AIA Group Limited Annual Report 2014

Plain-text annual report

ANNUAL REPORT 2014 AIA GROUP LIMITED 友邦保險控股有限公司 STOCK CODE : 1299 VISION & PURPOSE Our Vision is to become the pre-eminent life insurance provider in the Asia-Paciﬁc region. That is our service to our customers and our shareholders. Our Purpose is to play a leadership role in driving economic and social development across the region. That is our service to societies and their people. 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$167 billion as of 30 November 2014. AIA meets the long-term 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, partners 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, 2013 and 2014 refer to the financial year of the Group, which ends on 30 November of the year indicated. (3) 2013 financial information as well as embedded value (EV) and EV Equity have been adjusted to reflect the adoption of new and revised accounting standards by the Group in 2014. For a description of the new and revised accounting standards and a reconciliation of the adjustments made to the 2013 financial information as previously reported, please refer to our 2014 audited consolidated financial statements. AIA AT-A-GLANCE (1) WE HAVE A DIVERSIFIED BUSINESS 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. HISTORY OF OVER 90 YEARS IN ASIA-PACIFIC SERVING THE HOLDERS OF MORE THAN 28 MILLION INDIVIDUAL POLICIES AND OVER 16 MILLION PARTICIPATING MEMBERS OF GROUP INSURANCE SCHEMES 100% OWNERSHIP IN 15 OUT OF 17 GEOGRAPHICAL MARKETS AIA PROVIDES PROTECTION TO PEOPLE ACROSS THE REGION WITH TOTAL SUM ASSURED OF US$1.17 TRILLION IN HELPING CUSTOMERS AND THEIR FAMILIES TO MEET CHALLENGES AND NEW OPPORTUNITIES AT DIFFERENT LIFE STAGES, AIA MADE MORE THAN 12 MILLION BENEFIT PAYMENTS DURING 2014, EQUIVALENT TO 1 BENEFIT PAYMENT EVERY SECOND OF EVERY DAY EV EQUITY OF US$39.0 BILLION TOTAL ASSETS OF US$167 BILLION HONG KONG MACAU THAILAND SINGAPORE AUSTRALIA BRUNEI INDONESIA MALAYSIA NEW ZEALAND CHINA KOREA THE PHILIPPINES SRI LANKA TAIWAN VIETNAM INDIA MYANMAR Note: (1) All the figures on this page are as of 30 November 2014. 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. 2013 AIA completed the full integration of the businesses of AIA and ING Malaysia. We commenced business in Sri Lanka through the acquisition of Aviva NDB Insurance. We opened a representative office in Myanmar. 2014 EXCLUSIVE LONG-TERM BANCASSURANCE PARTNERSHIP AIA and Citibank formed a landmark, long-term and exclusive bancassurance partnership that encompasses 11 markets in the Asia-Pacific region, the widest-reaching bancassurance distribution partnership ever in Asia. EXTENDED PARTNERSHIP WITH TOTTENHAM HOTSPUR FOOTBALL CLUB AIA and Tottenham Hotspur Football Club entered into a new long-term partnership to promote the role of sports in Asia-Pacific as a key element of healthy living. GLOBAL MEDIUM TERM NOTE PROGRAMME We expanded our medium term note programme to become a US$3 billion Global Medium Term Note Programme. S T N E T N O C OVERVIEW CORPOR ATE GOVERNANCE Financial Highlights ..................................004 Statement of Directors’ Responsibilities .....................072 Chairman’s Statement ..............................008 Board of Directors and Executive Committee .............073 Group Chief Executive and President’s Report .................................... 010 Report of the Directors .................................................078 Corporate Governance Report .....................................083 FINANCIAL AND OPER ATING REVIEW Remuneration Report ...................................................090 Financial Review ....................................... 016 Business Review .......................................032 Risk Management .....................................054 Regulatory Developments ........................063 Our People .................................................064 Corporate Social Responsibility ...............068 002 AIA GROUP LIMITED THE REAL GROWTH COMPANY AIA is exceptionally well-positioned for sustainable growth, given the power of our franchise, the resilience of our operating model, the consistent execution of our well-established growth strategy and the advantages of our exclusive geographical focus on the Asia-Paciﬁc region. FINANCIAL STATEMENTS ADDITIONAL INFORMATION Independent Auditor’s Report ...................................... 101 Information for Shareholders ..................238 Consolidated Income Statement .................................. 103 Corporate Information ..............................240 Glossary ..................................................... 241 Consolidated Statement of Comprehensive Income ................................................ 104 Consolidated Statement of Financial Position ............ 105 Consolidated Statement of Changes in Equity ............ 107 Consolidated Statement of Cash Flows ....................... 109 Notes to the Consolidated Financial Statements and Signiﬁcant Accounting Policies ............................. 111 Financial Statements of the Company ......................... 211 Supplementary Embedded Value Information ............ 214 ANNUAL REPORT 2014 003 OVERVIEW FINANCIAL HIGHLIGHTS 2014 RESULTS AT-A-GLANCE* VALUE OF NEW BUSINESS (VONB)(1) ANNUALISED NEW PREMIUM (ANP)(2) OPERATING PROFIT AFTER TAX (OPAT)(3) US$ millions 2,000 1,600 1,200 800 400 0 1,845 1,490 1,188 932 667 2010 2011 2012 2013 2014 US$ millions 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,700 3,341 2,696 2,472 2,025 2010 2011 2012 2013 2014 US$ millions 3,000 2,500 2,000 1,500 1,000 500 0 2,910 2,506 2,159 1,922 1,699 2010 2011 2012 2013 2014 +24% +11% +16% TOTAL WEIGHTED PREMIUM INCOME (TWPI)(4) EV EQUITY (5) TOTAL ASSETS AND TOTAL LIABILITIES US$ millions 20,000 16,000 12,000 8,000 4,000 0 19,211 17,808 15,360 14,442 13,013 2010 2011 2012 2013 2014 US$ millions 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 39,042 US$ billions 180 34,871 31,657 27,464 24,948 2010 2011 2012 2013 2014 150 120 90 60 30 0 167 136 147 123 134 108 108 88 114 93 2010 2011 2012 2013 2014 +8% +12% +13% +11% TOTAL ASSETS TOTAL LIABILITIES Note * Percentages shown indicate changes in 2014 compared with 2013. 004 004 AIA GROUP LIMITED AIA GROUP LIMITED 2014 BREAKDOWN BY SEGMENT VALUE OF NEW BUSINESS (VONB)(1)(6) ANNUALISED NEW PREMIUM (ANP)(2) 11% 4% 8% 13% 31% 18% 10% 9% 26% 15% 15% 18% 9% 13% HONG KONG THAILAND SINGAPORE CHINA MALAYSIA KOREA OTHER MARKETS(7) OPERATING PROFIT AFTER TAX (OPAT)(3) TOTAL WEIGHTED PREMIUM INCOME (TWPI)(4) 11% 6% 9% 10% 31% 15% 18% 16% 23% 12% 11% 17% 9% 12% W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I Notes (1) Value of new business (VONB) is the present value, measured at the 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 the required capital in excess of regulatory reserves to support this business. (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. (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. (3) Operating profit after tax (OPAT) is shown after non-controlling interests. (6) Based on local statutory basis and before unallocated Group Office expenses, VONB by segment includes pension business. (7) The results of our joint venture in India are accounted for using the equity method. For clarity, TWPI, ANP and VONB exclude any contribution from India. (4) Total weighted premium income (TWPI) consists of 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums, before reinsurance ceded. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 ANNUAL REPORT 2014 005 005 By being directly engaged in the lives of millions of policyholders and their families, and through the long-term investment of their financial resources, AIA is working to bridge the vast savings and protection gap in Asia-Pacific, helping build capital markets and infrastructure and driving economic and social development. AIA is making a real difference in people’s lives. 006 AIA GROUP LIMITED EFFECTING REAL CHANGE ANNUAL REPORT 2014 007 OVERVIEW CHAIRMAN’S STATEMENT I am pleased to report that in 2014, AIA has once again delivered excellent results. We have maintained the positive momentum and track record built up since we became an independent company in October 2010 with each of our main ﬁnancial performance metrics exceeding, by a substantial margin, the record results we achieved in 2013. Value of new business (VONB) is our main measure of proﬁtable growth and we achieved a 24 per cent increase to US$1,845 million, compared with 2013. IFRS operating proﬁt after tax (OPAT) also grew by 16 per cent to US$2,910 million. AIA has delivered large-scale growth, while maintaining our disciplined ﬁnancial management Mr. Edmund Sze-Wing Tse Non-executive Chairman and strong capital position. The The Board has recommended a ﬁnal rates of return for shareholders and solvency ratio for our principal dividend of 34.00 Hong Kong cents deliver prudent, sustainable and regulated operating company per share subject to shareholders’ progressive shareholder dividends. AIA Co. as at 30 November 2014 approval, which represents an stood at 427 per cent and our free increase of 19 per cent compared surplus increased by 16 per cent to with the ﬁnal dividend for 2013. US$7.8 billion. This brings the total dividend for 2014 to 50.00 Hong Kong cents per share, demonstrating AIA’s ability to ﬁnance proﬁtable new business growth opportunities at attractive Since AIA became a listed company, I am honoured to have worked alongside our committed Board members to establish our highest standards of corporate governance. Such governance is in addition to the stringent regulatory controls and internal risk management 008 AIA GROUP LIMITED discipline that govern the conduct customers and their communities of our operations and our through our products and services. relationships with our customers. Our customers are at the heart During the year, we continued to of what we do and our success is make every effort to ensure that built on sustainable relationships we maintain the high standards and sustainable business practices. appropriate to our business, As our 2014 results show, it is this including regular external reviews commitment that beneﬁts all of our of our risk management principles stakeholders. and practices. My reappointment as Non-executive Chairman was for two years from 1 January 2013. The Board has invited me to remain as Chairman for another two years and I am very pleased to accept. Edmund Sze-Wing Tse Non-executive Chairman 26 February 2015 We have maintained the positive momentum and track record built up since we became an independent company in October 2010 with each of our main financial performance metrics exceeding, by a substantial margin, the record results we achieved in 2013. We are indebted to AIA’s employees, agents and partners for their commitment and contribution to making AIA the leading life insurance franchise in the Asia- Paciﬁc region. Special thanks are due to your Group Chief Executive and President Mark Tucker and his team for the leadership they provide in delivering these outstanding results. Mark’s contribution to the wider success of Hong Kong has been recognised by him being named as Business Person of the Year 2014 in the DHL/ SCMP Hong Kong Business Awards. I speak for the entire Board in conveying my deepest appreciation to all of our customers and shareholders for their continued trust in and support for AIA. AIA is focused on building shareholder value, and we are also focused on building shared values: making a difference to the real lives of our W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 009 OVERVIEW GROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT I am pleased to report that AIA has again achieved an excellent set of results in 2014. Value of new business (our main performance measure) reached a new high, increasing by 24 per cent compared with 2013 and continuing the pattern of sustained growth that AIA has established since our listing in 2010. We have also achieved strong growth in IFRS operating proﬁt and delivered a signiﬁcant increase in shareholder dividends. Powerful economic and social factors are driving growth across our 17 markets in Asia-Paciﬁc. We continue to beneﬁt from signiﬁcant and Mr. Mark Edward Tucker Group Chief Executive and President ongoing urbanisation as well as rising distribution reach, a broad product strength and relevance of our brand wealth and disposable incomes. The range, a leading brand built over proposition that AIA is The Real middle class and active workforce many years and unrivalled ﬁnancial Life Company for people to rely on are growing rapidly. The inability strength. However sustainable for support when facing real life of state-funded retirement income success depends on two additional opportunities and challenges. This and medical and welfare services to elements: the implementation clear theme informs every aspect of meet demand across much of the of a clear strategy focused on our development, prompting our region combines with these factors to proﬁtable growth in each of our major focus on simplicity in all that provide enormous structural growth markets; and strong corporate values we do; reﬁning the way we align opportunities in our markets. that emphasise our commitment beneﬁts to customers’ needs and AIA is in an exceptionally strong position to harness these forces to to supporting the markets and inﬂuencing the management and communities in which we operate. training of our agents to enhance the help people achieve ﬁnancial security In 2014 our management teams quality of our service. and reduce the social welfare burden from across the Group took part in As our performance in 2014 on the state. We have an exceptional a major project to assess all aspects shows, we are building on a strong of our strategy and to ensure that foundation to deliver sustainable we continue to optimise our business growth. model. The project reinforced the 010 AIA GROUP LIMITED We have an exceptional distribution reach, a broad product range, a leading brand built over many years and unrivalled financial strength. 2014 PERFORMANCE HIGHLIGHTS Value of new business (VONB) grew by 24 per cent to US$1,845 million. This excellent performance was achieved by optimising growth in new business value rather than focusing on market share or margin in isolation. Our other main performance metrics also reported strong growth with IFRS operating proﬁt after tax up 16 per cent to US$2,910 million and EV Equity higher by US$4,171 million to US$39,042 million. The strength in-force book and our ﬁnancial We are making the most of the pace of this ﬁnancial performance once discipline. The continuing low of technological change and the again demonstrates the immense interest rate environment presented rapid spread of consumer information potential that AIA has to create future an opportunity for the Group to and product awareness to add shareholder value. issue senior debt of US$1 billion innovative features and efﬁciency W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C China and Hong Kong delivered excellent performances with VONB up 55 per cent and 32 per cent respectively. Malaysia, Thailand and Singapore also delivered double-digit VONB growth, with Malaysia performing strongly as we beneﬁted from the integration of our acquisition of ING Malaysia in 2013. The strength of our overall performance once again demonstrates the enormous potential the Group draws from its broad distribution reach and diversiﬁcation across 17 Asia-Paciﬁc markets. under its Global Medium Term improvements to our already highly Note programme in March 2014. successful distribution channels. We This received high levels of investor are making a considerable investment demand, reﬂecting the market’s in enhancing our interactive point- appreciation of our ﬁnancial strength of-sale system, iPoS, and our next and creditworthiness. REGIONAL PLATFORM Distribution AIA was one of the ﬁrst insurance generation system has already been launched across the majority of our markets. We are also dedicating signiﬁcant resources to developing further the technical skills of our companies to use a proprietary agency force as well as reﬁning our agency network to distribute life recruitment and training programmes insurance products across Asia. to lift productivity and efﬁciency for Agency distribution remains the the beneﬁt of both customers and cornerstone of our business, shareholders. S T N E M E T A T S L A C N A N F I I generating 72 per cent of our VONB The solvency ratio of our main in 2014. Distribution through trained insurance operating company, AIA professional agents provides the most Co., measured on the prudent effective means of engaging with HKICO basis, remained strong our customers to offer needs-based at 427 per cent as at the end of advice across a wide range of Asian November 2014. This reﬂects markets, from those purchasing high-quality retained earnings from their ﬁrst ﬁnancial products to more the successful management of our sophisticated consumer segments. While agency is our primary distribution channel, we have extended our market coverage and penetration with partnership distribution, predominantly through exclusive distribution agreements with retail banks but also selectively through IFA and direct marketing N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 011 OVERVIEW GROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT channels. In all instances, we ensure local operations, as well as the calibre we promote only those products of partners we are able to attract. that meet our customers’ needs and provide appropriate returns both consistent with the risks we take on the behalf of our shareholders and our commitment to supporting markets and communities. As reported last year, in December 2013 we entered into an exclusive 15-year strategic partnership agreement with Citibank, N.A. (Citibank) to provide protection and life insurance products to Citibank’s AIA derives around 28 per cent 13 million retail cardholders and of VONB from our partnership banking customers in 11 Asian distribution. Our business model markets. 2014 saw the detailed combines centralised expertise planning of the implementation of in developing and managing this agreement and its progressive relationships and product distribution roll-out across each of the markets. with collaboration between AIA’s We are very excited about the local operation and our partners prospects of this partnership and its in each market. The strong and potential to deliver a material source Marketing and Product Innovation In 2014, we continued to develop The Real Life Company brand positioning as the framework for the communication of our products and services to our customers. During the year, we also continued to develop our brand awareness by extending our relationship with Tottenham Hotspur Football Club (Spurs) with a comprehensive ﬁve-year deal to become lead shirt sponsor of the club. This is a partnership that introduces AIA to new audiences and provides us with many opportunities to differentiate our brand across Asia. sustained growth we have achieved of additional proﬁtable growth for We are always looking to improve is a testament to the skill and the Group. Initial indications, given the experience of our customers effectiveness of the partnership the performance so far, are highly when they engage with AIA, both teams at Group Ofﬁce and in our encouraging. Our life protection, health and long-term savings products contribute directly to the financial security of our policyholders and their families. at the point of sale and throughout the lifetime of their relationship with us. In 2014, we undertook Customer Understanding Programmes across all our markets that involved conversations with customers from a wide range of social and economic backgrounds. The results were incorporated into a Model Customer Experience framework to enhance our local operations’ understanding of the key elements of customer satisfaction. A third major theme in our marketing activity is a focus on generating new business from existing customers through the systematic identiﬁcation of gaps in their in-force cover, particularly as we introduce innovative new products. This has been a particular focus over the last two years and, in 2014, we continued to deliver additional sources of growth with a 39 per cent increase in VONB from existing customer-related initiatives. 012 AIA GROUP LIMITED CORPORATE SOCIAL RESPONSIBILITY (CSR) AIA’s core business promotes social ENGAGEMENT WITH PEOPLE AIA’s success would not be possible savings products ensures a measure of protection from cyclical economic forces. These positive structural well-being in the communities we without the high levels of expertise, trends, together with the investment serve. Our life protection, health professionalism and commitment we are making to upgrade our and long-term savings products shown by our employees and agents distribution and servicing capacity, contribute directly to the ﬁnancial across the region. Sustaining this mean that AIA is exceptionally well- security of our policyholders and level of motivation depends on a positioned to grow our business by their families. Our CSR programme collective belief in our corporate helping our customers meet their complements our brand positioning operating philosophy of “Doing long-term protection needs and as The Real Life Company. CSR is led the Right Thing, in the Right Way, wealth aspirations. We will continue by the Group and managed by each with the Right People”, conﬁdent to do this in a way that resonates of our local businesses so that it is that the right results will follow. with our aim of making a difference attuned to speciﬁc local community Our culture is distinctive, bringing to the real lives of people and priorities. together empowerment of our local their communities and to deliver Healthy Living is our main CSR theme. The increasing prosperity in Asia is raising living standards and improving access to medical care but lifestyle health risks are also increasing. AIA Vitality, a science-backed wellness programme, connects our CSR theme with our mainstream customer proposition by promoting changes in diet and lifestyle and encouraging people to exercise regularly and work towards personal health goals. businesses with a focused and shared long-term sustainable value for our commitment to implementing AIA’s shareholders. core strategy. This is supported by an undertaking to cultivate all aspects of employee engagement, performance management and personal development to ensure that empowerment within an appropriate Mark Edward Tucker risk management framework remains Group Chief Executive and President a core strength of the organisation. 26 February 2015 OUTLOOK The overall long-term economic W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C Alongside our Healthy Living outlook for Asia-Paciﬁc ex-Japan activities, we encourage our remains positive, with a gradual employees to take part in rebalancing in favour of domestic community-based charitable work, consumption in emerging markets, providing ﬁnancial resources to notably China. While Asia is not support their projects. The scale isolated from near-term economic of these efforts can be substantial, factors outside the region such as such as in the aftermath of Typhoon difﬁculties in the Eurozone, threats Haiyan. Having provided emergency to geopolitical stability and a more support when the typhoon struck in demanding regulatory environment, late 2013, we continued our efforts the outlook and growth proﬁle for in 2014 through fundraising and the the markets in which we operate provision of medicine and supplies remain highly attractive. to help rebuild communities and infrastructure in the Philippines. AIA beneﬁts from the signiﬁcant long-term economic and demographic growth drivers in Asia. The substantial and ongoing need for healthcare, protection and S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 013 HOLDING A REAL STAKE IN THE FUTURE 014 AIA GROUP LIMITED Rapid urbanisation and a fast-growing middle class with rising spending power are lifting living standards and people’s aspirations. Protecting hard-earned gains against mortality and morbidity requires resources that will span generations. AIA is assuming a vital role in helping governments meet society’s future needs, while rewarding today’s stakeholders. ANNUAL REPORT 2014 015 FINANCIAL AND OPERATING REVIEW FINANCIAL REVIEW SUMMARY AIA has delivered excellent ﬁnancial results across all of our main performance metrics. Our focus on the execution of a clear strategy combined with disciplined ﬁnancial management has produced signiﬁcant and proﬁtable new business growth and a strong increase in IFRS operating proﬁts. Value of new business grew by 24 per cent to US$1,845 million and IFRS operating proﬁt after tax increased by 16 per cent to US$2,910 million on actual exchange rates. EV Equity was higher by US$4,171 million or 12 per cent to US$39,042 million. These results are reported on actual exchange rates. They were achieved despite the depreciation of local currencies against our US dollar reporting currency. The strong performance on both actual and constant exchange rates demonstrates AIA’s resilience, scale and diversiﬁcation across the region. We delivered this large-scale new business growth with increased capital efﬁciency and higher returns. The free surplus generation from our in-force book has enabled us to maintain our resilient solvency position and invest capital in proﬁtable growth at the same time as increasing shareholder dividends. Reﬂecting these results and conﬁdence in the future of the business, the Board of Directors has recommended a ﬁnal dividend increase of 19 per cent to bring the total dividend for 2014 to 50.00 Hong Kong cents per share. Our ﬁnancial performance in 2014 has once again demonstrated the substantial opportunities that AIA provides to generate proﬁtable growth with attractive shareholder returns and progressive dividends. Mr. Garth Jones Group Chief Financial Officer EV operating proﬁt was 14 per cent higher at US$4,535 Value Growth VONB grew by 24 per cent to US$1,845 million compared with million reﬂecting strong growth in the value of new business, overall positive operating experience variances and operating 2013. China and Hong Kong once again delivered excellent assumption changes of US$108 million. Operating return on performances and Malaysia, Thailand and Singapore also adjusted opening EV increased by 70 basis points compared with generated double-digit growth. 2013 to 13.7 per cent. ANP grew by 11 per cent to US$3,700 million on actual exchange EV Equity was higher by US$4,171 million to US$39,042 million at rates and VONB margin increased by 5.0 pps to 49.1 per cent 30 November 2014, with the increase mainly coming from strong with the margin increase mainly driven by a positive shift in EV operating proﬁt generation less the payment of dividends product mix. We do not focus on new business volumes or to shareholders. This represents growth of 12 per cent from margins in isolation but continue to focus on optimising the mix US$34,871 million at 30 November 2013. to deliver sustainable growth in total new business value. IFRS Earnings IFRS operating proﬁt after tax (OPAT) grew by 16 per cent compared with 2013 to US$2,910 million. This strong performance was the result of underlying business growth and scale combined with our focus on improving proﬁtability through writing higher-quality savings and protection business. 016 AIA GROUP LIMITED Our financial performance in 2014 has once again demonstrated the substantial opportunities that AIA provides to generate profitable growth with attractive shareholder returns and progressive dividends. US$3,807 million of fair value gains on assets mainly due to the IFRS accounting effect of lower interest rates on the treatment of debt securities that are classiﬁed as available for sale. Capital and Dividends At 30 November 2014, the total available capital for AIA Co., our main regulated entity, was US$6,730 million as measured under the HKICO basis and AIA Co. has a solvency ratio of 427 per cent of regulatory minimum capital, compared with 433 per cent at the end of November 2013. The ratio was stable year-on-year from strong retained earnings and positive market movements less the US$800 million upfront payment (Citibank Upfront Payment) for our long-term partnership with Citibank, N.A. (Citibank) in the ﬁnancial year 2014, dividends to AIA Group Limited and increased regulatory minimum capital due to growth in the business. Our local IFRS net proﬁt increased by 22 per cent compared with 2013 businesses remitted US$1,718 million to the Group Corporate to US$3,450 million, reﬂecting the strong growth in operating Centre in 2014. proﬁt and positive gains from equity markets. AIA’s IFRS net proﬁt deﬁnition includes mark-to-market movements from our equity portfolio. The Board of Directors has recommended an increase in ﬁnal dividend of 19 per cent to 34.00 Hong Kong cents per share, in line with our prudent, sustainable and progressive dividend Shareholders’ IFRS equity increased by 25 per cent or US$6,124 policy and subject to shareholders’ approval at the Company’s million to US$30,806 million at 30 November 2014 from forthcoming AGM. This brings the total dividend for 2014 to US$24,682 million at 30 November 2013. The increase included 50.00 Hong Kong cents per share, an increase of 18 per cent compared with 2013. NEW BUSINESS GROWTH Value of New Business (VONB) and Annualised New Premium (ANP) by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Korea Other Markets Subtotal 2014 (1) VONB Margin 62.3% 63.2% 61.2% 50.1% 83.1% 21.7% 31.3% 53.1% VONB 619 361 299 161 258 82 212 1,992 ANP VONB 952 572 489 320 311 380 676 468 319 269 120 166 91 220 3,700 1,653 2013 (1) VONB Margin 57.6% 56.3% 67.3% 37.8% 66.4% 26.8% 32.0% 48.9% ANP 781 565 400 319 249 338 689 3,341 VONB Change ANP Change 32% 13% 11% 34% 55% (10)% (4)% 21% 22% 1% 22% – 25% 12% (2)% 11% Adjustment to reﬂect additional Hong Kong reserving and capital requirements (2) (50) n/m n/m (67) 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. (97) n/m 1,845 49.1% n/m 3,700 (96) n/m 1,490 44.1% n/m 3,341 n/m 24% n/m 11% (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. ANNUAL REPORT 2014 017 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW FINANCIAL REVIEW VONB grew by 24 per cent to US$1,845 million, an increase of delivering VONB growth of 21 per cent to US$1,414 million US$355 million compared with 2013. and partnership distribution VONB growing by 17 per cent to China and Hong Kong once again delivered an excellent performance with VONB up 55 per cent and 32 per cent respectively driven by the execution of our Premier Agency and product strategies. Malaysia, Thailand and Singapore also delivered strong double-digit VONB growth with Malaysia US$551 million compared with 2013. The reported growth for partnership distribution was moderated by local currency depreciation and the industry-wide suspension of outbound telesales in Korea as highlighted above. Underlying partnership VONB growth exceeded 30 per cent excluding these effects. performing well as we beneﬁted from the integration of the ING ANP grew by 11 per cent to US$3,700 million compared with Malaysia acquisition in 2013. The industry-wide suspension of outbound telesales in Korea by regulators, as previously highlighted in our 2014 interim results announcement, affected the performance of AIA’s Korean business in 2014. However, the growth in our bancassurance, broker and agency channels offset lower direct marketing sales and AIA outperformed the Korean life industry as a whole. US$3,341 million in 2013, driven by excellent growth in China, Hong Kong and Singapore. The reported ANP growth rate for Thailand, Malaysia and our Other Markets were affected by local currency depreciation. VONB margin increased by 5.0 pps to 49.1 per cent compared with 44.1 per cent in 2013. The majority of the increase was from product mix improvements with economic assumption changes representing 1.2 pps. Other Markets delivered double-digit VONB growth on constant VONB is reported after a deduction of US$147 million for exchange rates in the second half of the year, despite the slower additional Hong Kong reserving and capital requirements above start in the ﬁrst half of 2014. Reported VONB for the Other local statutory requirements and unallocated Group Ofﬁce Markets for the full year was lower than 2013 due in large part expenses, representing the expenses incurred by the Group to the depreciation of local currencies against our US dollar Ofﬁce which are not allocated by business unit. The deduction reporting currency and the effect of liquidity tightening in the for additional Hong Kong reserving and capital requirements was banking sector, as previously disclosed. lower compared with 2013 as a result of a focus on products We continued to achieve double-digit growth across both agency and partnership distribution channels with agency distribution with improved capital efﬁciency and geographical mix. EMBEDDED VALUE (EV) EQUITY EV Equity US$ millions, unless otherwise stated EV Goodwill and other intangible assets (1) EV Equity As at 30 November 2014 As at 30 November 2013 Change 37,153 1,889 39,042 33,818 1,053 34,871 10% 79% 12% 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$4,171 million to US$39,042 million at EV Equity included goodwill and other intangible assets of 30 November 2014, an increase of 12 per cent over the year from US$1,889 million at 30 November 2014 compared with US$1,053 US$34,871 million at 30 November 2013, mainly as a result of million at 30 November 2013, with the increase arising principally strong EV operating proﬁt. from the Citibank Upfront Payment. 018 AIA GROUP LIMITED Analysis of EV Movement An analysis of the movements in EV is shown as follows: US$ millions, unless otherwise stated Opening EV Citibank Upfront Payment Adjusted Opening EV Value of new business Expected return on EV Operating experience variances Operating assumption changes Finance costs 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 Purchase price Acquired EV Effect of acquisitions Adjusted Opening EV Value of new business Expected return on EV Operating experience variances Operating assumption changes Finance costs 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 ANW 13,462 (800) 12,662 (995) 3,531 (126) (13) (53) 2,344 610 6 530 3,490 (689) (14) (98) 15,351 ANW 13,135 (1,865) 683 (1,182) 11,953 (957) 3,089 (255) (83) (26) 1,768 335 – 361 2,464 (595) 11 (371) 13,462 2014 VIF 20,356 – 20,356 2,840 (896) 314 (67) – 2,191 110 116 (507) 1,910 – – (464) 21,802 2013 VIF 18,238 – 374 374 18,612 2,447 (700) 369 93 – 2,209 10 429 (515) 2,133 – – (389) 20,356 EV 33,818 (800) 33,018 1,845 2,635 188 (80) (53) 4,535 720 122 23 5,400 (689) (14) (562) 37,153 EV 31,373 (1,865) 1,057 (808) 30,565 1,490 2,389 114 10 (26) 3,977 345 429 (154) 4,597 (595) 11 (760) 33,818 ANNUAL REPORT 2014 019 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW FINANCIAL REVIEW EV grew to US$37,153 million at 30 November 2014. The growth mainly due to lower interest rates; and positive other non- in EV of US$3,335 million is shown after a deduction for the operating variances of US$23 million. This was offset by the Citibank Upfront Payment and the payment of shareholder payment of shareholder dividends totalling US$689 million, dividends. Underlying growth excluding the Citibank Upfront negative other capital movements of US$14 million and negative Payment was US$4,135 million. foreign exchange movements of US$562 million. EV operating proﬁt grew by 14 per cent to US$4,535 million EV includes adjusted net worth (ANW) and value of in-force compared with 2013. The strong performance reﬂected business (VIF). ANW increased by 14 per cent to US$15,351 a combination of a higher VONB of US$1,845 million, an million at 30 November 2014 from US$13,462 million at 30 increased expected return on EV of US$2,635 million from a November 2013 with the operating increase of US$2,344 million higher opening EV and overall positive operating experience partially offset by the Citibank Upfront Payment. VIF increased by variances and operating assumption changes which totalled 7 per cent to US$21,802 million at 30 November 2014 compared US$108 million, less ﬁnance costs of US$53 million on medium with US$20,356 million at 30 November 2013 with the operating term notes. Operating return on adjusted opening EV after the increase of US$2,191 million partially offset by negative other Citibank Upfront Payment and including ﬁnance costs increased non-operating variances of US$507 million and negative foreign by 70 basis points compared with 2013 to 13.7 per cent. exchange movements of US$464 million. Non-operating EV movements included positive investment return variances of US$720 million, largely due to increased EV and VONB Sensitivities Sensitivities to EV and VONB arising from changes to central market values of equities and ﬁxed income assets; the positive assumptions from equity price and interest rate movements are effect of changes in economic assumptions of US$122 million shown below: US$ millions, unless otherwise stated Central value Equity price changes 10 per cent increase in equity prices 10 per cent decrease in equity prices Interest rate changes 50 basis points increase in interest rates 50 basis points decrease in interest rates EV as at 30 November 2014 EV as at 30 November 2013 2014 VONB 2013 VONB 37,153 1,845 33,818 1,490 37,914 36,377 37,232 37,014 n/a n/a 1,923 1,748 34,455 33,164 34,027 33,414 n/a n/a 1,564 1,399 Please refer to Section 3 of the Supplementary Embedded Value Information for additional information. 020 AIA GROUP LIMITED IFRS PROFIT IFRS Operating Proﬁt After Tax (OPAT) (1) by Segment US$ millions, unless otherwise stated 2014 2013 Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total Note: (1) Attributable to shareholders of AIA Group Limited. 905 544 429 280 283 165 314 (10) 2,910 773 528 396 250 205 150 239 (35) 2,506 YoY 17% 3% 8% 12% 38% 10% 31% n/m 16% OPAT grew by 16 per cent compared with 2013 to US$2,910 by the depreciation in the Thai baht by 6 per cent against our US million. This strong performance was the result of underlying dollar reporting currency and lower investment income following business growth and operational efﬁciency combined with our dividends remitted to the Group Corporate Centre. focus on improving proﬁtability through writing higher-quality savings and protection business. An excellent performance in China was mainly driven by strong underlying business growth leading to improvements in scale, Each of our market segments delivered positive growth in OPAT. increased proﬁtability from changes in product mix and higher Hong Kong and Malaysia delivered strong increases as a result of investment income. The signiﬁcant growth in Other Markets was underlying business growth and improved product proﬁtability. mainly the result of increased scale and growth in Indonesia, the Malaysia’s OPAT growth was further supported by a lower Philippines and Australia. Group Corporate Centre beneﬁted from effective tax rate. The reported increase in Thailand was affected higher investment income and a lower effective tax rate. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C Total Weighted Premium Income (TWPI) by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total TWPI increased by 8 per cent to US$19,211 million with the reported growth rate affected by currency depreciation in Thailand, Malaysia and Other Markets. Persistency remained strong at 94.4 per cent in 2014. 2014 4,330 3,334 2,339 2,084 1,786 2,205 3,133 2013 3,770 3,364 2,150 2,036 1,599 2,049 2,840 19,211 17,808 YoY 15% (1)% 9% 2% 12% 8% 10% 8% S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 021 FINANCIAL AND OPERATING REVIEW FINANCIAL REVIEW Investment Income (1) Operating Expenses US$ millions, unless otherwise stated Interest income Dividend income Rental income Total Note: (1) Excluding unit-linked contracts. 2014 2013 4,801 428 123 5,352 4,445 398 115 4,958 YoY 8% 8% 7% 8% US$ millions, unless otherwise stated Operating expenses 2014 1,636 2013 (1) 1,537 YoY 6% Note: (1) US$37 million expenses have been reclassified from operating expenses to investment management expenses for the year ended 30 November 2013 to be consistent with current year presentation. Further details are disclosed in note 8 to the financial statements. Operating expenses increased by 6 per cent to US$1,636 million Investment income increased by 8 per cent to US$5,352 million compared with 2013 and the expense ratio decreased to 8.5 per compared with 2013, reﬂecting an increased level of invested cent in 2014 from 8.6 per cent in 2013. assets at the start of 2014. Net Proﬁt (1) US$ millions, unless otherwise stated OPAT Net gains from equities, net of tax Other non-operating investment experience and other items, net of tax Total Note: (1) Attributable to shareholders of AIA Group Limited. 2014 2,910 508 32 3,450 2013 2,506 424 (106) 2,824 YoY 16% 20% n/m 22% AIA’s IFRS net proﬁt deﬁnition includes mark-to-market contributed US$508 million in 2014 compared with US$424 movements from our equity portfolio. Net proﬁt increased by million in 2013. Other non-operating investment experience and 22 per cent compared with 2013 to US$3,450 million from other items, net of tax, increased to US$32 million mainly from higher equity market gains. Net gains from equities, net of tax, net realised gains from debt securities. 022 AIA GROUP LIMITED EARNINGS PER SHARE (EPS) Basic IFRS OPAT earnings per share increased by 16 per cent to Basic EPS based on IFRS net proﬁt attributable to shareholders of AIA Group Limited increased by 22 per cent to 28.83 US cents in 24.31 US cents in 2014 from 20.93 US cents in 2013. 2014 from 23.58 US cents in 2013. Earnings Per Share – Basic Proﬁt (US$ 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) (2) Notes: (1) Attributable to shareholders of AIA Group Limited. Net Proﬁt (1) OPAT (1) 2014 2013 2014 3,450 11,968 28.83 2,824 11,974 23.58 2,910 11,968 24.31 2013 2,506 11,974 20.93 Net Proﬁt (1) OPAT (1) 2014 2013 2014 3,450 12,009 28.73 2,824 12,006 23.52 2,910 12,009 24.23 2013 2,506 12,006 20.87 (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 40 to the financial statements. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 023 FINANCIAL AND OPERATING REVIEW 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 2014 As at 30 November 2013 Change 138,809 121,354 1,384 1,835 142,028 16,593 8,298 166,919 121,034 2,934 11,996 135,964 30,955 149 30,806 1,128 2,316 124,798 15,738 6,866 147,402 112,134 1,950 8,491 122,575 24,827 145 24,682 14% 23% (21)% 14% 5% 21% 13% 8% 50% 41% 11% 25% 3% 25% Assets Total assets grew by 13 per cent to US$166,919 million at Liabilities Total liabilities increased by 11 per cent to US$135,964 million 30 November 2014 compared with US$147,402 million at at 30 November 2014 compared with US$122,575 million at 30 November 2013 mainly reﬂecting positive net ﬂows from 30 November 2013. underlying growth in the business and fair value gains from debt securities. Insurance and investment contract liabilities grew by 8 per cent to US$121,034 million at 30 November 2014 compared Cash and cash equivalents decreased to US$1,835 million at with US$112,134 million at 30 November 2013, reﬂecting the 30 November 2014 compared with US$2,316 million at 30 underlying growth of the in-force portfolio and new business. November 2013, reﬂecting increased investments in ﬁnancial assets and the payment of shareholder dividends totalling US$689 million. Deferred acquisition and origination costs increased to US$16,593 million at 30 November 2014 compared with US$15,738 million at 30 November 2013, reﬂecting underlying growth in the business. Borrowings increased to US$2,934 million at 30 November 2014 mainly due to the issue in March 2014 of two medium term notes of a combined nominal amount of US$1.0 billion. Other liabilities increased by 41 per cent to US$11,996 million at 30 November 2014 compared with US$8,491 million at 30 November 2013 mainly from the US$1,864 million increase in obligations under repurchase agreements and the US$1,005 Other assets increased by 21 per cent to US$8,298 million mainly million increase in tax liabilities driven by market appreciation from the Citibank Upfront Payment of US$800 million, higher of available-for-sale debt securities and an increase in deferred reinsurance assets of US$278 million and other asset growth of acquisition costs. US$354 million. 024 AIA GROUP LIMITED Details of commitments and contingencies are included in note 43 to the ﬁnancial statements. Equity – Movement in Shareholders’ Equity US$ millions, unless otherwise stated Opening shareholder’s equity Net proﬁt Fair value gains/(losses) 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 2014 24,682 3,450 3,807 (430) (91) (689) 77 6,124 30,806 2013 26,662 2,824 (3,712) (508) (87) (595) 98 (1,980) 24,682 Shareholders’ IFRS equity excluding non-controlling interests increased by 25 per cent over the year to US$30,806 million INVESTED ASSETS The carrying value of our invested assets, including ﬁnancial at 30 November 2014 compared with US$24,682 million at investments, investment property and cash and cash equivalents, 30 November 2013. This increase was mainly from net proﬁt increased by 14 per cent to US$142,028 million at 30 November of US$3,450 million, fair value gains on assets of US$3,807 2014 compared with US$124,798 million at 30 November 2013. million primarily reﬂecting fair value gains from debt securities, The increase was a result of an overall positive movement in the a decrease in foreign currency translation reserves of US$430 market value of the portfolio and the investment of operating million less the payment of shareholder dividends totalling cash ﬂows arising from the business in 2014. US$689 million. Invested assets include total assets held in respect of Sensitivities to IFRS proﬁt before tax and net assets arising from policyholders and shareholders, and those backing unit-linked foreign exchange rate, interest rate and equity price risk are contracts as well as assets from consolidated investment funds. included in note 38 to the ﬁnancial statements. Total Invested Assets US$ millions, unless otherwise stated Total policyholder and shareholder Total unit-linked contracts and consolidated investment funds Total invested assets As at 30 November 2014 Percentage of total As at 30 November 2013 Percentage of total 121,054 20,974 142,028 85% 15% 100% 105,174 19,624 124,798 84% 16% 100% W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 025 FINANCIAL AND OPERATING REVIEW 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 As at 30 November 2014 Percentage of total As at 30 November 2013 Percentage of total 8,271 11,321 2,095 21,687 5,044 292 136 92 7% 9% 2% 18% 4% – – – 7,041 11,150 1,944 20,135 4,569 269 215 95 27,251 22% 25,283 35,983 42,273 5,374 83,630 7,707 1,047 127 1,292 93,803 121,054 30% 35% 4% 69% 7% 1% – 1% 78% 100% 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% Unit-Linked Contracts and Consolidated Investment Funds US$ millions, unless otherwise stated Unit-linked contracts and consolidated investment funds Debt securities Loans and deposits Equities Cash and cash equivalents Derivatives As at 30 November 2014 Percentage of total As at 30 November 2013 Percentage of total 4,215 185 16,076 496 2 20% 1% 77% 2% – 3,740 147 15,218 516 3 19% – 78% 3% – Total unit-linked contracts and consolidated investment funds 20,974 100% 19,624 100% 026 AIA GROUP LIMITED Invested assets held in respect of policyholders and shareholders 2014 compared with US$1,800 million at 30 November 2013, increased to US$121,054 million at 30 November 2014 compared reﬂecting increased investments in ﬁnancial assets and the with US$105,174 million at 30 November 2013. The increase was payment of shareholder dividends totalling US$689 million. mainly as a result of an overall positive movement in the market value of the portfolio and the investment of net operating cash ﬂows arising from the business over the year. Invested assets held in respect of unit-linked contracts and consolidated investment funds totalled US$20,974 million at 30 November 2014 compared with US$19,624 million at Fixed income investments, including debt securities, loans and 30 November 2013. term deposits, held in respect of policyholders and shareholders, totalled US$105,317 million at 30 November 2014 compared with US$90,920 million at 30 November 2013. Government and government agency bonds represented 42 per cent of our ﬁxed income investments at 30 November 2014 compared with 43 per cent at 30 November 2013. Corporate CAPITAL Free Surplus Generation The Group’s free surplus at 30 November 2014 represented the excess of adjusted net worth over liabilities and required capital calculated on the HKICO basis. bonds and structured securities accounted for 51 per cent of our Free surplus including the Citibank Upfront Payment increased by ﬁxed income investments at 30 November 2014 compared with US$1,067 million to US$7,794 million at 30 November 2014. Free 49 per cent at 30 November 2013. surplus before the Citibank Upfront Payment grew by US$1,867 Equity securities held in respect of policyholders and shareholders million. totalled US$12,751 million at 30 November 2014 compared with Free surplus generated increased by 16 per cent compared with US$10,884 million at 30 November 2013. The increase in carrying 2013 to US$4,397 million from strong growth in our in-force value was mainly attributable to new purchases as well as gains business, positive market-related and other gains. in market values. Within this ﬁgure, equity securities totalling US$5,044 million were held in participating funds. This was offset by investment in new business of US$1,655 million, unallocated Group Ofﬁce expenses including ﬁnance Cash and cash equivalents held in respect of policyholders costs of US$172 million, the payment of shareholder dividends and shareholders totalled US$1,339 million at 30 November totalling US$689 million and negative other capital movements of US$14 million. The following table shows the change in free surplus: US$ millions, unless otherwise stated Opening free surplus Citibank Upfront Payment 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 2014 6,727 (800) – 5,927 4,397 (1,655) (172) (689) (14) 7,794 2013 6,608 – (1,431) 5,177 3,786 (1,510) (142) (595) 11 6,727 Note: (1) Unallocated Group Office expenses included finance costs of US$53 million on medium term notes for the year ended 30 November 2014 and finance costs of US$26 million on medium term notes and an acquisition credit facility for the year ended 30 November 2013. ANNUAL REPORT 2014 027 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW FINANCIAL REVIEW Net Funds to Group Corporate Centre Working capital comprises debt and equity securities, deposits 30 November 2013. The increase was mainly due to net remittances from business units of US$1,718 million plus the issue and cash and cash equivalents held at the Group Corporate of two medium term notes in March 2014 with net proceeds of Centre. Working capital, after the Citibank Upfront Payment, US$985 million less the Citibank Upfront Payment of US$800 grew by 19 per cent over the year to US$6,614 million at million and the payment of shareholder dividends totalling 30 November 2014 compared with US$5,556 million at US$689 million. The movements in working capital are summarised as follows: US$ 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 Citibank Upfront Payment Payment for acquisitions Increase in borrowings Purchase of shares held by the employee share-based trusts Payment of dividends Change in fair value reserve and others Closing working capital 2014 5,556 (63) 752 641 267 112 (100) 24 22 1,718 (800) – 985 (91) (689) (2) 6,614 2013 5,185 (31) 839 700 222 118 (101) 27 (72) 1,733 – (1,865) 1,441 (87) (595) (225) 5,556 REGULATORY CAPITAL The Group’s lead insurance regulator is the Hong Kong Ofﬁce of basis and AIA Co. has a solvency ratio of 427 per cent of regulatory minimum capital. The ratio was stable year-on-year the Commissioner of Insurance (HKOCI). The Group’s principal from strong retained earnings and positive market movements operating company is AIA Co., a Hong Kong-domiciled insurer. less the Citibank Upfront Payment, dividends to AIA Group At 30 November 2014, the total available capital for AIA Co. Limited and increased regulatory minimum capital due to growth amounted to US$6,730 million as measured under the HKICO in the business. A summary of the total available capital and solvency ratios of AIA Co. is as follows: As at 30 November 2014 As at 30 November 2013 6,730 1,577 427% 6,057 1,399 433% US$ millions, unless otherwise stated Total available capital Regulatory minimum capital (100%) Solvency ratio (%) 028 AIA GROUP LIMITED 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 2014. GLOBAL MEDIUM TERM NOTE PROGRAMME AIA established a US$2 billion Medium Term Note (MTN) programme on 27 February 2013. Subsequently, on 21 February 2014, we expanded the MTN programme into a US$3 billion Global Medium Term Note (GMTN) programme. We issued two senior unsecured ﬁxed rate notes under this expanded programme in March 2014. The notes are for terms of 5 years and 30 years at nominal amounts of US$500 million each and bear annual interest of 2.250 per cent and 4.875 per cent respectively. At 30 November 2014, the carrying amount of the medium term notes was US$2,126 million. CREDIT RATINGS At 30 November 2014, AIA Co. has ﬁnancial strength ratings of AA- (Very Strong) and Aa3 (Very Low Credit Risk) with stable outlooks from Standard & Poor’s and Moody’s respectively. AIA Group Limited has issuer credit ratings of A (Strong) and A3 (Low Credit Risk) with stable outlooks from Standard & Poor’s and Moody’s respectively. DIVIDENDS The Board of Directors has recommended an increase in the ﬁnal dividend of 19 per cent to 34.00 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 brings the total dividend for 2014 to 50.00 Hong Kong cents per share, an increase of 18 per cent compared with 2013. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 029 AIA’s proprietary agency network is the cornerstone of its distribution platform. Bancassurance, direct marketing and other intermediated channels complementary to AIA’s agency distribution are further extending AIA’s reach. AIA’s people and its partners provide the highest standards of service and advice to existing and new customers alike. REAL REACH FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW DISTRIBUTION Agency AIA’s proprietary tied agency network remains the cornerstone of our distribution platform and is a signiﬁcant competitive advantage for AIA allowing us to build and maintain long- term relationships with our customers by offering advice on a broad range of protection and long-term savings products. The exceptional scale and quality of our agency operations is a fundamental strength and provides an unequalled platform for unlocking the enormous market potential across the Asia- Paciﬁc region. We made strong progress in executing our Premier Agency strategy in 2014, focusing on training, quality recruitment and increased efﬁciency. Our agency business generated 21 per cent growth in VONB to US$1,414 million in 2014, accounting for 72 per cent of the Group’s total VONB. ANP grew by 8 per cent in reporting currency and VONB margin increased by 6.9 pps to 60.8 per cent mainly from a change in product mix. Our absolute priority is ensuring that our growing agency force has all the skills and knowledge our agents need to provide sound, professional advice to our customers. Our recruitment process has evolved under our Premier Agency strategy to introduce greater selection using proﬁling tools developed through our strategic partnership with LIMRA and dedicated recruitment teams targeting younger, highly-educated agents looking to develop a full-time professional career in the industry. As part of our recruitment process, we have upgraded training programmes to accelerate the productivity of new agents joining AIA and raise their activity levels. Intensive induction training periods covering regulations, compliance and technical product skills are followed by sales skills training and coaching from leaders. Our agency leaders also have access to best-in-class training through our strategic partnership with GAMA International, a worldwide association dedicated to supporting the professional development of ﬁeld leaders in the ﬁnancial services industry. In 2014, over one-third of our agency leaders across the region had completed the GAMA training courses and we also launched new leader training to strengthen the recruitment skills of our newly-promoted agency leaders. Selected experienced leaders have been certiﬁed as trainers so they can share invaluable real life experience and perspectives to complement our GAMA programmes. 1 Our absolute priority is ensuring that our growing agency force has all the skills and knowledge our agents need to provide sound, professional advice to our customers. Our strong agency performance is a direct result of this focus on recruitment and career development with active new agents increasing by 14 per cent compared with 2013. It is also reﬂected in the growth of our Million Dollar Round Table (MDRT) qualiﬁers, which is an important external industry benchmark of leading ﬁnancial planners. Overall, the Group’s MDRT qualiﬁers increased by 24 per cent in 2014. AIA is now the second-largest insurer for MDRT membership worldwide. 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 1 AIA and Citibank have worked closely to obtain regulatory approvals and successfully launch the partnership in each of the 11 markets. 2 We continued to take advantage of the opportunities offered by new technology and accelerated the use of our iPoS platform across the Group. 3 In 2014, over one-third of our agency leaders across the region had completed the GAMA training courses. 2 3 AIA is committed to investment in technology and innovation to support our agents in meeting customer needs while delivering the best possible customer experience. Our market-leading interactive point-of-sale (iPoS) technology is now available in 11 of our markets, forming an integral part of our operation with broad-based and growing adoption amongst our agency force. During 2014, we started to launch a next generation system that incorporates iPoS into our new interactive Mobile Ofﬁce (iMO) platform. Expanded functionality allows our agents and agency leaders to manage lead generation, sales productivity, recruitment activity, development training and customer analytics on a mobile device. The new technology is transforming the way our agents work, increasing the quality of interactions with our customers and helping AIA to sustain our growth. direct marketing and other intermediated distribution channels to deliver 17 per cent VONB growth to US$551 million compared with 2013 with ANP up 17 per cent and VONB margin of 40.2 per cent. The reported growth in 2014 was moderated by local currency depreciation against our US dollar reporting currency and the industry-wide suspension of outbound telesales in Korea, which affected the growth of our direct marketing business. Underlying VONB growth was more than 30 per cent excluding these effects. Overall, our partnership distribution continued to deliver substantial additional sources of sustainable proﬁtable growth for the Group, accounting for 28 per cent of our total VONB in 2014. Bancassurance The successful execution of our bancassurance strategy generated strong growth in 2014. We continued to maintain the momentum in our existing bank partnerships across the region by collaborating with our partners in a number of key areas, notably the recruitment and training of insurance specialists; enhanced customer segmentation; and rigorous activity management using our proprietary iPoS platform to improve in-branch sales productivity. In addition to expanding our sales from insurance specialists in bank branches, we have developed new business streams with our bank partners through direct marketing, private banking and group insurance. AIA continued to make good progress in our newly-established strategic partnership with Citibank, N.A. (Citibank). Our landmark 15-year distribution agreement was signed in December 2013 representing one of the most wide-ranging geographic bancassurance partnerships in Asia, covering 11 markets and 13 million customers across the region. AIA and Citibank have worked closely to obtain regulatory approvals and successfully launch the partnership in each of the 11 markets: Hong Kong, Singapore, Thailand, China, Indonesia, the Philippines, Vietnam, Malaysia, Australia, India and Korea. We have established a joint partnership management structure and developed business plans with the launch of more than 80 products and engagement of more than 2,000 salespeople. We have made a signiﬁcant investment in technology to enable cutting-edge W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I Partnerships Barriers to entry for distribution in Asia are high and our broad front-end sales and service solutions for our clients. We have also built a new regional sales management programme for partnership distribution platform provides a complementary and bank relationship managers; organised joint branding campaigns material source of competitive advantage by extending our reach across the markets; and established telesales call centres for in the fast-growing Asian insurance market. We have built on our direct marketing of AIA products to Citibank’s retail cardholders. strong strategic relationships with our partners in bancassurance, N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 033 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW We anticipate a gradual build-up of sustainable proﬁtable growth Our multi-channel distribution strategy and leading beneﬁts over time as we implement our business plans to signiﬁcantly platform combined with the signiﬁcant potential in the Asia- increase the life and health insurance penetration of Citibank’s Paciﬁc region provides AIA with the opportunity to deliver further large retail and corporate customer base across Asia. substantial growth in the group insurance market. Direct Marketing and Other Partnership Channels As previously highlighted in our 2014 interim results announcement, the industry-wide suspension of outbound telesales by the Korean ﬁnancial regulators affected industry performance during the year and with it, the performance of our direct marketing business. VONB was affected by the additional costs of ﬁnancial support provided to telesales representatives and regulatory changes following the industry-wide suspension. MARKETING AIA’s brand positioning as The Real Life Company continued to play an important role in guiding our brand and marketing activities in 2014. It reﬂects our commitment to providing ﬁnancial solutions for our customers to help them prepare for the opportunities and challenges of real life. In addition to serving as the foundation for our visual communications and campaigns, it also provides a framework for engaging with our stakeholders AIA’s intermediated partnership channels, including IFAs, brokers, throughout the Asia-Paciﬁc region, including through events private banks and specialist advisers, delivered excellent VONB such as The Music Run™ in Malaysia and Thailand, The Electric growth in 2014, driven by increased sales and higher margins Run in Hong Kong, The Real Life Now Music Festival in Korea and in IFA and broker channels. Our focus has been on generating the Taylor Swift Red Concerts in Malaysia and Singapore. new sales through targeted product launches and a dedicated approach to sales and service support. An important part of our brand awareness strategy was the extension of our partnership with Tottenham Hotspur Football Group Insurance AIA is a leader in the group insurance market across the Asia- Club (Spurs) announced at the beginning of 2014. AIA became the club’s exclusive Ofﬁcial Shirt Partner for ﬁve years. Through Paciﬁc region, meeting the needs of over 16 million in-force our partnership with Spurs, we are not only promoting greater insured scheme members and more than 120,000 corporate awareness of AIA among the many millions of English Premier clients. With our strong multi-channel distribution capabilities League supporters throughout the region but also broadening and long-standing relationships with corporate clients, we continued to hold market-leading positions in Australia, Singapore, Thailand, Hong Kong and Malaysia, while building our presence in other growth markets including China, Indonesia and the Philippines. Our strategy of developing life and health employee beneﬁts propositions to companies ranging from small-and-medium sized enterprises (SMEs) to large multinational corporations through our agency channel and broker relationships delivered a solid performance in 2014. Our Premier Agency distribution continued to be a major competitive advantage for AIA in the SME segment and we provide targeted support and training to agents who have pre-existing relationships with small business owners and are identiﬁed as potential high performers in this business segment. We launched the AIA Asia Beneﬁts Network in 2014 to allow multinational corporations to aggregate their local group insurance contracts with AIA into a single, exclusive regional risk pool. We worked closely with our broker and human resource consultant partners to provide a seamless, integrated service to their domestic and multinational clients across the region. AIA’s brand positioning as The Real Life Company continued to play an important role in guiding our brand and marketing activities in 2014. Note: VONB and VONB margin by distribution channel are based on local statutory reserving and capital requirements and exclude pension business. 034 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C 1 S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A 1 We extended our partnership with Tottenham Hotspur Football Club in 2014 and became the club’s exclusive Official Shirt Partner for five years. 2-4 AIA’s brand positioning as The Real Life Company provides a framework for engaging with our stakeholders, including through events such as The Real Life Now Music Festival in Korea and the Taylor Swift Red Concerts in Malaysia and Singapore. ANNUAL REPORT 2014 035 2 3 4 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW our reach to connect with new audiences. It provides us with many opportunities to differentiate our brand and engage with our customers, agents, partners and employees, as well as local communities. Customer Engagement Our aim is to deliver the best possible customer experience through a deep understanding of what matters most to our customers. In 2014, we spoke to more than 14,000 consumers across the region, including path-to-purchase research, as part of the ongoing Customer Understanding Programmes that we began in 2013. Our detailed knowledge of “how and why” customers purchase insurance allows us to better understand customer needs and identify critical success factors in product and service design. As a result of our research, we have created a new framework called Model Customer Experience, launched initially in Malaysia, China and the Philippines that reinforces our guiding principles of reducing complexity in all of our interactions with our customers. Our in-force customer base of more than 28 million individual policies and over 16 million participating members of group insurance schemes provides AIA with a signiﬁcant advantage in generating new business and our marketing teams have worked alongside our distribution channels to expand sales to these customer groups. In addition to running targeted sales campaigns, we have expanded our customer reunion programme that enables our agents and salespeople to reconnect with inactive customers. In 2014 we continued to make strong progress in this area with 39 per cent VONB growth from existing customer marketing initiatives compared with 2013. We also leverage the opportunity for new sources of customer 1 1-2 We extended AIA Vitality, our innovative wellness programme, to Australia in 2014. 2 engagement through developing social media platforms. Unit-linked products remain central to our product strategy by Product Development AIA offers an extensive range of products to meet the evolving real life protection needs and long-term wealth aspirations of our customers. Our products are designed to provide tailored beneﬁts to our different customer segments and levels of cover aligned with the different stages of our customers’ lives. In 2014 we extended our popular comprehensive protection product to the young family segment in China and launched a new long- term product speciﬁcally designed to meet education-funding providing our customers with the ﬂexibility to adjust the balance between protection cover and wealth accumulation over the lifetime of the product. In Malaysia, we introduced additional protection riders for our ﬂagship regular premium unit-linked products targeted at women and young adults, which helped drive a 38 per cent increase in unit-linked VONB compared with 2013. We have also expanded our range of riders for our ﬁrst-of- its-kind unit-linked product in Thailand, doubling our unit-linked VONB as we look to develop this nascent segment of the market. needs. In Hong Kong, we produced a packaged comprehensive Following the initial launch in Singapore, we extended AIA retirement solution for our customers to raise awareness Vitality, our innovative wellness programme, to Australia in 2014. about retirement planning and our operation in Singapore has This science-backed programme enables us to offer protection also rolled out an affordable critical illness product to senior products designed to encourage and reward sustained changes customers to meet their speciﬁc needs. in lifestyle that promote healthy living and further differentiate AIA’s protection proposition. 036 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I TECHNOLOGY AND OPERATIONS We have made signiﬁcant progress in delivering our ongoing technology and business process transformation programme. Our aim is to increase operational efﬁciency, simplify our interactions with our customers and reinforce AIA’s competitive advantages through the innovative use of new technologies. The changes we are making to enhance our core business operations and technology platform will support AIA in delivering sustainable growth. Improving Efﬁciency The modernisation of our data centre made excellent progress during the year in providing cost-efﬁcient infrastructure services across the Group, while at the same time enhancing information security and raising service quality. The changes will help increase platform ﬂexibility and improve operating costs as the modernisation programme reduces data centre infrastructure and decreases data centre ofﬁce space. In 2015, we will complete the retirement of our remaining mainframe platforms, further reducing operating costs and The improved customer experience and reduced complexity will increase customer loyalty and operating efficiency – two significant drivers of financial performance. increasing administrative ﬂexibility. During the year, we continued the roll-out of our expert underwriting systems to automate new Promoting Innovation Through close partnerships with leading global technology business issuance in our markets. For example, following the providers, we continued to take advantage of the opportunities launch in Malaysia, we realised signiﬁcant efﬁciency beneﬁts, offered by new technology. We accelerated the use of our iPoS achieving a straight-through processing rate of approximately 70 platform across the Group, building on our early adoption of per cent of new policy applications submitted through the system this integrated mobile technology in our agency and partnership during the year. AIA remains focused on safeguarding our customers, partners, employees and shareholders against information security risks. distribution channels. We also launched our next generation system that incorporates iPoS into our new interactive Mobile Ofﬁce (iMO) platform. We have implemented a continuous cycle of security upgrades 2014 also marked the formation of AIA Edge, an internal team and initiatives, spanning technology, operations, process and mandated to promote business innovation throughout the Group education, supplemented with advanced intelligence-gathering with a medium-term horizon. AIA Edge goes beyond our regular techniques to ensure we stay ahead of the fast-evolving threat business plans to explore new sources of competitive advantage for AIA. The team has established relationships with a network of external partners ranging from start-ups and universities to research institutes and government agencies. In its ﬁrst year of inception, AIA Edge has already engaged in projects involving commercial opportunities in data analytics and digital health. from cybercrime. Reducing Complexity Following extensive customer research based on our Customer Understanding Programmes, we have launched a range of initiatives to reduce complexity and make it easier to do business with AIA. The core principles include the use of simple language, providing a consistent customer experience and integrating customer feedback. Our aim is to identify opportunities to simplify products and business processes, improving efﬁciency while increasing our understanding of what customers really value in their interactions with AIA. The improved customer experience and reduced complexity will increase customer loyalty and operating efﬁciency – two signiﬁcant drivers of ﬁnancial performance. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 037 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW GEOGRAPHICAL MARKETS HONG KONG Financial Highlights AIA’s Hong Kong business delivered another year of excellent growth with VONB up by 32 per cent compared with 2013 to US$619 million. The strong performance was driven by a combination of sustained improvements in our high-quality agency distribution channel through the ongoing execution of our Premier Agency strategy, excellent growth in our partnership business and positive changes in product mix. ANP grew by 22 per cent to US$952 million with VONB margin up by 4.7 pps to 62.3 per cent. IFRS operating proﬁt after tax grew by 17 per cent to US$905 million compared with 2013, as a result of growth in the underlying business, improved proﬁtability and higher investment income. Group insurance delivered a strong performance, with 26 per cent growth in VONB as we reinforced our relationships with independent brokers and increased our proprietary agency activity within the SME market. In the agency channel, our average number of active group insurance producers increased by 29 per cent, with total cases closed up by 38 per cent compared with 2013. AIA maintained its position as a market leader in protection provision in Hong Kong. We expanded our protection range by introducing a comprehensive critical illness product for young and mature families and the launch of a new disability income plan targeted at the middle-class working population. One of our main priorities is helping our customers save for retirement. Integrated marketing campaigns raised awareness of the importance of retirement planning, producing excellent results alongside the launch of our regular savings participating products at the beginning of the year. Business Highlights Our commitment to developing our Premier Agents through high-quality recruitment and professional career development continued to strengthen AIA’s market-leading agency distribution in Hong Kong. Our training programmes delivered through the AIA Premier Academy build on our successful “Road to MDRT” and “Executive Development Programme” to target a younger generation of agents and agency leaders and promote a culture of high activity and productivity. Our focus on recruiting and developing our new generation of high-quality candidates produced a 15 per cent increase in active new agents compared with 2013. AIA is the market leader for MDRT members in Hong Kong and our MDRT qualiﬁers grew by 18 per cent compared with 2013 demonstrating the quality and professionalism of our agency. Our partnership distribution channel was an important contributor to VONB growth in 2014, led by our IFA business. We strengthened our IFA proposition during the year through tailored long-term protection and savings products and our ongoing commitment to high levels of service and support. In March 2014, AIA’s Hong Kong business began our exclusive long- term bancassurance partnership with Citibank. We continued to make good progress with the initial roll-out of our product, marketing and training plans to support the growth of this business and build scale over time. 038 AIA GROUP LIMITED VONB (1) 2014 619 2013 468 ANP 2014 952 2013 781 YoY 32% YoY 22% VONB MARGIN (2) 2014 62.3% 2013 YoY 57.6% 4.7pps T WPI 2014 4,330 2013 YoY 3,770 15% OPER ATING PROFIT AF TER TA X 2014 905 2013 773 YoY 17% US$ MILLIONS, UNLESS OTHERWISE STATED Notes: (1) VONB figures shown in the table 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. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 039 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW THAILAND Financial Highlights AIA delivered a strong performance in 2014, demonstrating the resilience of our long- standing business in Thailand. VONB growth of 13 per cent to US$361 million was achieved despite the 6 per cent depreciation in the Thai baht against our US dollar reporting currency. VONB margin improved by 6.9 pps to 63.2 per cent as a result of improved product mix from the launch of new protection riders and the positive effect of agency compensation structure changes implemented towards the end of 2013. IFRS operating proﬁt after tax grew by 3 per cent to US$544 million. The growth rate in Thailand was affected by the depreciation in the Thai baht and lower investment income following dividends remitted to the Group Corporate Centre. We have assumed that the corporate tax rate in Thailand will be 20 per cent for assessment year 2015 and return to 30 per cent from assessment year 2016 onward. Business Highlights Our market-leading agency network in Thailand has enabled AIA to offer a broad range of long-term savings and life and VONB (1) 2014 361 2013 319 ANP 2014 572 2013 565 YoY 13% YoY 1% VONB MARGIN (2) 2014 63.2% 2013 56.3% YoY 6.9pps T WPI 2014 3,334 2013 (1)% 3,364 YoY OPER ATING PROFIT AF TER TA X 2014 544 2013 528 YoY 3% US$ MILLIONS, UNLESS OTHERWISE STATED Notes: (1) VONB figures shown in the table 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. health protection products to our customers nationwide. We While our proprietary agency channel provides AIA with have continued to develop the professionalism and breadth of signiﬁcant competitive advantages, the development of our knowledge of our proprietary agents through training from partnership business continued in 2014, particularly in the direct our AIA Premier Academy and the introduction of enhanced marketing channel supported by our leading brand awareness. recruitment policies. VONB from unit-linked products doubled compared with 2013 as we focused on training licensed agents qualiﬁed to sell these products following our launch of Thailand’s ﬁrst-of-its-kind next generation unit-linked product in 2013. The upmarket health product we launched late last year has been a signiﬁcant contributor to the strong underlying VONB growth throughout 2014, and in the second half of the year we launched a new product with complementary beneﬁts which The 45 per cent increase in MDRT qualiﬁers during the year has been well received by the market. Our ﬂexible and unique underscores the quality of AIA’s agency distribution in Thailand. product offerings have resulted in a signiﬁcant increase in the The beneﬁts from the modiﬁcations to our agency compensation attachment of protection riders, a key driver of the increase structure implemented towards the end of 2013 also began to in VONB margin compared with 2013. These successes are a emerge in 2014. The execution of our Premier Agency strategy validation of our focus on long-term savings and protection has delivered VONB growth of more than 20 per cent in our products rather than pursuing headline market share gains agency business on constant exchange rates compared with without regard to proﬁtability. 2013. The continued investment in our market-leading agency distribution network positions AIA extremely well as the Thai insurance market continues to grow. 040 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 041 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW SINGAPORE Financial Highlights AIA’s operation in Singapore delivered an increase in VONB of 11 per cent to US$299 million building on our sustained growth from prior years including a particularly strong performance in 2013. ANP growth of 22 per cent and VONB margin of 61.2 per cent reﬂected the completion of the HealthShield protection plan upgrade running from March 2013 to February 2014 that boosted protection sales substantially in 2013. Lower sales of the HealthShield plan were offset by strong growth in unit-linked and participating business and this more balanced mix of savings and protection business was the driver of strong ANP growth over the year. IFRS operating proﬁt after tax increased by 8 per cent to US$429 million, in line with the underlying business growth. Business Highlights The successful execution of our Premier Agency strategy continues to strengthen our market- leading position in the agency channel in Singapore in 2014. Our targeted recruitment strategy combined with comprehensive development programmes to support our new recruits has delivered 16 per cent growth in the number of active agents. Our new leadership career structure has continued to deliver strong results with a 23 per cent increase in the number of new recruits compared with 2013. We also beneﬁted from the successful completion of our recruitment offer to agents from HSBC Insurance Singapore following our agreement in November 2013. We are committed to enhancing the efﬁciency and productivity of our agency force through adopting new technology. AIA’s proprietary interactive point-of-sale system, iPoS, is now established as the primary sales tool for our participating savings products for this channel. We produced a strong performance in our bancassurance business through our consistent execution and collaboration with our existing bank partners, while we began the roll-out of our exclusive bancassurance partnership with Citibank in March 2014. AIA is consistently looking for new ways of engaging with our customers and further differentiating our products and services. The latest addition to our next generation unit-linked range in Singapore offers greater ﬂexibility to adjust levels of cover and types of beneﬁts as needs change over the lifetime of the policy and has driven excellent growth in unit-linked VONB compared with 2013. AIA Vitality, our innovative science-backed wellness programme, has continued to gain traction in 2014 as we further integrated the programme into our protection products and reward our customers for sustained changes in behaviour towards a healthier lifestyle. VONB (1) 2014 299 2013 269 ANP 2014 489 2013 400 YoY 11% YoY 22% VONB MARGIN (2) 2014 61.2% 2013 67.3% YoY (6.1)pps T WPI 2014 2,339 2013 YoY 2,150 9% OPER ATING PROFIT AF TER TA X 2014 429 2013 396 YoY 8% agents in Singapore. Another major milestone US$ MILLIONS, UNLESS OTHERWISE STATED was the completion of a major system upgrade of our policy administration system, adopting signiﬁcantly enhanced technology capabilities to allow greater product innovation and ﬂexibility. Partnership distribution delivered solid growth in VONB as we continued to expand our relationships with our IFA and bancassurance distribution partners. The IFA channel delivered strong growth as we launched new protection and 042 AIA GROUP LIMITED Notes: (1) VONB figures shown in the table 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. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 043 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW 044 AIA GROUP LIMITED MALAYSIA Financial Highlights AIA’s Malaysian operation reported another year of excellent results with VONB growth of 34 per cent to US$161 million. ANP was ﬂat in reporting currency with VONB margin signiﬁcantly higher by 12.3 pps to 50.1 per cent following a successful move towards regular premium protection and unit-linked products. The improvement in product mix over the year was a direct result of the product and training strategy we set out at the time of our acquisition of ING Malaysia in December 2012. IFRS operating proﬁt after tax rose by 12 per cent to US$280 million, reﬂecting positive underlying business growth, improved product VONB (1) 2014 161 2013 120 ANP 2014 320 2013 319 YoY – VONB MARGIN (2) 2014 50.1% YoY 34% 2013 37.8% YoY 12.3pps T WPI 2014 2,084 2013 YoY 2,036 2% OPER ATING PROFIT AF TER TA X 2014 280 2013 250 YoY 12% proﬁtability and a lower effective tax rate. This US$ MILLIONS, UNLESS OTHERWISE STATED was partially offset by the depreciation of the Malaysian ringgit against our US dollar reporting currency. Business Highlights As part of the integration of ING Malaysia, we launched a new, uniﬁed structure for agency compensation towards the end of 2013. It is designed to drive quality recruitment and improve agency productivity supporting our aim of promoting and rewarding full-time agents, who are looking for a professional career with AIA. New recruitment programmes are focused on the under-35 age group and generated a 29 per cent increase in the number of active new agents compared with 2013. Notes: (1) VONB figures shown in the table 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. Our exclusive bancassurance partnership with Public Bank has again made a material contribution to VONB, building on its successful start in 2013. The broadening of our product offering and training of in-branch sales executives have raised productivity Our AIA Premier Academy has focused on improving product mix and improved the product mix, delivering excellent VONB growth and productivity through training aligned with our new product compared with 2013. Our market-leading group insurance range and integrated with iPoS, our market-leading interactive business also performed strongly with new schemes and the point-of-sale platform. The take-up of iPoS has continued to be successful launch of a portable protection product, delivering strong with around 90 per cent of our active agents in Malaysia 35 per cent VONB growth compared with 2013. adopting this innovative technology. We launched new riders during 2014 as part of our expanded On 1 March 2014, we completed the consolidation of our single product range, offering combinations of protection cover Takaful licence and rebranding to AIA PUBLIC Takaful Bhd. and beneﬁt levels tailored speciﬁcally for different market Takaful VONB increased by over 50 per cent compared with segments: young adults, young families, mature families, 2013, as we beneﬁted from the strength of our existing qualiﬁed women and pre-retirees. The riders have been pre-packaged agents and the launch of a comprehensive recruitment strategy with unit-linked savings plans and integrated within iPoS, that more than doubled our number of new recruits in this providing our agents with the ﬂexibility and interactive market compared with 2013. sales tools to shape premiums and beneﬁts to the needs of individual customers. The VONB from unit-linked products grew by 38 per cent compared with 2013. ANNUAL REPORT 2014 045 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW CHINA Financial Highlights AIA’s business in China has produced another excellent performance in 2014. The disciplined execution of our Premier Agency strategy resulted in 55 per cent growth in VONB compared with 2013. ANP increased by 25 per cent to US$311 million reﬂecting the strong growth in the number of active agents and improvements in productivity. New products aimed at protecting the ﬁnancial position of young families made a strong contribution to our growth during the year. VONB margin reﬂected our continued positive shift towards longer-term savings and protection products. IFRS operating proﬁt after tax grew by 38 per cent to US$283 million compared with 2013, building on an increase of 36 per cent in the year before. This strong performance was due to strong underlying business growth leading to improvements in VONB (1) 2014 258 2013 166 ANP 2014 311 2013 249 YoY 55% YoY 25% VONB MARGIN (2) 2014 83.1% 2013 66.4% YoY 16.7pps T WPI 2014 1,786 2013 1,599 YoY 12% OPER ATING PROFIT AF TER TA X 2014 283 2013 205 YoY 38% US$ MILLIONS, UNLESS OTHERWISE STATED Notes: (1) VONB figures shown in the table 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. 046 AIA GROUP LIMITED scale, increased proﬁtability from changes in product mix and higher investment income. Our business in China has achieved a compound annual growth rate of 40 per cent over the last four years in both VONB and OPAT. Business Highlights Our strategy in China is focused on growing AIA’s professional agency distribution through superior recruitment, best-in-class training and leadership development programmes. Our aim is to help our agents and leaders build long-term professional careers with AIA, as demonstrated by the 58 per cent growth in MDRT qualiﬁers compared with 2013. We have established a culture of rewarding productivity aligned with the long-term interests of our customers. This focus has enabled our agents to provide better solutions for customers, generate proﬁtable new business growth while increasing their average income levels over the year. The combination of our stringent selection criteria and dedicated new joiner programmes has increased the number of quality recruits and the activity of our new agents. These actions have resulted in a 42 per cent increase in our active new agents. Our approach to agency support and development backed by the use of our interactive point-of-sale technology has also increased active agent productivity levels by 9 per cent compared with 2013. While agency remained our main source of new business, our partnership channel continued to deliver strong VONB growth in 2014. We launched our exclusive new bancassurance partnership with Citibank in April 2014 and began the roll-out of our long-term savings and protection product range to the branches during the year. Building on our success in the protection market in China, AIA continued to focus on rolling out products that address customers’ needs for protection and long-term savings. The launch of two products speciﬁcally designed to meet the long-term protection and education- funding needs of young families in this area delivered strong results throughout 2014. We also expanded our product portfolio with our innovative plans that combine the strengths of traditional and unit-linked products to meet the long-term savings needs of Chinese consumers. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 047 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW KOREA Financial Highlights AIA operates a broad multi-channel distribution strategy in Korea. The industry-wide suspension of outbound telesales and subsequent regulatory changes affected the performance of AIA’s direct marketing business in 2014. However, the growth in our bancassurance, broker and agency channels offset lower direct marketing sales and AIA outperformed the market with ANP growth of 12 per cent to US$380 million set against an overall contraction in the Korean life insurance industry. VONB declined by 10 per cent to US$82 million compared with 2013, with positive growth reported in the second half of 2014. This result was due to lower margins in our direct marketing business caused by the costs of ﬁnancial support provided to telesales VONB MARGIN (2) 2014 21.7% YoY (10)% 2013 26.8% YoY (5.1)pps VONB (1) 2014 82 2013 91 ANP 2014 380 2013 338 YoY 12% T WPI 2014 2,205 2013 YoY 2,049 8% OPER ATING PROFIT AF TER TA X 2014 165 2013 150 YoY 10% US$ MILLIONS, UNLESS OTHERWISE STATED representatives and regulatory changes following the industry-wide suspension. IFRS operating proﬁt after tax grew by 10 per cent to US$165 million compared with 2013 reﬂecting revenue growth and improved claims experience. Business Highlights As noted in our 2014 interim results announcement, the Korean ﬁnancial regulators imposed an industry-wide temporary Notes: (1) VONB figures shown in the table 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. suspension of outbound telesales in the ﬁrst half of the year We diversiﬁed our multi-channel strategy further in Korea during and introduced new regulations leading to a lengthier sales the year, expanding our successful distribution partnerships in process. This was in response to a leak of personal data involving the broker channel and launching new health products. Our three credit card companies, which was not related to AIA or bancassurance business also delivered excellent VONB growth in the insurance industry. During the year, we began an extensive 2014 driven by increased production as we continued to launch personal data re-veriﬁcation process and undertook a number new products selectively with our bank partners. of initiatives to improve sales efﬁciency as we adapted our outbound telesales model to the new regulatory environment. Our focus in Korea is to provide products that meet customers’ protection and long-term savings needs. Our direct marketing Our agency force in Korea delivered strong VONB growth in simpliﬁed issue health product was extended to both agency 2014, as we continued to reprice key products, drive new training and broker channels in 2014 and its popularity continued programmes aimed at improving agent productivity and further throughout the year. We also concentrated our marketing efforts align agency compensation structures to reward an increased on increasing AIA’s brand awareness in Korea through a number shift towards protection products and health rider attachments. of campaigns targeting the young customer segment. We acted The systematic implementation of these new product and as the title sponsor of the AIA Real Life Now Music Festival in sales management programmes improved both margin and August, which had over 55,000 attendees, and created a popular productivity per active agent compared with 2013. online video campaign that generated around 6 million views. 048 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 049 FINANCIAL AND OPERATING REVIEW BUSINESS REVIEW OTHER MARKETS Other Markets include AIA’s operations in Australia, Indonesia, increasing the number of active in-branch sales specialists and we New Zealand, the Philippines, Sri Lanka, Taiwan and Vietnam. also added another new bancassurance partnership with a local The ﬁnancial results from our 26 per cent shareholding in our Indonesian bank in the second half of 2014. Quality recruitment joint venture with Tata in India is included in IFRS operating proﬁt and training remained at the heart of our Premier Agency after tax on an equity accounted basis. strategy to deliver sustainable growth in our agency channel, Financial Highlights Other Markets delivered double-digit VONB growth in the second half of 2014 on constant exchange rates and despite the slower start in the ﬁrst half of the year. Reported VONB for a strategy that has delivered strong underlying VONB growth compared with 2013. Overall, AIA increased its proﬁtable market share during the year achieving a top three position by weighted new business premium. the full year was lower than 2013 at US$212 million due in large New Zealand: AIA delivered strong VONB growth in New part to the depreciation of local currencies against our US dollar Zealand in 2014, as a result of the successful delivery of our reporting currency and the effect of liquidity tightening in the targeted service model for the IFA channel and effective banking sector, as previously disclosed. IFRS operating proﬁt product portfolio management that improved VONB margin. after tax increased signiﬁcantly by 31 per cent to US$314 million In the second half of 2014, we continued to expand our direct mainly driven by increased scale and growth in Indonesia, the marketing business and build our new proprietary agency force Philippines and Australia. to engage with the fast-growing Asian communities in New Business Highlights Australia: Our strategy in Australia is to use our leading Zealand. Philippines: AIA’s businesses in the Philippines achieved solid position as an independent risk specialist to provide protection VONB growth with reported results also affected by currency insurance that addresses the country’s substantial protection depreciation. Our bancassurance channel performed well in gap. We continued to expand our market-leading Premier IFA the second half of 2014. We worked closely with our joint model with the addition of new platform partnerships in 2014, venture partner, Bank of the Philippine Islands (BPI), to focus on providing access to over 1,100 additional advisers. The launch of expanding the footprint of our in-branch insurance specialists AIA Vitality, our innovative wellness programme, has reinforced and improving their capabilities. This was supported by the our protection proposition in the retail market and received implementation of a productive lead-generation programme, very positive participation during the year. AIA Vitality has also focused training and sales activity management. As a result, the been made available on wealth management platforms in the number of active specialists grew by 49 per cent in 2014. Agency second half to provide additional access to protection business delivered a solid performance, with growth in active agent funded through investment accounts. We consolidated our productivity and the number of active agents supported by our leading position in the group insurance market as we continued ongoing focus on agent recruitment and training. to review beneﬁt design and proactively manage our claims experience through our leading claims assessment process. While our Australian business delivered a solid underlying performance in 2014, reported VONB growth was affected by signiﬁcant currency depreciation. Sri Lanka: AIA continued to grow its infrastructure and distribution platforms to capture the signiﬁcant opportunities in the emerging Sri Lankan life insurance market. We expanded our agency distribution platform with the opening of 31 additional new branches across the country and the number of active Indonesia: AIA delivered double-digit VONB growth on constant agents grew signiﬁcantly. In addition to our partnership with exchange rates in the second half of 2014 with reported results National Development Bank PLC (NDB), we entered into new affected by a 13 per cent weakening of the Indonesian rupiah bancassurance agreements during the year that increased the against the US dollar reporting currency compared with 2013. number of bank branches selling AIA products by 69 per cent We expanded our existing bancassurance partnerships by compared with 2013. 050 AIA GROUP LIMITED Taiwan: Our Taiwanese business delivered excellent VONB Vietnam: AIA’s operations in Vietnam once again delivered an growth as we continued to make solid progress in developing excellent performance with VONB double the amount reported in our multi-channel distribution model, using technology to 2013. AIA continued to take proﬁtable market share and is a top deliver increased efﬁciency and enhanced levels of service to our three player in terms of weighted new business premium. Our distribution partners and customers. Each of our agency, IFA, focus on quality recruitment and training increased the number bancassurance and direct marketing businesses delivered positive of active agents by 25 per cent compared with 2013 and the VONB growth compared with 2013 and we also beneﬁted from improvements made to our product range last year have allowed an improved product mix as we concentrated on providing stand- greater ﬂexibility around rider attachments, helping to improve alone protection and integrated packaged products. VONB margin in 2014. VONB (1) 2014 212 2013 220 ANP 2014 676 2013 689 YoY (4)% YoY (2)% VONB MARGIN (2) 2014 31.3% 2013 32.0% YoY (0.7)pps T WPI 2014 3,133 2013 YoY 2,840 10% OPER ATING PROFIT AF TER TA X 2014 314 2013 239 YoY 31% US$ MILLIONS, UNLESS OTHERWISE STATED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I Notes: (1) VONB figures shown in the table 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. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 051 GETTING REAL RESULTS 052 AIA GROUP LIMITED Organic growth and new initiatives, platform quality and platform scale, investment in people and investment in technology – AIA is balancing its priorities for sustainable growth. ANNUAL REPORT 2014 053 FINANCIAL AND OPERATING REVIEW RISK MANAGEMENT OVERVIEW AIA recognises the importance of sound risk management in This is achieved by clearly deﬁning roles and responsibilities for the management of risk between those taking executive every aspect of our business and for all our stakeholders. For decisions, the Risk functions and Internal Audit, with each policyholders it is the security from knowing that we will always of these working closely together but ultimately operating be there for them. For regulators sound risk management is independently from each other. vital to the stability of the ﬁnancial system. For investors it is a means of protecting and enhancing the long-term value of their investment. The ﬁrst line of defence (First Line) is made up of the executive decision-makers and functions other than Risk, Compliance and Internal Audit. Executive management of Group Ofﬁce, At AIA we recognise that strong corporate governance and each business unit and the various functions are required to sound risk management are at the core of our business ensure that risk is being managed in a way consistent with the proposition. Indeed, we believe that our focus in these areas RMF and that appropriate processes, limits and controls for the has been a signiﬁcant contributor to our performance. As our identiﬁcation, management and mitigation of all relevant risks business grows in scale and against a backdrop of political, social are in place and effective. In particular, the amount of risk taken and economic change, so our approach to risk management is at each level of the organisation has to be consistent with both constantly evolving. the Group’s and relevant local business unit’s Risk Appetite. The Risk Management Framework (RMF) provides the structure Unless reserved to the Board, all decisions are made by identiﬁed for identifying, quantifying and mitigating risk across the executives operating in the First Line. These executives have full Group. An effective RMF is the key to avoiding the ﬁnancial and accountability for their decisions. Decisions regarding activities reputational damage that arises from inadequate or ineffective deemed to have signiﬁcant risks attached or that are materially control of the risks in the business. outside policy will be referred to the Group Chief Executive or, AIA’s RMF is built around supporting our business. AIA has where appropriate, to the Board. adopted the “three lines of defence” model for risk management The second line of defence (Second Line) at the Group level which is described below. Consistent with that approach our risk consists of two important functional areas, namely Compliance functions provide support to our business with tools, processes and Risk. These functions are independent from the First Line and capabilities for the identiﬁcation, quantiﬁcation and but work closely with them to ensure that they are appropriately management of risk. Our risk functions also exercise oversight – objective judgement as to the appropriateness, sufﬁciency and effectiveness of the measures taken to manage risk. supported in meeting their obligations in respect of risk management, and to exercise effective oversight of First Line activities. It is also the responsibility of the Second Line to give assurance to executive management, the Board and the Risk Committee that risks are being managed satisfactorily within Clarity of responsibility for different aspects of risk management AIA’s Risk Appetite. is fundamental to sound risk management. Responsibility for AIA’s RMF starts with the Board who determine AIA’s Risk Appetite and retain overall responsibility for the Group’s risk management activities. It is the responsibility of Group Risk to provide assurance to both executive management and the Board that risks are being managed within the Risk Appetite. The local Risk functions are expected to provide similar assurance to their executive management and Boards. The Group 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 of 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 its These themes – support, accountability, oversight and assurance constituent businesses are subject. – are at the foundation of our risk management culture. THREE LINES OF DEFENCE The three lines of defence model (Three Lines) for risk management is a commonly used approach to managing risk in ﬁnancial institutions globally. The objective of Three Lines is to ensure that an appropriate system of checks and balances are in place to minimise unexpected losses and reputational damage. The third line of defence (Third Line) comprises Group Internal Audit, which reports to the Board, through the Audit Committee, on the effectiveness of risk controls. The Third Line, amongst other things, reviews the RMF, coordinating with Risk and Compliance, but acting independently of those functions, to ensure that risks and their management processes are being identiﬁed and monitored on a consistent basis. The Third Line also audits the Second Line. 054 AIA GROUP LIMITED The application of the three lines of defence model in AIA is illustrated 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 1st Line of Defence 2nd Line of Defence 3rd Line of Defence RISK MANAGEMENT FRAMEWORK AIA’s RMF has the following components: RISK GOVERNANCE AIA’s risk governance is designed to provide for: 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 • Risk Governance; • Risk Appetite; • Risk Metrics; and • Group and Local Risk Functions. • Consistent application of the RMF across the Group through common committee structures, policies and metrics; • Streamlined processes for the early identification and swift escalation of risk issues; • Objective analysis of risk issues enabling informed decision- making; and • Discussion and challenge in relation to risk issues at suitable forums. AIA’s current committee structure was implemented in 2012 and is set out in the chart below: AIA Group Limited Board Audit Committee Risk Committee Remuneration Committee Nomination Committee W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I Operational Risk Committee Financial Risk Committee Non-Financial Risks (Operational, Strategic) Financial Risks (Credit, Market, Liquidity) and Insurance Risk N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 055 FINANCIAL AND OPERATING REVIEW RISK MANAGEMENT The Board The Company’s Board retains overall responsibility for oversight In 2014 the ORC discussed, amongst other things, a new structure for business continuity planning, investment operations of the Group’s risk management activities. In this regard the in support of unit-linked products, the operational aspects of Board sets the Group’s Risk Appetite, agrees the RMF and repurchase agreements and derivatives, information security and monitors group-wide risks. In fulﬁlling these responsibilities the the impact of big data and social networking on our risk proﬁle. Board is supported and advised by the Risk Committee. Risk Committee The Risk Committee advises the Board on all risk-related Financial Risk Committee (FRC) The FRC provides oversight of ﬁnancial and insurance risk activities within the Group. These include market and insurance issues requiring Board attention. The Risk Committee is also risks as well as the Group’s balance sheet, liquidity and responsible for approving risk metrics used in the context of capital position. The FRC approves Group policies, processes the Group’s Risk Appetite. The members of the Risk Committee and metrics related to the management of these risks, or are all Board directors, with the Chairman required to be an recommends the same for approval by the Risk Committee. The Independent Non-executive Director. The Risk Committee meets FRC is chaired by the Group Chief Executive. The members of 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 the FRC include the Group Chief Investment Ofﬁcer, Group Chief Financial Ofﬁcer and Group General Counsel. The FRC meets at least four times a year. risk environment, reviews the activities of the Group’s executive At each meeting the Group’s capital and balance sheet position risk committees and the Group’s ﬁnancial and operational are reviewed as well as the risks in the Group’s investment risk proﬁle. The Risk Committee also conducts more detailed portfolio. Risk governance, local business unit reports and watch reviews of both ﬁnancial and operational risks as well as speciﬁc lists are standing agenda items with issues deemed to have a scenarios. In 2014 the Risk Committee reviewed, amongst other Group dimension placed on the Group Watch List. things, the Group’s business continuity planning programme, the robustness of the Group’s internal credit rating framework, its pension scheme liabilities, the potential impact of various political issues and the ebola outbreak. 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 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, or recommends the same for approval by the Where activities, proposals and/or reports are relevant to both the FRC and the ORC, the FRC is responsible for coordination. The FRC has approved policies for key activities and risks. Should a transaction or an existing position fall outside the parameters described in those policies an exception request is triggered. This request is considered by the Second Line who reviews and refers the transaction to an appropriate executive in the First Line for approval. Transactions deemed to require the Group Chief Executive’s approval are considered ﬁrst by the FRC and, where appropriate, the ORC. Risk Committee. The ORC is chaired by the Group Chief Financial In 2014 the FRC discussed, amongst other things, new limits Ofﬁcer. The members of the ORC are predominantly members and policies in relation to equity risk, repurchase agreements, of the Group Executive Committee. The ORC meets at least four subordinated debt, liquidity and foreign exchange rate risk as times a year. well as reviewing the Group’s economic capital models and At each meeting the operational risk environment is reviewed based on the Group’s deﬁned key operating risks. Emerging risks deemed to have a Group dimension from local business unit ORC reports are considered for inclusion on the Group Watch List. their application. 056 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I RISK APPETITE AIA’s Risk Appetite is the foundation of its RMF. It establishes the level and volatility of shareholder returns are in line with a broadly-based risk proﬁle appropriate to an Asia-Paciﬁc ex-Japan- the quantum and nature of risks the Group is prepared to focused life insurance company.” take to achieve its strategic objectives and helps to inform stakeholder expectations. This statement is consistent with AIA’s vision of being the pre- eminent life insurance provider in the Asia-Paciﬁc ex-Japan region Risk Appetite can be presented as a pyramid, with qualitative while contributing to the ﬁnancial security of the people and the statements supported by quantitative metrics which are economic and social development of the region. applied at each level within the business, as illustrated in the ﬁgure below: 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 Risk Appetite Statement Risk Tolerances Risk Principles Risk Allocations Risk Preferences Risk Limits Risk Controls Quantitative Metrics Qualitative Statements Liquidity • The Risk Appetite Statement (RAS) is an overarching comment on the enterprise’s attitude to risk; Earnings Volatility • Risk Principles are qualitative statements that expand the RAS; • Risk Tolerances are quantitative metrics that validate the Risk Principles and thus the RAS; • Risk Allocations reflect the division of the Risk Tolerances between specific risks, products and businesses; • Risk Preferences define the enterprise’s attitude to specific risks; and “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 • Risk Limits and Controls reflect the risk allocations and the Board that AIA is operating within its Risk Appetite. preferences in the business. AIA’s Risk Appetite Statement, Risk Principles and Risk Tolerances AIA has adopted the following Risk Appetite Statement: have all been approved by the Board and their application is “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 monitored by the Risk Committee. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 057 FINANCIAL AND OPERATING REVIEW RISK MANAGEMENT RISK METRICS Fundamental to sound risk management is the need to quantify LOCAL AND GROUP RISK FUNCTIONS The role of the risk management functions are as follows: 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 • Provide business managers with the tools, processes and capabilities to identify, quantify and manage risk; sheet. There are four principal risk modeling activities: • Exercise oversight and objective judgement as to the • Stress Testing: Stress testing provides assurance that the Group and the business units are adequately capitalised to appropriateness, sufficiency and effectiveness of the measures taken to manage risk; and maintain regulatory solvency and withstand adverse ﬁnancial • Provide assurance to both executive management and risk events. We perform regular stress testing to monitor the potential the Board that risks are being managed by the businesses appropriately and within Risk Appetite. impact of the changing investment and economic Above all, the objective for all risk ofﬁcers is to support the environment on the regulatory capital position of the Group embedding of risk in the Group’s mindset and culture. 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 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. • 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. AIA maintains risk teams in all business units, in each case supported by risk professionals with experience in all the major risk areas. The Group Risk function provides specialist support to the local risk teams and oversees their activities. Group Risk is also expected to take the lead on speciﬁc issues, provide general guidance as to best practice and to intervene where signiﬁcant issues may potentially occur. This year our Group Risk function has worked closely with the local risk functions to embed risk and support the development of risk culture. A common standard for risk functions has been established by the Group with the active sponsorship of the Group Chief Executive. The emphasis of this standard has AIA is developing an economic capital model based on best been on ensuring that the role of risk management is clearly estimates of its liabilities to an agreed confidence level. The understood and that our risk functions are supported with model draws on global industry best practices and takes consistent governance, reporting and measurement. into account the environment in the Asia-Pacific region, in particular in relation to the economic and market-related parameters adopted within the model. The interface between Group and local risk functions is critical to ensuring that emerging risks are identiﬁed, escalated and dealt with in a timely and effective manner. This is achieved through • Market Risk: Group Risk works closely with the Investment the following: 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 • 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; and liquidity risk, and Value At Risk measures are used to • Involvement of local risk functions in determining whether assess different investment strategies. These measures are transactions are “within policy” and preparing checklists and used in the regular updates on investments provided to the risk assessments as required; FRC and in setting limits and defining actions to mitigate market risk. • Regular and consistent consultation among local and Group Risk, Group Compliance and Internal Audit functions with • Operational Risk: Where data is scarce, scenario modeling regular reporting to Group Executive Committee members to techniques are used by the operational risk team to identify emerging issues; and approximate the loss distribution associated with a particular event or set of circumstances. • Transparency in the conduct of risk management through a common portal where relevant documentation is made available, risk databases can be accessed, exceptions processed and experience shared. 058 AIA GROUP LIMITED RISK CATEGORISATIONS Under the RMF, the Group adopts a common language in the follow a disciplined budgeting and control process that allows for the management of expenses within pricing estimates description of risks at both the Group and the local business unit based on the Group’s very substantial experience within the levels to proactively manage a wide spectrum of ﬁnancial and markets in which we operate. 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 Principal Risks The principal risks and the Group’s approach to managing them • 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 derived from a large and predictable in-force book of business across a broad set of markets. • Experience Management: The Group conducts regular are discussed below with further information provided in note 38 experience studies of all the insurance risk factors in its to the ﬁnancial statements. Insurance Risk Insurance risk is the potential loss resulting from mortality, morbidity, persistency, longevity and adverse expense experience. in-force book. 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. This includes the potential impacts from catastrophic events such • Research: Through monitoring the development of both as pandemics and natural disasters. local and global trends in medical technology, health and 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. 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 • Product Design: The Group manages product design risk policies or new risks, and as protection against catastrophic through the New Product Approval Process where products events such as pandemics or natural disasters. are reviewed against pricing, design and operational risk benchmarks agreed by the 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 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. ANNUAL REPORT 2014 059 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW RISK MANAGEMENT The Group also manages ﬁnancial risk by periodically running speciﬁc scenario modeling exercises to gauge the potential Interest Rate Risk The Group’s exposure to interest rate risk predominantly arises impact of macro political, social and economic events on ﬁnancial from any difference between the duration of the Group’s 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 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. reinsurance, procurement and treasury activities. Exposure to interest rate risk is summarised in note 38 to the 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 ﬁnancial statements, which shows the split of ﬁnancial assets and liabilities between variable, ﬁxed and non-interest bearing investments. carried in the Financial Statements. The Group manages interest rate risk by ensuring appropriate 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 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 liabilities. 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. technically within risk tolerances but there is a speciﬁc concern, AIA nonetheless manages its Credit Spread Risk carefully, Group Risk brings these to the attention of the FRC for inclusion focusing on overall portfolio quality and diversiﬁcation and in the Group Watch List. seeking to avoid excessive volatility in the mark-to-market value Market Risk Market risk is the risk of ﬁnancial loss from adverse movements in the value of assets owing to market factors, including changes of its investment portfolios. Equity Price Risk Equity price risk arises from changes in the market value of equity in interest and foreign exchange rates, as well as movements in securities and equity funds. Investment in equity assets on a the spread of credit instruments to corresponding government long-term basis is expected to provide diversiﬁcation beneﬁts and bonds, “Credit Spread Risk”, and in equity and property prices. enhance returns. Note 38 to the ﬁnancial statements provides further detail relating to the market risks discussed below. The extent of exposure to equities at any time is at the discretion of the Investment Department operating within the terms of the The FRC approves all policies and metrics associated with the Group’s and local business units’ strategic asset allocations. evaluation of market risk exposures. 060 AIA GROUP LIMITED From a risk perspective, particular emphasis is placed on Hong Kong businesses. In this respect cross-currency swaps or managing concentrations and volatility in the Group’s equity foreign exchange forward contracts are sometimes used. 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 38 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, Liquidity Risk AIA identiﬁes liquidity risk as occurring in two ways, Funding Liquidity Risk and Investment Liquidity Risk. Funding Liquidity Risk 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 38 to the ﬁnancial statements provides a maturity analysis of the Group’s which form part of the Group’s investment portfolios and are ﬁnancial assets and its liabilities and insurance contracts. 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 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. actions that may directly or indirectly inﬂuence the market. It can In order to maximise returns to policyholders and shareholders also be driven by the characteristics of speciﬁc holdings: their the Group seeks to remain as fully invested as prudent. A US$300 location within an area, the competitiveness of their facilities and million committed bank facility has therefore been put in place their physical condition. Foreign Exchange Rate Risk At the Group level, foreign exchange rate risk arises mainly from the Group’s operations in multiple geographical markets in the Asia-Paciﬁc region and the translation of multiple currencies and bond repurchase markets are also used to manage short- term liquidity needs where it is in the Group’s interest to remain fully invested. This can be used in conjunction with the Group’s Global Medium Term Note programme which provides ready access to the capital markets subject to market conditions. to US dollars for ﬁnancial reporting purposes. Note 38 to the Investment Liquidity Risk occurs in relation to our ability to ﬁnancial statements shows the Group’s currency exposures and buy and sell investments. This is a function of the size of the the sensitivity of shareholders’ equity and proﬁt to movements in Group’s holdings relative to the availability of counterparties those currencies. willing to buy or sell these holdings at any given time. In times Foreign exchange rate risk is managed in AlA on various levels. The balance sheet values of our operating units and the expected cash ﬂows from these are generally not hedged to the Group’s reporting currency, US dollar. Local capital requirements are generally held in assets of the same currency as the corresponding liabilities. Expected capital movements in less than one year such as dividends and investments may be hedged to or from US dollar at the discretion of the Group’s senior management. At a local level, Business Units are generally expected to match their assets and liabilities by currency. This includes the matching of US$ and HK$ assets and liabilities in the 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. ANNUAL REPORT 2014 061 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW RISK MANAGEMENT Non-Financial Risks Non-ﬁnancial risks cover the potential for AIA’s business to The ORC also reviews new activities where there is deemed to be the potential for material operational risk. For all new suffer through either key control failures, changes in the products, derivative instruments, large property projects and business environment or inadequate planning or management “Restricted Investments” (generally non-generic or illiquid of infrastructure. While ultimately all losses are ﬁnancial, in the traded investments such as hedge funds, structured credits or case of non-ﬁnancial risks the loss may initially take the form of instruments containing embedded derivatives) an operational damage to the Group’s reputation. The risk of such damage, or risk checklist is completed including potential reputational issues, reputational risk, is that negative publicity regarding a company’s operational readiness and technical dependencies. 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. 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 Consideration of reputational risk is a key element in the Group’s severity, and then agrees mitigation strategies to reduce these operational risk checklists and is actively monitored by the risks. These strategies are then monitored and the exercise operational risk teams working closely with Group Law, Group repeated, with the results stored in a dedicated operational risk Compliance, Group Corporate Communications and business unit database. management. AIA protects itself against ﬁnancial losses by purchasing insurance The Group’s non-ﬁnancial risks comprise operational risk and coverage against a range of operational loss events including 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. 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 social, economic, political, regulatory, competitive and technical changes that may impact AIA’s business. 062 AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW REGULATORY DEVELOPMENTS The International Association of Insurance Supervisors (“IAIS”) has undertaken a number of initiatives toward the stated aim of fostering a globally consistent framework for principles- based insurance regulation. In particular, the IAIS has adopted “Insurance Core Principles” to serve as guidance for insurance regulators, and proposed the development of a common framework (“ComFrame”) to be implemented by 2019 for the supervision of internationally active insurance groups (“IAIGs”); it is anticipated that the Group will be nominated as an IAIG. As part of ComFrame, a risk-based global insurance capital standard is also planned to be developed and be applied to IAIGs. In addition, the insurance regulators in many of our markets, including HKOCI, the Group’s lead insurance regulator in Hong Kong, have in recent years implemented, or announced their intention to implement, enhanced capital and solvency frameworks. The relevant proposals are moving through various developmental stages and the Group remains constructively engaged in the consultation processes, however the ultimate outcomes of these consultations remain uncertain. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 063 FINANCIAL AND OPERATING REVIEW OUR PEOPLE 1 2 PEOPLE DEVELOPMENT Our people are the key to AIA’s success. Our agents and employees provide the drive and innovation that enable us to deliver on our commitments to our customers, support the communities in which we operate, achieve our ambitions and sustain our success. ENGAGING WITH OUR PEOPLE We aim to engage, develop and empower our employees and agents to share and realise our Vision to become the pre-eminent life insurance provider in the Asia-Paciﬁc region. Through our continuing and active engagement with our team of agents and 20,000 employees, our operating philosophy of “Doing the Right Thing, in the Right Way, with the Right People … and the results will come” has become deeply embedded. In 2014, both Group and local leadership have been fully invested in promoting our Vision and Purpose to employees and agents across the Group. Initiatives such as our “Inside AIA” online employee publication and our internal social network have encouraged meaningful and regular interaction for managers and employees at all levels. Across all the territories in which we operate and throughout the organisation, employees can share ideas, concerns and solutions and have a genuine voice in the development of “their AIA”. To ensure that this culture continues to be fostered, our annual Leadership Conference brings together more than 300 of the organisation’s leaders for an intensive and thoughtful review of our progress. We also discuss how we move forward to unlock the vast potential represented by our people and the markets in which we operate. Our annual employee engagement survey provides feedback on all of these efforts. Since inception in 2011, the overall participation rate for the survey has improved year-on-year reaching 98 per cent in 2014. Engagement scores have also improved substantially over the life of the survey and together with the almost universal support employees have shown for the process, demonstrate the strong connection employees have to the Group together with their pride in the organisation and its place in our communities. 064 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I secondments (three to six months), business assignments (two or more years) as well as permanent inter-entity and intra-entity transfers. A number of initiatives including the AIA Career website, a job mobility guide and a “mobility dashboard” were launched to provide greater structure, process and an appropriate platform to promote self-help in supporting leadership mobility and individual development. Where there have been very speciﬁc needs within areas of functional specialisation, we have also introduced specially-tailored mobility programmes. Group leadership also conducts a rigorous annual review of over 1,100 senior positions across the business units and the Group Ofﬁce. The process includes a review of our organisational structure, leadership and technical capabilities, talent pipeline and other human capital considerations followed by customised action plans for team and individual development. RECOGNISING PERFORMANCE We offer employee compensation and beneﬁts packages that recognise the importance of creating sustainable value for shareholders and policyholders; that are fair and competitive within their markets; and that embed delivery ﬁrmly within our framework of customer-centric values. 3 1-3 To promote personal and career development, in 2014 we introduced a series of bespoke and in-house training programmes across all of our markets. PERSONAL AND CAREER DEVELOPMENT Harnessing the immense energies of our team and focusing that Our total rewards programme is built on the principle of providing equitable, motivational and market-competitive packages to foster a strong performance culture. The programme energy on delivering AIA’s strategies is central to the sustainability avoids rewarding short-term success and exposure of the of our success. To promote this we have in 2014 continued the Group to risks outside its prudent risk appetite. Our incentive development and introduction of a series of bespoke and programmes are based on a combination of Group, business in-house AIA Manager programmes across all of our markets. unit and personal performance against predetermined criteria to ensure that no single performance metric dominates. During the year, we introduced a number of new modules to the AIA Manager series that placed signiﬁcant emphasis on the “how” of achievement in addition to the “what” and the “why”. More than 85 per cent of our management level employees have been involved in these leadership programmes since their launch, with feedback demonstrating genuine alignment between our employees’ interest in personal and career development and the Group’s focus on realising the potential of all our people. With business operations in 16 markets, we have a major opportunity to ensure the application of best practice in employee and leadership development across our organisation through internal promotion and project experience. Over 700 job moves at all levels took place within the Group, covering N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 065 FINDING REAL MEANING 066 AIA GROUP LIMITED AIA’s social responsibility ethos finds its truest meaning in the diverse charitable activities of its employees and agents, who connect closely with their local communities. AIA’s CSR strategy, recognising the symbiotic relationship of its insurance business to its markets, is to promote and support Healthy Living practices among staff, customers and the wider community. ANNUAL REPORT 2014 067 FINANCIAL AND OPERATING REVIEW CORPORATE SOCIAL RESPONSIBILITY As a life insurance company our core business is concerned with securing the ﬁnancial well-being of our customers and their families throughout their lives. It is therefore appropriate PROVIDING OPPORTUNITIES FOR PEOPLE TO ENGAGE IN HEALTHY ACTIVITIES Throughout 2014, we supported and funded a wide variety of that the dominant theme in our Corporate Social Responsibility sports-related family events. (CSR) programme should be to promote actively the health and well-being of our customers, employees and agents and the communities in which they live and work. The importance of well-being and health to quality of life is now widely recognised and was underscored by our landmark Healthy Living Index Surveys conducted in 2011 and 2013 with each survey interviewing over 10,000 adults in 15 countries across the Asia-Paciﬁc region. These surveys conﬁrmed that In Singapore, more than 1,200 AIA employees, agents, customers and their families joined 16,000 members of the public to take part in the annual Jurong Lake Run 2014. In Indonesia, AIA supported “The Color RunTM” – dubbed the “Happiest 5k on the Planet” – where in two events over 24,000 participants were splashed with coloured powder before taking to the course. the overwhelming majority of adults recognise the principle Harnessing the power of music to bring fun, social interaction that “living a healthy life” is important while acknowledging and ﬁtness together for people of all ages and ﬁtness levels, that there are many areas in which they as individuals need to AIA in April brought 8,000 participants to the streets of Kuala do more, whether in terms of diet, physical activity levels or Lumpur to walk, run and dance for 5km to their favourite music stress management. We have designed our CSR programmes at at “The Music Run™”. Our colleagues in Thailand followed this both Group and operating company level to focus on “making up in November with their own take on “The Music Run™”, a difference” in these areas and helping to create a better when 10,000 participants brought the party to the streets of personal, workplace and community environment for all. Bangkok. In 2014, we engaged in a diverse range of Healthy Living-related In the spirit of Healthy Living, in 2014, we also organised family initiatives across the region in support of these goals. days in Vietnam, Taiwan and Malaysia that brought together more than 5,000 of our employees to spend quality time with family and colleagues. LEVERAGING OUR PARTNERSHIP WITH TOTTENHAM HOTSPUR Recognising the vital role that active participation in sports plays in promoting a healthy lifestyle and the special motivation top- calibre professional athletes can provide as role models, AIA and our English Premier League partner Tottenham Hotspur (Spurs) announced a series of activities across our markets. Throughout the year, Spurs’ legends and coaching teams travelled across Asia with AIA representatives. In China, they visited schools, running football classes with students, teaching the value of teamwork and competition in the context of the “beautiful game”. In May, we announced our sponsorship of the Hong Kong Under 16 Representative Team (HKRT U16) for a football training camp in the United Kingdom with Spurs. The training camp helped prepare the youth team players for the ﬁnals of the 2014 Asian Football Confederation U16 Championship. AIA sponsored a 12-day football training camp for the HKRT U16 team at the Tottenham Hotspur Training Centre in the UK. 068 AIA GROUP LIMITED In Sri Lanka, AIA employees distributed leaflets to increase awareness as part of an effort to reduce the threat of dengue fever. PROMOTING GOOD HEALTHCARE HABITS We never lose sight of the fact that we have a tremendous university students in bringing their community projects to life. Over 4,000 students from 15 universities in China participated, opportunity to play an active role in improving the lives of others sending in 310 proposals. 69 of those were shortlisted and through encouraging and supporting healthy living habits. funded, with the participants receiving training from AIA and the In Sri Lanka, in an effort to reduce the danger of dengue fever China Youth Development Foundation. that leads to an estimated 500 cases being reported each week In Hong Kong, this year marked the 17th year of AIA’s own in the country, AIA employees took part in a “Wipeout” clean- Young Leaders Development Programme. Over the years, up project, targeting breeding grounds for mosquitoes, before a total of 450 elite university students have been selected distributing educational leaﬂets to increase awareness. through a stringent evaluation process that takes into account In Korea, AIA made a donation of US$200,000 to the EWHA Women’s Cancer Centre, to subsidise medical fees for low- income cancer patients and to provide free cancer screening to women. their academic results, leadership potential, their passion for community service and a willingness to give back to society. Under this year’s theme, “A Hand to Lead A Vision to Serve”, 14 selected students completed a series of specially-designed training programmes and travelled to Sichuan province to help During 2014, employees and agents of AIA in Singapore and rebuild homes devastated by the April 2013 earthquake. Brunei raised over US$100,000 to support the less fortunate and elderly. EXTENDING THE POWER OF EDUCATION Education has the power to bring about positive change in the lives of individuals and their communities. In 2014, AIA in Hong Kong participated in “Project WeCan” and began a ﬁve-year partnership with Concordia Lutheran School (CLS) to help inspire close to 400 students to pursue a better future. By broadening their horizons, improving their conﬁdence and enhancing their communication skills, the goal is to provide them with more opportunities to understand the corporate world There is also a close association between education and health, and help them explore various career options. and in many of our communities we have launched literacy projects like the AIA Young Leaders Development Programme in China, which ﬁrst took place in 2012. In partnership with the China Youth Development Foundation, the Programme supports ANNUAL REPORT 2014 069 W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A FINANCIAL AND OPERATING REVIEW CORPORATE SOCIAL RESPONSIBILITY In Vietnam, every year over 200,000 children drop out of school 30,000 volunteers from the AIA family, who contributed to a primarily because of the long distances they need to travel to wide range of activities, including the repair of broken public and from school each day. AIA launched “The Real Life Journey” facilities, the revamp of a local sports centre, tree planting and project – a series of 12 cycling events across Vietnam throughout landscaping in public parks, a mobile medical check-up service 2014 through which the company donated 770 bicycles (valued and the donation of sports equipment. at over US$60,000) to underprivileged children in 22 provinces and cities. Also in Thailand, AIA continued its long-running “AIA Operation Smile” initiative. Now in its 11th consecutive year, In Thailand, as part of our “AIA School Libraries” project, AIA AIA Operation Smile forms an important part of the company’s donated funds to establish libraries in schools in three regions of CSR commitment, and in 2014, about US$46,000 was donated the country. In Sri Lanka AIA helped to rebuild schools damaged during the country’s 30-year civil war. In Australia, AIA employees took part in “Literacy Buddies®”, to provide children with encouragement and support for their academic achievements and boost self-esteem at a critical stage of their lives. through the Operation Smile Foundation to help provide surgery for 100 children with cleft lips and palates in the north-east of the country. In Indonesia, AIA employees organised a successful fundraising event – “Real Action for AIA Village” – to raise capital to upgrade facilities in a public primary school in West Java. Employees also visited the school to spend a day interacting with students, painting classrooms and donating books to the school library. SUPPORTING COMMUNITIES In Thailand, AIA successfully established a new milestone in its In Australia, we successfully piloted the placement of “AIA Vitality Kiosks” to engage people in Healthy Living activities in long CSR history of community support with the “AIA Sharing A a fun, light-hearted way. The interactive kiosks featured Bike n’ Life Day” – an event designed to promote healthy living across Blend® smoothies, where participants’ pedal power helped blend Thailand through community service activities that took place a healthy drink. simultaneously at 21 different locations. The event involved over 1 2 070 AIA GROUP LIMITED Our employees and agents also reached out to their communities We also conduct regular energy audits of building equipment to through initiatives such as raising money for low-income families, improve energy savings and participate in events such as “Earth donating blood and fundraising activities for children in Taiwan; Hour” to promote environmental awareness. constructing new sidewalks for schoolchildren and organising a charity bazaar in Malaysia; creating, packing and donating moon cakes to the elderly in Singapore; and supporting the Prostheses PROVIDING AID IN TIMES OF NEED While Healthy Living is our main focus, AIA’s CSR strategy also Foundation in Thailand for the sixth year with a donation to includes providing aid in times of crisis and supporting people in provide 800 artiﬁcial legs to patients in need. our communities when they need us most. CARING FOR THE ENVIRONMENT We are committed to improving our environment and raising awareness about sustainability by taking part in activities that highlight these issues. Relief for ﬂood victims and those affected by Typhoon Haiyan continued into 2014 through fundraising and the provision of medicine and supplies. AIA also mobilised local and international celebrities to raise awareness across the globe, while Philam Life, through the Philam Foundation, sponsored the rebuilding of 40 In 2013, we opened our new AIA Financial Centre in Foshan, classrooms in the areas most affected by the typhoon. China – the ﬁrst commercial building in Foshan to be certiﬁed a “green building” by the recognised green building authority Leadership in Energy and Environmental Design (LEED). For the 21st consecutive year, AIA conducted its hallmark CSR initiative of safeguarding pilgrims visiting the sacred city of Anuradhapura, Sri Lanka through facilitating the presence of over In 2014, we completed construction of our AIA Capital Centre in 600 lifesavers from the Sri Lanka Police, the Navy and the Life Thailand. Using state-of-the-art green technology, the 34-storey Saving Association of Sri Lanka. building is the ﬁrst ofﬁce building in the area to secure LEED Gold accreditation. In 2015, we expect to complete the AIA Sathorn Tower in Bangkok – also designed to meet the standards required ACKNOWLEDGEMENT OF OUR CONTRIBUTIONS We are proud of the work being done by our employees and for “green building” certiﬁcation by LEED. agents throughout the region, and are touched when their efforts are recognised by individuals and institutions alike. In Hong Kong, we received the “Caring Company Logo” award from the Hong Kong Council for Social Service (HKCSS). This is the 12th consecutive year we have received this honour. In March, in Sri Lanka, AIA won the “Social Empowerment” award at the Asia Responsible Entrepreneurship Awards 2014 – South Asia, and this was followed a short time later by a Silver Award for Design at the Spikes Asia Awards 2014, for providing people with a simple tool to use at prayer at their temples – serving a profound need and providing a real life, meaningful solution. W E I V R E V O W E I V E R G N I T A R E P O D N A L A I C N A N I F E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I 1-3 AIA encourages its employees to support local communities through charitable work, and provides the resources needed to support their projects. In Thailand, we held the “AIA Sharing A Life Day”. In Vietnam, we launched “The Real Life Journey” project to support underprivileged children. 3 N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 071 CORPORATE GOVERNANCE STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Company’s The Directors are responsible for keeping proper accounting consolidated ﬁnancial statements in accordance with applicable records that give a true and fair view of the state of the laws and regulations. Company’s affairs and explain its transactions. In preparing the consolidated ﬁnancial statements of the The Directors are responsible for taking reasonable steps to Company, the Directors are required to: safeguard the assets of the Group and to prevent and detect • Select suitable accounting policies and apply them consistently; • Make judgments and estimates that are reasonable and prudent; • State whether the financial statements have been prepared in accordance with International Financial Reporting Standards and Hong Kong Financial Reporting Standards; and 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 89 of this Annual Report. The Directors conﬁrm that to the best of their knowledge: 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, • Prepare the financial statements on a going concern basis, cash flows and results of the Company and its undertakings unless it is not appropriate to make the presumption that the included in the consolidated financial statements taken as a Group will continue in business. 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 BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I Front row, left to right: Mr. Jack Chak-Kwong So, Mr. Edmund Sze-Wing Tse, Mr. Mark Edward Tucker. Back row, left to right: Mr. Mohamed Azman Yahya, Mr. John Barrie Harrison, Professor Lawrence Juen-Yee Lau, Mr. Chung-Kong Chow, Mr. George Yong-Boon Yeo. NON-EXECUTIVE CHAIRMAN AND NON-EXECUTIVE DIRECTOR Mr. Edmund Sze-Wing Tse Aged 77, is the Non-executive Chairman and a Non-executive EXECUTIVE DIRECTOR Mr. Mark Edward Tucker Aged 57, is an Executive Director and the Group Chief Executive and President of the Company with responsibility for building on Director of the Company. He was appointed Non-executive and expanding AIA’s unparalleled platform as the pre-eminent Director of the Company on 27 September 2010 and was elected life insurance provider in Asia Paciﬁc region. Mr. Tucker joined Non-executive Chairman on 1 January 2011. He is also the the Group in July 2010 and is also Chairman and Chief Executive Chairman of The Philippine American Life and General Insurance Ofﬁcer of AIA Co. and AIA International. From 12 October 2010 Company and AIA Foundation. Amongst Mr. Tse’s appointments to 31 December 2010, he served as Group Executive Chairman during more than 50 years with the Group and its predecessor and Group Chief Executive Ofﬁcer of the Company. In addition to AIG Group, include serving as Honorary Chairman of AIA Co., his responsibilities with AIA, Mr. Tucker has been an Independent a wholly owned subsidiary of the Company, from July 2009 to Director of The Goldman Sachs Group, Inc. since November 2012. December 2010, Chairman and Chief Executive Ofﬁcer of AIA Co. Prior to joining the Group, Mr. Tucker served as Group Chief from 2000 to June 2009 and its President and Chief Executive Executive of Prudential plc from 2005 to 2009, ﬁrst joining that Ofﬁcer from 1983 to 2000. Mr. Tse is a non-executive director group in 1986. Amongst the leadership positions that of PCCW Limited and a director of Bridge Holdings Company Mr. Tucker held during his time at Prudential, he was the founder Limited. He served as a non-executive director of PineBridge and Chief Executive of Prudential Corporation Asia Limited Investments Limited from 2012 to 2014 and a non-executive from 1994 to 2003 and an Executive Director of Prudential plc director of PICC Property and Casualty Company Limited from from 1999 to 2003. During the period from 2004 to 2005, 2004 to July 2014. In recognition of his outstanding contributions Mr. Tucker was Group Finance Director of HBOS plc. Mr. Tucker to the development of Hong Kong’s insurance industry, Mr. Tse was a non-executive director of the Court of The Bank of England was awarded the Gold Bauhinia Star by the HKSAR Government from June 2009 to May 2012, also serving as a member of its in 2001. Mr. Tse received an honorary fellowship and an honorary Financial Stability Committee and Audit and Risk Committee. degree of Doctor of Social Sciences from The University of Hong Mr. Tucker qualiﬁed as an Associate of the Institute of Chartered Kong in 1998 and 2002 respectively. In 2003, he was elected to Accountants in England and Wales (ACA) in 1985. the prestigious Insurance Hall of Fame. ANNUAL REPORT 2014 073 E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE INDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Jack Chak-Kwong So Aged 69, is an Independent Non-executive Director of the Mr. John Barrie Harrison Aged 58, is an Independent Non-executive Director of the Company having ﬁrst been appointed on 1 July 2011. Company. He was appointed as a Non-executive Director of Mr. Harrison is currently an independent non-executive director the Company on 28 September 2010 and re-designated as an of Hong Kong Exchanges and Clearing Limited, The London Independent Non-executive Director of the Company on 26 Metal Exchange Limited and LME Clear Limited. He is also an September 2012. From August 2007 to September 2010, independent non-executive director of BW Group Limited and Mr. So served as an Independent Non-executive Director of has been appointed Vice Chairman of BW LPG Limited since AIA Co. He is currently an independent non-executive director 2013. He is a member of the Asian Advisory Committee of of Cathay Paciﬁc Airways Limited and China Resources Power AustralianSuper Pty Ltd since 2012. Mr. Harrison is a council Holdings Co. Ltd. and is also an independent senior advisor to member, standing committee member and honorary treasurer Credit Suisse, Greater China. He was appointed as Chairman of The Hong Kong University of Science and Technology. From of the Consultative Committee on Economic and Trade Co- 2008 to 2010, Mr. Harrison was Deputy Chairman of KPMG operation between Hong Kong and the Mainland in October International. In 2003, he was elected Chairman and Chief 2013 and has been a member of the Chinese People’s Political Executive Ofﬁcer of KPMG, China and Hong Kong and Chairman Consultative Conference since 2008. Mr. So was awarded the of KPMG Asia Paciﬁc. Mr. Harrison began his career with KPMG Gold Bauhinia Star by the HKSAR Government in 2011. He is an in London in 1977 and was made a partner of KPMG Hong Kong International Business Advisor to the Mayor of Beijing and the in 1987. Mr. Harrison is a Fellow of the Institute of Chartered Honorary Consultant to the Mayor of San Francisco. From 1985 Accountants in England and Wales and a member of the Hong to 1992, Mr. So served as an executive director of the Hong Kong Kong Institute of Certiﬁed Public Accountants. Trade Development Council and was appointed as its Chairman in October 2007. He also served as the Chairman of the Hong Kong Film Development Council from April 2007 to March 2013. Mr. George Yong-Boon Yeo Aged 60, is an Independent Non-executive Director of the Company dating to his initial appointment on 2 November Mr. Chung-Kong Chow Aged 64, is an Independent Non-executive Director of the 2012. Mr. Yeo is currently the Vice-chairman of Kerry Group Limited and the Chairman of Kerry Logistics Network Limited. Company having ﬁrst been appointed on 28 September 2010. He has been a member of International Advisory Committee of Mr. Chow is the Chairman of Hong Kong Exchanges and Mitsubushi Corporation since June 2014 and a non-executive Clearing Limited. He was appointed as a non-ofﬁcial member director of Wilmar International Limited since November 2014. of the Executive Council of Hong Kong from 1 July 2012 and He is a member of the Foundation Board of the World Economic the Chairman of the Advisory Committee on Corruption of Forum and the Berggruen Institute on Governance. In 2013, Independent Commission Against Corruption from 1 January he was appointed a member of the Pontiﬁcal Commission for 2013. He has also been a Steward of The Hong Kong Jockey Reference on the Economic-Administrative Structure of the Club since March 2011. In 2000, Mr. Chow was knighted in the Holy See. From February 2014, he became a member of the United Kingdom for his contribution to industry. Mr. Chow was Vatican Council for the Economy and is also a member of the Chief Executive Ofﬁcer of MTR Corporation Limited from 2003 Vatican Media Committee from July 2014. In 2012, Mr. Yeo to 2011, Chief Executive Ofﬁcer of Brambles Industries plc, a was presented with the Order of Sikatuna by the Philippines global support services company from 2001 to 2003, and Chief Government and the Padma Bhushan by the Indian Government, Executive of GKN plc, a leading engineering company based in and became an Honorary Ofﬁcer of the Order of Australia. the United Kingdom from 1997 to 2001. He was an independent From 1988 to 2011, Mr. Yeo was a member of the Singapore non-executive director of Anglo American plc from 2008 to Parliament and held various Cabinet positions, including Minister 2014, independent non-executive director of Standard Chartered for Foreign Affairs, Minister for Trade and Industry, Minister plc from 1997 to 2008 and the Chairman of the Hong Kong for Health, Minister for Information and the Arts and Minister General Chamber of Commerce from 2012 to June 2014. 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. 074 AIA GROUP LIMITED Mr. Mohamed Azman Yahya Aged 51, is an Independent Non-executive Director of the Professor Lawrence Juen-Yee Lau Aged 70, is an Independent Non-executive Director of the Company having been appointed on 24 February 2014. Company having been appointed on 18 September 2014. Mr. Yahya is the Executive Chairman of Symphony Life Berhad Professor Lau currently serves as an independent non- and Symphony House Berhad; both listed entities on the Main executive director of CNOOC Limited and Hysan Development Market of Bursa Malaysia Securities Berhad (Bursa Malaysia). Company Limited and an independent director of Far EasTone He is an independent non-executive director of Scomi Group Telecommunications Company Limited which is listed on the Berhad which is also listed on Bursa Malaysia and a director of Taiwan Stock Exchange. He has been serving as Ralph and various companies including PLUS Expressways International Claire Landau Professor of Economics at The Chinese University Berhad. Mr. Yahya is active in public service and sits on the of Hong Kong (CUHK) since 2007. He currently also serves as boards of Khazanah Nasional Berhad, the Malaysian government a member of the Exchange Fund Advisory Committee of the investment arm and Ekuiti Nasional Berhad, a government HKSAR and Chairman of its Governance Sub-committee and linked private equity fund management company. He is also a Member of its Currency Board Sub-committee. He was awarded member of the Financial Reporting Foundation, the trustee body the Gold Bauhinia Star by the HKSAR Government in 2011. From that oversees the Malaysian Accounting Standards Board and 2004 to 2010, Professor Lau served as Vice-Chancellor (President) a member of the Capital Market Advisory Group of Malaysian of the CUHK. He was appointed Chairman of CIC International Securities Commission. He is a member of The Institute of (Hong Kong) Co., Limited, a wholly-owned subsidiary of Chartered Accountants in England and Wales, the Malaysian China Investment Corporation, in September 2010 and retired Institute of Accountants and a fellow of the Institute of Bankers from the same in September 2014. He also served as a non- Malaysia. Mr. Yahya was a director of Malaysian Airline System executive director of Semiconductor Manufacturing International Berhad and AirAsia Berhad until May 2013 and April 2012 Corporation from 2011 to 2014. He is a member of the 12th respectively. He started his career at KPMG in London and National Committee of the Chinese People’s Political Consultative worked in a variety of roles in investment banking, ultimately Conference and the Vice-Chairman of its Sub-committee of being named chief executive of Amanah Merchant Bank. In Economics. He received his B.S. degree (with Great Distinction) 1998, he was tasked by the Malaysian Government to set-up in Physics from Stanford University in 1964 and his M.A. and and head Danaharta, the national asset management company. Ph.D. degrees in Economics from the University of California at He was also the Chairman of the Corporate Debt Restructuring Berkeley in 1966 and 1969 respectively. He joined the faculty of Committee, set up by Bank Negara Malaysia, to mediate and the Department of Economics at Stanford University in 1966, assist in debt restructuring programmes of viable companies. becoming its Professor of Economics in 1976 and the ﬁrst Kwoh-Ting Li Professor in Economic Development in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Paciﬁc Research Center at Stanford University, and from 1997 to 1999 as the Director of the Stanford Institute for Economic Policy Research. He became its Kwoh-Ting Li Professor in Economic Development, Emeritus, upon his retirement from Stanford University in 2006. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 075 CORPORATE GOVERNANCE BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE From left to right: Mark Saunders, John Tai-Wo Chu, Simeon Preston, Garth Jones, Shulamite Khoo, Mark Edward Tucker, Gordon Watson, Mitchell New, Ng Keng Hooi. EXECUTIVE COMMITTEE Mr. Mark Edward Tucker Mr. Tucker’s biography is set out above. Mr. Garth Jones Aged 52, 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 and the Annual Business Planning and Budgeting process. 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 Mr. Ng Keng Hooi Aged 60, is the Regional Chief Executive responsible for the Group’s businesses operating in Thailand, China, Indonesia, Singapore, Brunei, Malaysia and Taiwan as well as Group Agency. 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 51, is the Regional Chief Executive responsible for the Chief Financial Ofﬁcer of the Asian life insurance operations. Prior Group’s businesses operating in Hong Kong, Korea, Australia, to joining Prudential, Mr. Jones led the development of reinsurer the Philippines, Vietnam, New Zealand, Macau, Sri Lanka and Swiss Re’s Asia life business. Mr. Jones is a Fellow of the Institute India as well as the Group Corporate Solutions business, Group of Actuaries in the United Kingdom. He has been appointed Partnership Distribution and the AIA Vitality initiative. He is a a member of the Insurance Advisory Committee which is a director of various companies within the Group including AIA Co. statutory committee established under the HKICO since and AIA International. Mr. Watson rejoined the Group in January 1 October 2014. 076 AIA GROUP LIMITED 2011. He worked in various parts of AIG (including within AIA) for over 29 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. Mr. John Tai-Wo Chu Aged 75, is the Group Chief Investment Ofﬁcer responsible Mr. Mark Saunders Aged 51, is the Group Chief Strategy and Marketing Ofﬁcer, for providing oversight to the management of the investment responsible for the Group’s strategy including corporate and portfolios of the Group. He is a director of various companies product development. He also leads the Group Marketing within the Group. Mr. Chu joined the Group in June 1993 as function providing support and leadership on marketing Senior Vice President and Chief Investment Ofﬁcer of AIA Co. initiatives at the Group level and in the country operations. He Prior to joining the Group, Mr. Chu spent 19 years with Bank joined the Group in April 2014. Prior to joining AIA, Mr. Saunders of America in various senior management positions, including was Managing Director of Towers Watson for the Asia-Paciﬁc Country Senior Credit Ofﬁcer, Head of Corporate Banking in Insurance Sector, as well as Managing Director for the ﬁrm’s Hong Kong and Country Manager of Bank of America in China. Hong Kong ofﬁce. Before joining Towers Watson, he was Asian Regional Leader, Hong Kong Chief Executive Ofﬁcer, and Executive Director and Board Member of the Isle of Man-based international life insurance operations of Clerical Medical and its joint venture life insurer in Korea (Coryo-CM). Mr. Saunders has been involved in the insurance industry in Asia since 1989. He is a Fellow of the Institute and Faculty of Actuaries and Fellow of ﬁve other professional actuarial bodies. Mr. Simeon Preston Aged 44, is the Group Chief Operations Ofﬁcer responsible at the Group level for 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 53, is the Group Chief Human Resources Ofﬁcer responsible for the development of overall human capital strategies and their implementation across the Group as well as leading and providing support to the human resources functions in country 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 and Group Executive Management 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. Mitchell New Aged 51, is the Group General Counsel, responsible for the provision of legal services and company secretarial services for the Group and providing leadership 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. He was also previously Senior Vice President and General Counsel to Manulife’s Canadian division. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 077 CORPORATE GOVERNANCE REPORT OF THE DIRECTORS The Board is pleased to present this Annual Report and the audited consolidated ﬁnancial statements of the Company for the DIRECTORS The Directors of the Company during the year and up to the date year ended 30 November 2014. of this Annual Report are as follows: 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 44 to the ﬁnancial statements. 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 Mr. John Barrie Harrison RESULTS The results of the Group for the year ended 30 November 2014 Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya and the state of the Group’s affairs at that date are set out in the Professor Lawrence Juen-Yee Lau ﬁnancial statements on pages 101 to 213 of this Annual Report. Dr. Qin Xiao (Note) DIVIDEND An interim dividend of 16.00 Hong Kong cents per share (2013: 13.93 Hong Kong cents per share) was paid on 29 August 2014. The Board has recommended a ﬁnal dividend of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share) in respect of the year ended 30 November 2014. Together with the interim dividend already paid, this will result in a total dividend of 50.00 Hong Kong cents per share (2013: 42.55 Hong Kong cents per share) for the year ended 30 November 2014. Dr. Narongchai Akrasanee (Note) Note: Dr. Qin and Dr. Narongchai resigned as Independent Non-executive Directors of the Company with effect from 30 May 2014 and 1 September 2014 respectively . Mr. Mohamed Azman Yahya and Professor Lawrence Juen-Yee Lau were appointed as Independent Non-executive Directors of the Company on 24 February 2014 and 18 September 2014 respectively. Mr. Yahya was re-elected as Independent Non-executive Director of the Company by the shareholders Under the Trust Deed of the Company’s Restricted Share Unit at the 2014 Annual General Meeting of the Company held Scheme (RSU Scheme), shares of the Company are held by the on 9 May 2014. Professor Lau will retire from ofﬁce at the trustee in either of two trust funds. These shares are held against forthcoming annual general meeting pursuant to Article 104 the future entitlements of scheme participants. Provided the of the Company’s Articles of Association and offers himself for shares of the Company are held by the trustee and no beneﬁcial re-election. 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). In accordance with Article 100 of the Company’s Articles of Association and Code Provision A.4.2 of the Corporate Governance Code, Mr. Chung-Kong Chow and Mr. John Barrie Harrison will retire from ofﬁce by rotation at the forthcoming As of 29 August 2014 (being the payment date of the interim annual general meeting and offer themselves for re-election. dividend), 72,345,029 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 Friday, 29 May 2015 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 13 May 2015. 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 35 to the ﬁnancial statements. 078 AIA GROUP LIMITED INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As of 30 November 2014, 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: W E I V R E V O Name of Shareholder 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) 1,083,128,432(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 Citigroup Global Markets Asia Limited 1,054,334,400(L) Ordinary Percentage of the total number of shares in issue (Note 6) Long Position (L) Short Position (S) Lending Pool (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 JPMorgan Chase & Co. 1,054,334,400(L) Ordinary 8.75(L) 1,054,334,400(L) Ordinary 8.75(L) 1,033,775,430(L) 61,283,066(S) 734,949,361(P) Ordinary The Capital Group Companies, Inc. 848,133,207(L) Ordinary BlackRock, Inc. 722,290,170(L) 2,592,600(S) Ordinary Aberdeen Asset Management Plc and 701,120,884(L) Ordinary its associates Notes: (1) The interests held by Citigroup Inc. were held in the following capacities: 8.58(L) 0.51(S) 6.10(P) 7.04(L) 6.00(L) 0.02(S) 5.82(L) W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I Capacity Note 1 Note 2 Note 2 Note 3 Interest of controlled corporation Interest of controlled corporation Interest of controlled corporation Note 4 Interest of controlled corporation Interest of controlled corporation Investment manager 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 – – (2) 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 Number of shares Number of shares (Long position) (Short position) 1,059,115,800 15,081,200 856,100 – ANNUAL REPORT 2014 079 N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE REPORT OF THE DIRECTORS (3) 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 (4) The interests held by JPMorgan Chase & Co. were held in the following capacities: Capacity Beneﬁcial owner Investment manager Trustee (other than a bare trustee) Custodian corporation/approved lending agent (5) The interests or short positions include underlying shares as follows: Number of shares Number of shares (Long position) (Short position) 1,058,995,800 15,081,200 856,100 – Number of shares Number of shares (Long position) (Short position) 84,700,733 61,283,066 213,946,428 178,908 734,949,361 – – – Long position Short position 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 – – – – – – – – 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 – – – – – – – – – – – – – – – 5,227,840 – – – – – – – – – – – – – – – – – – – Name of Shareholder 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 JPMorgan Chase & Co. 9,026,032 1,147,200 3,349,132 12,339,830 4,786,000 4,598,200 384,832 50,072,334 BlackRock, Inc. – 800 – – 2,583,000 9,600 – – (6) Based on 12,045,117,225 shares in issue as at 30 November 2014. Save as disclosed above, as at 30 November 2014, no person, other than the Directors and Chief Executive of the Company, whose interests are set out in the section entitled “Directors’ and Chief Executive’s Interests and Short Positions in Shares and DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As of 30 November 2014, the Directors’ and Chief Executive’s Underlying Shares”, holds any interests or short positions in the interests and short positions in the shares, underlying shares or shares or underlying shares of the Company as recorded in the debentures of the Company and its associated corporations as register required to be kept by the Company pursuant to Section recorded in the register required to be kept by the Company 336 of Part XV of the SFO. under Section 352 of Part XV of the SFO, or as otherwise notiﬁed to the Company pursuant to the Model Code, are as follows: 080 AIA GROUP LIMITED (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 Mr. Edmund Sze-Wing Tse 18,777,152(L) (1) Ordinary 3,560,400(L) (2) Ordinary Mr. Chung-Kong Chow 86,000(L) (2) Ordinary Percentage of the total number of shares in issue (3) Capacity 0.16 0.03 Beneﬁcial owner Interest of controlled corporation < 0.01 Beneﬁcial owner Notes: (1) The interests include 3,151,767 shares of the Company, 11,072,844 share options under the Share Option Scheme, 4,549,021 restricted share units under the Restricted Share Unit Scheme and 3,520 matching restricted stock purchase units under the Employee Share Purchase Plan. (2) The interests are ordinary shares of the Company. (3) Based on 12,045,117,225 shares in issue as at 30 November 2014. (ii) Interests and short positions in the shares of associated corporation: Name of Director Associated Corporation Number of shares Percentage of the total number of Class shares in issue Mr. Edmund Sze-Wing Tse Philam Life 1(L) Ordinary < 0.01 Capacity Trustee Save as disclosed above, as at 30 November 2014, none of the Directors or Chief Executive of the Company holds any interests RESERVES As at 30 November 2014, the aggregate amount of reserves or short positions in the shares, underlying shares or debentures available for distribution to shareholders of the Company, as of the Company and its associated corporations as recorded in calculated under the provisions of Part 6 of the Companies the register required to be kept by the Company under Section Ordinance was US$2,102 million (2013: US$1,652 million). W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C 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 2014 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. Details of the movements in the reserves of the Group for the year ended 30 November 2014 are set out in the Consolidated Statement of Changes in Equity on pages 107 to 108 of this Annual Report. BANK LOANS AND OTHER BORROWINGS Bank loans and other borrowings of the Group as at 30 November 2014 amounted to US$2,934 million (2013 as adjusted: US$1,950 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 (2013: US$2 million). S T N E M E T A T S L A C N A N F I I SUBSIDIARIES AND ASSOCIATED COMPANIES Details of the Company’s principal subsidiaries and associated companies as at 30 November 2014 are set out in note 44 and note 15 to the ﬁnancial statements respectively. CHANGES IN EQUITY Details of changes in equity of the Group during the year ended 30 November 2014 are set out in the Consolidated Statement of Changes in Equity on pages 107 to 108 of this Annual Report. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 081 CORPORATE GOVERNANCE REPORT OF THE DIRECTORS MAJOR CUSTOMERS AND SUPPLIERS During the year ended 30 November 2014, the percentage of the aggregate purchases attributable to the Group’s ﬁve largest PURCHASE, SALE AND REDEMPTION OF THE SECURITIES OF THE COMPANY Save for the purchase of 19,404,804 shares and sale of 320,390 suppliers was less than 30 per cent of the Group’s total value of forfeited shares of the Company under the Restricted Share purchases and the percentage of the aggregate sales attributable Unit Scheme and the Employee Share Purchase Plan at a total to the Group’s ﬁve largest customers was less than 30 per cent of consideration of approximately US$93 million and US$2 million the Group’s total value of sales. RETIREMENT SCHEMES The Group operates a number of deﬁned beneﬁt plans and respectively, 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 2014. These purchases and sales were made by the relevant scheme trustees deﬁned contribution plans. Particulars of these plans are set out on the Hong Kong Stock Exchange. These shares are held on in note 39 to the ﬁnancial statements. trust for participants of the relevant schemes and therefore were not cancelled. Please refer to note 40 to the ﬁnancial statements EVENTS AFTER THE REPORTING PERIOD Details of signiﬁcant events after the year ended 30 November for details. 2014 are set out in note 45 to the ﬁnancial statements. SHARE-BASED INCENTIVE SCHEMES Restricted Share Unit Scheme During the year ended 30 November 2014, 19,086,387 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 restricted share units were awarded by the Company under the at the date of this Annual Report. 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 2014, 6,678,445 share options were awarded by the Company under the Share Option Scheme adopted by the Company on 28 September 2010 (as amended). 1,117,224 share options were exercised during the year and the Company issued 1,117,224 new shares accordingly. The proceeds received amounted to approximately US$4 million. Details of the Share Option Scheme are set out in the Remuneration Report. NON-EXEMPT CONNECTED TRANSACTIONS During the year ended 30 November 2014, the Group had not 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 2014. entered into any connected transactions which are not exempt PricewaterhouseCoopers will retire and, being eligible, offer from annual reporting requirement in Chapter 14A of the Listing themselves for re-appointment. A resolution for the re- Rules. appointment of PricewaterhouseCoopers as auditor of the Company is to be proposed at the forthcoming annual general RELATED PARTY TRANSACTIONS Details of the related party transactions undertaken by the Group meeting. during the year ended 30 November 2014 in the ordinary course of business are set out in note 42 to the ﬁnancial statements. Such related party transactions are all exempt connected By Order of the Board transactions. Edmund Sze-Wing Tse Non-executive Chairman 26 February 2015 082 AIA GROUP LIMITED CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT W E I V R E V O CORE PRINCIPLES The Board believes that strong corporate governance is essential for delivering sustainable value, enhancing a culture of business BOARD OF DIRECTORS Roles and Responsibilities The Board is accountable to shareholders for the affairs of integrity and maintaining investor conﬁdence. The Board is the Company. It meets these obligations by ensuring the ultimately responsible for the performance of the Group, maintenance of high standards of governance in all aspects of including the consistent achievement of business plans and the Company’s business, setting the strategic direction for the compliance with statutory as well as corporate obligations. Group and maintaining appropriate levels of review, challenge The Board is also responsible for the development and and guidance in its relationship with Group management. It is implementation of the Group’s corporate governance practices. also the ultimate decision-making body for all matters considered This Corporate Governance Report explains the Company’s material to the Group and is responsible for ensuring that, as corporate governance principles and practices, including how the a collective body, it has the appropriate skills, knowledge and Board manages the business to deliver long-term shareholder experience to perform its role effectively. value and to promote the development of the Group. In these matters, the Board provides leadership to the Company As a company listed on the Main Board of the Hong Kong in respect of operational issues through the Group Chief Stock Exchange, the Company is committed to high standards Executive, who is authorised to act on behalf of the Board in the of corporate governance and sees the maintenance of good day-to-day management of the Company. Any responsibilities corporate governance practices as essential to its sustainable not so delegated by the Board to the Group Chief Executive growth. It is vital that Board members, in aggregate, have remain the responsibility of the Board. 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. During the period under review, the Board updated the terms of reference of the Risk Committee to reﬂect best practice and reviewed the Company’s compliance with the Corporate Governance Code including the necessary disclosures in its reports to shareholders. The Board also adopted various audit- related policies as recommended by the Audit Committee. The Board was recognised for its ongoing efforts by The Hong Kong Throughout the year ended 30 November 2014, the Company Institute of Directors in the form of a Directors of the Year Award complied with all the applicable code provisions set out in the for 2014. 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 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. throughout the year ended 30 November 2014. A Board Diversity Policy was adopted by the Board in 2013 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 2014 083 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT Board Independence Each of the Independent Non-executive Directors of the plans as well as interim and annual results and to consider other signiﬁcant matters. At these meetings, senior management Company meets the independence guidelines set out in Rule also provides regular updates to the Board with respect to the 3.13 of the Listing Rules and has provided to the Company the business activities and development of the Group. 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 Process Board meetings are held at least four times a year to determine overall strategies, receive management updates, approve business 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. Details of the attendance of individual Directors at the Board meetings, Committees meetings and 2014 AGM during the period under review are as follows: Name of Director Board Committee Committee Committee Audit Nomination Remuneration Risk Committee 2014 AGM No. of Meetings Attended / Required Meetings to Attend Non-executive Chairman and Non-executive Director Mr. Edmund Sze-Wing Tse 5/5 4/4 1/1 – 3/4 Executive Director, Group Chief Executive and President Mr. Mark Edward Tucker 5/5 – – 3/3 4/4 Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo (1) Mr. Mohamed Azman Yahya (2) Professor Lawrence Juen-Yee Lau (2) Dr. Qin Xiao (3) Dr. Narongchai Akrasanee (3) 5/5 5/5 5/5 5/5 4/4 1/1 2/2 4/4 4/4 – 4/4 4/4 – – – – 1/1 1/1 1/1 1/1 n/a n/a 1/1 1/1 3/3 – – 3/3 2/2 – 1/1 – – 4/4 4/4 – – 1/1 – 3/3 1 1 1 1 1 1 1 n/a 1 1 Notes: (1) Mr. Yeo was appointed as a member of the Remuneration Committee with effect from 17 January 2014. (2) Mr. Yahya and Professor Lau were appointed as Independent Non-executive Directors with effect from 24 February 2014 and 18 September 2014 respectively. Both of them attended all meetings held from their respective dates of appointment to 30 November 2014. (3) Dr. Qin and Dr. Narongchai resigned as Independent Non-executive Directors with effect from 30 May 2014 and 1 September 2014 respectively. Both of them attended all meetings held from 1 December 2013 to their respective dates of resignation. 084 AIA GROUP LIMITED During the year ended 30 November 2014, the Board conducted The term of Mr. Tse as Non-executive Chairman expired on an evaluation survey of the Board’s performance including the 31 December 2014. Mr. Tse was re-elected as Non-executive structure and operation of its committees. Chairman for a further term of two years from 1 January 2015 by Minutes of the meetings of the Board and all committees are the Board. kept by the Company Secretary. Such minutes are open for The Board approved the appointment of Mr. Yahya and Professor inspection on reasonable notice by any Director. Lau as Independent Non-executive Directors of the Company for 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 a term of three years commencing on 24 February 2014 and 18 September 2014 respectively. Mr. Yahya retired from ofﬁce and was re-elected by the shareholders at the 2014 annual general meeting of the Company. Professor Lau will retire from ofﬁce at the forthcoming annual general meeting pursuant to Article 104 of the Company’s Articles of Association and offers himself for re-election. in a timely manner. He is also responsible for making sure that good corporate governance practices and procedures are Induction and Ongoing Development The Company provides each Director with personalised induction, 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 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. and administration. Mr. Tucker attends Board meetings as the Each Director receives detailed brieﬁngs on the Group’s principal sole Executive Director and, in his capacity as Group Chief businesses, the markets in which it operates and the overall Executive and President, ensures that the Board is updated at competitive environment. Other areas addressed include legal least monthly in respect of material aspects of the Company’s and compliance issues affecting directors of ﬁnancial services performance. Mr. Tucker discharges his responsibilities within companies, the Group’s governance arrangements, its investor the framework of the Company’s policies, reserved powers and relations programme and remuneration policies. The Directors routine reporting requirements and is advised and assisted by the are continually updated on the Group’s business and the latest senior executive management of the Group. developments to the Listing Rules and other applicable statutory The roles and responsibilities of the Board, the Chairman of the Board and the Group Chief Executive are set out in the Board requirements to ensure compliance and continuous good corporate governance practice. Charter of the Company which is available on the Company’s During the year, the Company organised a Board Strategy Day 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. and provided a number of brieﬁngs to the Directors to update them on the latest developments in the Group’s principal businesses and major products as well as the new Companies Ordinance which came into force in March 2014. The overseas Board visit in 2014 was to Shanghai, where Directors received an in-depth review of our operations in China. The visit also provided an opportunity for the Directors to gain new insights into the life insurance sector in China and its prospects for The Non-executive Director and Independent Non-executive continued growth. 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. ANNUAL REPORT 2014 085 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT 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 Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya Professor Lawrence Juen-Yee Lau Dr. Qin Xiao (Note) Dr. Narongchai Akrasanee (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: Dr. Qin and Dr. Narongchai resigned as Independent Non-executive Directors of the Company with effect from 30 May 2014 and 1 September 2014 respectively. COMMITTEES OF THE BOARD The Company’s corporate governance is implemented through a the Company’s ﬁnancial information including quarterly business highlights, interim and annual results of the Group, reviewing structured hierarchy, which includes the Board of Directors and the Group’s ﬁnancial and accounting policies and practices as four committees of the Board established by resolutions of the well as its whistle-blowing arrangements and monitoring the Board, namely the Audit Committee, the Nomination Committee, effectiveness of the internal audit function. The Committee also the Remuneration Committee and the Risk Committee. The provided oversight for and management of the relationship with Terms of Reference of the Board committees are available on the Group’s external auditor, including reviewing and monitoring the websites of both the Hong Kong Stock Exchange and the in accordance with applicable standards the external auditor’s Company. In addition, the Group Chief Executive has established independence and objectivity and the effectiveness of the audit a number of management committees including, among others, process. an Executive Committee and Operational and Financial Risk Committees. Four meetings were held by the Audit Committee during the year ended 30 November 2014. The attendance records of the Further details of the roles and functions and the composition of Audit Committee members are set out on page 84 of this Annual the Board committees are set out below. Report. Audit Committee The Audit Committee consists of four members. This includes Nomination Committee The Nomination Committee consists of seven members. This three Independent Non-executive Directors: Mr. Harrison, who includes the Non-executive Chairman, Mr. Tse, who serves as serves as chairman of the Committee, Mr. So and Mr. Yeo as chairman of the Committee, and the six Independent Non- well as the Non-executive Chairman Mr. Tse. The primary duties executive Directors. Mr. Yahya and Professor Lau have been performed by the Audit Committee during the year were the members of the Committee since 24 February 2014 and 18 oversight of the Group’s ﬁnancial reporting system and internal September 2014 respectively. Dr. Qin and Dr. Narongchai were control procedures, monitoring the integrity of preparation of members of the Committee until their respective dates of resignation from the Board. The primary duties performed by 086 AIA GROUP LIMITED the Nomination Committee during the year included reviewing of the Committee until the date of his resignation from the and making recommendations to the Board on the structure, size Board. The duties performed by the Risk Committee during the and composition of the Board, including the skill, knowledge, year included provision of advice to the Board on the risk proﬁle experience and diversity of background of its membership, and risk management strategy of the Group, considering and overseeing the identiﬁcation and assessment of potential reviewing disclosures in interim / annual report, risk management board candidates, providing oversight and direction in respect related policies and guidelines and statutory solvency positions, of the succession planning for directors and determining the risk appetite and metrics, overseeing the risk management composition of the Board committees. framework and considering and endorsing the Company’s risk The Committee’s processes and criteria for selecting and making governance structure and major risks. recommendations for appointment of Board members are During the year ended 30 November 2014, four meetings were designed to satisfy high standards of corporate governance. held by the Risk Committee. The attendance records of the Risk These processes meet or exceed the Hong Kong Stock Exchange Committee members are set out on page 84 of this Annual requirements to ensure that every director of the Company has Report. the requisite character, experience and integrity and is able to demonstrate a standard of competence, commensurate with his position as a director of a listed issuer, and that where the EXTERNAL AUDITOR The external auditor of the Company is PricewaterhouseCoopers. nomination of Independent Non-executive Directors is under The Audit Committee is responsible for making recommendations consideration the requirements of Rule 3.13 of the Listing Rules to the Board as to the appointment, re-appointment and are satisﬁed. One meeting was held by the Nomination Committee during the year ended 30 November 2014. The attendance records of the Nomination Committee members are set out on page 84 of this Annual Report. 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. During the year, the Board has reviewed, updated and Remuneration Committee The Remuneration Committee consists of four members. This adopted policies on nomination and appointment of and services performed by the external auditor to enhance related governance includes three Independent Non-executive Directors: Mr. So, practices. the Committee chairman, Mr. Yeo who became a member on 17 January 2014 and Mr. Yahya who became a member on 24 February 2014 as well as the Executive Director, Mr. Tucker. Dr. Qin was a member of the Committee until the date of his resignation from the Board. 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. Three meetings were held by the Remuneration Committee during the year ended 30 November 2014. Details of the attendance records are set out on page 84 of this Annual Report 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 The Audit Committee also reviews the non-audit services provided by the external auditor and its remuneration on a regular basis. For the year ended 30 November 2014, the total estimated remuneration payable by the Group to PricewaterhouseCoopers is US$14.6 million (2013: US$12.5 million), an analysis of which is set out below: US$ millions Audit services Non-audit services, including: Audit related services Tax services Other services Total 2014 (1) 11.1 2013 10.7 (2) 1.2 1.8 0.5 14.6 0.7 0.9 0.2 12.5 Notes: (1) 2014 is based upon estimated fees for 2014 audit services and non-audit services through 30 November 2014. (2) Audit services include US$0.2 million in 2013 services related to 2012 services. chairman Mr. Chow, Mr. Harrison and Professor Lau who became In addition to those fees disclosed above, audit fees of a member on 18 September 2014. Also included on the Risk US$0.6 million (2013: US$0.6 million) were payable to Committee are the Non-executive Chairman Mr. Tse; and the PricewaterhouseCoopers by funds for which the Group is the Executive Director, Mr. Tucker. Dr. Narongchai was a member investment adviser, manager or administrator. ANNUAL REPORT 2014 087 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT ACCOUNTABILITY AND AUDIT Financial Report The annual results of the Company and other ﬁnancial range of brokerage houses. An active and open dialogue with institutional investors is maintained through regular investor interactions, including meetings, investment conferences information were published in accordance with the requirements and roadshows. Investor feedback and analysts’ reports on of the Listing Rules and other applicable regulations and the Company are circulated to the Board and the Executive industry best practice. When preparing the Company’s ﬁnancial Committee of the Group on a regular and systematic basis to reports, the Board of Directors has endeavoured to present such promote an understanding of external views on the Group’s information in a comprehensible, informative and user-friendly performance. manner. A Shareholders’ Communication Policy was adopted by the Board The Directors acknowledge their responsibility for preparing in 2013 and such policy will be reviewed on a regular basis to the Company’s consolidated ﬁnancial statements and ensuring ensure its effectiveness and the Board welcomes views, questions that the preparation of the Company’s consolidated ﬁnancial and concerns from shareholders and stakeholders. Shareholders statements is in accordance with the relevant requirements and and stakeholders may at any time send their enquiries and applicable standards. concerns to the Board. The contact details are set out on pages The statement of the Company’s auditor concerning its reporting 238 to 239 of this Annual Report. responsibilities on the Company’s consolidated ﬁnancial statements is set out in the Independent Auditor’s Report on 2014 Annual General Meeting The most recent general meeting of the Company was the 2014 pages 101 and 102 of this Annual Report. Annual General Meeting of the Company (2014 AGM) held at 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. 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 the Grand Ballroom, 2/F, Hotel Nikko Hongkong, 72 Mody Road, Tsimshatsui East, Kowloon, Hong Kong on 9 May 2014 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 2014 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 2013; programmes and budget of the Company’s accounting and • Declaration of a final dividend of 28.62 Hong Kong cents per ﬁnancial reporting function. share for the year ended 30 November 2013; ENGAGEMENT WITH SHAREHOLDERS The Board recognises the importance of communication and undertakes to maintain an ongoing dialogue with the • Re-election of Mr. Yahya and Mr. So as Independent Non- executive Directors and Mr. Tse as Non-executive Director of the Company; shareholders of the Company through general meetings, • Re-appointment of PricewaterhouseCoopers as auditor of the releases, announcements and corporate communications such Company until the conclusion of next annual general meeting as the annual report, interim report and circulars. The Board is and authorised the Board to fix its remuneration; committed to the timely disclosure of information. The latest information regarding the Group’s activities, announcements, results presentation, webcasts and corporate communications is made available on the Company’s website at www.aia.com in a timely manner. The ﬁnancial calendar highlighting the key dates for shareholders is set out on page 238 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 • General mandate to Directors to cause the Company to issue additional shares of the Company, not exceeding 10 per cent of the aggregate number of shares in the Company at the date of the 2014 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 aggregate number of shares in the Company at the date of the 2014 AGM; 088 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I • General mandate to Directors to cause the Company to issue the time at which notice is given of that meeting. The request additional shares of the Company, not exceeding 2.5 per cent must be deposited at the registered ofﬁce of the Company at of the aggregate number of shares in the Company at the 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong date of the 2014 AGM under the restricted share unit scheme; or sent by email to ir@aia.com for the attention of the Company and • Adoption of the new Articles of Association of the Company in response to the introduction of the new Companies Ordinance. The forthcoming annual general meeting of the Company will be held on Friday, 8 May 2015. 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 General Meeting Shareholder(s) of the Company may request to call a general meeting. 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 Companies Ordinance for calling a general meeting. Moving a Resolution at an Annual General Meeting Shareholder(s) of the Company may request the Company to Secretary. Shareholders of the Company should make reference to sections 615 and 616 of the 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 adoption of new Articles of Association of the Company in response to the introduction of the new Companies Ordinance at the 2014 AGM. Details of the amendments were set out in the 2014 AGM notice and the accompanied circular to the Shareholders of the Company dated 25 March 2014. The latest version of the Company’s Articles of Association is available on the Company’s website at www.aia.com. By Order of the Board give notice of a resolution and move such resolution at an annual Lai Wing Nga general meeting. Such notice of resolution must be given by the Company Secretary Company if it has received such requests from: 26 February 2015 (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. 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, N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 089 CORPORATE GOVERNANCE REMUNERATION REPORT Dear Shareholders, I am pleased to present the Report on Remuneration for Directors and Key Management Personnel (the Report) for the year ended 30 November 2014. The structure of executive remuneration at the Group consists of four broad elements: basic salary, short-term incentive, long- term incentive and beneﬁts, with a signiﬁcant proportion of total remuneration awarded subject to multi-year performance-based vesting conditions. Payments under our short-term incentive At the outset, I am very pleased to note the addition of plan are capped, and the maximum number of restricted share Mr. George Yeo and Mr. Mohamed Azman Yahya to the units and share options in our long-term incentive plan is also Remuneration Committee from 17 January 2014 and 24 February determined at the outset. 2014 respectively. Dr. Qin Xiao ceased to be a member of the Remuneration Committee on 30 May 2014 following his resignation as Independent Non-executive Director, and I would like to express my gratitude for his contribution. The payout of short-term incentives and the vesting of long- term incentives are subject to the Remuneration Committee’s approval. In early 2014, the Remuneration Committee approved the full vesting of the ﬁrst long-term incentive award after the This Report provides an overview of the objectives of our Group’s initial public offering, which reﬂects explicitly the strong remuneration policy and the main components of the performance of the Group over the ﬁrst three years post listing. remuneration structure. It demonstrates that our approach to remuneration links pay with performance and rewards executives for sustainable value creation. Remuneration for our Non-executive Directors is provided solely through fees which are not linked to corporate performance, with decisions on Non-executive Director remuneration made at The determination of executive remuneration at the Group the full Board level. follows a rigorous process that takes into consideration market practice and the evolving regulatory framework. The Remuneration Committee is updated during the year on trends in executive remuneration and governance by an external remuneration consultant which the Remuneration Committee The Committee believes that our processes and structures ensure that remuneration arrangements operate within our governance standards, and align with the risk appetite of the Group as well as our shareholders’ interests. uses as a source for independent professional advice. The Group I trust that you will ﬁnd the Report clear and informative. Chief Executive and President is not present at or involved in discussion of his own remuneration. In line with our Terms of Reference, the Remuneration Committee provided the Risk Committee with an overview of the remuneration arrangements at the Group, covering the process of determining executive remuneration, the structure of executive remuneration, as well as the Non-executive Director remuneration. Our coordinated approach to remuneration helps ensure that the Group’s remuneration arrangements provide appropriate incentives for the creation of sustainable value while discouraging excessive risk-taking. Jack Chak-Kwong So Chairman, Remuneration Committee 26 February 2015 090 AIA GROUP LIMITED REMUNERATION COMMITTEE The Remuneration Committee is responsible for determining During the year ended 30 November 2014, three meetings were held by the Remuneration Committee. The attendance records of the speciﬁc remuneration packages of the Executive Director the Remuneration Committee members are set out on page 84 and Key Management Personnel (senior executives who, by of this Annual Report. 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 During the year, major activities performed by the Remuneration Committee in relation to the remuneration of the Executive Director, Key Management Personnel, Chairman and Non- executive Directors were as follows: Directors. • Reviewed the executive benchmark results and approved 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 the 2014 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 subsequently approved by the Independent Non-executive Directors); remuneration paid by comparable companies, remuneration • Provided the Risk Committee with an updated summary of levels within the Group and the application of performance- considerations undertaken by the Remuneration Committee based remuneration programmes. The Remuneration Committee in ensuring that the Group’s compensation and benefits also oversees the operation of the Company’s share option arrangements align with stakeholders’ interests and avoid scheme and other incentive schemes, recommending share- excessive risk-taking; based employee awards to the Board for approval as well as reviewing and, where appropriate, amending the terms of the schemes as may be required. The Remuneration Committee is authorised by the Board to • Reviewed and approved the 2013 short-term incentive plan payout and the vesting of the 2011 long-term incentive award; • Reviewed and approved the 2014 long-term incentive award; discharge its duties as outlined in its Terms of Reference. It is also • Reviewed and approved the performance measures to be authorised to seek any remuneration information it requires from used in the 2015 short-term incentive plan(1) and the 2015 the Executive Director and/or Key Management Personnel and long-term incentive award; may obtain external independent professional advice if necessary. • Reviewed and approved the peer group for benchmarking the The full Terms of Reference of the Remuneration Committee can compensation of the Group Chief Executive and President; be accessed at www.aia.com. and Meetings in 2014 As at 30 November 2014, the Committee consisted of four members: three Independent Non-executive Directors, being Mr. Jack Chak-Kwong So, who is the Chairman of the Committee, Mr. George Yong-Boon Yeo, and Mr. Mohamed Azman Yahya; and one Executive Director, being Mr. Mark Edward Tucker. Dr. Qin Xiao was a member of the Committee until 29 May 2014. • Reviewed and approved the 2013 Remuneration Report. Note: (1) The performance measures used in the 2014 short-term incentive plan were approved in November 2013. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 091 CORPORATE GOVERNANCE REMUNERATION REPORT REMUNERATION POLICY Objectives The Company’s executive remuneration policy is based on the 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 principle of providing an equitable, motivating and competitive stakeholders and do not encourage executives to take excessive remuneration package to foster a strong performance- risks that may threaten the value of the Group. oriented culture within an appropriate overall risk management framework. Main Components of Remuneration The table below summarises the Company’s remuneration The policy aims to ensure that rewards and incentives relate policies regarding the elements of the remuneration structure directly to the performance of individuals, the operations and as it applied to the Executive Director and Key Management functions in which they work or for which they are responsible, Personnel during the year. Element Purpose Basis of determination Notes on practices Basic 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 plan focuses key contributors on the long-term success of the Group and is used to align the interests of executives with those of shareholders using a combination 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 Basic 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 basic 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, where applicable, 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, with the restricted share units subject to pre-deﬁned performance 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 092 AIA GROUP LIMITED SHORT-TERM INCENTIVE PLAN For 2014, short-term incentive targets were determined and LONG-TERM INCENTIVE (LTI) PLAN The Restricted Share Unit Scheme and the Share Option Scheme communicated to the Executive Director and Key Management were adopted on 28 September 2010 and are effective for a Personnel at the beginning of the ﬁnancial year. The performance period of 10 years from the date of adoption. Summary details measures for 2014 short-term incentives were: are provided in the pages that follow and in detail in note 40 to • Value of new business; • Excess embedded value growth; and • Operating profit after tax. the ﬁnancial statements. These schemes are designed to motivate and reward participants who have not only made an important contribution to AIA’s success but are expected to play a signiﬁcant role in the future. Value of new business (VONB) is an estimate of the economic Awards made under these schemes are discretionary and are value of one year’s sales as published by the Company. determined on an annual basis with reference to the magnitude 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 of overall variable remuneration, the competitiveness of the total remuneration package, the roles, responsibilities, performance and potential of the individual. EV) and operating assumption changes (value of future operating The schemes operate through the award of restricted share units outperformance considered permanent enough for recognition in and share options to deliver a balanced mix of incentives and the current year) in the EV operating proﬁt. ownership. The awards made are subject to eligibility criteria and Operating proﬁt after tax (OPAT) is the IFRS operating proﬁt after generally vest after a three-year period. tax based on the IFRS results published by the Company. As applicable to other remuneration payments, long-term The weighting of the three performance measures described above is 60 per cent, 10 per cent and 30 per cent for VONB, incentive vesting is subject to the Remuneration Committee’s approval and is in compliance with all relevant Group policies. EEV Growth and OPAT respectively. Based on the level of The schemes are reviewed regularly to ensure that the design, achievement of the performance measures, short-term incentive process, structure and governance work together to balance risk awards in respect of 2014 will be paid to the Executive Director and incentives. and Key Management Personnel in March 2015. The total value of short-term incentive awards accrued for the Executive Director and Key Management Personnel for the ﬁnancial year ended 30 November 2014 is US$12,045,400. Such amount is included in note 41 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. 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 sustainable value for shareholders through the award of restricted share units to participants. During the year ended 30 November 2014, 19,086,387 restricted share units were awarded by the Company under the Restricted Share Unit Scheme. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 093 CORPORATE GOVERNANCE REMUNERATION REPORT Performance Measures and Vesting Vesting of performance-based restricted share unit awards In early 2014, after assessing the performance of the Company over the period from 1 December 2010 to 30 November 2013, will be contingent on the extent of achievement of three-year the Remuneration Committee approved the vesting of the performance targets as outlined below for the following metrics: 2011 restricted share unit awards at the maximum level based • 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. on the strong overall performance of the Company against its challenging performance targets. The 2012 restricted share unit awards will vest on 15 March 2015. The chart below shows AIA’s TSR compared with the DJTINN during the period from 1 December 2011 to 30 November 2014, which is the same period that the performance is measured for the purpose of the 2012 restricted share unit awards. The Hang Seng Index (HSI) performance for the same period is also shown Equity attributable to shareholders of the Company on the for reference as it is a recognised Hong Kong equity market index embedded value basis (EV Equity) is the total of embedded of which AIA is a constituent. value, goodwill and other intangible assets. Embedded value is an estimate of the economic value of in-force life insurance AIA TSR Performance Against DJTINN and HSI business, including the net worth on the Group’s balance sheet 100% but excluding any economic value attributable to future new 80% 60% 40% 20% 0% -20% 1 Dec 2011 1 Jun 2012 1 Dec 2012 1 Jun 2013 1 Dec 2013 1 Jun 2014 1 Dec 2014 AIA DJTINN HSI business. The VONB and EV Equity performance considered in determining incentive awards are based on the Group VONB and Group EV Equity 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. 094 AIA GROUP LIMITED The table below summarises the movements in restricted share unit awards. W E I V R E V O Executive Director, Key Management Personnel and other eligible employees Executive Director Mr. Mark Edward Tucker Date of grant (day / month / year) (1) 1/6/2011 1/6/2011 1/6/2011 Key Management Personnel (excluding Executive Director) Other eligible employees 15/3/2012 11/3/2013 5/3/2014 1/6/2011 1/6/2011 15/3/2012 11/3/2013 5/3/2014 14/4/2014 14/4/2014 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 5/3/2014 11/9/2014 11/9/2014 Restricted share units outstanding as at 1 December Restricted share units awarded during the year ended 30 November Restricted share units vested during the year ended 30 November Restricted share units cancelled / lapsed during the year ended 30 November Restricted share units outstanding as at 30 November 2014 2014 2014 (7) 2014 Vesting date(s) (day / month / year) See note (2) 1/4/2014 (3) See note (4) 15/3/2015 (3) 11/3/2016 (3) 5/3/2017 (3) 1/4/2014 (3) See note (4) 15/3/2015 (3) 11/3/2016 (3) 5/3/2017 (3) 14/4/2017 (3) See note (6) See note (4) 2013 492,045 1,433,149 806,147 1,434,842 1,314,873 – 1,261,874 2,253,565 3,729,321 1,949,178 1,779,549 – – – – – – – 1,546,053 203,016 487,238 2,626,073 1/4/2014 (3) 12,770,760 1/8/2014 (3) 146,193 18/10/2014 (3) 1,031,469 18/10/2014 (5) 59,581 15/3/2015 (3) 15,543,206 15/3/2015 (5) 6/9/2015 (3) 81,831 218,664 11/3/2016 (3) 15,990,781 264,994 75,865 1/8/2016 (3) 11/3/2016 (3) 5/3/2017 (3) 11/9/2017 (3) 5/3/2017 (3) – – – 15,535,289 48,724 4,193 – – – – – – – – – – – – – – – – (492,045) (1,433,149) (268,715) – – – (2,253,565) (1,243,104) – – – – – – – – – – – – – – – – – – – – 537,432 1,434,842 1,314,873 1,261,874 – 2,486,217 1,949,178 1,779,549 1,546,053 203,016 487,238 (851,615) (71,214) 1,703,244 (12,256,123) (514,637) – (185,775) (32,427) – – – – (1,609,772) 13,863,942 (81,831) – – 218,664 (25,758) (1,530,911) 14,434,112 – – – – – – – 264,994 75,865 (558,880) 14,976,409 – – 48,724 4,193 (146,193) (845,694) (27,154) (69,492) – – Notes: (1) The measurement dates (i.e. the dates used to determine the value of the awards for accounting purposes) 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 for awards made in 2014 were determined to be 5 March 2014, 14 April 2014 and 11 September 2014. 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 (492,045 restricted share units) vested on 1 June 2014. (3) The vesting of these restricted share units is subject to the achievement of performance conditions shown on the preceding page. (4) The vesting of these restricted share units is service-based only. One-third of restricted share units vested 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. (6) The vesting of these restricted share units is service-based only. One-half of restricted share units vest on 14 April 2015; and one-half vest on 14 April 2016. (7) There were no cancelled restricted share units during the year ended 30 November 2014. ANNUAL REPORT 2014 095 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A CORPORATE GOVERNANCE REMUNERATION REPORT Share Option Scheme The objective of the Share Option Scheme is to align the Performance Measures and Vesting Share options awarded under the Share Option Scheme interests of Scheme participants with those of the Company’s have a life of 10 years before expiry. Generally, share options shareholders. Under the Share Option Scheme, the Company become exercisable three years after the grant date and remain may award share options to employees, Directors (excluding exercisable for another seven years, subject to participants’ Independent Non-executive Directors) or ofﬁcers of the Company continued employment in good standing. There are no or any of its subsidiaries. No amount is payable by the eligible performance conditions attached to the vesting of share options. participants on the acceptance of a share option. Each share option entitles the eligible participant to subscribe for During the year ended 30 November 2014, 6,678,445 share options were awarded by the Company under the Share one ordinary share. Beneﬁts are realised only to the extent that share price exceeds exercise price. Option Scheme to employees and ofﬁcers of the Company and The majority of the share options awarded in 2011 became employees, ofﬁcers and directors of a number of its subsidiaries. exercisable on 1 April 2014. The share options awarded in 2014 The exercise price of such share options was determined by will vest in 2017. Details of the valuation of the share options are applying the highest of (i) the closing price of the shares on the set out in note 40 to the ﬁnancial statements. 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 total number of share options that can be awarded under the scheme is 301,100,000, representing approximately 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. 096 AIA GROUP LIMITED The table below summarises the movements in share option awards. W E I V R E V O Executive Director, Key Management Personnel and other eligible employees Date of grant (day / month / year) (1) Period during which share options exercisable (day / month / year) Share options outstanding as at 1 December Share options awarded during the year ended 30 November Share options vested during the year ended 30 November Share options cancelled / lapsed during the year ended 30 November Share options exercised during the year ended 30 November Share options outstanding as at 30 November Exercise price (HK$) 2013 2014 2014 2014 (8) 2014 2014 (HK$) Weighted average closing price of shares immediately before the dates on which share options were exercised Executive Director Mr. Mark Edward Tucker 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 – – – – 5/3/2014 5/3/2017 - 4/3/2024 (6) – 2,169,274 Key Management Personnel (excluding Executive Director) 1/6/2011 1/6/2011 1/4/2014 - 31/5/2021 (2) 3,380,346 1/4/2014 - 31/5/2021 (3) 4,919,047 15/3/2012 15/3/2015 - 14/3/2022 (4) 2,923,765 11/3/2013 11/3/2016 - 10/3/2023 (5) 2,954,666 – – – – 5/3/2014 5/3/2017 - 4/3/2024 (6) 14/4/2014 14/4/2017 - 13/4/2024 (7) – – 2,657,795 332,282 2,149,724 806,146 – – – 3,380,346 1,639,679 – – – – – – – – – – – – – – – – 27.35 2,149,724 – 27.35 2,418,439 – 28.40 2,152,263 – 34.35 2,183,144 – 37.56 2,169,274 – 27.35 3,380,346 – 27.35 4,919,047 – 28.40 2,923,765 – 34.35 2,954,666 – 37.56 2,657,795 – 39.45 332,282 Other eligible employees 1/6/2011 1/4/2014 - 31/5/2021 (2) 1,744,437 1/6/2011 1/4/2014 - 31/5/2021 (3) 3,695,966 15/3/2012 15/3/2015 - 14/3/2022 (4) 1,987,840 11/3/2013 11/3/2016 - 10/3/2023 (5) 1,781,484 – – – – 1,624,407 (120,030) (725,558) 27.35 898,849 1,160,768 (213,640) (391,666) 27.35 3,090,660 13,114 (236,292) – 28.40 1,751,548 6,918 (176,461) – 34.35 1,605,023 5/3/2014 5/3/2017 - 4/3/2024 (6) – 1,519,094 – – – 37.56 1,519,094 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 40.13 40.05 n/a n/a n/a Notes: (1) The measurement date (i.e. the date used to determine the value of the awards for accounting purposes) 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 for awards made in 2014 were determined to be 5 March 2014 and 14 April 2014. 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 vested 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 vested 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) The closing price of the Company’s shares immediately before the date on which share options were awarded is HK$37.35. The vesting of share options is service-based only and has no further performance conditions. All share options vest on 5 March 2017. (7) The closing price of the Company’s shares immediately before the date on which share options were awarded is HK$39.65. The vesting of share options is service-based only and has no further performance conditions. All share options vest on 14 April 2017. (8) There were no cancelled share options during the year ended 30 November 2014. W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 097 CORPORATE GOVERNANCE REMUNERATION REPORT DIRECTORS AND KEY MANAGEMENT PERSONNEL EMOLUMENTS Executive Director The Group Chief Executive and President, Mr. Mark Edward Tucker, is the sole Executive Director on the Company’s Board. He receives his remuneration exclusively for his role as Group Chief Executive and receives no separate fees for his role as a Board Director or for acting as a director of any subsidiary companies. The table below provides details of target remuneration for the Group Chief Executive during the years 2013 and 2014. Details of remuneration cost incurred by the Company during the period from 1 December 2013 to 30 November 2014 are included in note 41 to the ﬁnancial statements. US$ Executive Director Mr. Mark Edward Tucker Year 2014 Year 2013 Target Pay Opportunity Target short-term incentive Target long-term incentive Total Basic salary 1,414,800 1,347,300 2,122,200 2,021,000 6,012,900 5,389,400 9,549,900 8,757,700 Non-executive Directors The remuneration of the Non-executive Director and Independent Non-executive Directors of the Company during the year ended 30 November 2014 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 2013 to 30 November 2014 and included the fees for their services provided to the Board Committees. Dr. Qin Xiao 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 Mr. John Barrie Harrison resigned as Independent Non-executive Director of the Company Mr. George Yong-Boon Yeo (2) with effect from 30 May 2014 and his remuneration was paid Mr. Mohamed Azman Yahya (3) in respect of the period between 1 December 2013 and 29 May Professor Lawrence Juen-Yee Lau (4) 2014. Dr. Narongchai Akrasanee resigned as Independent Non- Dr. Qin Xiao (5) executive Director of the Company with effect from 1 September Dr. Narongchai Akrasanee (5) 2014 and his remuneration was paid in respect of the period between 1 December 2013 and 31 August 2014. Mr. Mohamed Total 2014 Directors’ remuneration 668,009 220,000 205,000 235,000 207,425 141,918 38,521 91,233 142,630 1,949,736 Azman Yahya and Professor Lawrence Juen-Yee Lau were appointed as Independent Non-executive Directors with effect from 24 February 2014 and 18 September 2014 respectively Notes: (1) US$24,126 which represents the remuneration for Mr. Tse in respect of his services as a Director of a subsidiary of the Company. (2) Mr. Yeo was appointed as a member of the Remuneration Committee with and their remuneration was paid in respect of the period from effect from 17 January 2014. their respective date of appointment to 30 November 2014 on (3) Mr. Yahya was appointed as Independent Non-executive Director of the a pro-rata basis. Mr. George Yong-Boon Yeo was appointed as a member of the Remuneration Committee with effect from 17 January 2014 and was entitled for an additional annual fee of US$20,000 for his services provided to the Remuneration Company and a member of the Remuneration Committee and Nomination Committee with effect from 24 February 2014. (4) Professor Lau was appointed as Independent Non-executive Director of the Company and a member of the Risk Committee and Nomination Committee with effect from 18 September 2014. Committee during the year on a pro-rata basis. Details of the (5) Dr. Qin and Dr. Narongchai resigned as Independent Non-executive Directors of changes have been set out on pages 86 to 87 of this Annual Report. the Company with effect from 30 May 2014 and 1 September 2014 respectively. All remuneration of the Non-executive Director and Independent Non-executive Directors was on a ﬂat annual fee basis, with no variable component linked to either corporate or individual performance and therefore with no ﬁnancial incentive to promote the assumption by the Group of inappropriate levels of risk. 098 AIA GROUP LIMITED 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 2014 is US$46,464,005. Details of remuneration during the year are included in note 41 to the ﬁnancial statements. EMPLOYEE SHARE PURCHASE PLAN Under the Employee Share Purchase Plan (ESPP), in year 2014 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 basic 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 matching shares. For employees that leave prior to the end of the vesting period, matching shares will generally be forfeited, subject to certain special circumstances, in which case pro rata vesting may be permitted. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 099 FINANCIAL STATEMENTS S T N E T N O C Independent Auditor’s Report ..............101 22. Derivative ﬁnancial instruments Consolidated Income Statement ......... 103 23. Fair value measurement Consolidated Statement of Comprehensive Income ....................... 104 Consolidated Statement of Financial Position ..................................105 Consolidated Statement of Changes in Equity .................................107 Consolidated Statement of Cash Flows .............................................109 Notes to the Consolidated Financial Statements and Signiﬁcant Accounting Policies ............................... 111 1. Corporate information 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. Offsetting of ﬁnancial assets and 2. Signiﬁcant accounting policies ﬁnancial liabilities 3. Critical accounting estimates 33. Provisions 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 21. Financial investments 34. Other liabilities 35. Share capital and reserves 36. Non-controlling interests 37. Group capital structure 38. Risk management 39. Employee beneﬁts 40. Share-based compensation 41. Remuneration of directors and key management personnel 42. Related party transactions 43. Commitments and contingencies 44. Subsidiaries 45. Events after the reporting period 46. Effect of adoption of new and revised accounting standards Financial Statements of the Company ...211 Statement of Financial Position of the Company Notes to the Financial Statements of the Company Supplementary Embedded Value Information ............................................214 FINANCIAL STATEMENTS Independent Auditor’s Report W E I V R E V O 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 213, which comprise the consolidated and company statements of financial position as at 30 November 2014, 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 80 of Schedule 11 to 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. W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 101 FINANCIAL STATEMENTS Independent Auditor’s Report 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 2014 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 26 February 2015 102 AIA GROUP LIMITED FINANCIAL STATEMENTS Consolidated Income Statement 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$) Basic Diluted Dividends to shareholders of the Company attributable to the year: US$m Interim dividend declared and paid of 16.00 Hong Kong cents per share (2013: 13.93 Hong Kong cents per share) Final dividend proposed after the reporting date of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share) W E I V R E V O Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) Notes W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A 9 9 10 11 12 12 Notes 13 13 18,225 (1,173) 17,052 8,204 177 25,433 17,828 (1,024) 16,804 2,139 1,636 103 420 21,102 4,331 14 4,345 (125) 4,220 (877) 125 (752) 3,468 3,450 18 0.29 0.29 16,666 (959) 15,707 6,030 155 21,892 15,299 (816) 14,483 1,934 1,537 71 340 18,365 3,527 14 3,541 (47) 3,494 (692) 47 (645) 2,849 2,824 25 0.24 0.24 Year ended 30 November 2014 Year ended 30 November 2013 247 525 772 215 442 657 ANNUAL REPORT 2014 103 FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income US$m Net profit Other comprehensive income/(expense) Items that may be reclassified subsequently to profit or loss: Fair value gains/(losses) on available for sale financial assets (net of tax of: 2014: US$(694)m; 2013: US$555m) Fair value gains on available for sale financial assets transferred to income on disposal (net of tax of: 2014: US$3m; 2013: US$2m) Foreign currency translation adjustments Cash flow hedges Share of other comprehensive income/(expense) from associates and joint venture Subtotal Items that will not be reclassified subsequently to profit or loss: Effect of remeasurement of net liability of defined benefit schemes (net of tax of: 2014: US$(1)m; 2013: US$(3)m) Subtotal Total other comprehensive income/(expense) Total comprehensive income/(expense) Total comprehensive income/(expense) attributable to: Shareholders of AIA Group Limited Non-controlling interests Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 3,468 2,849 3,813 (3,671) (29) (433) 4 22 (23) (505) – (23) 3,377 (4,222) (10) (10) 3,367 6,835 6,821 14 29 29 (4,193) (1,344) (1,367) 23 104 AIA GROUP LIMITED FINANCIAL STATEMENTS Consolidated Statement of Financial Position US$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 33 11 34 W E I V R E V O As at 30 November 2014 As at 30 November 2013 (As adjusted) W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A 2,152 131 541 1,384 1,657 16,593 1,321 93 480 1,128 1,379 15,738 7,654 7,484 77,744 64,763 24,319 28,827 265 22,560 26,102 445 138,809 121,354 10 54 3,753 1,835 6 44 3,543 2,316 166,919 147,402 113,097 103,436 7,937 2,934 3,753 211 213 3,079 198 4,542 8,698 1,950 1,889 89 187 2,030 242 4,054 135,964 122,575 ANNUAL REPORT 2014 105 FINANCIAL STATEMENTS Consolidated Statement of Financial Position US$m Equity Share capital Share premium Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Others Amounts reflected in other comprehensive income Total equity attributable to: Shareholders of AIA Group Limited Non-controlling interests Total equity Total liabilities and equity As at 30 November 2014 As at 30 November 2013 (As adjusted) Notes 35 35 35 35 35 35 36 13,962 – (286) 12,044 1,914 (274) (11,994) (11,995) 22,831 6,076 227 (10) 6,293 30,806 149 30,955 166,919 20,070 2,270 657 (4) 2,923 24,682 145 24,827 147,402 Approved and authorised for issue by the Board of Directors on 26 February 2015. Mark Edward Tucker Director Edmund Sze-Wing Tse Director 106 AIA GROUP LIMITED FINANCIAL STATEMENTS Consolidated Statement of Changes in Equity W E I V R E V O US$m Notes Share capital and share premium Employee share- based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Non- controlling interests Others Total equity Other comprehensive income Balance at 1 December 2013, as previously reported Effect of adoption of IAS 19 (as revised in 2011) Balance at 1 December 2013, as adjusted Net profit Fair value gains/(losses) on available for sale financial assets Fair value gains on available for sale financial assets transferred to income on disposal Foreign currency translation adjustments Cash flow hedges Share of other comprehensive income from associates and joint venture Effect of remeasurement of net liability of defined benefit schemes Total comprehensive income/ (expense) for the year Dividends 13 Shares issued under share option scheme 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 13,958 (274) (11,995) 20,070 2,270 657 – – – – – – 13,958 (274) (11,995) 20,070 2,270 657 3,450 – – (4) (4) – – – – 4 – (10) – – – (430) – – – 3,814 (29) – – 22 – 3,807 (430) (6) – – (1) – – – – – – – – – – – – – – – – – – 145 24,831 – (4) 145 18 24,827 3,468 (1) 3,813 – (3) – – – (29) (433) 4 22 (10) 14 (11) 6,835 (700) – 1 – – – – 4 – 83 (91) – (3) – – – – – – – – – 4 – – – – – – – – – – – – – – – – – (91) 79 – – – – – – – – – – – – 83 – (79) (3) – – – – – – 3,450 (689) – – – – – – Balance at 30 November 2014 13,962 (286) (11,994) 22,831 6,076 227 (10) 149 30,955 ANNUAL REPORT 2014 107 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Consolidated Statement of Changes in Equity US$m Notes Share capital and share premium Employee share- based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Non- controlling interests Others Total equity Other comprehensive income 13,958 (188) (12,060) 17,843 5,979 1,165 – 131 26,828 – – – (2) – – 13,958 (188) (12,060) 17,841 5,979 1,165 – – – – – – – – – – – – – – – – – – – – – – – – – (87) 1 – – – – – – – – – – (8) 75 – – (2) – – – 2,824 – – (3,676) – – – – (23) – (498) (13) (10) – – 2,824 (3,712) (508) (595) – – – – – – – – 3 – – – – – – – – – – – (33) (33) – – – – – 29 29 – – – – – – – – (35) 131 25 26,793 2,849 5 (3,671) – (7) – – 23 (9) 16 (16) – – – – (23) (505) (23) 29 (1,344) (604) 16 (21) 75 (87) 1 (2) 13,958 (274) (11,995) 20,070 2,270 657 (4) 145 24,827 Balance at 1 December 2012, as previously reported Effect of adoption of IAS 19 (as revised in 2011) Balance at 1 December 2012, as adjusted Net profit Fair value (losses)/gains on available for sale financial assets Fair value gains on available for sale financial assets transferred to income on disposal Foreign currency translation adjustments Share of other comprehensive expense from associates Effect of remeasurement of net liability of defined benefit schemes Total comprehensive income/ (expense) for the year Dividends 13 Acquisition of subsidiaries Acquisition of non-controlling interests Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts Others Balance at 30 November 2013, as adjusted 108 AIA GROUP LIMITED FINANCIAL STATEMENTS Consolidated Statement of Cash Flows US$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 operating activities Cash flows from investing activities Payments for intangible assets Contribution to a joint venture Loans 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 Shares issued under share option scheme Acquisition of non-controlling interests Net cash provided by 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 30 30 30 30 W E I V R E V O Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) Notes 4,345 3,541 (15,479) (10,190) W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A 10,430 1,892 (5,084) 4,678 535 (57) (516) 744 (911) – (16) – (456) – 35 – (1,348) 990 – (49) 347 (348) (700) (91) 4 – 153 (451) 2,140 (58) 1,631 8,342 121 (5,052) 4,330 472 (47) (451) 1,066 (65) (30) – 1 (176) (296) 82 (1,802) (2,286) 2,868 (1,725) (23) 324 (8) (604) (87) – (21) 724 (496) 2,709 (73) 2,140 ANNUAL REPORT 2014 109 FINANCIAL STATEMENTS Consolidated Statement of Cash Flows Cash and cash equivalents in the above consolidated statement of cash flows can be further analysed as follows: Cash and cash equivalents in the consolidated statement of financial position Bank overdrafts Cash and cash equivalents in the consolidated statement of cash flows Notes 26 Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 1,835 (204) 1,631 2,316 (176) 2,140 110 AIA GROUP LIMITED FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies W E I V R E V O 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. Hong Kong Companies Ordinance for this financial year and the comparative period continue to be those of the predecessor Companies Ordinance (Cap. 32), in accordance with transitional and saving arrangements for Part 9 of the Hong Kong Companies Ordinance (Cap. 622), ‘Accounts and Audit’, which are set out in sections 76 to 87 of Schedule 11 to that 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 26 February 2015. 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. In addition, the Group reclassified bank overdrafts of US$176m from “Borrowings” to “Other liabilities” in the consolidated statement of financial position as of 30 November 2013 and expenses of US$37m from “Operating expenses” to “Other expenses” in the consolidated income statement for the year ended 30 November 2013 to be consistent with current year presentation. In prior years, cash and cash equivalents in the consolidated statement of cash flows was the same as cash and cash equivalents in the consolidated statement of financial position. The Group has reassessed the composition of cash and cash equivalents in the consolidated statement of cash flows and included bank overdrafts within the definition of cash and cash equivalents in the consolidated statement of cash flows. (a) New and revised standards adopted by the Group • IFRS 10, Consolidated Financial Statements, 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. The adoption of IFRS 10 resulted in the consolidation of certain funds and deconsolidation of certain others which led to a net increase of US$809m in total assets and total liabilities with no impact on shareholders’ equity as at 30 November 2013. It also led to a net decrease of US$34m in investment return, a decrease of US$30m in other expenses and a decrease of US$4m in net insurance and investment contract benefits with no impact on the net profit for the year ended 30 November 2013. ANNUAL REPORT 2014 111 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (a) New and revised standards adopted by the Group (continued) • IAS 19, Employee Benefits (as revised in 2011), eliminates the corridor approach and calculates finance costs on a net funding basis. It also requires 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). The adoption of the amendments resulted in the recognition of additional remeasurement loss, net of tax, of US$4m in other comprehensive income as at 30 November 2013. It also resulted in a remeasurement gain, net of tax, of US$29m in other comprehensive income and the reduction of operating expenses, net of tax, of US$2m in profit or loss for the year ended 30 November 2013. Additional information on the quantitative effect of the adoption of the new and revised accounting standards on the Group’s consolidated financial statements is provided in note 46. (b) The following relevant new standards and amendments to standards are mandatory for the first time (except for the amendments to IAS 36 which have been early adopted) for the financial year beginning 1 December 2013 and have no material impact to the Group (some new standards do require additional disclosures): • IFRS 11, Joint Arrangements; • IFRS 12, Disclosure of Interests in Other Entities; • IFRS 13, Fair Value Measurement; • IAS 27, Separate Financial Statements (as revised in 2011); • IAS 28, Investments in Associates and Joint Ventures (as revised in 2011); • Amendments to IAS 1, Presentation of Financial Statements, Clarification of the requirements for comparative information; • Amendments to IAS 32, Financial Instruments: Presentation, Tax effect of distributions to holders of equity instruments; • Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets; • Amendments to IFRS 7, Financial Instruments: Disclosures on offsetting financial assets and financial liabilities; • Amendments to IFRS 10, IFRS 11 and IFRS 12: Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance; • Amendment to IFRS 13, Fair Value Measurement, Scope of portfolio exception; and • Amendment to IFRS 13, Fair Value Measurement, Short-term receivables and payables. 112 AIA GROUP LIMITED 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (c) The following relevant new standards, interpretation and amendments to standards have been issued but are not effective for the financial year ended 30 November 2014 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: • IFRIC 21, Levies (2015); • IFRS 15, Revenue from Contracts with Customers (2018); • Amendments to IAS 1, Disclosure Initiative (2017); • Amendments to IAS 16 and IAS 38, Clarification of Acceptable Methods of Depreciation and Amortisation (2017); • Amendments to IAS 19, Employee Benefits, Discount rate: regional market issue (2017); • Amendment to IAS 24, Related Parties Disclosures, Key management personnel (2015); • Amendments to IAS 27, Equity Method in Separate Financial Statements (2017); • Amendments to IAS 32, Financial Instruments: Presentation on offsetting financial assets and financial liabilities (2015); • Amendments to IAS 34, Interim Financial Reporting, Disclosure of information ‘elsewhere in the interim financial report’ (2017); • 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 5, Non-current Assets Held for Sale and Discontinued Operations, Changes in methods of disposal (2017); • Amendments to IFRS 7, Financial Instruments: Disclosure, Servicing contracts and applicability of the amendments to IFRS 7 to condensed interim financial statements (2017); • 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 and IAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (2017); • Amendments to IFRS 11, Acquisitions of Interests in Joint Operations (2017); and • The annual report requirements of Part 9 ‘Accounts and Audit’ of the new Hong Kong Companies Ordinance (Cap. 622) come into operation as from the company’s first financial year commencing on or after 3 March 2014 in accordance with section 358 of that Ordinance. ANNUAL REPORT 2014 113 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (d) The following relevant new standard and requirements have been issued but are not effective for the financial year ended 30 November 2014 and have not been early adopted: • IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. 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. In addition, a revised expected credit losses model will replace the incurred loss impairment model in IAS 39. 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. The standard is mandatorily effective for annual periods beginning on or after 1 January 2018. 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. 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. 114 AIA GROUP LIMITED 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Basis of consolidation Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, and the relevant activities are directed by means of contractual arrangements. The Group has determined that the investment funds and structured securities, such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities that the Group has interest are structured entities. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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 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. Investment funds Investment funds in which the Group has interests and power to direct their relevant activities that affect the return of the funds are consolidated in the financial statements. In conducting the assessment, the Group considers substantive contractual rights as well as de facto control. De facto control of an entity may arise from circumstances where the Group does not have more than 50% of the voting power but it has the practical ability to direct the relevant activities of the entity. If the Group has power to remove or control over the party having the ability to direct the relevant activities of the fund based on the facts and circumstances and that the Group has exposure to variable returns of the investment funds, they are consolidated. Variable returns include both rights to the profits or distributions as well as the obligation to absorb losses of the investees. 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 IFRS 10; 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. ANNUAL REPORT 2014 115 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Basis of consolidation (continued) 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. 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. 116 AIA GROUP LIMITED 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 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. ANNUAL REPORT 2014 117 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 Basis of accounting for: Insurance contract liabilities Investment contract liabilities 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 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 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) 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 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. 118 AIA GROUP LIMITED 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) 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. ANNUAL REPORT 2014 119 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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. 120 AIA GROUP LIMITED 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. ANNUAL REPORT 2014 121 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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. 122 AIA GROUP LIMITED 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. ANNUAL REPORT 2014 123 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 derivative transactions, securities lending transactions, and repo and reverse repo transactions, 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. 124 AIA GROUP LIMITED 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, which is considered to be the price within the bid-ask spread that is most representative of the fair value in the circumstances. 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. ANNUAL REPORT 2014 125 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 adopts hedge accounting to these transactions only in limited circumstances. 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. Where hedge accounting does not apply, these transactions are 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. 126 AIA GROUP LIMITED 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 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 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 investment property and property, plant and equipment 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”. ANNUAL REPORT 2014 127 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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. In the separate financial statements of the Company, 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. 128 AIA GROUP LIMITED 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. ANNUAL REPORT 2014 129 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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. Remeasurements arising from defined benefit plans comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). The Group recognises them immediately in other comprehensive income and all other expenses related to defined benefit plans in staff costs in the consolidated income statement. When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in consolidated income statement when the plan amendment or curtailment occurs. 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 The Group launched a number of share-based compensation plans, under which the Group receives services from the employees, directors, officers and agents 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. 130 AIA GROUP LIMITED 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 Ordinary shares are classified in equity when there is no obligation to transfer cash or other assets to the holders. 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. ANNUAL REPORT 2014 131 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 and bank overdrafts 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. 132 AIA GROUP LIMITED 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 investment 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 expected 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. ANNUAL REPORT 2014 133 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 38. 134 AIA GROUP LIMITED 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 40. ANNUAL REPORT 2014 135 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 US dollar exchange rates Year ended 30 November 2014 Year ended 30 November 2013 7.75 32.43 1.26 3.25 6.15 7.76 30.58 1.25 3.13 6.16 1,048.22 1,095.29 US dollar exchange rates As at 30 November 2014 As at 30 November 2013 7.75 32.82 1.30 3.38 6.15 7.75 32.10 1.25 3.22 6.09 1,107.65 1,058.51 Exchange rates are expressed in units of local currency per US$1. 5. CHANGES IN GROUP COMPOSITION This note provides details of the acquisitions of subsidiaries that the Group has made during the year ended 30 November 2014. Acquisition In March 2014, the Group acquired a further 10 per cent of the equity interest in AIA PUBLIC Takaful Bhd. 136 AIA GROUP LIMITED 6. OPERATING PROFIT AFTER TAX Operating profit after tax may be reconciled to net profit as follows: US$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 of 2014: US$(111)m; 2013: US$(89)m) Other non-operating investment experience and other items (net of tax of 2014: US$(62)m; 2013: US$11m) Net profit Operating profit after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests Year ended 30 November 2014 Year ended 30 November 2013 2,925 2,516 Note 8 508 35 3,468 2,910 15 3,450 18 424 (91) 2,849 2,506 10 2,824 25 7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUM For management decision-making and internal performance management purposes, the Group measures business volumes during the year using a performance measure referred to as total weighted premium income (TWPI), while the Group measures new business activity using a performance measure referred to as annualised new premium (ANP). TWPI consists of 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums, before reinsurance ceded, and includes deposits and contributions for contracts that are accounted for as deposits in accordance with the Group’s accounting policies. Management considers that TWPI provides an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not intended to be indicative of premium and fee income recorded in the consolidated income statement. ANP is a key internal measure of new business activities, which consists of 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. ANP excludes new business of pension business, personal lines and motor insurance. TWPI US$m TWPI by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Year ended 30 November 2014 Year ended 30 November 2013 4,330 3,334 2,339 2,084 1,786 2,205 3,133 3,770 3,364 2,150 2,036 1,599 2,049 2,840 19,211 17,808 ANNUAL REPORT 2014 137 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUM (continued) TWPI US$m First year premiums by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Single premiums by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total Renewal premiums by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total ANP US$m ANP by geography Hong Kong Thailand Singapore Malaysia China Korea Other Markets Total 138 AIA GROUP LIMITED Year ended 30 November 2014 Year ended 30 November 2013 772 498 300 259 297 286 675 659 501 257 241 233 256 668 3,087 2,815 1,585 209 1,684 202 27 309 481 897 285 1,079 193 29 201 641 4,497 3,325 3,400 2,816 1,870 1,804 1,486 1,888 2,410 3,021 2,834 1,785 1,776 1,363 1,773 2,108 15,674 14,660 Year ended 30 November 2014 Year ended 30 November 2013 952 572 489 320 311 380 676 781 565 400 319 249 338 689 3,700 3,341 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 insurance, accident and health insurance and savings plans 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, Indonesia, New Zealand, the Philippines, Sri Lanka, Taiwan, Vietnam 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 others, 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 2014 139 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 8. SEGMENT INFORMATION (continued) US$m Year ended 30 November 2014 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) Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 952 572 489 320 311 380 676 4,330 3,334 2,339 2,084 1,786 2,205 3,133 – 3,700 – 19,211 4,138 1,280 5,418 3,391 2,685 1,888 1,668 1,602 1,855 2 17,229 933 838 552 536 426 555 232 5,352 4,324 3,523 2,440 2,204 2,028 2,410 234 22,581 3,635 2,817 2,579 1,764 1,486 1,403 1,298 (2) 14,980 473 223 575 174 265 158 141 180 144 210 240 155 301 373 – 163 2,139 1,636 99 44 20 22 27 13 37 74 336 Total expenses 4,430 3,610 3,022 2,107 1,867 1,811 2,009 235 19,091 – 988 (79) 909 – 714 (170) 544 – 501 (72) 429 1 334 (53) 281 – 337 (54) 283 – 217 (52) 165 17 418 (94) 324 (4) (5) (5) 14 3,504 (579) (10) 2,925 905 4 544 – 429 – 280 1 283 – 165 – 314 10 5.2% 5.2% 6.8% 8.6% 11.8% 7.0% 11.9% 22.8% 21.4% 21.4% 16.0% 18.9% 9.8% 13.3% (10) 2,910 – – – – 15 8.5% 18.2% 12.6% Operating return on allocated equity 21.6% 13.1% 21.9% 10.8% 17.1% 9.0% 12.1% Operating profit/(loss) before tax includes: Finance costs Depreciation and amortisation 17 12 7 12 2 13 5 17 18 10 – 8 2 30 52 16 103 118 Notes: (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. 140 AIA GROUP LIMITED Share of profit/(loss) from associates and joint venture Operating profit/(loss) before tax Tax on operating profit/(loss) 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 8. SEGMENT INFORMATION (continued) Allocated equity may be analysed as follows: US$m 30 November 2014 Assets before investments in associates and joint venture Investments in associates and joint venture Total assets Total liabilities Total equity Allocated equity Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 41,687 25,920 30,030 16,460 15,661 13,768 16,411 6,851 166,788 – – 1 7 – – 123 – 131 41,687 25,920 30,031 16,467 15,661 13,768 16,534 6,851 166,919 34,477 20,567 27,311 13,821 13,397 11,342 12,494 2,555 135,964 7,210 4,497 5,353 4,243 2,720 2,120 2,646 2,679 2,264 1,965 2,426 1,902 4,040 2,851 4,296 30,955 4,256 24,513 Net capital (out)/in flows (752) (641) (267) (112) 100 (24) (22) 1,022 (696) 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 2014 Total revenue 22,581 2,634 218 Of which: Net premiums, fee income and other operating revenue 17,229 – Investment return 5,352 2,634 Total expenses 19,091 – – – – – – – – – – – – – 25,433 Total revenue Of which: Net premiums, fee income and other operating revenue 17,229 8,204 Investment return – – 103 (19) 1,281 604 42 21,102 Total expenses – 218 – – – – – – – – – – – – 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 investment funds Share of profit from associates and joint venture Operating profit before tax 14,980 – 336 – 14 (71) 1,281 604 10 16,804 – – 55 103 (3) – – – – – – – – – – – – 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 – – 55 436 32 32 investment funds Share of profit from associates and joint venture – 14 3,504 2,634 218 (103) 19 (1,281) (604) (42) 4,345 Profit before tax Other non-operating items in 2014 consist of restructuring and other non-operating costs of US$55m (see note 10). ANNUAL REPORT 2014 141 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 8. SEGMENT INFORMATION (continued) US$m Year ended 30 November 2013 – As adjusted 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) Hong Kong (5) Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 781 565 400 319 249 338 689 3,770 3,364 2,150 2,036 1,599 2,049 2,840 – 3,341 – 17,808 3,344 1,121 4,465 3,498 2,369 1,899 1,498 1,504 1,740 10 15,862 943 791 525 437 389 564 188 4,958 4,441 3,160 2,424 1,935 1,893 2,304 198 20,820 2,959 2,959 2,345 1,768 1,342 1,345 1,286 (2) 14,002 381 191 559 185 191 153 144 172 145 194 206 138 308 361 – 143 1,934 1,537 92 45 17 19 19 6 35 46 279 Total expenses 3,623 3,748 2,706 2,103 1,700 1,695 1,990 187 17,752 – 842 (65) 777 – 693 (165) 528 – 454 (58) 396 1 322 (72) 250 – 235 (30) 205 – 198 (48) 150 19 333 (88) 245 (6) 5 (40) (35) 14 3,082 (566) 2,516 773 4 528 – 396 – 250 – 205 – 150 – 239 6 5.1% 5.5% 7.1% 8.4% 12.1% 6.7% 12.7% 22.3% 20.6% 21.1% 15.8% 14.7% 9.7% 11.7% (35) 2,506 – – – – 10 8.6% 17.3% 12.1% Operating return on allocated equity 20.1% 12.9% 22.9% 16.1% 17.4% 8.9% 11.4% Operating profit before tax includes: Finance costs Depreciation and amortisation 16 10 10 12 2 13 2 16 12 9 – 6 3 26 26 15 71 107 Notes: (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) Due to the retrospective application of certain new and revised accounting standards, the Group’s operating expenses have been reduced by US$3m, tax on operating profit before tax has been increased by US$1m and operating profit after tax has been increased by US$2m for the year ended 30 November 2013. Please refer to note 2.1(a) and note 46 for further information of these new and revised accounting standards. (5) US$37m expenses of the Hong Kong segment have been reclassified from operating expenses to investment management expenses for the year ended 30 November 2013 to be consistent with current year presentation. 142 AIA GROUP LIMITED Share of profit/(loss) from associates and joint venture Operating profit before tax(4) Tax on operating profit before tax(4) Operating profit/(loss) after tax(4) Operating profit/(loss) after tax attributable to: Shareholders of AIA Group Limited(4) Non-controlling interests Key operating ratios: Expense ratio Operating margin 8. SEGMENT INFORMATION (continued) Allocated equity may be analysed as follows: W E I V R E V O US$m As at 30 November 2013 – As adjusted Assets before investments in associates and joint venture Investments in associates and joint venture Total assets(6) Total liabilities(6) Total equity(6) Allocated equity Hong Kong Thailand Singapore Malaysia China Korea Other Markets Group Corporate Centre Total 35,495 24,026 27,547 15,774 11,728 12,631 14,360 5,748 147,309 – – 1 7 – – 81 4 93 35,495 24,026 27,548 15,781 11,728 12,631 14,441 5,752 147,402 30,517 19,433 25,314 13,272 10,601 10,675 10,941 1,822 122,575 4,978 3,892 4,593 4,036 2,234 1,792 2,509 2,494 1,127 1,347 101 1,956 1,753 3,500 2,336 3,930 24,827 4,109 21,759 (27) 183 (748) (616) Net capital (out)/in flows (839) (700) (222) 1,636 Notes: (6) Due to the retrospective application of certain new and revised accounting standards, the Group’s total assets have been increased by US$817m, total liabilities have been increased by US$821m and total equity has been reduced by US$4m for the year ended 30 November 2013. Please refer to note 2.1(a) and note 46 for further information of these new and revised accounting standards. Segment information may be reconciled to the consolidated income statement as shown below: Related changes in insurance and investment contract benefits Investment income related to unit-linked contracts Investment management expenses related to unit-linked contracts Other non- operating items Unit-linked contracts Participating funds Third-party interests in consolidated investment funds Consolidated income statement US$m Segment information Investment experience Year ended 30 November 2013 – As adjusted Total revenue 20,820 870 202 – Of which: Net premiums, fee income and other operating revenue Investment return Total expenses 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 investment funds Share of profit from associates and joint venture Operating profit before tax 15,862 4,958 17,752 – 870 – – 202 – 14,002 – 279 – 14 – – – – – – – – – – – – 89 – – 89 – – – – – – – – – – – – 21,892 Total revenue Of which: Net premiums, fee income and other operating revenue 15,862 6,030 Investment return – – (16) 861 (306) (15) 18,365 Total expenses (70) 861 (306) (4) 14,483 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 – – 54 368 (11) (11) investment funds – 14 Share of profit from associates and joint venture 54 – – – – – – – – – – – 3,082 870 202 (89) 16 (861) 306 15 3,541 Profit before tax Other non-operating items in 2013 consist of restructuring and other non-operating costs of US$54m (see note 10). ANNUAL REPORT 2014 143 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 9. REVENUE Investment return US$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 gains/(losses) 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 Other net realised (losses)/gains Investment experience Investment return Investment income US$m Income from listed investments Income from unlisted investments Total Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 4,901 546 123 5,570 32 32 653 1,996 – (206) 2,443 188 (29) 2,634 8,204 4,539 506 115 5,160 25 25 (903) 1,589 1 (81) 606 167 72 870 6,030 Year ended 30 November 2014 Year ended 30 November 2013 3,542 2,028 5,570 3,248 1,912 5,160 Other net realised (losses)/gains include gains on disposal of properties of US$5m (2013: US$114m). Foreign currency movements resulted in the following gains recognised in the consolidated income statement (other than gains and losses arising on items measured at fair value through profit or loss): US$m Foreign exchange gains Other operating revenue The balance of other operating revenue largely consists of asset management fees. Year ended 30 November 2014 Year ended 30 November 2013 76 94 144 AIA GROUP LIMITED 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 2014 Year ended 30 November 2013 (As adjusted) 9,711 7,773 344 17,828 (1,024) 16,804 3,747 (1,608) 2,139 1,088 75 29 111 333 1,636 333 55 32 420 103 9,067 5,931 301 15,299 (816) 14,483 3,357 (1,423) 1,934 1,015 70 27 103 322 1,537 297 54 (11) 340 71 21,102 18,365 Other operating expenses include auditors’ remuneration of US$15m (2013: US$13m). Note: (1) Restructuring costs represent costs related to restructuring programmes and are primarily comprised of redundancy and contract termination costs. Other non-operating costs primarily consist of acquisition-related and integration expenses. Investment management expenses and others may be analysed as: US$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 2014 Year ended 30 November 2013 (As adjusted) 312 21 333 281 16 297 Year ended 30 November 2014 Year ended 30 November 2013 34 69 103 30 41 71 Finance costs include interest expense of US$35m (2013: US$29m) on bank loans, overdrafts and other loans wholly repayable within five years and US$34m (2013: US$12m) on bank loans, overdrafts and other loans not wholly repayable within five years. ANNUAL REPORT 2014 145 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 10. EXPENSES (continued) Employee benefit expenses consist of: US$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 2014 Year ended 30 November 2013 (As adjusted) 875 80 60 14 59 813 75 54 12 61 1,088 1,015 Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 73 391 413 877 67 311 314 692 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$125m (2013: US$47m). The provision for Hong Kong Profits Tax is calculated at 16.5 per cent. Taxation for overseas subsidiaries and branches is charged at the appropriate current rates of taxation ruling in the relevant jurisdictions of which the most significant jurisdictions are outlined below. Hong Kong Thailand Singapore Malaysia China Korea Others Year ended 30 November 2014 Year ended 30 November 2013 16.5% 16.5% 20% 17% 25% 25% 20% 17% 25% 25% 24.2% 24.2% 12% – 30% 12% – 30% The table above reflects the principal rate of corporate income taxes, as at the end of each year. The rate changes reflect changes to the enacted or substantively enacted corporate tax rates throughout the year in each jurisdiction. For Thailand, the corporate income tax rate is assumed to be 20 per cent in assessment years 2014 and 2015 and 30 per cent thereafter. The corporate income tax rate for Malaysia will reduce to 24 per cent from assessment year 2016 onward. The corporate income tax rate for Vietnam is 22 per cent for the assessment years 2014 and 2015 and 20 per cent from assessment year 2016 onward. 146 AIA GROUP LIMITED 11. INCOME TAX (continued) US$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 2014 Year ended 30 November 2013 (As adjusted) 4,345 821 – (91) (9) – (43) (143) 54 – 39 – 27 79 – 199 877 3,541 672 (25) (76) – (10) – (111) – 37 27 1 10 7 49 131 692 (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 2014 147 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 11. INCOME TAX (continued) The movement in net deferred tax liabilities in the period may be analysed as set out below: Net deferred tax asset/ (liability) at 1 December Acquisition of subsidiaries (2) Credited/ (charged) to the income statement Fair value reserve (3) Foreign exchange Others Net deferred tax asset/ (liability) at year end Credited/(charged) to other comprehensive income (593) (2,296) 1,568 (139) 135 15 (579) (135) (2,024) (1,210) (2,099) 1,678 (115) 129 25 (517) (105) (2,214) – – – – – – – – – (21) (3) – – 3 – (97) – (118) (286) (184) 50 – 6 3 (56) 54 (413) 57 (277) (37) (37) 9 (10) 10 (29) (314) (691) – – – – – – – (691) 557 – – – – – – – 557 18 63 (44) – (3) – 25 1 60 24 83 (73) 13 (3) – 25 (1) 68 – – – – (1) – – – (1,552) (2,417) 1,574 (139) 137 18 (610) (80) (1) (3,069) – – – – (3) – – – (593) (2,296) 1,568 (139) 135 15 (579) (135) (3) (2,024) US$m 30 November 2014 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 2013 – As adjusted 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) The amount of US$118m represents a one-time adjustment in respect of the acquisition of ING Malaysia and ANI. (3) Of the fair value reserve deferred tax (credit)/charge of US$691m (2013: US$(557)m) for 2014, US$694m (2013: US$(555)m) relates to fair value gains and losses on available for sale financial assets and US$(3)m (2013: US$(2)m) relates to fair value gains and losses on available for sale financial assets transferred to income on disposal. 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 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 2014 Year ended 30 November 2013 53 30 83 105 21 126 The Group has not provided deferred tax liabilities of US$97m (2013: US$47m) in respect of unremitted earnings of operations in three jurisdictions from which a withholding tax charge would be incurred upon distribution as the Group does not consider it probable that this portion of accumulated earnings will be remitted in the foreseeable future. The Group has unused income tax losses carried forward in Hong Kong, Macau, Thailand, Malaysia, China, Korea, the Philippines, Taiwan, New Zealand and Sri Lanka. The tax losses of Hong Kong, Malaysia, New Zealand and Sri Lanka can be carried forward indefinitely. The tax losses of remaining branches and subsidiaries are due to expire within the periods ending 2017 (Macau and the Philippines), 2018 (China), 2019 (Thailand) and 2024 (Korea and Taiwan). 12. EARNINGS PER SHARE Basic Basic earnings per share is calculated by dividing the net profit attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the year. The shares held by employee share-based trusts are not considered to be outstanding from the date of the purchase for purposes of computing basic and diluted earnings per share. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Basic earnings per share (US cents per share) Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 3,450 11,968 28.83 2,824 11,974 23.58 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 2014 and 2013, 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 40. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Adjustment for share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted under share-based compensation plans Weighted average number of ordinary shares for diluted earnings per share (million) Diluted earnings per share (US cents per share) Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 3,450 11,968 41 12,009 28.73 2,824 11,974 32 12,006 23.52 At 30 November 2014, 13,414,360 share options (2013: 6,919,294) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. ANNUAL REPORT 2014 149 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 12. EARNINGS PER SHARE (continued) Operating profit after tax per share Operating profit after tax (see note 6) per share is calculated by dividing the operating profit after tax attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the year. As of 30 November 2014 and 2013, the Group has potentially dilutive instruments which are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units granted to eligible employees, directors, officers and agents under various share-based compensation plans as described in note 40. Basic (US cents per share) Diluted (US cents per share) 13. DIVIDENDS Dividends to shareholders of the Company attributable to the year: US$m Interim dividend declared and paid of 16.00 Hong Kong cents per share (2013: 13.93 Hong Kong cents per share) Final dividend proposed after the reporting date of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share)(1) Year ended 30 November 2014 Year ended 30 November 2013 (As adjusted) 24.31 24.23 20.93 20.87 Year ended 30 November 2014 Year ended 30 November 2013 247 525 772 215 442 657 Note: (1) Based upon shares outstanding at 30 November 2014 and 2013 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 26 February 2015 subject to shareholders’ approval at the AGM to be held on 8 May 2015. 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$m Year ended 30 November 2014 Year ended 30 November 2013 Final dividend in respect of the previous financial year, approved and paid during the year of 28.62 Hong Kong cents per share (2013: 24.67 Hong Kong cents per share) 442 380 150 AIA GROUP LIMITED 14. INTANGIBLE ASSETS US$m Cost At 1 December 2012 Additions Acquisition of subsidiaries Disposals Foreign exchange movements At 30 November 2013 Additions Disposals Foreign exchange movements At 30 November 2014 Accumulated amortisation and impairment At 1 December 2012 Amortisation charge for the year Disposals Foreign exchange movements At 30 November 2013 Amortisation charge for the year Disposals Foreign exchange movements At 30 November 2014 Net book value At 30 November 2013 At 30 November 2014 Goodwill Computer software Distribution and other rights 126 – 1,009 – – 1,135 – – – 1,135 (6) – – – (6) – – – (6) 1,129 1,129 263 33 3 (1) (9) 289 48 (1) (11) 325 (163) (26) 1 7 (181) (28) 1 7 (201) 108 124 66 2 48 (5) (7) 104 831 – (2) 933 (14) (11) 5 – (20) (15) – 1 (34) 84 899 Total 455 35 1,060 (6) (16) 1,528 879 (1) (13) 2,393 (183) (37) 6 7 (207) (43) 1 8 (241) 1,321 2,152 Of the above, US$2,109m (2013: US$1,284m) is expected to be recovered more than 12 months after the end of the reporting period. During the year ended 30 November 2014, the Group entered into an agreement with Citibank to enter into an exclusive, long-term bancassurance partnership for a 15-year period. The agreement provided for a payment of US$800m to Citibank upon signing, which was capitalised as an intangible asset. Impairment tests for goodwill Goodwill arises primarily in respect of the Group’s insurance business in Malaysia. Goodwill is tested for impairment by comparing the carrying amount of the cash-generating unit, including goodwill, to the recoverable amount of that cash- generating unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the goodwill allocated to that unit shall be regarded as not impaired. The recoverable amount is the value in use of the cash-generating unit unless otherwise stated. The value in use is determined by calculating the present value of expected future cash flows plus a multiple of the present value of the new business generated. Value in use is calculated as an actuarially determined appraisal value, based on the embedded value of the business and the value from future new business. The key assumptions used in the embedded value calculations include investment returns, mortality, morbidity, persistency, expenses, and inflation. The value from future new business is calculated based on a combination of indicators which include, among others, a multiple of the projected one-year value of new business (VONB), taking into account recent production mix, business strategy and market trends. The Group may apply alternative method to estimate the value of future new business if the described method is not appropriate under the circumstances. ANNUAL REPORT 2014 151 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 15. INVESTMENTS IN ASSOCIATES AND JOINT VENTURE US$m Group Investments in associates Investment in joint venture Total Year ended 30 November 2014 Year ended 30 November 2013 131 – 131 89 4 93 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 Group’s interest in its principal associates and joint venture is as follows: Place of incorporation Principal activity Type of shares held Group’s interest % As at 30 November 2014 As at 30 November 2013 Tata AIA Life Insurance Company Limited India Insurance – Ordinary 26% 26% AIA Vitality Company Limited(1) Hong Kong Development of wellness programmes – Ordinary – Preference 50% 100% 50% 100% Note: (1) The economic interest is 35%. All associates and joint venture are unlisted. Aggregated financial information of associates The investment in the associate is measured using the equity method. The following table analyses, in aggregate, the carrying amount and share of profit and other comprehensive income of these associates. US$m Carrying amount in the statement of financial position Profit from continuing operations Other comprehensive income/(expense) Total comprehensive income/(expense) Year ended 30 November 2014 Year ended 30 November 2013 131 18 22 40 89 20 (23) (3) 152 AIA GROUP LIMITED 16. PROPERTY, PLANT AND EQUIPMENT US$m Cost At 1 December 2012 Additions Acquisition of subsidiaries Disposals Net transfers from investment property Foreign exchange movements At 30 November 2013 Additions Disposals Net transfers from investment property Foreign exchange movements At 30 November 2014 Accumulated depreciation At 1 December 2012 Depreciation charge for the year Disposals Net transfers from investment property Foreign exchange movements At 30 November 2013 Depreciation charge for the year Disposals Net transfers to investment property Foreign exchange movements At 30 November 2014 Net book value At 30 November 2013 At 30 November 2014 Property held for use Computer hardware Fixtures and fittings and others 457 13 33 (28) 35 (17) 493 24 (2) 61 (19) 557 (195) (15) 15 (2) 7 (190) (15) 1 1 7 207 29 4 (17) – (7) 216 26 (13) – (5) 224 (164) (23) 10 – 6 (171) (26) 11 – 5 325 59 1 (32) – (4) 349 43 (15) – (7) 370 (218) (32) 30 – 3 (217) (34) 13 – 5 Total 989 101 38 (77) 35 (28) 1,058 93 (30) 61 (31) 1,151 (577) (70) 55 (2) 16 (578) (75) 25 1 17 (196) (181) (233) (610) 303 361 45 43 132 137 480 541 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 2014 153 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 17. INVESTMENT PROPERTY US$m Cost At 1 December 2012 Additions Acquisition of subsidiaries Disposals Net transfers to property, plant and equipment Foreign exchange movements At 30 November 2013 Additions Disposals Net transfers to property, plant and equipment Foreign exchange movements At 30 November 2014 Accumulated depreciation At 1 December 2012 Charge for the year Disposals Net transfers to property, plant and equipment Foreign exchange movements At 30 November 2013 Charge for the year Disposals Net transfers from property, plant and equipment Foreign exchange movements At 30 November 2014 Net book value At 30 November 2013 At 30 November 2014 1,100 42 115 (3) (35) (18) 1,201 358 (2) (61) (19) 1,477 (65) (16) 2 2 4 (73) (21) 1 (1) 1 (93) 1,128 1,384 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$123m (2013: US$115m). Direct operating expenses (including repair and maintenance) on investment property that generates rental income amounted to US$29m (2013: US$25m). The Group owns investment property in the form of freehold land outside Hong Kong and leasehold land under finance lease. The Group does not hold freehold land in Hong Kong. An analysis of the carrying value of the Group’s interest in those land and land use right is set out in note 24. 154 AIA GROUP LIMITED 17. INVESTMENT PROPERTY (continued) The future minimum operating lease rental income under non-cancellable operating leases that the Group expects to receive in future periods may be analysed as follows: US$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 As at 30 November 2014 As at 30 November 2013 99 140 5 244 86 100 5 191 18. FAIR VALUE OF INVESTMENT PROPERTY AND PROPERTY HELD FOR USE US$m Carrying value(1) Investment property Property held for use (classified as property, plant and equipment) Leasehold land under operating lease (classified as prepayments in other assets) Total Fair value(1) Investment property (including land) Property held for use (including land) Total Note: As at 30 November 2014 As at 30 November 2013 1,384 361 442 2,187 3,639 1,492 5,131 1,128 303 453 1,884 3,180 1,388 4,568 (1) Carrying and fair values are presented before non-controlling interests and, for assets held in participating funds, before allocation to policyholders. 19. REINSURANCE ASSETS US$m Amounts recoverable from reinsurers Ceded insurance and investment contract liabilities Total As at 30 November 2014 As at 30 November 2013 240 1,417 1,657 141 1,238 1,379 ANNUAL REPORT 2014 155 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 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 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 2014 As at 30 November 2013 15,793 14,836 534 266 603 299 16,593 15,738 Year ended 30 November 2014 Year ended 30 November 2013 15,738 1,631 – (385) (23) (368) 14,161 1,432 322 (414) (9) 246 16,593 15,738 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 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 AAA AA+ to AA- A+ to A- BBB+ to BBB- BB+ and below Moody’s Aaa Aa1 to Aa3 A1 to A3 Baa1 to Baa3 Ba1 and below Internal ratings Reported as 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 2014 157 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 21. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Debt securities by type comprise the following: Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked US$m Rating FVTPL FVTPL AFS Subtotal FVTPL Consolidated investment funds (3) FVTPL Total A AA AA AAA BBB A BB BBB BB AA BBB A A BBB BBB 30 November 2014 Government bonds – issued in local currency Thailand China Korea Singapore Philippines Malaysia Indonesia Other(1) Subtotal Government bonds – foreign currency Philippines Indonesia Qatar Mexico Malaysia Korea Russia South Africa Other(1) Subtotal Government agency bonds(2) AAA AA A BBB Below investment grade Not rated Subtotal Notes: – 1,099 – 1,768 – 2,149 23 16 5,055 – 86 – 7 73 19 19 – – 204 1,321 612 803 253 23 – 3,012 – – – – – – – 2 2 9 16 – 15 – – 15 18 121 194 – – – – – – – 11,002 11,002 4,211 3,543 1,175 2,879 541 632 575 5,310 3,543 2,943 2,879 2,690 655 593 – 18 202 435 75 24 55 2 24,558 29,615 811 397 357 318 228 91 135 104 103 161 406 459 318 250 164 154 138 121 282 1,894 2,292 1,070 1,926 4,721 1,439 179 – 2,391 2,538 5,524 1,692 202 – 89 5 3 – 2 7 – – 12 118 116 83 18 6 6 6 9,335 12,347 235 – – – – – – – – – – – – – – – – – – – 39 61 50 – – 61 211 11,002 5,328 3,745 3,378 2,954 2,714 710 595 30,426 495 464 321 250 166 161 138 121 294 2,410 2,546 2,682 5,592 1,698 208 67 12,793 (1) Of the total government bonds listed as “Other” at 30 November 2014, 61 per cent are rated as investment grade and a further 21 per cent are rated BB- and above. The remaining are 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. (3) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. 158 AIA GROUP LIMITED 21. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder Participating funds Other policyholder and shareholder Consolidated investment funds (3) Unit-linked US$m FVTPL FVTPL AFS Subtotal FVTPL FVTPL Total W E I V R E V O 30 November 2014 Corporate bonds AAA AA A BBB Below investment grade Not rated Subtotal Structured securities(4) AAA AA A BBB Below investment grade Not rated Subtotal Total(5) Notes: 66 1,100 4,980 3,933 864 18 – 8 61 76 – 1 81 4,457 16,778 17,150 2,701 149 147 5,565 21,819 21,159 3,565 168 5 23 638 462 75 108 52 186 531 246 33 473 204 5,774 22,988 21,867 3,673 749 10,961 146 41,316 52,423 1,311 1,521 55,255 – 6 10 308 29 7 360 19,592 – 20 – 38 56 56 170 512 10 18 438 150 – 25 641 77,744 10 44 448 496 85 88 1,171 97,848 – – – 2 – 1 3 – – – 5 – – 5 10 44 448 503 85 89 1,179 2,478 1,737 102,063 (3) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (4) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (5) Debt securities of US$2,920m are restricted due to local regulatory requirements. ANNUAL REPORT 2014 159 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 21. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked US$m Rating FVTPL FVTPL AFS Subtotal FVTPL Consolidated investment funds (3) FVTPL A AA AA AAA BBB A BB BBB BB AA BBB A A BBB BBB 30 November 2013 – As adjusted Government bonds – issued in local currency Thailand China Korea Singapore Philippines Malaysia Indonesia Other(1) Subtotal Government bonds – foreign currency Philippines Indonesia Qatar Mexico Malaysia Korea Russia South Africa Other(1) Subtotal Government agency bonds(2) AAA AA A BBB Below investment grade Not rated Subtotal Notes: – 390 – 1,694 – 2,288 2 13 4,387 – 71 – 7 75 17 20 – – 190 1,112 486 574 275 17 – 2,464 – – – – – – – 5 5 16 8 – 12 – – 17 8 117 178 – – – – – – – 10,217 10,217 2,072 3,189 1,305 3,016 674 555 552 2,462 3,189 2,999 3,016 2,962 557 570 – 10 154 281 57 5 99 4 21,580 25,972 610 409 296 272 171 98 219 108 131 139 425 375 272 190 173 236 145 139 256 1,843 2,211 914 1,597 4,597 1,247 148 – 2,026 2,083 5,171 1,522 165 – 81 4 3 – 2 8 – – 13 111 120 57 22 10 2 2 8,503 10,967 213 – – – – – – – – – – – – – – – – – – – 43 – 5 – – 62 110 Total 10,217 2,472 3,343 3,280 3,073 2,967 656 574 26,582 506 379 275 190 175 244 145 139 269 2,322 2,189 2,140 5,198 1,532 167 64 11,290 (1) Of the total government bonds listed as “Other” at 30 November 2013, 68 per cent are rated as investment grade and a further 15 per cent are rated BB- and above. The remaining are 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. (3) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. 160 AIA GROUP LIMITED 21. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder Participating funds Other policyholder and shareholder Consolidated investment funds (3) Unit-linked US$m FVTPL FVTPL AFS Subtotal FVTPL FVTPL Total W E I V R E V O 30 November 2013 – As adjusted Corporate bonds AAA AA A BBB Below investment grade Not rated Subtotal Structured securities(4) AAA AA A BBB Below investment grade Not rated Subtotal Total(5) Notes: 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 47 142 407 189 2 644 275 3,762 20,149 17,745 2,756 963 10,672 279 32,039 42,990 1,229 1,431 45,650 – 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 – – – – 31 – 31 2,168 1,572 – 31 643 488 190 127 1,479 87,323 (3) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (4) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (5) Debt securities of US$2,067m are restricted due to local regulatory requirements. The Group’s debt securities classified at fair value through profit or loss can be analysed as follows: US$m Debt securities – FVTPL Designated at fair value through profit or loss Held for trading Total As at 30 November 2014 As at 30 November 2013 (As adjusted) 24,297 22 24,319 22,516 44 22,560 ANNUAL REPORT 2014 161 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 21. FINANCIAL INVESTMENTS (continued) Equity securities Equity securities by type comprise the following: Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked FVTPL FVTPL Subtotal FVTPL Consolidated investment funds (1) FVTPL 3,476 1,568 5,044 6,005 1,702 7,707 9,481 3,270 12,751 3,948 12,124 16,072 1 3 4 US$m 30 November 2014 Equity shares Interests in investment funds Total Policyholder and shareholder Participating funds Other policyholder and shareholder Unit-linked US$m FVTPL FVTPL Subtotal FVTPL Consolidated investment funds (1) FVTPL 30 November 2013 – As adjusted Equity shares Interests in investment funds Total Note: 3,032 1,537 4,569 5,026 1,289 6,315 8,058 2,826 10,884 3,325 11,890 15,215 1 2 3 (1) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. Debt and equity securities Total 13,430 15,397 28,827 Total 11,384 14,718 26,102 US$m Debt securities Listed Hong Kong Overseas Unlisted Total Equity securities Listed Hong Kong Overseas Unlisted Total 162 AIA GROUP LIMITED As at 30 November 2014 As at 30 November 2013 (As adjusted) 8,489 63,528 72,017 30,046 102,063 1,661 13,615 15,276 13,551 28,827 5,222 55,447 60,669 26,654 87,323 1,225 11,992 13,217 12,885 26,102 21. FINANCIAL INVESTMENTS (continued) Interests in structured entities The Group has determined that the investment funds and structured securities, such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities that the Group has interest are structured entities. The Group has consolidated certain investment funds for which the Group provides guarantee on capital or rate of return to the investors and deemed to have control based on an analysis of the guidance in IFRS 10. For these investment funds, the Group has the ability to reduce the guaranteed rates of return, subject to obtaining approvals of applicable regulators. The Group has an obligation to absorb losses in the event that the returns of the funds are insufficient to cover the capital or rate of return guarantee provided to the investors. The following table summarises the Group’s interest in unconsolidated structured entities as at 30 November 2014: US$m Available for sale debt securities Debt securities at fair value through profit or loss Equity securities at fair value through profit or loss Total Notes: Investment funds Structured securities (1) 577 (2) 360 (2) 15,397 16,334 641 538 – 1,179 (1) Structured securities include collateralised debt obligation, mortgage-backed securities and other asset-backed securities. (2) Balance represents the Group’s interests in loans to real estate investment trusts. The Group’s maximum exposure to loss arising from its interests in these unconsolidated structured entities is limited to the carrying amount of the assets. Dividend income and interest income are received during the reporting period from these interests in unconsolidated structured entities. In addition, the Group receives management fees and trustee fees in respect of providing trustee, management and administrative services to certain retirement scheme funds and investment funds. These funds are not held and the associated investment risks are not borne by the Group, the Group does not have exposure to loss in these funds. 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: As at 30 November 2014 As at 30 November 2013 2,433 2,384 645 14 808 (16) 3,884 2,201 1,569 7,654 650 15 718 (14) 3,753 2,127 1,604 7,484 (1) The promissory notes are issued by a government. 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$1,757m (2013: US$1,772m). 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 2014, the carrying value of such receivables is US$101m (2013: US$81m). ANNUAL REPORT 2014 163 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 22. DERIVATIVE FINANCIAL INSTRUMENTS The Group’s non-hedge derivative exposure was as follows: US$m 30 November 2014 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 Netting Total 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 Notional amount Assets Liabilities Fair value 622 6,142 177 20 6,961 157 144 (177) 7,085 665 5,278 182 19 6,144 320 140 5 (187) 6,422 4 246 – – 250 7 8 – (12) (198) – – (210) (1) – – 265 (211) 4 428 – 1 433 5 7 – – (3) (86) – – (89) – – – – 445 (89) The column “notional amount” in the above table represents the pay leg of derivative transactions. Of the total derivatives, US$7m (2013: 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’s derivative contracts are established to economic hedge financial exposures. The Group adopts hedge accounting in limited circumstances. 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. 164 AIA GROUP LIMITED 22. DERIVATIVE FINANCIAL INSTRUMENTS (continued) 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 2014, the Group had posted cash collateral of US$20m (2013: US$21m) and pledged debt securities with carrying value of US$96m (2013: US$31m) for liabilities and held cash collateral of US$122m (2013: US$230m), deposit collateral of US$25m (2013: US$6m) and debt securities collateral with carrying value of US$2m (2013: US$24m) for assets in respect of derivative transactions. The Group did not sell or repledge the collateral received. These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and repurchase agreements. ANNUAL REPORT 2014 165 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 23. FAIR VALUE MEASUREMENT Fair value of financial instruments The Group classifies all financial assets as either at fair value through profit or loss, or as available for sale, which are carried at fair value, or as loans and receivables, which are carried at amortised cost. Financial liabilities are classified as either at fair value through profit or loss or at amortised cost, except for investment contracts with DPF which are accounted for under IFRS 4. The following tables present the fair values of the Group’s financial assets and financial liabilities: US$m Notes 30 November 2014 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 Fair value Fair value through profit or loss Available for sale Cost/ amortised cost Total carrying value Total fair value – 24,319 28,827 265 – – – – – 7,654 77,744 – – – – – – – – – 240 1,632 1,345 1,835 7,654 102,063 28,827 265 240 1,632 1,345 1,835 7,675 102,063 28,827 265 240 1,632 1,345 1,835 53,411 77,744 12,706 143,861 143,882 Notes 28 30 31 22 34 Fair value through profit or loss 7,315 – – 211 1,221 8,747 Cost/ amortised cost Total carrying value Total fair value 622 2,934 3,753 – 3,321 10,630 7,937 2,934 3,753 211 4,542 7,937 3,005 3,753 211 4,542 19,377 19,448 166 AIA GROUP LIMITED 23. FAIR VALUE MEASUREMENT (continued) Fair value of financial instruments (continued) US$m Notes 30 November 2013 – As adjusted 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 Fair value Fair value through profit or loss Available for sale Cost/ amortised cost Total carrying value Total fair value – 22,560 26,102 445 – – – – – 7,484 64,763 – – – – – – – – – 141 1,473 1,368 2,316 7,484 87,323 26,102 445 141 1,473 1,368 2,316 7,517 87,323 26,102 445 141 1,473 1,368 2,316 49,107 64,763 12,782 126,652 126,685 Notes 28 30 31 22 34 Fair value through profit or loss 7,429 – – 89 1,197 8,715 Cost/ amortised cost Total carrying value 1,269 1,950 1,889 – 2,857 7,965 8,698 1,950 1,889 89 4,054 16,680 Total fair value 8,698 1,915 1,889 89 4,054 16,645 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 38 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. ANNUAL REPORT 2014 167 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 23. FAIR VALUE MEASUREMENT (continued) 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. 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 Group does not have assets or liabilities measured at fair value on a non-recurring basis during the year ended 30 November 2014. The following methods and assumptions were used by the Group to estimate the fair value of financial instruments. Determination of fair value for financial instruments 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 23. FAIR VALUE MEASUREMENT (continued) Determination of fair value for financial instruments (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. When the Group holds a group of derivative assets and derivative liabilities entered into with a particular counterparty, the Group takes into account the arrangements that mitigate credit risk exposure in the event of default (e.g. International Swap and Derivatives Association (ISDA) Master Agreements and Credit Support Annex (CSA) that require the exchange of collateral on the basis of each party’s net credit risk exposure). The Group measures the fair value of the group of financial assets and financial liabilities on the basis of its net exposure to the credit risk of that counterparty or the counterparty’s net exposure to our credit risk that reflects market participants’ expectations about the likelihood that such an arrangement would be legally enforceable in the event of default. 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 financial 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 2014 169 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 23. FAIR VALUE MEASUREMENT (continued) Determination of fair value for financial instruments (continued) Other liabilities The fair values of other unquoted financial 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 for fair value measurement on a recurring basis 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 23. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) A summary of assets and liabilities carried at fair value on a recurring basis according to fair value hierarchy is given below. W E I V R E V O US$m 30 November 2014 Recurring fair value measurements Financial assets Available for sale Debt securities At fair value through profit or loss Debt securities Participating funds Unit-linked and consolidated investment funds Other policyholder and shareholder Equity securities Participating funds Unit-linked and consolidated investment funds Other policyholder and shareholder Derivative financial instruments Foreign exchange contracts Interest rate contracts Other contracts Total assets on a recurring fair value measurement basis Total % Financial liabilities Investment contract liabilities Derivative financial instruments Foreign exchange contracts Interest rate contracts Other liabilities Total liabilities on a recurring fair value measurement basis Total % Fair value hierarchy Level 1 Level 2 Level 3 Total – – – – 4,704 15,177 7,019 – – 7 76,993 751 77,744 19,323 3,888 281 111 899 343 250 7 1 269 327 231 229 – 345 – – – 19,592 4,215 512 5,044 16,076 7,707 250 7 8 26,907 20.5 102,096 77.9 2,152 1.6 131,155 100.0 – – – – – – – 7,315 7,315 210 1 1,221 1,432 16.4 – – – 7,315 83.6 210 1 1,221 8,747 100.0 ANNUAL REPORT 2014 171 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 23. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) US$m Level 1 Level 2 Level 3 Total Fair value hierarchy 30 November 2013 – As adjusted Recurring fair value measurements Financial assets Available for sale Debt securities At fair value through profit or loss Debt securities Participating funds Unit-linked and consolidated investment funds Other policyholder and shareholder Equity securities Participating funds Unit-linked and consolidated investment funds Other policyholder and shareholder Derivative financial instruments Foreign exchange contracts Interest rate contracts Other contracts Total assets on a recurring fair value measurement basis Total % Financial liabilities Investment contract liabilities Derivative financial instruments Foreign exchange contracts Other liabilities Total liabilities on a recurring fair value measurement basis Total % – – – – 4,359 13,943 5,965 – – 1 63,983 780 64,763 17,826 3,344 399 11 1,275 86 432 5 5 365 396 230 199 – 264 1 – 1 18,191 3,740 629 4,569 15,218 6,315 433 5 7 24,268 21.3 87,366 76.7 2,236 2.0 113,870 100.0 – – – – – – 7,429 7,429 89 1,197 1,286 14.8 – – 7,429 85.2 89 1,197 8,715 100.0 172 AIA GROUP LIMITED 23. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) The Group’s policy is to recognise transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. During the year ended 30 November 2014, the Group transferred US$55m of assets measured at fair value from Level 1 to Level 2 during the year. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. The Company transferred $483m of assets from Level 2 to Level 1 during the year ended 30 November 2014. The Group’s Level 2 financial instruments include debt securities, equity securities and derivative instruments. The fair values of Level 2 financial instruments are estimated using values obtained from private pricing services and brokers corroborated with internal review as necessary. When the quotes from third-party pricing services and brokers are not available, internal valuation techniques and inputs will be used to derive the fair value for the financial instruments. The tables below set out a summary of changes in the Group’s Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended 30 November 2014 and 2013. The tables reflect gains and losses, including gains and losses on financial assets and liabilities categorised as Level 3 as at 30 November 2014 and 2013. Level 3 financial assets and liabilities US$m At 1 December 2013 – As adjusted Net movement on investment contract liabilities Total gains/(losses) Reported under investment return in the consolidated income statement Reported under fair value reserve and foreign currency translation reserve in the consolidated statement of comprehensive income Purchases Sales Settlements Transfer into Level 3 Transfer out of Level 3 At 30 November 2014 Change in unrealised gains or losses included in the consolidated income statement for assets and liabilities held at the end of the reporting period, under investment return Debt securities Equity securities 1,771 – 463 – 87 80 (12) 504 (202) (149) – (421) 1,578 (12) 78 (35) – – – 574 70 82 Derivative financial assets/ (liabilities) 2 – (1) – – – (1) – – – (1) Investment contracts (7,429) 114 – – – – – – – (7,315) – ANNUAL REPORT 2014 173 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 23. FAIR VALUE MEASUREMENT (continued) Level 3 financial assets and liabilities (continued) US$m At 1 December 2012 – As adjusted Net movement on investment contract liabilities Total gains/(losses) Reported under investment return in the consolidated income statement Reported under fair value reserve and foreign currency translation reserve in the consolidated statement of comprehensive income Acquisition of subsidiaries Purchases Sales Settlements Transfer into Level 3 Transfer out of Level 3 At 30 November 2013 – As adjusted Change in unrealised gains or losses included in the consolidated income statement for assets and liabilities held at the end of the reporting period, under investment return Debt securities 1,341 – 66 (25) 133 450 (23) (70) 26 (127) 1,771 Equity securities 406 – 9 (8) 48 42 (34) – – – 463 60 4 Derivative financial assets/ (liabilities) 4 – 2 – – 1 – (5) – – 2 1 Investment contracts (7,533) 104 – – – – – – – – (7,429) – Movements in investment contract liabilities at fair value are offset by movements in the underlying portfolio of matching assets. Details of the movement in investment contract liabilities are provided in note 28. Assets transferred out of Level 3 mainly relate to corporate debt instruments of which market-observable inputs became available during the year and were used in determining the fair value. There are no differences between the fair values on initial recognition and the amounts determined using valuation techniques since the models adopted are calibrated using initial transaction prices. Significant unobservable inputs for level 3 fair value measurements As at 30 November 2014, the valuation techniques and applicable unobservable inputs used to measure the Group’s Level 3 financial instruments are summarised as follows: Description Fair value at 30 November 2014 (US$m) Valuation techniques Unobservable inputs Range Debt securities 548 Discounted cash flows Discount rate for liquidity 5.28% – 11.49% Valuation processes The Group has the valuation policies, procedures and analyses in place to govern the valuation of financial assets required for financial reporting purposes, including Level 3 fair values. In determining the fair values of financial assets, the Group in general uses third-party pricing providers and, only in rare cases when no third-party prices exist, will use prices derived from internal models. Chief Investment Officers of each business units are required to review the reasonableness of the prices used and report price exceptions, if any. Group Investment team analyses reported price exceptions and reviews price challenge responses from third party pricing providers and provides the final recommendation on the appropriate price to be used. Any changes in valuation policies are reviewed and approved by the Group Pricing Committee (GPC) which is part of the Group’s wider financial risk governance processes. Changes in Level 2 and 3 fair values are analysed at each reporting date. 174 AIA GROUP LIMITED 23. FAIR VALUE MEASUREMENT (continued) Valuation processes (continued) The main Level 3 input used by the Group pertains to the discount rate for the fixed income securities and investment contracts. The unobservable inputs to determining the fair value of these instruments include the obligor’s credit spread and/or the liquidity spread. A significant increase/(decrease) in any of the unobservable input may result in a significantly lower/(higher) fair value measurement. The Group has subscriptions to private pricing services for gathering such information. If the information from private pricing services is not available, the Group uses the proxy pricing method based on internally-developed valuation inputs. Fair value for assets and liabilities for which the fair value is disclosed at reporting date A summary of fair value hierarchy of assets and liabilities not carried at fair value but for which the fair value is disclosed as at 30 November 2014 is given below. Fair value hierarchy Level 1 Level 2 Level 3 Total US$m 30 November 2014 Assets for which the fair value is disclosed Financial assets Loans and deposits Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Investment property and property held for use Investment property (including land) Property held for use (including land) 632 – – 15 1,835 – – 3,293 240 1,534 1,330 – – – Total assets for which the fair value is disclosed 2,482 6,397 Liabilities for which the fair value is disclosed Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Other liabilities Total liabilities for which the fair value is disclosed – 2,046 – 204 2,250 – 959 3,753 3,027 7,739 3,750 – 98 – – 3,639 1,492 8,979 622 – – 90 712 7,675 240 1,632 1,345 1,835 3,639 1,492 17,858 622 3,005 3,753 3,321 10,701 The Group engaged external, independent and qualified valuers to determine the fair value of the Group’s properties at the end of every financial year. The valuation on open market value basis by independent professional valuer for certain investment properties was calculated by reference to net rental income allowing for reversionary income potential. The fair values of other properties were derived using the Market Data Approach. In this approach, the values are based on sales and listing of comparable property registered in the vicinity. In valuing the investment properties and properties in use, the current use of the properties are considered to be its highest and best use; records of recent sales and offerings of similar property are analysed and comparison made for such factors as size, location, quality and prospective use. The investment properties and properties in use are valued on the basis of the highest and best use of the properties that is physically possible, legally permissible and financially feasible. Records of recent sales and offerings of similar property are analysed and comparison made for such factors as size, location, quality and prospective use. In limited occasions, potential redevelopment of the properties in use would be taken into account when they would maximise the fair value of the properties; the Group is occupying these properties for operational purposes. ANNUAL REPORT 2014 175 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 24. OTHER ASSETS US$m Accrued investment income Pension scheme assets Defined benefit pension scheme surpluses Insurance receivables due from insurance and investment contract holders Others Total As at 30 November 2014 As at 30 November 2013 (As adjusted) 1,345 1,368 25 998 1,385 3,753 22 870 1,283 3,543 All amounts other than prepayments in respect of operating leases of leasehold land are generally 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. Below sets out an analysis of the Group’s interest in land and land use rights: As at 30 November 2014 As at 30 November 2013 Property, plant and equipment Investment property Prepayments of operating leases Property, plant and equipment Investment property Prepayments of operating leases Total Total US$m Land held in Hong Kong Long-term leases (>50 years) 43 588 288 919 43 589 292 924 Medium-term leases (10 to 50 years) Short-term leases (<10 years) Land held outside Hong Kong Freehold Long-term leases (>50 years) Medium-term leases (10 to 50 years) Short-term leases (<10 years) – – – – 88 225 2 – – – – – – – – 54 100 – – – 313 56 100 – – – – – 75 157 2 – – – – – – – – 56 105 – – – 232 58 105 – Total 133 813 442 1,388 120 746 453 1,319 25. IMPAIRMENT OF FINANCIAL ASSETS In accordance with the Group’s accounting policies, impairment reviews were performed for available for sale securities and loans and receivables. Available for sale debt securities During the year ended 30 November 2014, no impairment losses (2013: US$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 2014 was US$48m (2013: US$66m). 176 AIA GROUP LIMITED 25. IMPAIRMENT OF FINANCIAL ASSETS (continued) 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 2014 was US$25m (2013: US$22m). The Group has a portfolio of residential and commercial mortgage loans which it originates. To the extent that any such loans are past their due dates specific allowance is made, together with a collective allowance, based on historical delinquency. Insurance receivables are short-term in nature and cover is not provided if consideration is not received. An ageing of accounts receivable is not provided as all amounts are due within one year and cover is cancelled if consideration is not received. 26. CASH AND CASH EQUIVALENTS US$m Cash Cash equivalents Total(1) Note: As at 30 November 2014 As at 30 November 2013 (As adjusted) 1,067 768 1,835 1,248 1,068 2,316 (1) Of cash and cash equivalents, US$467m (2013: US$428m) are held to back unit-linked contracts and US$29m (2013: US$88m) are held by consolidated investment funds. Cash comprises cash at bank and cash in hand. Cash equivalents comprise bank deposits and highly liquid short-term investments with maturities at acquisition of three months or less and money market funds. Accordingly, all such amounts are expected to be realised within 12 months after the end of the reporting period. 27. INSURANCE CONTRACT LIABILITIES The movement of insurance contract liabilities (including liabilities in respect of investment contracts with DPF) is shown as follows: US$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 2014 Year ended 30 November 2013 (As adjusted) 103,436 20,273 (12,170) (954) 3,442 (2,699) 2,055 – (286) 90,613 17,755 (10,917) (843) 3,288 (2,674) 702 5,396 116 113,097 103,436 ANNUAL REPORT 2014 177 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 Traditional participating life assurance with DPF Participating funds 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 Minimum guaranteed benefits may be enhanced based on investment experience and other considerations Factors affecting contract cash flows • 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 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 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 • Claims experience All(1) All(1) All(1) All(1) 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 • Lapses • Expenses • Mortality • Investment performance • Crediting rates • Lapses • Expenses • Mortality Note: (1) Other than the Group Corporate Centre segment. 178 AIA GROUP LIMITED 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 Market and credit risk Direct exposure Insurance and investment contract liabilities Risks associated with related investment portfolio Indirect exposure Significant insurance and lapse risks Participating funds • Net neutral except for the insurer’s share of participating investment performance • Net neutral except for the insurer’s share of participating investment performance • Investment performance subject to smoothing through dividend declarations • Impact of persistency on future dividends • Mortality • Guarantees • Guarantees Other participating business • 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 • Impact of persistency on future dividends • Mortality Traditional non-participating life assurance • Investment performance • Credit risk • Asset-liability mismatch risk • Guarantees • Asset-liability mismatch risk • Not applicable • Mortality • Persistency • Morbidity Accident and health • Loss ratio • Asset-liability mismatch risk • Investment performance • Credit risk • Asset-liability mismatch risk • Not applicable • Claims experience • Morbidity • Persistency Pension • Net neutral • Asset-liability mismatch risk • Net neutral • Asset-liability mismatch risk • Performance-related • Persistency investment management fees Unit-linked • Net neutral • Net neutral • Performance-related investment management fees • Persistency • Mortality Universal life • Guarantees • Asset-liability mismatch risk • Investment performance • Credit risk • Asset-liability mismatch risk • Spread between earned rate and crediting rate to policyholders • Mortality • Persistency • Withdrawals The Group is also exposed to foreign exchange rate 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. ANNUAL REPORT 2014 179 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes 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 2014 and 2013, 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$m At beginning of financial year Effect of foreign exchange movements Investment contract benefits Fees charged Net withdrawals and other movements At end of financial year As at 30 November 2014 As at 30 November 2013 3.50% – 7.50% 3.50% – 7.50% 3.25% – 9.00% 3.25% – 9.00% 2.00% – 7.25% 2.00% – 7.25% 3.70% – 8.90% 3.70% – 8.90% 2.75% – 7.00% 2.75% – 7.00% 3.33% – 6.50% 3.33% – 6.50% 2.20% – 9.20% 2.20% – 9.20% 3.10% – 10.80% 3.10% – 10.80% 5.07% – 12.25% 5.07% – 12.25% 3.83% – 7.11% 3.83% – 7.11% 3.83% – 5.75% 3.83% – 5.75% 1.75% – 6.50% 1.75% – 6.50% 9.30% – 11.90% 9.69% – 12.69% Year ended 30 November 2014 Year ended 30 November 2013 8,698 8,865 (71) 344 (174) (860) (83) 301 (187) (198) 7,937 8,698 29. EFFECT OF CHANGES IN ASSUMPTIONS AND ESTIMATES The table below sets out the sensitivities of the assumptions in respect of insurance and investment contracts with DPF to key variables. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, and deferred acquisition costs and does not allow for offsetting movements in the fair value of financial assets backing those liabilities. US$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 180 AIA GROUP LIMITED As at 30 November 2014 As at 30 November 2013 14 (14) (4) (21) (16) 12 (15) (3) (19) (18) 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$3m decrease in profit (2013: US$9m decrease). 30. BORROWINGS US$m Bank loans and bank credit facilities Medium term notes Total As at 30 November 2014 As at 30 November 2013 808 2,126 2,934 809 1,141 1,950 Properties with a book value of US$874m at 30 November 2014 (2013: US$882m) and a fair value of US$2,135m at 30 November 2014 (2013: US$2,020m) and cash and cash equivalents and term deposits with a book value of US$21m (2013: US$19m) 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 38. 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 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. On 11 March 2014, the Group issued a 5-year and a 30-year fixed rate medium term notes at nominal amount of US$500m each; these notes bear annual interest of 2.250 per cent and 4.875 per cent respectively. The four US dollar medium term notes at nominal amount of US$500m each are listed on The Stock Exchange of Hong Kong Limited. The net proceeds from these notes are used for general corporate purposes. On 8 October 2013, the Group entered into a committed multicurrency revolving credit facility in an aggregate amount equal to US$300m. The revolving credit facility bears floating rate interest. No facility was drawn down as at 30 November 2014. ANNUAL REPORT 2014 181 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 31. OBLIGATIONS UNDER SECURITIES LENDING AND REPURCHASE AGREEMENTS The Group has entered into securities lending agreement whereby securities are loaned to a national monetary authority. In addition, the Group has entered into repurchase agreements whereby securities are sold to third parties with a concurrent agreement to repurchase the securities at a specified date. The securities related to these agreements are not derecognised from the Group’s consolidated statement of financial position, but are retained within the appropriate financial asset classification. During the term of the securities lending and repurchase agreements, the Group is restricted from selling or pledging the transferred debt securities. The following table specifies the amounts included within financial investments subject to securities lending or repurchase agreements which do not qualify for derecognition at each year end: US$m Debt securities – AFS Repurchase agreements Debt securities – FVTPL Securities lending Repurchase agreements Total As at 30 November 2014 As at 30 November 2013 3,243 1,552 299 598 4,140 312 332 2,196 Collateral At 30 November 2014, the Group had pledged debt securities with carrying value of US$5m (2013: US$10m) and held cash collateral of US$10m (2013: US$nil) and debt securities collateral of US$2m (2013: US$2m) based on the initial market value of the securities transferred. In the absence of default, the Group does not sell or repledge the debt securities collateral received and they are not recognised in the consolidated statement of financial position. The securities lending transactions outstanding as at 30 November 2014 are conducted with a national monetary authority on securities denominated in local currency issued by the same authority. The following table shows the obligations under repurchase agreements at each year end: US$m Repurchase agreements As at 30 November 2014 As at 30 November 2013 3,753 1,889 182 AIA GROUP LIMITED 32. OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Offsetting, enforceable master netting agreements and similar agreements The following table shows the assets that are subject to offsetting, enforceable master netting agreements and similar arrangements at each year end: Gross amount of recognised financial liabilities set off in the consolidated statement of financial position Net amount of financial assets presented in the consolidated statement of financial position Gross amount of recognised financial assets Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral received Net amount 265 101 366 – – – 265 101 366 (2) (101) (103) (147) – (147) 116 – 116 Gross amount of recognised financial liabilities set off in the consolidated statement of financial position Net amount of financial assets presented in the consolidated statement of financial position Gross amount of recognised financial assets Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral received Net amount 445 81 526 – – – 445 81 526 (24) (81) (105) (236) – (236) 185 – 185 US$m 30 November 2014 Financial assets: Derivative assets Reverse repurchase agreements US$m 30 November 2013 Financial assets: Derivative assets Reverse repurchase agreements ANNUAL REPORT 2014 183 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 32. OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) Offsetting, enforceable master netting agreements and similar agreements (continued) The following table shows the liabilities that are subject to offsetting, enforceable master netting agreements and similar arrangements at each year end: Gross amount of recognised financial assets set off in the consolidated statement of financial position Net amount of financial liabilities presented in the consolidated statement of financial position Gross amount of recognised financial liabilities Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral pledged Net amount 211 3,753 3,964 – – – 211 (96) (20) 3,753 3,964 (3,753) (3,849) – (20) 95 – 95 Gross amount of recognised financial assets set off in the consolidated statement of financial position Net amount of financial liabilities presented in the consolidated statement of financial position Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral pledged Net amount – – – 89 (31) (21) 1,889 1,978 (1,889) (1,920) – (21) 37 – 37 Gross amount of recognised financial liabilities 89 1,889 1,978 US$m 30 November 2014 Financial liabilities: Derivative liabilities Repurchase agreements, securities lending, and similar arrangements US$m 30 November 2013 Financial liabilities: Derivative liabilities Repurchase agreements, securities lending, and similar arrangements The Group entered into enforceable master netting agreements for derivative transactions, as well as the repurchase agreements and securities lending agreements for debt instruments with various counterparties. Except for certain futures contracts executed through clearing house mechanism where the settlement arrangement satisfied the IFRS netting criteria, the transactions under the enforceable master netting agreements and similar agreements involving the exchange of financial instruments or cash as collateral do not satisfy the IFRS netting criteria. The provision in the master netting agreement and similar agreements enables a party to terminate transactions early and settle at a net amount if a default or termination event occurs. 184 AIA GROUP LIMITED 33. PROVISIONS US$m At 1 December 2012 – As adjusted Charged to the consolidated income statement Credited to other comprehensive income Acquisition of subsidiaries Exchange differences Released during the year Utilised during the year Other movements At 30 November 2013 – As adjusted Charged to the consolidated income statement Charged to other comprehensive income Exchange differences Released during the year Utilised during the year Other movements At 30 November 2014 Employee benefits 133 12 (32) 2 (3) (11) (4) 9 106 15 9 (3) (3) (3) 3 124 Other 118 59 – 10 (2) (15) (89) – 81 61 – (2) (19) (32) – 89 Total 251 71 (32) 12 (5) (26) (93) 9 187 76 9 (5) (22) (35) 3 213 Other provisions Other provisions comprise provisions in respect of regulatory matters, litigation, reorganisation and restructuring. In view of the diverse nature of the matters provided for and the contingent nature of the matters to which they relate, the Group is unable to provide an accurate assessment of the term over which provisions are expected to be utilised. 34. OTHER LIABILITIES US$m Trade and other payables Third-party interests in consolidated investment funds Reinsurance payables Total As at 30 November 2014 As at 30 November 2013 (As adjusted) 2,926 1,221 395 4,542 2,556 1,197 301 4,054 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 generally 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. ANNUAL REPORT 2014 185 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 35. SHARE CAPITAL AND RESERVES Share capital At beginning of the financial year Transfers from share premium on 3 March 2014 Shares issued under share option scheme At end of the financial year Share premium As at 30 November 2014 As at 30 November 2013 Million shares US$m Million shares US$m 12,044 – 1 12,044 1,914 4 12,045 13,962 12,044 – 12,044 12,044 – – – – 12,044 1,914 There were 1,117,224 shares issued under share option schemes during the year ended 30 November 2014 (2013: nil). Except for 19,404,804 shares (2013: 21,274,914 shares) of the Company purchased by and 320,390 shares (2013: nil) of the Company sold 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 2014. These purchases and sales 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. As at 30 November 2014, 73,219,060 shares (2013: 74,598,995 shares) of the Company were held by the employee share-based trusts. During the year ended 30 November 2014, 20,464,365 vested shares were transferred to eligible employees, directors and officers of the Group under share-based compensation plans. Please refer to note 40 for details. The transfer of share premium to share capital resulted from the abolition of nominal value of shares under the New Companies Ordinance which is effective from 3 March 2014. There is no impact on the number of shares in issue or the relative entitlement of any of the members as a result of this transition. 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. 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 mainly include the impact of merger accounting for business combinations under common control and share-based compensation. 186 AIA GROUP LIMITED 36. NON-CONTROLLING INTERESTS US$m Equity shares in subsidiaries Share of earnings Share of other reserves Total As at 30 November 2014 As at 30 November 2013 59 52 38 149 63 45 37 145 37. 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 2014 and 2013 are as follows: US$m AIA Co. AIA International 30 November 2014 30 November 2013 Total available capital Regulatory minimum capital 6,730 6,319 1,577 1,641 Solvency ratio 427% 385% Total available capital 6,057 4,752 Regulatory minimum capital 1,399 1,422 Solvency ratio 433% 334% 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 “regulatory minimum 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 regulatory minimum capital. 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. ANNUAL REPORT 2014 187 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 37. GROUP CAPITAL STRUCTURE (continued) Regulatory Solvency (continued) 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 2014, 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. 188 AIA GROUP LIMITED 38. RISK MANAGEMENT Risk management framework AIA recognises the importance of sound risk management in every aspect of our business and for all our stakeholders. The Risk Management Framework (RMF) provides the structure for identifying, quantifying and mitigating risk across the Group. 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. 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. The Group manages its exposure to insurance risk at each stage of the process, which includes: • Product design; • Underwriting, claims & expense discipline; • Sales quality; • Experience management; • Research; and • Reinsurance. 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’s 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. The Group adheres 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 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 book. 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. ANNUAL REPORT 2014 189 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 38. RISK MANAGEMENT (continued) Insurance risk (continued) 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. The Group is exposed to a range of financial risks, including credit risk, market risk, and liquidity risk. The Group manages its exposure to financial risk within tolerances agreed by the FRC. 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 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. 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, or credit spread risk, and in equity and property prices. The FRC approves all policies and metrics associated with the evaluation of market risk exposures. 190 AIA GROUP LIMITED 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) 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. This exposure can be heightened in products with inherent interest rate options or guarantees. 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 liabilities. 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. 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. US$m 30 November 2014 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Total financial assets Financial liabilities Investment contract liabilities Borrowings Obligations under securities lending and repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 1,062 18 7,156 – – – 1,674 – 6,570 – 94,907 – – – – – 22 1,589 – 28,827 240 1,345 161 265 7,654 1,607 102,063 28,827 240 1,345 1,835 265 9,910 101,477 32,449 143,836 – 958 3,753 159 – 4,870 – 1,976 – – – 1,976 7,937 – – 4,383 211 12,531 7,937 2,934 3,753 4,542 211 19,377 ANNUAL REPORT 2014 191 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) Exposure to interest rate risk (continued) US$m 30 November 2013 – As adjusted 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 1,258 3 7,202 – – – 2,165 – 10,628 – 991 1,889 – – 6,198 29 80,121 – – 114 – – 28 1,441 – 26,102 141 1,254 151 445 7,484 1,473 87,323 26,102 141 1,368 2,316 445 86,462 29,562 126,652 – 959 – – – 8,698 – – 4,054 89 12,841 8,698 1,950 1,889 4,054 89 16,680 2,880 959 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. 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. 192 AIA GROUP LIMITED 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) Sensitivity analysis (continued) The impact of any impairments of financial assets has been ignored 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 on the grounds that 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 price 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 2014 30 November 2013 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) 836 (836) (121) 121 836 (836) (3,868) 3,868 691 (691) (98) 98 691 (691) (2,827) 2,827 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. Generally, the Group seeks to match the currency applicable to its local liabilities and assets. 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 derivative contracts entered into to hedge foreign exchange rate risk. 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. ANNUAL REPORT 2014 193 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) Net exposure United States Dollar Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Korean Won 19,256 (6,180) 13,076 144 (144) – 144 (144) – United States Dollar 14,867 (5,683) 9,184 78 (78) – 78 (78) – 309 601 910 17 (8) 9 8 (17) (9) Hong Kong Dollar 200 401 601 (13) 7 (6) 28 (22) 6 3,189 (2,472) 1,535 2,575 2,306 1,665 4,854 3,228 756 – 1,535 19 2,594 573 2,879 5 238 243 (4) (239) (243) 26 11 37 (9) (28) (37) 2 75 77 (1) (76) (77) 23 107 130 30 114 144 (16) (24) (114) (130) (120) (144) Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Korean Won 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 5 231 236 (4) (232) (236) 28 32 60 (11) (49) (60) 4 71 75 (3) (72) (75) 24 54 78 (17) (61) (78) 30 95 125 (24) (101) (125) US$m 30 November 2014 Equity analysed by original currency Net notional amounts of currency derivative positions Currency exposure 5% strengthening of original currency Impact on profit before tax Impact on other comprehensive income Impact on total equity 5% strengthening of the US dollar Impact on profit before tax Impact on other comprehensive income Impact on total equity US$m 30 November 2013 – As adjusted Equity analysed by original currency Net notional amounts of currency derivative positions Currency exposure 5% strengthening of original currency Impact on profit before tax Impact on other comprehensive income Impact on total equity 5% strengthening of the US dollar Impact on profit before tax Impact on other comprehensive income Impact on total equity 194 AIA GROUP LIMITED 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) Liquidity risk AIA identifies liquidity risk as occurring in two ways, Funding Liquidity Risk and Investment Liquidity Risk. Funding Liquidity Risk 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. The local business units 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. Investment Liquidity Risk occurs in relation to our 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. 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 2014 Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments 7,654 1,607 102,063 28,827 240 1,345 1,835 265 2,437 48 – 28,827 – 4 – – Total 143,836 31,316 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: 119,592 2,934 3,753 4,542 211 – – – 1,221 – 131,032 1,221 (1) Includes amounts of US$1,390m falling due after 2 years through 5 years. 797 1,525 3,322 – 240 1,335 1,835 102 9,156 (967) 410 3,753 3,248 13 6,457 1,477 25 602 2 2,341 7 18,724 26,689 53,328 – – 6 – 151 – – – – 7 – – – – 5 20,383 27,300 55,681 937 8,763 110,859 1,537 (1) 497 490 – 33 58 – 1 132 – 39 8 2,565 9,393 111,396 ANNUAL REPORT 2014 195 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 38. RISK MANAGEMENT (continued) Financial risks (continued) Market risk (continued) Liquidity risk (continued) US$m 30 November 2013 – As adjusted Financial assets Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments 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: 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 7,484 1,473 87,323 26,102 141 1,368 2,316 445 2,387 70 – 26,102 – – – – 110,896 1,950 1,889 4,054 89 – – – 1,197 – 952 1,297 3,686 – 141 1,258 2,316 124 9,774 (699) 322 1,889 2,857 – 1,139 97 818 2 2,188 7 17,461 24,520 41,656 – – 43 – 311 – – 67 – 10 – – – – – 19,051 25,417 43,851 694 9,077 101,824 1,130 (1) 498 – – 29 – – 54 – – – 6 118,878 1,197 4,369 1,853 9,629 101,830 Total 126,652 28,559 (1) Includes amounts of US$719m falling due after 2 years through 5 years. 39. 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, Korea and Vietnam. The latest independent actuarial valuations of the plans were at 30 November 2014 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 46 per cent (2013: 51 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$83m (2013: US$87m). The total expenses relating to these plans recognised in the consolidated income statement was US$14m (2013 as adjusted: US$12m). 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$60m (2013: US$54m). 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. 196 AIA GROUP LIMITED 40. SHARE-BASED COMPENSATION Share-based compensation plans During the year ended 30 November 2014, 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 (2013: 301,100,000), representing 2.5 per cent (2013: 2.5 per cent) of the number of shares in issue at 30 November 2014. Number of shares Restricted Share Units Outstanding at beginning of financial year Granted Forfeited Vested Outstanding at end of financial year Year ended 30 November 2014 Year ended 30 November 2013 64,002,086 50,450,631 19,086,387 20,645,534 (4,585,447) (6,767,954) (19,912,607) (326,125) 58,590,419 64,002,086 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 (2013: 301,100,000), representing 2.5 per cent (2013: 2.5 per cent) of the number of shares in issue at 30 November 2014. The measurement dates for share option grants made in June 2011, March 2012, March 2013, March 2014 and April 2014 were determined to be 15 June 2011, 15 March 2012, 11 March 2013, 5 March 2014 and 14 April 2014 respectively, in accordance with IFRS 2. ANNUAL REPORT 2014 197 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 40. SHARE-BASED COMPENSATION (continued) Share-based compensation plans (continued) SO Scheme (continued) 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 Exercised Forfeited or expired Outstanding at end of financial year Share options exercisable at end of financial year Year ended 30 November 2014 Year ended 30 November 2013 Number of share options Weighted average exercise price (HK$) 32,291,121 6,678,445 (1,117,224) (746,423) 37,105,919 9,663,878 29.08 37.65 27.35 29.34 30.67 27.36 Number of share options 28,171,257 7,490,459 – (3,370,595) 32,291,121 – Weighted average exercise price (HK$) 27.64 34.35 – 28.77 29.08 – The weighted average share price of the Group at the date the share option was exercised was HK$39.68 for the year ended 30 November 2014 (2013: nil). The range of exercise prices for the share options outstanding as of 30 November 2014 and 2013 is summarised in the table below. Year ended 30 November 2014 Year ended 30 November 2013 Number of share options outstanding Weighted average remaining contractual life (years) Number of share options outstanding Weighted average remaining contractual life (years) 30,427,474 6,678,445 37,105,919 7.07 9.27 7.47 32,291,121 – 32,291,121 8.05 – 8.05 Range of exercise price HK$26 – HK$35 HK$36 – HK$45 Outstanding at end of financial year 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 2014, eligible employees paid US$10m (2013: US$8m) to purchase 1,893,088 ordinary shares (2013: 1,745,775 ordinary shares) of the Company. 198 AIA GROUP LIMITED 40. 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 2014, eligible agents paid US$12m (2013: US$11m) to purchase 2,222,176 ordinary shares (2013: 2,365,707 ordinary shares) of the Company. Valuation methodology The Group utilises a binomial lattice model to calculate the fair value of the share option grants, a Monte-Carlo simulation model and/or discounted cash flow technique to calculate the fair value of the RSU, ESPP and ASPP awards, taking into account the terms and conditions upon which the awards were granted. The price volatility is estimated on the basis of implied volatility of the Company’s shares which is based on an analysis of historical data since they are traded in the Hong Kong Stock Exchange and takes into consideration the historical volatility of peer companies (the constituent companies in Dow Jones Insurance Titans 30 Index) in view of the short trading history of the Company’s shares on the measurement date. The expected life of the share options is derived from the output of the valuation model and is calculated based on an analysis of expected exercise behaviour of the Company’s employees. The estimate of market condition for performance-based RSUs is based on one-year historical data preceding the grant date. No allowance for forfeiture prior to vesting is included in the valuation of the awards. The fair value calculated for share options is inherently subjective due to the assumptions made and the limitations of the model utilised. Year ended 30 November 2014 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units 2.14% – 2.22% 0.51% – 0.59%* 0.37% – 0.94% Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) Share option life (in years) Expected life (in years) Weighted average fair value per option/unit at measurement date (HK$) 25% 1.2% 37.56 – 39.45 10 7.54 10.43 25% 1.2% n/a n/a n/a 30.77 25% – 26% 1.2% n/a n/a n/a 0.64% 25% 1.2% n/a n/a n/a 38.85 30.64 ANNUAL REPORT 2014 199 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 40. SHARE-BASED COMPENSATION (continued) Valuation methodology (continued) Year ended 30 November 2013 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) 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 The weighted average share price for share option valuation for grants made during the year ended 30 November 2014 is HK$37.50 (2013: HK$34.35). The total fair value of share options granted during the year ended 30 November 2014 is US$9m (2013: 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 2014 is US$84m (2013: US$77m). 41. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL Directors’ remuneration The Executive Director receives compensation in the form of salaries, bonuses, contributions to pension schemes, long-term incentives, housing and other allowances, and benefits in kind subject to applicable laws, rules and regulations. Bonuses and long-term incentives represent the variable components in the Executive Director’s compensation and are linked to the performance of the Group and the Executive Director. Details of share-based payment schemes are described in note 40. Salaries, allowances and benefits in kind Director’s fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments (1) Inducement fees Termination fees Total – – 2,052,688 4,244,400 2,052,688 4,244,400 83,876 83,876 – – 8,896,950 8,896,950 – – – 15,277,914 – 15,277,914 US$ Year ended 30 November 2014 Executive Director Mr. Mark Edward Tucker Total Note: (1) Include SOs and RSUs awarded based upon the fair value at grant date assuming maximum performance levels are achieved. 200 AIA GROUP LIMITED 41. 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 – – 1,943,664 4,042,000 1,943,664 4,042,000 80,250 80,250 – – 8,660,080 (2) 8,660,080 – – – 14,725,994 – 14,725,994 US$ Year ended 30 November 2013 Executive Director Mr. Mark Edward Tucker Total Notes: (1) Include SOs and RSUs awarded based upon the fair value at grant date assuming maximum performance levels are achieved. (2) The comparative information has been adjusted to conform to current year presentation. The remuneration of Non-executive Director and Independent Non-executive Directors of the Company at 30 November 2014 and 2013 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 2014 Non-executive Director Mr. Edmund Sze-Wing Tse(1) 575,126 92,883 Independent Non-executive Directors Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya(2) Professor Lawrence Juen-Yee Lau(2) Dr. Qin Xiao(3) 220,000 205,000 235,000 207,425 141,918 38,521 91,233 Dr. Narongchai Akrasanee(3) 142,630 – – – – – – – – Total Notes: 1,856,853 92,883 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 668,009 220,000 205,000 235,000 207,425 141,918 38,521 91,233 142,630 1,949,736 (1) US$24,126 which represents remuneration to Mr. Edmund Sze-Wing Tse in respect of his services as director of a subsidiary of the Company is included in his fees. (2) Mr. Mohamed Azman Yahya and Professor Lawrence Juen-Yee Lau were appointed as Independent Non-executive Directors of the Company on 24 February 2014 and 18 September 2014, respectively. (3) Dr. Qin Xiao and Dr. Narongchai Akrasanee resigned as Independent Non-executive Directors of the Company with effect from 30 May 2014 and 1 September 2014, respectively. ANNUAL REPORT 2014 201 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 41. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL (continued) Directors’ remuneration (continued) Salaries, allowances and benefits in kind Directors’ fees Pension scheme contributions Post- employment benefits Bonuses Share-based payments Inducement fees Termination fees Total US$ Year ended 30 November 2013 Non-executive Director Mr. Edmund Sze-Wing Tse(1) 564,922 81,615 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 Notes: 220,000 205,000 190,890 235,000 190,000 190,000 100,685 – – – – – – – 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$19,813 which represents remuneration to Mr. Edmund Sze-Wing Tse in respect of his services as director of a subsidiary of the Company is included in his fees. (2) Mr. Barry Chun-Yuen Cheung resigned as Independent Non-executive Director of the Company with effect from 25 May 2013. Remuneration of five highest paid individuals The aggregate remuneration of the five highest paid individuals employed by the Group in each of the years ended 30 November 2014 and 2013 is presented in the table below. Salaries, allowances and benefits in kind Pension scheme contributions Post- employment benefits Bonuses Share-based payments (1) Inducement fees Termination fees Total US$ Year ended 30 November 2014 5,840,510 8,584,077 30 November 2013 6,371,858 8,281,530 197,286 189,753 – – 18,816,073 19,169,227 (2) – – – – 33,437,946 34,012,368 Notes: (1) Include 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) The comparative information has been adjusted to conform to current year presentation. 202 AIA GROUP LIMITED 41. 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: W E I V R E V O HK$ 27,500,001 to 28,000,000 28,500,001 to 29,000,000 31,500,001 to 32,000,000 37,000,001 to 37,500,000 40,000,001 to 40,500,000 46,500,001 to 47,000,000 49,000,001 to 49,500,000 114,000,001 to 114,500,000 118,000,001 to 118,500,000 Note: Year ended 30 November 2014 Year ended 30 November 2013 (1) 1 1 – 1 – 1 – – 1 – 1 1 – 1 – 1 1 – (1) The comparative information has been adjusted to conform to current year presentation. 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 2014 Year ended 30 November 2013 22,012,074 21,695,497 420,921 397,034 – – – 180,911 24,031,010 21,667,247 (2) 46,464,005 43,940,689 (1) Include SOs and RSUs awarded to the key management personnel based upon the fair value at grant date assuming maximum performance levels are achieved. (2) The comparative information has been adjusted to conform to current year presentation. ANNUAL REPORT 2014 203 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 41. 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$ 1,500,001 to 2,000,000 2,000,001 to 2,500,000 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 5,000,001 to 5,500,000 6,000,001 to 6,500,000 14,500,001 to 15,000,000 15,000,001 to 15,500,000 Note: Year ended 30 November 2014 Year ended 30 November 2013 (1) 2 – 4 1 – 1 – 1 – 1 2 1 3 – 1 – 1 1 1 – (1) The comparative information has been adjusted to conform to current year presentation. 42. RELATED PARTY TRANSACTIONS Remuneration of directors and key management personnel is disclosed in note 41. 43. COMMITMENTS AND CONTINGENCIES Commitments under operating leases Total future aggregate minimum lease payments under non-cancellable operating leases are as follows: US$m Properties and others expiring Not later than one year Later than one and not later than five years Later than five years Total As at 30 November 2014 As at 30 November 2013 89 131 56 276 86 125 31 242 The Group is the lessee in respect of a number of properties and items of office equipment held under operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually reviewed at the end of the lease term to reflect market rates. None of the leases include contingent rentals. 204 AIA GROUP LIMITED 43. COMMITMENTS AND CONTINGENCIES (continued) Investment and capital commitments US$m Not later than one year Later than one and not later than five years Later than five years Total As at 30 November 2014 As at 30 November 2013 427 6 – 433 693 14 1 708 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$924m at 30 November 2014 (2013: US$1,248m). The liabilities and related reinsurance assets, which totalled US$4m (2013: US$6m), 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. ANNUAL REPORT 2014 205 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 44. 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: Name of entity Place of incorporation and operation Principal activity Issued share capital Group’s interest % NCI’s interest % Group’s interest % NCI’s interest % As at 30 November 2014 As at 30 November 2013 AIA Company Limited(1) Hong Kong Insurance AIA International Limited Bermuda Insurance AIA Australia Limited Australia Insurance 1,151,049,861 ordinary shares for US$5,962,084,000 issued 100% share capital 3,000,000 ordinary shares of US$1.20 each 112,068,300 ordinary shares of A$1 each 100% 100% AIA Pension and Trustee Co. Ltd. British Virgin Islands Trusteeship 1,300,000 ordinary shares 100% AIA Bhd. Malaysia Insurance AIA Singapore Private Limited Singapore Insurance PT. AIA Financial Indonesia Insurance The Philippine American Life and General Insurance Company Philippines Insurance of US$1 each 767,438,174 ordinary shares of RM1 each 1,374,000,001 ordinary shares of S$1 each 477,711,032 ordinary shares of Rp1,000 each 199,560,671 ordinary shares of PHP10 each and 439,329 treasury shares 100% 100% 100% 100% – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – AIA (Vietnam) Life Insurance Company Limited Vietnam Insurance Contributed capital of VND1,264,300,000,000 100% AIA Insurance Lanka PLC Sri Lanka Insurance Contributed capital of LKR300,000,000 97.15% 2.85% 97.15% 2.85% Bayshore Development Group Limited British Virgin Islands Investment holding company 100 ordinary shares of US$1 each 90% 10% 90% 10% BPI-Philam Life Assurance Corporation Philippines Insurance 749,993,979 ordinary shares of PHP1 each and 6,000 treasury shares 51% 49% 51% 49% AIA Reinsurance Limited Bermuda Reinsurance 250,000 common 100% – 100% – shares of US$1 each Notes: (1) The Company’s subsidiary. (2) All of the above subsidiaries are audited by PricewaterhouseCoopers. All subsidiaries are unlisted except AIA Insurance Lanka PLC which is listed on the Main Board of the Colombo Stock Exchange. 206 AIA GROUP LIMITED 45. EVENTS AFTER THE REPORTING PERIOD On 26 February 2015, the Board of Directors proposed a final dividend of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share). 46. EFFECT OF ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS The new and revised accounting standards adopted by the Group in 2014 are explained in note 2.1(a). The tables below show the quantitative effect of the adoption of these new and revised standards on the consolidated financial statements. (a) Consolidated Income Statement US$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 Year ended 30 November 2013 (As previously reported) Retrospective adjustments for Reclassifications IFRS 10 IAS 19 Year ended 30 November 2013 (As adjusted) 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 – – – – – – – – – – (37) – 37 – – – – – – – – – – – – – – – (34) – (34) (4) – (4) – – – (30) (34) – – – – – – – – – – – – – – – – – – – – – (3) – – (3) 3 – 3 – 3 (1) – (1) 2 2 – 16,666 (959) 15,707 6,030 155 21,892 15,299 (816) 14,483 1,934 1,537 71 340 18,365 3,527 14 3,541 (47) 3,494 (692) 47 (645) 2,849 2,824 25 The adoption of new accounting policy had an immaterial impact on earnings per share for the comparative year ended 30 November 2013. ANNUAL REPORT 2014 207 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 46. EFFECT OF ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (continued) (b) Consolidated Statement of Financial Position 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 Equity Share capital Share premium Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Others Amounts reflected in other comprehensive income Total equity attributable to: Shareholders of AIA Group Limited Non-controlling interests Total equity Total liabilities and equity 208 AIA GROUP LIMITED As at 1 December 2012 (As previously reported) Retrospective adjustments for Reclassifications IFRS 10 IAS 19 As at 1 December 2012 (As adjusted) 272 91 412 1,035 1,153 14,161 6,425 62,268 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 12,044 1,914 (188) (12,060) 17,843 5,979 1,165 – 7,144 26,697 131 26,828 134,439 – – – – – – – – – – – – – – – – – – – (273) – – – – – 273 – – – – – – – – – – – – – – – – – – – – – – 1,543 (555) – 988 – – 15 34 1,037 39 – – – – – – – 998 1,037 – – – – – – – – – – – – 1,037 – – – – – – – – – – – – – – 2 – 2 – – – – – 47 (10) – – 37 – – – – (2) – – (33) (33) (35) – (35) 2 272 91 412 1,035 1,153 14,161 6,425 62,268 20,137 23,101 638 112,569 5 46 2,752 2,982 135,478 90,613 8,865 493 1,792 41 251 2,219 328 4,083 108,685 12,044 1,914 (188) (12,060) 17,841 5,979 1,165 (33) 7,111 26,662 131 26,793 135,478 46. EFFECT OF ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (continued) (b) Consolidated Statement of Financial Position (continued) As at 30 November 2013 (As previously reported) Retrospective adjustments for Reclassifications IFRS 10 US$m IAS 19 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 Equity Share capital Share premium Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Others Amounts reflected in other comprehensive income Total equity attributable to: Shareholders of AIA Group Limited Non-controlling interests Total equity Total liabilities and equity 1,321 93 480 1,128 1,379 15,738 7,484 64,763 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 12,044 1,914 (274) (11,995) 20,070 2,270 657 – 2,927 24,686 145 24,831 146,585 – – – – – – – – – – – – – – – – – – – (176) – – – – – 176 – – – – – – – – – – – – – – – – – – – – – – 1,572 (866) – 706 – – 15 88 809 35 – – – – – – – 774 809 – – – – – – – – – – – – 809 – – – – – – – – – – – – – – 8 – 8 – – – – – 18 (6) – – 12 – – – – – – – (4) (4) (4) – (4) 8 As at 30 November 2013 (As adjusted) 1,321 93 480 1,128 1,379 15,738 7,484 64,763 22,560 26,102 445 121,354 6 44 3,543 2,316 147,402 103,436 8,698 1,950 1,889 89 187 2,030 242 4,054 122,575 12,044 1,914 (274) (11,995) 20,070 2,270 657 (4) 2,923 24,682 145 24,827 147,402 ANNUAL REPORT 2014 209 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Notes to the Consolidated Financial Statements and Significant Accounting Policies 46. EFFECT OF ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (continued) (C) Consolidated Statement of Cash Flows US$m Cash flows from operating activities Net cash provided by operating activities Cash flows from investing activities Net cash used in investing activities Cash flows from financing activities Net cash provided by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the financial year Year ended 30 November 2013 (As previously reported) Retrospective adjustments for Reclassifications IFRS 10 IAS 19 Year ended 30 November 2013 (As adjusted) 915 97 54 (2,286) 724 (647) – – 97 2,948 (273) (73) – 2,228 (176) – – 54 34 – 88 – – – – – – – 1,066 (2,286) 724 (496) 2,709 (73) 2,140 Cash and cash equivalents in the above consolidated statement of cash flows can be further analysed as follows: Cash and cash equivalents in the consolidated statement of financial position Bank overdrafts Cash and cash equivalents in the consolidated statement of cash flows Year ended 30 November 2013 (As previously reported) 2,228 – 2,228 Retrospective adjustments for Reclassifications IFRS 10 IAS 19 Year ended 30 November 2013 (As adjusted) – (176) (176) 88 – 88 – – – 2,316 (176) 2,140 210 AIA GROUP LIMITED FINANCIAL STATEMENTS Financial Statements of the Company STATEMENT OF FINANCIAL POSITION OF THE COMPANY W E I V R E V O US$m Assets Investment in a subsidiary Amounts due from subsidiaries Other assets Cash and cash equivalents Total assets Liabilities Borrowings Other liabilities Total liabilities Equity Share capital Share premium Employee share-based trusts Retained earnings Other reserves Amounts reflected in other comprehensive income Total equity Total liabilities and equity As at 30 November 2014 As at 30 November 2013 Notes 2 3 4 5 6 6 6 7 8 15,741 2,345 35 45 15,741 910 22 10 18,166 16,683 2,226 19 2,245 13,962 – (286) 2,102 139 4 15,921 18,166 1,201 11 1,212 12,044 1,914 (274) 1,652 135 – 15,471 16,683 Notes: (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 2014 and 2013 were US$1,139m and US$944m, respectively. Approved and authorised for issue by the Board of Directors on 26 February 2015. Mark Edward Tucker Director Edmund Sze-Wing Tse Director ANNUAL REPORT 2014 211 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Financial Statements of the Company NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 1. ACCOUNTING POLICIES Where applicable, the accounting policies of the Company are the same as for the Group as set out on pages 111 to 132. The Company’s financial statements comply with both IFRS and HKFRS. 2. INVESTMENT IN A SUBSIDIARY US$m Unlisted shares, at cost As at As at 30 November 30 November 2014 2013 15,741 15,741 See note 44 to the Group’s consolidated financial statements for further information of the Company’s subsidiary. 3. AMOUNTS DUE FROM SUBSIDIARIES Of the total amounts due from subsidiaries, US$985m is unsecured and interest-bearing at 2.51 per cent per annum which will be recoverable in March 2019. The remaining balance is unsecured, interest-free and repayable on demand. 4. CASH AND CASH EQUIVALENTS The cash and cash equivalents balance consists of cash of US$45m (2013: US$10m). 5. 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 the first tranche of a 10-year unsecured floating rate medium term note series to a subsidiary at a nominal value of US$60m. On 7 August 2014, the Company issued the second tranche of the same floating rate medium term note series to the subsidiary at a nominal value of US$40m. The medium term note bears interest upon LIBOR and will be fully repaid in November 2023. The medium term note has been eliminated in the Group’s consolidated financial statements. 6. SHARE CAPITAL, SHARE PREMIUM AND EMPLOYEE SHARE-BASED TRUSTS Details of share capital, share premium and employee share-based trusts are presented in note 35 to the Group’s consolidated financial statements. 7. OTHER RESERVES Other reserves comprise share-based compensation recognised under the RSU Scheme, ESPP, ASPP and Share Option Scheme. 8. AMOUNTS REFLECTED IN OTHER COMPREHENSIVE INCOME Amounts reflected in other comprehensive income comprise cash flow hedge reserve. 9. RISK MANAGEMENT Risk management in the context of the Group is discussed in note 38 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 amounts due from subsidiaries and cash and cash equivalents. 212 AIA GROUP LIMITED NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY (continued) 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 45 to the Group’s consolidated financial statements. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 213 FINANCIAL STATEMENTS Supplementary Embedded Value Information TOWERS WATSON REPORT ON THE REVIEW OF THE SUPPLEMENTARY EMBEDDED VALUE 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 2014 (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 2014, and the value of new business for the 12-month period 1 December 2013 to 30 November 2014; • A review of the economic and operating assumptions used to calculate the embedded value as at 30 November 2014 and the value of new business for the 12-month period 1 December 2013 to 30 November 2014; 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 2014, the value of new business for the 12-month period 1 December 2013 to 30 November 2014, the analysis of movement in embedded value for the 12-month period ended 30 November 2014, and the sensitivity analysis. Towers Watson 26 February 2015 214 AIA GROUP LIMITED 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. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 215 FINANCIAL STATEMENTS Supplementary 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. 2013 EV and EV Equity have been adjusted to reflect the adoption of new and revised accounting standards by AIA in 2014. For a description of the new and revised accounting standards and a reconciliation of the adjustments made to the 2013 financial information as previously reported, see our 2014 audited consolidated financial statements. 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 2014 As at 30 November 2013 39,042 37,153 15,351 21,802 34,871 33,818 13,462 20,356 12 months ended 30 November 2014 12 months ended 30 November 2013 1,845 3,700 49.1% 1,490 3,341 44.1% Growth 12% 10% 14% 7% YoY 24% 11% 5.0 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 24 per cent to US$1,845 million, an increase of US$355 million compared with 2013. ANP grew by 11 per cent to US$3,700 million compared with US$3,341 million in 2013. VONB margin increased by 5.0 pps to 49.1 per cent compared with 44.1 per cent in 2013. EV Equity grew by US$4,171 million to US$39,042 million at 30 November 2014, an increase of 12 per cent over the year from US$34,871 million at 30 November 2013. EV Equity included goodwill and other intangible assets of US$1,889 million at 30 November 2014 compared with US$1,053 million at 30 November 2013. EV grew to US$37,153 million at 30 November 2014. The growth in EV of US$3,335 million is shown after a deduction for the Citibank Upfront Payment and the payment of shareholder dividends. Underlying growth excluding the Citibank Upfront Payment was US$4,135 million. 216 AIA GROUP LIMITED 1. HIGHLIGHTS (continued) EV operating profit grew by 14 per cent to US$4,535 million compared with 2013. The growth reflected a combination of a higher VONB of US$1,845 million, an increased expected return on EV of US$2,635 million from a higher opening EV and overall positive operating experience variances and operating assumption changes which totalled US$108 million, less finance costs of US$53 million on medium term notes. Non-operating EV movements included positive investment return variances of US$720 million, positive effect of changes in economic assumptions of US$122 million and positive other non-operating variances of US$23 million. This was offset by the payment of shareholder dividends totalling US$689 million, negative other capital movements of US$14 million and negative foreign exchange movements of US$562 million. EV as at 30 November 2014 included ANW of US$15,351 million and VIF of US$21,802 million, up 14 per cent and 7 per cent respectively compared with 30 November 2013. 2. EV RESULTS 2.1 Embedded Value by Business Unit The EV as at 30 November 2014 is detailed in Table 2.1 below. Results are presented separately for the six largest Business Units, with those for the remaining Business Units presented together under the category “Other Markets”. This is consistent with the segment information in the IFRS financial statements. Section 4.1 of this report contains a full list of the entities included in this report and the mapping of these entities to Business Units for the purpose of this report. Table 2.1 Summary of EV by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China AIA Korea Other Markets Group Corporate Centre Subtotal As at 30 November 2014 As at 30 November 2013 ANW(1) VIF before CoC(2) CoC(2) VIF after CoC(2) EV EV 5,529 5,370 1,741 1,375 1,482 1,805 3,331 4,874 7,515 2,476 3,095 1,398 2,779 748 1,492 (102) 572 724 561 260 196 401 270 – 6,943 1,752 2,534 1,138 2,583 347 1,222 (102) 12,472 10,716 7,122 4,275 2,513 4,065 2,152 4,553 4,772 6,854 4,007 2,440 3,106 1,907 3,973 4,405 25,507 19,401 2,984 16,417 41,924 37,408 Adjustment to reflect additional Hong Kong reserving and capital requirements(3) (10,156) 6,281 219 6,062 (4,094) (2,940) After-tax value of unallocated Group Office expenses Total Notes: – (677) – (677) (677) 15,351 25,005 3,203 21,802 37,153 (650) 33,818 (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 described 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. ANNUAL REPORT 2014 217 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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 2014. 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 2014 As at 30 November 2013 30,806 (16,593) 24,682 (15,738) 9,894 10,725 (6,699) (5,013) 2,509 (2,152) 1,175 (132) 25,507 (10,156) 15,351 2,250 (1,321) 1,006 (138) 21,466 (8,004) 13,462 218 AIA GROUP LIMITED 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) W E I V R E V O Free surplus Required capital ANW As at 30 November 2014 As at 30 November 2013 Hong Kong basis for branches of AIA Co. and AIA International 7,794 7,557 15,351 Local statutory basis 18,884 6,623 25,507 Hong Kong basis for branches of AIA Co. and AIA International 6,727 6,735 13,462 Local statutory basis 15,644 5,822 21,466 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 both 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 2014, 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 2014 reduced by US$11,090 million (2013: US$8,917 million) under the Hong Kong basis compared with the local statutory basis, reflecting US$10,156 million (2013: US$8,004 million) higher reserving requirements and US$934 million (2013: US$913 million) higher required capital under the Hong Kong basis for branches of AIA Co. and AIA International. ANNUAL REPORT 2014 219 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary Embedded Value Information 2. EV RESULTS (continued) 2.4 Earnings Profile Table 2.4 shows how the after-tax distributable earnings from the assets backing the statutory reserves and required capital of the in-force business of the Group are projected to emerge over future years. The projected values reflect the Hong Kong reserving and capital requirements for the branches of AIA Co. and AIA International. Table 2.4 Profile of projected after-tax distributable earnings for the Group’s in-force business (US$ millions) Financial year 2015 – 2019 2020 – 2024 2025 – 2029 2030 – 2034 2035 and thereafter Total As at 30 November 2014 Undiscounted Discounted 13,732 12,692 11,935 10,843 46,261 95,463 11,311 6,884 4,410 2,749 4,005 29,359 The profile of distributable earnings is shown on an undiscounted and discounted basis. The discounted value of after-tax distributable earnings of US$29,359 million (2013: US$27,091 million) plus the free surplus of US$7,794 million (2013: US$6,727 million) shown in Table 2.3 is equal to the EV of US$37,153 million (2013: US$33,818 million) shown in Table 2.1. 220 AIA GROUP LIMITED 2. EV RESULTS (continued) 2.5 Value of New Business The VONB for the Group for the 12-month period from 1 December 2013 to 30 November 2014 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 this report and the mapping of these entities to Business Units for the purpose of this report. The Group VONB for the 12 months ended 30 November 2014 was US$1,845 million, an increase of US$355 million, or 24 per cent, from US$1,490 million for the same period in 2013. Table 2.5 Summary of VONB by Business Unit (US$ 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 2014 12 months ended 30 November 2013 VONB before CoC(1) VONB after VONB after CoC(1) CoC(1) (3) CoC(1) (3) 720 422 338 181 282 104 233 101 61 39 20 24 22 21 619 361 299 161 258 82 212 2,280 288 1,992 (68) (18) (50) 2,212 (97) 2,115 270 – 270 1,942 (97) 1,845 468 319 269 120 166 91 220 1,653 (67) 1,586 (96) 1,490 (1) CoC refers to the cost arising from holding the required capital as described 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 2014 and 30 November 2013 were US$13 million and US$11 million respectively. ANNUAL REPORT 2014 221 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary Embedded Value Information 2. EV RESULTS (continued) 2.5 Value of New Business (continued) Table 2.6 shows the VONB margin for the Group. The VONB margin is defined as VONB, excluding pension business, expressed as a percentage of ANP. The VONB for pension business is excluded from the margin calculation to be consistent with the definition of ANP. The Group VONB margin for the 12 months ended 30 November 2014 was 49.1 per cent compared with 44.1 per cent for the same period in 2013. Table 2.6 Summary of VONB Margin by Business Unit (US$ 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 2014 12 months ended 30 November 2013 VONB Excluding Pension ANP(1) VONB Margin(1) VONB Margin(1) 593 361 299 160 258 82 212 952 572 489 320 311 380 676 62.3% 63.2% 61.2% 50.1% 83.1% 21.7% 31.3% 57.6% 56.3% 67.3% 37.8% 66.4% 26.8% 32.0% 1,965 3,700 53.1% 48.9% (50) – 1,915 (97) 1,818 3,700 – 3,700 51.8% 46.9% 49.1% 44.1% (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. 222 AIA GROUP LIMITED 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 2014. For comparison purposes, the quarterly VONB, ANP and VONB margin for business written in the 12 months to 30 November 2013 are also shown in the same table. Table 2.7 Summary of VONB, ANP and VONB Margin by quarter for the Group (US$ millions) W E I V R E V O Quarter Values for 2014 3 months ended 28 February 2014 3 months ended 31 May 2014 3 months ended 31 August 2014 3 months ended 30 November 2014 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 Notes: VONB after CoC(1) ANP(2) VONB Margin(2) 354 438 468 585 291 354 379 466 799 891 944 1,066 745 782 839 975 43.8% 48.4% 48.7% 54.2% 38.4% 44.7% 44.7% 47.3% (1) CoC refers to the cost arising from holding the required capital as described in Section 4.2 of this report. (2) ANP and VONB margin exclude pension business. ANNUAL REPORT 2014 223 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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 2013 to 30 November 2014. Table 2.8 Analysis of movement in EV (US$ millions) Opening EV Effect of acquisitions Citibank Upfront Payment Adjusted Opening EV Value of new business Expected return on EV Operating experience variances Operating assumption changes Finance 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 2014 12 months ended 30 November 2013 ANW VIF EV EV 13,462 20,356 33,818 31,373 – (800) 12,662 (995) 3,531 (126) (13) (53) 2,344 610 6 530 3,490 (689) (14) (98) 15,351 – – 20,356 2,840 (896) 314 (67) – 2,191 110 116 (507) 1,910 – – (464) 21,802 – (800) 33,018 1,845 2,635 188 (80) (53) 4,535 720 122 23 5,400 (689) (14) (562) (808) – 30,565 1,490 2,389 114 10 (26) 3,977 345 429 (154) 4,597 (595) 11 (760) 37,153 33,818 YoY EV 8% n/m n/m 8% 24% 10% 65% n/m 104% 14% 109% (72)% n/m 17% 16% n/m (26)% 10% EV operating profit grew by 14 per cent to US$4,535 million (2013: US$3,977 million) compared with 2013. The growth reflected a combination of a higher VONB of US$1,845 million (2013: US$1,490 million), an increased expected return on EV of US$2,635 million (2013: US$2,389 million) from a higher opening EV and overall positive operating experience variances and operating assumption changes which totalled US$108 million (2013: US$124 million), less finance costs of US$53 million (2013: US$26 million) on medium term notes. 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 2014 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. 224 AIA GROUP LIMITED 2. EV RESULTS (continued) 2.6 Analysis of EV Movement (continued) The main operating experience variances, net of tax, are: • Expense variances of US$16 million (2013: US$1 million) including non-recurring project expenses of US$(14) million (2013: US$(9) million); • Mortality and morbidity claims variances of US$124 million (2013: US$116 million); and • Persistency and other variances of US$48 million (2013: US$(3) million). The effect of changes to operating assumptions during the Period was US$(80) million (2013: US$10 million). The EV profit of US$5,400 million (2013: US$4,597 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$720 million (2013: US$345 million) were largely caused by positive market movements offset by negative statutory reserve 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$122 million (2013: US$429 million) includes the impact of changes in long-term investment return assumptions of US$(337) million (2013: US$161 million) and the impact of changes in risk discount rates of US$459 million (2013: US$268 million). Other non-operating variances amounted to US$23 million (2013: US$(154) million) and included: • Positive tax-related adjustments of US$24 million (2013: US$195 million); • Restructuring and other non-operating costs of US$52 million (2013: US$44 million); and • Modelling enhancements, accounting for the majority of the balance. The Group paid total shareholder dividends of US$689 million (2013: US$595 million). Other capital movements of US$(14) million (2013: US$11 million) were mainly due to the purchase of shares held by employee share-based trusts. There were negative foreign exchange movements of US$562 million during the Period (2013: US$760 million). 2.7 EV Equity The EV as at 30 November 2014 included a deduction of US$800 million for the Citibank Upfront Payment. The EV Equity grew to US$39,042 million at 30 November 2014, an increase of 12 per cent from US$34,871 million at 30 November 2013. Table 2.9 sets out the derivation of EV Equity from EV as at 30 November 2014. Table 2.9 Derivation of EV Equity from EV (US$ millions) EV Goodwill and other intangible assets(1) EV Equity Note: As at 30 November 2014 As at 30 November 2013 37,153 1,889 39,042 33,818 1,053 34,871 Growth 10% 79% 12% (1) Consistent with the IFRS financial statements, net of tax, amounts attributable to participating funds and non-controlling interests. ANNUAL REPORT 2014 225 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary Embedded Value Information 3. SENSITIVITY ANALYSIS The EV as at 30 November 2014 and the VONB for the 12-month period 1 December 2013 to 30 November 2014 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 2014 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 2014); and • Equity prices decreased proportionally by 10 per cent (i.e. 90 per cent of the prices at 30 November 2014). 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 2014 and the values of debt instruments held at 30 November 2014 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 dollars (the presentation currency). In order to provide sensitivity results for EV and VONB of the impact 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 2014 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 analyses, the statutory reserving bases at 30 November 2014 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. 226 AIA GROUP LIMITED 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 2014 (US$ millions) W E I V R E V O 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 2014 (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% EV 37,153 32,590 43,822 37,914 36,377 37,232 37,014 36,157 38,149 36,771 37,613 34,384 40,048 37,627 37,578 VONB 1,845 1,373 2,539 1,923 1,748 1,779 1,911 1,719 1,984 1,550 2,139 1,910 1,891 ANNUAL REPORT 2014 227 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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.), a subsidiary of the Company, and AIA International Limited (AIA International), 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 China 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 Korea branch of AIA International; • AIA Malaysia refers to AIA Bhd., a subsidiary of AIA Co., its subsidiary Green Health Certification Berhad (formerly known as AIA AFG Takaful Bhd.), and AIA PUBLIC Takaful Bhd., a 70 per cent owned subsidiary of AIA Co.; • AIA New Zealand refers to the New Zealand branch of AIA International; • 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 Sri Lanka refers to AIA Insurance Lanka PLC, a 97.15 per cent owned subsidiary of AIA Co.; • AIA Taiwan refers to the Taiwan branch of AIA International; • AIA Thailand refers to the Thailand branches of AIA Co.; and • AIA Vietnam refers to AIA (Vietnam) Life Insurance Company Limited, a subsidiary of AIA International. AIA’s previously-announced acquisitions of ING Management Holdings (Malaysia) Sdn. Bhd. (ING Malaysia) and Aviva NDB Insurance (ANI) in Sri Lanka completed in December 2012. The financial results of these two newly-acquired businesses are accounted for in the Group’s 2013 results from the respective dates of completion. In March 2014, the Group acquired a further 10 per cent of the equity interest in AIA PUBLIC Takaful Bhd. 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. 228 AIA GROUP LIMITED 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 own use that is 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$13 million for the 12 months ended 30 November 2014 (2013: 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. ANNUAL REPORT 2014 229 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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, sales of new contracts during the period and any new contributions, 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 local 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 2014, 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. 230 AIA GROUP LIMITED 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 Required Capital AIA Australia 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: 100% of the regulatory capital adequacy requirement 100% of required minimum solvency margin 150% of required minimum solvency margin(1) 120% of regulatory Risk-Based Capital requirement 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 180% of regulatory Risk-Based Capital requirement 120% of proposed Risk-Based Capital requirement 250% of regulatory Risk-Based Capital requirement 140% of regulatory Risk-Based Capital requirement 100% of required minimum solvency margin (1) 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. ANNUAL REPORT 2014 231 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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 2014 and the VONB for the 12 months to 30 November 2014 and highlights certain differences in assumptions between the EV as at 30 November 2013 and the EV as at 30 November 2014. 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. 232 AIA GROUP LIMITED 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 2014. 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 (%) Risk discount rates 10-year government bonds Local equities Business Unit AIA Australia AIA China AIA Hong Kong(1) AIA Indonesia AIA Korea AIA Malaysia AIA New Zealand Philam Life AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Notes: As at 30 Nov 2014 7.75 9.75 7.00 13.00 9.50 8.75 8.25 10.50 (3) 6.75 18.00 7.75 9.00 13.80 As at 30 Nov 2013 7.75 9.75 7.25 13.00 9.75 8.75 8.25 11.50 6.75 19.00 7.75 9.25 14.80 As at 30 Nov 2014 3.37 3.74 2.50 7.50 3.60 4.20 3.99 4.00 2.23 12.33 1.48 3.62 8.00 As at 30 Nov 2013 3.37 3.74 2.68 6.50 3.85 4.20 3.99 4.00 2.23 13.33 1.48 3.87 9.00 As at 30 Nov 2014 7.15 9.49 7.55 12.25 6.94 8.75 As at 30 Nov 2013 7.15 9.49 7.73 11.25 7.19 8.75 n/a (2) n/a (2) 9.16 7.00 14.00 6.62 9.37 13.80 9.16 7.00 15.00 6.62 9.62 14.80 (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) Philippine long term sovereign debt was raised to investment grade in a series of upgrades over 2013 and 2014 by the major international rating agencies. ANNUAL REPORT 2014 233 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary 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 2014. 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. 234 AIA GROUP LIMITED 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 (%) W E I V R E V O Business Unit AIA Australia 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 As at 30 November 2014 As at 30 November 2013 3.25 3.25 2.0 2.0 6.0 3.5 3.0 2.5 3.5 2.0 6.5 1.0 2.0 5.0 2.0 2.0 6.0 3.5 3.0 2.5 3.5 2.0 6.5 1.0 2.5 5.0 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. ANNUAL REPORT 2014 235 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A FINANCIAL STATEMENTS Supplementary Embedded Value Information 5. ASSUMPTIONS (continued) 5.9 Policyholder Dividends, Profit Sharing and Interest Crediting The projected policyholder dividends, 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 AIA Indonesia AIA Korea AIA Malaysia(1) AIA New Zealand Philam Life AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand(2) AIA Vietnam Notes: As at 30 November 2014 As at 30 November 2013 30.0 25.0 16.5 25.0 24.2 30.0 25.0 16.5 25.0 24.2 25.0 for assessment years 2014 to 2015; 24.0 thereafter 25.0 for assessment years 2013 to 2015; 24.0 thereafter 28.0 30.0 17.0 28.0 17.0 28.0 30.0 17.0 28.0 17.0 20.0 for assessment years 2014 and 2015; 30.0 thereafter 22.0 for assessment years 2014 and 2015; 20.0 thereafter 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 (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) During the year, Thailand extended the 20% corporate income tax rate reduction for assessment year 2015. The best estimate corporate tax rates for future assessment years remain uncertain and will continue to be evaluated. 236 AIA GROUP LIMITED 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 2014 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 2014 and 30 November 2013 have been translated into US dollars using exchange rates as at each valuation date. The VONB results shown in this report have been translated into US dollars 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 26 December 2014, the Financial Supervisory Service of Korea announced changes to the Risk-Based Capital requirement. These changes are effective 31 December 2014. The impact of these changes is not expected to be significant. On 30 December 2014, the Financial Supervisory Commission of Taiwan announced changes to the Risk-Based Capital requirement. These changes are effective 1 January 2015. The impact of these changes is not expected to be significant. On 26 February 2015, the Board of Directors proposed a final dividend of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share). ANNUAL REPORT 2014 237 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I L A N O I T I D D A ADDITIONAL INFORMATION Information for Shareholders 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 2014 Number of shareholder accounts % of total number of shareholder accounts 18,931 4,075 444 231 7 79.92 17.20 1.87 0.98 0.03 Number of Shares 7,143,481 9,376,033 3,407,000 5,150,800 12,020,039,911 23,688 100.00 12,045,117,225 % of total number of shares 0.06 0.08 0.03 0.04 99.79 100.00 FINANCIAL CALENDAR Announcement of 2014 Full Year Results Book Close Period for 2015 Annual General Meeting 2015 Annual General Meeting Announcement of 2015 Interim Results 26 February 2015 6 May 2015 to 8 May 2015 (both days inclusive) 8 May 2015 24 July 2015 ANNUAL GENERAL MEETING The 2015 Annual General Meeting will be held at 11:00 a.m. Hong Kong time on Friday, 8 May 2015 at the Grand Ballroom, 2/F, New World Millennium Hong Kong Hotel, 72 Mody Road, Tsim Sha Tsui 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, 8 May 2015. FINAL DIVIDEND The Board has recommended a final dividend of 34.00 Hong Kong cents per share (2013: 28.62 Hong Kong cents per share) in respect of the year ended 30 November 2014. If approved, the proposed final dividend together with the interim dividend will represent a total dividend of 50.00 Hong Kong cents per share (2013: 42.55 Hong Kong cents per share) in respect of the year ended 30 November 2014. Subject to shareholders’ approval at the AGM, the final dividend will be payable on Friday, 29 May 2015 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 13 May 2015. Relevant Dates for the proposed 2014 Final Dividend Payment Ex-dividend date Record date Payment date 12 May 2015 13 May 2015 29 May 2015 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 238 AIA GROUP LIMITED ANNUAL REPORT AND ELECTRONIC COMMUNICATIONS 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. Shareholders are encouraged to elect to receive shareholder documents electronically which provides environmental benefits as well as reducing printing and distribution costs. You may at any time send written notice to the Company c/o the Company’s share registrar specifying your name, address and request to change your choice of language or means of receipt of all shareholder documents. 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. ANNUAL REPORT 2014 239 W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A 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 ADDITIONAL INFORMATION Corporate Information 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 Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya Professor Lawrence Juen-Yee Lau 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. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya Professor Lawrence Juen-Yee Lau Remuneration Committee Mr. Jack Chak-Kwong So (Chairman) Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya Mr. Mark Edward Tucker Risk Committee Mr. Chung-Kong Chow (Chairman) Mr. John Barrie Harrison Professor Lawrence Juen-Yee Lau Mr. Edmund Sze-Wing Tse Mr. Mark Edward Tucker 240 AIA GROUP LIMITED ADDITIONAL INFORMATION Glossary 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. W E I V R E V O 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 Active market An agent who sells at least one policy per month. 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 2015 Annual General Meeting of the Company to be held at 11:00 a.m. Hong Kong time on Friday, 8 May 2015. AIA or the Group AIA Group Limited and its subsidiaries. AIA Co. AIA Company Limited, a subsidiary of the Company. AIA International AIA International Limited, a subsidiary of AIA Co. W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I AIA Vitality AIG ALICO 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. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 241 ADDITIONAL INFORMATION Glossary 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. Agency Share Purchase Plan. Asset-liability management (ALM) ALM is the management of the relative risk profiles of assets and liabilities. 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. Common control 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. Deferred acquisition costs (DAC) 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. 242 AIA GROUP LIMITED Deferred origination costs (DOC) Defined benefit plans Defined contribution plans 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. 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. 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. 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. Effective interest method W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I 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. Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) EV Equity is the total of embedded value, goodwill and other intangible assets attributable to shareholders of the Company. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 243 ADDITIONAL INFORMATION Glossary ESPP ExCo Fair value Fair value through profit or loss (FVTPL) 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. 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 premiums received in the first year of a recurring premium policy, and include the amount of premium that is expected to be required to provide insurance coverage until maturity. Foreign exchange rate risk The risk that the Company’s value may be affected by changes in exchange rates. FRC Free surplus Financial Risk Committee. ANW in excess of the required capital. Functional currency The currency of the primary economic environment in which the entity operates. The risk that insufficient cash is available to meet payment obligations to counterparties as they fall due. A worldwide association serving the professional development needs of field leaders in the insurance, investment and financial services industry. 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. Hong Kong Interbank Offered Rate. 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. Funding Liquidity Risk GAMA International Goodwill Group insurance Group Office HIBOR HKFRS HKOCI Hong Kong 244 AIA GROUP LIMITED W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I Hong Kong Companies Ordinance/ Companies Ordinance A substantial part of the Companies Ordinance (Laws of Hong Kong, Chapter 622) which came into force on 3 March 2014. 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 IFRS Interpretations Committee (IFRS IC) or the former Standing Interpretations Committee (SIC). E C N A N R E V O G E T A R O P R O C ING Malaysia ING Management Holdings (Malaysia) Sdn. Bhd. Insurance contract Insurance risk Interactive Mobile Office (iMO) Interactive Point of Sales (iPoS) 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. iMO is a mobile office platform with a comprehensive suite of applications that allow agents and agency leaders to manage their daily activities from lead generation, sales productivity and recruitment activity through to development training and customer analytics. 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. ANNUAL REPORT 2014 245 S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ADDITIONAL INFORMATION Glossary Investment income Investment income comprises interest income, dividend income and rental income. Investment Liquidity Risk The risk that the Group will be unable to buy and sell securities. This risk generally occurs where our actual or required holdings are greater than market appetite. 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. 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 Listing Rules LTI Market risk A general term for the risks that companies may be unable to meet their obligations to counterparties as they fall due or to buy and sell securities as required. See also Funding Liquidity Risk and Investment Liquidity Risk. Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. 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 246 AIA GROUP LIMITED 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. Net book value The net value of an asset. Equal to its original cost (its book value) minus depreciation and amortisation. Net funds to Group Corporate Centre 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. Net profit Net profit is calculated by subtracting a company’s total expenses from total revenue, including share of profit/(loss) from associates and joint venture and after tax. 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 Operating return on allocated equity 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 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 others, and adjusted for intercompany debt. Operating segment A component of an entity that: W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I • 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. N O I T A M R O F N I L A N O I T I D D A ANNUAL REPORT 2014 247 ADDITIONAL INFORMATION Glossary 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. Participating funds Participating policies Persistency Philam Life 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. The percentage of insurance policies remaining in force from month to month in the past 12 months, as measured by premiums. The Philippine American Life and General Insurance Company, a subsidiary of AIA Co.; in the context of the Supplementary Embedded Value Information, Philam Life includes BPI-Philam Life Assurance Corporation. 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. 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. Protection gap Puttable liabilities 248 AIA GROUP LIMITED RCSA Risk and Control Self-Assessment. Regulatory minimum capital Net assets held to meet the 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: W E I V R E V O • 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. Renewal premiums Premiums receivable in subsequent years of a recurring premium policy. Repurchase agreements (repos) Reverse repurchase agreements (reverse repos) Rider Risk-adjusted return Risk appetite 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. 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. A supplemental plan that can be attached to a basic insurance policy, typically with payment of additional premium. The return produced by an investment after accounting for the risks involved in producing that return. Risk appetite is the amount of risk that companies are willing to take in order to achieve their business objectives. 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. ANNUAL REPORT 2014 249 W E I V E R G N I T A R E P O D N A L A C N A N F I I E C N A N R E V O G E T A R O P R O C S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ADDITIONAL INFORMATION Glossary RMF RSUs Risk Management Framework. Restricted share units. RSU Scheme Restricted Share Unit Scheme. Securities lending SFO Shadow accounting Singapore Single premiums SME SO Scheme Solvency Solvency ratio 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. The Republic of Singapore; in the context of our reportable segments, Singapore includes Brunei. Single premiums are the lump sum payments from a policyholder, excluding first year premiums and renewal premiums. 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 the total available capital to the regulatory minimum capital 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 Takaful 250 AIA GROUP LIMITED 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. Islamic insurance which is based on the principles of mutual assistance and risk sharing. W E I V R E V O W E I V E R G N I T A R E P O D N A L A C N A N F I I Total weighted premium income (TWPI) TWPI consists of 100 per cent of renewal premiums, 100 per cent of first year 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. 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. E C N A N R E V O G E T A R O P R O C 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. Value of new business (VONB) VONB margin VONB is the present value, measured at the 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 the required capital in excess of regulatory reserves to support this business. VONB for AIA is stated after adjustments to reflect additional 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 additional 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 additional 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 additional Hong Kong reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. ANNUAL REPORT 2014 251 S T N E M E T A T S L A C N A N F I I N O I T A M R O F N I L A N O I T I D D A ADDITIONAL INFORMATION Glossary Withholding tax Working capital 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. 252 AIA GROUP LIMITED 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 4 AIA.COM

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