Hong Kong:AIA Group upgraded to 'A+' from 'A'; outlook stable

S&P Global Ratings has raised its long-term issuer credit ratings on AIA Group to 'A+' from 'A'. The outlook on the company is stable. The global credit rating agency also affirmed its 'A-1' short-term issuer credit ratings on AIA Group, a Hong Kong-based non-operating holding company.

At the same time, S&P raised its long-term rating on AIA Group's medium-term senior unsecured notes programme to 'A+' from 'A'. In addition, it raised the rating on the outstanding subordinated notes to 'A' from 'A-'. S&P also affirmed its 'A-1' short-term issue ratings.

Reason for upgrade

S&P says that it raised the ratings because, in its view, AIA Group has built up its liquid assets, which lessens its reliance on cash flows from its operating subsidiaries to meet its growing, albeit still low, debt obligations. Furthermore, the company has built a strong record of dividend remittances from its operating subsidiaries in various jurisdictions over the years since its listing in 2010. Consequently, the rating on AIA Group is now one notch lower than the ratings on the core operating companies of AIA instead of two notches.

S&P expects AIA to maintain strong liquidity buffers at the holding company level. This ample liquidity together with its diversified dividend income streams places AIA Group in a better position to service its obligations.

In addition, AIA Group uses promissory notes to manage the timing of the dividend streams from its operating units. These promissory notes, which are issued by its main operating entities, are payable on demand by AIA Group when funds are required. As of 31 December 2020, about one third of AIA Group's invested assets consists of US$3.4 billion in US Treasury securities. The promissory notes amounted to $1.8bn.

At the consolidated group level, AIA's gearing and interest coverage will remain supportive of its credit profile. As of 31 December 2020, the insurance group's leverage remained low at 12% while its fixed charge coverage stayed healthy at 13.7x. Furthermore, in S&P's view, AIA's material holdings of liquid assets (government bonds represent 36% of its total invested asset base in 2020) will alleviate liquidity issues in case of stress.

Dividend remittances

The life insurance group benefits from a good track record of dividend remittances from its geographically diverse operating subsidiaries. This is despite the evolving regulation in Asia-Pacific markets. In 2020, total dividend remittances from the group's business units amounted to $2.7bn (2019: $3.7bn). The China subsidiary contributed $1.14bn, which is about 40% of the remittances. While S&P expects the China subsidiary's ongoing domestic expansion to prompt more retained earnings, reducing remittances, the rating agency believes the other profitable subsidiaries will remain supportive of overall dividend remittances.

Following the implementation of the group-wide supervision framework in AIA's home turf of Hong Kong, S&P expects enhanced collaboration between regulators in the group's key operating markets. This should lead to smoother and better coordination of capital movement even during periods of stress. The new regulations entered into effect on 29 March 2021.

The stable outlook reflects S&P's view that AIA Group will maintain strong liquidity buffers and a low level of holding company obligations over the next two years. It also reflects S&P's expectation that AIA Group will maintain its track record of earning material dividends from its diverse operating units over the next two years.

Source: Asia Insurance Review