AIA Group Limited (OTCPK:AAGIY) Q2 2020 Earnings Conference Call August 19, 2020 9:30 PM ET
Lee Siong – Executive Director and Group Chief Executive Officer and President
Garth Jones – Group Chief Financial Officer
William Lisle – Regional Chief Executive and Group Chief Distribution Officer
Stuart Spencer – Group Chief Marketing Officer
Jacky Chan – Regional Chief Executive
Conference Call Participants
Thomas Wang – Goldman Sachs Group Inc
Jenny Jiang – Morgan Stanley
Charles Zhou – Credit Suisse
Kailesh Mistry – HSBC
Scott Russell – Macquarie Research
Leon Qi – Daiwa Securities Co. Ltd
MW Kim – JPMorgan
Good morning, everyone. And welcome to our First Half 2020 Results. I’m Garth Jones, Group Chief Financial Officer. Let me begin with today’s agenda. I’ll start with our first half results and how AIA successfully responded to the effects of the COVID-19 pandemic. Our new Group Chief Executive and President, Lee Yuan Siong will then talk about our new strategy to build on AIA’s competitive advantages and strong track record to transform AIA for the benefits of our shareholders and customers. While these presentations were recorded earlier this week, we will later move to Q&A session conducted by live teleconference.
Before I update you on the business performance in the first half of 2020, let me say that particularly in the current circumstances, we do hope that you remain safe and well. The pandemic has impacted us all and brought about extraordinary macroeconomic conditions, as well as many operational challenges. AIA has responded rapidly and effectively to a socially distanced world. We seized the opportunity to accelerate the use of technology moving all of our processes online, providing uninterrupted support for our customers and distributors; while always ensuring the safety of our people. Our financial results demonstrate the strength of our established business model, built on high quality distribution, recurring and diversified sources of income; and geographical diversification at scale across the most dynamic region in the world for life and health insurance.
AIA’s financial performance in the first half of 2020 demonstrates our resilience in the context of an unprecedented economic environment. The most direct impact of the pandemic as containment measures progressively increased was on sales as restrictions limited the movement of people and face-to-face meetings. Pre-pandemic, we had a bright start to the year and while the value of new business declined by 37% during the first half; we have seen strong positive momentum market-by-market as restrictions eased. EV equity of $61.4 billion after the payment of the shareholder dividend in the first half decreased slightly as negative investment variances offset operating profit. The quality of our growing in force business supported a 5% increase in operating profit after tax to $2.9billion, and shareholders allocated equity increased to $43.3 billion underlying free surplus generation grew by 11% to $3 billion, reflecting growth in the value of our enforced business.
And the Board has declared an interim dividend of HKD 0.35 per share, up 5% on 2019. These robust financial results reflect AIA’s continuing focus on executing our strategic priorities while exercising financial discipline to generate attractive returns for shareholders.
As usual I’ll now provide more detail in the three areas of growth, earnings and capital and dividends starting with growth. AIA’s portfolio of market leading businesses enables us to capitalize on the attractive long-term growth opportunities available across Asia Pacific. While the pandemic impacts on sales have been widespread looking at the VONB month-by-month, the main driver was clearly the timing and scale of containment measures. AIA China achieved positive year-on-year growth in the second quarter as movement controls eased and became the largest contributor to the groups VONB for the first time. AIA Hong Kong’s result was primarily driven by the minimal numbers of men and Chinese visitors since early February. While business in the domestic segment remained resilient across each quarter. More generally, we saw strong VONB momentum resume across all our markets as containment measures eased, supported by new online capabilities.
In addition to daily agency activities, we moved our end-to-end agent recruitment and training capabilities online. We have had very strong success with online recruitment in particular. Our businesses held more than 8,000 online seminars in the first half; supporting growth in new recruits of more than 20%. We introduced additional capabilities to complete sales remotely and securely across all of our markets without the need for physical face-to-face meetings. Over 90% of our products can now be sold remotely. The response to these new online capabilities has been very positive with more than 40% of agency cases in the second quarter close remotely. We also move swiftly to support our customers, providing additional COVID-19 related coverages free of charge. And we’ve provided support to the communities we serve; for example, with complementary coverage to frontline ancillary workers here in Hong Kong. I should recognize and thank our customers for their commitment and confidence in AIA during these difficult times. In the first half, renewal premiums increased by 13% reflecting the quality of our enforced book and the compounding effect of our focus on regular premium products. Renewal commissions from quality business have helped our agents weather the financial impacts of the pandemic, and further highlighted the benefits of a career with AIA.
Throughout the turbulence of the first half, our persistency has remained very strong at greater than 95% unchanged from last year. This slide show the strong positive VONB momentum that has built up across our markets as movement controls eased. The first country was Mainland China and our business recovered quickly in March. VONB grew year-on-year in the second quarter as I mentioned and this has continued into July with strong growth over July 2019. AIA Hong Kong also saw positive momentum from domestic customers after the lows in March when stricter measures were introduced. VONB from domestic customers in both June and July was more than double the result in March. For the most part the rest of the group saw peak containment measures in April and we have seen VONB progressively recover through May, June and July.
In all markets, our agency distribution has been strengthened by additional online capabilities; for example, close to 100% of our new business in India was completed remotely in the second quarter. We’ve seen continued use of these online tools even as restrictions have eased across our markets, and face-to-face meetings resumed. Overall, we are very encouraged by the strong momentum we have seen generated across the group. EV operating profit was $3.9 billion supported by continuing positive operating variances of $389 million. Operating ROEV was 12.9%, a robust performance given the environment in the first half.
Operating profit offset both negative investment return variances and the further reduction in our long-term economic assumptions to reflect lower interest rates. This maintained EV equity at $63.8 billion before the payment of the 2019 final dividend and exchange rates. AIA’s continuing positive operating experience reflects the quality and resilience of our enforced business. Mortality and mobility claims experience remain positive supported by lower incidence of non-critical medical claims during the pandemic. Despite reduced new business volumes in aggregate expense variances also continue to be positive. Our EV results demonstrate the prudence in our operating assumptions. Our pricing discipline and the proactive management of our large enforced book. Overall, operating variances have added more than $3 billion to EV since our IPO. Our EV sensitivities both interest rates and equity market movements remain small. Our EV methodology uses spot market yields and trends over time to our long-term assumptions. The interest rate sensitivity shown here applies a 50 basis points movement from the current spot government bond yields and our long-term assumptions including equity returns and risk discount rates. Our long-term assumptions aim to smooth out short-term volatility in markets, and we made a further reduction at the half-year for the first time reflecting lower rates.
The weighted assumed rates remain in line with market forward rates at the end of June 2020. We will continue to review our assumptions for each reporting period as we have since IPO. EV equity of $61.4 billion is now 2.5x the level at IPO, demonstrating our long track record of shareholder value creation. You can see that the main growth driver of EV equity over time is EV operating profit. We’ve generated more than $54 billion of EV operating profit through the addition of profitable new business and proactive in force management. Net variances remain small including the negative from the first half at just $1.5 billion in total since our IPO.
Now to earnings and our IFRS results; the Group’s operating profit after tax increased by 5% to $2.9 billion from our growing enforced business. This was supported by lower non-critical medical claims. With fewer movement restrictions, we expect additional claims later in the year and are provisioned for this. Overall, our operating margin remains stable at 17.5%. AIA Hong Kong delivered 7% growth to $1 billion despite the impact of lower bond investment income and the change in long-term investment return assumptions on equities made at the end of 2019. AIA China continued to deliver very strong growth with a 22% increase reflecting high quality earnings and increased scale, while AIA Singapore increased by 11% through active management of the in force.
Our Thailand business was affected by increased lapses due to weak consumer sentiment together with lower equity returns. In Australia, we experienced a higher cost of income protection claims which reduced other markets OPAT. Finally, Malaysia where excluding the impact of a one-off industry-wide initiative, OPAT grew by 9%. Shareholders allocated equity increased by 5% to $45.5 billion before the payment of the 2019 final dividend and exchange rate movements. Growth in operating profit more than offset negative mark-to- market movements in equities. After payment of $1.5 billion to shareholders allocated equity remains stable at $43.3 billion.
Operating profit after tax of $2.9 billion in the first half was 3x the figure in 2010, reflecting the significant new business growth that has increased the size of our enforced book. The resilience of our portfolio as a result of it being steadily built up through quality business accumulated over many years. Consistently 99% of our total weighted premium income has been recurring. And these premiums have been invested on a prudent basis in high quality, well diversified assets. The average credit quality of our bonds has remained stable at A minus during the first half and only 0.3% of our bond portfolio migrated from investment grade. We have seen no impairments in the first half. This focus on quality forms the foundation of our resilient sources of earnings demonstrated by our continued growth in the first half of 2020.
Operating profit after tax has added more than $37 billion to shareholders allocated equity since our IPO. While movements in the market value of equities causes short-term volatility in net profit; it is clear that this has averaged out over time to just $1.2 billion since IPO. After shareholder dividend payments of more than $10 billion, shareholders allocated equity of $43.3 billion at the end of June was 2.5x times the level at IPO.
Finally, capital and dividends. The solvency ratio for AIA Co remains strong at 328% and reflects lower government bond yields and equity markets in the first half. The legislation for the Hong Kong Group-Wide Supervision or GWS framework was enacted on the 17th of July. While we are waiting further details from subsidiary legislation, we have shown our expectation of how the framework applies to AIA. This is the group LCSM cover ratio of 350% shown here. And as you can see, it has remained strong and stable from the ratio at the year end. This does not include any contribution from our medium term notes and there are further details of the calculation of this ratio in the interim results pack.
Both of these solvency measures demonstrate the Group’s strong capital position. Underlying free surplus generation increased by 11% to $3 billion benefiting from further growth of the enforced portfolio, new business investment of $0.7 billion reduced by 4%. Free surplus increased by $2.2 billion before investment variances and dividend payment. Investment return variances reduce free surplus by $3.9 billion primarily from the movement in regulatory reserves from the reduction in government bond yields, most notably in the United States and Thailand.
After the payments of $1.5 billion for shareholder dividends closing free surplus was $11.8 billion. UFSG consists of four elements: the emergence of profits from the value of in force, the release of required capital as the enforced business matures; the expected investment return on free surplus and the operating variances that flow into free surplus. The first two of these, the emergence of profits and release of required capital from in force are the main drivers of UFSG. You can visualize this as moving from the left-hand chart to the right-hand chart. As I said at the full year, persistent low interest rates could slow free surplus emergence and remittances from some of our businesses. That is the pace of movement from the left-hand chart to the right-hand chart.
You can see that as we have added successive layers of quality new business since IPO, our growing profitable enforce book has translated into a growing level of UFSG with both our value of enforce and UFSG having more than doubled. Since IPO, cumulative underlying free surplus generation has reached almost $38 billion. Our primary goal is to grow our new business organically and we’ve reinvested close to $14 billion to generate more than $23 billion of VONB. We’ve paid share dividends to our shareholders of more than $10 billion and we have selectively taken advantage of inorganic opportunities. While the events of 2020 are an extreme example of capital market stress, a combination of positive and negative investment variances has accumulated to a small net impact of $1 billion. Our stock of free surplus has increased by $6.8 billion since IPO to $11.8 billion aligned with the growth in our balance sheet.
The Board has declared a 5% increase in the interim dividend to HKD$0.35 per share. This increase reflects both the Group’s strong financial position and the unprecedented macroeconomic and capital markets environment. The Board continues to follow AIA’s established prudent, sustainable and progressive dividend policy allowing for future growth opportunities.
In conclusion, the Group’s results in the first half of 2020 demonstrate our resilience in an extreme environment. We’ve seen strong momentum in markets as containment measures have been progressively relaxed, supported by our enhanced online sales capabilities. The quality of our growing enforced business helped drive increases in both operating profit after tax and underlying free surplus generation. EV equity was maintained and shareholders’ allocated equity increased before the payment of the 2019 final dividend.
Our financial position is robust with strong solvency levels. And we’ve declared a further increase in our interim dividend. These results reflect the quality and resilience of our business; our strong execution capabilities and our disciplined financial management. In summary, our continuing ability to build sustainable value for our shareholders.
I’ll now hand over to Yuan Siong who’ll talk about the future for AIA.
Good morning and thank you for joining us. On behalf of all of us at AIA, let me begin by saying that we hope that you and your families are safe and in good health. I am incredibly proud of the way AIA staff, agents and partners have responded to the challenges brought about by the COVID-19 pandemic and provided uninterrupted service and support to our customers and communities. Since becoming Group Chief Executive and President on the 1st of June, I have worked with the senior leadership team to complete a full strategic review of the business. AIA is a great company with outstanding people, significant competitive advantages and incredible opportunities to grow shareholder value. We see substantial potential in all of our markets and the structural drivers of growth in Asia and in particular for AIA remain resilient and powerful.
To take full advantage of this structural growth, our clear and ambitious new strategy will transform our company building on AIA’s strong track record and significant competitive advantages to drive profitable growth well into the future. This morning, I will share with you some highlights and I very much look forward to giving you further updates as we deliver our strategic priorities. Our new strategy builds on five long-term structural drivers of growth. Compounding wealth creation and the increasing need for protection generate immense potential for life insurance across the region. Understanding rapidly shifting consumer behavior is critical in turning this up potential into reality for millions of customers. Wellness, healthcare and higher expectations of quality of life into OH are increasingly front of mind. At the same time, consumers are unsure of how much cover they need and which products to buy. With so many options they increasingly rely on personal recommendations and choose companies that provide trusted advice with relevant, timely and personalized services.
Advances in technology and digital have opened up increasing opportunities for greater connectivity, scale and efficiency, driven by deeper customer insights and analytics. Lastly, as the events of 2020 demonstrate, resilience is paramount in a world of increasing, frequent but hard to predict shocks. All of our stakeholders expect us to respond in the right way with purpose and a view to a long-term sustainability. This new strategy will ensure that AIA has the competitive advantages to fully leverage all of these powerful structural growth drivers. As I said earlier, AIA is a great company with significant competitive advantages. We have an unparalleled platform in Asia built up over many decades and whole leading positions in the vast majority of our markets. Our 100% focus on Asia will not change and our 100% ownership structures allow us to capture the full economics of growth for our shareholders in the world’s most attractive region for life insurance.
A step change in technology, digital and analytics is at the heart of our strategy. This will transform the experience of our customers, distributors, partners and employees achieving greater growth and efficiency. Our customer experience will be built on the principles of simplicity, timeliness and reliability exceeding expectations. There is a substantial opportunity to accelerate growth in the number of our premier agents especially in our developing and emerging markets, while driving ever higher quality using digital and analytics. Integrating our technology with our industry leading portfolio of bank and digital partnerships will provide access to millions of previously untapped customers. Exclusive platforms and ecosystems will differentiate our protection and long-term savings propositions, making them impossible for our competitors to copy. Underpinning everything we do is our strong culture of empowerment enabled by a simpler, faster more connected organization and our financial discipline focus on sustainable, profitable growth.
Let me take you through some highlights. The rapid middle class expansion in Asia will see our target customer base double in 10 years growing 7x faster than the rest of the world. While wealth creation in Asia has grown dramatically, life insurance penetration remains incredibly low and the protection gap only gets wider. The compounding effect of growing economies and increasing life insurance penetration creates unprecedented and resilient growth potential for Asia’s life insurance markets and in turn for AIA. AIA is exceptionally well placed to capture this opportunity. Our strategic focus on Asia and our unrivaled platform allows us to actively assess channel, product and market dynamics to deploy capital and create the greatest value for shareholders over the long term. This discipline drives stronger levels of profitability and superior VONB margins that strengthen our leadership positions across our markets.
Mainland China is a great example and provides AIA with a unique opportunity. In July, we were honored to become the only foreign company with a wholly owned life insurance subsidiary in Mainland China. On Tuesday, we held the opening ceremony for our new subsidiary in Shanghai and have made substantial progress on our plans to expand our footprint. AIA China’s strong track record of growth speaks for itself. Through our differentiated strategy AIA’s agents generate 4.7x the VONB of our competitors on average and annual VONB has grown 17x since 201. Even so our customers make up less than 2% of the middle class population available to us today leaving significant upside in our existing footprint. As we target additional provinces for growth, the potential market for AIA quadruplets. Our strategy is scalable and proven and will allow us to capture this opportunity. I have long admired AIA China’s premier agency model; now that I have spent time with our exceptional team and seen the disciplined execution of our differentiated strategy, I’m very confident that we can grow rapidly and sustainably. In each new city we successfully replicate our premier agency supported by management from our established operations. Our highly digitalized model drives activity management, efficiency and scalability and ensures our strict quality standards are maintained as we expand. AIA China’s agents earn more than twice the average local income; powerful proof of our successful model enabling us to attract, develop and retain the best agents. We have a very strong track record of expansion into new cities as you can see in Jiangsu with 67% compound growth in VONB. AIA’s model delivers strong and sustainable results and we are ready to take full advantage of the extraordinary opportunity that Mainland China presents for us.
As I said earlier, a step change in technology, digital and analytics is at the heart of our new strategy and there is enormous potential to transform AIA.
Let me take you through each in turn beginning with technology. The foundation of our transformation is the upgrading to fully modern architecture and systems; so that we can scale our strategic initiatives and drive greater efficiency, connectivity and ease of working. Our ambitious plans require 90% cloud adoption ensuring our technology needs are met in real time. Greater automation will deliver straight through processing rates of 90% across core customer journeys resulting in industry leading cost efficiency. Extensive use of big data and artificial intelligence in our business processes will deepen understanding of our customers needs and lead to smarter, faster decision making. All of this will result in best-in-class experiences for our customers, distributors, partners and employees’ our aim is to position AIA as industry leading in the use of technology not just in the region but globally.
Moving to digital; our vision is best in class connectivity for agents, customers and partners allowing for rapid and seamless interactions. For premier agency, powerful new tools enhance recruitment, training, agency management, sales and servicing. This eliminates manual processes leading to higher productivity and increased scale. Our partners benefit from seamless and integrated experiences for their customers enabling access to previously untapped segments. And our own digital platforms drive engagement and customer traffic to AIA through new models and non-traditional partners. And customers interact with AIA anytime anywhere through multiple channels across their learn, buy service and claim journeys. Greater and digital interactions create richer data for analytics models which ultimately benefit and enrich the customer experience. We have set ambitious KPIs for each of these demonstrating our commitment to achieving our goals.
Data analytics will power everything that we do at AIA. There are many potential uses for analytics within each of our functions. We have identified and prioritized a set of 60 high impact use cases. These provide deeper and actionable insights into customer needs and preferences; powering our distribution, operations and other functions. Our approach is to test and learn in one market and then industrialize across our 18 markets to quickly replicate success. While this slide shows analytics by function, applying them across every element of customer and agent journeys will transform end-to-end experiences. For example, using analytics we can deliver a distinctive, personalized and more meaningful experience for customers. In the learn stage, we can match customers with the most suitable products and channels. Agents are automatically prompted with the next best offer for customers, predictive underwriting and personalized pricing leads to frictionless sales and increased conversion rates. And simplified service with faster turnaround times leads to better outcomes including improved retention and profitability.
I’m really passionate about providing the best experience for our customers and this includes our promise to look for every reason to pay a claim. AIA’s best-in-class experience will be based on personalized engagement and the principles of simplicity, timeliness and reliability. Our goal will be to always exceed expectations. To achieve this, a number of fundamental shifts are necessary. Reorienting the organization around customer journeys rather than functions, embedding data and analytics in everything we do, raising group-wide minimum standards and implementing real-time customer feedback. Outstanding customer experience will also achieve a range of business benefits, including unlocking new business growth; driving higher quality sales, improving persistency and generating more products per customer.
Next, I will cover our differentiated quality distribution. AIA has built an unparalleled premier agency platform with market leading positions across Asia. Since joining I’ve met with many of our agents and leaders across the region; they are the most professional, productive and dedicated agents I’ve seen. AIA has been the number one MBRT Company globally for six years in a row. And we have set the benchmark for a professional agency in the industry. In our developed markets, we will continue to grow AIA’s successful premier agency through our recruitment, training and development initiatives. In Mainland China, AIA has the highest quality and most productive agents in the market, and our potential is clear and unprecedented.
In our developing and emerging markets, we will drive a step change in the growth in our numbers of active agents to meet the significant opportunities in countries such as Thailand, Vietnam, Indonesia and India. And I am clear that we will do this while continuing to raise quality through the use of technology to support our next generation of agency leaders. NextGen leaders have been instrumental to the success of our fastest growing markets such as China in recent years. Technology, digital and analytics transform the ability of our leaders to recruit, train and actively manage increasing numbers of new agents supported by real-time performance tracking. Analytics is also essential for expanding distribution capacity by helping us identify and fast-track future leaders. For our agents, full adoption of digital tools across the entire premier agency value chain delivers a material improvement in productivity, higher agent retention and ensures that we continue to achieve the best income levels for our agents.
As we embed powerful analytics and integrate social media, our digital tools become even more effective in driving agency success. All of this is critical to ensuring that our premier agents remain the most active and productive in the industry, while significantly increasing capacity. You can see that India and China are already leading the way on digital adoption, but there is much more we can do across the Group, and we have very ambitious targets. We have long-term and leading bank assurance partnerships across Asia, in addition to our regional relationship with Citibank; we have partnered with top three domestic banks across nine of our markets. The vast majority of our key strategic partnerships have more than 10 years less to run. This gives us access to more than 100 million existing customers with significant potential for growth. The quality of these partners and their leading retail positions in their local markets are key competitive advantage for AIA.
Our successful model has achieved very strong VONB growth relying on in-branch referrals from relationship managers to our insurance specialists. Our new digitally led model uses data driven marketing and propensity models to better target in-branch customers and provide broader access to previously untapped online and credit card customers. As digital banking evolves, we offer our customers more choice of how to purchase from fully online to face-to-face advice. We have a tremendous opportunity to increase engagement with greater numbers of customers to accelerate our VONB growth. Digital platforms bring new models and new growth. As consumer behaviors evolve, the demand for choice and convenience is driving usage of digital platforms for day-to-day transactions and services.
We are connected to an expanding network of the best partners allowing access to hundreds of millions of highly engaged and active users. But these non-traditional channels need non-traditional approaches. We will adopt an agile approach, as we constantly test and learn how best to onboard customers and increase conversion rates; for example, we gain more than a million new AIA vitality members through SK Telecom’s digital platform. These models offer a whole new way for AIA to attract millions of new customers, many outside our usual demographics. To lead the industry in providing compelling propositions, our strategy has two key areas of focus; expanding AIA’s health and wellness offering and leveraging AIA’s regional funds platform.
Our protection strategy is focused on next generation, life and health products fully integrated with our health and wellness ecosystem including AIA vitality as the core engagement platform. Our ambition is to extend AIA’s leadership position by delivering better health outcomes for our customers, resulting in lower costs of insurance. By incentivizing behavioral change, AIA vitality has achieved impressive results. Members are more engaged with up to 80% higher cost sales of new products and 50% greater persistency than non-members generating higher VONB and improved business outcomes. We will accelerate our ability to scale AIA vitality so that we lead the market in prediction and prevention and help customers stay healthier for longer.
Our broader health and wellness ecosystem is anchored on four fundamental components. The first is AIA vitality. The second will be our local network of telemedicine and healthcare providers. This will be accompanied by AIA’s regional health passport leveraging our footprint to offer policyholders access to the leading international hospitals in the region. Finally, personal case management; for example, with medics; our exclusive regional partner ensures customers receive the best possible medical care. Along the entire health care journey, we will partner with best in class solution providers to deliver both value and improve health outcomes. As I said earlier, integrated and exclusive access to our health and wellness ecosystem further differentiates our protection propositions to our customers and makes them difficult to copy by our competitors. I highlighted the opportunities from Asia’s significant wealth creation earlier. Asia also has the world’s fastest growing retirement population and a majority of personal financial assets are held by those nearing retirement. Our objective is simple, to encourage these individuals to save more effectively. We do this by leveraging AIA’s scale and distribution power to build strong relationships with leading external fund managers globally. We create AIA’s proprietary investment strategies using the best managers offered exclusively to AIA’s customers integrated into our innovative savings products.
These funds are offered through AIA’s regional funds platform and provide retail access to leading institutional fund managers through a range of diversified fund options. Our experienced team gives customers peace of mind through professional stewardship encompassing our proven manager selection process and ongoing performance monitoring. We will use our platform to accelerate our ambition to meet the needs of consumers across the region for legacy protection, retirement income and long term savings. AIA’s enviable track record of performance has been achieved through a culture of local empowerment with accountability. Our new people strategy has been designed to leverage our distinct culture. We will streamline our organizational structure to improve cross-functional collaboration, embed new agile ways of working where optimal and attract the best technology, digital and analytics talent. This will make AIA a simpler, faster more connected organization and secure the execution of our strategic priorities. The execution of our strategy will extend AIA’s track record of superior, profitable growth driving strong earnings free surplus generation and prudent sustainable and progressive dividends.
We continue to see significant opportunities to reinvest capital to deliver organic growth at attractive returns for shareholders. We will do this by following a highly disciplined approach of optimizing value creation rather than purely chasing top-line volumes, constantly looking to improve capital efficiency and the quality of our portfolio. With such attractive reinvestment economics, our ability to invest in substantial new business growth remains an important priority and differentiator for AIA.
I have covered a lot this morning. So I would like to leave you with these key messages. AIA operates in the most attractive markets in the world for life insurance. We remain 100% focused on Asia with substantial growth opportunities in all of our markets. In Mainland China, our new potential target market is 4x our current footprint and we have a proven track record of expansion. A step change in technology, digital and analytics is at the heart of our strategy and will transform AIA. We will accelerate growth in the number of our premier agents using technology to ensure quality standards and support our NextGen leaders. Digitally led partnership models will support our distribution channels by providing new ways to attract and engage significant numbers of previously untapped customers.
Our integrated protection and long-term savings propositions will deliver improved outcomes for customers and will be impossible for competitors to replicate. Underpinning all of this will be our financial discipline and a simpler, faster more connected organization to ensure that we achieve all of our strategic plans. I am confident that our clear and ambitious strategy will achieve our purpose of helping millions of people live healthier, longer, better lives while delivering profitable growth and shareholder value well into the future. Thank you for listening.
As I said, we will now move to a Q&A session that will be conducted by teleconference. [Operator Instructions]
Our first question comes from Thomas Wang from Goldman Sachs.
Thank you. Good morning, everyone. Got a couple questions; firstly, on China could we get some update on Jiangsu and Shenjing just in terms of the age and the number of agents each of the brands has now? Because we’re seeing a very good agent income at the time of disclosure. And specifically on Shandong, this was color used a rare case rather than new province and so we probably got one city in COVID problems, but if we think about further footprint expansion when we get to a new problem, will this still the one city at the time approach or can we do a few more is just this asset to one go?
And the second question on the capital from, I appreciate that we are following this progressive dividend approach. Do we have any numerical sort of dividend rules of growth that we want to follow? So I think with dividend now is about one-third of the free supplement generation each year, is that something how we think about that with the impact growth. Thank you.
Okay. Thank you for your question. I will answer the first one and Garth will take the capital question. On China, as you know, we have seen the success we have delivered in our existing markets of Beijing, Shanghai Guangdong, Jiangsu and Shenjing, right. I think we have a unique opportunity in China. We have 100% ownership, so we do not have to share any of the economics with any local partner; we have a very good track record if you see from my slide in Jiangsu, province of expanding into new cities. We have a very proven model. Our agents are very — the most productive in China and you can see that we have achieved two times or more the local income levels for agents on average. Going forward, I think you can see that we have a huge potential to expand into new provinces. We have targeted 10 to 12 new provinces and as you know each province in china is the size of a mid-sized company in the rest country in the rest of Asia, which means that going forward in the next few years you can consider that AIA is going to expand 10 to 12 new countries. Now expand the two new markets which is the size of each country, so the potential is enormous and we’re very excited about the opportunities going forward. I can tell you that the progress in Tianjin and Shijiazhuang and Hubei province, in Hubei province, we’re starting with Shijiazhuang base. We can actually expand to Hubei province under the Ching -Ching E policy. So and the progress since we got the license late last year is very encouraging. The quality of the people that we are recruiting in Tianjin and Shijiazhuang is very high and they have been and they have achieved more than two times the local income in those two cities as well.
So we are very happy with the progress. On capital, I think Garth —
Thanks Yuan Siong. We have an established prudent sustainable and progressive dividend policy and that’s unchanged. You’ll see the interim dividend is 5% higher than this time last year, which we think is a strong and appropriate increase given the unprecedented environment that reflects both the group’s strong financial position and our prudent approach. You heard from Yuan Siong earlier that there are substantial growth opportunities in all our markets and our objective is to maintain a prudent balance sheet, striking the right balance between funding those long-term, very profitable growth opportunities while maintaining financial flexibility for both stress and future dividends. We look at a broad dashboard of metrics to frame the dividend and run stress scenarios to ensure sustainability. Those metrics include things like future growth, free surplus generation, IFRS earnings, solvency levels, remittances and the working capital that we have centrally.
Overall, the key thing is that we have prudence, sustainable and progressive approach and you can see that our dividends have been following that pattern and cumulative dividends since IPO are now over $10 billion.
Our next question comes from Jenny Jiang from Morgan Stanley.
Hi, good morning, gentlemen. Thanks a lot for the presentation. Probably two questions for Yuan Siong. Very happy to reconnect with you here at AIA briefing again. The first one is about China as well. Thanks a lot for all the details — share all the details about your thoughts on digital, on other channels. Shall we consider those strategy will apply to China as well because before we tend to think we are a little bit a niche play in China focusing on more high-end customers maybe using agency channel only and with the extension in digital strategies shall we probably think AIA China will be a dominating player in all segments or all customer segments in the future probably in all product segments in the future as well.
So the second question is it’s an easy one and it’s about our EV assumptions. And I’m probably I want to hear Yuan Siong’s thoughts about our China EV assumption. If you look at the risk discount rate we use for China operation is still a little bit lower than the domestic Chinese insurers, particularly given your background you work at Ping An before and you were actually before — how should we understand that the gap between the assumption adopted by AIA versus Chinese peers. Are you happy with those assumptions? Do you think those are justified giving your new role here? Thank you.
I’ll take — thank you. I’ll take the easy question first. I think I’ve been very impressed when I came to AIA by the financial discipline of AIA. It is really one of the strengths of AIA; you can see this demonstrated really in the very resilient results that we have shown in the first half of this year in this kind of environment. As to the EV assumptions for AIA, I regard it as a very prudent and it’s reflective of the type of business and products that we sell. So I will not compare, I will not try to compare it with other companies. So if you are interested in opinions or EV assumptions, you can — I know you have asked them– asked me those questions before, but now you can ask James, Gartner or the other people, okay.
China, I think like I said I’m very impressed with the AIA China’s premier agency model. If you look at the slide that I show in page 31 and you’ll find that in every single market, our agents earn twice the annual average income of that particular market. This is a very, very powerful metric. If you can — as you know, if you have — if your agents can earn good money working with us, they can — and it actually fuels the growth of the agency for, so the agency channel — our agency model is both scalable, high quality and I think as I said in my presentation it will support our expansion into the new markets, the new provinces as you know very well each province in China is like a– is the size of a country in the rest of Asia. So the opportunity for us to grow our premier agency model across China is very strong and powerful. Obviously that we are also tapped into digital models. As I said, we are testing — we have partnerships with the likes of SK Telecoms in Korea. We have the partnership with Gojek in Indonesia.
So we are working with different digital platforms to try to learn how we can assess even more untapped customer segments and bring them onto AIA’s platform and convert them to become AIA’s customers. Similarly in China, we will work with — we already have a relationship with WeDoctor and we are working with them. So these are models that we will explore and test in all our markets.
Our next question comes from Charles Zhou from Credit Suisse.
Hi. Good morning, good evening and thanks for your presentation. I have three questions. The first one is that you mentioned the technology as one of the five long-term structural drivers and at the heart of the AIA. But we can see the sales were adversely affected by the COVID despite the use of the technology like video technology and mobile signature. And if those pickup after Asia will go out and also meet customers. Given most of the AIA’s high margin products still require face-to-face, so how do you see the balance between the technology and also the face-to-face meeting.
My second question is related to expansion in China. We understand that AIA targets 12 provinces, so do you feel that premium agency strategy could still work very well as AIA moves into lower tier cities. This is because my understanding is that the new regions probably are less well developed so and also they already have many existing players there, so already for many competition and maybe not many supply of the high quality agent to feed your premium agency strategy. So how does — and so how do you see this? And also how long does AIA new province to generate meaningful value of new business similar to the existing region maybe five or seven years, can you give us an outline about this one?
And lastly, it’s related to your talking about long-term saving products. I think AIA is very, very well known for its long-term protection and the investors also like it profits from mortality, from morbidity instead of investment or spread So now as AIA talk about long-term savings so what should we think about the margin trend? So should we expect some maybe change of the profit going forward more from the investment spread instead of the mortality and morbidity gain? Thank you.
Okay. I will pass it on to Bill to tackle the first question and the second question. And I would supplement along the way and then Bill is our Chief Distribution Officer. And then the third question I will pass on to Stuart, our Chief Marketing Officer to talk about long-term savings, yes.
Thanks for the question, Charles. And just looking more broadly across the group and our premier agency strategy; as we’ve talked about many times, it’s been a proven differentiator and remains a key strategic advantage to us. Having said that, we work to continue to digitally enable our agency, and we’ve moved quickly particularly through the period of COVID, March, April time. And as Yuan Siong and Garth has mentioned, we now have remote sales completion capability in all of our markets for over 90% of our products and actually in Q2, 40% of our cases were issued by using this new technology, specifically calling out places like Singapore where we’ve seen 80% of our agents use this technology to close sales. And in India where we’ve probably seen the most significant lockdown, 95% of our policies have been submitted digitally.
But it’s not just about digital remote selling, it’s all — we’ve also extended this technology across recruitment sales activities for agents that’s helped us drive over 8,000 online recruitment seminars and help us increase our number of agents by 20% in the first half. All of this digital enablement and I keep on emphasizing our agency, our premier agency strategy is core to the growth across the group and in particular China by digitally enhancing our agents, they have easier connectivity with our customers. It gives our customers choice of how they want to engage with our agents whether that be digital, online or remote, face-to-face. And all of this positions as well for the future, and I think coming out of COVID as we started to see some of the easing of lockdowns; we’ve seen month-on-month growth across May, June and July. So, again, I think we’re positioned well for the future and giving our customer choice which is ultimately what we want to do with our digital tools.
Okay. On your second question about China going into the new provinces. I like to highlight that we are– currently our footprint is three provinces, four mainly — well four, three provinces and three major municipalities right, Tianjin, Beijing and Shanghai plus the Shenzhen and special economic zone, right. We actually have 20 over more new provinces that we can expand to further into but we have selected the 10 to 12 most attractive, most wealthy provinces to expand and these provinces I would not describe them as a third tier, fourth tier; they are actually very wealthy provinces with cities like Hangzhou, Tiantu, Chenzhou Wuhan, yes.
Actually if I may just to add on to that for expansion in China. As we’ve talked about and Yuan Siong has emphasized a number of times the premier agency strategy, it’s a proven, scalable model. And I think what’s been very interesting particularly in the first half of the year as we’ve driven recruitment online through these provinces that we’re operating in. We’ve actually seen an increased or strengthening of our standards of recruitment. The percentage of new recruits with bachelor degree or above in H1 was actually even higher than the average for the full year 2019. And again, this gives us confidence along with the earnings which are double the average local income and four times, 4.7 times the VONB of our competitors. This gives us confidence that we can recruit, attract and recruit the highest caliber of agents in China.
Charles, thank you so much for the question. Let me emphasize, we don’t see it necessarily as an either or between long-term savings and protection and the gains in mortality and morbidity. Our focus remains on protection and high quality long-term savings. We’re trying to find the harmony and the balance. And clearly, we’ve learned through this COVID time particularly in the first half through our research and feedback from customers that there’s a tremendous interest in demand to reinforce their own personal financial, as well as health well-being. So we see the really appropriate convergence of both high quality long-term savings, as well as a very comprehensive array of health and wellness solutions and not a concentration on short-term deposit-taking. Thank you.
Our next question comes from Kailesh Mistry from HSBC. Please go ahead, sir.
Hi. Good morning. It’s Kailesh Mistry from HSBC. Thanks for taking my questions. I’ve got three. The first one is just thank you very much for the strategic update; obviously, the focus is on digitalization, analytics health and China. Just on those, are there any additional specific costs that we need to be factoring into our model for these initiatives or is that just part of the normal course or your expense based? Related to that where in your development in the platforms et cetera could M&A help? And if they’re to accelerate a contribution? And are there any key strategic and financial criteria that you wanted to highlight? On China, have you actually applied for any licenses or are we still waiting for that?
The second question is on the expense overruns. I appreciate the impact is an issue of the current environment. Have you taken any action to reduce its impact for the second half or is the focus purely on getting the volumes back to pre-COVID levels which would look after that?
The last question I have is on the markets where you’ve emerged from lockdown, I appreciate the volume has started to recover but as face-to-face interaction has resumed what have you observed? And what I’m thinking here is as life distribution gone back towards face-to-face agency have product trends, distribution trends; duration of products started to revert back to historical norms? Thank you very much.
Okay. Thank you for your questions. I will take the first question and then Garth will take the second and Bill will take the third. On the first question, I think, as I emphasized during my presentation; there’s a huge opportunity to transform AIA to a step change in technology, digital and analytics and to deliver greater growth and efficiency. We are making very good — already making good progress in terms of our planning. It is not one size fits all. I think we operate in 18 different markets and with BUs, business units at different stages of development. For example, I think China and India is much further ahead compared to the other business units in India; they are much higher levels of digital adoption and much higher levels of straight through processing and much more efficient, right. So the good thing about AIA is that we are in 18 markets so we can share the best practices and experience across each market, so that we can learn and industrialize the best practices very quickly. We have very ambitious targets for our — in terms of our TDA, our investments will be targeted and will meet very stringent financial criteria. So we will be very careful in terms of like — our investments, what sort of investments we will undertake and it has to meet our internal, financial criteria. The investments will make a very material difference enabling AIA to fully leverage on our opportunities and enhancing all the aspects of our business as I demonstrated earlier. Yes, so this is the first question. The second question I think I’ll ask Garth.
Yes, thanks, Kailesh. Yes as you will know most of our acquisition expenses are actually variable. And you’ve seen our expense variances overall were positive. So what we see is that while we have tightened our belts, we’ve continued to invest in the business and ensure that as the momentum comes back into the business; we have the people and the capacity to then grow again. So that’s the short answer, yes.
Thanks Garth and thanks for the question. Just looking again generally what we’re seeing across the region. And as you mentioned, a lot of our markets have entered and hence exiting COVID at slightly different times, but what we are seeing is a strong recovery in our sales momentum from May through June and into July. And this is obviously being driven in some of our markets by the return of face-to-face as we’re seeing lockdowns ease, but it’s also being driven by a surge of online search from our customers. Obviously, health, wellness protection is top of mind for our customers and hence we’re extremely well positioned with our agency force having been digitized to take advantage of this and make sure our customers get the right advice. One thing we’re very confident about is the continuation of digital enablement of our distribution. As I mentioned, we’ve now got digital sales capability across all of our markets, and even if we even as we move into a more face-to-face environment; I think you’d agree COVID is very difficult to predict. So we now have optionality for our customers and our distributors to be able to connect, engage and serve our customers whether that be face-to-face, physical or remote selling. So I think these positions us very well for the future.
Yes, on your question on China license, obviously; I can see that you are as excited as we are about the expansion into China. I’d like to remind you that we got the approval to subsidiaries in June. We have to go through all this process of setting up the company, including the registration with the Gong Shang Wai Qi Zi which is the state administration for commerce and we held our first board meeting for the new subsidiary on 24th of July. We have already in place all the plans including the setup of a war room to recruit and staff and management talent for future expansion. So this is all — this has been going in progress at the same time in parallel we’ve been in communications and discussions with the regulatory authorities about the pace of submission for future licenses. So things are happening very quickly. Yes, so thank you for having and as I said I can see you are as excited as you are about our China opportunity.
Absolutely. Thank you very much. Can I just have one request as well, if in the future we could get sensitivities to the LCSM ratio? I couldn’t find them. Apologies if I’ve missed them in the disclosure somewhere.
Yes. Thanks Kailesh. Yes, we will obviously be publishing suitable disclosures as the basis is finalized which we expect to have great clarity on as we get towards the year-end, yes. I think the intention is that the basis will only come in to effect in the first quarter of next year.
Our next question comes from Scott Russell from Macquarie.
Yes. Good morning, all. It’s Scott Russell at Macquarie. Just got a few questions, please. Firstly, the cross border business in Hong Kong; obviously, with the border closed it had significant cost sales on the business. If the border is reopened say next month what confidence do you have that customers will come back and what sort of time frame do you think it is required for the Chinese visitors to return to Hong Kong? And what sort of product would you expect that they would purchase to try to get a sense for the recovery there?
The second question is about rate, interest rate. So thanks for marking to market at the first half and I’m just looking at the back of the EV report where you can see the long term assumptions for the 10 year government bond yield by market. And I can’t see that there are actually very many changes. So at face value, it would appear that the long run reinvestment returns that you’ve allowed for in EV are actually still quite high. So just trying to reconcile that with the reference rate and the large negative EV and free surplus impact.
And I guess a related question to that is just around your pricing, for what extent are these risk-free rates have they been baked into policies currently being stalled in their pricing? That’s all from me. Thank you.
Okay. On the cross-border MCV business in Hong Kong, I will take the question and see if Bill has anything to supplement. And on interest rates, Garth will take the question. As you know, I’ve worked in China more than years; in fact, I’ve lived 16 years just across the border in Shenzhen. So I know that for a fact that as long as Hong Kong policies and products compare favorably versus Mainland China’s products, they will come back ultimately. I have many, many of my ex friends and ex-colleagues who work in the same building as me and I know that in the past that in the weekend they will come to Hong Kong to buy insurance products from, I don’t know which company it could be AIA but so as long as the Hong Kong policies compare favorably versus Mainland China, they will come back.
Now as to when they will come back it really depends on the opening up of the border but in the meantime, I think we are focusing very much on growing the domestic market. We remain very confident in the prospects of the Hong Kong market. We have seen a good traction in terms of our development of the Hong Kong domestic market. Now in fact after in the months of April, May, June, and July; we have seen the pickup in domestic business in Hong Kong. And it is quite encouraging, so but the Mainland Chinese visitors will come back ultimately, yes.
I think you’ve covered a lot. I think the only thing to add to that would be that premier agency strategy in Hong Kong is still core and will remain core. The strategic focus to grow our business and as and when MCV comes back our agency will be ready to take advantage of that, but as Yuan Siong said, we’re very confident with the growth opportunities in the domestic market and we continue to build out our premier agency. We’ve recently launched a new recruitment campaign on our new digital — our enhanced digital platform. We had over 7,000 views of our recruitment presentations and over 1.2 million views of our promotion video in the first three days on social media. So I believe we’re extremely well positioned to take the opportunities within the domestic market and also well positioned with our digital platforms and our scaling of our premier agency as and when the MCV customers come back into Hong Kong.
Can I follow up on that if you don’t mind? Once on only a couple of factories would be comparing life insurance products between Shenzhen and Hong Kong in their weekends. But what features exactly do you think make Hong Kong policies relatively more attractive to similar policies in the Mainland? It’s a question I often get but I’d be interested in your views on that having obviously watched this now from both sides of the border.
Yes. I think you just see look at the volume of people coming in over the last few years. They must have worked it out that actually Hong Kong products compare favorably against Mainland Chinese companies products in terms of pricing, in terms of the kind of service that they get; in terms of the coverage plus the fact that I think you get — you are able to buy bigger policies here without having to go through a lot of extensive and very extensive medical checkups and things like that. So but I think the numbers speak for itself, you look at the last four, five years; so many people have come. They must have worked it out and Chinese people are very good at comparing. Garth?
Yes. Thanks Scott. As you know, our EVS methodology uses spot rates and then trends over time to our long-term assumptions. Given the significant interest rate falls in the first half particularly in U.S rates, we just did certain long-term assumptions to reflect our expectations as to the future economic experience. As you know, we normally would only do so once a year to make it easier to compare year-to-year performance. But this year with the unprecedented drop in interest rates in the US, we decided to adjust U.S rates in particular.
And I think if you look across the different countries what you’ll see is that we made changes at the year end. And then we’re making further changes at the half year. That’s in particular in the U.S rates and Singapore rates which tend to follow the U.S rates, whereas in places like China, rates haven’t changed so much. In Thailand, the rates came — were changed in the second half. You’ll see yields came off in the second half and won’t change that much during the first half of the year. So I think that should give you a good explanation. And as you’d expect, as we see our expectations changed as to the future, we do actively reprice our products and we have been actively doing so in all our markets where that’s deemed necessary.
Our next question comes from Leon Qi from Daiwa.
Question on the [Indiscernible] China which is more — which has a long-term structure and the last one on Hong Kong is very duly tactical. On China, I appreciate that Yuan Siong has already elaborated your strategy of geographic expansion and also rising digital adoption. I’m just wondering how you want to strike balance between the geographic expansions into new provinces versus the new business momentum. I’m referring to a longer-term duration rather than the short-term COVID impact. I think the thing is in order to maintain our premium agency model, we try to reallocate some of the agency leaders to these grassroots launching areas, but that would probably more or less affecting our new business in these existing regions. Just wondered how you try to strike balance between the dividend growth in existing provinces and the launches, the new provinces, or probably there are any guidance on the KPIs advanced agency leaders. And secondly, when talking about online distribution more than not with about more constructive products versus the protection products which are usually more sophisticated. Again how you are designing your agency guides to make sure that when online distribution is on the rise, the product of quality is not being compromised.
And then lastly on Hong Kong, we understand that from July this year on board there are more production products being allowed to be sold online. Other than all these regular restrictions of the product that can be sold online, appreciate management have shared with us that if there are any other obstacles in terms of trying to raise the proportion of products being sold online in Hong Kong. Because I guess this is probably one of the major regions that are lagging behind by online distribution versus countries like China, India or Singapore. Yes, that’s all my questions.
Okay. I’m sorry because you were breaking up, we couldn’t hear very clearly your question. I gather that the first question is how we are going to expand into new cities in China. Are we going to use our — move our existing agents from existing markets into these new cities? And would it affect our existing markets? The second question is about whether the digital insurance products, how we are preparing our agents if this grows. I think the second question I’ll leave it to Bill to answer. And the third question is about remote selling in Hong Kong, right. So yes —
Yes. I think the second question is more about how we are going to make sure when we use more online distribution, the distribution of sophisticated structural protection products will not be impacted because usually online you sell infrastructure products.
Okay. So on the first question about expansion in China; you have seen in our slide that we have demonstrated that we can expand very quickly into new cities, and at the same time still achieve a very strong performance from our existing markets. I think do not underestimate the size of the Chinese talent pool; there are a lot of — since I’ve been involved in the Chinese market since 1994, so and China has developed and become much more sophisticated in terms of the insurance industry and the talent pool is very, very deep now in China. And as I mentioned before, we have set up a war room to prepare ourselves for future operations.
We also — we are recruiting people, training them, letting them know our very differentiated model; our primary agency model, how we do things. Our emphasis on quality, on long-term protection; so this is — so we are planning ahead as we expand into new provinces; obviously, there will be people within our existing operations who may want to see the opportunity. And they want to say, I want to go to a new province to try out; so we welcome this and in fact, we are also extending this to the rest of AIA Singapore, Malaysia, Hong Kong Taiwan and all the other markets people who have — who think that like what I did back in 1994 when I left Singapore to go to China to work.
They think that this is an opportunity to progress in AIA; they want to go to China to work. We welcome them and we have other systems and processes to support, and to support talented people to go to work and build a career in our Mainland Chinese operations. So I’m not worried that expansion into newer markets will affect our existing — the existing growth potential of our existing footprint. Also, I’d like to emphasize that in AIA, we are very prudent and we look for long-term sustainable, growth; so we will expand at a place which we think is will not be able to — we will not sacrifice the quality of our franchise and our model in China.
Hi, Leon. Let me let me take the second question around digital direct sales of which you pointed out are normally more simple products, easier to understand and easier to buy. We see this as being very complimentary to our existing distribution both agency and bank assurance, where we can empower and enable our agency with simple products to be able to connect with their customers through things like social media as Yuan Siong mentioned in the strategy update. We plan on integrating social media into our digital platforms using data analytics to have propensity models to be able to help position these products on a personalized basis to our customers, and using both our agency and bank insurance to be able to do that. Then moving to an upsell cross-sell of the more complex products that we sell today. So in essence, we see this as being very complementary that accelerates our agency and bank assurance growth by being able to access customer segments. We’re possibly not accessing today.
Hong Kong, any issues other than regulatory on selling online?
No. We — obviously that was a phased approach from the Hong Kong AIA, but as of recently we’ve been able to sell our market leading sell long-term savings products. So as of today, we haven’t got any issues around remote selling in Hong Kong.
Our next question comes from MW Kim, JPMorgan. Please go ahead, sir.
Thank you for taking my questions. I have a few questions. One is about the old life policy and the other is about the Indian business. But first may I ask about the company’s last experience, but previously the company showed the disclosure about the 13 months of proficiency ratio in the presentation. So I want to know that updated trend about the proficiency ratio. When I actually look at the embedded value movement, the proficiency ratio, the variance looks no positive in the first half, so to get the more understanding on that and also if we think about this COVID-19 outbreak and potential — the impact on the economy affect in a longer period perhaps there will be more pressure on the back book side. So that is the background on this first question.
The next question is about the India side. Clearly, the company’s positioning seems to be focusing on the leading protection market and based on my experience, the India the insurance market seems to be largely based on the [Indiscernible] business and then the growing business is more about the par or non-par saving business and protection is a very fast growing and relatively small market. So the my question is that whether when the company is looking at opportunity in India, it is purely based on the lite protection market or it is more like diversified the product and mix strategy building of the input book. Thank you.
Okay. Hi, Kim. Garth will take the first question on the persistency and I think Bill will take the second question on India.
Yes. Thanks Kim. Yes on persistency, as I said in the presentation; our persistency remained very strong above 95% still and we’ve seen our renewal premiums increase by 13%. So we’ve been very pleased and as I said I thanked our customers in my presentation for their continued loyalty and trust and confidence in AIA and continuing to pay their premiums. If you look in the embedded value variances, you’ll see that there is a small persistency variance. We had some persistency variants in Thailand in particular due to this — the economy there but overall when we look at it our experience variances have been positive. You saw very strong operating experience variances of 389 million in the first half. So again that reflects a strong bankbook of business and continued strong persistency. Thanks.
Yes. Thank you for the question regarding India. Let me just start by saying we have an outstanding business in India with an exceptional JV partner in Tata. The scale of the country and the economy 1.4 billion people rapidly urbanization, a rapid urbanization and to your protection question there was less than 3% penetration of protection in India and our focus is on protection and long-term savings as it is across the rest of the group. And we believe we have a market leading model; it’s a multi-channel, but it’s focused on quality not quantity. I think we’ve demonstrated that in recent years and particularly through the lockdown, and this is probably the most severe lockdown we’ve seen across the region. But Tata AIA recorded the highest growth amongst the Top 10 private insurers with 10% growth through this very challenging time. Whilst the overall industry only grew 3% and actually the private sector declined 2%. The India business that I mentioned is multi-channel; it’s highly digitized and it’s focused on protection, and we’re actually the largest protection provider in India. Coming back to digitization, 95% of our policies were submitted digitally through April through June and our agency force remained the most productive in India again focused on high quality sales of protection policy. So we believe we’ve got the right mix, the right channel; the right focuses on quality and we see protection as being a key driver for us in improving the connectivity and engagement with our customers. We’ve got time for one more question, operator. Thanks.
Our next question comes from Ken Dan from CICC.
Good morning. This is Dan from CICI. Thank you for taking my question. I have two questions today. The first is about China; sorry the first question is actually a follow-up on the cross-border business. We know since the second half of last year many people Mainland China simply couldn’t or hesitated to make their way to Hong Kong to buy policy from AIA Hong Kong even if they really wanted to. I want to know if there is any chance our Mainland operation can capture those potential business or customers or simply those demands just flowing to other Chinese competitors. Apparently that’s a big customer segment to profit from especially with Mr. Lee on board as the new CEO. I love to see how you look at this problem.
Another question will be about Hong Kong business. I’m just trying to understand how our agents in Hong Kong have been holding up for the past six months especially with much lower newbie sales and presumably much lower commission income from new business in the past 12-months or so. Thank you.
Okay. Thank you for your question on — firstly, as I said earlier I think the Mainland customers will come back once the borders are open. They will still come back here to buy their designer bags and also their insurance policies so as long as there’s a Hong Kong products compare favorably versus the Mainland Chinese Company’s products. We have a special opportunity at AIA which is quite unique compared to other companies that do a lot of Mainland Chinese visitor business in Hong Kong. In fact, that we are 100% owned in China across the border and 100% own here, so it really doesn’t matter financially to me whether the business is sold in this side of the border or that side of the border. We will still capture the full economics of the sale, so but at the same time we also see the developments in terms of the Greater Bay Area. So what we have done to position ourselves organizationally we have put Jacky Chan, our RCE to be in charge of Hong Kong and in charge of Mainland China, so that he can oversee both markets and see how we can get the most synergies out of the two business units. I will invite Jacky; so he’s also here today to say a few words later about the Greater Bay Area. And so the second thing is — the second question is also about Hong Kong agents. I think we have the most professional and productive agents in Hong Kong. I’ve met with them personally and in Hong Kong and I find that our agency force in Hong Kong is really very, very professional and while the Mainland Chinese visitors are not coming — have not — that the business was impacted in the first half and the second. First half of this year and also the second half of last year. Our Hong Kong agents have also been active selling to domestic agents because Jacky is very familiar with Hong Kong. I will let Jacky also talk about the Hong Kong agency. So Jacky?
Thank you, Yuan Siong. First of all, let me talk about a Greater Bay Area. We are very excited about the opportunities of the Greater Bay Area which cover a population of over 70 million. And we have been working and discussing closely with regulators both in Mainland China and in Hong Kong. And we are very supportive of all those initiatives. I believe all of us also know that the recent announcement about surfacing center in the Greater Bay Area and also the possibility of insurance connect and AIA just like Yuan Siong say to us, yes, the business we are 100% ownership in both Mainland China and Hong Kong to us is indifferent whether where the business is placed, but we are really going to support and service the customers at best in Greater Bay Area for the cooperation.
In the Hong Kong agency, I want to say that we always say Hong Kong agency is probably one of the best agencies in the world. And in terms of the MDRT membership, Hong Kong ranked number one globally among all the insurance companies and the Hong Kong agency force of course with this MCV business are almost gone, our agents focus on the domestic. In fact, all of our agents in Hong Kong; they are licensed to sell to our Hong Kong customers. So all our agents are working very hard on this and in fact with this COVID-19 situation, in Hong Kong also launched a full range of digital tools to support the agency both in recruitment, in training and of course in selling. And I have to say that the Hong Kong agency force stand up strongly in this challenging situation. And we have to understand that this is really an unprecedented situation. And we still have a very positive outlook in the long-term structural drivers of growth in Hong Kong. Bill, you want to say one or two things.
No. I think between you and Jacky who said everything. This is an exemplar agency. As we’ve said a number of times but we’ll remind you it’s number one in the world for MDRT and Jacky and the team and Peter Crewe done an exceptional job to keep our agency focused and domestic market. Well, as obviously we’ve seen challenges end of last year and this year protests and then into COVID, so we’re positioned well for the future. We’ve got the right products. We’ve got the right distribution, and we’re aggressively recruiting to meet the demands of our local domestic customer segment in Hong Kong.
Okay. Thank you everyone for your attention and for your questions. And please come through to Investor Relations if you have any follow-ups. Good morning.