AIA CEO outlines growth strategies, but is short on detail

As the pan-Asia life insurer opens the retail portion of its $13.9 billion to $20.6 billion IPO and kicks off the marketing to US institutional investors today, sources say the entire deal, including the upsize option, is already covered.
Mark Tucker addresses the Hong Kong media via video link
Mark Tucker addresses the Hong Kong media via video link

In the words of new chairman and CEO, Mark Tucker, AIA Group’s ongoing initial public offering is “a critical turning point” for the company, not just because it will help separate the pan-Asia life insurer from its troubled US parent, but also because it marks the starting point in the public eye for the new management and its focus on achieving faster growth.

The deal could raise more than $20 billion and will value AIA at between $28.6 billion and $30.7 billion, depending on the final IPO size.

Ahead of the launch of the retail portion of the offering today, Tucker yesterday told the Hong Kong media how he plans to make the most of AIA’s unique pan-Asia presence and scale to grow its profits. The plans include a focus on organic growth; an expansion into second and third tier cities as well as a fresh recruitment strategy in China; an increased focus on bancassurance via a move towards long-term strategic partnerships, such as that struck with Industrial and Commercial Bank of China (ICBC) in September; leveraging the firm’s licences for Islamic takaful and Shar’iah products in Malaysia and Indonesia; and an increase of the proportion of high-margin products.

Speaking via a video link from San Francisco, he noted that the firm has announced a number of growth initiatives over the past eight to 10 weeks, but didn’t elaborate. Details will be revealed in due course, he said.

He also declined to provide any further details about the firm’s relationship with ICBC, saying only that it will give AIA access to more bank branches in China, and shunned questions about how he plans to deal with the capital outflow restrictions that the company operates under in some of its markets. These restrictions make capital redeployment between different countries and different parts of its business a challenge, may limit dividend payouts and have led to AIA owning large portions of the local government bond markets in certain counties, such as Thailand.

However, deeming from the response to the deal so far, investors seem willing to accept the new CEO’s word – supported by his track record of having successfully built Prudential’s business in Asia over the course of a decade – that AIA will be able to step up its game and capture the opportunities that stem from the region’s economic growth and its low density of life insurance.

According to sources, the base deal of up to HK$115.3 billion ($14.9 billion) was covered after the first day of institutional marketing and, as of now, almost two weeks later, the order amount is large enough to also cover the 20% upsize option – and that is before the formal marketing to US investors has even started. The four global coordinators are also said to have stopped accepting orders with price limits last week, suggesting they are preparing for a possible pricing at the top of the indicated range.

If the price is fixed at the top, and the upsize option is also exercised in full, the IPO will raise as much as $17.9 billion. Add in the 15% overallotment option and the total proceeds will increase to $20.6 billion. That would make it the second largest IPO in the world this year after Agricultural Bank of China’s $22.1 billion offering in July and also the largest listing in Hong Kong ever, ahead of ICBC’s $16 billion H-share IPO in 2006. The rest of ICBC’s $21.9 billion IPO was made up of Shanghai-listed A-shares. Agricultural Bank of China also sold part of its offering in the domestic market, raising only $12 billion from the Hong Kong market.

A top-end pricing and full exercise of the upsize option would clearly be desirable from the point of view of AIA’s parent company, American International Group, which is on a quest to raise enough capital to repay the $182.3 billion government bailout that it received in 2008. All the shares sold in the IPO are secondary shares currently held by AIG, meaning it will receive all the proceeds from the offering after expenses.

From the investors’ point of view, the use of the upsize option would also mean that AIG’s stake in AIA will come down by a corresponding amount, reducing its influence over the Asian unit. AIG currently owns 100% of AIA, which will be reduced to 51.4% following the sale of the base offering. If the upsize and overallotment options are also exercised in full, that stake will fall to 32.9%. And since there is seemingly sufficient demand to cover an upsized deal at the top of the range, there is really little reason not to go ahead and take advantage of this opportunity – especially since AIG is expected to eventually divest its entire stake in the company. It will be subject to a lockup after the IPO, but will be allowed to sell 50% of its remaining shares 12 months after the listing and the other 50% after 18 months.

Because of the large size of the deal, AIA is seeing strong demand from funds that benchmark themselves to the various indices that the stock is expected to go into, including the MSCI Asia and Hong Kong’s blue-chip Hang Seng Index. But an attractive valuation is also seeing other global long-only funds, hedge funds and private banking investors drawn to the deal, sources say.

The base deal comprises 5.857 billion AIA shares, or 48.6% of the company, which are offered at a price between HK$18.38 and HK$19.68 apiece. This values the Asian life insurer at 1.23 to 1.32 times its embedded value (EV) for 2010, which is estimated at $23.12 billion, based on the joint bookrunner average. The embedded value estimates the net worth of life insurance companies based on today’s net asset value, including the present value of profits from future premiums paid by existing policyholders, but excluding new business.

The price range pitches AIA at a similar valuation to other regional players, such as Axa Asia Pacific Holdings or Southeast Asia-focused Great Eastern, but well below the price-to-EV multiple of 1.5 that analysts tend to view as fair value. It is also offered significantly cheaper than the fast growing Chinese life insurers, which are valued at between 2.0 and 2.7 times embedded value. The final price will be fixed after the close of US trading on October 21 and the trading debut is scheduled for October 29.

Ten percent of the offering has been earmarked for Hong Kong retail investors through the public offering that will run until Thursday. The retail tranche may, however, be increased to a maximum of 25% of the base deal through a clawback mechanism in case of strong demand.

As reported earlier, AIA has also signed up five cornerstones, which have jointly committed to buying $1.92 billion worth of stock with a six-month lockup. The largest among them is the Kuwait Investment Authority, which will buy $1 billion worth of stock.

With more than 23 million individual policies and a presence in 15 Asian markets – it has a number one position in six – AIA is the leading life insurance company in Asia. And even though it is currently only allowed to operate in two provinces in China as well as in Shanghai, Beijing and Shenzhen, it is the largest foreign life insurer in the country based on premiums received in 2009 as well as the only foreign life insurance company with 100% ownership of its Chinese business.

As of May this year, it had total assets of $95.7 billion and an embedded value of $22 billion. Tucker said yesterday that the company is expected to generate an operating profit of at least $2 billion in the fiscal year to November 2010, following a first-half operating profit of $1.1 billion. If this materialises, 2010 will be a record year for AIA. In fiscal 2009, it reported an operating profit of $1.8 billion.

Citi, Deutsche Bank, Goldman Sachs and Morgan Stanley are joint global coordinators, as well as bookrunners together with Bank of America Merrill Lynch, Barclays Capital, CIMB, Credit Suisse, ICBC International, J.P. Morgan and UBS.

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