September 28, 2017 / 7:42 AM / a year ago

Fitch Affirms AIA After Proposal on Buying CBA's Life Business

(The following statement was released by the rating agency) HONG KONG, September 28 (Fitch) Fitch Ratings has affirmed AIA Company Limited's and AIA International Limited's Insurer Financial Strength Ratings of 'AA' and AIA Group Limited's (AIA) Long-Term Issuer Default Rating of 'A+'. The Outlook is Stable. The ratings affirmation reflects our view that AIA's credit profile will remain solid following the proposed acquisition of Commonwealth Bank of Australia's (CBA; AA-/Stable) life insurance business in Australia and New Zealand, including The Colonial Mutual Life Assurance Society Limited (CMLA) and Sovereign Assurance Company Limited (Sovereign). AIA expects the transaction to be completed in 2018, subject to regulatory and governmental approvals. In addition, it will enter into 20-year strategic bancassurance partnerships with CBA in Australia and ASB Bank Limited (ASB; AA-/Stable) in New Zealand. KEY RATING DRIVERS Fitch considers the impact of the acquisition on AIA's financial position to be minimal due to the acquired entities' relatively small size and manageable capital needs for the acquisitions. The gross consideration to be paid for the transaction is AUD3,800 million (USD3,036 million). AIA expects the final net cash outlay will be about AUD1,882 million (USD1,503 million) after taking into account the proceeds from reinsurance agreements and the free surplus within the two entities. AIA plans to use external debt financing to fund part of the net cash payment. This will marginally increase the group's financial leverage and we believe the ratio will remain below 15%, based on end-May 2017 balance sheet capital. Aggregated net profit after tax for the full financial year ended 30 June 2017 for CMLA and Sovereign was USD180 million, representing 4.3% of AIA's FY16 (year ended November 2016) earnings. Their aggregated shareholders' equity as of end-June 2017 was equivalent to 4.7% of AIA's equity base as of end-May 2017. The proposed transaction will further strengthen AIA's leading market position in the Asia-Pacific region. AIA will become the top-ranked life insurance provider in both Australia and New Zealand's life protection markets following the acquisitions. CMLA (established in 1873) is one of the largest insurance providers in Australia, while Sovereign (established in 1989) is the largest life insurer in New Zealand. CMLA held an 11% share (by life risk in-force gross premium income as at end-2016) in the Australian life protection market and Sovereign had a 27% market share in New Zealand by life risk in-force premium income as at end-June 2017, and a 33% bancassurance market share in 2016. The bancasurrance partnerships will expand AIA's distribution network and customer reach in Australia and New Zealand. It will have access to the 13 million existing bank customers (a number equal to more than 40% of the combined population of the two countries) of CBA and ASB and the two banks have more than 1,200 branches across the region. RATING SENSITIVITIES Rating downgrade triggers include significant deterioration in financial performance, with pretax 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. 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 sustained financial performance and strong capitalisation, with Fitch's Prism Factor-Based Capital Model score well into the "Extremely Strong'' category ("Very Strong" at FYE16). 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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