November 23, 2017 / 7:31 AM / a year ago

Fitch Upgrades AIA Group's IDR to 'AA-', Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 23 (Fitch) Fitch Ratings has upgraded AIA Group Limited's (AIA) Long-Term Issuer Default Rating (IDR) to 'AA-' from 'A+' and affirmed the Insurer Financial Strength Ratings of AIA Company Limited and AIA International Limited at 'AA'. The Outlook is Stable. The upgrade of AIA's IDR follows ongoing discussions with management, and Fitch's expectation that the group will maintain low financial leverage and very strong fixed-charge coverage. Fitch has therefore closed the gap between the IDR on the holding company and the implied insurance operating company's IDR. This was done by raising the holding company's IDR by one notch. KEY RATING DRIVERS The issuer ratings reflect AIA's very strong market franchise and financial performance, conservative investment mix and very strong capitalisation. AIA and its subsidiaries comprise one of the largest life insurance groups in Asia-Pacific, with a presence in 18 markets. The group offers a range of products and services, and serves the holders of more than 30 million individual policies and over 16 million participating members of group insurance schemes through agents, partners and employees across the region. Overall persistency remained strong, at 95% as of May 2017, reflecting a very strong and sustained market franchise. Pre-tax operating return on assets remained very strong at 3.7% (annualised) for the six months ended May 2017 and 2.8% in the financial year ended November 2016 (FY16), versus the median of 1.4% for Fitch's 'AAA' rating category. This was attributable to robust insurance underwriting and fee-based profits due to prudent underwriting and successful customer outreach. AIA's quality investment portfolio with moderate equity exposure and a high level of currency matching between assets and liabilities underpins the persistently low earnings volatility. Annualised new premiums (ANP) increased by 37% (yoy, on a constant-exchange-rate basis) to USD3.2 billion in 1H17, with regular premiums accounting for more than 90% of total ANP. This supported the strong 42% (yoy, on a constant-exchange-rate basis) expansion in value of new business to USD1.8 billion. Bond investments accounted for 80% of total invested assets at end-May 2017, including a significant portion in government and government agency bonds. Securities in the bond portfolio were rated at 'A' on average. Equity exposure remained low at 12% of total investments. Risky assets, including stocks, property, and non-investment-grade and non-rated bonds, represented about 69% of adjusted equity, generally in line with Fitch's median ratio for an 'AA' IFS Rating. AIA Company Limited's solvency ratio stayed at 427% at end-May 2017, higher than the statutory minimum requirement set by the Hong Kong regulator. The group's consolidated capital score, as measured by Fitch's Prism Factor-Based Capital Model, reached "Very Strong" at FYE16, with operating leverage of 4x, well below the median score of 11x for an 'AA' IFS Rating. AIA has good access to capital markets as a listed company on the Hong Kong Stock Exchange. It has established its presence in the bond market through regular note issuance from its MTN programme, with proceeds used for general corporate purposes. Fitch expects AIA to consistently maintain low financial leverage at below 16% (9% at end-May 2017), although the planned external debt financing to fund part of the proposed acquisition of Commonwealth Bank of Australia's (AA-/Stable) life and health insurance businesses may marginally increase the group's leverage ratio. RATING SENSITIVITIES Downgrade rating triggers include significant deterioration in financial performance, with pre-tax operating return on assets at below 1%, financial leverage increasing to above 20% on a consolidated basis and below investment-grade bonds/adjusted equity rising to above 40% for an extended period. An increase in financial leverage to 16% or above or a sharp decline in fixed-charge coverage on a sustained basis will likely trigger a downgrade of AIA's IDR to return to a standard one notch gap between the IDR on the holding company and the implied insurance operating company's IDR. Fitch sees an upgrade as unlikely in the near term. Upgrade triggers include a significant improvement in the industry profiles and operating environments of the markets AIA is in, together with very strong and sustained financial performance and very strong capitalisation, with Fitch's Prism Factor-Based Capital Model score well into the "Extremely Strong'' category. Contact: Primary Analyst Joyce Huang, CFA Director +852 2263 9595 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terrence Wong Director +852 2263 9920 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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