“A long-term view in a period of uncertainty”

August 2011

(Part 1 of 2) Conversation with Mark Tucker, group CEO of AIA on rebuilding the agency network after the Greenberg accounting scandals – surviving the current market turmoil – localising his investment strategy. If you do not see the video already displayed below, please select the alternative sites from the tabs here:

Here is the transcript of the video.

1. Importance of the distribution channel

Emmanuel Daniel (ED): You’re now group CEO of AIA, the listed entity of AIG in the Asia Pacific region. You also are the dalliance of the insurance industry worldwide, and the listed entity is now one of the top five life insurance globally all within a very short period of time.

I want to start by going back to the basics of the insurance business. The basics of the insurance business can be described as the agency network, the investment portfolio that you have, and the distribution capability. At the time when you listed the entity in Hong Kong in 2010, there had to be a lot of work to be done to rehabilitate the agency network. How would you describe where the AIA agency network is today in all of the countries that you work in?

Mark Tucker (MT): I think you’re right. In terms of the significance and importance to us and our main and prime distribution channel it is the agency channel, and that’s very significant. If you look at the quality of agents across the region, it is enormously strong. The legacy that I was fortunate enough to inherit meant that we have had a tremendous history.

The quality, the professionalism, the dedication, the loyalty, the commitment of the agents across the region was immense. If you look at the circumstances, they’ve been through a very tough time. The Greenberg accounting scandals, the whole elements with the global financial crisis, the potential bid – all of this was deeply unsettling.

To a degree the IPO just drew a line in the sand between the past and the future and gave the agency significant confidence of AIA’s independence and its future position.

ED: But also as a business you’ve had to trim the agency network, and trim in terms of the benefits you were passing down and how much of the business that you wanted to originate directly. So how would you describe the use of the agency network going forward and the relationships you’re going to have? And in some countries your agency network operates almost like a union in itself. They respond very aggressively to any initiative at the business level that you put on them.

MT: The agency is the key channel for us. Our relationship with the agencies across the region is very strong. It’s a proprietary distribution channel. It’s a channel that many of us have worked in for 20, 25 years; and so we have deep experience and understanding of the mechanics of how agency works.

We’ve seen agencies across the region without exception to be very supportive, and if you look at indicators, there are two very important ones for us. One is the activity level i.e. how many agents are active i.e. selling cases and then productivity. Once they’re selling, how many cases and how big are the cases?

And I’ll beshowing you in the first six months of this year in the results a few weeks ago was that activity was up 9%. Productivity was up 17%. These are both very strong indicators of good relationships, and then the company and the agency absolutely aligned.

ED: Given all the experience with the Prudential attempt to buy into AIA, what have you had to do from the time the entity was listed in Asia to today to rehabilitate the agency relationship?  What specifically have you had to do?

MT: The basis, the listing, was very important. The listing just drew that dividing line very clearly.  We have an immensely strong and loyal agency.  I think there the conversations have continued. There’s nothing exceptionally being done.

It is the uncertainty the agency was more macro related than it was micro related, and clearly circumstances have changed very materially over the last year where we have listed – we’ve got onto the Hang Seng index and become one of the largest components of that index – and the stock in the company has performed strongly.

2. Prowess in investments

ED: Let’s move on to the other leg of the business, the investment capability and your prowesses as an investment house and to some extent the failings at the AIG level and the learnings that the institution has taken on and what it’s going to look like going forward, especially now with the economy looking the way it is, the uncertainty with the U.S. downgrade and so on.  As an investment house or wearing the investor cap, how do you see AIA in terms of the strategy in the next two steps at least?

MT: The investment element of our business is clearly a very significant and important one.  You’ve got to look at things from a context point of view – we’re a long-term investor. Our liabilities are longer term; and therefore, we have the ability to invest longer term.  And once we invest, we have the ability to – have the ability and the intent to hold that asset certainly on the bum side until duration.

So I think the short-term fluctuations, any short-term turbulence is not of significance to us because in longer term if it has knock on effects, then we rethink. But we’ve been in business for 90 years. We’ve seen economic cycles, good, bad, and indifferent. We’ve survived and more than survived.  We’ve prospered through all of them. This is another cycle.  AIA remains incredibly strong in all aspects.

ED: With the U.S. downgrade, the S&P downgrade of the U.S. assets, the whole market went around swirling around the world, looked for assets, and came right back and found that U.S. treasury bonds are still the most – the safest and the best assets.  And not only that, the market moved more towards long-term investments.  Do you think that was the right thing to do, or are there other alternative asset classes that the market should have been looking at? And what has AIA been doing in that time?

MT: I’m a great respecter of the market. I think the market finds the right level, and the market ultimately with the information it gets will make the right decision. So I think nothing that the market has done has been a big surprise.

ED: And what is your investment strategy in the next six months or so?

MT: We continue to look to match the liabilities that we create through writing insurance contracts. We look to match those both in terms of length and commitment, and I think that will continue. So there’s been no fundamental change either in the way we think about investment or the strategic asset on occasion bench box that we use.

ED: At the same time, as a business unlike banks and other sorts of financial services, you need to be local in just about every market that you operate in. Today you’re significantly incorporated in countries like Singapore, and a number of Southeast Asian countries, in China, and so on. Would your strategy, your investment strategy in each of these markets differ from an overall strategy that you would be taking?

MT: No. As you say, we have a mix of branches and subsidiaries across the region. In reality the subsidiarization in Singapore is putting into legal form the practice that we’ve been here. We’ve been here for 80 years, so I think there’s again no majorsignificance of this.  We are deeply committed to Singapore, deeply committed to growing the business, and deeply committed to our customers and agents and staff here.

ED: Give us a sense of the large anchor countries in Asia; China, India, Indonesia, and perhaps Vietnam and the Philippines going forward. The countries with sizeable populations where you have a lot of work to be done, building a lot more debt than the countries. Give us a sense of what you think you’ll be doing in these places.

MT: I think you’ve certainly identified a number of the market places where there are enormous opportunities and where the insurance penetration is very low. We see opportunities right across the field; in Indonesia its the sheer size and scope there both for traditional products and for the Sharia and Takaful products.

In Vietnam with a 85 – 90 million population there is a significant opportunity to grow.  We have a small business there. Our aim is to become one of the market leaders there. When you look at China and India, clearly massive market places, we have access to a third of China’s GDP, a third of China’s new life premium. We have a business that is growing, and we are very optimistic about both China itself and the opportunity that we have there.

With India – again, very significant market in terms of size – has been a more challenged market in terms of the insurance business and the insurance industry. But over time I think India will be an enormously successful and valuable marketplace.

ED: But the regulators in each of these markets are putting increasing pressure and expecting you to be increasingly local. At the same time, there’s competition. So in that sense the old AIA model of organic growth cannot possibly take its time in the way that it used to. You probably have shorter performance lead times today than you would have had in the last 20 years. Would mergers and acquisitions (M&A) be a strategy? Would other non-organic ways in which you can build your depth in these markets?

MT: The primary focus and because of the vast on the penetration, because of the macro position, economic growth, increasing wealth, increasing earnings in the middle classes, the demographics, they’re all very strong positive indicators to a life insurance business. So I think there’s nothing in terms of the future that concerns us in terms of where we need to invest or where we need to be.

And I think the focus remains primarily on organic. That’s really where we think the opportunity is.  Inorganic we’ve said will be tactical re-opportunistic, but the 99% of our focus is no looking at what we can do to optimize the organic growth. We think there’s a long way to go.

ED: That might render you second and not first in the number of these markets, or third.  A number of these markets, Singapore, China, have their own local players with greater size, greater penetration, and all that. Is there a need to find leverage relationships, leverage partnerships, joint ventures outside of M&A to sort of just be there if not the first, then the top two in each of these markets?

MT: It depends on what measure – I think we are much more focused on value than we are volume. So just going after being number one in the marketplace is not as significant as being the most profitable in the marketplace. That is where our shareholders would want us to be.

So I think no.  At this point in time, as you’ve seen over the 90 year history, we are number one in six or seven marketplaces. Across Asia we’re number one in terms of from insured and enforced premium here in Singapore. Nothing has stopped us growing, and up until early next year, we would have been a branch.  And nothing is limiting us in our current structure. The opportunities remain regardless of structure.

ED: That episode during the time when Prudential was trying to buy into AIG’s Asian assets, was that something that you had conceived of when you were in Prudential and you saw being played out, or was that somewhat incongruent with what you thought Prudential should have been doing at that point in time?

MT: I can talk about clearly what I did, and we certainly, we looked at AIA as an asset while I was chief executive of Prudential. But I think always in these elements you’ve got to focus on assuring you’ve got the right price and the right value. And I think we had a clear view of that, and the progress – no further progress was made.  But certainly, we looked at it as an asset because it’s a tremendous company.

ED: But the motivation when you’re looking at it that was global dominance, being the largest, creating scale, and all of that. How’s that featuring in your mind today about the business that you’re running?  In a way you’re number five, and you need to move up the scale even more today as a result.

MT: As of today in terms of capitalization, I think we’re the sixth biggest insurance company in the world. A year ago we were virtually a long way away from that.  So I think the progress made over the last year has been very significant. The players ahead of us, particularly the Chinese, are very significant and very mature.

We have great ambition, and we will continue to look to move up that lead table.  But we want to ensure that we do that thoughtfully, prudently, wisely, and profitably.

ED: Yes, but what exactly do you need to do to move up that lead table?  What are the low hanging fruits in the next year or so that will move you up in the lead table?

MT: The simple answer to that is we need to continue to deliver the results that warrant a movement up in price. I think it’s a focus on execution. It’s a focus on delivery. It’s a focus on performance, and that’s really where all the energy and the efforts of the AIA team are at.

ED: From what you’ve seen as the leader in the insurance industry, when do the inorganic opportunities present themselves; and what does a insurance company need to be like at the management level, at the board level to be able to take advantage of those opportunities when they come?

MT: It is largely opportunistic. I think you cannot ever say that something will happen on this date.  Events both macro and micro happen all the time, and it’s a dynamic situation.  So what as a company is valuable to me is getting prepared in many senses to be able to deal with opportunistic chances and the best way to do that is clearly to be financial strong and organized and have the strength of the team.

The financial strength of AIA is immense. We are one of the strongest and best capitalized insurance companies in the world. The quality of the team and the depth of the team is very strong; and we are focusing on optimization performance now rather than focusing on anything that’s involved in organic in the future.

ED: Well, what about non-life?  Is that a missing component in your group that you think you need to build some skill on?

MT: We have a number of non-life licenses; but we think the greatest opportunity at this time and where we’ll put all our energies and efforts is on the life business, the life and protection businesses and that’s really where our focus is, so we may look at it again over time, but at this point in time, our focus is very much on building our life savings and protection business.

ED: Looking back on the listing in Asia, do you think that large global financial conglomerates with significant Asian footprints at the time of the crisis should have considered some form of listing in Asia to sort of ring fence or decouple the energy of the business in the different parts of the world that they have? Do you think that other financial conglomerates could have considered that as an option, or was that an option that was unique to AIA?

MT: We are an Asian business. We are 100% Asia. I think if you look at AIA, what is unique is we are 100% Asia, 100% retail, 100% financial services.  And the ownership structure means that we have 100 percent ownership of 14 out of our 15 businesses.  That is a completely unique position.  If you want to play a pure financial play on the Asian consumer, then AIA is the only company that you can buy.  So that’s a unique position.

ED: Yes, but what had to be done to sell the idea to the AIG group? What were the conversations at the board level to make that decision to be listed in Asia?

MT: That was a decision taken before I came on board. I think that the group had commitments to the U.S. treasury, to the U.S. fed, and clearly parts of the paying back of the debt was owed was the proceeds from the IPO.

ED: Outside of the insurance industry, you did have short stints as a director at HBOS and Prudential where you were before owned Egg as a banking channel in a sense. What is your thinking today on insurance companies owning banks or owning other financial intermediaries in order to grow?

MT: Each company must go down its own path.  The banking businesses and the insurance businesses are very different businesses, and I think it’s important (to know) they’re clearly in the financial services space, but as businesses, they are very different. One is much shorter term.  One is much longer term. One is structurally more liquid than the other.

It’s important always just to ensure that there is clarity. But I think there are many companies that will be successful, and insurance companies buying banks and banks buying insurance companies. There’s no right or wrong model. I think what will clearly be the focus of boards and companies going through and forward are the capital regimes that are needed and any potential ring fencings. All of these, I think, will be the areas of focus; but there’s no right or wrong way of doing it.

3. Relationship with banks

ED: Is it still an attractive proposition because of all these issues that are increasingly complicated and that sense. Are banks still of interest to you?

MT: No, for AIA there is no interest in acquiring a bank. There never has been, and this is not something on our radar screens.We have such an opportunity within the life protection saving space that we are and in that we will put all of the energy.

ED: Final question, in all the conversations that you have with your management team, what are the two or three biggest items on your mind that you keep talking about and spending most time on and you think that there’s a lot of work to be done?

MT: That there’s always work to be done, but there’s always more that we can do, and we can do it significantly better. What dominates a lot of our time is people to ensure that we have the right people, to ensure that we are motivating people, to ensure that we are retaining people, and to ensure that we provide people with a great future – and that is really sort of where the majority of our time is spent.

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