AIA Group Ltd. Ratings Affirmed Following Agreement To Acquire CMLA And Sovereign Assurance

Stocks and Financial Services Press Releases Monday September 25, 2017 17:58
HONG KONG--25 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 25, 2017--S&P Global Ratings said today it affirmed its 'A' long-term and 'A-1' short-term issuer credit ratings on AIAGroup Ltd. (AIA Group), a Hong Kong-based non-operating holding company. The outlook on the long-term rating is stable. At the same time, we affirmed our 'A' long-term and 'A-1' short-term issue ratings on AIA Group's medium-term notes program.

We also affirmed our 'AA-' long-term local currency insurer financial strength and counterparty credit ratings on AIA Co. Ltd., AIA International Ltd. (including branches), AIA Reinsurance Ltd., and AIA Singapore Pte. Ltd.--all core operating subsidiaries of AIA Group. At the same time, we affirmed our 'A+' local currency long-term financial strength and counterparty credit ratings on AIA Australia Ltd., a highly strategic subsidiary.

For all of these entities, our outlook on the long-term ratings is stable.

The affirmation on AIA Group reflects our view that the Hong Kong-based insurance group's overall business and financial profiles will remain steady following its announced acquisition of Commonwealth Bank of Australia's (CBA) life insurance operations for A$3.8 billion (approximately US$3.03 billion) on Sept 21, 2017. These operations include the Colonial Mutual Life Assurance Society Ltd. (CMLA) in Australia and Sovereign Assurance Co. Ltd. (Sovereign) in New Zealand. We expect the transaction to complete in 2018, subject to regulatory and governmental approvals.

Following the acquisition, we anticipate that AIA Group's business franchise in Australia and New Zealand will strengthen. CMLA and Sovereign have leading positions within the Australian and New Zealand life insurance markets, respectively. In addition, the deal included a 20-year strategic bancassurance partnership agreement with CBA and ASB Bank Ltd., which we anticipate will allow AIA Group to strengthen its distribution network within Australia and New Zealand. We also consider CMLA's businesses to be complementary to AIA Australia Ltd.'s capabilities.

We consider the announced acquisition will have limited impact on AIA Group's financial profile given the group's strong capital position. We believe the transaction will be funded by a combination of reinsurance support, cash, and debt. After taking into account the proceeds from reinsurance agreements, and the free surplus within CMLA and Sovereign, the final net cash outlay by AIA Group will be around A$1.88 billion (US$1.5 billion). We anticipate the group's financial leverage will increase marginally and remain within our rating buffer.

The stable outlook reflects our view that AIA Group will maintain its extremely strong competitive position, including its excellent brand strength and market leadership in its respective markets of operations, and its strong capital and earnings position over the next two years. We expect AIA Group's overall reinsurance utilization will remain low throughout the same period.

We could lower the ratings if, contrary to our expectations, AIA Group's:

Capital and earnings position weakens to moderately strong from strong owing to its aggressive dividend policy, deterioration of the group's investment portfolio or from the group engaging in overly aggressive expansion. Risk position deteriorates to moderate from intermediate should the group undertake aggressive investments (reflected through an increase in investment leverage and unhedged foreign-exchange risk exposure).

While we consider a positive rating action to be remote in the next 24 months, we may raise the rating on the group if: Its capital and earnings position strengthen, while supported by a reduced dependency on softer forms of capital, andIts enterprise risk management (ERM) strengthens to a level that displays a capability to consistently identify, measure, and manage risk exposures and losses within chosen risk-tolerance levels.

At the same time, we believe a more integrated approach towards ERM will enhance the capital and earnings quality of the Group.

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