AIA announces USD 10y subordinated bonds at IPG of T+155bps

Financial highlights

(All dollar values in USD and all growth rates are on a year-on-year (YoY) basis unless otherwise stated. AIA’s financial year ends in December each year, and the article will generally refer to FY23 data referring to the period ending in December 2023.)

AIA Group Ltd (AIA) plans to issue new USD 10y subordinated bonds at an initial price guidance of T+155bps (about 5.79% based on a 10y UST yield of 4.24%). The bonds will come with an optional call option 3 months before maturity subject to several conditions.

The issuer is rated A1 (Negative) by Moody’s, A+ (Stable) by S&P, and AA- (Stable) by Fitch. This new issue is expected to be rated A2 by Moody’s, A- by S&P, and A by Fitch. Proceeds from this new issuance will be used for general corporate purposes.

AIA is one of the largest life insurers in Asia, with operations in 18 markets across Asia-Pacific. It has total assets of $286b as of 31 December 2023. It is currently listed on the Hong Kong Stock Exchange with a market capitalization of HKD 618b as of 25 March 2024.

In FY23, AIA reported annualized new premiums at $7.7b, marking a significant +37% growth over the previous year in constant currency terms. Despite a weakening of margins from 57.0% in FY22 to 52.6% in FY23, AIA’s new business continued to generate significant profits in this period. FY23’s ‘value of new business’ (VONB) was reported at $4.0b, marking a significant +33% growth over the previous year in constant currency terms and a +30% growth in actual exchange rates (AER). This was particularly driven by the Hong Kong geographical segment, which reported $1.4b in VONB, which also marked a +82% growth over the previous year.

With the strong growth in new businesses, AIA reported a sizeable increase in embedded value (EV) operating profit too, from $6.8b in FY22 to $8.9b in FY23 (+33% in constant currency terms). VONB accounted for 45% of this increase in EV operating profit in FY23.

Looking at IFRS earnings, AIA’s total weighted premium income came in at $37.9b, a 7% increase over FY22 ($36.2b) in constant currency terms, and a +5% increase in actual exchange rates (AER). Its reported operating profit after tax (OPAT) came in at $6.2b in FY23, marking a slight -1% decrease in constant currency terms and a -3% decline in AER. To summarise the previous segments, we think that AIA’s financial performance remained fairly stable with robust growth observed through the ‘new business’ segments.

As of FY23, AIA’s Tier 1 group capital was reported at about $47.0b, while its total capital (‘eligible group capital resources’) was reported at about $73.2b. Both represented slight increases from the previous year, and management described these increases as ‘driven mainly by the in-force business capital generation and the effects of regulatory changes’.

Regarding regulatory changes, the group prescribed capital requirement did increase from $25.0b to $26.6b in FY23 as well, but the increases in capital levels in FY23 helped AIA maintain a robust LCSM (Local Capital Summation method) coverage ratio of 275% (FY22: 283%, Regulatory Requirement: 100%) and Tier 1 group capital coverage ratio of 345% (FY22: 355%).

AIA also conducted sensitivity analyses on its LCSM coverage ratios. As of FY23, they estimate a 10% increase/decrease in equity prices would lead to a 1pp increase/decrease in this ratio, while a 50bps increase/decrease in interest rates would lead to a 10pp decrease/increase in this ratio. We think these still give AIA a healthy buffer over regulatory minimums, and think AIA’s financial position remains fairly solid.

Thoughts on new issue

Investors should note that this new issue is a subordinated bond only available to accredited and institutional investors. More importantly, AIA is subjected to group capital requirements which can affect the payment of its coupons and principal. In the event of liquidity pressures that affect AIA’s ability to comply with such requirements, they may opt to defer their distributions and/or principal repayments without it constituting a default.

We estimate the IPG of T+155bps to be approximately 5.79% (based on a 10y UST of 4.24%), though we expect the eventual final price guidance (FPG) to come in slightly lower than this. With that being said, using the IPG for comparison, this new issue does have a slight yield pickup over the AIA’s Apr 2033 USD bonds (which yields about 4.93%), though this is attributed to the lower seniority (subordinated versus senior unsecured). Its IPG of 5.79% is also slightly higher than the yield of AIA’s Sep 2040 USD bonds, but if the FPG comes in slightly lower than the IPG, this may not hold.

We think this bond is likely suited for investors who are (i) confident in AIA’s long-term credit profile; (ii) looking for a slightly riskier option amongst AIA’s outstanding bonds; and (iii) comfortable with the fairly long duration exposure of this bond.

Table 1: Comparison against peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in FWDGHD 5.750% 09Jul2024 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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