According to Jiuji Financial News, on March 29, Moody's granted an “A3 (hyb)” rating for sub-prime perpetual securities issued under the AIA Group Limited (“AIA”, 01299.HK, A2 Stable) MTN program.
Ratings rationale
The “A3 (hyb)” rating of a sub-prime perpetual security reflects that the debt will represent the issuer's direct, unconditional, unsecured, and subprime debt. This rating is one level lower than AIA's “A2” issuer rating because the securities are subject to the claims of all senior creditors.
This also reflects the fact that the note has an optional coupon skip mechanism (optional coupon skip mechanism), and at the same time, a certain equity weight is determined under Moody's debt equity continuum based on the bill's maturity time, coupon deferral characteristics, and dependency relationships.
AIA intends to use sub-prime perpetual securities as regulated T2 capital under the “Hong Kong Group Regulatory Framework”, which will be implemented on March 29, 2021.
After issuance, Moody's anticipated that due to AIA's strong capital base and the equity weight of hybrid securities, its financial leverage ratio would only increase slightly after adjusting its estimates. This level will remain within Moody's expectations for current ratings.
The issuer rating of AIA Insurance is “A2,” which is three sub-levels lower than the financial strength rating (IFSR) of its operating companies, AIA Company Limited (AA2 stable) and AIA International Limited (“AIA International” for short, “AA2 stable”, financial strength: stable financial strength: Aa2). This is consistent with Moody's typical rating adjustment practices for insurance holding companies operating mainly in jurisdictions where a single regulation is in effect. The difference in ratings reflects that compared to policyholders of AIA Insurance Co., Ltd., the sole direct subsidiary of AIA, AIA creditors face structural subordination. If AIA defaults, it may result in greater losses.
AAIA Limited and AIA International's “Aa2” IFSRs reflect the group's strong profit record, solid capital levels, and excellent brand recognition in most markets. Its good access to capital markets and low financial leverage also provided the insurer with strong financial flexibility.
These advantages are offset by its relatively large operations in less developed countries, where business risk and volatility are higher.
Although new business growth in the region is likely to slow and market volatility may increase due to channel disruptions due to the pandemic, the “stable” outlook for AIA and its subsidiaries at the entity level reflects its solid capital position, continued account profit, and strong geographical diversification.
Factors that may cause ratings to rise or fall
If AIA Limited and AIA International's IFSRs are raised, AIA's issuer and debt ratings will be raised.
The IFSR of AIA Limited and AIA International is already at a very high level, and the possibility of further increases in the near future is limited. Nevertheless, if the operating environment in some of the less developed markets where these two companies are located improves significantly, and their current strong business and financial position is maintained, the IFSRS is likely to be raised.
Furthermore, the issuer rating gap between AIA and the two companies is likely to narrow if (1) investment in liquidity holding companies, which account for more than 75% of its outstanding debt, continues to increase; (2) the group is divided into a more hierarchical structure so that dividends can flow from its different subsidiaries to the group rather than just from AIA Limited; and/or (3) strengthened group-wide supervision in Hong Kong, China plays a role in AIA.
On the other hand, if (1) the operating environment of major markets deteriorates further; (2) sales in many of its markets slow down sharply, leading to a sharp drop in profit and capital generation; for example, its return on capital remains below 8%; (3) the adjusted financial leverage ratio of AIA rises to 20% or more; (4) the acquisition of large amounts of debt financing or a significant increase in acquisitions in less developed markets, and AIA's risk exposure increases; (5) AIA's capital adequacy ratio falls sharply and its capital/assets remain below 12% after the adjustment, then AIA, AIA and AIA Ltd. International issuers and debt ratings are likely to be downgraded.
AIA provides diversified life insurance products in 18 markets in the Asia Pacific region. These products include traditional individual life, group life and medical insurance, credit life, accidents, and health and investment-related products sold through bundled agents, bank insurance, brokers, and direct marketing channels. As of December 31, 2020, AIA's total assets and shareholders' equity were US$326.1 billion and US$63.7 billion, respectively.