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AIA Group Stakes Its Claim for Leadership of Asia’s Insurance Market

CEO Mark Tucker is using his newfound independence from AIG to expand the Hong Kong insurer’s franchise across the region.

WHEN MARK TUCKER, CHIEF EXECUTIVE OF AIA GROUP, GOT WIND LAST March that several European insurers were looking to sell their Asian assets, he immediately told his senior executives to give chase. Within weeks reports came back that Dutch financial services outfit ING Group was preparing to put its Asian operations up for sale. Tucker sent a team of executives to Amsterdam to begin talks, well ahead of half a dozen rivals.

After seven months and thousands of hours of negotiations, AIA emerged victorious on October 11, prevailing against rival offers from Canada’s Manulife Financial Corp. and a consortium backed by Richard Li, son of Hong Kong billionaire Li Ka-shing. Instead of buying all of ING’s Asian operations, however, AIA cherry-picked and bought only the Dutch group’s Malaysian subsidiary, one of its most profitable Asian units, paying $1.73 billion, or 1.6 times estimated 2012 earnings. The deal, completed in October, vaulted AIA from the No. 4 spot to become the largest insurer in Malaysia and is expected to increase group profits by 6 percent.

“Some people said we overpaid, but I disagree,” Tucker tells Institutional Investor in an interview in the top-floor executive boardroom at AIA Central, the group’s 35-story glass-tower headquarters building in Hong Kong’s Central district. “The acquisition is accretive. We have greater opportunities for synergy than others and begin making money immediately. You just have to look at the multiples paid elsewhere to get a sense of the value generated.”

 
 AIA Group CFO Garth Jones (left) and IR head Paul Lloyd

Tucker’s brash confidence is a sign of the new era at AIA. Although the company has long enjoyed an enviable Asian franchise, the insurer’s future was clouded in recent years by the turmoil surrounding its former parent, American International Group. AIA spent much of 2010 on the auction block as AIG desperately tried to sell assets; the ownership uncertainty sapped morale and stalled the group’s growth.

Today the company has swept those doubts aside. Recruited in July 2010 by AIG’s chief executive, Robert Benmosche, to turn AIA around, Tucker, a former CEO of British insurer Prudential, has done so with aplomb. He steered the company to a successful $20.5 billion initial public offering in just three months’ time and in the process helped AIG repay a chunk of its massive $182.3 billion U.S. government bailout. With his bold Malaysian gambit, as well as the $109 million acquisition of the Sri Lankan business of the U.K.’s Aviva in September, Tucker has sent a clear signal that AIA is back on the growth track as predator, not prey.

“We are looking to deliver quality, sustainable organic growth,” Tucker says. “But we will also be prudently opportunistic. If there are high-quality assets that come up and if it makes both financial and strategic sense for our shareholders to acquire them, we will do so. You saw that in Malaysia and Sri Lanka.”

Both deals take AIA, which is the largest pan-Asian insurer outside Japan and China, more deeply into the region’s fast-growing emerging markets. Analysts welcome Tucker’s expansion efforts. “We see AIA’s recent acquisitions as strategically sensible, as they highlight its pro-growth strategy,” says Darwin Lam, a Hong Kong–based analyst at Citigroup. “Currently, only about half of AIA’s geographical markets are developing markets. By acquiring insurance assets in Sri Lanka and Malaysia, this will increase its share in the faster-growing developing markets and hence uplift AIA’s long-term growth potential.”

Analysts say the company is poised for further growth. Even after its recent acquisitions, AIA has no debt and is sitting on $3.8 billion in surplus cash. That puts the company in a commanding position to take advantage of European insurers’ continued withdrawal from the region by making further purchases, says Arjan van Veen, a Hong Kong–based analyst for Credit Suisse.

“The company is now very, very financially sound,” says van Veen. “It has an AA rating at a time when AA is difficult to get.”

AIA posted a 10 percent increase in net income in the six months ended May 31, 2012, to $1.44 billion. Annualized new premiums rose 9 percent, to $1.2 billion. The gains reflected strong growth in Hong Kong, where the value of new business rose 55 percent, to $140 million; Thailand, where new business was up 54 percent at $131 million; and Singapore, which posted a 65 percent increase to $99 million.

With a share price of HK$30.70 ($3.96), up from HK$25 a year ago and 56 percent above the IPO price, AIA’s market capitalization has ballooned to more than $47 billion, rapidly approaching the same size as AIG, which is currently valued at about $55 billion and posted net income of $7.6 billion in the first nine months of 2012.

The success of AIA has impressed many veteran sales managers who were initially skeptical about Tucker because of his lengthy experience at Prudential, a rival that tried and failed to buy AIA in 2010. “We had no idea the company would succeed upon an IPO,” says one senior sales manager, who spoke on condition of anonymity. “The global financial crisis was upon us, and the IPO was really an act of desperation. But there is no question Tucker has done an outstanding job. A few years ago rivals came to headhunt our best salespeople. Today we are headhunting the best from among our rivals.”

AIA ENJOYS A LEGENDARY HERITAGE in Asia. The company was founded in 1919 by American entrepreneur Cornelius Vander Starr, who launched an insurance agency from a little office on Shanghai’s storied Bund. He quickly broadened his ambitions across Asia, opening offices in Hong Kong and Singapore in 1931, Malaysia in 1933 and   Thailand in 1938. Eleven years later, however, advancing troops from Mao Zedong’s People’s Liberation Army forced the entrepreneur to flee Shanghai for New York, where he refounded the business as American International Group and expanded insurance sales to the U.S.

AIA thrived under AIG’s parentage until the financial crisis, when the American giant was brought down by its excessive exposure to U.S. subprime mortgage securities and related credit default swaps. In August 2009, after a year of management turmoil, the U.S. government appointed Benmosche CEO and charged him with restructuring the company and reimbursing taxpayers for the unprecedented bailout (Institutional Investor, November 2012). As the group’s largest and most valuable asset, AIA was bound to play a critical role in AIG’s recovery.

It’s easy to see why Benmosche tapped Tucker for the AIA job. A 55-year-old Briton, Tucker briefly played professional football in England before studying business management and qualifying as a chartered accountant. He joined Prudential Portfolio Managers, the insurer’s fund management arm, in 1986 and rose steadily through the ranks all the way to the C suite. Crucially, he helped build the U.K. insurer into a major player in Asia, serving as head of the group’s Hong Kong office from 1989 to 1992 and then as chief executive of Prudential Corp. Asia from 1994 to 2003. He gained valuable experience in the region as well as keen insights into AIA, his chief rival at the time. In 2008, when he was CEO at Prudential, Tucker made overtures to AIG about a possible offer for AIA but was rebuffed. He left the Pru in September 2009.

“He was effectively responsible for building the Prudential Asia footprint from scratch,” says Credit Suisse’s van Veen. “Prudential is now No. 2 in the region because of the foundation he built in the 1990s.” According to Credit Suisse, Prudential has a 3.3 percent share of life premiums sold in Asia, just behind AIA, which leads among non-Chinese and non-Japanese companies, with 4.3 percent. Both are substantially bigger than the No. 3 player, Germany’s Allianz, which has a 1.7 percent market share, and No. 4 ING, with 1.5 percent.

Tucker didn’t hesitate to seize Benmosche’s offer. “I knew AIA well,” he says. “I competed against it for 20 years. It was a giant. To take a giant that had been through tough times, that had been sleeping, and to revitalize it and take it to the next level was enormously exciting.”

Exciting, but challenging. Tucker faced a number of urgent issues upon taking the job. He needed to restore morale at AIA, which had lost momentum because of the turmoil at its parent and was suffering defections by some of its 300,000 agents. He also needed to resolve the ownership question left hanging by the failure of Prudential’s bid to buy AIA; that proposed $35.5 billion deal fell through when shareholders of the U.K. insurer opposed the steep price tag, but AIG still needed to sell the company to pay off its obligations.

Tucker started by visiting the head offices of each AIA subsidiary in his first 30 days to calm the nerves of local executives and unify them behind his vision of building an independent company. What he found was reassuring: Most employees remained fiercely loyal to AIA.

He quickly reorganized top management, bringing to AIA a number of former aides from his days at Prudential. They included CFO Garth Jones, who had served as Asia CFO at Prudential under Tucker and most recently was executive vice president at Shanghai-based China Pacific Life Insurance Co., the No. 3 life insurer on the Chinese mainland. Jones represented the interests of Carlyle Group, the Washington-based private equity firm that owns 4.9 percent of the insurer’s holding company, China Pacific Insurance (Group) Co., according to its most recent annual report. Other former Pru colleagues Tucker brought on board include Ng Keng Hooi, AIA’s regional chief executive for Brunei, China, Malaysia, Singapore and Taiwan, who was previously group chief executive of Singapore-based Great Eastern Holdings; and Huynh Thanh Phong, AIA’s regional boss for India, Indonesia, Sri Lanka, Thailand and Vietnam, who joined from Fullerton Financial Holdings, the financial services investment arm of Singaporean sovereign wealth fund Temasek Holdings.

Tucker tapped Edmund Tse to return to AIA as nonexecutive chairman just before the company’s IPO, in a bid to recapture some of the luster of AIA’s glory days. Tse began his career with AIA in Hong Kong in 1961 and served as CEO from 1983 to 2009. Another key hire is Paul Lloyd, a former London-based insurance analyst at Goldman Sachs Group and Credit Suisse whom Tucker hired in 2011 as head of corporate development and investor relations.

“We have an open dialogue with asset managers,” says Lloyd. “They clearly have global macroeconomic concerns, but they understand we are different and advantaged compared with other international insurers because of our exclusive focus on the Asia-Pacific region. On top of that, we have proprietary distribution, financial strength, good corporate governance and a strong brand.”

Many investors share that optimism. “A quality management team is a key characteristic we look for in all of our investments,” says Mark Yockey, managing director of Milwaukee-based Artisan Partners and portfolio manager of the $9.7 billion Artisan International Fund, which counts AIA as one of its top ten holdings. “We believe AIA’s management team has a proven track record and a clear strategy for growth, which will help the company to capitalize on the meaningful potential in this sector.”

By September 2010, two months after his arrival, Tucker had worked with underwriters, including Citi, Deutsche Bank, Goldman Sachs Group and Morgan Stanley, to give AIA a valuation of $30.5 billion. On October 29 they pulled off the biggest IPO in insurance history, helping AIG raise $20.5 billion and pay down a chunk of its bailout.

The successful flotation was a landmark for the insurance industry in Asia, says Stephan Binder, Shanghai-based head of the Asian insurance practice at management consulting firm McKinsey & Co. “The IPO of AIA acted as a catalyst for investor interest in the Asian insurance sector by bringing in many first-time buyers and increasing the number of insurance-dedicated research analysts on the sell side,” Binder says.

The strength of AIA’s share price allowed AIG to complete its divestment: It sold its remaining 13.7 percent stake for $6.4 billion in December and paid back the last of its U.S. bailout obligations. All told, AIG raised more than $35 billion through its sale of AIA.

The company is now in a strong position to build on its Asian franchise, says Tucker. “We are just two years from the IPO,” he says. “We are independent, we are financially very strong, and we are exclusively Asian. The team has done a terrific job and made great progress. But we are just at the start of a journey.  The opportunities are almost unlimited. We are at the beginning of something special; the best is yet to come.”

Tucker has good reason for his optimism. Insurers in the West are struggling to grapple with sluggish economic growth and historically low interest rates, which depress investment returns and make many of their products less attractive. In Asia, however, the sky seems to be the limit.

Spending on life insurance premiums in Asia ex-Japan is growing at a rate of 11 percent a year, about five times as fast as in Europe and the U.S., according to McKinsey. By 2014 premiums in non-Japan Asia will represent nearly a quarter of the $2.7 trillion global market, up from 11 percent in 2004; with Japan included, the region will account for 36 percent of the global market by 2014 — the same size as Western Europe, McKinsey says.

“Asia’s need and latent demand for both long-term savings and protection products grow exponentially as high rates of economic growth feed through to increased consumer incomes,” says Tucker. “We are tapping a vast and until now underserved market for accident and health, medical and mortality protection insurance. And with very little state-sponsored provision for income in old age, the scope for development of the pensions savings market is vast.”

To tap that opportunity, AIA needs to have powerful distribution throughout the region. The acquisition of ING’s Malaysian subsidiary did just that, boosting AIA’s sales force in the country to 16,000 agents from 7,400. “The geographic spread of [ING] agents is very complementary to that of the existing AIA agency force,”  Tucker says. “The acquisition also allows us to broaden our bank distribution with the addition of exclusive distribution with Public Bank, one of Malaysia’s biggest and best banks.”

In Sri Lanka the acquisition gives AIA entrée into a small but fast-growing market. Life insurance premiums grew at a compound annual rate of 16.2 percent from 2006 through 2010. The former Aviva unit has 3,000 agents and a bank distribution agreement with National Development Bank, one of the nation’s largest lenders.

Tucker and his team are eager to develop more new markets. One on the radar screen: Myanmar. Executives say AIA is considering a move into the country, which is just starting to open up to foreign investors after decades of isolation from the global economy. “Myanmar will be a very interesting one,” says Tucker. “It has all the demographics and potential to be a significant market.”

China, of course, is by far the biggest potential prize in Asia. The country provided 9 percent of AIA’s premium income in 2011 and 6 percent of pretax operating profits. In the first half of 2012, pretax operating profits in China rose by 33 percent from a year earlier, to $88 million.

“We have 1 million policies in force in China,”  Tucker notes. “We are the only foreign insurer with 100 percent ownership. We are very confident of the economy, the leadership and the opportunity. It is our sixth-largest market, and over time it should be even higher. There is no reason why it can’t be No. 1.”

Despite its potential, China still has a long way to go to fulfill Tucker’s ambitions. The country ranks far behind Hong Kong, which generated pretax operating profits of $792 million in 2011; Thailand ($560 million); Singapore ($391 million); and Malaysia ($166 million).

To drive sales and profit growth, Tucker is pursuing a two-track strategy. He has been eliminating low-margin products, such as savings-based investment policies that compete with bank deposits, and focusing on higher-margin life, accident and health insurance policies for Asia’s fast-growing middle class and high-net-worth individuals. At the same time, he is giving national and regional bosses the autonomy to tailor products and marketing to the specific needs of their markets. The new arrangement represents a major departure for AIA, which previously required subsidiaries to get approval from the head office in Hong Kong before launching new products.

“We want local heads to run businesses and execute locally based on strategies set at the group level, but within the framework of appropriate risk management oversight from the group level and with a continuity of the AIA brand value,” says CFO Jones. “This means we are more nimble and more in tune with our customers.” Adds Tucker, “We want to speed up market-time execution.”

In China, for instance, AIA last year introduced its All-in-One insurance product, which targets couples of the post-’80s generation. Most members of the country’s emerging middle class don’t have siblings — a result of China’s one-child policy. Thus many modern couples find themselves responsible for taking care of two sets of parents as well as their child. The new policy offers a wide range of protection, covering serious illness, accidents, disability, retirement and death.

The new product was a key driver of the 36 percent growth of new business in the first half of 2012, helping AIA keep its footing in a highly competitive market dominated by China Life Insurance Co., which has a 50 percent market share, and Ping An Insurance (Group) Co. of China, which has 16 percent. AIA has about a 1 percent market share. Although modest by comparison with the domestic giants, that still makes AIA the largest foreign insurer in China.

“AIA’s top-line growth in China has been reasonably stagnant since 2007,” says Credit Suisse’s van Veen. But the company “has had strong success refocusing the business on more protection insurance business and as such has been able to grow its value of new business strongly despite negative new-business premium growth.” In Singapore, AIA executives have introduced investment-linked products that target middle-class and high-net-worth individuals. The efforts have helped the company maintain its No. 1 market position in the Lion City.

The group’s Hong Kong unit has used its autonomy to come up with something different: an insurance product with the slightly racier name of Forever Love Coupon Plan 2 that is designed to address longevity concerns. Under the policy a 35-year-old male would pay a premium of US$9,649 a year for ten years to guarantee a cash reserve of as much as $409,000 by the age of 100. Policyholders have the option of drawing on the reserve after age 55. The policy, which also offers accident coverage, targets consumers who fear catastrophic medical costs in old age.

Besides the Forever Love plan, AIA’s Hong Kong agents are also selling a product called CEO Medical Plan, which offers comprehensive high-end medical coverage for members of the corporate C suite, and Family Secure, which provides life, accident and health coverage for an entire family over their working lives and retirement.

Executives acknowledge that AIA faces challenges, beginning with the fragmented reality of the Asian market. “We expect the uncertainties on the group’s risk exposure primarily to come from the overall regulatory environment and underdevelopment of capital markets within the developing markets in Asia where the group seeks growth,” says Serene Hsieh, associate director of financial services ratings at Taiwan Ratings Corp., a partner of Standard & Poor’s in Asia. “Nevertheless, operations in developing markets provide good growth momentum.”

Tucker agrees wholeheartedly. He is confident that AIA has the right risk procedures in place to avoid costly mistakes like the ones that nearly brought down AIG and sufficient local talent to deal with regulatory complexities and seize the Asian opportunity.

“By 2050 half of the world’s GDP and financial assets will be in Asia,” he says. “There are obviously challenges, but what is important to note is that debt levels are lower in Asia, and governments in Asia have more firepower because of that. The Asian consumer continues to strengthen. I believe we are in the right place at the right time.”

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