April 20, 2017 10:00 am JST

Company in focus: AIA's chief passes the torch -- and some big challenges

To maintain momentum, insurer needs sharper China and digital strategies

JOYCE HO, Nikkei staff writer

AIA Group headquarters in Hong Kong's financial district © AP

HONG KONG Mark Tucker, the well-regarded chief executive of AIA Group, surprised investors on March 13 when he announced that he was leaving one of the world's largest life insurers by market value for HSBC, the struggling international bank. AIA's Hong Kong-listed shares fell 2.98% to 48.80 Hong Kong dollars that day, while HSBC shares rose 2.14%.

The market reaction was perhaps less dramatic than it might have been, given Tucker's achievements. He turned a troubled insurer into a leading Pan-Asian player, after American International Group, better known as AIG, cashed out of AIA in a 2010 initial public offering. The IPO was conducted to repay a roughly $180 billion bailout the U.S. government provided in the wake of the 2008 global financial crisis.

AIA had seen its share price more than double since its IPO in October 2010. Its value of new business, which measures the current value of present and future profits from new policies sold in a given year, quadrupled from 2010 to 2016, while its embedded value increased by 70%.

AIA traces its roots to Shanghai, where American entrepreneur Cornelius Vander Starr established a fire and marine insurance agency in 1919 that later grew into the global insurance and financial services group AIG under Maurice Greenberg.

Although AIA is still seen as having growth potential -- as it moves from mature markets into emerging ones such as mainland China -- many analysts were taken aback by the exit of Tucker, who joined AIA three months before its $20.51 billion IPO, which was priced at the top end of its range. Its shares spiked 17% on the first trading day, giving AIA a market valuation above the $35.5 billion offer made by British rival Prudential in an unsuccessful takeover bid in the first half of 2010.

Tucker's "stepping down is a disappointment and a negative surprise to the market," said Esther Chwei, an analyst at Deutsche Bank. The 59-year-old executive, who is British and once was a professional soccer player, started his financial career at PwC, where he qualified as an accountant, before joining Prudential in 1986. He also has served as a board member at Goldman Sachs since late 2012.

"He took over an organization that was somewhat directionless, and he very clearly articulated the direction," said Jan van der Schalk, an analyst at brokerage CLSA. "He then surrounded himself, both from within the organization and outside the organization, with people who could execute in that direction."

While Tucker can be "quite abrupt, bordering on the blunt," Van der Schalk added, he is "revered by the people who work with him."

Advising investors to "resist the hunger to pine for what once was," van der Schalk has raised his target price for AIA to HK$64. He cited the insurer's "decentralized, federal model" in helping maintain regional oversight and called Ng Keng Hooi, the incoming chief executive, "the right successor" because of his "collegiate," "knowledgeable" and "disciplined" qualities.

Currently the group's regional chief executive, the 62-year-old Ng, who is Malaysian, oversees AIA's businesses in China, Indonesia, Thailand, Taiwan, Brunei and Singapore. He joined AIA in October 2010 and also supervises the group's agency distribution business, which Tucker has called a key to the company's success. With a presence in 18 Asian markets, AIA said in its 2016 annual report that around 70% of its new business value, totaling $2.75 billion, came from agency distribution.

Ng has spent 20 of his 37 years in the Asian insurance industry working closely with Tucker, first at Prudential. They jointly managed Prudential's Asian unit, which was founded by Tucker, and acquired full ownership of a Malaysian business in the aftermath of the 1997 Asian financial crisis. Ng went his own way in 2008, when he became chief executive of Singapore-listed Great Eastern Holdings and oversaw a compensation settlement of nearly $600 million for thousands of retail investors who had bought products linked to collateralized debt obligations and suffered huge losses.

Analysts see Ng as representing both strategic continuity and a shift in focus after six years of breakneck growth under Tucker. "We foresee a few markets taking the baton from Hong Kong offshore business in terms of AIA's growth momentum," wrote Leon Qi, an analyst at Daiwa Capital Markets, in a note on Feb. 27. "We believe its diverse portfolio, notably China and Malaysia, are the reasons for this good start."

Van der Schalk suggested that AIA's growth will inevitably slow, but investors will likely be compensated by higher dividend payments. After it recorded a 50.6% jump in net profit to $4.16 billion last year, the group proposed increasing its dividend payout to a record 63.75 Hong Kong cents per share, almost triple what it paid after its listing in 2010.

SHIFTING GEARS Slower growth is most evident in mature markets such as Hong Kong and Singapore, with Hong Kong accounting for 40% of the group's value of new business last year and Singapore 11%. While the Hong Kong market registered a 42% jump in new business value, the margin from its new business value fell to 48.8%, from 62% a year earlier. This was due to increased sales of long-term participating insurance policies, which pay a dividend to policyholders but usually carry lower margins.

Many believe Beijing's tighter capital controls will affect AIA's growth in Hong Kong, where it has relied on purchases of foreign-denominated assets by mainland Chinese in recent years. Last October, the offshore unit of UnionPay, China's leading debit and credit card operator, announced it would ban overseas transactions related to investment-linked insurance policies.

"It's more difficult for people to wire money out now. Even when they do a bank transfer, the banks would ask quite a lot of questions, because of more scrutiny from the regulators," said Sally Yim, senior vice president at credit rating agency Moody's. Yim said AIA's strong growth last year was largely fueled by mainland Chinese rushing to buy policies in Hong Kong for investment diversification and moving assets offshore amid tighter capital controls.

Mainlanders made up around 50% of AIA's Hong Kong business last year, according to Tucker. This compared with 37% for the entire local insurance industry during the first three quarters. "What you've seen in Hong Kong is a strong track record of delivery across a wide range of the customer segment," Tucker told reporters on Feb. 24 in releasing the company's results. "The mainland segment has been part of the strength in Hong Kong for 10 to 15 years -- not a new thing." But he noted that growth among Hong Kong residents also remained strong.

Nomura International on April 10 said it will maintain a "neutral" recommendation on AIA, with a target price of HK$54.08 -- noting weaker prospects for mainlanders to buy life insurance in Hong Kong, and that year-on-year growth outside China and Hong Kong came to only 1% in fiscal 2016. Nomura forecast that AIA Hong Kong's new business value will decline by 13% this year, slowing the group's overall growth to 4% from 25% last year, on an actual exchange rate basis.

In Singapore, AIA saw a 7% decline in new business value, while margins increased 1.4 percentage points to 74.1%. The deterioration was largely due to reduced sales of single-premium policies as part of an effort by AIA to adjust its product mix. However, these policies continued to account for a large portion of AIA's Singapore business last year, representing 34% of its annualized new premiums.

Eunice Tan, director for financial services ratings at S&P Global Ratings, said a lot of AIA's single-premium sales are universal life policies, often acquired by wealthy individuals as part of their legacy planning. This reflects Singapore's plan to become a hub for private banks and a regional financial center.

She said Singapore's proposed update to the risk-based capital framework for insurers, intended to strengthen regulators' management over risk exposure, might force market players to modify their product mixes. That includes reducing the sale of universal life policies, which are sensitive to interest rate movements, since they offer guaranteed returns.

MAINLAND RACE With subdued growth in mature markets, AIA's next growth engine is expected to be China and other emerging economies such as Indonesia and Malaysia, with their expanding middle classes. Last year, the new business value of AIA's China business rose 54% to $536 million from a year earlier.

"China will be our biggest business at some point, and it will be bigger than the Hong Kong business at some point, but that will be in the future," Tucker said. "This is a market that has doubled in size since 2000 and will double again in size by 2020."

He estimated that it will take China 15 years to reach a 7% insurance penetration rate -- a gauge of life insurance premiums as a percentage of gross domestic product. It took 53 years in the U.S. "China is moving at a speed three times faster," Tucker said. "The size of the opportunity is big enough for many players to be part of that marketplace."

Despite being a foreign player with the rare privilege of having full operational control over its business in China, AIA controlled just 0.7% of a mainland market that collected 2.17 trillion yuan ($320 billion) in premium income last year. It has ranked second among foreign-affiliated insurers since 2013, behind French insurer AXA, which has partnered with Industrial and Commercial Bank of China, or ICBC, the country's largest bank.

AIA was granted special treatment in 1992, and exempted from finding a local Chinese partner. This privilege was offered thanks to then-AIG Chairman Greenberg's good relationship with Zhu Rongji, who had been mayor of Shanghai and went on to become China's premier.

While AIA has been disciplined in maintaining profits amid intense competition, most analysts said new digital strategies are needed to grow in China. "Connecting with customers on such mediums as WeChat is extremely important," said Benjamin Quinlan, chief executive of Quinlan & Associates, a financial services consultancy in Hong Kong.

Quinlan said that while AIA was the first in the industry to incorporate digital strategies in the underwriting process, it was now only "keeping pace" with its peers and lagging behind leaders such as AXA and Ping An Insurance Group, which have more comprehensive strategies in using big data.

Restoring the company's digital edge is just one of the many challenges incoming CEO Ng will have to tackle if he hopes to fill the void left by Tucker.

Asia300

AIA Group Ltd.

Hong Kong

Market(Ticker): HKG(1299)
Sector:
Industry:
Finance
Life/Health Insurance
Market cap(USD): 88,936.5M
Shares: 12,074.1M
Asia300

Ping An Insurance (Group) Co. of China Ltd.

China

Market(Ticker): HKG(2318)
Sector:
Industry:
Finance
Multi-Line Insurance
Market cap(USD): 128,698M
Shares: 18,280.2M
Asia300

Industrial & Commercial Bank of China Ltd.

China

Market(Ticker): HKG(1398)
Sector:
Industry:
Finance
Major Banks
Market cap(USD): 260,509M
Shares: 356,406M
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