AIA Group Limited
Annual Report 2013

Plain-text annual report

AIA GROUP LIMITED 友邦保險控股有限公司 ANNUAL REPORT 2013 STOCK CODE : 1299 MEETING REAL NEEDS The AIA Group seeks to provide its customers with financial protection, security and a comfortable future. The Real Life Company brand position speaks to our long and remarkable history, to the wealth of customer insights we have gained along our journey and to the help we have provided to millions of people around the Asia- Pacific region in good times and in challenging times. AIA will continue to protect generations of people, for many years to come, whatever life brings them. VISION AIA is the pre-eminent life insurance provider in the Asia-Pacific region, differentiated from our competitors by the combination of our Asia regional focus, the scale, quality and profitability of our operations across the region, and the standards of service and benefits we deliver to our customers. Our vision is to grow our business prudently and profitably in all the markets we serve in order to optimise returns for our shareholders over time. ABOUT AIA AIA Group Limited and its subsidiaries (collectively “AIA” or “the Group”) comprise the largest independent publicly listed pan- Asian life insurance group. It has operations in 17 markets in Asia-Pacific – wholly-owned branches and subsidiaries in Hong Kong, Thailand, Singapore, Malaysia, China, Korea, the Philippines, Australia, Indonesia, Taiwan, Vietnam, New Zealand, Macau, Brunei, a 97 per cent subsidiary in Sri Lanka, a 26 per cent joint venture in India and a representative office in Myanmar. The business that is now AIA was first established in Shanghai over 90 years ago. It is a market leader in the Asia-Pacific region (ex-Japan) based on life insurance premiums and holds leading positions across the majority of its markets. It had total assets of US$147 billion as of 30 November 2013. AIA meets the savings and protection needs of individuals by offering a range of products and services including life insurance, accident and health insurance and savings plans. The Group also provides employee benefits, credit life and pension services to corporate clients. Through an extensive network of agents and employees across Asia-Pacific, AIA serves the holders of more than 28 million individual policies and over 16 million participating members of group insurance schemes. AIA Group Limited is listed on the Main Board of The Stock Exchange of Hong Kong Limited under the stock code “1299” with American Depositary Receipts (Level 1) traded on the over- the-counter market (ticker symbol: “AAGIY”). Notes: (1) Explanations of certain terms and abbreviations used in this report are set forth in the Glossary. (2) Unless otherwise specified, 2012 and 2013 refer to the financial year of AIA Group Limited, which ends on 30 November of the year indicated. ANNUAL REPORT 2013 001 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 …as the largest and longest- established independent pan-Asian insurer, operating in 17 geographical markets. The scale, reach and strength of our distribution platforms and brand, our unrivalled financial strength, and our depth of experience derived from our long history in the Asia-Pacific region leave us well positioned to capture the enormous growth opportunities this region provides. 002 AIA GROUP LIMITED OVERVIEWContents OVERVIEW 008 010 012 Financial Highlights Chairman’s Statement Group Chief Executive and President’s Report FINANCIAL AND OPERATING REVIEW Financial Review Business Review Risk Management Our People Corporate Social Responsibility CORPORATE GOVERNANCE Statement of Directors’ Responsibilities Board of Directors and Executive Committee Report of the Directors Corporate Governance Report Remuneration Report 018 032 054 062 064 072 073 078 083 091 FINANCIAL STATEMENTS 101 Independent Auditor’s Report 10 3 Consolidated Income Statement 10 4 10 5 10 7 10 8 10 9 204 207 2 31 233 234 Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements and Significant Accounting Policies Financial Statements of the Company Supplementary Embedded Value Information ADDITIONAL INFORMATION Information for Shareholders Corporate Information Glossary ANNUAL REPORT 2013 003 Key Milestones 1919 AIA put down its corporate roots in Asia when the group founder Mr. Cornelius Vander Starr established an insurance agency in Shanghai. 1921 Mr. Cornelius Vander Starr founded Asia Life Insurance Company, his first life insurance enterprise in Shanghai. 1931 Mr. Cornelius Vander Starr founded International Assurance Company, Limited (INTASCO), in Shanghai. INTASCO established branch offices in Hong Kong and Singapore. 1938 INTASCO entered Siam, later renamed Thailand. 1947 The Philippine American Life and General Insurance Company (Philam Life) was founded in the Philippines. INTASCO moved its head office to Hong Kong and changed its name to American International Assurance Company, Limited. 1948 We entered Malaysia. 1957 We registered in Brunei. 1972 We formed a subsidiary in Australia. 1981 Our New Zealand operations began as a branch of American Life Insurance Company (ALICO). 1982 We entered Macau. 1984 We entered Indonesia. 1987 Korean operations began. 1990 Our operations in Taiwan were established as a branch of ALICO. 1992 We re-established our presence in China through a branch office in Shanghai, the first foreign- owned life business to receive a licence in the country. 1998 We celebrated the return to our former headquarters building on The Bund in Shanghai. 2000 We formed a subsidiary in Vietnam. 2001 A joint venture in India was established. 2009 ALICO Taiwan became our branch office. Philam Life became our operating subsidiary. We completed the reorganisation driven by AIG’s liquidity crisis in 2008, leading to the positioning of the Company for a public listing. 2010 AIA Group Limited successfully listed on the Main Board of The Stock Exchange of Hong Kong Limited, the third-largest IPO ever globally at the time. 2011 AIA Group Limited became a constituent stock of the Hang Seng Index. We launched a sponsored Level 1 American Depositary Receipt programme. 2012 The divestment by AIG of its remaining shareholding in AIA marked the end of our association with AIG. 004 AIA GROUP LIMITED The first life insurance policy issued in Shanghai. 1919 Mr. Cornelius Vander Starr 1969 1984 We entered Indonesia. 1992 2010 AIA Group Limited successfully listed on the Main Board of The Stock Exchange of Hong Kong Limited. 2013 Celebrating the full integration of the businesses of AIA and ING Malaysia. 2013 We launched The Real Life Company brand positioning. 2013 ACQUISITION OF ING MALAYSIA AIA’s transaction with ING closed in December 2012 and completed the full integration of the businesses of AIA and ING Malaysia in June 2013. EXPANSION INTO SRI LANKA We commenced business in Sri Lanka through the acquisition of Aviva NDB Insurance. ENTRY INTO MYANMAR We opened a representative office in Myanmar. LAUNCH OF THE REAL LIFE COMPANY BRAND POSITIONING The new brand positioning reflects our role in providing the right financial solutions and support for our customers and their families in a constantly changing world. ANNUAL REPORT 2013 005 AIA At-a-Glance(1) We have a diversified franchise across the Asia-Pacific region. Our long experience in the region allows us to tailor our strategies to the culture, demographics and insurance needs of each market in which we operate. 100% OWNERSHIP IN 15 OUT OF 17 GEOGRAPHICAL MARKETS VIETNAM MYANMAR THAILAND INDIA SRI LANKA MALAYSIA SINGAPORE BRUNEI INDONESIA KOREA CHINA TAIWAN HONG HONG MACAU THE PHILIPPINES AUSTRALIA NEW ZEALAND Note: (1) All the figures on pages 6 and 7 are as of 30 November 2013. 006 AIA GROUP LIMITED SERVING THE HOLDERS OF MORE THAN 28 MILLION INDIVIDUAL POLICIES AND HISTORY OF OVER 90 YEARS IN ASIA-PACIFIC EV EQUITY OF 34.9 BILLION US$ OVER 16 MILLION PARTICIPATING MEMBERS OF GROUP INSURANCE SCHEMES TOTAL ASSETS OF 147 BILLION US$ ANNUAL REPORT 2013 007 US$ millions 1,500 1,200 900 667 600 545 1,188 932 300 0 2009 2010 2011 2012 2013 US$ millions 3,000 2,500 2,000 1,500 1,438 1,922 1,699 1,000 500 0 2009 2010 2011 2012 2013 Financial Highlights 2013 RESULTS AT-A-GLANCE* Value of New Business (VONB)(1) Annualised New Premium (ANP)(2) 1,490 +25% US$ millions 3,500 3,000 2,500 3,341 +24% 2,696 2,472 2,000 1,878 2,025 1,500 1,000 500 0 2009 2010 2011 2012 2013 Operating Profit After Tax (OPAT)(3) Total Weighted Premium Income (TWPI)(4) 2,504 2,159 +16% US$ millions 18,000 15,000 13,013 12,000 11,632 15,360 14,442 17,808 +16% 9,000 6,000 3,000 0 2009 2010 2011 2012 2013 EV Equity(5) Total Assets and Total Liabilities US$ millions 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 34,875 31,657 +10% 27,464 24,948 21,162 2009 2010 2011 2012 2013 US$ billions 150 120 90 60 30 0 147 122 134 114 108 108 88 93 91 76 TOTAL ASSETS +9% +13% TOTAL LIABILITIES 2009 2010 2011 2012 2013 * Percentages shown indicate changes in 2013 compared with 2012. 008 AIA GROUP LIMITED OVERVIEW2013 BREAKDOWN BY SEGMENT Value of New Business (VONB)(1)(6) Annualised New Premium (ANP)(2) 6% 10% 7% 14% 16% 28% 19% 21% 23% 10% 7% 17% 10% 12% Operating Profit After Tax (OPAT)(3) Total Weighted Premium Income (TWPI)(4) 10% 6% 30% 8% 10% 15% 21% 16% 21% 12% 9% 19% 11% 12% Hong Kong Thailand Singapore Malaysia China Korea Other Markets(7) Notes: (1) Value of new business (VONB) is the present value, measured at point of sale, of projected after-tax statutory profits emerging in the future from new business sold in the period less the cost of holding required capital in excess of regulatory reserves to support this business. (2) Annualised new premium (ANP) is a measure of new business activity that is calculated as the sum of 100 per cent annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. (5) Embedded value (EV) is an actuarially determined estimate of the economic value of a life insurance business based on a particular set of assumptions as to future experience, excluding any economic value attributable to future new business. EV Equity is the total of embedded value, goodwill and other intangible assets. (6) Based on local statutory basis and before unallocated Group Office expenses, VONB by segment includes pension business. (3) Operating profit after tax (OPAT) percentages are shown after non-controlling interests. (7) The results of our joint venture in India are accounted for using the equity method. For (4) Total weighted premium income (TWPI) consists of 100 per cent of regular premiums and 10 per cent of single premiums, before reinsurance ceded. clarity, TWPI, ANP and VONB exclude any contribution from India. ANNUAL REPORT 2013 009 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONChairman’s Statement I am proud that AIA continues to deliver strong results by providing high-quality products and services that address the vast and rapidly growing real life protection and savings needs of our customers throughout the region. I am pleased to report that 2013 was another year of considerable progress and strong growth for AIA. Once again the Group has produced excellent results across all of our main financial metrics maintaining our established track record of executing our growth strategy to create sustainable value for our shareholders. I am proud that AIA continues to deliver strong results by providing high- quality products and services that address the vast and rapidly growing real life protection and savings needs of our customers throughout the region. Value of new business (VONB), our main measure of performance, reached another record level in 2013 and now stands at US$1,490 million, a 25 per cent increase compared with our previous high in 2012. IFRS operating profit after tax (OPAT) increased by 16 per cent to US$2,504 million. These strong levels of profitable growth have been achieved alongside a further improvement in our solvency ratio and free surplus position. AIA also successfully integrated both the 010 AIA GROUP LIMITED OVERVIEWING Malaysia and Aviva NDB Insurance Sri Lanka acquisitions during 2013. Our ability to fund strategically aligned inorganic opportunities in addition to driving strong organic growth rates is a testament to the quality of the Group’s in-force business and the prudent management of our financial position. While AIA is only three years old as an independent and publicly listed company, we believe that our unrivalled depth of experience in Asia and the quality and scale of our distribution and product platform position us well to play a major role in promoting the development of the private social welfare system in Asia. We understand that AIA’s ongoing ability to finance new business growth and deliver progressive dividends is of great importance to our shareholders. In line with our previously-stated goal to deliver prudent, sustainable and progressive shareholder dividends, the Board has recommended a final dividend of 28.62 Hong Kong cents per share, subject to shareholders’ approval at the AGM. This represents an increase of 16 per cent compared with the final dividend in 2012 reflecting the strength of our results and brings the total dividend for 2013 to 42.55 Hong Kong cents per share. The Board is committed to upholding the highest standards of corporate governance and risk management controls, which are fundamental to AIA’s sustainable development and to maintaining investor and customer confidence in our organisation. I am privileged to have the opportunity to lead a Board composed of high-calibre individuals who are keenly committed to the Group’s success. As at 30 November 2013, our share price has outperformed the Hang Seng Index (HSI) by 94 per cent since Iisting and AIA remains the largest Hong Kong headquartered and incorporated company in the HSI. I would like to thank all of our shareholders for their support and who believe, as we do, in AIA’s outstanding prospects. I would like to convey my deepest thanks on behalf of the Board to everyone involved in AIA’s continued success including AIA’s employees, agents, partners and customers for their ongoing support. Particular thanks go to your Group Chief Executive and President Mark Tucker and his team for their skilled leadership. AIA’s outstanding achievements in 2013 are a function of their outstanding execution against the backdrop of the Group’s exceptional position as the leading life insurance franchise in the Asia-Pacific region. Edmund Sze-Wing Tse Non-executive Chairman 21 February 2014 ANNUAL REPORT 2013 011 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGroup Chief Executive and President’s Report Our large-scale growth year-on-year demonstrates the strength and diversity of AIA’s franchise, our financial strength and our ability to generate sustainable value for our shareholders. It gives me great pleasure to report that 2013 was another very successful year for AIA. Our focus remains on executing our clear growth strategy to sustain our core competitive advantages, as we continue to build on AIA’s unrivalled position as the leading pan-Asian life insurance company. perform strongly across other key performance metrics with IFRS operating profit after tax up by 16 per cent to US$2,504 million and growth in EV Equity by 10 per cent to a new high of US$34,875 million. Our ability to achieve large-scale growth year-on-year demonstrates the strength and diversity of AIA’s franchise, our rigorous financial discipline and our ability to convert the considerable opportunities in the Asia-Pacific region into sustainable value for shareholders. It is this rare and powerful combination that differentiates AIA from its competitors and ensures that we remain well positioned for the future. 2013 PERFORMANCE HIGHLIGHTS Value of new business (VONB) – our main performance measure – increased by 25 per cent to US$1,490 million – a result achieved by careful management of the mix of new business volume and margin. Annualised new premium (ANP) increased by 24 per cent compared with 2012 and margin remained healthy at 44.1 per cent. The Group continued to We also achieved double-digit growth in VONB in each of our reported market segments highlighting the strength through geographical diversity of AIA’s regional platform. At the same time as achieving strong growth in new business profitability, our free surplus generation increased substantially. This is another indication of the quality of our existing portfolio of businesses. The solvency ratio of our main operating company, AIA Co., on the 012 AIA GROUP LIMITED OVERVIEWprudent HKICO basis, improved by 80 pps to 433 per cent as at the end of November 2013. The increase reflected strong earnings and the benefit of rising interest rates. Our focus continues to be on organic growth but our scale presence and financial strength also place us in a strong position to capture any value-enhancing inorganic opportunities that arise. To this end, we completed two transactions in December 2012 when we significantly expanded our presence in Malaysia with the acquisition of ING Malaysia and entered Sri Lanka as the second- largest life insurance company in the country. ASIAN GROWTH OPPORTUNITY Asia offers one of the most attractive and robust life insurance markets in the world and our business continues to be well positioned to take advantage of the major drivers of growth in the region. Asia has a comparatively young and upwardly mobile population and this is driving the rapidly-rising rates of urbanisation and growth in disposable incomes across the region. Coupled with relatively low levels of state-funded social welfare provision, the need for the private sector to provide regular savings and life and health protection coverage to ensure the social well-being of the people in our markets is substantial. Additionally, existing levels of private provision are recognised generally as being insufficient and a large proportion of the Asian population does not have adequate savings or protection cover in place. These demographic trends and significant levels of underinsurance combine to create a vast latent need for life insurance – and one that can best be served and serviced by well-established companies with the distribution reach and the expertise across the broad spectrum of product design, investment management, policy administration and financial discipline to be able to deliver value consistently to the customer. OUR ADVANTAGED PLATFORM AIA’s advantaged platform across our markets derives from our long history in Asia and provides us with a unique presence, scale and depth of experience. This experience combined with our exclusive focus on the dynamic Asia-Pacific region means that we are well placed to understand and respond to the needs of our customers locally. AIA’s trusted brand and large-scale proprietary distribution offer direct access to these customers enabling us to provide advice across our product range and to benefit from the significant growth opportunities our markets offer. Our financial strength also places us in a strong position to finance our growth while maintaining a prudent, sustainable and progressive dividend policy. Our 100 per cent ownership structures allow us to capture the full economics of this growth for our shareholders. Our exceptional team of employees is fully committed to executing our strategy of developing ever more effective distribution channels, more targeted products and greater customer engagement to sustain the track record we have established. Premier Agency and Partnership Distribution Our core business as a life insurer is to protect the financial health and welfare of our customers through the provision of regular savings and protection products. High- quality, large-scale distribution is required to market these products effectively. We strive to reach as many people as possible to raise awareness of the need for adequate levels of savings and protection cover for the long term. AIA’s proprietary tied agency network has been built up over many years and remains the cornerstone of our distribution platform in the region. The scale and quality of our agency force allows AIA to develop long-term face-to-face relationships with our customers and their families with, in many cases these relationships enduring from generation to generation. We remain committed to sustaining the highest standards of service and advice to our new and existing customers through high-quality agent recruitment combined with outstanding training and development programmes as part of the execution of our Premier Agency strategy. We continue to see this as one of AIA’s fundamental strengths and critically important to sustaining our advantaged platform and business model in the region. Our partnership distribution business has been very successful in further expanding our distribution reach through bancassurance, direct marketing and other intermediated channels while meeting our profitability requirements. These sources of growth complement our agency business and our aim is to build strong relationships with our ANNUAL REPORT 2013 013 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGroup Chief Executive and President’s Report new and existing partners that achieve the right returns for our customers, our partners and AIA. As part of our ongoing strategy, we signed a landmark distribution agreement with Citibank, N.A. (Citibank) in December 2013. This exclusive 15-year agreement is the widest-reaching bancassurance distribution partnership ever secured in Asia covering 11 markets and 13 million customers in the region and builds on our established bancassurance capabilities. Brand Management and The Real Life Company AIA has the leading insurance brand in Asia and the introduction of our new brand positioning as The Real Life Company in June 2013 marked a significant milestone for us. The Real Life Company brand was the culmination of extensive analysis and research with customers, agents and employees across the region. It has been launched across 15 of our markets using a multi-channel media communication strategy including television, print, digital and social media. The Real Life Company brand communicates to our current and potential customers that we are genuinely engaged in their lives and that we will provide the right financial solutions and support for them and their families through life’s ups and downs. In August 2013, AIA completed its first major sponsorship deal when we announced our Cup Shirt partnership with English Premier League Football Club, Tottenham Hotspur. Our partnership continues to differentiate the AIA brand and offers another opportunity to engage with our customers, agents and employees through three major cup competitions in the United Kingdom and Europe, commanding over 1.5 billion television viewers across Asia. Product Innovation AIA offers a wide range of products to meet the life and health protection needs and long-term wealth creation goals of our customers. Consumers are looking for better healthcare services and deeper levels of protection. The general increase in longevity, inflation of living costs and a move away from long-standing family support relationships will also increase the importance of planning ahead for retirement. In 2013, we continued to promote the use of insurance cover as a more effective alternative to self-funding and we launched a number of new initiatives across our markets to help increase the levels of protection cover that people have in place. We also focused on the use of regular savings as a more disciplined and efficient way to accumulate funds while often addressing protection needs, for example, for education and retirement planning. Our next generation unit-linked products are playing an increasingly important role in this area. Our approach to innovation goes beyond traditional product development. This year, we launched AIA Vitality, a science- backed wellness programme that provides participants with the knowledge, tools and motivation to help them achieve their personal health goals. The programme, which is part of AIA’s commitment to healthy living, is a joint venture between AIA and Discovery Limited, a specialist insurer headquartered in South Africa. AIA Vitality is a transformational initiative to support healthy-living practices, signalling AIA’s commitment to engaging with our customers in ways that both encourage and empower them to make real improvements in their health and to reward them for doing so. ENGAGEMENT WITH PEOPLE Employees and Agents The diligence, professionalism and commitment of our employees and agents are essential to AIA’s continued success. In 2012, we communicated our Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People” and our Operating Principles that help guide and shape our employees’ actions and behaviours across all of AIA’s markets. Throughout 2013, we continued to build on these fundamental principles to refine and enhance the way in which we engage and empower our people to create a distinctive culture for AIA. We look to develop and reward employees and agents who not only meet or exceed their individual performance goals but who also exemplify our Operating Principles in the way they interact with each other and our external stakeholders. We listen to feedback from our employees to help shape our work practices and we have conducted an annual employee engagement survey each year since 2011 that is independently measured by Gallup. The survey had a participation rate of 96 per cent in 2013 and engagement scores have improved each year since its inception. 014 AIA GROUP LIMITED OVERVIEWOur wide-ranging training and development programmes are designed to provide learning opportunities for our employees at all levels of seniority to increase their professionalism and broaden their skills. We continued to expand our mentoring programme in 2013 and also further accelerated both our secondment and transfer efforts to promote best practices by sharing of ideas and building closer relationships among employees in different business units and functional roles to develop our next generation of leaders. Our compensation structure is designed to reward performance based on individual, business unit and group-wide delivery against defined goals and to do so without creating incentives to encourage employees to expose the business to inappropriate short-term risks. Employees also have the opportunity to participate in our Employee Share Purchase Plan that was launched in 2011. In 2013 we extended the opportunity for participation in this plan to encompass 13 of the territories in which we operate. I was particularly pleased to report last year that we had introduced a share ownership scheme for agents equivalent to that for employees and this had been launched in seven locations by 2013. We are encouraged to see increasing numbers of employees and agents enrolling in the plans each year. Customers and Communities AIA actively supports our local communities in many ways that fit alongside our core business as a life insurer. Our business is about helping people achieve their goals to provide a better future for themselves and their families. Such aspirations include the desire to lead a longer, healthier life and encouraging people across the region to lead healthier lives is the main focus of AIA’s corporate social responsibility strategy. Based on the results of AIA’s Healthy Living Index Survey, which included more than 10,000 respondents across 15 markets in the Asia-Pacific region, our offices have implemented both internal initiatives to encourage healthy-living practices among our employees and external projects through a range of well-being and fundraising programmes. Contributing to local communities and their well-being is therefore very much a core value of AIA and an integral part of our long- term commitment to the region. While Healthy Living is our main group-wide priority, we encourage and support our employees and agents to engage in charitable and community activities that connect our people and our businesses more closely to their local communities, as well as providing emergency aid in times of crises. One example of this in 2013 was in response to the impact of Typhoon Haiyan across Southeast Asia and, particularly in the Philippines. AIA acted both locally and across the region, led by our team in the Philippines, to aid immediate relief efforts and long-term reconstruction through numerous initiatives to raise funds for victims of the typhoon. To support this effort, our local business Philam Life donated US$500,000 to the Philam Foundation to provide food, shelter, medical care, clean water, safe sanitation, and kick-start the rebuilding process including the building of schools for those affected by the typhoon. OUTLOOK While debate over the timing of withdrawal of supportive U.S. monetary policy caused market volatility over 2013 and tested those countries running current account deficits, Asian central banks responded appropriately and successfully. They have the ability, capacity and resolve to respond proactively and effectively to contain any future global liquidity challenges. Exchange rates have begun to stabilise and macroeconomic fundamentals in Asia remain robust. I have said many times that we at AIA are exceptionally well positioned by the quality and scale of our advantaged platform to capitalise on the opportunities that Asia offers. We also have a clear strategy in place and our dedicated team remains focused on the right priorities. We have established a strong track record of delivery as demonstrated by our financial performance in 2013 and our consistent execution since our IPO. The opportunities available to us are truly exceptional and I am confident of AIA’s continued success in deriving growth in shareholders’ value. There is much more to come! Mark Edward Tucker Group Chief Executive and President 21 February 2014 ANNUAL REPORT 2013 015 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 …from every person within our organisation. At AIA, business is about doing the right thing in the right way with the right people and knowing that when we get that right, success will come. That is the way to build sustainable growth…and that is the way we are working to ensure that we are a truly great company. 016 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWANNUAL REPORT 2013 017 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFinancial Review AIA has delivered another year of excellent financial results, building on our track record of profitable growth, through the consistent execution of our strategy and prudent management of our balance sheet. The Group has achieved record results for each of our key performance metrics driven by strong operating performances against a backdrop of weaker Asian equity markets. VONB grew by 25 per cent to US$1,490 million and IFRS OPAT increased by 16 per cent to US$2,504 million. EV Equity was up by US$3,218 million or 10 per cent to US$34,875 million. This large-scale growth was achieved while reducing our new business strain as a proportion of VONB. We also delivered an increase in free surplus generated over the year through the disciplined management of our in-force portfolio and a positive effect from rising interest rates. Our regulatory solvency ratio for AIA Co. stands at 433 per cent on the prudent Hong Kong Insurance Companies Ordinance basis, which is an increase of 80 pps compared with 2012. Our financial performance in 2013 once again demonstrated the powerful combination of AIA’s significant growth opportunities, the effective execution of our clear strategy and the rigorous financial discipline that underscores AIA’s ability to continue to deliver sustainable value for our shareholders. SUMMARY Value Creation VONB grew by 25 per cent compared with 2012 to US$1,490 million, net of tax, with each of our market segments delivering double-digit growth over the year. We continued to focus on optimising the mix of volume and margin to deliver sustainable growth in new business profitability with an increase of 24 per cent in ANP compared with 2012 to US$3,341 million and VONB margin to 44.1 per cent from 43.6 per cent in 2012. EV Equity is the total of embedded value, goodwill and other intangible assets. EV Equity grew by US$3,218 million to US$34,875 million at 30 November 2013, mainly as a result of strong EV operating profit. This represents an increase of 10 per cent from US$31,657 million at 30 November 2012. EV Equity included goodwill and other intangible assets of US$1,053 million at 30 November 2013 compared with US$249 million at 30 November 2012, with the increase arising principally from acquisitions. EV grew to US$33,822 million at 30 November 2013, an increase of 8 per cent over the year from US$31,408 million at 30 November 2012. The growth in EV of US$2,414 million was mainly driven by a strong operating performance and is shown after a deduction of US$808 million for the effect of acquisitions in the year. EV operating profit grew by 14 per cent to US$3,975 million compared with 2012. The strong performance reflected a combination of a higher VONB of US$1,490 million, increased expected return on EV of US$2,387 million and positive operating experience variances and operating assumption changes which totalled US$124 million, less interest costs of US$26 million on medium term notes and an acquisition credit facility. 018 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWAIA has achieved record results for each of our key performance metrics driven by strong operating performances against a backdrop of weaker Asian equity markets. Non-operating EV movements included a positive contribution of US$620 million from investment return variances and changes in economic assumptions mainly due to an increase in interest rates and negative other non-operating variances. This was offset by the payment of total shareholder dividends of US$595 million, negative other capital movements of US$18 million and negative foreign exchange movements of US$760 million. IFRS Profit IFRS operating profit after tax (OPAT), grew by 16 per cent compared with 2012 to US$2,504 million. The increase was a result of strong business growth in each of our market segments, improvements in investment income and a positive contribution from acquisitions. AIA’s IFRS net profit definition includes mark-to-market movements from our equity portfolio. Net profit decreased by 7 per cent compared with 2012 to US$2,822 million, reflecting the decline in equity markets in the second half of 2013. Net gains from equities, net of tax, contributed US$424 million in 2013 compared with US$787 million in 2012. Shareholders’ equity reduced by 8 per cent to US$24,686 million at 30 November 2013 from US$26,697 million at 30 November 2012 mainly due to the accounting effect of rising interest rates on the treatment of debt securities that are classified as available for sale under the IFRS basis that AIA has adopted. IFRS OPAT exceeded US$2.5 billion for the first time and has increased by around half over the period since our IPO in 2010. This significant increase is a direct result of the strong underlying growth we have delivered across our businesses and our focus on improving operating margins through writing higher-quality new regular savings and protection business. ANNUAL REPORT 2013 019 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFinancial Review Capital and Dividends At 30 November 2013, the total available regulatory capital for AIA Co., our main regulated entity, was US$6,057 million as measured under the HKICO basis. AIA Co. has a solvency ratio of 433 per cent of the minimum regulatory capital requirement, which is an increase of 80 pps compared with 353 per cent at the end of November 2012. The positive movement included retained earnings generated during the year and the effect of rising interest rates. Our local businesses remitted US$1,733 million to the Group Corporate Centre in 2013, which is an increase of 9 per cent compared with 2012. The Board of Directors has recommended a final dividend of 28.62 Hong Kong cents per share in line with our prudent, sustainable and progressive dividend policy and subject to shareholders’ approval at the Company’s forthcoming AGM. This represents an increase of 16 per cent compared with the final dividend in 2012 reflecting the strength of our results and brings the total dividend for 2013 to 42.55 Hong Kong cents per share, an increase of 15 per cent compared with 2012. ACQUISITIONS As previously announced, AIA’s acquisitions of ING Malaysia and Aviva NDB Insurance (ANI) completed in December 2012, the first month of the Group’s financial year. The financial results of the two newly-acquired businesses are therefore accounted for in the Group’s 2013 financial results from the respective dates of completion. Further details are disclosed in note 5 to the financial statements. NEW BUSINESS GROWTH Value of New Business (VONB) and Annualised New Premium (ANP) by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Korea Other Markets Subtotal 2013 (1) VONB Margin 57.6% 56.3% 67.3% 37.8% 66.4% 26.8% 32.0% 48.9% VONB 468 319 269 120 166 91 220 1,653 2012 (1) (3) VONB Margin 58.4% 53.9% 65.1% 46.0% 57.5% 28.5% 27.0% 47.8% ANP VONB 781 565 400 319 249 338 689 366 287 220 69 124 68 167 3,341 1,301 VONB Change ANP Change 28% 11% 22% 74% 34% 34% 32% 27% 29% 6% 18% 111% 16% 43% 11% 24% ANP 604 532 339 151 215 237 618 2,696 Adjustment to reflect additional Hong Kong reserving and capital requirements (2) (67) n/m n/m (41) n/m n/m n/m n/m After-tax value of unallocated Group Office expenses Total Notes: (1) ANP and VONB margin exclude pension business. (96) n/m 1,490 44.1% n/m 3,341 (72) n/m 1,188 43.6% n/m 2,696 n/m 25% n/m 24% (2) Adjustment to VONB for the branches of AIA Co. and AIA International, as described in Section 4.4 of the Supplementary Embedded Value Information. (3) Certain segmental reclassifications have been made in the prior year VONB and VONB margin results to conform to current year presentation. The reclassification has no impact on the total VONB and VONB margin of the Group for the year ended 30 November 2012. 020 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWVONB grew by 25 per cent to US$1,490 million, an increase of US$302 million compared with 2012. We achieved significant growth across both agency and partnership distribution channels in 2013 with agency VONB up by 24 per cent to US$1,166 million and VONB for partnership distribution growing by 35 per cent to US$469 million compared with 2012. Each of our market segments delivered double-digit growth in VONB. China, Korea and Other Markets reported excellent VONB growth in excess of 30 per cent compared with 2012. Hong Kong and Singapore delivered strong performances with increases of 28 per cent and 22 per cent respectively driven by growth in active agents and improved productivity. Thailand delivered a solid performance with VONB growth of 11 per cent, as our agency distribution adjusted to modifications made to their compensation structure over the year to align more closely with our long-term emphasis on productivity, quality recruitment and sales. Finally, Malaysia reported an uplift in VONB of 74 per cent including the consolidation of ING Malaysia. ANP grew by 24 per cent to US$3,341 million compared with US$2,696 million in 2012. In particular, Hong Kong and Korea reported excellent growth of 29 per cent and 43 per cent respectively with ANP in Malaysia more than double the prior year figure reflecting the consolidation of ING Malaysia. VONB margin increased to 44.1 per cent compared with 43.6 per cent in 2012. The positive change in margin was mainly due to product and channel mix improvements of 0.6 pps, offset by a reduction of 0.4 pps from geographical mix changes primarily reflecting the growth in our operations in Korea following the restructuring and the consolidation of our acquisition of ING Malaysia. Economic assumption changes and other items improved margin by 0.3 pps in total. VONB is reported after a deduction of US$163 million of which US$67 million is for additional Hong Kong reserving and capital requirements above local statutory requirements and US$96 million is for unallocated Group Office expenses, representing the expenses incurred by the Group Office which are not already allocated by business unit. EMBEDDED VALUE (EV) EV Equity US$ millions, unless otherwise stated EV Goodwill and other intangible assets(1) EV Equity As at 30 November 2013 As at 30 November 2012 Change 33,822 1,053 34,875 31,408 249 31,657 8% 323% 10% Note: (1) Consistent with the IFRS financial statements, net of tax, amounts attributable to participating funds and non-controlling interests. EV Equity grew by US$3,218 million to US$34,875 million at 30 November 2013, an increase of 10 per cent over the year from US$31,657 million at 30 November 2012, mainly as a result of strong EV operating profit. EV Equity included goodwill and other intangible assets of US$1,053 million at 30 November 2013 compared with US$249 million at 30 November 2012, with the increase arising principally from acquisitions. ANNUAL REPORT 2013 021 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Financial Review Analysis of EV Movement An analysis of the movements in EV is shown as follows: US$ millions, unless otherwise stated 2013 ANW 13,170 (1,865) 683 (1,182) 11,988 (957) 3,087 (255) (83) (26) 1,766 335 – 361 2,462 (595) (18) (371) 13,466 ANW 10,906 (924) 2,807 (116) (20) 1,747 554 – 410 2,711 (530) (42) 125 13,170 VIF 18,238 – 374 374 18,612 2,447 (700) 369 93 – 2,209 10 429 (515) 2,133 – – (389) 20,356 2012 VIF 16,333 2,112 (615) 256 (9) 1,744 379 (105) (523) 1,495 – – 410 18,238 EV 31,408 (1,865) 1,057 (808) 30,600 1,490 2,387 114 10 (26) 3,975 345 429 (154) 4,595 (595) (18) (760) 33,822 EV 27,239 1,188 2,192 140 (29) 3,491 933 (105) (113) 4,206 (530) (42) 535 31,408 Opening EV Purchase price Acquired EV Effect of acquisitions EV post acquisitions Value of new business Expected return on EV Operating experience variances Operating assumption changes Interest costs on medium term notes and acquisition credit facility EV operating profit Investment return variances Effect of changes in economic assumptions Other non-operating variances Total EV profit Dividends Other capital movements Effect of changes in exchange rates Closing EV US$ millions, unless otherwise stated Opening EV Value of new business Expected return on EV Operating experience variances Operating assumption changes EV operating profit Investment return variances Effect of changes in economic assumptions Other non-operating variances Total EV profit Dividends Other capital movements Effect of changes in exchange rates Closing EV 022 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWEV grew to US$33,822 million at 30 November 2013, an increase of 8 per cent over the year from US$31,408 million at 30 November 2012. The growth in EV of US$2,414 million was mainly driven by a strong operating performance and is shown after a deduction of US$808 million for the effect of acquisitions in the year. EV operating profit grew by 14 per cent to US$3,975 million compared with 2012. The strong performance reflected a combination of a higher VONB of US$1,490 million, increased expected return on EV of US$2,387 million and positive operating experience variances and operating assumption changes which totalled US$124 million, less interest costs of US$26 million on medium term notes and an acquisition credit facility. Non-operating EV movements included a positive contribution of US$620 million from investment return variances and changes in economic assumptions mainly due to rising interest rates and negative other non-operating variances. This was offset by the payment of total shareholder dividends of US$595 million, negative other capital movements of US$18 million and negative foreign exchange movements of US$760 million. EV includes the adjusted net worth (ANW) and value of in-force business (VIF). ANW increased by 2 per cent to US$13,466 million at 30 November 2013 from US$13,170 million at 30 November 2012 with an increase of US$1,478 million offset by the deduction of US$1,182 million for the effect of acquisitions. After deducting the cost of holding required capital, VIF increased by 12 per cent to US$20,356 million at 30 November 2013, compared with US$18,238 million at 30 November 2012. Total undiscounted after-tax distributable earnings of US$14,132 million are expected to emerge from the VIF over the next five years compared with US$11,870 million reported in 2012. EV and VONB Sensitivities Sensitivities to EV and VONB arising from changes to central assumptions from equity market and interest rate movements are shown below. US$ millions, unless otherwise stated Central value Equity market risk 10 per cent increase in equity prices 10 per cent decrease in equity prices Interest rate risk 50 basis points increase in interest rates 50 basis points decrease in interest rates EV as at 30 November 2013 EV as at 30 November 2012 2013 VONB 2012 VONB 33,822 1,490 31,408 1,188 34,459 33,168 34,031 33,418 n/a n/a 1,564 1,399 31,961 30,846 31,605 31,007 n/a n/a 1,261 1,099 Please refer to Section 3 of the Supplementary Embedded Value Information for additional information. ANNUAL REPORT 2013 023 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Financial Review IFRS PROFIT Total Weighted Premium Income (TWPI) by Segment IFRS Operating Profit After Tax (OPAT) (1) by Segment US$ millions, unless otherwise stated 2013 2012(2) Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 770 526 396 250 205 150 244 732 471 345 150 151 125 207 (37) 2,504 (22) 2,159 YoY 5% 12% 15% 67% 36% 20% 18% n/m 16% Notes: (1) Attributable to shareholders of AIA Group Limited. (2) Certain segmental reclassifications have been made in the prior year OPAT result to conform to current year presentation. The reclassification has no impact on the total OPAT of the Group for the year ended 30 November 2012. Further details are disclosed in note 8 to the financial statements. OPAT grew by 16 per cent compared with 2012 to US$2,504 million. The increase was a result of strong business growth in each of our market segments, improvements in investment income and a positive contribution from acquisitions. OPAT growth in Hong Kong of 5 per cent and in Thailand of 12 per cent was due to growth in the underlying businesses, partly offset by lower investment income following net funds remitted to the Group Corporate Centre. Singapore reported 15 per cent growth in OPAT mainly from strong investment income and Malaysia reported 67 per cent growth in OPAT including the consolidation of ING Malaysia. China achieved 36 per cent growth in OPAT from a combination of underlying growth in the business, strong investment income and a lower effective tax rate and Korea’s OPAT grew by 20 per cent due to favourable claims experience. OPAT growth of 18 per cent in Other Markets was mainly attributable to strong results in Indonesia and the Philippines. US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total 2013 3,770 3,364 2,150 2,036 1,599 2,049 2,840 17,808 2012 3,372 3,119 2,035 964 1,446 1,942 2,482 15,360 YoY 12% 8% 6% 111% 11% 6% 14% 16% TWPI increased by 16 per cent to US$17,808 million, reflecting growth in each of our market segments and the consolidation of ING Malaysia. Persistency remained strong and stable at 94.3 per cent in 2013. Investment Income (1) US$ millions, unless otherwise stated Interest income Dividend income Rental income Total Note: (1) Excluding unit-linked contracts. 2013 4,445 398 115 4,958 2012 3,864 316 97 4,277 YoY 15% 26% 19% 16% Investment income increased by 16 per cent to US$4,958 million compared with 2012, reflecting the higher level of invested assets at the start of 2013 and higher rental yields achieved over the year. Operating Expenses US$ millions, unless otherwise stated Operating expenses 2013 1,577 2012 1,340 YoY 18% Operating expenses increased by 18 per cent to US$1,577 million compared with 2012 mainly as a result of acquisitions. The expense ratio increased slightly to 8.9 per cent in 2013 from 8.7 per cent in 2012. 024 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW Net Profit (1) US$ millions, unless otherwise stated OPAT Net gains from equities, net of tax Other non-operating investment experience and other items, net of tax Total 2013 2,504 2012 2,159 YoY 16% 424 787 (46)% (106) 2,822 73 3,019 n/m (7)% Note: (1) Attributable to shareholders of AIA Group Limited. Earnings Per Share – Basic Profit (US$ millions) Weighted average number of ordinary shares (millions) Basic earnings per share (US cents) Note: (1) Attributable to shareholders of AIA Group Limited. Earnings Per Share – Diluted Profit (US$ millions) Weighted average number of ordinary shares (millions) (2) Diluted earnings per share (US cents) Notes: (1) Attributable to shareholders of AIA Group Limited. AIA’s IFRS net profit definition includes mark-to-market movements from our equity portfolio. Following a decline in equity markets in the second half of 2013, net profit decreased by 7 per cent compared with 2012 to US$2,822 million with net gains from equities, net of tax, contributing US$424 million in 2013 compared with US$787 million in 2012. Negative other non-operating investment experience and other items, net of tax, of US$106 million primarily included a net realised loss from debt securities of US$46 million and integration and restructuring expenses of US$54 million. EARNINGS PER SHARE (EPS) OPAT earnings per share increased by 16 per cent to 20.91 US cents in 2013 from 18.00 US cents in 2012. EPS based on net profit attributable to shareholders of AIA Group Limited decreased to 23.57 US cents in 2013 from 25.16 US cents in 2012 following mark-to-market movements in equity markets mentioned above. Net Profit (1) OPAT (1) 2013 2012 2013 2,822 11,974 23.57 3,019 11,997 25.16 2,504 11,974 20.91 2012 2,159 11,997 18.00 Net P rofit (1) OPAT (1) 2013 2012 2013 2,822 12,006 23.50 3,019 12,008 25.14 2,504 12,006 20.86 2012 2,159 12,008 17.98 (2) Diluted earnings per share including the dilutive effects, if any, of the awards of share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted to eligible employees, directors, officers and agents under the share-based compensation plans as described in note 39 to the financial statements. ANNUAL REPORT 2013 025 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Financial Review BALANCE SHEET Consolidated Statement of Financial Position US$ millions, unless otherwise stated Assets Financial investments Investment property Cash and cash equivalents Invested assets Deferred acquisition and origination costs Other assets Total assets Liabilities Insurance and investment contract liabilities Borrowings Other liabilities Less total liabilities Equity Total equity Less non-controlling interests Total equity attributable to shareholders of AIA Group Limited As at 30 November 2013 As at 30 November 2012 Change 120,648 1,128 2,228 124,004 15,738 6,843 146,585 112,099 2,126 7,529 121,754 24,831 145 24,686 111,581 1,035 8% 9% 2,948 (24)% 115,564 14,161 4,714 134,439 99,439 766 7,406 107,611 26,828 131 26,697 7% 11% 45% 9% 13% 178% 2% 13% (7)% 11% (8)% Assets Total assets grew by 9 per cent to US$146,585 million at 30 November 2013 compared with US$134,439 million at 30 November 2012 reflecting positive net flows from underlying growth in the business and from acquisitions. Cash and cash equivalents decreased by 24 per cent to US$2,228 million at 30 November 2013 compared with US$2,948 million at 30 November 2012, reflecting increased investments in financial assets and the payment of shareholder dividends totalling US$595 million. Deferred acquisition and origination costs increased by 11 per cent to US$15,738 million at 30 November 2013 compared with US$14,161 million at 30 November 2012 from growth in new business and acquisitions. Other assets grew by 45 per cent to US$6,843 million mainly due to the addition of goodwill of US$1,009 million and other assets of US$335 million arising from acquisitions, and US$295 million associated with the acquisition of a property in Hong Kong in December 2012. 026 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW Liabilities Total liabilities increased by 13 per cent to US$121,754 million at 30 November 2013 compared with US$107,611 million at 30 November 2012. Insurance and investment contract liabilities grew by 13 per cent to US$112,099 million at 30 November 2013 compared with US$99,439 million at 30 November 2012, reflecting the underlying growth of the in-force portfolio and from acquisitions. Borrowings increased by 178 per cent to US$2,126 million at 30 November 2013 mainly from the issue in March 2013 of two medium term notes of a combined nominal amount of US$1.0 billion and the drawdown of a credit facility relating to the financing of a property acquisition in Hong Kong. Details of commitments and contingencies are included in note 42 to the financial statements. Equity – Movement in Shareholders’ Equity of AIA Group Limited US$ millions, unless otherwise stated Opening shareholders’ equity Net profit Fair value (losses)/gains on assets Foreign currency translation adjustments Purchase of shares held by employee share-based trusts Dividends Other capital movements Total movement in shareholders’ equity Closing shareholders’ equity 2013 26,697 2,822 (3,712) (508) (87) (595) 69 (2,011) 24,686 2012 21,313 3,019 2,565 372 (84) (530) 42 5,384 26,697 Shareholders’ IFRS equity excluding non-controlling interests reduced by 8 per cent to US$24,686 million at 30 November 2013 from US$26,697 million at 30 November 2012 mainly due to the accounting effect of rising interest rates on the treatment of debt securities that are classified as available for sale leading to a reduction in the fair value reserve of US$3,712 million. Other negative movements included foreign currency translation reserves of US$508 million and the payment of shareholder dividends of US$595 million. Sensitivities to IFRS profit before tax and net assets arising from foreign exchange rate, interest rate and equity market risk are included in note 37 to the financial statements. Total Invested Assets US$ millions, unless otherwise stated Total policyholder and shareholder Total unit-linked contracts Total invested assets INVESTED ASSETS The carrying value of invested assets, including financial investments, investment property and cash and cash equivalents, increased by 7 per cent to US$124,004 million at 30 November 2013 compared with US$115,564 million at 30 November 2012. Invested assets include total assets held in respect of policyholders and shareholders, and those backing unit-linked contracts. As at 30 November 2013 Percentage of total As at 30 November 2012 Percentage of total 105,174 18,830 124,004 85% 15% 100% 98,240 17,324 115,564 85% 15% 100% ANNUAL REPORT 2013 027 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFinancial Review Details of the investment mix are as follows: Policyholder and Shareholder Invested Assets US$ millions, unless otherwise stated Participating funds Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Cash and cash equivalents Derivatives Investment property Subtotal participating funds Other policyholder and shareholder Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Cash and cash equivalents Derivatives Investment property Subtotal other policyholder and shareholder Total policyholder and shareholder Unit-linked Contracts US$ millions, unless otherwise stated Unit-linked contracts Debt securities Loans and deposits Equities(1) Cash and cash equivalents Derivatives Total unit-linked contracts Note: (1) Including third-party interests in equities. 028 AIA GROUP LIMITED As at 30 November 2013 Percentage of total As at 30 November 2012 Percentage of total 7,041 11,150 1,944 20,135 4,569 269 215 95 25,283 32,109 33,283 5,393 70,785 6,315 1,531 227 1,033 79,891 105,174 7% 11% 2% 20% 4% – – – 24% 31% 32% 5% 68% 6% 1% – 1% 76% 100% 6,011 9,842 1,303 17,156 3,534 316 317 15 21,338 32,072 30,893 5,047 68,012 5,656 1,897 317 1,020 76,902 98,240 6% 10% 2% 18% 4% – – – 22% 33% 31% 5% 69% 6% 2% – 1% 78% 100% As at 30 November 2013 Percentage of total As at 30 November 2012 Percentage of total 2,168 147 16,084 428 3 12% 1% 85% 2% – 18,830 100% 2,044 75 14,466 735 4 17,324 12% – 84% 4% – 100% FINANCIAL AND OPERATING REVIEW Invested assets held in respect of policyholders and shareholders increased by 7 per cent to US$105,174 million at 30 November 2013 compared with US$98,240 million at 30 November 2012. The increase was mainly a result of the investment of operating cash flows generated by the business over the year and acquisitions. reflecting increased investments in financial assets and the payment of shareholder dividends totalling US$595 million. Invested assets held in respect of unit-linked contracts totalled US$18,830 million at 30 November 2013 compared with US$17,324 million at 30 November 2012. Fixed income investments, including debt securities, loans, and term deposits, held in respect of policyholders and shareholders, totalled US$90,920 million at 30 November 2013 compared with US$85,168 million at 30 November 2012. The increase was mainly from new purchases partly offset by increases in interest rates. Government and government agency bonds represented 43 per cent of our fixed income investments at 30 November 2013 compared with 45 per cent held at 30 November 2012. Corporate bonds and structured securities accounted for 49 per cent of fixed income investments at 30 November 2013 compared with 48 per cent at 30 November 2012. Total equity securities held in respect of policyholders and shareholders totalled US$10,884 million at 30 November 2013, compared with US$9,190 million at 30 November 2012. The increase in carrying value was attributable to new purchases as well as gains in market values. Equity securities totalling US$4,569 million were held in participating funds. Cash and cash equivalents held in respect of policyholders and shareholders totalled US$1,800 million at 30 November 2013 compared with US$2,213 million at 30 November 2012 CAPITAL Free Surplus Generation The Group’s free surplus at 30 November 2013 represented the excess of adjusted net worth over liabilities and required capital calculated on the HKICO basis. Free surplus generated increased by 33 per cent compared with 2012 to US$3,784 million from strong growth in our in- force business and a positive effect from rising interest rates. This was partially offset by investment in new business of US$1,510 million, which increased by 7 per cent compared with VONB growth of 25 per cent. Other deductions included unallocated Group Office expenses and interest costs of US$142 million, the payment of shareholder dividends of US$595 million and negative other capital movements of US$18 million. Overall, free surplus before the effect of acquisitions and others increased by US$1,519 million over the year. Total free surplus increased by US$88 million to US$6,731 million at 30 November 2013 with the increase of US$1,519 million offset by the effect of acquisitions and others of US$1,431 million. The following table shows the change in free surplus: US$ millions, unless otherwise stated Opening free surplus Effect of acquisitions and others Free surplus post acquisitions and others Free surplus generated Free surplus used to fund new business Unallocated Group Office expenses (1) Dividends Other capital movements Closing free surplus 2013 6,643 (1,431) 5,212 3,784 (1,510) (142) (595) (18) 6,731 2012 5,930 – 5,930 2,845 (1,412) (148) (530) (42) 6,643 Note: (1) Unallocated Group Office expenses for the year ended 30 November 2013 included interest costs of US$26 million on medium term notes and an acquisition credit facility. ANNUAL REPORT 2013 029 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Financial Review Net Funds to Group Corporate Centre Working capital comprises debt and equity securities, deposits and cash and cash equivalents held by Group Corporate Centre. Working capital, after payment of shareholder dividends, was US$5,556 million at 30 November 2013 compared with US$5,185 million at 30 November 2012. Our business units remitted US$1,733 million to the Group Corporate Centre, which was an increase of 9 per cent compared with 2012. Movements over the year also included a reduction in working capital from payments made for acquisitions partially offset by an increase in borrowings mainly due to the issue of medium term notes as discussed before and the drawdown of a credit facility relating to the financing of a property acquisition in Hong Kong. The movements in working capital are summarised as follows: US$ millions, unless otherwise stated Opening working capital Group Corporate Centre net losses Capital flows from business units Hong Kong Thailand Singapore Malaysia China Korea Other Markets Net funds remitted to Group Corporate Centre Payment for acquisitions Increase in borrowings Change in fair value reserve Payment of dividends Purchase of shares held by the employee share-based trusts Change in share-based compensation reserve Other changes in working capital Closing working capital 2013 5,185 (31) 2012(1) 3,912 (14) 839 700 222 118 (101) 27 (72) 1,733 (1,865) 1,441 (232) (595) (87) 75 (68) 5,556 1,104 503 23 98 (100) – (45) 1,583 – – 217 (530) (84) 41 60 5,185 Note: (1) Certain segmental reclassifications have been made in the prior year to conform to current year presentation. The reclassification has no impact on the closing working capital for the year ended 30 November 2012. Further details are disclosed in note 8 to the financial statements. 030 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW REGULATORY CAPITAL The Group’s lead insurance regulator is the Hong Kong Office of the Commissioner of Insurance (HKOCI). The Group’s principal operating company is AIA Co., a Hong Kong- domiciled insurer. At 30 November 2013, the total available regulatory capital for AIA Co. amounted to US$6,057 million as measured under the HKICO basis. AIA Co. has a solvency ratio of 433 per cent of the minimum regulatory capital requirement, which is an increase of 80 pps compared with 353 per cent reported at the end of November 2012. The positive movement included retained earnings generated during the year and the effect of rising interest rates. A summary of the total available regulatory capital and solvency ratios of AIA Co. is as follows: US$ millions, unless otherwise stated Total Available Regulatory Capital Regulatory Minimum Required Capital (100%) Solvency ratio (%) As at 30 November 2013 As at 30 November 2012 6,057 1,399 433% 4,811 1,362 353% AIA has given an undertaking to the HKOCI that it will maintain a solvency ratio of not less than 150 per cent in each of AIA Co. and AIA International. The Group’s individual branches and subsidiaries are also subject to supervision in the jurisdictions in which they operate. This means that local operating units, including branches and subsidiaries, must meet the regulatory capital requirements of their local prudential regulators. The various regulators overseeing the Group’s branches and subsidiaries actively monitor their capital position. The local operating units were in compliance with the capital requirements of their respective local regulators in each of our geographical markets at 30 November 2013. respectively. Additional notes were issued in November 2013 including a 3-year floating rate note at a nominal amount of HK$1,160 million (approximately US$150 million) that bears interest based upon HIBOR and a 10-year unsecured floating rate note at a nominal amount of US$60 million that bears interest based upon LIBOR. CREDIT RATINGS At 30 November 2013, AIA Co. had published financial strength ratings of AA- (Very Strong) with a stable outlook and the AIA Group Limited rating is A (Strong) with stable outlook from Standard & Poor’s. MEDIUM TERM NOTE PROGRAMME AIA established a US$2 billion Medium Term Note (MTN) programme on 27 February 2013. A total nominal amount of US$1.21 billion has been drawn down through the programme including an inaugural public offering of two senior unsecured fixed rate notes that was successfully completed in March 2013. The notes are for terms of 5 years and 10 years at nominal amounts of US$500 million each and bear annual interest of 1.750 per cent and 3.125 per cent DIVIDENDS The Board of Directors has recommended a final dividend of 28.62 Hong Kong cents per share in line with our prudent, sustainable and progressive dividend policy and subject to shareholders’ approval at the Company’s forthcoming AGM. This represents an increase of 16 per cent compared with the final dividend in 2012 reflecting the strength of our results and brings the total dividend for 2013 to 42.55 Hong Kong cents per share, an increase of 15 per cent compared with 2012. ANNUAL REPORT 2013 031 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Business Review DISTRIBUTION Agency AIA’s proprietary tied agency network is a major source of growth and competitive advantage for the Group. The combination of scale and quality across our markets is one of AIA’s fundamental strengths and underpins our unique presence in the region. In 2013, we continued to implement our successful Premier Agency strategy that helps AIA’s agents provide our customers with professional, high-quality advice and products that serve their evolving needs. Our agency model is fundamentally aligned with our focus on developing regular savings and protection products, which require high-calibre and well-trained agents to distribute effectively to our customers. We remain committed to ensuring that the highest standards of knowledge, skills and best practices are developed, maintained and shared across our entire network of agents in order to provide the best available service to our customers. The execution of our strategy has delivered excellent agency VONB growth of 24 per cent compared with 2012 to US$1,166 million and contributed 71 per cent of the Group’s total VONB in 2013. ANP increased by 25 per cent with a sustained VONB margin of 53.9 per cent compared with 2012. Our growth was the result of an increased number of active agents and strong gains in agency productivity during the year. Our newly-acquired businesses in Malaysia and Sri Lanka also contributed to the overall performance following their successful integration into the Group. Note: VONB and VONB margin by distribution channel are based on local statutory reserving and capital requirements and exclude pension business. 032 AIA GROUP LIMITED 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 FINANCIAL AND OPERATING REVIEW…between each of our geographical markets. What they each do have in common is AIA’s high-quality people who are deeply committed to serving the holders of more than 28 million individual policies and creating sustainable value for our shareholders. ANNUAL REPORT 2013 033 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review The cornerstone of our strategy for sustained growth in our agency channel remains focused recruitment backed by best-in-class training programmes. Our high-quality agent selection is driving our recruitment of younger, highly-educated and dynamic candidates into our agency business. Dedicated recruitment teams have been established to identify and recruit people who fit this profile, alongside innovative selection tools and upgraded new agent induction programmes developed through our interaction with LIMRA, a global leader in insurance training and recruitment practices. Our training programmes have been developed over time to improve our agency training competency through our AIA Premier Academies. In 2013, we entered into a new strategic partnership with GAMA International, an association dedicated to supporting the professional development of field leaders in the insurance and financial services industry. Our aim is to further extend our competitive advantage regionally by developing our agency leaders through skills- based professional development experience, peer-to-peer networking and enhancing our proven agency management practices. These initiatives have helped the number of active new agents in 2013 grow by 27 per cent compared with 2012. Million Dollar Round Table (MDRT) qualification is an important external global industry measure of the top financial planners and advisers and remains a benchmark for our Premier Agency platform. We continue to promote qualification through regional events that recognise sales performance and inspire and encourage the highest possible levels of productivity and quality. AIA is the number one ranked Asia-based insurer for MDRT members and our MDRT qualifiers grew by 20 per cent compared with 2012 demonstrating the depth and quality of the growth in our agency force. AIA continued to invest in iPoS, our industry-leading interactive point-of-sale technology. This pioneering technology enables our agents to reduce their administrative work and optimise their time spent advising existing and potential customers. iPoS has now been deployed to our agents in eight markets – Thailand, Singapore, Malaysia, Indonesia, the Philippines, Sri Lanka, Taiwan and Vietnam. Following the successful implementation of this first phase of the regional roll-out, we have begun the development of the 034 AIA GROUP LIMITED AIA Premier Academy organised an annual kick-off seminar to help agents and agency leaders plan ahead in their pursuits of MDRT qualification during the year. second phase which incorporates additional tools that assist our agents and agency leaders to manage their agency teams still more effectively. Partnerships AIA’s partnership distribution business expands our distribution reach and creates additional growth opportunities through bancassurance, direct marketing and other intermediated distribution channels. Our partnership strategy is built around establishing mutually beneficial relationships with our partners that allow us to maintain our disciplined approach to the types of products we sell so that we can achieve the right returns for our customers, our partners and AIA. This deliberate strategy of balancing growth in the breadth of our distribution channels while meeting our profitability targets has once again delivered excellent results, with partnership VONB growth of 35 per cent compared with 2012 to US$469 million. This growth was driven by increased ANP of 23 per cent and further VONB margin expansion of 3.4 pps to 39.8 per cent compared with 2012, as we improved our productivity and enhanced our business mix by achieving a higher proportion of protection product sales through our partners. Overall, our partnership business accounted for 29 per cent of the Group’s total VONB in 2013. Bancassurance In recent years, we have transformed our bancassurance business through the ongoing development of collaborative partnerships with highly-regarded regional and local banks, so that it now represents a substantial part of our FINANCIAL AND OPERATING REVIEWoverall partnership distribution. We have continued to work closely with our bank partners to increase sales force productivity from the proactive management and expansion of our in-branch specialists, greater network coverage and improvements to our product mix. In 2013, we also began the roll-out of iPoS to partners to further enhance the productivity of our specialists and to broaden the product range available to bank customers. The successful execution of our bancassurance strategy continued to produce excellent results in 2013, maintaining our strong track record of delivering financially-disciplined growth with an increase in VONB for this channel of 57 per cent compared with 2012 including a margin uplift of 4.0 pps. Our new exclusive relationship with Public Bank provided an important contribution to bancassurance VONB in Malaysia. Public Bank is one of Malaysia’s largest banking groups with over five million customers. Direct Marketing Our direct marketing business has continued to make good progress as a result of continuing investments in our people, products and processes. In Korea, we have progressively restructured our operations to target best-in-class direct marketing capabilities with successful recruitment campaigns to attract quality telesales representatives (TSRs). We continued to implement our training and development programmes during the year to bring newly-recruited TSRs up to required levels of productivity. Other Partnership Channels AIA’s additional partnership channels include independent financial advisers (IFAs), brokers, private banks and specialist advisers. We delivered solid overall growth in these channels during 2013. We continued to develop our Premier IFA model in Australia and this has delivered strong sales growth combined with attractive margins in the individual retail protection market to supplement our group insurance business. Group Insurance For more than 60 years, AIA has operated in the group insurance market in the Asia-Pacific region with currently more than 120,000 existing corporate clients and 16 million insured members. Our market expertise and distribution relationships have enabled AIA to build long-standing partnerships with companies through our market-leading products, comprehensive advice and regional support provided to a wide range of local domestic and multinational corporations. Our group insurance business is organised around two main channels. Our Regional Employee Benefits Partnership Platform provides the broad geographical footprint to work strategically with key specialist global brokers to deliver group insurance products and services to multinational organisations across the region. Our Premier Agency distribution channel continues to focus on increasing the penetration of group insurance in small-and-medium sized enterprises (SMEs) that are widespread across Asia. The successful execution of our strategy has delivered group insurance VONB growth of 26 per cent compared with 2012 and established our market-leading positions in Singapore, Thailand, Hong Kong, Australia and Malaysia, while continuing to build our presence in other growth markets such as China, Indonesia and the Philippines. We remain optimistic about the continuing success of our group insurance business and believe there is vast potential for the future growth of this segment. A combination of favourable demographic trends, increased urbanisation, rising income levels, increasing demand for labour and more sophisticated human resources practices will continue to drive an increasing need for group insurance cover. This is occurring against a market backdrop where overall coverage remains very low compared with that offered in more developed markets. AIA’s advantaged platform combined with the market’s potential scale and clear capacity for further expansion provide us with significant opportunities for profitable growth. AIA continued to provide training and development programmes to its TSRs. Our TSRs in Korea attended a direct marketing workshop in June 2013. Note: VONB and VONB margin by distribution channel are based on local statutory reserving and capital requirements and exclude pension business. ANNUAL REPORT 2013 035 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review The Real Life Company brand positioning was the most comprehensive branding programme in AIA’s history. MARKETING AIA has the leading Asian insurance brand and is one of the most recognised and trusted insurance companies in the industry. Our aim is to lead in the evolving market for regular savings and protection products, through our unrivalled depth of understanding gained from our extensive customer experience programmes. This allows us to help inform and educate customers of the importance of planning for the future and tailor products to meet their evolving needs. The Real Life Company Reflecting our aspiration to provide all of our stakeholders with a better understanding of what AIA stands for, we launched our new brand positioning as The Real Life Company in 2013. This was the most comprehensive branding programme in AIA’s history and was the culmination of extensive analysis and research with customers, agents and employees across the region. Our new brand positioning reflects the wealth of customer insights gleaned from AIA’s long and remarkable history supporting millions of people in the Asia-Pacific region. The Real Life Company brand communicates that we are genuinely engaged in the lives of our customers allowing them to rely on AIA to provide them with the right financial solutions and support throughout their lives. The Real Life Company brand has been launched internally and externally across 15 markets using a multi-channel media communication strategy including television, print, digital and social media. Our local markets have adapted and tailored our very successful regional campaign to reflect local context and culture, which has led to deeper engagement with our businesses, employees, customers and communities. This year also marked AIA’s entry into major sponsorship promotion with the aim of increasing the profile and significance of the AIA brand across Asia and internationally. In August 2013, we announced our Cup Shirt partnership with English Premier League Football Club, Tottenham Hotspur (Spurs). The cup shirt sponsorship encompasses three major competitions in the United Kingdom and Europe that commands over 1.5 billion television viewers across Asia. Additionally, Spurs have around 80 million fans in the region. This major partnership provides AIA with a strong point of brand differentiation from our industry competitors and offers yet another opportunity to engage with a younger market segment alongside our other customer segments. 036 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWOur marketing teams have introduced advanced customer data analytics to help our agents and employees improve their engagement with our existing customers. In 2013 we continued to realise this important source of new business growth and we have seen positive results with a 78 per cent increase in VONB from new sales to existing customers compared with 2012. As part of our aim to create powerful new ways of actively engaging with our customers and making the benefits of life insurance products more tangible, we launched a new wellness programme in July 2013 called “AIA Vitality”. AIA Vitality is a strategic joint venture with Discovery Limited, a specialist insurer headquartered in South Africa, and combines AIA’s brand, distribution and product leadership with Discovery Limited’s wellness-based expertise and experience. This innovative and science-backed programme enables us to offer protection products designed to encourage and reward sustained changes in healthy living while improving claims and persistency experience for AIA to further differentiate our proposition in the market and enhance sustainable value creation. Engagement with Social Media One of the many ways our marketing teams increase customer engagement is through the use of digital and social media. Increasing our social media presence has been one of our main digital marketing objectives in 2013. AIA now has a substantial and growing presence across a range of global and regional social media platforms with over 5.2 million followers using LINE in Thailand, 600,000 followers on Facebook and over 500,000 fans on Kakao Talk in Korea. Delivering The Right Products AIA’s core business is to offer our customers financial security through protection against life’s risks and efficient regular savings plans to build up funds for the future. AIA offers an extensive range of products to meet the medical and healthcare, life cover, long-term wealth accumulation, retirement and legacy planning needs of our customers, with insurance providing a more effective means of securing protection than reliance on self-funding and a more reliable route to wealth accumulation than casual savings. ANNUAL REPORT 2013 037 The Cup Shirt partnership with Tottenham Hotspur provides AIA with strong point of brand differentiation from industry competitors. Improving Customer Experience and Advocacy Our customer experience programmes are designed to help us focus on the areas of service that matter most to our customers. Customer experience in each of our markets is monitored on an ongoing basis through customer assessments, mystery shopping and customer dashboards. We have used the insights gained from this detailed analysis to influence a number of major strategic and product initiatives. For example, our “Early Care” programme introduced simplified and integrated communications to build stronger relationships with our customers from their first contact with AIA. We also launched a “Customer Understanding” initiative in each of our markets to monitor and assess a number of specific areas including brand health and customer advocacy. This work has helped us generate tailored products for a range of customer segments including young families, women, overseas workers, high-net-worth individuals and seniors. Better Engagement with Our Customers AIA’s large-scale existing customer base of over 28 million individual policies and 16 million group insurance scheme members places us in a unique and advantaged position to generate new business growth from meeting evolving customer needs through cross-selling and upselling new products. OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review Our primary focus in protection is on raising the awareness of the need for additional cover to address the significant shortfall that exists between the levels of cover people need to protect the wealth and income of their families and the amounts they currently have in place. This shortfall exists globally but it is particularly significant in many Asian countries because of the low level of state welfare provision. As well as encouraging the take-up of new policies, we have also adopted a systematic approach to advising our customers of the need to increase their existing levels of cover to keep pace with their changing financial circumstances. We have developed and launched new products in this area, such as multiple-payment and early-payment comprehensive critical illness products in Hong Kong, simplified issue health products in Korea, enhanced critical illness rider covers in Singapore and a comprehensive protection product in China. We also see a major aspect of our business as providing customers with products to meet their long-term wealth creation goals, sometimes combined with additional protection, such as pre-funding education and retirement planning. For example, the value of new business generated from our unit-linked product range, which includes higher levels of protection cover, increased by 64 per cent compared with 2012. TECHNOLOGY AND OPERATIONS In 2013, we continued to drive further improvements in our technology systems and business processes across the Group. We introduced a series of strategic, organisational and operational initiatives to increase our operating efficiency, enhance the quality of our service and improve our engagement with customers, agents and distribution partners. Major initiatives during the year included: • Strengthening our technology and operations leadership by improving the structure and depth of expertise of our teams; • Modernising our technology platforms with a focus on operating efficiency, business continuity and information security; • Providing operational support to our local markets to improve business efficiency and enhancing the service quality of our shared service centres in China and Malaysia; and • Increasing employee and agent productivity while at the same time improving customer experience. Improvements in Technology The organisational changes undertaken in 2013 streamlined Group accountabilities for technology governance, applications and infrastructure. A number of senior appointments were made during the year to strengthen our expertise in each of these areas. AIA continued to invest in upgrading technology and infrastructure to support our growth ambitions while maintaining cost efficiency. Early in the year we launched a major programme to replace our core policy administration systems in Hong Kong, Malaysia and Singapore and to retire our remaining mainframe platforms. A number of applications and processes are being replaced and upgraded as part of the ongoing roll-out of the programme. We expect improvements in operating efficiency and customer service, while reducing time to market for new products as the new systems come on stream. We accelerated the modernisation of our server infrastructure using a “virtualization” process that allows us to pool our hardware resources making IT more flexible and cost effective as part of the first phase of a group-wide data centre upgrade programme. Over 90 per cent of our servers were converted during the year delivering significant performance and efficiency gains. We also automated many of our technology security processes to enhance the monitoring of potential security risk and events. Enhanced Operational Support The purpose of our newly-formed Group Office business process transformation team is to support our local businesses by providing specialist expertise, experience and resources and working with them to apply shared best practices. During 2013, we supported a number of new initiatives from our local businesses, in particular those in Singapore and Thailand. As a result of the introduction of new service performance metrics and management information systems, turnaround times and staff productivity levels have significantly improved across these markets. For example, in Singapore average underwriting processing time for individual new business reduced by 25 per cent during the year and Thailand improved its average claims processing times for group insurance business by 84 per cent. We continued to invest in proprietary shared service centres to improve operating efficiency and lower expenses where possible. During 2013, we continued to expand the capacity and scope of our shared service centres that provide finance, actuarial, information technology and insurance processing back-office support services to Group Office and local business units. 038 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWAIA’s proprietary iPoS technology is a first-of-its-kind, industry-leading sales tool. Our technology shared service centres in China supported enhancements to existing systems and the roll-out of new ones, such as iPoS, across all of AIA’s markets during 2013. We continued to drive material productivity gains in both new business underwriting and claims processing from our operations shared service centre in Malaysia. This allowed us to meet the increasing business demands from the Group Office and our operations in Singapore, Hong Kong and Australia. Overall, more than 8 million transactions were processed at this centre in 2013 which is an increase of 10 per cent compared with 2012. Supporting Employee and Agent Productivity AIA’s internal enterprise community network, “Wave”, was launched in 2012. It has been extensively adopted in 2013 and it has become our principal platform for internal communication, collaboration and innovation. It allows employees to share documents, knowledge and ideas; participate in group discussions; manage projects; approach subject-matter experts and keep up with the latest company news. More than 10,000 employees across the Group are registered users of Wave making up more than 1,000 interest groups spanning a full range of business, technical and social subject areas across the region. AIA’s proprietary iPoS technology is a first-of-its-kind, industry-leading sales tool. Using iPad mobile devices as the host device, iPoS improves the sales experience and allows our agents and partners to provide customers with a comprehensive financial advisory process including needs analysis, preparation of quotations, proposal generation, electronic signature and the secure electronic submission of policy applications. Designed to be highly interactive and intuitive, iPoS provides customers with an entirely new experience, enabling our agents to identify their needs and to help them explore and buy life insurance products on the spot. For our agents, iPoS is a tool that greatly enhances their productivity and reduces the administrative workload as they conduct client meetings and process client applications with the aid of digitised forms and pre-validated data, resulting in fewer branch visits and less iterations in the underwriting and sale process. It also enables straight-through processing with the ability to enhance the customer experience and reduce administrative work in the back office, thereby shortening turnaround times and lowering overall processing costs. The iPoS development team began a series of additional functionality and updates for our agents and agency leaders during the year that will further improve customer experience at the point of sale and also assist our agency leaders in managing agency productivity. iPoS was first implemented in Taiwan, Singapore, Malaysia and Indonesia with the majority of active agents now adopting the new technology. In the last quarter of 2013 alone, over 100,000 new insurance applications were submitted through iPoS. ANNUAL REPORT 2013 039 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review GEOGRAPHICAL MARKETS HONG KONG US$ millions, unless otherwise stated VONB(1) 2013 468 VONB MARGIN(2) 2013 57.6% 2012(3) 366 YoY 28% 2012(3) 58.4% YoY (0.8) pps ANP 2013 781 TWPI 2013 3,770 2012(3) 604 YoY 29% 2012(3) 3,372 YoY 12% OPERATING PROFIT AFTER TAX 2013 770 2012(3) 732 YoY 5% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. 040 AIA GROUP LIMITED 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 FINANCIAL AND OPERATING REVIEWIn 2013, AIA’s Hong Kong business once again achieved excellent VONB growth as a result of the continuing execution of our Premier Agency strategy and the progress we have made in expanding partnership distribution. Our rigorous approach to agency development has delivered improvements in the quality of agent recruitment, activity and productivity which combined to drive profitable growth and sustain one of our main competitive advantages in Hong Kong. The efficient and effective service provided by our distribution was backed by new products and targeted marketing designed to deliver a combination of high-quality advice and tailored products to meet the growing needs of our customers. FINANCIAL HIGHLIGHTS VONB grew by 28 per cent compared with 2012 to US$468 million. ANP increased by 29 per cent from improved agency productivity, the launch of new participating products and increased sales of accident and health benefit riders during the year. VONB margin for the year reduced by 0.8 pps compared with 2012. This represented an improvement in margin from the first half, which was due, in part, to new critical illness and regular savings products launched in the second half of the year. IFRS operating profit after tax increased by 5 per cent to US$770 million compared with 2012. Hong Kong continued to be the largest contributor to the Group’s VONB and IFRS profit in 2013, accounting for 28 per cent of overall VONB and 30 per cent of IFRS operating profit after tax. DISTRIBUTION AIA’s agency sales force is the largest in Hong Kong and the leader in terms of MDRT qualifiers with an increase of 31 per cent compared with 2012 and 13 per cent of our agents qualifying for MDRT status in 2013. Our Premier Agency strategy is predicated on the recruitment of high-quality candidates, comprehensive training, development and support for our agents and agency leaders. Our “Road to MDRT” programme, designed by our AIA Premier Academy for high-potential recruits new to the insurance industry, continued to set the standard for agency development in Hong Kong with more than 1,000 graduates since inception. New business productivity levels were twice that of the average new recruit in Hong Kong and over 10 per cent of graduates qualified for MDRT in 2013. We also launched new programmes targeted at the middle tier of agents to reward activity levels and drive increases in productivity. Overall active agent productivity increased by 19 per cent compared with 2012. We have built on this success by launching our “Executive Development Programme” and “Future Leader Programme” also through the AIA Premier Academy. These new programmes offer clear agency leader career paths to young professionals with a strong track record in sales management and who are committed to developing their own agency teams within the life insurance industry. We introduced new manager training and assessment schemes that were highly successful in increasing the recruitment activity levels and in supporting the validation of newly-promoted unit managers. As a result of our initiatives, our number of active new agents increased by 18 per cent compared with 2012 and more than half of our new recruits in 2013 were below the age of 30. While our agency network remained our major distribution channel in Hong Kong, our partnership business also delivered excellent growth as we improved our protection product mix in the IFA channel and continued to invest in our service proposition to brokers. Our group insurance business VONB grew by 43 per cent compared with 2012 through the ongoing development of our broker partnerships and a focus on driving group insurance sales through our experienced agency force. PRODUCTS AND CUSTOMERS The success of our product strategy is built on our ability to innovate and deliver quality regular savings and protection products that meet the evolving needs of the Hong Kong market. Our primary focus remains on the integration of protection cover within our product range. We upgraded our flagship multiple-payment and early-payment critical illness products during the year to further extend our market-leading position in this area. In 2013, we continued to improve the analysis and segmentation of our large-scale existing customer base to support our integrated marketing and product campaigns. As a result, we extended our product range to target two customer segments, in particular young families and pre-retirees. We introduced regular savings participating products specifically designed to help pre-fund education needs for young families and address retirement planning and income distribution needs for our pre-retiree customer segment. ANNUAL REPORT 2013 041 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review THAILAND AIA has the market-leading life insurance business in Thailand, which is the result of our nationwide agency network, leading industry brand and product expertise that has been built up over our 75-year history in the country. We continued to build on our advantaged position through the execution of our Premier Agency strategy with our focus on high-quality recruitment and enhanced training to improve activity levels and productivity. We launched a revised agency compensation and leadership structure towards the end of 2013 to encourage and reward performance aligned more closely with our emphasis on productivity and quality recruitment. We extended our product range with the introduction of our first- to-market next generation unit-linked product and strengthened our brand awareness with the launch of our new brand positioning during the year. Our new Chief Executive Officer in Thailand joined in July 2013 and the execution of our strategy to reinforce AIA’s significant competitive advantages in Thailand delivered a solid performance in 2013. FINANCIAL HIGHLIGHTS VONB grew by 11 per cent to US$319 million compared with 2012. VONB margin improved by 2.4 pps to 56.3 per cent following the launch of new products and the proactive management of our product portfolio. ANP increased by 6 per cent to US$565 million as the agency force adjusted to the design of a new compensation structure during the year. IFRS operating profit after tax grew by 12 per cent compared with 2012 to US$526 million from underlying growth in the business. As previously disclosed in our Annual Report 2012, the corporate tax rate in Thailand is assumed to be 20 per cent for assessment year 2014 and we have assumed a return to 30 per cent from assessment year 2015 onward. DISTRIBUTION Our main focus in 2013 was on transforming our approach to recruitment through improving the efficiency of our agency leaders and increased training of new agents to improve activity levels. We established a new specialist recruitment department to work closely with our AIA Premier Academy and we also completed the full-scale implementation of our candidate profiling tools during the year. These tools are designed to determine those candidates that are best suited for a full-time career as a professional life insurance agent. By the end of 2013, around 90 per cent of new hires were undertaking this process prior to joining AIA. Changes in our agency compensation structure were launched towards the end of the year and we believe that these will be positive for the business in the longer term by encouraging higher quality and more consistent recruitment and sales productivity. We also changed the agency leadership structure at the middle management levels to encourage promotion by helping agents build their teams and transition to managers. Our number of active new agents increased by 14 per cent compared with 2012 contributing to AIA retaining its position as the number one ranked agency distribution for MDRT members in Thailand in 2013. While agency remains our main distribution channel in Thailand and a clear competitive advantage, we made good progress in expanding partnership distribution in 2013. In particular, our bancassurance business delivered a strong result from the launch of new products and our direct marketing operation benefited from increased investment in call centre capacity. We maintained our market-leading position in group insurance in Thailand from our focus on sales through our broker relationships and our agency channel to the SME segment. PRODUCTS AND CUSTOMERS AIA has continued to build on its product leadership position by developing innovative ways of attracting new customers and improving the level of protection cover for our large-scale existing customer base. In the first half of 2013, we launched our next generation unit-linked product, which was the first of its kind in Thailand and was well received by the market. We also introduced a new comprehensive health plan in October 2013. The new plan is an upmarket health product enabling our agents to target a more affluent segment of the Thai market, leading to higher rider attachment ratios. The launch was also accompanied by existing customer marketing campaigns to upgrade the amounts and types of cover for our in-force policyholders. 042 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWUS$ millions, unless otherwise stated VONB(1) 2013 319 VONB MARGIN(2) 2013 56.3% 2012(3) 287 YoY 11% 2012(3) 53.9% YoY 2.4 pps ANP 2013 565 2012(3) 532 YoY 6% TWPI 2013 3,364 2012(3) 3,119 YoY 8% OPERATING PROFIT AFTER TAX 2013 526 2012(3) 471 YoY 12% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 ANNUAL REPORT 2013 043 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review SINGAPORE ANP 2013 400 2012(3) 339 YoY 18% US$ millions, unless otherwise stated VONB MARGIN(2) 2013 67.3% YoY 22% 2012(3) 65.1% YoY 2.2 pps VONB(1) 2013 269 2012(3) 220 TWPI 2013 2,150 2012(3) 2,035 YoY 6% OPERATING PROFIT AFTER TAX 2013 396 2012(3) 345 YoY 15% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. 044 AIA GROUP LIMITED 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 FINANCIAL AND OPERATING REVIEWSingapore sustained strong growth momentum with an excellent performance in 2013. Our Premier Agency platform is an important competitive advantage for AIA and the main driver of our growth. We achieved a significant increase in our number of active agents, new recruits and agency productivity levels from the strong execution of our Premier Agency strategy. We continued to build on the success of our partnership distribution model and market-leading position in group insurance to complement our agency growth. The strong progress we have made in our distribution channels was supported by the roll-out of our new brand positioning and targeted new products that reinforced our position as a leader in the protection insurance market in Singapore. FINANCIAL HIGHLIGHTS VONB grew by 22 per cent compared with 2012 to US$269 million. VONB margin expanded by 2.2 pps to 67.3 per cent as a result of strong sales of new health protection products that were weighted towards the first half of the year partially offset by a higher proportion of savings products in the second half. ANP increased by 18 per cent to US$400 million driven by excellent growth in our agency force and strongly supported by our partnership distribution channel. IFRS operating profit after tax increased by 15 per cent to US$396 million compared with 2012 due to underlying growth in the business and strong investment income. DISTRIBUTION Our commitment to the recruitment of the next generation of Premier Agents to reinforce the strength of our distribution platform has delivered excellent results in 2013. The launch of new initiatives during the year included innovative agency referral and recruitment programmes and we continued to build on the success of our new agency leadership career structure that was introduced towards the end of 2012. Together, our recruitment programmes delivered a 44 per cent increase in the number of active new agents compared with 2012. Our successful recruitment strategy, alongside training programmes from our AIA Premier Academy and targeted sales campaigns, achieved higher active agent productivity levels and 15 per cent growth in the number of active agents during the year. AIA also launched iPoS, a fully mobile and secure interactive point-of-sale system for iPad mobile devices. It has quickly become a valuable sales tool for our Premier Agents with well over half of our active agents submitting applications through the system. Our commitment to enhancing efficiency through adopting this new technology in Singapore earned AIA the “Innovation of the Year” award by Asia Insurance Review. Our partnership distribution channel accounts for around a quarter of our new business profitability in Singapore and continued to deliver strong growth through our relationships with regional and domestic banking partners and brokers targeting the more affluent segment. We maintained our position as the market leader in group insurance business by focusing on developing our broker partnerships through our regional platform and targeting SMEs using our Premier Agency network. Our research shows that 89 per cent of Singaporeans believe that companies should do more to help employees lead healthier lives. To this end, we launched a new group insurance product through our agency channel in the second half of the year, which included a simple menu of comprehensive protection plans to continue to differentiate our proposition in this attractive market. PRODUCTS AND CUSTOMERS We introduced a new range of products to help our customers meet their regular savings and protection needs and strengthen AIA’s position as a market leader in protection insurance in Singapore. Our HealthShield plans were aligned with the Singaporean government’s latest upgrade of its insurance scheme at the beginning of the year. These redesigned products were very well received and encouraged significant numbers of new and existing customers to upgrade their levels of cover. We also launched AIA Vitality in Singapore in 2013. This innovative and science-backed programme enables us to offer protection products designed to encourage and reward sustained changes in healthy living. We offer premium discounts to participating customers as they progress against their own personal health goals, while improving claims and persistency experience for AIA. The programme is part of our aim of creating powerful new ways of actively engaging with our customers and further differentiating AIA within the market. ANNUAL REPORT 2013 045 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review MALAYSIA Our primary focus in 2013 was on the successful integration of our newly-acquired business, ING Malaysia, following the close of the transaction on 18 December 2012. We achieved a major milestone in June 2013 with the legal consolidation of the two businesses under a single licence and with the adoption of the AIA brand across the combined operation. We made further progress with the launch of a new, single unified range of products on a common new business administration platform and with the alignment of a single agency compensation structure in the second half of the year. While the work to complete the full integration continues, our progress in consolidating our leading position in the attractive Malaysian market is ahead of schedule and with realised expense synergies above our expectations. We remain committed to building a leading business in Malaysia that will deliver further opportunities for profitable growth. FINANCIAL HIGHLIGHTS Our Malaysian business reported a 74 per cent uplift in VONB to US$120 million following the consolidation of ING Malaysia’s results with effect from the close of the transaction. We delivered ANP of US$319 million, which was more than double the amount of AIA’s stand-alone business in 2012. The VONB margin on a combined basis was 37.8 per cent reflecting the mix of lower-margin products from ING Malaysia, as disclosed in our interim results announced on 26 July 2013. VONB margin in the second half of 2013 improved to 40.2 per cent from a positive shift in product mix following the launch of our new product range in June 2013. IFRS operating profit after tax increased by 67 per cent to US$250 million following the consolidation of our newly-acquired business. 2013, over 70 per cent of our active agents were submitting new business applications through iPoS, improving agency productivity while enhancing customer experience. Our new bancassurance partnership with Public Bank, one of the leading retail banking groups in Malaysia, has also made a successful start. We introduced a new product range to this channel earlier in the year accompanied by the launch of training programmes for in-branch insurance sales specialists. As a result, the improvements in product mix combined with sustained increases in productivity has delivered a material contribution to the VONB performance of our Malaysian business in 2013 with bancassurance accounting for around 18 per cent of the total VONB generated. DISTRIBUTION The acquisition of ING Malaysia has materially strengthened the scale and breadth of our distribution capabilities in Malaysia. The transaction broadened the geographical coverage of our agency distribution and doubled the size of our agency force. We extended our Premier Agency strategy to incorporate our enlarged sales force during the year with a focus on improving recruitment and productivity. We introduced a number of recruitment schemes in conjunction with a nationwide marketing campaign that was successful in utilising AIA’s new market leadership position to target young professionals. As a result, the number of new recruits trebled compared with 2012. We also increased active agent productivity at the same time as improving VONB margin with the introduction of our new range of products in June 2013. Our Premier Agency strategy in Malaysia is strongly supported by our ongoing investment in industry-leading point-of-sale technology, as we continued to roll out iPoS to our enlarged agency force during the year. AIA launched the system in December 2012 to our agency in Malaysia. By the end of PRODUCTS AND CUSTOMERS Our product development and customer campaigns during the year were in line with the overall group strategy and centred on raising customer awareness of the need for regular savings and protection cover. We withdrew existing products to enable us to introduce a new, single range of enhanced products under the AIA brand following the legal consolidation of the two businesses in June 2013. The new product range offers a comprehensive series of unit-linked and protection products administered on a single new business platform to help our agency distribution address the needs of our customers while improving the mix of our product portfolio. We also launched our new “Empower” range of flexible unit- linked plans through our partnership with Public Bank. These products offer a combination of increased protection and rider attachments combined with regular savings and sales in the second half of the year have been encouraging. We continued to engage the holders of our more than 3.9 million individual policies and launched a series of new paperless campaigns through our iPoS platform focused on cross-selling unit-linked products with higher protection content. 046 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWUS$ millions, unless otherwise stated VONB(1) 2013 120 VONB MARGIN(2) 2013 37.8% 2012(3) 69 YoY 74% 2012(3) 46.0% YoY (8.2) pps ANP 2013 319 TWPI 2013 2,036 2012(3) 151 YoY 111% 2012(3) 964 YoY 111% OPERATING PROFIT AFTER TAX 2013 250 2012(3) 150 YoY 67% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 ANNUAL REPORT 2013 047 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review CHINA ANP 2013 249 2012(3) 215 YoY 16% US$ millions, unless otherwise stated VONB MARGIN(2) 2013 66.4% YoY 34% 2012(3) 57.5% YoY 8.9 pps VONB(1) 2013 166 2012(3) 124 TWPI 2013 1,599 2012(3) 1,446 YoY 11% OPERATING PROFIT AFTER TAX 2013 205 2012(3) 151 YoY 36% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. 048 AIA GROUP LIMITED 03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 FINANCIAL AND OPERATING REVIEWOur consistent strategy of improving the quality and professionalism of our agency distribution has delivered excellent financial results in 2013 with sustained profitable new business growth and a significant uplift in IFRS operating profit after tax. AIA has successfully positioned itself as a leader in the provision of comprehensive protection insurance products in China in addition to our established role as a provider of long-term savings products. The effective execution of our Premier Agency strategy has enabled us to recruit, develop and retain the high-calibre agents needed to provide the advice and service required to effectively distribute these products to our customers. Over the last three years, we have more than doubled our VONB and IFRS operating profit after tax in China and our differentiated approach has once again delivered profitable growth. FINANCIAL HIGHLIGHTS VONB grew by 34 per cent compared with 2012 to US$166 million. VONB margin increased by 8.9 pps to 66.4 per cent mainly driven by product mix improvements, lower expenses and a positive tax effect. ANP increased by 16 per cent to US$249 million from improved agency productivity combined with an increased number of active agents. IFRS operating profit after tax increased by 36 per cent compared with 2012 to US$205 million from strong business growth, improved investment income and a lower effective tax rate compared with 2012. DISTRIBUTION Agency remained our core distribution channel and primary driver of growth in China. We continued to develop our Premier Agency leaders in 2013 with training designed to increase the effectiveness of our recruitment activities. We also launched a new induction programme for agents and agency leaders to provide better supervision and coaching of new agents. The number of active new agents grew by 35 per cent compared with 2012 reflecting both the increase in recruitment and improvement in activity levels as a result of these initiatives. Our aim is to provide our agents with the advisory skills and product range to enable them to build a long-term career as professional agents. AIA’s approach to agency training allows us to develop agents who can adapt to serve the evolving needs of our customers. It enables our agents to grow their incomes and increase productivity, which in turn enables AIA to recruit and retain Premier Agents. Average income levels and productivity per active agent increased notably in China in 2013, as demonstrated by the number of MDRT qualifiers growing by 30 per cent. Our partnership distribution channel in China is an additional source of growth for AIA. Our bancassurance and direct marketing businesses delivered strong performances during the year with a significant improvement in VONB margin driven by our sales of protection and long-term regular premium savings products. We continue to focus on partnership business opportunities that generate appropriate returns for our customers, our partners and our shareholders. PRODUCTS AND CUSTOMERS Since AIA re-entered China more than two decades ago, we have established a track record of offering innovative new products to match the developing sophistication and needs of our customers. The provision of advice and solutions focused on insurance protection has remained at the forefront of our strategy and is a clear advantage for AIA within the Chinese life insurance market. Adding to the success of our bestselling All-in-One product offering comprehensive cover to middle- income customers and our established regular premium savings products, we broadened our range to include a next generation unit-linked product with higher protection content, which became our third bestselling product in 2013. We also launched retirement savings products specifically designed to target the ageing population in China. ANNUAL REPORT 2013 049 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review KOREA The strategic decisions we have taken in our Korean business over the last two years have begun to lay a solid foundation for achieving our commitment of delivering quality growth in this market. While some other companies pursue market share through writing lower-margin business, our strategy is to focus on profitable growth by expanding the protection content of our products through our direct marketing and tied agency channels. AIA’s Korean operation delivered strong growth in 2013, as a direct result of the execution of this strategy. We have made good progress in repositioning our agency channel over this period and the ongoing transformation of our direct marketing business has also delivered a positive result in 2013. FINANCIAL HIGHLIGHTS VONB increased by 34 per cent compared with 2012 to US$91 million. ANP grew by 43 per cent as a result of strong growth in active agent numbers and a solid performance in our direct marketing channel following successful product launches and increased recruitment. In the first quarter of the year, we also benefited from strong sales through selected bancassurance partners preceding a one-time change in the local tax law. VONB margin reduced by 1.7 pps compared with 2012 but improved in the second half of 2013 as we benefited from the launch of a new unit-linked packaged product with greater accident and health rider attachments in the agency channel and an increased proportion of higher-margin direct marketing sales. IFRS operating profit after tax increased by 20 per cent compared with 2012 to US$150 million due to improved claims experience. DISTRIBUTION AIA operates a multi-channel distribution strategy in Korea. The fundamental drivers of sustainable agency growth are quality recruitment and superior training and we have achieved good results in each of these areas in 2013. Our targeted approach to recruitment and improvements in training have delivered a 17 per cent increase in the number of active agents. We launched our “Next AIA” recruitment and development programme that builds on the success of the Hong Kong “Road to MDRT” initiative and demonstrates the new agency culture we are looking to embed in Korea. Over 200 agents were recruited through this programme in the second half of 2013 and early results showed that activity levels were 20 per cent higher than the average of our Korean business. The strong growth in active agents has been accompanied by improvements in productivity. We delivered an improved performance in our direct marketing channel in 2013 from our strategy of growing distribution capacity while improving the productivity and retention levels of new recruits. The expansion of our four new call centres in 2012 enabled us to launch new recruitment campaigns that increased the number of telesales representatives (TSRs) in 2013 by 30 per cent compared with 2012. Our new training programmes have improved sales productivity levels and driven an improving trend in the retention rates of our TSRs, as we undertake stringent selection and better equip our sales leaders to train and coach new recruits. While we have made positive progress during the year, we continue to prioritise improvements in our direct marketing operations, including our sales management systems to enhance the quality and allocation of our sales lead data and our performance management processes to improve productivity levels, in order to deliver a market-leading distribution platform. PRODUCTS AND CUSTOMERS AIA remains focused on segments of the Korean market that are aligned with the Group’s strategy of providing our customers with the ability to meet their long-term wealth creation goals while providing additional protection cover. AIA launched new products during the year including our simplified issue health product sold through our direct marketing channel and a new health product designed to reach the senior segment in Korea. 050 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 US$ millions, unless otherwise stated VONB(1) 2013 91 2012(3) 68 VONB MARGIN(2) 2013 26.8% YoY 34% 2012(3) 28.5% YoY (1.7) pps ANP 2013 338 2012(3) 237 YoY 43% TWPI 2013 2,049 2012(3) 1,942 YoY 6% OPERATING PROFIT AFTER TAX 2013 150 2012(3) 125 YoY 20% Notes: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to conform to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. ANNUAL REPORT 2013 051 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBusiness Review OTHER MARKETS Other Markets refers to AIA’s operations in Australia, Indonesia, the Philippines, New Zealand, Sri Lanka, Taiwan and Vietnam. Our 26 per cent share of the financial results from our joint venture in India is included in IFRS operating profit after tax on an equity accounted basis. FINANCIAL HIGHLIGHTS Our Other Markets delivered another strong performance with VONB growth of 32 per cent compared with 2012 to US$220 million. The result was driven by excellent growth in the Philippines and Indonesia and strong performances in Australia and Vietnam. Sri Lanka also made a positive contribution after its successful integration into the Group during the year. VONB margin expanded by 5.0 pps to 32.0 per cent and ANP grew by 11 per cent to US$689 million with the positive growth in US dollar terms moderated by foreign exchange translation effects particularly in Australia and Indonesia. IFRS operating profit after tax grew strongly by 18 per cent compared with 2012 mainly driven by business growth and margin improvements in Indonesia and the Philippines. BUSINESS UNIT PERFORMANCE Australia: AIA’s Australian business delivered solid growth in VONB driven by the execution of our Premier IFA model and our prominent position as an independent risk specialist. The Australian life insurance market has one of the lowest protection penetration levels globally and a rapidly-growing protection gap. Our strategy is to drive future profitable growth by offering products that protect the financial health and welfare of our customers and to differentiate AIA by providing best-in-class service to our advisers. In 2013, AIA also led the way in restructuring the design of group insurance schemes by working closely with our corporate clients to introduce new profit sharing arrangements. We continued to manage claims proactively and effectively over the year through our highly-experienced claims assessment and rehabilitation teams. These new arrangements enable us to work ever more closely with the human resources teams of our corporate clients to help claimants return to work efficiently benefiting the individuals concerned, the employers and AIA. Indonesia: While reported growth in US dollar terms was affected by foreign currency exchange translation in the fourth quarter, AIA’s business in Indonesia achieved solid results in 2013. AIA benefits from a multi-channel distribution strategy to target the large and growing working population in Indonesia. Following the successful launch of our next generation unit-linked products in our agency channel in 2012, we introduced a similar range of products with accident and health riders through our bank partners in 2013. Product mix improvements contributed to a substantial increase in VONB margin compared with 2012. Our Premier Agency strategy continued to focus on quality recruitment and training including the development of a new 24-month comprehensive training roadmap for our agents and agency leaders. Our bancassurance business maintained its excellent track record of outstanding results with an increase in VONB of 67 per cent compared with 2012. The growth was driven by a 26 per cent increase in the number of active in-branch insurance specialists compared with 2012, new additional bank partnerships and a strong margin increase from product mix improvements. Philippines: AIA’s operations in the Philippines delivered another outstanding performance in 2013. The launch of new recruitment and activity management programmes as part of our overall Premier Agency strategy generated excellent results with a 79 per cent increase in the number of active new agents compared with 2012. As well as improvements in agency productivity and activity, the successful adoption of our next generation unit-linked products also significantly improved the new business margin in our agency channel. Our joint venture with the Bank of the Philippine Islands (BPI) also had another strong year. The introduction of new activity management and training programmes improved both the productivity and activity levels of our in-branch specialists driving strong ANP growth. The effective execution of our growth strategy across our distribution channels combined with the successful adoption of our next generation unit- linked products delivered growth in VONB exceeding 90 per cent compared with 2012. 052 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWUS$ millions, unless otherwise stated VONB(1) 2013 220 VONB MARGIN(2) 2013 32.0% 2012(3) 167 YoY 32% 2012(3) 27.0% YoY 5.0 pps ANP 2013 689 2012(3) 618 YoY 11% TWPI 2013 2,840 2012(3) 2,482 YoY 14% OPERATING PROFIT AFTER TAX 2013 244 2012(3) 207 YoY 18% Notes: (1) VONB figures shown in the tables are based on local statutory include pension reserving and capital requirements and business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. (3) Certain segmental reclassifications have been made in the prior year VONB, VONB margin and IFRS operating profit after tax results to current year presentation. The reclassification has no impact on the total VONB, VONB margin and IFRS operating profit after tax of the Group for the year ended 30 November 2012. to conform New Zealand: AIA’s New Zealand business delivered strong VONB growth in 2013 as a direct result of the extensive work undertaken over the last two years to refocus our core IFA proposition. Our strategy is based on the delivery of a targeted service model using adviser segmentation and a redesigned product portfolio to improve margins. As part of our efforts to continue to diversify our distribution capabilities, we further expanded our direct marketing business in 2013 and introduced a new agency channel designed to engage with the fast-growing Asian communities in New Zealand. Sri Lanka: AIA entered Sri Lanka with the completion of the acquisition of a 92 per cent stake in Aviva NDB Insurance (ANI) in December 2012 (further increased to 97 per cent in April 2013). Through the acquisition, AIA became the second- largest life insurance company in Sri Lanka. Our high-quality agency force is our primary distribution channel and we have grown our active new agents by 69 per cent with 23 new branch locations opened compared with 2012. We also continued to roll out our bancassurance distribution with our exclusive partner National Development Bank PLC (NDB), one of the largest financial conglomerates in the country. The results in Sri Lanka also benefited from product innovation and best practice sharing as part of the Group which included the launch of a range of new protection products aligned with the wider group strategy. Taiwan: Our Taiwanese operation continued to develop its distribution platform in 2013 with the aim of creating a modern multi-channel insurance business using technology to deliver improved service levels and efficiencies. We continued to make progress in agency with an increased number of active agents and material improvements in new business margin compared with 2012. We launched new critical illness and next generation unit-linked products in the year to replace an existing lower-margin product. AIA has also secured important relationships with a number of prominent brokers that has led to growth in this emerging channel. Our direct marketing business has made progress through the recruitment of high-quality telesales representatives and the launch of a new hospital income product towards the end of the year. Vietnam: AIA’s business in Vietnam delivered strong VONB growth compared with 2012. The training and recruitment programmes launched in 2013 have driven a material uplift in agency productivity leading to strong growth in ANP and higher new business margins. VONB from agency more than doubled compared with 2012 and the average case size per agent increased by 37 per cent. We also further expanded our product range with the first half launch of a new hospital benefit rider plan and a regular savings participating product meeting the rapidly-growing regular savings and protection needs of our customers in Vietnam. ANNUAL REPORT 2013 053 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRisk Management OVERVIEW The core of AIA’s business is accepting, pooling and managing risk for the benefit of policyholders, bondholders and shareholders. Effective risk management is vital in any organisation but especially in a life insurance business where it is a key driver of value. Accordingly, AIA does not seek to eliminate all risks but rather to identify, understand and manage them within acceptable limits in order to create long- term value. All business unit managers and executives are accountable for ensuring their businesses operate at all times within the Risk Appetite set by the Board. This is done by identifying the risks associated with their activities, understanding and seeking to manage and mitigate them effectively and achieving appropriate returns for the risks taken. In this they are supported at an operational level by specialist functions within each business and the Group’s financial, actuarial, investment, legal, compliance, risk management and underwriting teams. The Group operates a risk management framework (RMF) with Group Risk and Compliance providing assurance to the Board and executive management that this framework is appropriate and effective. AIA manages risk using a “three lines of defence” governance model described in the Risk Governance and Reporting Structure section that follows. The Company’s Board retains overall responsibility for oversight of the Group’s risk management activities. All risks that are undertaken by the Group are backed by appropriate levels of capital to support the ongoing business and protect policyholders. While AIA seeks capital efficiency, we do so within acceptable levels of risk without compromising either financial strength or the requirement for appropriate returns. We discuss below the principal risks and how these are managed. RISK MANAGEMENT FRAMEWORK An effective RMF is the key to avoiding the financial and reputational damage that arises from inadequate or ineffective control of the risks in the business. AIA’s RMF has the following components: • Risk Appetite; • Risk Governance; • Risk Metrics; 054 AIA GROUP LIMITED • Local Risk Functions; and the • Group Risk Function. RISK APPETITE AIA’s Risk Appetite is the foundation of its RMF. It establishes the risk boundaries within which the business will operate, sets stakeholder expectations in regard to the risks being run and assures policyholders, regulators, shareholders, bondholders and employees that the institution has a comprehensive approach to risk management and is thus well placed to deal with unexpected shocks. Risk Appetite can be presented as a pyramid, with qualitative statements supported by quantitative metrics which are applied at each level within the business, as illustrated in the figure below: Risk Appetite Statement Risk Tolerances Risk Principles Risk Allocations Risk Preferences Risk Limits Risk Controls Quantitative Metrics Qualitative Metrics • The Risk Appetite Statement (RAS) is an overarching comment on the enterprise’s attitude to risk; • Risk Principles are qualitative statements that expand the RAS; • Risk Tolerances are quantitative statements that validate the Risk Principles and thus the RAS; • Risk Allocations are the risk tolerances for each category of risk between specific risks, products or businesses; • Risk Preferences define the enterprise’s attitude to specific risks; and • Limits and Controls reflect the risk allocations and preferences in the business. FINANCIAL AND OPERATING REVIEWAIA has adopted the following Risk Appetite Statement: “The amount of risk taken by AIA in the ordinary course of its business will be sufficient to meet its customers’ reasonable requirements for protection and benefits while ensuring that the level and volatility of shareholder returns are in line with a broadly-based risk profile appropriate to an Asia ex-Japan- focused life insurance company.” This statement is consistent with AIA’s vision of being the pre-eminent life insurance provider in the Asia-Pacific region while contributing to the financial security of the people and the economic and social development of the region. AIA supports its RAS with four Risk Principles, each addressing one of AIA’s risk and capital management priorities. Priority Risk Principle Regulatory Capital Financial Strength Liquidity Earnings Volatility “We have no appetite for regulatory non-compliance and as such will ensure that we hold sufficient capital to meet our current statutory minimum solvency in all but the most extreme market conditions.” “We will ensure the Group’s ability to meet all future commitments to our customers, both financial obligations and in terms of the promises we make to them. We will maintain sufficient capital to support a Financial Strength Rating that meets our business needs.” “We will maintain sufficient liquidity to meet our expected financial commitments as they fall due.” “We will seek to deliver reported operating earnings consistent with expectations and will implement policies, limits and controls to contain operational risks, risk concentrations and insurance risks within reasonable tolerances.” Each of these Risk Principles is supported by a Risk Tolerance, a measurable financial benchmark that enables AIA to validate each of these principles such that assurance can be provided to the Board that AIA is operating within its Risk Appetite. RISK GOVERNANCE AND REPORTING STRUCTURE The “three lines of defence” model is embodied in the Group’s risk governance structure as illustrated in the chart below: AIA Group Limited Board Risk Committee Audit Committee Group Chief Executive Executive Risk Committees (Governance) Executive Committee, Local Business Units and Group Functions Group Risk Management and Compliance Group Internal Audit B o a r d L e v e l M a n a g e m e n t L e v e l 1st Line of Defence 2nd Line of Defence 3rd Line of Defence The “first line of defence” is made up of the business units and the Finance, Actuarial and Investment functions. Executive management of each business unit is required to put in place processes, limits and controls for the identification, management and mitigation of all risks. These must be consistent with the Group’s policies so as to ensure that the business operates at all times within its Risk Appetite. All decisions at both a business unit and Group level are made by individual executives operating in the first line of defence under delegation from the Group Chief Executive. These executives are accountable for their decisions. Decisions regarding activities deemed to have significant risks attached or that are materially outside policy will be referred to the Group Chief Executive or, where appropriate, to the Board. The “second line of defence” at Group level consists of two important functional areas, the Group’s Compliance functions and Group Risk. Though separate functions, their combined role is to provide effective and objective oversight of all risks being managed in the Company and to give assurance to executive management and the Board that risks are being managed satisfactorily within AIA’s Risk Appetite. The second line provides support to executive management through regular reporting to the executive risk committees described below, and to the Board via the Risk Committee. The Group ANNUAL REPORT 2013 055 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Risk Management Risk function manages the RMF, ensuring that consistent policies and processes are adopted across the Group and that all decisions are made within policies and risk appetite following a full assessment of all risks associated with a business or transaction. Compliance supports these efforts by providing oversight to the programmes that ensure adherence to the high standards set by the Group in its various policies and procedures, as well as the regulatory requirements to which the Group and the businesses of which it is comprised are subject. The “third line of defence” comprises Group Internal Audit, which provides assurance to the Board, through the Audit Committee, and executive management as to the effectiveness of risk management processes and internal controls. This assists the Board in maintaining an international standard of corporate governance. AIA’s current risk governance and reporting structure was implemented in 2012 and is illustrated in the chart below: AIA Group Limited Board Audit Committee Risk Committee Remuneration Committee Nomination Committee Operational Risk Committee Financial Risk Committee Non-Financial Risks (Operational, Stategic) Financial Risks (Credit, Market, Liquidity) and Insurance Risk The Board The Company’s Board retains overall responsibility for oversight of the Group’s risk management activities. In this regard the Board sets the Group’s Risk Appetite, agrees the RMF and monitors group-wide risks. In fulfilling these responsibilities the Board is supported and advised by the Risk Committee. Risk Committee The Risk Committee advises the Board on all risk-related issues requiring Board attention. The Risk Committee is also responsible for approving risk metrics used in the context of the Group’s Risk Appetite. The members of the Risk Committee are all Board directors, with the Chairman required to be an Independent Non-Executive Director. The Risk Committee meets at least four times a year. The Risk Committee has oversight over all risk management activities in the Group. At each meeting it considers the general risk environment, reviews the activities of the Group’s executive risk committees and the Group’s financial position. The Risk Committee undertakes thorough reviews of the material risks undertaken by the Group and regularly conducts a more detailed review of both financial and operational risks. In 2013 the Risk Committee also reviewed, amongst other things, the Group’s development of new risk measures, its fraud prevention programme and the impact, both actual and potential, of specific market events in Asia and globally on the Group’s financial condition. Operational Risk Committee (ORC) The ORC provides oversight of non-financial risk activities within the Group. These include any activity that has the potential to weaken the business, whether strategic or reputational, and may include issues related to human, physical or technology resources. The ORC approves Group policies, processes and metrics related to the management of Operational Risk. The members of the ORC are predominantly members of the Group Executive Committee and the ORC is chaired by the Group Chief Financial Officer. The ORC meets at least four times a year. At each meeting the operational risk environment is reviewed based on the Group’s defined key operating risks and the local business unit ORC reports with emerging risks deemed to have a Group dimension considered for inclusion on the 056 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWGroup Watch List. In 2013 the ORC discussed, amongst other things, the Group’s arrangements for incident management and business resumption, changes in investment operations, the execution of integration plans for AIA in Malaysia and Sri Lanka and the Group’s major IT projects. Financial Risk Committee (FRC) The FRC provides oversight of financial and insurance risk activities within the Group. These include market and insurance risks as well as the Group’s balance sheet, liquidity and capital position. The FRC approves Group policies, processes and metrics related to the management of these risks. The members of the FRC include the Group Chief Investment Officer, Group Chief Financial Officer and Group General Counsel. The FRC is chaired by the Group Chief Executive. The FRC meets at least four times a year. At each meeting the Group’s capital and balance sheet position are reviewed as well as the risks in the Group’s investment portfolio. Risk governance items, local business unit FRC reports and watch lists are standing agenda items with issues deemed to have a Group dimension placed on the Group Watch List. In addition, at each meeting a local risk officer leads a review of that country’s risk profile. In 2013 the FRC discussed, amongst other things, risk tolerances to support the RAS, the risks associated with various investment diversification strategies, asset-liability management (ALM) and the Group’s underwriting risk management. Where activities, proposals and/or reports are relevant to both the FRC and the ORC, the FRC is responsible for coordination. LOCAL AND GROUP RISK FUNCTIONS The primary role of the local and Group risk functions (working together) is to provide effective and objective oversight of all risks being managed in the Company and to provide assurance to management and boards, both locally and at Group, that risks are being managed satisfactorily and contained within AIA’s Risk Appetite. Oversight is the process of ensuring that appropriate controls and processes are in place for identifying and managing all risks and that through these processes emerging risks are being identified and, where appropriate, escalated. AIA has adopted a local risk management structure consistent with its operating model with local risk functions reporting to local management. This also supports the direction being taken by local regulators and boards and holds local management accountable for risk management. While local risk functions report to local management, they operate and are benchmarked against standards set by the Group. Local risk functions work closely with Group Risk which is responsible for overseeing and ensuring their effectiveness. Regulators and local Boards are demanding more from local risk functions and this, coupled with the increasing scale and complexity of the business, requires a broad and sophisticated risk function in all business units. We ensure that each business unit is appropriately resourced with the necessary experience and tools to oversee the risks detailed below. Group Risk provides oversight of all risks across the Group. The identification and escalation of any risks that may be described as “having a Group dimension”, i.e. are of sufficient materiality to constitute a financial or reputational threat to the wider AIA Group, is a critical part of AIA’s RMF. This is achieved through: • Close oversight of local risk committees whose activities and risk watch lists are reviewed by the Group Risk function and form standing items on the FRC and ORC agendas; • A consistent process for escalating matters that fall outside existing policies, with a particular focus on materiality; and • Regular and consistent consultation among local risk, Group Compliance and Internal Audit functions with regular reporting to Group Executive Committee members to identify emerging issues. More generally the Group Risk function will be expected to take the lead on specific issues, provide general guidance as to best practice and to intervene where significant issues may potentially occur. RISK METRICS Fundamental to sound risk management is the need to quantify risks effectively. Group Risk has a dedicated risk modeling function that works closely with the Finance, Actuarial and Investment functions to assess the various risks in the balance sheet. There are four principal risk modeling activities: • Stress Testing: Stress testing provides assurance that the Group and the business units are adequately capitalised to maintain regulatory solvency and withstand adverse financial risk events. We perform regular stress testing to monitor the potential impact of the changing investment and economic environment on the regulatory capital position of the Group and each of the business units. These tests show the financial impact the risks identified above are likely to have when considered individually and collectively. The ability to ANNUAL REPORT 2013 057 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRisk Management diversify risk is a key competitive advantage for a financial institution operating across a diverse set of economies. Accordingly, AIA closely monitors the correlations between risks across different countries. Principal Risks The principal risks and the Group’s approach to managing them are discussed below with further information provided in note 37 to the financial statements. • Economic Capital: Economic capital is widely used by large international financial services groups as a measure of financial strength and as a means of comparing the relative financial merits of different business strategies regardless of varying regulatory capital requirements. Insurance Risk Insurance risk is the potential loss resulting from mortality, morbidity, persistency, longevity and adverse expense experience. This includes the potential impacts from catastrophic events such as pandemics and natural disasters. AIA is developing an economic capital model based on best estimates of its liabilities to an agreed confidence level. The model draws on global industry best practices and takes into account the environment in the Asia-Pacific region, in particular in relation to the economic and market-related parameters adopted within the model. • Market Risk: Group Risk works closely with the Investment Analytics team to develop and implement quantitative techniques for measuring AIA’s market risks. For example, duration and other related measures are used to quantify interest rate risk, peak exposure is used to determine credit and liquidity risk, and Value At Risk measures are used to assess different investment strategies. These measures are used in the regular updates on investments provided to the Financial Risk Committee and in setting limits and defining actions to mitigate market risk. • Operational Risk: Where data is scarce, scenario modeling techniques are used to approximate the loss distribution associated with a particular event or set of circumstances. The operational risk team uses scenario modeling to estimate the potential for losses arising from major strategic and operational risks, and to quantify such losses. RISK CATEGORISATIONS Under the RMF, the Group adopts a common language in the description of risks at both the Group and the local business unit levels to proactively manage a wide spectrum of financial and non-financial risks as summarised in the chart below: Insurance Risk Financial Risks Non-Financial Risks Credit Risk Operational Risk Market Risk Strategic Risk Liquidity Risk Note 27 to the financial statements details insurance contract liabilities, the nature of insurance products and their principal risks. The Group manages its exposure to insurance risk at each stage of the process. • Product Design: The Group manages product design risk through the New Product Approval Process where products are reviewed against pricing, design and operational risk benchmarks agreed by the Group Financial Risk Committee (FRC). Local business units work closely with a number of Group functions including product management, actuarial, legal, compliance, risk and underwriting. The Group monitors closely the performance of new products and focuses on actively managing each part of the actuarial control cycle to minimise risk in the in-force book as well as for new products. • Underwriting, Claims & Expense Discipline: Professional underwriting together with active management of expenses reduces the risk of actual experience being adverse compared with the assumptions used in the pricing of products. We adhere to well-defined market- oriented underwriting and claims guidelines and practices that have been developed based on extensive historical experience. Daily operations also follow a disciplined budgeting and control process that allows for the management of expenses within pricing estimates based on the Group’s very substantial experience within the markets in which we operate. • Sales Quality: Ensuring customers buy products that meet their needs is central to the Group’s operating philosophy. Through comprehensive sales training programmes and active monitoring and management of sales activities and persistency, the Group seeks to ensure that appropriate products are sold by sales representatives and that standards of service consistently meet or exceed our customers’ reasonable expectations. This allows the Group to meet customer needs while also delivering sustainable value to shareholders through the consistent income 058 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWderived from a large and predictable in-force book of business across a broad set of markets. • Experience Management: The Group conducts regular experience studies of all the insurance risk factors in its in- force block. These internal studies together with external data are used to identify emerging trends which can then be used to inform product design, pricing, underwriting, claims management and reinsurance needs. • Research: Through monitoring the development of both local and global trends in medical technology, health and wellness, the impact of legislation and general social, political and economic conditions the Group seeks to anticipate and respond promptly to potential adverse experience impacts on its products. • Reinsurance: The Group uses reinsurance solutions to help reduce concentration and volatility risk, especially with large policies or new risks, and as protection against catastrophic events such as pandemics or natural disasters. Financial Risks Financial risk is the potential loss resulting from adverse movements in financial markets, changes in the financial condition of counterparties and in market liquidity to buy and sell investments. Financial risk is subdivided into credit risk, market risk (which includes interest rate, credit spread, equity price, property price and foreign exchange rate risk) and liquidity risk. The Group manages its exposure to financial risk within tolerances agreed by the FRC. Risk metrics such as those described above are used to identify exposure to each of the major financial risks. “First line” management of financial risk is primarily conducted by the Investment and Treasury functions with oversight provided by a dedicated Investment Risk function in Group Risk and financial risk management units in all major business units. The Group also manages financial risk by periodically running specific scenario modeling exercises to gauge the potential impact of macro political and economic events on financial strength and profitability. Credit Risk Credit risk is the risk that third parties fail to meet their obligations to the Group when they fall due. Credit risk occurs wherever reliance is placed on a third party to satisfy a financial obligation. Although the primary source of credit risk is the Group’s investment portfolio, such risk can also arise through reinsurance, procurement and treasury activities. Note 21 to the financial statements provides further details of the Group’s financial investments in debt instruments, the credit quality of those instruments and the basis on which they are carried in the Financial Statements. The management of all credit risk occurs on two levels within AIA. The Credit Research team in the Investment Department performs a detailed analysis of individual counterparties and recommends a rating within the internal ratings framework. The Group Risk function manages the Group’s internal ratings framework and reviews these recommendations and where appropriate makes recommendations for revisions from time to time. Agreed internal ratings are then used to determine the Group’s appetite for exposure to each counterparty. A matrix of risk tolerances has been approved by the FRC that ensures that credit risk in the investment portfolio is contained within AIA’s Risk Appetite. These tolerances cover individual counterparty, segmental concentration and cross-border exposures. The Investment Department has discretion to shape the portfolio within those risk tolerances, seeking further Group approvals through the risk governance framework where they wish to invest outside those tolerances. If certain investments are technically within risk tolerances but there is a specific concern, Group Risk brings these to the attention of the FRC for inclusion in the Group Watch List. Market Risk Market risk is the risk of financial loss from adverse movements in the value of assets owing to market factors, including changes in interest and foreign exchange rates, as well as movements in the spread of credit instruments to corresponding government bonds, “Credit Spread Risk”, and in equity and property prices. Note 37 to the financial statements provides further detail relating to the market risks discussed below. The FRC approves all policies and metrics associated with the evaluation of market risk exposures. Interest Rate Risk The Group’s exposure to interest rate risk predominantly arises from any difference between the duration of the Group’s liabilities and assets, in particular in relation to the reinvestment of maturing assets to meet the Group’s commitments, predominantly its insurance liabilities. In insurance companies this is often known as ALM risk. This exposure can be heightened in products with inherent options or guarantees. Since the majority of the Group’s investments are in fixed income securities interest rate risk is the Group’s largest market risk. ANNUAL REPORT 2013 059 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRisk Management Exposure to interest rate risk is summarised in note 37 to the financial statements, which shows the split of financial assets and liabilities between variable, fixed and non-interest bearing investments. The Group manages interest rate risk by ensuring appropriate insurance product design and underlying assumptions as part of the product approval process and by matching, to the extent possible and appropriate, the duration of investment assets with the duration of insurance policies. For in-force policies, we regularly review the policyholder bonus payout and crediting rates applicable to policyholder account balances, considering amongst other things bond yields and policyholders’ reasonable expectations. Credit Spread Risk Credit Spread Risk arises from changes in the market value of non-government securities as a result of a change in perception as to their likelihood of repayment. These price changes are distinct from those resulting from changes in interest rates. AIA invests in non-government securities in a number of its portfolios. Because these securities are mostly held to maturity, Credit Spread Risk is only taken to the extent that the Group may be forced to sell those securities before they mature. AIA nonetheless manages its Credit Spread Risk carefully, focusing on overall portfolio quality and diversification and seeking to avoid excessive volatility in the mark-to-market value of its investment portfolios. Equity Price Risk Equity price risk arises from changes in the market value of equity securities and equity funds. Investment in equity assets on a long-term basis is expected to provide diversification benefits and enhance returns. The extent of exposure to equities at any time is at the discretion of the Investment Department operating within the terms of the Group’s and local business units’ strategic asset allocations. From a risk perspective, particular emphasis is placed on managing concentrations and volatility in the Group’s equity exposures. The Group’s “Margin of Safety Investment” approach is designed to target value in equity selection. Equity exposures are also included in the aggregate credit exposure reports on individual counterparties to ensure concentrations are avoided. Note 21 to the financial statements provides further details of the Group’s financial investments in equity securities, including the basis on which they are carried in the Financial Statements. Note 37 to the financial statements indicates the sensitivity of profit and net assets to changes in equity prices. Property Price Risk Property price risk arises from interests in real estate assets, which form part of the Group’s investment portfolios and are subject to market value changes due to general or specific factors. A considerable number of such real estate assets are self-occupied and used for operating purposes. Real estate assets are expected to provide useful diversification benefits and a long-term return with some inflation protection. The price risk in property can be driven by broader economic and social factors, notably tenant supply and demand, liquidity of individual buildings, evolving infrastructure or government actions that may directly or indirectly influence the market. It can also be driven by the characteristics of specific holdings: their location within an area, the competitiveness of their facilities and their physical condition. Foreign Exchange Rate Risk At the Group level, foreign exchange rate risk arises mainly from the Group’s operations in multiple geographical markets in the Asia-Pacific region and the translation of multiple currencies to US dollars for financial reporting purposes. Note 37 to the financial statements shows the Group’s currency exposures and the sensitivity of shareholders’ equity and profit to movements in those currencies. Foreign exchange rate risk is managed at a Group level through modeling and monitoring the currency of earnings and business unit dividend remittances together with other earnings from operations. At a local level the Group seeks to match the currency applicable to its local liabilities and assets excluding foreign equity holdings. This includes the matching of US$ and HK$ assets and liabilities in the Hong Kong businesses. In this respect cross-currency swaps or foreign exchange forward contracts are sometimes used. Generally, working capital at the Group level is held in US dollars and is not matched proportionally to the currency of the Group’s risks. Liquidity Risk Liquidity risk occurs in two ways. In the first instance it is the risk that insufficient cash is available to meet payment obligations to counterparties as they fall due. This covers the need to ensure that cash or cash equivalent assets are available to cover expected insurance liabilities including any volatility in those liabilities arising from experience variance or from insurance products that permit surrender, withdrawal or other forms of early termination for a cash surrender value. Note 37 to the financial statements provides a maturity analysis of the Group’s financial assets and its liabilities and insurance contracts. 060 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWThe local business units seek to manage liquidity risk through insurance product design and by matching near- term expected cash flows from liabilities and assets. In this respect, the positive cash flows from the business provide an important source of liquidity. At the Group level we hold sufficient cash and liquid assets to cover expected Group obligations and commitments. In order to maximise returns to policyholders and shareholders the Group seeks to remain as fully invested as prudent. A US$300 million committed bank facility has therefore been put in place and bond repurchase markets will also be used to manage short-term liquidity needs where it is in the Group’s interest to remain fully invested. This can be used in conjunction with the Group’s Medium Term Note programme which provides ready access to the capital markets subject to market conditions. Liquidity risk also occurs more generally in relation to the ability to buy and sell investments. This is a function of the size of the Group’s holdings relative to the availability of counterparties willing to buy or sell these holdings at any given time. In times of stress, market losses will generally be compounded by forced sellers seeking unwilling buyers. While life insurance companies benefit from the relatively low need for liquidity to cover those of their liabilities which are directly linked to mortality and morbidity, this risk is managed by regularly assessing the relative liquidity of the Group’s assets and managing the size of individual holdings through risk tolerances. As disclosed in note 21 to the financial statements, most assets are in the form of marketable securities, which can typically be converted to cash quickly should the need arise. Non-Financial Risks Non-financial risks cover the potential for AIA’s business to suffer through either key control failures, changes in the business environment or inadequate planning or management of infrastructure. While ultimately all losses are financial, in the case of non-financial risks the loss may initially take the form of damage to the Group’s reputation. The risk of such damage, or reputational risk, is that negative publicity regarding a company’s business practices, whether true or not, could have adverse consequences, including but not limited to a loss of customers, financial loss, sanction by regulators, damage to the brand and litigation. Consideration of reputational risk is a key element in the Group’s operational risk checklists and is actively monitored by the operational risk teams working closely with Group Law, Group Compliance, Group Corporate Communications and business unit management. The Group’s non-financial risks comprise operational risk and strategic risk. Operational Risk Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, personnel and systems or from external events. Operational risk is broken down into a common classification which is used across the Group. At the Group level, operational risk is overseen through 11 defined risk areas or Key Operational Risks (KORs). Each KOR is measured using Key Risk Indicators (KRIs), with a designated “first line” owner for each KOR. The ORC reviews these risks regularly, placing items that are seen to have a Group dimension on the Group Watch List for further action and heightened review. The ORC also reviews new activities where there is deemed to be the potential for material operational risk. For all new products, derivative instruments, large property projects and “Restricted Investments”(generally non-generic or illiquid traded investments such as hedge funds, structured credits or instruments containing embedded derivatives) an operational risk checklist is completed including potential reputational issues, operational readiness and technical dependencies. The Group’s Risk and Control Self-Assessment (RCSA) process is used to identify and assess the impact of operational risks. The RCSA is an exercise whereby management considers possible or actual risk events, ascribes likelihood of occurrence and potential severity, and then agrees mitigation strategies to reduce these risks. These strategies are then monitored and the exercise repeated, with the results stored in a dedicated operational risk database. AIA protects itself against financial losses by purchasing insurance coverage against a range of operational loss events including business disruption, property damage and internal fraud. The excess amounts and extent of coverage are determined taking into consideration the results of scenario modeling. Strategic Risk Strategic risk refers to adverse impacts from unexpected changes to the Group’s operating and market environment. Strategic risk is addressed as part of the business planning process and ongoing monitoring of and response to economic, political, regulatory, competitive and technical changes that may impact AIA’s business. ANNUAL REPORT 2013 061 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOur People Our employees and agents have been at the heart of our promise to customers since our establishment in Asia in 1919. They remain genuinely engaged in the lives of our customers – providing the right protection, savings and investment solutions for them and their families. Today, our AIA team of agents and 20,000 employees delivers The Real Life Company brand promise with the same dedication and professionalism that have helped many generations of families to realise their life goals. AIA’s culture is guided by our Operating Philosophy: “Doing the Right Thing, in the Right Way, with the Right People” and the Operating Principles derived from these. To support our values we continued in 2013 to reward employees and agents that have brought our Operating Principles to life or acted as inspiring role models. At AIA, we also pride ourselves on an environment that connects employees with senior management and each other through open dialogue. Our Group Chief Executive and President Mark Tucker, members of the Board and the Executive Committee have regular conversations with employees at frequent events such as town hall meetings, board visits and at the Leadership Conference, which once a year brings together around 300 of our most senior leaders from across the region. In addition, AIA enables dialogue, collaboration and sharing across the organisation through numerous employee events as well as internal electronic media such as the employee newsletter “Inside AIA” and the enterprise social network “Wave”. Launched in December 2012, Wave has also provided a valuable platform for senior management to engage with the more than 10,000 employees who registered throughout 2013. LISTENING TO OUR PEOPLE We believe that AIA is best able to deliver on its promises to customers and shareholders by harnessing the energy and ideas of its employees. This is achieved in part by listening to our employees through an annual employee engagement survey. In 2013, the overall participation rate for the survey was 96 per cent – a total of over 15,000 voices. While engagement scores have improved each year since the inception of the survey in 2011, the real value is in the opportunity for employees to shape the environment in which they work. 062 AIA GROUP LIMITED To support our values we continued in 2013 to reward employees and agents that have brought our Operating Principles to life or acted as inspiring role models. DEVELOPING OUR PEOPLE We know that excellence in people development is key to realising our vision, achieving our strategy and meeting our goals. Operating under the 70/20/10 framework (i.e. 70 per cent stretch assignments and learning on the job, 20 per cent learning through coaching and mentoring, and 10 per cent through structured learning curriculum), we seek to provide learning opportunities for employees at all levels. Personal accountability is critical to successful development and therefore beginning in 2012, we mandated that each employee should take on at least one development action per year as part of their personal development plans. Our comprehensive range of learning and development programmes touches employees at every stage of their career; from a thorough employee orientation curriculum for new employees through learning and development for our most senior leaders. Complementing classroom learning is a series of online learning modules that allow employees to learn and absorb new concepts at their own pace. FINANCIAL AND OPERATING REVIEWAIA encourages dialogue, collaboration and sharing across the organisation through numerous employee events and internal communications channels. Our two-tiered managerial programme – “The AIA Manager” and “The AIA Manager As Coach” – supports our focus on continuous improvement for middle and senior managers, while engaging and empowering their teams toward achieving long-term success. A new programme – “The Best of Me” – was launched to help non-managers better understand how they can leverage their own style of work as they grow both personally and professionally in their career journey. The Company also continued to expand its mentoring programme throughout 2013. Senior managers from across the Group are actively involved in the programme as mentors to employees from the Group Office and markets. We also believe in making the most of the opportunities available for cross-border development in a Group operating across 17 markets. Our development programmes include mobilising our people to take on new job opportunities through transfers between functions and to different operating units within the Group. More than 290 such transfers, including project secondments (three to six months), business assignments (two years) and permanent transfers, were recorded across the Group in 2013. DEVELOPING OUR LEADERS FOR THE FUTURE AIA is a meritocracy and we believe strongly in developing leaders from within by providing them with the opportunities they need to grow into new and challenging roles. Our senior management is drawn from most of the countries in which we operate. The diversity of our management team – representing over 20 nationalities – reflects our commitment to hire, coach, develop and promote people from within the AIA community. To ensure strong and sustainable leadership and robust succession, we conduct an annual Organisation and People Review. The exercise involves a systematic and rigorous evaluation of the organisation’s leadership requirements and capabilities, emerging talent and other human capital considerations. Over 860 top leadership positions – across all business units and 11 functions – were reviewed in 2013. REWARDING PERFORMANCE Our compensation programme has a strong emphasis on rewarding performance. We offer compensation and benefits that are fair and competitive, recognise the importance of creating sustainable value for shareholders and embed delivery firmly within our framework of customer-centric values. Accordingly, our compensation programme rewards employees based on a combination of individual performance, the performance of their business unit and the performance of the Group as a whole. The Performance Development Dialogue in AIA ensures that employees grow with the Company through constant dialogue with their managers on their performance and development needs. Rewards are linked to the delivery of both the performance (“what”) and the behaviour (“how”). Leaders are also given the opportunity to share directly in AIA’s corporate success via performance-related share schemes. Staff, Premier Agents and Premier Agency Leaders are encouraged to participate in the Employee Share Purchase Plan (ESPP) and Agent Share Purchase Plan (ASPP) where available in their locations, the details of which are set out on pages 194 and 195 of this Annual Report. Since their launch in 2011, both Plans have increased their scope of adoption within the region with the ESPP adopted in 13 locations and the ASPP adopted in seven locations, with growing numbers of eligible employees and agents enrolling in the Plans in each successive year of their availability. ANNUAL REPORT 2013 063 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCorporate Social Responsibility To celebrate AIA’s 65th anniversary in Malaysia, close to 1,000 employees visited hospitals, care facilities and orphanages as part of the “AIA Touching Lives” initiative. AIA’s business is focused on contributing to the well-being of customers, employees and agents but beyond that we have a deep commitment to fostering the well-being of the communities in which we operate. Better personal, workplace, community and environmental health benefit all and that is why the primary focus of AIA’s Corporate Social Responsibility (CSR) programme is Healthy Living – encouraging, enabling and empowering people across the region to lead healthier lives. We have rolled out a diverse range of healthy living-related initiatives across the region to promote these goals. HEALTHY LIVING – PHYSICAL, EMOTIONAL, ENVIRONMENTAL We take the view that well-being involves physical and mental health as well as environmental issues. Based on this broad platform, all our offices are empowered to implement both internal programmes to encourage healthy living amongst our employees and external projects selected with their relevance to our local communities in mind. Our internal programmes include encouraging employees to take part in well-being initiatives through such activities as healthy meals in staff canteens; workshops encouraging better physical and mental health; and a wide range of company- sponsored fitness and weight-loss activities – including our very own AIA Olympics, boot camps and yoga. Our employees and agents also reach out to their communities with a variety of fundraising, health-promotion, environmental and well-being projects. For example we sponsor initiatives to address the physical and emotional impact of heart defects, as well as cleft lips, cleft palates and other facial deformities by paying for the necessary surgeries and providing support to the families whose children are affected. In addition, in 2013, many of our activities were focused on helping people achieve a more balanced frame of mind (another important facet of healthy living), including programmes that nurture young artists. 064 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWIn 2013, we conducted our comprehensive Healthy Living Index Survey for the second time interviewing 10,245 respondents across 15 Asia-Pacific markets. Healthy Living Index Survey – Increasing awareness, promoting action AIA’s Healthy Living platform has a solid empirical foundation. This year we conducted our comprehensive Healthy Living Index Survey for the second time. 10,245 respondents across 15 Asia-Pacific markets were interviewed about their overall health, their health concerns and their hopes for a healthier way of life. 73 per cent of survey respondents said that their health was not as good as it had been five years ago and most agreed that there were many areas where they needed to do more, including improving their eating, sleeping and exercise habits. Importantly, the survey also identified emerging threats to health such as food safety, obesity, environmental pollution and Internet addiction, where more than half of the adults admitted that the Internet and social networking is becoming addictive, and two-thirds said it prevented them from getting enough exercise and sleep. These and other survey findings help inform individuals and society at large on areas for improvement; and at AIA, we are also using the findings to fine-tune our CSR initiatives and develop other activities that will motivate people across the region to adopt healthier habits. Providing Opportunities for People to Engage in Healthy Activities AIA continues to support and fund participation in a wide variety of sports-related charity events, encouraging the general public, our employees and our agents to get involved. The great level of uptake has shown that these are very popular. For example AIA was Action Partner for the annual Médecins Sans Frontières (MSF) Orienteering Competition in Hong Kong which attracted a record of nearly 3,000 participants in 2013 and saw more than 700 AIA financial planners raise record donations to support MSF’s worldwide humanitarian work. AIA also supported three corporate teams’ participation in Oxfam Trailwalker 2013, one of the territory’s most challenging sporting events attracting more than 4,000 participants. The AIA teams completed the 100km MacLehose Trail within 48 hours and raised over US$24,500 to support Oxfam’s poverty alleviation and emergency relief projects in Asia and in Africa. Our joint venture in India, Tata AIA, sponsored the Mumbai Marathon 2013 to provide support to a children’s education and protection charity. More than 40,000 people from all walks of life took part in what is now one of Asia’s largest marathons. In Indonesia, our employees and agents continued to support The Jakarta Race. Over 2,800 participants joined this race in 2013 to raise funds for the Indonesian Cancer Foundation. Similarly for the second consecutive year, AIA in Singapore was a Presenting Sponsor of the Jurong Lake Run. More than 15,000 participants took part in this flagship running event held with the objective of promoting healthy living. AIA in Singapore was a Presenting Sponsor of the Jurong Lake Run for the second consecutive year. ANNUAL REPORT 2013 065 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCorporate Social Responsibility AIA was Action Partner for the annual Médecins Sans Frontières (MSF) Orienteering Competition in Hong Kong to support MSF’s worldwide humanitarian work. Our employees also participated in the 2013 “Around the Bay In A Day” cycling race, Australia’s largest one-day bicycle ride. The race raised sufficient funds to help more than 2,400 disadvantaged primary school students. In Thailand, special football clinics were held for the second year in a row to provide basic training to over 1,400 youths. In New Zealand, AIA encouraged employees to lead a more active and healthier lifestyle through participation in an action- packed game known as Turbo Touch by forming a corporate team to enter the 12-week North Shore Turbo competition. Promoting Good Healthcare Habits In Hong Kong, AIA held a series of “Love Your Heart!” roadshows, providing free heart health assessments to members of the public. Agents, employees and the Group Office also took up the Lifeline Express cause, and the funds raised will allow more than 200 patients in rural China to have much-needed cataract surgery. Partnering with the non- governmental organisations, including Against Child Abuse and Christian Action, our employees extended to families in need free tickets to one of Hong Kong’s leading attractions, Ocean Park. In Korea, AIA donated over US$210,000 to the EWHA Women’s Cancer Centre to subsidise medical fees for low-income cancer patients and also to provide free cancer screening for women. 066 AIA GROUP LIMITED In Indonesia, AIA distributed nutritious food to students and held a sports competition for approximately 200 elementary school students in Jonggol, West Java. Through the AIA Mobile Clinic, free medical services were provided to communities in Yogyakarta. In China, AIA promoted health and well-being in local communities with a special focus on disadvantaged children. In Jiangsu, in addition to organising a sports day for migrant workers’ children, AIA volunteers visited a charity bakery to help raise funds for the mentally retarded. In Guangdong, AIA cooperated with New Express Daily to hold a painting contest for children with proceeds from auctioning the top 10 paintings donated to congenital heart disease treatment. Our Employees and Agents Lending a Helping Hand Supporting our employees and agents as they help others is also a priority, and this has led to many new AIA-led community initiatives and to our deeper involvement in existing events. In Malaysia, we officially launched “AIA Touching Lives” with seed funds of approximately US$110,000 which included donations raised by employees. In conjunction with this launch, AIA reaffirmed its commitment towards two worthy causes it has championed over the years by disbursing US$25,000 to children with congenital heart illness and pledging US$15,000 to children born with cleft lip and palate conditions. In Indonesia, AIA launched “Real Action for AIA Village” with its employees renovating a number of facilities in the public primary school in Jonggol, West Java. Bicycles and sports equipment were also donated to schools in underprivileged areas in Indonesia. In Australia, employees’ participation in many charity-driven sports events was funded by the Company. Additionally, every AIA office in Australia participated in Australia’s Biggest Morning Tea, raising funds for cancer research and prevention. In Sri Lanka, AIA sponsored a free wheelchair service for hundreds of elderly Buddhist pilgrims visiting sacred sites, and around 60 employees volunteered to clean, paint and garden at Lady Ridgeway Hospital, the largest hospital in the world that serves children free-of-charge. Financial support was also provided to the Sanhinda orphanage and 40 foster children received direct financial support for a year. FINANCIAL AND OPERATING REVIEWCaring for the Environment 2013 saw the opening of the AIA Financial Centre, the first commercial building in Foshan, China to be certified a “green building” by the official authority, Leadership in Energy and Environmental Design (LEED). AIA continues to invest in environmentally friendly construction with two new commercial buildings in Bangkok, the AIA Capital Centre and the AIA Sathorn Tower. Both designed to meet the standards required for “green building” certification by LEED. Across the region, energy-saving devices have been installed in many AIA offices. In Hong Kong, continuing the momentum of a survey on electronic waste (e-waste) commissioned jointly by AIA and the Chinese University of Hong Kong (CUHK) in 2012, a series of electronic device (e-device) collection days were held at AIA and at CUHK to promote proper disposal and recycling habits. Over 600 old e-devices ranging from computers, laptops, mobile phones to cameras were collected. Our staff in Malaysia expressed their appreciation and gratitude to various communities by bringing cheer and treats to patients in hospitals and care facilities. To support autistic children in China, our employees and agents received professional volunteering training through our cooperation with Shanghai Aihao Children Rehabilitation Centre. As a mark of their concern for vulnerable community members, and to extend tangible care to those in need, our employees and agents in Australia, China, Hong Kong, India, the Philippines, Taiwan and Thailand participated enthusiastically in blood donation drives. They also mobilised their families, friends, policyholders and even the general public to support this worthwhile cause. Our pension unit in Hong Kong also showed its care for the environment by joining the stationary bicycle challenge to generate electricity for the Konica Minolta Green Concert 2013. The event raised money for local charities and a new Guinness World Record was set for the most participants in a static cycling relay in 12 hours. The AIA team won first runner-up prize for its efforts. Using Healthy Activities to Commemorate Special Occasions To celebrate AIA’s 65th anniversary in Malaysia, close to 1,000 employees devoted their time and energy to express their appreciation and gratitude to various communities by bringing cheer and treats to patients in hospitals and care facilities and also to children in orphanages as part of the AIA Touching Lives initiative. In August 2013, we announced our Cup Shirt partnership with English Premier League Football Club, Tottenham Hotspur. In addition to other benefits, this sponsorship has provided a very good platform to promote the role of sports in Asia-Pacific as a key element of healthy living. Celebrating the third anniversary of AIA’s public listing, Hong Kong held a special AIA-Tottenham Hotspur Youth Football Day, allowing local youth the opportunity to meet and play with two football legends from Spurs. In Hong Kong, AIA continued the collaboration with the Chinese University of Hong Kong to promote proper disposal of electronic devices and recycling habits amongst youngsters. ANNUAL REPORT 2013 067 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCorporate Social Responsibility In China, AIA held its third annual drawing competition for children to promote a low-carbon life and raise awareness on environmental protection and received close to 1,000 submissions. 220 children were shortlisted for the final round of the competition and their families were invited to join an energy saving and environmental protection winter camp held at the Beijing Energy Conservation and Environmental Protection Center. We also partnered with the non-governmental organisation, Roots & Shoots, to sponsor mini-organic farms at middle schools and to plant trees in Inner Mongolia. In Hong Kong, employees volunteered to do conservation work at Wetland Park. In Vietnam, we donated 130 water filters to help provide clean water to the local communities. EXTENDING THE POWER OF EDUCATION In China, we have developed the AIA Young Leaders Development Programme to provide funding and training to university students to encourage them to develop their own creative CSR and charity initiatives. In 2013, in line with our objective to help develop a generation of more caring leaders, over 5,000 students from 13 universities participated in our CSR competition. 57 projects were shortlisted and 10 winning campaigns were selected. These campaigns have since moved to implementation with online fundraising platforms already up and running. AIA in China received the “Annual Impactful Project” award for its Young Leaders Development Programme at the Financial Industry CSR Award Ceremony and Summit 2013, co-organised by the management committee of Shanghai Lujiazui Finance Trade Zone and the national financial media group China Business News. The Young Leaders initiative also won AIA “the Best Social Responsibility Company” title in China at the Competitiveness and Credibility Survey of Listed Companies. In Thailand, the “AIA School Libraries” project continued to offer valuable educational support for the ninth consecutive year. In 2013, three libraries were provided for needy schools benefitting 2,000 students and other people in the community. In Vietnam, our scholarship programmes benefitted almost 1,000 students across the country. In the Philippines, we partnered with the Department of Education through our Philam Paaralan Programme to build fully-furnished classrooms in underserved areas. This year Philam Foundation has completed two additional classrooms in Lemery, Batangas. This brought the total number of classrooms completed to 23 since the launch of the programme in 2011. Nurturing youngsters’ artistic talent has also been promoted by AIA in Hong Kong through a new major international art contest for children, Brushstrokes Over Hong Kong: International Children Painting Competition in Hong Kong, organised by the Promotion of Young Artists Foundation. More than 10,000 submissions were received from 52 countries and regions. The judging was undertaken in Hong Kong in January 2013 by 11 internationally renowned children’s art experts with the winners being honoured in an award ceremony. OTHER COMMUNITY SUPPORT While Healthy Living is our main focus, AIA’s CSR strategy also includes long-standing local initiatives worthy of support as well as providing emergency aid in times of crises and natural disasters. In China, we have developed the AIA Young Leaders Development Programme to provide funding and training to university students and 10 winning campaigns were selected. 068 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWIn Thailand, the “AIA School Libraries” project continued to offer valuable educational support for the ninth consecutive year. In Thailand, sufficient funds were raised for Operation Smile to repair facial deformities for 200 children, and 200 prostheses were donated through the “New Legs, New Life” campaign to needy recipients. In Taiwan, AIA worked in conjunction with the Taiwan Children’s Welfare League Foundation on the “Help Kids Grow” programme. Over US$210,000 was raised between August and October to cover food and education expenses for more than 2,000 needy children. To help build awareness of the programme, we also released a documentary highlighting how hard it is for underprivileged families in Taiwan to cover the nutrition and education expenses of their children. Clinic; the women’s cervical health screening and support programme; and the provision of nutritious food to elementary students in Jonggol. In the Philippines, we supported the launch of “GiveBackPhilippines” to raise funds for the victims of the Typhoon Haiyan disaster. Beneficiaries of the online donation campaign are Philam Foundation, Action Against Hunger and United Nations Children’s Fund (UNICEF). With Typhoon Haiyan damaging more than 3,000 schools, the need to rebuild classrooms is an urgent priority. To support this effort, Philam Life donated US$500,000 to Philam Foundation to kick-start the building process. In Vietnam, AIA continued to help minimise paediatric drowning, one of the leading causes of accidental deaths for children in Vietnam, by donating 1,000 lifesaver school bags. In Indonesia, we received the prestigious Corporate Social Responsibility 2013 award which recognises companies with CSR at their core. It was conferred by the Ministry of Women’s Empowerment and Child Protection in a ceremony broadcast on Seputar Indonesia, the country’s most-watched newscast. The award acknowledges the contribution AIA in Indonesia has made through many initiatives, including: the AIA Mobile Relief was also provided to storm and flood victims in Vietnam. In Thailand, employees and agents volunteered to pack and distribute 2,000 survival kits to flood victims in several provinces affected by floods. SUMMARY We are very proud of the work being done by our employees and agents throughout the region, and of the positive impact this is having on people’s lives. In 2013, more than 26,000 of our employees and agents as well as over 220,000 members of the general public participated in our health-oriented activities. ANNUAL REPORT 2013 069 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION03:00 04:00 05:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 00:00 01:00 02:00 070 AIA GROUP LIMITED CORPORATE GOVERNANCE…will continue to unfold. Asia-Pacific region provides one of the most attractive and resilient life insurance markets in the world. The demographic drivers in the region coupled with low levels of social welfare provision and the rapid expansion in the numbers of middle- and high-income households provide enormous growth opportunities, and all of this is happening on an unprecedented scale. ANNUAL REPORT 2013 071 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONStatement of Directors’ Responsibilities The Directors are responsible for preparing the Company’s consolidated financial statements in accordance with applicable laws and regulations. The Directors are responsible for keeping proper accounting records that give a true and fair view of the state of the Company’s affairs and explain its transactions. In preparing the consolidated financial statements of the Company, the Directors are required to: • Select suitable accounting policies and apply them consistently; • Make judgments and estimates that are reasonable and prudent; The Directors are responsible for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are also responsible for preparing a Report of the Directors and the Corporate Governance Report on pages 78 to 90 of this Annual Report. The Directors confirm that to the best of their knowledge: • State whether the financial statements have been prepared in accordance with International Financial Reporting Standards and Hong Kong Financial Reporting Standards; and • Prepare the financial statements on a going concern basis, unless it is not appropriate to make the presumption that the Group will continue in business. 1. the consolidated financial statements of the Company, prepared in accordance with International Financial Reporting Standards and Hong Kong Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position, cash flows and results of the Company and its undertakings included in the consolidated financial statements taken as a whole; and 2. the section headed “Financial and Operating Review” included in this Annual Report presents a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidated financial statements taken as a whole, together with a description of the principal risks and uncertainties the Company faces. 072 AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE Board of Directors and Executive Committee From left to right: Mr. John Barrie Harrison, Dr. Narongchai Akrasanee, Mr. Jack Chak-Kwong So, Mr. Mark Edward Tucker, Mr. Edmund Sze-Wing Tse, Mr. George Yong-Boon Yeo, Mr. Chung-Kong Chow, Dr. Qin Xiao, Tan Sri Mohamed Azman Yahya NON-EXECUTIVE CHAIRMAN AND NON-EXECUTIVE DIRECTOR Mr. Edmund Sze-Wing Tse Aged 76, is the Non-executive Chairman and a Non-executive Director of the Company. He is also the Chairman of The Philippine American Life and General Insurance Company. Amongst Mr. Tse’s appointments during more than 50 years with the Group, he served as Honorary Chairman of AIA Co. from July 2009 to December 2010, Chairman and Chief Executive Officer of AIA Co. from 2000 to June 2009 and its President and Chief Executive Officer from 1983 to 2000. Mr. Tse is a Non-executive Director of PCCW Limited and PICC Property and Casualty Company Limited. He has also been a Non-executive Director of PineBridge Investments Limited since May 2012. In recognition of his outstanding contributions to the development of Hong Kong’s insurance industry, Mr. Tse was awarded the Gold Bauhinia Star by the HKSAR Government in 2001. Mr. Tse received an honorary fellowship and an honorary degree of Doctor of Social Sciences from The University of Hong Kong in 1998 and 2002 respectively. In 2003, Mr. Tse was elected to the prestigious Insurance Hall of Fame. Mr. Tse was appointed as a Non- executive Director of the Company on 27 September 2010 and Non-executive Chairman on 1 January 2011. EXECUTIVE DIRECTOR Mr. Mark Edward Tucker Aged 56, is an Executive Director and the Group Chief Executive and President of the Company. For the period from 12 October 2010 to 31 December 2010, he served as Group Executive Chairman and Group Chief Executive Officer of the Company. Mr. Tucker joined the Group in July 2010 and is also Chairman and Chief Executive Officer of AIA Co. and AIA International. He is responsible for the strategic direction and overall management and performance of the Group. In addition to his responsibilities with the Group, Mr. Tucker has been an Independent Director of The Goldman Sachs Group, Inc. since November 2012. Prior to joining the Group, Mr. Tucker served as Group Chief Executive of Prudential plc from 2005 to 2009, first joining that group in 1986. Amongst the leadership positions that Mr. Tucker occupied during his time at Prudential, he was the founder and Chief Executive of Prudential Corporation Asia Limited from 1994 to 2003 and an Executive Director of Prudential plc from 1999 to 2003. During the period from 2004 to 2005, Mr. Tucker was Group Finance Director of HBOS plc. Mr. Tucker was a Non-executive Director of the Court of The Bank of England from June 2009 to May 2012, also serving as a member of its Financial Stability Committee and Audit and Risk Committee. Mr. Tucker qualified as a Chartered Accountant (ACA) in 1985. ANNUAL REPORT 2013 073 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Board of Directors and Executive Committee INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Jack Chak-Kwong So Aged 68, is an Independent Non-executive Director of the Company. From August 2007 to September 2010, Mr. So served as an Independent Non-executive Director of AIA Co., a wholly-owned subsidiary of the Company. He is currently an Independent Non-executive Director of Cathay Pacific Airways Limited and an independent Senior Advisor to Credit Suisse, Greater China. Mr. So also served as an Executive Director of the Hong Kong Trade Development Council from 1985 to 1992 and was appointed as its Chairman in October 2007. He was also appointed as Chairman of the Consultative Committee on Economic and Trade Co-operation between Hong Kong and the Mainland in October 2013, served as the Chairman of the Hong Kong Film Development Council from April 2007 to March 2013 and was awarded the Gold Bauhinia Star by the HKSAR Government in 2011. He has been a member of the Chinese People’s Political Consultative Conference since 2008. He is an International Business Advisor to the Mayor of Beijing and the Honorary Consultant to the Mayor of San Francisco. Mr. So was appointed as a Non-executive Director of the Company on 28 September 2010 and re-designated as an Independent Non-executive Director of the Company on 26 September 2012. Mr. Chung-Kong Chow Aged 63, is an Independent Non-executive Director of the Company. Mr. Chow is the Chairman of Hong Kong Exchanges and Clearing Limited. He has been an Independent Non- executive Director of Anglo American plc since 2008. Mr. Chow was Chief Executive Officer of MTR Corporation Limited from 2003 to 2011 and Chief Executive Officer of Brambles Industries plc, a global support services company, from 2001 to 2003. From 1997 to 2001, Mr. Chow was the Chief Executive of GKN plc, a leading engineering company based in the United Kingdom. Mr. Chow has been appointed as a non- official member of the Executive Council of Hong Kong from 1 July 2012 and the Chairman of the Independent Commission Against Corruption’s Advisory Committee on Corruption from 1 January 2013. He is the Chairman of the Hong Kong General Chamber of Commerce. He has also been a Steward of The Hong Kong Jockey Club since March 2011. In 2000, Mr. Chow was knighted in the United Kingdom for his contribution to industry. Mr. Chow was appointed as an Independent Non- executive Director of the Company on 28 September 2010. Dr. Qin Xiao Aged 66, is an Independent Non-executive Director of the Company. Dr. Qin served as Chairman of China Merchants Bank Co., Ltd. from April 2001 to September 2010 and as Chairman of China Merchants Group Limited from December 2000 to August 2010; President of China International Trust and Investment Corporation (CITIC) from April 1995 to July 2000; Vice Chairman of CITIC from July 2000 to December 2001 and Chairman of CITIC Industrial Bank from 1998 to 2000. Dr. Qin has been appointed as Non-executive Chairman of Amex Resources Limited since April 2012. He has served as Independent Non-executive Director of China Telecom Corporation Limited, HKR International Limited and China World Trade Center Co., Ltd. since 2008, 2009 and 2010, respectively. He has been a member of Lafarge’s International Advisory Board since 2007 and a member of the Financial Services Development Council since 17 January 2013. Dr. Qin was appointed as an Independent Non-executive Director of the Company on 28 September 2010. Mr. John Barrie Harrison Aged 57, is an Independent Non-executive Director of the Company. Mr. Harrison is currently an Independent Non- executive Director of Hong Kong Exchanges and Clearing Limited, The London Metal Exchange Limited and LME Clear Limited. He is also an Independent Non-executive Director of BW Group Limited and has been appointed Vice Chairman of BW LPG Limited since 21 November 2013. He is a member of the Asian Advisory Committee of AustralianSuper Pty Ltd since 30 June 2012. Mr. Harrison is a council member, standing committee member and honorary treasurer of The Hong Kong University of Science and Technology. From 2008 to 2010, he was Deputy Chairman, KPMG International. In 2003, Mr. Harrison was elected Chairman and Chief Executive Officer of KPMG, China and Hong Kong and Chairman of KPMG Asia Pacific. Mr. Harrison began his career with KPMG in London in 1977 and was made a partner of KPMG Hong Kong in 1987. Mr. Harrison is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. Mr. Harrison was appointed as an Independent Non-executive Director of the Company on 1 July 2011. 074 AIA GROUP LIMITED CORPORATE GOVERNANCETan Sri Mohamed Azman Yahya Aged 50, is an Independent Non-executive Director of the Company. Tan Sri Azman is the Executive Chairman of Symphony Life Berhad and an executive director and Group Chief Executive of Symphony House Berhad; both listed entities on the Main Market of Bursa Malaysia Securities Berhad (“Bursa Malaysia”). He is an independent non- executive director of Scomi Group Berhad which is also listed on Bursa Malaysia and a director of various companies including PLUS Expressways International Berhad. Tan Sri Azman was a director of Malaysian Airline System Berhad and AirAsia Berhad until May 2013 and April 2012, respectively. Tan Sri Azman started his career at KPMG in London and qualified as a chartered accountant before returning to Malaysia in 1988 where he worked in a variety of roles in investment banking, ultimately being named chief executive of Amanah Merchant Bank. In 1998, he was tasked by the Malaysian Government to set-up and head Danaharta, the national asset management company. He was also the Chairman of the Corporate Debt Restructuring Committee (“CDRC”), set up by Bank Negara Malaysia, to mediate and assist in debt restructuring programmes of viable companies. During his tenure with Danaharta and CDRC from 1998 to 2003, he received a number of international recognitions including being named one of Asia’s “Most Influential Bankers” by Institutional Investor and “Restructuring Agency Chief of the Year” by Asiamoney. Tan Sri Azman is active in public service and sits on the boards of Khazanah Nasional Berhad, the Malaysian government investment arm and Ekuiti Nasional Berhad, a government linked private equity fund management company. He is also a member of the Financial Reporting Foundation, the trustee body that oversees the Malaysian Accounting Standards Board and a member of the Capital Market Advisory Group of Malaysian Securities Commission. He is a member of The Institute of Chartered Accountants in England and Wales, the Malaysian Institute of Accountants and a fellow of the Institute of Bankers Malaysia. Tan Sri Azman was appointed as an Independent Non- executive Director of the Company on 24 February 2014. Mr. George Yong-Boon Yeo Aged 59, is an Independent Non-executive Director of the Company. Mr. Yeo is currently the Vice-chairman of Kerry Group Limited and the Chairman of Kerry Logistics Network Limited. He is a member of the Foundation Board of the World Economic Forum and the Berggruen Institute on Governance (formerly known as Nicolas Berggruen Institute’s 21st Century Council). In 2013, he was appointed a member of the Pontifical Commission for Reference on the Economic- Administrative Structure of the Holy See. In 2012, Mr. Yeo was presented with the Order of Sikatuna by the Philippines Government and the Padma Bhushan by the Indian Government, and became an Honorary Officer of the Order of Australia. From 1988 to 2011, Mr. Yeo was a Member of the Singapore Parliament and held various Cabinet positions, including Minister for Foreign Affairs, Minister for Trade and Industry, Minister for Health, Minister for Information and the Arts and Minister of State for Finance. From 1972 to 1988, Mr. Yeo served in the Singapore Armed Forces and attained the rank of Brigadier-General in 1988 when he was Director of Joint Operations and Planning in the Ministry of Defence. Mr. Yeo was appointed as an Independent Non-executive Director of the Company on 2 November 2012. Dr. Narongchai Akrasanee Aged 68, is an Independent Non-executive Director of the Company. Dr. Narongchai is a former Minister of Commerce for Thailand and Senator and has acted as adviser to several Thai Prime Ministers. He retired as Chairman of the Export- Import Bank of Thailand in June 2010. Dr. Narongchai also served as a Director of the Office of the Insurance Commission of Thailand during the period from October 2007 to August 2012 and a Director of the National Economic and Social Development Board of Thailand from July 2009 to June 2013. He is currently Chairman of the Thailand National Committee for the Pacific Economic Cooperation Council and a member of the Monetary Policy Committee of the Bank of Thailand. Dr. Narongchai also acts as a director for certain entities listed on the Stock Exchange of Thailand, including acting as Chairman of MFC Asset Management Public Company Limited, Chairman of Ananda Development Public Company Limited, Vice Chairman and an independent director of Thai-German Products Public Company Limited and as an independent director of Malee Sampran Public Company Limited. He is also Chairman and an independent director of The Brooker Group Public Company Limited, which is listed on the Stock Exchange of Thailand’s Market for Alternative Investment. Dr. Narongchai was appointed as an Independent Non-executive Director of the Company on 21 November 2012. ANNUAL REPORT 2013 075 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBoard of Directors and Executive Committee From left to right: Ng Keng Hooi, Simeon Preston, Mitchell New, Gordon Watson, Mark Edward Tucker, Garth Jones, Paul Groves, John Tai-Wo Chu, Shulamite Khoo EXECUTIVE COMMITTEE Mr. Mark Edward Tucker Mr. Tucker’s biography is set out above. Mr. Garth Jones Aged 51, is the Group Chief Financial Officer, responsible for leading the Group in all aspects of finance and risk management and oversight of the Group’s actuarial function as well as managing relationships with key external stakeholders, including regulators and rating agencies. He is also responsible for the Annual Business Planning and Budgeting process and the Group Corporate Transaction team which supports merger and acquisition activity across the Group. He is a director of various companies within the Group including AIA Co. and AIA International. He joined the Group in April 2011. Prior to joining the Group, Mr. Jones was the Executive Vice President of CPIC Life, the life insurance arm of China Pacific Insurance (Group) Co., Ltd. (CPIC). He also held a number of senior management positions during 12 years with Prudential Corporation Asia Limited, including Chief Financial Officer of the Asian life insurance operations. Prior to joining Prudential, Mr. Jones led the development of reinsurer Swiss Re’s Asia life business. Mr. Jones is a Fellow of the Institute of Actuaries in the United Kingdom. Mr. Ng Keng Hooi Aged 59, is the Regional Chief Executive responsible for the Group’s businesses operating in Thailand, Singapore, Brunei, Malaysia, China and Taiwan as well as Group Agency and Group Product Strategy. He is a director of various companies within the Group including AIA Co. and AIA International. He joined the Group in October 2010. Prior to joining the Group, Mr. Ng was Group Chief Executive Officer and Director of Great Eastern Holdings Limited from December 2008. Mr. Ng worked for Prudential plc from 1989 to 2008, serving as a Managing Director of Insurance of Prudential Corporation Asia Limited from 2005 to 2008 responsible for its operations in Malaysia, Singapore, Indonesia and the Philippines. He has been a Fellow of the Society of Actuaries (U.S.) since 1985. Mr. Gordon Watson Aged 50, is the Regional Chief Executive responsible for the Group’s businesses operating in Hong Kong, Korea, the Philippines, Australia, Indonesia, Vietnam, New Zealand, Macau, India and Sri Lanka as well as the Group Corporate Solutions business, Group Partnership Distribution and the Vitality initiative. He is a director of various companies within the Group including AIA Co. and AIA International. Mr. Watson rejoined the Group in January 2011. He worked in various parts of AIG (including within AIA) for over 27 years, during which time he served as Global Vice Chairman of ALICO and Chairman and Chief Executive Officer of ALICO Asia. He also served as Global Chief Operating Officer and as Chairman of ALICO Japan. He is a Fellow of the Chartered Insurance Institute and Chartered Institute of Marketing. 076 AIA GROUP LIMITED CORPORATE GOVERNANCEMr. Mitchell New Aged 50, is the Group General Counsel, responsible for the provision of legal services and company secretarial services for the Group and providing support to legal and corporate governance functions within country operations. He is a director of various companies within the Group. He joined the Group in April 2011. Prior to joining the Group, Mr. New occupied various senior roles with Manulife Financial where he was most recently Senior Vice President & Chief Legal Officer for Asia, based in Hong Kong and with responsibility for providing legal services to its operations throughout Asia. He also managed several strategic initiatives including Manulife’s demutualisation in Asia, which led to the listing by Manulife of its shares on the stock exchanges of Hong Kong and the Philippines. In addition to the Asia division, he was also previously Senior Vice President and General Counsel to Manulife’s Canadian division. Mr. John Tai-Wo Chu Aged 74, is the Group Chief Investment Officer responsible for providing oversight to the management of the investment portfolios of the Group. He is a director of various companies within the Group. Mr. Chu joined the Group in June 1993 as Senior Vice President and Chief Investment Officer of AIA Co. Prior to joining the Group, Mr. Chu spent 19 years with Bank of America in various senior management positions, including Country Senior Credit Officer, Head of Corporate Banking in Hong Kong and Country Manager of Bank of America in China. Mr. Simeon Preston Aged 43, is the Group Chief Strategy and Operations Officer responsible at the Group level for business strategy, technology and operations. He is a director of various companies within the Group. He joined the Group in September 2010. Prior to joining the Group, Mr. Preston served as a senior partner in the financial services practice of global management consultants Bain & Company, where he specialised in the Asia life insurance sector. He previously spent almost nine years with consulting firm Marakon Associates and was named a partner in 2006. Ms. Shulamite Khoo Aged 52, is the Group Human Resources Director responsible for the development of human capital strategies and their implementation across the Group as well as leading and providing support to human resources functions in local market operations. She is also responsible for the Group Corporate Security function. She joined the Group in January 2011. Prior to joining the Group, Ms. Khoo was Group Executive Vice President, Global Head of Human Resources of the AXA Group, based in Paris. Prior to AXA, she was Regional Head of Human Resources for Prudential Corporation Asia Limited based in Hong Kong. She is a Chartered Fellow of the Chartered Institute of Personnel and Development. Mr. Paul Groves Aged 51, is the Group Chief Marketing Officer and leads the Group Marketing function providing support on marketing issues for country operations. He joined the Group in January 2011. Prior to joining the Group, Mr. Groves served as Senior Vice President, Head of International Marketing & Direct to Consumer Channel of MetLife International (formerly ALICO). Mr. Groves also worked with GE Money where he served as Chief Marketing Officer for the United Kingdom and Ireland. Mr. Groves spent 27 years with Barclays and Barclaycard in the United Kingdom, serving latterly as Chief Marketing Officer of Barclaycard International. ANNUAL REPORT 2013 077 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONReport of the Directors The Board is pleased to present this Report and the audited consolidated financial statements of the Company for the year ended 30 November 2013. whose names appear on the register of members of the Company at the close of business on Wednesday, 14 May 2014. PRINCIPAL ACTIVITIES The Company is an investment holding company. The principal activities of the Group are the provision of products and services to individuals and businesses for their insurance, protection, savings, investment and retirement needs. Details of the activities and other particulars of the Company’s principal subsidiaries are set out in note 43 to the financial statements. RESULTS The results of the Group for the year ended 30 November 2013 and the state of the Group’s affairs at that date are set out in the financial statements on pages 101 to 206 of this Annual Report. DIVIDEND An interim dividend of 13.93 Hong Kong cents per share (2012: 12.33 Hong Kong cents per share) was paid on 30 August 2013. The Board has recommended a final dividend of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share) in respect of the year ended 30 November 2013. Together with the interim dividend already paid, this will result in a total dividend of 42.55 Hong Kong cents per share (2012: 37.00 Hong Kong cents per share) for the year ended 30 November 2013. Under the Trust Deed of the Company’s Restricted Share Unit Scheme (RSU Scheme), shares of the Company are held by the trustee in either of two trust funds. These shares are held against the future entitlements of scheme participants. Provided the shares of the Company are held by the trustee and no beneficial interest in those shares has been vested in any beneficiary, the trustee shall waive any right to dividend payments or other distributions in respect of those shares (unless the Company determines otherwise). As of 30 August 2013 (being the payment date of the interim dividend), 72,923,969 shares were held by the trustee. The amount of interim dividend waived was US$1 million. Pursuant to the Trust Deed, the trustee will waive the right to final dividend if it is declared. Subject to shareholders’ approval at the AGM, the final dividend will be payable on Thursday, 29 May 2014 to shareholders DIRECTORS The Directors of the Company during the year and up to the date of this Report are as follows: Non-executive Chairman and Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director Mr. Mark Edward Tucker (Group Chief Executive and President) Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung (Note) Note: Mr. Cheung resigned as Independent Non-executive Director with effect from 25 May 2013. On 30 January 2014, the Board approved the appointment of Tan Sri Mohamed Azman Yahya as Independent Non- executive Director of the Company for a term of three years commencing on 24 February 2014. He will retire from office at the forthcoming annual general meeting pursuant to Article 105 of the Company’s Articles of Association and offers himself for re-election. In accordance with Article 101 of the Company’s Articles of Association, Mr. Edmund Sze-Wing Tse and Mr. Jack Chak- Kwong So will retire from office by rotation at the forthcoming annual general meeting and offer themselves for re-election. BIOGRAPHIES OF DIRECTORS AND MEMBERS OF THE EXECUTIVE COMMITTEE Biographies of Directors and members of the Executive Committee are set out on pages 73 to 77 of this Annual Report. SHARE CAPITAL Details of movements in share capital of the Company are set out in note 34 to the financial statements. 078 AIA GROUP LIMITED CORPORATE GOVERNANCEINTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As of 30 November 2013, the following are the persons, other than the Directors or Chief Executive of the Company, who had interests or short positions in the shares or underlying shares of the Company as recorded in the register of interests required to be kept by the Company pursuant to Section 336 of Part XV of the SFO: Name of Shareholder JPMorgan Chase & Co. Citigroup Inc. Citigroup Financial Products Inc. Citigroup Global Markets Holdings Inc. Citigroup Global Markets (International) Finance AG Number of shares or underlying shares (Note 5) Long Position (L) Short Position (S) Lending Pool (P) 1,298,956,453(L) 19,322,919(S) 794,001,037(P) 1,083,128,432(L) 6,083,940(S) 3,703,592(P) 1,074,197,000(L) 856,100(S) 1,074,197,000(L) 856,100(S) 1,074,077,000(L) 856,100(S) Class Ordinary Ordinary Ordinary Ordinary Ordinary Citigroup Global Markets Asia Limited 1,054,334,400(L) Ordinary Percentage of the total number of shares in issue Long Position (L) Short Position (S) Lending Pool (P) 10.79(L) 0.16(S) 6.59(P) 8.99(L) 0.05(S) 0.03(P) 8.92(L) 0.01(S) 8.92(L) 0.01(S) 8.92(L) 0.01(S) 8.75(L) Citigroup Global Markets Hong Kong Holdings Limited Citigroup Global Markets Overseas Finance Limited 1,054,334,400(L) Ordinary 8.75(L) 1,054,334,400(L) Ordinary 8.75(L) The Capital Group Companies, Inc. 848,133,207(L) Ordinary 7.04(L) BlackRock, Inc. 705,500,204(L) 4,258,000(S) Ordinary 5.85(L) 0.03(S) Capacity Note 1 Note 2 Note 3 Note 3 Note 4 Interest of controlled corporation Interest of controlled corporation Interest of controlled corporation Interest of controlled corporation Interest of controlled corporation Notes: (1) The interests held by JPMorgan Chase & Co. were held in the following capacities: Capacity Beneficial owner Investment manager Custodian corporation/approved lending agent Number of shares Number of shares (Long position) (Short position) 226,852,868 19,322,919 278,102,548 794,001,037 – – ANNUAL REPORT 2013 079 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Report of the Directors (2) The interests held by Citigroup Inc. were held in the following capacities: Capacity Interests held jointly with another person Interest of controlled corporation Custodian corporation/approved lending agent Security interest in shares Number of shares Number of shares (Long position) (Short position) 1,054,334,400 10,009,240 3,703,592 15,081,200 – 6,083,940 – – (3) The interests held by each of Citigroup Financial Products Inc. and Citigroup Global Markets Holdings Inc. were held in the following capacities: Capacity Interest of controlled corporation Security interest in shares (4) The interests held by Citigroup Global Markets (International) Finance AG were held in the following capacities: Capacity Interest of controlled corporation Security interest in shares (5) The interests or short positions include underlying shares as follows: Number of shares Number of shares (Long position) (Short position) 1,059,115,800 15,081,200 856,100 – Number of shares Number of shares (Long position) (Short position) 1,058,995,800 15,081,200 856,100 – Long position Short position Name of Shareholder Physically settled equity listed derivatives Cash settled equity listed derivatives Physically settled equity unlisted derivatives Cash settled equity unlisted derivatives Physically settled equity listed derivatives Cash settled equity listed derivatives Physically settled equity unlisted derivatives Cash settled equity unlisted derivatives JPMorgan Chase & Co. 3,694,000 – 8,923,628 390,000 2,925,000 2,765,600 8,986,719 2,000,000 Citigroup Inc. Citigroup Financial Products Inc. Citigroup Global Markets Holdings Inc. Citigroup Global Markets (International) Finance AG Citigroup Global Markets Asia Limited Citigroup Global Markets Hong Kong Holdings Limited Citigroup Global Markets Overseas Finance Limited BlackRock, Inc. – – – – – – – – – 1,059,562,240 – 1,054,334,400 – 1,054,334,400 – 1,054,334,400 – 1,054,334,400 – 1,054,334,400 – 1,054,334,400 3,046,600 – – – – – – – – – – – – – – – – 3,676,000 – 5,227,840 – – – – – – – – – – – – – – – – – – – – – – Save as disclosed above, as at 30 November 2013, no person, other than the Directors and Chief Executive of the Company, whose interests are set out in the section “Directors’ and Chief Executive’s Interests and Short Positions in Shares and Underlying Shares” below, holds any interests or short positions in the shares or underlying shares of the Company as recorded in the register required to be kept by the Company pursuant to Section 336 of Part XV of the SFO. 080 AIA GROUP LIMITED CORPORATE GOVERNANCE DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As of 30 November 2013, the Directors’ and Chief Executive’s interests and short positions in the shares, underlying shares or debentures of the Company and its associated corporations as recorded in the register required to be kept by the Company under Section 352 of Part XV of the SFO, or as otherwise notified to the Company pursuant to the Model Code, are as follows: (i) Interests and short positions in the shares and underlying shares of the Company: Number of shares or Name of Director underlying shares Class Mr. Mark Edward Tucker 15,341,457(L) (1) Ordinary Mr. Edmund Sze-Wing Tse Mr. Chung-Kong Chow 3,560,400(L) (2) Ordinary 86,000(L) (2) Ordinary Percentage of the total number of shares in issue Capacity 0.13 Beneficial owner Interest of controlled corporation 0.03 < 0.01 Beneficial owner Notes: (1) The interests include 952,541 shares of the Company, 8,903,570 share options under the Share Option Scheme, 5,481,056 restricted share units under the Restricted Share Unit Scheme and 4,290 matching restricted stock purchase units under the Employee Share Purchase Plan. (2) The interests are ordinary shares of the Company. (ii) Interests and short positions in the shares of associated corporation: Name of Director Mr. Edmund Sze-Wing Tse Associated Corporation Philam Life Number of shares Class Percentage of the total number of shares in issue 1(L) Ordinary < 0.01 Capacity Trustee Save as disclosed above, as at 30 November 2013, none of the Directors or Chief Executive of the Company holds any interests or short positions in the shares, underlying shares or debentures of the Company and its associated corporations as recorded in the register required to be kept by the Company under Section 352 of Part XV of the SFO, or as otherwise notified to the Company pursuant to the Model Code. DIRECTORS’ BENEFITS FROM RIGHTS TO ACQUIRE SHARES OR DEBENTURES Under his service contract, Mr. Mark Edward Tucker (by virtue of his role as Group Chief Executive and President) is entitled to an annual discretionary earned incentive award, which includes payment in the form of shares of the Company. Details of Mr. Tucker’s incentive award are set out in the Remuneration Report. DIRECTORS’ INTERESTS IN CONTRACTS No contracts of significance to which the Company or any of its subsidiaries was a party, and in which any Director of the Company had a material interest, subsisted at 30 November 2013 or at any time during the year. PROPERTY, PLANT AND EQUIPMENT Details of acquisitions and other movements in property, plant and equipment are set out in note 16 to the financial statements. RESERVES As at 30 November 2013, the aggregate amount of reserves available for distribution to shareholders of the Company, as calculated under the provision Section 79B of the Companies Ordinance (Laws of Hong Kong, Chapter 32) was US$1,652 million (2012: US$1,303 million). Details of the movements in the reserves of the Group for the year ended 30 November 2013 are set out in the Consolidated Statement of Changes in Equity on page 107 of this Annual Report. BANK LOANS AND OTHER BORROWINGS Bank loans and other borrowings of the Group as at 30 November 2013 amounted to US$2,126 million (2012: US$766 million). Particulars of the borrowings are set out in note 30 to the financial statements. CHARITABLE DONATIONS Charitable donations made by the Group during the year amounted to US$2 million (2012: US$1 million). SUBSIDIARIES AND ASSOCIATED COMPANIES Details of the Company’s principal subsidiaries and associated companies as at 30 November 2013 are set out in note 43 and note 15 to the financial statements respectively. ANNUAL REPORT 2013 081 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Report of the Directors CHANGES IN EQUITY Details of changes in equity of the Group during the year ended 30 November 2013 are set out in the Consolidated Statement of Changes in Equity on page 107 of this Annual Report. MAJOR CUSTOMERS AND SUPPLIERS During the year ended 30 November 2013, the percentage of the aggregate purchases attributable to the Group’s five largest suppliers was less than 30 per cent of the Group’s total value of purchases and the percentage of the aggregate sales attributable to the Group’s five largest customers was less than 30 per cent of the Group’s total value of sales. RETIREMENT SCHEMES The Group operates a number of defined benefit plans and defined contribution plans. Particulars of these plans are set out in note 38 to the financial statements. EVENTS AFTER THE REPORTING PERIOD Details of significant events after the year ended 30 November 2013 are set out in note 44 to the financial statements. SHARE-BASED INCENTIVE SCHEMES Restricted Share Unit Scheme During the year ended 30 November 2013, 20,645,534 restricted share units were awarded by the Company under the Restricted Share Unit Scheme adopted by the Company on 28 September 2010 (as amended). Details of the awards are set out in the Remuneration Report. Share Option Scheme During the year ended 30 November 2013, 7,490,459 share options were awarded by the Company under the Share Option Scheme adopted by the Company on 28 September 2010 (as amended). Details of the awards are set out in the Remuneration Report. NON-EXEMPT CONNECTED TRANSACTIONS During the year ended 30 November 2013, the Group had not entered into any connected transactions which are not exempt under either Rule 14A.31 or Rule 14A.33 of the Listing Rules. RELATED PARTY TRANSACTIONS Details of the related party transactions undertaken by the Group during the year in the ordinary course of business are set out in note 41 to the financial statements. As noted in note 41 to the financial statements, the amount due from the joint venture does not fall under the definition of connected transaction for the purpose of the Listing Rules while the remunerations of directors were exempt connected transactions. 082 AIA GROUP LIMITED PURCHASE, SALE AND REDEMPTION OF THE SECURITIES OF THE COMPANY Save for the purchase of 21,274,914 shares of the Company under the Restricted Share Unit Scheme and the Employee Share Purchase Plan at a total consideration of approximately US$87 million, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year ended 30 November 2013. These purchases were made by the relevant scheme trustees on the Hong Kong Stock Exchange. These shares are held on trust for participants of the relevant schemes and therefore were not cancelled. Please refer to note 39 to the financial statements for details. PUBLIC FLOAT Based on information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the amount of public float as approved by the Hong Kong Stock Exchange and as permitted under the Listing Rules as at the date of this Annual Report. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE Details of the compliance by the Company with the Corporate Governance Code are set out in the Corporate Governance Report on page 83 of this Annual Report. MODEL CODE Details of the compliance by the Company with the Model Code are set out in the Corporate Governance Report on page 83 of this Annual Report. AUDITOR PricewaterhouseCoopers was re-appointed as auditor of the Company in 2013. PricewaterhouseCoopers will retire and, being eligible, offer themselves for re-appointment. A resolution for the re- appointment of PricewaterhouseCoopers as auditor of the Company is to be proposed at the forthcoming annual general meeting. By Order of the Board Edmund Sze-Wing Tse Non-executive Chairman 21 February 2014 CORPORATE GOVERNANCECORPORATE GOVERNANCE Corporate Governance Report CORE PRINCIPLES The Board believes that strong corporate governance is essential for delivering sustainable value, enhancing a culture of business integrity and maintaining investor confidence. The Board is ultimately responsible for the performance of the Group, including the consistent achievement of business plans and compliance with statutory as well as corporate obligations. The Board is also responsible for the development and implementation of the Group’s corporate governance practices. This Corporate Governance Report explains the Company’s corporate governance principles and practices, including how the Board manages the business to deliver long-term shareholder value and to promote the development of the Group. As a company listed on the Main Board of the Hong Kong Stock Exchange, the Company is committed to high standards of corporate governance and sees the maintenance of good corporate governance practices as essential to its sustainable growth. It is vital that Board members, in aggregate, have their requisite skills and expertise supported by a structure that enables delegation, where appropriate, between the Board, its committees and management, whilst ensuring that the Board retains overall control. To promote effective governance across all of its operations, the Board has approved a governance framework, which maps out internal approval processes including those matters which may be delegated. Throughout the year ended 30 November 2013, the Company complied with all the applicable code provisions set out in the Corporate Governance Code except for Code Provision F.1.3. Code Provision F.1.3 provides that the company secretary should report to the chairman of the board and/or the chief executive. The Company operates under a variant of this model whereby the Group Company Secretary reports to the Group General Counsel who is ultimately accountable for the company secretarial function and who in turn reports directly to the Group Chief Executive. The Company has also adopted its own Directors’ and Chief Executives’ Dealing Policy on terms no less exacting than those set out in the Model Code in respect of dealings by the Directors in the securities of the Company. All of the Directors confirmed, following specific enquiry by the Company, that they have complied with the required standards set out in the Model Code and the Directors’ and Chief Executives’ Dealing Policy throughout the year ended 30 November 2013. BOARD OF DIRECTORS Roles and Responsibilities The Board is accountable to shareholders for the affairs of the Company. It meets these obligations by ensuring the maintenance of high standards of governance in all aspects of the Company’s business, setting the strategic direction for the Group and maintaining appropriate levels of review, challenge and guidance in its relationship with Group management. It is also the ultimate decision-making body for all matters considered material to the Group and is responsible for ensuring that, as a collective body, it has the appropriate skills, knowledge and experience to perform its role effectively. In these matters, the Board provides leadership to the Company in respect of operational issues through the Group Chief Executive, who is authorised to act on behalf of the Board in the day-to-day management of the Company. Any responsibilities not so delegated by the Board to the Group Chief Executive remain the responsibility of the Board. During the period under review, the Board conducted a review of the Group’s corporate governance framework, adopted a Board Diversity Policy, updated the terms of reference of the Remuneration Committee to reflect best practice. The Board also reviewed the Company’s compliance with the Corporate Governance Code including the necessary disclosures in its reports to the shareholders. Board Composition As of the end of the financial period, the Board consists of eight members, comprising one Executive Director and seven Non-executive Directors, six of whom are Independent Non- executive Directors. All Directors are expressly identified by reference to such categories in all corporate communications that disclose their names. The composition of the Board is well balanced with each Director having sound board level experience and expertise relevant to the business operations and development of the Group. The Board is comprised of members with extensive business, government, regulatory and policy experience from a variety of backgrounds. There is diversity of nationality, ethnicity, educational background, functional expertise and experience. A Board Diversity Policy was adopted by the Board during the period under review and is available on the Company’s website at www.aia.com. Biographies of the Directors are set out on pages 73 to 75 of this Annual Report. ANNUAL REPORT 2013 083 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCorporate Governance Report Board Independence Each of the Independent Non-executive Directors of the Company meets the independence guidelines set out in Rule 3.13 of the Listing Rules and has provided to the Company the requisite annual confirmation as to his independence. None of the Independent Non-executive Directors of the Company has any business with or significant financial interests in the Company or its subsidiaries and therefore all the Independent Non-executive Directors continue to be considered by the Company to be independent. Board Meetings During the period under review, there were five scheduled Board meetings, all of which were convened in accordance with the Articles of Association of the Company and attended by the Directors either in person or through electronic means of communication. The attendance records of individual Directors are as follows: Name of Director Non-executive Chairman and Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director Mr. Mark Edward Tucker Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung (Note) No. of Board Meetings Attended / Eligible to Attend 5/5 5/5 5/5 5/5 5/5 5/5 5/5 5/5 2/2 Note: Mr. Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013. He attended all Board meetings held during the period from 1 December 2012 to 24 May 2013. Board Process Board meetings are held at least four times a year to determine overall strategies, receive management updates, approve business plans as well as interim and annual results and to consider other significant matters. At these meetings, senior management also provide regular updates to the Board with respect to the business activities and development of the Group. During the year ended 30 November 2013, the Board conducted an evaluation survey of the Board’s performance including the structure and operation of its committees. Minutes of the meetings of the Board and all committees are kept by the Company Secretary. Such minutes are open for inspection on reasonable notice by any Director. Chairman and Group Chief Executive Mr. Edmund Sze-Wing Tse, Non-executive Chairman of the Company, plays the critical role of leading the Board in its responsibilities. With the support of the Group Chief Executive and President and senior management, Mr. Tse seeks to ensure that all Directors are properly briefed on issues arising at Board meetings and that they receive adequate and reliable information in a timely manner. He is also responsible for making sure that good corporate governance practices and procedures are followed. Mr. Mark Edward Tucker, Group Chief Executive and President of the Company, reports to the Board and is responsible for the overall leadership, strategic and executive management and profit performance of the Group, including all day-to-day operations and administration. Mr. Tucker attends Board meetings as the sole Executive Director and, in his capacity as Group Chief Executive and President, ensures that the Board is updated at least monthly in respect of material aspects of the Company’s performance. Mr. Tucker discharges his responsibilities within the framework of the Company’s policies, reserved powers and routine reporting requirements and is advised and assisted by the senior executive management of the Group. The roles and responsibilities of the Board, the Chairman of the Board and the Group Chief Executive are set out in the Board Charter of the Company which is available on the Company’s website at www.aia.com. Appointment of Directors The Company uses a formal and transparent procedure for the appointment of new Directors. Recommendations for the appointment of new Directors are received by the Board from the Nomination Committee. The Board then deliberates over such recommendations prior to approval. The Non-executive Director and Independent Non-executive Directors have been appointed for a specific term of three years, subject to re-nomination and re-election as required by the Articles of Association of the Company or pursuant to the Listing Rules at the general meetings of the Company. 084 AIA GROUP LIMITED CORPORATE GOVERNANCE During the period under review, Mr. Tse, Mr. So, Mr. Chow, Dr. Qin and Mr. Harrison have been re-appointed for a term of three years, subject to retirement by rotation in accordance with the Articles of Association of the Company or pursuant to the Listing Rules. Mr. Tse was re-elected as Non-executive Chairman for a further term of two years from 1 January 2013. of financial services companies, the Group’s governance arrangements, its investor relations programme and remuneration policies. The Directors are continually updated on the Group’s business and the latest developments to the Listing Rules and other applicable statutory requirements to ensure compliance and continuous good corporate governance practice. On 30 January 2014, the Board approved the appointment of Tan Sri Mohamed Azman Yahya as Independent Non- executive Director of the Company for a term of three years commencing on 24 February 2014. He will retire from office at the forthcoming annual general meeting pursuant to Article 105 of the Company’s Articles of Association and offers himself for re-election. Induction and Ongoing Development The Company provides each Director with personalised induction, training and development. On appointment, each Director receives a comprehensive and tailored induction covering, amongst other things, the principal basis of accounting for the Group’s results, the role of the Board and its key committees, and the ambit of the internal audit and risk management functions. Each Director receives detailed briefings on the Group’s principal businesses, the markets in which it operates and the overall competitive environment. Other areas addressed include legal and compliance issues affecting directors During the year, the Company provided a number of briefings to the Directors to update them on the latest developments in the Group’s principal businesses and major products. The overseas Board visit in 2013 was to Kuala Lumpur, where Directors received an in-depth review of delivery against the Group’s strategic goals. The visit also provided an opportunity for the Directors to gain insight into the progress of integration of the recently acquired ING operations into AIA in Malaysia. As usual an annual Board Strategy Day was also held for the Directors, covering a wide range of topics including the external competitive environment, specific business unit strategies and major geographical and regional reviews. All Directors are encouraged to participate in continuous professional development to extend and refresh their knowledge and skills, and are required to provide their training records to the Company. The training received by the Directors during the period under review is summarised as follows: Name of Director Non-executive Chairman and Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director, Group Chief Executive and President Mr. Mark Edward Tucker Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung (Note) Types of Training Reading or attending briefings / seminars / conferences relevant to regulatory and governance updates Attending corporate events / Board visits / executive briefings relevant to the Group’s business √ √ √ √ √ √ √ √ - √ √ √ √ √ √ √ √ √ Note: Mr. Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013. ANNUAL REPORT 2013 085 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Corporate Governance Report COMMITTEES OF THE BOARD The Company’s corporate governance is implemented through a structured hierarchy, which includes the Board of Directors and four committees of the Board established by resolutions of the Board, namely the Audit Committee, the Nomination Committee, the Remuneration Committee and the Risk Committee. The Terms of Reference of the Board committees are available on the Hong Kong Stock Exchange’s and the Company’s websites. In addition, the Group Chief Executive has established a number of management committees including, among others, an Executive Committee and Operational and Financial Risk Committees. Further details of the roles and functions and the composition of the Board committees are set out below. Audit Committee The Audit Committee consists of four members. This includes three Independent Non-executive Directors: Mr. Harrison, who serves as chairman of the Committee, Mr. So and Mr. Yeo as well as the Non-executive Chairman Mr. Tse, who has been a member since 25 February 2013. Dr. Qin and Mr. Cheung were members of the Audit Committee until 24 February 2013 and 24 May 2013 respectively. The primary duties performed by the Audit Committee during the year were the oversight of the Group’s financial reporting system and internal control procedures, monitoring the integrity of preparation of the Company’s financial information including quarterly business highlights, interim and annual results of the Group, reviewing the Group’s financial and accounting policies and practices as well as the whistle-blowing arrangements and monitoring the effectiveness of the internal audit function. The Committee also provided oversight for and management of the relationship with the Group’s external auditor, including reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process in accordance with applicable standards. Four meetings were held by the Audit Committee during the year ended 30 November 2013. The attendance records of Audit Committee members are as follows: Name of Audit Committee Member Mr. John Barrie Harrison (Chairman) Mr. Jack Chak-Kwong So Mr. George Yong-Boon Yeo Mr. Edmund Sze-Wing Tse (1) Dr. Qin Xiao (2) Mr. Barry Chun-Yuen Cheung (3) No. of Meetings Attended / Eligible to Attend 4/4 4/4 3/4 3/3 1/1 2/2 Notes: (1) Mr. Tse was appointed as a member of the Audit Committee with effect from 25 February 2013. (2) Dr. Qin ceased to be a member of the Audit Committee with effect from 25 February 2013. (3) Mr. Cheung ceased to be a member of the Audit Committee as a result of his resignation as Independent Non-executive Director of the Company with effect from 25 May 2013. Nomination Committee The Nomination Committee consists of eight members. This includes the Non-executive Chairman, Mr. Tse, who serves as chairman of the Committee, and the seven Independent Non-executive Directors. Mr. Cheung was a member of the Committee until 24 May 2013 while the Board has approved the appointment of Tan Sri Azman as a member of the Committee with effect from 24 Febreary 2014. The primary duties of the Nomination Committee are to review and make recommendations to the Board on the structure, size and composition of the Board, including the skill, knowledge, experience and diversity of background of its membership, to oversee the identification and assessment of potential board candidates, to provide oversight and direction in respect of the succession planning for directors and to determine the composition of the Board committees. The Committee’s processes and criteria for selecting and making recommendations for appointment of Board members are designed to satisfy high standards of corporate governance. These processes meet or exceed the Hong Kong Stock Exchange requirements to ensure that every director of the Company has the requisite character, experience and integrity and is able to demonstrate a standard of 086 AIA GROUP LIMITED CORPORATE GOVERNANCE competence, commensurate with his position as a director of a listed issuer, and that where the nomination of Independent Non-executive Directors is under consideration the requirements of Rule 3.13 of the Listing Rules are satisfied. One meeting was held by the Nomination Committee during the year ended 30 November 2013. During the year the Committee considered and adopted a Board Diversity Policy, which is available on the Company’s website. The attendance records of the Nomination Committee members are as follows: Name of Nomination Committee Member Mr. Edmund Sze-Wing Tse (Chairman) Mr. Chung-Kong Chow Mr. Jack Chak-Kwong So Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung (Note) No. of Meeting Attended / Eligible to Attend 1/1 1/1 1/1 0/1 1/1 0/1 1/1 1/1 Note: Mr. Cheung ceased to be a member of the Nomination Committee as a result of his resignation as an Independent Non-executive Director of the Company with effect from 25 May 2013. Remuneration Committee The Remuneration Committee consists of five members. This includes four Independent Non-executive Directors: Mr. So, the Committee chairman, Dr. Qin, Mr. Yeo and Tan Sri Azman as well as the Executive Director, Mr. Tucker. Mr. Yeo has been a member of the Committee since 17 January 2014 while the Board has approved the appointment of Tan Sri Azman as a member of the Committee with effect from 24 February 2014. They are entitled to an additional annual fee of US$20,000. Mr. Cheung was a member of the Committee until 24 May 2013. The primary duties of the Remuneration Committee are to evaluate and make recommendations to the Board on the remuneration policy covering the Directors and senior management of the Group. Mr. Tucker is not present at or involved in discussion of his own remuneration. Four meetings were held by the Remuneration Committee during the year ended 30 November 2013. Details of the attendance records and key activities performed by the Remuneration Committee during the year have been set out in the Remuneration Report, which forms part of this Corporate Governance Report. Risk Committee The Risk Committee consists of five members, three of whom are Independent Non-executive Directors including the Committee chairman Mr. Chow, Mr. Harrison and Dr. Narongchai. Also included on the Risk Committee are the Non-executive Chairman Mr. Tse; and the Executive Director, Mr. Tucker. The duties performed by the Risk Committee during the year included provision of advice to the Board on the risk profile and risk management strategy of the Group; considering, reviewing and approving risk management policies and guidelines; deciding on risk levels; and considering and endorsing the Company’s risk governance structure and major risks, including capital adequacy, asset- liability management and operational risks. During the year ended 30 November 2013, four meetings were held by the Risk Committee. The attendance records of the Risk Committee members are as follows: Name of Risk Committee Member Mr. Chung-Kong Chow (Chairman) Mr. John Barrie Harrison Dr. Narongchai Akrasanee Mr. Edmund Sze-Wing Tse Mr. Mark Edward Tucker No. of Meetings Attended / Eligible to Attend 4/4 4/4 4/4 4/4 4/4 EXTERNAL AUDITOR The external auditor of the Company is PricewaterhouseCoopers. The Audit Committee is responsible for making recommendations to the Board as to the appointment, re-appointment and removal of the external auditor, which is subject to the approval by the Board and at the general meetings of the Company by its shareholders. In assessing the external auditor, the Audit Committee will take into account relevant experience, performance, objectivity and independence of the external auditor. The Audit Committee adopted a policy for hiring of current or former professional employees of the external auditor and reviews its application regularly to ensure no impairment of the auditor’s judgment or independence for the audit. ANNUAL REPORT 2013 087 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Corporate Governance Report The Audit Committee also reviews the non-audit services provided by the external auditor and its remuneration on a quarterly basis. For the year ended 30 November 2013, the total estimated remuneration payable by the Group to PricewaterhouseCoopers is US$12.5 million (2012: US$13.7 million), an analysis of which is set out below: Internal Control Throughout this Corporate Governance Report, the Board of Directors seeks to set out the Company’s corporate governance structure and policies, inform shareholders of the corporate governance undertakings of the Company and demonstrate to shareholders the value of such practices. US$ millions Audit services (2) Non-audit services, including: Audit related services Tax services Other services Total 2013(1) 10.7 0.7 0.9 0.2 12.5 2012 9.7 3.6 0.2 0.2 13.7 In addition to those fees disclosed above, fees of US$0.6 million (2012: US$0.6 million) were payable to PricewaterhouseCoopers by funds for which the Group is the investment adviser, manager, or administrator. Notes: (1) 2013 is based upon estimated fees for 2013 audit services and non-audit services through 30 November 2013. (2) Audit services include US$0.2 million in 2013 related to 2012 services and US$0.3 million in 2012 related to 2011 services. ACCOUNTABILITY AND AUDIT Financial Report The annual results of the Company and other financial information were published in accordance with the requirements of the Listing Rules and other applicable regulations and industry best practice. When preparing the Company’s financial reports, the Board of Directors has endeavoured to present such information in a comprehensible, informative and user-friendly manner. The Directors acknowledge their responsibility for preparing the Company’s consolidated financial statements and ensuring that the preparation of the Company’s consolidated financial statements is in accordance with the relevant requirements and applicable standards. The statement of the Company’s auditor concerning its reporting responsibilities on the Company’s consolidated financial statements is set out in the Independent Auditor’s Report on pages 101 and 102 of this Annual Report. The Board of Directors has, through the Audit Committee, reviewed and is generally satisfied with the effectiveness of the Group’s internal control systems, including the adequacy of resources, qualifications and experience of staff, training programmes and budget of the Company’s accounting and financial reporting function. ENGAGEMENT WITH SHAREHOLDERS The Board recognises the importance of communication and undertakes to maintain an ongoing dialogue with the shareholders of the Company through general meetings, releases, announcements and corporate communications such as the annual report, interim report and circular. The Board is committed to the timely disclosure of information. The latest information regarding the Group’s activities, announcements, results presentation, webcasts and corporate communications are made available on the Company’s website at www.aia.com in a timely manner. The financial calendar highlighting the key dates for shareholders are set out on page 231 of this Annual Report. The Group’s Investor Relations function oversees the Company’s engagement with investors. The Company’s institutional shareholder base is geographically diversified and the Company is also extensively covered by research analysts from a wide range of brokerage houses. An active and open dialogue with institutional investors is maintained through regular investor interactions, including meetings, investment conferences and roadshows. Investor feedback and analysts’ reports on the Company are circulated to the Board and the Executive Committee of the Group on a regular and systematic basis to promote an understanding of external views on the Group’s performance. The Board adopted the latest version of the Shareholders’ Communication Policy in February 2013 and reviews the policy on a regular basis to ensure its effectiveness and the Board welcomes views, questions and concerns from shareholders and stakeholders. Shareholders and stakeholders may at any time send their enquiries and concerns to the Board. The contact details are set out on pages 232 to 233 of this Annual Report. 088 AIA GROUP LIMITED CORPORATE GOVERNANCE 2013 Annual General Meeting The most recent general meeting of the Company was the 2013 Annual General Meeting of the Company (2013 AGM) held at the Grand Ballroom, 2/F, Hotel Nikko Hongkong, 72 Mody Road, Tsimshatsui East, Kowloon, Hong Kong on 10 May 2013 at 11:00 a.m. The Chairman and all other members of the Board, together with the Group’s senior management and external auditor, attended the 2013 AGM. The poll voting results are available on the Company’s website. The matters resolved thereat are summarised below. • Receipt of the audited consolidated financial statements of the Company, the Report of the Directors and the Independent Auditor’s Report for the year ended 30 November 2012; • Declaration of a final dividend of 24.67 Hong Kong cents The forthcoming annual general meeting of the Company will be held on Friday, 9 May 2014. Further details will be set out in the circular to the shareholders of the Company to be sent together with this Annual Report. SHAREHOLDERS’ RIGHTS A substantial part of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) (the “New Companies Ordinance”) will come into force on 3 March 2014. The relevant provisions regarding shareholders’ rights in the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (the “Existing Companies Ordinance”) apply prior to 3 March 2014. General Meeting Shareholder(s) of the Company may request to call a general meeting. per share for the year ended 30 November 2012; Requests made before 3 March 2014: • Re-election of Mr. Cheung, Mr. Yeo, Dr. Narongchai and Dr. Qin as Independent Non-executive Directors and Mr. Tucker as Executive Director of the Company; • Re-appointment of PricewaterhouseCoopers as auditor of the Company until the conclusion of next annual general meeting and authorised the Board to fix its remuneration; • General mandate to Directors to cause the Company to issue additional shares of the Company, not exceeding 10 per cent of the issued share capital of the Company at the date of the 2013 AGM and the discount for any shares to be issued not to exceed 10 per cent of the benchmarked price; • General mandate to Directors to cause the Company to repurchase shares of the Company, not exceeding 10 per cent of the issued share capital of the Company at the date of the 2013 AGM; • General mandate to Directors to cause the Company to issue additional shares of the Company, not exceeding 2.5 per cent of the issued share capital of the Company at the date of the 2013 AGM under the restricted share unit scheme; and • Amendments to the Articles of Association of the Company to clarify the process for retirement and re-election of Directors by rotation. If such a request is made by Shareholder(s) of the Company holding not less than one-twentieth of the paid-up capital of the Company, such general meeting must be called. Such a request must state the objects of the meeting, and must be signed by the relevant Shareholder(s) of the Company and may consist of several documents in like form, each signed by one or more of the relevant Shareholder(s). The request must be deposited at the registered office of the Company at 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong for the attention of the Company Secretary. Shareholder(s) of the Company should make reference to the provisions under section 113 of the Existing Companies Ordinance for calling a general meeting before 3 March 2014. Requests made on or after 3 March 2014: If such request is made by Shareholder(s) of the Company representing at least 5 per cent of the total voting rights of all the Shareholders of the Company having a right to vote at general meetings, such general meeting must be called. Such request, either in hard copy form or in electronic form and being authenticated by the person or persons making it, must be deposited at the registered office of the Company at 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong or sent by email to ir@aia.com for the attention of the Company Secretary. Shareholder(s) of the Company should make reference to the provisions under sections 566 to 568 of the New Companies Ordinance for calling a general meeting on or after 3 March 2014. ANNUAL REPORT 2013 089 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCorporate Governance Report Moving a Resolution at an Annual General Meeting Shareholder(s) of the Company may request the Company to give notice of a resolution and move such resolution at an annual general meeting. Requests made before 3 March 2014: Such notice of resolution must be given by the Company if it has received such requests from: (a) Shareholder(s) of the Company representing not less than one-fortieth of the total voting rights of all the Shareholder(s) of the Company having at the date of the request a right to vote at the annual general meeting to which the request relates; or (b) not less than 50 Shareholder(s) of the Company holding shares in the Company on which there has been paid up an average sum, per member, of not less than HK$2,000. Such a request must state the resolution, accompanied by a statement of not more than 1,000 words with respect to the matter referred to in the proposed resolution or the business to be dealt with at the annual general meeting and signed by all the relevant Shareholder(s) of the Company. Such a request must be deposited at the registered office of the Company at 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong for the attention of the Company Secretary: (i) in case of a request requiring notice of a resolution, not less than six weeks before the meeting; and (ii) in case of any other request, not less than one week before the meeting, with a sum reasonably sufficient to meet the Company’s expenses in serving the notice of the proposed resolution and circulating the statement to all Shareholder(s) of the Company as required by applicable laws and regulations. Shareholders of the Company should make reference to section 115A of the Existing Companies Ordinance for the relevant procedures to move a resolution at an annual general meeting. Such a request must identify the resolution of which notice is to be given, be either in hard copy form or in electronic form and authenticated by the person or persons making it, and be received by the Company not later than six weeks before the annual general meeting to which the request relates or, if later, the time at which notice is given of that meeting. The request must be deposited at the registered office of the Company at 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong or sent by email to ir@aia.com for the attention of the Company Secretary. Shareholders of the Company should make reference to sections 615 and 616 of the New Companies Ordinance for the relevant procedures to move a resolution at an annual general meeting. Proposing a Person for Election as a Director Shareholders can propose a person (other than a retiring Director or himself/herself) for election as a director at a general meeting of the Company. Relevant procedures are available on the Company’s website at www.aia.com. CONSTITUTIONAL DOCUMENTS Shareholders of the Company approved amendments to the Articles of Association of the Company to clarify the process for retirement and re-election of Directors by rotation at the 2013 AGM. Details of the amendments were set out in the 2013 AGM notice and the accompanied circular to the Shareholders of the Company dated 25 March 2013. The latest version of the Memorandum and Articles of Association of the Company is available on the Company’s website at www.aia.com. In view of the coming into force of a substantial part of the New Companies Ordinance on 3 March 2014, corresponding amendments to the Articles of Association of the Company will be proposed for Shareholders’ approval at the 2014 AGM. Requests made on or after 3 March 2014: By Order of the Board Such notice of resolution must be given by the Company if it has received such requests from: (a) Shareholder(s) of the Company representing at least 2.5 per cent of the total voting rights of all the Shareholders of the Company who have a right to vote on the resolution at the annual general meeting to which the request relates; or (b) at least 50 Shareholders of the Company who have the right to vote on the resolution at the annual general meeting to which the request relates. Lai Wing Nga Company Secretary 21 February 2014 090 AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE Remuneration Report Dear Shareholders, As the Chairman of the Remuneration Committee, I am pleased to present the Remuneration Report for the year ended 30 November 2013. Our executive management has once again delivered strong financial returns and exceeded the Group’s demanding targets on all key financial performance measures in 2013. Over the year, the stock price has gone up by 30 per cent and dividends to shareholders increased by 15 per cent. The remuneration environment continued to evolve during 2013 and the Remuneration Committee (the Committee) decided that it was timely to undertake a review of our executive remuneration arrangements. Our objective as a Committee and in the review has been, as always, to ensure that AIA’s executive remuneration framework continues to provide a strong competitive base to enable the Group to: • Attract and retain talented employees in the global financial services marketplace; • Motivate our executives to sustain high performance and achieve our financial and strategic goals leading to the creation of long-term sustainable shareholder value; and • Link a significant proportion of executive remuneration to our longer-term business achievement and share price performance and thereby align the interests of our senior executives with those of our shareholders. Our review therefore encompassed all aspects of both basic and performance-linked remuneration including ensuring the adequacy of arrangements to exclude the possibility of executives profiting unduly from transitory short-term performance. As an outcome of this review, given the experience in the past few years and the fast-growing nature of the business, and after seeking opinions from a range of our large institutional shareholders, the Committee has decided to: • Maintain the performance measures and vesting schedules currently adopted in long-term incentive (LTI) schemes; and • Maintain the clawback and malus arrangements already in place, as they are fully adequate to protect investors given the nature of life insurance profit emergence. Considerations of risk appetite and alignment with the interests of policyholders and shareholders, over and above those secured by the high levels of internal monitoring and external interaction with regulators and professional bodies, is integral to our thinking as we take decisions on remuneration. We will continue to keep the executive remuneration framework transparent, to ensure that such framework is in line with market practice, and to ascertain that the remuneration arrangements under the framework promote pay-for-performance and is aligned with the promotion at all times of the long-term interests of shareholders. I trust that you will find this Remuneration Report clear and informative. Jack Chak-Kwong So Chairman, Remuneration Committee 21 February 2014 ANNUAL REPORT 2013 091 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRemuneration Report REMUNERATION COMMITTEE The Remuneration Committee is responsible for determining the specific remuneration packages of the Executive Director and Key Management Personnel (senior executives who, by the nature and accountabilities of their respective positions, participate directly in the development, monitoring and reporting of the overall business strategies of the Group) and making recommendations to the Board on the remuneration policy and structure to be applied for the Chairman and Non- executive Directors. The Remuneration Committee is also responsible for establishing formal and transparent procedures for developing such remuneration policies and structures. In making its determinations and recommendations, the Remuneration Committee considers such factors as the responsibilities of the Executive Director and Key Management Personnel, the remuneration paid by comparable companies, remuneration levels within the Group and the application of performance-based remuneration programmes. The Remuneration Committee also oversees the operation of the Company’s share option scheme and other incentive schemes, recommending employee awards to the Board for approval as well as reviewing and where appropriate, amending terms of the schemes as may be required. The Remuneration Committee is authorised by the Board to discharge its duties as outlined in its terms of reference. It is also authorised to seek any remuneration information it requires from the Executive Director and/or Key Management Personnel and may obtain external independent professional advice if necessary. The full terms of reference of the Remuneration Committee can be accessed at www.aia.com. Meetings in 2013 As at 30 November 2013, the Committee consisted of three members: two Independent Non-executive Directors, being Mr. Jack Chak-Kwong So, who is the Chairman of the Committee, and Dr. Qin Xiao; and one Executive Director, being Mr. Mark Edward Tucker. Mr. Barry Chun-Yuen Cheung was a member of the Committee until 24 May 2013. During the year ended 30 November 2013, four meetings were held by the Remuneration Committee. The attendance records of the Remuneration Committee members are as follows: Name of Remuneration Committee Member Mr. Jack Chak-Kwong So (Chairman) Dr. Qin Xiao Mr. Mark Edward Tucker Mr. Barry Chun-Yuen Cheung (1) No. of Meetings Attended / Eligible to Attend 4/4 3/4 4/4 1/1 Note: (1) Mr. Cheung ceased to be a member of the Remuneration Committee as a result of his resignation as Independent Non-executive Director of the Company with effect from 25 May 2013. During the year, major activities performed by the Remuneration Committee in relation to the Executive Director, Key Management Personnel, Chairman and Non-executive Director remuneration were as follows: • Reviewed the executive benchmark results and approved the 2013 remuneration packages for the Executive Director and Key Management Personnel (the Executive Director was not involved in discussion of his own remuneration and the long-term incentive awards for the Executive Director were approved by the Independent Non-executive Directors); • Reviewed and approved the 2012 short-term incentive payout and the performance measures to be used for the 2013 short-term incentive plan; • Reviewed and approved the 2013 long-term incentive award and the performance measures to be used in the 2014 long-term incentive awards; • Reviewed and approved the peer group for benchmarking the compensation of the Group Chief Executive and President; and • Reviewed and approved the 2012 Remuneration Report. 092 AIA GROUP LIMITED CORPORATE GOVERNANCE REMUNERATION POLICY Objectives The Company’s executive remuneration policy is based on the principle of providing an equitable, motivating and competitive remuneration package to foster a strong performance-oriented culture within an appropriate overall risk management framework. The policy aims to ensure that rewards and incentives relate directly to the performance of individuals, the operations and functions in which they work or for which they are responsible, and the overall performance of the Group. The compensation and benefits arrangements designed under the policy provide incentives that are consistent with the interests of the Company’s stakeholders and do not encourage executives to take excessive risks that may threaten the value of the Group. Main Components of Remuneration The table below summarises the Company’s remuneration policies regarding the elements of the remuneration structure as it applied to the Executive Director and Key Management Personnel during the year. Element Purpose Basis of determination Notes on practices Base salary Fixed cash element of remuneration to recruit and retain talent Short-term incentive Long-term incentive Benefits Short-term incentives are delivered in the form of a performance-based cash award to recognise and reward achievement of the Group’s objectives and individual contribution Long-term incentive plans focus key contributors on the long-term success of the Group and are used to align the interests of executives with those of shareholders using a range of share-based awards and share options to deliver a balanced mix of ownership and incentives Benefits form part of the long- term employment relationship and contribute to the value of total remuneration provided at market competitive levels Base salary is determined with reference to the specific roles and responsibilities of the position, internal relativities, market practice, individual experience, performance and other factors to attract and retain employees with required capabilities to achieve the Group’s business objectives Short-term incentive target and maximum opportunities are determined with reference to the market appropriateness of total compensation and the roles and responsibilities of the individual Long-term incentive target awards are determined with reference to the competitiveness of the total compensation package and the roles and responsibilities of the individual The benefits programme is determined such that it is market competitive. It remains fully compliant with local regulations Employee share purchase plan (ESPP) Share purchase plan with matching offer to facilitate and encourage AIA share ownership by employees, and provide a long- term retention mechanism The ESPP is open to all employees who have completed probation and subject to a maximum contribution indicated as a percentage of base salary or the plan maximum limit The Remuneration Committee reviews salaries annually for the Executive Director against a peer group of publicly listed insurance companies and Key Management Personnel against relevant industry survey sources Salary increases, if any, typically take effect from 1 March Annual short-term incentive based on the achievement of financial performance measures and relevant strategic objectives, as well as individual contribution Awards are discretionary and determined on an annual basis Awards are made in restricted share units and/or share options, and generally vest after a three-year period, subject to performance and eligibility requirements The Executive Director and Key Management Personnel receive certain benefits, for example, participation in pension schemes, medical and life insurance, use of company car and/or driver Participants receive matching shares for shares purchased at a rate approved by the Remuneration Committee Matching shares vest after three years ANNUAL REPORT 2013 093 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRemuneration Report SHORT-TERM INCENTIVES For 2013, short-term incentive targets were determined and communicated to the Executive Director and Key Management Personnel at the beginning of the year. The performance measures for 2013 short-term incentive were: • Value of new business; • Excess embedded value growth; and • Operating profit after tax. Value of new business (VONB) is an estimate of the economic value of one year’s sales as published by the Company. Excess embedded value growth (EEV Growth) is the sum of the operating experience variances (current year performance against the operating assumptions for calculating embedded value or EV) and operating assumption changes (value of future operating outperformance considered permanent enough for recognition in the current year) in the EV operating profit. Operating profit after tax (OPAT) is the IFRS operating profit after tax based on the IFRS results published by the Company. The weighting of the three performance measures described above is 60 per cent, 15 per cent and 25 per cent for VONB, EEV Growth and OPAT respectively. Based on the level of achievement of the performance measures, short-term incentive awards in respect of 2013 will be paid to the Executive Director and Key Management Personnel in March 2014. The total value of short-term incentive awards accrued for the Executive Director and Key Management Personnel for the financial year ended 30 November 2013 is US$11,175,679. Such amount is included in note 40 to the financial statements as the Bonuses to the Executive Director and as part of the “Salaries and other short-term employee benefits” to the Key Management Personnel. LONG-TERM INCENTIVE (LTI) PLANS Legacy LTI Plans The Remuneration Committee continues to operate the two cash-based long-term incentive plans for 2009 and 2010 in order to facilitate payments under the plans to eligible participants, after which time the plans will cease to operate. No further awards have been made under these plans since the date of listing of the Company and no further award will be made in the future. Only one existing member of the Key Management Personnel has an outstanding award at 30 November 2013. Such awards all vested and paid in December 2013. 50 per cent of the 2009 LTI award was vested and paid in April 2011; 25 per cent was vested and paid in January 2012; and the remaining 25 per cent vested and paid in January 2013. 2010 LTI award vested one-third in December 2011 and paid in March 2012; another one-third vested and paid in December 2012; and the remaining one-third vested and paid in December 2013. AIA LTI Plans The Restricted Share Unit Scheme and the Share Option Scheme were adopted on 28 September 2010 and have a life of 10 years from the date of adoption. Summary details are provided in the pages that follow and in detail in note 39 to the financial statements. In future periods, the Remuneration Committee will continue to determine the appropriate awards and performance conditions for the Executive Director and Key Management Personnel under these schemes. Restricted Share Unit Scheme Under the Restricted Share Unit Scheme, the Company may award restricted share units to employees, Directors (excluding Independent Non-executive Directors) or officers of the Company or any of its subsidiaries. The objectives of the Restricted Share Unit Scheme are to retain participants, align their interests with those of the Company’s investors and reward the creation of value for shareholders through the award of restricted share units to participants. During the year ended 30 November 2013, 20,645,534 restricted share units were awarded by the Company under the Restricted Share Unit Scheme. Movements in restricted share unit awards are summarised on the next page: 094 AIA GROUP LIMITED CORPORATE GOVERNANCERestricted share units outstanding as at 1 December 2012 Restricted share units awarded during the year ended 30 November 2013 Restricted share units vested during the year ended 30 November 2013 Restricted share units reclassified/ cancelled/ lapsed during the year ended 30 November 2013(7) Restricted share units outstanding as at 30 November 2013 Executive Director, Key Management Personnel and other eligible employees Executive Director Mr. Mark Edward Tucker Key Management Personnel (excluding Executive Director) Other eligible employees Date of grant (day/ month/ year) (1) 1/6/2011 1/6/2011 1/6/2011 15/3/2012 11/3/2013 1/6/2011 1/6/2011 15/3/2012 11/3/2013 1/6/2011 1/6/2011 1/6/2011 18/10/2011 18/10/2011 18/10/2011 15/3/2012 15/3/2012 6/9/2012 11/3/2013 1/8/2013 1/8/2013 738,066 1,433,149 806,147 15/3/2015 (3) 1,434,842 Vesting date(s) (day/ month/ year) See note (2) 1/4/2014 (3) See note (4) 11/3/2016 (3) 1/4/2014 (3) See note (4) 15/3/2015 (3) 11/3/2016 (3) See note (4) See note (5) - 1,314,873 2,958,575 5,246,778 2,645,704 - - - - 2,399,244 1,989,145 31,079 1/4/2014 (3) 14,371,638 1/8/2014 (3) 146,193 18/10/2014 (3) 1,031,469 18/10/2014 (6) 59,581 15/3/2015 (3) 17,257,770 81,831 218,664 15/3/2015 (6) 6/9/2015 (3) 11/3/2016 (3) 1/8/2016 (3) 11/3/2016 (3) - - - 16,590,558 264,994 75,865 - - - - - - - - - - - - - (246,021) - - - - - - - - - (31,079) (29,240) - - - - - - - - 492,045 1,433,149 806,147 1,434,842 1,314,873 (705,010) 2,253,565 (1,517,457) (696,526) (619,695) 636,928 - 3,729,321 1,949,178 1,779,549 2,626,073 - (1,571,638) 12,770,760 - - - 146,193 1,031,469 59,581 (19,785) (1,694,779) 15,543,206 - - - - - - - 81,831 218,664 (599,777) 15,990,781 - - 264,994 75,865 Notes: (1) The measurement dates for awards made in 2011 were determined to be 15 June 2011 and 2 November 2011. The measurement dates for awards made in 2012 were determined to be 15 March 2012 and 6 September 2012. The measurement dates for awards made in 2013 were determined to be 11 March 2013 and 1 August 2013. The measurement dates were determined in accordance with IFRS 2. (2) The vesting of these restricted share units is service-based only (meaning there are no further performance conditions attached). 25 per cent of the restricted share units (246,021 restricted share units) vested on 1 June 2012; 25 per cent (246,021 restricted share units) vested on 1 June 2013; and 50 per cent vest on 1 June 2014. (3) The vesting of these restricted share units is subject to the achievement of performance conditions shown on the next page and to the terms and conditions of the grant. (4) The vesting of these restricted share units is service-based only. One-third of restricted share units vest on 1 April 2014; one-third vest on 1 April 2015; and one-third vest on 1 April 2016. (5) The vesting of these restricted share units is service-based only. 48,812 restricted share units vested on 1 April 2012; 71,847 restricted share units vested on 1 August 2012; and the remaining 31,079 restricted share units vested on 1 April 2013. (6) The vesting of these restricted share units is service-based only. (7) These restricted share units lapsed or were reclassified during the year ended 30 November 2013. The reclassification of restricted share units was a result of an executive who was previously categorised as “Key Management Personnel”, becoming “other eligible employees” during the year. 6,767,954 restricted share units lapsed and no restricted share unit was cancelled during the year. ANNUAL REPORT 2013 095 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration Report Performance Measures and Vesting Vesting of performance-based restricted share unit awards will be contingent on the extent of achievement of three-year performance targets as outlined below for the following metrics: • Value of new business; • Equity attributable to shareholders of the Company on the embedded value basis; and • Total shareholder return. Value of new business (VONB) is an estimate of the economic value of one year’s sales. Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) is the total of embedded value, goodwill and other intangible assets. Embedded value is an estimate of the economic value of in-force life insurance business, including the net worth on the Group’s balance sheet but excluding any economic value attributable to future new business. Value of new business and embedded value performance are based on the Group value of new business and embedded value results published by the Group. Total shareholder return (TSR) is the compound annual return from the ownership of a share over a period of time, measured by calculating the change in the share price and the gross value of dividends received (and reinvested) during that period. AIA‘s TSR will be calculated in the same way and compared with the TSR of the peer companies in the Dow Jones Insurance Titans 30 Index (DJTINN) over the performance period. The three performance measures are equally weighted. Achievement of each performance measure will independently determine the vesting of one-third of the award. Threshold performance levels are required for restricted share units to vest; at target performance levels (for TSR, median relative performance measured against the TSR of the peer companies in the DJTINN) 50 per cent of the restricted share units will vest; and at maximum performance levels (for TSR, top quartile relative performance measured against the TSR of the peer companies in the DJTINN) the full allocation of restricted share units will vest. The line chart below shows the AIA’s TSR compared with the DJTINN during the period from 1 December 2010 to 30 November 2013, which is the same period that the performance is measured for the purpose of Restricted Share Unit Scheme. The Hang Seng Index (HSI) performance for the same period is also shown for reference as it is a recognised Hong Kong equity market index of which AIA is a constituent. AIA TSR Perfomance Against DJTINN and HSI 100% 80% 60% 40% 20% 0% -20% -40% 01 Dec 2010 01 Jun 2011 01 Dec 2011 01 Jun 2012 01 Dec 2012 01 Jun 2013 01 Dec 2013 AIA DJTINN HSI Share Option Scheme The objective of the Share Option Scheme is to align participants’ interests with those of the Company’s shareholders by allowing participants to share in the value created at the point they exercise their share options. Under the Share Option Scheme, the Company may award share options to employees, Directors (excluding Independent Non-executive Directors) or officers of the Company or any of its subsidiaries. During the year ended 30 November 2013, 7,490,459 share options were awarded by the Company under the Share Option Scheme to employees and officers of the Company and employees, officers and directors of a number of its subsidiaries. The exercise price of such share options was determined by applying the highest of (i) the closing price of the shares on the date of grant, (ii) the average closing price of the shares for the five business days immediately preceding the date of grant and (iii) the nominal value of a share. The Share Option Scheme has a life of 10 years from the date of adoption. No amount is payable by the eligible participants on the acceptance of a share option. 096 AIA GROUP LIMITED CORPORATE GOVERNANCEThe total number of share options that can be awarded under the scheme is 301,100,000, representing 2.5 per cent of the number of shares in issue as at the date of this Annual Report. Unless shareholders’ approval is obtained in accordance with the relevant procedural requirements under the Listing Rules, the maximum number of shares under options that may be awarded to any employee in any 12-month period up to and including a proposed date of grant is 0.25 per cent of the number of shares in issue as of the proposed date of grant. No share options have been awarded to substantial shareholders, or in excess of the individual limit. The share option awards in year 2013 will be vested entirely on 11 March 2016. In order to be eligible to receive the vested awards, participants are required to remain in employment with the Group as of the vesting date. The share options awarded expire 10 years from the date of grant and each share option entitles the eligible participant to subscribe for one ordinary share. Movements in share option awards are summarised below: Executive Director, Key Management Personnel and other eligible employees Executive Director Mr. Mark Edward Tucker Date of grant (day / month / year) (1) Period during which share options exercisable (day / month / year) Share options outstanding as at 1 December 2012 Share options awarded during the year ended 30 November 2013 Share options vested during the year ended 30 November 2013 Share options reclassified/ cancelled/ lapsed during the year ended 30 November 2013(6) Share options exercised during the year ended 30 November 2013 Closing price of shares immediately before the date on which share options were awarded (HK$) Share options outstanding as at 30 November 2013 Exercise price (HK$) 1/6/2011 1/4/2014 - 31/5/2021 (2) 2,149,724 1/6/2011 1/4/2014 - 31/5/2021 (3) 2,418,439 15/3/2012 15/3/2015 - 14/3/2022 (4) 2,152,263 - - - 11/3/2013 11/3/2016 - 10/3/2023 (5) - 2,183,144 Key Management Personnel (excluding Executive Director) 1/6/2011 1/4/2014 - 31/5/2021 (2) 4,437,861 1/6/2011 1/4/2014 - 31/5/2021 (3) 6,831,120 15/3/2012 15/3/2015 - 14/3/2022 (4) 3,968,554 - - - Other eligible employees 11/3/2013 11/3/2016 - 10/3/2023 (5) - 3,983,573 1/6/2011 1/4/2014 - 31/5/2021 (2) 1,462,698 1/6/2011 1/4/2014 - 31/5/2021 (3) 3,055,048 15/3/2012 15/3/2015 - 14/3/2022 (4) 1,695,550 - - - 11/3/2013 11/3/2016 - 10/3/2023 (5) - 1,323,742 - - - - - - - - - - - - - - - - - 27.35 2,149,724 - 27.35 2,418,439 - 28.40 2,152,263 27.45 27.45 27.95 - 34.35 2,183,144 33.80 (1,057,515) - 27.35 3,380,346 (1,912,073) - 27.35 4,919,047 (1,044,789) - 28.40 2,923,765 27.45 27.45 27.95 (1,028,907) - 34.35 2,954,666 33.80 281,739 - 27.35 1,744,437 640,918 - 27.35 3,695,966 292,290 - 28.40 1,987,840 27.45 27.45 27.95 457,742 - 34.35 1,781,484 33.80 Notes: (1) The measurement date for awards made in 2011 was determined to be 15 June 2011. The measurement date for awards made in 2012 was determined to be 15 March 2012. The measurement date for awards made in 2013 was determined to be 11 March 2013. The measurement dates were determined in accordance with IFRS 2. (2) The vesting of share options is service-based only and has no further performance conditions. All share options vest on 1 April 2014. (3) The vesting of share options is service-based only and has no further performance conditions. One-third of share options vest on 1 April 2014; one-third vest on 1 April 2015; and one-third vest on 1 April 2016. (4) The vesting of share options is service-based only and has no further performance conditions. All share options vest on 15 March 2015. (5) The vesting of share options is service-based only and has no further performance conditions. All share options vest on 11 March 2016. (6) These options lapsed or were reclassified during the year ended 30 November 2013. The reclassification of options was a result of an executive who was previously categorised as “Key Management Personnel”, becoming “other eligible employees” during the year. 3,370,595 share options lapsed and no share option was cancelled during the year. ANNUAL REPORT 2013 097 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Remuneration Report Performance Measures and Vesting Share options awarded under the Share Option Scheme have a life of 10 years before expiry. Generally, share options become exercisable three years after the grant date and remain exercisable for another seven years, subject to participants’ continued employment in good standing. There are no performance conditions attached to the vesting of share options. The share options awarded in 2011 will become exercisable on 1 April 2014. Benefits are realised only to the extent that share price exceeds exercise price. Details of the valuation of the share options are set out in note 39 to the financial statements. DIRECTORS AND KEY MANAGEMENT PERSONNEL EMOLUMENTS Executive Director The Group Chief Executive and President, Mr. Mark Edward Tucker, is the sole Executive Director on the Company’s Board. He receives his remuneration exclusively for his role as Group Chief Executive and receives no separate fees for his role as a Board Director. The table below provides details of target remuneration for the Group Chief Executive during the years of 2012 and 2013. Details of remuneration cost incurred to the Company during the period from 1 December 2012 to 30 November 2013 are included in note 40 to the financial statements. US$ Executive Director Mr. Mark Edward Tucker Year 2013 Year 2012 Target Pay Opportunity Target short-term incentive Target long-term incentive Total Base salary 1,347,300 1,308,100 2,021,000 1,962,150 5,389,400 5,232,400 8,757,700 8,502,650 Non-executive Directors The remuneration of the Non-executive Director and Independent Non-executive Directors of the Company during the year ended 30 November 2013 is included in the table on the right. Remuneration for the Non-executive Director and Independent Non-executive Directors was paid in respect of the period from 1 December 2012 to 30 November 2013 and included the fees for their services provided to the Board Committees. Mr. Barry Chun-Yuen Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013 and his remuneration was paid in respect of the period between 1 December 2012 and 24 May 2013. Mr. Edmund Sze-Wing Tse was appointed as a member of the Audit Committee with effect from 25 February 2013 and was entitled to an additional annual fee of US$25,000 for his services provided to the Audit Committee in respect of the period from 25 February 2013 to 30 November 2013 on a pro- rata basis. Dr. Qin Xiao ceased to be a member of the Audit Committee with effect from 25 February 2013 and did not receive any fees in that capacity since that date. Details of the changes have been set out on pages 86 to 87 of this Annual Report. US$ Non-executive Chairman and Non-executive Director Mr. Edmund Sze-Wing Tse (1) Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung (2) Total 2013 Directors’ remuneration 646,537 220,000 205,000 190,890 235,000 190,000 190,000 100,685 1,978,112 Notes: (1) US$19,813 which represents the remuneration to Mr. Tse in respect of his services as a Director of a subsidiary of the Company and US$81,615 being the value of the benefits in kind received by Mr. Tse as a Director of the Company are included. (2) Mr. Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013. 098 AIA GROUP LIMITED CORPORATE GOVERNANCE Directors’ Service Contracts No Director proposed for re-election at the forthcoming AGM has any service contract which is not determinable by the Company or any of its subsidiaries within one year without payment of compensation (other than statutory compensation). Key Management Personnel The total remuneration cost charged to the consolidated income statement for the Key Management Personnel during the year ended 30 November 2013 is US$40,545,797. Details of remuneration during the year are included in note 40 to the financial statements. EMPLOYEE SHARE PURCHASE PLAN Under the Employee Share Purchase Plan (ESPP), in year 2013 the employees of the Company and its subsidiaries participated in the plan to purchase shares and received a matching offer of shares from the Company. The objectives of the ESPP are to facilitate and motivate share ownership by employees and to align their interests with those of the Company’s shareholders. Currently the ESPP is designed such that participants are eligible to contribute up to 5 per cent of their base salary or the plan maximum limit of US$15,000 per annum approved by the Remuneration Committee, whichever is lower, to purchase shares. For every two shares purchased by a participant, the Company will match with one additional share. Performance Measures and Vesting The ESPP has no performance conditions and vesting occurs after three years, at which time participants receive ownership over the matched shares. For employees that leave prior to the end of the vesting period, matched shares will generally be forfeited, subject to certain special circumstances, in which case pro rata vesting may be permitted. ANNUAL REPORT 2013 099 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONContents FINANCIAL STATEMENTS Independent Auditor’s Report 101 103 Consolidated Income Statement 104 Consolidated Statement of Comprehensive Income 105 Consolidated Statement of Financial Position 107 Consolidated Statement of Changes in Equity 108 Consolidated Statement of Cash Flows 109 Notes to the Consolidated Financial Statements and Significant Accounting Policies 1. Corporate information 2. Significant accounting policies 3. Critical accounting estimates and judgements 4. Exchange rates 5. Changes in group composition 6. Operating profit after tax 7. Total weighted premium income and annualised new premium 8. Segment information 9. Revenue 10. Expenses 11. Income tax 12. Earnings per share 13. Dividends 14. Intangible assets 15. Investments in associates and joint venture 16. Property, plant and equipment 17. Investment property 18. Fair value of investment property and property held for use 19. Reinsurance assets 20. Deferred acquisition and origination costs 100 AIA GROUP LIMITED 21. Financial investments 22. Derivative financial instruments 23. Fair value of financial instruments 24. Other assets 25. Impairment of financial assets 26. Cash and cash equivalents 27. Insurance contract liabilities 28. Investment contract liabilities 29. Effect of changes in assumptions and estimates 30. Borrowings 31. Obligations under securities lending and repurchase agreements 32. Provisions 33. Other liabilities 34. Share capital and reserves 35. Non-controlling interests 36. Group capital structure 37. Risk management 38. Employee benefits 39. Share-based compensation 40. Remuneration of directors and key management personnel 41. Related party transactions 42. Commitments and contingencies 43. Subsidiaries 44. Events after the reporting period 204 Financial Statements of the Company Statement of Financial Position of the Company Notes to the Financial Statements of the Company 207 Supplementary Embedded Value Information To The shareholders of aIa Group lImITed (incorporated in Hong Kong with limited liability) We have audited the consolidated financial statements of AIA Group Limited (the Company) and its subsidiaries (together, “the Group”) set out on pages 103 to 206, which comprise the consolidated and company statements of financial position as at 30 November 2013 and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. directors’ responsibility for the consolidated financial statements The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (HKICPA), and with the International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the HKICPA. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. ANNUAL REPORT 2013 101 FINANCIAL STATEMENTSIndependent Auditor’s ReportOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONauditor’s responsibility (continued) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinion In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 30 November 2013 and of the Group’s profit and cash flows for the year then ended in accordance with both Hong Kong Financial Reporting Standards issued by the HKICPA and with International Financial Reporting Standards issued by the IASB and have been properly prepared in accordance with the Hong Kong Companies Ordinance. PricewaterhouseCoopers Certified Public Accountants Hong Kong 21 February 2014 102 AIA GROUP LIMITED FINANCIAL STATEMENTSIndependent Auditor’s ReportUS$m revenue Turnover Premiums and fee income Premiums ceded to reinsurers Net premiums and fee income Investment return Other operating revenue Total revenue expenses Insurance and investment contract benefits Insurance and investment contract benefits ceded Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs Other expenses Total expenses Profit before share of profit from associates and joint venture Share of profit from associates and joint venture Profit before tax Income tax expense attributable to policyholders’ returns Profit before tax attributable to shareholders’ profits Tax expense Tax attributable to policyholders’ returns Tax expense attributable to shareholders’ profits Net profit Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests earnings per share (us$) Basic Diluted Year ended 30 November 2013 Year ended 30 November 2012 Notes 16,666 (959) 15,707 6,064 155 21,926 15,303 (816) 14,487 1,934 1,577 71 333 18,402 3,524 14 3,538 (47) 3,491 (691) 47 (644) 2,847 2,822 25 0.24 0.24 13,816 (762) 13,054 7,206 127 20,387 14,077 (703) 13,374 1,641 1,340 19 315 16,689 3,698 16 3,714 (104) 3,610 (685) 104 (581) 3,029 3,019 10 0.25 0.25 9 9 10 15 11 12 12 Dividends to shareholders of the Company attributable to the year: US$m Interim dividend declared and paid of 13.93 Hong Kong cents per share (2012: 12.33 Hong Kong cents per share) Final dividend proposed after the reporting date of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share) Notes 13 13 Year ended 30 November 2013 Year ended 30 November 2012 215 442 657 191 382 573 ANNUAL REPORT 2013 103 FINANCIAL STATEMENTSConsolidated Income StatementOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION US$m Net profit other comprehensive (expense)/income Items that may be reclassified subsequently to profit or loss: Fair value (losses)/gains on available for sale financial assets (net of tax of: 2013: US$555m; 2012: US$(211)m) Fair value gains on available for sale financial assets transferred to income on disposal (net of tax of: 2013: US$2m; 2012: US$3m) Foreign currency translation adjustments Share of other comprehensive (expense)/income from associates and joint venture Subtotal Total comprehensive (expense)/income Total comprehensive (expense)/income attributable to: Shareholders of AIA Group Limited Non-controlling interests Year ended 30 November 2013 Year ended 30 November 2012 2,847 3,029 (3,671) 2,617 (23) (505) (23) (4,222) (1,375) (1,398) 23 (47) 377 12 2,959 5,988 5,956 32 104 AIA GROUP LIMITED FINANCIAL STATEMENTSConsolidated Statement of Comprehensive Income US$m assets Intangible assets Investments in associates and joint venture Property, plant and equipment Investment property Reinsurance assets Deferred acquisition and origination costs Financial investments: Loans and deposits Available for sale Debt securities At fair value through profit or loss Debt securities Equity securities Derivative financial instruments Deferred tax assets Current tax recoverable Other assets Cash and cash equivalents Total assets liabilities Insurance contract liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Derivative financial instruments Provisions Deferred tax liabilities Current tax liabilities Other liabilities Total liabilities Notes 14 15 16 17, 18 19 20 21, 23 22 11 24 26 27 28 30 31 22 32 11 33 As at 30 November 2013 As at 30 November 2012 1,321 93 480 1,128 1,379 15,738 272 91 412 1,035 1,153 14,161 7,484 6,425 64,763 62,268 20,988 26,968 445 120,648 6 44 3,520 2,228 146,585 103,401 8,698 2,126 1,889 89 169 2,036 242 3,104 121,754 18,594 23,656 638 111,581 5 46 2,735 2,948 134,439 90,574 8,865 766 1,792 41 204 2,229 328 2,812 107,611 ANNUAL REPORT 2013 105 FINANCIAL STATEMENTSConsolidated Statement of Financial PositionOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION US$m equity Issued share capital Share premium Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Amounts reflected in other comprehensive income Total equity attributable to: Shareholders of AIA Group Limited Non-controlling interests Total equity Total liabilities and equity Approved and authorised for issue by the Board of Directors on 21 February 2014. As at 30 November 2013 As at 30 November 2012 Notes 34 34 34 34 34 34 35 12,044 1,914 (274) (11,995) 20,070 2,270 657 2,927 24,686 145 24,831 146,585 12,044 1,914 (188) (12,060) 17,843 5,979 1,165 7,144 26,697 131 26,828 134,439 Mark Edward Tucker Director Edmund Sze-Wing Tse Director 106 AIA GROUP LIMITED FINANCIAL STATEMENTSConsolidated Statement of Financial Position US$m Notes Issued share capital and share premium Employee share- based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Non- controlling interests Total equity Balance at 1 December 2011 13,958 (105) (12,101) 15,354 3,414 793 Net profit Fair value gains on available for sale financial assets Fair value gains on available for sale financial assets transferred to income on disposal Foreign currency translation adjustments Share of other comprehensive income/(expense) from associates Total comprehensive income for the year Dividends Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts 13 – – – – – – – – – – – – – – – – – – (84) 1 – – – – – – – 41 – – Net profit Fair value (losses)/gains on available for sale financial assets Fair value gains on available for sale financial assets transferred to income on disposal Foreign currency translation adjustments Share of other comprehensive expense from associates and joint venture Total comprehensive income/ (expense) for the year Dividends 13 Acquisition of subsidiaries Acquisition of non-controlling interests Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts Others – – – – – – – – – – – – – – – – – – – – – – – (87) 1 – – – – – – – – – (8) 75 – – (2) 102 10 21,415 3,029 18 2,617 – 4 – 32 (3) – – – (47) 377 12 5,988 (533) 41 (84) 1 131 25 26,828 2,847 5 – (3,671) (23) 3,019 – 2,599 (47) – 373 13 (1) 3,019 2,565 372 (530) – – – – – – – – – – – 2,822 – – – – – – – (3,676) (23) – – – – – – – – – (498) (7) (505) (13) (10) – (23) 2,822 (3,712) (508) (595) – – – – – – – – 3 – – – – – – – – – – – 23 (9) 16 (16) – – – – (1,375) (604) 16 (21) 75 (87) 1 (2) Balance at 30 November 2012 13,958 (188) (12,060) 17,843 5,979 1,165 Balance at 30 November 2013 13,958 (274) (11,995) 20,070 2,270 657 145 24,831 ANNUAL REPORT 2013 107 FINANCIAL STATEMENTSConsolidated Statement of Changes in EquityOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Cash flows presented in this statement cover all the Group’s activities and include flows from unit-linked contracts, participating funds, and other policyholder and shareholder activities. Year ended 30 November 2013 Year ended 30 November 2012 Notes 3,538 3,714 (10,219) (13,856) 8,346 121 (5,175) 4,330 472 (47) (451) 915 (65) (30) 1 (176) (296) 82 (1,802) (2,286) 2,868 (1,725) (23) 324 (8) (604) (87) (21) 724 (647) 2,948 (73) 2,228 8,613 1,081 (3,665) 3,848 387 (24) (510) (412) (58) – 4 (302) (104) – – (460) – – – 490 (453) (533) (84) – (580) (1,452) 4,303 97 2,948 US$m Cash flows from operating activities Profit before tax Adjustments for: Financial investments Insurance and investment contract liabilities Obligations under securities lending and repurchase agreements 31 Other non-cash operating items, including investment income Operating cash items: Interest received Dividends received Interest paid Tax paid Net cash provided by/(used in) operating activities Cash flows from investing activities Payments for intangible assets Contribution to a joint venture Distribution from investments in associates Payments for investment property and property, plant and equipment Payments for leasehold land Proceeds from sale of investment property and property, plant and equipment Acquisition of subsidiaries, net of cash acquired Net cash used in investing activities Cash flows from financing activities Issuance of medium term notes and drawdown of acquisition credit facility Repayment of acquisition credit facility Interest paid on medium term notes and acquisition credit facility Proceeds from other borrowings Repayment of other borrowings Dividends paid during the year Purchase of shares held by employee share-based trusts Acquisition of non-controlling interests Net cash provided by/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the financial year 14 15 15 16, 17 24 5 30 30 30 30 26 108 AIA GROUP LIMITED FINANCIAL STATEMENTSConsolidated Statement of Cash Flows 1. CorporaTe InformaTIon AIA Group Limited (the Company) was established as a company with limited liability incorporated in Hong Kong on 24 August 2009. The address of its registered office is 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong. AIA Group Limited is listed on the Main Board of The Stock Exchange of Hong Kong Limited under the stock code “1299” with American Depositary Receipts (Level 1) being traded on the over-the-counter market (ticker symbol: “AAGIY”). AIA Group Limited and its subsidiaries (collectively “AIA” or “the Group”) is a life insurance based financial services provider operating in 17 jurisdictions throughout the Asia-Pacific region. The Group’s principal activity is the writing of life insurance business, providing life insurance, accident and health insurance and savings plans throughout Asia, and distributing related investment and other financial services products to its customers. 2. sIGnIfICanT aCCounTInG polICIes 2.1 Basis of preparation and statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), Hong Kong Financial Reporting Standards (HKFRS) and the Hong Kong Companies Ordinance. HKFRS is substantially consistent with IFRS and the accounting policy selections that the Group has made in preparing these consolidated financial statements are such that the Group is able to comply with both IFRS and HKFRS. References to IFRS, International Accounting Standards (IAS) and Interpretations developed by the IFRS Interpretations Committee (IFRS IC) in these consolidated financial statements should be read as referring to the equivalent HKFRS, Hong Kong Accounting Standards (HKAS) and Hong Kong (IFRIC) Interpretations (HK(IFRIC) – Int) as the case may be. Accordingly, there are no differences of accounting practice between IFRS and HKFRS affecting these consolidated financial statements. The consolidated financial statements have been approved for issue by the Board of Directors on 21 February 2014. The consolidated financial statements have been prepared using the historical cost convention, as modified by the revaluation of available for sale financial assets, certain financial assets and liabilities designated at fair value through profit or loss and derivative financial instruments, all of which are carried at fair value. Items included in the consolidated financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in millions of US dollars (US$m) unless otherwise stated, which is the Company’s functional currency, and the presentation currency of the Company and the Group. The accounting policies adopted are consistent with those of the previous financial year, except as described below. (a) The following amendments to standards are mandatory for the first time for the financial year beginning 1 December 2012 and have no material impact for the Group: • Amendment to IAS 1, Presentation of Items of Other Comprehensive Income; and • Amendments to IAS 12, Income Taxes, Recovery of underlying assets. ANNUAL REPORT 2013 109 FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting PoliciesOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.1 Basis of preparation and statement of compliance (continued) (b) The following relevant new standards, interpretation and amendments to standards have been issued but are not effective for the financial year ended 30 November 2013 and have not been early adopted (the financial years for which the adoption is planned and required are stated in parentheses). The Group has assessed the full impact of these new standards on its financial position and results of operations and they are not expected to have a material impact on the financial position or results of operations of the Group but may require additional disclosures: • IFRS 11, Joint Arrangements (2014); • IFRS 12, Disclosure of Interests in Other Entities (2014); • IFRS 13, Fair Value Measurement (2014); • IAS 27, Separate Financial Statements (as revised in 2011) (2014); • IAS 28, Investments in Associates and Joint Ventures (as revised in 2011) (2014); • IFRIC 21, Levies (2015); • Amendments to IAS 1, Presentation of Financial Statements, Clarification of the requirements for comparative information (2014); • Amendment to IAS 24, Related Parties Disclosures, Key management personnel (2015); • Amendments to IAS 32, Financial Instruments: Presentation on offsetting financial assets and financial liabilities (2015); • Amendments to IAS 32, Financial Instruments: Presentation, Tax effect of distributions to holders of equity instruments (2014); • Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets (the Group plans to early adopt in 2014); • Amendment to IAS 40, Investment Property, Clarifying the interrelationship between IFRS 3 and IAS 40 when classifying property as investment property or owner-occupied property (2015); • Amendment to IFRS 2, Share-based Payment, Definition of vesting condition (2015); • Amendment to IFRS 3, Business Combinations, Accounting for contingent consideration in a business combination (2015); • Amendments to IFRS 7, Financial Instruments: Disclosures on offsetting financial assets and financial liabilities (2014); • Amendments to IFRS 8, Operating Segments, Aggregation of operating segments and Reconciliation of the total of the reportable segments’ assets to the entity’s assets (2015); • Amendments to IFRS 10, IFRS 11 and IFRS 12: Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (2014); • Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities (2015); • Amendment to IFRS 13, Fair Value Measurement, Scope of portfolio exception (2014); and • Amendment to IFRS 13, Fair Value Measurement, Short-term receivables and payables (2014). 110 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.1 Basis of preparation and statement of compliance (continued) (c) The following relevant new standards and amendments to standards have been issued but are not effective for the financial year ended 30 November 2013 and have not been early adopted (the financial years for which the adoption is planned and required are stated in parentheses). • • • IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. In addition, the new standard revises the hedge accounting model to more closely align with the entity’s risk management strategies. The Group is yet to assess the full impact of the standard on its financial position and results of operations given the likely amendments and uncertain implementation date. IFRS 10, Consolidated Financial Statements (2014), replaces the consolidation guidance in IAS 27, Consolidated and separate financial statements and SIC 12, Consolidation – Special purpose entities. It builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. In the 2014 Group’s financial statements, the adoption of IFRS 10 will require a restatement of comparatives in respect of the 2013 period. It is expected that the application of the standard would result in the consolidation of certain funds and deconsolidation of certain others which would lead to a net increase of US$806m in total assets and total liabilities with no impact on shareholders’ equity as at 30 November 2013. IAS 19, Employee Benefits (as revised in 2011) (2014), eliminates the corridor approach and calculates finance costs on a net funding basis. It would also require recognition of all actuarial gains and losses in other comprehensive income as they occur and of all past service costs in profit or loss. The amendments replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability/(asset). As at 30 November 2013, the Group has an unrecognised actuarial loss of US$7m and an unrecognised past service cost of US$3m which will be recognised in other comprehensive income and retained earnings respectively upon adoption of the amendments. All key items are defined upon the first time they are used and included in the glossary. The significant accounting policies adopted in the preparation of the Group’s consolidated financial statements are set out below. These policies have been applied consistently in all periods presented. ANNUAL REPORT 2013 111 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.2 operating profit The long-term nature of much of the Group’s operations means that, for management’s decision-making and internal performance management purposes, the Group evaluates its results and its operating segments using a financial performance measure referred to as “operating profit”. The Group defines operating profit before and after tax respectively as profit excluding the following non-operating items: • investment experience (which consists of realised gains and losses, foreign exchange gains and losses, impairments and unrealised gains and losses on investments held at fair value through profit or loss); • investment income related to unit-linked contracts (consisting of dividends, interest income and rental income); • investment management expenses related to unit-linked contracts; • corresponding changes in insurance and investment contract liabilities in respect of unit-linked contracts and participating funds (see note 2.4) and changes in third-party interests in consolidated investment funds; • policyholders’ share of tax relating to changes in insurance and investment contract liabilities; and • other significant items that management considers to be non-operating income and expenses. Whilst these excluded non-operating items are significant components of the Group’s profit, the Group considers that the presentation of operating profit enhances the understanding and comparability of its performance and that of its operating segments. The Group considers that trends can be more clearly identified without the fluctuating effects of these non-operating items, many of which are largely dependent on market factors. Operating profit is provided as additional information to assist in the comparison of business trends in different reporting periods on a consistent basis and enhance overall understanding of financial performance. 2.3 Basis of consolidation subsidiaries Subsidiaries are those entities (including special purpose entities) over which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which control is transferred to the Group and are excluded from consolidation from the date at which the Group no longer has control. Intercompany transactions are eliminated. The Group utilises the acquisition method of accounting to account for the acquisition of subsidiaries, unless the acquisition forms part of the Group reorganisation of entities under common control. Under this method, the cost of an acquisition is measured as the fair value of consideration payable, shares issued or liabilities assumed at the date of acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill (see note 2.10 below). The Group recognises, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the subsidiary. Any surplus of the acquirer’s interest in the subsidiary’s net assets over the cost of acquisition is credited to the consolidated income statement. The consolidated financial statements of the Group include the assets, liabilities and results of the Company and subsidiaries in which AIA Group Limited has a controlling interest, using accounts drawn up to the reporting date. 112 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.3 Basis of consolidation (continued) Investment funds In several countries, the Group has invested in investment funds, such as mutual funds and unit trusts. These invest mainly in equities, debt securities and cash and cash equivalents. The Group’s percentage ownership in these funds can fluctuate from day to day according to the Group’s and third-party participation in them. Where the Group is deemed to control such funds, with control determined based on an analysis of the guidance in IAS 27 and SIC 12, they are consolidated, with the interests of parties other than the Group being classified as liabilities because there is a contractual obligation for the issuer to repurchase or redeem units in such funds for cash. These are presented as “Third-party interests in consolidated investment funds” within other liabilities in the consolidated statement of financial position. In instances where the Group’s ownership of investment funds declines marginally below 50 per cent and, based on historical analysis and future expectations, the decline in ownership is expected to be temporary, the funds continue to be consolidated as subsidiaries under IAS 27. Likewise, marginal increases in ownership of investment funds above 50 per cent which are expected to be temporary are not consolidated. Where the Group does not control such funds, they are not accounted for as associates and are, instead, carried at fair value through profit or loss within financial investments in the consolidated statement of financial position. employee share-based trusts Trusts are set up to acquire shares of the Company for distribution to participants in future periods through the share-based compensation schemes. The consolidation of these trusts is evaluated in accordance with SIC 12; where the Group is deemed to control the trusts, they are consolidated. Shares acquired by the trusts to the extent not provided to the participants upon vesting are carried at cost and reported as “employee share-based trusts” in the consolidated statement of financial position, and as a deduction from the equity in the consolidated statement of changes in equity. non-controlling interests Non-controlling interests are presented within equity except when they arise through the minority’s interest in puttable liabilities such as the unit holders’ interest in consolidated investment funds, when they are recognised as a liability, reflecting the net assets of the consolidated entity. Acquisitions and disposals of non-controlling interests, except when they arise through the minority’s interest in puttable liabilities, are treated as transactions between equity holders. As a result, any difference between the acquisition cost or sale price of the non- controlling interest and the carrying value of the non-controlling interest is recognised as an increase or decrease in equity. associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control. Generally, it is presumed that the Group has significant influence if it has between 20 per cent and 50 per cent of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of an asset transferred between entities. Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in an associate or joint venture, together with the Group’s share of that entity’s post-acquisition changes to equity, is included as an asset in the consolidated statement of financial position. Cost includes goodwill arising on acquisition. The Group’s share of post-acquisition profits or losses is recognised in the consolidated income statement and its share of post- acquisition movement in equity is recognised in other comprehensive income. Equity accounting is discontinued when the Group no longer has significant influence over the investment. If the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the undertaking, additional losses are provided for, and a liability recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. The Group also accounts for investments in joint ventures that are subject to joint control using the equity method of accounting. The Company’s investments In the Company’s statement of financial position, subsidiaries, associates and joint ventures are stated at cost, unless impaired. The Company’s interests in investment funds such as mutual funds and unit trusts are designated at fair value through profit or loss. ANNUAL REPORT 2013 113 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts Consistent accounting policies for the measurement and recognition of insurance and investment contracts have been adopted throughout the Group to substantially all of its business. In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction, without deferral of acquisition costs. product classification The Group classified its contracts written as either insurance contracts or investment contracts, depending on the level of insurance risk. Insurance contracts are those contracts that transfer significant insurance risk, while investment contracts are those contracts without significant insurance risk. Some insurance and investment contracts, referred to as participating business, have discretionary participation features, “DPF”, which may entitle the customer to receive, as a supplement to guaranteed benefits, additional non-guaranteed benefits, such as policyholder dividends or bonuses. The Group applies the same accounting policies for the recognition and measurement of obligations arising from investment contracts with DPF as it does for insurance contracts. In the event that a scenario (other than those lacking commercial substance) exists in which an insured event would require the Group to pay significant additional benefits to its customers, the contract is accounted for as an insurance contract. For investment contracts that do not contain DPF, IAS 39, Financial Instruments: Measurement and Recognition, and, if the contract includes an investment management element, IAS 18, Revenue Recognition, are applied. IFRS 4 permits the continued use of previously applied accounting policies for insurance contracts and investment contracts with DPF, and this basis has been adopted by the Group in accounting for such contracts. Once a contract has been classified as an insurance or investment contract, no reclassification is subsequently performed unless the terms of the agreement are later amended. Certain contracts with DPF supplement the amount of guaranteed benefits due to policyholders. These contracts are distinct from other insurance and investment contracts as the Group has discretion in the amount and/or timing of the benefits declared, and how such benefits are allocated between groups of policyholders. Customers may be entitled to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the Group; and • that are contractually based on: – the performance of a specified pool of contracts or a specified type of contract; – realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or – the profit or loss of the Company, fund or other entity that issues the contract. The Group applies the same accounting policies for the recognition and measurement of obligations and the deferral of acquisition costs arising from investment contracts with DPF as it does to insurance contracts. The Group refers to such contracts as participating business. In some jurisdictions participating business is written in a participating fund which is distinct from the other assets of the Company or branch. The allocation of benefits from the assets held in such participating funds is subject to minimum policyholder participation mechanisms which are established by regulation. The extent of such policy participation may change over time. The current policyholder participation in declared dividends for locations with participating funds is set out below: Country Singapore Malaysia China Australia Brunei Current policyholder participation 90% 90% 70% 80% 80% In some jurisdictions participating business is not written in a distinct fund and the Group refers to this as other participating business. 114 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) product classification (continued) The Group’s products may be divided into the following main categories: Policy type Description of benefits payable Insurance contract liabilities Basis of accounting for: Traditional participating life assurance with DPF Participating funds Other participating business Non-participating life assurance, annuities and other protection products Universal life Participating products combine protection with a savings element. The basic sum assured, payable on death or maturity, may be enhanced by dividends or bonuses, the aggregate amount of which is determined by the performance of a distinct fund of assets and liabilities The timing of dividend and bonus declarations is at the discretion of the insurer. Local regulations generally prescribe a minimum proportion of policyholder participation in declared dividends Participating products combine protection with a savings element. The basic sum assured, payable on death or maturity, may be enhanced by dividends or bonuses, the timing or amount of which are at the discretion of the insurer taking into account factors such as investment experience Benefits payable are not at the discretion of the insurer Benefits are based on an account balance, credited with interest at a rate set by the insurer, and a death benefit, which may be varied by the customer Unit-linked These may be primarily savings products or may combine savings with an element of protection Investment contract liabilities Not applicable, as IFRS 4 permits contracts with DPF to be accounted for as insurance contracts Insurance contract liabilities make provision for the present value of guaranteed benefits less estimated future net premiums to be collected from policyholders. In addition, an insurance liability is recorded for the proportion of the net assets of the participating fund that would be allocated to policyholders, assuming all performance would be declared as a dividend based upon local regulations Insurance contract liabilities make provision for the present value of guaranteed benefits and non- guaranteed participation less estimated future net premiums to be collected from policyholders Not applicable, as IFRS 4 permits contracts with DPF to be accounted for as insurance contracts Insurance contract liabilities reflect the present value of future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. In addition, deferred profit liabilities for limited payment contracts are recognised Insurance contract liabilities reflect the accumulation value, representing premiums received and investment return credited, less deductions for front-end loads, mortality and morbidity costs and expense charges. In addition, liabilities for unearned revenue and additional insurance benefits are recorded Insurance contract liabilities reflect the accumulation value, representing premiums received and investment return credited, less deductions for front-end loads, mortality and morbidity costs and expense charges. In addition, liabilities for unearned revenue and additional insurance benefits are recorded Investment contract liabilities are measured at amortised cost Not applicable as such contracts generally contain significant insurance risk Investment contract liabilities are measured at fair value (determined with reference to the accumulation value) ANNUAL REPORT 2013 115 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) product classification (continued) In the notes to the financial statements, unit-linked contracts are presented together with pension contracts for disclosure purposes. The basis of accounting for insurance and investment contracts is discussed in notes 2.4.1 and 2.4.2 below. 2.4.1 Insurance contracts and investment contracts with DPF Premiums Premiums from life insurance contracts, including participating policies and annuity policies with life contingencies, are recognised as revenue when due from the policyholder. Benefits and expenses are provided in respect of such revenue so as to recognise profits over the estimated life of the policies. For limited pay contracts, premiums are recognised in profit or loss when due, with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments. Amounts collected as premiums from insurance contracts with investment features but with sufficient insurance risk to be considered insurance contracts, such as universal life, and certain unit-linked contracts, are accumulated as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration, and surrenders during the period. Upfront fees are recognised over the estimated life of the contracts to which they relate. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholder contract deposits and interest credited to policyholder deposits. Unearned revenue liability Unearned revenue liability arising from insurance contracts representing upfront fees and other non-level charges is deferred and released to the consolidated income statement over the estimated life of the business. Deferred acquisition costs The costs of acquiring new insurance contracts, including commissions and distribution costs, underwriting and other policy issue expenses which vary with and are primarily related to the production of new business or renewal of existing business, are deferred as an asset. Deferred acquisition costs are assessed for recoverability in the year of policy issue to ensure that these costs are recoverable out of the estimated future margins to be earned on the policy. Deferred acquisition costs are assessed for recoverability at least annually thereafter. Future investment income is also taken into account in assessing recoverability. To the extent that acquisition costs are not considered to be recoverable at inception or thereafter, these costs are expensed in the consolidated income statement. Deferred acquisition costs for life insurance and annuity policies are amortised over the expected life of the contracts as a constant percentage of expected premiums. Expected premiums are estimated at the date of policy issue and are consistently applied throughout the life of the contract unless a deficiency occurs when performing liability adequacy testing (see below). Deferred acquisition costs for universal life and unit-linked contracts are amortised over the expected life of the contracts based on a constant percentage of the present value of estimated gross profits expected to be realised over the life of the contract or on a straight-line basis. Estimated gross profits include expected amounts to be assessed for mortality, administration, investment and surrenders, less benefit claims in excess of policyholder balances, administrative expenses and interest credited. Estimated gross profits are revised regularly. The interest rate used to compute the present value of revised estimates of expected gross profits is the latest revised rate applied to the remaining benefit period. Deviations of actual results from estimated experience are reflected in earnings. Deferred sales inducements Deferred sales inducements, consisting of day one bonuses, persistency bonuses and enhanced crediting rates are deferred and amortised using the same methodology and assumptions used to amortise acquisition costs when: • the sales inducements are recognised as part of insurance contract liabilities; • they are explicitly identified in the contract on inception; • they are incremental to amounts credited on similar contracts without sales inducements; and • they are higher than the expected ongoing crediting rates for periods after the inducement. 116 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) 2.4.1 Insurance contracts and investment contracts with DPF (continued) Unbundling The deposit component of an insurance contract is unbundled when both of the following conditions are met: • • the deposit component (including any embedded surrender option) can be measured separately (i.e. without taking into account the insurance component); and the Group’s accounting policies do not otherwise require the recognition of all obligations and rights arising from the deposit component. Bifurcation To the extent that certain of the Group’s insurance contracts include embedded derivatives that are not clearly and closely related to the host contract, these are bifurcated from the insurance contracts and accounted for as derivatives. Benefits and claims Insurance contract benefits reflect the cost of all maturities, surrenders, withdrawals and claims arising during the year, as well as policyholder dividends accrued in anticipation of dividend declarations. Accident and health claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for recoveries, and any adjustments to claims outstanding from previous years. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims, and are included in operating expenses. Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) Insurance contract liabilities represent the estimated future policyholder benefit liability for life insurance policies. Future policy benefits for life insurance policies are calculated using a net level premium valuation method which represents the present value of estimated future policy benefits to be paid, less the present value of estimated future net premiums to be collected from policyholders. For contracts with an explicit account balance, such as universal life and unit-linked contracts, insurance contract liabilities are equal to the accumulation value, which represents premiums received and investment returns credited to the policy less deductions for mortality and morbidity costs and expense charges. Settlement options are accounted for as an integral component of the underlying insurance or investment contract unless they provide annuitisation benefits, in which case an additional liability is established to the extent that the present value of expected annuitisation payments at the expected annuitisation date exceeds the expected account balance at that date. Where settlement options have been issued with guaranteed rates less than market interest rates, the insurance or investment contract liability does not reflect any provision for subsequent declines in market interest rates unless a deficiency is identified through liability adequacy testing. The Group accounts for participating policies within participating funds by establishing a liability for the present value of guaranteed benefits less estimated future net premiums to be collected from policyholders. In addition, an insurance liability is recorded for the proportion of the net assets of the participating fund that would be allocated to policyholders assuming all performance were to be declared as a dividend based upon local regulations. The Group accounts for other participating business by establishing a liability for the present value of guaranteed benefits and non-guaranteed participation, less estimated future net premiums to be collected from policyholders. ANNUAL REPORT 2013 117 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) 2.4.1 Insurance contracts and investment contracts with DPF (continued) Liability adequacy testing The adequacy of liabilities is assessed by portfolio of contracts, in accordance with the Group’s manner of acquiring, servicing and measuring the profitability of its insurance contracts. Liability adequacy testing is performed for each geographical market. For traditional life insurance contracts, insurance contract liabilities reduced by deferred acquisition costs and value of business acquired on acquired insurance contracts, are compared to the gross premium valuation calculated on a best estimate basis, as of the valuation date. If there is a deficiency, the unamortised balance of deferred acquisition cost and value of business acquired on acquired insurance contracts are written down to the extent of the deficiency. If, after writing down the unamortised balance for the specific portfolio of contracts to nil, a deficiency still exists, the net liability is increased by the amount of the remaining deficiency. For universal life and investment contracts, deferred acquisition costs, net of unearned revenue liabilities, are compared to estimated gross profits. If a deficiency exists, deferred acquisition costs are written down. Financial guarantees Financial guarantees are regarded as insurance contracts. Liabilities in respect of such contracts are recognised as loss is incurred by a holder. 2.4.2 Investment contracts Investment contracts do not contain sufficient insurance risk to be considered insurance contracts and are accounted for as a financial liability, other than investment contracts with DPF which are excluded from the scope of IAS 39 and are accounted for as insurance contracts. Revenue from these contracts consists of various charges (policy fees, handling fees, management fees and surrender charges) made against the contract for the cost of insurance, expenses and early surrender. First year charges are amortised over the life of the contract as the services are provided. Investment contract fee revenue Customers are charged fees for policy administration, investment management, surrenders or other contract services. The fees may be fixed amounts or vary with the amounts being managed, and will generally be charged as an adjustment to the policyholder’s account balance. The fees are recognised as revenue in the period in which they are received unless they relate to services to be provided in future periods, in which case they are deferred and recognised as the service is provided. Origination and other “upfront” fees (fees that are assessed against the account balance as consideration for origination of the contract) are charged on some non-participating investment and pension contracts. Where the investment contract is recorded at amortised cost, these fees are amortised and recognised over the expected term of the policy as an adjustment to the effective yield. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are amortised and recognised as the services are provided. Deferred origination costs The costs of acquiring investment contracts with investment management services, including commissions and other incremental expenses directly related to the issue of each new contract, are deferred and amortised over the period that services are provided. Deferred origination costs are tested for recoverability at each reporting date. The costs of acquiring new investment contracts without investment management services are included as part of the effective interest rate used to calculate the amortised cost of the related investment contract liabilities. 118 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) 2.4.2 Investment contracts (continued) Investment contract liabilities Deposits received in respect of investment contracts are not accounted for through the consolidated income statement, except for the investment income and fees attributable to those contracts, but are accounted for directly through the consolidated statement of financial position as an adjustment to the investment contract liability, which reflects the account balance. The majority of the Group’s contracts classified as investment contracts are unit-linked contracts, with measurement directly linked to the underlying investment assets. These represent investment portfolios maintained to meet specific investment objectives of policyholders who generally bear the credit and market risks on those investments. The liabilities are carried at fair value determined with reference to the accumulation value (current unit value) with changes recognised in profit or loss. The costs of policy administration, investment management, surrender charges and certain policyholder taxes assessed against customers’ account balances are included in revenue, and accounted for as described under “Investment contract fee revenue” above. Non unit-linked investment contract liabilities are carried at amortised cost, being the fair value of consideration received at the date of initial recognition, less the net effect of principal payments such as transaction costs and front-end fees, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity value, and less any write- down for surrender payments. The effective interest rate equates the discounted cash payments to the initial amount. At each reporting date, the unearned revenue liability is determined as the value of the future best estimate cash flows discounted at the effective interest rate. Any adjustment is immediately recognised as income or expense in the consolidated income statement. The amortised cost of the financial liability is never recorded at less than the amount payable on surrender, discounted for the time value of money where applicable, if the investment contract is subject to a surrender option. 2.4.3 Insurance and investment contracts Reinsurance The Group cedes reinsurance in the normal course of business, with retentions varying by line of business. The cost of reinsurance is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for such policies. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position. Reinsurance assets consist of amounts receivable in respect of ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured insurance or investment contract liabilities or benefits paid and in accordance with the relevant reinsurance contract. To the extent that reinsurance contracts principally transfer financial risk (as opposed to insurance risk) they are accounted for directly through the consolidated statement of financial position and are not included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured. If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in the consolidated income statement. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the impact on the amounts that the Group will receive from the reinsurer can be reliably measured. Value of business acquired (VOBA) The VOBA in respect of a portfolio of long-term insurance and investment contracts, either directly or through the purchase of a subsidiary, is recognised as an asset. If this results from the acquisition of an investment in a joint venture or an associate, the VOBA is held within the carrying amount of that investment. In all cases, the VOBA is amortised over the estimated life of the contracts in the acquired portfolio on a systematic basis. The rate of amortisation reflects the profile of the value of in-force business acquired. The carrying value of VOBA is reviewed annually for impairment and any reduction is charged to the consolidated income statement. ANNUAL REPORT 2013 119 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.4 Insurance and investment contracts (continued) 2.4.3 Insurance and investment contracts (continued) Shadow accounting Shadow accounting is applied to insurance and certain investment contracts with discretionary participation feature where financial assets backing insurance and investment contract liabilities are classified as available for sale. Shadow accounting is applied to deferred acquisition costs, VOBA, deferred origination costs and the contract liabilities for investment contracts with DPF to take into account the effect of unrealised gains or losses on insurance liabilities or assets that are recognised in other comprehensive income in the same way as for a realised gain or loss recognised in the consolidated income statement. Such assets or liabilities are adjusted with corresponding charges or credits recognised directly in shareholders’ equity as a component of the related unrealised gains and losses. Other assessments and levies The Group is potentially subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included in insurance or investment contract liabilities but are included under “Provisions” in the consolidated statement of financial position. 2.5 financial instruments 2.5.1 Classification of and designation of financial instruments Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss comprise two categories: • financial assets or liabilities designated at fair value through profit or loss upon initial recognition; and • financial assets or liabilities classified as held for trading. Management designates financial assets and liabilities at fair value through profit or loss if this eliminates a measurement inconsistency or if the related assets and liabilities are actively managed on a fair value basis, including: • financial assets held to back unit-linked contracts and participating funds; • other financial assets managed on a fair value basis; consisting of the Group’s equity portfolio and investments held by the Group’s fully consolidated investment funds; and • compound instruments containing an embedded derivative, where the embedded derivative would otherwise require bifurcation. Financial assets and liabilities classified as held for trading include financial assets acquired principally for the purpose of selling them in the near future and those that form part of a portfolio of financial assets in which there is evidence of short-term profit taking, as well as derivative assets and liabilities. Dividend income from equity instruments designated at fair value through profit or loss is recognised in investment income in the consolidated income statement, generally when the security becomes ex-dividend. Interest income is recognised on an accrued basis. For all financial assets designated at fair value through profit or loss, changes in fair value are recognised in investment experience. Transaction costs in respect of financial assets and liabilities at fair value through profit or loss are expensed as they are incurred. Available for sale financial assets Financial assets, other than those at fair value through profit or loss, and loans and receivables, are classified as available for sale. The available for sale category is used where the relevant investments backing insurance and investment contract liabilities and shareholders’ equity are not managed on a fair value basis. These principally consist of the Group’s debt securities (other than those backing participating funds and unit-linked contracts). Available for sale financial assets are initially recognised at fair value plus attributable transaction costs. For available for sale debt securities, the difference between their cost and par value is amortised. Available for sale financial assets are subsequently measured at fair value. Interest income from debt securities classified as available for sale is recognised in investment income in the consolidated income statement using the effective interest method. 120 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.5 financial instruments (continued) 2.5.1 Classification of and designation of financial instruments (continued) Available for sale financial assets (continued) Unrealised gains and losses on securities classified as available for sale are analysed between differences resulting from foreign currency translation, and other fair value changes. Foreign currency translation differences on monetary available for sale investments, such as debt securities are calculated as if they were carried at amortised cost and so are recognised in the consolidated income statement as investment experience. For impairments of available for sale financial assets, reference is made to the section “Impairment of financial assets”. Changes in the fair value of securities classified as available for sale, except for impairment losses and relevant foreign exchange gains and losses, are recognised in other comprehensive income and accumulated in a separate fair value reserve within equity. Impairment losses and relevant foreign exchange gains and losses are recognised in the income statement. Realised gains and losses on financial assets Realised gains and losses on available for sale financial assets are determined as the difference between the sale proceeds and amortised cost. Cost is determined by specific identification. Recognition of financial instruments Purchases and sales of financial instruments are recognised on the trade date, which is the date at which the Group commits to purchase or sell the assets. Derecognition and offset of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the fair value of the asset. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from loans and receivables is recognised in investment income in the consolidated income statement using the effective interest method. Term deposits Deposits include time deposits with financial institutions which do not meet the definition of cash and cash equivalents as their maturity at acquisition exceeds three months. Certain of these balances are subject to regulatory or other restriction as disclosed in note 21 Loans and Deposits. Deposits are stated at amortised cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with maturities at acquisition of three months or less, which are held for cash management purposes. Cash and cash equivalents also include cash received as collateral for securities lending as well as cash and cash equivalents held for the benefit of policyholders in connection with unit-linked products. Cash and cash equivalents are measured at amortised cost using the effective interest method. ANNUAL REPORT 2013 121 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.5 financial instruments (continued) 2.5.2 Fair values of non-derivative financial assets The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, having regard to the specific characteristics of the asset or liability concerned, assuming that the transfer takes place in the most advantageous market to which the Group has access. The fair values of financial instruments traded in active markets (such as financial instruments at fair value through profit or loss and available for sale securities) are based on quoted market prices at the date of the consolidated statement of financial position. The quoted market price used for financial assets held by the Group is the current bid price. The fair values of financial instruments that are not traded in active markets are determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions at the date of each consolidated statement of financial position. The objective of using a valuation technique is to estimate the price at which an orderly transaction would take place between market participants at the date of the consolidated statement of financial position. Financial instruments carried at fair value are measured using a fair value hierarchy described in note 23. 2.5.3 Impairment of financial assets General Financial assets are assessed for impairment on a regular basis. The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset, or group of financial assets, is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. For loans and receivables, the Group first assesses whether objective evidence of impairment exists for financial assets that are individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. Available for sale financial instruments When a decline in the fair value of an available for sale asset has been recognised in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss already recognised directly in other comprehensive income is recognised in current period profit or loss. If the fair value of a debt instrument classified as available for sale increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss. Where, following the recognition of an impairment loss in respect of an available for sale debt security, the asset suffers further falls in value, such further falls are recognised as an impairment only in the case when objective evidence exists of a further impairment event to which the losses can be attributed. Loans and receivables For loans and receivables, impairment is considered to have taken place if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount is decreased through a charge to profit or loss. The carrying amount of mortgage loans or receivables is reduced through the use of an allowance account, and the amount of any allowance is recognised as an impairment loss in profit or loss. 2.5.4 Derivative financial instruments Derivative financial instruments primarily include foreign exchange contracts and interest rate swaps that derive their value mainly from underlying foreign exchange rates and interest rates. All derivatives are initially recognised in the consolidated statement of financial position at their fair value, which represents their cost excluding transaction costs, which are expensed, giving rise to a day one loss. They are subsequently remeasured at their fair value, with movements in this value recognised in profit or loss. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. 122 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.5 financial instruments (continued) 2.5.4 Derivative financial instruments (continued) Derivative instruments for economic hedging Whilst the Group enters into derivative transactions to provide economic hedges under the Group’s risk management framework, it does not currently apply hedge accounting to these transactions. This is either because the transactions would not meet the specific IFRS rules to be eligible for hedge accounting or the documentation requirements to meet hedge accounting criteria would be unduly onerous. These transactions are therefore treated as held for trading and fair value movements are recognised immediately in investment experience. Embedded derivatives Embedded derivatives are derivatives embedded within other non-derivative host financial instruments to create hybrid instruments. Where the economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host instrument, and where the hybrid instrument is not measured at fair value with changes in fair value recognised in profit or loss, the embedded derivative is bifurcated and carried at fair value as a derivative in accordance with IAS 39. 2.6 segment reporting An operating segment is a component of the Group that engages in business activity from which it earns revenues and incurs expenses and, for which, discrete financial information is available, and whose operating results are regularly reviewed by the Group’s chief operating decision-maker, considered to be the Executive Committee of the Group (ExCo). 2.7 foreign currency translation Income statements and cash flows of foreign entities are translated into the Group’s presentation currency at average exchange rates for the year as this approximates to the exchange rates prevailing at the transaction date. Their statements of financial position are translated at year or period end exchange rates. Exchange differences arising from the translation of the net investment in foreign operations, are taken to the currency translation reserve within equity. On disposal of a foreign operation, such exchange differences are transferred out of this reserve and are recognised in the consolidated income statement as part of the gain or loss on sale. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies into functional currency, are recognised in the consolidated income statement. Translation differences on financial assets designated at fair value through profit or loss are included in investment experience. For monetary financial assets classified as available for sale, translation differences are calculated as if they were carried at amortised cost and so are recognised in the consolidated income statement. Foreign exchange movements on non-monetary equities that are accounted for as available for sale are included in the fair value reserve. 2.8 property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate cost less any residual value over the estimated useful life, generally: Furniture, fixtures and office equipment Buildings Other assets Freehold land 5 years 20-40 years 3-5 years No depreciation Subsequent costs are included in the carrying amount or recognised as a separate asset, as appropriate, when it is probable that future economic benefits will flow to the Group. Repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred. Residual values and useful lives are reviewed and adjusted, if applicable, at each reporting date. An asset is written down to its recoverable amount if the carrying value is greater than the estimated recoverable amount. ANNUAL REPORT 2013 123 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.8 property, plant and equipment (continued) Any gain and loss arising on disposal of property, plant and equipment is measured as the difference between the net sale proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement. Where the cost of the Group’s leasehold land is known, or can be reliably determined at the inception of the lease, the Group records its interest in leasehold land and land use rights separately as operating leases or finance leases depending on whether substantially all the risks and rewards incidental to ownership of the land are transferred to the Group. These leases are recorded at original cost and amortised over the term of the lease (see note 2.19). 2.9 Investment property Property held for long-term rental that is not occupied by the Group is classified as investment property, and is carried at cost less accumulated depreciation and any accumulated impairment losses. Investment property comprises freehold or leasehold land and buildings. Buildings located on leasehold land are classified as investment property if held for long-term rental and not occupied by the Group. Where the cost of the land is known, or can be reliably determined at the inception of the lease, the Group records its interest in leasehold land and land use rights separately as operating leases or finance leases depending on whether substantially all the risks and rewards incidental to ownership of the land are transferred to the Group (see note 2.19). These leases are recorded at original cost and amortised over the term of the lease. Buildings that are held as investment properties are amortised on a straight-line basis over their estimated useful lives of 20 to 40 years. If an investment property becomes held for use, it is reclassified as property, plant and equipment. Where a property is partly used as an investment property and partly for the use of the Group, these elements are recorded separately within property, plant and equipment and investment property respectively, where the component used as investment property would be capable of separate sale or finance lease. The fair value of investment property and property held for use is disclosed under note 18. It is the Group’s policy to obtain external property valuations annually except in the case of a discrete event occurring in the interim that has a significant impact on the fair value of the properties. 2.10 Goodwill and other intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 December 2006 (the date of transition to IFRS) is carried at book value (original cost less cumulative amortisation) on that date, less any impairment subsequently incurred. Goodwill arising on the Group’s investment in subsidiaries since that date is shown as a separate asset and is carried at cost less any accumulated impairment losses, whilst that on associates and joint ventures is included within the carrying value of those investments. All acquisition-related costs are expensed as incurred. other intangible assets Other intangible assets consist primarily of acquired computer software and contractual relationships, such as access to distribution networks, and are amortised over their estimated useful lives. The amortisation charge for rights to access distribution networks is included in the consolidated income statement under “Commission and other acquisition expenses”. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Costs directly associated with the internal production of identifiable and unique software by the Group that will generate economic benefits exceeding those costs over a period greater than a year, are recognised as intangible assets. All other costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs of acquiring computer software licences and incurred in the internal production of computer software are amortised using the straight-line method over the estimated useful life of the software, which does not generally exceed a period of 3 to 15 years. The amortisation charge for the year is included in the consolidated income statement under “Operating expenses”. 124 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.11 Impairment of non-financial assets Property, plant and equipment, goodwill and other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised to the extent that the carrying amount of the asset exceeds its recoverable amount, which is the higher of the fair value of the asset less cost to sell and value in use. For the purposes of assessing impairment, assets are grouped into cash-generating units at the level of the Group’s operating segments, the lowest level for which separately identifiable cash flows are reported. The carrying values of goodwill and intangible assets with indefinite useful lives are reviewed at least annually or when circumstances or events indicate that there may be uncertainty over this value. The Group assesses at the end of each reporting period whether there is any objective evidence that its investments in associates and joint ventures are impaired. Such objective evidence includes whether there has been any significant adverse changes in the technological, market, economic or legal environment in which the associates and joint ventures operate or whether there has been a significant or prolonged decline in value below their cost. If there is an indication that an interest in an associate or a joint venture is impaired, the Group assesses whether the entire carrying amount of the investment (including goodwill) is recoverable. An impairment loss is recognised in profit or loss for the amount by which the carrying amount is lower than the higher of the investment’s fair value less costs to sell or value in use. Any reversal of such impairment loss in subsequent periods is reversed through profit or loss. Impairment testing of the investments in subsidiaries, associates and joint ventures is required upon receiving dividends from these investments if the dividend exceeds the total comprehensive income of the subsidiaries, associates or joint ventures in the period the dividend is declared or if the carrying amount of the relevant investment in the Company’s statement of financial position exceeds its carrying amount in the consolidated financial statements of the investees’ net assets including goodwill. 2.12 securities lending including repurchase agreements The Group has been a party to various securities lending agreements under which securities are loaned to third parties on a short- term basis. The loaned securities are not derecognised and so they continue to be recognised within the appropriate investment classification. assets sold under repurchase agreements (repos) Assets sold under repurchase agreements continue to be recognised and a liability is established for the consideration received. The Group may be required to provide additional collateral based on the fair value of the underlying assets, and such collateral assets remain on the consolidated statement of financial position. assets purchased under agreements to resell (reverse repos) The Group enters into purchases of assets under agreements to resell (reverse repos). Reverse repos are initially recorded at the cost of the loan or collateral advanced within the caption “Loans and deposits” in the consolidated statement of financial position. In the event of failure by the counterparty to repay the loan, the Group has the right to the underlying assets. 2.13 Collateral The Group receives and pledges collateral in the form of cash or non-cash assets in respect of derivative transactions, securities lending transactions, and repo and reverse repo transactions, in order to reduce the credit risk of these transactions. The amount and type of collateral depends on an assessment of the credit risk of the counterparty. Collateral received in the form of cash, which is not legally segregated from the Group, is recognised as an asset in the consolidated statement of financial position with a corresponding liability for the repayment. Non-cash collateral received is not recognised on the consolidated statement of financial position unless the Group either sells or repledges these assets in the absence of default, at which point the obligation to return this collateral is recognised as a liability. To further minimise credit risk, the financial condition of counterparties is monitored on a regular basis. Collateral pledged in the form of cash which is legally segregated from the Group is derecognised from the consolidated statement of financial position and a corresponding receivable established for its return. Non-cash collateral pledged is not derecognised (except in the event of default) and therefore continues to be recognised in the consolidated statement of financial position within the appropriate financial instrument classification. ANNUAL REPORT 2013 125 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.14 Borrowings Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, borrowings are stated at amortised cost, and any difference between net proceeds and redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. All borrowing costs are expensed as they are incurred, except for borrowing costs directly attributable to the development of investment properties and other qualifying assets, which are capitalised as part of the cost of the asset. 2.15 Income taxes The current tax expense is based on the taxable profits for the year, including any adjustments in respect of prior years. Tax is allocated to profit or loss before taxation and amounts charged or credited to equity as appropriate. Deferred tax is recognised in respect of temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements, except as described below. The principal temporary differences arise from the basis of recognition of insurance and investment contract liabilities, revaluation of certain financial assets and liabilities including derivative contracts, deferred acquisition costs and the future taxes arising on the surplus in life funds where the relevant local tax regime is distributions-based. The rates enacted or substantively enacted at the date of the consolidated statement of financial position are used to determine deferred tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. In countries where there is a history of tax losses, deferred tax assets are only recognised in excess of deferred tax liabilities if there is evidence that future profits will be available. Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and which affects neither accounting nor taxable profit or loss at the time of the transaction. Deferred tax related to fair value remeasurement of available for sale investments and other amounts taken directly to equity, is recognised initially within the applicable component of equity. It is subsequently recognised in the consolidated income statement, together with the gain or loss arising on the underlying item. In addition to paying tax on shareholders’ profits, certain of the Group’s life insurance businesses pay tax on policyholders’ investment returns (policyholder tax) at policyholder tax rates. Policyholder tax is accounted for as an income tax and is included in the total tax expense and disclosed separately. 2.16 revenue Investment return Investment income consists of dividends, interest and rents receivable for the reporting period. Investment experience comprises realised gains and losses, impairments and unrealised gains and losses on investments held at fair value through profit or loss. Interest income is recognised as it accrues, taking into account the effective yield on the investment. Rental income on investment property is recognised on an accrual basis. Investment return consists of investment income and investment experience. The realised gain or loss on disposal of an investment is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost as appropriate. Unrealised gains and losses represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase price if purchased during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. other fee and commission income Other fee and commission income consists primarily of fund management fees, income from any incidental non-insurance activities, distribution fees from mutual funds, commissions on reinsurance ceded and commission revenue from the sale of mutual fund shares. Reinsurance commissions receivable are deferred in the same way as acquisition costs. All other fee and commission income is recognised as the services are provided. 126 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.17 employee benefits annual leave and long service leave Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the reporting date. post-retirement benefit obligations The Group operates a number of funded and unfunded post-retirement employee benefit schemes, whose members receive benefits on either a defined benefit basis (generally related to salary and length of service) or a defined contribution basis (generally related to the amount invested, investment return and annuity rates), the assets of which are generally held in separate trustee- administered funds. The defined benefit plans provide life and medical benefits for employees after retirement and a lump sum benefit on cessation of employment, and the defined contribution plans provide post-retirement pension benefits. For defined benefit plans, the costs are assessed using the projected unit credit method. Under this method, the cost of providing benefits is charged to the consolidated income statement so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The obligation is measured as the present value of the estimated future cash outflows, using a discount rate based on market yields for high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related liability. The resulting scheme surplus or deficit appears as an asset or liability in the consolidated statement of financial position. For each plan, the Group recognises a portion of its actuarial gains and losses in income or expense if the unrecognised actuarial net gain or loss at the end of the previous reporting period exceeds the greater of: • 10 per cent of the projected benefit obligations at that date; or • 10 per cent of the fair value of any plan assets at that date. Any recognised actuarial net gain or loss exceeding the greater of these two values is generally recognised in the consolidated income statement over the expected average remaining service periods of the employees participating in the plans. For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. The Group’s contributions are charged to the consolidated income statement in the reporting period to which they relate and are included in staff costs. share-based compensation and cash incentive plans Following the public listing of the Group on The Stock Exchange of Hong Kong Limited and the divestiture by AIG of more than 50 per cent of the Group on 29 October 2010, the Group launched a number of share-based compensation plans, under which the Group receives services from the agents, employees, directors and officers as consideration for the shares and/or share options of the Company. These share-based compensation plans comprise the Share Option Scheme (SO Scheme), the Restricted Share Unit Scheme (RSU Scheme), the Employee Share Purchase Plan (ESPP) and the Agency Share Purchase Plan (ASPP). The Group’s share-based compensation plans are predominantly equity-settled plans. Under equity-settled share-based compensation plan, the fair value of the employee services received in exchange for the grant of shares and/or share options is recognised as an expense in profit or loss over the vesting period with a corresponding amount recorded in equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the share and/or share options awarded. Non-market vesting conditions are included in assumptions about the number of shares and/or share options that are expected to be vested. At each period end, the Group revises its estimates of the number of shares and/or share options that are expected to be vested. Any impact of the revision to original estimates is recognised in profit or loss with a corresponding adjustment to equity. Where awards of share-based payment arrangements have graded vesting terms, each tranche is recognised as a separate award, and therefore the fair value of each tranche is recognised over the applicable vesting period. The Group estimates the fair value of share options using a binomial lattice model. This model requires inputs such as share price, implied volatility, risk-free interest rate, expected dividend rate and the expected life of the share option. ANNUAL REPORT 2013 127 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. sIGnIfICanT aCCounTInG polICIes (continued) 2.17 employee benefits (continued) share-based compensation and cash incentive plans (continued) Where modification or cancellation of an equity-settled share-based compensation plan occurs, the grant date fair value continues to be recognised, together with any incremental value arising on the date of modification if non-market conditions are met. For cash-settled share-based compensation plans, the fair value of the employee services in exchange for the grant of cash-settled award is recognised as an expense in profit or loss, with a corresponding amount recognised in liability. At the end of each reporting period, any unsettled award is remeasured based on the change in fair value of the underlying asset and the liability and expense are adjusted accordingly. 2.18 provisions and contingencies Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of economic resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract held, the reimbursement is recognised as a separate asset only when the reimbursement is virtually certain. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingencies are disclosed if material and if there is a possible future obligation as a result of a past event, or if there is a present obligation as a result of a past event, but either a payment is not probable or the amount cannot be reliably estimated. 2.19 leases Leases, where a significant portion of the risks and rewards of ownership is retained by the Group as a lessor, are classified as operating leases. Assets subject to such leases are included in property, plant and equipment or investment property, and are depreciated to their residual values over their estimated useful lives. Rentals from such leases are credited to the consolidated income statement on a straight-line basis over the period of the relevant lease. Payments made by the Group as lessee under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight- line basis over the period of the relevant lease. The Group classifies amounts paid to acquire leasehold land either as an operating lease prepayment or as a component of property, plant and equipment or investment property depending on whether substantially all the risks and rewards incidental to the ownership of the land are transferred to the Group. There are no freehold land interests in Hong Kong. The Group classifies the amounts paid to acquire leasehold land under operating leases and finance leases as operating lease prepayments and property, plant and equipment or investment property respectively. Operating lease prepayments are included within “Other assets”. Amortisation is calculated to write off the cost of the land on a straight-line basis over the terms of the lease. 2.20 share capital Issued capital represents the nominal value of shares issued plus any share premium received from the issue of share capital. share issue costs Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds of the issue. dividends Interim dividends on ordinary shares are recognised when they have been paid. Final dividends on ordinary shares are recognised when they have been approved by shareholders. 2.21 presentation of the consolidated statement of financial position The Group’s insurance and investment contract liabilities and related assets are realised and settled over periods of several years, reflecting the long-term nature of the Group’s products. Accordingly, the Group presents the assets and liabilities in its consolidated statement of financial position in approximate order of liquidity, rather than distinguishing current and non-current assets and liabilities. The Group regards its intangible assets, investments in associates and joint ventures, property, plant and equipment, investment property and deferred acquisition and origination costs as non-current assets as these are held for the longer-term use of the Group. 128 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies2. sIGnIfICanT aCCounTInG polICIes (continued) 2.22 earnings per share Basic earnings per share is calculated by dividing net profit available to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. Earnings per share has also been calculated on the operating profit before adjusting items, attributable to ordinary shareholders, as the Directors believe this figure provides a better indication of operating performance. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, such as share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share. 2.23 fiduciary activities Assets and income arising from fiduciary activities, together with related undertakings to return such assets to customers, are excluded from these consolidated financial statements where the Group has no contractual rights to the assets and acts in a fiduciary capacity such as nominee, trustee or agent. 2.24 Consolidated statement of cash flow The consolidated statement of cash flow presents movements in cash and cash equivalents as shown in the consolidated statement of financial position. Purchases and sales of financial investments are included in operating cash flows as the purchases are funded from cash flows associated with the origination of insurance and investment contracts, net of payments of related benefits and claims. Purchases and sales of investment property are included within cash flows from investing activities. 2.25 related party transactions Transactions with related parties are recorded at amounts mutually agreed and transacted between the parties to the arrangement. 3. CrITICal aCCounTInG esTImaTes and judGemenTs The Group makes estimates and assumptions that affect the reported amounts of assets, liabilities, and revenue and expenses. All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and predictions of future events and actions. Actual results can always differ from those estimates, possibly significantly. Items that are considered particularly sensitive to changes in estimates and assumptions, and the relevant accounting policies are those which relate to product classification, insurance contract liabilities (including liabilities in respect of investment contracts with DPF), deferred acquisition and origination costs, liability adequacy testing, fair value of financial assets, impairment of financial assets, impairment of goodwill and other intangible assets and share-based compensation. 3.1 product classification The Group issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk, while investment contracts are those contracts without significant insurance risk. The Group exercises significant judgement to determine whether there is a scenario (other than those lacking commercial substance) in which an insured event would require the Group to pay significant additional benefits to its customers. In the event the Group has to pay significant additional benefits to its customers, the contract is accounted for as an insurance contract. The judgements exercised in determining the level of insurance risk in product classification affect the amounts recognised in the consolidated financial statements as insurance and investment contract liabilities and deferred acquisition and origination costs. The accounting policy on product classification is described in note 2.4. ANNUAL REPORT 2013 129 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION3. CrITICal aCCounTInG esTImaTes and judGemenTs (continued) 3.2 Insurance contract liabilities (including liabilities in respect of investment contracts with dpf) The Group calculates the insurance contract liabilities for traditional life insurance using a net level premium valuation method, whereby the liability represents the present value of estimated future policy benefits to be paid, less the present value of estimated future net premiums to be collected from policyholders. This method uses best estimate assumptions at inception adjusted for a provision for the risk of adverse deviation for mortality, morbidity, expected investment yields, policyholder dividends (for other participating business), surrenders and expenses set at the policy inception date. These assumptions remain locked in thereafter, unless a deficiency arises on liability adequacy testing. Interest rate assumptions can vary by geographical market, year of issuance and product. Mortality, surrender and expense assumptions are based on actual experience by each geographical market, modified to allow for variations in policy form. The Group exercises significant judgement in making appropriate assumptions. For contracts with an explicit account balance, such as universal life and unit-linked contracts, insurance contract liabilities represent the accumulation value, which represents premiums received and investment returns credited to the policy less deductions for mortality and morbidity costs and expense charges. Significant judgement is exercised in making appropriate estimates of gross profits which are based on historical and anticipated future experiences, these estimates are regularly reviewed by the Group. The Group accounts for insurance contract liabilities for participating business written in participating funds by establishing a liability for the present value of guaranteed benefits less estimated future net premiums to be collected from policyholders. In addition, an insurance liability is recorded for the proportion of the net assets of the participating fund that would be allocated to policyholders assuming all relevant surplus at the date of the consolidated statement of financial position were to be declared as a policyholder dividend based upon applicable regulations. Establishing these liabilities requires the exercise of significant judgement. In addition, the assumption that all relevant performance is declared as a policyholder dividend may not be borne out in practice. The Group accounts for other participating business by establishing a liability for the present value of guaranteed benefits and non-guaranteed participation, less estimated future net premiums to be collected from policyholders. The judgements exercised in the valuation of insurance contract liabilities (including contracts with DPF) affect the amounts recognised in the consolidated financial statements as insurance contract benefits and insurance contract liabilities. Further details of the related accounting policy, key risk and variables, and the sensitivities of assumptions to the key variables in respect of insurance contract liabilities are provided in notes 2.4, 27 and 29. 3.3 deferred acquisition and origination costs The judgements exercised in the deferral and amortisation of acquisition and origination costs affect amounts recognised in the consolidated financial statements as deferred acquisition and origination costs and insurance and investment contract benefits. As noted in note 2.4.1, deferred acquisition costs for traditional life insurance and annuity policies are amortised over the expected life of the contracts as a constant percentage of expected premiums. Expected premiums are estimated at the date of policy issue and are applied consistently throughout the life of the contract unless a deficiency occurs when performing liability adequacy testing. As noted in note 2.4.1, deferred acquisition costs for universal life and unit-linked contracts are amortised over the expected life of the contracts based on a constant percentage of the present value of estimated gross profits to be realised over the life of the contract or on a straight-line basis. As noted in note 3.2, significant judgement is exercised in making appropriate estimates of gross profits. The expensing of acquisition costs is accelerated following adverse investment performance. Likewise, in periods of favourable investment performance, previously expensed acquisition costs are reversed, not exceeding the amount initially deferred. Additional details of deferred acquisition and origination costs are provided in notes 2.4 and 20. 130 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies3. CrITICal aCCounTInG esTImaTes and judGemenTs (continued) 3.4 liability adequacy testing The Group evaluates the adequacy of its insurance and investment contract liabilities with DPF at least annually. Significant judgement is exercised in determining the level of aggregation at which liability adequacy testing is performed and in selecting best estimate assumptions. Liability adequacy is assessed by portfolio of contracts in accordance with the Group’s manner of acquiring, servicing and measuring the profitability of its insurance contracts. The Group performs liability adequacy testing separately for each geographical market in which it operates. The judgements exercised in liability adequacy testing affect amounts recognised in the consolidated financial statements as commission and other acquisition expenses, deferred acquisition costs, insurance contract benefits and insurance and investment contract liabilities. 3.5 fair values of financial assets The Group determines the fair values of financial assets traded in active markets using quoted bid prices as of each reporting date. The fair values of financial assets that are not traded in active markets are typically determined using a variety of other valuation techniques, such as prices observed in recent transactions and values obtained from current bid prices of comparable investments. More judgement is used in measuring the fair value of financial assets for which market observable prices are not available or are available only infrequently. The degree of judgement used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions. Changes in the fair value of financial assets held by the Group’s participating funds affect not only the value of financial assets, but are also reflected in corresponding movements in insurance and investment contract liabilities. This is due to an insurance liability being recorded for the proportion of the net assets of the participating funds that would be allocated to policyholders if all relevant surplus at the date of the consolidated statement of financial position were to be declared as a policyholder dividend based on current local regulations. Both of the foregoing changes are reflected in the consolidated income statement. Changes in the fair value of financial assets held to back the Group’s unit-linked contracts result in a corresponding change in insurance and investment contract liabilities. Both of the foregoing changes are also reflected in the consolidated income statement. Further details of the fair value of financial assets and the sensitivity analysis to interest rates and equity prices are provided in notes 23 and 37. ANNUAL REPORT 2013 131 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION3. CrITICal aCCounTInG esTImaTes and judGemenTs (continued) 3.6 Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for impairment regularly. This requires the exercise of significant judgement. The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Objective evidence that a financial asset, or group of assets, is impaired includes observable data that comes to the attention of the Group about the following events: • significant financial difficulty of the issuer or debtor; • a breach of contract, such as a default or delinquency in payments; • it becomes probable that the issuer or debtor will enter bankruptcy or other financial reorganisation; • the disappearance of an active market for that financial asset because of financial difficulties; or • observable data, including market prices, indicating that there is a potential decrease in the estimated future cash flows since the initial recognition of those assets, including: – adverse changes in the payment status of issuers; or – national or local economic conditions that correlate with increased default risk. For loans and receivables, impairment loss is determined using an analytical method based on knowledge of each loan group or receivable. The method is usually based on historical statistics, adjusted for trends in the group of financial assets or individual accounts. Further details of the impairment of financial assets during the year are provided in note 25. 3.7 Impairment of goodwill and other intangible assets For the purposes of impairment testing, goodwill and other intangible assets are grouped into cash generating units. These assets are tested for impairment by comparing the carrying amount of the cash generating unit, including goodwill, to the recoverable amount of that cash generating unit. The determination of the recoverable amount requires significant judgement regarding the selection of appropriate valuation techniques and assumptions. Further details of the impairment of goodwill during the year are provided in note 14. 3.8 share-based compensation The Group has adopted a number of share-based compensation plans to retain, motivate and align the interests of eligible employees, directors, officers and agents with those of the Group. These share-based compensation plans are predominantly accounted for as equity-settled plans under which shares or options to purchase shares are awarded. The Group utilises a binomial lattice model to calculate the fair value of the share option grants, a Monte-Carlo simulation model and/or discounted cash flow technique to calculate the fair value of the other share awards. These models require assumption inputs that may differ from actual results due to changes in economic conditions. Further details of share-based compensation are provided in notes 2.17 and 39. 132 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies4. exChanGe raTes The Group’s principal overseas operations during the reporting period were located within the Asia-Pacific region. The results and cash flows of these operations have been translated into US dollars at the following average rates: Hong Kong Thailand Singapore Malaysia China Korea Assets and liabilities have been translated at the following year-end rates: Hong Kong Thailand Singapore Malaysia China Korea Exchange rates are expressed in units of local currency per US$1. US dollar exchange rates Year ended 30 November 2013 Year ended 30 November 2012 7.76 30.58 1.25 3.13 6.16 7.76 31.12 1.26 3.10 6.32 1,095.29 1,132.50 US dollar exchange rates As at 30 November 2013 As at 30 November 2012 7.75 32.10 1.25 3.22 6.09 7.75 30.68 1.22 3.04 6.23 1,058.51 1,082.25 ANNUAL REPORT 2013 133 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION5. ChanGes In Group ComposITIon This note provides details of the acquisitions of subsidiaries that the Group has made during the year ended 30 November 2013. acquisitions On 5 December 2012, the Group completed the acquisition of 92.3 per cent of the issued share capital in Sri Lankan insurer Aviva NDB Insurance (ANI). In addition, ANI has entered into an exclusive 20-year bancassurance agreement with the National Development Bank in Sri Lanka. The acquisition positions the Group to develop a significant operation in the expanding Sri Lankan market. The price, including purchase price adjustment, with respect to the transaction of US$111m was paid from existing cash resources. In April 2013, the Group acquired a further 4.9 per cent of the share capital of ANI from the remaining shareholders by way of a voluntary offering for an aggregate price of US$4m. On 18 December 2012, the Group acquired 100 per cent of the share capital of ING Management Holdings (Malaysia) Sdn. Bhd. (ING Malaysia). ING Malaysia was the third largest life insurer in Malaysia based upon gross premiums earned for the year ended 31 December 2011. The acquisition presents the Group with a high calibre distribution force of over 9,000 agents and a long-term bancassurance partnership with a leading Malaysian banking group, Public Bank. The price with respect to this transaction was EUR1,332m or US$1,754m at exchange rates on the date of the transaction, and was paid from cash financed initially through an acquisition credit facility which was subsequently largely repaid with a combination of internal cash resources and medium term notes. The Group utilised a foreign currency forward contract to economically hedge the purchase price. The Group has the ability to exercise control over ANI and ING Malaysia through control of their voting rights. The Group incurred US$17m of acquisition-related costs which were recognised as “other expenses” in the Group’s consolidated income statement for the year ended 30 November 2013. Details of the finalised fair values of the assets and liabilities acquired and the goodwill arising from the acquisition of ANI and ING Malaysia are set out as follows: US$m Intangible assets Deferred acquisition costs (value of business acquired) Property, plant and equipment Investment property Loans and deposits(1) Investment securities Other assets Cash and cash equivalents Insurance contract liabilities Deferred tax liabilities Other liabilities Total net assets acquired Less: non-controlling interests Net assets acquired Goodwill arising on acquisition Fair value of purchase price Less: cash and cash equivalents in acquired subsidiaries Net cash outflow Note: (1) Fair value approximates the gross contractual amount. 134 AIA GROUP LIMITED Provisional fair values as at the date of acquisition Adjustments Finalised fair values as at the date of acquisition 51 318 38 115 900 4,876 245 63 (5,371) (125) (224) 886 (16) 870 995 1,865 (63) 1,802 – 4 – – – – 1 – (25) 7 (1) (14) – (14) 14 – – – 51 322 38 115 900 4,876 246 63 (5,396) (118) (225) 872 (16) 856 1,009 1,865 (63) 1,802 FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies5. ChanGes In Group ComposITIon (continued) acquisitions (continued) In March 2013, the Group acquired the remaining 30 per cent of the share capital of AIA AFG Takaful Bhd. from the remaining shareholder for an aggregate price of US$14m. The business of AIA AFG Takaful Bhd. and the acquired AIA PUBLIC Takaful Bhd. (formerly known as ING PUBLIC Takaful Ehsan Berhad, a subsidiary of ING Malaysia) is in the process of integration. The integration is expected to be completed in the first half of 2014. During the year ended 30 November 2013, the Group acquired 0.22 per cent of the share capital of Philam Life from the remaining shareholders for an aggregate price of US$3m. Goodwill The goodwill recognised is mainly attributable to the distribution strength and synergies and other benefits from combining ING Malaysia with the Group’s Malaysian business. The goodwill is not expected to be deductible for tax purposes. Impact of acquisitions on the results of the Group As the acquired ING Malaysian business has been integrated into the Group’s Malaysian business, the post-acquisition stand-alone results of the acquired ING Malaysian business are not available. The acquired ANI contributed revenue of US$106m and profit before tax of US$9m to the Group’s consolidated income statement for the year ended 30 November 2013; the impact of the acquisition would not be materially different had the acquisitions been completed at the beginning of the reporting period. 6. operaTInG profIT afTer Tax Operating profit after tax may be reconciled to net profit as follows: US$m Operating profit after tax Non-operating items, net of related changes in insurance and investment contract liabilities: Net gains from equity securities, net of tax Other non-operating investment experience and other items, net of tax Net profit Operating profit after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests Year ended 30 November 2013 Year ended 30 November 2012 2,514 2,169 Note 8 424 (91) 2,847 2,504 10 2,822 25 787 73 3,029 2,159 10 3,019 10 ANNUAL REPORT 2013 135 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 7. ToTal weIGhTed premIum InCome and annualIsed new premIum For management decision-making and internal performance management purposes, the Group measures business volumes during the year using a performance measure referred to as total weighted premium income (TWPI), while the Group measures new business activity using a performance measure referred to as annualised new premium (ANP). TWPI consists of 100 per cent of regular premiums and 10 per cent of single premiums, before reinsurance ceded, and includes deposits and contributions for contracts that are accounted for as deposits in accordance with the Group’s accounting policies. Management considers that TWPI provides an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not intended to be indicative of premium and fee income recorded in the consolidated income statement. ANP is a key internal measure of new business activities, which consists of 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. ANP excludes new business of pension business, personal lines and motor insurance. TWPI US$m TWPI by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Regular premiums by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Single premiums by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total 136 AIA GROUP LIMITED Year ended 30 November 2013 Year ended 30 November 2012 3,770 3,364 2,150 2,036 1,599 2,049 2,840 3,372 3,119 2,035 964 1,446 1,942 2,482 17,808 15,360 3,680 3,335 2,042 2,017 1,596 2,029 2,776 3,304 3,101 1,947 952 1,442 1,937 2,438 17,475 15,121 897 285 1,079 193 29 201 641 3,325 678 187 881 123 39 45 445 2,398 FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies7. ToTal weIGhTed premIum InCome and annualIsed new premIum (continued) ANP US$m ANP by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Year ended 30 November 2013 Year ended 30 November 2012 781 565 400 319 249 338 689 604 532 339 151 215 237 618 3,341 2,696 8. seGmenT InformaTIon The Group’s operating segments, based on the reports received by the ExCo, are each of the geographical markets in which the Group operates. Each of the reportable segments, other than the “Group Corporate Centre” segment, writes life insurance business, providing life, pension and accident and health products to customers in its local market, and distributes related investment and other financial services products. The reportable segments are Hong Kong (including Macau), Thailand, Singapore (including Brunei), Malaysia, China, Korea, Other Markets and Group Corporate Centre. Other Markets includes the Group’s operations in Australia, the Philippines, Indonesia, Vietnam, Taiwan, New Zealand, Sri Lanka and India. The activities of the Group Corporate Centre segment consist of the Group’s corporate functions, shared services and eliminations of intragroup transactions. Because each reportable segment other than the Group Corporate Centre segment focuses on serving the life insurance needs of its local market, there are limited transactions between reportable segments. The key performance indicators reported in respect of each segment are: • ANP; • TWPI; • investment income (excluding investment income in respect of unit-linked contracts); • operating expenses; • operating profit after tax attributable to shareholders of AIA Group Limited; • expense ratio, measured as operating expenses divided by TWPI; • operating margin, measured as operating profit before tax (see above) expressed as a percentage of TWPI; and • operating return on allocated equity, measured as operating profit after tax attributable to shareholders of AIA Group Limited expressed as a percentage of the simple average of opening and closing allocated segment equity (being the segment assets less segment liabilities in respect of each reportable segment less non-controlling interests, fair value and foreign currency translation reserves, and adjusted for intercompany debt). In presenting net capital in/(out) flows to reportable segments, capital outflows consist of dividends and profit distributions to the Group Corporate Centre segment and capital inflows consist of capital injections into reportable segments by the Group Corporate Centre segment. For the Group, net capital in/(out) flows reflect the net amount received from shareholders by way of capital contributions less amounts distributed by way of dividends. Business volumes in respect of the Group’s five largest customers are less than 30 per cent of premiums and fee income. ANNUAL REPORT 2013 137 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION8. seGmenT InformaTIon (continued) Total expenses 3,626 3,751 2,706 2,103 1,700 1,695 1,985 US$m Year ended 30 November 2013 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment income(1) Total revenue Net insurance and investment contract benefits(2) Commission and other acquisition expenses Operating expenses Investment management expenses and finance costs(3) Share of profit/(loss) from associates and joint venture Operating profit before tax Tax on operating profit before tax Operating profit/(loss) after tax Operating profit/(loss) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on allocated equity Operating profit before tax includes: Finance costs Depreciation and amortisation Notes: Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 781 3,770 565 3,364 400 2,150 319 2,036 249 1,599 338 2,049 689 2,840 – – 3,341 17,808 3,344 1,121 4,465 3,498 943 4,441 2,369 791 3,160 1,899 525 2,424 1,498 437 1,935 1,504 389 1,893 1,740 564 2,304 10 188 198 15,862 4,958 20,820 2,959 2,959 2,345 1,768 1,342 1,345 1,286 (2) 14,002 381 231 55 559 188 45 191 153 17 144 172 19 145 194 19 206 138 6 308 356 35 – 839 (65) 774 – 690 (164) 526 – 454 (58) 396 1 322 (72) 250 – 235 (30) 205 – 198 (48) 150 19 338 (88) 250 770 4 526 – 396 – 250 – 205 – 150 – 244 6 6.1% 5.6% 7.1% 8.4% 22.3% 20.5% 21.1% 15.8% 12.1% 14.7% 6.7% 9.7% 12.5% 11.9% 20.0% 12.9% 22.9% 16.1% 17.4% 8.9% 11.7% – 145 46 189 (6) 3 (40) (37) 1,934 1,577 242 17,755 14 3,079 (565) 2,514 (37) 2,504 – – – – 10 8.9% 17.3% 12.1% 16 10 10 12 2 13 2 16 12 9 – 6 3 26 26 15 71 107 (1) Excludes investment income related to unit-linked contracts. (2) Excludes corresponding changes in insurance and investment contract liabilities from investment experience for unit-linked contracts and participating funds and investment income and investment management expenses related to unit-linked contracts. It also excludes policyholders’ share of tax relating to the change in insurance and investment contract liabilities. (3) Excludes investment management expenses related to unit-linked contracts. 138 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 8. seGmenT InformaTIon (continued) Operating profit before tax may be reconciled to net profit as follows: US$m Year ended 30 November 2013 Operating profit before tax Non-operating items Profit before tax Hong Kong 839 167 1,006 690 169 859 Tax on operating profit before tax (65) (164) Policyholders’ tax on operating profit before tax Non-operating tax expense Tax expense Net profit/(loss) Net profit/(loss) attributable to: Shareholders of AIA Group Limited Non-controlling interests – (10) (75) 931 927 4 – (80) (244) 615 615 – Allocated equity may be analysed as follows: Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre 454 (56) 398 (58) (41) 43 (56) 342 342 – 322 (27) 295 (72) (25) 46 (51) 244 244 – 235 50 285 (30) – (12) (42) 243 243 – 198 18 216 (48) – (5) (53) 163 163 – Total 3,079 459 3,538 3 16 19 (40) (565) – (10) (50) (31) (70) (56) (691) 2,847 338 122 460 (88) (4) (28) (120) 340 319 21 (31) 2,822 – 25 US$m 30 November 2013 Assets before investments in associates and joint venture Investments in associates and joint venture Total assets Total liabilities(4) Total equity Hong Kong Thailand(4) Singapore Malaysia China Korea Other Markets(4) Group Corporate Centre(4) Total 34,260 24,026 27,547 15,774 11,728 12,631 14,352 6,174 146,492 – – 1 7 – – 81 4 93 34,260 24,026 27,548 15,781 11,728 12,631 14,433 6,178 146,585 29,282 19,419 25,314 13,269 10,601 10,676 10,942 2,251 121,754 4,978 4,607 2,234 2,512 1,127 1,955 3,491 123 3,927 24,831 – 145 Non-controlling interests 13 – – 9 – – Amounts reflected in other comprehensive income: Fair value reserve 1,076 326 119 (8) (378) 229 1,112 (206) 2,270 Foreign currency translation reserve Allocated equity – 3,889 245 4,036 323 1,792 Net capital (out)/in flows (839) (700) (222) Total assets include: 17 2,494 1,636 158 1,347 101 (27) (85) 26 657 1,753 (27) 2,341 183 4,107 21,759 (748) (616) Additions to non-current assets(5) 338 17 27 1,170 19 8 83 27 1,689 Notes: (4) Group Corporate Centre segment, Thailand segment and Other Markets segment adjusted for intercompany debt provided to Thailand segment and Other Markets segment of US$13m and US$25m, respectively. (5) The non-current assets comprise intangible assets, property, plant and equipment, investment property and operating leases of leasehold land. ANNUAL REPORT 2013 139 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 8. seGmenT InformaTIon (continued) Segment information may be reconciled to the consolidated income statement as shown below: US$m Segment information Investment experience Investment income related to unit-linked contracts Investment management expenses related to unit-linked contracts Other non- operating items Unit-linked contracts Participating funds Third-party interests in consolidated investment funds Consolidated income statement Related changes in insurance and investment contract benefits Year ended 30 November 2013 Total revenue 20,820 903 203 – Of which: Net premiums, fee income and other operating revenue Investment return Total expenses Of which: Net insurance and investment 15,862 4,958 17,755 – 903 – – 203 – contract benefits 14,002 Restructuring and other non-operating costs Investment management expenses and finance costs Change in third-party interests in consolidated investment funds Share of profit from associates and joint venture Operating profit before tax – 242 – 14 – – – – – – – – – – – – 89 – – 89 – – – – – – – – – – – – 21,926 Total revenue Of which: Net premiums, fee income and other operating revenue 15,862 6,064 Investment return – – (16) 861 (306) 19 18,402 Total expenses (70) 861 (306) – 14,487 Of which: Net insurance and investment contract benefits Restructuring and other non-operating costs Investment management expenses and finance costs Change in third-party interests in consolidated – – 54 331 19 19 investment funds Share of profit from associates and joint venture – 14 54 – – – – – – – – – – – 3,079 903 203 (89) 16 (861) 306 (19) 3,538 Profit before tax Other non-operating items in 2013 consist of restructuring and other non-operating costs of US$54m (see note 10). 140 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 8. seGmenT InformaTIon (continued) Total expenses 3,021 3,466 2,279 US$m Year ended 30 November 2012 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment income(1) Total revenue Net insurance and investment contract benefits(2) Commission and other acquisition expenses Operating expenses Investment management expenses and finance costs(3) Share of profit/(loss) from associates Operating profit before tax(4) Tax on operating profit before tax Operating profit/(loss) after tax(4) Operating profit/(loss) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on allocated equity Operating profit before tax includes: Finance costs Depreciation and amortisation Notes: Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre 604 3,372 532 3,119 339 2,035 151 964 215 1,446 237 1,942 618 2,482 2,818 999 3,817 3,205 885 4,090 1,967 718 2,685 855 292 1,147 1,352 364 1,716 1,443 355 1,798 1,539 522 2,061 – – 2 142 144 Total 2,696 15,360 13,181 4,277 17,458 2,476 2,808 1,930 778 1,217 1,304 1,184 (1) 11,696 299 212 34 451 173 34 196 139 14 – 796 (60) 736 (1) 623 (152) 471 – 406 (61) 345 88 81 6 953 – 194 (45) 149 127 180 12 199 127 4 281 299 31 1,536 1,634 1,795 – 180 (29) 151 – 164 (39) 125 17 283 (69) 214 732 4 471 – 345 – 150 (1) 151 – 125 – 207 7 6.3% 5.5% 6.8% 8.4% 23.6% 20.0% 20.0% 20.1% 12.4% 12.4% 6.5% 8.4% 12.0% 11.4% 18.9% 12.2% 23.6% 25.4% 16.7% 8.0% 12.3% – 129 11 139 – 5 (27) (22) 1,641 1,340 146 14,823 16 2,651 (482) 2,169 (22) 2,159 – – – – 10 8.7% 17.3% 11.8% 6 9 3 9 2 12 1 8 7 10 – 6 3 21 (3) 13 19 88 (1) Excludes investment income related to unit-linked contracts. (2) Excludes corresponding changes in insurance and investment contract liabilities from investment experience for unit-linked contracts and participating funds and investment income and investment management expenses related to unit-linked contracts. It also excludes policyholders’ share of tax relating to the change in insurance and investment contract liabilities. (3) Excludes investment management expenses related to unit-linked contracts. (4) Certain segmental reclassifications have been made from Group Corporate Centre segment to key segments to conform to current year presentation. For the year ended 30 November 2012, operating profit before and after tax of Thailand segment have been increased by US$19m, Singapore segment have been increased by US$13m, Malaysia segment have been increased by US$8m and Group Corporate Centre segment have been decreased by US$40m. The reclassification has no impact to the operating profit before and after tax, allocated equity and net capital outflow of the Group for the year ended 30 November 2012. ANNUAL REPORT 2013 141 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre 8. seGmenT InformaTIon (continued) Operating profit before tax may be reconciled to net profit/(loss) as follows: Tax on operating profit before tax (60) (152) US$m Year ended 30 November 2012 Operating profit before tax Non-operating items Profit before tax Policyholders’ tax on operating profit before tax Non-operating tax expense Tax expense Net profit/(loss) Net profit/(loss) attributable to: Shareholders of AIA Group Limited Non-controlling interests Hong Kong 796 215 623 656 1,011 1,279 – – (60) 951 – (91) (243) 1,036 406 167 573 (61) (29) (36) (126) 447 947 4 1,036 – 447 – Allocated equity may be analysed as follows: 194 19 213 (45) (14) (12) (71) 142 143 (1) 180 (70) 110 (29) – 17 (12) 98 98 – 164 4 168 (39) – (17) (56) 112 112 – 283 59 342 (69) (4) (12) (85) 257 250 7 US$m 30 November 2012 Assets before investments in associates Investments in associates Total assets Total liabilities(5) Total equity(6) Non-controlling interests Amounts reflected in other comprehensive income: Hong Kong Thailand(5) Singapore Malaysia China Korea Other Markets(5) Group Corporate Centre(5) Total 32,869 24,216 27,247 8,597 10,587 11,615 13,598 5,619 134,348 – 32,869 26,121 6,748 11 – 24,216 18,834 5,382 – 1 27,248 24,724 2,524 – 8 8,605 7,844 761 9 – – 10,587 11,615 9,511 1,076 – 9,539 2,076 – 82 13,680 10,315 3,365 107 Fair value reserve 2,936 798 463 42 (59) 524 1,274 Foreign currency translation reserve Allocated equity Net capital (out)/in flows Total assets include: – 3,801 (1,104) 463 4,121 (503) 389 1,672 (23) 96 614 (98) 132 1,003 100 Additions to non-current assets(7) 176 16 20 15 10 (65) 1,617 145 1,839 – 11 45 28 Notes: (5) Group Corporate Centre segment, Thailand segment and Other Markets segment adjusted for intercompany debt provided to Thailand segment and Other Markets segment of US$13m and US$29m, respectively. (6) Certain segmental reclassifications have been made from Group Corporate Centre segment to key segments to conform to current year presentation. As at 30 November 2012, total equity of Thailand segment has been increased by US$19m, Singapore segment has been increased by US$13m, Malaysia segment has been increased by US$8m, and Group Corporate Centre segment has been decreased by US$40m. The reclassification has no impact to the total equity, allocated equity and net capital outflow of the Group as of 30 November 2012. (7) The non-current assets comprise intangible assets, property, plant and equipment, investment property and operating leases of leasehold land. 142 AIA GROUP LIMITED Total 2,651 1,063 3,714 5 13 18 (27) (482) – (5) (32) (14) (47) (156) (685) 3,029 (14) – 3,019 10 – 91 5,619 134,439 723 107,611 4,896 26,828 4 1 5 4,886 1,011 131 5,979 1,165 19,553 (572) 164 440 FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 8. seGmenT InformaTIon (continued) Segment information may be reconciled to the consolidated income statement as shown below: US$m Segment information Investment experience Investment income related to unit-linked contracts Investment management expenses related to unit-linked contracts Other non- operating items Unit-linked contracts Participating funds Third-party interests in consolidated investment funds Consolidated income statement Related changes in insurance and investment contract benefits Year ended 30 November 2012 Total revenue 17,458 2,743 186 – – (47) 1,147 578 – – – – – – 1,147 578 – – – – – – – – – 2,743 – – – – – – – 186 – – – – – – – – 86 – – – – 53 80 86 20 – – – – – 20,387 Total revenue Of which: Net premiums, fee income and other operating revenue 13,181 7,206 Investment return 16,689 Total expenses Of which: Net insurance and investment contract 13,374 benefits Restructuring and other non-operating costs Investment management expenses and finance costs Change in third-party interests in consolidated investment funds 80 252 2 Share of profit 16 from associates – – 2 – – – 2 – Of which: Net premiums, fee income and other operating revenue Investment return Total expenses Of which: 13,181 4,277 14,823 Net insurance and investment contract benefits 11,696 Restructuring and other non-operating costs Investment management expenses and finance costs Change in third-party interests in consolidated investment funds Share of profit from associates Operating profit before tax – 146 – 16 2,651 2,743 186 (86) (53) (1,147) (578) (2) 3,714 Profit before tax Other non-operating items in 2012 consist of restructuring and other non-operating costs of US$80m (see note 10). ANNUAL REPORT 2013 143 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 9. revenue Investment return US$m Interest income Dividend income Rental income Investment income Available for sale Net realised gains from debt securities Net gains of available for sale financial assets reflected in the consolidated income statement At fair value through profit or loss Net gains/(losses) of financial assets designated at fair value through profit or loss Net (losses)/gains of debt securities Net gains of equity securities Net gains/(losses) of financial instruments held for trading Net gains of debt investments Net fair value movement on derivatives Net gains in respect of financial instruments at fair value through profit or loss Net foreign exchange gains/(losses) Other net realised gains/(losses) Investment experience Investment return Investment income US$m Income from listed investments Income from unlisted investments Total Year ended 30 November 2013 Year ended 30 November 2012 4,539 506 115 5,160 25 25 (903) 1,623 1 (81) 640 167 72 904 6,064 3,957 409 97 4,463 50 50 579 2,328 1 140 3,048 (287) (68) 2,743 7,206 Year ended 30 November 2013 Year ended 30 November 2012 3,248 1,912 5,160 2,867 1,596 4,463 Other net realised gains/(losses) include impairment of intangible assets of US$nil (2012: US$62m) and gains on disposal of properties of US$114m (2012: US$nil). Foreign currency movements resulted in the following gains/(losses) recognised in the consolidated income statement (other than gains and losses arising on items measured at fair value through profit or loss): US$m Foreign exchange gains/(losses) other operating revenue The balance of other operating revenue largely consists of asset management fees. Year ended 30 November 2013 Year ended 30 November 2012 94 (55) 144 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies10. expenses US$m Insurance contract benefits Change in insurance contract liabilities Investment contract benefits Insurance and investment contract benefits Insurance and investment contract benefits ceded Insurance and investment contract benefits, net of reinsurance ceded Commission and other acquisition expenses incurred Deferral and amortisation of acquisition costs Commission and other acquisition expenses Employee benefit expenses Depreciation Amortisation Operating lease rentals Other operating expenses Operating expenses Investment management expenses and others Restructuring and other non-operating costs(1) Change in third-party interests in consolidated investment funds Other expenses Finance costs Total Year ended 30 November 2013 Year ended 30 November 2012 9,067 5,935 301 15,303 (816) 14,487 3,357 (1,423) 1,934 1,018 70 27 103 359 1,577 260 54 19 333 71 7,879 5,658 540 14,077 (703) 13,374 2,840 (1,199) 1,641 858 64 24 99 295 1,340 233 80 2 315 19 18,402 16,689 Other operating expenses include auditors’ remuneration of US$13m (2012: US$14m). Note: (1) Restructuring costs represent costs related to restructuring programmes and are primarily comprised of redundancy and contract termination costs. Other non-operating costs primarily consist of acquisition-related and integration expenses. Investment management expenses and others may be analysed as: US$m Investment management expenses Depreciation on investment property Total Finance costs may be analysed as: US$m Securities lending and repurchase agreements (see note 31 for details) Bank and other loans Total Year ended 30 November 2013 Year ended 30 November 2012 244 16 260 224 9 233 Year ended 30 November 2013 Year ended 30 November 2012 30 41 71 14 5 19 Finance costs include interest expense of US$29m (2012: US$5m) on bank loans, overdrafts and other loans wholly repayable within five years and US$12m (2012: US$nil) on bank loans, overdrafts and other loans not wholly repayable within five years. ANNUAL REPORT 2013 145 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION10. expenses (continued) Employee benefit expenses consist of: US$m Wages and salaries Share-based compensation Pension costs – defined contribution plans Pension costs – defined benefit plans Other employee benefit expenses Total 11. InCome Tax US$m Tax charged in the consolidated income statement Current income tax – Hong Kong Profits Tax Current income tax – overseas Deferred income tax on temporary differences Total Year ended 30 November 2013 Year ended 30 November 2012 813 75 54 15 61 1,018 682 45 46 16 69 858 Year ended 30 November 2013 Year ended 30 November 2012 67 311 313 691 54 479 152 685 The tax benefit or expense attributable to Singapore, Brunei, Malaysia, Indonesia, Australia, Sri Lanka and the Philippines life insurance policyholder returns is included in the tax charge or credit and is analysed separately in the consolidated income statement in order to permit comparison of the underlying effective rate of tax attributable to shareholders from year to year. The tax attributable to policyholders’ returns included above is US$47m (2012: US$104m). The provision for Hong Kong Profits Tax is calculated at 16.5 per cent. Taxation for overseas subsidiaries and branches is charged at the appropriate current rates of taxation ruling in the relevant jurisdictions of which the most significant jurisdictions are outlined below. Thailand Singapore Korea Malaysia China Hong Kong Others Year ended 30 November 2013 Year ended 30 November 2012 20% 17% 24.2% 25% 25% 16.5% 23% 17% 24.2% 25% 25% 16.5% 12% – 30% 12% – 30% The table above reflects the principal rate of corporate income taxes, as at the end of each year. The rate changes reflect changes to the enacted or substantively enacted corporate tax rates throughout the year in each jurisdiction. For Thailand, the corporate income tax rate is assumed to be 20 per cent in assessment year 2014 and 30 per cent from assessment year 2015 onward. During the year, Malaysia and Vietnam announced changes in corporate income tax rates. The corporate income tax rate for Malaysia will reduce to 24 per cent from assessment year 2016 onward. This resulted in a reduction of deferred tax liabilities of US$10m, of which US$9m is recognised as a non-operating item and US$1m is recognised in other comprehensive income. 146 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies11. InCome Tax (continued) For Vietnam, the corporate income tax rate will reduce to 22 per cent for the assessment years 2014 and 2015 and 20 per cent from assessment year 2016 onward. This resulted in a reduction of deferred tax liabilities of US$1m, which is recognised as a non- operating item. US$m Income tax reconciliation Profit before income tax Tax calculated at domestic tax rates applicable to profits/(losses) in the respective jurisdictions Reduction in tax payable from: Life insurance tax(1) Exempt investment income Amount over-provided in prior years Changes in tax rate and law Others Increase in tax payable from: Life insurance tax(1) Withholding taxes Disallowed expenses Amounts under-provided in prior years Unrecognised deferred tax assets Provisions for uncertain tax positions Others Total income tax expense Note: Year ended 30 November 2013 Year ended 30 November 2012 3,538 671 (25) (76) – (10) – (111) – 37 27 1 10 7 49 131 691 3,714 720 – (66) (6) (56) (93) (221) 35 31 18 – 40 62 – 186 685 (1) Life insurance tax refers to the permanent differences which arise where the tax regime specific to the life insurance business does not adopt net income as the basis for calculating taxable profit, for example Hong Kong, where life business taxable profit is derived from life premiums. ANNUAL REPORT 2013 147 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION11. InCome Tax (continued) The movement in net deferred tax liabilities in the period may be analysed as set out below: Credited/(charged) to other comprehensive income Net deferred tax asset/ (liability) at 1 December Acquisition of subsidiaries(3) Credited/ (charged) to the income statement Fair value reserve(2) Foreign exchange Net deferred tax asset/ (liability) at year end (1,210) (2,099) 1,678 (115) 119 25 (517) (105) (2,224) (924) (1,836) 1,495 (95) 99 6 (441) (110) (1,806) (21) (3) – – 3 – (97) – (118) – – – – – – – – – 57 (277) (37) (37) 10 (10) 10 (29) (313) (73) (209) 146 (15) 18 19 (48) 10 (152) 557 – – – – – – – 557 (208) – – – – – – – (208) 24 83 (73) 13 (3) – 25 (1) 68 (5) (54) 37 (5) 2 – (28) (5) (58) (593) (2,296) 1,568 (139) 129 15 (579) (135) (2,030) (1,210) (2,099) 1,678 (115) 119 25 (517) (105) (2,224) US$m 30 November 2013 Revaluation of financial instruments Deferred acquisition costs Insurance and investment contract liabilities Withholding taxes Provision for expenses Losses available for offset against future taxable income Life surplus (1) Others Total 30 November 2012 Revaluation of financial instruments Deferred acquisition costs Insurance and investment contract liabilities Withholding taxes Provision for expenses Losses available for offset against future taxable income Life surplus (1) Others Total Notes: (1) Life surplus relates to the temporary difference which arises where the taxable profits are based on actual distributions from the long-term fund. This primarily relates to Singapore and Malaysia. (2) Of the fair value reserve deferred tax (credit)/charge of US$(557)m (2012: US$208m) for 2013, US$(555)m (2012: US$211m) relates to fair value gains and losses on available for sale financial assets and US$(2)m (2012: US$(3)m) relates to fair value gains and losses on available for sale financial assets transferred to income on disposal. (3) The amount of US$118m represents a one-time adjustment in respect of the acquisition of ING Malaysia and ANI. Deferred tax assets are recognised to the extent that sufficient future taxable profits will be available for realisation. The Group has not recognised deferred tax assets on tax losses and the temporary difference on insurance and investment contract liabilities arising from different accounting and statutory/tax reserving methodology for certain branches and subsidiaries on the basis that they have histories of tax losses and there is insufficient evidence that future profits will be available. 148 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 11. InCome Tax (continued) Temporary differences not recognised in the consolidated statement of financial position are: US$m Tax losses Insurance and investment contract liabilities Total Year ended 30 November 2013 Year ended 30 November 2012 105 21 126 100 32 132 The Group has not provided deferred tax liabilities of US$47m (2012: US$51m) in respect of unremitted earnings of operations in two jurisdictions from which a withholding tax charge would be incurred upon distribution as the Group does not consider it probable that this portion of accumulated earnings will be remitted in the foreseeable future. The Group has unused income tax losses carried forward in Hong Kong, Malaysia, New Zealand, Macau, the Philippines, Thailand, Korea and Taiwan. The tax losses of Hong Kong, Malaysia and New Zealand can be carried forward indefinitely. The tax losses of the remaining branches and subsidiaries are due to expire within the periods ending 2016 (Macau and the Philippines), 2018 (Thailand), and 2023 (Korea and Taiwan). 12. earnInGs per share Basic Basic earnings per share is calculated by dividing the net profit attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the year. The shares held by employee share-based trusts are not considered to be outstanding from the date of the purchase for purposes of computing basic and diluted earnings per share. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Basic earnings per share (US cents per share) Year ended 30 November 2013 Year ended 30 November 2012 2,822 11,974 23.57 3,019 11,997 25.16 diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. As of 30 November 2013 and 2012, the Group has potentially dilutive instruments which are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted to eligible employees, directors, officers and agents under various share-based compensation plans as described in note 39. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Adjustment for restricted share units, restricted stock purchase units and restricted stock subscription units granted under share-based compensation plans Weighted average number of ordinary shares for diluted earnings per share (million) Diluted earnings per share (US cents per share) Year ended 30 November 2013 Year ended 30 November 2012 2,822 11,974 32 12,006 23.50 3,019 11,997 11 12,008 25.14 At 30 November 2013, 6,919,294 share options (2012: 28,171,257) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. ANNUAL REPORT 2013 149 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION12. earnInGs per share (continued) operating profit after tax per share Operating profit after tax (see note 6) per share is calculated by dividing the operating profit after tax attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the year. As of 30 November 2013 and 2012, the Group has potentially dilutive instruments which are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted to eligible employees, directors, officers and agents under various share-based compensation plans as described in note 39. Basic (US cents per share) Diluted (US cents per share) 13. dIvIdends Dividends to shareholders of the Company attributable to the year: US$m Interim dividend declared and paid of 13.93 Hong Kong cents per share (2012: 12.33 Hong Kong cents per share) Final dividend proposed after the reporting date of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share)(1) Year ended 30 November 2013 Year ended 30 November 2012 20.91 20.86 18.00 17.98 Year ended 30 November 2013 Year ended 30 November 2012 215 442 657 191 382 573 Note: (1) Based upon shares outstanding at 30 November 2013 and 2012 that are entitled to a dividend, other than those held by employee share-based trusts. The above final dividend was proposed by the Board on 21 February 2014 subject to shareholders’ approval at the AGM to be held on 9 May 2014. The proposed final dividend has not been recognised as a liability at the reporting date. Dividends to shareholders of the Company attributable to the previous financial year, approved and paid during the year: US$m Year ended 30 November 2013 Year ended 30 November 2012 Final dividend in respect of the previous financial year, approved and paid during the year of 24.67 Hong Kong cents per share (2012: 22.00 Hong Kong cents per share) 380 339 150 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 14. InTanGIBle asseTs US$m Cost At 1 December 2011 Additions Disposals Foreign exchange movements At 30 November 2012 Additions Acquisition of subsidiaries Disposals Foreign exchange movements At 30 November 2013 Accumulated amortisation and impairment At 1 December 2011 Amortisation charge for the year Impairment Disposals Foreign exchange movements At 30 November 2012 Amortisation charge for the year Disposals Foreign exchange movements At 30 November 2013 Net book value At 30 November 2012 At 30 November 2013 Goodwill Computer software Distribution and other rights 126 – – – 126 – 1,009 – – 1,135 (6) – – – – (6) – – – (6) 120 1,129 193 67 (4) 7 263 33 3 (1) (9) 289 (84) (22) (57) 3 (3) (163) (26) 1 7 (181) 100 108 54 10 – 2 66 2 48 (5) (7) 104 (7) (2) (5) – – (14) (11) 5 – (20) 52 84 Total 373 77 (4) 9 455 35 1,060 (6) (16) 1,528 (97) (24) (62) 3 (3) (183) (37) 6 7 (207) 272 1,321 Of the above, US$1,284m (2012: US$248m) is expected to be recovered more than 12 months after the end of the reporting period. Impairment tests for goodwill Goodwill arises primarily in respect of the Group’s insurance business in Malaysia. Goodwill is tested for impairment by comparing the carrying amount of the cash generating unit, including goodwill, to the recoverable amount of that cash generating unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the goodwill allocated to that unit shall be regarded as not impaired. The recoverable amount is the value in use of the cash generating unit unless otherwise stated. The value in use is determined by calculating the present value of expected future cash flows plus a multiple of the present value of the new business generated. Value in use is calculated as an actuarially determined appraisal value, based on the embedded value of the business and the value from future new business. The key assumptions used in the embedded value calculations include investment returns, mortality, morbidity, persistency, expenses, and inflation. The value from future new business is calculated based on a combination of indicators which include, among others, a multiple of the projected one-year value of new business (VONB), taking into account recent production mix, business strategy and market trends. The Group may apply alternative method to estimate the value of future new business if the described method is not appropriate under the circumstances. ANNUAL REPORT 2013 151 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 15. InvesTmenTs In assoCIaTes and joInT venTure US$m Group At beginning of financial year Additions Distribution from associates Share of net profit Others Foreign exchange movements At end of financial year The Group’s interest in its principal associates and joint venture is as follows: Tata AIA Life Insurance Company Limited Place of Principal incorporation activity India Insurance Type of shares held – Ordinary AIA Vitality Company Limited(1) Hong Kong Development of wellness programmes – Ordinary – Preference Note: (1) The economic interest is 35%. All associates and joint venture are unlisted. Aggregated financial information of associates and joint venture US$m Share of income Share of expenses Share of net profit US$m Share of total assets Share of total liabilities Share of net assets Year ended 30 November 2013 Year ended 30 November 2012 91 30 (1) 14 (31) (10) 93 61 – (4) 16 19 (1) 91 Group’s interest % As at 30 November 2013 As at 30 November 2012 26% 50% 100% 26% 100% – Year ended 30 November 2013 Year ended 30 November 2012 157 (143) 14 144 (128) 16 As at 30 November 2013 As at 30 November 2012 843 (750) 93 854 (763) 91 Investments in associates and joint venture are held for their long-term contribution to the Group’s performance and so all amounts are expected to be realised more than 12 months after the end of the reporting period. The amount due from joint venture amounted to US$3m (2012: US$nil) is unsecured, non-interest bearing which is expected to be settled within one year. 152 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies16. properTy, planT and equIpmenT US$m Cost At 1 December 2011 Additions Disposals Net transfers to investment property Foreign exchange movements At 30 November 2012 Additions Acquisition of subsidiaries Disposals Net transfers from investment property Foreign exchange movements At 30 November 2013 Accumulated depreciation At 1 December 2011 Depreciation charge for the year Disposals Net transfers to investment property Foreign exchange movements At 30 November 2012 Depreciation charge for the year Disposals Net transfers from investment property Foreign exchange movements At 30 November 2013 Net book value At 30 November 2012 At 30 November 2013 Property held for use Computer hardware Fixtures and fittings and others 438 25 (12) (12) 18 457 13 33 (28) 35 (17) 493 (186) (14) 7 7 (9) (195) (15) 15 (2) 7 (190) 262 303 190 25 (14) – 6 207 29 4 (17) – (7) 216 (149) (20) 11 – (6) (164) (23) 10 – 6 298 76 (57) – 8 325 59 1 (32) – (4) 349 (232) (30) 50 – (6) (218) (32) 30 – 3 (171) (217) 43 45 107 132 Total 926 126 (83) (12) 32 989 101 38 (77) 35 (28) 1,058 (567) (64) 68 7 (21) (577) (70) 55 (2) 16 (578) 412 480 The Group holds freehold land outside Hong Kong and leasehold land under finance lease in the form of property, plant and equipment. An analysis of the carrying value of the Group’s interest in those land and land use rights is set out in note 24. The Group holds property, plant and equipment for its long-term use and, accordingly, the annual depreciation charge approximates to the amount expected to be recovered through consumption within 12 months after the end of the reporting period. ANNUAL REPORT 2013 153 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION17. InvesTmenT properTy US$m Cost At 1 December 2011 Additions Disposals Net transfers from property, plant and equipment Foreign exchange movements At 30 November 2012 Additions Acquisition of subsidiaries Disposals Net transfers to property, plant and equipment Foreign exchange movements At 30 November 2013 Accumulated depreciation At 1 December 2011 Charge for the year Disposals Net transfers from property, plant and equipment Foreign exchange movements At 30 November 2012 Charge for the year Disposals Net transfers to property, plant and equipment Foreign exchange movements At 30 November 2013 Net book value At 30 November 2012 At 30 November 2013 942 133 (1) 12 14 1,100 42 115 (3) (35) (18) 1,201 (46) (9) – (7) (3) (65) (16) 2 2 4 (73) 1,035 1,128 The Group holds investment property for long-term use, and so the annual amortisation charge approximates to the amount expected to be recovered within 12 months after the reporting period. The Group leases out its investment property under operating leases. The leases typically run for an initial period of one to twelve years, with an option to renew the lease based on future negotiations. Lease payments are usually negotiated every one to three years to reflect market rentals. There were no material contingent rentals earned as income for the year. Rental income generated from investment properties amounted to US$115m (2012: US$97m). Direct operating expenses (including repair and maintenance) on investment property that generates rental income amounted to US$25m (2012: US$15m). The Group owns investment property in the form of freehold land outside Hong Kong and leasehold land under finance lease. The Group does not hold freehold land in Hong Kong. An analysis of the carrying value of the Group’s interest in those land and land use right is set out in note 24. 154 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies17. InvesTmenT properTy (continued) The future minimum operating lease rental income under non-cancellable operating leases that the Group expects to receive in future periods may be analysed as follows: US$m Leases of investment property Expiring no later than one year Expiring later than one year and no later than five years Expiring after five years or more Total 18. faIr value of InvesTmenT properTy and properTy held for use US$m Carrying value(1) Investment property Property held for use (classified as property, plant and equipment) Leasehold land under operating lease (classified as prepayments in other assets) Total Fair value(1) Investment property (including land) Property held for use (including land) Total Note: As at 30 November 2013 As at 30 November 2012 86 100 5 191 78 78 2 158 As at 30 November 2013 As at 30 November 2012 1,128 303 453 1,884 3,180 1,388 4,568 1,035 262 168 1,465 2,773 1,153 3,926 (1) Carrying and fair values are presented before non-controlling interests and, for assets held in participating funds, before allocation to policyholders. 19. reInsuranCe asseTs US$m Amounts recoverable from reinsurers Ceded insurance and investment contract liabilities Total As at 30 November 2013 As at 30 November 2012 141 1,238 1,379 95 1,058 1,153 ANNUAL REPORT 2013 155 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION20. deferred aCquIsITIon and orIGInaTIon CosTs US$m Carrying amount Deferred acquisition costs on insurance contracts Deferred origination costs on investment contracts Value of business acquired Total US$m Movements in the year At beginning of financial year Deferral and amortisation of acquisition and origination costs Acquisition of subsidiaries Foreign exchange movements Impact of assumption changes Other movements At end of financial year As at 30 November 2013 As at 30 November 2012 14,836 13,465 603 299 677 19 15,738 14,161 Year ended 30 November 2013 Year ended 30 November 2012 14,161 1,432 322 (414) (9) 246 12,818 1,210 – 356 (11) (212) 15,738 14,161 Deferred acquisition and origination costs are expected to be recoverable over the mean term of the Group’s insurance and investment contracts, and liability adequacy testing is performed at least annually to confirm their recoverability. Accordingly, the annual amortisation charge, which varies with investment performance for certain universal life and unit-linked products, approximates to the amount which is expected to be realised within 12 months of the end of the reporting period. 21. fInanCIal InvesTmenTs The following tables analyse the Group’s financial investments by type and nature. The Group manages its financial investments in two distinct categories: Unit-linked Investments and Policyholder and Shareholder Investments. The investment risk in respect of Unit-linked Investments is generally wholly borne by our customers, and does not directly affect the profit for the year before tax. Furthermore, unit-linked contract holders are responsible for allocation of their policy values amongst investment options offered by the Group. Although profit for the year before tax is not affected by Unit-linked Investments, the investment return from such financial investments is included in the Group’s profit for the year before tax, as the Group has elected the fair value option for all Unit-linked Investments with corresponding changes in insurance and investment contract liabilities for unit-linked contracts. Policyholder and Shareholder Investments include all financial investments other than Unit-linked Investments. The investment risk in respect of Policyholder and Shareholder Investments is partially or wholly borne by the Group. Policyholder and Shareholder Investments are further categorised as Participating Funds and Other Policyholder and Shareholder. The Group has elected to separately analyse financial investments held by Participating Funds within Policyholder and Shareholder Investments as they are subject to local regulations that generally prescribe a minimum proportion of policyholder participation in declared dividends. The Group has elected the fair value option for debt and equity securities of Participating Funds. The Group’s accounting policy is to record an insurance liability for the proportion of net assets of the Participating Fund that would be allocated to policyholders assuming all performance would be declared as a dividend based upon local regulations as at the date of the statement of financial position. As a result the Group’s net profit for the year before tax is impacted by the proportion of investment return that would be allocated to shareholders as described above. 156 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies21. fInanCIal InvesTmenTs (continued) Other Policyholder and Shareholder Investments are distinct from Unit-linked Investments and Participating Funds as there is no direct contractual or regulatory requirement governing the amount, if any, for allocation to policyholders. The Group has elected to apply the fair value option for equity securities in this category and the available for sale classification in respect of the majority of debt securities in this category. The investment risk from investments in this category directly impacts the Group’s financial statements. Although a proportion of investment return may be allocated to policyholders through policyholder dividends, the Group’s accounting policy for insurance and certain investment contract liabilities utilises a net level premium methodology that includes best estimates as at the date of issue for non-guaranteed participation. To the extent investment return from these investments either is not allocated to participating contracts or varies from the best estimates, it will impact the Group’s profit before tax. In the following tables, “FVTPL” indicates financial investments classified at fair value through profit or loss and “AFS” indicates financial investments classified as available for sale. debt securities In compiling the tables, external ratings have been used where available. Where external ratings are not readily available an internal rating methodology has been adopted. The following conventions have been adopted to conform the various ratings. External ratings Standard and Poor’s Moody’s Internal ratings Reported as AAA AA+ to AA- A+ to A- BBB+ to BBB- BB+ and below Aaa Aa1 to Aa3 A1 to A3 Baa1 to Baa3 Ba1 and below 1 2+ to 2- 3+ to 3- 4+ to 4- AAA AA A BBB 5+ and below Below investment grade(1) Note: (1) Unless otherwise identified individually. ANNUAL REPORT 2013 157 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION21. fInanCIal InvesTmenTs (continued) debt securities (continued) Debt securities by type comprise the following: US$m Rating FVTPL FVTPL AFS Subtotal FVTPL Total Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked 30 November 2013 Government bonds – issued in local currency Singapore Thailand Philippines Malaysia China Indonesia Korea Other(1) Subtotal Government bonds – foreign currency Mexico South Africa Philippines Malaysia Indonesia Korea China Other(1) Subtotal Government agency bonds(2) AAA AA A BBB Below investment grade Not rated Subtotal Notes: AAA A BBB A AA BB AA BBB BBB BBB A BB A AA 1,694 – – 2,288 390 2 – 13 4,387 7 – – 75 71 17 – 20 190 1,112 486 574 275 17 – 2,464 – – – – – – – 5 5 12 8 16 – 8 – – 134 178 – – – – – – – 1,305 10,217 3,016 674 2,072 555 3,189 552 2,999 10,217 3,016 2,962 2,462 557 3,189 570 21,580 25,972 171 131 409 98 296 219 15 504 190 139 425 173 375 236 15 658 1,843 2,211 914 1,597 4,597 1,247 148 – 2,026 2,083 5,171 1,522 165 – 281 – 57 5 10 99 154 4 610 – – 81 2 4 8 1 15 111 120 57 22 10 2 2 3,280 10,217 3,073 2,967 2,472 656 3,343 574 26,582 190 139 506 175 379 244 16 673 2,322 2,146 2,140 5,193 1,532 167 2 8,503 10,967 213 11,180 (1) Of the total government bonds listed as “Other” at 30 November 2013, 78 per cent are rated as investment grade and a further 10 per cent are rated BB- and above. The balance is rated below BB- or not rated. (2) Government agency bonds comprise bonds issued by government-sponsored institutions such as national, provincial and municipal authorities; government-related entities; multilateral development banks and supranational organisations. 158 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 21. fInanCIal InvesTmenTs (continued) debt securities (continued) US$m 30 November 2013 Corporate bonds AAA AA A BBB Below investment grade Not rated Subtotal Structured securities(3) AAA AA A BBB Below investment grade Not rated Subtotal Total(4) Notes: Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked FVTPL FVTPL AFS Subtotal FVTPL Total 108 806 4,857 4,184 653 64 – 8 190 71 – 10 115 2,799 14,018 12,953 2,050 104 223 3,613 19,065 17,208 2,703 178 5 7 677 348 51 141 228 3,620 19,742 17,556 2,754 319 10,672 279 32,039 42,990 1,229 44,219 – 16 43 328 51 40 478 18,191 – – 19 – 108 40 167 629 – 15 581 157 – 45 798 64,763 – 31 643 485 159 125 1,443 83,583 – – – 3 – 2 5 2,168 – 31 643 488 159 127 1,448 85,751 (3) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (4) Debt securities of US$2,067m are restricted due to local regulatory requirements or other pledge restrictions. ANNUAL REPORT 2013 159 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION21. fInanCIal InvesTmenTs (continued) debt securities (continued) US$m Rating FVTPL FVTPL AFS Subtotal FVTPL Total Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked 30 November 2012 Government bonds – issued in local currency Singapore Thailand Philippines Malaysia China Indonesia Korea Other(1) Subtotal Government bonds – foreign currency Mexico South Africa Philippines Malaysia Indonesia Korea China Other(1) Subtotal Government agency bonds(2) AAA AA A BBB Below investment grade Not rated Subtotal Notes: AAA 1,864 A BB A AA BB AA BBB BBB BB A BB A AA – – 1,352 407 2 – 15 3,640 8 – 7 77 68 20 – 51 231 1,238 358 433 111 – – 2,140 – – – – – – – 10 10 19 5 14 – 18 – – 135 191 – – – – – – – 1,230 10,568 2,901 288 2,325 870 3,044 406 3,094 10,568 2,901 1,640 2,732 872 3,044 431 21,632 25,282 203 180 474 105 293 232 18 456 230 185 495 182 379 252 18 642 216 – 43 – – 145 128 3 535 2 2 115 2 2 4 2 7 3,310 10,568 2,944 1,640 2,732 1,017 3,172 434 25,817 232 187 610 184 381 256 20 649 1,961 2,383 136 2,519 1,000 1,147 4,731 1,313 87 – 2,238 1,505 5,164 1,424 87 – 118 46 24 2 – – 2,356 1,551 5,188 1,426 87 – 8,278 10,418 190 10,608 (1) Of the total government bonds listed as “Other” at 30 November 2012, 86 per cent are rated as investment grade and a further 11 per cent are rated BB- and above. The balance is rated below BB- or not rated. (2) Government agency bonds comprise bonds issued by government-sponsored institutions such as national, provincial and municipal authorities; government-related entities; multilateral development banks and supranational organisations. 160 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 21. fInanCIal InvesTmenTs (continued) debt securities (continued) US$m 30 November 2012 Corporate bonds AAA AA A BBB Below investment grade Not rated Subtotal Structured securities(3) AAA AA A BBB Below investment grade Not rated Subtotal Total(4) Notes: Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked FVTPL FVTPL AFS Subtotal FVTPL Total 80 905 3,810 4,171 455 19 9,440 4 – 43 285 34 36 402 15,853 – 38 224 102 2 14 380 – – 18 – 73 25 116 697 128 2,583 13,273 12,171 1,349 87 29,591 – 7 657 131 – 11 806 62,268 208 3,526 17,307 16,444 1,806 120 39,411 4 7 718 416 107 72 1,324 78,818 16 117 495 389 48 113 1,178 – – – 3 – 2 5 2,044 224 3,643 17,802 16,833 1,854 233 40,589 4 7 718 419 107 74 1,329 80,862 (3) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (4) Debt securities of US$1,967m are restricted due to local regulatory requirements or other pledge restrictions. The Group’s debt securities classified at fair value through profit or loss can be analysed as follows: US$m Debt securities – FVTPL Designated at fair value through profit or loss Held for trading Total As at 30 November 2013 As at 30 November 2012 20,944 44 20,988 18,545 49 18,594 ANNUAL REPORT 2013 161 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 21. fInanCIal InvesTmenTs (continued) equity securities Equity securities by type comprise the following: US$m 30 November 2013 Equity shares Interests in investment funds Total US$m 30 November 2012 Equity shares Interests in investment funds Total debt and equity securities US$m Debt securities Listed Hong Kong Overseas Unlisted Total Equity securities Listed Hong Kong Overseas Unlisted Total 162 AIA GROUP LIMITED Policyholder and shareholder Other policyholder and shareholder Participating funds Unit-linked Third-party interest FVTPL FVTPL Subtotal FVTPL FVTPL Total 3,032 1,537 4,569 5,026 1,289 6,315 8,058 2,826 10,884 3,325 12,333 15,658 – 426 426 11,383 15,585 26,968 Policyholder and shareholder Other policyholder and shareholder Participating funds Unit-linked Third-party interest FVTPL FVTPL Subtotal FVTPL FVTPL Total 2,246 1,288 3,534 4,708 948 5,656 6,954 2,236 9,190 3,077 11,157 14,234 – 232 232 10,031 13,625 23,656 As at 30 November 2013 As at 30 November 2012 5,150 55,122 60,272 25,479 85,751 1,225 11,991 13,216 13,752 26,968 3,345 55,051 58,396 22,466 80,862 815 10,749 11,564 12,092 23,656 FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 21. fInanCIal InvesTmenTs (continued) loans and deposits US$m Policy loans Mortgage loans on residential real estate Mortgage loans on commercial real estate Other loans Allowance for loan losses Loans Term deposits Promissory notes(1) Total Note: (1) The promissory notes are issued by a government. As at 30 November 2013 As at 30 November 2012 2,384 1,998 650 15 718 (14) 3,753 2,127 1,604 7,484 433 16 674 (7) 3,114 1,632 1,679 6,425 Certain term deposits with financial institutions and promissory notes are restricted due to local regulatory requirements or other pledge restrictions. The restricted balance held within term deposits and promissory notes is US$1,772m (2012: US$1,073m). Other loans include receivables from reverse repurchase agreements under which the Group does not take physical possession of securities purchased under the agreements. Sales or transfers of securities are not permitted by the respective clearing house on which they are registered while the loan is outstanding. In the event of default by the counterparty to repay the loan, the Group has the right to the underlying securities held by the clearing house. At 30 November 2013, the carrying value of such receivables is US$81m. ANNUAL REPORT 2013 163 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNotional amount Assets Liabilities Fair value 1,329 10,971 364 38 12,702 640 140 5 (369) 4 428 – 1 433 5 7 – – (3) (86) – – (89) – – – – 13,118 445 (89) 5,038 8,371 26 13,435 666 125 183 (183) 14,226 15 596 – 611 18 9 – – 638 – (41) – (41) – – – – (41) 22. derIvaTIve fInanCIal InsTrumenTs The Group’s non-hedge derivative exposure was as follows: US$m 30 November 2013 Foreign exchange contracts Forwards Cross-currency swaps Foreign exchange futures Currency options Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Equity index futures Netting Total 30 November 2012 Foreign exchange contracts Forwards Cross-currency swaps Currency options Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Equity index futures Netting Total 164 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 22. derIvaTIve fInanCIal InsTrumenTs (continued) Both pay and receive legs of the transaction have been disclosed in the column “notional amount”, as applicable. Of the total derivatives, US$3m (2012: US$3m) are listed in exchange or dealer markets and the rest are over-the-counter (OTC) derivatives. OTC derivative contracts are individually negotiated between contracting parties and not cleared through an exchange. OTC derivatives include forwards, swaps, and options. Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Derivative assets and derivative liabilities are recognised in the consolidated statement of financial position as financial assets at fair value through profit or loss and derivative financial liabilities respectively. The Group does not employ hedge accounting, although most of its derivative holdings may have the effect of an economic hedge of other exposures. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities in the consolidated statement of financial position as they do not represent the fair value of these transactions. The notional amounts in the previous table reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall scale of derivative transactions. foreign exchange contracts Foreign exchange forward and futures contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed price and settlement date. Currency options are agreements that give the buyer the right to exchange the currency of one country for the currency of another country at agreed prices and settlement dates. Currency swaps are contractual agreements that involve the exchange of both periodic and final amounts in two different currencies. Exposure to gain and loss on the foreign exchange contracts will increase or decrease over their respective lives as a function of maturity dates, interest and foreign exchange rates, implied volatilities of the underlying indices, and the timing of payments. Interest rate swaps Interest rate swaps are contractual agreements between two parties to exchange periodic payments in the same currency, each of which is computed on a different interest rate basis, on a specified notional amount. Most interest rate swaps involve the net exchange of payments calculated as the difference between the fixed and floating rate interest payments. other derivatives Warrants and options are option agreements that give the owner the right to buy or sell securities at an agreed price and settlement date. Equity index futures contracts are exchange-traded cash-settled contracts on the value of particular stock market index. The Group entered into equity index futures contracts to manage its equity market exposure. netting adjustment The netting adjustment is related to futures contracts executed through clearing house where the settlement arrangement satisfied the netting criteria under IFRS. Collateral under derivative transactions At 30 November 2013, the Group had posted cash collateral of US$21m (2012: US$nil) and pledged debt securities with carrying value of US$31m (2012: US$12m) for liabilities and held cash collateral of US$230m (2012: US$321m), deposit collateral of US$6m (2012: US$nil) and debt securities collateral with carrying value of US$24m (2012: US$nil) for assets in respect of derivative transactions. The Group did not sell or repledge the collateral received. These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and repurchase agreements. ANNUAL REPORT 2013 165 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION23. faIr value of fInanCIal InsTrumenTs The Group classifies all financial assets as either at fair value through profit or loss, or as available for sale, which are carried at fair value, or as loans and receivables, which are carried at amortised cost. Financial liabilities are classified as either at fair value through profit or loss or at amortised cost, except for investment contracts with DPF which are accounted for under IFRS 4. The following tables present the fair values of the Group’s financial assets and financial liabilities: US$m Notes Fair value Fair value through profit or loss Available for sale Cost/ amortised cost Total carrying value Total fair value 30 November 2013 Financial investments Loans and deposits Debt securities Equity securities Derivative financial instruments Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Financial assets 21 22 19 24 24 26 Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Derivative financial instruments Other liabilities Financial liabilities – 20,988 26,968 445 – – – – – 7,484 64,763 – – – – – – – – – 141 1,472 1,354 2,228 7,484 85,751 26,968 445 141 1,472 1,354 2,228 7,517 85,751 26,968 445 141 1,472 1,354 2,228 48,401 64,763 12,679 125,843 125,876 Notes 28 30 31 22 33 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value 7,429 – – 89 426 7,944 1,269 2,126 1,889 – 2,678 7,962 8,698 2,126 1,889 89 3,104 15,906 8,698 2,091 1,889 89 3,104 15,871 166 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 23. faIr value of fInanCIal InsTrumenTs (continued) US$m Notes Fair value Fair value through profit or loss Available for sale Cost/ amortised cost Total carrying value Total fair value 30 November 2012 Financial investments Loans and deposits Debt securities Equity securities Derivative financial instruments Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Financial assets 21 22 19 24 24 26 Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Derivative financial instruments Other liabilities Financial liabilities – 18,594 23,656 638 – – – – – 6,425 62,268 – – – – – – – – – 95 1,231 1,196 2,948 6,425 80,862 23,656 638 95 1,231 1,196 2,948 6,455 80,862 23,656 638 95 1,231 1,196 2,948 42,888 62,268 11,895 117,051 117,081 Notes 28 30 31 22 33 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value 7,533 – – 41 232 7,806 1,332 766 1,792 – 2,580 6,470 8,865 766 1,792 41 2,812 14,276 8,865 766 1,792 41 2,812 14,276 The carrying amount of assets included in the above tables represents the maximum credit exposure. Foreign currency exposure, including the net notional amount of foreign currency derivative positions, is shown in note 37 for the Group’s key foreign exchange exposures. The fair value of investment contract liabilities measured at amortised cost is not considered to be materially different from the amortised cost carrying value. The carrying value of financial instruments expected to be settled within 12 months (after taking into account valuation allowances, where applicable) is not considered to be materially different from the fair value. fair value measurements on a recurring basis The Group measures at fair value financial instruments classified at fair value through profit or loss, available for sale securities portfolios, derivative assets and liabilities, investments held by investment funds which are consolidated, investments in non- consolidated investment funds and certain investment contract liabilities on a recurring basis. The fair value of a financial instrument is the amount that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ANNUAL REPORT 2013 167 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 23. faIr value of fInanCIal InsTrumenTs (continued) fair value measurements on a recurring basis (continued) The degree of judgement used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgement is used in measuring fair value. Conversely, financial instruments traded in other than active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgement. An active market is one in which transactions for the asset or liability being valued occur with sufficient frequency and volume to provide pricing information on an ongoing basis. An other than active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions. The following methods and assumptions were used by the Group to estimate the fair value of financial instruments. financial assets and liabilities loans and receivables For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash flows using interest rates offered for similar loans to borrowers with similar credit ratings. The fair values of mortgage loans are estimated by discounting future cash flows using interest rates currently being offered in respect of similar loans to borrowers with similar credit ratings. The fair values of fixed rate policy loans are estimated by discounting cash flows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying values of policy loans with variable rates approximate to their fair values. debt securities and equity securities The fair values of equity securities are based on quoted market prices or, if unquoted, on estimated market values generally based on quoted prices for similar securities. Fair values for fixed interest securities are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated using values obtained from brokers, private pricing services or by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investment. Priority is given to values from independent sources when available, but overall the source of pricing and/or valuation technique is chosen with the objective of arriving at the price at which an orderly transaction would take place between market participants on the measurement date. The inputs to determining fair value that are relevant to fixed interest securities include, but not limited to risk-free interest rates, the obligor’s credit spreads, foreign exchange rates, and credit default rates. For holdings in hedge funds and limited partnerships, fair values are determined based on the net asset values provided by the general partner or manager of each investment, the accounts of which are generally audited on an annual basis. The transaction price is used as the best estimate of fair value at inception. 168 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies23. faIr value of fInanCIal InsTrumenTs (continued) financial assets and liabilities (continued) derivative financial instruments The Group values its derivative financial assets and liabilities using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value a derivative depends on the contract terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The Group generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgement. Examples of inputs that are generally observable include foreign exchange spot and forward rates, benchmark interest rate curves and volatilities for commonly traded option products. Examples of inputs that may be unobservable include volatilities for less commonly traded option products and correlations between market factors. Cash and cash equivalents The carrying amount of cash approximates its fair value. reinsurance receivables The carrying amount of amounts receivable from reinsurers is not considered materially different to their fair value. fair value of securities sold under repurchase agreements and the associated payables The contract values of payables under repurchase agreements approximate their fair value as these obligations are short-term in nature. other assets The carrying amount of other assets is not materially different to their fair value. The fair values of deposits with banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics. Investment contract liabilities For investment contract liabilities, the fair values have been estimated using a discounted cash flow approach based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. For investment contracts where the investment risk is borne by the policyholder, the fair value generally approximates to the fair value of the underlying assets. Investment contracts with DPF enable the contract holder to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating business and are measured and classified according to the Group practice for insurance contract liabilities and hence are disclosed within note 27. These are not measured at fair value as there is currently no agreed definition of fair value for investment and insurance contracts with DPF under IFRS. In the absence of any agreed methodology, it is not possible to provide a range of estimates within which fair value is likely to fall. The IASB is expecting to address this issue in Phase II of its insurance contracts project. Borrowings The fair values of borrowings with stated maturities have been estimated based on discounting future cash flows using the interest rates currently applicable to deposits of similar maturities or prices obtained from brokers. ANNUAL REPORT 2013 169 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION23. faIr value of fInanCIal InsTrumenTs (continued) financial assets and liabilities (continued) other liabilities The fair values of other unquoted liabilities is estimated by discounting expected future cash flows using current market rates applicable to their yield, credit quality and maturity, except for those with no stated maturity, where the carrying value approximates to fair value. fair value hierarchy Assets and liabilities recorded at fair value in the consolidated statement of financial position are measured and classified in a hierarchy for disclosure purposes consisting of three “levels” based on the observability of inputs available in the marketplace used to measure their fair values as discussed below: • Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access as of the measurement date. Market price data is generally obtained from exchange or dealer markets. The Group does not adjust the quoted price for such instruments. Assets measured at fair value on a recurring basis and classified as Level 1 are actively traded listed equities. The Group considers that government debt securities issued by G7 countries (the United States, Canada, France, Germany, Italy, Japan, the United Kingdom) and traded in a dealer market to be Level 1, until they no longer trade with sufficient frequency and volume to be considered actively traded. • Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset and liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 generally include government securities issued by non-G7 countries, most investment grade corporate bonds, hedge fund investments and derivative contracts. • Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Unobservable inputs are only used to measure fair value to the extent that relevant observable inputs are not available, allowing for circumstances in which there is little, if any, market activity for the asset or liability. Assets and liabilities measured at fair value on a recurring basis and classified as Level 3 include certain classes of structured securities, certain derivative contracts, private equity and real estate fund investments, and direct private equity investments. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Group’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement. In making the assessment, the Group considers factors specific to the asset or liability. 170 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies23. faIr value of fInanCIal InsTrumenTs (continued) fair value hierarchy (continued) A summary of investments carried at fair value according to fair value hierarchy is given below: US$m 30 November 2013 Financial assets Available for sale Debt securities At fair value through profit or loss Debt securities Participating funds Unit-linked Other policyholder and shareholder Equity securities Participating funds Unit-linked Other policyholder and shareholder Derivative financial instruments Total Total % Financial liabilities Investment contract liabilities Derivative financial instruments Other liabilities Total Total % Fair value hierarchy Level 1 Level 2 Level 3 Total – – – – 4,359 14,369 5,965 1 24,694 21.8 – – 426 426 5.4 63,983 780 64,763 17,826 1,777 399 11 1,715 86 442 86,239 76.2 – 89 – 89 1.1 365 391 230 199 – 264 2 2,231 2.0 7,429 – – 7,429 93.5 18,191 2,168 629 4,569 16,084 6,315 445 113,164 100.0 7,429 89 426 7,944 100.0 ANNUAL REPORT 2013 171 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 23. faIr value of fInanCIal InsTrumenTs (continued) fair value hierarchy (continued) US$m 30 November 2012 Financial assets Available for sale Debt securities At fair value through profit or loss Debt securities Participating funds Unit-linked Other policyholder and shareholder Equity securities Participating funds Unit-linked Other policyholder and shareholder Derivative financial instruments Total Total % Financial liabilities Investment contract liabilities Derivative financial instruments Other liabilities Total Total % Fair value hierarchy Level 1 Level 2 Level 3 Total – – – – 3,331 12,700 5,461 3 21,495 20.4 – – 232 232 3.0 61,750 518 62,268 15,544 1,757 474 72 1,534 152 631 81,914 77.9 – 41 – 41 0.5 309 287 223 131 – 275 4 1,747 1.7 7,533 – – 7,533 96.5 15,853 2,044 697 3,534 14,234 5,888 638 105,156 100.0 7,533 41 232 7,806 100.0 172 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 23. faIr value of fInanCIal InsTrumenTs (continued) fair value hierarchy (continued) The tables below set out a summary of changes in the Group’s Level 3 financial assets and liabilities for the year ended 30 November 2013 and 2012. The tables reflect gains and losses, including gains and losses on financial assets and liabilities categorised as Level 3 as at 30 November 2013 and 2012. level 3 financial assets and liabilities US$m At 1 December 2012 Realised gains Net movement on investment contract liabilities Total gains/(losses) relating to instruments still held at the reporting date Reported in the consolidated income statement Reported in the consolidated statement of comprehensive income Acquisition of subsidiaries Purchases Sales Settlements Transfer into Level 3 Transfer out of Level 3 At 30 November 2013 US$m At 1 December 2011 Realised gains/(losses) Net movement on investment contract liabilities Total gains/(losses) relating to instruments still held at the reporting date Reported in the consolidated income statement Reported in the consolidated statement of comprehensive income Purchases Sales Settlements Transfer into Level 3 Transfer out of Level 3 At 30 November 2012 Debt securities Equity securities Derivative financial assets Derivative financial liabilities Investment contracts 1,337 406 1 – 64 (25) 133 450 (23) (70) 26 (127) 1,766 5 – 4 (8) 48 42 (34) – – – 463 4 – – 2 – – 1 – (5) – – 2 – – – – – – – – – – – – (7,533) – 104 – – – – – – – – (7,429) Debt securities Equity securities Derivative financial assets Derivative financial liabilities Investment contracts 861 34 – 100 41 517 (18) (78) 88 (208) 1,337 375 (1) – (12) 12 73 (33) (1) 4 (11) 406 1 – – 1 – 3 – – – (1) 4 – – – – – – – – – – – (7,048) – (485) – – – – – – – (7,533) ANNUAL REPORT 2013 173 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 23. faIr value of fInanCIal InsTrumenTs (continued) fair value hierarchy (continued) level 3 financial assets and liabilities (continued) Realised gains and losses arising from the disposal of the Group’s Level 3 financial assets and liabilities are presented in the consolidated income statement. Movements in investment contract liabilities at fair value are offset by movements in the underlying portfolio of matching assets. Details of the movement in investment contract liabilities are provided in note 28. There are no differences between the fair values on initial recognition and the amounts determined using valuation techniques since the models adopted are calibrated using initial transaction prices. During the year, there were no material transfers between Level 1 and Level 2 fair value measurements. 24. oTher asseTs US$m Prepayments Operating leases of leasehold land Other Accrued investment income Pension scheme assets Defined benefit pension scheme surpluses Insurance receivables Due from insurance and investment contract holders Due from agents, brokers and intermediaries Receivables from sales of investments Other receivables Total As at 30 November 2013 As at 30 November 2012 453 227 1,354 14 870 56 155 391 3,520 168 129 1,196 11 725 38 80 388 2,735 All amounts other than prepayments in respect of operating leases of leasehold land are expected to be recovered within 12 months after the end of the reporting period. Prepayments in respect of operating leases of land are expected to be recovered over the period of the leases shown below. 174 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies24. oTher asseTs (continued) Below sets out an analysis of the Group’s interest in land and land use rights: As at 30 November 2013 As at 30 November 2012 Property, plant and equipment Investment property Prepayments of operating leases Property, plant and equipment Investment property Prepayments of operating leases Total US$m Land held in Hong Kong Long-term leases (>50 years) Medium-term leases (10 to 50 years) Short-term leases (<10 years) 589 292 924 43 – – – – – – 232 58 105 – – – – 56 105 – 453 43 – – 81 1 – – 590 – – 114 – – – – – – – 58 110 – 168 1,319 125 704 Land held outside Hong Kong Freehold 75 157 Long-term leases (>50 years) Medium-term leases (10 to 50 years) Short-term leases (<10 years) 2 – – – – – Total 120 746 Total 633 – – 195 59 110 – 997 25. ImpaIrmenT of fInanCIal asseTs In accordance with the Group’s accounting policies, impairment reviews were performed for available for sale securities and loans and receivables. available for sale debt securities During the year ended 30 November 2013, no impairment losses (2012: US$nil) were recognised in respect of available for sale debt securities. The carrying amounts of available for sale debt securities that are individually determined to be impaired at 30 November 2013 was US$66m (2012: US$64m). loans and receivables The Group’s primary potential credit risk exposure in respect of loans and receivables arises in respect of policy loans and a portfolio of mortgage loans on residential and commercial real estate (see note 21 Financial investments for further details). The Group’s credit exposure on policy loans is mitigated because, if and when the total indebtedness on any policy, including interest due and accrued, exceeds the cash surrender value, the policy terminates and becomes void. The Group has a first lien on all policies which are subject to policy loans. The carrying amounts of loans and receivables that are individually determined to be impaired at 30 November 2013 was US$22m (2012: US$17m). The Group has a portfolio of residential and commercial mortgage loans which it originates. To the extent that any such loans are past their due dates specific allowance is made, together with a collective allowance, based on historical delinquency. Insurance receivables are short-term in nature and cover is not provided if consideration is not received. An ageing of accounts receivable is not provided as all amounts are due within one year and cover is cancelled if consideration is not received. ANNUAL REPORT 2013 175 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 26. Cash and Cash equIvalenTs US$m Cash Cash equivalents Total(1) Note: As at 30 November 2013 As at 30 November 2012 1,205 1,023 2,228 1,581 1,367 2,948 (1) Of cash and cash equivalents, US$428m (2012: US$735m) are held to back unit-linked contracts. Cash comprises cash at bank and cash in hand. Cash equivalents comprise bank deposits and highly liquid short-term investments with maturities at acquisition of three months or less and money market funds. Accordingly, all such amounts are expected to be realised within 12 months after the reporting period. 27. InsuranCe ConTraCT lIaBIlITIes The movement of insurance contract liabilities (including liabilities in respect of investment contracts with DPF) is shown as follows: US$m At beginning of financial year Valuation premiums and deposits Liabilities released for policy termination or other policy benefits paid and related expenses Fees from account balances Accretion of interest Foreign exchange movements Change in net asset values attributable to policyholders Acquisition of subsidiaries Other movements At end of financial year Year ended 30 November 2013 Year ended 30 November 2012 90,574 17,755 (10,917) (843) 3,288 (2,674) 706 5,396 116 78,752 15,213 (9,906) (702) 2,875 2,620 1,728 – (6) 103,401 90,574 176 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies27. InsuranCe ConTraCT lIaBIlITIes (continued) Business description The table below summarises the key variables on which insurance and investment contract cash flows depend. Type of contract Material terms and conditions Participating funds Traditional participating life assurance with DPF Other participating business Traditional non-participating life Participating products combine protection with a savings element. The basic sum assured, payable on death or maturity, may be enhanced by dividends, the aggregate amount of which is determined by the performance of a distinct fund of assets and liabilities. The timing of dividend declarations is at the discretion of the insurer. Local regulations generally prescribe a minimum proportion of policyholder participation in declared dividends Participating products combine protection with a savings element. The basic sum assured, payable on death or maturity, may be enhanced by dividends, the timing or amount of which is at the discretion of the insurer taking into account factors such as investment experience Benefits paid on death, maturity, sickness or disability that are fixed and guaranteed and not at the discretion of the insurer Accident and health These products provide morbidity or sickness benefits and include health, disability, critical illness and accident cover Nature of benefits and compensation for claims Factors affecting contract cash flows Minimum guaranteed benefits may be enhanced based on investment experience and other considerations • Investment performance • Expenses • Mortality • Surrenders Key reportable segments Singapore, China, Malaysia Minimum guaranteed benefits may be enhanced based on investment experience and other considerations • Investment performance • Expenses • Mortality • Surrenders Hong Kong, Thailand, Other Markets All(1) All(1) Benefits, defined in the insurance contract, are determined by the contract and are not affected by investment performance or the performance of the contract as a whole Benefits, defined in the insurance contract, are determined by the contract and are not affected by investment performance or the performance of the contract as a whole • Mortality • Morbidity • Lapses • Expenses • Mortality • Morbidity • Lapses • Expenses • Claims experience Unit-linked Universal life Unit-linked contracts combine savings with protection, the cash value of the policy depending on the value of unitised funds Benefits are based on the value of the unitised funds and death benefits The customer pays flexible premiums subject to specified limits accumulated in an account balance which are credited with interest at a rate set by the insurer, and a death benefit which may be varied by the customer Benefits are based on the account balance and death benefit • Investment performance All(1) • Lapses • Expenses • Mortality • Investment performance All(1) • Crediting rates • Lapses • Expenses • Mortality Note: (1) Other than the Group Corporate Centre segment. ANNUAL REPORT 2013 177 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION27. InsuranCe ConTraCT lIaBIlITIes (continued) methodology and assumptions The most significant items to which profit for the year and shareholders’ equity are sensitive are market, insurance and lapse risks which are shown in the table below. Indirect exposure indicates that there is a second order impact. For example, whilst the profit for the year attributable to shareholders is not directly affected by investment income earned where the investment risk is borne by policyholders (for example, in respect of unit-linked contracts), there is a second-order effect through the investment management fees which the Group earns by managing such investments. The distinction between direct and indirect exposure is not intended to indicate the relative sensitivity to each of these items. Where the direct exposure is shown as being “net neutral”, this is because the exposure to market and credit risk is offset by a corresponding movement in insurance contract liabilities. Type of contract Traditional participating life assurance with DPF Participating funds Other participating business Traditional non-participating life assurance Accident and health Pension Market and credit risk Direct exposure Insurance and investment contract liabilities Risks associated with related investment portfolio Indirect exposure Significant insurance and lapse risks • Net neutral except for the insurer’s share of participating investment performance • Net neutral except for the insurer’s share of participating investment performance • Guarantees • Guarantees • Net neutral except for the insurer’s share of participating investment performance • Net neutral except for the insurer’s share of participating investment performance • Guarantees • Guarantees • Investment performance subject to smoothing through dividend declarations • Impact of persistency on future dividends • Mortality • Investment performance • Impact of persistency on future dividends • Mortality • Investment performance • Credit risk • Asset-liability mismatch risk • Loss ratio • Asset-liability mismatch risk • Net neutral • Asset-liability mismatch risk • Guarantees • Asset-liability mismatch risk • Investment performance • Credit risk • Asset-liability mismatch risk • Net neutral • Asset-liability mismatch risk • Not applicable • Mortality • Persistency • Morbidity • Not applicable • Claims experience • Morbidity • Persistency • Performance-related • Persistency investment management fees Unit-linked • Net neutral • Net neutral • Performance-related Universal life • Guarantees • Asset-liability mismatch risk • Investment performance • Credit risk • Asset-liability mismatch risk investment management fees • Spread between earned rate and crediting rate to policyholders • Persistency • Mortality • Mortality • Persistency • Withdrawals The Group is also exposed to currency risk in respect of its operations, and to interest rate risk, credit risk and equity price risk on assets representing net shareholders’ equity, and to expense risk to the extent that actual expenses exceed those that can be charged to insurance and investment contract holders on non-participating business. Expense assumptions applied in the Group’s actuarial valuation models assume a continuing level of business volumes. 178 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies27. InsuranCe ConTraCT lIaBIlITIes (continued) methodology and assumptions (continued) valuation interest rates As at 30 November 2013 and 2012, the ranges of applicable valuation interest rates for traditional insurance contracts, which vary by territory, year of issuance and products, within the first 20 years are as follows: Hong Kong Thailand Singapore Malaysia China Korea Philippines Indonesia Vietnam Australia New Zealand Taiwan Sri Lanka 28. InvesTmenT ConTraCT lIaBIlITIes US$m At beginning of financial year Effect of foreign exchange movements Investment contract benefits Fees charged Net (withdrawals)/deposits and other movements At end of financial year As at 30 November 2013 As at 30 November 2012 3.50% – 7.50% 3.50% – 7.50% 3.25% – 9.00% 3.25% – 9.00% 2.00% – 7.25% 2.00% – 7.25% 3.70% – 8.90% 3.14% – 8.90% 2.75% – 7.00% 2.75% – 7.00% 3.33% – 6.50% 3.33% – 6.50% 2.20% – 9.20% 2.20% – 9.20% 3.10% – 10.80% 3.05% – 10.80% 5.07% – 12.25% 5.07% – 12.25% 3.83% – 7.11% 3.83% – 7.11% 3.83% – 5.75% 3.83% – 5.75% 1.75% – 6.50% 1.75% – 6.50% 9.69% – 12.69% – Year ended 30 November 2013 Year ended 30 November 2012 8,865 (83) 301 (187) (198) 8,698 8,360 107 540 (189) 47 8,865 29. effeCT of ChanGes In assumpTIons and esTImaTes The table below sets out the sensitivities of the assumptions in respect of insurance and investment contracts with DPF to key variables. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, and deferred acquisition costs and does not allow for offsetting movements in the fair value of financial assets backing those liabilities. US$m (Increase)/decrease in insurance contract liabilities, increase/(decrease) in equity and profit before tax 0.5 pps increase in investment return 0.5 pps decrease in investment return 10% increase in expenses 10% increase in mortality rates 10% increase in lapse/discontinuance rates As at 30 November 2013 As at 30 November 2012 12 (15) (3) (19) (18) 8 (10) (2) (16) (19) ANNUAL REPORT 2013 179 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 29. effeCT of ChanGes In assumpTIons and esTImaTes (continued) Future policy benefits for traditional life insurance policies (including investment contracts with DPF) are calculated using a net level premium valuation method with reference to best estimate assumptions set at policy inception date unless a deficiency arises on liability adequacy testing. There is no impact of the above assumption sensitivities on the carrying amount of traditional life insurance liabilities as the sensitivities presented would not have triggered a liability adequacy adjustment. During the years presented there was no effect of changes in assumptions and estimates on the Group’s traditional life products. For interest sensitive insurance contracts, such as universal life products and unit-linked contracts, assumptions are made at each reporting date including mortality, persistency, expenses, future investment earnings and future crediting rates. The impact of changes in assumptions on the valuation of insurance and investment contracts with DPF was US$9m decrease in profit (2012: US$9m decrease). 30. BorrowInGs US$m Bank loans and bank credit facilities Bank overdrafts Medium term notes Total As at 30 November 2013 As at 30 November 2012 809 176 1,141 2,126 493 273 – 766 Properties with a book value of US$882m at 30 November 2013 (2012: US$893m) and a fair value of US$2,020m at 30 November 2013 (2012: US$2,008m) and cash and cash equivalents with a book value of US$19m (2012: US$2m) are pledged as security with respect to amounts disclosed as bank loans and bank credit facilities above. Interest on loans reflects market rates of interest. Interest expense on borrowings is shown in note 10. Further information relating to interest rates and the maturity profile of borrowings is presented in note 37. On 30 November 2012, the Group obtained a 12-month bank loan facility of HK$2,507m (approximately US$323m). The loan bore interest based upon HIBOR. Subsequently on 9 July 2013, the Group entered into a 3-year multicurrency bank facility in an aggregate amount equal to US$323m with floating rate interest for refinancing the existing loan. On 10 December 2012, the Group obtained an 18-month acquisition credit facility of US$1,725m. The loan bore interest based upon LIBOR and was fully repaid during the year ended 30 November 2013. On 13 March 2013, the Group issued a 5-year and a 10-year fixed rate medium term notes at nominal amount of US$500m each; these notes bear annual interest of 1.750 per cent and 3.125 per cent respectively. On 4 November 2013, the Group issued a 3-year floating rate medium term note at nominal amount of HK$1,160m (approximately US$150m); the note bears interest based upon HIBOR. These medium term notes are listed on The Stock Exchange of Hong Kong Limited. The net proceeds from these notes are used for general corporate purposes and to refinance the unsecured credit facility associated with the acquisition. On 8 October 2013, the Group entered into a committed multicurrency revolving credit facility in an aggregate amount equal to US$300m. The revolving credit facility bears floating rate interest. 180 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies31. oBlIGaTIons under seCurITIes lendInG and repurChase aGreemenTs The Group has entered into securities lending agreement whereby securities are loaned to a national monetary authority. In addition, the Group has entered into repurchase agreements whereby securities are sold to third parties with a concurrent agreement to repurchase the securities at a specified date. The securities related to these agreements are not derecognised from the Group’s consolidated statement of financial position, but are retained within the appropriate financial asset classification. During the term of the securities lending and repurchase agreements, the Group is restricted from selling or pledging the transferred debt securities. The following table specifies the amounts included within financial investments subject to securities lending or repurchase agreements which do not qualify for derecognition at each year end: US$m Debt securities – AFS Repurchase agreements Debt securities – FVTPL Securities lending Repurchase agreements Total As at 30 November 2013 As at 30 November 2012 1,552 1,799 312 332 2,196 – 47 1,846 Collateral The securities lending transactions outstanding as at 30 November 2013 are conducted with a national monetary authority on securities denominated in local currency issued by the same authority. The following table shows the obligations under repurchase agreements at each year end: US$m Repurchase agreements 32. provIsIons US$m At 1 December 2011 Charged to the consolidated income statement Exchange differences Released during the year Utilised during the year At 30 November 2012 Charged to the consolidated income statement Acquisition of subsidiaries Exchange differences Released during the year Utilised during the year At 30 November 2013 As at 30 November 2013 As at 30 November 2012 1,889 1,792 Employee benefits Other Total 84 16 1 (5) (10) 86 15 2 (3) (11) (1) 88 96 78 3 (7) (52) 118 59 10 (2) (15) (89) 81 180 94 4 (12) (62) 204 74 12 (5) (26) (90) 169 other provisions Other provisions comprise provisions in respect of regulatory matters, litigation, reorganisation and restructuring. In view of the diverse nature of the matters provided for and the contingent nature of the matters to which they relate, the Group is unable to provide an accurate assessment of the term over which provisions are expected to be utilised. ANNUAL REPORT 2013 181 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION33. oTher lIaBIlITIes US$m Trade and other payables Third-party interests in consolidated investment funds Payables from purchases of investments Reinsurance payables Total As at 30 November 2013 As at 30 November 2012 2,138 426 239 301 3,104 1,949 232 449 182 2,812 Third-party interests in consolidated investment funds consist of third-party unit holders’ interests in consolidated investment funds which are reflected as a liability since they can be put back to the Group for cash. Trade and other payables are all expected to be settled within 12 months after the end of the reporting period. The realisation of third-party interests in investment funds cannot be predicted with accuracy since these represent the interests of third-party unit holders in consolidated investment funds held to back insurance and investment contract liabilities and are subject to market risk and the actions of third-party investors. 34. share CapITal and reserves share capital Authorised Ordinary shares of US$1 each Issued and fully paid As at 30 November 2013 As at 30 November 2012 Million shares US$m Million shares US$m 20,000 20,000 20,000 20,000 At beginning and end of the financial year 12,044 Share premium 12,044 1,914 12,044 12,044 1,914 There were no shares issued under share option schemes during the year ended 30 November 2013 (2012: nil). Except for 74,598,995 shares (2012: 53,653,843 shares) of the Company held by the employee share-based trusts, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year ended 30 November 2013. These purchases were made by the relevant scheme trustees on the Hong Kong Stock Exchange. These shares are held on trust for participants of the relevant schemes and therefore were not cancelled. Please refer to note 39 for details. Share premium of US$1,914m represents the difference between the net book value of the Group on acquisition by the Company of US$13,958m and the nominal value of the share capital issued of US$12,044m. reserves fair value reserve The fair value reserve comprises the cumulative net change in the fair value of available for sale securities held at the end of the reporting period. foreign currency translation reserve The foreign currency translation reserve comprises all foreign currency exchange differences arising from the translation of the financial statements of foreign operations. 182 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies34. share CapITal and reserves (continued) reserves (continued) employee share-based trusts Trusts have been established to acquire shares of the Company for distribution to participants in future periods through the share- based compensation schemes. Those shares acquired by the trusts, to the extent not transferred to the participants upon vesting, are reported as “Employee share-based trusts”. other reserves Other reserves include the impact of merger accounting for business combinations under common control and share-based compensation. 35. non-ConTrollInG InTeresTs US$m Equity shares in subsidiaries Share of earnings Share of other reserves Total As at 30 November 2013 As at 30 November 2012 63 45 37 145 60 29 42 131 36. Group CapITal sTruCTure Capital management approach The Group’s capital management objectives focus on maintaining a strong capital base to support the development of its business, maintaining the ability to move capital freely and satisfying regulatory capital requirements at all times. The Group’s capital management function oversees all capital-related activities of the Group and assists senior management in making capital decisions. The capital management function participates in decisions concerning asset-liability management, strategic asset allocation and ongoing solvency management. This includes ensuring capital considerations are paramount in the strategy and business planning processes and when determining the AIA’s capacity to pay dividends to shareholders. regulatory solvency The Group is in compliance with the solvency and capital adequacy requirements applied by its regulators. The Group’s primary insurance regulator at the AIA Company Limited (AIA Co.) and AIA International Limited (AIA International) levels is the Hong Kong Office of the Commissioner of Insurance (HKOCI), which requires that AIA Co. and AIA International meet the solvency margin requirements of the Hong Kong Insurance Companies Ordinance (HKICO). The HKICO (among other matters) sets minimum solvency margin requirements that an insurer must meet in order to be authorised to carry on insurance business in or from Hong Kong. The HKOCI requires AIA Co. and AIA International to maintain an excess of assets over liabilities of not less than the required minimum solvency margin. The amount required under the HKICO is 100 per cent of the required minimum solvency margin. The excess of assets over liabilities to be maintained by AIA Co. and AIA International required by the HKOCI is not less than 150 per cent of the required minimum solvency margin. The capital positions of the Group’s two principal operating companies as of 30 November 2013 and 2012 are as follows: US$m AIA Co. AIA International 30 November 2013 30 November 2012 Total available capital 6,057 4,752 Required capital Solvency ratio 1,399 1,422 433% 334% Total available capital 4,811 3,108 Required capital Solvency ratio 1,362 1,415 353% 220% For these purposes, the Group defines total available capital as the amount of assets in excess of liabilities measured in accordance with the HKICO and “required capital” as the minimum required margin of solvency calculated in accordance with the HKICO. The solvency ratio is the ratio of total available capital to required capital. ANNUAL REPORT 2013 183 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION36. Group CapITal sTruCTure (continued) regulatory solvency (continued) The Group’s individual branches and subsidiaries are also subject to the supervision of government regulators in the jurisdictions in which those branches and subsidiaries operate and, in relation to subsidiaries, in which they are incorporated. The various regulators overseeing the Group actively monitor our local solvency positions. AIA Co. and AIA International submit annual filings to the HKOCI of their solvency margin position based on their annual audited accounts, and the Group’s other operating units perform similar annual filings with their respective local regulators. The ability of the Company to pay dividends to shareholders and to meet other obligations depends ultimately on dividends and other payments being received from its operating subsidiaries and branches, which are subject to contractual, regulatory and other limitations. The various regulators overseeing the individual branches and subsidiaries of the Group have the discretion to impose additional restrictions on the ability of those regulated subsidiaries and branches to make payment of dividends or other distributions and payments to AIA Co., including increasing the required margin of solvency that an operating unit must maintain. For example, capital may not be remitted from Thailand without the consent of the Office of the Insurance Commission in Thailand. The payment of dividends, distributions and other payments to shareholders is subject to the oversight of the HKOCI. Capital and regulatory orders specific to the Group As of 30 November 2013, the requirements and restrictions summarised below may be considered material to the Group and remain in effect unless otherwise stated. hong Kong office of the Commissioner of Insurance AIA Group Limited has given to the Insurance Authority an undertaking that AIA Group Limited will: (i) ensure that (a) AIA Co. and AIA International will at all times maintain a solvency ratio of not less than 150 per cent, both on an individual insurer basis and on an AIA Co./AIA International consolidated basis; (b) it will not withdraw capital or transfer any funds or assets out of either AIA Co. or AIA International that will cause AIA Co.’s or AIA International’s solvency ratio to fall below 150 per cent, except with, in either case, the prior written consent of the Insurance Authority; and (c) should the solvency ratio of either AIA Co. or AIA International fall below 150 per cent, AIA Group Limited will take steps as soon as possible to restore it to at least 150 per cent in a manner acceptable to the Insurance Authority; (ii) notify the Insurance Authority in writing as soon as the Company becomes aware of any person (a) becoming a controller (within the meaning of Section 9(1)(c)(ii) of the HKICO) of AIA Co. and AIA International through the acquisition of our shares traded on the HKSE; or (b) ceasing to be a controller (within the meaning of Section 9(1)(c)(ii) of the HKICO) of AIA Co. and AIA International through the disposal of our shares traded on the HKSE; (iii) be subject to the supervision of the Insurance Authority and AIA Group Limited will be required to continually comply with the Insurance Authority’s guidance on the “fit and proper” standards of a controller pursuant to Section 8(2) of the HKICO. The Insurance Authority is empowered by the HKICO to raise objection if it appears to it that any person is not fit and proper to be a controller or director of an authorised insurer. These standards include the sufficiency of a holding company’s financial resources; the viability of a holding company’s business plan for its insurance subsidiaries which are regulated by the Insurance Authority; the clarity of the Group’s legal, managerial and operational structures; the identities of any other holding companies or major regulated subsidiaries; whether the holding company, its directors or controllers is subject to receivership, administration, liquidation or other similar proceedings or failed to satisfy any judgement debt under a court order or the subject of any criminal convictions or in breach of any statutory or regulatory requirements; the soundness of the Group’s corporate governance; the soundness of the Group’s risk management framework; the receipt of information from its insurance subsidiaries which are regulated by the Insurance Authority to ensure that they are managed in compliance with applicable laws, rules and regulation; and its role in overseeing and managing the operations of its insurance subsidiaries which are regulated by the Insurance Authority; and (iv) fulfil all enhancements or improvements to the guidance referred to in subparagraph (iii) above, as well as administrative measures issued from time to time by the Insurance Authority or requirements that may be prescribed by the Insurance Authority in accordance with the HKICO, regulations under the HKICO or guidance notes issued by the Insurance Authority from time to time. 184 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies37. rIsK manaGemenT risk management framework The managed acceptance of risk is fundamental to the Group’s insurance business model. The Group’s Risk Management Framework seeks to effectively manage, rather than eliminate, the risks the Group faces. The Group’s Risk Management Framework has been established for the identification, evaluation and management of the key risks faced by the organisation within stated Risk Appetite. The framework includes an established risk governance structure with clear oversight and assignment of responsibility for monitoring and management of financial and non-financial risks. Insurance risk The Group considers insurance risk to be a combination of the following component risks: • Product design risk; • Underwriting and expense overrun risk; • Lapse risk; and • Claims risk product design risk Product design risk refers to potential defects in the development of a particular insurance product. The Group manages product design risk through the New Product Approval Process where products are reviewed against pricing, design and operational risk benchmarks agreed by the Group Financial Risk Committee (FRC). Local business units work closely with a number of Group functions including product management, actuarial, legal, compliance, risk and underwriting. The Group monitors closely the performance of new products and focuses on actively managing each part of the actuarial control cycle to minimise risk in the in-force book as well as for new products. A significant component of the Group’s long-term insurance business is participating in nature where the Group has the ability to adjust dividends to reflect market conditions. This reduces the Group’s exposure to changes in circumstances, in particular investment returns, that may arise during the life of long-term insurance policies. underwriting and expense overrun risk Underwriting and expense overrun risk refers to the possibility of product-related income being inadequate to support future obligations arising from an insurance product. The Group manages underwriting risk by adhering to the Group underwriting guidelines. Each operating unit maintains a team of professional underwriters who review and select risks that are consistent with the underwriting strategy of the Group. A second layer of underwriting review is conducted at the Group level for complex and large risks. Any exceptions require specific approval and may be subject to separate risk management actions. In certain circumstances, such as when entering a new line of business, products or markets for which insufficient experience data is available the Group makes use of reinsurance to obtain product pricing expertise. In pricing insurance products the Group manages expense overrun risk by allowing for an appropriate level of expenses that reflects a realistic medium- to long-term view of the underlying cost structure. A disciplined expense budgeting and management process is followed that controls expenses within product pricing allowances over the medium to long term. lapse risk Lapse risk refers to the possibility that lapse experience diverges from that assumed when products were priced. It includes potential financial loss due to early termination of contracts where the acquisition cost incurred may not be recoverable from future revenue. The Group carries out regular reviews of persistency experience. The results are assimilated into new and in-force business management. Target payback periods that form part of the product pricing controls enable monitoring of the Group’s exposure to lapse risk. In addition, many of the Group’s products include surrender charges that entitle the Group to additional fees on early termination by the policyholder, thereby reducing exposure to lapse risk. ANNUAL REPORT 2013 185 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION37. rIsK manaGemenT (continued) Insurance risk (continued) Claims risk Claims risk refers to the possibility that the frequency or severity of claims arising from insurance contracts exceeds the level assumed when the products were priced. The Group seeks to mitigate claims risk by conducting regular experience studies, including reviews of mortality and morbidity experience, reviewing internal and external data, and considering the impact of these on product design, pricing and reinsurance needs. As a result of the Group’s history and scale, a substantial volume of experience data has been accumulated which assists in the evaluation and pricing of insurance risk. Mortality and morbidity risk in excess of the respective retention limits are ceded to reduce volatility in claims experience for the Group. The Group’s capital position combined with its profitable product portfolio and diversified geographical presence are factors in management’s decision to retain (rather than reinsure) a high proportion of its written insurance risks. The Group has a broad geographical footprint across the Asia-Pacific region which provides a degree of natural geographical diversification of claims experience. We mitigate and manage this risk by adhering to the underwriting and claims management policies and procedures that have been developed based on our extensive historical experience. Our broad product offering and large in-force product portfolio also reduce our exposure to concentration risk. Finally, we use reinsurance solutions to help reduce concentration and volatility risk, especially with large policies or new risks, and as protection against catastrophes. financial risk exposures The Group is exposed to a range of financial risks, including credit risk, market risk, and liquidity risk. The Group applies a consistent risk management philosophy that is embedded in management processes and controls such that both existing and emerging risks are considered and addressed. The following section summarises the Group’s key risk exposures and the primary policies and processes used by the Group to manage its exposures to these risks. Credit risk Credit risk occurs wherever we are relying on a third party to satisfy their financial obligation to us. Although the primary source of credit risk is the Group’s investment portfolio, credit risk also arises in our reinsurance, settlement and treasury activities. The management of credit risk occurs on two levels in AIA. The Investment Credit Research team performs a detailed analysis of individual counterparties and recommends a rating within the internal ratings framework. The Group Risk function manages the Group’s internal ratings framework and agrees these recommendations. Internal ratings are then used to determine our appetite for exposure to each counterparty. A matrix of risk tolerances has been approved by the FRC that ensures that credit risk in the investment portfolio is contained within AIA’s risk appetite. These tolerances cover individual counterparty, segmental concentration and cross-border exposures. The Investment function has discretion to shape the portfolio within those risk tolerances. If certain investments are technically within risk tolerances but there is a specific concern, Group Risk may bring these to the attention of the FRC. market risk Market risk arises from the possibility of financial loss caused by changes in financial instruments’ fair values or future cash flows due to fluctuations in key variables, including interest rates, equity market prices, foreign exchange rates and real estate property market prices. The FRC approves all policies and metrics associated with the evaluation of market risk exposures. 186 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies37. rIsK manaGemenT (continued) financial risk exposures (continued) market risk (continued) Interest rate risk The Group’s exposure to interest rate risk predominantly arises from any difference between the tenor of the Group’s liabilities and assets, or any difference between the return on investments and the return required to meet the Group’s commitments, predominantly its insurance liabilities. This exposure can be heightened in products with inherent interest rate options or guarantees. We seek to manage interest rate risk by ensuring appropriate insurance product design and underlying assumptions as part of the product approval process and by matching, to the extent possible and appropriate, the duration of our investment assets with the duration of our insurance policies. For in-force policies, we regularly adjust the policyholder bonus payout and crediting rates applicable to policyholder account balances considering, amongst other things, the earned yields and policyholders’ reasonable expectations. Exposure to interest rate risk The table below summarises the nature of the interest rate risk associated with financial assets and financial liabilities. In preparing this analysis, fixed rate interest bearing instruments that mature or reprice within 12 months of the reporting date have been disclosed as variable rate instruments. Variable interest rate Fixed interest rate Non-interest bearing Total US$m 30 November 2013 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total financial assets Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities 6,198 29 78,549 – – 114 – – 28 1,440 – 26,968 141 1,240 151 445 7,484 1,472 85,751 26,968 141 1,354 2,228 445 84,890 30,413 125,843 1,258 3 7,202 – – – 2,077 – 10,540 – 962 1,889 – – – 1,000 – – – 2,851 1,000 8,698 164 – 3,104 89 12,055 8,698 2,126 1,889 3,104 89 15,906 ANNUAL REPORT 2013 187 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 37. rIsK manaGemenT (continued) financial risk exposures (continued) market risk (continued) Interest rate risk (continued) Exposure to interest rate risk (continued) US$m 30 November 2012 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total financial assets Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 995 66 5,932 – – – 2,767 – 9,760 – 492 1,792 – – 2,284 5,386 1 74,930 – – 92 – – 44 1,164 – 23,656 95 1,104 181 638 6,425 1,231 80,862 23,656 95 1,196 2,948 638 80,409 26,882 117,051 – – – – – – 8,865 274 – 2,812 41 11,992 8,865 766 1,792 2,812 41 14,276 Foreign exchange rate risk At the Group level, foreign exchange rate risk arises mainly from our operations in multiple geographical markets in the Asia- Pacific region and the translation of multiple currencies to US dollars for financial reporting purposes. Foreign currency risk associated with assets and liabilities denominated in non-functional currencies results in gains and losses being recognised in the consolidated income statement. Foreign currency risk associated with the translation of the net assets of operations with non-US dollar functional currencies results in gains or losses being recorded directly in other comprehensive income. On a local operating unit level, we invest in assets denominated in currencies that match the related liabilities to the extent possible and appropriate in order to avoid currency mismatches. The Group’s net foreign currency exposures and the estimated impact of changes in foreign exchange rates are set out in the tables below after taking into account the effect of economic hedges of currency risk. Whilst providing economic hedges that reduce the Group’s net exposure to foreign exchange risk, hedge accounting is not applied. Currencies for which net exposure is not significant are excluded from the analysis below. In compiling the table below the impact of a 5 per cent strengthening of original currency is stated relative to the functional currency of the relevant operation of the Group. The impact of a 5 per cent strengthening of the US dollar is also stated relative to functional currency. Currency exposure reflects the net notional amount of currency derivative positions as well as net equity by currency. 188 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 37. rIsK manaGemenT (continued) financial risk exposures (continued) market risk (continued) Foreign exchange rate risk (continued) Net exposure US$m 30 November 2013 Equity analysed by original currency Net notional amounts of currency derivative positions Currency exposure 5% strengthening of original currency United States Dollar Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Korean Won 14,867 (5,683) 9,184 200 401 601 2,894 (2,380) 1,495 1,533 2,327 1,830 4,724 3,566 1,186 – 1,495 19 1,552 162 2,489 Impact on profit before tax 78 (13) 5 28 4 24 30 5% strengthening of the US dollar Impact on other comprehensive income US$m 30 November 2012 Equity analysed by original currency Net notional amounts of currency derivative positions Currency exposure 5% strengthening of original currency (78) 10 (218) (38) (59) (53) (101) United States Dollar Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Korean Won 15,990 (6,177) 9,813 153 301 454 3,713 (1,963) 1,609 5,322 3,149 1,186 837 – 837 1,377 2,567 2 1,379 – 2,567 Impact on profit before tax 107 (9) 4 29 5 20 29 5% strengthening of the US dollar Impact on other comprehensive income (107) 11 (252) (36) (34) (46) (98) Equity market and interest rate risk Equity market risk arises from changes in the market value of equity securities and equity funds. Investment in equity assets on a long-term basis is expected to provide diversification benefits and return enhancements which can improve the risk-adjusted return of the portfolios. ANNUAL REPORT 2013 189 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 37. rIsK manaGemenT (continued) financial risk exposures (continued) market risk (continued) Equity market and interest rate risk (continued) Sensitivity analysis Sensitivity analysis to the key variables affecting financial assets and liabilities is set out in the table below. Information relating to sensitivity of insurance and investment contracts with DPF is provided in note 29. The carrying values of other financial assets are not subject to changes in response to movements in interest rates or equity prices. In calculating the sensitivity of debt and equity instruments to changes in interest rates and equity prices, the Group has made assumptions about the corresponding impact of asset valuations on liabilities to policyholders. Assets held to support unit-linked contracts have been excluded on the basis that changes in fair value are wholly borne by policyholders. Sensitivity analysis for assets held in participating funds has been calculated after allocation of returns to policyholders using the applicable minimum policyholders’ participation ratios described in note 2. Information is presented to illustrate the estimated impact on profits and net assets arising from a change in a single variable before taking into account the effects of taxation. For the purpose of illustrating the sensitivity of profit before tax and net assets before the effects of taxation to changes in interest rates and equity prices, the impact of possible impairments of financial investments classified as available for sale which may arise in times of economic stress has been ignored, since default events reflect the characteristics of individual issuers. Because the Group’s accounting policies lock in interest rate assumptions on policy inception and the Group’s assumptions incorporate a provision for adverse deviations, the level of movement illustrated in this sensitivity analysis does not result in loss recognition and so there is no corresponding effect on liabilities. US$m Equity market risk 10 per cent increase in equity prices 10 per cent decrease in equity prices Interest rate risk + 50 basis points shift in yield curves - 50 basis points shift in yield curves 30 November 2013 30 November 2012 Impact on profit before tax Impact on net assets (before the effects of taxation) Impact on profit before tax Impact on net assets (before the effects of taxation) 691 (691) (98) 98 691 (691) (2,827) 2,827 630 (630) (92) 92 630 (630) (2,770) 2,770 liquidity risk Liquidity risk primarily refers to the possibility of having insufficient cash available to meet payment obligations to counterparties when they become due. The Group is exposed to liquidity risk in respect of insurance and investment policies that permit surrender, withdrawal or other forms of early termination for a cash surrender value specified in the contractual terms and conditions. To manage liquidity risk the Group has implemented a variety of measures, including emphasising flexible insurance product design, so that it can retain the greatest flexibility to adjust contract pricing or crediting rates. The Group also seeks to match, to the extent possible and appropriate, the duration of its investment assets with the duration of insurance policies issued. The maturity analysis presented in the tables below presents the estimated maturity of carrying amounts in the consolidated statement of financial position. The estimated maturity for insurance and investment contracts is proportionate to their carrying values based on projections of estimated undiscounted cash flows arising from insurance and investment contracts in force at that date. The Group has made significant assumptions to determine the estimated undiscounted cash flows of insurance benefits and claims and investment contract benefits, which include assumptions in respect of mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. The maturity profile of the Group’s borrowings is presented on the assumption that the Group will continue to satisfy loan covenants which, if breached, would cause the borrowings to be repayable on demand. The Group regularly monitors its compliance with these covenants and was in compliance with them at the date of the consolidated statement of financial position and throughout each of the periods presented. Due to the significance of the assumptions used, the maturity profiles presented below could be materially different from actual payments. 190 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies37. rIsK manaGemenT (continued) financial risk exposures (continued) liquidity risk (continued) A maturity analysis based on the earliest contractual repayment date would present the insurance and investment contract liabilities as falling due in the earliest period in the table because of the ability of policyholders to exercise surrender options. Financial assets and liabilities other than investment contract liabilities are presented based on their respective contractual maturities. Total No fixed maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years US$m 30 November 2013 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments 7,484 1,472 85,751 26,968 141 1,354 2,228 445 2,387 70 – 26,968 – – – – Total 125,843 29,425 Financial and insurance contract liabilities Insurance and investment contract liabilities (net of reinsurance) Borrowings Obligations under securities lending and repurchase agreements Other liabilities Derivative financial instruments Total Note: 110,861 2,126 1,889 3,104 89 118,069 – 176 – 426 – 602 (1) Includes amounts of US$719m falling due after 2 years through 5 years. 952 1,296 3,544 – 141 1,244 2,228 124 9,529 (699) 322 1,889 2,678 – 4,190 1,139 97 818 2 2,188 7 16,522 24,068 41,617 – – 43 – 311 – – 67 – 10 – – – – – 18,112 24,965 43,812 694 1,130(1) 9,075 498 – – 29 – – 54 101,791 – – – 6 1,853 9,627 101,797 ANNUAL REPORT 2013 191 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Total No fixed maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years 6,425 1,231 80,862 23,656 95 1,196 2,948 638 1,949 65 – 23,656 – – – – 475 1,065 2,413 – 95 1,104 2,948 146 8,246 (871) 7 1,792 2,580 4 3,512 1,203 89 15,974 – – 36 – 415 17,717 784 486(1) – – 16 1,286 728 4 2,070 8 22,089 40,386 – – 56 – 79 – – – – (2) 22,956 42,462 8,553 89,915 – – – 21 8,574 – – – – 89,915 37. rIsK manaGemenT (continued) financial risk exposures (continued) liquidity risk (continued) US$m 30 November 2012 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total 117,051 25,670 Financial and insurance contract liabilities Insurance and investment contract liabilities (net of reinsurance) Borrowings Obligations under securities lending and repurchase agreements Other liabilities Derivative financial instruments Total Note: 98,381 766 1,792 2,812 41 103,792 – 273 – 232 – 505 (1) Includes amounts of US$486m falling due after 2 years through 5 years. 192 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 38. employee BenefITs defined benefit plans The Group operates funded and unfunded defined benefit plans that provide life and medical benefits for participating employees after retirement and a lump sum benefit on cessation of employment. The locations covered by these plans include Hong Kong, Singapore, Malaysia, Thailand, Taiwan, Indonesia, the Philippines, Sri Lanka and Korea. The latest independent actuarial valuations of the plans were at 30 November 2013 and were prepared by credentialed actuaries of Mercer (Hong Kong) Limited. All the actuaries are qualified members of professional actuarial organisations to render the actuarial opinions. The actuarial valuations indicate that the Group’s obligations under these defined benefit retirement plans are 51 per cent (2012: 34 per cent) covered by the plan assets held by the trustees. The fair value of plan assets as at year end at the date of valuation was US$87m (2012: US$60m). The total expenses relating to these plans recognised in the consolidated income statement was US$15m (2012: US$16m). defined contribution plans The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current year was US$54m (2012: US$46m). Employees and the employer are required to make monthly contributions equal to 2 per cent to 21 per cent of the employees’ monthly basic salaries, depending on years of service and subject to any applicable caps of monthly relevant income in different jurisdictions. For defined contribution pension plans with vesting conditions, any forfeited contributions by employers on behalf of employees who leave the scheme prior to vesting fully in such contributions are used by the employer to reduce any future contributions. The amount of forfeited contributions used to reduce the existing level of contributions is not material. 39. share-Based CompensaTIon share-based compensation plans During the year ended 30 November 2013, the Group made further grants of share options, restricted share units (RSUs) and restricted stock purchase units to certain employees, directors and officers of the Group under the Share Option Scheme (SO Scheme), the Restricted Share Unit Scheme (RSU Scheme) and the Employee Share Purchase Plan (ESPP). As well, the Group made further grants of restricted stock subscription units to eligible agents under the Agency Share Purchase Plan (ASPP). rsu scheme Under the RSU Scheme, the vesting of the granted RSUs is conditional upon the eligible participants remaining in employment with the Group during the respective vesting periods. RSU grants are vested either entirely after a specific period of time or in tranches over the vesting period. For RSU grants that are vested in tranches, each vesting tranche is accounted for as a separate grant for the purposes of recognising the expense over the vesting period. For certain RSUs, performance conditions are also attached which include both market and non-market conditions. RSUs subject to performance conditions are released to the participants at the end of the vesting period depending on the actual achievement of the performance conditions. During the vesting period, the participants are not entitled to dividends of the underlying shares. Except in jurisdictions where restrictions apply, the granted RSUs are expected to be settled in equity; grants that the Group has the legal or constructive obligation to settle in cash are insignificant to the Group. The maximum number of shares that can be granted under this scheme is 301,100,000 (2012: 301,100,000), representing 2.5 per cent (2012: 2.5 per cent) of the number of shares in issue at 30 November 2013. Restricted Share Units Outstanding at beginning of financial year Granted Forfeited Vested Outstanding at end of financial year Year ended 30 November 2013 Number of shares Year ended 30 November 2012 Number of shares 50,450,631 20,645,534 31,202,819 22,348,056 (6,767,954) (2,733,564) (326,125) (366,680) 64,002,086 50,450,631 ANNUAL REPORT 2013 193 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION39. share-Based CompensaTIon (continued) share-based compensation plans (continued) so scheme The objectives of the SO Scheme are to align eligible participants’ interests with those of the shareholders of the Company by allowing eligible participants to share in the value created at the point they exercise their options. Share option (SO) grants are vested either entirely after a specific period of time or in tranches over the vesting period approximately three to five years, during which, the eligible participants are required to remain in employment with the Group. For SO grants vested in tranches, each vesting tranche is accounted for as a separate grant for the purposes of recognising the expense over the vesting period. The granted share options expire 10 years from the date of grant and each share option entitles the eligible participant to subscribe for one ordinary share. Except in jurisdictions where restrictions apply, the granted share options are expected to be settled in equity; grants that the Group has the legal or constructive obligation to settle in cash are insignificant to the Group. The total number of shares under options that can be granted under the scheme is 301,100,000 (2012: 301,100,000), representing 2.5 per cent (2012: 2.5 per cent) of the number of shares in issue at 30 November 2013. The measurement dates for share option grants made in June 2011, March 2012 and March 2013 were determined to be 15 June 2011, 15 March 2012 and 11 March 2013 respectively, in accordance with IFRS 2. Information about share options outstanding and share options exercisable by the Group’s employees and directors as at the end of the reporting period is as follows: Share options Outstanding at beginning of financial year Granted Forfeited or expired Outstanding at end of financial year Share options exercisable at end of financial year Weighted average remaining contractual life (years) Year ended 30 November 2013 Year ended 30 November 2012 Number of share options Weighted average exercise price (HK$) Number of share options Weighted average exercise price (HK$) 28,171,257 7,490,459 (3,370,595) 32,291,121 – 8.05 27.64 34.35 28.77 29.08 – 20,426,519 7,816,367 (71,629) 28,171,257 – 8.72 27.35 28.40 27.35 27.64 – The share options outstanding as of 30 November 2013 have an exercise price of between HK$27.35 and HK$34.35 (2012: between HK$27.35 and HK$28.40). espp Under the plan, eligible employees of the Group can purchase ordinary shares of the Company with qualified employee contributions and the Company will award one matching restricted stock purchase unit to them at the end of the vesting period for each two shares purchased through the qualified employee contributions (contribution shares). Contribution shares are purchased from the open market. During the vesting period, the eligible employees must hold the contribution shares purchased during the plan cycle and remain employed by the Group. The level of qualified employee contribution is limited to not more than 5 per cent of the annual basic salary subject to a maximum of US$15,000 per annum. The granted matching restricted stock purchase units are expected to be settled in equity. For the year ended 30 November 2013, eligible employees paid US$8m (2012: US$6m) to purchase 1,745,775 ordinary shares (2012: 1,630,722 ordinary shares) of the Company. 194 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies39. share-Based CompensaTIon (continued) share-based compensation plans (continued) aspp The structure of the ASPP generally follows that of the ESPP, the key difference being that the eligible agents are required to pay a subscription price of US$1 to subscribe for each new share in the Company at the end of the vesting period. Under the plan, eligible agents of the Group can purchase ordinary shares of the Company with qualified agent contributions and the Company will award one matching restricted stock subscription unit to them at the end of the vesting period for each two shares purchased through the qualified agent contributions (agent contribution shares). Each restricted stock subscription unit entitles eligible agents to subscribe for one new share of the Company. Agent contribution shares are purchased from the open market. During the vesting period, the eligible agents must hold the contribution shares purchased during the plan cycle and maintain their agent contracts with the Group. The granted matching restricted stock subscription units are expected to be settled in equity. The level of qualified agent contribution is subject to a maximum of US$15,000 per annum. For the year ended 30 November 2013, eligible agents paid US$11m (2012: US$4m) to purchase 2,365,707 ordinary shares (2012: 1,130,720 ordinary shares) of the Company. valuation methodology The Group utilises a binomial lattice model to calculate the fair value of the share option grants, a Monte-Carlo simulation model and/or discounted cash flow technique to calculate the fair value of the RSU, ESPP and ASPP awards, taking into account the terms and conditions upon which the awards were granted. The price volatility is estimated on the basis of implied volatility of the Company’s shares which is based on an analysis of historical data since they are traded in the Hong Kong Stock Exchange and takes into consideration the historical volatility of peer companies (the constituent companies in Dow Jones Insurance Titans 30 Index) in view of the short trading history of the Company’s shares on the measurement date. The expected life of the share options is derived from the output of the valuation model and is calculated based on an analysis of expected exercise behaviour of the Company’s employees. The estimate of market condition for performance-based RSUs is based on one-year historical data preceding the grant date. No allowance for forfeiture prior to vesting is included in the valuation of the awards. The fair value calculated for share options is inherently subjective due to the assumptions made and the limitations of the model utilised. Year ended 30 November 2013 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) Share option life (in years) Expected life (in years) Weighted average fair value per option/unit at measurement date (HK$) * Applicable to RSU with market conditions. 1.26% 0.25% – 0.37%* 0.12% – 0.66% 30% 1.1% 34.35 10 7.41 10.54 30% 1.1% n/a n/a n/a 28.94 26% – 30% 1.1% – 1.3% n/a n/a n/a 0.34% 30% 1.1% n/a n/a n/a 35.69 24.51 ANNUAL REPORT 2013 195 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION39. share-Based CompensaTIon (continued) valuation methodology (continued) Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) Share option life (in years) Expected life (in years) Weighted average fair value per option/unit at measurement date (HK$) * Applicable to RSU with market conditions. Year ended 30 November 2012 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units 1.44% 0.20% – 0.36%* 0.19% – 0.49% 0.16% – 0.40% 30% 1.2% 28.40 10 7.40 8.71 30% 25% – 30% 30% 1.2% – 1.3% 1.2% – 1.3% 1.2% – 1.3% n/a n/a n/a n/a n/a n/a n/a n/a n/a 23.74 27.43 18.96 The weighted average share price for share option valuation for grants made during the year ended 30 November 2013 is HK$34.35 (2012: HK$28.40). The total fair value of share options granted during the year ended 30 November 2013 is US$9m (2012: US$9m). recognised compensation cost The total recognised compensation cost (net of expected forfeitures) related to various share-based compensation awards granted under the RSU Scheme, SO Scheme, ESPP and ASPP by the Group for the year ended 30 November 2013 is US$77m (2012: US$45m). 40. remuneraTIon of dIreCTors and Key manaGemenT personnel directors’ remuneration The Executive Director receives compensation in the form of salaries, bonuses, contributions to pension schemes, long-term incentives, housing and other allowances, and benefits in kind subject to applicable laws, rules and regulations. Bonuses and long- term incentives represent the variable components in the Executive Director’s compensation and are linked to the performance of the Group and the Executive Director. Details of share-based payment schemes are described in note 39. Salaries, allowances and benefits in kind Director’s fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments(1) Inducement fees Termination fees Total – – 1,943,664 4,042,000 1,943,664 4,042,000 80,250 80,250 – – 7,423,415 (2) 7,423,415 – – – – 13,489,329 13,489,329 US$ Year ended 30 November 2013 Executive Director Mr. Mark Edward Tucker Total Notes: (1) Included SOs and RSUs awarded based upon the fair value at grant date assuming maximum performance levels are achieved. (2) Share–based payments excluded a one–off adjustment of US$2,747,462 relating to a change in recognition of expense for accounting purposes. 196 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies40. remuneraTIon of dIreCTors and Key manaGemenT personnel (continued) directors’ remuneration (continued) Salaries, allowances and benefits in kind Director’s fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments(1) Inducement fees Termination fees Total – – 1,905,036 3,924,300 1,905,036 3,924,300 77,732 77,732 15,994 5,646,971 (2) 15,994 5,646,971 – – – – 11,570,033 11,570,033 US$ Year ended 30 November 2012 Executive Director Mr. Mark Edward Tucker Total Notes: (1) Included SOs and RSUs awarded based upon the fair value at grant date assuming maximum performance levels are achieved. (2) Share-based payments excluded a one-off adjustment of US$1,509,697 relating to a change in recognition of expense for accounting purposes. The remuneration of Non-executive Directors and Independent Non-executive Directors of the Company at 30 November 2013 and 2012 are included in the tables below: Salaries, allowances and benefits in kind Directors’ fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments Inducement fees Termination fees Total US$ Year ended 30 November 2013 Non-executive Director Mr. Edmund Sze-Wing Tse(1) Independent Non-executive Directors Mr. Jack Chak-Kwong So Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Mr. Barry Chun-Yuen Cheung(2) Total Notes: Mr. Chung-Kong Chow 205,000 564,922 81,615 220,000 190,890 235,000 190,000 190,000 100,685 – – – – – – – 1,896,497 81,615 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 646,537 – – – – – – – – 220,000 205,000 190,890 235,000 190,000 190,000 100,685 1,978,112 (1) US$19,813 which represents remuneration to Mr. Edmund Sze-Wing Tse in respect of his services as director of a subsidiary of the Company is included in his fees. (2) Mr. Barry Chun-Yuen Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013. ANNUAL REPORT 2013 197 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION40. remuneraTIon of dIreCTors and Key manaGemenT personnel (continued) directors’ remuneration (continued) Salaries, allowances and benefits in kind Directors’ fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments Inducement fees Termination fees Total US$ Year ended 30 November 2012 Non-executive Directors Mr. Edmund Sze-Wing Tse(1) 535,541 75,168 Mr. Jeffrey Joy Hurd(3) Mr. Jay Steven Wintrob(3) Independent Non-executive Directors Mr. Jack Chak-Kwong So(4) Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. Barry Chun-Yuen Cheung(2) Mr. George Yong-Boon Yeo(2) Dr. Narongchai Akrasanee(2) Mr. Rafael Si-Yan Hui(3) Total Notes: – – 215,301 233,197 233,142 225,601 33,798 14,385 5,191 71,530 – – – – – – – – – – 1,567,686 75,168 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 610,709 – – 215,301 233,197 233,142 225,601 33,798 14,385 5,191 71,530 1,642,854 (1) US$18,940 which represents remuneration to Mr. Edmund Sze-Wing Tse in respect of his services as director of a subsidiary of the Company is included in his fees. (2) Mr. Barry Chun-Yuen Cheung, Mr. George Yong-Boon Yeo and Dr. Narongchai Akrasanee were appointed as Independent Non-executive Directors of the Company on 20 September 2012, 2 November 2012 and 21 November 2012, respectively. (3) Mr. Jeffrey Joy Hurd and Mr. Jay Steven Wintrob resigned as Non-executive Directors of the Company on 8 March 2012 and Mr. Rafael Si-Yan Hui resigned as Independent Non-executive Director of the Company on 29 March 2012. (4) Mr. Jack Chak-Kwong So was re-designated as Independent Non-executive Director of the Company with effect from 26 September 2012. remuneration of five highest paid individuals The aggregate remuneration of the five highest paid individuals employed by the Group in each of the years ended 30 November 2013 and 2012 is presented in the table below: Salaries, allowances and benefits in kind Pension scheme contributions Post- employment benefits Bonuses Share-based payments(1) Inducement fees Termination fees Total US$ Year ended 30 November 2013 6,371,858 8,281,530 30 November 2012 6,307,954 8,359,300 189,753 199,762 – 16,521,742 (2) 47,438 12,731,677 (3) – – – – 31,364,883 27,646,131 Notes: (1) Included SOs and RSUs awarded to the five highest paid individuals based upon the fair value at grant date assuming maximum performance levels are achieved. (2) Share-based payments excluded a one-off adjustment of US$5,941,198 relating to a change in recognition of expense for accounting purposes. (3) Share-based payments excluded a one-off adjustment of US$3,362,577 relating to a change in recognition of expense for accounting purposes. 198 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies40. remuneraTIon of dIreCTors and Key manaGemenT personnel (continued) remuneration of five highest paid individuals (continued) The emoluments of the five individuals with the highest emoluments are within the following bands: HK$ 25,000,001 to 25,500,000 26,000,001 to 26,500,000 28,500,001 to 29,000,000 29,500,001 to 30,000,000 32,500,001 to 33,000,000 37,000,001 to 37,500,000 38,000,001 to 38,500,000 45,500,001 to 46,000,000 89,500,001 to 90,000,000 104,500,001 to 105,000,000 Year ended 30 November 2013 Year ended 30 November 2012 – 1 – 1 – 1 – 1 – 1 1 – 1 – 1 – 1 – 1 – Key management personnel remuneration Key management personnel have been identified as the members of the Group’s Executive Committee. US$ Key management compensation and other expenses Salaries and other short-term employee benefits Post-employment benefits – defined contribution Post-employment benefits – medical & life Other long-term benefits Share-based payments(1) Total Notes: Year ended 30 November 2013 Year ended 30 November 2012 21,695,497 23,356,919 397,034 – 180,911 395,984 100,397 468,426 18,272,355 (2) 17,730,158 (3) 40,545,797 42,051,884 (1) Included SOs and RSUs awarded to the key management personnel based upon the fair value at grant date assuming maximum performance levels are achieved. (2) Share-based payments excluded a one-off adjustment of US$7,761,839 relating to a change in recognition of expense for accounting purposes. (3) Share-based payments excluded a one-off adjustment of US$4,858,875 relating to a change in recognition of expense for accounting purposes. ANNUAL REPORT 2013 199 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION40. remuneraTIon of dIreCTors and Key manaGemenT personnel (continued) Key management personnel remuneration (continued) The emoluments of the key management personnel are within the following bands: US$ 1,000,001 to 1,500,000 1,500,001 to 2,000,000 2,000,001 to 2,500,000 2,500,001 to 3,000,000 3,000,001 to 3,500,000 3,500,001 to 4,000,000 4,000,001 to 4,500,000 4,500,001 to 5,000,000 5,500,001 to 6,000,000 11,500,001 to 12,000,000 13,000,001 to 13,500,000 Year ended 30 November 2013 Year ended 30 November 2012 – 2 1 – 3 1 – 1 1 – 1 1 1 – 2 3 1 1 1 – 1 – 41. relaTed parTy TransaCTIons The amount due from joint venture is disclosed in note 15. Remuneration of directors and key management personnel is disclosed in note 40. 42. CommITmenTs and ConTInGenCIes Commitments under operating leases Total future aggregate minimum lease payments under non-cancellable operating leases are as follows: US$m Properties and others expiring Not later than one year Later than one and not later than five years Later than five years Total As at 30 November 2013 As at 30 November 2012 86 125 31 242 79 103 32 214 The Group is the lessee in respect of a number of properties and items of office equipment held under operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually increased at the end of the lease term to reflect market rates. None of the leases include contingent rentals. 200 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies42. CommITmenTs and ConTInGenCIes (continued) Investment and capital commitments US$m Not later than one year Later than one and not later than five years Later than five years Total As at 30 November 2013 As at 30 November 2012 693 14 1 708 641 63 4 708 Investment and capital commitments consist of commitments to invest in private equity partnerships and other assets. Contingencies The Group is subject to regulation in each of the geographical markets in which it operates from insurance, securities, capital markets, pension, data privacy and other regulators and is exposed to the risk of regulatory actions in response to perceived or actual non-compliance with regulations relating to suitability, sales or underwriting practices, claims payments and procedures, product design, disclosure, administration, denial or delay of benefits and breaches of fiduciary or other duties. The Group believes that these matters have been adequately provided for in these financial statements. The Group is exposed to legal proceedings, complaints and other actions from its activities including those arising from commercial activities, sales practices, suitability of products, policies and claims. The Group believes that these matters are adequately provided for in these financial statements. The Group is the reinsurer in a residential mortgage credit reinsurance agreement covering residential mortgages in Australia. Due to a change in law, further cessions under this contract ended in July 2008. This reinsurance was fully retroceded to a subsidiary of AIG and this retrocession was terminated in February 2012 on a run-off basis. The Group is exposed to the risk of losses in the event of the failure of the counterparty retrocessionaire to honour its outstanding obligations which is mitigated by a trust agreement put in place after the aforesaid termination. The principal balance outstanding of mortgage loans to which the reinsurance agreement relates were approximately US$1,248m at 30 November 2013 (2012: US$1,877m). The liabilities and related reinsurance assets, which totalled US$6m (2012: US$11m), respectively, arising from these agreements are reflected and presented on a gross basis in these financial statements in accordance with the Group’s accounting policies. The Group expects to fully recover amounts outstanding at the reporting date under the terms of this agreement from the retrocessionaire. At 30 November 2013, the Group has issued capital guarantees and guarantees of indebtedness and minimum guaranteed rates of return ranging from 0 per cent to 5 per cent to holders of units of pension funds that have an accumulation value of approximately US$1,640m (2012: US$1,477m). The Group has the ability to reduce the guaranteed rates of return, subject to obtaining approvals of applicable regulators. ANNUAL REPORT 2013 201 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION43. suBsIdIarIes The principal subsidiary companies which materially contribute to the net income of the Group or hold a material element of its assets and liabilities are: Place of incorporation and operation Principal activity Issued share capital AIA Company Limited(1) Hong Kong Insurance 1,151,049,861 ordinary shares of US$5 each Group’s interest % As at 30 November 2013 As at 30 November 2012 100% 100% Bermuda Insurance 3,000,000 ordinary shares of US$1.20 each 100% 100% (formerly known as American International Assurance Company, Limited) AIA International Limited (formerly known as American International Assurance Company (Bermuda) Limited) AIA Australia Limited Australia Insurance 112,068,300 ordinary shares of A$1 each 100% 100% AIA Pension and Trustee Co. Ltd. AIA Bhd. (formerly known as American International Assurance Berhad) British Virgin Islands Trusteeship 1,300,000 ordinary shares of US$1 each 100% 100% Malaysia Insurance 767,438,174 ordinary shares of RM1 each 100% 100% AIA Singapore Private Limited Singapore Insurance PT. AIA Financial Indonesia Insurance The Philippine American Life and General Insurance Company Philippines Insurance AIA (Vietnam) Life Insurance Company Limited Vietnam Insurance AIA Insurance Lanka PLC (formerly known as Aviva NDB Insurance) Sri Lanka Insurance Bayshore Development Group Limited British Virgin Islands Investment holding company BPI-Philam Life Assurance Corporation Philippines Insurance AIA Reinsurance Limited Bermuda Reinsurance Notes: (1) The Company’s subsidiary. (2) All of the above subsidiaries are audited by PricewaterhouseCoopers. 1,374,000,001 ordinary shares of S$1 each 100% 100% 477,711,032 ordinary shares of Rp1,000 each 100% 100% 199,560,671 ordinary shares of PHP10 each and 439,329 treasury shares Contributed capital of VND1,243,116,791,693 Contributed capital of LKR 300,000,000 100 ordinary shares of US$1 each 749,993,979 ordinary shares of PHP1 each and 6,000 treasury shares 250,000 ordinary shares of US$1 each 100% 99.78% 100% 100% 97.15% – 90% 90% 51% 51% 100% 100% All subsidiaries are unlisted except AIA Insurance Lanka PLC which is listed on the Main Board of the Colombo Stock Exchange. 202 AIA GROUP LIMITED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements and Significant Accounting Policies 44. evenTs afTer The reporTInG perIod On 19 December 2013, the Group entered into an agreement with Citibank to enter into an exclusive, long-term bancassurance partnership for a 15-year period that encompasses 11 markets in the Asia-Pacific region. The markets covered are: Hong Kong, Singapore, Thailand, China, Indonesia, the Philippines, Vietnam, Malaysia, Australia, India and Korea. The agreement provided for a payment of US$800m to Citibank upon signing, together with future payments during the contract term. On 21 February 2014, the Board of Directors proposed a final dividend of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share). ANNUAL REPORT 2013 203 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONsTaTemenT of fInanCIal posITIon of The Company US$m assets Investment in a subsidiary Amount due from subsidiary Derivative financial instruments Other assets Cash and cash equivalents Total assets liabilities Borrowings Other liabilities Total liabilities equity Issued share capital Share premium Employee share-based trusts Retained earnings Other reserves Total equity Total liabilities and equity Notes: As at 30 November 2013 As at 30 November 2012 Notes 2 3 4 5 6 7 7 7 8 15,741 910 – 22 10 13,994 1,040 8 18 86 16,683 15,146 1,201 11 1,212 12,044 1,914 (274) 1,652 135 15,471 16,683 – 13 13 12,044 1,914 (188) 1,303 60 15,133 15,146 (1) The financial information of the Company should be read in conjunction with the consolidated financial statements of the Group. (2) Net profit of the Company for the years ended 30 November 2013 and 2012 were US$944m and US$1,240m, respectively. Approved and authorised for issue by the Board of Directors on 21 February 2014. Mark Edward Tucker Director Edmund Sze-Wing Tse Director 204 AIA GROUP LIMITED FINANCIAL STATEMENTSFinancial Statements of the Company noTes To The fInanCIal sTaTemenTs of The Company 1. aCCounTInG polICIes Where applicable, the accounting policies of the Company are the same as for the Group as set out on pages 109 to 129. The Company’s financial statements comply with both IFRS and HKFRS. 2. InvesTmenT In a suBsIdIary US$m Unlisted shares, at cost As at 30 November 2013 As at 30 November 2012 15,741 13,994 See note 43 to the Group’s consolidated financial statements for further information of the Company’s subsidiary. 3. amounT due from suBsIdIary The balance is unsecured, interest-free and repayable on demand. 4. derIvaTIve fInanCIal InsTrumenTs The Company’s non-hedge derivative exposure was as follows: US$m 30 November 2012 Foreign exchange contracts Forwards Total Notional amount Fair value 3,468 3,468 8 8 The Company did not have any derivative exposure as of 30 November 2013. Details of derivative financial instruments are presented in note 22 to the Group’s consolidated financial statements. 5. Cash and Cash equIvalenTs The cash and cash equivalents balance consists of cash of US$10m (2012: US$86m). 6. BorrowInGs Details of the borrowings of the Company are provided in note 30 to the Group’s consolidated financial statements. On 22 November 2013, the Company issued a 10-year unsecured floating rate medium term note to a subsidiary at a nominal value of US$60m; the medium term note bears interest upon LIBOR. The medium term note has been eliminated in the Group’s consolidated financial statements. 7. share CapITal, share premIum and employee share-Based TrusTs Details of share capital, share premium and employee share-based trusts are presented in note 34 to the Group’s consolidated financial statements. 8. oTher reserves Other reserves comprise share-based compensation recognised under the RSU Scheme, ESPP, ASPP and Share Option Scheme. ANNUAL REPORT 2013 205 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONnoTes To The fInanCIal sTaTemenTs of The Company (continued) 9. rIsK manaGemenT Risk management in the context of the Group is discussed in note 37 to the Group’s consolidated financial statements. The business of the Company is managing its investments in subsidiaries, associates and joint venture operations. Its risks are considered to be the same as those described in the context of the consolidated group. Such investments are held by the Company at cost in accordance with accounting policy discussed in note 2.3 to the Group’s consolidated financial statements. Financial assets, other than investment in a subsidiary, largely consist of cash and cash equivalents. 10. relaTed parTy TransaCTIons The Company receives dividend from subsidiaries and pays interest and expenses to those subsidiaries in the normal course of business. Except as disclosed elsewhere in the financial statements, there are no other material related party transactions. 11. ConTInGenCIes The Company has issued a guarantee to financial institutions in respect of a 3-year multicurrency bank facility of HK$2,507m (approximately US$323m) borrowed by its subsidiary. The Company is exposed to the risk in the event of default payment by its subsidiary. 12. evenTs afTer The reporTInG perIod Details of the events after the reporting period of the Company are presented in note 44 to the Group’s consolidated financial statements. 206 AIA GROUP LIMITED FINANCIAL STATEMENTSFinancial Statements of the CompanyTowers waTson repor T on The revIew of The supplemenT ary emBedded v alue InformaTIon AIA Group Limited (the Company) and its subsidiaries (together, “AIA” or “the Group”) have prepared supplementary embedded value results (EV Results) for the year ended 30 November 2013 (the Period). These EV Results, together with a description of the methodology and assumptions that have been used, are shown in the Supplementary Embedded Value Information section of this report. Towers Watson Hong Kong Limited, trading as Towers Watson (Towers Watson), has been engaged to review the Group’s EV Results and prior year comparisons. This opinion is made solely to the Company and, to the fullest extent permitted by applicable law, Towers Watson does not accept or assume any responsibility, duty of care or liability to any third party for or in connection with its review work, the opinions it has formed, or for any statement set forth in this opinion. sCope of worK Our scope of work covered: • A review of the methodology used to calculate the embedded value and the equity attributable to shareholders of the Company on the embedded value basis as at 30 November 2013, and the value of new business for the 12-month period 1 December 2012 to 30 November 2013; • A review of the economic and operating assumptions used to calculate the embedded value as at 30 November 2013 and the value of new business for the 12-month period 1 December 2012 to 30 November 2013; and • A review of the results of AIA’s calculation of the EV Results. In carrying out our review, Towers Watson has relied on data and information provided by the Group. opInIon Towers Watson has concluded that: • The methodology used to calculate the embedded value and value of new business is consistent with recent industry practice for publicly listed companies in Hong Kong as regards traditional embedded value calculations based on discounted values of projected deterministic after-tax cash flows. This methodology makes an overall allowance for risk for the Group through the use of risk discount rates which incorporate risk margins and vary by Business Unit, together with an explicit allowance for the cost of holding required capital; • The economic assumptions are internally consistent and have been set with regard to current economic conditions; and • The operating assumptions have been set with appropriate regard to past, current and expected future experience, taking into account the nature of the business conducted by each Business Unit. Towers Watson has performed a number of high-level checks on the models, processes and the results of the calculations, and has confirmed that no issues have been discovered that have a material impact on the disclosed embedded value and the equity attributable to shareholders of the Company on the embedded value basis as at 30 November 2013, the value of new business for the 12-month period 1 December 2012 to 30 November 2013, the analysis of movement in embedded value for the 12-month period ended 30 November 2013, and the sensitivity analysis. Towers Watson 21 February 2014 ANNUAL REPORT 2013 207 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL STATEMENTSSupplementary Embedded Value InformationCauTIonary sTaTemenTs ConCernInG supplemenTary emBedded value InformaTIon This report includes non-IFRS financial measures and should not be viewed as a substitute for IFRS financial measures. The results shown in this report are not intended to represent an opinion of market value and should not be interpreted in that manner. This report does not purport to encompass all of the many factors that may bear upon a market value. The results shown in this report are based on a series of assumptions as to the future. It should be recognised that actual future results may differ from those shown, on account of changes in the operating and economic environments and natural variations in experience. The results shown are presented at the valuation dates stated in this report and no warranty is given by the Group that future experience after these valuation dates will be in line with the assumptions made. 208 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information1. hIGhlIGhTs The embedded value (EV) is a measure of the value of shareholders’ interests in the earnings distributable from assets allocated to the in-force business after allowance for the aggregate risks in that business. The Group uses a traditional deterministic discounted cash flow methodology for determining its EV and value of new business (VONB). This methodology makes implicit allowance for all sources of risk including the cost of investment return guarantees and policyholder options, asset-liability mismatch risk, credit risk, the risk that actual experience in future years differs from that assumed, and for the economic cost of capital, through the use of a risk-adjusted discount rate. The equity attributable to shareholders of the Company on the embedded value basis (EV Equity) is the total of EV, goodwill and other intangible assets attributable to shareholders of the Company. More details of the EV Results, methodology and assumptions are covered in later sections of this report. Table 1.1 summarises the key results including the adjusted net worth (ANW) and value of in-force business (VIF). Table 1.1 Summary of Key Metrics(1) (US$ millions) Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) Embedded value (EV) Adjusted net worth (ANW) Value of in-force business (VIF) Value of new business (VONB) Annualised new premium (ANP) (2) (3) VONB margin (3) Notes: As at 30 November 2013 As at 30 November 2012 34,875 33,822 13,466 20,356 31,657 31,408 13,170 18,238 12 months ended 30 November 2013 12 months ended 30 November 2012 1,490 3,341 44.1% 1,188 2,696 43.6% Growth 10% 8% 2% 12% YoY 25% 24% 0.5 pps (1) The results are after adjustments to reflect additional Hong Kong reserving and capital requirements and the after-tax value of unallocated Group Office expenses. (2) ANP represents 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. (3) ANP and VONB margin exclude pension business. VONB grew by 25 per cent compared with 2012 to US$1,490 million, net of tax, with each of our market segments delivering double- digit growth over the year. ANP grew by 24 per cent compared with 2012 to US$3,341 million and VONB margin increased to 44.1 per cent from 43.6 per cent in 2012. EV Equity grew by US$3,218 million to US$34,875 million at 30 November 2013. This represents an increase of 10 per cent from US$31,657 million at 30 November 2012. EV Equity included goodwill and other intangible assets of US$1,053 million at 30 November 2013 compared with US$249 million at 30 November 2012. EV grew to US$33,822 million at 30 November 2013, an increase of 8 per cent over the year from US$31,408 million at 30 November 2012. The growth in EV of US$2,414 million is shown after a deduction of US$808 million for the effect of acquisitions in the year. EV operating profit grew by 14 per cent to US$3,975 million compared with 2012. The growth reflected a combination of a higher VONB of US$1,490 million, increased expected return on EV of US$2,387 million and positive operating experience variances and operating assumption changes which totalled US$124 million, less interest costs of US$26 million on medium term notes and an acquisition credit facility. ANNUAL REPORT 2013 209 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION1. hIGhlIGhTs (continued) Non-operating EV movements included positive contribution of US$620 million from investment return variances and changes in economic assumptions and negative other non-operating variances. This was offset by the payment of total shareholder dividends of US$595 million, negative other capital movements of US$18 million and negative foreign exchange movements of US$760 million. EV as at 30 November 2013 included ANW of US$13,466 million and VIF of US$20,356 million, up 2 per cent and 12 per cent respectively compared with 30 November 2012. 2. ev resulTs 2.1 embedded value by Business unit The EV as at 30 November 2013 is detailed in Table 2.1 below. Results are presented separately for the six largest Business Units, with those for the remaining Business Units presented together under the category “Other Markets”. This is consistent with the segment information in the IFRS financial statements. Section 4.1 of this report contains a full list of the entities included in the report and the mapping of these entities to “Business Units” for the purpose of the report. Table 2.1 Summary of EV by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China AIA Korea Other Markets Group Corporate Centre Subtotal Adjustment to reflect additional Hong Kong reserving and capital requirements(3) After-tax value of unallocated Group Office expenses Total Notes: As at 30 November 2013 VIF before VIF after As at 30 November 2012 ANW(1) CoC(2) CoC(2) CoC(2) EV EV(4) 4,438 4,884 1,520 1,318 509 1,292 3,040 4,469 6,714 2,604 2,936 1,359 2,757 972 1,190 (67) 436 620 449 234 160 358 266 – 6,278 1,984 2,487 1,125 2,597 614 924 (67) 10,716 10,059 6,868 4,007 2,443 3,106 1,906 3,964 4,402 6,750 3,746 1,286 2,192 1,731 3,929 5,348 21,470 18,465 2,523 15,942 37,412 35,041 (8,004) 5,196 132 5,064 (2,940) (3,031) – (650) 13,466 23,011 – 2,655 (650) (650) 20,356 33,822 (602) 31,408 (1) ANW by Business Unit is after net capital flows between Business Units and Group Corporate Centre as reported in the IFRS financial statements. (2) CoC refers to the cost arising from holding the required capital as defined in Section 4.2 of this report. (3) Adjustment to EV for the branches of AIA Co. and AIA International, as described in Section 4.4 of this report. (4) Certain segmental reclassifications have been made in the prior year, mainly within VIF, to conform to current period presentation. The reclassification has no impact on the total EV of the Group as of 30 November 2012. 210 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information2. ev resulTs (continued) 2.2 reconciliation of anw to Ifrs equity Table 2.2 sets out the derivation of ANW from IFRS equity as at 30 November 2013. Table 2.2 Derivation of the Group ANW from IFRS equity (US$ millions) IFRS equity attributable to shareholders of the Company Elimination of IFRS deferred acquisition and origination costs assets Difference between IFRS policy liabilities and local statutory policy liabilities (for entities included in the EV Results) Difference between net IFRS policy liabilities and local statutory policy liabilities (for entities included in the EV Results) Mark-to-market adjustment for property and mortgage loan investments, net of amounts attributable to participating funds Elimination of intangible assets Recognition of deferred tax impacts of the above adjustments Recognition of non-controlling interests impacts of the above adjustments Group ANW (local statutory basis) Adjustment to reflect additional Hong Kong reserving requirements, net of tax Group ANW (after additional Hong Kong reserving requirements) As at 30 November 2013 As at 30 November 2012 24,686 (15,738) 26,697 (14,161) 10,725 6,659 (5,013) (7,502) 2,250 (1,321) 1,006 (138) 21,470 (8,004) 13,466 2,163 (292) 795 (113) 21,748 (8,578) 13,170 ANNUAL REPORT 2013 211 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 2. ev resulTs (continued) 2.3 Breakdown of anw Table 2.3 shows the breakdown of the ANW for the Group between the required capital, as defined in Section 4.6 of this report, and the free surplus, which is the ANW in excess of the required capital. Table 2.3 Free surplus and required capital for the Group (US$ millions) Free surplus Required capital ANW As at 30 November 2013 As at 30 November 2012 Hong Kong basis for branches of AIA Co. and AIA International 6,731 6,735 13,466 Local statutory basis 15,648 5,822 21,470 Hong Kong basis for branches of AIA Co. and AIA International 6,643 6,527 13,170 Local statutory basis 16,082 5,666 21,748 The Company’s subsidiaries, AIA Co. and AIA International, are both Hong Kong-regulated entities subject to Hong Kong statutory requirements. The business written in the branches of AIA Co. and AIA International is subject to the local reserving and capital requirements in the relevant territory and the Hong Kong reserving and capital requirements applicable to AIA Co. and AIA International at the entity level. At 30 November 2013, the more onerous reserving basis for both AIA Co. and AIA International was the Hong Kong basis. Therefore, the Group’s free surplus at 30 November 2013 reduced by US$8,917 million (2012: US$9,439 million) under the Hong Kong basis compared with the local statutory basis, reflecting US$8,004 million (2012: US$8,578 million) higher reserving requirements and US$913 million (2012: US$861 million) higher required capital under the Hong Kong basis for branches of AIA Co. and AIA International. 212 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information2. ev resulTs (continued) 2.4 earnings profile Table 2.4 shows how the after-tax distributable earnings from the assets backing the statutory reserves and required capital of the in-force business of the Group are projected to emerge over future years. The projected values reflect the Hong Kong reserving and capital requirements for the branches of AIA Co. and AIA International. Table 2.4 Profile of projected after-tax distributable earnings for the Group’s in-force business (US$ millions) Financial year 2014 – 2018 2019 – 2023 2024 – 2028 2029 – 2033 2034 and thereafter Total As at 30 November 2013 Undiscounted Discounted 14,132 11,948 10,180 8,946 36,051 81,257 11,660 6,452 3,689 2,199 3,091 27,091 The profile of distributable earnings is shown on an undiscounted and discounted basis. The discounted value of after-tax distributable earnings of US$27,091 million (2012: US$24,765 million) plus the free surplus of US$6,731 million (2012: US$6,643 million) shown in Table 2.3 is equal to the EV of US$33,822 million (2012: US$31,408 million) shown in Table 2.1. ANNUAL REPORT 2013 213 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. ev resulTs (continued) 2.5 value of new Business The VONB for the Group for the 12-month period from 1 December 2012 to 30 November 2013 is summarised in Table 2.5 below. The VONB is defined as the present value, at the point of sale, of the projected after-tax statutory profits less the cost of required capital. Results are presented separately for the six largest Business Units, with those for the remaining Business Units presented together under the category “Other Markets”. This is consistent with the segment information in the IFRS financial statements. Section 4.1 of this report contains a full list of the entities included in the report and the mapping of these entities to “Business Units” for the purpose of the report. The Group VONB for the 12 months ended 30 November 2013 was US$1,490 million, an increase of US$302 million, or 25 per cent, from US$1,188 million for the same period in 2012. Table 2.5 Summary of VONB by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China AIA Korea Other Markets Total before unallocated Group Office expenses (local statutory basis) Adjustment to reflect additional Hong Kong reserving and capital requirements(2) Total before unallocated Group Office expenses (after additional Hong Kong reserving and capital requirements) After-tax value of unallocated Group Office expenses Total Notes: 12 months ended 30 November 2013 12 months ended 30 November 2012 VONB before CoC(1) VONB after VONB after CoC(1) CoC(1) (3) CoC(1) (3) (4) 548 381 297 138 187 104 255 1,910 (77) 1,833 (96) 1,737 80 62 28 18 21 13 35 257 (10) 247 – 247 468 319 269 120 166 91 220 366 287 220 69 124 68 167 1,653 1,301 (67) (41) 1,586 (96) 1,490 1,260 (72) 1,188 (1) CoC refers to the cost arising from holding the required capital as defined in Section 4.2 of this report. (2) Adjustment to VONB for the branches of AIA Co. and AIA International, as described in Section 4.4 of this report. (3) VONB for the Group is calculated before deducting the amount attributable to non-controlling interests. The amounts of VONB attributable to non- controlling interests for the 12 months ended 30 November 2013 and 30 November 2012 were US$11 million and US$11 million respectively. (4) Certain segmental reclassifications have been made in the prior period to conform to current period presentation. The reclassification has no impact on the total VONB of the Group for the 12 months ended 30 November 2012. 214 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information 2. ev resulTs (continued) 2.5 value of new Business (continued) Table 2.6 shows the VONB margin for the Group. The VONB margin is defined as VONB, excluding pension business, expressed as a percentage of ANP. The VONB for pension business is excluded from the margin calculation to be consistent with the definition of ANP. The Group VONB margin for the 12 months ended 30 November 2013 was 44.1 per cent compared with 43.6 per cent for the same period in 2012. Table 2.6 Summary of VONB Margin by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China AIA Korea Other Markets Total before unallocated Group Office expenses (local statutory basis) Adjustment to reflect additional Hong Kong reserving and capital requirements(2) Total before unallocated Group Office expenses (after additional Hong Kong reserving and capital requirements) After-tax value of unallocated Group Office expenses Total Notes: 12 months ended 30 November 2013 12 months ended 30 November 2012 ANP(1) VONB Margin(1) VONB Margin(1) (3) 781 565 400 319 249 338 689 57.6% 56.3% 67.3% 37.8% 66.4% 26.8% 32.0% 58.4% 53.9% 65.1% 46.0% 57.5% 28.5% 27.0% VONB Excluding Pension 449 318 269 121 166 91 221 1,635 3,341 48.9% 47.8% (67) – 1,568 (96) 1,472 3,341 – 3,341 46.9% 46.2% 44.1% 43.6% (1) ANP and VONB margin exclude pension business. (2) Adjustment to VONB for the branches of AIA Co. and AIA International, as described in Section 4.4 of this report. (3) Certain segmental reclassifications have been made in the prior period to conform to current period presentation. The reclassification has no impact on the total VONB and VONB margin of the Group for the 12 months ended 30 November 2012. ANNUAL REPORT 2013 215 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 2. ev resulTs (continued) 2.5 value of new Business (continued) Table 2.7 shows the breakdown of the VONB, ANP and VONB margin for the Group by quarter for business written in the 12 months to 30 November 2013. For comparison purposes, the quarterly VONB, ANP and VONB margin for business written in the 12 months to 30 November 2012 are also shown in the same table. Table 2.7 Summary of VONB, ANP and VONB Margin by quarter for the Group (US$ millions) Quarter Values for 2013 3 months ended 28 February 2013 3 months ended 31 May 2013 3 months ended 31 August 2013 3 months ended 30 November 2013 Values for 2012 3 months ended 29 February 2012 3 months ended 31 May 2012 3 months ended 31 August 2012 3 months ended 30 November 2012 Notes: VONB after CoC(1) ANP(2) VONB Margin(2) 291 354 379 466 232 280 300 376 745 782 839 975 543 644 696 813 38.4% 44.7% 44.7% 47.3% 42.1% 43.1% 42.6% 45.8% (1) CoC refers to the cost arising from holding the required capital as defined in Section 4.2 of this report. (2) ANP and VONB margin exclude pension business. 216 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information2. ev resulTs (continued) 2.6 analysis of ev movement Table 2.8 shows the analysis of movement in EV from 30 November 2012 to 30 November 2013. Table 2.8 Analysis of movement in EV (US$ millions) Opening EV Purchase price Acquired EV Effect of acquisitions EV post acquisitions Value of new business Expected return on EV Operating experience variances Operating assumption changes Interest costs on medium term notes and acquisition credit facility EV operating profit Investment return variances Effect of changes in economic assumptions Other non-operating variances Total EV profit Dividends Other capital movements Effect of changes in exchange rates Closing EV 12 months ended 30 November 2013 12 months ended 30 November 2012 ANW VIF EV EV 13,170 (1,865) 683 (1,182) 11,988 (957) 3,087 (255) (83) (26) 1,766 335 – 361 2,462 (595) (18) (371) 18,238 31,408 27,239 – 374 374 18,612 2,447 (700) 369 93 – 2,209 10 429 (515) 2,133 – – (389) (1,865) 1,057 (808) 30,600 1,490 2,387 114 10 (26) 3,975 345 429 (154) 4,595 (595) (18) (760) – – – 27,239 1,188 2,192 140 (29) – 3,491 933 (105) (113) 4,206 (530) (42) 535 13,466 20,356 33,822 31,408 YoY EV 15% n/m n/m n/m 12% 25% 9% (19)% n/m n/m 14% (63)% n/m 36% 9% 12% (57)% n/m 8% EV grew to US$33,822 million at 30 November 2013, an increase of 8 per cent over the year from US$31,408 million at 30 November 2012. The growth in EV of US$2,414 million is shown after a deduction of US$808 million for the effect of acquisitions in the year. The purchase price of US$1,865 million is in respect of the acquisitions of Sri Lankan insurer Aviva NDB Insurance (ANI) and ING Management Holdings (Malaysia) Sdn. Bhd. (ING Malaysia) completed on 5 December 2012 and 18 December 2012 respectively per note 5 to the IFRS financial statements. The acquired EV of US$1,057 million represents the EV of these two businesses at the respective completion dates of acquisition. EV operating profit grew by 14 per cent to US$3,975 million in 2013 (2012: US$3,491 million). The increase reflected a higher VONB of US$1,490 million (2012: US$1,188 million), US$2,387 million (2012: US$2,192 million) from the expected return on the higher opening EV, positive operating experience variances of US$114 million (2012: US$140 million), positive operating assumption changes of US$10 million (2012: US$(29) million) offset by interest costs of US$26 million (2012: nil) on medium term notes and an acquisition credit facility. The VONB shown in Table 2.8 is calculated at the point of sale for business written during the Period before deducting the amount attributable to non-controlling interests. The expected return on EV is the expected change in the EV over the Period plus the expected return on the VONB from the point of sale to 30 November 2013 less the VONB attributable to non-controlling interests. Operating experience variances reflect the impact on the ANW and VIF from differences between the actual experience over the Period and that expected based on the operating assumptions. ANNUAL REPORT 2013 217 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2. ev resulTs (continued) 2.6 analysis of ev movement (continued) The main operating experience variances (net of tax) are: • Expense variances of US$1 million (2012: US$(23) million) including non-recurring project expenses of US$(9) million (2012: US$(27) million); • Mortality and morbidity claims variances of US$116 million (2012: US$152 million); and • Persistency and other variances of US$(3) million (2012: US$11 million). The overall effect of changes to operating assumptions during the Period was US$10 million (2012: US$(29) million). The EV profit of US$4,595 million (2012: US$4,206 million) is the total of EV operating profit, investment return variances, the effect of changes in economic assumptions and other non-operating variances. The investment return variances arise from the impact of differences between the actual investment returns in the Period and the expected investment returns. This includes the impact on the EV of changes in the market values and market yields on existing fixed income assets, and the impact on the EV of changes in the economic assumptions used in the statutory reserving bases for the Group. The investment return variances of US$345 million (2012: US$933 million) were largely caused by positive statutory reserve movements offset by negative market movements compared with the assumptions used in the EV calculation at the start of the Period. The effect of changes in economic assumptions of US$429 million (2012: US$(105) million) includes the impact of changes in long- term investment return assumptions of US$161 million (2012: US$(893) million) and the impact of changes in risk discount rates of US$268 million (2012: US$788 million). Other non-operating variances amounted to US$(154) million (2012: US$(113) million) and included: • Tax adjustments resulting in a gain of US$195 million (2012: US$256 million); • Restructuring and other non-operating costs of US$44 million (2012: US$75 million), plus the current Period effect of US$(32) million (2012: US$(29) million) for the Agency Incentive Plan which was a one-off initiative to improve agent activity and productivity prior to the IPO of the Company; and • Modelling enhancements, accounting for the majority of the balance. The Group paid total shareholder dividends of US$595 million (2012: US$530 million). Other capital movements of US$(18) million (2012: US$(42) million) were mainly due to the purchase of shares held by employee share-based trusts. The US$(760) million (2012: US$535 million) effect of changes in exchange rates reflects the translation gains and losses in respect of exchange rate movements over the Period. 2.7 ev equity The EV as at 30 November 2013 included a deduction of US$808 million (2012: nil) for the effect of acquisitions in the year. The EV Equity grew to US$34,875 million at 30 November 2013, an increase of 10 per cent from US$31,657 million at 30 November 2012. Table 2.9 sets out the derivation of EV Equity from EV as at 30 November 2013. Table 2.9 Derivation of EV Equity from EV (US$ millions) EV Goodwill and other intangible assets(1) EV Equity Note: As at 30 November 2013 As at 30 November 2012 33,822 1,053 34,875 31,408 249 31,657 Growth 8% 323% 10% (1) Consistent with the IFRS financial statements, net of tax, amounts attributable to participating funds and non-controlling interests. 218 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information3. sensITIvITy analysIs The EV as at 30 November 2013 and the VONB for the 12-month period 1 December 2012 to 30 November 2013 have been recalculated to illustrate the sensitivity of the results to changes in certain central assumptions discussed in Section 5. The sensitivities analysed were: • Risk discount rates 200 basis points per annum higher than the central assumptions; • Risk discount rates 200 basis points per annum lower than the central assumptions; • Interest rates 50 basis points per annum higher than the central assumptions; • Interest rates 50 basis points per annum lower than the central assumptions; • The presentation currency (as explained below) appreciated by 5 per cent; • The presentation currency depreciated by 5 per cent; • Lapse and premium discontinuance rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); • Lapse and premium discontinuance rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); • Mortality/morbidity rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); • Mortality/morbidity rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); • Maintenance expenses 10 per cent lower (i.e. 90 per cent of the central assumptions); and • Expense inflation set to 0 per cent. The EV as at 30 November 2013 has been further analysed for the following sensitivities: • Equity prices increased proportionally by 10 per cent (i.e. 110 per cent of the prices at 30 November 2013); and • Equity prices decreased proportionally by 10 per cent (i.e. 90 per cent of the prices at 30 November 2013). For the interest rate sensitivities, the investment return assumptions and the risk discount rates were changed by 50 basis points per annum; the projected bonus rates on participating business, the statutory reserving bases at 30 November 2013 and the values of debt instruments held at 30 November 2013 were changed to be consistent with the interest rate assumptions in the sensitivity analysis, while all the other assumptions were unchanged. The EV Results of each entity in Section 4.1 are measured in the currency of the primary economic environment in which that entity operates (the functional currency) and presented in US dollar (the presentation currency). In order to provide a sensitivity to EV and VONB of foreign currency movements to the translation from functional currencies, a change of 5 per cent to the presentation currency is included. This sensitivity does not include the impact of currency movements on the translation of transactions denominated in a foreign currency of an entity into its functional currency (including any impacts on VIF). For the equity price sensitivities, the projected bonus rates on participating business and the values of equity securities and equity funds held at 30 November 2013 were changed to be consistent with the equity price assumptions in the sensitivity analysis, while all the other assumptions were unchanged. For each of the remaining sensitivity analysis, the statutory reserving bases at 30 November 2013 and the projected bonus rates on participating business were changed to be consistent with the sensitivity analysis assumptions, while all the other assumptions remain unchanged. The results of the above sensitivity analysis are shown below in Table 3.1 for the EV and in Table 3.2 for the VONB. ANNUAL REPORT 2013 219 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION3. sensITIvITy analysIs (continued) The sensitivities chosen do not represent the boundaries of possible outcomes, but instead illustrate how certain alternative assumptions would affect the results. Table 3.1 Sensitivity of EV as at 30 November 2013 (US$ millions) Scenario Central value 200 bps increase in risk discount rates 200 bps decrease in risk discount rates 10% increase in equity prices 10% decrease in equity prices 50 bps increase in interest rates 50 bps decrease in interest rates 5% appreciation in the presentation currency 5% depreciation in the presentation currency 10% increase in lapse/discontinuance rates 10% decrease in lapse/discontinuance rates 10% increase in mortality/morbidity rates 10% decrease in mortality/morbidity rates 10% decrease in maintenance expenses Expense inflation set to 0% Table 3.2 Sensitivity of VONB for the 12 months ended 30 November 2013 (US$ millions) Scenario Central value 200 bps increase in risk discount rates 200 bps decrease in risk discount rates 50 bps increase in interest rates 50 bps decrease in interest rates 5% appreciation in the presentation currency 5% depreciation in the presentation currency 10% increase in lapse rates 10% decrease in lapse rates 10% increase in mortality/morbidity rates 10% decrease in mortality/morbidity rates 10% decrease in maintenance expenses Expense inflation set to 0% 220 AIA GROUP LIMITED EV 33,822 29,976 39,314 34,459 33,168 34,031 33,418 32,874 34,770 33,440 34,275 31,226 36,497 34,280 34,217 VONB 1,490 1,068 2,104 1,564 1,399 1,434 1,546 1,378 1,614 1,213 1,766 1,551 1,540 FINANCIAL STATEMENTSSupplementary Embedded Value Information4. meThodoloGy 4.1 entities Included in This report The Group operates through a number of subsidiaries and branches. Its two main operating subsidiaries are AIA Company Limited (AIA Co., formerly known as American International Assurance Company, Limited), a subsidiary of the Company, and AIA International Limited (AIA International, formerly known as American International Assurance Company (Bermuda) Limited), a subsidiary of AIA Co. Furthermore, AIA Co. has branches located in Brunei, China and Thailand and AIA International has branches located in Hong Kong, Korea, Macau, New Zealand and Taiwan. The following is a full list of the entities and their mapping to “Business Units” for the purpose of this report. • AIA Australia refers to AIA Australia Limited, a subsidiary of AIA Co.; • AIA China refers to the Chinese branches of AIA Co.; • AIA Hong Kong refers to the total of the following three entities: • • the Hong Kong and Macau branches of AIA International; the Hong Kong and Macau business written by AIA Co.; and • AIA Pension and Trustee Co. Ltd., a subsidiary of AIA Co. • AIA Indonesia refers to PT. AIA Financial, a subsidiary of AIA International; • AIA Korea refers to the Korean branch of AIA International; • AIA New Zealand refers to the New Zealand branch of AIA International; • AIA Malaysia refers to AIA Bhd. (formerly known as American International Assurance Bhd.), a subsidiary of AIA Co., its subsidiary AIA AFG Takaful Bhd., and AIA PUBLIC Takaful Bhd. (formerly known as ING PUBLIC Takaful Ehsan Berhad), a 60 per cent owned subsidiary of AIA Co.; • Philam Life refers to The Philippine American Life and General Insurance Company, a subsidiary of AIA Co. and its 51 per cent owned subsidiary BPI-Philam Life Assurance Corporation; • AIA Singapore refers to AIA Singapore Private Limited, a subsidiary of AIA Co., and Brunei branch of AIA Co.; • AIA Thailand refers to the Thailand branches of AIA Co.; • AIA Taiwan refers to the Taiwanese branch of AIA International; • AIA Vietnam refers to AIA (Vietnam) Life Insurance Company Limited, a subsidiary of AIA International; and • AIA Sri Lanka refers to AIA Insurance Lanka PLC (formerly known as Aviva NDB Insurance), a 97.15 per cent owned subsidiary of AIA Co. The Group completed the acquisitions of Aviva NDB Insurance and ING Management Holdings (Malaysia) Sdn. Bhd. on 5 December 2012 and 18 December 2012 respectively. The financial results of these two newly-acquired businesses are accounted for in the Group’s 2013 results from the respective dates of completion. The business of ING Management Holdings (Malaysia) Sdn. Bhd. has been integrated into AIA Malaysia. See note 5 to the IFRS financial statements for more details. In addition, the entity Tata AIA Life Insurance Company Limited, which is 26 per cent owned by AIA International, has been included in the Group ANW presented in this report on an equity method accounting basis. The summary of the EV of the Group by Business Unit in this report also includes a segment for “Group Corporate Centre” results. The results shown for this segment consist of the ANW for the Group’s corporate functions and the present value of remittance taxes payable on distributable profits to Hong Kong. The ANW has been derived as the IFRS equity for this segment plus mark-to- market adjustments less the value of excluded intangible assets. Results are presented separately for the six largest Business Units, with those for the remaining Business Units presented together under the category “Other Markets”. This is consistent with the segment information in the IFRS financial statements. For the VONB, “Other Markets” includes the present value of allowance for remittance taxes payable on distributable profits to Hong Kong. ANNUAL REPORT 2013 221 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION4. meThodoloGy (continued) 4.2 embedded value and value of new Business The Group uses a traditional deterministic discounted cash flow methodology for determining its EV and VONB. This methodology makes implicit allowance for all sources of risk including the cost of investment return guarantees and policyholder options, asset-liability mismatch risk, credit risk, the risk that actual experience in future years differs from that assumed, and for the economic cost of capital, through the use of a risk-adjusted discount rate. Typically, the higher the risk discount rate, the greater the allowance for these factors. This is a common methodology used by life insurance companies in Asia currently. Alternative valuation methodologies and approaches continue to emerge and may be considered by AIA. The business included in the VIF and VONB calculations includes all life business written by the Business Units of the Group, plus other lines of business which may not be classified as life business but have similar characteristics. These include accident and health, group and pension businesses. The projected in-force business included in the VIF also incorporates expected renewals on short-term business with a term of one year or less. The EV is the sum of the ANW and VIF. The ANW is the market value of assets in excess of the assets backing the policy reserves and other liabilities of the life (and similar) business of the Group, plus the IFRS equity value (excluding the value of intangible assets) of other activities, such as general insurance business. It excludes any amounts not attributable to shareholders of the Company. The market value of investment property and property held for use used to determine the ANW is based on the fair value disclosed in the Group’s IFRS financial statements as at the valuation date. It is the Group’s policy to obtain external property valuations annually except in the case of a discrete event occurring in the interim that has a significant impact on the fair value of the properties. The VIF is the present value of projected after-tax statutory profits emerging in the future from the current in-force business less the cost arising from holding the required capital (CoC) to support the in-force business. CoC is calculated as the face value of the required capital as at the valuation date less the present value of the net-of-tax investment return on the shareholder assets backing required capital and the present value of projected releases from the assets backing the required capital. Where the required capital may be covered by policyholder assets such as surplus assets in a participating fund there is no associated cost of capital included in the VIF or VONB. EV Equity is the total of EV, goodwill and other intangible assets attributable to shareholders of the Company. The VONB is the present value, measured at point of sale, of projected after-tax statutory profits emerging in the future from new business sold in the period less the cost of holding required capital in excess of regulatory reserves to support this business. The VONB for the Group is calculated based on assumptions applicable at the point of measurement and before deducting the amount attributable to non-controlling interests. The VONB attributable to non-controlling interests was US$11 million for the 12-month period ended 30 November 2013 (2012: US$11 million). A deduction has been made from the EV and VONB for the present value of future after-tax unallocated Group Office expenses, representing the expenses incurred by the Group Office which are not allocated to the Business Units. These unallocated Group Office expenses have been allocated to acquisition and maintenance activities, and a deduction made from the VONB and VIF respectively. 222 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information4. meThodoloGy (continued) 4.3 definition of new Business New business includes the sale of new contracts during the period, additional single premium payments on recurrent single premium contracts and increments to existing contracts where these are not variations allowed for in the calculation of the VIF. The VONB also includes the present value of cash flows associated with new policies written during the reporting period but subsequently terminated before the valuation date. For group renewable business including group yearly renewable term business, new business is composed of new schemes set up during the period plus any premium payable on existing schemes that exceeds the prior year’s premium. For short-term accident and health business with a term of one year or less, renewals of existing contracts are not considered new business, and the value of expected renewals on this business is included in the VIF. For pension business, sale of new contracts during the period and any new contribution, including assets transferred in, are considered as new business for the calculation of the VONB. New business volumes shown in this report are measured using annualised new premium (ANP), which is an internal measure of new business sales. This represents 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. It excludes new business sales for pension business. 4.4 Consolidation of hong Kong Branches The Group’s subsidiaries, AIA Co. and AIA International, are both Hong Kong-regulated entities. AIA operates in a number of territories as branches of these entities. Therefore, the business written in these branches is subject to the local reserving and capital requirements in the relevant territory and the Hong Kong reserving and capital requirements applicable to AIA Co. and AIA International at the entity level. For these branches, the EV Results shown in Section 2 have been calculated reflecting the more onerous of the Hong Kong and branch level regulatory reserving and capital requirements. This was done because the ultimate distribution of profits to shareholders of the Company from AIA Co. and AIA International will depend on both the Hong Kong and the local regulatory reserving and capital requirements. At the end of November 2013, the more onerous reserving basis for both AIA Co. and AIA International was the Hong Kong regulatory basis. This impact is shown as a Group-level adjustment to the EV and VONB. The EV and VONB for each Business Unit reflect only the local reserving and capital requirements, as discussed in Section 4.6. 4.5 valuation of future statutory losses For certain lines of business, projected future statutory profits are negative due to the local statutory reserves being insufficient to meet the value of future policyholder cash flows. Within a traditional embedded value framework, there are a number of acceptable methods for determining the value of a combination of positive and negative statutory profits for different lines of business. For the purposes of this valuation, future projected statutory losses have been valued by discounting them at the risk discount rate for the relevant Business Unit. This has been done because the allowance for risk in the range of selected risk discount rates for each Business Unit has been set taking into account the presence of any such business lines with projected statutory losses. Also, the currently more onerous Hong Kong regulatory reserving requirements for the branches of AIA Co. and AIA International have the effect of reducing the level of any future projected statutory losses for these Business Units. Based on the assumptions described in Section 5, and allowing for the Hong Kong statutory reserving and capital requirements for the branches of AIA Co. and AIA International, the overall projected annual distributable profits from the current in-force business and the assets backing the required capital of the Group are positive over the remaining lifetime of the business. Therefore, it is not considered necessary to change the discounting approach described above. ANNUAL REPORT 2013 223 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION4. meThodoloGy (continued) 4.6 required Capital Each of the Business Units has a regulatory requirement to hold shareholder capital in addition to the assets backing the insurance liabilities. The Group’s assumed levels of required capital for each Business Unit are set out in Table 4.1 below. Further, the consolidated EV Results for the Group have been calculated reflecting the more onerous of the Hong Kong and branch level local regulatory reserving and capital requirements for AIA Co. and AIA International. Table 4.1 Required Capital by Business Unit Business Unit AIA Australia AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand Philam Life Required Capital 100% of the regulatory capital adequacy requirement(1) 100% of required minimum solvency margin 150% of required minimum solvency margin(2) 120% of regulatory Risk-Based Capital requirement(3) 150% of regulatory Risk-Based Capital requirement 170% of regulatory Risk-Based Capital requirement 100% of the local regulatory requirement 100% of regulatory Risk-Based Capital requirement AIA Singapore – Brunei business 100% of the local regulatory requirement AIA Singapore – Singapore business 180% of regulatory Risk-Based Capital requirement AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Notes: 120% of proposed Risk-Based Capital requirement 250% of regulatory Risk-Based Capital requirement(4) 140% of regulatory Risk-Based Capital requirement 100% of required minimum solvency margin (1) The Australian Prudential Regulatory Authority has implemented new capital standards which are effective 1 January 2013. The new requirements have been assumed to apply from 30 November 2012 in EV and VONB calculations. (2) The assumed level of required capital for AIA Hong Kong is also used for the branches of AIA Co. and AIA International in the calculation of the consolidated EV Results. (3) The Ministry of Finance of Indonesia has implemented new capital standards which are effective 1 January 2013. The new requirements have been assumed to apply from 1 December 2012 in EV and VONB calculations. (4) Following an announcement by the Financial Supervisory Commission on 8 February 2013, the required capital assumed in EV and VONB calculations has been changed from 200% to 250% of regulatory Risk-Based Capital requirement effective 1 December 2012. 224 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information5. assumpTIons 5.1 Introduction This section summarises the assumptions used by the Group to determine the EV as at 30 November 2013 and the VONB for the 12 months to 30 November 2013 and highlights certain differences in assumptions between the EV as at 30 November 2012 and the EV as at 30 November 2013. 5.2 economic assumptions Investment returns The Group has set the assumed long-term future returns for fixed income assets to reflect its view of expected returns having regard to historical returns, estimates of long-term forward rates from yields available on government bonds and current bond yields. In determining returns on fixed income assets the Group allows for the risk of default, and this allowance varies by the credit rating of the underlying asset. Where these long-term views of investment return assumptions differ from current market yields on existing fixed income assets such that there would be a significant impact on value, an adjustment was made to make some allowance for the current market yields. In these cases, in calculating the VIF, adjustment was made to the investment return assumptions such that the investment returns on existing fixed income assets were set consistently with the current market yield on these assets for their full term, to be consistent with the valuation of the assets backing the policy liabilities. The Group has set the equity return assumptions by reference to the return on 10-year government bonds, allowing for an internal assessment of equity risk premia that vary by territory. For each Business Unit, the non-linked portfolio is divided into a number of distinct product groups, and the returns for each of these product groups have been derived by considering current and future targeted asset allocations and associated investment returns for major investment classes. For unit-linked business, fund growth assumptions have been determined based on actual fund mixes at the valuation date and expected long-term returns for major asset classes. risk discount rates The risk discount rates for each Business Unit can be considered as the sum of the appropriate risk-free interest rate, to reflect the time value of money, and a risk margin to make allowance for the risk profile of the business. The Group has generally set the risk discount rates to be equal to the estimated cost of equity capital for each Business Unit within the Group. The cost of equity capital is derived using an estimated long-term risk-free interest rate, an equity risk premium and a market risk factor. In some cases, adjustments have been made to reflect territorial or Business Unit-specific factors. ANNUAL REPORT 2013 225 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION5. assumpTIons (continued) 5.2 economic assumptions (continued) risk discount rates (continued) Table 5.1 summarises the risk discount rates and assumed long-term investment returns for the major asset classes for each Business Unit as at 30 November 2013. The investment returns on existing fixed income assets were set consistently with the market yields on these assets. Note that VONB results were calculated based on start-of-quarter economic assumptions consistent with the measurement at point of sale. The same risk discount rates were used for all the EV Results shown in Section 1 and Section 2 of this report. In particular, for the branches of AIA Co. and AIA International, the consolidated EV Results reflecting the Hong Kong reserving and capital requirements were calculated using the branch-specific risk discount rates shown in the table. The present value of unallocated Group Office expenses was calculated using the AIA Hong Kong risk discount rate. The investment returns shown are gross of tax and investment expenses. Table 5.1 Risk discount rates and long-term investment return assumptions by Business Unit (%) Business Unit Risk discount rates 10-year government bonds Local equities As at 30 Nov 2013 7.75 9.75 7.25 13.00 9.75 8.75 8.25 11.50 6.75 6.75 19.00 7.75 9.25 14.80 As at 30 Nov 2012 7.75 10.00 7.25 13.50 9.75 8.75 8.25 12.25 7.00 7.00 n/a(3) 7.75 9.50 16.00 As at 30 Nov 2013 As at 30 Nov 2012 3.37 3.74 2.68 6.50 3.85 4.20 3.99 4.00 2.23 2.23 13.33 1.48 3.87 9.00 3.37 3.74 2.43 6.50 3.85 4.20 3.99 5.25 1.93 1.93 n/a(3) 1.48 3.87 10.20 As at 30 Nov 2013 7.15 9.49 7.73 11.25 7.19 8.75 n/a(2) 9.16 7.00 7.00 15.00 6.62 9.62 14.80 As at 30 Nov 2012 7.15 9.74 7.73 11.25 7.19 8.09 n/a(2) 10.41 7.25 7.25 n/a(3) 6.62 9.87 16.00 AIA Australia AIA China AIA Hong Kong(1) AIA Indonesia (Rupiah-denominated business) AIA Korea AIA Malaysia AIA New Zealand Philam Life (Peso-denominated business) AIA Singapore – Brunei business AIA Singapore – Singapore business AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Notes: (1) The majority of AIA Hong Kong’s assets and liabilities are denominated in US dollars. The 10-year government bond assumption is for US dollar- denominated bonds. (2) The assumed asset allocations do not include equities. (3) The Business Unit results have been included in the EV Results since the acquisition completion date of 5 December 2012. 226 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information 5. assumpTIons (continued) 5.3 persistency Persistency covers the assumptions required, where relevant, for policy lapse (including surrender), premium persistency, premium holidays, partial withdrawals and retirement rates for pension products. Assumptions have been developed by each of the Business Units based on their recent historical experience, and their best estimate expectations of current and expected future experience. Persistency assumptions vary by policy year and product type with different rates for regular and single premium products. Where experience for a particular product was not credible enough to allow any meaningful analysis to be performed, experience for similar products was used as a basis for future persistency experience assumptions. In the case of surrenders, the valuation assumes that current surrender value bases will continue to apply in the future. 5.4 expenses The expense assumptions have been set based on the most recent expense analysis. The purpose of the expense analysis is to allocate firstly total expenses between acquisition and maintenance activities, and then to allocate these acquisition and maintenance expenses to various product categories to derive unit cost assumptions. Where the expenses associated with certain activities have been identified as being one-off, these expenses have been excluded from the expense analysis. Expense assumptions have been determined for acquisition and maintenance activities, split by product type, and unit costs expressed as a percentage of premium, sum assured and an amount per policy. Where relevant, expense assumptions have been calculated per distribution channel. Expense assumptions do not make allowance for any anticipated future expense savings as a result of any strategic initiatives aimed at improving policy administration and claims handling efficiency. Assumptions for commission rates and other sales-related payments have been set in line with actual experience. Group office expenses Group Office expense assumptions have been set, after excluding non-recurring expenses, based on actual acquisition and maintenance expenses in the 12-month period to 30 November 2013. The Group Office acquisition expenses have been deducted from the VONB. The present value of the projected future Group Office maintenance expenses has been deducted from the Group EV. The maintenance expense assumptions in the VONB also allow for the allocation of Group Office expenses. ANNUAL REPORT 2013 227 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION5. assumpTIons (continued) 5.5 expense Inflation The assumed expense inflation rates are based on expectations of long-term consumer price and salary inflation. The expense inflation assumptions are shown in Table 5.2 below. Table 5.2 Expense inflation assumptions by Business Unit (%) Business Unit AIA Australia AIA Brunei AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand Philam Life AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Note: As at 30 November 2013 As at 30 November 2012 3.25 3.25 2.0 2.0 2.0 6.0 3.5 3.0 2.5 3.5 2.0 6.5 1.0 2.5 5.0 2.0 2.0 2.0 6.0 3.5 3.0 2.5 4.5 2.0 n/a(1) 1.0 2.5 5.0 (1) The Business Unit results have been included in the EV Results since the acquisition completion date of 5 December 2012. Unallocated Group Office expenses are assumed to inflate by the weighted average of the Business Unit expense inflation rates. 5.6 mortality Assumptions have been developed by each Business Unit based on their recent historical experience, and their expectations of current and expected future experience. Where historical experience is not credible, reference has been made to pricing assumptions supplemented by market data, where available. Mortality assumptions have been expressed as a percentage of either standard industry experience tables or, where experience is sufficiently credible, as a percentage of tables that have been developed internally by the Group. For products that are exposed to longevity risk, an allowance has been made for expected improvements in mortality; otherwise no allowance has been made for mortality improvements. 5.7 morbidity Assumptions have been developed by each Business Unit based on their recent historical experience, and their expectations of current and expected future experience. Morbidity rate assumptions have been expressed as a percentage of standard industry experience tables or as expected claims ratios. 5.8 reinsurance Reinsurance assumptions have been developed by each Business Unit based on the reinsurance arrangements in force as at the valuation date and the recent historical and expected future experience. 228 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value Information5. assumpTIons (continued) 5.9 policyholder dividends, profit sharing and Interest Crediting The projected policyholder dividend, profit sharing and interest crediting assumptions set by each Business Unit that have been used in calculating the EV Results presented in this report, reflect contractual and regulatory requirements, policyholders’ reasonable expectations (where clearly defined) and each Business Unit’s best estimate of future policies, strategies and operations consistent with the investment return assumptions used in the EV Results. Participating fund surpluses have been assumed to be distributed between policyholders and shareholders via future final bonuses or at the end of the projection period so that there are no residual assets at the end of the projection period. 5.10 Taxation The projections of distributable earnings underlying the values presented in this report are net of corporate tax, based on current taxation legislation and corporate tax rates. The projected amount of tax payable in any year allows, where relevant, for the benefits arising from any tax loss carried forward. The local corporate tax rates used by each Business Unit are set out in Table 5.3 below. Table 5.3 Local corporate tax rates by Business Unit (%) Business Unit AIA Australia AIA China AIA Hong Kong – Hong Kong business AIA Hong Kong – Macau business AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand Philam Life AIA Singapore – Brunei business AIA Singapore – Singapore business AIA Sri Lanka AIA Taiwan AIA Thailand(3) AIA Vietnam Notes: As at 30 November 2013 As at 30 November 2012 30.0 25.0 16.5 12.0 25.0 24.2 25.0 for assessment years 2013 to 2015; 24.0 thereafter(1) 28.0 30.0 20.0 17.0 28.0 17.0 30.0 25.0 16.5 12.0 25.0 24.2 25.0 28.0 30.0 20.0 17.0 n/a(2) 17.0 20.0 for assessment years 2013 and 2014; 30.0 thereafter 25.0 for assessment year 2013; 22.0 for assessment years 2014 and 2015; 20.0 thereafter(4) 23.0 for assessment year 2012; 20.0 for assessment years 2013 and 2014; 30.0 thereafter 25.0 (1) The Malaysian Government announced a corporate tax rate change in the Federal Government Budget 2014 which will be effective from assessment year 2016. (2) The Business Unit results have been included in the EV Results since the acquisition completion date of 5 December 2012. (3) An extension of the current tax rate reduction beyond the 2014 assessment year remains uncertain upon expiry of the 2011 Royal Decree. The best estimate corporate tax rates for future assessment years will continue to be evaluated. (4) The amended law on corporate income tax has been passed and will be effective 1 January 2014. ANNUAL REPORT 2013 229 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION5. assumpTIons (continued) 5.10 Taxation (continued) The tax assumptions used in the valuation reflect the local corporate tax rates set out above. Where applicable, tax payable on investment income has been reflected in projected investment returns. The EV of the Group as at 30 November 2013 is calculated after deducting any remittance taxes payable on the anticipated distribution of both the ANW and VIF. Where territories have an imputation credit system in place, e.g. Australia, no allowance has been made for the value of the imputation credits in the results shown in this report. 5.11 statutory valuation Bases The projection of regulatory liabilities at future points in time assumes the continuation of the reserving methodologies used to value policyholder liabilities as at the valuation date. 5.12 product Charges Management fees and product charges reflected in the VIF and VONB have been assumed to follow existing scales. 5.13 foreign exchange The EV as at 30 November 2013 and 30 November 2012 have been translated into US dollar using exchange rates as at each valuation date. The VONB results shown in this report have been translated into US dollar using the corresponding average exchange rates for each quarter. The other components of the EV profit shown in the analysis of movement in EV have been translated using average exchange rates for the period. 6. evenTs afTer The reporTInG perIod On 19 December 2013, the Group entered into an agreement with Citibank to enter into an exclusive, long-term bancassurance partnership for a 15-year period that encompasses 11 markets in the Asia-Pacific region. The markets covered are: Hong Kong, Singapore, Thailand, China, Indonesia, the Philippines, Vietnam, Malaysia, Australia, India and Korea. The agreement provided for a payment of US$800 million to Citibank upon signing, together with future payments during the contract term. On 21 February 2014, the Board of Directors proposed a final dividend of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share). 230 AIA GROUP LIMITED FINANCIAL STATEMENTSSupplementary Embedded Value InformationanalysIs of reGIsTered shareholder aCCounTs Size of registered shareholding 1,000 shares or below 1,001 – 5,000 shares 5,001 – 10,000 shares 10,001 – 100,000 shares 100,001 shares or above 30 November 2013 Number of shareholder accounts % of total number of shareholder accounts 19,678 4,216 437 222 7 80.12 17.17 1.78 0.90 0.03 24,560 100.00 Number of shares 7,395,876 9,694,433 3,319,400 5,176,800 12,018,413,492 12,044,000,001 % of total number of shares 0.06 0.08 0.03 0.04 99.79 100.00 fInanCIal Calendar Announcement of 2013 Full Year Results Book Close Period for 2014 Annual General Meeting 2014 Annual General Meeting Ex-dividend date for proposed 2013 Final Dividend Record date for proposed 2013 Final Dividend Payment date for proposed 2013 Final Dividend Announcement of 2014 Interim Results 21 February 2014 5 May 2014 to 9 May 2014 (both days inclusive) 9 May 2014 13 May 2014 14 May 2014 29 May 2014 25 July 2014 annual General meeTInG The 2014 Annual General Meeting will be held at 11:00 a.m. Hong Kong time on Friday, 9 May 2014 at the Grand Ballroom, 2/F, Hotel Nikko Hongkong, 72 Mody Road, Tsimshatsui East, Kowloon, Hong Kong. Details of the business to be transacted at the AGM are set out in the circular to the shareholders of the Company to be sent together with this Annual Report. Details of voting results at the AGM can be found on the website of the Hong Kong Stock Exchange at www.hkex.com.hk and the Company’s website at www.aia.com on Friday, 9 May 2014. fInal dIvIdend The Board has recommended a final dividend of 28.62 Hong Kong cents per share (2012: 24.67 Hong Kong cents per share) in respect of the year ended 30 November 2013. If approved, the proposed final dividend together with the interim dividend will represent a total dividend of 42.55 Hong Kong cents per share (2012: 37.00 Hong Kong cents per share) in respect of the year ended 30 November 2013. Subject to shareholders’ approval at the AGM, the final dividend will be payable on Thursday, 29 May 2014 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 14 May 2014. share reGIsTrar If you have any enquiries relating to your shareholding, please contact the Company’s share registrar at the contact given below: Computershare Hong Kong Investor Services Limited 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong Telephone: 852 2862 8555 Email: hkinfo@computershare.com.hk Website: www.computershare.com ANNUAL REPORT 2013 231 ADDITIONAL INFORMATIONInformation for ShareholdersOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONeleCTronIC CommunICaTIons Shareholders are encouraged to elect to receive shareholder documents electronically. You may at any time send written notice to the Company c/o the Company’s share registrar or via email at aia.ecom@computershare.com.hk specifying your name, address and request to change your choice of language or means of receipt of all shareholder documents. This provides environmental benefits as well as reducing printing and distribution costs. annual reporT This Annual Report is printed in English and Chinese and is available at the website of the Company. If you would like to have a printed version of this Annual Report, please contact the Company’s share registrar using the contact details given below: Computershare Hong Kong Investor Services Limited 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong Email: aia.ecom@computershare.com.hk The Company makes every effort to ensure consistency between the Chinese and English version of this Annual Report. However, in the event of any inconsistency, the English version shall prevail. InvesTmenT CommunITy and news medIa Enquiries may be directed to: Investment Community Paul Lloyd Feon Lee Joel Lieginger +852 2832 6160 +852 2832 4704 +852 2832 4703 News Media Stephen Thomas Sonia Tsang Emerald Ng +852 2832 6178 +852 2832 1868 +852 2832 4720 forward-looKInG sTaTemenTs This document contains certain forward-looking statements relating to the Group that are based on the beliefs of the Group’s management as well as assumptions made by and information currently available to the Group’s management. These forward- looking statements are, by their nature, subject to significant risks and uncertainties. These forward-looking statements include, without limitation, statements relating to the Group’s business prospects, future developments, trends and conditions in the industry and geographical markets in which the Group operates, its strategies, plans, objectives and goals, its ability to control costs, statements relating to prices, volumes, operations, margins, overall market trends, risk management and exchange rates. When used in this document, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions, as they relate to the Group or the Group’s management, are intended to identify forward-looking statements. These forward-looking statements reflect the Group’s views as of the date hereof with respect to future events and are not a guarantee of future performance or developments. You are strongly cautioned that reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statements as a result of a number of factors, including any changes in the laws, rules and regulations relating to any aspects of the Group’s business operations, general economic, market and business conditions, including capital market developments, changes or volatility in interest rates, foreign exchange rates, equity prices or other rates or prices, the actions and developments of the Group’s competitors and the effects of competition in the insurance industry on the demand for, and price of, the Group’s products and services, various business opportunities that the Group may or may not pursue, changes in population growth and other demographic trends, including mortality, morbidity and longevity rates, persistency levels, the Group’s ability to identify, measure, monitor and control risks in the Group’s business, including its ability to manage and adapt its overall risk profile and risk management practices, its ability to properly price its products and services and establish reserves for future policy benefits and claims, seasonal fluctuations and factors beyond the Group’s control. Subject to the requirements of the Listing Rules, the Group does not intend to update or otherwise revise the forward-looking statements in this document, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this document might not occur in the way the Group expects, or at all. Accordingly, you should not place undue reliance on any forward-looking information or statements. All forward-looking statements in this document are qualified by reference to the cautionary statements set forth in this section. 232 AIA GROUP LIMITED ADDITIONAL INFORMATIONInformation for Shareholdersregistered office 35/F, AIA Central No. 1 Connaught Road Central Hong Kong website www.aia.com Company secretary Ms. Wing-Nga Lai, FCIS, FCS authorised representatives Mr. Mark Edward Tucker Ms. Wing-Nga Lai share registrar Computershare Hong Kong Investor Services Limited 17M Floor Hopewell Centre 183 Queen’s Road East, Wanchai Hong Kong principal Bankers Citibank, N.A. Standard Chartered Bank auditor PricewaterhouseCoopers Certified Public Accountants Board of dIreCTors non-executive Chairman and non-executive director Mr. Edmund Sze-Wing Tse executive director Mr. Mark Edward Tucker Independent non-executive directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Tan Sri Mohamed Azman Yahya (with effect from 24 February 2014) audit Committee Mr. John Barrie Harrison (Chairman) Mr. Jack Chak-Kwong So Mr. George Yong-Boon Yeo Mr. Edmund Sze-Wing Tse nomination Committee Mr. Edmund Sze-Wing Tse (Chairman) Mr. Chung-Kong Chow Mr. Jack Chak-Kwong So Dr. Qin Xiao Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee Tan Sri Mohamed Azman Yahya (with effect from 24 February 2014) remuneration Committee Mr. Jack Chak-Kwong So (Chairman) Dr. Qin Xiao Mr. George Yong-Boon Yeo Tan Sri Mohamed Azman Yahya (with effect from 24 February 2014) Mr. Mark Edward Tucker risk Committee Mr. Chung-Kong Chow (Chairman) Mr. John Barrie Harrison Dr. Narongchai Akrasanee Mr. Edmund Sze-Wing Tse Mr. Mark Edward Tucker ANNUAL REPORT 2013 233 ADDITIONAL INFORMATIONCorporate InformationOVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAccident and health (A&H) insurance products A&H insurance products provide morbidity or sickness benefits and include health, disability, critical illness and accident cover. A&H insurance products are sold both as stand-alone policies and as riders that can be attached to our individual life insurance policies. Acquisition cost (of a financial instrument) The amount of cash or cash equivalents paid or the fair value of other consideration provided, in order to acquire an asset at the date of its acquisition. Active agent An agent who sells at least one life insurance policy per month. Active market A market in which all the following conditions exist: • the items traded within the market are homogeneous; • willing buyers and sellers can normally be found at any time; and • prices are available to the public. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. ANW is the market value of assets in excess of the assets backing the policy reserves and other liabilities of the life (and similar) business of AIA, plus the IFRS equity value (excluding the value of intangible assets) of other activities, such as general insurance business. It excludes any amounts not attributable to shareholders of AIA Group Limited. The market value of investment property and property held for use used to determine the ANW is based on the fair value disclosed in AIA’s IFRS financial statements as at the valuation date. It is AIA’s policy to obtain external property valuations annually except in the case of a discrete event occurring in the interim that has a significant impact on the fair value of the properties. Adjusted net worth (ANW) AGM 2014 Annual General Meeting of the Company to be held at 11:00 a.m. Hong Kong time on Friday, 9 May 2014. AIA or the Group AIA Group Limited and its subsidiaries. AIA Co. AIA International AIA Vitality AIG ALICO 234 AIA GROUP LIMITED AIA Company Limited (formerly known as American International Assurance Company, Limited), a subsidiary of the Company. AIA International Limited (formerly known as American International Assurance Company (Bermuda) Limited), a subsidiary of AIA Co. A science-backed wellness programme that provides participants with the knowledge, tools and motivation to help them achieve their personal health goals. The programme is a joint venture between AIA and Discovery Limited, a specialist insurer headquartered in South Africa. American International Group, Inc. American Life Insurance Company. ADDITIONAL INFORMATIONGlossary Amortised cost The amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility. ANI Aviva NDB Insurance. Annualised new premium (ANP) ANP represents 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. It is an internally used measure of new business sales or activity for all entities within AIA. ANP excludes new business of pension business, personal lines and motor insurance. Annuity ASPP A savings product where the accumulated amount can be paid out to the customer in a variety of income streams. Agent Share Purchase Plan. Asset-liability management ALM is the management of the relative risk profiles of assets and liabilities. (ALM) Available for sale (AFS) financial assets Financial assets that may be sold before maturity and that are used to back insurance and investment contract liabilities and shareholders’ equity, and which are not managed on a fair value basis. Non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables or as at fair value through profit or loss. Available for sale financial instruments are measured at fair value, with movements in fair value recorded in other comprehensive income. Bancassurance The distribution of insurance products through banks or other financial institutions. Claims risk Common control The possibility that the frequency or severity of claims arising from insurance products exceeds the levels assumed when the products were priced. A business combination involving entities under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination. The Company AIA Group Limited. Corporate Governance Code Corporate Governance Code set out in Appendix 14 to the Listing Rules. Cost of capital (CoC) CoC is calculated as the face value of the required capital as at the valuation date less the present value of the net-of-tax investment return on the shareholder assets backing the required capital and the present value of projected releases from the assets backing the required capital. Where the required capital may be covered by policyholder assets such as surplus assets in a participating fund, there is no associated cost of capital included in the VIF or VONB. Credit risk The risk that third parties fail to meet their obligations to the Group when they fall due. Currency risk A substantial part of the risk that asset or liability values, cash flows, income or expenses will be affected by changes in exchange rates. ANNUAL REPORT 2013 235 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Deferred acquisition costs (DAC) Deferred origination costs (DOC) DAC are expenses of an insurer which are incurred in connection with the acquisition of new insurance contracts or the renewal of existing insurance contracts. They include commissions and other variable sales inducements and the direct costs of issuing the policy, such as underwriting and other policy issue expenses. These costs are deferred and expensed to the consolidated income statement on a systematic basis over the life of the policy. DAC assets are tested for recoverability at least annually. Origination costs are expenses which are incurred in connection with the origination of new investment contracts or the renewal of existing investment contracts. For contracts that involve the provision of investment management services, these include commissions and other incremental expenses directly related to the issue of each new contract. Origination costs on contracts with investment management services are deferred and recognised as an asset in the consolidated statement of financial position and expensed to the consolidated income statement on a systematic basis in line with the revenue generated by the investment management services provided. Such assets are tested for recoverability. Defined benefit plans Post-employment benefit plans under which amounts to be paid or services to be provided as post-retirement benefits are determined by reference to a formula usually based on employees’ earnings and/or years of service. Defined contribution plans Post-employment benefit plans under which amounts to be paid as post-retirement benefits are determined by contributions to a fund together with earnings thereon. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay the post-retirement benefits. Discretionary participation features (DPF) A contractual right to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the Group; and • that are contractually based on: – the performance of a specified pool of contracts or a specified type of contract; – realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or – the profit or loss of the company, fund or other entity that issues the contract. Effective interest method A method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments or receipts through the expected life of the financial instrument, or when appropriate, a shorter period, to the net carrying value of the financial asset or financial liability. Embedded value (EV) An actuarially determined estimate of the economic value of a life insurance business based on a particular set of assumptions as to future experience, excluding any economic value attributable to future new business. EPS Earnings per share. 236 AIA GROUP LIMITED ADDITIONAL INFORMATIONGlossary Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) ESPP ExCo Fair value EV Equity is the total of embedded value, goodwill and other intangible assets attributable to shareholders of the Company. Employee Share Purchase Plan. The Executive Committee of the Group. The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value through profit or loss (FVTPL) Financial assets that are held to back unit-linked contracts and participating funds or financial assets and liabilities that are held for trading. A financial asset or financial liability that is measured at fair value in the statement of financial position with gains and losses arising from movements in fair value being presented in the consolidated income statement as a component of the profit or loss for the year. First year premiums First year premiums are the premiums received in the first year of a recurring premium policy. As such, they provide an indication of the volume of new policies sold. FRC Financial Risk Committee. Free surplus ANW in excess of the required capital. Functional currency The currency of the primary economic environment in which the entity operates. GAMA International A worldwide association serving the professional development needs of field leaders in the insurance, investment and financial services industry. Goodwill Group insurance Group Office Goodwill represents the excess of the purchase price of an acquisition over the fair value of the Group’s share of the net identifiable assets including VOBA of the acquired subsidiary, associate or joint venture at the date of acquisition. An insurance scheme whereby individual participants are covered by a master contract held by a single group or entity on their behalf. Group Office includes the activities of the Group Corporate Centre segment consisting of the Group’s corporate functions, shared services and eliminations of intragroup transactions. HIBOR Hong Kong Interbank Offered Rate. High-net-worth (HNW) individuals Individuals who have investable assets of US$1.0 million or more. HKFRS HKOCI Hong Kong Hong Kong Financial Reporting Standards. Hong Kong Office of the Commissioner of Insurance. The Hong Kong Special Administrative Region of the PRC; in the context of our reportable segments, Hong Kong includes Macau. ANNUAL REPORT 2013 237 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Hong Kong Companies Ordinance/ Existing Companies Ordinance The Companies Ordinance (Laws of Hong Kong, Chapter 32), as amended from time to time. Hong Kong Insurance Companies Ordinance (HKICO) The Insurance Companies Ordinance (Laws of Hong Kong, Chapter 41) (HKICO) provides a legislative framework for the prudential supervision of the insurance industry in Hong Kong. The objectives of the HKICO are to protect the interests of the insuring public and to promote the general stability of the insurance industry. Hong Kong Stock Exchange The Stock Exchange of Hong Kong Limited. (HKSE) IAS IASB IFA IFRS International Accounting Standards. International Accounting Standards Board. Independent financial adviser. Standards and interpretations adopted by the International Accounting Standards Board (IASB) comprising: • International Financial Reporting Standards; • International Accounting Standards; and • Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). ING Malaysia ING Management Holdings (Malaysia) Sdn. Bhd. Insurance contract Insurance risk A contract under which the insurer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if specified uncertain future events adversely affect the policyholder. The potential loss resulting from inappropriate underwriting, mispricing, adverse expense, lapse, mortality and morbidity experiences. Under IFRS, insurance risk means risk, other than financial risk, transferred from the holder of a contract to the issuer. Interactive Point of Sales (iPoS) iPoS is a secure, mobile point-of-sale technology that features a paperless sales process from the completion of the customer’s financial-needs analysis to proposal generation with electronic biometric signature of life insurance applications on tablet devices. Investment contract An investment contract is an insurance policy that, whilst structured and regulated as a contract of insurance, does not meet the accounting definition of an insurance contract because it does not transfer significant insurance risk. Investment experience Realised and unrealised investment gains and losses recognised in the consolidated income statement. Investment income Investment income comprises interest income, dividend income and rental income. Investment property Property (land and/or a building or part of a building) held to earn rentals or for capital appreciation or both rather than for use by AIA. 238 AIA GROUP LIMITED ADDITIONAL INFORMATIONGlossary Investment return Investment return consists of investment income plus investment experience. IPO Lapse risk Initial public offering. The risk that, having purchased an insurance policy from AIA, customers either surrender the policy or cease paying premiums on it and so the expected stream of future premiums ceases. Lapse risk is taken into account in formulating projections of future premium revenues, for example when testing for liability adequacy and the recoverability of deferred acquisition and origination costs. LEED Leadership in Energy and Environmental Design. Liability adequacy testing An assessment of whether the carrying amount of an insurance liability needs to be increased or the carrying amount of related deferred acquisition and origination costs or related intangible assets decreased based on a review of future cash flows. LIBOR London Interbank Offered Rate. Life Insurance and Market Research Association (LIMRA) A worldwide research, consulting and professional development organisation, established to help its member companies from life insurance and financial services industries improve their marketing and distribution effectiveness. Liquidity risk The risk of having insufficient cash available to meet payment obligations to counterparties when they fall due. Listing Rules Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. LTI Market risk Long-term incentive. The risk of loss from adverse movements in the value of assets owing to market factors, including changes in interest and foreign exchange rates, as well as movements in credit, equity and property prices. Million Dollar Round Table (MDRT) MDRT is a global professional trade association of life insurance and financial services professionals that recognises significant sales achievements and high service standards. Model Code Monetary items Net book value Net funds to Group Corporate Centre Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules. Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. The net value of an asset. Equal to its original cost (its book value) minus depreciation and amortisation. In presenting net capital in/(out) flows to reportable segments, capital outflows consist of dividends and profit distributions to the Group Corporate Centre segment and capital inflows consist of capital injections into reportable segments by the Group Corporate Centre segment. For the Company, net capital in/(out) flows reflect the net amount received from shareholders by way of capital contributions less amounts distributed by way of dividends. ANNUAL REPORT 2013 239 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Net profit Net profit is calculated by subtracting a company’s total expenses from total revenue, including share of loss from associates and after tax. New Companies Ordinance A substantial part of the Companies Ordinance (Laws of Hong Kong, Chapter 622) which will come into force on 3 March 2014. Non-controlling interests The equity in a subsidiary not attributable, directly or indirectly, to a parent. Also referred to as “minority interests”. Non-participating life assurance Contracts of insurance with no DPF. n/a n/m OPAT Operating profit before tax and after tax Not available. Not meaningful. Operating profit after tax attributable to shareholders of AIA Group Limited. The Group defines operating profit before and after tax excluding investment experience; investment income and investment management expenses related to unit-linked contracts; corresponding changes in insurance and investment contract benefits in respect of unit-linked contracts and participating fund; changes in third-party interests in consolidated investment funds, policyholders’ share of tax relating to the change in insurance and investment contract liabilities and other significant items of non-operating income and expenditure. Operating return on allocated equity Operating return on allocated equity is calculated as operating profit after tax attributable to shareholders of the Company, expressed as a percentage of the simple average of opening and closing total equity attributable to shareholders of the Company, less the fair value and foreign currency translation reserves, and adjusted for intercompany debt. Operating segment A component of an entity that: • engages in business activities from which it may earn revenues and incur expenses; • whose operating results are regularly reviewed by the entity’s chief operating decision- maker to make decisions about resources to be allocated to the segment and assess its performance; and • for which discrete financial information is available. Operational risk The potential direct or indirect loss (including reputational loss) resulting from inadequate or failed internal processes, personnel and systems; or from external events. ORC OTC Operational Risk Committee. Over-the-counter. Other comprehensive income Items of income and expense that form part of total comprehensive income but, as required or permitted by IFRS, do not form part of profit or loss for the year, such as fair value gains and losses on available for sale financial assets. 240 AIA GROUP LIMITED ADDITIONAL INFORMATIONGlossaryParticipating funds Participating policies Participating funds are distinct portfolios where the policyholders have a contractual right to receive at the discretion of the insurer additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. The Group may either have discretion as to the timing of the allocation of those benefits to participating policyholders or may have discretion as to the timing and the amount of the additional benefits. Participating policies are contracts with DPF. Participating policies may either be written within participating funds or may be written within the Company’s general account, whereby the investment performance is determined for a group of assets or contracts, or by reference to the Company’s overall investment performance and other factors. The latter is referred to by the Group as “other participating business”. Whether participating policies are written within a separate participating fund or not largely depends on matters of local practice and regulation. Persistency The percentage of insurance policies remaining in force from month to month in the past 12 months, as measured by premiums. Philam Life The Philippine American Life and General Insurance Company, a subsidiary of AIA Co. Policyholder and shareholder Investments other than those held to back unit-linked contracts. investments Policyholder dividends Policyholder dividends are the means of participating policyholders receiving the non- guaranteed element of the discretionary benefits, through which they participate in the investment return of the reference portfolio or pool of assets. pps PRC Percentage points. The People’s Republic of China. Property held for use Property held for use in AIA’s business. Protection gap Puttable liabilities The difference between the resources needed and resources available to maintain dependants’ living standards after the death of the primary wage-earner. A puttable financial instrument is one in which the holder of the instrument has the right to put the instrument back to the issuer for cash (or another financial asset). Units in investment funds such as mutual funds and open-ended investment companies are typically puttable instruments. As these can be put back to the issuer for cash, the non- controlling interest in any such funds which have to be consolidated by AIA are treated as financial liabilities. RCSA Risk and Control Self-Assessment. ANNUAL REPORT 2013 241 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Regular premiums Regular premiums represent the total of first year premiums and renewal premiums. First year premiums are the premiums received in the first year of a recurring premium policy. As such, they provide an indication of the volume of new policies sold. Renewal premiums are the premiums receivable in subsequent years of a recurring premium policy. Regulatory capital A minimum solvency margin requirement set by the HKICO that an insurer must meet in order to be authorised to carry on insurance business in or from Hong Kong. Related parties Related parties may be related to AIA for any of the following reasons: • they are directly or indirectly controlled by an AIA entity; • an AIA entity has significant influence on the party; • they are in a joint venture arrangement with an AIA entity; • they are part of AIA’s key management or a close member of the family of any key management or any entity that is controlled by these persons; or • they are a post-retirement benefit plan for the employees of AIA. A repurchase transaction involves the sale of financial investments by AIA to a counterparty, subject to a simultaneous agreement to repurchase those securities at a later date at an agreed price. Accordingly, for accounting purposes, the securities are retained on AIA’s consolidated statement of financial position for the life of the transaction, valued in accordance with AIA’s policy for assets of that nature. The proceeds of the transaction are reported in the caption “Obligations under securities lending and repurchase agreements”. Interest expense from repo transactions is reported within finance costs in the consolidated income statement. Repurchase agreements (repos) Reverse repurchase agreements (reverse repos) A reverse repurchase transaction (reverse repo) involves the purchase of financial investments with a simultaneous obligation to sell the assets at a future date, at an agreed price. Such transactions are reported within “Loans and deposits” in the consolidated statement of financial position. The interest income from reverse repo transactions is reported within investment return in the consolidated income statement. Rider A supplemental plan that can be attached to a basic insurance policy, typically with payment of additional premium. Risk-adjusted return The return produced by an investment after accounting for the risks involved in producing that return. Risk appetite Risk appetite is the amount of risk that companies are willing to take in order to achieve their business targets. RAS Risk Appetite Statement. Risk-Based Capital (RBC) RBC represents an amount of capital based on an assessment of risks that a company should hold to protect customers against adverse developments. RMF Risk Management Framework. 242 AIA GROUP LIMITED ADDITIONAL INFORMATIONGlossary RSUs Restricted share units. RSU Scheme Restricted Share Unit Scheme. Securities lending SFO Shadow accounting Securities lending consists of the loan of certain securities within the Group’s financial investments to third parties on a short-term basis. The loaned securities continue to be recognised within the appropriate financial investment classifications in the Group’s consolidated statement of financial position. The Securities and Futures Ordinance (Laws of Hong Kong, Chapter 571), as amended from time to time. Investment experience (realised and unrealised investment gains and losses) has a direct effect on the measurement of insurance contract liabilities and related deferred acquisition costs and intangible assets, such as VOBA (see below). Shadow accounting permits adjustments to insurance contract liabilities and the related assets to be reflected in other comprehensive income to match the extent to which unrealised investment gains and losses are recognised in other comprehensive income. Singapore The Republic of Singapore; in the context of our reportable segments, Singapore includes Brunei. Single premium Single lump sum payment from a policyholder. SME SO Scheme Solvency Solvency ratio Small-and-medium sized enterprise. Share Option Scheme. The ability of an insurance company to satisfy its policyholder benefits and claims obligations. The ratio of actual capital to the minimum capital requirement applicable to the insurer pursuant to relevant regulations. Statement of financial position Formerly referred to as the balance sheet. Strategic asset allocation (SAA) SAA is the setting of strategic asset allocation targets, based on long-term capital market assumptions, to meet long-term requirements of the insurance business and shareholders. Strategic risk Stress tests The risk of unexpected changes in the regulatory, market and competitive environment in which the Group operates. The application of shocks to the assumptions underlying valuations. Stress tests are used to observe the resilience of the Company to stress events and the volatility of those valuations. Takaful Islamic insurance which is based on the principles of mutual assistance and risk sharing. Total weighted premium income (TWPI) TWPI consists of 100 per cent of regular premiums and 10 per cent of single premiums, before reinsurance ceded. As such it provides an indication of AIA’s longer-term business volumes as it smoothes the peaks and troughs in single premiums. ANNUAL REPORT 2013 243 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Underwriting The process of examining, accepting or rejecting insurance risks, and classifying those accepted, in order to charge an appropriate premium for each accepted risk. Unit-linked investments Financial investments held to back unit-linked contracts. Unit-linked products Universal life Value of business acquired (VOBA) Unit-linked products are insurance products where the policy value is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investment or indices. Investment risk associated with the product is usually borne by the policyholder. Insurance coverage, investment and administration services are provided for which the charges are deducted from the investment fund assets. Benefits payable will depend on the price of the units prevailing at the time of death of the insured or surrender or maturity of the policy, subject to surrender charges. A type of insurance product where the customer pays flexible premiums, subject to specified limits, which are accumulated in an account balance which are credited with interest at a rate either set by the insurer or reflecting returns on a pool of matching assets. The customer may vary the death benefit and the contract may permit the policyholder to withdraw the account balance, typically subject to a surrender charge. VOBA in respect of a portfolio of long-term insurance and investment contracts acquired is recognised as an asset, calculated using discounted cash flow techniques, reflecting all future cash flows expected to be realised from the portfolio. VOBA is amortised over the estimated life of the contracts in the acquired portfolio on a systematic basis. The rate of amortisation reflects the profile of the additional value of the business acquired. The carrying value of VOBA is reviewed annually for impairment and any impairment is charged to the consolidated income statement. Value of in-force business (VIF) VIF is the present value of projected after-tax statutory profits emerging in the future from the current in-force business less the cost arising from holding the required capital (CoC) to support the in-force business. VONB is the present value, measured at point of sale, of projected after-tax statutory profits emerging in the future from new business sold in the period less the cost of holding required capital in excess of regulatory reserves to support this business. VONB for AIA is stated after adjustments to reflect applicable Hong Kong reserving and capital requirements and the after-tax value of unallocated Group Office expenses. VONB by market is stated before adjustments to reflect applicable Hong Kong reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. VONB excluding pension business, expressed as a percentage of ANP. VONB margin for AIA is stated after adjustments to reflect applicable Hong Kong reserving and capital requirements and the after-tax value of unallocated Group Office expenses. VONB margin by market is stated before adjustments to reflect applicable Hong Kong reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. When a payment is made to a party in another country, the laws of the payer’s country may require withholding tax to be applied to the payment. International withholding tax may be required for payments of dividends or interest. A double tax treaty may reduce the amount of withholding tax required, depending upon the jurisdiction in which the recipient is tax resident. Working capital comprises debt and equity securities, deposits and cash and cash equivalents held at the Group Corporate Centre. These liquid assets are available to invest in building the Group’s business operations. Value of new business (VONB) VONB margin Withholding tax Working capital 244 AIA GROUP LIMITED ADDITIONAL INFORMATIONGlossary I A A G R O U P L I M I T E D 友 邦 保 險 控 股 有 限 公 司 A N N U A L R E P O R T 2 0 1 3 AIA.COM 

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