are the mainlanders' most favored insurers.

Data shows that Hong Kong operations of Chinese insurers don't fare as well as their international rivals while local banks which offer insurance services do not have large enough teams to solicit and win clients from across the border.

HSBC Global Research has raised the target prices of AIA and Prudential by around 10 percent to HK$100 and HK$175 respectively and maintained their buy ratings.

Apart from their Hong Kong operations, the firm anticipates a gradual recovery in new life insurance business in the mainland and believes the two insurers have more room for growth there over their Chinese peers, thanks to a lower base.

Morgan Stanley estimates AIA's new business value last year fell moderately by 6 percent due to Covid-19 outbreaks in the mainland in the last quarter, but it expects the pace of recovery of its business in the mainland and Hong Kong will help its stock price.

The investment bank believes AIA's new business may see double-digit growth this year and remains its overweight rating with a HK$112 target for the insurer.

Some analysts think AIA's ongoing three-year stock repurchase plan of US$10 billion (HK$78 billion) is doing little to stimulate the stock. AIA's share performance was weak last September and October despite aggressive repurchases during the period, though the buybacks did support the stock, which had a smaller decline compared to the general market during the rout, says Wen.

Top picks

KGI Asia has chosen AIA as one of the top picks this year and has given a target price of HK$112.

Goldman Sachs, meanwhile, maintains buy ratings for AIA and Prudential, with a more optimistic view on Prudential.

It foresees Prudential to have the fastest growth in new business value among local and Chinese insurance stocks with growth of 32 percent and 24 percent in 2023 and 2024, 5 to 6 percentage points higher than AIA.

Goldman Sachs has also replaced AIA with Prudential in its "conviction buy list" and lifted the target price by almost 15 percent to HK$185.

Prudential entered Macau in January but Wen says the life insurance penetration rate there is lower than Hong Kong's and expects the new operation won't contribute much to the insurer's business.

Using AIA's Macau operations as an example, Wen says the insurer had strong new business growth from sales to mainlanders in Macau during the pandemic but the branch's contribution to the total value of new business of Hong Kong "remains at a low single-digit percentage."

However, Wen does not rule out the possibility that Prudential's shares may have a stronger momentum than AIA's due to its lower valuation.

Everbright Securities International strategist Kenny Ng Lai-yin echoes Wen's analysis, given the significant growth of Prudential's business in the mainland over the last three years.

He says the proportion of Prudential's mainland operation in the whole business grew nearly 10 percentage points from 13.7 percent in the first half of 2019 to 22.9 percent in the same period of 2022, suggesting a faster growth than that of AIA, which increased from 27.1 percent to 30.1 percent during the same period.

As Manulife Financial's (0945) new business in Hong Kong decreased by 27 percent last year compared to 2021, Wen agrees the reopening will benefit the insurer in Hong Kong.

Nevertheless, the result of its Hong Kong operations alone may not have a significant impact on its stock compared to the other two multinationals, as Wen points out that the company also has large exposure in Canada and the United States.

Unlike Prudential and AIA, whose Hong Kong segments contributed nearly 60 percent and 36.6 percent of new business in 2019 before the pandemic struck, Manulife's North American operations accounted for 22 percent of its total new business while Hong Kong took up 35 percent of its business growth.

Anticipated pick-up

UBS expects mainlander insurance spending in Hong Kong reach its pre-pandemic peak in the next two years while Hong Kong Federation of Insurers chairman Winnie Wong also expects a pick up, though she says more time is needed to see if sales can recover to pre-Covid levels.

And while multinational insurers are expanding in China, Ng believes mainlanders still favor Hong Kong.

Besides the quality of service, he says that many Chinese prefer diversifying their portfolio with products of different currencies, which can barely be found in the mainland.

In fact, the UBS survey shows mainlanders usually opt for US dollar-denominated policies which pay out performance-linked dividends and US dollar critical illness products that guarantee payouts of up to tens of millions of Hong Kong dollars.

Also, mainland residents are expected to accelerate their asset allocation outside China and insurers in Hong Kong will benefit from their enormous purchasing power in the long term, says Chu.

Based on UBS's calculation of an 18 percent compound annual growth rate from 2022 to 2030, overseas assets held by mainland Chinese may be worth US$1.7 trillion by the end of this decade.