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Rating Action:

Moody’s affirms AIA Group Limited’s ratings, following rating action on Hong Kong

17 September 2019


Hong Kong , September 17, 2019 – Moody's Investors Service has affirmed the long-term issuer rating and senior unsecured debt ratings of AIA Group Limited (AIA or the Group) at A2 and maintained the stable outlook, following Moody's decision to change to negative from stable the outlook on the Aa2 rating of the Government of Hong Kong, as announced on September 16, 2019.

For full details, please refer to: https://www.moodys.com/research/Moodys-changes-outlook-on-Hong-Kongs-Aa2-rating-to-negative--PR_409149

At the same time, Moody's has affirmed the insurance financial strength ratings (IFSR) of AIA Company Limited (AIA Co) and AIA International Limited (AIA International) at Aa2 and maintained the stable outlook.

RATINGS RATIONALE

The affirmation of AIA's rating with a stable outlook follows the change in outlook to negative of Hong Kong's Aa2 rating. Moody's considers that AIA's key credit fundamentals (asset quality, capitalisation, profitability and financial flexibility) are partly correlated with -- and thus linked to -- the economic and market conditions in the country of domicile, due to the financial and operational links that can exist.

The affirmation of AIA's ratings reflects that the Group has very limited exposure to the sovereign bonds of Hong Kong, given that the vast majority of policies sold in Hong Kong are denominated in USD. As a result, any potential volatilities of the capital markets in Hong Kong are expected to have limited impact on AIA's investment portfolio and capitalisation. This also considers the insurer's prudent asset and liability management with minimal mismatch on currency and duration.

In addition, Moody's expects that AIA will continue to achieve strong earnings and capital generation despite the risk of slower economic growth and uncertainties over consumer sentiment amid the ongoing protests in Hong Kong, and the potentially significant fall in business flows from both mainland Chinese visitors and domestic segments in the coming quarters. This reflects the Group's strong geographic diversification and its large in-force book with a high proportion of recurring premiums to total premiums.

While Hong Kong is the largest market of the Group, accounting for 41% value of new business (VONB) and 34% of capital remittance to the Group in 2018, the insurer has a presence in 18 markets in Asia Pacific with increasingly diversified sources of earnings and capital, in particular from China (A1 stable), Malaysia (A3 stable) and other markets such as Australia (Aaa stable) and Vietnam (Ba3 stable). Although some of these operations are in weaker sovereign environments than Hong Kong, presenting higher levels of operational risk and volatility, the nature of the products sold (protection-oriented with investment risk sharing mechanism) and prudent balance sheet management help insulate these operations from related asset risk. In aggregate, Moody's expects the broad-based profitable growth across other markets to partially offset the expected slowdown of sales in Hong Kong.

The strengths of AIA's overall credit profile and its Hong Kong operations largely rest in its strong brand recognition and large and productive agency force. We do not expect any material increase in lapses from its large profitable in-force book with high persistency, which will continue to contribute to earnings and generate capital.

The affirmation of the ratings also reflects the Group's strong financial profile, including its strong financial flexibility, maintenance of a strong earnings track record, robust capitalization and excellent brand recognition and presence across multiple Asia Pacific markets. These strengths position AIA well to meet the growing demand in Asia for long-term protection and investment solutions, stemming from the protection gap and economic growth.

RATING DRIVERS

AIA Co and AIA International's IFSRs are already at very high levels, and the potential for a further upgrade is limited in the near term. Nevertheless, the IFSRs could be upgraded if there is a significant improvement in the operating environments and sovereign ratings of some of its less-developed markets, combined with a continuation of the existing strong business and financial profiles.

The spread between AIA Group's A2 issuer rating and the Aa2 IFSRs of AIA Co and AIA International is three notches, consistent with the typical notching practice we have for insurance holding companies operating mainly in jurisdictions where solo-only regulation is in force. This notching reflects the structural subordination faced by creditors of AIA Group compared with the policyholders of AIA Co, which would likely result in a much higher loss given default at the AIA Group level, given that AIA Co is its sole direct subsidiary of substance. However, this spread could become narrower if (1) there is a sustained increase in liquid holding company investments that account for over 75% of its outstanding debt; and/or (2) the Group is organized into a more de-stacked structure so that dividends can flow to the Group from its different subsidiaries rather than only from AIA Co, which is currently its only direct subsidiary of substance.

On the other hand, AIA's ratings could be downgraded if there is (1) a further deterioration in the operating environments and sovereign ratings of its key markets; (2) a significant slowdown in sales across many of its markets which lead to much weaker earnings and capital generation, for example, such that its return on capital falls consistently below 8%; (3) an increase in the group's adjusted financial leverage to more than 20%; (4) an acquisition that is heavily debt funded or which substantially increases the group's exposure to less-developed markets; (5) a significant reduction in the group's capital adequacy, illustrated by its adjusted capital/assets remaining consistently below 12%.

RATINGS LIST

Affirmations:

..Issuer: AIA Group Limited

.... Long-term Issuer Rating (Foreign Currency and Local Currency), Affirmed A2

....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)A2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency and Local Currency), Affirmed A2

..Issuer: AIA Company Limited

....Insurance Financial Strength Rating (Foreign Currency and Local Currency), Affirmed Aa2

..Issuer: AIA International Limited

....Insurance Financial Strength Rating , Affirmed Aa2

Outlook Actions:

..Issuer: AIA Group Limited

....Outlook, Maintained at Stable

..Issuer: AIA Company Limited

....Outlook, Maintained at Stable

..Issuer: AIA International Limited

....Outlook, Maintained at Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AIA Group Limited offers a wide variety of life insurance products in 18 markets throughout Asia Pacific. These include traditional individual life, group life and medical, credit life, accident, and health and investment-linked products sold through tied agents, bancassurance, brokers, and direct marketing channels. As of 30 June 2019, AIA Group's total assets and shareholders' equity registered USD255.7 billion and USD50.3 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Frank Yuen, CFA
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Sally Yim, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Releasing Office :
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

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