By Prudence Ho
HONG KONG—Fund managers see the initial public offering of stock in AIA Group Ltd., the pan-Asian life-insurance unit of American International Group /zigman2/quotes/203700638/composite AIG +7.50% Inc., as fairly priced, with the uniqueness of the insurer supporting the deal. But fund managers expressed concerns that the U.S. government's intention to sell its entire stake in AIG represents an overhang on AIA's share prices.
Another caution: the fact that a quarter of AIA's premium income comes from mature markets such as Hong Kong.
AIA kicked off investor presentations Tuesday for its IPO, which aims to raise between US$13.9 billion and US$14.9 billion, amid a flurry of requests for shares from institutional investors, people familiar with the matter said, helping offset earlier lackluster interest from tycoons and sovereign-wealth funds.
Demand for AIA's Offering Picks Up
Its shares are on sale at 18.38 to 19.68 Hong Kong dollars (US$2.37 to US$2.54) each, equivalent to 1.23 to 1.32 times the 2010 embedded value of the insurer, according to a term sheet seen by Dow Jones Newswires. Embedded value represents the future profits an insurer's existing life-insurance policies are expected to generate.
"Given the uniqueness of [the] AIA franchise, the IPO price range is in keeping with the company's fair value," said Alex Au , managing director of Richland Capital Management Ltd, a US$300 million pan-Asian hedge fund.
"There isn't a directly comparable listed peer to AIA, as its presence is throughout Asia; China itself accounts for a small portion of its businesses, so it can't be compared with Hong Kong-listed Chinese insurers," said Mr. Au, adding that he is subscribing to the IPO.
AIA, which has a presence in 15 markets in the region, is the only foreign insurer allowed to have a fully owned entity in China, but that country accounts for just 5% of the insurer's 2009 pretax operating profit, according to its listing prospectus.
China Life Insurance Co. /zigman2/quotes/202359856/delayed HK:2628 -6.70% Ltd., the country's biggest life insurer by premiums, trades at 3.3 times its estimated 2010 embedded value, according to a person at one of the bookrunners on the deal, while No. 2 insurer Ping An Insurance (Group) Co. of China /zigman2/quotes/210315058/delayed HK:2318 -1.95% Ltd. trades at 3.4 times.
The two insurers fund managers say the closest comparisons to AIA are U.K. insurer Prudential PLC /zigman2/quotes/205760760/composite PUK +1.54% , which made a failed US$35.5 billion bid earlier this year for the AIG unit, and Australian wealth manager AXA Asia Pacific Holdings Ltd.
AIA's IPO range of 1.23 to 1.32 times 2010 embedded value still exceeds that of Prudential's Asian businesses, estimated at 1.2 times the U.K. insurer's 2010 embedded value, according to a Bank of America Merrill Lynch research report dated Sept. 28. Prudential's bid for AIA was valued at 1.7 times the target's embedded value.
AXA Asia Pacific, which is mainly focused on Australia, New Zealand and Hong Kong, trades at 1.2 times its forecast 2010 embedded value.
On the whole, fund managers said AIA's IPO has been priced fairly, if not cheaply, but said an overarching concern about the deal is the U.S. government's goal to exit AIG as soon as possible.
Last week, AIG and the U.S. government agreed on an exit strategy that would repay what AIG owes the Federal Reserve Bank of New York by early 2011 and let the Treasury Department take steps to start selling off its majority ownership in AIG.
Under the exit plan, the cash proceeds from the AIA IPO and a separate sale of another overseas unit will be used to repay AIG's $20 billion secured debt from the New York Fed. Proceeds from future secondary share offerings of AIA stock likely will go to the Treasury, which will be taking over the New York Fed's remaining positions in special-purpose vehicles that own preferred interests in the overseas units.
AIA's strength in mature markets like Hong Kong also worried a few investors. Hong Kong alone accounted for 25% its total weighted premium income in its 2009 fiscal year, according to its listing prospectus. It also dominates a few key markets; according to its listing prospectus, its share of life-insurance premiums is 35.6% in Thailand, 24.9% in Singapore, and 15.9% in Hong Kong.
AIA's IPO comes in a year that several Asian insurance giants have gone public. Japan's Dai-ichi Life Insurance Co. Ltd., the second-largest life insurer in Japan by premium revenue, raised US$11.1 billion and South Korea's Samsung Life Insurance Co. Ltd raised US$4.4 billion in the second- and third-largest IPOs globally this year after Agricultural Bank of China /zigman2/quotes/200705246/delayed HK:1288 -2.63% Ltd.'s record US$22.1 billion offering in July. Both, however, are focused on their home countries.
The IPO proceeds from AIA could rise to US$17.1 billion, or even US$20.57 billion, if options to increase the offering due to strong investor demand are exercised, reducing AIG's stake to as low as 32.9%.
Despite the concerns, by midday Tuesday, demand from investors already equaled the number of shares being offered, people familiar with the situation said. The average offer from investors has been at the top end of that range, the people said.
Citigroup /zigman2/quotes/207741460/composite C +6.47% Inc., Goldman Sachs Group /zigman2/quotes/209237603/composite GS +4.44% Inc., Morgan Stanley /zigman2/quotes/209104354/composite MS +4.82% , and Deutsche Bank /zigman2/quotes/203042512/composite DB +3.91% AG are in charge of the sale.
Write to Prudence Ho at Prudence.Ho@dowjones.com