2nd UPDATE: AIA Shares Surges As Much As 17.6% on Hong Kong Debut

Shares of AIA Group Ltd. (1299.HK) rose as much as 17.6% on their Hong Kong debut Friday despite declines in the broader market, reflecting investor optimism about Asia's economic growth and AIA's strong position in the region's insurance markets.

AIA, the pan-Asian life unit of American International Group Inc. (AIG), raised US$17.8 billion from its IPO, after exercising an option to sell an extra 1.17 billion shares in deal, on top of the planned 5.86 billion shares. If it exercises an overallotment option to sell an additional 1.05 billion shares, AIA's IPO, the biggest already in Hong Kong, will raise a total of US$20.5 billion for AIG, which is listing the Asian insurer to help repay U.S. taxpayers after a 2008 bailout.

On their first day of trade in Hong Kong Friday, AIA's shares were up 17.1% at HK$23.05 from their IPO price of HK$19.68, but off their earlier high of HK$23.15. The benchmark Hang Seng Index was down 0.49% at 23,096. Trading volume in AIA's shares totaled HK$49.4 billion, about 36% of the market's total volume on Friday of HK$135.9 billion.

AIA Executive Chairman Mark Tucker said at the company's listing ceremony Friday that he believed there is no better place to list than Hong Kong, "where we have our oldest and most successful operations." He added he sees enormous growth opportunities in Asia, and AIA aims to continue to build its business there. Hong Kong alone accounted for 25% of AIA's total weighted premium income in the 2009 fiscal year.

Analysts said they are optimistic about AIA's share-price performance because the insurer is positioned to benefit from Asia's brisk economic growth, given its wide-ranging geographic presence, with leadership positions in six of the 15 markets in the Asia Pacific region and 100% ownership structure in all markets except in India.

"AIA has a scale and scope in the Asia Pacific region that its competitors may find difficult to replicate, especially in developed markets," said in a report of Core Pacific-Yamaichi dated Oct. 18.

AIA shares should continue rising, analysts said, because its size means it is bound to be a component of benchmark indexes. "As AIA looks set to join the Hang Seng Index and become an index stock, interest in it will continue to be strong, " said Ben Kwong, associate director at KGI Asia. "It's not unreasonable to expect AIA to trade 20% higher than its IPO price, thus matching the valuation of other insurance companies which are trading at more than two times embedded value,"

AIA's IPO price translated to 1.3 times its 2010 embedded value, while Chinese insurers such as China Life Insurance Co. Ltd., the country's biggest life insurer by premiums, trade at 2.7 times, according to a report from CLSA on Oct. 6.

Embedded value represents the future profits an insurer's existing life-insurance policies are expected to generate.

If AIA exercises its overallotment option and raises US$20.5 billion, it would have the world's second-largest IPO this year and the third-biggest ever, after Agricultural Bank of China Ltd.'s US$22.1 billion dual listing in Hong Kong and Shanghai in July, and Industrial & Commercial Bank of China Ltd.'s US$21.93 billion offering in 2006.

For AIG, the completion of the AIA offering would be a milestone in the U.S. insurer's restructuring and attempts to repay a record bailout that used more than US$120 billion in taxpayer funds.

AIA last week priced its IPO at the top end of the HK$18.38-HK$19.68 range, in line with expectations, after the share sale closed two days ahead of schedule due to strong demand from large investors keen to buy into one of the few pan-Asian insurers available for sale. The retail tranche of the IPO was 9.62 times subscribed and the institutional tranche was almost eight times covered, according to people familiar with the deal.

Earlier in the IPO process, AIA secured commitments for US$1.9 billion from five cornerstone investors. The biggest cornerstone investment was a $1 billion pledge from the Kuwait Investment Authority.

Others included property and financial-services firms Guoco Group Ltd. and Hong Leong Group, both controlled by Malaysian tycoon Quek Leng Chan, which committed a total of US$420 million; Malaysia's state-owned retirement fund, which invested US$200 million; Chow Tai Fook Enterprises Ltd. and New World Development Co., both controlled by Hong Kong tycoon Cheng Yu-tong, which invested a total of US$100 million; and Wharf (Holdings) Ltd., a Hong Kong ports-to-telecom conglomerate which put in US$100 million.

-By Prudence Ho, Dow Jones Newswires; 852-2832-2335; [e-mail]