HONG KONG -- Mark Tucker, the respected chief executive of AIA Group, surprised financial markets 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 48.8 Hong Kong dollars that day, while HSBC shares rose 2.1%.
The market reaction was perhaps less dramatic than expected given Tucker's achievements in turning around the troubled insurer and making it a leading pan-Asian player after the American International Group, better known as AIG, cashed out of AIA in a 2010 initial public offering to repay a U.S. government bailout of approximately $180 billion following 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 profits from new policies sold, quadrupled between 2010-2016, while its embedded value increased by 70%.
AIA can trace 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 China, many analysts were taken aback by the exit of Tucker, who joined AIA in 2010, three months before its $20.51 billion IPO, 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 deal 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 Tucker, 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. He then surrounded himself, both from within the organization, and outside the organization, with people who could execute in that direction," Jan van der Schalk, an analyst at brokerage CLSA, told the Nikkei Asian Review. "In many ways he is quite abrupt, bordering on the blunt," he said, but added that Tucker 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 AIA'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 said has been 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 continuity in business strategy 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, 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 suggesterd 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.
"The message that we are going to get from Keng [will be] a little bit different," said Van der Schalk, "subtly different from what we're getting from Mark."
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 from 62% to 48.8% from a year earlier. This was due to increased sales of long-term participating insurance policies, which pay a dividend to policyholders, but which usually carry lower margins.
Beijing has been increasing capital controls, which many believe will affect AIA's growth in Hong Kong, its biggest market, because it has relied on the buying of foreign-denominated assets there 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," Sally Yim, senior vice president at credit rating agency Moody's, told the Nikkei Asian Review. 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 10-15 years -- not a new thing." But he noted that growth among Hong Kong residents also remained strong.
Nomura International on April 10 said that it will maintain a "neutral" recommendation on AIA with a target price of HK$54.08 because it is harder for mainlanders to buy life insurance in Hong Kong, with growth outside China and Hong Kong rising by only 1% on a year-to-year basis 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 readjust its product mix. However, these policies continued to account for a high 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 regional financial center.
She said Singapore's proposed update in insurance risk-based capital framework, intended to strengthen regulator's management over insurers' risk exposure, might force market players to readjust their product mix. That includes reducing the sale of universal life policies, which are sensitive to interest rate movements as they offer guaranteed returns.
Intense Chinese competition
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 due to a growing middle class. 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," said Tucker. "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, which measures life insurance premiums as a percentage of gross domestic product. This compares with the 53 years it took in the U.S. "China is moving at a speed three times faster," said Tucker. "The size of the opportunity is big enough for many players to be part of that marketplace."
AIA Building on the Bund in Shanghai (Photo by Kenji Kawase)
Acting like shadow banks, China's insurers have grown by leaps and bounds in the past few years because of increased deregulation and the lack of alternative investment vehicles. Aggressive insurance policies promising generous returns have proliferated, along with new entrants. State-owned China Life Insurance, the country's leading insurer, has lost ground to the new entrants, with its market share falling to 19.9% last year from 45.3% a decade ago, according to the China Insurance Regulatory Commission.
The industry upheaval has led to disciplinary actions by the authorities. On April 9, Xiang Junbo, the chairman of the state insurance regulator, was detained for investigation. He had pushed through changes that broadened investment options for insurers, which had increased their exposure to high-risk assets, including acquiring large stakes in listed companies. Xiang was suspected of "serious disciplinary violations" by the Central Commission for Discipline Inspection, the Communist Party's anti-corruption agency.
One representative of an institutional investor, who asked not to be named, said that AIA has positioned itself differently from its Chinese rivals. Most domestic players, except for Ping An Life Insurance Group, have focused on selling investment or savings-type products through banking channels. "These products are generally lower margin and very sensitive to interest rate changes," she said, contrasting that against AIA's focus on agency channels and protection-type rather than savings-type products, which reduces the company's exposure to interest rate and investment volatility risks.
Despite being a foreign player with the rare privilege of having full operational control over its business in China, AIA had just 0.7% of the 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 (ICBC), the country's largest bank.
AIA was granted special treatment in 1992, where it was made exempt from finding a local Chinese partner. This privilege was offered thanks to then AIG chairman Greenberg's good relationship with Zhu Rongji, who was mayor of Shanghai at the time before becoming China's prime minister.
While AIA has been disciplined in maintaining profits despite losing market share, most analysts said that digital strategies are needed to grow in China. "Connecting with customers on such medium 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 had been 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, 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.
