Hong Kong Investors wary of insurer growth divergence

IFRS 17 tends to undervalue savings contracts, Jefferies noted.

Investors raise fears of the notable divergence in growth rates between new businesses under Embedded Value (used in valuations) (EV) and IFRS 17 (used for consensus EPS forecasts), said Jefferies Equity Research. 

The IFRS 17 tends to undervalue savings contracts, such as those AIA and Prudential sell to Mainland Chinese Visitors (MCVs) in Hong Kong, affecting investor perceptions of recent growth.

For Hong Kong-listed life insurers, there's a marked difference between the growth of New Business Value under EV and the New Business added to the Contract Service Margin (CSM) under IFRS 17. 

AIA's Value of New Business (VONB) grew by 31% to $4,034 million, whilst its New Business CSM increased by only 16% to $6,974 million. 

Prudential showed an even greater divergence, with New Business Value (NBV) up by 43% to $3,125 million, but New Business CSM grew by just 14% to $2,348 million.

This divergence highlights a key methodological difference between the two accounting regimes. 

EV considers management's expectations of real-world returns, discounted at a risk-adjusted rate, and is presented post-tax. 

In contrast, IFRS 17 is a risk-neutral regime, focusing only on underwriting profits, discounted at a risk-free rate with a liquidity premium, and presented pre-tax.

When applied to AIA and Prudential, IFRS 17 accurately measures the economic value of protection products but poorly reflects the value of savings products. 

Since both companies focus more on protection products compared to global peers, they perform well under IFRS 17, showing a higher CSM relative to equity. 

This discrepancy is crucial now, as the reopening of the Hong Kong border has significantly boosted sales of savings products to MCVs, becoming a more significant part of their new business growth.