The financial performance of AIA Group (AIA) is ‘Very Strong’ in light of its broad earnings sources, notes Fitch Ratings in a report released last week.
AIA’s after-tax operating profit increased by 5% year on year to $2.9bn in 1H2020 despite a decline in the value of new business (VNB) due to the measures to contain the coronavirus pandemic, which constrained its new business generation. The group’s VNB decreased by 34% y-o-y on a constant exchange basis to $2.1bn in 3Q2020 while its VNB margin dropped by 12.6 percentage points to 53.4%.
The annualised return on assets (pretax) in 1H2020 amounted to 1.9%, still well above the guideline for the same rating category. Fitch expects stable insurance underwriting and fee-based profit, positive investment spreads, and diverse geographical earnings sources to continue to contribute favourably to the group’s operating stability.
Fitch has affirmed the Insurer Financial Strength Ratings of AIA Co, AIA International and AIA New Zealand at ‘AA’ (Very Strong) and the Long-Term Issuer Default Rating (IDR) of AIA at ‘AA-‘. The outlook on the ratings is stable.
At the same time, Fitch has affirmed the ‘A+’ long-term rating on AIA’s global medium-term note and securities programme. Fitch has also affirmed AIA’s $1bn 3.375% senior unsecured notes due 2030 and the $1.75bn 3.2% subordinated securities due 2040 at ‘A+’ and ‘A’, respectively.
The rating affirmation reflects AIA’s ‘Very Strong’ capitalisation, ‘Most Favourable’ business profile, and prudent investment approach, says Fitch. The ratings also consider AIA’s wide earnings sources despite the interruption of new business generation due to the avoidance of face-to face interaction as a result of the coronavirus pandemic.
AIA maintained a strong capital buffer on a consolidated basis to withstand the asset volatility and support the ongoing business growth of its insurance subsidiaries throughout APAC.
Fitch estimated that AIA’s consolidated capital score, in terms of the Prism model, stood at the ‘Very Strong’ category at end-June 2020 due primarily to a prudent investment mix and low operating leverage. AIA Co and AIA International had solvency ratios of 328% and 298%, respectively, at end-June 2020, well exceeding the 100% regulatory minimum in Hong Kong.
Fitch estimated AIA’s financial leverage would have increased to about 13% on a pro forma basis from 11% at end-1H20 after the issue of the $1.75bn subordinated securities in September. AIA reported a 350% cover ratio of the group’s available capital to its minimum capital requirement under the local capital summation method (LCSM) at end-1H2020. The calculation of the group’s LCSM cover ratio is based on AIA’s understanding of the likely application of a new group-wide supervision capital framework to the insurer as a whole.
Fitch ranks AIA’s business profile as ‘Most Favourable’ against that of other life insurers in Hong Kong due to its vast operating scale, strong brand name, leading business franchise, and highly diversified market coverage. As such, Fitch scores AIA’s business profile at ‘aa’ under the agency’s credit-factor scoring guidelines.
The group has highly diversified sources of business with a presence in 18 regions in APAC. AIA has a leading position in several core markets such as Hong Kong and Thailand due to its strong distribution capability and successful customer outreach. Fitch expects AIA’s business from China to expand further although its market presence in mainland China by direct written premiums remains small.
AIA completed the conversion of its Shanghai branch into a wholly owned life insurance subsidiary in October 2020. Fitch believes the conversion to an operating subsidiary from a branch will give AIA greater flexibility in executing its business expansion strategy in China.
Fitch regards AIA Co, AIA International and AIA NZ as AIA’s core operating entities under its group rating methodology; their IFS Ratings are based on Fitch’s assessment of the financial strength of AIA as a whole.