AIA Group Limited Annual Report 2018

Plain-text annual report

LEADING A HEALTHIER CENTURY ANNUAL REPORT 2018 STOCK CODE 1299 VISION & PURPOSE OUR VISION IS TO BE THE WORLD’S PRE-EMINENT LIFE INSURANCE PROVIDER. OUR PURPOSE IS TO PLAY A LEADERSHIP ROLE IN DRIVING ECONOMIC AND SOCIAL DEVELOPMENT ACROSS THE REGION. HEALTHIER, LONGER, BETTER LIVES As we position AIA for another century of growth and success, our brand promise of Healthier, Longer, Better Lives could not be more relevant. By delivering on this promise we are able to make a substantial and positive impact on people’s lives and help build a better future for our communities all around the Asia-Pacific region. Notes: (1) Numerous photos used throughout this report are winning images from AIA Group’s 2018 Regional Photo Competition. AIA employees across our markets were asked to visualise what Healthier, Longer, Better Lives meant to them through their own photography. (2) Explanations of certain terms and abbreviations used in this report are set forth in the Glossary. DRIVING ECONOMIC AND SOCIAL DEVELOPMENT ACROSS ASIA SINCE 1919 PRESENCE IN 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 a presence in 18 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, Cambodia, a 97 per cent subsidiary in Sri Lanka, a 49 per cent joint venture in India and a representative office in Myanmar. The business that is now AIA was first established in Shanghai a century ago in 1919. 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$230 billion as of 31 December 2018. 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 33 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”). 1919CHINA1990TAIWAN 1931HONG KONG1982MACAU1938THAILAND2000VIETNAM2012SRI LANKA2001INDIA2013MYANMAR2015CAMBODIA1947PHILIPPINES1931SINGAPORE1957BRUNEI1948MALAYSIA1984INDONESIA1919 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. 1947 The Philippine American Life and General Insurance Company (Philam Life) was founded in the Philippines. INTASCO moved its head office to Hong Kong. 1948 INTASCO changed its name to American International Assurance Company, Limited. 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. 2009 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. 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. 2014 AIA and Citibank formed a landmark, long-term and exclusive bancassurance partnership that encompasses 11 markets in the Asia-Pacific region. AIA became the Official Shirt Partner of Tottenham Hotspur Football Club to promote the role of sports as a key element of healthy living. 2015 AIA became the #1 MDRT company in the world. 2016 The AIA Leadership Centre opened in Bangkok. AIA became the world’s #1 MDRT company for two consecutive years. We increased AIA Group’s stake in Tata AIA Life Insurance Company Limited, a joint venture in India, from 26 per cent to 49 per cent. 2017 AIA named #1 MDRT company in the world for third year running. AIA presented the Hong Kong Observation Wheel and the AIA Vitality Park. 1987KOREA1990TAIWAN 1981NEW ZEALAND1972AUSTRALIA2018 AIA AND WEDOCTOR FORM LONG-TERM STRATEGIC PARTNERSHIP Through this strategic partnership, AIA strengthened its existing leadership position in health insurance among multinational insurers in the Asia-Pacific region, further building upon our health and wellness strategy to deliver superior health outcomes through partnerships with quality healthcare providers and digitally-enabled personalised healthcare journeys. AIA COMPLETES ITS ACQUISITION OF SOVEREIGN AND ENTERS INTO 20-YEAR STRATEGIC PARTNERSHIP AIA completed its acquisition of Sovereign, the life insurance business in New Zealand of Commonwealth Bank of Australia. The strategic bancassurance partnership with ASB Bank Limited in New Zealand became effective. AIA LAUNCHES NEW BRAND PROMISE: HEALTHIER, LONGER, BETTER LIVES Healthier, Longer, Better Lives is a single, powerful brand promise that is an accurate and up-to-date reflection of what AIA stands for – and what we do as a company. To launch our new brand promise, we held events in Beijing and Hong Kong featuring AIA’s Global Ambassador, David Beckham. AIA TOPS THE TABLE FOR FOURTH YEAR RUNNING AIA became the only multinational company in the world to have achieved the largest number of Million Dollar Round Table members for four consecutive years. AIA AT-A-GLANCE THE LARGEST LISTED COMPANY ON THE HONG HONG STOCK EXCHANGE which is incorporated and headquartered in Hong Kong THE LARGEST LIFE INSURER IN THE WORLD NO.1 WORLDWIDE FOR MDRT MEMBERS The only multinational company to top the table for four consecutive years Provides protection to people across the region with total sum assured of US$1.58 TRILLION OVER 13 MILLION BENEFIT PAYMENTS were made during 2018, helping customers and their families to cope with challenges at different life stages Serving the holders of more than individual policies and over 33 MILLION 16 MILLION participating members of group insurance schemes The only international life insurer headquartered and listed in Hong Kong and 100% FOCUSED ON ASIA-PACIFIC CONTENTS OVERVIEW 006 008 010 Financial Highlights Chairman’s Statement Group Chief Executive and President’s Report FINANCIAL AND OPERATING REVIEW 019 036 054 065 Financial Review Business Review Risk Management Regulatory and International Developments Valuing Our People Corporate Social Responsibility 066 070 CORPORATE GOVERNANCE 075 Statement of Directors’ Responsibilities Board of Directors Executive Committee Report of the Directors Corporate Governance Report Remuneration Report FINANCIAL STATEMENTS 129 136 Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements and Significant Accounting Policies Supplementary Financial Information on a Calendar Year Basis Independent Auditor’s Report on the Supplementary Embedded Value Information Supplementary Embedded Value Information ADDITIONAL INFORMATION 294 Condensed Business and Financial Review for the Thirteen Months Ended 31 December 2018 Information for Shareholders Corporate Information Glossary 076 084 089 099 112 137 138 140 142 144 249 267 271 304 307 308 ANNUAL REPORT 2018 | 003 2018 RESULTS AT-A-GLANCE(1) VALUE OF NEW BUSINESS (2) ANNUALISED NEW PREMIUMS (3) OPERATING PROFIT AFTER TAX (4) US$ millions 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,955 3,206 2,750 US$ millions 7,000 6,000 5,000 6,510 5,624 5,123 2,198 1,845 4,000 3,700 3,991 3,000 2,000 1,000 0 2014 2015 2016 2017 2018 +15% YoY (CER) +16% YoY (AER) 2014 2015 2016 2017 2018 +22% YoY (CER) +23% YoY (AER) US$ millions 6,000 5,000 4,000 3,000 2,000 1,000 0 5,298 4,635 3,981 3,556 3,248 2014 2015 2016 2017 2018 +13% YoY (CER) +14% YoY (AER) TOTAL WEIGHTED PREMIUM INCOME (5) EV EQUITY (6) TOTAL ASSETS AND TOTAL LIABILITIES US$ millions 30,000 25,000 20,000 15,000 10,000 5,000 0 30,543 26,393 22,133 19,211 19,876 2014 2015 2016 2017 2018 +14% YoY (CER) +16% YoY (AER) US$ millions 60,000 50,000 40,000 30,000 20,000 10,000 0 56,203 52,429 39,042 39,818 43,650 2014 2015 2016 2017 2018 +9% YoY (CER) +7% YoY (AER) US$ billions 250 200 150 100 50 0 230 219 190 175 169 170 136 138 185 150 2014 2015 2016 2017 2018 +5% +9% TOTAL ASSETS TOTAL LIABILITIES Note: Percentages shown in the charts above indicate changes for twelve months ended 31 December 2018 compared with twelve months ended 31 December 2017. The table on the right covers the financial information for the thirteen-month period from 1 December 2017 to 31 December 2018 for the current period and for the twelve-month period from 1 December 2016 to 30 November 2017 for the prior period. Balance sheet items are presented as at 31 December 2018 for the current period and as at 30 November 2017 for the prior period. US$ millions Value of New Business (2) Annualised New Premiums (3) Operating Profit After Tax (4) Total Weighted Premium Income (5) Thirteen-month period from 1 December 2017 to 31 December 2018 Twelve-month period from 1 December 2016 to 30 November 2017 4,067 6,770 5,684 3,512 6,092 4,647 33,109 26,147 US$ millions As at 31 December 2018 As at 30 November 2017 EV Equity (6) Total Assets Total Liabilities 56,203 229,806 190,400 51,775 215,691 173,319 006 | AIA GROUP LIMITED OVERVIEW2018 BREAKDOWN BY MARKET SEGMENT(1) VALUE OF NEW BUSINESS (2)(7) ANNUALISED NEW PREMIUMS (3) 10% 6% 9% 11% 23% 41% 19% 6% 8% 9% 16% 42% Hong Kong China Thailand Singapore Malaysia Other Markets (8) OPERATING PROFIT AFTER TAX (4) TOTAL WEIGHTED PREMIUM INCOME (5) 15% 6% 10% 34% 21% 7% 9% 37% 19% 16% 13% 13% Notes: (1) Due to the change of AIA Group Limited’s financial year-end date from 30 November to 31 December and for the purpose of enhancing the comparability of financial information, the financial information in 2018 Results at a glance and 2018 Breakdown by market segment covers a twelve-month period from 1 January 2018 to 31 December 2018 for the current period and a twelve-month period from 1 January 2017 to 31 December 2017 for the prior period. Balance sheet items are presented as at 31 December 2018 for the current period and as at 31 December 2017 for the prior period. The financial information from 2014 to 2016 is presented on the 30 November financial year-end basis. (2) 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. (3) Annualised new premiums (ANP) is a measure of new business activity that is calculated as the sum of 100 per cent of annualised first year premiums and 10 per cent of single premiums, before reinsurance ceded. (4) Operating profit after tax (OPAT) is shown after non-controlling interests. (5) 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. (6) 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. (7) Based on local statutory basis and before unallocated Group Office expenses, VONB by segment includes pension business. (8) 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. ANNUAL REPORT 2018 | 007 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCHAIRMAN’S STATEMENT AIA is an exceptional company and we are well-positioned to capture the significant potential that the dynamic Asia-Pacific region presents. I am very pleased to report that 2018 was another very successful year of strong growth. Volatility returned to capital markets this year as a consequence of increasing concerns about the sustainability of the global economic growth cycle and uncertainty surrounding international trade policy. Despite this, the long- term fundamental drivers of growth for the life insurance industry in the Asia-Pacific region remain robust. AIA continues to benefit from the powerful social, demographic and economic changes that are taking place across our markets. Rising incomes are driving rapid growth in the middle classes and Asian consumers are transforming the region’s economies. At the same time, the provision of social welfare remains at relatively low levels. These structural trends are creating substantial long-term savings and financial protection needs. The resilience of the Group as a result of these structural drivers and the execution of our growth strategy, has once again been demonstrated through the excellent performance delivered in 2018. Value of new business (VONB) reached US$3,955 million, a 22 per cent increase compared with 2017, and operating profit after tax (OPAT) grew by 13 per cent to US$5,298 million, all on constant exchange rates (CER). Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) increased by US$3,774 million over the year to US$56,203 million. As at 31 December 2018, the solvency ratio for our principal regulated operating company AIA Company Limited (AIA Co.) was 421 per cent and the Group’s free surplus above required regulatory capital was US$14,751 million, as measured under the Hong Kong Insurance Ordinance (HKIO) basis. The board of Directors (Board) has recommended an increase in the final dividend of 14 per cent to 84.80 Hong Kong cents per share, consistent with AIA’s established prudent, sustainable and progressive dividend policy. The Board has also recommended a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date. The dividends reflect the strength of our financial results and the Board’s continued confidence in the future prospects of the Group. The recommended dividends are subject to shareholders’ approval at the Company’s forthcoming Annual General Meeting (AGM). During 2019, AIA will celebrate its centennial year. The Group traces its extraordinary heritage back to its origins in Shanghai in 1919, and our commitment to the Asia-Pacific region is stronger than ever. This landmark year also provides an opportunity to thank all who have contributed to our continued growth and success over the last 100 years. AIA could not have reached this important milestone without the support of our customers and shareholders, who every day place their trust in AIA to deliver innovative financial solutions and long-term returns. I would also like to express the Board’s deep appreciation to AIA’s employees, agents and partners - past and present – for the focus and commitment that have made AIA what it is today. Special thanks are due once again, to our Group Chief Executive and President Ng Keng Hooi, along with his outstanding leadership team, who have together led the Group through another year of strong results. Over the eight years since AIA became a listed company, it has been an honour and a pleasure to work as a member of a Board that is committed to maintaining the highest standards of corporate governance. All of the Board’s non-executive directors are independent and have wide-ranging governance and executive experience. Our approach to effective governance is underpinned by embedding a strong culture throughout the organisation 008 | AIA GROUP LIMITED OVERVIEWMr. Edmund Sze-Wing Tse Independent Non-executive Chairman and ensuring that our risk management framework evolves to reflect the changing business and regulatory environment. Given the rising global concerns in relation to data privacy, cybersecurity and ethical business practices, we have also placed a greater emphasis on our practices in these areas. This is fundamental to AIA’s sustainable development and to maintaining the confidence of all of our organisation’s stakeholders. Finally, as we enter our Centennial year, I believe that AIA, now more than at any point in the Group’s history, is ready, able and committed to fulfilling our Purpose in playing a leadership role in driving economic and social development across the Asia-Pacific region. This year, we launched AIA’s new brand promise – “Healthier, Longer, Better Lives”. This promise renews our commitment to that leadership role and serving our communities across the region, while building sustainable relationships with our customers and employees and creating long-term value for our shareholders. Thank you for being with us on this journey. Edmund Sze-Wing Tse Independent Non-executive Chairman 15 March 2019 ANNUAL REPORT 2018 | 009 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT AIA has delivered another excellent set of results in 2018 with double-digit growth across all our main financial metrics. Value of new business (VONB) grew by 22 per cent, operating profit after tax (OPAT) increased by 13 per cent and underlying free surplus generation grew by 13 per cent on a comparable basis, all on constant exchange rates (CER). Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) increased by US$3,774 million to reach US$56,203 million. The board of Directors (Board) has recommended a final dividend of 84.80 Hong Kong cents per share, which represents an increase of 14 per cent and brings the total dividend (excluding special dividend) for 2018 to 114.00 Hong Kong cents per share. This reflects the strength of AIA’s financial performance and our confidence in the Group’s prospects. Additionally, the Board has recommended a special dividend of 9.50 Hong Kong cents per share, which represents an additional month of full year dividend due to the change of the Company’s financial year-end date. Our strong operating performance reflects our focus on managing the business proactively and the execution of our growth strategy against a challenging backdrop of financial market volatility and concerns over the global macroeconomic environment. AIA’s success has been driven by our talented teams across the Asia-Pacific region and the high levels of professionalism, commitment and care shown by our employees and agents throughout the company. The life insurance industry plays an important role in developing economies by helping to meet the social and infrastructure challenges that arise following step changes in economic growth. Rising affluence creates both a need and an aspiration for individuals to protect accumulated wealth and provide for dependants, and the financial responsibility on any one breadwinner can be considerable. Largely as a consequence of the traditional role of the extended family in the provision of welfare, government organised social welfare safety-nets are underdeveloped and there is a general recognition amongst Asian governments that costly, fully-comprehensive social welfare provision is unsustainable. In our markets – developed and emerging – this creates a material “protection gap” that represents the shortfall between a society’s need for financial provision for adversity and ill health, and the actual levels of insurance and savings in place to cover the risk. Dependency ratios are increasing in many of our markets, creating an emerging “retirement savings gap” – inefficient forms of savings, lack of provision for retirement and increasing longevity are all contributing to a significant shortfall in long-term savings. Private insurance is key to effective provision against these lifetime contingencies. The region, however, remains significantly underinsured in terms of life protection, health insurance, pensions and annuities – this demonstrates both the resilience of our markets and the significant potential for growth. The expectations of Asian consumers are also evolving. Well-being, health, longevity and higher expectations of the quality of life into old age are increasingly front of mind. At the same time, consumers are unsure of how much cover they need and what types of products to buy. 010 | AIA GROUP LIMITED OVERVIEWMr. Ng Keng Hooi Group Chief Executive and President ANNUAL REPORT 2018 | 011 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT AIA’s unrivalled distribution capabilities, strong brand, financial strength and ability to invest in product innovation place us in a unique position to help meet these fundamental social and economic needs. We remain focused on executing our clear strategic priorities that will build on these competitive advantages to sustain our profitable growth and help safeguard the future health and financial security of our customers. 2018 PERFORMANCE HIGHLIGHTS (ON A CONSTANT EXCHANGE RATE BASIS) Hong Kong had another very successful year with VONB up by 24 per cent to US$1,712 million. This excellent result demonstrates the quality of our multi-channel distribution and was broad-based with growth from both domestic and Mainland Chinese visitor customer segments. The continued success in executing our Premier Agency strategy drove a double-digit increase in the number of active agents. We also have a significant retail independent financial adviser (IFA) business in Hong Kong and our long-term strategic partnership with Citibank, N.A. (Citibank) once again delivered very strong VONB growth. OPAT increased by 11 per cent to US$1,814 million. In China, we delivered another excellent performance with VONB up by 30 per cent to US$965 million. Our focus on quality recruitment and best-in-class training, supported by our innovative digital platforms, produced a double-digit increase in the number of active agents. Growth in the underlying business and favourable insurance experience contributed to a 32 per cent increase in OPAT. In February 2019, we were delighted to receive regulatory approvals to begin preparations for the establishment of sales and service centres in Tianjin and Shijiazhuang, Hebei. We are looking forward to bringing AIA’s differentiated products and services to more and more families in China over time. Our business in Thailand returned to double-digit growth with an increase in VONB of 12 per cent to US$447 million. The success of our focus on raising the quality of our agency force saw a 36 per cent increase in the number of Million Dollar Round Table (MDRT) qualifiers, as we continued to grow full-time, professional active agents that provide high-quality advice to our customers. Our new partnership with Bangkok Bank Public Company Limited (Bangkok Bank) was launched in March 2018 and we continue to lay the foundations for future growth by expanding our product range through the bank’s in-branch insurance specialists. Underlying business growth and improvements to in-force persistency saw OPAT grow by 9 per cent. Singapore delivered very strong VONB growth of 18 per cent in 2018 driven by the agency channel and our strategic partnership with Citibank. The execution of our Premier Agency strategy delivered both an increase in the number of active agents and improved productivity levels. OPAT increased by 7 per cent. Malaysia achieved an improved second-half performance to deliver VONB growth of 8 per cent for the full year, amidst a market environment that has been affected by reduced consumer activity and changes to Goods and Services Tax (GST). Our Takaful business delivered double-digit VONB growth and remains an important strategic focus. OPAT increased by 9 per cent. VONB grew by 13 per cent in Other Markets. Highlights included strong performances from our businesses in Australia and New Zealand, Korea, the Philippines and Taiwan. OPAT increased by 14 per cent to US$826 million. Our performance in 2018 is another clear demonstration of the benefits of AIA’s diversified growth portfolio across geographical markets, products and distribution channels, and the tremendous potential for profitable growth in the Asia-Pacific region. 012 | AIA GROUP LIMITED OVERVIEWGROUP-WIDE OVERVIEW DISTRIBUTION Our proprietary tied agency force is our core distribution channel and the professionalism and scale of our agency is a significant competitive advantage for AIA. In 2018, the focused execution of our Premier Agency strategy delivered VONB growth of 26 per cent to US$2,943 million. We believe that our agents are the most effective means of meeting the financial protection and long-term savings needs of the mass affluent market in Asia. Our ability to attract the highest-quality recruits and provide them with the best training and back-office support across every aspect of agency management is an important driver of our growth. AIA is also at the forefront of providing agents with next-generation digital tools which help to enhance both their professionalism and productivity. The execution of our Premier Agency strategy will continue to be the cornerstone of AIA’s future success. MDRT membership is an important measure of the quality of our agency and AIA has over 10,000 registered members, which is an increase of 22 per cent compared with 2017. AIA has now been the multinational with the highest number of MDRT registered members globally for four consecutive years, a clear indicator of our success in developing a highly professional, full-time agency distribution. AIA’s long-term strategic partnerships broaden our access to customers across the Asia-Pacific region. VONB from AIA’s partnership distribution business grew by 11 per cent to US$1,172 million in 2018, building on the exceptionally strong performance from Hong Kong’s retail IFA channel in the first half of 2017, as previously highlighted. In March 2018, we launched our new strategic partnership with Bangkok Bank, the largest bank by total assets and with one of the largest retail banking customer bases in Thailand. This partnership offers a significant opportunity to reinforce our market leadership position in Thailand. In July 2018, the Group announced the completion of the transaction to acquire Sovereign Assurance Company Limited in New Zealand and the beginning of our 20-year strategic bancassurance partnership with ASB Bank Limited (ASB). We also look to develop non-traditional strategic partnerships with companies that have large existing customer bases and where the arrangements make commercial sense for AIA, such as those we launched during the year with WeDoctor in China and SK Telecom in Korea. Through our partnership with WeDoctor, AIA has gained preferred access to WeDoctor’s services for AIA customers and AIA has become the preferred provider of life and health insurance solutions to WeDoctor’s registered user base of over 180 million Chinese consumers. We also launched AIA Vitality into our strategic partnership with SK Telecom, the nation’s leading telecommunications provider by number of customers. These new partnerships represent additional growth opportunities for AIA by providing us with broader access to new customers and enabling the provision of new digital health and wellness services for our existing policyholders. In addition, our scale and presence across the Asia-Pacific region place us in a strong position to take advantage of strategic partnership opportunities as they arise. We look for opportunities that will materially extend our distribution reach and rigorously evaluate these opportunities against strict financial and strategic criteria. BRAND AND MARKETING AIA’s brand promise to help our customers live Healthier, Longer, Better Lives was launched across all of our markets in 2018. AIA is leading the way in transforming our protection business from that of a passive claims payer to a partner that actively helps our customers improve their health and well-being. This changes the way that customers perceive the purchase of life and health insurance and allows them to see positive, tangible benefits early on in their relationship with AIA. Our approach is fully aligned with the rapidly evolving needs and expectations of consumers in Asia-Pacific and offers significant potential for enhancing the quality and frequency of engagement with our customers and our distribution. ANNUAL REPORT 2018 | 013 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT Our stated Purpose is to play a leadership role in driving economic and social development across the region and our new brand promise represents what we stand for as a company. We are actively fostering long-term relationships with our customers to address the protection needs created by rising personal wealth that is leading to an increasing prevalence of lifestyle-related diseases in Asia. Our leadership position in health insurance, integrated with wellness, is at the forefront of these developments and this is an important strategic priority for the Group that will enable us to deliver both positive benefits for our customers and their communities, and help AIA to sustain our long-term growth. AIA Vitality is our comprehensive science-backed wellness programme. Since its launch in 2013, we have been able to demonstrate positive health outcomes for our customers by encouraging and rewarding healthy lifestyle choices. We also launched AIA Vitality into many of our bancassurance partnerships during the year and total membership of our wellness programmes has exceeded 1.2 million people as at the end of 2018. Our marketing and sponsorship activity is focused on associating the AIA brand with healthy lifestyles and encouraging active participation in sport. Our Global Principal Partnership with Tottenham Hotspur Football Club (Spurs) and our Global Ambassador, David Beckham, raise awareness among our customers, partners and employees of our brand promise through social media campaigns, football coaching clinics, customer and employee engagement sporting events and other media opportunities. Environmental, Social and Governance (ESG) considerations are increasingly front-of-mind for all of our stakeholders. As the largest pan-Asian life insurer, we have an important role to play in helping encourage greater awareness and consideration of ESG issues. AIA supports the recommendations of the Task Force on Climate- related Financial Disclosures (TCFD), and we also became the first Hong Kong-headquartered asset owner to join the Principles for Responsible Investment (PRI), reflecting our commitment to sustainable investment across our markets. In 2018, we received a “Prime” rating from ISS-oekom and are included in the FTSE4Good Index Series. We were also pleased to be included once again in the Bloomberg Gender Equality Index. TECHNOLOGY AND OPERATIONS Transformation through digitalisation is a key enabler across all aspects of our business. In 2018, we continued to make significant and targeted investments to simplify back-office processes and enhance efficiency, driving further productivity improvements and ensuring that we deliver innovative products and quality service to our customers. Depending on their preferences, our customers engage with our businesses both online and offline. We continue to invest in improving our digital capabilities from online self-service for basic administration and simple policy requests, to providing the sophisticated digital tools needed to support our market-leading agency and other distribution partners. Every year our customers interact with us on more than 34 million standard product-related insurance transactions and an additional 105 million digital customer interactions through AIA Vitality. We are increasingly looking at ways in which we can employ artificial intelligence (AI) capabilities to support our operations. AI is employed across many of our processes including new business processing, existing customer servicing and claims handling. AIA’s digital point-of-sale technology continues to evolve with more than 90 per cent of new business cases across the Group submitted digitally in 2018. Automatic underwriting rates continued to increase in 2018 with 57 per cent of all new business underwritten at point of sale with no human intervention. We continued to enhance the applications used by our agency across AIA’s proprietary interactive Mobile Office (iMO) platform: iRecruit improves recruitment success and digitalises the onboarding process, while iAcademy is an e-learning platform that is deployed across our businesses, enabling agents to continue to learn and develop wherever they want. 014 | AIA GROUP LIMITED OVERVIEWWe are also looking at ways to transform our business through innovation and the use of new technology. A Group digitalisation initiative for partnership distribution has been launched to develop an end-to-end sales and services platform for our bank partners. Our aim is to drive a step change in the experience that these digital tools provide to both our customers and our distribution. Cybersecurity is a critically important focus for AIA and a mounting risk to the industry and to our business. Regular updates are provided to the Group Executive Committee and the Board to ensure that this area receives the strongest management focus, support and governance. We continue to strengthen and invest in our capabilities in this area and have established a new cybersecurity shared services centre to provide additional advanced cyberthreat prevention, detection and response capabilities across the Group to support our dedicated cybersecurity teams. ENGAGEMENT WITH PEOPLE Central to AIA’s success are more than 22,000 talented, professional and committed employees. It is due to their dedication, hard work and unrelenting focus on customer service and the consistent execution of our strategy that we are able to sustain our strong track record of growth and success. AIA’s culture is characterised by our Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People... the Right Results will come”. Our corporate structure is designed to empower our local businesses, within a strategic and risk management framework, set and monitored by the group centre, and this encourages stronger engagement between our employees and their local markets. We believe the key to maintaining this culture is ensuring that we attract, train and retain highly-capable employees who actively look for the opportunities we provide for continuing professional development and who embrace AIA’s brand promise and Purpose. The AIA Leadership Centre (ALC) plays an important role in developing our senior executives across the Group. The centre has a clear focus on delivering impactful leadership development programmes aligned with AIA’s key strategic priorities. Now in its third year of operation, the ALC hosted more than 240 events in 2018, partnering with leading business schools and consulting firms. Technical leadership and functional leadership programmes are also provided to enhance domain-specific knowledge and skills. In recognition of its commitment to professional education, AIA was awarded ‘Excellence in Education’ by LOMA. We use technology to help deliver our learning and development programmes and we have launched a new learning platform providing digitalised learning content and delivery methods including access to content on-demand. We have also embarked on a major strategic initiative to transform our human resources information systems to improve efficiency and people analytics capabilities. We conducted a review of approximately 1,400 senior positions across our markets during the year, ensuring that we have clear plans for succession and the opportunities to develop our people. It has always been a top priority for AIA to grow leaders from within the business and we filled a majority of our senior leadership vacancies through internal promotions during the year. Our annual employee engagement survey is an important indicator of the success of our combined efforts across our markets and continues to provide us with valuable insights. I am pleased to report that the employee engagement scores for the Group place us in the top quartile of Gallup’s global financial services and insurance industry benchmark. AIA was one of 39 companies globally and the only international life insurer to be conferred a Great Workplace Award from Gallup in 2018. ANNUAL REPORT 2018 | 015 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGROUP CHIEF EXECUTIVE AND PRESIDENT’S REPORT OUTLOOK Asia’s growth fundamentals remain resilient despite recent volatility in financial markets, geopolitical uncertainty caused by ongoing international trade tensions and concerns over the sustainability of the current economic growth cycle. While global economic growth rates are expected to slow, the strong domestic drivers of demand and major demographic trends in Asia provide positive structural support for the long-term prospects of AIA’s business. US policymakers have responded by putting interest rate rises on hold for the time being and we expect China to continue its transition towards slower but higher-quality economic growth, accompanied by further financial reform. Asia is expected to account for 90 per cent of the world’s next billion middle-class consumers and the region’s middle-class population on this basis will more than double by 2025. Against the backdrop of an uncertain global macroeconomic and geopolitical environment, the need for our insurance products continues to grow, given low levels of private insurance penetration and social welfare coverage, and we remain focused on executing our strategic priorities. AIA has been in Asia for a century, operating in some of the most dynamic and attractive life and health insurance markets in the world. As we mark our Centennial year in 2019, this is an opportunity to restate our commitment to safeguarding the financial security of our customers. As the Group looks forward to the next 100 years, our promise of Healthier, Longer, Better Lives is especially relevant to how we will meet the growing needs of customers created by the unprecedented structural economic, demographic and social changes taking place across our markets. By delivering on this promise we will make a real and positive impact on people’s lives. After 100 years, it is rare that a company can say it is just at the beginning of its journey, but I remain as convinced as ever that AIA has much more to offer our customers, our employees, our partners and our shareholders. Of course, we have a lot to do to capture the opportunities that we have, but I believe we have the right strategy, the right leadership and the best platform from which we can continue to create long-term sustainable value. I am incredibly excited to be leading AIA into the next 100 years and I look forward to AIA leading a healthier century across the Asia-Pacific region. Ng Keng Hooi Group Chief Executive and President 15 March 2019 016 | AIA GROUP LIMITED OVERVIEWFINANCIAL AND OPERATING REVIEW 019 Financial Review 036 Business Review 054 Risk Management 065 Regulatory and International Developments 066 Valuing Our People 070 Corporate Social Responsibility ANNUAL REPORT 2018 | 017 Mr. Garth Jones Group Chief Financial Officer AIA is the largest publicly listed pan-Asian life insurance group, with a presence across 18 markets in the Asia- Pacific region. We receive the vast majority of our premiums in local currencies and we closely match our local assets and liabilities to minimise the economic effects of foreign exchange movements. When reporting the Group’s consolidated figures, there is a currency translation effect as we report in US dollars. We have provided growth rates and commentaries on our operating performance on a constant exchange rate (CER) basis, unless otherwise stated, as this provides a clearer picture of the year-on-year performance of the underlying businesses. In February 2018, the board of Directors (Board) of AIA Group Limited (the Company) resolved to change the Company’s financial year-end date from 30 November to 31 December. Accordingly, the current financial period-end date of the Company is 31 December 2018. In conjunction with this change and for the purpose of enhancing the comparability of financial information, the financial information presented below covers a twelve-month period from 1 January 2018 to 31 December 2018 for the current period and a twelve-month period from 1 January 2017 to 31 December 2017 for the prior period. In addition, we have voluntarily presented the Group’s audited consolidated financial results for the twelve months ended 31 December 2018 and the comparative financial information covering the twelve months ended 31 December 2017 as set out in note 47 to the consolidated financial statements and the supplementary embedded value information. 018 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEW SUMMARY AND KEY FINANCIAL HIGHLIGHTS AIA has delivered another set of excellent financial results in 2018 with double-digit growth in value of new business (VONB), operating profit after tax (OPAT), embedded value (EV) operating profit and underlying free surplus generation as we have continued to build on our competitive advantages and make strong progress in delivering our strategic priorities. We have also increased free surplus and maintained our resilient solvency position while financing both our organic growth and value-enhancing inorganic opportunities. Reflecting these financial results and our confidence in the future of AIA, the Board has recommended an increase in the final dividend of 14 per cent to 84.80 Hong Kong cents per share. The Board has also recommended a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date from 30 November 2018 to 31 December 2018. EMBEDDED VALUE VONB grew by 22 per cent to US$3,955 million in 2018 with all our reportable market segments delivering positive VONB growth. Agency distribution remains our main source of new business and accounted for 72 per cent of the Group’s total VONB. The focused execution of our Premier Agency strategy has continued to drive very strong VONB growth of 26 per cent to US$2,943 million from the agency channel. VONB from partnership distribution delivered solid growth of 11 per cent, building on the exceptionally strong performance from Hong Kong’s retail Independent Financial Adviser (IFA) channel in the first half of 2017 as previously highlighted. Annualised new premiums (ANP) increased by 15 per cent to US$6,510 million and VONB margin was higher by 3.7 pps at 60.0 per cent. The present value of new business premium (PVNBP) margin increased to 10 per cent from 9 per cent in 2017, reflecting positive shifts in product and country mix. EV operating profit grew by 23 per cent to US$8,278 million, reflecting strong new business growth, a higher expected return on EV of US$3,893 million and overall positive operating variances of US$603 million resulting from the proactive management of our in-force portfolio. This has resulted in a strong increase of 110 bps in our operating return on EV (Operating ROEV) to 16.3 per cent compared with 2017. Equity attributable to shareholders of the Company on the embedded value basis (EV Equity) grew by US$3,774 million to US$56,203 million. The increase was mainly driven by EV operating profit, partly offset by negative investment return variances of US$2,218 million reflecting the effect of short-term equity and other capital market movements on our investment portfolio and statutory reserves compared with long-term expected returns. The EV is shown after the payment of shareholder dividends totalling US$1,589 million. EV Equity included goodwill and other intangible assets of US$1,686 million at 31 December 2018 compared with US$1,650 million at 31 December 2017. The increase arose primarily from the acquisition of Sovereign Assurance Company Limited, included as part of the acquisition of ASB Group (Life) Limited and its subsidiaries (Sovereign), the life and health insurance businesses owned by Commonwealth Bank of Australia (CBA) in New Zealand, which completed on 2 July 2018. ANNUAL REPORT 2018 | 019 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION IFRS EARNINGS OPAT increased by 13 per cent to US$5,298 million. All our reportable market segments delivered positive OPAT growth in 2018 as a result of new business growth over time and the proactive management of our in-force portfolio. The expense ratio reduced to 7.1 per cent from 7.6 per cent in 2017 as we continued to benefit from increasing scale. Operating margin after tax was 17.5 per cent compared with 17.7 per cent in 2017 primarily reflecting strong total weighted premium income (TWPI) growth in 2018 and an increasing proportion of participating business in the in-force portfolio. Operating return on shareholders’ allocated equity (Operating ROE) increased by 40 bps to 14.5 per cent, mainly driven by OPAT growth. At 31 December 2018, shareholders’ allocated equity remained stable at US$36,795 million, after the payment of shareholder dividends of US$1,589 million, reflecting the depreciation of local currencies against our US dollar reporting currency of US$732 million and net profit of US$2,597 million, which included negative mark- to-market movement from our equity portfolio. CAPITAL AND DIVIDENDS Free surplus increased by US$2,165 million to US$14,751 million at 31 December 2018. This included a positive addition to free surplus of US$1,886 million due to the subsidiarisation of AIA Korea and a deduction of US$497 million for the net effect of the acquisition of Sovereign. Underlying free surplus generation increased to US$4,945 million, representing growth of 13 per cent on a comparable basis before a reduction of US$263 million relating to the subsidiarisation of AIA Korea. New business investment increased by 10 per cent to US$1,540 million, negative investment return variances and other items were US$795 million and the payment of shareholder dividends totalled US$1,589 million. The solvency ratio of AIA Company Limited (AIA Co.), was 421 per cent at 31 December 2018, compared with 446 per cent at 31 December 2017. Our solvency ratio remained very strong after the effect of the acquisition of Sovereign and dividends to the Company. Our local businesses remitted US$2,753 million to the Group Corporate Centre in 2018, including special remittance from New Zealand post acquisition of Sovereign, compared with US$2,039 million in 2017. The Board has recommended an increase in the final dividend of 14 per cent to 84.80 Hong Kong cents per share, consistent with AIA’s established prudent, sustainable and progressive dividend policy. The Board has also recommended a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date from 30 November 2018 to 31 December 2018. The dividends reflect the strength of our financial results and the Board’s continued confidence in the future prospects of the Group. The recommended dividends are subject to shareholders’ approval at the Company’s forthcoming Annual General Meeting (AGM). 020 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEWVONB Change YoY CER 24% 12% 18% 8% 30% 13% 21% YoY AER 24% 17% 20% 15% 33% 10% 23% n/m 22% n/m 23% NEW BUSINESS PERFORMANCE VONB, ANP and Margin by Segment US$ millions, unless otherwise stated VONB 2018 VONB Margin 2017 VONB Margin ANP ANP VONB 1,712 62.0% 2,697 1,384 53.7% 2,493 447 357 247 965 435 73.1% 65.4% 63.8% 90.5% 35.8% 4,163 63.2% 611 547 382 1,067 1,206 6,510 381 297 215 725 395 73.4% 69.7% 62.5% 83.1% 39.9% 519 426 340 873 973 3,397 59.4% 5,624 Hong Kong Thailand Singapore Malaysia China Other Markets Subtotal Adjustment to reflect consolidated reserving and capital requirements After-tax value of unallocated Group Office expenses (56) n/m n/m (61) n/m n/m n/m n/m Total 3,955 60.0% 6,510 3,206 56.0% 5,624 (152) n/m n/m (130) n/m n/m VONB grew by 22 per cent to US$3,955 million in 2018 with all our reportable market segments delivering positive VONB growth. ANP increased by 15 per cent to US$6,510 million and VONB margin rose by 3.7 pps to 60.0 per cent. PVNBP margin increased to 10 per cent from 9 per cent in 2017, reflecting positive shifts in product and country mix. Agency distribution remains our main source of new business and accounted for 72 per cent of the Group’s total VONB. The focused execution of our Premier Agency strategy has continued to drive very strong VONB growth of 26 per cent to US$2,943 million from the agency channel. This was delivered through strong ANP growth of 18 per cent to US$4,179 million and a higher VONB margin of 70.4 per cent. VONB from partnership distribution delivered solid growth of 11 per cent, building on the exceptionally strong performance from Hong Kong’s retail IFA channel in the first half of 2017. Our bank partnerships collectively delivered VONB growth of 18 per cent. Hong Kong delivered VONB growth of 24 per cent to US$1,712 million in 2018 with excellent performance across both domestic and Mainland Chinese visitor customer segments. VONB margin increased by 8.3 pps to 62.0 per cent as our product mix continued to shift towards higher-margin long-term savings and protection products. AIA’s wholly-owned operation in China was our fastest-growing reportable market segment with VONB growth of 30 per cent to US$965 million. This excellent performance reflects the disciplined execution of our Premier Agency strategy, focusing on quality recruitment together with continuing productivity enhancements. Thailand returned to VONB growth in 2018 with an increase of 12 per cent to US$447 million, mainly driven by ANP growth of 13 per cent. Sales momentum continued in the second half of 2018 as we continued to transform the agency through our Financial Adviser programme. Singapore delivered very strong VONB growth of 18 per cent, mainly driven by our core agency channel and strategic partnership with Citibank, N.A. (Citibank). VONB margin was lower at 65.4 per cent as a result of lower profitability from our HealthShield business as previously highlighted and higher volumes of single premium unit-linked business ahead of a regulatory change in October 2018. ANNUAL REPORT 2018 | 021 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONDespite reduced consumer activity and changes to tax regulations during the year, Malaysia’s VONB growth improved in the second half of 2018 and was up by 8 per cent over the full year to US$247 million. Other Markets reported VONB growth of 13 per cent to US$435 million. Highlights included strong growth from Australia (including New Zealand), Korea, the Philippines and Taiwan. The VONB results for the Group are reported after a deduction of US$208 million for the consolidated reserving and capital requirements over and above local statutory requirements and for the present value of unallocated Group Office expenses. EV EQUITY EV OPERATING PROFIT EV operating profit increased by 23 per cent to US$8,278 million compared with 2017. This strong performance was the result of 22 per cent growth in VONB to US$3,955 million, a higher expected return on EV of US$3,893 million and overall positive operating variances of US$603 million. Operating variances since our initial public offering (IPO) in 2010 have added more than US$2.0 billion to EV. Operating ROEV increased by 110 bps to 16.3 per cent compared with 2017. EV Operating Earnings Per Share – Basic EV operating profit (US$ millions) Weighted average number of ordinary shares (millions) Basic EV operating earnings per share (US cents) EV Operating Earnings Per Share – Diluted EV operating profit (US$ millions) Weighted average number of ordinary shares(1) (millions) Diluted EV operating earnings per share(1) (US cents) 2018 8,278 12,021 68.86 2018 8,278 12,056 68.66 2017 6,654 12,002 55.44 2017 6,654 12,039 55.27 YoY CER 23% n/a 23% YoY CER 23% n/a 23% YoY AER 24% n/a 24% YoY AER 24% n/a 24% Note: (1) Diluted EV earnings per share including the dilutive effects, if any, of the awards of share options, restricted share units, restricted stock purchase units (RSPUs) and restricted stock subscription units (RSSUs) granted to eligible directors, officers, employees and agents under the share-based compensation plans as described in note 39 to the financial statements. EV MOVEMENT EV grew by US$3,738 million to US$54,517 million at 31 December 2018. The increase was mainly driven by strong EV operating profit, partly offset by negative investment return variances of US$2,218 million reflecting the effect of short-term equity and other capital market movements on our investment portfolio and statutory reserves compared with long-term expected returns. Other non- operating variances amounted to US$270 million, mainly from the positive effect of the subsidiarisation of AIA Korea, partly offset by corporate transaction related costs and implementation costs of new accounting standards. The effect of negative foreign exchange translation movements was US$1,037 million. 022 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEWThe EV is shown after the payment of shareholder dividends of US$1,589 million and a deduction of US$111 million for the net effect from the acquisition of Sovereign, which comprised of the purchase price of US$918 million, the acquired EV of US$807 million. An analysis of the movement in EV is shown as follows: US$ millions, unless otherwise stated Opening EV Purchase price Acquired EV(1) Effect of acquisition 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 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 20,974 (918) 487 (431) (660) 4,550 355 29 (173) 4,101 (1,428) (3) 3,452 6,122 (1,589) 98 (537) 24,637 ANW 16,862 (591) 4,154 297 (229) (138) 3,493 1,272 (7) 387 5,145 (1,376) 134 209 20,974 2018 VIF EV 29,805 50,779 – 320 320 4,615 (657) 257 (38) – 4,177 (790) 50 (3,182) 255 – – (500) 29,880 2017 VIF 25,986 3,797 (846) 64 146 – 3,161 61 (185) (741) 2,296 – – 1,523 29,805 (918) 807 (111) 3,955 3,893 612 (9) (173) 8,278 (2,218) 47 270 6,377 (1,589) 98 (1,037) 54,517 EV 42,848 3,206 3,308 361 (83) (138) 6,654 1,333 (192) (354) 7,441 (1,376) 134 1,732 50,779 Note: (1) The acquired EV for Sovereign is calculated as at 2 July 2018 net of the related reinsurance agreement. ANNUAL REPORT 2018 | 023 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONEV Equity US$ millions, unless otherwise stated EV Goodwill and other intangible assets(1) EV Equity As at 31 December 2018 As at 31 December 2017 54,517 1,686 56,203 50,779 1,650 52,429 Note: (1) Consistent with the IFRS financial statements, net of tax, amounts attributable to participating funds and non-controlling interests. EV AND VONB SENSITIVITIES Sensitivities to EV and VONB arising from changes to central assumptions from equity price and interest rate movements are shown below and are consistent with the prior period. US$ millions, unless otherwise stated Central value Impact of equity price changes 10 per cent increase in equity prices 10 per cent decrease in equity prices Impact of interest rate changes 50 basis points increase in interest rates 50 basis points decrease in interest rates EV as at 31 December 2018 54,517 VONB 2018 3,955 EV as at 31 December 2017 50,779 736 (731) 158 (249) n/a n/a 142 (184) 750 (743) 49 (456) VONB 2017 3,206 n/a n/a 162 (225) Please refer to Section 3 of the Supplementary Embedded Value Information for additional information. 024 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEWIFRS PROFIT OPAT(1) by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total 2018 1,814 995 558 320 870 826 (85) 5,298 2017 1,627 868 513 274 643 742 (32) 4,635 YoY CER 11% 9% 7% 9% 32% 14% n/m 13% YoY AER 11% 15% 9% 17% 35% 11% n/m 14% Note: (1) Attributable to shareholders of the Company only excluding non-controlling interests. OPAT grew by 13 per cent to US$5,298 million. All our reportable market segments delivered positive OPAT growth in 2018 as a result of new business growth over time and the proactive management of our in-force portfolio. Hong Kong delivered an OPAT increase of 11 per cent reflecting growth in our business and improved claims experience, partly offset by a shift in product mix towards participating business, as previously highlighted in our Interim Report 2018. China achieved excellent OPAT growth of 32 per cent, primarily driven by the growing scale of our business and positive claims experience. Thailand’s OPAT continued its positive growth momentum from the first half of 2018 and grew by 9 per cent for the full year, reflecting our business growth and improved persistency. Singapore reported a 7 per cent increase in OPAT despite pressure on profitability from double-digit medical inflation in the market. Malaysia reported a 9 per cent increase in OPAT, in line with business growth. Other Markets delivered a strong result with growth of 14 per cent in 2018. Highlights included strong performances from Australia (including New Zealand), the Philippines, Taiwan and Vietnam. Operating ROE increased by 40 bps to 14.5 per cent, driven by OPAT growth partly offset by higher average shareholders’ allocated equity compared with 2017. TWPI by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Other Markets Total 2018 11,444 3,895 2,738 2,083 4,006 6,377 2017 9,535 3,559 2,435 1,848 3,118 5,898 30,543 26,393 YoY CER 20% 5% 10% 6% 26% 10% 14% YoY AER 20% 9% 12% 13% 28% 8% 16% TWPI increased by 14 per cent to US$30,543 million compared with 2017. ANNUAL REPORT 2018 | 025 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONIFRS Operating Profit Investment Return US$ millions, unless otherwise stated Interest income Expected long-term investment return for equities and real estate Total 2018 6,125 1,951 8,076 2017 5,500 1,689 7,189 YoY CER 10% 14% 11% YoY AER 11% 16% 12% IFRS operating profit investment return increased by 11 per cent to US$8,076 million compared with 2017. The growth was primarily driven by the increased size of our investment portfolio. Operating Expenses US$ millions, unless otherwise stated Operating expenses 2018 2,171 2017 2,019 YoY CER 7% YoY AER 8% Operating expenses grew by 7 per cent to US$2,171 million with a lower expense ratio of 7.1 per cent compared with 7.6 per cent in 2017 as we continued to benefit from increasing scale. Net Profit(1) US$ millions, unless otherwise stated OPAT 2018 5,298 2017 4,635 Short-term fluctuations in investment return related to equities and real estate, net of tax(2) (2,063) 2,040 Reclassification of revaluation gain for property held for own use, net of tax(2)(3) Corporate transaction related costs, net of tax(3) Implementation costs of new accounting standards, net of tax(3) Other non-operating investment return and other items, net of tax(3) Total (212) (148) (42) (236) 2,597 (84) (25) (7) (63) 6,496 YoY CER 13% n/m n/m n/m n/m YoY AER 14% n/m n/m n/m n/m n/m (60)% n/m (60)% Notes: (1) Attributable to shareholders of the Company only excluding non-controlling interests. (2) Short-term fluctuations in investment return include the revaluation gain for property held for own use. This amount is then reclassified out of net profit to conform to IFRS measurement and presentation. (3) The comparative information has been adjusted to conform to current year presentation. IFRS NON-OPERATING MOVEMENT AIA’s IFRS net profit definition includes mark-to-market movements from our equity portfolio. IFRS net profit decreased by 60 per cent to US$2,597 million compared with 2017. The decrease was due to negative short-term fluctuations from equities and real estate of US$2,063 million, particularly in respect of our other participating business with distinct portfolios, compared with positive movements of US$2,040 million in 2017. Other non- operating items in 2018 included corporate transaction related costs of US$148 million, representing tax expenses in relation to the subsidiarisation of AIA Korea and costs associated with the acquisition of Sovereign, and implementation costs of new accounting standards of US$42 million. 026 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEW Movement in Shareholders’ Allocated Equity US$ millions, unless otherwise stated Opening shareholders’ allocated equity Net profit Purchase of shares held by employee share-based trusts Dividends Revaluation gains on property held for own use Foreign currency translation adjustments Other capital movements Total movement in shareholders’ allocated equity Closing shareholders’ allocated equity Average shareholders’ allocated equity 2018 36,413 2,597 (11) (1,589) 8 (732) 109 382 36,795 36,604 2017 29,653 6,496 (10) (1,376) 88 1,409 153 6,760 36,413 33,034 The movement in shareholders’ allocated equity is shown before fair value reserve movements. AIA believes this provides a clearer reflection of the underlying movement in shareholders’ equity over the year, before the IFRS accounting treatment of market value movements in available for sale bonds. Average shareholders’ allocated equity increased by US$3,570 million to US$36,604 million in 2018 compared with US$33,034 million in 2017 as a result of a higher opening position for 2018 arising from significant mark- to-market gains in our equity portfolio during 2017. At 31 December 2018, shareholders’ allocated equity remained stable at US$36,795 million, after the payment of shareholder dividends of US$1,589 million, reflecting the depreciation of local currencies against our US dollar reporting currency of US$732 million and net profit of US$2,597 million which included negative mark- to-market movement from our equity portfolio. Sensitivities arising from foreign exchange rate, interest rate and equity price movements are included in note 37 to the financial statements. ANNUAL REPORT 2018 | 027 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONIFRS EARNINGS PER SHARE (EPS) Basic EPS based on IFRS OPAT attributable to shareholders increased by 12 per cent to 44.07 US cents in 2018. Basic EPS based on IFRS net profit attributable to shareholders, including mark-to-market movements from our equity and investment property portfolios, decreased by 60 per cent to 21.60 US cents in 2018. IFRS EPS – Basic Profit (US$ millions) Weighted average number of ordinary shares (millions) Basic earnings per share (US cents) IFRS EPS – Diluted Profit (US$ millions) Weighted average number of ordinary shares(2) (millions) Diluted earnings per share(2) (US cents) Net Profit(1) OPAT(1) 2018 2,597 12,021 21.60 2017 6,496 12,002 54.12 2018 5,298 12,021 44.07 Net Profit(1) OPAT(1) 2018 2,597 12,056 21.54 2017 6,496 12,039 53.96 2018 5,298 12,056 43.94 2017 4,635 12,002 38.62 2017 4,635 12,039 38.50 Notes: (1) Attributable to shareholders of the Company only excluding non-controlling interests. (2) Diluted earnings per share including the dilutive effects, if any, of the awards of share options, restricted share units, RSPUs and RSSUs granted to eligible directors, officers, employees and agents under the share-based compensation plans as described in note 39 to the financial statements. CAPITAL FREE SURPLUS GENERATION The Group’s free surplus at 31 December 2018 represented the excess of adjusted net worth over required capital including the consolidated reserving and capital requirements. Free surplus increased by US$2,165 million to US$14,751 million at 31 December 2018. This included a positive addition to free surplus of US$1,886 million due to the subsidiarisation of AIA Korea and a deduction of US$497 million for the net effect of the acquisition of Sovereign. Underlying free surplus generation, which excludes investment return variances and other items, increased to US$4,945 million, representing growth of 13 per cent on a comparable basis before a reduction of US$263 million relating to the subsidiarisation of AIA Korea. This reflects the growing scale of our in-force business and our focus on writing quality new business with attractive returns on capital. The amount invested in writing new business increased by 10 per cent to US$1,540 million. The overall effect of investment return variances and other items including regulatory developments was negative US$795 million and the payment of shareholder dividends was US$1,589 million. 028 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEW The following table summarises the change in free surplus: US$ millions, unless otherwise stated Opening free surplus Release of free surplus through the subsidiarisation of AIA Korea on 1 January 2018 Effect of acquisition Underlying free surplus generated Free surplus used to fund new business Investment return variances and other items Unallocated Group Office expenses Dividends Finance costs and other capital movements Closing free surplus 2018 12,586 1,886 (497) 4,945 (1,540) (795) (170) (1,589) (75) 14,751 2017 9,940 – – 4,568 (1,386) 1,039 (195) (1,376) (4) 12,586 NET FUNDS TO GROUP CORPORATE CENTRE Working capital comprises debt and equity securities, deposits and cash and cash equivalents held at the Group Corporate Centre. Working capital increased to US$10,296 million at 31 December 2018. Net remittances from business units increased by US$714 million to US$2,753 million compared with US$2,039 million in 2017, mainly due to higher remittances from China and Other Markets, which largely reflected a special remittance from New Zealand post acquisition of Sovereign. This was partly offset by a lower remittance from Thailand in 2018 due to the timing of various required regulatory approvals, which was pending clarification of the regulatory approval framework; subsequently Thailand remitted an additional US$319 million to the Group Corporate Centre in January 2019. Borrowings increased by US$1,001 million from the net proceeds of the issuance of medium-term notes of US$1,490 million, partly offset by the redemption of medium-term notes of US$500 million upon maturity. The total increase in working capital is reported after the payment of shareholders dividends of US$1,589 million and the gross payment of US$918 million for the acquisition of Sovereign. The movements in working capital are summarised as follows: US$ millions, unless otherwise stated Opening working capital Group Corporate Centre operating results Capital flows from business units Hong Kong Thailand Singapore Malaysia China Other Markets Net funds remitted to Group Corporate Centre Payment for acquisition of Sovereign 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 2018 9,714 (85) 1,054 149 267 185 542 556 2,753 (918) 1,001 (11) (1,589) (569) 10,296 2017 8,404 (32) 952 467 238 192 207 (17) 2,039 – 514 (10) (1,376) 175 9,714 ANNUAL REPORT 2018 | 029 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONIFRS BALANCE SHEET Consolidated Statement of Financial Position US$ millions, unless otherwise stated Assets Financial investments Investment property Cash and cash equivalents 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 Shareholders’ allocated equity Movement in Shareholders’ Equity US$ millions, unless otherwise stated Opening shareholders’ equity Net profit Fair value (losses)/gains on assets Purchase of shares held by employee share-based trusts Dividends Revaluation gains on property held for own use Foreign currency translation adjustments Other capital movements Total movement in shareholders’ equity Closing shareholders’ equity As at 31 December 2018 As at 31 December 2017 Change AER 186,142 179,503 4,794 2,451 24,626 11,793 4,363 1,922 21,950 10,908 229,806 218,646 172,649 159,685 4,954 12,797 3,958 11,447 190,400 175,090 39,406 400 39,006 36,795 43,556 380 43,176 36,413 2018 43,176 2,597 (4,552) (11) (1,589) 8 (732) 109 (4,170) 39,006 4% 10% 28% 12% 8% 5% 8% 25% 12% 9% (10)% 5% (10)% 1% 2017 34,555 6,496 1,861 (10) (1,376) 88 1,409 153 8,621 43,176 030 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEW Total Investments US$ millions, unless otherwise stated As at 31 December 2018 Percentage of total As at 31 December 2017 Percentage of total Total policyholder and shareholder 171,337 88% 162,676 87% Total unit-linked contracts and consolidated investment funds Total investments 23,938 195,275 12% 100% 24,815 187,491 13% 100% The investment mix remained stable during the year as set out below: 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 31 December 2018 Percentage of total As at 31 December 2017 Percentage of total 4,765 81 18,418 672 2 20% – 77% 3% – 4,720 97 19,522 466 10 19% – 79% 2% – Total unit-linked contracts and consolidated investment funds 23,938 100% 24,815 100% ANNUAL REPORT 2018 | 031 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Policyholder and Shareholder Investments US$ millions, unless otherwise stated Participating funds and Other participating business with distinct portfolios(1) Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Investment property and property held for own use Cash and cash equivalents Derivatives Subtotal Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder(1) Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Investment property and property held for own use Cash and cash equivalents Derivatives Subtotal other policyholder and shareholder Total policyholder and shareholder As at 31 December 2018 Percentage of total As at 31 December 2017 Percentage of total 14,121 30,183 2,179 46,483 13,892 888 395 148 8% 18% 1% 27% 8% 1% – – 11,470 28,403 2,245 42,118 12,498 761 201 82 7% 18% 1% 26% 8% – – – 61,806 36% 55,660 34% 49,317 41,835 5,132 96,284 5,789 5,794 1,384 280 109,531 171,337 29% 24% 3% 56% 3% 4% 1% – 64% 100% 45,693 42,583 5,868 94,144 6,059 5,305 1,255 253 107,016 162,676 28% 26% 4% 58% 4% 3% 1% – 66% 100% Note: (1) Presentation of Participating funds and Other participating business with distinct portfolios and Other policyholder and shareholder is consistent with note 20 to the financial statements. The comparative information has been adjusted to conform to current year presentation. Please refer to note 20 to the financial statements for additional information. 032 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEW ASSETS Participating business is written in a segregated statutory fund, with regulations governing the division of surplus between policyholders and shareholders. “Other participating business with distinct portfolios” is supported by segregated investment assets and explicit provisions for future surplus distribution though the division of surplus between policyholders and shareholders is not defined in regulations. We have enhanced our investment disclosures to reflect the nature and greater size of this business by grouping its assets together with participating business. Comparative information is also shown for 31 December 2017. Total assets increased by US$11,160 million to US$229,806 million at 31 December 2018, compared with US$218,646 million at 31 December 2017. Total investments including financial investments, investment property, property held for own use, and cash and cash equivalents increased by US$7,784 million to US$195,275 million at 31 December 2018, compared with US$187,491 million at 31 December 2017. Of the total US$195,275 million investments at 31 December 2018, US$171,337 million were held in respect of policyholders and shareholders and the remaining US$23,938 million were backing unit-linked contracts and consolidated investment funds. Fixed income investments, including debt securities, loans and term deposits held in respect of policyholders and shareholders, totalled US$142,767 million at 31 December 2018 compared with US$136,262 million at 31 December 2017. The average credit rating of the fixed income portfolio of A remained consistent with the position at 31 December 2017. Government and government agency bonds represented 44 per cent of fixed income investments at 31 December 2018, compared with 42 per cent at 31 December 2017. Corporate bonds and structured securities accounted for 50 per cent of fixed income investments at 31 December 2018, compared with 52 per cent at 31 December 2017. Equity securities held in respect of policyholders and shareholders totalled US$19,681 million at 31 December 2018, compared with US$18,557 million at 31 December 2017. The US$1,124 million increase in carrying value was mainly attributable to new purchases offset by negative mark-to-market movements. Within this figure, equity securities of US$13,892 million were held in participating funds and other participating business with distinct portfolios. Cash and cash equivalents increased by US$529 million to US$2,451 million at 31 December 2018 compared with US$1,922 million at 31 December 2017. The increase largely reflected positive net cash inflows from our operating business, net proceeds of the issuances of medium-term notes totalling US$1,490 million during the year, partly offset by the redemption of medium-term notes of US$500 million upon maturity and the payment of shareholder dividends of US$1,589 million. Investment property and property held for own use in respect of policyholders and shareholders totalled US$6,682 million at 31 December 2018 compared with US$6,066 million at 31 December 2017. Deferred acquisition and origination costs increased to US$24,626 million at 31 December 2018 compared with US$21,950 million at 31 December 2017, largely reflecting new business growth. Other assets increased to US$11,793 million at 31 December 2018 compared with US$10,908 million at 31 December 2017, reflecting an increase in reinsurance recoveries, accrued interest and prepayments. ANNUAL REPORT 2018 | 033 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONLIABILITIES Total liabilities increased to US$190,400 million at 31 December 2018 from US$175,090 million at 31 December 2017. Insurance and investment contract liabilities grew to US$172,649 million at 31 December 2018 compared with US$159,685 million at 31 December 2017, reflecting the underlying growth of the in-force portfolio offset by negative mark-to-market movements on equities backing unit-linked and participating policies and negative foreign exchange translation. Borrowings increased to US$4,954 million at 31 December 2018, due to the net proceeds of the issuances of medium-term notes totalling US$1,490 million during the year, partly offset by the redemption of medium-term notes of US$500 million upon maturity. Medium-term notes with a notional amount of US$500 million issued in 2014 will mature in March 2019 as disclosed in note 29 to the financial statements. Leverage ratio, which is defined as borrowings expressed as a percentage of total borrowings and equity, was 11.2 per cent, compared with 8.3 per cent at 31 December 2017. Other liabilities were US$12,797 million at 31 December 2018, compared with US$11,447 million at 31 December 2017, reflecting an increase in deferred tax liabilities and investment-related payables. Details of commitments and contingencies are included in note 42 to the financial statements. REGULATORY CAPITAL Our Group supervisor is the Hong Kong Insurance Authority (HKIA). The Group’s principal operating company is AIA Co., a Hong Kong-domiciled insurer. At 31 December 2018, the total available capital for AIA Co., our main regulated entity, was US$9,208 million as measured under the Hong Kong Insurance Ordinance (HKIO) basis, resulting in a solvency ratio of 421 per cent of regulatory minimum capital compared with 446 per cent at 31 December 2017. Our solvency ratio remained very strong after the effect of the acquisition of Sovereign and dividends to the Company. A summary of the total available capital and solvency ratios of AIA Co. is as follows: US$ millions, unless otherwise stated Total available capital Regulatory minimum capital (100%) Solvency ratio (%) As at 31 December 2018 As at 31 December 2017 9,208 2,189 421% 8,395 1,882 446% The Group’s individual branches and subsidiaries are also subject to supervision, including relevant capital requirements, in the jurisdictions in which they and their parent entity operate. The local operating units were in compliance with the capital requirements of their respective entity and local regulators in each of our geographical markets at 31 December 2018. 034 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWFINANCIAL REVIEWFINANCIAL AND OPERATING REVIEWGLOBAL MEDIUM-TERM NOTE AND SECURITIES PROGRAMME Under our US$6 billion Global Medium-term Note (GMTN) and Securities programme, the Company issued senior unsecured fixed rate notes with a nominal amount of US$500 million and HK$3,900 million in April 2018 and US$500 million in September 2018. The US$500 million notes issued in April 2018 bear annual interest of 3.90 per cent and will mature in 2028. The HK$3,900 million notes issued in April 2018, which are not listed, bear annual interest of 2.76 per cent and will mature in 2021. The US$500 million notes issued in September 2018 bear annual interest of 3 months LIBOR rate plus 0.52 per cent and will mature in 2021. The Company redeemed senior unsecured fixed rate notes with a nominal amount of US$500 million in March 2018. At 31 December 2018, the aggregate carrying amount of the debt issued under the GMTN and Securities programme was US$4,954 million. On 16 January 2019, the Group issued Hong Kong dollar-denominated fixed rate medium-term notes that are unlisted. The offering comprised of HK$1,300 million of 3.5-year notes at an annual rate of 2.95 per cent and HK$1,100 million of 12-year notes at an annual rate of 3.68 per cent. In aggregate the US dollar-equivalent is approximately US$307 million. CREDIT RATINGS At 31 December 2018, AIA Co. has financial strength ratings of Aa2 (Very Low Credit Risk) with a stable outlook from Moody’s; AA (Very Strong) with a stable outlook from Fitch; and AA- (Very Strong) with a stable outlook from Standard & Poor’s. The Company has issuer credit ratings of A2 (Low Credit Risk) with a stable outlook from Moody’s; AA- (Very High Credit Quality) with a stable outlook from Fitch; and A (Strong) with a stable outlook from Standard & Poor’s. DIVIDENDS The Board has recommended an increase in the final dividend of 14 per cent to 84.80 Hong Kong cents per share, consistent with AIA’s established prudent, sustainable and progressive dividend policy. The Board has also recommended a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date from 30 November 2018 to 31 December 2018. The dividends reflect the strength of our financial results and the Board’s continued confidence in the future prospects of the Group. The recommended dividends are subject to shareholders’ approval at the Company’s forthcoming AGM. ANNUAL REPORT 2018 | 035 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW DISTRIBUTION AGENCY AIA’s proprietary tied agency is our core distribution channel and a major growth engine for the Group. The professionalism and extensive scale of our agency force are key competitive advantages for AIA. They enable regular and personalised customer engagement while delivering our comprehensive suite of products and services to address customer needs through different life stages. The focused execution of our Premier Agency strategy delivered very strong VONB growth in 2018 with an increase of 26 per cent to US$2,943 million. VONB from agency represented 72 per cent of the Group’s total VONB. ANP grew by 18 per cent to US$4,179 million and VONB margin increased to 70.4 per cent. AIA’s Premier Agency strategy provides our agents with best-in-class training and development programmes, empowering them to offer high-quality advice and help our customers live Healthier, Longer, Better Lives. In 2018, we launched new digital support tools and enhanced our targeted training and development programmes to boost the quality and professionalism of our agents and agency leaders. We also raised the minimum performance standards in all our markets as we continued to focus on agency quality as a key differentiator for AIA across the region. We invest in developing digital mobile platforms across the Group to enhance the sales and service experience for both agents and customers. More than 90 per cent of total agency new business for the Group was submitted through our interactive Point of Sale (iPoS) technology during 2018. In 2018, we began to integrate financial needs analysis and our propensity models into our digital tools, including iPoS, to guide our agents and better enable them to advise our customers on the most suitable products for their needs. We also started to pilot digital classrooms in many of our markets, which aims to create a more interactive and engaging learning experience that is completely paperless. Overall, our initiatives and continued focus on quality recruitment supported 7 per cent growth in the number of active agents and a double-digit increase in active agent productivity for the Group over the year. In 2018, AIA reported another outstanding result in Million Dollar Round Table (MDRT) membership with over 10,000 registered members across the Group. This represents an increase of 22 per cent compared with 2017 and is a clear indicator of our strong progress in developing a professional, full-time agency force. AIA has become the first multinational company to have the most MDRT registered members globally for four consecutive years. 036 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWPARTNERSHIPS AIA’s partnership distribution is complementary to our proprietary agency and accounted for 28 per cent of the Group’s total VONB in 2018. VONB from partnership distribution increased 11 per cent to US$1,172 million, building on the exceptionally strong performance from Hong Kong’s retail IFA channel in the first half of 2017 as previously highlighted. ANP increased by 10 per cent to US$2,331 million, while VONB margin remained strong at 50.3 per cent. Our long-term strategic partnerships with many of the leading multinational and local banks across our markets are an important competitive advantage. Bancassurance for the Group reported 18 per cent VONB growth, reflecting success from various initiatives, including joint marketing campaigns customised for specific customer segments, analytics-backed digital leads generation and bespoke sales management programmes. Over the course of the year, we launched new long-term strategic partnerships with Bangkok Bank Public Company Limited (Bangkok Bank) in Thailand and ASB Bank Limited (ASB) in New Zealand. We also introduced AIA Vitality to our existing bancassurance partnerships in many of our markets to further differentiate AIA’s products and services from our competitors. For example, sales of Vitality integrated products accounted for nearly two-thirds of total products able to be sold together with the wellness programme in our partnership with the Bank of the Philippine Islands (BPI). Our intermediated channels, including IFAs, brokers, private banks and specialist advisers, delivered strong VONB growth in the second half of 2018 and positive growth for the full year, building on the exceptional result in the first half of 2017. We maintained our leadership position in our key markets with a service support model that is both highly differentiated and tailored for our major partners. VONB results for our direct marketing business benefited from strong growth in Korea as we continued to strengthen engagement with our partners and the new business mix shifted towards higher-margin protection products. In 2018, AIA also launched new non-traditional partnerships with technology companies and telecommunication providers, including WeDoctor in China and SK Telecom in Korea. These partnerships represent a significant additional opportunity for AIA, providing broader customer access and enabling us to offer new digital health and wellness services in these markets as part of our brand promise. ANNUAL REPORT 2018 | 037 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION01 04 BUSINESS REVIEW 02 038 | AIA GROUP LIMITED 03 03 In 2018, we launched our new purpose-led brand promise across all our markets: Healthier, Longer, Better Lives. 04 In 2018, 10 of our markets ran football training sessions with Spurs for 25,000 children, parents and employees. 01 Since its launch in 2013, AIA Vitality has driven a step change in customer engagement. The AIA Vitality Park in Hong Kong is a vibrant and active place for people celebrating health and well-being. 02 Our Global Principal Partnership with Spurs continued to play an important role in linking AIA with healthy lifestyles and encouraging active participation in sport. FINANCIAL AND OPERATING REVIEWMARKETING Our long history in Asia, since establishing a presence in Shanghai 100 years ago, means that AIA is one of the most trusted and recognised brands in the region. In 2018, we launched our new purpose-led brand promise across all our markets: Healthier, Longer, Better Lives. This is what we stand for as a company, expressing the value we provide to our customers and our intent to play a role in combatting the dramatic rise of lifestyle-related diseases in Asia. This brand promise is the focus of all of our marketing activity but also is at the heart of actions we take as a company to help our customers live Healthier, Longer, Better Lives. CUSTOMER ENGAGEMENT With more than 33 million individual policies and over 16 million participating members of group insurance schemes, the scale and footprint of AIA’s customer base presents a huge growth opportunity as we actively engage and nurture long-term relationships with our customers. We continue to enrich our customer data and increasingly employ enhanced machine learning to better understand their needs and create meaningful customer segmentation to help deliver individually-tailored product and service offerings. Propensity modelling provides insights into customer characteristics and behaviours that influence their decision to buy insurance. The resulting targeted sales campaigns, in collaboration with our bank partners, have generated up to three times the closing rate compared with campaigns where no propensity models were used for lead selection. The Asian markets in which we operate continue to witness exceptional growth in mobile and internet usage. Our customers engage with our businesses both online and offline, and we continue to invest in improving our capabilities to satisfy their preferences: from online self-service for simple solutions to holistic planning and support from our market-leading, professional agents. Our Global Ambassador, David Beckham, took part in large-scale AIA events in Indonesia, China, Hong Kong, Australia and Thailand during the year, promoting our brand to tens of millions of people. This helped to raise awareness of our brand promise among our customers and other stakeholders and the importance of taking small steps towards a healthier life. The second phase of the #WhatsYourWhy campaign featuring David was launched across our markets with children, often people’s greatest motivator, asking about healthy living. To date, we have recorded over 56 million views of the video supporting the campaign and there have been over two million visitors to the campaign webpages. Our Global Principal Partnership with Tottenham Hotspur Football Club (Spurs) continued to play an important role in linking AIA with healthy lifestyles and encouraging active participation in sport. In 2018, 10 of our markets ran football training sessions with Spurs for 25,000 children, parents and employees. PRODUCT INNOVATION Since its launch in 2013, AIA Vitality has driven a step change in customer engagement, rewarding healthier behaviour and generating positive health outcomes where it has been adopted. In 2018, we continued to refine our mobile platform providing our customers with an expanded wellness proposition, enhanced functionality and an improved user experience. During 2018, we launched 20 new products integrated with AIA Vitality, including the first such product in the Korean market, bringing the total to 85 integrated products across the Group. Based on the health assessments provided by AIA Vitality members in six markets, the proportion of members who have moved from an unhealthy to a healthy range in blood pressure and cholesterol levels has reached 56 per cent and 38 per cent respectively. Across Asia, AIA Vitality members engage with AIA 16 times more frequently than our other customers. ANNUAL REPORT 2018 | 039 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW To date, more than three million health assessments and two million body mass index (BMI) readings have been uploaded to our platform by AIA Vitality members, and each day more than 600,000 workouts are submitted through fitness trackers. Total membership in our wellness programmes has exceeded 1.2 million. Health and wellness is increasingly core to our customer propositions, reflecting our brand promise. In 2018, AIA Malaysia introduced an innovative medical plan, A-Plus Health, which provides a “health wallet” based on customer behaviour and claims history that can be spent on recovery and preventative health benefits or enhanced policy benefits. We have also developed a new critical illness plan that helps protect our customers’ physical and mental health in Singapore. In the event of a critical illness or mental illness, the plan not only supports our customers financially but also gives them access to personalised medical support. Our exclusive partnership with Medix was extended and now provides first-of-its-kind, personal medical case management services to our customers in Singapore as well as Hong Kong. TECHNOLOGY AND OPERATIONS A key enabler of our Group’s strategic priorities is the transformation of our technology systems and business processes through digitalisation. During the year, we made significant investments in relevant technology to enhance back-office processes and systems, driving further productivity improvements across all distribution channels and using innovation to improve customer experience and the products we offer. Information security is critical for an insurer and in 2018 we established a new cybersecurity shared services centre to provide additional advanced cyberthreat detection and response capabilities. We have also enhanced our ability to detect cyberthreats by implementing artificial intelligence (AI) capabilities on our devices. We now continuously analyse system behaviour for suspicious activity and use advanced e-mail threat detection to protect our business against phishing threats. Our dedicated cybersecurity team has made significant progress in strengthening AIA’s business continuity capabilities by successfully testing our technology readiness across all critical applications. INCREASING EFFICIENCY THROUGH DIGITALISATION Every year our customers interact with us on more than 34 million standard product-related insurance transactions and an additional 105 million digital customer interactions through AIA Vitality. Digitalisation of our back office has enabled greater operational efficiencies across the Group and supports the delivery of excellent customer service. Increased digitalisation of customer services has helped productivity with an increase in transactions per employee of 25 per cent across the Group in 2018. Increasingly we employ AI capabilities to support our operations, enhancing the choice and convenience we offer to customers and distributors. AI supports new business processes in many ways, including intelligent application tools, servicing powered by chatbots, and using advanced analytics within claims handling to make efficiency improvements and identify potential fraud. In China, online tools and an AI-enabled service bot for agent servicing allowed us to rationalise our call centres in the fourth quarter of 2018. In 2018, we completed the migration of the Group’s back office to a dedicated “private cloud” environment, ensuring business continuity across all of our markets. AIA has built strategic partnerships with IBM and BT as we progress our data centre modernisation project. During 2018, we also expanded our strategic relationship with Microsoft and built the operational capabilities to deliver a “hybrid multi-cloud” strategy which supports our business transformation. 040 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWWe also established a Robotic Process Automation centre of excellence in our shared services centre based in Malaysia, using both Nice and Automation Anywhere. We have already seen improvements in processing time of up to 50 per cent for some transactions, enabling us to refocus resources on more complex, high-value tasks. DRIVING PRODUCTIVITY AND SERVICE EXCELLENCE AIA’s digital point-of-sale technology continues to evolve and its impact is growing: more than 90 per cent of new business across the Group was submitted digitally in 2018. Automatic underwriting rates continued to increase in 2018 with 57 per cent of all new business applications across the Group underwritten through our rules engine at the point of sale with no human intervention. The combination of front-end digitalisation and back-end automation is delivering tangible results for customers across the Group with dramatically shorter turnaround times. End-to-end straight-through-processing rates reached 70 per cent on new business in AIA China by the end of 2018. Turnaround times for these transactions are now minutes instead of days. We continued to expand the suite of applications in our agency interactive Mobile Office (iMO) platform. iRecruit improves the quality of our recruitment and the success of our new recruit onboarding, while iAcademy is an e-learning platform deployed across our businesses, enabling agents to learn at their own pace. MyPage, our next generation customer platform, is operational in all of our major markets, linking our customers with our products and services in a single portal. PROMOTING INNOVATION AND ENHANCED CUSTOMER EXPERIENCE AIA is building core innovation capabilities in key areas such as AI and blockchain while developing a growing network of expertise in emerging technologies. Our strategy is to apply innovative technology to enable the transformation and enhancement of our business, deepening customer engagement and supporting sustainable growth. We are focused on digital health and wellness as we develop our ecosystems to significantly improve customer experience. In Malaysia, A-Plus Health includes an innovative “health wallet” and AIA Thailand launched “Connected Claims”, a digital health claim service which enables a much-improved cashless claims experience for our customers. Our partnership with WeDoctor provides customers of AIA China with preferred access to its technology-enabled healthcare solutions. We established a blockchain lab in Vietnam with our partner FPT Software in 2018, which has allowed us to leverage IBM’s Hyperledger technology. AIA is also a member of the R3 blockchain consortium and we have participated in global trials including the Know Your Customer application, which is built on the Corda open-source blockchain platform. Transformational technologies such as cognitive AI provide additional capacity that can help our highly-trained staff to deliver around-the-clock services to our agents and customers as well as achieve greater back office efficiencies. Examples include self-service chatbot capabilities for employees, agents and customers. Our operations in Hong Kong and Singapore also became the first insurance companies in their markets to introduce humanoid robots in their customer service centres. ANNUAL REPORT 2018 | 041 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBUSINESS REVIEW • GEOGRAPHICAL MARKETS HONG KONG FINANCIAL HIGHLIGHTS AIA Hong Kong delivered excellent VONB growth across both domestic and Mainland Chinese visitor customer segments, once again demonstrating the outstanding quality of our multi-channel distribution. VONB increased by 24 per cent to US$1,712 million and ANP grew 8 per cent to US$2,697 million as we maintained our focus on executing our Premier Agency strategy and driving sustainable growth across our partnership distribution channel. Our product mix continued to shift towards higher-margin long-term savings and protection products which supported an increase in VONB margin to 62.0 per cent. OPAT increased by 11 per cent to US$1,814 million as a result of strong underlying business growth and better claims experience, partly offset by an increasing proportion of participating business in the in-force portfolio. BUSINESS HIGHLIGHTS Our Premier Agency strategy in Hong Kong is focused on quality recruitment by attracting young, high-calibre recruits and developing them into MDRT agents and future leaders. Our comprehensive recruitment and training platforms, AIA Premier Academy and AIA Premier Leaders Academy, are supported by a broad suite of digital tools that enable our agents to better engage and connect with customers. In 2018, our focused execution of these initiatives drove a double-digit increase in the number of active agents and further productivity gains, which sustained very strong VONB growth over the year. Our long-term strategic partnership with Citibank also delivered very strong VONB growth. We collaborated closely with the bank to launch marketing campaigns targeted at specific customer needs and to further integrate life insurance advice and solutions into the bank’s proprietary wealth management platform. The retail IFA channel reported solid VONB growth for the full year as sales remained steady between the first and second half of the year. AIA Hong Kong is committed to meeting its customers’ protection and long-term savings needs through active engagement and enhanced customer experience, particularly by investing in new digital tools. During 2018, we launched a mobile application that provides customers with a single portal to manage all of their AIA products and services. We also enhanced our iPoS platform with optical character recognition and AI technology to simplify identity document verification and further streamline on-boarding procedures for new customers. AIA Vitality remains a key enabler for more frequent customer engagement as membership of the programme increased by more than 40 per cent and VONB from integrated product sales doubled in 2018. 042 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWHONG KONG V O N B (1) 2018 1,712 2017 1,384 V O N B M A R G I N (2) 2018 2017 53.7% 62.0% A N P 2018 2,697 2017 2,493 T W P I 2018 11,444 2017 9,535 O PAT 2018 1,814 2017 1,627 US$ MILLIONS, UNLESS OTHERWISE STATED ANNUAL REPORT 2018 | 043 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)24%YoY (CER)8.3ppsYoY (AER)24%YoY (AER)8.3ppsYoY (CER)8%YoY (CER)20%YoY (AER)8%YoY (AER)20%YoY (CER)11%YoY (AER)11%BUSINESS REVIEW • GEOGRAPHICAL MARKETS THAILAND FINANCIAL HIGHLIGHTS AIA Thailand delivered a strong performance in 2018 and returned to double-digit VONB growth with an increase of 12 per cent to US$447 million. ANP increased 13 per cent, despite a decline across the industry overall, while VONB margin remained strong at 73.1 per cent. Sales growth was mainly driven by accelerating momentum in our agency channel. OPAT increased by 9 per cent to US$995 million as a result of underlying business growth and improvements in persistency. BUSINESS HIGHLIGHTS Our Thailand business continued to drive wholesale agency transformation through our Financial Adviser programme, which aims to improve the overall quality and productivity of our nationwide agency force. Aimed at selected high-potential candidates, our enhanced training and development programmes helped our newly recruited Financial Advisers achieve an activity ratio of more than double that of other new agents, while active new agent productivity was also significantly higher. Our Financial Advisers’ ANP grew by 37 per cent and we continued to raise the minimum standards across our agency to further reduce the number of less productive agents. Our focus on executing our strategy saw a 36 per cent increase in the number of MDRT qualifiers, and we continued to lead the industry in terms of registered members. In March 2018, we launched our partnership with Bangkok Bank with an initial focus on recruiting and training the bank’s in-branch insurance specialists. During the second half, we expanded the product range and piloted new sales models for protection and long-term savings products across the bank’s different customer segments. AIA is the market leader for protection business in Thailand. During the year, we expanded our range of critical illness products, which contributed to a 18 per cent increase in ANP for protection products. AIA is committed to enhancing customer experience through digitalisation, and in 2018 we rolled out MyPage, a web and mobile-enabled customer self-service portal, through which customers can access policy information and update their personal details. In August, we also launched an e-payment tool that facilitates electronic verification and enables direct benefits payments into our customers’ bank accounts. 044 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWV O N B M A R G I N (2) 2018 2017 73.4% 73.1% T W P I 2018 3,895 2017 3,559 THAILAND V O N B (1) 2018 447 A N P 2018 611 OPAT 2018 995 2017 381 2017 519 2017 868 US$ MILLIONS, UNLESS OTHERWISE STATED ANNUAL REPORT 2018 | 045 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)12%YoY (CER)(0.4)ppsYoY (CER)13%YoY (CER)5%YoY (AER)17%YoY (AER)(0.3)ppsYoY (AER)18%YoY (AER)9%YoY (CER)9%YoY (AER)15%BUSINESS REVIEW • GEOGRAPHICAL MARKETS SINGAPORE FINANCIAL HIGHLIGHTS AIA Singapore delivered very strong VONB growth of 18 per cent in 2018, mainly driven by the agency channel and our strategic partnership with Citibank. ANP grew by 26 per cent, while VONB margin decreased primarily due to lower profitability from our HealthShield business as previously highlighted and higher volumes of single premium unit-linked business ahead of a regulatory change in October 2018. OPAT increased by 7 per cent to US$558 million despite pressure on profitability from double-digit medical inflation in the market. BUSINESS HIGHLIGHTS AIA Singapore maintained its market leadership position in agency distribution and delivered very strong growth in VONB through this core distribution channel. Focused execution of our Premier Agency strategy drove increases in both the number of active agents and productivity, as our professional agents continued to concentrate on meeting customer needs with an emphasis on regular premium protection products. In 2018, we developed several innovative digital tools including a new mobile application integrated with our propensity models that helps our agents engage with customers more effectively to better meet their needs. The introduction of these tools and our targeted recruitment and training programmes drove active agent growth of 16 per cent and a double-digit increase in productivity. Our strategic partnership with Citibank delivered excellent VONB growth, with a focus on recruiting and enhancing the productivity of the bank’s insurance specialists to address our customers’ protection needs. AIA Singapore also remained a market leader in the group insurance market where we secured several new and sizeable corporate client cases during the year. Throughout 2018, we continued to dedicate significant efforts to deliver high-quality and sustainable healthcare services to our customers within a very competitive health insurance market. We further expanded our AIA Quality Healthcare Partners network, increased the number of participating hospitals with pre-approval claims services and offered more medical plan options to our customers. We also launched an exclusive partnership with Medix that provides first-of-its-kind, personal medical case management services to our customers. AIA Singapore also continued to invest in our award-winning AIA Vitality wellness programme. We added new reward benefits, launched a new AIA Vitality mobile application and integrated the programme across more insurance products. Overall membership of AIA Vitality increased by over 40 per cent with 70 per cent growth in the number of corporate members compared with 2017. 046 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWV O N B M A R G I N (2) 2018 2017 69.7% 65.4% T W P I 2018 2,738 2017 2,435 SINGAPORE V O N B (1) 2018 357 A N P 2018 547 OPAT 2018 558 2017 297 2017 426 2017 513 US$ MILLIONS, UNLESS OTHERWISE STATED ANNUAL REPORT 2018 | 047 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)18%YoY (CER)(4.3)ppsYoY (AER)20%YoY (AER)(4.3)ppsYoY (CER)7%YoY (AER)9%YoY (CER)26%YoY (CER)10%YoY (AER)28%YoY (AER)12%BUSINESS REVIEW • GEOGRAPHICAL MARKETS MALAYSIA FINANCIAL HIGHLIGHTS Despite reduced consumer activity and changes to tax regulations during the year, AIA Malaysia delivered an 8 per cent increase in VONB for the full year to US$247 million as growth improved in the second half. ANP increased by 5 per cent to US$382 million, and VONB margin remained strong at 63.8 per cent as we launched several new flagship unit-linked and health propositions. Driven by underlying business growth, OPAT increased by 9 per cent to US$320 million. BUSINESS HIGHLIGHTS AIA Malaysia’s agency remains focused on selective recruitment and continued development of our training capabilities, which supported an increase in agent productivity. The Takaful segment also continues to be an important area of strategic focus for AIA Malaysia and our Takaful agency delivered solid VONB growth in 2018. In the first half of 2018, we launched the AIA Life Planner App, our proprietary digital tool for agency sales activity management. We then introduced a series of upgrades and new functionality for both agents and agency leaders in the second half of the year. Response to the platform has been very positive, with usage reaching more than 80 per cent. Our strategic partnership with Public Bank Berhad delivered double-digit VONB growth as we continued to drive greater penetration of the bank’s affluent customer base, which was helped by the launch of a bespoke high sum assured regular premium unit-linked product. AIA also retained our position as the clear leader in Malaysia’s group insurance market. In the second half of 2018, AIA Malaysia became the first insurer in the country to offer unit-linked products that are compliant with the new Minimum Allocation Rate regulation in advance of the formal regulatory deadline. We also launched a new health rider for these products, which is integrated with our AIA Vitality programme. This rider offers first-to-market healthcare and wellness features designed to encourage healthy living and provide recovery support following treatment. 048 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWV O N B M A R G I N (2) 2018 2017 62.5% 63.8% T W P I 2018 2,083 2017 1,848 MALAYSIA V O N B (1) 2018 247 A N P 2018 382 OPAT 2018 320 2017 215 2017 340 2017 274 US$ MILLIONS, UNLESS OTHERWISE STATED ANNUAL REPORT 2018 | 049 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)8%YoY (CER)1.4ppsYoY (AER)15%YoY (AER)1.3ppsYoY (CER)9%YoY (AER)17%YoY (CER)5%YoY (CER)6%YoY (AER)12%YoY (AER)13%BUSINESS REVIEW • GEOGRAPHICAL MARKETS CHINA FINANCIAL HIGHLIGHTS AIA China delivered another excellent performance with VONB up by 30 per cent to US$965 million. ANP grew by 19 per cent to US$1,067 million and VONB margin increased by 7.1 pps to 90.5 per cent, reflecting our commitment to selling regular premium protection and long-term savings products, as well as the benefit of further scale economies. Growth in the underlying business and sustained favourable claims experience contributed to a 32 per cent increase in OPAT. BUSINESS HIGHLIGHTS The sustained execution of AIA China’s Premier Agency strategy is underpinned by our focus on quality recruitment and support from innovative digital platforms. We continued to prioritise agency quality through our stringent selection criteria, robust interview process, best-in-class training and advanced agency leader development programmes. Our digital platforms include comprehensive functions for customer acquisition and nurturing, needs-based advice, selling and servicing. These functions help our agents to provide high-quality advice and deliver a seamless customer experience. In 2018, we launched Master Planner, a new digital tool that further enhances our agency leaders’ professionalism and expertise by supporting them with new agent development, performance evaluations and team activity management. AIA China’s progress in executing its strategic priorities for the agency channel delivered strong double-digit growth in the number of active agents, while our focus on quality recruitment enabled us to increase new agent productivity by 17 per cent. In 2018, we further differentiated our protection-focused customer propositions. Membership of our wellness programme in China more than doubled over the year and we began to offer engagement activities tailored to specific customer segments through the programme’s mobile customer app. In May 2018, we formed a long-term strategic partnership with WeDoctor, China’s leading technology-enabled healthcare solution platform, which provides our customers with preferred access to WeDoctor’s services. We also leveraged emerging technology to launch AIA Xiao You, AIA China’s first AI-enabled service bot, in the second half of the year. This service bot is deployed on social media platforms and provides instant and interactive 24/7 enquiry services to both agents and customers across a wide range of topics. In the coming year, we will continue to expand the service’s capabilities and enhance its linkage with our online customer portal and agency digital platforms. In February 2019, we received approval from the China Banking and Insurance Regulatory Commission (CBIRC) Tianjin Bureau and Hebei Bureau to begin preparations for the establishment of sales and service centres in Tianjin and Shijiazhuang, Hebei. This approval is received in accordance with the existing regulatory policy and pilot programme on promoting insurance integration under the Beijing-Tianjin-Hebei Integration Plan. We will commence operations in Tianjin and Hebei province once we receive final regulatory approval upon the completion of our preparatory work. 050 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWCHINA V O N B (1) 2018 965 2017 725 V O N B M A R G I N (2) 2018 2017 83.1% 90.5% A N P 2018 1,067 2017 873 T W P I 2018 4,006 2017 3,118 OPAT 2018 870 2017 643 US$ MILLIONS, UNLESS OTHERWISE STATED ANNUAL REPORT 2018 | 051 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)30%YoY (CER)7.1ppsYoY (AER)33%YoY (AER)7.4ppsYoY (CER)32%YoY (AER)35%YoY (CER)19%YoY (CER)26%YoY (AER)22%YoY (AER)28%BUSINESS REVIEW • GEOGRAPHICAL MARKETS OTHER MARKETS AIA’s Other Markets include Australia (including New Zealand), Cambodia, Indonesia, Korea, the Philippines, Sri Lanka, Taiwan, Vietnam and India. The financial results from our 49 per cent shareholding in Tata AIA Life, our joint venture with the Tata Group in India, are accounted for using the equity method. For clarity, VONB, ANP and TWPI exclude any contribution from India. FINANCIAL HIGHLIGHTS Other Markets delivered 13 per cent VONB growth to US$435 million in 2018. ANP grew by 27 per cent to US$1,206 million and VONB margin was 35.8 per cent. Full-year VONB growth for the segment was 14 per cent excluding the effect of large group schemes in Australia that were previously highlighted in our Interim Report 2018. OPAT increased by 14 per cent to US$826 million, mainly from underlying business growth and the inclusion of Sovereign’s results in the second half. BUSINESS HIGHLIGHTS Australia: AIA Australia and New Zealand delivered strong VONB growth in 2018. The results reflect our leading position in the Australian life protection market and include the contribution from Sovereign. AIA is now the leading life insurer in the New Zealand protection market by new business premiums. AIA Vitality remains a key differentiator for AIA in the Australian market and has helped our retail IFA business deliver double-digit VONB growth in 2018, despite lower new business volumes for the overall industry. We more than doubled the number of AIA Vitality members and expanded the programme to a major corporate client in September 2018. Our group insurance business also delivered strong year-on-year VONB growth as we renewed several key schemes in 2018 and secured a new large scheme in March 2018. Cambodia: AIA’s Cambodian business continued to build scale through our multi-channel distribution strategy. We expanded our agency as we maintained our focus on recruiting and developing professional agents. New partners in our bancassurance network, including the affluent banking segment of Cambodian Public Bank, have significantly broadened our customer reach. Indonesia: Total VONB for our Indonesian business declined as volatility and uncertainty in the local equity markets impacted demand for unit-linked products in the second half. AIA Indonesia’s focus on quality recruitment in our agency channel enabled us to deliver an increase in active agent numbers and positive VONB growth for the channel, which was offset by lower VONB from the bancassurance channel. Korea: Our Korean business recorded very strong VONB growth, primarily driven by our direct marketing channel, which was helped by double-digit growth in the number of telesales representatives and an increase in quality customer leads. VONB margin increased due to a positive shift in product mix. During the second half of 2018, AIA Korea became the first company to receive regulatory approval for an integrated wellness insurance product. We also launched our strategic partnership with SK Telecom, the nation’s leading telecommunication provider by number of customers, to offer AIA Vitality to its customers. 052 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWPhilippines: Our business in the Philippines delivered strong VONB growth in 2018. In the agency channel, our focus on quality recruitment led to a double-digit increase in the number of active agents. We increased the number of active in-branch insurance specialists by more than 30 per cent in our joint venture with BPI, which helped to deliver excellent VONB growth. Following the launch of new protection products and customer engagement campaigns, VONB from Vitality integrated products more than trebled in 2018. Sri Lanka: AIA Sri Lanka’s VONB decreased in 2018 as political and economic uncertainty weighed on consumer sentiment. VONB margin was impacted by a change in tax regulations that took effect in April 2018 as previously highlighted. Despite these challenges, ANP growth in 2018 was positive as we continued to strengthen engagement with our key bancassurance partners and launched new protection and retirement savings solutions. Taiwan: AIA Taiwan delivered excellent VONB growth in 2018. Strong sales growth in both the IFA and bancassurance channels was supported by our insurance solutions designed to meet customer needs in legacy planning and retirement, effective sales promotion and comprehensive sales support for our distribution partners. Vietnam: Our business in Vietnam reported double-digit VONB growth. Agency remained the largest contributor to VONB as we continued to focus on executing our strategic initiatives to enhance our agents’ activity and productivity. Contribution from our partnerships increased significantly, as our exclusive partnership with Vietnam Prosperity Joint Stock Commercial Bank and other domestic bank partnerships achieved excellent VONB growth in 2018. OTHER MARKETS V O N B (1) 2018 435 2017 395 V O N B M A R G I N (2) 2018 2017 39.9% 35.8% A N P 2018 1,206 2017 973 T W P I 2018 6,377 2017 5,898 OPAT 2018 826 2017 742 US$ MILLIONS, UNLESS OTHERWISE STATED Notes: Throughout the Distribution section: VONB and VONB margin by distribution channel are based on local statutory reserving and capital requirements and exclude pension business. Throughout the Geographical Markets section: (1) VONB figures shown in the tables are based on local statutory reserving and capital requirements and include pension business. (2) VONB margin excludes pension business to be consistent with the definition of ANP used within the calculation. ANNUAL REPORT 2018 | 053 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONYoY (CER)13%YoY (CER)(4.1)ppsYoY (AER)10%YoY (AER)(4.1)ppsYoY (CER)27%YoY (CER)10%YoY (AER)24%YoY (AER)8%YoY (CER)14%YoY (AER)11%RISK MANAGEMENT OVERVIEW The Group recognises the importance of sound risk management in every aspect of our business and for all stakeholders. For our policyholders it provides the security of knowing that we will always be there for them. For investors it is key to protecting and enhancing the long-term value of their investment. Finally, for regulators, sound risk management supports industry growth and enhances the public’s trust in the industry. While effective risk management is vital to any organisation, it goes to the core of a life insurance business where it is a fundamental driver of value. The Group’s Risk Management Framework (RMF) does not seek to eliminate all risks but rather to identify, understand and manage them within acceptable limits in order to support the creation of long-term value. The Group’s RMF is built around developing an appropriate and mindful risk culture at every level of the organisation in support of our strategic objectives. The RMF provides business units with appropriate tools, processes and capabilities for the identification, assessment and, where required, upward referral of identified material risks for further evaluation. The Group’s RMF consists of the following key components: • Risk Culture; • Risk Management Process; • Risk Governance; • Risk Appetite; and • Risk Landscape. Risk Landscape Risk Culture Risk Appetite STRATEGIC OBJECTIVES Risk Management Process Risk Governance 054 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW RISK CULTURE The RMF recognises the importance of risk culture in the effective management of risks. Risk culture defines the Group’s attitude to risks and ensures its remuneration structure promotes the right behaviour. ACCOUNTABILITY A key component of the Group’s risk culture is accountability. The First Line of Defence (First Line) generally consists of business unit management and is responsible for managing risks associated with their businesses. The Risk Management and Compliance Function makes up our Second Line of Defence (Second Line) and is headed by the Group Chief Risk Officer (CRO) who has overall accountability for the Risk & Compliance function across the Group. Within each business unit, the business unit CRO is a senior position with a primary reporting line into the Group CRO and a secondary reporting line to the local Chief Executive Officer (CEO). This structure ensures independence of the Second Line while ensuring that business unit CROs have full access to local business discussions so as to provide risk management perspectives and insights. The Group CRO is a member of the Group Executive Committee while business unit CROs are, in most cases, also members of their respective local Executive Committees. The Risk & Compliance organisational structure is shown below: REMUNERATION The Company’s executive remuneration structure ensures appropriate consideration of the RMF within a strong performance-oriented culture. This is supported by a performance management system where all staff are measured on ‘how’ as well as ‘what’ they deliver. This structure places significant emphasis on conduct as well as achievement, and is consistent with our fundamental Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People... Right Results will come”. Group Chief Executive and President Group CRO Group Risk & Compliance Business Unit CROs ANNUAL REPORT 2018 | 055 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK MANAGEMENT PROCESS The Group has a robust Risk Management Process that provides sufficient information, capability and tools to manage its key risks. To that end, the Group has developed the following key processes to identify, quantify, manage and monitor the risk exposures. IDENTIFICATION Timely and complete identification of risks is an essential first step to the risk management process. The Risk & Compliance function has developed a systematic process to identify existing and emerging risks in the business units. QUANTIFICATION Quantification of risk is important in establishing the level of exposure and in determining the appropriate management actions within the Group’s Risk Appetite. Specific risk metrics adopted to support the quantification process are detailed in the Risk Landscape section of this report. ESCALATION AND MITIGATION Following the risk quantification process, the executives working in the First Line are responsible for the timely identification and escalation of material risk developments and for the implementation of risk mitigation actions, as appropriate. REPORTING AND MONITORING [In addition to providing advice, guidance, support and challenge to the First Line,] the Second Line is responsible for monitoring First Line activities and reporting to the appropriate Risk Committees the performance of the First Line against risk metrics and limits defined in the Risk Appetite. In addition, to ensure the effectiveness of the Risk Management Process, an Own Risk and Solvency Assessment is reported to the Risk Committees for annual review. 056 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWRISK MANAGEMENTRISK GOVERNANCE THREE LINES OF DEFENCE The Group’s Risk Governance framework is built on the “Three Lines of Defence” model. With regard to risk management, the objective is to ensure that an appropriate framework is in place, including an independent system of checks and balances, to provide assurance that risks are identified, assessed, managed and governed properly. The framework clearly defines roles and responsibilities for the management of risk between the Executive Management (First Line), Risk & Compliance (Second Line) and Internal Audit (Third Line) functions. While each line of defence is independent from the others, they work closely to ensure effective oversight. The First Line is made up of the business decision-takers who are responsible for ensuring that effective and appropriate processes are in place at all times to effectively identify, assess and manage risk in a manner consistent with the RMF. In particular, the amount of risk taken at each level of the organisation must be consistent with both the Risk Appetite of the Group and the relevant business unit. Initial identification, assessment and management of risk is the responsibility of executives operating in the First Line. Decisions regarding activities deemed to have significant risks attached or that are outside the limits delegated to a given level of management are referred to a senior Group executive or, where appropriate, through the Group Chief Executive and President to the Risk Committee of the Board and, where appropriate, to the full Board of Directors. The Second Line consists of the Risk & Compliance function. This function (under a Group CRO who reports directly to the Group Chief Executive and President) is independent of but works closely with the First Line to ensure that risks are being managed appropriately within the Group’s Risk Appetite. The Second Line is also responsible for overseeing First Line activities and ensuring the Group adheres to its own high standards. The Third Line of Defence (Third Line) is the Group Internal Audit (GIA) function, which reports to the Audit Committee of the Board. GIA is responsible for providing independent assurance over the effectiveness of risk management and key internal controls and makes recommendations based on the audit findings. The Three Lines of Defence converge at the Board, which retains overall responsibility for the Group’s RMF. AIA Group Limited Board Group and Business Units Functions Group and Business Units Risk & Compliance Group Internal Audit Executive Management Risk Oversight Independent Assurance First Line of Defence Second Line of Defence Third Line of Defence ANNUAL REPORT 2018 | 057 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK COMMITTEE STRUCTURE The Group’s Risk Committee structure is designed to: • ensure consistent application of the RMF across the Group; • provide streamlined processes for the timely identification, assessment and escalation of risk issues; • provide objective analysis of risk issues enabling informed decision-making; and • ensure discussion and challenge in relation to risk issues in suitable forums leading to optimal outcomes. AIA Group Limited Board Audit Committee Risk Committee Remuneration Committee Nomination Committee Operational Risk Committee Financial Risk Committee The Board The Board retains overall responsibility for oversight of the Group’s risk management activities. In this regard the Board sets the Group’s Risk Appetite, approves the RMF (including amendments or refinements from time to time) and monitors material Group-wide risks. In fulfilling these responsibilities, the Board is supported and advised by the Risk Committee. Risk Committee The Risk Committee oversees risk management across the Group and advises the Board on all risk-related issues requiring Board attention. The members of the Risk Committee are all Board directors, with the majority of members including the Committee Chairman being Independent Non-executive Directors. The Risk Committee meets at least four times a year. Operational Risk (ORC) and Financial Risk (FRC) Committees The Risk Committee is supported by two Executive Risk Committees which, between them, oversee the management of all risks. The ORC is chaired by the Group Chief Financial Officer and oversees risks associated with failure in internal processes, personnel and systems or from external events. The FRC is chaired by the Group Chief Executive and President and oversees risks associated with Financial, Insurance and Investment activities. The FRC and ORC each meet at least four times a year. The above committee structures are replicated at the business unit level where applicable. 058 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWRISK MANAGEMENTRISK APPETITE Risk Appetite Statement Risk Principles and Risk Tolerances Risk Controls and Risk Limits The Group’s Risk Appetite is the foundation of its RMF. It establishes the quantum and nature of risks the Group is prepared to take to achieve its strategic objectives. • The Risk Appetite Statement (RAS) is an overarching statement on the enterprise’s attitude to risk; • Risk Principles and Risk Tolerances are qualitative statements and quantitative metrics that expand and validate the RAS; and • Risk Controls and Risk Limits are used to manage specific risks. The Group has adopted the following RAS: “The amount of risk taken by AIA in the ordinary course of its business will be sufficient to meet its customers’ reasonable requirements for protection and benefits while ensuring that the level and volatility of shareholder returns are in line with a broadly-based risk profile appropriate to an Asia-Pacific ex-Japan-focused life insurance company.” The RAS is supported by five Risk Principles: Risk Principles Regulatory Capital Financial Strength “AIA has 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.” “AIA 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.” Liquidity “AIA will maintain sufficient liquidity to meet our expected financial commitments as they fall due.” Earnings Volatility Business Practice “AIA 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.” “AIA will uphold high ethical standards and will implement sound internal controls to minimise the downside risk from the impact of any operational failures within reasonable tolerances.” ANNUAL REPORT 2018 | 059 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK LANDSCAPE The Group maintains a detailed risk taxonomy to ensure all risks are identified and systematically managed. The principal risks and their definitions are summarised below: Financial Risks Operational Risks Investment Insurance ALM Credit Lapse Interest Rate Distribution Equity Price Expense Foreign Exchange Rate Fraud & Financial Crime Property Price Morbidity Credit Spread Mortality Investment Liquidity Financial Liquidity Legal & Regulatory Investment Operations People Strategic Risks Information Technology Information Security Finance & Actuarial Product Management Operations Third Party Key Projects Business Interruption Risks Investment Insurance Definition Investment risk is the risk arising from the Group’s investment portfolio due to (i) counterparties defaulting on obligations - “Credit Risk”; (ii) market movements – “Market Risk”; or (iii) reduced liquidity in markets. Insurance risk is the risk arising from changes in claims experience as well as more general exposure relating to the acquisition and persistency of insurance business. This also includes changes to actuarial assumptions regarding future experience for these risks. Asset-Liability Mismatch (ALM) ALM risk is the risk arising from the difference in duration between the Group’s assets and liabilities. This mismatch is mainly caused by differences in timing and size of the respective asset and liability cash flows. Operational Strategic Operational risk is the risk arising from internal processes, personnel and systems or from external events which may result in direct or indirect business impact. Strategic risk is the risk arising from the potential impact of the business strategy on the Group’s earnings, capital and reputation. This also takes into consideration the wider social, economic, political, regulatory, competitive or technological trends that could impact the business strategy within a set time period. 060 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWRISK MANAGEMENTFINANCIAL RISKS – INVESTMENT Credit The risk arising from the uncertainty of third parties meeting their obligations to the Group when they fall due. Although the primary source of credit risk is the Group’s investment portfolio, such risk can also arise through reinsurance and treasury activities. The Group performs a detailed analysis of each counterparty and recommends a rating, which will be updated from time to time. This rating then forms the basis for the quantum of exposure that the Group is willing to take with such counterparties. The Group’s Risk Management function manages the Group’s internal ratings framework and reviews these recommendations and, where appropriate, makes recommendations for revisions from time to time. Equity Price The risk arising from changes in the market value of equity securities. Equity price risk is managed through the individual investment mandates which define benchmarks and any tracking error targets. Equity limits are also applied to contain individual exposures. Equity exposures are included in the aggregate credit exposure reports on individual counterparties to monitor total concentration levels. Property Price The risk arising from the volatility of real estate market value due to general or specific factors. Property price risk can be driven by broader economic and social factors, notably tenant supply and demand, liquidity of individual assets, evolving infrastructure or government actions that may directly or indirectly influence the market. It can also be driven by the characteristics of specific holdings: their location within an area, the competitiveness of their facilities and their physical condition. Any material property investment is individually reviewed by the Group to ensure it does not give rise to an unacceptable concentration of exposure and that it does not compromise the financial flexibility of the relevant business unit. Credit Spread The risk arising from changes in the market value of securities as a result of a change in perception as to their likelihood of repayment. The Group invests in non-government securities in a number of its portfolios for yield purposes, and the primary intention is to hold these to maturity. The Group manages its credit spread risk carefully, focusing on overall portfolio quality and diversification and seeking to avoid excessive volatility in the mark-to-market value of its investment portfolios. Investment Liquidity The risk arising from the Group’s ability to buy and sell investments subject to market availability and pricing. Investment liquidity risk is managed in the first instance through the size of the Group’s individual holdings relative to market volume, complemented by the quality of the investments which are primarily in government and high-quality corporate bonds with good liquidity profile. The Group also maintains a minimum liquidity threshold on its investments in listed equities. ANNUAL REPORT 2018 | 061 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RISKS – INSURANCE Lapse Lapse risk is the risk that the rate of policy termination deviates from the Group’s expectation. Ensuring that customers only buy products that match their needs is central to the Group’s Operating Philosophy. Through effective implementation of the Business Quality Framework, comprehensive sales training programmes and active monitoring of sales activities and persistency, the Group seeks to ensure that appropriate products are sold by qualified sales representatives and that standards of service consistently meet our customers’ needs. Expense Expense risk is the risk that the cost of selling new business and of administering the in-force book exceeds the assumptions made in pricing and/or reserving. Daily operations follow a disciplined budgeting and control process that allows for the management of expenses based on the Group’s very substantial experience within the markets in which we operate. Morbidity and Mortality Morbidity and mortality risk is the risk that the occurrence and/or amounts of medical/death claims are higher than the assumptions made in pricing or reserving. The Group adheres to well-defined market-oriented underwriting and claims guidelines and practices that have been developed based on extensive historical experience and with the assistance of professional reinsurers. The Group’s actuarial teams conduct 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. 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. Environmental risk, including climate change, forms part of our overall insurance risk profile through its role in the frequency and intensity of certain diseases and the health and mortality impacts of natural disasters. Reinsurance is used to reduce concentration and volatility risk, especially with large policies or new risks, and as protection against catastrophic events such as pandemics or natural disasters. We assess the overall level of insurance risk by taking into consideration a range of diverse risk factors across the many categories in our product range. This diversity of risk, combined with our reinsurance programme and broad geographic footprint helps us to distribute risk and provide protection against the impact of catastrophic events and short-term environmental impacts. Recent initiatives to manage morbidity risk and improve claims management include the promotion of wellness programmes such as AIA Vitality and the establishment of a dedicated Healthcare team to improve customer healthcare experience. 062 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWRISK MANAGEMENTFINANCIAL RISKS – ALM Interest Rate The risk arising from the impact of interest rate movements on the value of future asset and liability cash flows. Exposure to interest rate risk predominantly arises from any difference between the duration of the Group’s assets and liabilities. The Group manages its interest rate risk primarily on an economic basis to determine the durations of both assets and liabilities. Interest rate risk on the local solvency basis is also taken into consideration for business units where local solvency regimes deviate from the economic basis. Furthermore, for products with discretionary benefits, additional modelling of interest rate risk is performed to guide determination of appropriate management actions. Management also takes into consideration the asymmetrical impact of interest rate movements when evaluating products with options and guarantees. Exposure to interest rate risk is summarised in note 36 to the financial statements, which shows the split of financial assets and liabilities between variable, fixed and non-interest bearing investments. Foreign Exchange Rate The risk arising from foreign exchange rate movements on the value of future asset and liability cash flows, and the translation of business units’ balance sheets to the Group’s reporting currency. Assets, liabilities and all regulatory and stress capital in each business unit are currency matched within set limits with the exception of holdings of equities denominated in currencies other than the local currency. Any expected capital movements due within one year are required to be hedged. The balance sheet values of the Group’s business units are not hedged to the Group’s reporting currency of US dollar. Financial Liquidity The risk arising from the availability of cash resources to meet payment obligations to counterparties as they fall due. As disclosed in note 19 to the financial statements, most of the Group’s investments are in the form of marketable securities and can be readily converted into cash should the need arise. Another financial liquidity risk arises from the availability of collateral in derivative and repo trades. This risk is managed by determining appropriate limits and assessing the ability of the business units to withstand extreme market events. The Group also supports its liquidity needs through committed bank facilities and maintaining access to debt markets via the Group’s Global Medium-term Note and Securities programme. Note 36 to the financial statements provides a maturity analysis of the Group’s financial assets and its financial liabilities and insurance contract liabilities. ANNUAL REPORT 2018 | 063 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOPERATIONAL RISKS The risk arising from internal processes, personnel and systems or from external events which may result in direct or indirect business impact. Operational risk is categorised into a common taxonomy which is adopted across the Group. The Group’s operational risks arise in the following key areas: • Distribution Risk – This involves intermediary misconduct such as churning, mis-selling/product suitability, fraud and other market conduct-related issues; • Regulatory Compliance Risk – This concerns compliance with the relevant laws and regulations; • Financial and Operational Process Risk – This involves the controls in key processes in business functions such as product management, investment, finance, actuarial, underwriting, claims, and policy administration; and • Systems and Information Security Risk – This includes system performance, disaster recovery, and cyber and information security standards. Each operational risk is assessed against four defined impacts that such risk could have on the business, namely Financial Loss, Regulatory Breach, Reputation Damage and Business Disruption. This assessment allows the Group to monitor its exposure against the newly defined Business Practice Risk Principle and Risk Tolerance stated earlier in the Risk Appetite section. The Group uses various techniques to manage operational risks, including: • Appointment of First Line Risk Owners and Risk Champions; • Risk and Control Assessments (RCAs) for each key operational risk; • Key Risk Indicators (KRIs) monitoring; • Internal Incidents reporting; and • Operational risk checklists for material projects and key processes such as product management. The Group also protects itself against financial losses by purchasing insurance cover against a range of operational loss events including business disruption, property damage and internal fraud. The coverage is determined after taking into consideration the Group’s operational risk profile. STRATEGIC RISKS Strategic risk is identified as part of the business plan process and is defined as the potential impact of the business strategy on the Group’s earnings, capital and reputation. This also takes into consideration the wider social, economic, political, regulatory, competitive or technological trends that could impact the business strategy within a set time period. 064 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWRISK MANAGEMENTREGULATORY AND INTERNATIONAL DEVELOPMENTS Internationally, the regulatory environment facing life insurers has continued to evolve. In particular, the International Association of Insurance Supervisors (IAIS) continues a multi-year review of certain Insurance Core Principles with the longer-term aim of developing and implementing an updated common framework for the international regulation of insurance companies. Regulators across AIA’s span of operations are in the midst of a variety of initiatives intended to align their respective regulatory frameworks with the broad principles recommended by the IAIS including in relation to application to risk-based capital frameworks. AIA continues to be involved in these initiatives across the region, and is an active participant in the international industry dialogue on a host of relevant issues, including formulation by the IAIS of an Insurance Capital Standard (ICS). Field testing for the ICS is expected to be completed in 2019 with implementation of the ICS to be conducted in two phases. Under the first phase, ICS will be used for confidential reporting to group-wide supervisors in a monitoring period lasting five years. The second phase will be implementation of the ICS as a group-wide prescribed capital requirement. In 2016, Bermuda’s prudential framework for insurance was deemed to be equivalent to the regulatory standards applied to European insurers in accordance with the requirements of the Solvency II Directive. Under the enhanced commercial prudential return regime, the Bermuda Monetary Authority has instituted a number of changes to its statutory and prudential reporting requirements, including the need for commercial insurers to prepare an economic balance sheet. These new regulatory requirements were first applied to AIA’s financial year ended 30 November 2017 and AIA continues to participate in the development and refinement of these initiatives. Following the establishment of the HKIA on 26 June 2017 as the regulator of Hong Kong insurance companies, it is anticipated that the HKIA will also begin directly regulating intermediaries in 2019. A multi-year consultation process is also underway to develop a risk-based capital regime for Hong Kong insurers. AIA continues to be closely and constructively engaged in these developments. On 16 May 2017, the HKIA and the China Banking and Insurance Regulatory Commission (formerly the China Insurance Regulatory Commission) signed the Equivalence Assessment Framework Agreement on the Solvency Regulatory Regime. As a transitional arrangement, AIA will report under the HKIO the capital position of its China branches based on the China local regulatory solvency basis progressively over a 4-year phase-in period to full implementation on 31 March 2022. On 18 May 2017, the International Accounting Standards Board (IASB) published International Financial Reporting Standard (IFRS) 17, Insurance Contracts (previously IFRS 4 Phase II) which will replace the current IFRS 4, Insurance Contracts. IFRS 17 includes some fundamental differences to current accounting in both insurance contract measurement and profit recognition. On 12 December 2017, the Hong Kong Institute of Certified Public Accountants (HKICPA) approved the issuance of Hong Kong Financial Reporting Standard (HKFRS) 17, Insurance Contracts. The Group is conducting a detailed assessment of the new standards and preparing for their implementation. At its meeting in November 2018, the IASB voted to defer the effective date of IFRS 17 for one year, meaning the standards will become mandatorily effective for financial periods beginning on or after 1 January 2022. ANNUAL REPORT 2018 | 065 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONVALUING OUR PEOPLE We are proud of our people and the culture at the heart of our Company. At AIA, equipping our employees for success is vital to serving our customers and enabling our communities to live Healthier, Longer, Better Lives. Our vision to be the world’s pre-eminent life insurance provider is supported by over 22,000 employees and many thousands of agents. Guided by our Operating Philosophy of “Doing the Right Thing, in the Right Way, with the Right People… the Right Results will come”, we focus on recruiting, developing and retaining capable, engaged and high-performing employees who can continuously learn and grow while delivering their best work. These are people who thrive in our customer-centric culture, embrace AIA’s brand promise and exhibit our leadership characteristics. DEVELOPING OUR LEADERS Our AIA Leadership Centre (ALC) based in Bangkok is a world-class learning facility offering various programmes to our senior executives, top agency leaders and key partner executives. With a clear focus on AIA’s strategic and governance priorities, the ALC continues to deliver impactful leadership development programmes, including those focusing on: • Executive Leadership – Targeting AIA’s current and future executives, our programmes are designed to accelerate executive leadership as well as management capabilities. Our Enterprise Leadership Programme continues to be our signature programme offering to all markets. • Technical Leadership – Designed to develop technical and professional capabilities within our core functions to promote operational excellence. • Distribution Leadership – Designed for AIA’s senior distribution leaders, senior agents and partners, these programmes develop the sales leadership and technical skills required to produce consistent best in class results. The ALC has now entered its third year of operation. In 2018 it hosted more than 240 events and delivered more than 20 customised leadership programmes, partnering with world renowned business schools and consulting firms. At AIA, we make it a top priority to develop our people and their leadership and functional capabilities. We believe in growing our leaders from within and in 2018, we closed a large proportion of our senior management positions through internal progression. Committed to having a strong pipeline of senior leaders, we conduct a comprehensive Group-wide people review process annually to identify and plan for the succession of key roles. In 2018, we reviewed approximately 1,400 senior positions across the Group, ensuring we consider succession planning from a holistic perspective. 066 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW01 ANNUAL REPORT 2018 | 067 02 02 AIA Sri Lanka was recognised as a “Great Place to Work” and “Best Workplace for Women” and received a Bronze award in the Large Sized Enterprise category by The Great Place to Work Institute. 01 To support our employees to live Healthier, Longer, Better Lives, we offer a wide array of wellness programmes throughout the year. 03 We embarked on a strategic initiative across all markets to standardise, optimise, and streamline towards a more customer- centric service for our employees, increasing efficiencies, business reporting and people analytics capabilities. 03 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONVALUING OUR PEOPLE FOSTERING A CULTURE OF PEOPLE DEVELOPMENT We foster a robust learning culture at AIA that empowers our people to develop critical capabilities for their current roles and career aspirations. AIA’s enterprise-wide development framework aligns our people development with our business strategy and talent needs. Core development modules for senior employees such as the People Manager Accelerator Programme and the AIA Manager Series remain foundational curriculum items offered throughout the year. These core modules are complemented with a wide variety of skills-based training to target individual development needs as well. In 2018 we expanded the digitisation of learning content and delivery methods with the launch of a new learning platform that centrally houses an extensive range of content. This platform provides employees with flexibility regarding the subject matter they would like to develop while addressing some key principles of modern learning – access to content is on-demand, anytime and anywhere. As we transform our functional operating model, we have also outlined capability roadmaps to provide our leaders and employees with key knowledge, skills and behaviours required for their success in future roles. We offer internal mobility opportunities in other teams, functions and markets to broaden our employees’ perspectives and present new career experiences. RECOGNISING AND REWARDING OUR PEOPLE Our total rewards policies and programmes play an important role in supporting the execution of AIA’s strategy and the delivery of AIA’s performance. Using a combination of market competitive financial and non-financial rewards, our policies and programmes are designed to attract, engage and retain high-calibre employees and motivate them to help AIA execute its short and long-term business goals. Our remuneration programmes are tied to our Performance Development Dialogue, which is designed to enable line managers to assess the performance and behaviours of their staff, and recommend development activities to help meet defined career objectives. We strive to recognise and reward our workforce and to drive desired behaviours that comply with our risk management framework. An important element of our total rewards framework is our recognition, benefits and wellness programmes that work together to enhance employee well-being both in and outside of work. We appreciate the evolving and varied needs of our diverse workforce. For example, we have piloted flexible benefits in some of our businesses to provide more choices to our employees. To support our employees to live Healthier, Longer, Better Lives, we also offer a wide array of wellness programmes throughout the year. These programmes include AIA Vitality memberships, wellness themed activity days, team challenges and health check-ups. We are proud to offer our employees the opportunity to become AIA shareholders through our Employee Share Purchase Plan (ESPP). This year the percentage of eligible employees and the number of participating employees in the plan grew to their highest levels to date. We rolled out the plan in Cambodia for the first time in 2018, resulting in a total of 17 of our markets providing employees the opportunity to invest in AIA’s future. 068 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEWEMBRACING DIGITAL TRANSFORMATION In 2018, we embarked on a strategic initiative to deliver greater business insights, operational efficiencies and line manager empowerment. It includes replacing the current human resources information system and thereby redefining the human resources service delivery model. Over the next 18 months, we plan to work closely across all our markets to standardise, optimise and streamline towards a more customer-centric service for our employees, increasing efficiencies, business reporting and people analytics capabilities. ENGAGING OUR PEOPLE Our annual employee engagement survey continues to provide us with valuable insights into our culture, workplace environment and employee needs. In 2018, approximately 97 per cent of our people responded to the survey and the employee engagement scores for the Group placed us in the top quartile of Gallup’s global financial services and insurance industry benchmark. AIA Group was one of 39 companies globally and the only international life insurer to be conferred a Great Workplace Award from Gallup in 2018. In addition, several of our markets won prestigious local and regional awards, including the following: • In recognition of its commitment to professional education, our Group Office received the “Excellence in Education Award” by LOMA. • AIA won Aon’s 2018 “Best Employers” Asia Pacific Regional Award for the second consecutive year. • AIA China also won Aon’s 2018 “Best Employers” China Award for the fourth consecutive year, along with winning a “Top Employer China” award by Top Employers Institute. • AIA Singapore won GTI Media’s “Most Popular Graduate Employer 2017” in the Insurance and Risk Management Sector, and was recognised as one of “Singapore’s 100 Leading Graduate Employers in 2017”. • GTI Media recognised AIA Malaysia Shared Services within the “Most Popular Graduate Employer of the Year 2018” for the BPO & Shared Services Sector. • Both AIA Sri Lanka and AIA Vietnam were recognised as a “Great Place to Work” by The Great Place to Work Institute. • Additionally, AIA Sri Lanka was recognised as a “Best Workplace for Women” and received a Bronze award in the Large Sized Enterprise category by The Great Place to Work Institute. • AIA Taiwan was one of the winners of “Taiwan’s Best Companies to Work for in Asia 2018” by HR Asia. • Tata AIA won Aon’s “Best Employers” India Award for the third time since 2016. • AIA Group became the first insurance company in the world to be accredited under the Institute and Faculty of Actuaries Quality Assurance Scheme. ANNUAL REPORT 2018 | 069 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCORPORATE SOCIAL RESPONSIBILITY AIA is committed to helping people in our communities live Healthier, Longer, Better Lives. We believe that we can achieve this both through the operation of our business and through a host of programmes delivered in the communities in which we operate. ENCOURAGING PHYSICAL EXERCISE In Malaysia, AIA launched the “Active Park AIA Vitality” in Kepong Metropolitan Park in north Kuala Lumpur. AIA collaborated with Fitness First to provide exercise machines at “Active Park AIA Vitality”, designed to encourage more people to get outdoors and stay active. AIA continued to support a number of landmark running events across the region. In April 2018, “The Music RunTM by AIA 2018” returned to Singapore for the fourth year, with 10,000 attendees running, dancing and partying to the beat at Palawan Green in Sentosa. In Thailand, over 50,000 people joined AIA’s flagship “AIA Sharing a Life Charity Run” in September 2018. The run took place across 10 provinces in Thailand, encouraging people from rural Thailand to stay active and lead a healthy lifestyle. AIA also donated outdoor workout facilities to all 10 participating provinces in the name of “AIA Vitality Workout”. For the fourth consecutive year, AIA was the principal sponsor of “Oxfam Trailwalker” in Hong Kong. This event, which has become a tradition in Hong Kong, saw 13,000 people participate this year. In addition to acting as a sponsor, AIA fielded the largest number of corporate teams – 47 in total, comprising 188 employees and financial planners. AIA raised HK$1.9 million to become the Overall Fund Raising Champion. The funds are intended to support Oxfam’s efforts to alleviate poverty both in Hong Kong and internationally. AIA was also the principal sponsor of the “Oxfam Tower-Run” in Macau in October 2018. Approximately 250 AIA employees and financial planners joined over a hundred members of the public in this race. In September 2018, AIA hosted the 10km “2018 Easy Run by AIA” in Shanghai, China, which attracted more than 5,000 runners from over 20 countries. Back by popular demand, “FitnessFest by AIA 2018” returned to Singapore in May 2018 for its second edition. Nearly 6,000 fitness enthusiasts participated in the 12-hour “Fitathon”, which offered sports ranging from yoga to boxing. PROMOTING FOOTBALL IN ASIA In 2018, AIA’s commitment to community football training and health education continued as part of AIA’s partnership with Spurs. Throughout the year, two dedicated Spurs coaches stationed with AIA in Hong Kong have conducted training camps and coaching clinics in 10 AIA markets across the Asia-Pacific region. These programmes are designed to encourage youth participation and also provide much needed education around the benefits of a healthy diet and regular exercise. In 2018, more than 25,000 children, parents and employees took part in these programmes. As part of our partnership with the China Youth Development Foundation, AIA conducted the AIA China Youth Football Development Programme for the fifth year. In 2018, AIA supported 45 undergraduates who are sports education majors to receive professional football training from Spurs coaches. The student volunteers then 070 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW 01 02 01 In 2018, more than 25,000 children, parents and employees took part in training programmes conducted by the AIA Spurs coaches. 02 Nearly 6,000 fitness enthusiasts participated in the 12-hour “Fitathon” at “FitnessFest by AIA 2018” in Singapore. 03 David Beckham visited the Great Wall of China and took part in an event supporting AIA’s work with our CSR partner China Youth Development Foundation. 03 conducted a 2-month football training programme for elementary schools in Shanxi, Yunnan, Hainan and Guangdong. With the goal of supporting football education and promoting healthy living, AIA also organised football training camps in Guangdong and Jiangsu, with over 1,200 children participating in the training sessions. In September 2018, AIA hosted its first “AIA Family Fest in Sentosa” creating a holistic wellness experience for children in Singapore. More than 3,000 families enjoyed a wide range of family and wellness activities, including kickabout sessions with Spurs football coaches as well as games and activities for participants of all ages to encourage full family participation. AIA Singapore also invited 39 children and their families from its charity partner Children’s Wishing Well to attend the event as part of its commitment to supporting children from all backgrounds. ANNUAL REPORT 2018 | 071 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCORPORATE SOCIAL RESPONSIBILITY In New Zealand, AIA engaged 55,000 school children and their families from over 500 schools through the Healthiest Schools Challenge. The objective was to inspire children and families to make healthy choices and to lead Healthier, Longer, Better lives. Participants logged their activity levels to move avatars of themselves through a virtual tour of the world, receiving various health and wellness messages along the way. The initiative was supported by the AIA Spurs coaches, who ran football skill sessions with more than 4,000 participants during a nationwide tour in October and November. AIA’s Global Ambassador, David Beckham participated in the first “AIA Soccer for the Nation” event in Jakarta in March. David supported AIA in providing football equipment and launching a development initiative that included 1,600 children. David also visited the Great Wall of China and took part in an event supporting AIA’s work with our CSR partner China Youth Development Foundation. The event included a variety of media events promoting the CSR initiatives of China Youth Development Foundation and AIA and a football training session with 36 children. SUPPORTING EDUCATION In Thailand, AIA has been contributing to school libraries since 2005 to promote education, literacy and a love of reading. In December 2018, AIA Thailand was proud to sponsor another AIA School Library for a school in Ranong, the 36th such library since the inception of the programme. In Vietnam, more than 200,000 children drop out of school each year, primarily because of the long distance they need to travel to and from school each day. Since 2014, AIA has raised funds to provide bicycles for children through the Li’v Journey Programme to encourage them to continue their education. In 2018, the Programme saw AIA donate nearly 3,000 bicycles to individual children in 36 locations nationwide. In the Philippines, the Philam Foundation, the CSR arm of Philam Life, has launched a financial literacy programme for students, parents and teachers to promote the value of saving and being prudent. In recognition of this programme, launched in July 2017, and its broader work across the Philippines, the Philam Foundation was honoured at the Asia Responsible Entrepreneurship Awards. HEALTHY COMMUNITIES To coincide with the launch of our brand promise to help people live Healthier, Longer, Better Lives, we held a week-long, large-scale, free-to-all health and wellness event at Hong Kong’s AIA Vitality Park in September 2018. Sixty activities were held for the community during the week, featuring yoga, a number of football games, healthy cooking demonstrations, music performances, kids sports and health talks attracting nearly 40,000 participants in total. In Korea, AIA partnered with “Weconnect”, a social enterprise that employs working mothers and women on career breaks, to support potential start-ups in the area of healthcare and insure-tech. A total of 92 participants benefited from the programme from May to December 2018. In collaboration with the Philippine College of Surgeons and Philippine College of Physicians, the Philam Foundation took the lead to form the Alliance for Philippines’ Health and Advocacy (ALPHA) in December 2017. Among other ALPHA initiatives, in partnership with Cancer Registry Philippines, the Alliance established a hospital-based cancer registry programme, with the goal of gathering data on cancer in the Philippines to help improve care and long-term outcomes. In 2018, a total of 20 hospitals signed up for the programme and doctors from participating hospitals were trained to use the registry application. 072 | AIA GROUP LIMITED FINANCIAL AND OPERATING REVIEW01 02 01 In 2018, AIA in Vietnam donated nearly 3,000 bicycles to individual children in 36 locations nationwide through the Li’v Journey Programme. 02 Over 50,000 people joined AIA’s flagship “AIA Sharing a Life Charity Run” in September 2018 which took place across 10 provinces in Thailand. 03 In addition to acting as the principal sponsor, AIA fielded the largest number of corporate teams in the “Oxfam Trailwalker” in Hong Kong in 2018 and raised HK$1.9 million to become the Overall Fund Raising Champion. 03 In Thailand, AIA has worked with the Office of the Insurance Commission to campaign for road safety for 4 years. In 2018, AIA gave 2,500 helmets to students and other members of the community nationwide to help reduce the number of injuries and fatalities. In support of World Blood Donor Day, AIA Hong Kong worked with Red Cross Hong Kong in a marathon blood drive over six days in May and June 2018. A total of 318 donations were provided by employees and financial planners. In September, more than 200 agents and employees from AIA Vietnam participated in AIA Blood Donation Day. In June 2018, the Hong Kong Observation Wheel, presented by AIA, celebrated its one millionth visitor. AIA supports this initiative by subsidising the entry fee and ridership has increased dramatically as a result. Since its re-opening in December 2017, the Wheel and the adjacent AIA Vitality Park has drawn two million local and international visitors and has become an iconic landmark and family attraction in Hong Kong that is genuinely available to everyone in Hong Kong. For the fifth year, the “AIA Carnival” held from December 2018 to February 2019, sponsored by AIA in Hong Kong, has been a popular outdoor event during the festive season. The event enabled us to deliver our healthy living message to close to one million attendees. Through partnerships with 11 local charities, we also helped ensure that a wide spectrum of community groups are able to access and enjoy this event. ANNUAL REPORT 2018 | 073 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCORPORATE GOVERNANCE 075 Statement of Directors’ Responsibilities 076 Board of Directors 084 Executive Committee 089 Report of the Directors 099 Corporate Governance Report 112 Remuneration Report 074 | AIA GROUP LIMITED STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Company’s consolidated financial statements in accordance with applicable laws and regulations. In preparing the consolidated financial statements of the Company, the Directors are required to: • select suitable accounting policies and apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether the financial statements have been prepared in accordance with HKFRS and IFRS; and • prepare the financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records that give a true and fair view of the state of the Company’s affairs and explain its transactions. The Directors are responsible for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are also responsible for preparing a Report of the Directors and the Corporate Governance Report on pages 89 to 111 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 Hong Kong Financial Reporting Standards and International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position, cash flows and results of the Company and its undertakings included in the consolidated financial statements taken as a whole; and 2. the section headed “Financial and Operating Review” included in this Annual Report presents a fair review of the development and performance of the business and the position of the Company and its undertakings included in the consolidated financial statements taken as a whole, together with a description of the principal risks and uncertainties that the Group faces. ANNUAL REPORT 2018 | 075 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONBOARD OF DIRECTORS Mr. John Barrie Harrison Mr. Mohamed Azman Yahya Dr. Narongchai Akrasanee Mr. Jack Chak-Kwong So Mr. Edmund Sze-Wing Tse Mr. Ng Keng Hooi 076 | AIA GROUP LIMITED CORPORATE GOVERNANCEMr. Chung-Kong Chow Ms. Swee-Lian Teo Professor Lawrence Juen-Yee Lau Mr. Cesar Velasquez Purisima Mr. George Yong-Boon Yeo ANNUAL REPORT 2018 | 077 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT NON-EXECUTIVE CHAIRMAN AND INDEPENDENT NON-EXECUTIVE DIRECTOR Mr. Edmund Sze-Wing Tse Aged 81, is the Independent Non-executive Chairman and an Independent Non-executive Director of the Company. He was appointed Non-executive Director of the Company on 27 September 2010 and elected Non-executive Chairman on 1 January 2011. He was re-designated as the Independent Non-executive Chairman and an Independent Non-executive Director of the Company on 23 March 2017. Mr. Tse is also the Chairman of the Nomination Committee and a member of the Remuneration Committee and the Risk Committee of the Company. He is a director of AIA Foundation. Mr. Tse’s appointments during almost 58 years with the Group and its predecessor, AIG Group, include serving as Honorary Chairman of AIA Co. from July 2009 to December 2010, Chairman and Chief Executive Officer from 2000 to June 2009 and President and Chief Executive Officer from 1983 to 2000. He also served as Chairman of The Philippine American Life and General Insurance (PHILAM LIFE) Company from 2005 to 2015. Mr. Tse is a non-executive director of PCCW Limited (listed on the Hong Kong Stock Exchange) and a director of Bridge Holdings Company Limited. He served as a non-executive director of PineBridge Investments Limited from 2012 to 2014 and a non-executive director of PICC Property and Casualty Company Limited (listed on the Hong Kong Stock Exchange) from 2004 to July 2014. In recognition of his outstanding contributions to the development of Hong Kong’s insurance industry, Mr. Tse was awarded the Gold Bauhinia Star by the HKSAR Government in 2001. Mr. Tse received an honorary fellowship and an honorary degree of Doctor of Social Sciences from The University of Hong Kong in 1998 and 2002, respectively. He also received an honorary degree of Doctor of Business Administration from Lingnan University in 2018. In 2003, he was elected to the prestigious Insurance Hall of Fame and in 2017, Mr. Tse was awarded the first ever Lifetime Achievement Award at the Pacific Insurance Conference in recognition of his outstanding contribution to the insurance industry. EXECUTIVE DIRECTOR AND GROUP CHIEF EXECUTIVE AND PRESIDENT Mr. Ng Keng Hooi Aged 64, is an Executive Director and the Group Chief Executive and President of the Company, having been appointed on 1 June 2017. Mr. Ng is also a member of the Risk Committee of the Company. He joined the Group in October 2010 and has over 38 years of experience in Asian life insurance having spent his entire career in the sector. Prior to his current role, he was Group Chief Executive and President Designate from March 2017 and was a Regional Chief Executive for the Group since his initial appointment in 2010. During that time, he was responsible for a number of the Company’s businesses, including those operating in Mainland China, Thailand, Indonesia, Singapore, Brunei and Taiwan as well as for the Group’s Agency Distribution channel. He is a director of various companies within the Group including acting as Chairman and Chief Executive Officer for both AIA Co. and AIA International. Prior to joining the Group, he was Group Chief Executive Officer and Director of Great Eastern Holdings Limited from December 2008 to 2010. 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. Mr. Ng began his career in life insurance at AIA Malaysia in 1980. He has been a board member of the Financial Services Professional Board in Kuala Lumpur since 24 September 2014 and has been a Fellow of the Society of Actuaries (U.S.) since 1985. He received his Bachelor of Science degree in Mechanical Engineering from Lafayette College (Pennsylvania, USA) in 1979. 078 | AIA GROUP LIMITED CORPORATE GOVERNANCEBOARD OF DIRECTORSINDEPENDENT NON-EXECUTIVE DIRECTORS Mr. Jack Chak-Kwong So Aged 74, is an Independent Non-executive Director of the Company. He was appointed a Non-executive Director of the Company on 28 September 2010 and re-designated as an Independent Non-executive Director of the Company on 26 September 2012. He is also the Chairman of the Remuneration Committee and a member of the Audit Committee and the Nomination Committee of the Company. From August 2007 to September 2010, Mr. So served as an independent non-executive director of AIA Co. He is currently an independent non-executive director of China Resources Power Holdings Co. Ltd. (listed on the Hong Kong Stock Exchange) and the Chairman of Airport Authority Hong Kong. He is also an independent senior advisor to Credit Suisse, Greater China and a non-official member of the Chief Executive’s Council of Advisers on Innovation and Strategic Development. Mr. So was Chairman of the Consultative Committee on Economic and Trade Co-operation between Hong Kong and Mainland China from October 2013 to December 2015. Mr. So was awarded the Gold Bauhinia Star and the Grand Bauhinia Medal by the HKSAR Government in 2011 and 2017, respectively. Mr. So served as an executive director of the Hong Kong Trade Development Council from 1985 to 1992 and served as its Chairman from 2007 to 2015. He was an independent non-executive director of Cathay Pacific Airways Limited (listed on the Hong Kong Stock Exchange) from 2002 to 2015, a non-executive director of The Hongkong and Shanghai Banking Corporation Limited from 2000 to 2007, the Chairman of the Hong Kong Film Development Council from 2007 to 2013 and a member of the Chinese People’s Political Consultative Conference from 2008 to 2018. Mr. Chung-Kong Chow Aged 68, is an Independent Non-executive Director of the Company, having been appointed on 28 September 2010. He is also the Chairman of the Risk Committee and a member of the Nomination Committee of the Company. Mr. Chow was appointed a non-official member of the Executive Council of the HKSAR on 1 July 2012 and was further appointed for a new term of office from 1 July 2017. Mr. Chow was also appointed as the Chairman of the Advisory Committee on Admission of Quality Migrants and Professionals of the HKSAR from 1 July 2016, a director of the Community Chest of Hong Kong from 19 June 2017, a member of the Financial Leaders Forum set up by the HKSAR Government from 18 August 2017, a non-official member of the Human Resources Planning Commission of the HKSAR Government from 1 April 2018 and a member of the InnoHK Steering Committee from 4 February 2019. He has also been a Steward of The Hong Kong Jockey Club since March 2011. Mr. Chow was knighted in the United Kingdom for his contribution to industry in 2000 and was awarded the Gold Bauhinia Star by the HKSAR Government in 2015. Mr. Chow was the Chairman of the Advisory Committee on Corruption of the Independent Commission Against Corruption from 2013 to 2018, the Chairman of Hong Kong Exchanges and Clearing Limited (listed on the Hong Kong Stock Exchange) from 2012 to 2018, Chief Executive Officer of MTR Corporation Limited (listed on the Hong Kong Stock Exchange) from 2003 to 2011, Chief Executive Officer of Brambles Industries plc, a global support services company, from 2001 to 2003, and Chief Executive of GKN plc, a leading industrial company based in the United Kingdom, from 1997 to 2001. He was an independent non-executive director of Anglo American plc from 2008 to 2014, independent non-executive director of Standard Chartered plc from 1997 to 2008 and the Chairman of the Hong Kong General Chamber of Commerce from 2012 to June 2014. ANNUAL REPORT 2018 | 079 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. John Barrie Harrison Aged 62, is an Independent Non-executive Director of the Company, having been appointed on 1 July 2011. He is also the Chairman of the Audit Committee and a member of the Nomination Committee and the Risk Committee of the Company. Mr. Harrison is an independent non-executive director of Cathay Pacific Airways Limited (listed on the Hong Kong Stock Exchange). He is also an independent non-executive director of BW Group Limited and has been Vice Chairman of BW LPG Limited since 2013. Mr. Harrison is also an independent non-executive director and the Chairman of the audit committee of Grosvenor Asia Pacific Limited since 1 December 2017. He was appointed an Honorary Court Member of The Hong Kong University of Science and Technology with effect from 20 September 2016. He was an independent non-executive director of Hong Kong Exchanges and Clearing Limited (listed on the Hong Kong Stock Exchange) from 20 April 2011 to 26 April 2017, The London Metal Exchange Limited from 6 December 2012 to 26 April 2017 and LME Clear Limited from 16 December 2013 to 26 April 2017. From 2008 to 2010, Mr. Harrison was Deputy Chairman of KPMG International. In 2003, he was elected Chairman and Chief Executive Officer of KPMG, China and Hong Kong and Chairman of KPMG Asia Pacific. Mr. Harrison began his career with KPMG in London in 1977, becoming a partner of KPMG Hong Kong in 1987. From 2012 to May 2015, he was also a member of the Asian Advisory Committee of AustralianSuper Pty Ltd. Mr. Harrison received an honorary fellowship from The Hong Kong University of Science and Technology in 2017. Mr. Harrison is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. Mr. George Yong-Boon Yeo Aged 64, is an Independent Non-executive Director of the Company, having been appointed on 2 November 2012. He is also a member of the Audit Committee, the Nomination Committee and the Remuneration Committee of the Company. Mr. Yeo is the Chairman of Kerry Logistics Network Limited (listed on the Hong Kong Stock Exchange) and a director of Kerry Holdings Limited. Mr. Yeo is an independent director of Pinduoduo Inc. (listed on the Nasdaq Global Select Market) and New Yangon Development Company Limited. He has been a member of the International Advisory Committee of Mitsubishi Corporation since June 2014. He is a member of the International Advisory Board of the Berggruen Institute on Governance. In March 2018, he became a senior advisor to Brunswick Group LLP for its Geopolitical Initiative. In 2013, he was appointed a member of the Pontifical Commission for Reference on the Economic-Administrative Structure of the Holy See. He became a member of the Vatican Council for the Economy in February 2014. In 2012, Mr. Yeo was presented with the Order of Sikatuna by the Philippines Government and the Padma Bhushan by the Indian Government, and became an Honorary Officer of the Order of Australia. From 1988 to 2011, Mr. Yeo was a member of the Singapore Parliament and held various Cabinet positions, including Minister for Foreign Affairs, Minister for Trade and Industry, Minister for Health, Minister for Information and the Arts and Minister of State for Finance. From 1972 to 1988, Mr. Yeo served in the Singapore Armed Forces and attained the rank of Brigadier-General in 1988 when he was Director of Joint Operations and Planning in the Ministry of Defence. 080 | AIA GROUP LIMITED CORPORATE GOVERNANCEBOARD OF DIRECTORSMr. Mohamed Azman Yahya (alias: Mohamed Azman bin Yahya) Aged 55, is an Independent Non-executive Director of the Company, having been appointed on 24 February 2014. He is also a member of the Nomination Committee and the Remuneration Committee of the Company. Mr. Yahya is the Executive Chairman of Symphony Life Berhad, the Independent Non-executive Chairman of Ranhill Holdings Berhad and an independent non-executive director of Sime Darby Berhad, all of which are listed on the Main Market of Bursa Malaysia Securities Berhad (Bursa Malaysia). Mr. Yahya is a director and Chairman of various companies, including Symphony House Sdn Bhd (formerly known as Symphony House Berhad) and Sepang International Circuit Sdn Bhd. He also sits on the board of Ekuiti Nasional Berhad, a government linked private equity fund management company. He started his career at KPMG in London and thereafter worked in a variety of roles in investment banking, ultimately being named chief executive of Amanah Merchant Bank. In 1998, he was tasked by the Malaysian Government to set-up and head Danaharta, the national asset management company. He was also the Chairman of the Corporate Debt Restructuring Committee, set up by Bank Negara Malaysia to mediate and assist in debt restructuring programmes of viable companies. He was also a director of Khazanah Nasional Berhad, the Malaysian government investment arm from 2004 to 2018. Mr. Yahya was the Non-executive Chairman of Ranhill Holdings Berhad before his re-designation as Independent Non-executive Chairman with effective from 2 February 2019. Mr. Yahya received his BSc Economics (First Class) from the London School of Economics and Political Science in 1985 and is a member of the Institute of Chartered Accountants in England and Wales, the Malaysian Institute of Accountants and a fellow of the Institute of Bankers Malaysia. Professor Lawrence Juen-Yee Lau Aged 74, is an Independent Non-executive Director of the Company, having been appointed on 18 September 2014. He is also a member of the Nomination Committee and the Risk Committee of the Company. Professor Lau currently serves as an independent non-executive director of CNOOC Limited and Semiconductor Manufacturing International Corporation (both listed on the Hong Kong Stock Exchange and the New York Stock Exchange). He is also an independent non-executive director of Hysan Development Company Limited (listed on the Hong Kong Stock Exchange) and Far EasTone Telecommunications Company Limited (listed on the Taiwan Stock Exchange). He has been serving as the Ralph and Claire Landau Professor of Economics at The Chinese University of Hong Kong (CUHK) since 2007 and the Chairman of the Council of Shenzhen Finance Institute of CUHK, Shenzhen since 12 January 2017. He currently serves as a member of the Exchange Fund Advisory Committee of the HKSAR, Chairman of its Governance Sub-committee and a member of its Currency Board Sub-committee and Investment Sub-committee. In addition, he serves as a member and Chairman of the Prize Recommendation Committee for the LUI Che Woo Prize Limited, Vice-Chairman of the Our Hong Kong Foundation, Vice-Chairman of China Center for International Economic Exchanges, Beijing, as well as a member of the Hong Kong Trade Development Council Belt and Road Committee. He was awarded the Gold Bauhinia Star by the HKSAR Government in 2011. From 2004 to 2010, Professor Lau served as Vice-Chancellor (President) of CUHK. He was appointed Chairman of CIC International (Hong Kong) Co., Limited, a wholly-owned subsidiary of China Investment Corporation, in September 2010 and retired from the position in September 2014. He was a member of the 12th National Committee of the Chinese People’s Political Consultative Conference and a Vice-Chairman of its Sub-committee of Economics from 2013 to 2018. He received his B.S. degree (with Great Distinction) in Physics from Stanford University in 1964 and his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969, respectively. He joined the faculty of the Department of Economics at Stanford University in 1966, 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. ANNUAL REPORT 2018 | 081 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMs. Swee-Lian Teo Aged 59, is an Independent Non-executive Director of the Company, having been appointed on 14 August 2015. She is also a member of the Nomination Committee and the Risk Committee of the Company. Ms. Teo currently serves as a non-executive and independent director and a member of the corporate governance and nominations committee and executive resource and compensation committee and chairs the risk committee of Singapore Telecommunications Limited (listed on the Singapore Exchange). She is also a non-executive director and chairs the audit and risk committee of Avanda Investment Management Pte Ltd., a Singapore-based fund management company. Ms. Teo is a member of the board of directors of the Dubai Financial Services Authority and a director of Clifford Capital Pte. Ltd. Ms. Teo has over 27 years of experience with Monetary Authority of Singapore (MAS). During her time at the MAS, she worked in foreign reserves management, financial sector development, strategic planning and financial supervision. She was the Deputy Managing Director in charge of Financial Supervision, overseeing the regulation and supervision of the banking, insurance and capital markets industries and macroeconomic surveillance, and also represented the MAS on various international fora, including the Basel Committee on Banking Supervision, and on various committees and working groups of the Financial Stability Board. She retired from the MAS as Special Advisor in the Managing Director’s office in June 2015. In addition to the MAS, Ms. Teo also served on the board of the Civil Aviation Authority of Singapore from 2002 to 2010. Ms. Teo received her B.Sc. (First) in Mathematics from the Imperial College of Science and Technology, University of London in 1981 and her M.Sc. in Applied Statistics from the University of Oxford in 1982. She was also awarded the Public Administration Medal (Gold) (Bar) at the Singapore National Day Awards in 2012. Dr. Narongchai Akrasanee Aged 73, is an Independent Non-executive Director of the Company, having been appointed on 15 January 2016. He is also a member of the Audit Committee and the Nomination Committee of the Company and the Chairman of advisory board of AIA Thailand. Dr. Narongchai was previously an Independent Non-executive Director of the Company from 21 November 2012 to 31 August 2014. He is the former Minister of Energy and Minister of Commerce for the Kingdom of Thailand, and served as a Senator. Dr. Narongchai served as Chairman of the Export-Import Bank of Thailand from December 2005 to June 2010, a Director of the Office of the Insurance Commission of Thailand from October 2007 to August 2012, a Director of the National Economic and Social Development Board for the period from July 2009 to July 2013 and a member of the Monetary Policy Committee of the Bank of Thailand from November 2011 to September 2014. He is currently the Chairman of the Steering Committee and Vice-Chairman of the Council of Mekong Institute, the Chairman of the Thailand National Committee for the Pacific Economic Cooperation Council and the Chairman of the Khon Kaen University Council in Thailand. Dr. Narongchai also acts as the Chairman and an independent director of three entities listed on the Stock Exchange of Thailand, namely MFC Asset Management Public Company Limited, Ananda Development Public Company Limited and Thai-German Products Public Company Limited. He is the Chairman and an independent director of The Brooker Group Public Company Limited, which is listed on the Stock Exchange of Thailand’s Market for Alternative Investment. Dr. Narongchai is also the Chairman of the Seranee Group of companies. He previously served as an independent director of each of Malee Sampran Public Company Limited and ABICO Holdings Public Company Limited and as the Vice-Chairman and an independent director of Thai-German Products Public Company Limited, all of which are listed on the Stock Exchange of Thailand. Dr. Narongchai received his Bachelor’s degree in Economics with Honours from the University of Western Australia and a M.A. and Ph.D. in Economics from Johns Hopkins University. 082 | AIA GROUP LIMITED CORPORATE GOVERNANCEBOARD OF DIRECTORSMr. Cesar Velasquez Purisima Aged 58, is an Independent Non-executive Director of the Company, having been appointed on 1 September 2017. He is also a member of the Nomination Committee of the Company. Mr. Purisima currently serves as an independent director of Ayala Land, Inc. and Universal Robina Corporation (both listed on The Philippine Stock Exchange, Inc.). He is also a member of the Global Advisory Council of Sumitomo Mitsui Banking Corporation. Mr. Purisima served in the government of the Republic of the Philippines (the Philippines) as Secretary of the Department of Finance from July 2010 to June 2016 and as Secretary of the Department of Trade and Industry from January 2004 to February 2005. He also previously served on the boards of a number of government institutions, including as a member of Monetary Board of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines), Governor of the World Bank Group for the Philippines, Governor of the Asian Development Bank for the Philippines, Alternate Governor of the International Monetary Fund for the Philippines and Chairman of Land Bank of the Philippines. He was conferred the Chevalier dans l’Ordre national de la Légion d’Honneur (Knight of the National Order of the Legion of Honour) by the President of the French Republic in 2017, the Order of Lakandula, Rank of Grand Cross (Bayani) by the President of the Philippines in 2016 and the Chevalier de l’Ordre national du Mérite (Knight of the National Order of Merit) by the President of the French Republic in 2001. Mr. Purisima is a certified public accountant. He has extensive experience in public accounting both in the Philippines and abroad. He was Chairman and Managing Partner of SyCip, Gorres, Velayo & Co. (a member firm of Andersen Worldwide until 2002 when it became a member firm of Ernst & Young Global Limited) from 1999 until 2004. During the period, Mr. Purisima was also the Asia-Pacific Area Managing Partner for Assurance and Business Advisory Services of Andersen Worldwide from 2001 to 2002 and Regional Managing Partner for the ASEAN Practice of Andersen Worldwide from 2000 to 2001. Mr. Purisima obtained his Bachelor of Science in Commerce (Majors in Accounting & Management of Financial Institutions) degree from De La Salle University (Manila) in 1979, Master of Management degree from J. L. Kellogg Graduate School of Management, Northwestern University in 1983 and Doctor of Humanities honoris causa degree from Angeles University Foundation (the Philippines) in 2012. ANNUAL REPORT 2018 | 083 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONEXECUTIVE COMMITTEE Daisuke Iwase Biswa Misra Stuart A. Spencer Mark Konyn Cara Ang Jacky Chan William Lisle Ng Keng Hooi Garth Jones 084 | AIA GROUP LIMITED CORPORATE GOVERNANCEJohn Cai Mitchell New Mark Saunders Jon Nielsen ANNUAL REPORT 2018 | 085 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. Ng Keng Hooi Mr. Ng’s biography is set out above. Mr. Garth Jones Aged 56, is the Group Chief Financial Officer responsible for leading the Group in all aspects of capital and financial management, as well as managing relationships with key external stakeholders, including independent auditors and actuaries, rating agencies and international accounting and regulatory bodies. 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 China Pacific Life Insurance Co., Ltd., the life insurance arm of China Pacific Insurance (Group) Co., Ltd. He also held a number of senior management positions during 12 years with Prudential Corporation Asia Limited, including Chief Financial Officer of the Asian life insurance operations. Prior to joining Prudential, Mr. Jones led the development of Swiss Re’s Asia life business. Mr. Jones is a Fellow of the Institute of Actuaries in the United Kingdom. On 1 June 2016, he was appointed a member of the industry advisory committee on long term business, which advises the Independent Insurance Authority in Hong Kong. Mr. Jones is also a member of the IFRS Advisory Council of the IASB. Mr. William Lisle Aged 53, is the Regional Chief Executive responsible for the Group’s businesses operating in Thailand, Korea, Australia and New Zealand, India and Sri Lanka as well as Group Partnership Distribution. Mr. Lisle was Chief Executive Officer of AIA’s operation in Malaysia from December 2012 to May 2015, including leading the large- scale and successful integration of ING Malaysia after its acquisition by the Group in 2012. He is a director of various companies within the Group, including AIA Co., AIA Australia Limited and Sovereign Assurance Company. He is also a director of Tata AIA Life Insurance Company Limited, a joint venture between the Group and Tata Sons Limited in India. Mr. Lisle joined the Group in January 2011 as Group Chief Distribution Officer. Prior to joining the Group, Mr. Lisle was the Managing Director, South Asia for Aviva from May 2009 until 2010. Prior to joining Aviva, Mr. Lisle held a number of senior positions at Prudential Corporation Asia Limited, including Chief Executive Officer in Malaysia from 2008 to 2009, Chief Executive Officer in Korea from 2005 to 2008, Chief Agency Officer for ICICI Prudential from 2002 to 2004 and Director of Agency Development, South Asia in 2001. Mr. John Cai Aged 51, is the Regional Chief Executive responsible for the Group’s businesses operating in China, Malaysia, Vietnam, Taiwan and Myanmar. Mr. Cai is a director of various companies within the Group, including AIA Co. and AIA (Vietnam) Life Insurance Company Limited. He joined the Group in July 2009. Mr. Cai has over 27 years’ experience in the insurance industry, both in Asia and the United States. Prior to becoming Regional Chief Executive, since 2009, he was Chief Executive Officer of AIA China, which became AIA’s second-largest and fastest growing business during his tenure. Before joining the Group, Mr. Cai was Chief Executive Officer at AXA Hong Kong, having originally been appointed Chief Agency Officer in 2003. Mr. Cai graduated from Xi’an Jiaotong University in 1989. He is also a Chartered Financial Consultant (ChFC), a Chartered Life Underwriter and a Certified Financial Planner. Mr. Jacky Chan Aged 55, is the Regional Chief Executive responsible for the Group’s businesses operating in Hong Kong, Macau, Singapore, Brunei, Indonesia, the Philippines, and Cambodia as well as Group Agency Distribution. He is a director of various companies within the Group, including AIA Co. and AIA International. Mr. Chan has extensive experience having worked at AIA for the past 31 years. Prior to becoming a Regional Chief Executive, Mr. Chan was Chief Executive Officer of AIA Hong Kong and Macau since 2009. Previously, he held several senior positions including the Country Head of AIA China, Executive Vice President – Distribution & Marketing of Nan Shan Life Insurance of Taiwan and Senior Vice President & Head of Life Profit Centre of AIA - Asia (ex-Japan & Korea). Mr. Chan holds a Bachelor of Science Degree from The University of Hong Kong. He is a Fellow of the Society of Actuaries (FSA), a member of American Academy of Actuaries (MAAA) and a Fellow of the Canadian Institute of Actuaries (CIA). 086 | AIA GROUP LIMITED CORPORATE GOVERNANCEEXECUTIVE COMMITTEEMr. Mitchell New Aged 55, is the Group General Counsel and Company Secretary 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 including AIA International, AIA Singapore Private Limited and AIA Reinsurance Limited. He joined the Group in April 2011. Prior to joining the Group, Mr. New was a member of the law firm Fasken Martineau and occupied various senior roles with Manulife Financial, including Senior Vice President and Chief Legal Officer for Asia, based in Hong Kong and Senior Vice President and General Counsel to Manulife’s Canadian division. He is a qualified barrister and solicitor and member of the Law Society of Upper Canada and holds a Bachelor of Commerce Degree and Master’s Degree in Business Administration from McMaster University and a Bachelor of Laws Degree from the University of Western Ontario. Mr. Mark Saunders Aged 55, is the Group Chief Strategy and Corporate Development Officer responsible for strategy and corporate transactions for the Group. He is also responsible for the Group’s Corporate Solutions and Healthcare businesses. He joined the Group in April 2014 and is a director of various companies within the Group. He previously served as Group Chief Strategy and Marketing Officer. Prior to joining the Group, Mr. Saunders was Managing Director of Towers Watson for the Asia-Pacific Insurance Sector, as well as Managing Director for the firm’s Hong Kong business and a board member of various entities. Prior to his time at 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). He is a Fellow of the Institute and Faculty of Actuaries and Fellow of five other professional actuarial bodies. Dr. Mark Konyn Aged 57, is the Group Chief Investment Officer responsible for providing oversight to the management of the investment portfolios of the Group as well as supervising and supporting the many investment professionals throughout the Group. He is a director of various companies within the Group including Chairman of AIA Investment Management Private Limited. He joined the Group in September 2015. Dr. Konyn joined AIA from Cathay Conning Asset Management, where he was Chief Executive Officer responsible for the company’s investment business and strategic expansion in the region. He had held senior positions at Allianz Global Investors (where he was Asia-Pacific CEO for RCM Global Investors), Fidelity Investments and Prudential UK. He is a Fellow of the Royal Statistical Society, and holds a Diploma from the London Business School in Investment Management, having previously completed his Ph.D. in Operational Research sponsored by the UK Government. Ms. Cara Ang Aged 50, 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 joined the Group as the Chief Human Resources Officer for AIA Singapore in May 2016. Prior to joining AIA, Ms. Ang was the Head of Human Resources of Standard Chartered Bank Singapore. During her time with Standard Chartered, she spent more than 10 years in a variety of country, regional and global HR leadership roles based in Singapore and Thailand. Prior to joining Standard Chartered Bank Singapore, Ms. Ang was the Senior Vice President and Head of Human Resources for Marsh Asia. ANNUAL REPORT 2018 | 087 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMr. Biswa Misra Aged 41, is the Group Chief Technology and Operations Officer responsible for providing leadership to the Group’s technology, operations and innovation areas and leading all Group Office technology resources. He is a director of various companies within the Group. He joined the Group in June 2013. Prior to joining the Group, Mr. Misra served as the Regional Chief Technology Officer for ING Insurance Asia Pacific. Previously, he spent six years with information technology consulting firm Capgemini, leading the company’s insurance practice for Asia. Mr. Misra holds a degree in electrical engineering from the National Institute of Technology, Surat, India. Mr. Stuart A. Spencer Aged 53, is the Group Chief Marketing Officer of AIA, responsible for the Group’s marketing initiatives, customer propositions and AIA Vitality. He is a director of various companies within the Group. Mr. Spencer re-joined AIA in May 2017 from Zurich Insurance Group, where he was most recently the interim CEO, Asia Pacific. Prior to that he was Chief Executive Officer, General Insurance, Asia Pacific for Zurich Insurance from 2013 to 2016. Mr. Spencer was with the American International Group from 1996 to 2009, during which time he held a number of senior positions including leading their Accident & Health General Insurance operations in Latin America and the Caribbean and President – Accident and Health Worldwide. Mr. Spencer was also the Global Head and COO, Worldwide Life, Accident & Health, for Chubb Insurance. Mr. Spencer is an alumnus of the Harvard Business School, The Fletcher School of Law and Diplomacy and Brandeis University. Mr. Jon Nielsen Aged 46, is the Group Chief Risk Officer responsible for the Group’s risk and compliance functions. He is also a director of various companies within the Group. Mr. Nielsen has been with AIA for 11 years. He was appointed the Group’s Regional Chief Financial Officer in 2010, overseeing the Group’s financial planning, reporting and analysis, financial systems and operations, treasury and tax functions. Prior to joining AIA, Mr. Nielsen served as Deputy Head of Accounting Policy for Allianz Group for three years. Previously, he spent over eight years with Deloitte & Touche primarily serving insurance clients. He received a Master of Professional Accountancy and a Bachelor of Science in Business Administration from the University of Nebraska and is a Certified Public Accountant. Mr. Daisuke Iwase Aged 42, is the Group Chief Digital Officer responsible for the Group’s digital innovation initiatives. Mr. Iwase joined AIA in July 2018 from Lifenet Insurance Company (Lifenet), a listed digital direct life insurance company in Japan, where he was most recently the Representative Director and President. Mr. Iwase co-founded Lifenet in 2006 and took the company public on the Tokyo Stock Exchange in 2012. Prior to co-founding Lifenet, Mr. Iwase started his career as a strategy consultant with The Boston Consulting Group in Tokyo before establishing the Tokyo office of a US-based technology venture capital firm and later working in an international private equity firm. He holds an MBA with High Distinction from Harvard Business School and an LLB from The University of Tokyo. In 2010, he was nominated as a Young Global Leader by the World Economic Forum. 088 | AIA GROUP LIMITED CORPORATE GOVERNANCEEXECUTIVE COMMITTEEREPORT OF THE DIRECTORS The Board is pleased to present this report and the audited consolidated financial statements of the Company for the thirteen-month period ended 31 December 2018. PRINCIPAL ACTIVITIES The Group is a life insurance based financial services provider operating in 18 markets throughout the Asia-Pacific region. The Group’s principal activities are 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. Details of the activities and other particulars of the Company’s principal subsidiaries are set out in note 43 to the financial statements. CHANGE OF FINANCIAL YEAR-END DATE In February 2018, the Board resolved to change the Company’s financial year-end date from 30 November to 31 December. RESULTS The results of the Group for the thirteen-month period ended 31 December 2018 and the state of the Group’s affairs at that date are set out in the financial statements on pages 136 to 266 of this Annual Report. BUSINESS REVIEW The review of the business of the Group for the thirteen-month period ended 31 December 2018, including a description of its principal risks and uncertainties and an indication of likely future developments as required by Schedule 5 to the Hong Kong Companies Ordinance, is contained in the Financial Review (pages 19 to 35), Business Review (pages 36 to 53), Risk Management (pages 54 to 64), Valuing Our People (pages 66 to 69), and Corporate Social Responsibility (pages 70 to 73) sections under Financial and Operating Review, note 42 and note 44 to the financial statements as well as Condensed Business and Financial Review for the Thirteen Months Ended 31 December 2018 (pages 294 to 303). These discussions form part of this report. AIA takes a proactive approach to understanding the impacts posed to our business by the environment, while also mitigating our own environmental footprint. The Group issued its first Climate Change Statement in 2018, outlining the initiatives we have taken to understand and address the risks posed to our business by climate change. We also voiced our support for the Paris Agreement by becoming a signatory to the Task Force on Climate-related Financial Disclosures. In accordance with the Group’s Environmental Policy, we continue to measure and report on our emissions and energy footprint. ANNUAL REPORT 2018 | 089 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAIA monitors environmental regulation and opportunities in the area of green finance, and in 2018 became a founding member of the Hong Kong Green Finance Taskforce, which aims to contribute to the development of green finance regulation locally. Customer privacy is of paramount importance to the Group. We continue to upgrade and invest in physical, administrative and technical measures to protect personal and business data. This includes programmes to educate and raise awareness among our people regarding sound and proper cybersecurity and data protection practices. In line with recent revisions to our Code of Conduct, we have updated our Supplier Code of Conduct to better integrate sustainability issues within our supply chain and to encourage optimal ESG practices among our suppliers. To understand more about our ESG initiatives and the progress we have made, please refer to our Environmental, Social and Governance Report which will be published on the websites of both the Hong Kong Stock Exchange and the Company together with this Annual Report. The Group is licensed to conduct insurance business and subject to extensive local regulatory oversight in each of the geographical markets in which its branches and subsidiaries operate. While the extent of regulation varies from jurisdiction to jurisdiction, it typically includes laws and regulations regarding corporate governance, solvency/capital adequacy, investment management, financial reporting and distribution. The Group dedicates substantial resources and appropriate personnel to support compliance with relevant laws and regulations. In particular, during the thirteen-month period ended 31 December 2018, the Group complied with all material laws and regulations applicable to it including the solvency and capital adequacy requirements applied by its regulators, details of which are contained in note 36 to the financial statements. Please see the Corporate Governance Report for a discussion on the Company’s commitment to high standards of corporate governance and the Board’s responsibility for compliance with statutory obligations. Details of significant events affecting the Group that have occurred since 31 December 2018 are set out in note 44 to the financial statements. DIVIDENDS An interim dividend of 29.20 Hong Kong cents per share for the seven-month period ended 30 June 2018 (for the six-month period ended 31 May 2017: 25.62 Hong Kong cents per share) was paid on 28 September 2018. The Board has recommended an increase in the payment of a final dividend of 14 per cent to 84.80 Hong Kong cents per share for the thirteen-month period ended 31 December 2018 (for the twelve-month period ended 30 November 2017: 74.38 Hong Kong cents per share), consistent with AIA’s established prudent, sustainable and progressive dividend policy. The Board has also recommended the payment of a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date from 30 November 2018 to 31 December 2018. The dividends reflect the strength of our financial results and the Board’s continued confidence in the future prospects of the Group. 090 | AIA GROUP LIMITED CORPORATE GOVERNANCEREPORT OF THE DIRECTORSUnder the trust deed of the Company’s Restricted Share Unit Scheme (RSU Scheme), shares of the Company are held by the trustee in either of two trust funds. These shares are held against the future entitlements of scheme participants. Provided the shares of the Company are held by the trustee and no beneficial interest in those shares has been vested in any beneficiary, the trustee shall waive any right to dividend payments or other distributions in respect of those shares (unless the Company determines otherwise). As of 28 September 2018 (being the payment date of the interim dividend), the trustee held 49,036,565 shares. The amount of interim dividend payments waived was approximately US$2 million. Pursuant to the trust deed, the trustee will waive the right to final dividend and special dividend payments if a final dividend and a special dividend are declared. Subject to shareholders’ approval at the AGM, the final dividend and the special dividend will be payable on Thursday, 6 June 2019 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 22 May 2019, being the record date for determining the entitlements to the final dividend and the special dividend. DIRECTORS The Directors of the Company during the thirteen-month period under review and up to the date of this report are as follows: Independent Non-executive Chairman and Independent Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director Mr. Ng Keng Hooi (Group Chief Executive and President) 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 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee Mr. Cesar Velasquez Purisima In accordance with Article 100 of the Company’s Articles of Association, Ms. Swee-Lian Teo, Dr. Narongchai Akrasanee and Mr. George Yong-Boon Yeo will retire from office by rotation and, being eligible, offer themselves for re-election at the AGM. ANNUAL REPORT 2018 | 091 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCHANGES IN DIRECTORS’ INFORMATION Changes in the Directors’ information which are required to be disclosed pursuant to Rule 13.51B(1) of the Listing Rules are set out below: Name of Director Mr. Chung-Kong Chow All Independent Non-executive Directors Mr. Edmund Sze-Wing Tse Change • Ceased to be the Chairman of the Advisory Committee on Corruption of the Independent Commission Against Corruption with effect from 31 December 2018 • Appointed as member of the InnoHK Steering Committee with effect from 4 February 2019 • The Board membership fee (exclusive of Board committee membership or chair fee) has been increased from US$160,000 to US$168,000 per annum with effect from 1 January 2019 • The Board Chairman fee (inclusive of Board membership fee but exclusive of Board committee membership or chair fee) has been increased from US$485,000 to US$542,500 per annum with effect from 1 January 2019, and will be further increased to US$600,000 per annum with effect from 1 January 2020 Mr. Mohamed Azman Yahya • Re-designated as the Independent Non-executive Chairman of Ranhill Holdings Berhad with effect from 2 February 2019 Save as disclosed above, there is no other information required to be disclosed pursuant to Rule 13.51B(1) of the Listing Rules. DIRECTORS’ SERVICE CONTRACTS No Director proposed for re-election at the AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than statutory compensation). DIRECTORS OF SUBSIDIARIES The names of all directors who have served on the boards of the subsidiaries of the Company during the thirteen-month period under review and up to the date of this report are available on the Company’s website at www.aia.com under the sub-section headed “Board of Directors” of “Corporate Governance” in the section headed “Investor Relations”. PERMITTED INDEMNITY PROVISION Pursuant to the Company’s Articles of Association, subject to the relevant statutes, every Director shall be indemnified out of the assets of the Company against all costs, charges, expenses, losses and liabilities which he/ she may sustain or incur in or about the execution of his/her office or which may attach thereto. The Company has taken out insurance against the liabilities and costs associated with proceedings which may be brought against directors of the Group. 092 | AIA GROUP LIMITED CORPORATE GOVERNANCEREPORT OF THE DIRECTORSDIRECTORS’ AND THE CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES As at 31 December 2018, the Directors’ and the Chief Executive’s interests and short positions in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO, or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code, are as follows: Interests and short positions in the shares and underlying shares of the Company: Number of shares or underlying shares Long Position (L) Percentage of the total number of Class shares in issue (1) Capacity Name of Director Mr. Ng Keng Hooi Mr. Edmund Sze-Wing Tse 7,901,583(L) 61,200(L) (2) (3) 3,460,400(L) 100,000(L) (3) (3) Ordinary Ordinary Mr. Chung-Kong Chow 86,000(L)(3) Ordinary Mr. Jack Chak-Kwong So 260,000(L)(3) Ordinary Mr. John Barrie Harrison 75,000(L)(3) Ordinary Mr. George Yong-Boon Yeo 100,000(L)(3) Ordinary Professor Lawrence Juen-Yee Lau 60,000(L) 100,000(L) (3) (3) Ordinary Notes: (1) Based on 12,077,063,781 shares of the Company in issue as at 31 December 2018. 0.06 <0.01 0.02 <0.01 < 0.01 < 0.01 < 0.01 < 0.01 < 0.01 < 0.01 Beneficial owner Interest of spouse(4) Beneficial owner Interest of controlled corporation(5) Beneficial owner Interest of controlled corporation(6) Beneficial owner Beneficial owner Beneficial owner Interest of spouse(7) (2) The interests included 2,349,596 shares of the Company, 4,309,630 share options under the Share Option Scheme (SO Scheme), 1,240,152 restricted share units under the RSU Scheme and 2,205 matching restricted stock purchase units under the ESPP. (3) The interests were in the shares of the Company. (4) The 61,200 shares were held by Ms. Leong Seet Lan, the spouse of Mr. Ng Keng Hooi, as beneficial owner. (5) The 100,000 shares were held by Edmund & Peggy Tse Foundation Limited, one-third interest of which is beneficially held by Mr. Edmund Sze-Wing Tse. (6) The 260,000 shares were held by Cyber Project Developments Limited, a company beneficially wholly owned by Mr. Jack Chak-Kwong So. (7) The 100,000 shares were held by Ms. Ayesha Abbas Macpherson, the spouse of Professor Lawrence Juen-Yee Lau, as beneficial owner. Save as disclosed above, as at 31 December 2018, neither any Director nor the Chief Executive of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept under Section 352 of the SFO, or as otherwise notified to the Company and the Hong Kong Stock Exchange pursuant to the Model Code. ANNUAL REPORT 2018 | 093 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARES OF PERSONS OTHER THAN THE DIRECTORS OR THE CHIEF EXECUTIVE As at 31 December 2018, the following persons, other than the Directors or the Chief Executive of the Company, had interests and short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO: Name of Shareholder JPMorgan Chase & Co. The Bank of New York Mellon Corporation Number of shares or underlying shares (Note 1) Long Position(L) Short Position(S) Lending Pool(P) 1,088,254,932(L) 19,556,741(S) 737,449,866(P) 1,071,693,611(L) 280,300,460(S) 748,065,678(P) Class Ordinary Ordinary The Capital Group Companies, Inc. 984,372,860(L) Ordinary Citigroup Inc. BlackRock, Inc. 743,672,359(L) 4,243,480(S) 732,874,388(P) 629,705,868(L) 2,007,714(S) Ordinary Ordinary Notes: (1) The interests or short positions include underlying shares as follows: Percentage of the total number of shares in issue (Note 2) 9.01 0.16 6.10 8.87 2.32 6.19 8.15 6.15 0.03 6.06 5.21 0.01 Capacity Note 3 Note 4 Interest of controlled corporations Note 5 Interest of controlled corporations Long Position Short Position Name of Shareholder Physically settled listed equity derivatives Cash settled listed equity derivatives Physically settled unlisted equity derivatives Cash settled unlisted equity derivatives Physically settled listed equity derivatives Cash settled listed equity derivatives Physically settled unlisted equity derivatives Cash settled unlisted equity derivatives JPMorgan Chase & Co. 4,623,648 1,556,000 491,200 6,687,175 1,082,000 10,685,300 1,725,066 5,889,375 The Bank of New York Mellon Corporation The Capital Group Companies, Inc. – – Citigroup Inc. 4,224,852 BlackRock, Inc. – – – – – – 3,593,080 – – – – 926,370 96,400 300,000 – 182,000 – (2) Based on 12,077,063,781 shares in issue as at 31 December 2018. (3) JPMorgan Chase & Co. held the interests and short positions in the following capacities: – 280,300,460 – – – 879,080 3,064,400 – 818,114 – – – Capacity Beneficial owner Investment manager Trustee Custodian corporation / Approved lending agent Number of shares or underlying shares (Long Position) 100,979,108 249,550,900 275,058 737,449,866 Number of shares or underlying shares (Short Position) 19,556,741 – – – 094 | AIA GROUP LIMITED CORPORATE GOVERNANCEREPORT OF THE DIRECTORS(4) The Bank of New York Mellon Corporation held the interests and short positions in the following capacities: Capacity Number of shares or underlying shares (Long Position) Number of shares or underlying shares (Short Position) Interest of controlled corporation 1,071,693,611 280,300,460 (5) Citigroup Inc. held the interests and short positions in the following capacities: Capacity Person having a security interest in shares Interest of controlled corporations Approved lending agent Number of shares or underlying shares (Long Position) Number of shares or underlying shares (Short Position) 2,800 10,795,171 732,874,388 – 4,243,480 – Save as disclosed above, as at 31 December 2018, no person, other than the Directors or the Chief Executive of the Company, whose interests are set out in the section entitled “Directors’ and the Chief Executive’s Interests and Short Positions in Shares and Underlying Shares”, had any interest or short position in the shares or underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO. DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES Under his service contract, Mr. Ng Keng Hooi, an Executive Director and the 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. Ng Keng Hooi’s incentive awards are set out in the Remuneration Report. DIRECTORS’ INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS No transactions, arrangements or contracts of significance to which the Company or any of its subsidiaries was a party, and in which any Director of the Company or his/her connected entity has a material interest, directly or indirectly, subsisted as at 31 December 2018 or at any time during the thirteen-month period under review. RESERVES As at 31 December 2018, the aggregate amount of reserves available for distribution to shareholders of the Company, as calculated under the provisions of Part 6 of the Hong Kong Companies Ordinance, was US$6,488 million (30 November 2017: US$3,315 million). CHARITABLE DONATIONS Charitable donations made by the Group during the thirteen-month period ended 31 December 2018 amounted to US$6 million (for the twelve-month period ended 30 November 2017: US$3 million). ANNUAL REPORT 2018 | 095 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONMAJOR CUSTOMERS AND SUPPLIERS During the thirteen-month period ended 31 December 2018, the percentage of the aggregate purchases attributable to the Group’s five largest suppliers was less than 30 per cent of the Group’s total value of purchases and the percentage of the aggregate sales attributable to the Group’s five largest customers was less than 30 per cent of the Group’s total value of sales. SHARES ISSUED Details of the shares issued during the thirteen-month period ended 31 December 2018 are set out in note 34 to the financial statements. DEBENTURES ISSUED Details of the debentures issued during the thirteen-month period ended 31 December 2018 are set out in note 29 to the financial statements. EQUITY-LINKED AGREEMENTS During the thirteen-month period ended 31 December 2018, the Company did not enter into any equity-linked agreements and there did not subsist any equity-linked agreement entered into by the Company as at 31 December 2018, save for the restricted share units, outstanding share options and restricted stock purchase units awarded to employees under the RSU Scheme, the SO Scheme and the ESPP, respectively, and the restricted stock subscription units awarded to agents under the Agency Share Purchase Plan (ASPP), each described below and in the Remuneration Report and note 39 to the financial statements. RSU SCHEME During the thirteen-month period ended 31 December 2018, 11,617,538 restricted share units were awarded by the Company under the RSU Scheme adopted by the Company on 28 September 2010 (as amended). Details of the scheme are set out in the Remuneration Report and note 39 to the financial statements. SO SCHEME During the thirteen-month period ended 31 December 2018, 4,601,313 share options were awarded by the Company under the SO Scheme adopted by the Company on 28 September 2010 (as amended). 1,355,304 share options were exercised during the thirteen-month period under review and the Company issued 1,355,304 new shares accordingly. The proceeds received amounted to approximately US$7 million. A summary of the terms of the SO Scheme is set out in the Remuneration Report and further details of the SO Scheme are set out in the Remuneration Report and note 39 to the financial statements. 096 | AIA GROUP LIMITED CORPORATE GOVERNANCEREPORT OF THE DIRECTORSESPP During the thirteen-month period ended 31 December 2018, 1,409,739 restricted stock purchase units were awarded by the Company and 841,108 matching restricted stock purchase units were vested under the ESPP adopted by the Company on 25 July 2011 (as amended). No new shares have been issued pursuant to the ESPP since its adoption. Details of the plan are set out in the Remuneration Report and note 39 to the financial statements. ASPP The Company adopted the ASPP on 23 February 2012 (ASPP Adoption Date). Under the ASPP, certain agents and agency leaders of the Group were selected to participate in the plan. Those agents selected for participation may elect to purchase the Company’s shares and, after having been in the plan for a period of three years, receive one matching share for each two shares purchased through the award of matching restricted stock subscription units (RSSUs). Each eligible agent’s participation level is capped at a maximum purchase in any plan year of US$15,000. Upon vesting of the matching RSSUs, those agents who remain as agents of the Group will receive one matching share for each RSSU which he or she holds. The aggregate number of shares which can be issued by the Company under the ASPP during the 10-year period shall not exceed 2.5 per cent of the number of shares in issue on the ASPP Adoption Date. During the thirteen-month period ended 31 December 2018, 1,439,468 matching RSSUs were awarded, 1,167,021 matching RSSUs were vested, and 1,167,021 new shares (Awarded Shares) were issued for RSSUs vested pursuant to the ASPP. The Awarded Shares were issued at the subscription price of US$1.00 each to Computershare Hong Kong Trustees Limited (being the plan trustee) to hold the same on trust for certain eligible agents upon vesting of their matching RSSUs. The closing price of the Company’s shares on 27 April 2018 (being the date on which the aforesaid matching RSSUs were vested) was HK$69.00. The proceeds received amounted to approximately US$1.17 million which had been used to fund the administration expenses of the ASPP. From the ASPP Adoption Date and up to 31 December 2018, a cumulative total of 4,173,047 new shares were issued under the ASPP, representing approximately 0.035 per cent of the shares in issue as at the ASPP Adoption Date. NON-EXEMPT CONNECTED TRANSACTIONS During the thirteen-month period ended 31 December 2018, the Group had not entered into any connected transactions which are not exempt from the annual reporting requirement under Chapter 14A of the Listing Rules. RELATED PARTY TRANSACTIONS Details of the related party transactions undertaken by the Group during the thirteen-month period ended 31 December 2018 in the ordinary course of business are set out in note 41 to the financial statements. Such related party transactions are all exempt connected transactions under Chapter 14A of the Listing Rules. ANNUAL REPORT 2018 | 097 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONPURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES Save for the purchase of 1,409,735 shares of the Company under the ESPP at a total consideration of approximately US$12 million, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the thirteen-month period ended 31 December 2018. These purchases were made by the trustees of the relevant scheme/plan on the Hong Kong Stock Exchange. These shares are held on trust for participants of the relevant scheme/plan and therefore were not cancelled. Please refer to note 39 to the financial statements for details. PUBLIC FLOAT Based on information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the amount of public float as approved by the Hong Kong Stock Exchange and permitted under the Listing Rules as at the date of this report. AUDITOR PricewaterhouseCoopers was re-appointed auditor of the Company in 2018. PricewaterhouseCoopers will retire and, being eligible, offer itself for re-appointment at the AGM. A resolution for the re-appointment of PricewaterhouseCoopers as auditor of the Company will be proposed at the AGM. By Order of the Board Edmund Sze-Wing Tse Independent Non-executive Chairman 15 March 2019 098 | AIA GROUP LIMITED CORPORATE GOVERNANCEREPORT OF THE DIRECTORSCORPORATE GOVERNANCE REPORT CORE PRINCIPLES The Board believes that strong corporate governance is essential both to the delivery of sustainable value and to maintaining a culture of business integrity, which in turn supports investor confidence. The Board is ultimately responsible for the performance of the Group, including the consistent achievement of business plans and compliance with statutory as well as corporate obligations. The Board is also responsible for the development and implementation of the Group’s corporate governance practices. This Corporate Governance Report explains the Company’s corporate governance principles and practices, including how the Board manages the business to deliver long-term shareholder value and to promote the development of the Group. As a company listed on the Main Board of the Hong Kong Stock Exchange, the Company is committed to high standards of corporate governance and sees the maintenance of good corporate governance practices as essential to its sustainable growth. It is vital that Board members, in aggregate, have the requisite skills and expertise and are supported by a structure that enables appropriate delegation between the Board, its committees and management, whilst ensuring that the Board retains overall control. To promote effective governance across all of our operations, the Board has approved a governance framework, which maps out internal approval processes including those matters that may be delegated. In this Corporate Governance Report, the Board 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. Throughout the thirteen-month period ended 31 December 2018, the Company complied with all applicable code provisions set out in the Corporate Governance Code. BOARD OF DIRECTORS ROLES AND RESPONSIBILITIES The Board is accountable to shareholders for the affairs of the Company. It meets these obligations by ensuring the maintenance of high standards of governance in all aspects of the Company’s business, setting the strategic direction for the Group and maintaining appropriate levels of review, challenge and guidance in its relationship with Group management. It is also the ultimate decision-making body for all matters considered material to the Group and is responsible for ensuring that, as a collective body, Board members have the appropriate skills, knowledge and experience to perform their roles effectively. ANNUAL REPORT 2018 | 099 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONIn these matters, the Board provides leadership to management in respect of operational issues through the Group Chief Executive, who is authorised to act on behalf of the Board in the operational management of the Company. Any responsibilities not so delegated by the Board to the Group Chief Executive remain the responsibility of the Board. The Board has also adopted and/or updated various policies as recommended by the Audit Committee and the Risk Committee for better corporate governance. During the thirteen-month period under review, the Board reviewed the Company’s compliance with the Corporate Governance Code, including the necessary disclosures in its reports to shareholders. The Board discharges the following responsibilities either by itself or through delegation to the Audit Committee, the Nomination Committee, the Remuneration Committee and the Risk Committee: (a) the development and review of the Company’s policies and practices on corporate governance; (b) the review and monitoring of the training and continuous professional development of Directors and senior management; (c) the review and monitoring of the Company’s policies and practices on compliance with legal and regulatory requirements; (d) the development, review and monitoring of the Code of Conduct applicable to all officers and employees of the Group; and (e) the review of the Company’s compliance with the Corporate Governance Code and disclosure in this Corporate Governance Report. The Company has also adopted its own Directors’ and Chief Executives’ Dealing Policy (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 Dealing Policy throughout the thirteen-month period ended 31 December 2018. BOARD EVALUATION The Board undertakes annually a formal evaluation of its own performance and that of its committees and individual Directors to ensure the Board and its committees continue to perform effectively. The evaluation is conducted either by way of internal assessment or through independent external consultants. A tailored questionnaire is used to collect views and comments from Board members. Findings are reviewed and considered by the Board to formulate appropriate follow-up actions. 100 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTBOARD COMPOSITION As of 31 December 2018 and up to the date of this Corporate Governance Report, the Board consists of eleven members, comprising one Executive Director and ten 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, financial, government, regulatory and policy experience from a variety of backgrounds. There is diversity of nationality, ethnicity, educational background, functional expertise, gender, age and experience. Biographies of the Directors are set out on pages 78 to 83 of this Annual Report. BOARD INDEPENDENCE Over 90 per cent (10 out of 11) of the Board are Independent Non-executive Directors. Save as disclosed below in respect of Mr. Tse, each of the Independent Non-executive Directors of the Company meets the independence guidelines set out in Rule 3.13 of the Listing Rules and has provided to the Company the requisite annual confirmation as to his or her independence. Mr. Tse, save for being currently a director of AIA Foundation (a subsidiary of the Company) and previously a Non-executive Director of the Company from 27 September 2010 to 22 March 2017 until his re-designation as an Independent Non-executive Director, has met the independence guidelines set out in Rule 3.13 of the Listing Rules. The Company has satisfied itself that Mr. Tse is independent pursuant to Rule 3.13 of the Listing Rules on the basis that since his appointment as a Non-executive Director of the Company on 27 September 2010, Mr. Tse has not held any executive or management role or function in the Company or any of its subsidiaries, and at no time during that period has he been employed by the Company or any of its subsidiaries. He has not taken part in the day-to-day management of the Company or its subsidiaries beyond his attendance at and participation in board and committee meetings of the Group. Save as disclosed herein, none of the Independent Non-executive Directors 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 plans as well as interim and annual results, and to consider other significant matters. At these meetings, senior management also provides regular updates to the Board with respect to the business activities and development of the Group, together with regulatory and policy updates. Directors are empowered under the relevant terms of reference to request further information from management whenever they think fit. During the thirteen-month period under review, there were seven 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. ANNUAL REPORT 2018 | 101 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONThe attendance of individual Directors at the Board meetings, committees’ meetings and the 2018 annual general meeting of the Company (2018 AGM) held during the thirteen-month period under review are as follows: Name of Director Independent Non-executive Chairman and Independent Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director, Group Chief Executive and President Mr. Ng Keng Hooi 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 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee Mr. Cesar Velasquez Purisima No. of Meetings Attended / No. of Meetings Held Audit Committee Nomination Committee Remuneration Committee Board Risk Committee 2018 AGM 7/7 7/7 3/7 6/7 7/7 6/7 7/7 7/7 7/7 7/7 6/7 – – 3/4 – 4/4 4/4 – – – 4/4 – 1/1 4/4 4/4 1/1 – 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 – 4/4 1/1 4/4 – – 3/4 4/4 – – – – – 4/4 4/4 – – 4/4 4/4 – – 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 Minutes of the meetings of and circular resolutions passed by the Board and all committees are kept by the Company Secretary. These minutes and resolutions are open for inspection on reasonable notice by any Director. CHAIRMAN AND GROUP CHIEF EXECUTIVE Mr. Edmund Sze-Wing Tse, Independent Non-executive Chairman of the Company, plays a critical role of leading the Board in fulfilling its responsibilities. With the support of the Group Chief Executive and President and senior management, Mr. Tse seeks to ensure that all Directors are properly briefed on issues arising at Board meetings and that they receive adequate and reliable information in a timely manner. He is also responsible for making sure that good corporate governance practices and procedures are followed. Mr. Ng Keng Hooi, 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 operations and administration. Mr. Ng attends Board meetings as the sole Executive Director and, in his capacity as Group Chief Executive and President, ensures that the Board is updated at least monthly in respect of material aspects of the Company’s performance. Mr. Ng discharges his responsibilities within the framework of the Company’s policies, reserved powers and routine reporting requirements and is advised and assisted by the senior management of the Group. 102 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORT The segregation ensures a clear distinction between the Chairman’s responsibility to manage the Board and the Group Chief Executive and President’s responsibility to manage the Group’s business. The roles and responsibilities of the Board, the Chairman of the Board and the Group Chief Executive are set out in the Board Charter of the Company, which is available on the Company’s website at www.aia.com. APPOINTMENT OF DIRECTORS The Company uses a formal and transparent procedure for the appointment of new Directors. The Board receives recommendations for the appointment of new Directors from the Nomination Committee, which considers the background of the proposed new Directors. The Board then deliberates over such recommendations prior to approval. To promote greater transparency in this respect, the Directors’ Nomination Policy was adopted by the Board on 14 March 2019. A summary of the Directors’ Nomination Policy is set out in the sub-section headed “Nomination Committee” of “Committees of the Board” section in this report. All Directors (including Non-executive Directors) are subject to retirement by rotation once every three years and are subject to re-election at the general meetings of the Company in accordance with the Articles of Association of the Company and the Corporate Governance Code. INDUCTION AND ONGOING DEVELOPMENT The Company provides each Director with personalised induction, training and development. On appointment, each Director receives a comprehensive and tailored induction covering, amongst other things, the role of the Board and its key committees, group structure, governance structure and the duties and responsibilities of a director under applicable laws and regulations. Directors receive detailed briefings on the Group’s principal businesses, the markets in which it operates and the overall competitive environment. Other areas addressed include legal and compliance issues affecting directors of financial services companies, the Group’s governance arrangements, the principal basis of accounting for the Group’s results, the internal audit and risk management functions, its investor relations programme and remuneration policies. The Directors are continually updated on the Group’s business and the latest developments to the Listing Rules and other applicable statutory requirements to ensure compliance and continuous good corporate governance practice. During the thirteen-month period under review, the Company organised a Board Strategy Day and provided a number of briefings to the Directors to update them on the implementation of the Group’s strategies to capture future business opportunities and the latest developments in the Group’s principal businesses and major products. In December 2018, the Board visited Ho Chi Minh City, Vietnam, where Directors had an in-depth review of the Group’s local operations. The visit also provided an opportunity for the Directors to gain new insights into the insurance sector in Vietnam and its prospects for continued growth. ANNUAL REPORT 2018 | 103 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONAll 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 thirteen-month period under review is summarised as follows: 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 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ Name of Director Independent Non-executive Chairman and Independent Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director, Group Chief Executive and President Mr. Ng Keng Hooi 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 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee Mr. Cesar Velasquez Purisima COMMITTEES OF THE BOARD The Company’s corporate governance is implemented through a structured hierarchy, which includes the Board and four committees established by the Board, namely, the Audit Committee, the Nomination Committee, the Remuneration Committee and the Risk Committee. The memberships and terms of reference of all Board committees are available on the websites of both the Hong Kong Stock Exchange and the Company. In addition to the four Board committees, a number of management committees have been established including, among others, an Executive Committee, the Group Operational Risk Committee and the Group Financial Risk Committee. AUDIT COMMITTEE The Audit Committee consists of four members, all of whom are Independent Non-executive Directors. They are Mr. Harrison, who serves as chairman of the Audit Committee, Mr. So, Mr. Yeo and Dr. Narongchai. The duties performed by the Audit Committee during the thirteen-month period under review included overseeing the Group’s financial reporting system, reviewing risk management and internal control systems and review of change of financial year-end date; monitoring the integrity of the preparation of the Company’s financial information, including quarterly business highlights and interim and annual results of the Group; reviewing the Group’s financial and accounting policies and practices as well as its whistle-blowing arrangements; and monitoring the adequacy of resources for and effectiveness of the internal audit function. Details of how the Audit Committee reviews the effectiveness of the risk management and internal control systems are set out in the Risk Management and Internal Control section of this report. 104 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTThe Audit Committee also provided oversight for and management of the relationship with the Group’s external auditor, including reviewing and monitoring the external auditor’s independence and objectivity, and the effectiveness of the audit process in accordance with applicable standards. The Audit Committee held four meetings during the thirteen-month period ended 31 December 2018. The attendance records of the Audit Committee members are set out on page 102 of this Annual Report. NOMINATION COMMITTEE The Nomination Committee consists of ten members, including the Independent Non-executive Chairman, Mr. Tse, who serves as chairman of the Nomination Committee, and the remaining nine Independent Non-executive Directors, Mr. So, Mr. Chow, Mr. Harrison, Mr. Yeo, Mr. Yahya, Professor Lau, Ms. Teo, Dr. Narongchai and Mr. Purisima. The duties performed by the Nomination Committee during the thirteen-month period under review included reviewing and making recommendations to the Board on the structure, size and composition of the Board, including the skills, knowledge, experience and diversity of background and experience of its members, overseeing the identification and assessment of potential candidates for directorship, providing oversight and direction in respect of the succession planning for directors and determining the composition of the Board committees. To promote greater transparency on the Nomination Committee’s processes and criteria for selecting and making recommendation to the Board on the appointment, election or re-election of Directors, the Directors’ Nomination Policy was adopted by the Board on 14 March 2019 upon the recommendation of the Nomination Committee. A summary of the Directors’ Nomination Policy is set out below: • In assessing the suitability of a candidate proposed for appointment, election or re-election as a Director, the Nomination Committee shall consider the candidate on the basis of the selection criteria set out in the Directors’ Nomination Policy, which includes, amongst other things, whether his/her skills, knowledge, experience and background can complement and enhance those of the existing Board members with due regards to the benefits of diversity perspectives set out in the Board Diversity Policy; his/her character, reputation, integrity and standard of competence; and the ability to devote sufficient time to discharge his/her duties as a Director. For candidate proposed for nomination as an Independent Non-executive Director, the satisfaction of the independence requirement under Rule 3.13 of the Listing Rules is also required. • For appointment or election of a new Director, the Nomination Committee shall take the lead in identifying candidates suitably qualified to become a Director. It may consider referrals from existing Director, using open advertising or the services of external advisers to facilitate the search based on the selection criteria set out in the Directors’ Nomination Policy. Shareholders may also propose a person for election as a Director of the Company at a general meeting, relevant procedures of which are set out on the website of the Company. The Nomination Committee shall evaluate the suitability of a candidate through interviews, background checks, third party reference checks, and/or any process as it deems necessary and appropriate. • For re-election of a retiring Director, the Nomination Committee will review the overall past contribution of the retiring Director to the Company, and determine whether he/she continues to meet the selection criteria set out in the Directors’ Nomination Policy. These processes aim to ensure that every Director has the requisite character, experience and integrity, and that he/she is able to demonstrate a standard of competence which commensurate with his/her position as a Director. ANNUAL REPORT 2018 | 105 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFurthermore, the Board Diversity Policy adopted by the Board in 2013, which describes the Company’s approach to ensuring adequate diversity, a summary of which is set out below: • Consideration and selection of candidates for appointment to the Board will be based on merit which shall include a review of any candidate’s integrity, experience, educational background, industry or related experience and more general experience; • Within that overriding emphasis on merit, the Nomination Committee shall seek to address Board vacancies by actively considering candidates that bring a diversity of background and opinion from amongst those candidates with the appropriate background and industry or related expertise and experience. The Nomination Committee’s considerations shall include achieving an appropriate level of diversity having regard to factors such as race, gender, age, nationality, cultural and educational background; • The Nomination Committee will (a) in reviewing the Board composition, consider the benefits of all aspects of diversity including, but not limited to, those described above, in order to maintain an appropriate range and balance of skills, experience, knowledge and character on the Board; and (b) as part of the performance evaluation of the Board, consider the balance of skills, experience, knowledge and independence of the Board; and • As part of the Nomination Committee’s annual review of the structure, size and composition of the Board, the Nomination Committee will expressly consider and include commentary to the Board on the subject of the Board’s diversity. The Nomination Committee held one meeting during the thirteen-month period ended 31 December 2018. The attendance records of the Nomination Committee members are set out on page 102 of this Annual Report. REMUNERATION COMMITTEE The Remuneration Committee consists of four members, all of whom are Independent Non-executive Directors. They are Mr. So, who serves as chairman of the Remuneration Committee, Mr. Yeo, Mr. Yahya and Mr. Tse. The duties of the Remuneration Committee are to make recommendations to the Board on the remuneration policy covering the Directors and senior management of the Group and to review and approve remuneration offered to the Executive Director and senior management of the Group. The Remuneration Committee held four meetings during the thirteen-month period ended 31 December 2018. The attendance records of the Remuneration Committee members are set out on page 102 of this Annual Report. Details of the key activities performed by the Remuneration Committee during the thirteen-month period under review have been set out in the Remuneration Report, which forms part of this Corporate Governance Report. RISK COMMITTEE The Risk Committee consists of six members, five of whom are Independent Non-executive Directors, including Mr. Chow, who serves as chairman of the Risk Committee, Mr. Harrison, Professor Lau, Ms. Teo, Mr. Tse and Mr. Ng, the sole Executive Director. The duties performed by the Risk Committee during the thirteen-month period under review included providing advice to the Board on the risk profile and risk management strategy of the Group; considering and reviewing disclosures in interim and annual reports, risk management-related policies and guidelines, statutory solvency positions, risk appetite and metrics; overseeing the risk management and compliance framework; reviewing the risk management and internal control systems; endorsing the Company’s risk governance structure; and reviewing major risks. Details of how the Risk Committee reviews the effectiveness of the risk management and internal control systems are set out in the Risk Management and Internal Control section of this report. The Risk Committee held four meetings during the thirteen-month period ended 31 December 2018. The attendance records of the Risk Committee members are set out on page 102 of this Annual Report. 106 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTEXTERNAL AUDITOR The external auditor of the Company is PricewaterhouseCoopers. The Audit Committee is responsible for making recommendations to the Board on the external auditor’s appointment, re-appointment and removal, which are subject to approval by the Board and by the shareholders at a general meeting of the Company. In assessing the external auditor, the Audit Committee will take into account relevant experience, performance, objectivity and independence of the external auditor. The Board has adopted policies on nomination and appointment of and services performed by the external auditor to enhance related governance practices. The Audit Committee also reviews the non-audit services provided by the external auditor and its remuneration on a regular basis. For the thirteen-month period ended 31 December 2018, the total estimated remuneration payable by the Group to PricewaterhouseCoopers was US$23.0 million (for the twelve-month period ended 30 November 2017: US$20.0 million), an analysis of which is set out below: US$ millions Audit services(Note) Non-audit services, including: Audit-related services(Note) Tax services Other services Total 2018 16.7 2.0 1.7 2.6 23.0 2017 16.0 2.3 0.9 0.8 20.0 Note: Expenses for audit services include the audit of the Supplementary Embedded Value Information which was reported as part of audit-related services in prior period. The comparative information has been adjusted to conform to current period presentation. In addition to those fees disclosed above, audit fees of US$0.8 million for the thirteen-month period ended 31 December 2018 (for the twelve-month period ended 30 November 2017: US$0.8 million) were payable to PricewaterhouseCoopers by funds for which the Group is the investment adviser, manager or administrator. ACCOUNTABILITY AND AUDIT FINANCIAL REPORTING The annual results of the Company and other financial information were published in accordance with the requirements of the Listing Rules and other applicable regulations and industry best practice. When preparing the Company’s financial reports, the Board endeavours to present this information in a comprehensible, informative and user-friendly manner. The Directors acknowledge their responsibility for preparing the Company’s consolidated financial statements and ensuring that the preparation of the Company’s consolidated financial statements is in accordance with the relevant requirements and applicable standards. The statement of the Company’s auditor concerning its reporting responsibilities on the Company’s consolidated financial statements is set out in the Independent Auditor’s Report on pages 129 to 135 of this Annual Report. RISK MANAGEMENT AND INTERNAL CONTROL The Board, assisted by its committees, is responsible for overseeing the Group’s risk management and internal control systems on an ongoing basis. The Board reviews the effectiveness of risk management and internal control systems on an annual basis. ANNUAL REPORT 2018 | 107 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION The Group’s RMF does not seek to eliminate all risks but rather to identify, understand and manage them within acceptable limits in order to support the sustainability of the business and the creation of long-term value, and can only provide reasonable and not absolute assurance against material misstatement or loss. The main features and other information on the RMF and the process used to identify, evaluate and manage significant risks are set out in the Risk Management section of this Annual Report. The Company has an internal audit function (Internal Audit). The key features of the Company’s internal control system include independent reviews and testing of internal controls, taking a risk-based approach and developing an annual audit plan presented to the Audit Committee. Reports of significant audit findings are prepared and communicated to management and the Audit Committee and where control weaknesses or defects are identified, recommendations are provided to resolve them. This includes issues formally identified from internal audits, forensic investigations, regulatory reports and special projects. Management is responsible for the design, implementation and evaluation of the internal control system, including ongoing mitigation, across the business and processes. The Board has, through the Risk Committee and Audit Committee, reviewed the adequacy and effectiveness of the Group’s risk management and internal control systems (covering all material controls such as financial, operational and compliance controls), including: • the adequacy of resources, staff qualifications and experience, training programmes and the budget of the Group’s accounting, internal audit and financial reporting functions; • areas of risk identified by management as well as the quality and scope of management’s ongoing monitoring of risks and the risk management system; • • • • the changes in the nature and extent of significant risks since the previous review and the Group’s ability to respond to changes in the external environment and its business; the quality and scope of the internal control system implemented by management and the work and effectiveness of Internal Audit as well as any significant risks reported by Internal Audit; the extent and frequency of communication of monitoring results to the Board and its committees, to enable the assessment of the effectiveness of the Group’s risk management and internal control systems; the incidence of any significant control failings or weaknesses that have been identified during the year and the extent to which they have resulted in a material impact on the Group’s financial performance or condition; • the effectiveness of the Group’s processes in relation to financial reporting and regulatory compliance; • the scope of work performed by both internal and external auditors and any significant issues arising from internal and external audit reports; and • the results of management’s control self-assessment exercises. The annual review of the Group’s risk management and internal control systems was supported by an internal certification process performed by management (at both the Company’s and subsidiaries’ levels), the Risk & Compliance function and Internal Audit of the Company. Management has confirmed to the Board that the Group’s risk management and internal control systems are adequate and effective. Based on the review result and management’s confirmation, the Board considered the Group’s risk management and internal control systems to be adequate and effective for the thirteen-month period ended 31 December 2018. 108 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTINSIDE INFORMATION The Company has implemented proper procedures and internal controls for the handling and dissemination of inside information: • The Company has established a policy on the disclosure of inside information to ensure that all current and prospective investors of the Company, market participants and the public are provided with appropriate information relating to the Group in a timely and simultaneous manner. The policy has been communicated to all relevant staff and related training has also been provided to them; and • A written communications protocol has also been established to implement a control process within the Group for the management of communications with various internal and external stakeholders. Such protocol identifies a list of spokespersons who are authorised to provide information about the Group to the relevant stakeholders. The Company’s Code of Conduct (which was updated in the period under review) further contains a strict prohibition on the unauthorised use of confidential or non-public information. COMPANY SECRETARY All the Directors have access to the advice and services of the Company Secretary at any time in respect of their duties and the effective operation of the Board and Board committees. The Company Secretary advises the Board on all corporate governance matters; facilitates the induction and professional development of Directors; and ensures good information flows and communications within the Board and its committees, and between management and the Non-executive Directors. The Company Secretary also plays an important role in ensuring that Board and Board committee policies and procedures are followed and the Board’s obligations to shareholders pursuant to the Listing Rules are discharged. During the thirteen-month period under review, the Company Secretary undertook at least 15 hours of relevant continuing professional education. ENGAGEMENT WITH SHAREHOLDERS The Board recognises the importance of maintaining an ongoing dialogue with the Company’s shareholders and does so through general meetings, press releases, announcements and corporate communications such as the annual report, interim report and circulars. The Board is committed to the timely disclosure of information. The latest information regarding the Group’s activities, announcements, results presentations, 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 304 of this Annual Report. The Investor Relations function oversees the Company’s engagement with investors. The Company’s institutional shareholder base is geographically diversified and the Company is also extensively covered by research analysts from a wide range of broker houses. An active and open dialogue with institutional investors is maintained through regular investor interactions, including meetings, investment conferences and roadshows. Investor feedback and analysts’ reports on the Company are circulated to the Board and the Executive Committee on a regular and systematic basis to promote an understanding of external views on the Company’s performance. The Board has adopted a Shareholders’ Communication Policy and such policy will be reviewed on a regular basis to ensure its effectiveness. The Board welcomes views, questions and concerns from shareholders and other stakeholders. Shareholders and other stakeholders may send their enquiries and concerns to the Board. The contact details are set out on page 305 of this Annual Report. ANNUAL REPORT 2018 | 109 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 2018 ANNUAL GENERAL MEETING The most recent general meeting of the Company was the 2018 AGM which was held at the Grand Ballroom, 2/F, New World Millennium Hong Kong Hotel, 72 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong on 18 May 2018. The Chairman and all other members of the Board at that time, together with the Group’s senior management and external auditor, attended the 2018 AGM. The poll voting results are available on the websites of both the Company and the Hong Kong Stock Exchange. The matters resolved at the 2018 AGM 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 2017; • Declaration of a final dividend of 74.38 Hong Kong cents per share for the year ended 30 November 2017; • Re-election, by separate ordinary resolutions, of Mr. Ng as Executive Director of the Company and Mr. Purisima, Professor Lau, Mr. Chow and Mr. Harrison as Independent Non-executive Directors of the Company; • Re-appointment of PricewaterhouseCoopers as auditor of the Company until the conclusion of the next annual general meeting and authorising the Board to fix its remuneration; • General mandate to Directors to cause the Company to issue additional shares of the Company, not exceeding 10 per cent of the aggregate number of shares of the Company in issue on the date of the 2018 AGM, and the discount for any shares to be issued not exceeding 10 per cent to the benchmarked price; • General mandate to Directors to cause the Company to buy back shares of the Company, not exceeding 10 per cent of the aggregate number of shares of the Company in issue on the date of the 2018 AGM; and • General mandate to Directors to cause the Company to issue shares of the Company under the RSU Scheme, not exceeding 2.5 per cent of the number of shares of the Company in issue on the date of the listing of the Company’s shares on the Hong Kong Stock Exchange. The forthcoming annual general meeting of the Company will be held on Friday, 17 May 2019. 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) 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, may request to call a general meeting. If such request is made, a 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 Hong Kong Companies Ordinance for calling a general meeting. 110 | AIA GROUP LIMITED CORPORATE GOVERNANCECORPORATE GOVERNANCE REPORTMOVING A RESOLUTION AT AN ANNUAL GENERAL MEETING Shareholder(s) of the Company may request the Company to give notice of a resolution and move such resolution at an annual general meeting. Such notice of resolution must be given by the Company if it has received such request from: (a) shareholder(s) of the Company representing at least 2.5 per cent of the total voting rights of all the shareholders of the Company who have a right to vote on the resolution at the annual general meeting to which the request relates; or (b) at least 50 shareholders of the Company who have a 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 be authenticated by the person or persons making it, and be received by the Company not later than six weeks before the annual general meeting to which the request relates or, if later, the time at which notice is given of that meeting. The request must be deposited at the registered office of the Company at 35/F, AIA Central, No. 1 Connaught Road Central, Hong Kong or sent by email to ir@aia.com for the attention of the Company Secretary. Shareholder(s) of the Company should make reference to Sections 615 and 616 of the Hong Kong 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 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 The Company’s Articles of Association (in both English and Chinese) is available on the websites of both the Company and the Hong Kong Stock Exchange. During the thirteen-month period under review, there has been no change to the Articles of Association of the Company. By Order of the Board Mitchell New Company Secretary 15 March 2019 ANNUAL REPORT 2018 | 111 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONREMUNERATION REPORT STATEMENT OF THE CHAIRMAN OF THE REMUNERATION COMMITTEE It gives me great pleasure to present the Report on Remuneration for Directors and Key Management Personnel for the thirteen-month period ended 31 December 2018. The Remuneration Committee’s work in the thirteen-month period ended 31 December 2018 focused on ensuring the remuneration arrangements for our senior executives and employees continue to support the Group’s strategic priorities and allow us to attract, motivate and retain high calibre talent. Similar to prior years, the Remuneration Committee undertook a rigorous process in reviewing the Group’s executive remuneration, taking into account market practice, our regulatory environment, AIA’s risk management framework and the interests of our shareholders. • • In the first quarter of 2018, the Remuneration Committee reviewed and subsequently approved the remuneration package to be provided to the Group Chief Digital Officer, a new member of the Group Executive Committee. In the second half of 2018, the Remuneration Committee and the Board reviewed the financial performance measures used in the short-term incentive plan. Following the review, the Board approved the introduction of Underlying Free Surplus Generation, in place of Excess Embedded Value Growth, as one of the measures in the short-term incentive plan for 2019 and future years. Adjustments to the performance measures and their weightings will enhance our focus on capital and cash generation in support of our prudent, sustainable and progressive shareholder dividend policy, while maintaining our emphasis on growth, earnings and quality of in-force business. • The Remuneration Committee also reviewed the fees for the Board Chairman and Non-executive Directors and subsequently proposed adjustments to the Board for approval. The change in fees has taken effect from 1 January 2019. Further details of Board Chairman and Non-executive Director fees can be found on pages 126 and 127 of this report. • Finally, the Remuneration Committee monitored the regulatory environment and corporate governance best practices in 2018 and will continue to do so in the future. 112 | AIA GROUP LIMITED CORPORATE GOVERNANCEThe overall remuneration structure for our senior executives remained unchanged in 2018 and will continue to apply in 2019. As in prior years, a significant proportion of total remuneration awarded in 2018 is subject to multi-year performance-based vesting conditions which ensure that our executives’ interests are closely aligned with those of our shareholders over the long term. Overall, the Remuneration Committee believes that the Group’s current remuneration arrangements should be maintained in 2019 and trusts that this report provides clear and detailed information regarding our policies and practices. Speaking for the Remuneration Committee, I would like to express our deepest appreciation to you all for your continued trust and support in remuneration-related matters and look forward to continuing our dialogue in the years to come. Jack Chak-Kwong So Chairman, Remuneration Committee 15 March 2019 ANNUAL REPORT 2018 | 113 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONREMUNERATION GOVERNANCE ROLE OF THE REMUNERATION COMMITTEE The Remuneration Committee is responsible for determining the specific remuneration packages of the Group Chief Executive and President (who is also the sole Executive Director) and Key Management Personnel (the members of the Group’s Executive Committee who, by the nature and accountabilities of their respective positions, participate directly in the development, monitoring and reporting of the overall business strategies of the Group), and making recommendations to the Board on the remuneration policy and structure to be applied for the Chairman and Non-executive Directors. The Remuneration Committee is also responsible for establishing formal and transparent procedures for developing remuneration policies and structures. In making its determinations and recommendations, the Remuneration Committee considers such factors as the responsibilities of the Group Chief Executive and President and Key Management Personnel, the remuneration paid by comparable companies, remuneration levels within the Group and the application of performance-based remuneration programmes. The Remuneration Committee also oversees the design and operation of the Company’s share schemes and other Group incentive schemes, recommending share-based employee awards for approval by the Board 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 discharge its duties as outlined in its Terms of Reference. It is also authorised to seek any remuneration information it requires from the Group Chief Executive and President and/or Key Management Personnel and may obtain external independent professional advice if necessary. The full Terms of Reference of the Remuneration Committee can be accessed at www.aia.com. MEMBERS AND MEETINGS As at 31 December 2018, the Remuneration Committee consisted of four Independent Non-executive Directors, being Mr. Jack Chak-Kwong So, who is the Chairman of the Remuneration Committee, Mr. George Yong-Boon Yeo, Mr. Mohamed Azman Yahya and Mr. Edmund Sze-Wing Tse. The Remuneration Committee held four meetings during the thirteen-month period ended 31 December 2018. The attendance records of the Remuneration Committee members are set out on page 102 of this Annual Report. 114 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORTACTIVITIES OF THE REMUNERATION COMMITTEE The Remuneration Committee has performed the following major activities during the thirteen-month ended 31 December 2018. Area Summary of activities Remuneration decisions for the Group Chief Executive and President and Key Management Personnel • Reviewed and approved the remuneration packages at the start of the year or on appointment for the Group Chief Executive and President and Key Management Personnel • Recommended the 2018 long-term incentive award for the Group Chief Executive and President for approval by the Independent Non-executive Directors of the Board • Reviewed the executive benchmarking results ahead of the 2018/19 annual review cycle Design and operation of the Group’s incentive schemes • Reviewed and approved the short-term incentive plan pay-out and the vesting of the performance based restricted share units Remuneration governance and disclosure • Reviewed and approved the long-term incentive awards granted in 2018 • Reviewed and approved the performance measures and targets to be used in the 2019 short-term incentive plan and the 2019 long-term incentive award • Reviewed and approved the 2017 Remuneration Report • Provided the Risk Committee with a summary of considerations undertaken by the Remuneration Committee in ensuring that the Group’s remuneration and benefits arrangements align with stakeholders’ interests and avoid excessive risk-taking • Reviewed the regulatory and corporate governance environment impacting executive remuneration in Hong Kong, Asia Pacific and other markets • Reviewed the emerging remuneration trends for AIA’s global insurance peers and for Asia Pacific and other regions Board Chairman and Non-executive Director fees • Reviewed Non-executive Director and Board Chairman fee benchmarking results • Proposed adjustments to Non-executive Director and Board Chairman fees to the Board for approval ANNUAL REPORT 2018 | 115 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONOUR EXECUTIVE REMUNERATION POLICY OBJECTIVES OF OUR REMUNERATION POLICY The Company’s executive remuneration policy is based on the principle of providing an equitable, motivating and competitive remuneration package to foster a strong performance-oriented culture within an appropriate risk management framework. The policy aims to ensure that rewards and incentives relate directly to the performance of individuals, the operations and functions in which they work or for which they are responsible, and the overall performance of the Group. The compensation and benefits arrangements designed under the policy provide incentives that are consistent with the interests of the Company’s stakeholders and do not encourage executives to take excessive risks that may threaten the value of the Group. 116 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORTCOMPONENTS OF OUR EXECUTIVE REMUNERATION POLICY The table below summarises the Company’s remuneration policies regarding the elements of the remuneration structure applied to the Group Chief Executive and President and the Key Management Personnel for the thirteen-month period ended 31 December 2018. The policies will continue to apply in 2019. Element Purpose Basis of determination Notes on practices Basic salary Basic salary is the fixed cash element of remuneration to recruit and retain talent 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 The Remuneration Committee reviews salaries annually against AIA’s global insurance peers and wider market levels Salary increases, where applicable, typically take effect from 1 March 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 Short-term incentive target and maximum opportunities are determined with reference to roles and responsibilities of the individual and market competitiveness of variable and total compensation Pay-out of short-term incentives is based on the achievement of the Group’s financial performance targets as well as individual contribution Short-term incentive Long-term incentive Long-term incentives are delivered in the form of restricted share units and share options Both types of award are used to align the interests of executives with those of shareholders, and to reward and motivate participants who have made important contributions or are expected to play a significant role in the future Long-term incentive grant values are determined with reference to roles and responsibilities as well as performance and potential of the individual, and also market competitiveness of variable and total compensation A significant proportion of the packages of the Group Chief Executive and President and Key Management Personnel are provided in the form of long-term incentives awards Benefits and allowances Benefits form part of the long-term employment relationship and contribute to the value of total remuneration The benefits programme is designed to be market competitive and fully compliant with local regulations Allowances may be provided where necessary Employee share purchase plan The employee share purchase plan provides employees with a share investment opportunity with matching offer to facilitate and encourage AIA share ownership Allowances may be provided to align with local practices and to ensure market competitiveness The plan is open to all employees who have completed probation and is subject to a maximum contribution indicated as a percentage of basic salary or the plan maximum limit Long-term incentive awards are discretionary and participation is determined on an annual basis Awards are made in restricted share units and share options to deliver a balanced mix of ownership and incentives, and generally vest after a three-year period The restricted share units are subject to pre-defined performance requirements The Group Chief Executive and President and Key Management Personnel participate in retirement schemes and receive, for example, medical and life insurance Participants receive matching shares for shares purchased subject to an investment limit approved by the Remuneration Committee Matching shares vest after three years Further details on the operation of our short and long-term incentives, along with the employee share purchase plan are provided on the following pages. ANNUAL REPORT 2018 | 117 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINCENTIVE AND SHARE-BASED PLANS SHORT-TERM INCENTIVE PLAN 2018 Short-term Incentive Plan 2018 short-term incentive target and maximum opportunities were determined by the Remuneration Committee and communicated to the Group Chief Executive and President and Key Management Personnel at the beginning of the financial period ended 31 December 2018. 2018 Performance Measures and Awards For 2018, performance measures for short-term incentives did not change from 2017 and were as follows: Group 2018 Short-term Incentive Measures Value of New Business (VONB) Excess Embedded Value Growth (EEV Growth) Operating Profit after Tax (OPAT) 60% WEIGHTING 10% WEIGHTING 30% WEIGHTING VONB is an estimate of the economic value of one year’s sales as published by the Company EEV Growth is the operating experience variance (current year performance against the operating assumptions for calculating embedded value or EV) in the EV operating profit OPAT is based on the IFRS results published by the Company Consistent with prior years, an individual’s performance contribution was also considered when determining the amounts to be paid to the Group Chief Executive and President and Key Management Personnel As a result of the change in financial year-end date from 30 November to 31 December, the short-term incentive awards in respect of the 2017 financial year, along with a payment covering the month of December 2017 were paid in March 2018 and based on the level of achievement of the performance targets. Short-term incentive awards in respect of the twelve-month period ended 31 December 2018 will be paid in March 2019 according to the level of achievement of performance measures over the 12-month period ended 31 December 2018. For the thirteen-month period ended 31 December 2018 the total value of short-term incentive awards that had been and will be paid to Mr. Ng Keng Hooi and the Key Management Personnel is US$14,925,211. The short-term incentive amounts for the thirteen-month period ended 31 December 2018 are included in note 40 to the financial statements as “Bonuses” for Mr. Ng Keng Hooi, and as part of the “Salaries and other short-term employee benefits” for the Key Management Personnel. 118 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORT2019 Short-term Incentive Plan In 2018, the Remuneration Committee and the Board reviewed the operation of the Group’s short-term incentive plan in light of the Group’s strategy, the key performance indicators that drive value for our shareholders and market practice. The Remuneration Committee and the Board concluded that changes should be made to further align the plan with the Group’s strategy and our shareholders’ interest, and that the following changes will be made to the operation of the Group’s 2019 short-term incentive plan for the Group Chief Executive and President and Key Management Personnel. • EEV Growth will be replaced by Underlying Free Surplus Generation (UFSG) with a 15 per cent weighting. UFSG is the free surplus generated by the business excluding the free surplus invested in new business, investment return variances and other items. • The weighting for OPAT will be changed from 30 per cent to 25 per cent. For the 2019 short-term incentive plan, the weightings for VONB, OPAT and UFSG are 60 per cent, 25 per cent and 15 per cent respectively. The adjustment to the performance measures and weightings will enhance our focus on capital and cash generation in support of our prudent, sustainable and progressive shareholder dividend policy, while maintaining our emphasis on growth, earnings and the quality of in-force business. Further details of the operation of the 2019 short-term incentive plan will be provided in the Company’s Annual Report 2019. LONG-TERM INCENTIVE PLANS The RSU Scheme and the SO Scheme were both adopted by the Company on 28 September 2010 and are effective for a period of 10 years from the date of adoption, summaries of which are provided later in this section and in note 39 to 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. Awards made under these schemes are discretionary and are determined on an annual basis with reference to an individual’s overall variable remuneration, total remuneration package competitiveness, role and responsibilities, as well as performance and potential. The schemes operate through the award of restricted share units and share options to deliver a balanced mix of incentives and ownership. The awards made are subject to eligibility criteria and generally vest after a three-year period. As applicable to other remuneration payments, long-term incentive vesting is subject to the Remuneration Committee’s approval. These schemes are reviewed regularly to ensure their design, process, structure and governance work together to balance risk and incentives. The RSU Scheme and the SO Scheme will both expire on 27 September 2020. In advance of expiry, the Remuneration Committee will review the Group’s long-term incentive arrangements, in conjunction with the Group’s remuneration policy, during 2019. ANNUAL REPORT 2018 | 119 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRESTRICTED SHARE UNIT SCHEME The objectives of the RSU Scheme are to retain participants, align their interests with those of the Company’s shareholders and reward the creation of sustainable value through the award of restricted share units to participants. Under the RSU 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. During the thirteen-month period ended 31 December 2018, the Company awarded 11,617,538 restricted share units under the RSU Scheme. Since the adoption of the RSU Scheme on 28 September 2010 and up to 31 December 2018, a cumulative total of 74,681,122 restricted share units vested under the RSU Scheme, representing approximately 0.620 per cent of the shares in issue as at the Company’s listing date. No new shares have been issued under the RSU Scheme since its adoption. 2018 RSU Performance Measures Consistent with prior years, vesting of the performance-based restricted share unit awards during 2018 is contingent on the extent of achievement of three-year performance targets for the following three performance measures: Performance Measures for 2018 Performance-based RSUs Value of New Business (VONB) Equity Attributable to Shareholders of the Company on the Embedded Value Basis (EV Equity) Relative Total Shareholder Return (TSR) 1/3 WEIGHTING 1/3 WEIGHTING 1/3 WEIGHTING VONB is an estimate of the economic value of one year’s sales as published by the Company (1) EV Equity is the total of embedded value, goodwill and other intangible assets as published by the Company. Embedded value is an estimate of the economic value of in-force life insurance business, including the net worth on the Group’s balance sheet but excluding any economic value attributable to future new business (1) 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. Relative TSR compares AIA’s TSR with the TSR of the peer companies (2) (3) over the performance period Notes: (1) VONB and EV Equity performance considered in determining incentive awards will be based on Group VONB and Group EV Equity results as published by the Company. (2) TSR peer companies for the 2018 performance-based RSUs include 19 life and health or multi-line insurance companies identified within the Dow Jones Insurance Titans 30 index (DJTINN) at the start of the performance period. (3) For the performance-based RSUs granted in 2016 and 2017, performance will be measured against all companies in DJTINN. 120 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORTThe performance-based RSUs are tested against pre-defined performance targets at the end of a three-year performance period. Achievement of each performance measure will independently determine the vesting of one-third of the award. • Threshold performance levels (for TSR, 25th percentile relative performance measured against the TSR of the peer companies) 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), 50 per cent of the restricted share units will vest. • At maximum performance levels (for TSR, 75th percentile or above relative performance measured against the TSR of the peer companies), the full allocation of restricted share units will vest. The 2018 restricted share unit award performance measures will be assessed over a three-year period starting 1 January 2018. Vesting of 2015 RSU Awards In February 2018, after assessing the performance of the Company against the pre-determined performance targets for the VONB, EV Equity and relative TSR measures over the three-year period from 1 December 2014 to 30 November 2017, the Remuneration Committee approved the vesting of the 2015 performance based restricted share unit awards at 96.17 per cent of the maximum level. The 2015 performance based restricted share unit awards vested on 12 March 2018. The final vesting results for the 2016 performance-based restricted share unit awards to vest in March 2019 will be disclosed in the Remuneration Report in the Company’s Annual Report 2019. 2019 RSU Awards The Remuneration Committee will grant performance-based restricted share units to selected participants after the Company’s year-end financial results announcement. Details of the grant will be disclosed in the Company’s Annual Report 2019. Consistent with prior years, VONB, EV Equity and relative TSR targets will continue to be used to assess the performance outcomes of the restricted share unit awards that will be granted in 2019. The three performance measures will continue to be equally weighted and will be assessed over a three-year period starting 1 January 2019. Similar to the 2018 performance-based restricted share units, for relative TSR assessment, the DJTINN companies that are considered life and health or multi-line insurance companies will be selected as peers (19 companies). ANNUAL REPORT 2018 | 121 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRSU Movements During the Thirteen-month Period Ended 31 December 2018 The table below summarises the movements in restricted share unit awards during the thirteen-month period ended 31 December 2018. Group Chief Executive and President, Key Management Personnel and other eligible employees and participants Group Chief Executive and President Mr. Ng Keng Hooi Date of grant (day / month / Vesting date(s) (day / month / Restricted share units outstanding as at 1 December year) (2) year) (3) 2017 (8) Restricted share units awarded during the 13-month period ended 31 December 2018 Restricted share units vested during the 13-month period ended 31 December 2018 Restricted share units cancelled / lapsed / reclassified during the 13-month period ended 31 December Restricted share units outstanding as at 31 December 2018 (8) 2018 (9) 12/3/2015 12/3/2018 (4) 283,490 9/3/2016 9/3/2019 (4) 320,071 10/3/2017 10/3/2020 (4) 267,659 31/7/2017 1/6/2020 (4) 213,164 – – – – 15/3/2018 15/3/2021 (4) – 439,258 Key Management Personnel (excluding the Group Chief Executive and President) 12/3/2015 12/3/2018 (4) 1,284,096 1/9/2015 See note (5) 169,688 9/3/2016 9/3/2019 (4) 1,661,968 1/8/2016 1/8/2019 (4) 41,249 10/3/2017 10/3/2020 (4) 1,441,875 31/7/2017 1/6/2020 (4) 311,947 – – – – – – 15/3/2018 15/3/2021 (4) 12/9/2018 12/9/2021 (4) – – 1,070,214 61,010 (272,633) (10,857) – – – – – – – – (924,739) (359,357) (169,688) – – 320,071 267,659 213,164 439,258 – – – – – – – – (364,163) 1,297,805 – 41,249 (304,526) 1,137,349 – – – 311,947 1,070,214 61,010 Other eligible employees and participants (including the Retired Group Chief Executive and President) (1) 12/3/2015 12/3/2018 (4) 10,916,765 1/9/2015 1/9/2018 (4) 20,316 9/3/2016 9/3/2019 (4) 13,327,726 1/8/2016 1/8/2019 (4) 34,621 17/10/2016 1/8/2019 (6) 101,217 17/10/2016 See Note (7) 41,875 10/3/2017 10/3/2020 (4) 12,134,441 31/7/2017 1/6/2020 (4) 28,519 – – – – – – – – (10,309,414) (607,351) (19,538) (778) – – (100,739) (1,224,764) 12,002,223 – – (20,937) – – – 34,621 101,217 20,938 (46,184) (1,192,358) 10,895,899 – – 28,519 15/3/2018 15/3/2021 (4) 29/6/2018 15/3/2021 (4) 12/9/2018 15/3/2021 (4) – – – 9,815,954 (8,120) (480,755) 9,327,079 108,956 122,146 – – – – 108,956 122,146 Notes: (1) Include restricted share units outstanding as at 1 December 2017 for the retired Group Chief Executive and President, Mr. Mark Edward Tucker. (2) The measurement dates (i.e. the dates used to determine the value of the awards for accounting purposes) for awards made during the year ended 30 November 2015 were determined to be 12 March 2015 and 1 September 2015. The measurement dates for awards made during the year ended 30 November 2016 were determined to be 9 March 2016, 1 August 2016 and 17 October 2016. The measurement dates for awards made during the year ended 30 November 2017 were determined to be 10 March 2017 and 31 July 2017. The measurement dates for awards made during the thirteen months ended 31 December 2018 were determined to be 15 March 2018, 29 June 2018 and 12 September 2018. These measurement dates were determined in accordance with IFRS 2. (3) The date of vesting is subject to applicable dealing restrictions. (4) The vesting of these restricted share units is subject to the achievement of performance measures shown on pages 120 and 121 of this Report. (5) The vesting of these restricted share units is service-based only (meaning there are no further conditions attached). Three-quarters of restricted share units vested on 1 September 2017 and one-quarter (representing all of the outstanding share units as at 1 December 2017) vested on 1 September 2018. 122 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORT(6) The vesting of these restricted share units is service-based only (meaning there are no further conditions attached). All restricted share units will vest on 1 August 2019. (7) The vesting of these restricted share units is service-based only (meaning there are no further conditions attached). One-third of restricted share units vested on 1 August 2017, one-third (representing half of the outstanding restricted share units as at 1 December 2017) vested on 1 August 2018 and one-third (representing half of the outstanding restricted share units as at 1 December 2017) will vest on 1 August 2019. (8) These restricted share units lapsed or were reclassified during the thirteen months ended 31 December 2018. The reclassification of restricted share units was a result of two executives who were previously categorised as “Key Management Personnel” becoming “Other eligible employees and participants” during this period. There were no cancelled restricted share units during the thirteen months ended 31 December 2018. (9) Include restricted share units outstanding as at 31 December 2018 that, in accordance with the RSU Scheme rules, may lapse on or before the respective vesting date. SHARE OPTION SCHEME The objective of the SO Scheme is to align the interests of participants with those of the Company’s shareholders by allowing eligible participants to share in the value created for our shareholders. Under the SO Scheme, the Company may award share options to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries. No amount is payable by the eligible participants on the acceptance of a share option. During the thirteen-month period ended 31 December 2018, the Company awarded 4,601,313 share options under the SO Scheme to a Director and certain employees and officers of the Company and a number of its subsidiaries. The formula for determining the exercise price of such share options is, as set out in the SO scheme rules, at least the highest of (i) the closing price of the shares on the date of grant, (ii) the average closing price of the shares for the five business days immediately preceding the date of grant and (iii) the nominal value of a share. Since the adoption of the SO Scheme on 28 September 2010 and up to 31 December 2018, a cumulative total of 28,890,733 new shares were issued under the SO Scheme, representing approximately 0.240 per cent of the shares in issue as at the Company’s listing date. The total number of shares available for issue for all outstanding share options and share options that can be awarded under the scheme is 272,209,267, representing approximately 2.25 per cent of the number of shares in issue as at the date of this report. Unless shareholders’ approval is obtained in accordance with the relevant procedural requirements under the Listing Rules, the maximum number of shares under option that may be awarded to any eligible participant 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. According to the SO Scheme rules, the minimum holding period of a share option is six months from date of acceptance, and a share option shall have a maximum life of 10 years before expiry. Generally, share options granted by the Company become exercisable three years after the date of grant and remain exercisable for another seven years, subject to the participants’ continued employment in good standing or retirement. There are no performance conditions attached to the vesting of share options. Each share option entitles the eligible participant to subscribe for one ordinary share. Benefits are realised only to the extent that share price exceeds exercise price. The SO Scheme will expire on 27 September 2020 and hence has a remaining life of approximately 1.5 years. Notwithstanding the SO Scheme’s expiry in 2020, the share options awarded prior to the Scheme expiry date will remain valid in accordance with the SO Scheme rules and Listing Rules. ANNUAL REPORT 2018 | 123 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION2018 Share Option Awards The share options awarded in 2018 will vest in 2021. Details of the valuation of the share options are set out in note 39 to the financial statements. Vesting of 2015 Share Option Awards All share options awarded in 2015 became exercisable on 12 March 2018. 2019 Share Option Awards The Remuneration Committee will grant share options to selected participants after the Company’s year-end financial results announcement. Details of these awards will be disclosed in the Company’s Annual Report 2019. Share Option Movements During the Thirteen-Month Period Ended 31 December 2018 The table below summarises the movements in share option awards during the thirteen-month period ended 31 December 2018. Group Chief Executive and President, Key Management Personnel and other eligible employees and participants Date of grant (day / month / year) (2) Period during which share options are exercisable (day / month / year) Share options awarded during the 13- month period ended 31 December 2018 Share options vested during the 13- month period ended 31 December 2018 Share options outstanding as at 1 December 2017 Share options cancelled / lapsed / reclassified during the 13- month period ended 31 December 2018 (15) Share options exercised during the 13- month period ended 31 December 2018 Weighted average closing price of shares immediately before the dates on which share options were exercised (HK$) n/a n/a n/a n/a n/a n/a 69.00 69.00 n/a n/a n/a n/a Share options outstanding as at 31 December 2018 (16) 602,486 541,692 851,026 732,574 476,786 1,105,066 Exercise price (HK$) 37.56 47.73 41.90 50.30 61.55 67.15 – – – – – – (45,467) 27.35 427,279 (106,820) 27.35 440,918 – – – – 28.40 34.35 37.56 39.45 519,012 563,167 663,790 332,282 – 541,692 – – – – – – – – – – – – – – – – – – – (229,513) (277,793) – 1,419,013 (616,297) (435,169) 47.73 983,844 67.15 – – – – – – – – – – (968,262) (833,479) – – – – – – 229,513 277,793 – – – – – – 41.90 50.30 61.55 67.15 63.64 27.35 2,769,436 2,413,333 697,732 2,692,372 161,951 668,366 (200,000) 27.35 431,097 (77,483) 28.40 677,692 (279,106) 34.35 623,256 (76,874) 37.56 2,837,839 2,670,779 209,034 (134,385) 47.73 2,536,394 – – – 213,847 64,546 (23,688) – – – 41.90 50.30 67.15 3,202,674 1,833,644 618,236 n/a n/a n/a n/a n/a n/a 68.55 66.92 67.72 66.10 67.23 n/a n/a n/a Group Chief Executive and President Mr. Ng Keng Hooi 5/3/2014 5/3/2017 - 4/3/2024 (3) 602,486 12/3/2015 12/3/2018 - 11/3/2025 (4) 541,692 9/3/2016 9/3/2019 - 8/3/2026 (5) 851,026 10/3/2017 10/3/2020 - 9/3/2027 (6) 732,574 31/7/2017 1/6/2020 - 30/7/2027 (7) 476,786 – – – – – 15/3/2018 15/3/2021 - 14/3/2028 (8) – 1,105,066 Key Management Personnel (excluding the Group Chief Executive and President) 1/6/2011 1/4/2014 - 31/5/2021 (9) 472,746 1/6/2011 1/4/2014 - 31/5/2021 (10) 547,738 15/3/2012 15/3/2015 - 14/3/2022 (11) 519,012 11/3/2013 11/3/2016 - 10/3/2023 (12) 792,680 5/3/2014 5/3/2017 - 4/3/2024 (3) 941,583 14/4/2014 14/4/2017 - 13/4/2024 (13) 332,282 12/3/2015 12/3/2018 - 11/3/2025 (4) 2,035,310 9/3/2016 9/3/2019 - 8/3/2026 (5) 3,737,698 10/3/2017 10/3/2020 - 9/3/2027 (6) 3,246,812 31/7/2017 1/6/2020 - 30/7/2027 (7) 697,732 – – – – – – – – – – 15/3/2018 15/3/2021 - 14/3/2028 (8) 12/9/2018 12/9/2021 - 11/9/2028 (14) – – 2,692,372 161,951 Other eligible employees and participants (including the Retired Group Chief Executive and President) (1) 1/6/2011 1/4/2014 - 31/5/2021 (9) 668,366 1/6/2011 1/4/2014 - 31/5/2021 (10) 631,097 15/3/2012 15/3/2015 - 14/3/2022 (11) 755,175 11/3/2013 11/3/2016 - 10/3/2023 (12) 672,849 5/3/2014 5/3/2017 - 4/3/2024 (3) 2,636,920 12/3/2015 12/3/2018 - 11/3/2025 (4) 2,461,745 9/3/2016 9/3/2019 - 8/3/2026 (5) 2,988,827 10/3/2017 10/3/2020 - 9/3/2027 (6) 1,769,098 – – – – – – – – 15/3/2018 15/3/2021 - 14/3/2028 (8) – 641,924 124 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORTNotes: (1) Include share options outstanding as at 1 December 2017 for the retired Group Chief Executive and President, Mr. Mark Edward Tucker. (2) The measurement date (i.e. the date used to determine the value of the awards for accounting purposes) for awards made during the year ended 30 November 2011 was determined to be 15 June 2011. The measurement date for awards made during the year ended 30 November 2012 was determined to be 15 March 2012. The measurement date for awards made during the year ended 30 November 2013 was determined to be 11 March 2013. The measurement dates for awards made during the year ended 30 November 2014 were determined to be 5 March 2014 and 14 April 2014. The measurement date for awards made during the year ended 30 November 2015 was determined to be 12 March 2015. The measurement date for awards made during the year ended 30 November 2016 was determined to be 9 March 2016. The measurement dates for awards made during the year ended 30 November 2017 were determined to be 10 March 2017 and 31 July 2017. The measurement dates for awards made during the thirteen months ended 31 December 2018 were determined to be 15 March 2018 and 12 September 2018. These measurement dates were determined in accordance with IFRS 2. (3) The vesting of share options is service-based only. All share options vested on 5 March 2017. (4) The vesting of share options is service-based only. All share options vested on 12 March 2018. (5) The vesting of share options is service-based only. All share options vested on 9 March 2019. (6) The vesting of share options is service-based only. All share options will vest on 10 March 2020. (7) The vesting of share options is service-based only. All share options will vest on 1 June 2020. (8) The closing price of the Company’s shares immediately before the date on which share options were awarded was HK$67.00. The vesting of share options is service-based only. All share options will vest on 15 March 2021. (9) The vesting of share options is service-based only. All share options vested on 1 April 2014. (10) The vesting of share options is service-based only. One-third of share options vested on 1 April 2014, one-third vested on 1 April 2015, and one third vested on 1 April 2016. (11) The vesting of share options is service-based only. All share options vested on 15 March 2015. (12) The vesting of share options is service-based only. All share options vested on 11 March 2016. (13) The vesting of share options is service-based only. All share options vested on 14 April 2017. (14) The closing price of the Company’s shares immediately before the date on which share options were awarded was HK$62.00. The vesting of share options is service-based only. All share options will vest on 12 September 2021. (15) These share options lapsed or were reclassified during the thirteen months ended 31 December 2018. The reclassification of share options was a result of two executives who were previously categorised as “Key Management Personnel” becoming “Other eligible employees and participants” during this period. There were no cancelled share options during the thirteen months ended 31 December 2018. (16) Include share options outstanding as at 31 December 2018 that, in accordance with the SO Scheme rules, will lapse on or before the end of the respective periods during which the share options are exercisable. EMPLOYEE SHARE PURCHASE PLAN The Company adopted the Employee Share Purchase Plan (ESPP) on 25 July 2011 (ESPP Adoption Date). The ESPP is designed to facilitate and encourage AIA share ownership by employees. Under the ESPP, eligible employees of the Group may elect to purchase the Company’s shares and, after having been in the plan for three years, receive one matching share for two shares purchased through the award of matching restricted stock purchase units (RSPUs). Each eligible employee’s participation level is capped at a maximum purchase in any plan year of 8 per cent of his or her base salary or HK$9,750 (or local equivalent) per calendar month, whichever is lower. Upon vesting of the matching RSPUs, those employees who are still in employment with the Group will receive one matching share for each RSPU which he or she holds. The matching shares can either be purchased on market by the trustee of the ESPP or provided to recipients through the issuance by the Company of new shares. The aggregate number of shares which can be issued by the Company under the ESPP during the 10-year period shall not exceed 2.5 per cent of the number of shares in issue on the ESPP Adoption Date. No new shares have been issued under the ESPP since its adoption. For further information on the ESPP, please refer to note 39 to the financial statements. ANNUAL REPORT 2018 | 125 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONDuring the thirteen-month period ended 31 December 2018, 1,409,739 matching RSPUs were awarded, 841,108 matching RSPUs vested and no new shares were issued for the RSPUs pursuant to the ESPP. Since the ESPP Adoption Date and up to 31 December 2018, a cumulative total of 3,479,304 matching RSPUs vested under the ESPP, representing approximately 0.029 per cent of the shares in issue as at the ESPP Adoption Date. DIRECTORS AND KEY MANAGEMENT PERSONNEL EMOLUMENTS EXECUTIVE DIRECTORS In the role of Group Chief Executive and President, Mr. Ng Keng Hooi received remuneration exclusively for his role and received no separate fees for his role as a Board Director or for acting as a director of any subsidiary companies. The table below provides details of annual target level of remuneration, excluding benefits and allowances for the Group Chief Executive and President and the retired Group Chief Executive and President Mr. Mark Edward Tucker. US$ thousands Basic Salary (2) Target short-term incentive Target long-term incentive Total Annual Target Pay Opportunity Annual Target Pay Opportunity (1) 2018 Mr. Ng Keng Hooi 2017 Mr. Ng Keng Hooi 2017 Mr. Mark Edward Tucker 1,030 1,800 3,600 6,430 993 1,500 3,000 5,493 1,608 2,412 6,834 10,854 Notes: (1) The target remuneration levels shown in the table above exclude benefits and allowances and the 2017 levels shown for Mr. Ng Keng Hooi are the annualised amounts. In both years, Mr. Ng Keng Hooi also received an annual housing allowance of HK$3,000,000, which was prorated in 2017 from 1 June 2017 upon his appointment. (2) Mr. Ng Keng Hooi’s basic salary is paid in Hong Kong Dollars. For 2017 the basic salary figure represents the annualised amount from appointment on 1 June 2017 while the 2018 figure represents the annualised amount from 1 March 2018 (being the 2018 annual review salary effective date). Values indicated in the table above have been converted to U.S. dollars using exchange rates as of the end of each year. Details of the actual remuneration costs incurred by the Company during the thirteen-month period ended 31 December 2018 in relation to the Group Chief Executive and President are included in note 40 to the financial statements. NON-EXECUTIVE DIRECTORS Remuneration for the Independent Non-executive Directors was paid during the thirteen-month period ended 31 December 2018 and included fees for their services provided to the Board Committees. All remuneration of the Independent Non-executive Directors was on a flat annual fee basis, with no variable component linked to either corporate or individual performance. Details of the Non-executive Directors’ remuneration cost incurred by the Company during the thirteen-month period ended 31 December 2018 are included in note 40 to the financial statements. Board Chairman During 2018, the Remuneration Committee reviewed the fees for the Board Chairman and Non-executive Directors and subsequently proposed adjustments to the Board for approval. To reflect the unique scope, contribution and time commitment of the Board Chairman role, and to ensure competitiveness against our global insurance peers, Board Chairman Basic Fees, inclusive of Board Membership fee, will be increased from US$485,000 to US$542,500 per annum effective 1 January 2019, and to US$600,000 per annum effective 1 January 2020. The Chairman abstained from discussion and voting on the fee increase. 126 | AIA GROUP LIMITED CORPORATE GOVERNANCEREMUNERATION REPORTNon-executive Directors Board Membership fees for the Non-executive Directors will be increased from US$160,000 to US$168,000 per annum effective 1 January 2019 to more closely align with the fee levels provided by our global insurance peers. Additional annual fees for Committee Membership and Chair positions are also provided to the Non-executive Directors and will remain unchanged as follows: • Audit Committee Chair • Audit Committee Member • Nomination Committee Chair • Nomination Committee Member • Remuneration Committee Chair US$55,000 US$40,000 US$25,000 US$15,000 US$45,000 • Remuneration Committee Member US$30,000 • Risk Committee Chair • Risk Committee Member US$45,000 US$30,000 KEY MANAGEMENT PERSONNEL The total remuneration cost charged to the consolidated income statement for the Key Management Personnel during the thirteen-month period ended 31 December 2018 was US$45,555,663. Details of remuneration provided during the thirteen-month period ended 31 December 2018 are included in note 40 to the financial statements. ANNUAL REPORT 2018 | 127 OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION24. Impairment of financial assets 25. Cash and cash equivalents 26. Insurance contract liabilities 27. Investment contract liabilities 28. Effect of changes in assumptions and estimates 29. Borrowings 30. Obligations under repurchase and securities lending agreements 31. Offsetting of financial assets and financial liabilities 32. Provisions 33. Other liabilities 34. Share capital and reserves 35. Non-controlling interests 36. Group capital structure 37. Risk management 38. Employee benefits 39. Share-based compensation 40. Remuneration of directors and key management personnel 41. Related party transactions 42. Commitments and contingencies 43. Subsidiaries 44. Events after the reporting period 45. Statement of financial position of the Company 46. Statement of changes in equity of the Company 47. Supplementary financial information on a calendar year basis 267 Independent Auditor’s Report on the Supplementary Embedded Value Information 271 Supplementary Embedded Value Information FINANCIAL STATEMENTS 129 Independent Auditor’s Report 136 Consolidated Income Statement 137 Consolidated Statement of Comprehensive Income 138 Consolidated Statement of Financial Position 140 Consolidated Statement of Changes in Equity 142 Consolidated Statement of Cash Flows 144 Notes to the Consolidated Financial Statements and Significant Accounting Policies 1. Corporate information 2. Significant accounting policies 3. Critical accounting estimates and judgements 4. Exchange rates 5. Change in Group Composition 6. Operating profit after tax 7. Total weighted premium income and annualised new premiums 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. Reinsurance assets 19. Deferred acquisition and origination costs 20. Financial investments 21. Derivative financial instruments 22. Fair value measurement 23. Other assets 128 | AIA GROUP LIMITED TO THE SHAREHOLDERS OF AIA GROUP LIMITED (incorporated in Hong Kong with limited liability) Opinion What we have audited The consolidated financial statements of AIA Group Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages 136 to 266, which comprise: (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) the consolidated statement of financial position as at 31 December 2018; the consolidated income statement for the thirteen months period ended 31 December 2018; the consolidated statement of comprehensive income for the thirteen months period ended 31 December 2018; the consolidated statement of changes in equity for the thirteen months period ended 31 December 2018; the consolidated statement of cash flows for the thirteen months period ended 31 December 2018; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows for the thirteen months period ended 31 December 2018 in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code. 129 INDEPENDENT AUDITOR’S REPORTANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL STATEMENTSKey Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters identified relate to the valuation of insurance contract liabilities and the amortisation of deferred acquisition costs (“DAC”). Key audit matter How our audit addressed the key audit matter a) Valuation of insurance contract liabilities Refer to the following notes in the consolidated financial statements: Note 2.4 for related accounting policies, Note 3 for critical accounting estimates and judgements, Note 26 and Note 28. As at 31 December 2018 the Group has insurance contract liabilities of US$164,764 million. We performed the following audit procedures to address this matter: (cid:127) We understood the valuation methodologies used, identified changes in methodologies from previous valuation and assessed the reasonableness and impact for material changes identified, by applying our industry knowledge and experience to compare whether the methodologies and changes to those are consistent with recognised actuarial practices and expectation derived from market experience. (cid:127) We assessed the reasonableness of the key assumptions including those for mortality, morbidity, persistency, expense, investment return and valuation interest rates as well as provision for adverse deviation. Our assessment of the assumptions included: (cid:127) Obtaining an understanding of, and to the controls in place testing, determine the assumptions; (cid:127) Examining the approach used by management to derive the assumptions by applying our industry knowledge and experience; uncertain liabilities about The Director’s valuation of these insurance involves significant contract judgement future outcomes, including mortality, morbidity, investment return, persistency, expense, valuation interest rates and provision for adverse deviation, as well as complex valuation methodologies. The liabilities for traditional participating life assurance policies with discretionary participation features and non-participating life assurance policies, annuities and policies related to other protection products are substantially determined by a net level premium valuation method using best estimate assumptions at policy inception for adverse deviation. These adjusted assumptions remain locked in thereafter, subject to meeting a liability adequacy test which compares the liabilities with a valuation on current best estimate assumptions. 130 | AIA GROUP LIMITEDFINANCIAL STATEMENTSKey Audit Matters (continued) Key audit matter How our audit addressed the key audit matter a) Valuation of insurance contract liabilities (continued) Insurance contract liabilities for universal life and unit-linked policies are substantially based on the value of the account balance together with for unearned liabilities revenue and additional insurance benefits which are dependent upon operating assumptions and future investment return assumptions that are reassessed at each reporting period. As part of our consideration of assumptions, insurance we have focused on those contracts where the assumptions are reassessed at each reporting date as well as how assumptions are set at policy inception dates. (cid:127) Challenging the key assumptions used by management against past experience, market observable data (as applicable) and our experience of market practice. (cid:127) We checked the calculation of the liability adequacy test and assessed the related results in order to ascertain whether the insurance contract liabilities used for the inforce business are adequate in the context of a valuation on current best estimate assumptions. Based upon the work performed, we found the methodologies and assumptions used by management to be appropriate, including those used in the liability adequacy test. in to We have, valuation relation methodologies used, focused on changes in methodologies from the previous valuation as well as methodologies applied to material new product types (as applicable). b) Amortisation of DAC Refer to the following notes in the consolidated financial statements: Note 2.4.1 for related accounting policies, Note 3.3 for critical accounting estimates and judgements and Note 19. As at 31 December 2018, the Group has reported DAC of US$24,626 million. We performed the following audit procedures to address this matter: The amortisation of DAC for traditional life insurance policies and annuities are amortised over the expected life of the policies as a constant percentage of premiums and involve less judgement by the Directors compared to universal life and unit-linked policies. Expected premiums are estimated at the date of policy issue. and accounting policy (cid:127) Reviewed and challenged the basis of amortisation of DAC in the context of the Group’s the appropriateness of the assumptions used in determining the estimated gross profits used for amortisation for universal life and unit-linked policies. This included those for mortality, morbidity, persistency, expense and investment returns by comparing against past experience, market observable data (as applicable) and our experience of market practice. 131 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTKey Audit Matters (continued) Key audit matter How our audit addressed the key audit matter b) Amortisation of DAC (continued) Based upon the work performed, we found the assumptions used in relation to the amortisation of DAC for universal life and unit-linked policies to be appropriate. The amortisation of DAC for universal life and unit-linked policies involves greater judgement by the Directors. For these contracts, DAC is 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 regularly and significant are judgement in making appropriate estimates of gross profits. exercised revised is As part of our audit we have focused on DAC related to universal life and unit-linked policies where the assumptions are reassessed at each reporting date. Other Information The Directors of the Company are responsible for the other information. The other information comprises the Group Chief Executive and President’s Report, Financial Review, Business Review, Regulatory and International Developments, Supplementary Embedded Value Information and our auditor’s report thereon, Condensed Business and Financial Review for the Thirteen Months ended 31 December 2018 and Glossary (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, and the Financial Highlights, Chairman’s Statement, Risk Management, Valuing Our People, Corporate Social Responsibility, Statement of Directors’ Responsibilities, Board of Directors, Executive Committee, Report of the Directors, Corporate Governance Report, Remuneration Report, Information for Shareholders and Corporate Information, which are expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 132 | AIA GROUP LIMITEDFINANCIAL STATEMENTSOther Information (continued) When we read the Financial Highlights, Chairman’s Statement, Risk Management, Valuing Our People, Corporate Social Responsibility, Statement of Directors’ Responsibilities, Board of Directors, Executive Committee, Report of the Directors, Corporate Governance Report, Remuneration Report, Information for Shareholders and Corporate Information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance and take appropriate action considering our legal rights and obligations. Other Matter The Group has prepared Supplementary Embedded Value Information as at and for the year ended 31 December 2018 in accordance with the embedded value basis of preparation set out in Sections 4 and 5 of the Supplementary Embedded Value Information, on which we issued a separate auditor’s report to the Board of Directors of the Company dated 15 March 2019. Responsibilities of Directors and Those Charged with Governance for the Consolidated Financial Statements The Directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and with IFRSs issued by the 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. In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 133 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTAuditor’s Responsibilities for the Audit of the Consolidated Financial Statements (continued) As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: (cid:127) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:127) Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. (cid:127) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. (cid:127) Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. (cid:127) Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (cid:127) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 134 | AIA GROUP LIMITEDFINANCIAL STATEMENTSAuditor’s Responsibilities for the Audit of the Consolidated Financial Statements (continued) We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Lars Christian Jordy Nielsen. PricewaterhouseCoopers Certified Public Accountants Hong Kong 15 March 2019 135 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORTUS$m REVENUE 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 ventures Share of profit from associates and joint ventures Profit before tax Income tax credit/(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$) Basic Diluted Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Notes 9 9 33,881 (1,968) 31,913 4,077 307 36,297 26,383 (1,787) 24,596 4,136 2,366 228 801 26,986 (1,497) 25,489 12,622 219 38,330 26,108 (1,267) 24,841 3,455 1,969 183 567 10 32,127 31,015 4,170 – 4,170 51 4,221 (944) (51) (995) 3,226 3,163 63 0.26 0.26 7,315 – 7,315 (128) 7,187 (1,128) 128 (1,000) 6,187 6,120 67 0.51 0.51 11 12 12 136 CONSOLIDATED INCOME STATEMENT| AIA GROUP LIMITEDFINANCIAL STATEMENTSUS$m Net profit OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit or loss: Fair value (losses)/gains on available for sale financial assets (net of tax of: thirteen months ended 31 December 2018: US$(177)m; twelve months ended 30 November 2017: US$297m) Fair value losses/(gains) on available for sale financial assets transferred to income on disposal and impairment (net of tax of: thirteen months ended 31 December 2018: US$18m; twelve months ended 30 November 2017: US$19m) Foreign currency translation adjustments Cash flow hedges Share of other comprehensive expenses from associates and joint ventures Subtotal Items that will not be reclassified subsequently to profit or loss: Revaluation gains on property held for own use (net of tax of: thirteen months ended 31 December 2018: US$(10)m; twelve months ended 30 November 2017: US$(14)m) Effect of remeasurement of net liability of defined benefit schemes (net of tax of: thirteen months ended 31 December 2018: US$(7)m; twelve months ended 30 November 2017: nil) Subtotal Total other comprehensive (expense)/income Total comprehensive (expense)/income Total comprehensive (expense)/income attributable to: Shareholders of AIA Group Limited Non-controlling interests Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 3,226 6,187 (4,174) 1,197 26 (510) 16 (45) (161) 1,028 (11) (24) (4,687) 2,029 11 1 12 (4,675) (1,449) (1,484) 35 78 18 96 2,125 8,312 8,250 62 137 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL STATEMENTS US$m ASSETS Intangible assets Investments in associates and joint ventures Property, plant and equipment Investment property Reinsurance assets Deferred acquisition and origination costs Financial investments: Loans and deposits Available for sale Debt securities At fair value through profit or loss Debt securities Equity securities Derivative financial instruments Deferred tax assets Current tax recoverable Other assets Cash and cash equivalents Total assets LIABILITIES Insurance contract liabilities Investment contract liabilities Borrowings Obligations under repurchase and securities lending agreements Derivative financial instruments Provisions Deferred tax liabilities Current tax liabilities Other liabilities Total liabilities As at 31 December 2018 As at 30 November 2017 Notes 14 15 16 17 18 19 20, 22 21 11 23 25 26 27 29 30 21 32 11 33 1,970 610 1,233 4,794 2,887 1,864 642 1,213 4,365 2,481 24,626 21,847 7,392 7,973 112,485 105,466 27,736 38,099 430 25,702 36,716 363 186,142 176,220 26 164 4,903 2,451 9 131 4,630 2,289 229,806 215,691 164,764 148,897 7,885 4,954 1,683 243 168 4,187 532 5,984 8,082 3,958 1,883 361 234 3,595 421 5,888 190,400 173,319 138 CONSOLIDATED STATEMENT OF FINANCIAL POSITION| AIA GROUP LIMITEDFINANCIAL STATEMENTS US$m EQUITY Share capital Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Property revaluation 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 Approved and authorised for issue by the Board of Directors on 15 March 2019. As at 31 December 2018 As at 30 November 2017 Notes 34 34 34 34 34 34 35 14,073 (258) 14,065 (297) (11,910) (11,948) 35,661 2,211 (1,301) 538 (8) 1,440 39,006 400 39,406 229,806 34,087 6,336 (751) 527 (25) 6,087 41,994 378 42,372 215,691 Ng Keng Hooi Director Edmund Sze-Wing Tse Director 139 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONSOLIDATED STATEMENT OF FINANCIAL POSITIONNote Share capital Employee share- based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Property revaluation reserve Non- controlling interests Others Total equity Other comprehensive income 14,065 (297) (11,948) 34,087 6,336 (751) 527 (25) 378 42,372 – – – – – – – – – – 8 – – – – – – – – – – – – – – – – – – – 3,163 – – – (4,151) – – – – – – – – – – – – 82 – – – – – – 26 – – – (505) – – (45) – – – – 3,163 (4,125) (550) (1,589) – – – – – – – – – – – – – – – – – – – – – – – – – – 11 – – – – 16 – – – 1 63 3,226 (23) (4,174) – (5) – 26 (510) 16 – – – (45) 11 1 11 – 17 – 35 (1,449) (20) (1,609) – – – – – – – – – – – – – 7 – – – – 8 7 82 (12) – 7 (12) – 51 – (51) 7 14,073 (258) (11,910) 35,661 2,211 (1,301) 538 (8) 400 39,406 US$m Balance at 1 December 2017 Net profit Fair value losses on available for sale financial assets Fair value losses on available for sale financial assets transferred to income on disposal and impairment Foreign currency translation adjustments Cash flow hedges Share of other comprehensive expenses from associates and joint ventures Revaluation gains on property held for own use Effect of remeasurement of net liability of defined benefit schemes Total comprehensive income/(expense) for the period Dividends 13 Shares issued under share option scheme and agency share purchase plan Capital contributions from non-controlling interests Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts Others Balance at 31 December 2018 140 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY| AIA GROUP LIMITEDFINANCIAL STATEMENTS US$m Balance at 1 December 2016 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 (expenses)/income from associates and joint ventures Revaluation gains on property held for own use Effect of remeasurement of net liability of defined benefit schemes Total comprehensive income for the year Dividends 13 Shares issued under share option scheme and agency share purchase plan Capital contributions from 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 2017 Note Share capital Employee share- based trusts Other reserves Retained earnings Other comprehensive income Fair value reserve Foreign currency translation reserve Property revaluation reserve Non- controlling interests Others Total equity 13,998 (351) (11,954) 29,334 5,352 (1,812) 449 (32) 326 35,310 – – – – – – – – – – 67 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 79 (10) – 64 – (64) (9) – – – 6,120 – – 1,202 – – – – – – (161) – – 1,028 – (57) 33 – – – – 6,120 984 1,061 (1,376) – – – – – 9 – – – – – – – – – – – – – – – – – – – – 78 – 78 – – – – – – – – – – – (11) – – 18 7 – – – – – – – 67 6,187 (5) 1,197 – – – – – – (161) 1,028 (11) (24) 78 18 62 8,312 (14) (1,390) – 4 – – – – 67 4 79 (10) – – 14,065 (297) (11,948) 34,087 6,336 (751) 527 (25) 378 42,372 141 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONSOLIDATED STATEMENT OF CHANGES IN EQUITY Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Notes 4,170 7,315 (14,998) (18,413) 14,037 (177) 14,312 (219) 482 – (8,095) (7,242) 6,718 782 (44) (855) 2,020 (92) (3) (127) (606) (828) 1,490 (500) 2,603 (2,603) (168) 7 5,627 703 (50) (582) 1,451 (151) (6) (84) – (241) 497 – – (1) (136) 4 (1,609) (1,390) (12) 8 (784) 408 1,787 (49) 2,146 (10) 67 (969) 241 1,482 64 1,787 US$m CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Financial investments Insurance and investment contract liabilities, and deferred acquisition and origination costs Obligations under repurchase and securities lending agreements Receipt of upfront reinsurance commission related to acquisition of subsidiaries Other non-cash operating items, including investment income and the effect of exchange rate changes on certain operating items 30 5 Operating cash items: Interest received Dividends received Interest paid Tax paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Payments for intangible assets Contribution to a joint venture Net payments for investment property and property, plant and equipment Acquisition of subsidiaries, net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Issuance of medium-term notes Redemption of medium-term notes Proceeds from other borrowings Repayment of other borrowings Interest paid on medium-term notes Capital contributions from non-controlling interests Dividends paid during the period Purchase of shares held by employee share-based trusts Shares issued under share option scheme and agency share purchase plan Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the financial period Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the financial period 14 15 16, 17 5 29 29 29 142 CONSOLIDATED STATEMENT OF CASH FLOWS| AIA GROUP LIMITEDFINANCIAL STATEMENTS Cash and cash equivalents in the above consolidated statement of cash flows can be further analysed as follows: US$m As at 31 December 2018 As at 30 November 2017 Note Cash and cash equivalents in the consolidated statement of financial position 25 Bank overdrafts CASH AND CASH EQUIVALENTS IN THE CONSOLIDATED STATEMENT OF CASH FLOWS 2,451 (305) 2,289 (502) 2,146 1,787 143 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONSOLIDATED STATEMENT OF CASH FLOWS1. 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 18 markets 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 all applicable Hong Kong Financial Reporting Standards (HKFRS), International Financial Reporting Standards (IFRS) and the Hong Kong Companies Ordinance. IFRS is substantially consistent with HKFRS 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 HKFRS and IFRS. 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 not any differences of accounting practice between HKFRS and IFRS affecting these consolidated financial statements. The consolidated financial statements have been approved for issue by the Board of Directors on 15 March 2019. 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, derivative financial instruments, property held for own use and investment properties, 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 Company’s functional currency and the presentation currency of the Company and the Group is the US dollar. The consolidated financial statements are presented in millions of US dollars (US$m) unless otherwise stated. The accounting policies adopted are consistent with those of the previous financial year, except as described as follows. 144 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES| AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (a) The following relevant new amendments to standards have been adopted for the first time for the financial period ended 31 December 2018 and have no material impact to the Group: (cid:127) Amendments to IAS 7, Disclosure Initiative; (cid:127) Amendments to IAS 12, Recognition of Deferred Tax Assets for Unrealised Losses; and (cid:127) Amendments to IFRS 12, Clarification of the Scope of the Standard. (b) The following relevant new standards, interpretation and amendments to standards have been issued but are not effective for the financial period ended 31 December 2018 and have not been early adopted (the financial years for which the adoption is required for the Group are stated in parentheses). The Group has assessed the 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: (cid:127) (cid:127) IFRIC 22, Foreign Currency Transactions and Advance Consideration (2019); IFRIC 23, Uncertainty Over Income Tax Treatments (2019); (cid:127) Amendments to IAS 1 and IAS 8, Definition of Material (2020); (cid:127) Amendments to IAS 12, Income Tax Consequences of Payments on Instruments Classified as Equity (2019); (cid:127) Amendments to IAS 19, Plan Amendment, Curtailment or Settlement (2019); (cid:127) Amendments to IAS 23, Borrowing Costs Eligible for Capitalisation (2019); (cid:127) Amendments to IAS 28, Measuring an Associate or Joint Venture at Fair Value (2019); (cid:127) Amendments to IAS 28, Long-term Interests in Associates and Joint Ventures (2019); (cid:127) Amendments to IAS 40, Transfers of Investment Property (2019); (cid:127) (cid:127) IFRS 15, Revenue from Contracts with Customers and amendments thereto (2019); IFRS 16, Leases (2019); (cid:127) Amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions (2019); (cid:127) Amendments to IFRS 3, Business Combinations and IFRS 11, Joint Arrangements – Remeasurement of Previously Held Interests (2019); and (cid:127) Amendments to IFRS 3, Definition of a Business (2020). 145 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (c) The following relevant new standards and requirements have been issued but are not effective for the financial period ended 31 December 2018 and have not been early adopted: (cid:127) 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 separate measurement categories: those measured as at fair value with changes either recognised in profit or loss or in other comprehensive income and those measured at amortised cost. The determination is made at initial recognition depending 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. The Group is yet to fully assess the impact of the standard on its financial position and results of operations. 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 IASB made further changes to two areas of IFRS 9. Financial assets containing prepayment features with negative compensation can be measured at amortised cost or at fair value through other comprehensive income if the cash flow represents solely payments of principal and interest. Non-substantial modifications or exchange of financial liabilities that do not result in derecognition will be required to be recognised in profit or loss. The Group is yet to fully assess the impact of the above new requirements and changes. The standard is mandatorily effective for financial periods beginning on or after 1 January 2018 (except for prepayment features with negative compensation and modifications or exchange of financial liabilities that do not result in derecognition which will become effective for financial periods beginning on or after 1 January 2019), but the Group qualifies for a temporary exemption as explained below. (cid:127) On 12 September 2016, the IASB issued amendments to IFRS 4, Insurance Contracts, Applying IFRS 9 Financial Instruments with IFRS 4, which provides two alternative measures to address the different effective dates of IFRS 9 and IFRS 17, Insurance Contracts. These measures include a temporary option for companies whose activities are predominantly connected with insurance to defer the effective date of IFRS 9 until the earlier of the effective date of IFRS 17 and financial reporting periods beginning on or after 1 January 2021 (please note below that the IASB is proposing to defer the effective date of IFRS 17 to 1 January 2022), as well as an approach that allows an entity to remove from profit or loss the effects of certain accounting mismatches that may occur before IFRS 17 is applied. Based on the amendments to IFRS 4, the Group is eligible for and will elect to apply the temporary option to defer the effective date of IFRS 9 in order to implement the changes in parallel with IFRS 17, Insurance Contracts. 146 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation and statement of compliance (continued) (c) The following relevant new standards and requirements have been issued but are not effective for the financial period ended 31 December 2018 and have not been early adopted: (continued) (cid:127) IFRS 17, Insurance Contracts (previously IFRS 4 Phase II) will replace the current IFRS 4, Insurance Contracts. IFRS 17 includes fundamental differences to current accounting in both insurance contract measurement and profit recognition. The general model is based on a discounted cash flow model with a risk adjustment and deferral of unearned profits. A separate approach applies to insurance contracts that are linked to returns on underlying items and meet certain requirements. Additionally, IFRS 17 requires more granular information and a new presentation format for the statement of comprehensive income as well as extensive disclosures. On 12 December 2017, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) approved the issuance of HKFRS 17, Insurance Contracts. The Group is in the midst of conducting a detailed assessment of the new standards. The standards are currently mandatorily effective for financial periods beginning on or after 1 January 2021, however in November 2018, IASB proposed to defer IFRS 17 and temporary IFRS 9 exemption available to insurers until the financial period beginning on or after 1 January 2022. The proposed deferral is subject to public consultation, which is expected in 2019. HKICPA has not yet made any announcements related to IASB proposed deferral for IFRS 17. 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”. Operating profit includes among others the expected long-term investment returns for investments in equities and real estate based on the assumptions applied by the Group in the Supplementary Embedded Value Information. The Group defines operating profit after tax as net profit excluding the following non-operating items: (cid:127) short-term fluctuations between expected and actual investment returns related to equities and real estate; (cid:127) other investment return (including short-term fluctuations due to market factors); and (cid:127) other significant items that management considers to be non-operating income and expenses. 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. 147 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. 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. 148 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3 Basis of consolidation (continued) Non-controlling interests Non-controlling interests are presented within equity except when they arise through the minority’s interest in puttable liabilities such as the unit holders’ interest in consolidated investment funds, when they are recognised as a liability, reflecting the net assets of the consolidated entity. Acquisitions and disposals of non-controlling interests, except when they arise through the minority’s interest in puttable liabilities, are treated as transactions between equity holders. As a result, any difference between the acquisition cost or sale price of the non-controlling interest and the carrying value of the non-controlling interest is recognised as an increase or decrease in equity. Associates and joint ventures Associates are entities over which the Group has significant influence, but which it does not control or joint 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 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. 149 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts Consistent accounting policies for the measurement and recognition of insurance and investment contracts have been adopted throughout the Group to substantially all of its business. In a limited number of cases, the Group measures insurance contract liabilities with reference to statutory requirements in the applicable jurisdiction. 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, reclassification is not subsequently performed unless the terms of the agreement are later amended. Certain contracts with DPF supplement the amount of guaranteed benefits due to policyholders. These contracts are distinct from other insurance and investment contracts as the Group has discretion in the amount and/or timing of the benefits declared, and how such benefits are allocated between groups of policyholders. Customers may be entitled to receive, as a supplement to guaranteed benefits, additional benefits or bonuses: (cid:127) that are likely to be a significant portion of the total contractual benefits; (cid:127) whose amount or timing is contractually at the discretion of the Group; and (cid:127) 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. 150 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 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 policyholder 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. 151 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. 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: Basis of accounting for: Policy type Description of benefits payable Insurance 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 include protection and savings elements. 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 include protection and savings elements. The basic sum assured, payable on death or maturity, may be enhanced by dividends or bonuses, the timing or amount of which are at the discretion of the insurer taking into account factors such as investment experience Benefits payable are not at the discretion of the insurer Benefits are based on an account balance, credited with interest at a rate set by the insurer, and a death benefit, which may be varied by the customer Unit-linked These may be primarily savings products or may combine savings with an element of protection Investment contract liabilities Not applicable, as IFRS 4 permits contracts with DPF to be accounted for as insurance contracts Insurance contract liabilities make provision for the present value of guaranteed benefits less estimated future net premiums to be collected from policyholders. In addition, an insurance liability is recorded for the proportion of the net assets of the participating funds that would be allocated to policyholders, assuming all performance would be declared as a dividend based upon local regulations Insurance contract liabilities make provision for the present value of guaranteed benefits and non-guaranteed participation less estimated future net premiums to be collected from policyholders Not applicable, as IFRS 4 permits contracts with DPF to be accounted for as insurance contracts Insurance contract liabilities reflect the present value of future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. In addition, deferred profit liabilities for limited payment contracts are recognised Insurance contract liabilities reflect the accumulation value, representing premiums received and investment return credited, less deductions for front-end loads, mortality and morbidity costs and expense charges. In addition, liabilities for unearned revenue and additional insurance benefits are recorded Insurance contract liabilities reflect the accumulation value, representing premiums received and investment return credited, less deductions for front-end loads, mortality and morbidity costs and expense charges. In addition, liabilities for unearned revenue and additional insurance benefits are recorded Investment contract liabilities are measured at amortised cost Not applicable as such contracts generally contain significant insurance risk Investment contract liabilities are measured at fair value (determined with reference to the accumulation value) In the notes to the financial statements, unit-linked contracts are presented together with pension contracts for disclosure purposes. 152 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) The basis of accounting for insurance and investment contracts is discussed in notes 2.4.1 and 2.4.2 below. 2.4.1 Insurance contracts and investment contracts with DPF Premiums Premiums from life insurance contracts, including participating policies and annuity policies with life contingencies, are recognised as revenue when due from the policyholder. Benefits and expenses are provided in respect of such revenue so as to recognise profits over the estimated life of the policies. For limited pay contracts, premiums are recognised in profit or loss when due, with any excess profit deferred and recognised in income in a constant relationship to the insurance in-force or, for annuities, the amount of expected benefit payments. Amounts collected as premiums from insurance contracts with investment features but with sufficient insurance risk to be considered insurance contracts, such as universal life, and certain unit-linked contracts, are accumulated as deposits. Revenue from these contracts consists of policy fees for the cost of insurance, administration, and surrenders during the period. Upfront fees are recognised over the estimated life of the contracts to which they relate. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholder contract deposits and interest credited to policyholder deposits. Unearned revenue liability Unearned revenue liability represents upfront fees and other non-level charges that have been collected and released to the consolidated income statement over the estimated life of the business. A separate liability for accumulation value is established. Deferred profit liability Deferred profit liability arising from traditional insurance contracts represents excess profits that have been collected and released to the consolidated income statement over the estimated life of the business. A separate liability for future policy benefits is established. 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. 153 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 2.4.1 Insurance contracts and investment contracts with DPF (continued) 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: (cid:127) (cid:127) (cid:127) (cid:127) 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. Unbundling The deposit component of an insurance contract is unbundled when both of the following conditions are met: (cid:127) (cid:127) 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 period, as well as policyholder dividends accrued in anticipation of dividend declarations. Accident and health claims incurred include all losses occurring during the period, 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. 154 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 2.4.1 Insurance contracts and investment contracts with DPF (continued) Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) (continued) 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 funds 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. 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. 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 reportable segment. 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 when loss is incurred. 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. 155 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 2.4.2 Investment contracts (continued) 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. 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. Deferred fee income liability Deferred fee income liability represents upfront fees and other non-level charges that have been collected and released to the consolidated income statement over the estimated life of the business. A separate liability for accumulation value is established. 156 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Insurance and investment contracts (continued) Product classification (continued) 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. The upfront premium rebate received on reinsurance contracts is a reinsurance liability. This liability is initially recognised as a reduction in deferred acquisition and origination costs up to the carrying value of associated deferred acquisition costs or associated value of business acquired, if any, with any excess being recognised in other liabilities. This reinsurance liability is released in line with the release of the underlying insurance contracts. Change in this reinsurance liability during the period is recognised as insurance and investment contract benefits ceded. 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. 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. 157 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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: (cid:127) (cid:127) 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: (cid:127) financial assets held to back unit-linked contracts and participating funds; (cid:127) 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 (cid:127) 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. 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. Amortised cost is determined by specific identification. 158 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Financial instruments (continued) 2.5.1 Classification of and designation of financial instruments (continued) 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 20 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, 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. 2.5.2 Fair values of non-derivative financial instruments 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 22. 159 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Financial instruments (continued) 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 objective evidence of impairment does not exist 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. 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. 160 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Financial instruments (continued) 2.5.4 Derivative financial instruments (continued) 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 period 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 held for own use is carried at fair value at last valuation date less accumulated depreciation. When an asset is adjusted for the latest fair value, any accumulated depreciation at the date of valuation is eliminated against the gross carrying amount of the asset. The movement of fair values is generally recognised in other comprehensive income. When such properties are sold, the amounts accumulated in other comprehensive income are transferred to retained earnings. The Group records its interest in leasehold land and land use rights associated with property held for own use 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. Those interests classified as finance leases are reported as a component of the property held for own use and carried at fair value at last valuation date. The prepayments to acquire leasehold land classified as operating leases are recorded at original cost within “Other assets” and amortised over the term of the lease (see note 2.19). Plant and equipment are 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. 161 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8 Property, plant and equipment (continued) Depreciation is calculated using the straight-line method to allocate cost less any residual value over the estimated useful life, generally: Fixtures, fittings and office equipment Buildings Computer hardware and 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. 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. 2.9 Investment property Property held for long-term rental or capital appreciation, or both that is not occupied by the Group is classified as investment property. Investment property, including land and buildings, is initially recognised at cost with changes in fair values in subsequent periods recognised in the consolidated income statement. If an investment property becomes held for own use, it is reclassified as property, plant and equipment. Where a property is partly used as an investment property and partly for the use by 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. 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 period is included in the consolidated income statement under “Operating expenses”. 162 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. 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 allocated to each of the Group’s cash-generating units, or group of cash-generating units, the lowest level for which there are separately identifiable cash flows. 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 statement of financial position 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. 163 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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 sells 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. 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 period, 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. 164 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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 period end and the carrying value at the previous year end or purchase price if purchased during the period, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the period. 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. 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, does not have any 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. 165 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 2.17 Employee benefits (continued) 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 award 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. 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 award 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. 166 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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 are classified either as an operating lease prepayment or as a component of investment property depending on whether the property interest is used as investment property. Operating leases held for long-term rental or capital appreciation or both that are not occupied by the Group are classified as investment property. They are initially recognised at cost with changes in fair values in subsequent periods recognised in the consolidated income statement. The Group classifies amounts paid to acquire leasehold land which are held for the Group’s own occupancy as an operating lease prepayment or as a component of property, plant and equipment depending on whether substantially all the risks and rewards incidental to the ownership of the land are transferred to the Group. Prepayments for land use rights under operating leases that are held for the Group’s own occupancy (net of any incentives received from the lessor) are included within “Other assets” and charged to the consolidated income statement on a straight-line basis over the period of the relevant lease. There are not any freehold land interests in Hong Kong. 2.20 Share capital Ordinary shares are classified in equity when there is not any 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. 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 period. 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 awarded 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 does not have contractual rights to the assets and acts in a fiduciary capacity such as nominee, trustee or agent. 167 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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 measurement and impairment of goodwill and other intangible assets. 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. 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. 168 | AIA GROUP LIMITEDFINANCIAL STATEMENTS3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.2 Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) (continued) 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 funds 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, 26 and 28. 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 19. 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 reportable segment. 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. 169 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.5 Fair value measurement 3.5.1 Fair value 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 assets 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 22 and 37. 3.5.2 Fair value of property held for own use and investment property The Group uses independent professional valuers to determine the fair value of properties on the basis of the highest and best use of the properties that is physically possible, legally permissible and financially feasible. In most cases, current use of the properties is considered to be the highest and best use for determining the fair value. Different valuation techniques may be adopted to reach the fair value of the properties. Under the Market Data Approach, records of recent sales and offerings of similar property are analysed and comparisons are made for factors such as size, location, quality and prospective use. For investment properties, the discounted cash flow approach may be used by reference to net rental income allowing for reversionary income potential to estimate the fair value of the properties. On some occasions, the cost approach is used as well to calculate the fair value which reflects the cost that would be required to replace the service capacity of the property. Further details of the fair value of property held for own use and investment property are provided in note 22. 3.6 Impairment of goodwill and other intangible assets For the purposes of impairment testing, goodwill and other intangible assets are grouped into cash-generating units or groups of cash generating units. These assets are tested for impairment by comparing the carrying amount of the cash-generating unit (group of units), including goodwill, to the recoverable amount of that cash-generating unit (group of units). 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 period are provided in note 14. 170 | AIA GROUP LIMITEDFINANCIAL STATEMENTS4. 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 Assets and liabilities have been translated at the following period-end rates: Hong Kong Thailand Singapore Malaysia China Exchange rates are expressed in units of local currency per US$1. US dollar exchange rates Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 7.84 32.35 1.35 4.04 6.61 7.79 34.15 1.39 4.33 6.78 US dollar exchange rates As at 31 December 2018 As at 30 November 2017 7.83 32.47 1.36 4.14 6.88 7.81 32.62 1.35 4.09 6.61 171 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES5. CHANGE IN GROUP COMPOSITION This note provides details of the acquisition of subsidiaries that the Group has made during the thirteen months ended 31 December 2018. Acquisition On 2 July 2018, the Group acquired 100 per cent of share capital of Sovereign Assurance Company Limited allowing 100 per cent control of its voting rights, included as part of the acquisition of ASB Group (Life) Limited and its subsidiaries (Sovereign), the life and health insurance businesses owned by Commonwealth Bank of Australia (CBA) in New Zealand. This acquisition presents the Group with an extensive customer reaches and distribution capabilities in New Zealand and a separate 20-year strategic bancassurance partnership with the ASB Bank Limited in New Zealand. The consideration with respect to this acquisition was AUD1,241m or US$918m at exchange rate on the date of the acquisition. There is a related reinsurance agreement, resulting in Sovereign receiving an upfront reinsurance commission of US$482m. The Group incurred US$15m of acquisition-related costs which were recognised as “other expenses” in the Group’s consolidated income statement. Details of the fair value of the assets and liabilities acquired and the goodwill arising from the acquisition of Sovereign are set out as follows: US$m Deferred acquisition costs (value of business acquired) Property, plant and equipment Reinsurance assets Investment securities Other assets(1) Cash and cash equivalents Insurance and investment contract liabilities Deferred tax liabilities Other liabilities Net assets acquired Goodwill arising on acquisition Fair value of consideration Less: Cash and cash equivalents held in acquired subsidiaries Net change in cash and cash equivalents Note: (1) Fair value approximates the gross contractual amount. Fair values as at the date of acquisition 348 10 19 1,083 37 312 (571) (455) (32) 751 167 918 (312) 606 Goodwill The goodwill recognised is mainly attributable to the distribution strengths and synergies and other benefits from combining Sovereign and the Group’s operations in Australia (including New Zealand). The goodwill is not expected to be deductible for tax purposes. Impact of acquisition on the results of the Group The acquired Sovereign contributed revenue of US$156m and profit before tax of US$16m to the Group’s consolidated income statement for the thirteen months ended 31 December 2018. The impact of the acquisition would not be materially different had the acquisition been completed at the beginning of the reporting period. 172 | AIA GROUP LIMITEDFINANCIAL STATEMENTS6. OPERATING PROFIT AFTER TAX Operating profit after tax may be reconciled to net profit as follows: US$m Operating profit after tax Non-operating items, net of related changes in insurance and investment contract liabilities: Short-term fluctuations in investment return related to equities and real estate (net of tax of: thirteen months ended 31 December 2018: US$164m; twelve months ended 30 November 2017: US$(117)m)(1) Reclassification of revaluation gain for property held for own use (net of tax of: thirteen months ended 31 December 2018: US$11m; twelve months ended 30 November 2017: US$4m)(1)(2) Corporate transaction related costs (net of tax of: thirteen months ended 31 December 2018: US$(35)m; twelve months ended 30 November 2017: US$6m)(2) Implementation costs for new accounting standards (net of tax of: thirteen months ended 31 December 2018: US$5m; twelve months ended 30 November 2017: nil)(2) Other non-operating investment return and other items (net of tax of: thirteen months ended 31 December 2018: US$22m; twelve months ended 30 November 2017: US$30m)(2) 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 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 5,731 4,682 Note 8 (1,881) 1,764 (212) (84) (148) (25) (43) (6) (221) 3,226 (144) 6,187 5,684 47 3,163 63 4,647 35 6,120 67 Operating profit is determined using, among others, expected long-term investment return for equities and real estate. Short-term fluctuations between expected long-term investment return and actual investment return for these asset classes are excluded from operating profit. The investment return assumptions used to determine expected long-term investment return are based on the same assumptions used by the Group in determining its embedded value and are disclosed in the Supplementary Embedded Value Information. Notes: (1) Short-term fluctuations in investment return include the revaluation gain for property held for own use. This amount is then reclassified out of net profit to conform to IFRS measurement and presentation. (2) The comparative information has been adjusted to conform to current period presentation. 7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUMS For management decision-making and internal performance management purposes, the Group measures business volumes during the period using a performance measure referred to as total weighted premium income (TWPI). The Group measures new business activity using a performance measure referred to as annualised new premiums (ANP). The presentation of this note is consistent with our reportable segment presentation in note 8. 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. 173 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUMS (continued) 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 premiums 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 Other Markets Total First year premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Single premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Renewal premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total 174 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 12,501 4,232 2,906 2,245 4,366 6,859 9,434 3,517 2,421 1,823 3,092 5,860 33,109 26,147 2,458 2,586 589 349 328 1,082 1,127 5,933 2,767 284 1,800 202 151 737 477 277 286 928 925 5,479 2,417 194 1,433 187 150 622 5,941 5,003 9,766 3,614 2,377 1,897 3,269 5,658 6,606 3,021 2,001 1,518 2,149 4,873 26,581 20,168 | AIA GROUP LIMITEDFINANCIAL STATEMENTS7. TOTAL WEIGHTED PREMIUM INCOME AND ANNUALISED NEW PREMIUMS (continued) ANP US$m ANP by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 2,793 2,849 648 562 396 1,098 1,273 6,770 518 433 348 968 976 6,092 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, Other Markets and Group Corporate Centre. Other Markets includes the Group’s operations in Australia (including New Zealand), Cambodia, Indonesia, Korea, 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. The acquired subsidiaries and respective operations mentioned in note 5 are included under the operations in Australia (including New Zealand). As 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: (cid:127) ANP; (cid:127) TWPI; (cid:127) investment return; (cid:127) operating expenses; (cid:127) operating profit after tax attributable to shareholders of AIA Group Limited; (cid:127) expense ratio, measured as operating expenses divided by TWPI; (cid:127) operating margin, measured as operating profit after tax expressed as a percentage of TWPI; and (cid:127) operating return on shareholders’ 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 shareholders’ allocated segment equity (being the segment assets less segment liabilities in respect of each reportable segment less non-controlling interests and fair value reserve). 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. 175 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES8. SEGMENT INFORMATION (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total Thirteen months ended 31 December 2018 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment return Total revenue Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs and other expenses 2,793 648 562 396 12,501 4,232 2,906 2,245 1,098 4,366 1,273 6,859 – – 6,770 33,109 14,046 2,849 16,895 4,156 1,433 5,589 3,295 1,271 4,566 1,970 4,222 644 934 2,614 5,156 4,505 1,200 5,705 28 397 425 32,222 8,728 40,950 12,600 3,156 3,290 1,701 3,246 3,030 26 27,049 1,568 438 149 828 235 55 380 226 32 273 196 13 294 348 38 775 701 55 13 222 169 430 4,131 2,366 511 34,057 Total expenses 14,755 4,274 3,928 2,183 3,926 4,561 Share of profit from associates and joint ventures – – Operating profit/(losses) before tax 2,140 1,315 Tax on operating profit/(losses) before tax (165) (254) Operating profit/(losses) after tax 1,975 1,061 – 638 (39) 599 – 431 (81) 350 – – 1,230 1,144 – (5) – 6,893 (291) 939 (248) 896 (84) (89) (1,162) 5,731 Operating profit/(losses) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on shareholders’ allocated equity Operating profit/(losses) before tax includes: Finance costs Depreciation and amortisation 1,958 1,061 17 – 599 – 345 5 939 – 871 25 3.5% 5.6% 7.8% 8.7% 8.0% 15.8% 25.1% 20.6% 15.6% 21.5% 10.2% 13.1% 25.4% 18.2% 19.7% 22.1% 27.0% 13.1% (89) 5,684 – – – – 47 7.1% 17.3% 15.7% 33 34 1 11 – 21 – 19 23 26 4 54 149 12 210 177 176 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 8. SEGMENT INFORMATION (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total 31 December 2018 Total assets Total liabilities Total equity Shareholders’ allocated equity 71,898 31,632 36,064 14,526 24,228 39,095 12,363 229,806 64,299 24,627 32,865 12,885 20,068 30,889 4,767 190,400 7,599 7,508 7,005 6,181 3,199 3,116 1,641 1,600 4,160 3,565 8,206 6,901 7,596 7,924 1,172 39,406 36,795 (1,504) Net capital (out)/in flows (1,054) (149) (267) (185) (542) (479) Total assets include: Investments in associates and joint ventures – – – 6 – 604 – 610 Segment information may be reconciled to the consolidated income statement as shown below: US$m Thirteen months ended 31 December 2018 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Short-term fluctuations in investment return related to equities and real estate Segment information Other non-operating items(1) Consolidated income statement Net premiums, fee income and other operating – (2,928) (2,928) (2) 32,220 revenue (1,723) (1,725) 4,077 Investment return 36,297 Total revenue (883) (1,570) 24,596 Net insurance and investment contract benefits – 523 7,531 Other expenses (883) (1,047) 32,127 Total expenses 32,222 8,728 40,950 27,049 7,008 34,057 Share of profit from associates and joint ventures – – Operating profit before tax 6,893 (2,045) – (678) Share of profit from associates and joint ventures – 4,170 Profit before tax Note: (1) Include unit-linked contracts. 177 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 8. SEGMENT INFORMATION (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total Total expenses 11,191 3,646 3,377 1,824 2,893 3,949 2,849 9,434 518 3,517 433 2,421 348 1,823 968 3,092 976 5,860 – – 6,092 26,147 10,828 2,148 12,976 3,532 1,189 4,721 2,837 1,083 3,920 1,610 547 2,157 3,006 734 3,740 3,888 1,057 4,945 7 25,708 338 345 7,096 32,804 9,454 2,659 2,822 1,439 2,406 2,603 1,213 407 117 739 199 49 347 181 27 210 164 11 181 278 28 752 552 42 – – 1,785 1,075 (137) 1,648 (210) 865 – 543 (39) 504 – 333 (59) 274 – 847 (208) 639 – 996 (217) 779 1,636 12 865 – 504 – 272 2 639 – 758 21 4.3% 5.7% 7.5% 9.0% 9.0% 9.4% 17.5% 24.6% 20.8% 15.0% 20.7% 13.3% 23.6% 17.5% 18.5% 19.1% 20.4% 12.8% 4 1 188 126 319 – 26 (53) (27) 21,387 3,443 1,969 400 27,199 – 5,605 (923) 4,682 (27) 4,647 – – – – 35 7.5% 17.9% 14.2% 29 37 6 10 – 16 – 17 16 17 2 40 104 12 157 149 Twelve months ended 30 November 2017 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment return Total revenue Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs and other expenses Share of profit from associates and joint ventures Operating profit before tax Tax on operating profit before tax Operating profit/(losses) after tax Operating profit/(losses) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on shareholders’ allocated equity Operating profit before tax includes: Finance costs Depreciation and amortisation 178 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 8. SEGMENT INFORMATION (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total 30 November 2017 Total assets Total liabilities Total equity Shareholders’ allocated equity 65,485 31,319 35,922 14,347 19,915 37,145 11,558 215,691 54,023 24,358 32,501 12,806 16,789 29,172 3,670 173,319 11,462 7,909 6,961 5,510 3,421 2,961 1,541 1,524 3,126 3,391 7,973 6,430 7,888 7,933 42,372 35,658 Net capital (out)/in flows (952) (467) (238) (192) (207) (50) 866 (1,240) Total assets include: Investments in associates and joint ventures – – 1 6 – 635 – 642 Segment information may be reconciled to the consolidated income statement as shown below: Short-term fluctuations in investment return related to equities and real estate Segment information Other non- operating items(1) Consolidated income statement 25,708 7,096 32,804 21,387 5,812 27,199 – 5,605 – 2,314 2,314 433 – 433 – 1,881 Net premiums, fee income and other operating – 25,708 revenue 3,212 3,212 3,021 362 3,383 – (171) 12,622 Investment return 38,330 Total revenue 24,841 Net insurance and investment contract benefits 6,174 Other expenses 31,015 Total expenses Share of profit from associates and joint ventures – 7,315 Profit before tax US$m Twelve months ended 30 November 2017 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Share of profit from associates and joint ventures Operating profit before tax Note: (1) Include unit-linked contracts. 179 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 9. REVENUE Investment return US$m Interest income Dividend income Rental income Investment income Available for sale Net realised gains from debt securities Impairment of debt securities Net (losses)/gains of available for sale financial assets reflected in the consolidated income statement At fair value through profit or loss Net (losses)/gains of financial assets designated at fair value through profit or loss Net gains/(losses) of debt securities Net (losses)/gains of equity securities Net fair value movement on derivatives Net (losses)/gains in respect of financial instruments at fair value through profit or loss Net fair value movement of investment property and property held for own use Net foreign exchange losses Other net realised losses Investment experience Investment return Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 6,743 849 184 7,776 10 (81) (71) 63 (4,028) (120) (4,085) 469 (2) (10) (3,699) 4,077 5,599 695 151 6,445 180 – 180 (89) 5,789 513 6,213 367 (560) (23) 6,177 12,622 Foreign currency movements resulted in the following gains/(losses) recognised in the consolidated income statement (other than gains and losses arising on items measured at fair value through profit or loss): US$m Foreign exchange gains/(losses) Other operating revenue The balance of other operating revenue largely consists of asset management fees. Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 53 (238) 180 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 10. EXPENSES US$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 Depreciation on property held for own use Restructuring and other non-operating costs(1) Change in third-party interests in consolidated investment funds Other expenses Finance costs Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 13,573 13,272 (462) 26,383 (1,787) 24,596 6,664 (2,528) 4,136 1,486 80 57 187 556 11,530 13,366 1,212 26,108 (1,267) 24,841 5,696 (2,241) 3,455 1,243 65 53 147 461 2,366 1,969 517 37 223 24 801 228 397 22 142 6 567 183 32,127 31,015 Other operating expenses include auditors’ remuneration of US$23m (twelve months ended 30 November 2017: US$20m), an analysis of which is set out below: US$m Audit services(2) Non-audit services, including: Audit-related services(2) Tax services Other services Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 17 2 2 2 23 16 2 1 1 20 Notes: (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 corporate transaction related costs and implementation costs for new accounting standards. (2) Expenses for audit services include the audit of the Supplementary Embedded Value Information which was reported as part of audit related services in prior period. The comparative information has been adjusted to conform to current period presentation. 181 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES10. EXPENSES (continued) Finance costs may be analysed as: US$m Repurchase agreements (see note 30 for details) Medium-term notes Other loans Total Employee benefit expenses consist of: US$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 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 43 176 9 228 47 132 4 183 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 1,217 1,012 74 89 10 96 73 72 7 79 1,486 1,243 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 148 796 – 944 124 526 478 1,128 The tax benefit or expense attributable to life insurance policyholder returns in Singapore, Brunei, Malaysia, Australia, Indonesia, the Philippines, Sri Lanka and New Zealand 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 credit attributable to policyholders’ returns included above is US$51m (twelve months ended 30 November 2017: tax expenses of US$128m). 182 | AIA GROUP LIMITEDFINANCIAL STATEMENTS11. INCOME TAX (continued) The provision for Hong Kong Profits Tax is calculated at 16.5 per cent. Taxation for overseas subsidiaries and branches is charged at the appropriate current rates of taxation ruling in the relevant jurisdictions of which the most significant jurisdictions are outlined below. Hong Kong Thailand Singapore Malaysia China Others Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 16.5% 16.5% 20% 17% 24% 25% 20% 17% 24% 25% 12% – 30% 12% – 30% The table above reflects the principal rate of corporate income tax as at the end of each period. The rates reflect enacted or substantively enacted corporate tax rates throughout the period in each jurisdiction. From fiscal years 2018 to 2020, AIA Korea is subject to an effective corporate income tax of 27.5%, which includes an Accumulated Earnings Tax following the subsidiarisation of the branch in AIA Korea. Based on current regulations, the corporate income tax rate will revert to 24.2% from fiscal year 2021. 183 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES11. INCOME TAX (continued) US$m Income tax reconciliation Profit before income tax Tax calculated at domestic tax rates applicable to profits in the respective jurisdictions Reduction in tax payable from: Life insurance tax(1) Exempt investment income Amount over-provided in prior years Provisions for uncertain tax positions Others Increase in tax payable from: Life insurance tax(1) Withholding taxes Disallowed expenses Unrecognised deferred tax assets Provisions for uncertain tax positions Change in tax rate and law Others Total income tax expense Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 4,170 874 – (312) (2) (28) – (342) 185 43 164 6 – 2 12 412 944 7,315 1,361 (108) (266) (10) – (83) (467) – 17 132 19 66 – – 234 1,128 Note: (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. 184 | AIA GROUP LIMITEDFINANCIAL STATEMENTS11. INCOME TAX (continued) The movement in net deferred tax liabilities in the period may be analysed as set out below: US$m 31 December 2018 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 2017 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 Net deferred tax asset/ (liability) at 1 December Acquisition of subsidiaries(3) Credited/ (charged) to the income statement Credited/(charged) to other comprehensive income Fair value reserve(2) Foreign exchange Others Net deferred tax asset/ (liability) at period end (1,156) (2,546) 1,086 (147) 146 31 (674) (326) 1 (98) (360) – 2 – – – (3,586) (455) (1,387) (2,196) 1,094 (132) 110 69 (534) (293) (3,269) – – – – – – – – – 424 (474) 12 (41) (1) 25 48 7 – (52) (214) (78) (16) 29 (39) (100) (8) (478) (159) – – – – – – – (159) 316 – – – – – – – 316 – 56 (12) 7 (3) (1) 9 – 56 (33) (136) 70 1 7 1 (40) (11) (141) – – – – (7) – – (10) (17) – – – – – – – (14) (14) (890) (3,062) 726 (181) 137 55 (617) (329) (4,161) (1,156) (2,546) 1,086 (147) 146 31 (674) (326) (3,586) Notes: (1) Life surplus relates to the temporary difference which arises where the taxable profits are based on actual distributions from the long-term fund. This primarily relates to Singapore and Malaysia. (2) Of the fair value reserve deferred tax charge/(credit) of US$159m for 2018 (twelve months ended 30 November 2017: US$(316)m), US$177m (twelve months ended 30 November 2017: US$(297)m) relates to fair value gains and losses on available for sale financial assets and US$(18)m (twelve months ended 30 November 2017: US$(19)m) relates to fair value gains and losses on available for sale financial assets transferred to income on disposal and impairment. (3) The amount of US$455m represents a one-time adjustment in respect of the acquisition of Sovereign. 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 of US$60m (30 November 2017: US$52m) 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. The Group has not provided deferred tax liabilities of US$59m (30 November 2017: US$62m) in respect of unremitted earnings of operations in two jurisdictions from which a withholding tax charge would be incurred upon distribution as the Group does not consider it probable that this portion of accumulated earnings will be remitted in the foreseeable future. The Group has unused income tax losses carried forward in Hong Kong, Macau, Thailand, Singapore, Malaysia, China, Korea, Cambodia, New Zealand, the Philippines, Sri Lanka and Taiwan. The tax losses of Hong Kong, Singapore and New Zealand can be carried forward indefinitely. The tax losses of remaining branches and subsidiaries are due to expire within the periods ending 2021 (Macau and the Philippines), 2023 (Thailand, China and Cambodia), 2024 (Sri Lanka), 2025 (Malaysia) and 2028 (Korea and Taiwan). 185 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 12. EARNINGS PER SHARE Basic Basic earnings per share is calculated by dividing the net profit attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the period. The shares held by employee share-based trusts are not considered to be outstanding from the date of the purchase for purposes of computing basic and diluted earnings per share. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Basic earnings per share (US cents per share) Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 3,163 12,020 26.31 6,120 12,000 51.00 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 31 December 2018 and 30 November 2017, the Group has potentially dilutive instruments which are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units awarded to eligible directors, officers, employees and agents under various share-based compensation plans as described in note 39. Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Adjustment for share options, restricted share units, restricted stock purchase units and restricted stock subscription units awarded under share-based compensation plans (million) Weighted average number of ordinary shares for diluted earnings per share (million) Diluted earnings per share (US cents per share) Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 3,163 12,020 35 12,055 26.24 6,120 12,000 37 12,037 50.84 At 31 December 2018, 5,752,143 share options (30 November 2017: 5,340,052) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. Operating profit after tax per share Operating profit after tax (see note 6) per share is calculated by dividing the operating profit after tax attributable to shareholders of AIA Group Limited by the weighted average number of ordinary shares in issue during the period. As of 31 December 2018 and 30 November 2017, the Group has potentially dilutive instruments which are the share options, restricted share units, restricted stock purchase units and restricted stock subscription units awarded to eligible directors, officers, employees and agents under various share-based compensation plans as described in note 39. Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 47.29 47.15 38.73 38.61 Basic (US cents per share) Diluted (US cents per share) 186 | AIA GROUP LIMITEDFINANCIAL STATEMENTS13. DIVIDENDS Dividends to shareholders of the Company attributable to the period: US$m Interim dividend declared and paid of 29.20 Hong Kong cents per share (twelve months ended 30 November 2017: 25.62 Hong Kong cents per share) Final dividend proposed after the reporting date of 84.80 Hong Kong cents per share (twelve months ended 30 November 2017: 74.38 Hong Kong cents per share) (1) Total dividend excluding special dividend Special dividend proposed after the reporting date of 9.50 Hong Kong cents per share (twelve months ended 30 November 2017: nil) (1) Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 449 1,302 1,751 146 1,897 393 1,144 1,537 – 1,537 Note: (1) Based upon shares outstanding at 31 December 2018 and 30 November 2017 that are entitled to a dividend, other than those held by employee share-based trusts. The above final and special dividends were proposed by the Board on 15 March 2019 subject to shareholders’ approval at the AGM to be held on 17 May 2019. The proposed final and special dividends have not been recognised as a liability at the reporting date. The Board has recommended a special dividend for the additional month in the accounting period due to the change of the Group’s financial year-end date from 30 November 2018 to 31 December 2018. Dividends to shareholders of the Company attributable to the previous financial year, approved and paid during the period: US$m Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Final dividend in respect of the previous financial year, approved and paid during the period of 74.38 Hong Kong cents per share (twelve months ended 30 November 2017: 63.75 Hong Kong cents per share) 1,140 983 187 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 14. INTANGIBLE ASSETS US$m Cost At 1 December 2016 Additions Disposals Foreign exchange movements At 30 November 2017 Additions Acquisition of subsidiaries Disposals Foreign exchange movements At 31 December 2018 Accumulated amortisation At 1 December 2016 Amortisation charge for the year Foreign exchange movements At 30 November 2017 Amortisation charge for the period Disposals Foreign exchange movements At 31 December 2018 Net book value At 30 November 2017 At 31 December 2018 Goodwill Computer software Distribution and other rights 775 – – 60 835 – 167 – (26) 976 (4) – – (4) – – – (4) 458 53 (2) 17 526 86 – (4) (10) 598 (232) (51) (14) (297) (57) 2 3 815 77 – 15 907 1 – (1) (19) 888 (69) (33) (1) (103) (40) 1 3 Total 2,048 130 (2) 92 2,268 87 167 (5) (55) 2,462 (305) (84) (15) (404) (97) 3 6 (349) (139) (492) 831 972 229 249 804 749 1,864 1,970 The Group holds intangible assets for its long-term use and the annual amortisation charge of US$90m (30 November 2017: US$84m) approximates the amount that is expected to be recovered through consumption within 12 months after the end of the reporting period. Intangible assets in this note exclude deferred acquisition and origination costs, which are separately disclosed with further details provided in note 19. 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 (group of units), including goodwill, to the recoverable amount of that cash-generating unit (group of units). If the recoverable amount of the unit (group of units) exceeds the carrying amount of the unit (group of units), the goodwill allocated to that unit (group of units) shall be regarded as not impaired. The recoverable amount is the value in use of the cash-generating unit (group of units) 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, which are detailed in Section 5 of Supplementary Embedded Value Information, include risk discount rate, 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. 188 | AIA GROUP LIMITEDFINANCIAL STATEMENTS15. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES US$m Group Investments in associates Investment in joint ventures Total As at 31 December 2018 As at 30 November 2017 602 8 610 636 6 642 Investments in associates and joint ventures 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 interests in its principal associates and joint ventures are as follows: Place of incorporation Principal activity Type of shares held Group’s interest % As at 31 December 2018 As at 30 November 2017 Tata AIA Life Insurance Company Limited India Insurance Ordinary 49% 49% All associates and joint ventures are unlisted. Aggregated financial information of associates and joint ventures The investments in the associates and joint ventures are 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 and joint ventures. US$m Carrying amount in the statement of financial position Profit from continuing operations Other comprehensive expenses Total comprehensive expenses Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 610 – (45) (45) 642 – (24) (24) 189 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES16. PROPERTY, PLANT AND EQUIPMENT US$m Cost or revaluation At 1 December 2016 Additions Disposals Net transfers to investment property Increase from valuation Foreign exchange movements At 30 November 2017 Additions Acquisition of subsidiaries Disposals Net transfers from investment property Increase from valuation Foreign exchange movements At 31 December 2018 Accumulated depreciation At 1 December 2016 Depreciation charge for the year Disposals Revaluation adjustment Foreign exchange movements At 30 November 2017 Depreciation charge for the period Disposals Net transfers from investment property Revaluation adjustment Foreign exchange movements At 31 December 2018 Net book value At 30 November 2017 At 31 December 2018 Property held for own use Computer hardware Fixtures and fittings and others 188 23 (21) – – 11 201 23 – (26) – – (3) 195 (160) (18) 19 – (9) (168) (20) 23 – – 3 464 66 (58) – – 18 490 75 10 (40) – – (9) 526 (265) (47) 37 – (14) (289) (60) 35 – – 6 Total 1,557 90 (86) (24) 62 71 1,670 99 10 (76) 12 5 (17) 1,703 (425) (81) 61 10 (22) (457) (110) 58 (4) 33 10 (162) (308) (470) 33 33 201 218 1,213 1,233 905 1 (7) (24) 62 42 979 1 – (10) 12 5 (5) 982 – (16) 5 10 1 – (30) – (4) 33 1 – 979 982 Properties held for own use are carried at fair value at the reporting date less accumulated depreciation. The fair value at the reporting date is determined by independent professional valuers. Details of valuation techniques and process are disclosed in notes 3 and 22. During the reporting period, no expenditure (30 November 2017: nil) recognised in the carrying amount of property held for own use was in the course of its construction. Increases from revaluation on property held for own use of US$38m (twelve months ended 30 November 2017: US$72m) were taken to other comprehensive income. If property held for own use were stated on a historical cost basis, the carrying value would be US$377m (30 November 2017: US$373m). The Group holds property, plant and equipment for its long-term use and, accordingly, the annual depreciation charge approximates to the amount expected to be recovered through consumption within 12 months after the end of the reporting period. 190 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 17. INVESTMENT PROPERTY US$m Fair value At 1 December 2016 Additions and capitalised subsequent expenditures Disposals Net transfers from property, plant and equipment Fair value gain Foreign exchange movements At 30 November 2017 Additions and capitalised subsequent expenditures Disposals Net transfers to property, plant and equipment Net transfers to other assets Fair value gain Foreign exchange movements At 31 December 2018 3,910 10 (12) 24 367 66 4,365 38 (7) (8) (34) 477 (37) 4,794 Investment properties are carried at fair value at the reporting date as determined by independent professional valuers. Details of valuation techniques and process are disclosed in notes 3 and 22. The Group leases out its investment property under operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease based on future negotiations. Lease payments are usually negotiated every one to four years to reflect market rentals. There were not any material contingent rentals earned as income for the period. Rental income generated from investment property amounted to US$184m (twelve months ended 30 November 2017: US$151m). Direct operating expenses (including repair and maintenance) on investment property that generates rental income amounted to US$38m (twelve months ended 30 November 2017: US$31m). The Group owns investment property in the form of freehold land outside Hong Kong and leasehold land under finance lease. Leasehold land under operating leases which is held for long-term rental or capital appreciation or both that is not occupied by the Group is classified as investment property. They are initially recognised at cost with changes in fair values in subsequent periods recognised in the consolidated income statement. The Group does not hold freehold land in Hong Kong. The future minimum operating lease rental income under non-cancellable operating leases that the Group expects to receive in future periods may be analysed as follows: US$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 31 December 2018 As at 30 November 2017 148 252 24 424 135 241 31 407 191 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES18. REINSURANCE ASSETS US$m Amounts recoverable from reinsurers Ceded insurance and investment contract liabilities Total 19. DEFERRED ACQUISITION AND ORIGINATION COSTS US$m Carrying amount Deferred acquisition costs on insurance contracts Deferred origination costs on investment contracts Value of business acquired Less: Upfront reinsurance premium rebate Total Movements in the period At beginning of financial period Deferral and amortisation of acquisition and origination costs Foreign exchange movements Impact of assumption changes Other movements At end of financial period As at 31 December 2018 As at 30 November 2017 539 2,348 2,887 506 1,975 2,481 As at 31 December 2018 As at 30 November 2017 24,162 21,345 347 454 (337) 24,626 373 129 – 21,847 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 21,847 2,507 (301) 21 552 18,898 2,318 833 (77) (125) 24,626 21,847 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. During the period, there was an addition to value of business of US$348m attributable to the acquisition of Sovereign, which has been applied in part against the reinsurance liability arising from the upfront reinsurance commission also attributable to the acquisition of Sovereign. 192 | AIA GROUP LIMITEDFINANCIAL STATEMENTS20. 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 period 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 period 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 period 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 participating business with discretionary expected sharing with policyholders and underlying distinct investment Portfolios (“Other Participating Business with distinct Portfolios”) and Other Policyholder and Shareholder. Other Participating Business with distinct Portfolios refers to business where it is expected that the policyholder will receive, at the discretion of the insurer, additional benefits based on the performance of underlying segregated investment assets where this asset segregation is supported by an explicit statutory reserve and reporting in the relevant territory. The reason for separately analysing financial investments held by Participating Funds and Other Participating Business with distinct Portfolios is that Participating Funds are subject to local regulations that generally prescribe a minimum proportion of policyholder participation in declared dividends and for Other Participating Business with distinct Portfolios it is, as explained above, expected that the policyholder will receive, at the discretion of the insurer, additional benefits based on the performance of the underlying segregated investment assets where this asset segregation is supported by an explicit statutory reserve and reporting in the relevant territory. 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 Funds 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 before tax for the period is impacted by the proportion of investment return that would be allocated to shareholders as described above. For Other Participating Business with distinct Portfolios, the Group either have discretion as to the timing or amount of additional benefits to the policyholders. The Group has elected the fair value option for equity securities and the available for sale classification of the majority of debt securities. The investment risk from Other Participating Business with distinct Portfolios directly impacts the Group’s financial statements, but it is expected that a proportion of investment return may be allocated to policyholders through policyholder dividends. Other Policyholder and Shareholder Investments are distinct from Unit-linked Investments, Participating Funds and Other Participating Business with distinct Portfolios as there is not any direct contractual or regulatory requirement governing the amount, if any, for allocation to policyholders or it is not expected that the policyholder will receive at the discretion of the insurer additional benefits based on the performance of the underlying segregated investment assets where this asset segregation is supported by an explicit statutory reserve and reporting in the relevant territory. 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, if applicable. External ratings for government bonds are based on issuers as well as currencies of issuances. The following conventions have been adopted to conform the various ratings. External ratings Internal ratings Reported as 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 Note: (1) Unless otherwise identified individually. 1 2+ to 2- 3+ to 3- 4+ to 4- AAA AA A BBB 5+ and below Below investment grade(1) 193 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Debt securities by type comprise the following: Policyholder and shareholder Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(2) US$m Rating FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2018 Government bonds – issued in local currency Thailand China Korea Singapore Philippines Malaysia United States Indonesia Other(1) Subtotal Government bonds – foreign currency AAA AA A BBB Below investment grade Subtotal Government agency bonds(3) AAA AA A BBB Below investment grade Not rated Subtotal A A AA AAA BBB A AA BBB – 1,952 – 2,753 – 1,575 262 81 353 – – – – – – 642 – – 6,976 642 – 57 95 190 3 345 1,683 165 2,480 296 51 – – 379 280 331 2 992 35 91 214 151 – – – – – – – – 6 33 355 394 – – – 21 6 27 – – 3 11 1 – 13,108 13,108 10,267 12,219 6,989 1,247 1,844 629 2,760 319 794 6,989 4,000 1,844 2,204 3,670 433 1,502 – 42 283 602 49 74 9 45 22 37,957 45,969 1,126 – 639 619 – 1,075 994 1,906 2,448 31 42 3,195 4,559 828 2,952 2,317 1,497 129 6 2,546 3,208 5,014 1,955 181 6 7 21 22 150 – 200 55 34 72 6 11 – – – – – – – – – – – – – – – – – – 303 35 – – – 13,108 12,261 7,272 4,602 1,893 2,278 3,679 478 1,524 47,095 7 1,096 1,016 2,598 42 4,759 2,601 3,545 5,121 1,961 192 6 4,675 491 15 7,729 12,910 178 338 13,426 Notes: (1) Of the total government bonds issued in local currency listed as “Other” at 31 December 2018, 71 per cent are rated as investment grade and a further 21 per cent are rated BB- and above. The remaining are rated below BB-. (2) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (3) 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. 194 | AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(2) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2018 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) 43 468 4,938 4,161 500 – 178 1,661 8,531 8,890 276 – – 17 37 368 589 3,149 5,295 17,490 30,996 123 18,439 31,613 15 2 1,739 2,530 1 3 5 17 309 632 149 113 – 594 382 5,694 1,147 32,452 169 32,414 – – 2,679 116 10,110 19,536 194 41,186 71,026 1,225 1,698 73,949 – 30 27 143 – 17 217 – 10 132 178 – – 320 – – – – – 18 18 10 100 191 131 4 1 437 10 140 350 452 4 36 992 – – – – – – – – – – – – – – 10 140 350 452 4 36 992 22,323 21,981 648 90,504 135,456 2,729 2,036 140,221 Notes: (2) 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$5,282m are restricted due to local regulatory requirements. 195 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder(4) Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(2) US$m Rating FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 30 November 2017 Government bonds – issued in local currency Thailand China Korea Singapore Philippines Malaysia United States Indonesia Other(1) Subtotal Government bonds – foreign currency AAA AA A BBB Below investment grade Subtotal Government agency bonds(3) AAA AA A BBB Below investment grade Subtotal A A AA AAA BBB A AA BBB – 1,520 – 2,440 – 1,249 168 77 6 5,460 – 36 90 117 6 249 1,184 367 2,084 198 71 3,904 – – – – – – 24 – – 24 – 274 252 338 6 870 61 119 205 127 35 547 – – – – – – – 25 – 25 – – – 23 6 29 – – 3 10 1 14 13,141 13,141 6,821 5,439 1,230 2,346 562 3,076 379 744 8,341 5,439 3,670 2,346 1,811 3,268 481 750 – 27 272 476 55 25 1 55 2 33,738 39,247 913 – 525 579 – 835 921 1,339 1,817 47 65 2,490 3,638 847 3,398 2,846 1,366 225 2,092 3,884 5,138 1,701 332 8 25 16 185 – 234 90 63 38 5 14 – – – – – – – – – – – – – – – – – 263 56 – – 13,141 8,368 5,711 4,146 2,401 1,836 3,269 536 752 40,160 8 860 937 2,002 65 3,872 2,182 4,210 5,232 1,706 346 8,682 13,147 210 319 13,676 Notes: (1) Of the total government bonds issued in local currency listed as “Other” at 30 November 2017, 44 per cent are rated as investment grade and a further 38 per cent are rated BB- and above. The remaining are rated below BB-. (2) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (3) 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. (4) The comparative information has been adjusted to conform to the current period presentation. 196 | AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Debt securities (continued) Policyholder and shareholder(4) Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(2) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 30 November 2017 Corporate bonds AAA AA A BBB Below investment grade Not rated Subtotal Structured securities(5) AAA AA A BBB Below investment grade Not rated Subtotal Total(6) 46 475 5,198 4,510 679 – 154 1,148 7,511 7,541 391 – – 17 30 277 477 2,873 4,513 18,639 31,378 106 17,920 30,077 19 2 2,030 3,119 – 2 5 11 377 598 191 177 – 482 349 4,873 1,139 32,894 181 30,856 – – 3,310 179 10,908 16,745 174 41,739 69,566 1,359 1,669 72,594 – – 18 165 – 31 214 – 10 144 167 – – 321 – – – – – 21 21 9 54 157 83 6 1 310 9 64 319 415 6 53 866 – – – – – – – – – – – – – – 9 64 319 415 6 53 866 20,735 18,507 263 86,959 126,464 2,716 1,988 131,168 Notes: (2) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (4) The comparative information has been adjusted to conform to the current period presentation. (5) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (6) Debt securities of US$4,900m are restricted due to local regulatory requirements. The Group’s debt securities classified at fair value through profit or loss are all designated at fair value through profit or loss. 197 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES20. FINANCIAL INVESTMENTS (continued) Equity securities Equity securities by type comprise the following: Policyholder and shareholder Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Unit-linked FVTPL FVTPL Subtotal FVTPL Consolidated investment funds(1) FVTPL 9,225 4,667 13,892 5,042 747 5,789 14,267 5,414 19,681 4,516 13,902 18,418 – – – US$m 31 December 2018 Equity shares Interests in investment funds Total Policyholder and shareholder(2) Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Unit-linked US$m FVTPL FVTPL Subtotal FVTPL Consolidated investment funds(1) FVTPL 30 November 2017 Equity shares Interests in investment funds Total 8,730 3,154 11,884 5,168 711 5,879 13,898 3,865 17,763 4,610 14,343 18,953 – – – Total 18,783 19,316 38,099 Total 18,508 18,208 36,716 Note: (1) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (2) The comparative information has been adjusted to conform to the current year presentation. Debt and equity securities US$m Debt securities Listed Unlisted Total Equity securities Listed Unlisted(1) Total As at 31 December 2018 As at 30 November 2017 111,008 29,213 140,221 20,060 18,039 38,099 100,647 30,521 131,168 20,205 16,511 36,716 Note: (1) Including US$16,495m (30 November 2017: US$15,375m) of investment funds which can be redeemed daily. 198 | AIA GROUP LIMITEDFINANCIAL STATEMENTS20. FINANCIAL INVESTMENTS (continued) Interests in structured entities The Group has determined that the investment funds and structured securities, such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities that the Group has interest are structured entities. The Group has consolidated certain investment funds for which the Group provides guarantee on capital or rate of return to the investors and deemed to have control based on an analysis of the guidance in IFRS 10. For these investment funds, the Group has the ability to reduce the guaranteed rates of return, subject to obtaining approvals of applicable regulators. The Group has an obligation to absorb losses in the event that the returns of the funds are insufficient to cover the capital or rate of return guarantee provided to the investors. The following table summarises the Group’s interest in unconsolidated structured entities: US$m As at 31 December 2018 As at 30 November 2017 Investment funds Structured securities(1) Investment funds Structured securities(1) Available for sale debt securities Debt securities at fair value through profit or loss Equity securities at fair value through profit or loss Total 1,506(2) 638(2) 19,316 21,460 757 235 – 992 1,250(2) 520(2) 18,208 19,978 631 235 – 866 Notes: (1) Structured securities include collateralised debt obligation, mortgage-backed securities and other asset-backed securities. (2) Balance represents the Group’s interests in debt securities issued by 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. 199 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES20. FINANCIAL INVESTMENTS (continued) Loans and deposits US$m Policy loans Mortgage loans on residential real estate Mortgage loans on commercial real estate Other loans Allowance for loan losses Loans Term deposits Promissory notes(1) Total Note: (1) The promissory notes are issued by a government. As at 31 December 2018 As at 30 November 2017 2,896 2,726 613 46 742 (12) 4,285 1,521 1,586 7,392 600 53 889 (12) 4,256 2,138 1,579 7,973 Certain term deposits with financial institutions and promissory notes are restricted due to local regulatory requirements. The restricted balance held within term deposits and promissory notes is US$1,782m (30 November 2017: US$1,749m). 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 31 December 2018, the carrying value of such receivables is US$149m (30 November 2017: US$326m). 200 | AIA GROUP LIMITEDFINANCIAL STATEMENTS21. DERIVATIVE FINANCIAL INSTRUMENTS The Group’s non-hedge derivative exposure was as follows: US$m 31 December 2018 Foreign exchange contracts Cross-currency swaps Forwards Foreign exchange futures Currency options Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Forward contracts Netting Total 30 November 2017 Foreign exchange contracts Cross-currency swaps Forwards Foreign exchange futures Currency options Total foreign exchange contracts Interest rate contracts Interest rate swaps Other Warrants and options Netting Total Notional amount Assets Liabilities Fair value 7,825 4,456 105 6 12,392 4,730 4,211 275 (105) 21,503 7,569 5,921 139 7 13,636 3,157 161 (139) 16,815 224 11 – – 235 122 57 16 – 430 249 47 – – 296 51 16 – 363 (159) (42) – – (201) (42) – – – (243) (164) (142) – – (306) (55) – – (361) The column “notional amount” in the above table represents the pay leg of derivative transactions other than equity index option. For certain equity-index call and put options with same notional amount that are purchased to hedge the downside risk of the underlying equities by means of a collar strategy, the notional amount represents the exposure of the hedged equities. Of the total derivatives, US$6m (30 November 2017: US$8m) 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 risks, 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. 201 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 21. 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 gains and losses 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. Forward contracts are contractual obligations to buy or sell a financial instrument on a predetermined future date at a specified price. 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 31 December 2018, the Group had posted cash collateral of US$20m (30 November 2017: US$10m) and pledged debt securities with carrying value of US$141m (30 November 2017: US$227m) for liabilities and held cash collateral of US$251m (30 November 2017: US$141m), debt securities collateral with carrying value of US$41m (30 November 2017: US$15m) for assets in respect of derivative transactions. The Group did not sell or repledge the collateral received. These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and repurchase agreements. 202 | AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT Fair value of financial instruments The Group classifies all financial assets as either at fair value through profit or loss, or as available for sale, which are carried at fair value, or as loans and receivables, which are carried at amortised cost. Financial liabilities are classified as either at fair value through profit or loss or at amortised cost, except for investment contracts with DPF which are accounted for under IFRS 4. The following tables present the fair values of the Group’s financial assets and financial liabilities: US$m 31 December 2018 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 Fair value Fair value through profit or loss Available for sale Cost/ amortised cost Total carrying value Total fair value Notes 20 21 18 23 23 25 – 27,736 38,099 430 – – – – – 7,392 7,392 7,392 112,485 – – – – – – – – – 539 2,242 1,604 2,451 140,221 140,221 38,099 38,099 430 539 2,242 1,604 2,451 430 539 2,242 1,604 2,451 66,265 112,485 14,228 192,978 192,978 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value Notes Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase and securities lending agreements Derivative financial instruments Other liabilities Financial liabilities 27 29 30 21 33 6,907 – – 243 1,153 8,303 549 4,954 1,683 – 4,831 12,017 7,456 4,954 1,683 243 5,984 7,456 4,984 1,683 243 5,984 20,320 20,350 203 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 22. FAIR VALUE MEASUREMENT (continued) Fair value of financial instruments (continued) US$m 30 November 2017 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 Financial liabilities Investment contract liabilities(1) Borrowings Obligations under 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 Notes 20 21 18 23 23 25 – 25,702 36,716 363 – – – – – 7,973 7,973 7,977 105,466 – – – – – – – – – 506 2,150 1,541 2,289 131,168 131,168 36,716 36,716 363 506 2,150 1,541 2,289 363 506 2,150 1,541 2,289 62,781 105,466 14,459 182,706 182,710 Fair value through profit or loss Cost/ amortised cost Total carrying value Total fair value Notes 27 29 30 21 33 7,020 – – 361 1,225 8,606 580 3,958 1,883 – 4,663 11,084 7,600 3,958 1,883 361 5,888 7,600 4,144 1,883 361 5,888 19,690 19,876 The carrying amount of assets included in the above tables represents the maximum credit exposure. Foreign currency exposure, including the net notional amount of foreign currency derivative positions, is shown in note 37 for the Group’s key foreign exchange exposures. The fair value of investment contract liabilities measured at amortised cost is not considered to be materially different from the amortised cost carrying value. The carrying value of financial instruments expected to be settled within 12 months (after taking into account valuation allowances, where applicable) is not considered to be materially different from the fair value. Note: (1) The comparative information has been adjusted to conform to the current period presentation. 204 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 22. FAIR VALUE MEASUREMENT (continued) Fair value measurements on a recurring basis The Group measures at fair value property held for own use, investment property, 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. Fair value of properties is based on valuation by independent professional valuers. The Group does not have assets or liabilities measured at fair value on a non-recurring basis during the thirteen months ended 31 December 2018. The following methods and assumptions were used by the Group to estimate the fair value of financial instruments and properties. Determination of fair value Loans and receivables For loans and advances that are repriced frequently and have not had any 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. 205 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES22. FAIR VALUE MEASUREMENT (continued) Determination of fair value (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. Property held for own use and investment property The Group engaged external, independent and qualified valuers to determine the fair value of the Group’s properties at least on an annual basis. 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. The properties held for own use and investment properties, in most cases, are valued on the basis of the highest and best use of the properties that is physically possible, legally permissible and financially feasible. 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. On 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. 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. 206 | AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Determination of fair value (continued) 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 26. These are not measured at fair value as there is currently not an 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. 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. 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 without 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: (cid:127) 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 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. (cid:127) 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. (cid:127) 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 properties held for own use, investment properties, certain classes of structured securities, certain derivative contracts, private equity and real estate fund investments, and direct private equity investments. 207 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) 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. A summary of assets and liabilities carried at fair value on a recurring basis according to fair value hierarchy is given below: US$m Level 1 Level 2 Level 3 Total Fair value hierarchy 31 December 2018 Recurring fair value measurements Non-financial assets Property held for own use Investment property Financial assets Available for sale Debt securities Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder At fair value through profit or loss Debt securities Participating funds and Other participating business with distinct portfolios Unit-linked and consolidated investment funds Other policyholder and shareholder Equity securities Participating funds and Other participating business with distinct portfolios 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 % of 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 % of Total 208 – – 27 – 7 – 1 12,124 18,223 4,859 – – 2 – – 982 4,794 982 4,794 21,645 89,591 21,785 4,697 618 710 195 655 235 122 71 309 913 531 68 29 1,058 – 275 – – – 21,981 90,504 22,323 4,765 648 13,892 18,418 5,789 235 122 73 35,243 19.1 140,324 76.0 8,959 4.9 184,526 100.0 – – – – – – – 6,907 6,907 201 42 1,153 1,396 16.8 – – – 6,907 83.2 201 42 1,153 8,303 100.0 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) Fair value hierarchy US$m Level 1 Level 2 Level 3 Total 30 November 2017 Recurring fair value measurements Non-financial assets Property held for own use Investment property Financial assets Available for sale Debt securities Participating funds and Other participating business with distinct portfolios(1) Other policyholder and shareholder(1) At fair value through profit or loss Debt securities Participating funds and Other participating business with distinct portfolios(1) Unit-linked and consolidated investment funds Other policyholder and shareholder(1) Equity securities Participating funds and Other participating business with distinct portfolios(1) Unit-linked and consolidated investment funds Other policyholder and shareholder(1) Derivative financial instruments Foreign exchange contracts Interest rate contracts Other contracts Total assets on a recurring fair value measurement basis % of Total Financial liabilities Investment contract liabilities(1) Derivative financial instruments Foreign exchange contracts Interest rate contracts Other liabilities Total liabilities on a recurring fair value measurement basis % of Total – – – – – – – 10,617 18,803 5,042 – – 8 – – 979 4,365 979 4,365 18,200 86,118 20,283 4,604 231 475 149 570 296 51 8 307 841 452 100 32 792 1 267 – – – 18,507 86,959 20,735 4,704 263 11,884 18,953 5,879 296 51 16 34,470 19.9 130,985 75.4 8,136 4.7 173,591 100.0 – – – – – – – 7,020 7,020 306 55 1,225 1,586 18.4 – – – 7,020 81.6 306 55 1,225 8,606 100.0 Note: (1) The information has been adjusted to conform to the current period presentation. 209 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 22. 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 thirteen months ended 31 December 2018, the Group transferred US$15m (twelve months ended 30 November 2017: US$50m) of assets measured at fair value from Level 1 to Level 2. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. The Group transferred no asset (twelve months ended 30 November 2017: US$148m) from Level 2 to Level 1 during the thirteen months ended 31 December 2018. The Group’s Level 2 financial instruments include debt securities, equity securities, derivative instruments and other liabilities. The fair values of Level 2 financial instruments are estimated using values obtained from private pricing services and brokers corroborated with internal review as necessary. When the quotes from third-party pricing services and brokers are not available, internal valuation techniques and inputs will be used to derive the fair value for the financial instruments. The tables below set out a summary of changes in the Group’s Level 3 assets and liabilities measured at fair value on a recurring basis for the thirteen months ended 31 December 2018 and the twelve months ended 30 November 2017. The tables reflect gains and losses, including gains and losses on assets and liabilities categorised as Level 3 as at 31 December 2018 and 30 November 2017. Level 3 assets and liabilities US$m At 1 December 2017 Net movement on investment contract liabilities Total gains/(losses) Reported under investment return and other expenses in the consolidated income statement Reported under fair value reserve, foreign currency translation reserve and property revaluation reserve in the consolidated statement of comprehensive income Acquisition of subsidiaries Transfer to other assets Transfer from investment property Purchases Sales Settlements Transfer into Level 3 At 31 December 2018 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 and other expenses Property held for own use Investment property Debt securities Equity securities Derivative financial assets/ (liabilities) 979 4,365 1,732 1,060 – – – – (30) 477 15 (14) 34 – – 8 1 (10) – – (37) – (34) (8) 38 (7) – – (55) (16) – – – 635 (11) (492) 26 – – – 375 (72) – – 982 4,794 1,850 1,333 (30) 477 14 19 – – – – – – – – – – – – – Investment contracts (7,020) 593 – – (480) – – – – – – (6,907) – 210 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 22. FAIR VALUE MEASUREMENT (continued) Fair value hierarchy for fair value measurement on a recurring basis (continued) Level 3 assets and liabilities (continued) US$m At 1 December 2016 Net movement on investment contract liabilities Total gains/(losses) Reported under investment return and other expenses in the consolidated income statement Reported under fair value reserve, foreign currency translation reserve and property revaluation reserve in the consolidated statement of comprehensive income Transfer to investment property Purchases Sales Settlements Transfer into Level 3 Transfer out of Level 3 At 30 November 2017 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 and other expenses Property held for own use Investment property Debt securities Equity securities Derivative financial assets/ (liabilities) 905 3,910 1,947 688 – – – – (16) 367 (56) 31 115 (24) 1 (2) – – – 66 24 10 (12) – – – 55 – 216 (20) (410) – – 979 4,365 1,732 18 – 369 (35) – 2 (13) 1,060 (16) 367 (61) 31 – – – – – – – – – – – – Investment contracts(1) (5,941) (1,079) – – – – – – – – (7,020) – 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 27. Assets transferred out of Level 3 mainly relate to corporate debt instruments of which market-observable inputs became available during the period and were used in determining the fair value. There are not any 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. Note: (1) The information has been adjusted to conform to the current period presentation. 211 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 22. FAIR VALUE MEASUREMENT (continued) Significant unobservable inputs for level 3 fair value measurements As at 31 December 2018 and 30 November 2017, 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 31 December 2018 (US$m) Valuation techniques Unobservable inputs Range Debt securities 872 Discounted cash flows Risk adjusted discount rate 3.83% – 13.41% Description Fair value at 30 November 2017 (US$m) Valuation techniques Unobservable inputs Range Debt securities 943 Discounted cash flows Risk adjusted discount rate 5.29% – 11.89% Fair value of the Group’s properties are determined based on appropriate valuation techniques which may consider among others income projection, value of comparable property and adjustments for factors such as size, location, quality and prospective use. These valuation inputs are deemed unobservable. 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 third-party prices do not exist, will use prices derived from internal models. The Chief Investment Officers of each of the business units are required to review the reasonableness of the prices used and report price exceptions, if any. The 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 Valuations Advisory Committee 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. 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 for 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. 212 | AIA GROUP LIMITEDFINANCIAL STATEMENTS22. FAIR VALUE MEASUREMENT (continued) Fair value of financial and insurance 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 31 December 2018 and 30 November 2017 is given below. US$m 31 December 2018 Assets for which the fair value is disclosed Financial assets Loans and deposits Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Total assets for which the fair value is disclosed Liabilities for which the fair value is disclosed Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase and securities lending agreements Other liabilities Total liabilities for which the fair value is disclosed US$m 30 November 2017 Assets for which the fair value is disclosed Financial assets Loans and deposits Reinsurance receivables Other receivables Accrued investment income Cash and cash equivalents Total assets for which the fair value is disclosed Liabilities for which the fair value is disclosed Financial liabilities Investment contract liabilities Borrowings Obligations under repurchase agreements Other liabilities Total liabilities for which the fair value is disclosed Fair value hierarchy Level 1 Level 2 Level 3 Total 601 – 5 26 2,451 3,083 – 4,504 – 476 4,980 2,525 539 2,178 1,578 – 6,820 – 480 1,683 4,131 6,294 4,266 – 59 – – 7,392 539 2,242 1,604 2,451 4,325 14,228 549 – – 224 773 549 4,984 1,683 4,831 12,047 Fair value hierarchy Level 1 Level 2 Level 3 Total 1,112 – – 21 2,289 3,422 – 3,630 – 692 4,322 2,680 506 2,109 1,520 – 6,815 – 514 1,883 3,938 6,335 4,185 – 41 – – 7,977 506 2,150 1,541 2,289 4,226 14,463 580 – – 33 613 580 4,144 1,883 4,663 11,270 213 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES23. OTHER ASSETS US$m Accrued investment income Pension scheme assets Defined benefit pension scheme surpluses Insurance receivables due from insurance and investment contract holders Prepayments – operating lease of leasehold land Others Total As at 31 December 2018 As at 30 November 2017 1,604 1,541 47 1,316 385 1,551 4,903 44 1,223 357 1,465 4,630 All amounts other than certain prepayments are generally expected to be recovered within 12 months after the end of the reporting period. 24. 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 thirteen months ended 31 December 2018, impairment loss of US$81m (twelve months ended 30 November 2017: nil) was 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 31 December 2018 was nil (30 November 2017: nil). 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 20 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 31 December 2018 was US$13m (30 November 2017: US$12m). The Group has a portfolio of residential and commercial mortgage loans which it originates. To the extent that any such loans are past their due dates specific allowance is made, together with a collective allowance, based on historical delinquency. Insurance receivables are short-term in nature and cover is not provided if consideration is not received. An ageing of accounts receivable is not provided as all amounts are due within one year and cover is cancelled if consideration is not received. 214 | AIA GROUP LIMITEDFINANCIAL STATEMENTS25. CASH AND CASH EQUIVALENTS US$m Cash Cash equivalents Total(1) As at 31 December 2018 As at 30 November 2017 1,657 794 2,451 1,735 554 2,289 Note: (1) Of cash and cash equivalents, US$590m (30 November 2017: US$385m) are held to back unit-linked contracts and US$82m (30 November 2017: US$71m) are held by consolidated investment funds. Cash comprises cash at bank and cash in hand. Cash equivalents comprise bank deposits and highly liquid short-term investments with maturities at acquisition of three months or less and money market funds. Accordingly, all such amounts are expected to be realised within 12 months after the end of the reporting period. 26. INSURANCE CONTRACT LIABILITIES The movement of insurance contract liabilities (including liabilities in respect of investment contracts with DPF) is shown as follows: US$m At beginning of financial period Valuation premiums and deposits Liabilities released for policy termination or other policy benefits paid and related expenses Fees from account balances Accretion of interest Change in net asset values attributable to policyholders Acquisition of subsidiaries Foreign exchange movements Other movements At end of financial period Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 148,897 31,660 128,186 25,586 (17,576) (1,924) 5,610 (666) 91 (1,949) 621 (14,929) (1,817) 4,417 2,762 – 5,232 (540) 164,764 148,897 Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) can also be analysed as follows: US$m Deferred profit Unearned revenue Policyholders’ share of participating surplus Liabilities for future policyholder benefits Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 8,386 3,224 7,474 145,680 164,764 7,046 2,674 7,935 131,242 148,897 215 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES26. INSURANCE CONTRACT LIABILITIES (continued) Business description The table below summarises the key variables on which insurance and investment contract cash flows depend. 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 Key reportable segments (cid:127) Investment performance Singapore, China, Malaysia (cid:127) Expenses (cid:127) Mortality (cid:127) Surrenders Minimum guaranteed benefits may be enhanced based on investment experience and other considerations Hong Kong, Thailand, Other Markets (cid:127) Investment performance (cid:127) Expenses (cid:127) Mortality (cid:127) Surrenders (cid:127) Morbidity Benefits, defined in the insurance contract, are determined by the contract and are not affected by investment performance or the performance of the contract as a whole Benefits, defined in the insurance contract, are determined by the contract and are not affected by investment performance or the performance of the contract as a whole Benefits are based on the value of the unitised funds and death benefits Benefits are based on the account balance and death benefit All(1) All(1) (cid:127) Mortality (cid:127) Morbidity (cid:127) Lapses (cid:127) Expenses (cid:127) Mortality (cid:127) Morbidity (cid:127) Lapses (cid:127) Expenses (cid:127) Investment performance All(1) (cid:127) Lapses (cid:127) Expenses (cid:127) Mortality All(1) (cid:127) Investment performance (cid:127) Crediting rates (cid:127) Lapses (cid:127) Expenses (cid:127) Mortality Type of contract Material terms and conditions Participating funds Traditional participating life assurance with DPF Other participating business Traditional non-participating life assurance Accident and health Unit-linked Universal life Participating products include protection and savings elements. 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 include protection and savings elements. 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 paid on death, maturity, sickness or disability that are fixed and guaranteed and not at the discretion of the insurer These products provide morbidity or sickness benefits and include health, disability, critical illness and accident cover Unit-linked contracts combine savings with protection, the cash value of the policy depending on the value of unitised funds 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 Note: (1) Other than the Group Corporate Centre segment. 216 | AIA GROUP LIMITEDFINANCIAL STATEMENTS26. INSURANCE CONTRACT LIABILITIES (continued) Methodology and assumptions The most significant items to which profit for the period 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 period 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. Market and credit risk Direct exposure Type of contract Traditional participating life assurance with DPF Participating funds Insurance and investment contract liabilities Risks associated with related investment portfolio Indirect exposure Significant insurance and lapse risks (cid:127) Net neutral except for the insurer’s share of participating investment performance (cid:127) Net neutral except for the insurer’s share of participating investment performance (cid:127) Guarantees (cid:127) Guarantees (cid:127) Investment performance subject to smoothing through dividend declarations (cid:127) Impact of persistency on future dividends (cid:127) Mortality Other participating business (cid:127) Net neutral except for the insurer’s share of participating investment performance (cid:127) Net neutral except for the insurer’s share of participating investment performance (cid:127) Guarantees (cid:127) Guarantees (cid:127) Investment performance subject to smoothing through dividend declarations (cid:127) Impact of persistency on future dividends (cid:127) Mortality (cid:127) Morbidity Traditional non-participating life assurance (cid:127) Guarantees (cid:127) Asset-liability mismatch risk Accident and health (cid:127) Asset-liability mismatch risk Pension (cid:127) Net neutral (cid:127) Asset-liability mismatch risk (cid:127) Investment performance (cid:127) Asset-liability mismatch risk (cid:127) Credit risk (cid:127) Investment performance (cid:127) Credit risk (cid:127) Asset-liability mismatch risk (cid:127) Net neutral (cid:127) Asset-liability mismatch risk (cid:127) Not applicable (cid:127) Mortality (cid:127) Persistency (cid:127) Morbidity (cid:127) Not applicable (cid:127) Morbidity (cid:127) Persistency (cid:127) Performance-related (cid:127) Persistency investment management fees Unit-linked (cid:127) Net neutral (cid:127) Net neutral (cid:127) Performance-related Universal life (cid:127) Guarantees (cid:127) Asset-liability mismatch risk (cid:127) Investment performance (cid:127) Credit risk (cid:127) Asset-liability mismatch risk investment management fees (cid:127) Spread between earned rate and crediting rate to policyholders (cid:127) Persistency (cid:127) Mortality (cid:127) Mortality (cid:127) Persistency (cid:127) 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. 217 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES26. INSURANCE CONTRACT LIABILITIES (continued) Methodology and assumptions (continued) Valuation interest rates As at 31 December 2018 and 30 November 2017, the ranges of applicable valuation interest rates for traditional insurance contracts, which vary by operating segment, year of issuance and products, within the first 20 years are as follows: Hong Kong Thailand Singapore Malaysia China Australia Indonesia Korea Philippines Sri Lanka Taiwan Vietnam 27. INVESTMENT CONTRACT LIABILITIES US$m At beginning of financial period Investment contract benefits Fees charged Acquisition of subsidiaries Net withdrawals and other movements Foreign exchange movements At end of financial period(1) As at 31 December 2018 As at 30 November 2017 3.50% – 7.50% 3.50% – 7.50% 3.13% – 9.00% 3.13% – 9.00% 2.00% – 7.00% 2.00% – 7.00% 3.70% – 5.43% 3.70% – 5.43% 2.75% – 7.00% 2.75% – 7.00% 2.04% – 7.11% 2.97% – 7.11% 3.02% – 8.75% 3.01% – 9.00% 2.74% – 6.50% 2.85% – 6.50% 2.20% – 9.20% 2.20% – 9.20% 8.34% – 12.57% 7.10% – 10.78% 1.75% – 6.50% 1.75% – 6.50% 5.53% – 11.48% 5.53% – 11.48% Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 8,082 (462) (134) 480 (3) (78) 7,885 7,028 1,212 (145) – (136) 123 8,082 Note: (1) Of investment contract liabilities, US$429m (30 November 2017: US$482m) represents deferred fee income. 218 | AIA GROUP LIMITEDFINANCIAL STATEMENTS28. EFFECT OF CHANGES IN ASSUMPTIONS AND ESTIMATES The table below sets out the sensitivities of the assumptions in respect of insurance and investment contracts with DPF to key variables. This disclosure only allows for the impact on liabilities and related assets, such as reinsurance, and deferred acquisition costs and does not allow for offsetting movements in the fair value of financial assets backing those liabilities. US$m (Increase)/decrease in insurance contract liabilities, increase/(decrease) in equity and profit before tax 0.5 pps increase in investment return 0.5 pps decrease in investment return 10% increase in expenses 10% increase in mortality rates 10% increase in lapse/discontinuance rates As at 31 December 2018 As at 30 November 2017 42 (64) (11) (55) (39) 20 (39) (7) (42) (32) 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 not any 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 were not any 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$11m (twelve months ended 30 November 2017: US$16m) increase in profit. 219 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES29. BORROWINGS US$m Medium-term notes Total As at 31 December 2018 As at 30 November 2017 4,954 4,954 3,958 3,958 Interest expense on borrowings is shown in note 10. Further information relating to interest rates and the maturity profile of borrowings is presented in note 37. The following table summarises the Company’s outstanding medium-term notes placed to the market at 31 December 2018: Nominal amount Interest rate Tenor Issue date 13 March 2013(1) 11 March 2014(1) 11 March 2014(1) 11 March 2015(1) 16 March 2016(1) 23 May 2017(2) 6 April 2018(1) 12 April 2018 20 September 2018(1) US$500m US$500m US$500m US$750m US$750m US$500m US$500m HK$3,900m 3.125% 2.250% 4.875% 3.200% 4.500% 4.470% 3.900% 10 years 5 years 30 years 10 years 30 years 30 years 10 years 3 years 3 years 2.760% US$500m 3M LIBOR + 0.52% Notes: (1) These medium-term notes are listed on The Stock Exchange of Hong Kong Limited. (2) These medium-term notes are listed on The Taipei Exchange, Taiwan. The Company has the right to redeem these notes at par on 23 May of each year beginning on 23 May 2022. The net proceeds from issuance during the thirteen months ended 31 December 2018 and the twelve months ended 30 November 2017 are used for general corporate purposes. The Group has access to an aggregate of US$2,374m unsecured committed credit facilities, which includes a US$300m revolving three-year credit facility expiring in 2020, as well as a US$2,074m five-year credit facility expiring in 2022. The credit facilities will be used for general corporate purposes. There were no outstanding borrowings under these credit facilities as of 31 December 2018 (30 November 2017: nil). 220 | AIA GROUP LIMITEDFINANCIAL STATEMENTS30. OBLIGATIONS UNDER REPURCHASE AND SECURITIES LENDING AGREEMENTS The Group has entered into repurchase agreements whereby securities are sold to third parties with a concurrent agreement to repurchase the securities at a specified date. In addition, the Group has entered into securities lending agreement whereby securities are loaned to a national monetary authority. The securities related to these agreements are not de-recognised from the Group’s consolidated statement of financial position, but are retained within the appropriate financial asset classification. During the term of the repurchase and securities lending agreements, the Group is restricted from selling or pledging the transferred debt securities. The following table specifies the amounts included within financial investments subject to repurchase or securities lending agreements which do not qualify for de-recognition at each period end: US$m Debt securities – AFS Repurchase agreements Securities lending Debt securities – FVTPL Repurchase agreements Total As at 31 December 2018 As at 30 November 2017 1,748 340 16 2,104 1,854 – 12 1,866 Collateral At 31 December 2018, the Group had no pledged debt securities (30 November 2017: US$1m). Cash collateral of US$5m (30 November 2017: US$1m) were held based on the 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 31 December 2018 are conducted with a national monetary authority on securities denominated in local currency issued by the same authority. At 31 December 2018, the obligations under repurchase agreements were US$1,683m (30 November 2017: US$1,883m). 221 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES31. OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Offsetting, enforceable master netting agreements and similar agreements The following table shows the assets that are subject to offsetting, enforceable master netting agreements and similar arrangements at each period end: Gross amount of recognised financial liabilities set off in the consolidated statement of financial position Net amount of financial assets presented in the consolidated statement of financial position Gross amount of recognised financial assets Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral received Net amount 430 149 579 – – – 430 149 579 (41) (149) (190) (251) – (251) 138 – 138 Gross amount of recognised financial liabilities set off in the consolidated statement of financial position Net amount of financial assets presented in the consolidated statement of financial position Gross amount of recognised financial assets Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral received Net amount 363 326 689 – – – 363 326 689 (15) (326) (341) (141) – (141) 207 – 207 US$m 31 December 2018 Financial assets: Derivative assets Reverse repurchase agreements Total US$m 30 November 2017 Financial assets: Derivative assets Reverse repurchase agreements Total 222 | AIA GROUP LIMITEDFINANCIAL STATEMENTS31. OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued) Offsetting, enforceable master netting agreements and similar agreements (continued) The following table shows the liabilities that are subject to offsetting, enforceable master netting agreements and similar arrangements at each period end: Gross amount of recognised financial assets set off in the consolidated statement of financial position Net amount of financial liabilities presented in the consolidated statement of financial position Gross amount of recognised financial liabilities Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral pledged Net amount 243 1,683 1,926 – – – 243 1,683 1,926 (141) (1,683) (1,824) (20) – (20) 82 – 82 Gross amount of recognised financial assets set off in the consolidated statement of financial position Net amount of financial liabilities presented in the consolidated statement of financial position Gross amount of recognised financial liabilities Related amounts not set off in the consolidated statement of financial position Financial instruments Cash collateral pledged Net amount 361 1,883 2,244 – – – 361 1,883 2,244 (227) (1,883) (2,110) (10) – (10) 124 – 124 US$m 31 December 2018 Financial liabilities: Derivative liabilities Repurchase agreements Total US$m 30 November 2017 Financial liabilities: Derivative liabilities Repurchase agreements Total The Group entered into enforceable master netting agreements for derivative transactions, as well as the repurchase and securities lending agreements for debt instruments with various counterparties. Except for certain futures contracts executed through clearing house mechanism where the settlement arrangement satisfied the IFRS netting criteria, the transactions under the enforceable master netting agreements and similar agreements involving the exchange of financial instruments or cash as collateral do not satisfy the IFRS netting criteria. The provision in the master netting agreement and similar agreements enables a party to terminate transactions early and settle at a net amount if a default or termination event occurs. 223 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES32. PROVISIONS US$m At 1 December 2016 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 2017 Charged to the consolidated income statement Charged to other comprehensive income Exchange differences Released during the period Utilised during the period Other movements At 31 December 2018 Employee benefits 145 7 (23) 9 – (12) 17 143 10 (8) – – (18) 3 130 Other 108 94 – – (29) (83) 1 91 30 – (1) (11) (64) (7) 38 Total 253 101 (23) 9 (29) (95) 18 234 40 (8) (1) (11) (82) (4) 168 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. 33. OTHER LIABILITIES US$m Trade and other payables Third-party interests in consolidated investment funds Reinsurance-related payables Total As at 31 December 2018 As at 30 November 2017 3,964 1,153 867 5,984 3,958 1,225 705 5,888 Third-party interests in consolidated investment funds consist of third-party unit holders’ interests in consolidated investment funds which are reflected as a liability since they can be put back to the Group for cash. Trade and other payables are generally expected to be settled within 12 months after the end of the reporting period. The realisation of third-party interests in investment funds cannot be predicted with accuracy since these represent the interests of third-party unit holders in consolidated investment funds held to back insurance and investment contract liabilities and are subject to market risk and the actions of third-party investors. 224 | AIA GROUP LIMITEDFINANCIAL STATEMENTS34. SHARE CAPITAL AND RESERVES Share capital As at 31 December 2018 As at 30 November 2017 Million shares US$m Million shares US$m At beginning of the financial period 12,074 14,065 12,056 13,998 Shares issued under share option scheme and agency share purchase plan At end of the financial period 3 12,077 8 14,073 18 12,074 67 14,065 The Company issued 1,355,304 shares under share option scheme (twelve months ended 30 November 2017: 17,053,136 shares) and 1,167,021 shares under agency share purchase plan (twelve months ended 30 November 2017: 1,037,294 shares) during the thirteen months ended 31 December 2018. The Company and its subsidiaries have not purchased, sold or redeemed any of the Company’s shares during the thirteen months ended 31 December 2018 with the exception of 1,409,735 shares (twelve months ended 30 November 2017: 1,395,132 shares) of the Company purchased by and nil share (twelve months ended 30 November 2017: nil) of the Company sold by the employee share-based trusts. These purchases were made by the relevant scheme trustees on the Hong Kong Stock Exchange. These shares are held on trust for participants of the relevant schemes and therefore were not cancelled. During the thirteen months ended 31 December 2018, 12,870,000 shares (twelve months ended 30 November 2017: 15,730,944 shares) were transferred to eligible directors, officers and employees of the Group from the employee share-based trusts under share-based compensation plans as a result of vesting. As at 31 December 2018, 52,259,936 shares (30 November 2017: 63,720,201 shares) of the Company were held by the employee share-based trusts. 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 plans. Those shares acquired by the trusts, to the extent not transferred to the participants upon vesting, are reported as “Employee share-based trusts”. Property revaluation reserve Property revaluation reserve comprises the cumulative net change in the revalued amount of property held for own use at the end of the reporting period. Property revaluation surplus is not considered to be a realised profit available for distribution to shareholders. Other reserves Other reserves mainly include the impact of merger accounting for business combinations under common control and share-based compensation. 225 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES35. NON-CONTROLLING INTERESTS US$m Equity shares in subsidiaries Share of earnings Share of other reserves Total As at 31 December 2018 As at 30 November 2017 71 356 (27) 400 64 310 4 378 36. GROUP CAPITAL STRUCTURE Capital Management Approach The Group’s capital management objectives focus on maintaining a strong capital base to support the development of its business, maintaining the ability to move capital freely and satisfying regulatory capital requirements at all times. The Group’s capital management function oversees all capital-related activities of the Group and assists senior management in making capital decisions. The capital management function participates in decisions concerning asset-liability management, strategic asset allocation and ongoing solvency management. This includes ensuring capital considerations are paramount in the strategy and business planning processes and when determining 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 Insurance Authority (HKIA), which requires that AIA Co. and AIA International meet the solvency margin requirements of the Hong Kong Insurance Ordinance (HKIO). The HKIO (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. On 16 May 2017, the HKIA and the China Banking and Insurance Regulatory Commission (formerly the China Insurance Regulatory Commission) signed the Equivalence Assessment Framework Agreement on the Solvency Regulatory Regime. As a transitional arrangement, AIA will report under the HKIO the capital position of its China branches based on the China local regulatory solvency basis progressively over a 4-year phase-in period to full implementation on 31 March 2022. AIA has given an undertaking to the HKIA to maintain an excess of assets over liabilities for branches other than Hong Kong at no less than 100% of the Hong Kong statutory minimum solvency margin requirement in each of AIA Co. and AIA International. The capital positions of the Group’s two principal operating companies as of 31 December 2018 and 30 November 2017 are as follows: US$m AIA Co. AIA International 31 December 2018 30 November 2017 Total available capital Regulatory minimum capital 9,208 6,772 2,189 1,855 Solvency ratio 421% 365% Total available capital Regulatory minimum capital 8,248 7,826 1,862 2,431 Solvency ratio 443% 322% For these purposes, the Group defines total available capital as the amount of assets in excess of liabilities measured in accordance with the HKIO and “regulatory minimum capital” as the required minimum margin of solvency calculated in accordance with the HKIO. The solvency ratio is the ratio of total available capital to regulatory minimum capital. 226 | AIA GROUP LIMITEDFINANCIAL STATEMENTS36. GROUP CAPITAL STRUCTURE (continued) Regulatory Solvency (continued) The Group’s individual branches and subsidiaries are also subject to the supervision of government regulators in the jurisdictions in which those branches and subsidiaries and their parent entity 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 HKIA of their solvency margin position based on their annual audited financial statements. 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 without the consent from regulators for certain individual branches or subsidiaries of the Group. The payment of dividends, distributions and other payments to shareholders is subject to the oversight of the HKIA. Capital and Regulatory Orders Specific to the Group As of 31 December 2018, the requirements and restrictions summarised below may be considered material to the Group and remain in effect unless otherwise stated. Hong Kong Insurance Authority AIA Group Limited has given to the HKIA an undertaking that AIA Group Limited will: (i) ensure that (a) each of AIA Co. and AIA International will at all times maintain an excess of assets over liabilities of not less than the aggregate of 150% of the Hong Kong statutory minimum solvency margin requirement in respect of the Hong Kong branch and no less than 100% of the Hong Kong statutory minimum solvency margin requirement for branches other than Hong Kong (“minimum amount”); (b) it will not withdraw capital or transfer any funds or assets out of AIA Co. or AIA International that will cause the solvency ratio to fall below the minimum amounts specified in (a), except with, in either case, the prior written consent of the HKIA; and (c) should the solvency ratio of either AIA Co. or AIA International fall below the respective minimum amounts, AIA Group Limited will take steps as soon as possible to restore it to at least the respective minimum amounts in a manner acceptable to the HKIA; (ii) notify the HKIA in writing as soon as the Company becomes aware of any person (a) becoming a controller (within the meaning of Section 9(1)(a)(iii)(B) of the HKIO) 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)(a)(iii)(B) of the HKIO) of AIA Co. and AIA International through the disposal of our shares traded on the HKSE; (iii) be subject to the supervision of the HKIA and AIA Group Limited will be required to continually comply with the HKIA’s guidance on the “fit and proper” standards of a controller pursuant to Section 8(2) of the HKIO. The HKIA is empowered by the HKIO 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 HKIA; 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 HKIA 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 HKIA; 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 HKIA or requirements that may be prescribed by the HKIA in accordance with the HKIO, regulations under the HKIO or guidelines issued by the HKIA from time to time. 227 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES37. 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 risk arising from changes in claims experience as well as more general exposure relating to the acquisition and persistency of insurance business. This also includes changes to assumptions regarding future experience for these risks. Lapse Lapse risk is the risk that the rate of policy termination deviates from the Group’s expectation. Ensuring customers buy products that meet their needs is central to the Group’s Operating Philosophy. Through effective implementation of the Business Quality Framework, comprehensive sales training programmes and active monitoring of sales activities and persistency, the Group seeks to ensure that appropriate products are sold by qualified sales representatives and that standards of service consistently meet our customers’ needs. Expense Expense risk is the risk that the cost of selling new business and of administering the in-force book exceeds the assumptions made in pricing and/or reserving. Daily operations follow a disciplined budgeting and control process that allows for the management of expenses based on the Group’s very substantial experience within the markets in which we operate. Morbidity and Mortality Morbidity and mortality risk is the risk that the occurrence and/or amounts of medical/death claims are higher than the assumptions made in pricing and/or reserving. The Group adheres to well-defined market-oriented underwriting and claims guidelines and practices that have been developed based on extensive historical experience and with the assistance of professional reinsurers. The Group’s actuarial teams conduct 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. Through monitoring the development of both local and global trends in medical technology, health and wellness, the impact of legislation and general social, political and economic conditions the Group seeks to anticipate and respond promptly to potential adverse experience impacts on its products. Reinsurance is used to reduce concentration and volatility risk, especially with large policies or new risks, and as protection against catastrophic events such as pandemics or natural disasters. 228 | AIA GROUP LIMITEDFINANCIAL STATEMENTS37. RISK MANAGEMENT (continued) Investment and financial risks Credit risk Credit risk is the risk that third parties fail to meet their obligations to the Group when they fall due. 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 Group’s credit risk management oversight process is governed centrally, but provides for decentralised management and accountability by our lines of business. A key to AIA’s credit risk management is adherence to a well-controlled underwriting process. The Group’s credit risk management starts with the assignment of an internal rating to all counterparties. A detailed analysis of each counterparty is performed and a rating recommended by the first line of business. The Group’s Risk Management function manages the Group’s internal ratings framework and reviews these recommendations and make final decision on the assigned ratings. Measuring and monitoring of credit risk is an ongoing process and is designed to enable early identification of emerging risk. Interest rate risk The Group’s exposure to interest rate risk predominantly arises from any differences between the duration of the Group’s liabilities and assets. Since most markets do not have assets of sufficient tenor to match life insurance liabilities, an uncertainty arises around the reinvestment of maturing assets to match the Group’s insurance liabilities. AIA manages interest rate risk primarily on an economic basis to determine the durations of both assets and liabilities. Interest rate risk on local solvency basis is also taken into consideration for business units where local solvency regimes deviate from economic basis. Furthermore, for products with discretionary benefits, additional modelling of interest rate risk is performed to guide determination of appropriate management actions. Management also takes into consideration the asymmetrical impact of interest rate movements when evaluating products with options and guarantees. 229 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES37. RISK MANAGEMENT (continued) Investment and financial risks (continued) 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 31 December 2018 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 repurchase and securities lending agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 978 2 6,406 – 6,499 133,722 – – – 2,201 – – – – – – 8 1,970 – 38,099 539 1,604 250 430 7,392 1,972 140,221 38,099 539 1,604 2,451 430 9,680 140,128 42,900 192,708 – 500 1,683 260 – 2,443 – 4,454 – 2 – 4,456 7,456 – – 5,722 243 13,421 7,456 4,954 1,683 5,984 243 20,320 230 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Exposure to interest rate risk (continued) US$m 30 November 2017 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(1) Borrowings Obligations under repurchase agreements Other liabilities Derivative financial instruments Total financial liabilities Variable interest rate Fixed interest rate Non-interest bearing Total 1,045 1 6,919 – 8,392 122,776 – – – 2,001 – – – – – – 9 1,898 – 36,716 506 1,541 288 363 7,973 1,899 131,168 36,716 506 1,541 2,289 363 11,439 129,695 41,321 182,455 – – 1,883 92 – – 3,958 – – – 1,975 3,958 7,600 – – 5,796 361 13,757 7,600 3,958 1,883 5,888 361 19,690 Equity price risk Equity price risk arises from changes in the market value of equity securities. Investments in equity securities on a long-term basis are expected to align policyholders expectations, provide diversification benefits and enhance returns. The extent of exposure to equities at any time is subject to the terms of the Group’s strategic asset allocations. Equity price risk is managed in the first instance through the individual investment mandates which define benchmarks and any tracking error targets. Equity limits are also applied to contain individual exposures. Equity exposures are included in the aggregate exposure reports on each individual counterparty to ensure concentrations are avoided. Note: (1) The information has been adjusted to conform to the current period presentation. 231 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Equity price risk (continued) Sensitivity analysis Sensitivity analysis to the key variables affecting financial assets and liabilities is set out in the table below. Information relating to sensitivity of insurance and investment contracts with DPF is provided in note 28. 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 total equity arising from a change in a single variable before taking into account the effects of taxation. The impact of any impairments of financial assets has been ignored for the purpose of illustrating the sensitivity of profit before tax and total equity 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. As 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 not any corresponding effect on liabilities. 31 December 2018 30 November 2017 Impact on total equity (before the effects of taxation) Impact on allocated equity (before the effects of taxation) Impact on profit before tax Impact on total equity (before the effects of taxation) Impact on allocated equity (before the effects of taxation) Impact on profit before tax US$m Equity price risk 10 per cent increase in equity prices 1,369 1,369 1,369 1,182 1,182 1,182 10 per cent decrease in equity prices (1,369) (1,369) (1,369) (1,182) (1,182) (1,182) Interest rate risk +50 basis points shift in yield curves - 50 basis points shift in yield curves (258) 274 (6,504) 7,231 (258) 274 (157) 169 (5,676) 6,272 (157) 169 232 | AIA GROUP LIMITEDFINANCIAL STATEMENTS37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Foreign exchange rate risk The Group’s foreign exchange rate risk arises mainly from the Group’s operations in multiple geographical markets in the Asia-Pacific region and the translation of multiple currencies to US dollar for financial reporting purposes. The balance sheet values of our operating units and subsidiaries are not hedged to the Group’s presentation currency, the US dollar. However, assets, liabilities and local regulatory and stress capital in each business unit are generally currency matched with the exception of holdings of equities denominated in currencies other than the functional currency, or any expected capital movements due within one year which may be hedged. Bonds denominated in currencies other than the functional currency are commonly hedged with cross-currency swaps or foreign exchange forward contracts. Foreign exchange rate net exposure US$m 31 December 2018 United States Dollar Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Equity analysed by original currency 19,278 2,527 3,819 (1,821) 2,153 4,380 Net notional amounts of currency derivative positions Currency exposure 5% strengthening of original currency Impact on profit before tax Impact on other comprehensive income Impact on total equity 5% strengthening of the US dollar Impact on profit before tax Impact on other comprehensive income Impact on total equity US$m 30 November 2017 (8,448) 10,830 595 3,122 3,209 7,028 2,806 985 – 2,153 (560) 3,820 100 (125) (25) 100 (125) (25) (36) 158 122 70 (192) (122) 7 344 351 (5) (346) (351) 12 37 49 4 (53) (49) 3 105 108 (2) (106) (108) (21) 212 191 23 (214) (191) United States Dollar Hong Kong Dollar Thai Baht Singapore Dollar Malaysian Ringgit China Renminbi Equity analysed by original currency 24,497 2,772 3,768 (2,356) 2,157 3,527 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 (9,225) 15,272 597 3,369 2,535 6,303 3,005 649 – 8 2,157 3,535 164 (188) (24) 164 (188) (24) 3 133 136 30 (166) (136) (8) 323 315 9 (324) (315) 21 12 33 (5) (28) (33) 4 104 108 (3) (105) (108) 19 158 177 (16) (161) (177) 233 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Liquidity risk AIA identifies liquidity risk as occurring in two ways, financial liquidity risk and investment liquidity risk. Financial liquidity risk is the risk that insufficient cash is available to meet payment obligations to counterparties as they fall due. One area of particular focus in the management of financial liquidity is collateral. AIA manages this exposure by determining limits for its activities in the derivatives and repurchase agreement markets based on the collateral available within the relevant fund or subsidiary to withstand extreme market events. More broadly AIA supports its liquidity through committed bank facilities, use of the bond repurchase markets and maintaining access to debt markets via the Company’s Global Medium-term Note and Securities programme. Investment liquidity risk occurs in relation to the Group’s 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 are characterised by a relatively low need for liquidity to cover those of their liabilities which are directly linked to mortality and morbidity, this risk is nevertheless carefully managed by continuously assessing the relative liquidity of the Group’s assets and managing the size of individual holdings through limits. US$m 31 December 2018 Financial assets (Policyholder and shareholder investments) Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Due in one year or less Due after one year through five years Due after five years through ten years Total Due after ten years No fixed maturity 7,311 1,913 135,456 19,681 539 1,546 1,779 428 1,011 1,788 2,683 – 539 1,537 1,779 121 708 68 270 5 2,422 2,900 – 17,352 30,450 84,971 – – – – 85 – – – – 164 – – – – 58 52 – 19,681 – 9 – – Subtotal 168,653 9,458 18,213 30,889 87,451 22,642 Financial assets (Unit-linked contracts and consolidated investment funds) Total Financial and insurance contract liabilities (Policyholder and shareholder investments) Insurance and investment contract liabilities (net of deferred acquisition and origination 24,055 192,708 – – – – 9,458 18,213 30,889 87,451 24,055 46,697 costs, and reinsurance) 122,563 2,914 10,824 11,965 96,860 Borrowings 4,954 500 1,496(1) 1,241 1,717 Obligations under repurchase and securities lending agreements Other liabilities Derivative financial instruments 1,683 4,754 243 1,683 3,526 54 – 126 98 – 5 53 – 2 38 – – – 1,095 – Subtotal 134,197 8,677 12,544 13,264 98,617 1,095 Financial and insurance contract liabilities (Unit-linked contracts and consolidated investment funds) Total Note: (1) These borrowings fall due after 2 years through 5 years. 234 24,073 158,270 – – – – 8,677 12,544 13,264 98,617 24,073 25,168 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 37. RISK MANAGEMENT (continued) Investment and financial risks (continued) Liquidity risk (continued) US$m 30 November 2017 Financial assets (Policyholders and shareholder investments) Loans and deposits Other receivables Debt securities Equity securities Reinsurance receivables Accrued investment income Cash and cash equivalents Derivative financial instruments Due in one year or less Total Due after one year through five years Due after five years through ten years Due after ten years No fixed maturity 7,866 1,727 126,464 17,763 506 1,494 1,833 352 1,427 1,617 3,834 – 506 1,486 1,833 76 919 59 399 6 2,392 2,729 – 17,553 31,334 73,743 – – 1 – – – – – 142 122 – – – – 12 45 – 17,763 – 7 – – Subtotal 158,005 10,779 18,674 31,861 76,147 20,544 Financial assets (Unit-linked contracts and consolidated investment funds) Total Financial and insurance contract liabilities (Policyholders and shareholder investments) Insurance and investment contract liabilities (net of deferred acquisition and origination costs, and reinsurance) Borrowings Obligations under repurchase agreements Other liabilities Derivative financial instruments Subtotal Financial and insurance contract liabilities (Unit-linked contracts and consolidated investment funds) Total Note: (1) No borrowings are due after 2 years through 5 years. 24,450 – – – – 182,455 10,779 18,674 31,861 76,147 24,450 44,994 109,900 3,958 1,883 4,445 361 120,547 24,450 144,997 2,609 500 1,883 3,314 170 8,476 10,420 11,404 85,467 499(1) 1,242 1,717 – 47 57 – 2 86 – – 48 – – – 1,082 – 11,023 12,734 87,232 1,082 – – – – 8,476 11,023 12,734 87,232 24,450 25,532 235 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 38. EMPLOYEE BENEFITS Defined benefit plans The Group operates funded and unfunded defined benefit plans that provide life and medical benefits for participating employees after retirement and a lump sum benefit on cessation of employment. The locations covered by these plans include Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Korea, the Philippines, Sri Lanka, Taiwan and Vietnam. The latest independent actuarial valuations of the plans were at 31 December 2018 and were prepared by credentialed actuaries of Mercer (Hong Kong) Limited and Mercer Philippines Inc. 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 48 per cent (30 November 2017: 44 per cent) covered by the plan assets held by the trustees. The fair value of plan assets as at period end at the date of valuation was US$82m (30 November 2017: US$79m). The total expenses relating to these plans recognised in the consolidated income statement was US$10m (twelve months ended 30 November 2017: US$7m). Defined contribution plans The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current thirteen months was US$89m (twelve months ended 30 November 2017: US$72m). Employees and the employer are required to make monthly contributions equal to 1 per cent to 22 per cent of the employees’ monthly basic salaries, depending on years of service and subject to any applicable caps of monthly relevant income in different jurisdictions. For defined contribution pension plans with vesting conditions, any forfeited contributions by employers on behalf of employees who leave the scheme prior to vesting fully in such contributions are used by the employer to reduce any future contributions. The amount of forfeited contributions used to reduce the existing level of contributions is not material. 39. SHARE-BASED COMPENSATION Share-based compensation plans During the thirteen months ended 31 December 2018, the Group made further awards of share options, restricted share units (RSUs) and restricted stock purchase units (RSPUs) to certain directors, officers and employees of the Group under the Share Option Scheme (SO Scheme), the Restricted Share Unit Scheme (RSU Scheme) and the Employee Share Purchase Plan (ESPP). In addition, the Group made further awards of restricted stock subscription units (RSSUs) to eligible agents under the Agency Share Purchase Plan (ASPP). RSU Scheme Under the RSU Scheme, the vesting of the awarded RSUs is conditional upon the eligible participants remaining in employment with the Group during the respective vesting periods. RSU awards are vested either entirely after a specific period of time or in tranches over the vesting period. For RSU awards that are vested in tranches, each vesting tranche is accounted for as a separate award 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 awarded RSUs are expected to be settled in equity; awards 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 awarded under this scheme is 301,100,000 (30 November 2017: 301,100,000), representing approximately 2.5 per cent (30 November 2017: 2.5 per cent) of the number of shares in issue at 31 December 2018. 236 | AIA GROUP LIMITEDFINANCIAL STATEMENTS39. SHARE-BASED COMPENSATION (continued) Share-based compensation plans (continued) RSU Scheme (continued) Number of shares Restricted Share Units Outstanding at beginning of financial period Awarded Forfeited Vested Outstanding at end of financial period Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 42,600,687 49,337,302 11,617,538 16,003,902 (4,544,909) (7,751,321) (11,871,992) (14,989,196) 37,801,324 42,600,687 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) awards 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 awards vested in tranches, each vesting tranche is accounted for as a separate award for the purposes of recognising the expense over the vesting period. The awarded 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 awarded share options are expected to be settled in equity; awards 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 awarded under the scheme is 301,100,000 (30 November 2017: 301,100,000), representing approximately 2.5 per cent (30 November 2017: 2.5 per cent) of the number of shares in issue at 31 December 2018. 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: Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Number of share options Weighted average exercise price (HK$) Number of share options Weighted average exercise price (HK$) Share options Outstanding at beginning of financial period Awarded Exercised Forfeited or expired Outstanding at end of financial period Share options exercisable at end of financial period 29,112,234 4,601,313 (1,355,304) (1,954,299) 30,403,944 12,849,114 42.58 67.03 38.00 46.73 46.22 38.11 41,581,033 9,460,949 (17,053,136) (4,876,612) 29,112,234 14,134,157 35.88 51.70 30.10 46.79 42.58 37.38 At the respective dates on which the share options were exercised, the weighted average share price of the Company was HK$67.88 for the thirteen months ended 31 December 2018 (twelve months ended 30 November 2017: HK$52.61). 237 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES39. SHARE-BASED COMPENSATION (continued) Share-based compensation plans (continued) SO Scheme (continued) The range of exercise prices for the share options outstanding as of 31 December 2018 and 30 November 2017 is summarised in the table below. Range of exercise price HK$26 – HK$35 HK$36 – HK$45 HK$46 – HK$55 HK$56 – HK$65 HK$66 – HK$75 Outstanding at end of financial period Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Number of share options outstanding Weighted average remaining contractual life (years) Number of share options outstanding Weighted average remaining contractual life (years) 4,350,787 11,259,533 9,041,481 1,336,469 4,415,674 30,403,944 3.11 6.40 7.29 8.72 9.20 6.70 5,059,663 12,090,822 10,787,231 1,174,518 – 29,112,234 4.21 7.58 8.34 9.67 – 7.36 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 8 per cent of the annual basic salary subject to a maximum of HK$117,000 per annum. The awarded matching restricted stock purchase units are expected to be settled in equity. For the thirteen months ended 31 December 2018, eligible employees paid US$24m (twelve months ended 30 November 2017: US$20m) to purchase 2,833,351 ordinary shares (twelve months ended 30 November 2017: 2,739,064 ordinary shares) of the Company. 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 awarded 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 thirteen months ended 31 December 2018, eligible agents paid US$25m (twelve months ended 30 November 2017: US$20m) to purchase 2,886,679 ordinary shares (twelve months ended 30 November 2017: 2,708,018 ordinary shares) of the Company. Valuation methodology The Group utilises a binomial lattice model to calculate the fair value of the share option awards, 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 made. 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. 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. An allowance for forfeiture prior to vesting is not included in the valuation of the awards. 238 | AIA GROUP LIMITEDFINANCIAL STATEMENTS39. SHARE-BASED COMPENSATION (continued) Valuation methodology (continued) The fair value calculated for share options is inherently subjective due to the assumptions made and the limitations of the model utilised. Thirteen months ended 31 December 2018 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units 1.87%-2.33% 1.48%-2.11%* 1.35%-2.27% 20% 20% 20% 1.50%-1.80% 1.50%-1.80% 1.50%-1.80% 63.64-67.15 10 7.89-7.95 n/a n/a n/a n/a n/a n/a 1.44% 20% 1.80% n/a n/a n/a 13.69 57.52 60.26 54.26 Twelve months ended 30 November 2017 Share options Restricted share units ESPP Restricted stock purchase units ASPP Restricted stock subscription units 1.45% – 1.90% 0.83% – 1.29%* 0.68% – 1.29% 20% 1.8% 50.30 – 61.55 10 7.95 – 8.00 20% 1.8% n/a n/a n/a 20% 1.8% n/a n/a n/a 1.25% 20% 1.8% n/a n/a n/a 10.47 39.95 58.25 45.81 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$) Assumptions Risk-free interest rate Volatility Dividend yield Exercise price (HK$) 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. The weighted average share price for share option valuation for awards made during the thirteen months ended 31 December 2018 is HK$67.03 (twelve months ended 30 November 2017: HK$51.70). The total fair value of share options awarded during the thirteen months ended 31 December 2018 is US$8m (twelve months ended 30 November 2017: US$13m). Recognised compensation cost The total recognised compensation cost (net of expected forfeitures) related to various share-based compensation awards made under the RSU Scheme, SO Scheme, ESPP and ASPP by the Group for the thirteen months ended 31 December 2018 is US$82m (twelve months ended 30 November 2017: US$79m). 239 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL Directors’ remuneration The Executive Director receives compensation in the form of salaries, bonuses, contributions to pension schemes, long-term incentives, housing and other allowances, and benefits in kind subject to applicable laws, rules and regulations. Bonuses and long-term incentives represent the variable components in the Executive Director’s compensation and are linked to the performance of the Group and the Executive Director. Details of share-based payment schemes are described in note 39. Salaries, allowances and benefits Share-based in kind(1) Bonuses payments(2) Director’s fees Pension scheme contributions Other benefits Inducement fees Total – 1,689,773 3,854,533 4,023,357 – 1,689,773 3,854,533 4,023,357 99,406 99,406 – – – – 9,667,069 9,667,069 Salaries, allowances and benefits Share-based in kind(1) Bonuses payments(2) Director’s fees Pension scheme contributions Other benefits(4) Inducement fees Total US$ Thirteen months ended 31 December 2018 Executive Director Mr. Ng Keng Hooi(3) Total US$ Twelve months ended 30 November 2017 Executive Directors Mr. Mark Edward Tucker(5) – 1,135,952 4,824,000 8,336,772 70,949 1,154,706 Mr. Ng Keng Hooi(3) – 749,333 1,504,110 1,375,587 44,788 – Total – 1,885,285 6,328,110 9,712,359 115,737 1,154,706 – 15,522,379 – 3,673,818 – 19,196,197 Notes: (1) Includes non-cash benefits for housing, medical and life insurance, club and professional membership, company car and perquisites. (2) Includes SOs and RSUs awarded based upon the fair value at grant date. (3) Mr. Ng Keng Hooi is currently the Group Chief Executive and President of the Company. He receives his remuneration exclusively for his role as Group Chief Executive and President and receives no separate fees for his role as Director of the Company or for acting as a director of any subsidiary of the Company. (4) Includes post-employment benefits received during garden leave and termination benefits. (5) Mr. Mark Edward Tucker retired as Group Chief Executive and President with effect from 1 June 2017. Formerly, he received remuneration exclusively for his role as Group Chief Executive and President and received no separate fees for his role as Director of the Company or for acting as a director of any subsidiary of the Company. 240 | AIA GROUP LIMITEDFINANCIAL STATEMENTS40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL (continued) Directors’ remuneration (continued) The remuneration of Non-executive Director and Independent Non-executive Directors of the Company at 31 December 2018 and 30 November 2017 are included in the tables below: US$ fees(1) in kind(2) Bonuses Salaries, allowances and benefits Director’s Share-based payments Pension scheme contributions Other benefits Inducement fees Total Thirteen months ended 31 December 2018 Independent Non-executive Directors Mr. Edmund Sze-Wing Tse 618,411 133,594 Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya 282,082 238,685 282,082 265,808 222,411 Professor Lawrence Juen-Yee Lau 222,411 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee(3) Mr. Cesar Velasquez Purisima 222,411 287,427 189,863 – – – – – – – – – Total 2,831,591 133,594 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 752,005 282,082 238,685 282,082 265,808 222,411 222,411 222,411 287,427 189,863 2,965,185 241 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL (continued) Directors’ remuneration (continued) US$ fees(1) in kind(2) Bonuses Salaries, allowances and benefits Director’s Share-based payments Pension scheme contributions Other benefits Inducement fees Total Twelve months ended 30 November 2017 Non-executive Director Mr. Mark Edward Tucker(4) Independent Non-executive Directors – – Mr. Edmund Sze-Wing Tse(5) 570,000 109,383 Mr. Jack Chak-Kwong So Mr. Chung-Kong Chow Mr. John Barrie Harrison Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya 260,000 220,000 260,000 245,000 205,000 Professor Lawrence Juen-Yee Lau 205,000 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee(3) Mr. Cesar Velasquez Purisima(6) 205,000 265,000 43,630 – – – – – – – – – Total 2,478,630 109,383 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 679,383 260,000 220,000 260,000 245,000 205,000 205,000 205,000 265,000 43,630 2,588,013 Notes: (1) Saved as disclosed below, all Directors receive the fees for their role as a Director of the Company and not for acting as a director of any subsidiary of the Company. (2) Includes non-cash benefits for housing, club and professional membership, medical insurance and company car. (3) Dr. Narongchai Akrasanee was appointed as Independent Non-executive Director of the Company on 15 January 2016. US$50,000 and US$54,167 which represented remuneration to Dr. Narongchai Akrasanee in respect of his services as Chairman of Advisory Board of AIA Thailand for the twelve months ended 30 November 2017 and for the thirteen months ended 31 December 2018 respectively were included in his fees stated above. (4) Mr. Mark Edward Tucker was re-designated as Non-executive Director of the Company on 1 June 2017 and retired from the position on 1 September 2017. He did not receive a Director’s fee during his tenure of office as a Non-executive Director of the Company. (5) Mr. Edmund Sze-Wing Tse was re-designated as Independent Non-executive Director of the Company on 23 March 2017. (6) Mr. Cesar Velasquez Purisima was appointed as Independent Non-executive Director of the Company on 1 September 2017. Remuneration of five highest-paid individuals The aggregate remuneration of the five highest-paid individuals employed by the Group in each of the thirteen months ended 31 December 2018 and the twelve months ended 30 November 2017 is presented in the table below. US$ Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Director’s fees – – Salaries, allowances and benefits Share-based in kind(1) Bonuses payments(2) Pension scheme contributions Other benefits(3) Inducement fees Total 5,885,017 8,676,292 10,343,424 326,851 465,665 – 25,697,249 5,098,393 10,523,042 15,462,857 247,032 2,458,727 – 33,790,051 Notes: (1) 2018 and 2017 non-cash benefits include housing, medical and life insurance, medical check-up, children’s education, club and professional membership, company car and perquisites. (2) Includes SOs and RSUs awarded to the five highest-paid individuals based upon the fair value at grant date. (3) 2018 other benefits include tax equalisation, 2017 other benefits include post-employment benefits received during garden leave, termination benefits and tax equalisation. 242 | AIA GROUP LIMITEDFINANCIAL STATEMENTS40. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL (continued) Remuneration of five highest-paid individuals (continued) The emoluments of the five individuals with the highest emoluments are within the following bands: HK$ 28,500,001 to 29,000,000 29,000,001 to 29,500,000 31,500,001 to 32,000,000 32,000,001 to 32,500,000 32,500,001 to 33,000,000 35,000,001 to 35,500,000 45,500,001 to 46,000,000 75,500,001 to 76,000,000 120,500,001 to 121,000,000 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 – 1 2 – 1 – – 1 – 1 – – 1 – 1 1 – 1 Key management personnel remuneration Key management personnel have been identified as the members of the Group’s Executive Committee. US$ Key management compensation and other expenses Salaries and other short-term employee benefits Post-employment benefits Share-based payments(1) Termination benefits Total Note: (1) Include SOs and RSUs awarded to the key management personnel based upon the fair value at grant date. The emoluments of the key management personnel are within the following bands: US$ Below 1,000,000 1,000,001 to 2,000,000 2,000,001 to 3,000,000 3,000,001 to 4,000,000 4,000,001 to 5,000,000 5,000,001 to 6,000,000 Over 7,000,000 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 28,562,471 27,287,043 726,421 3,731,580 16,266,771 18,646,971 – 3,078,510 45,555,663 52,744,104 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 1 – 4 4 3 – 1 4 5 1 3 2 1 1 243 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES41. RELATED PARTY TRANSACTIONS Remuneration of Directors and key management personnel is disclosed in note 40. 42. COMMITMENTS AND CONTINGENCIES Commitments under operating leases Total future aggregate minimum lease payments under non-cancellable operating leases are as follows: US$m Properties and others expiring Not later than one year Later than one and not later than five years Later than five years Total As at 31 December 2018 As at 30 November 2017 171 301 41 513 128 219 48 395 The Group is the lessee in respect of a number of properties and items of office equipment held under operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually reviewed at the end of the lease term to reflect market rates. None of the leases include contingent rentals. Investment and capital commitments US$m Not later than one year Later than one and not later than five years Total As at 31 December 2018 As at 30 November 2017 1,353 5 1,358 1,231 6 1,237 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. The Group is exposed to the risk of losses in the event of the failure of the retrocessionaire, a subsidiary of American International Group, Inc., to honour its outstanding obligations which is mitigated by a trust agreement. The principal balance outstanding of mortgage loans to which the reinsurance agreement relates were approximately US$486m at 31 December 2018 (30 November 2017: US$561m). The liabilities and related reinsurance assets, which totalled US$2m (30 November 2017: US$2m), 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. 244 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 43. SUBSIDIARIES The principal subsidiary companies which materially contribute to the net income of the Group or hold a material element of its assets and liabilities are: Place of incorporation As at As at 31 December 2018 30 November 2017 Group’s NCI’s Group’s NCI’s Name of entity and operation Principal activity Issued share capital interest % interest % interest % interest % AIA Company Limited(1) Hong Kong Insurance 1,151,049,861 ordinary shares of US$5,962,084,000 issued share capital 100% AIA International Limited Bermuda Insurance 3,000,000 ordinary shares of 100% AIA Australia Limited Australia Insurance US$1.20 each 112,068,300 ordinary shares of A$193,872,800 issued share capital 100% AIA Pension and Trustee Co. Ltd. British Virgin Islands Trusteeship 19,500,000 ordinary shares 100% of US$1 each AIA Bhd. Malaysia Insurance 767,438,174 ordinary shares of RM1,450,890,000 issued share capital 100% AIA Singapore Private Limited Singapore Insurance 1,374,000,001 ordinary shares 100% of S$1 each PT. AIA Financial Indonesia Insurance 1,910,844,140 ordinary shares 100% of Rp1,000 each The Philippine American Life and General Insurance (PHILAM LIFE) Company Philippines Insurance 199,560,671 ordinary shares 100% of PHP10 each and 439,329 treasury shares AIA (Vietnam) Life Insurance Vietnam Insurance Contributed capital of 100% Company Limited VND3,224,420,000,000 – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – AIA Insurance Lanka PLC Sri Lanka Insurance Stated capital of 97.16% 2.84% 97.16% 2.84% Bayshore Development Group Limited British Virgin Islands Investment holding company BPI-Philam Life Assurance (BPLAC) Philippines Insurance Corporation LKR511,921,836 100 ordinary shares of 90% 10% 90% 10% US$1 each 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 shares of 100% US$1 each AIA Life Insurance Co. Ltd. Korea Insurance 60,328,932 ordinary shares of 100% KRW603,289,320,000 issued share capital Sovereign Assurance Company New Zealand Insurance 187,805,849 ordinary shares 100% Limited of NZD539,676,534 issued share capital – – – 100% – – – – – 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. 245 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES44. EVENTS AFTER THE REPORTING PERIOD In September 2017, the Group reached an agreement to acquire Commonwealth Bank of Australia’s (CBA) life insurance business in Australia, including a 20-year strategic bancassurance partnership with CBA in Australia. The acquisition remains in progress, subject to securing all necessary regulatory and governmental approvals. The transaction aims to expand the Group’s distribution capabilities and customer reach in Australia. The total gross consideration to be paid with respect to the proposed transaction is expected to be approximately US$2.0 billion payable in cash on completion of the proposed transaction and subject to certain adjustments at completion. After taking into account the expected proceeds from reinsurance agreement and the expected free surplus of the acquired business, the final net cash outlay by AIA is expected to be approximately US$1.0 billion. On 16 January 2019, the Group issued Hong Kong dollar-denominated fixed rate medium-term notes that are unlisted. The offering comprised of HK$1,300 million of 3.5-year notes at an annual rate of 2.95 per cent and HK$1,100 million of 12- year notes at an annual rate of 3.68 per cent. In aggregate the US dollar-equivalent is approximately US$307 million. On 15 March 2019, a Committee appointed by the Board of Directors proposed a final dividend of 84.80 Hong Kong cents per share (twelve months ended 30 November 2017: 74.38 Hong Kong cents per share), and a special dividend of 9.50 Hong Kong cents per share (twelve months ended 30 November 2017: nil) for the additional month in the accounting period due to the change of the Group’s financial year-end date from 30 November 2018 to 31 December 2018. 246 | AIA GROUP LIMITEDFINANCIAL STATEMENTS45. STATEMENT OF FINANCIAL POSITION OF THE COMPANY US$m Assets Investment in subsidiaries Available for sale – debt securities At fair value through profit or loss – derivative financial instruments Loans to/amounts due from subsidiaries Other assets Cash and cash equivalents Total assets Liabilities Borrowings Derivative financial instruments Other liabilities Total liabilities Equity Share capital Employee share-based trusts Other reserves Retained earnings Amounts reflected in other comprehensive income Total equity Total liabilities and equity As at 31 December 2018 As at 30 November 2017 15,751 2,917 5 7,384 115 14 26,186 5,547 33 151 5,731 14,073 (258) 231 6,488 (79) 20,455 26,186 15,750 2,442 37 3,554 17 5 21,805 4,420 125 43 4,588 14,065 (297) 200 3,315 (66) 17,217 21,805 Note: (1) The financial information of the Company should be read in conjunction with the consolidated financial statements of the Group. Approved and authorised for issue by the Board of Directors on 15 March 2019. Ng Keng Hooi Director Edmund Sze-Wing Tse Director 247 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES46. STATEMENT OF CHANGES IN EQUITY OF THE COMPANY US$m Share capital Employee share-based trusts Other reserves Retained earnings Amounts reflected in other comprehensive income Total equity Balance at 1 December 2017 14,065 (297) 200 Net profit Fair value losses on available for sale financial assets Fair value losses on available for sale financial assets transferred to income on disposal Dividends Shares issued under share option scheme and agency share purchase plan Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts – – – – 8 – – – Balance at 31 December 2018 14,073 – – – – – – (12) 51 (258) – – – – – 82 – (51) 231 3,315 4,762 (66) 17,217 – 4,762 – – (1,589) – – – – (34) (34) 21 – – – – – 21 (1,589) 8 82 (12) – 6,488 (79) 20,455 US$m Share capital Employee share-based trusts Other reserves Retained earnings Amounts reflected in other comprehensive income Total equity Balance at 1 December 2016 13,998 (351) 185 Net profit Cash flow hedges Fair value losses on available for sale financial assets Fair value losses on available for sale financial assets transferred to income on disposal Dividends Shares issued under share option scheme and agency share purchase plan Share-based compensation Purchase of shares held by employee share-based trusts Transfer of vested shares from employee share-based trusts – – – – – 67 – – – Balance at 30 November 2017 14,065 – – – – – – – (10) 64 (297) – – – – – – 79 – (64) 200 2,620 2,071 – – – (1,376) – – – – (59) 16,393 – (11) (4) 8 – – – – – 2,071 (11) (4) 8 (1,376) 67 79 (10) – 3,315 (66) 17,217 248 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS In February 2018, the Board resolved to change the Company’s financial year-end date from 30 November to 31 December. Accordingly, the current financial period-end date of the Company is 31 December 2018 and the consolidated financial statements of the Group cover the 13-month period from 1 December 2017 to 31 December 2018. In conjunction with this change, the following financial information is voluntarily disclosed by the Company for comparison purpose. The accounting policies adopted to prepare the following supplementary financial information are consistent with those shown in note 2 of this 2018 consolidated financial statements. (a) Consolidated Income Statement US$m Revenue Premiums and fee income Premiums ceded to reinsurers Net premiums and fee income Investment return Other operating revenue Total revenue Expenses Insurance and investment contract benefits Insurance and investment contract benefits ceded Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs Other expenses Total expenses Profit before share of profit from associates and joint ventures Share of profit from associates and joint ventures Profit before tax Income tax credit/(expense) attributable to policyholders’ returns Profit before tax attributable to shareholders’ profits Tax expense Tax attributable to policyholders’ returns Tax expense attributable to shareholders’ profits Net profit Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests Earnings per share (US$) Basic Diluted Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 31,271 (1,842) 29,429 2,655 285 32,369 23,633 (1,675) 21,958 3,781 2,171 212 739 28,861 3,508 – 3,508 65 3,573 (849) (65) (914) 2,659 2,597 62 0.22 0.22 27,241 (1,524) 25,717 13,907 224 39,848 27,112 (1,282) 25,830 3,486 2,019 185 607 32,127 7,721 – 7,721 (135) 7,586 (1,159) 135 (1,024) 6,562 6,496 66 0.54 0.54 249 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (b) Consolidated Statement of Financial Position As at 31 December 2018 As at 31 December 2017 1,970 610 1,233 4,794 2,887 1,870 643 1,225 4,363 2,549 24,626 21,950 7,392 8,210 112,485 106,788 27,736 38,099 430 26,081 38,079 345 186,142 179,503 26 164 4,903 2,451 13 117 4,491 1,922 229,806 218,646 164,764 151,475 7,885 4,954 1,683 243 168 4,187 532 5,984 8,210 3,958 1,557 271 223 3,611 497 5,288 190,400 175,090 US$m Assets Intangible assets Investments in associates and joint ventures Property, plant and equipment(1) Investment property(1) Reinsurance assets Deferred acquisition and origination costs Financial investments: Loans and deposits Available for sale Debt securities At fair value through profit or loss Debt securities Equity securities Derivative financial instruments Deferred tax assets Current tax recoverable Other assets Cash and cash equivalents Total assets Liabilities Insurance contract liabilities Investment contract liabilities Borrowings Obligations under repurchase and securities lending agreements Derivative financial instruments Provisions Deferred tax liabilities Current tax liabilities Other liabilities Total liabilities 250 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (b) Consolidated Statement of Financial Position (continued) US$m Equity Share capital Employee share-based trusts Other reserves Retained earnings Fair value reserve Foreign currency translation reserve Property revaluation 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 31 December 2018 As at 31 December 2017 14,073 (258) 14,065 (298) (11,910) (11,943) 35,661 2,211 (1,301) 538 (8) 1,440 39,006 400 39,406 229,806 34,653 6,763 (569) 530 (25) 6,699 43,176 380 43,556 218,646 Note: (1) The appraisal values for the real estate of the Group as at 31 December 2017 remain unchanged from those reported in the consolidated financial statements of the Group as at 30 November 2017. 251 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (c) 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 Assets and liabilities have been translated at the following period-end rates: Hong Kong Thailand Singapore Malaysia China Exchange rates are expressed in units of local currency per US$1. US dollar exchange rates Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 7.84 32.33 1.35 4.03 6.61 7.79 33.90 1.38 4.30 6.75 US dollar exchange rates As at 31 December 2018 As at 31 December 2017 7.83 32.47 1.36 4.14 6.88 7.82 32.61 1.34 4.05 6.51 252 | AIA GROUP LIMITEDFINANCIAL STATEMENTS47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (d) Operating profit after tax Operating profit after tax may be reconciled to net profit as follows: US$m Operating profit after tax Non-operating items, net of related changes in insurance and investment contract liabilities: Short-term fluctuations in investment return related to equities and real estate (net of tax of: twelve months ended 31 December 2018: US$187m; twelve months ended 31 December 2017: US$(143)m) Reclassification of revaluation gain for property held for own use (net of tax of: twelve months ended 31 December 2018: US$11m; twelve months ended 31 December 2017: US$4m)(1)(2) Corporate transaction related costs (net of tax of: twelve months ended 31 December 2018: US$(35)m; twelve months ended 31 December 2017: US$6m)(2) Implementation costs for new accounting standards (net of tax of: twelve months ended 31 December 2018: US$5m; twelve months ended 31 December 2017: nil)(2) Other non-operating investment return and other items (net of tax of: twelve months ended 31 December 2018: US$12m; twelve months ended 31 December 2017: US$26m)(2) Net profit Operating profit after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Net profit attributable to: Shareholders of AIA Group Limited Non-controlling interests Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 5,343 4,670 (2,036) 2,063 (212) (84) (148) (25) (42) (7) (246) 2,659 (55) 6,562 5,298 45 2,597 62 4,635 35 6,496 66 Operating profit is determined using, among others, expected long-term investment return for equities and real estate. Short-term fluctuations between expected long-term investment return and actual investment return for these asset classes are excluded from operating profit. The investment return assumptions used to determine expected long-term investment return are based on the same assumptions used by the Group in determining its embedded value and are disclosed in the Supplementary Embedded Value Information. Notes: (1) Short-term fluctuations in investment return include the revaluation gain for property held for own use. This amount is then reclassified out of net profit to conform to IFRS measurement and presentation. (2) The comparative information has been adjusted to conform to current period presentation. 253 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (e) Total weighted premium income and annualised new premiums Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 11,444 3,895 2,738 2,083 4,006 6,377 9,535 3,559 2,435 1,848 3,118 5,898 30,543 26,393 2,386 2,231 554 337 307 1,050 1,067 5,701 2,556 269 1,747 195 142 687 477 272 285 838 925 5,028 2,405 194 1,422 182 136 620 5,596 4,959 8,802 3,314 2,226 1,757 2,942 5,241 7,063 3,063 2,021 1,545 2,266 4,911 24,282 20,869 TWPI US$m TWPI by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total First year premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Single premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Renewal premiums by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total 254 | AIA GROUP LIMITEDFINANCIAL STATEMENTS47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (e) Total weighted premium income and annualised new premiums (continued) ANP US$m ANP by geography Hong Kong Thailand Singapore Malaysia China Other Markets Total Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 2,697 2,493 611 547 382 1,067 1,206 6,510 519 426 340 873 973 5,624 255 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (f) Segment information US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total Twelve months ended 31 December 2018 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment return Total revenue Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs and other expenses 2,697 611 547 382 11,444 3,895 2,738 2,083 1,067 4,006 1,206 6,377 – – 6,510 30,543 12,858 2,647 15,505 3,832 1,322 5,154 3,114 1,175 4,289 1,831 3,878 592 860 2,423 4,738 4,177 1,112 5,289 26 368 394 29,716 8,076 37,792 11,572 2,895 3,103 1,577 2,968 2,791 25 24,931 1,414 401 137 757 218 51 353 209 29 254 180 12 266 323 35 721 640 52 13 200 159 397 3,778 2,171 475 31,355 Total expenses 13,524 3,921 3,694 2,023 3,592 4,204 Share of profit from associates and joint ventures – – Operating profit/(losses) before tax 1,981 1,233 Tax on operating profit/(losses) before tax (152) Operating profit/(losses) after tax 1,829 (238) 995 – 595 (37) 558 – 400 (75) 325 – – 1,146 1,085 – (3) – 6,437 (276) 870 (234) 851 (82) (85) (1,094) 5,343 Operating profit/(losses) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on shareholders’ allocated equity Operating profit/(losses) before tax includes: Finance costs Depreciation and amortisation 1,814 15 995 – 558 – 320 5 870 – 826 25 3.5% 5.6% 7.6% 8.6% 8.1% 16.0% 25.5% 20.4% 15.6% 21.7% 10.0% 13.3% 23.2% 16.8% 18.2% 20.2% 24.6% 12.3% (85) 5,298 – – – – 45 7.1% 17.5% 14.5% 31 33 1 11 – 19 – 16 21 25 3 49 139 11 195 164 256 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (f) Segment information (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total 31 December 2018 Total assets Total liabilities Total equity Shareholders’ allocated equity 71,898 31,632 36,064 14,526 24,228 39,095 12,363 229,806 64,299 24,627 32,865 12,885 20,068 30,889 4,767 190,400 7,599 7,508 7,005 6,181 3,199 3,115 1,641 1,601 4,160 3,565 8,206 6,901 7,596 7,924 1,245 39,406 36,795 (1,508) Net capital (out)/in flows (1,054) (149) (267) (185) (542) (556) Total assets includes: Investments in associates and joint ventures – – – 6 – 604 – 610 Segment information may be reconciled to the consolidated income statement as shown below: US$m Twelve months ended 31 December 2018 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Short-term fluctuations in investment return related to equities and real estate Segment information Other non-operating items(1) Consolidated income statement (2) 29,714 Net premiums, fee income and other operating revenue (2,281) (2,283) 2,655 Investment return 32,369 Total revenue – (3,140) (3,140) Net insurance and investment (917) (2,056) 21,958 contract benefits – 479 6,903 Other expenses (917) (1,577) 28,861 Total expenses 29,716 8,076 37,792 24,931 6,424 31,355 Share of profit from associates and joint ventures – – Operating profit before tax 6,437 (2,223) – (706) Share of profit from associates – and joint ventures 3,508 Profit before tax Note: (1) Include unit-linked contracts. 257 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (f) Segment information (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total Twelve months ended 31 December 2017 ANP TWPI Net premiums, fee income and other operating revenue (net of reinsurance ceded) Investment return Total revenue Net insurance and investment contract benefits Commission and other acquisition expenses Operating expenses Finance costs and other expenses 2,493 9,535 519 3,559 426 2,435 340 1,848 873 3,118 973 5,898 – – 5,624 26,393 10,972 2,187 13,159 3,567 1,208 4,775 2,840 1,094 3,934 1,622 554 2,176 3,011 747 3,758 3,921 1,058 4,979 8 25,941 341 349 7,189 33,130 9,615 2,697 2,821 1,457 2,410 2,642 1,232 416 119 747 202 49 352 183 28 209 167 11 183 286 30 748 569 43 Total expenses 11,382 3,695 3,384 1,844 2,909 4,002 Share of profit from associates and joint ventures Operating profit before tax Tax on operating profit before tax Operating profit/(losses) after tax Operating profit/(losses) after tax attributable to: Shareholders of AIA Group Limited Non-controlling interests Key operating ratios: Expense ratio Operating margin Operating return on – – 1,777 1,080 (138) 1,639 (212) 868 – 550 (37) 513 – 332 (56) 276 – 849 (206) 643 – 977 (214) 763 1,627 12 868 – 513 – 274 2 643 – 742 21 4.4% 5.7% 7.5% 9.0% 9.2% 9.6% 17.2% 24.4% 21.1% 14.9% 20.6% 12.9% shareholders’ allocated equity 23.1% 17.2% 18.6% 18.8% 20.3% 12.5% 4 1 196 126 327 – 22 (54) (32) 21,646 3,472 2,019 406 27,543 – 5,587 (917) 4,670 (32) 4,635 – – – – 35 7.6% 17.7% 14.0% Operating profit before tax includes: Finance costs Depreciation and amortisation 29 37 7 10 – 16 – 17 18 18 2 41 106 11 162 150 258 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (f) Segment information (continued) US$m Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total 31 December 2017 Total assets Total liabilities Total equity Shareholders’ allocated equity 66,710 31,299 36,175 14,546 20,470 37,913 11,533 218,646 54,658 24,111 32,665 12,957 17,263 29,852 3,584 175,090 12,052 8,122 7,188 5,656 3,510 3,019 1,589 1,566 3,207 3,511 8,061 6,539 17 7,949 8,000 43,556 36,413 799 (1,240) Net capital (out)/in flows (952) (467) (238) (192) (207) Total assets includes: Investments in associates and joint ventures – – 1 7 – 635 – 643 Segment information may be reconciled to the consolidated income statement as shown below: Short-term fluctuations in investment return related to equities and real estate Segment information Other non-operating items(1) Consolidated income statement 25,941 7,189 33,130 21,646 5,897 27,543 – 5,587 – 2,713 2,713 507 – 507 – 2,206 – 25,941 Net premiums, fee income and other operating revenue 4,005 4,005 3,677 400 4,077 – (72) 13,907 Investment return 39,848 Total revenue Net insurance and investment 25,830 contract benefits 6,297 Other expenses 32,127 Total expenses Share of profit from associates – and joint ventures 7,721 Profit before tax US$m Twelve months ended 31 December 2017 Net premiums, fee income and other operating revenue Investment return Total revenue Net insurance and investment contract benefits Other expenses Total expenses Share of profit from associates and joint ventures Operating profit before tax Note: (1) Include unit-linked contracts. 259 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (g) Investment return US$m Interest income Dividend income Rental income Investment income Available for sale Net realised (losses)/gains from debt securities Impairment of debt securities Net (losses)/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 of debt securities Net (losses)/gains of equity securities Net fair value movement on derivatives Net (losses)/gains in respect of financial instruments at fair value through profit or loss Net fair value movement of investment property and property held for own use Net foreign exchange gains/(losses) Other net realised losses Investment experience Investment return Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 6,235 795 171 7,201 (13) (81) (94) 53 (4,814) (206) (4,967) 469 54 (8) (4,546) 2,655 5,652 693 152 6,497 202 – 202 53 6,781 743 7,577 367 (709) (27) 7,410 13,907 Foreign currency movements resulted in the following gains/(losses) recognised in the consolidated income statement (other than gains and losses arising on items measured at fair value through profit or loss): US$m Foreign exchange gains/(losses) Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 69 (279) 260 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (h) Expenses US$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 Depreciation on property held for own use Restructuring and other non-operating costs(1) Change in third-party interests in consolidated investment funds Other expenses Finance costs Total Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 12,471 11,758 (596) 23,633 (1,675) 21,958 6,271 (2,490) 3,781 1,370 74 53 174 500 11,735 13,982 1,395 27,112 (1,282) 25,830 5,505 (2,019) 3,486 1,265 65 53 148 488 2,171 2,019 479 35 204 21 739 212 408 22 153 24 607 185 28,861 32,127 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 corporate transaction related costs and implementation costs for new accounting standards. Finance costs may be analysed as: US$m Repurchase agreements Medium-term notes Other loans Total Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 39 164 9 212 47 134 4 185 261 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (i) Earnings per share Basic Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Basic earnings per share (US cents per share) Diluted Net profit attributable to shareholders of AIA Group Limited (US$m) Weighted average number of ordinary shares in issue (million) Adjustment for share options, restricted share units, restricted stock purchase units and restricted stock subscription units awarded under share-based compensation plans (million) Weighted average number of ordinary shares for diluted earnings per share (million) Diluted earnings per share (US cents per share) Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 2,597 12,021 21.60 6,496 12,002 54.12 Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 2,597 12,021 35 12,056 21.54 6,496 12,002 37 12,039 53.96 At 31 December 2018, share options of 5,752,143 (31 December 2017: 5,835,750) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. Operating profit after tax per share Basic (US cents per share) Diluted (US cents per share) Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 44.07 43.94 38.62 38.50 262 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (j) Financial investments Debt securities Debt securities by type comprise the following: Policyholder and shareholder(5) Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Consolidated investment Unit-linked funds(4) US$m FVTPL AFS FVTPL AFS Subtotal FVTPL FVTPL Total 31 December 2017 Government bonds Government agency bonds(1) 6,097 3,942 896 535 Corporate bonds 10,854 17,033 Structured securities(2) 199 317 Total(3) 21,092 18,781 60 36,927 43,980 1,131 – 45,111 13 174 22 269 8,693 42,083 304 13,183 70,144 842 212 1,365 – 344 1,668 – 13,739 73,177 842 88,007 128,149 2,708 2,012 132,869 Notes: (1) 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. (2) Structured securities include collateralised debt obligations, mortgage-backed securities and other asset-backed securities. (3) Debt securities of US$4,692m are restricted due to local regulatory requirements. (4) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (5) The information has been adjusted to conform to the current period presentation. Equity securities Equity securities by type comprise the following: Policyholder and shareholder(2) Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder Unit-linked Consolidated investment funds(1) US$m FVTPL FVTPL Subtotal FVTPL FVTPL Total 31 December 2017 Equity shares Interests in investment funds Total 9,173 3,325 12,498 5,340 719 6,059 14,513 4,044 18,557 4,832 14,690 19,522 – – – 19,345 18,734 38,079 Notes: (1) Consolidated investment funds reflect 100 per cent of assets and liabilities held by such funds. (2) The information has been adjusted to conform to the current period presentation. 263 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (j) Financial investments (continued) Debt and equity securities US$m Debt securities Listed Unlisted Total Equity securities Listed Unlisted(1) Total Note: (1) Including US$15,804m of investment funds which can be redeemed daily. Loans and deposits US$m Policy loans Mortgage loans on residential real estate Mortgage loans on commercial real estate Other loans Allowance for loan losses Loans Term deposits Promissory notes(1) Total Note: (1) The promissory notes are issued by a government. As at 31 December 2017 102,106 30,763 132,869 21,118 16,961 38,079 As at 31 December 2017 2,765 607 44 1,114 (12) 4,518 2,113 1,579 8,210 264 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (k) Insurance and investment contract liabilities Insurance contract liabilities The movement of insurance contract liabilities (including liabilities in respect of investment contracts with DPF) is shown as follows: US$m At beginning of financial period Valuation premiums and deposits Liabilities released for policy termination or other policy benefits paid and related expenses Fees from account balances Accretion of interest Change in net asset values attributable to policyholders Acquisition of subsidiaries Foreign exchange movements Other movements At end of financial period Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 151,475 29,220 128,588 26,424 (16,155) (1,742) 5,208 (1,162) 91 (2,865) 694 (15,994) (1,834) 4,483 3,363 – 7,041 (596) 164,764 151,475 Insurance contract liabilities (including liabilities in respect of investment contracts with DPF) can also be analysed as follows: US$m Deferred profit Unearned revenue Policyholders’ share of participating surplus Liabilities for future policyholder benefits Total Investment contract liabilities US$m At beginning of financial period Investment contract benefits Fees charged Acquisition of subsidiaries Net withdrawals and other movements Foreign exchange movements At end of financial period Note: (1) Of investment contract liabilities, US$475m represents deferred fee income. As at 31 December 2017 7,213 2,605 8,117 133,540 151,475 Twelve months ended 31 December 2018 Twelve months ended 31 December 2017 8,210 (594) (122) 480 17 (106) 7,885 6,926 1,395 (144) – (145) 178 8,210(1) 265 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES 47. SUPPLEMENTARY FINANCIAL INFORMATION ON A CALENDAR YEAR BASIS (continued) (l) Group capital structure Regulatory Solvency The capital positions of the Group’s two principal operating companies as of 31 December 2017 are as follows: US$m AIA Co. AIA International 31 December 2017 (unaudited) Total available capital Regulatory minimum capital Solvency ratio 8,395 7,883 1,882 2,511 446% 314% 266 | AIA GROUP LIMITEDFINANCIAL STATEMENTSINDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATION AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 TO THE BOARD OF DIRECTORS OF AIA GROUP LIMITED (incorporated in Hong Kong with limited liability) Opinion What we have audited We have audited the Supplementary Embedded Value Information (the “EV Information”) of AIA Group Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages 271 to 293, which comprises: (cid:127) (cid:127) the consolidated EV results as at and for the year ended 31 December 2018; the sensitivity analysis as at and for the year then ended; and (cid:127) a summary of significant methodology and assumptions and other explanatory notes. Our opinion In our opinion, the EV Information of the Group as at and for the year ended 31 December 2018 is prepared, in all material respects, in accordance with the EV basis of preparation set out in Sections 4 and 5 of the EV Information. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the EV Information section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code. Emphasis of Matter – Basis of Preparation We draw attention to Sections 4 and 5 of the EV Information, which describe the EV basis of preparation. As a result, the EV Information may not be suitable for another purpose. Our opinion is not modified in respect of this matter. 267 INDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATIONANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL STATEMENTSOther Matter The Group has prepared a separate set of consolidated financial statements for the thirteen months period ended 31 December 2018 in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the HKICPA and with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board (“IASB”), on which we issued a separate auditor’s report to the shareholders of the Company dated 15 March 2019. Other Information The Directors of the Company are responsible for the other information. The other information comprises the Group Chief Executive and President’s Report, Financial Review, Business Review, Regulatory and International Developments, Consolidated Financial Statements and our auditor’s report thereon, Condensed Business and Financial Review for the Thirteen Months ended 31 December 2018 and Glossary (but does not include the EV Information of AIA Group Limited and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, and the Financial Highlights, Chairman’s Statement, Risk Management, Valuing Our People, Corporate Social Responsibility, Statement of Directors’ Responsibilities, Board of Directors, Executive Committee, Report of the Directors, Corporate Governance Report, Remuneration Report, Information for Shareholders and Corporate Information, which are expected to be made available to us after that date. Our opinion on the EV Information does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the EV Information, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the EV Information or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the Financial Highlights, Chairman’s Statement, Risk Management, Valuing Our People, Corporate Social Responsibility, Statement of Directors’ Responsibilities, Board of Directors, Executive Committee, Report of the Directors, Corporate Governance Report, Remuneration Report, Information for Shareholders and Corporate Information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance and take appropriate action considering our legal rights and obligations. 268 | AIA GROUP LIMITEDFINANCIAL STATEMENTSResponsibilities of Directors and Those Charged with Governance for the EV Information The Directors of the Company are responsible for the preparation of the EV Information in accordance with the EV basis of preparation set out in Sections 4 and 5 of the EV Information and for such internal control as the Directors determine is necessary to enable the preparation of the EV Information that is free from material misstatement, whether due to fraud or error. In preparing the EV Information, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s EV Information reporting process. Auditor’s Responsibilities for the Audit of the EV Information Our objectives are to obtain reasonable assurance about whether the EV Information as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this EV Information. As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: (cid:127) Identify and assess the risks of material misstatement of the EV Information, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:127) Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. 269 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATIONAuditor’s Responsibilities for the Audit of the EV Information (continued) (cid:127) Evaluate the appropriateness of the EV basis of preparation used and the reasonableness of accounting estimates and related disclosures made by the Directors. (cid:127) Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the EV Information or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. (cid:127) Obtain sufficient appropriate audit evidence regarding the EV Information of the entities or business activities within the Group to express an opinion on the EV Information. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Lars Christian Jordy Nielsen. PricewaterhouseCoopers Certified Public Accountants Hong Kong 15 March 2019 270 | AIA GROUP LIMITEDFINANCIAL STATEMENTSINDEPENDENT AUDITOR’S REPORT ON THE SUPPLEMENTARY EMBEDDED VALUE INFORMATIONCAUTIONARY 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. 271 SUPPLEMENTARY EMBEDDED VALUE INFORMATIONANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL STATEMENTS1. 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 an implicit overall level of allowance for 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 the economic cost of capital, through the use of a risk 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 on the EV results, methodology and assumptions are covered in later sections of this report. As set out in our 2017 annual results preliminary announcement published on 27 February 2018, the Board resolved to change the Company’s financial year-end date from 30 November to 31 December in February 2018. Accordingly, the current financial year-end date of the Company is 31 December 2018. In conjunction with this change, the financial information as at 31 December 2017 is provided for comparative purposes. The Group completed the acquisition of Sovereign Assurance Company Limited, included as part of the acquisition of ASB Group (Life) Limited and its subsidiaries (Sovereign) on 2 July 2018. The financial results of this newly-acquired business are reported in the Group’s results for the year ended 31 December 2018 from the date of completion. See Sections 2 and 4 of this report and note 5 to the IFRS consolidated financial statements for more details. Summary of key metrics(1) (US$ millions) As at 31 December 2018 As at 31 December 2017 Change CER Change AER Equity attributable to shareholders of the Company on 56,203 52,429 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 premiums (ANP) VONB margin EV operating profit Operating return on EV (Operating ROEV) 54,517 24,637 29,880 50,779 20,974 29,805 Year ended 31 December 2018 Year ended 31 December 2017 3,955 6,510 60.0% 8,278 16.3% 3,206 5,624 56.0% 6,654 15.5% 9% 10% 19% 3% YoY CER 22% 15% 7% 7% 17% – YoY AER 23% 16% 3.7 pps 23% 1.1 pps 4.0 pps 24% 0.8 pps Note: (1) The results are after adjustment to reflect the consolidated reserving and capital requirements and the present value of future after-tax unallocated Group Office expenses. 272 | AIA GROUP LIMITEDFINANCIAL STATEMENTS 2. EMBEDDED VALUE RESULTS 2.1 Embedded Value by Business Unit The EV as at 31 December 2018 is presented consistently with the segment information in the IFRS consolidated financial statements. Summary of EV by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China Other Markets Group Corporate Centre Subtotal Adjustment to reflect consolidated reserving and capital requirements(2) After-tax value of unallocated Group Office expenses Total Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China Other Markets Group Corporate Centre Subtotal Adjustment to reflect consolidated As at 31 December 2018 ANW(1) VIF before CoC 6,608 4,787 2,376 1,206 2,938 4,873 7,870 30,658 12,617 4,861 3,968 1,630 5,248 3,833 (131) 32,026 CoC 867 808 665 206 – 985 – 3,531 VIF after CoC EV 11,750 18,358 4,053 3,303 1,424 5,248 2,848 (131) 28,495 8,840 5,679 2,630 8,186 7,721 7,739 59,153 (6,021) 3,284 936 2,348 (3,673) – 24,637 (963) 34,347 – 4,467 (963) 29,880 (963) 54,517 As at 31 December 2017 ANW(1) VIF before CoC 6,701 4,566 2,516 1,200 2,143 4,823 8,381 30,330 11,158 4,719 3,643 1,508 4,863 3,258 (121) 29,028 CoC 935 784 721 218 – 978 VIF after CoC EV 10,223 16,924 3,935 2,922 1,290 4,863 2,280 8,501 5,438 2,490 7,006 7,103 8,261 55,723 (1) 3,635 (120) 25,393 reserving and capital requirements(2) (9,356) 5,597 118 5,479 (3,877) After-tax value of unallocated Group Office expenses Total – 20,974 (1,067) 33,558 – 3,753 (1,067) 29,805 (1,067) 50,779 Notes: (1) ANW by Business Unit is after net capital flows between Business Units and Group Corporate Centre as reported in the IFRS consolidated financial statements. (2) Adjustment to reflect consolidated reserving and capital requirements as described in Section 4.4 of this report. 273 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION 2. EMBEDDED VALUE RESULTS (continued) 2.2 Reconciliation of ANW from IFRS Equity Derivation of the consolidated 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 Difference between net IFRS policy liabilities and local statutory policy liabilities 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 ANW (Business Unit) Adjustment to reflect consolidated reserving requirements, net of tax ANW (Consolidated) As at 31 December 2018 As at 31 December 2017 39,006 (24,626) 15,587 (9,039) 523 (1,970) 2,075 63 30,658 (6,021) 24,637 43,176 (21,950) 8,588 (13,362) 348 (1,870) 1,979 59 30,330 (9,356) 20,974 2.3 Breakdown of ANW 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, is set out below: Free surplus and required capital for the Group (US$ millions) Free surplus Required capital ANW As at 31 December 2018 As at 31 December 2017 Business Unit Consolidated Business Unit Consolidated 22,093 8,565 30,658 14,751 9,886 24,637 21,831 8,499 30,330 12,586 8,388 20,974 The Company’s subsidiaries, AIA Company Limited (AIA Co.) and AIA International Limited (AIA International), are both subject to the Hong Kong reserving and capital requirements. In addition, AIA International, which is incorporated in Bermuda, is subject to the Bermuda Monetary Authority (BMA) reserving and capital requirements. These regulatory reserving and capital requirements, and other consolidated reserving and capital requirements, as determined by the Group, apply in addition to the relevant local requirements applicable to our Business Units. 274 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.4 Earnings Profile The tables below show 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 consolidated reserving and capital requirements. Profile of projected after-tax distributable earnings for the Group’s in-force business (US$ millions) Expected period of emergence 1 – 5 years 6 – 10 years 11 – 15 years 16 – 20 years 21 years and thereafter Total Expected period of emergence 1 – 5 years 6 – 10 years 11 – 15 years 16 – 20 years 21 years and thereafter Total As at 31 December 2018 Undiscounted Discounted 18,922 15,095 14,753 14,312 151,000 214,082 15,668 8,280 5,440 3,588 6,790 39,766 As at 31 December 2017 Undiscounted Discounted 18,434 14,491 14,499 13,425 126,545 187,394 15,175 7,952 5,386 3,434 6,246 38,193 The profile of distributable earnings is shown on an undiscounted and discounted basis. The discounted value of after-tax distributable earnings of US$39,766 million (2017: US$38,193 million) plus the free surplus of US$14,751 million (2017: US$12,586 million) shown in Section 2.3 of this report is equal to the EV of US$54,517 million (2017: US$50,779 million) shown in Section 2.1 of this report. 275 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION2. EMBEDDED VALUE RESULTS (continued) 2.5 Value of New Business The VONB for the Group for the year ended 31 December 2018 is summarised in the table 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 consistently with the segment information in the IFRS consolidated financial statements. Section 4.1 of this report contains a 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 year ended 31 December 2018 was US$3,955 million, an increase of US$749 million, or 23 per cent on actual exchange rates (AER), from US$3,206 million for the year ended 31 December 2017. Summary of VONB by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China Other Markets Total before unallocated Group Office expenses (Business Unit) Adjustment to reflect consolidated reserving and capital requirements Total before unallocated Group Office expenses (Consolidated) After-tax value of unallocated Group Office expenses Total Year ended 31 December 2018 Year ended 31 December 2017 VONB before CoC CoC VONB after CoC(1) VONB before CoC CoC VONB after CoC(1) 1,837 125 1,712 1,520 136 1,384 503 410 264 1,051 522 56 53 17 86 87 447 357 247 965 435 434 344 233 791 479 53 47 18 66 84 381 297 215 725 395 4,587 424 4,163 3,801 404 3,397 (76) (20) (56) (86) (25) (61) 4,511 404 4,107 3,715 379 3,336 (152) 4,359 – 404 (152) 3,955 (130) 3,585 – 379 (130) 3,206 Note: (1) 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 year ended 31 December 2018 and 31 December 2017 were US$27 million and US$22 million respectively. 276 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.5 Value of New Business (continued) The table below shows the breakdown of the VONB, ANP, VONB margin, and present value of new business premium (PVNBP) margin for the Group, by quarter, for business written in the year ended 31 December 2018. The VONB margin and PVNBP margin are defined as VONB, excluding pension business, expressed as a percentage of ANP and PVNBP, respectively. The VONB for pension business is excluded from the margin calculation to be consistent with the definition of ANP and PVNBP. The Group VONB margin for the year ended 31 December 2018 was 60.0 per cent compared with 56.0 per cent for the year ended 31 December 2017. The Group PVNBP margin for the year ended 31 December 2018 was 10 per cent compared with 9 per cent for the year ended 31 December 2017. Breakdown of VONB, ANP, VONB margin and PVNBP margin (US$ millions) VONB after CoC ANP VONB Margin PVNBP Margin Year Values for 2018 12 months ended 31 December 2018 3,955 6,510 60.0% Values for 2017 12 months ended 31 December 2017 3,206 5,624 56.0% Quarter Values for 2018 3 months ended 31 March 2018 3 months ended 30 June 2018 3 months ended 30 September 2018 3 months ended 31 December 2018 Values for 2017 3 months ended 31 March 2017 3 months ended 30 June 2017 3 months ended 30 September 2017 3 months ended 31 December 2017 1,021 933 979 1,022 811 794 846 755 1,696 1,556 1,582 1,676 1,630 1,276 1,422 1,296 59.7% 59.3% 61.1% 60.1% 49.2% 61.3% 58.4% 56.9% 10% 9% 10% 10% 10% 10% 9% 10% 10% 9% 277 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION2. EMBEDDED VALUE RESULTS (continued) 2.5 Value of New Business (continued) The table below shows the VONB (excluding pension business), ANP, and VONB margin by Business Unit. Summary of VONB excluding pension, ANP and VONB margin by Business Unit (US$ millions) Business Unit AIA Hong Kong AIA Thailand AIA Singapore AIA Malaysia AIA China Other Markets Total before unallocated Group Office expenses (Business Unit) Adjustment to reflect consolidated reserving and capital requirements Total before unallocated Group Office expenses (Consolidated) After-tax value of unallocated Group Office expenses Total Year ended 31 December 2018 Year ended 31 December 2017 VONB Excluding Pension ANP VONB Margin VONB Excluding Pension ANP VONB Margin 1,671 2,697 447 357 244 965 431 611 547 382 1,067 1,206 62.0% 73.1% 65.4% 63.8% 90.5% 35.8% 1,338 2,493 381 297 213 725 388 519 426 340 873 973 53.7% 73.4% 69.7% 62.5% 83.1% 39.9% 4,115 6,510 63.2% 3,342 5,624 59.4% (56) – (61) – 4,059 6,510 62.4% 3,281 5,624 58.4% (152) 3,907 – 6,510 60.0% (130) 3,151 – 5,624 56.0% 278 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement Analysis of movement in EV (US$ millions) Opening EV Purchase price Acquired EV(2) Effect of acquisition 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 Year ended 31 December 2018 Year ended 31 December 2017 ANW VIF EV ANW VIF EV 20,974 29,805 50,779 16,862 25,986 42,848 (918) 487 (431) (660) 4,550 355 29 (173) 4,101 (1,428) (3) 3,452 6,122 (1,589) 98 – 320 320 4,615 (657) 257 (38) – 4,177 (918) 807 (111) 3,955 3,893 612 (9) (173) 8,278 (790) (2,218) 50 (3,182) 47 270 255 6,377 – – – (591) 4,154 297 (229) (138) 3,493 1,272 (7) 387 5,145 – – (1,589) (1,376) 98 134 209 (537) (500) (1,037) 24,637 29,880 54,517 20,974 – – – 3,797 (846) 64 146 – 3,161 61 (185) (741) 2,296 – – – – – 3,206 3,308 361 (83) (138) 6,654 1,333 (192) (354) 7,441 (1,376) 134 1,523 29,805 1,732 50,779 YoY AER EV 19% n/m(1) n/m n/m 23% 18% 70% (89)% 25% 24% n/m n/m n/m (14)% 15% (27)% n/m 7% Notes: (1) Not meaningful (n/m). (2) The acquired EV for Sovereign is calculated as at 2 July 2018 net of the related reinsurance agreement. See note 5 to the IFRS consolidated financial statements for more details. 279 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement (continued) EV grew to US$54,517 million at 31 December 2018, an increase of 7 per cent over the year from US$50,779 million at 31 December 2017. The growth in EV of US$3,738 million was shown after a deduction of US$111 million as of 2 July 2018 relating to the acquisition of Sovereign. The purchase price of US$918 million for the acquisition as at 2 July 2018 was as per note 5 to the IFRS consolidated financial statements. The acquired EV of US$807 million is calculated as at 2 July 2018 net of the related reinsurance agreement. EV operating profit grew by 24 per cent on AER to US$8,278 million (2017: US$6,654 million) compared with 2017. The growth reflected a combination of a higher VONB of US$3,955 million (2017: US$3,206 million) and a higher expected return on EV of US$3,893 million (2017: US$3,308 million). Overall operating experience variances and operating assumption changes were again positive at US$603 million (2017:US$278 million). Finance costs were US$173 million (2017: US$138 million). The VONB is calculated at the point of sale for business written during the year before deducting the amount attributable to non-controlling interests. The expected return on EV is the expected change in the EV over the year plus the expected return on the VONB from the point of sale to 31 December 2018 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 year and that expected based on the operating assumptions. The main operating experience variances, net of tax, of US$612 million (2017: US$361 million), comprised of: (cid:127) Expense variances of US$53 million (2017: US$9 million); (cid:127) Mortality and morbidity claims variances of US$233 million (2017: US$193 million); and (cid:127) Persistency and other variances of US$326 million (2017: US$159 million) which included persistency variances of US$94 million (2017: US$27 million) and other variances arising from management actions of US$232 million (2017: US$132 million). The effect of changes in operating assumptions during the year was US$(9) million (2017: US$(83) million). The EV profit of US$6,377 million (2017: US$7,441 million) is the total of EV operating profit, investment return variances, the effect of changes in economic assumptions and other non-operating variances. The investment return variances arise from the impact of differences between the actual investment returns in the year and the expected investment returns reflecting short-term fluctuations in investment returns. This amounted to US$(2,218) million (2017: US$1,333 million) from the effect of short-term equity market and other capital market movements on the Group’s investment portfolio and statutory reserves compared with the expected returns. The effect of changes in economic assumptions amounted to US$47 million (2017: US$(192) million). Other non-operating variances amounted to US$270 million (2017: US$(354) million) which comprised of the effects of subsidiarising AIA Korea, the transitional arrangement for equivalence and other adjustments as described in Section 4.6 partly offset by other items including modelling-related enhancements. The Group paid total shareholder dividends of US$1,589 million (2017: US$1,376 million). Other capital movements increased EV by US$98 million (2017: US$134 million). Foreign exchange movements were US$(1,037) million (2017: US$1,732 million). 280 | AIA GROUP LIMITEDFINANCIAL STATEMENTS2. EMBEDDED VALUE RESULTS (continued) 2.6 Analysis of EV Movement (continued) Operating ROEV (US$ millions) Operating return on EV (operating ROEV) is calculated as EV operating profit expressed as a percentage of the opening EV and was 16.3 per cent (2017: 15.5 per cent) for the year ended 31 December 2018. EV operating profit Opening EV Operating ROEV Year ended 31 December 2018 Year ended 31 December 2017 8,278 50,779 16.3% 6,654 42,848 15.5% YoY CER 23% 14% YoY AER 24% 19% 1.1pps 0.8pps 2.7 EV Equity The EV Equity grew to US$56,203 million at 31 December 2018, an increase of 7 per cent on AER from US$52,429 million as at 31 December 2017. Derivation of EV Equity from EV (US$ millions) EV Goodwill and other intangible assets(1) EV Equity As at 31 December 2018 As at 31 December 2017 54,517 1,686 56,203 50,779 1,650 52,429 Change CER 10% 5% 9% Change AER 7% 2% 7% Note: (1) Consistent with the IFRS consolidated financial statements, net of tax, amounts attributable to participating funds and non-controlling interests. 281 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION3. SENSITIVITY ANALYSIS The EV as at 31 December 2018 and the VONB for the year ended 31 December 2018 have been recalculated to illustrate the sensitivity of the results to changes in certain central assumptions discussed in Section 5 of this report. The sensitivities analysed were: (cid:127) Risk discount rates 200 basis points per annum higher than the central assumptions; (cid:127) Risk discount rates 200 basis points per annum lower than the central assumptions; (cid:127) (cid:127) Interest rates 50 basis points per annum higher than the central assumptions; Interest rates 50 basis points per annum lower than the central assumptions; (cid:127) The presentation currency (as explained below) appreciated by 5 per cent; (cid:127) The presentation currency depreciated by 5 per cent; (cid:127) Lapse and premium discontinuance rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); (cid:127) Lapse and premium discontinuance rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); (cid:127) Mortality/morbidity rates increased proportionally by 10 per cent (i.e. 110 per cent of the central assumptions); (cid:127) Mortality/morbidity rates decreased proportionally by 10 per cent (i.e. 90 per cent of the central assumptions); (cid:127) Maintenance expenses 10 per cent lower (i.e. 90 per cent of the central assumptions); and (cid:127) Expense inflation set to 0 per cent. The EV as at 31 December 2018 has been further analysed for the following sensitivities: (cid:127) Equity prices increased proportionally by 10 per cent (i.e. 110 per cent of the prices at 31 December 2018); and (cid:127) Equity prices decreased proportionally by 10 per cent (i.e. 90 per cent of the prices at 31 December 2018). 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 31 December 2018 and the values of debt instruments held at 31 December 2018 were changed to be consistent with the interest rate assumptions in the sensitivity analysis, while all the other assumptions were unchanged. As the Group operates in multiple geographical markets in the Asia-Pacific region, the EV results for the Group are translated from multiple currencies to US dollar which is the Group’s presentation currency. In order to provide sensitivity results for EV and VONB of the impact of foreign currency movements, a change of 5 per cent to the US dollar is included. 282 | AIA GROUP LIMITEDFINANCIAL STATEMENTS3. SENSITIVITY ANALYSIS (continued) For the equity price sensitivities, the projected bonus rates on participating business and the values of equity securities and equity funds held at 31 December 2018 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 as at 31 December 2018 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 sensitivities chosen do not represent the boundaries of possible outcomes, but instead illustrate how certain alternative assumptions would affect the results. Sensitivity of EV (US$ millions) Scenario Central value Impact of: 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% Sensitivity of VONB (US$ millions) Scenario Central value Impact of: 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/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% As at 31 December 2018 As at 31 December 2017 EV Ratio EV Ratio 54,517 (6,607) 10,604 736 (731) 158 (249) (1,711) 1,711 (885) 984 (3,796) 3,779 625 672 (12.1)% 19.5% 1.4% (1.3)% 0.3% (0.5)% (3.1)% 3.1% (1.6)% 1.8% (7.0)% 6.9% 1.1% 1.2% 50,779 (6,227) 10,052 750 (743) 49 (456) (1,589) 1,589 (763) 886 (3,730) 3,665 574 605 (12.3)% 19.8% 1.5% (1.5)% 0.1% (0.9)% (3.1)% 3.1% (1.5)% 1.7% (7.3)% 7.2% 1.1% 1.2% Year ended 31 December 2018 Year ended 31 December 2017 VONB Ratio VONB Ratio 3,955 (952) 1,599 142 (184) (120) 120 (195) 215 (359) 351 96 60 (24.1)% 40.4% 3.6% (4.7)% (3.0)% 3.0% (4.9)% 5.4% (9.1)% 8.9% 2.4% 1.5% 3,206 (906) 1,689 162 (225) (100) 100 (178) 185 (335) 320 79 52 (28.3)% 52.7% 5.1% (7.0)% (3.1)% 3.1% (5.6)% 5.8% (10.4)% 10.0% 2.5% 1.6% 283 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION4. 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 Co., a company incorporated in Hong Kong and a subsidiary of the Company, and AIA International, a company incorporated in Bermuda and an indirect subsidiary of the Company. Furthermore, AIA Co. has branches located in Brunei, China and Thailand and AIA International has branches located in Hong Kong, Macau, New Zealand and Taiwan. The following is a list of the entities and their mapping to Business Units included in this report. (cid:127) AIA Australia refers to AIA Australia Limited, a subsidiary of AIA Co., Sovereign Assurance Company Limited, a subsidiary of AIA International, and the New Zealand branch of AIA International; (cid:127) AIA Cambodia refers to AIA (Cambodia) Life Insurance Plc., a subsidiary of AIA International; (cid:127) AIA China refers to the China branches of AIA Co.; (cid:127) 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. (cid:127) AIA Indonesia refers to PT. AIA Financial, a subsidiary of AIA International; (cid:127) AIA Korea refers to AIA Life Insurance Co. Ltd., a subsidiary of AIA International; (cid:127) AIA Malaysia refers to AIA Bhd., a subsidiary of AIA Co. and AIA PUBLIC Takaful Bhd., a 70 per cent owned subsidiary of AIA Co.; (cid:127) AIA Philippines refers to The Philippine American Life and General Insurance (PHILAM LIFE) Company, a subsidiary of AIA Co. and its 51 per cent owned subsidiary BPI-Philam Life Assurance Corporation; (cid:127) AIA Singapore refers to AIA Singapore Private Limited, a subsidiary of AIA Co., and the Brunei branch of AIA Co.; (cid:127) AIA Sri Lanka refers to AIA Insurance Lanka PLC, a 97.16 per cent owned subsidiary of AIA Co.; (cid:127) AIA Taiwan refers to the Taiwan branch of AIA International; (cid:127) AIA Thailand refers to the Thailand branches of AIA Co.; and (cid:127) AIA Vietnam refers to AIA (Vietnam) Life Insurance Company Limited, a subsidiary of AIA International. In addition, the financial results from the entity Tata AIA Life Insurance Company Limited (Tata AIA), which is 49 per cent owned by AIA International, are accounted for using the equity method and have been included in the Group ANW presented in this report. For clarity, the Group’s ANP and VONB exclude any contribution from Tata AIA. Results are presented consistently with the segment information in the IFRS consolidated financial statements. The summary of the EV of the Group by Business Unit in this report also includes the results for the “Group Corporate Centre” segment. 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. The ANW has been derived from the IFRS equity for this segment plus mark-to-market adjustments less the value of excluded intangible assets. For the VONB, “Other Markets” includes the present value of allowance for remittance taxes payable on distributable profits. 284 | AIA GROUP LIMITEDFINANCIAL STATEMENTS4. 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 an implicit overall level of allowance for 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 the economic cost of capital, through the use of a risk 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 of other activities, such as general insurance business, less the value of intangible assets. 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 consolidated 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 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 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$27 million for the year ended 31 December 2018 (2017: US$22 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. 285 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION4. 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 premiums. For individually significant group cases, the VONB is calculated over each premium rate guarantee period entered upon contract inception or renewal. 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 premiums (ANP), which is an internal measure of new business sales. 4.4 Consolidation of Branches and Subsidiaries of AIA Co. and AIA International The Group’s subsidiaries, AIA Co. and AIA International, are both Hong Kong-regulated entities. AIA operates in a number of territories as branches and subsidiaries of these entities. In addition, AIA International, which is incorporated in Bermuda, is subject to the BMA reserving and capital requirements. These regulatory and other consolidated reserving and capital requirements apply in addition to the relevant local requirements applicable to our Business Units. The EV and VONB results for the Group shown in Section 2 of this report have been adjusted to reflect the consolidated reserving and capital requirements. This approach was taken to reflect the distribution of profits from AIA Co. and AIA International after allowing for the Hong Kong, BMA, local regulatory and other reserving and capital requirements as applied by the Group. The EV and VONB for each Business Unit reflect the local reserving and capital requirements, as discussed in Section 4.6 of this report, before a Group-level adjustment to reflect the consolidated reserving and capital requirements. 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, with any negative VIF eliminated for each reported segment by reducing the ANW and EV. 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 consolidated reserving and capital requirements have the effect of reducing the level of any future projected statutory losses. Based on the assumptions described in Section 5 of this report, and allowing for the consolidated statutory reserving and capital requirements, 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. 286 | AIA GROUP LIMITEDFINANCIAL STATEMENTS4. 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 local required capital for each Business Unit are set out in the table below: Business Unit Required Capital AIA Australia Australia New Zealand AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam 100% of regulatory capital adequacy requirement 100% of regulatory capital adequacy requirement 100% of required capital as specified under the CAA EV assessment guidance 150% of required minimum solvency margin 120% of regulatory Risk-Based Capital requirement 150% of regulatory Risk-Based Capital requirement 170% of regulatory Risk-Based Capital requirement 100% of regulatory Risk-Based Capital requirement 180% of regulatory Risk-Based Capital requirement 120% of regulatory Risk-Based Capital requirement 250% of regulatory Risk-Based Capital requirement 140% of regulatory Risk-Based Capital requirement 100% of required minimum solvency margin Capital Requirements on Consolidation The Group has an undertaking to the Hong Kong Insurance Authority (HKIA) to maintain required capital not less than the aggregate of 150% of the Hong Kong statutory minimum solvency margin requirement in respect of AIA Hong Kong and no less than 100% of the Hong Kong statutory minimum solvency margin requirement for branches other than Hong Kong. AIA International and its subsidiaries hold required capital of no less than 120% of the BMA regulatory capital requirements. On 16 May 2017, the HKIA and the China Banking and Insurance Regulatory Commission (formerly the China Insurance Regulatory Commission) signed the Equivalence Assessment Framework Agreement on the Solvency Regulatory Regime. As a transitional arrangement, AIA reports under the Hong Kong Insurance Ordinance the capital position of its China branches based on the China local regulatory solvency basis progressively over a 4-year phase-in period to full implementation on 31 March 2022. In addition to the above, the reserving and capital requirements for the purpose of consolidation allow for the local regulatory requirements outlined above and other reserving and capital requirements as determined by the Group. 4.7 Foreign Exchange The EV as at 31 December 2018 and 31 December 2017 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. Change on AER is calculated based on the translated figures as described above. Change on constant exchange rates (CER) is calculated for all figures for the current year and for the prior year, using constant average exchange rates, other than for EV as at the end of the current year and as at the end of the prior year, which is translated using the CER. 287 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. ASSUMPTIONS 5.1 Introduction This section summarises the assumptions used by the Group to determine the EV as at 31 December 2018 and the VONB for the year ended 31 December 2018 and highlights certain differences in assumptions between the EV as at 31 December 2017 and the EV as at 31 December 2018. 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 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 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 allowance for the current market yields. In these cases, in calculating the VIF, adjustments have been 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 remaining term, to be consistent with the valuation of the assets backing the policy liabilities. The Group has set the equity return and property return assumptions by reference to the return on 10-year government bonds, allowing for an internal assessment of risk premia that vary by asset class and 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 asset classes. For unit-linked business, fund growth assumptions have been determined based on actual asset mix within the funds at the valuation date and expected long-term returns for major asset classes. Risk discount rates The risk discount rates 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 an implicit overall level of allowance for risk. The table below summarises the current market 10-year government bond yields referenced in EV calculations. Business Unit AIA Australia Australia New Zealand AIA China AIA Hong Kong(1) AIA Indonesia AIA Korea AIA Malaysia AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Current market 10-year government bond yields referenced in EV calculations (%) As at 31 December 2018 As at 31 December 2017 2.32 2.37 3.31 2.68 8.03 1.96 4.08 7.07 2.04 11.87 0.86 2.51 5.10 2.63 2.72 3.88 2.42 6.32 2.47 3.91 5.70 2.00 11.17 0.95 2.54 5.15 Note: (1) The majority of AIA Hong Kong’s assets and liabilities are denominated in US dollars. The 10-year government bond yields shown above are those of US dollar-denominated bonds. 288 | AIA GROUP LIMITEDFINANCIAL STATEMENTS5. ASSUMPTIONS (continued) 5.2 Economic Assumptions (continued) Risk discount rates (continued) The table below summarises the risk discount rates and long-term investment returns assumed in EV calculations. The same risk discount rates were used for all the EV results shown in Section 1 and Section 2 of this report. The present value of unallocated Group Office expenses was calculated using the AIA Hong Kong risk discount rate. The investment returns on existing fixed income assets were set consistently with the market yields on these assets. Note that the VONB results were calculated based on start-of-quarter economic assumptions consistent with the measurement at the point of sale. The investment returns shown are gross of tax and investment expenses. Business Unit AIA Australia Australia New Zealand AIA China AIA Hong Kong(1) AIA Indonesia AIA Korea AIA Malaysia AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam Risk discount rates assumed in EV calculations (%) As at 31 Dec 2018 As at 31 Dec 2017 Long-term investment returns assumed in EV calculations (%) 10-year government bonds Local equities As at 31 Dec 2018 As at 31 Dec 2017 As at 31 Dec 2018 As at 31 Dec 2017 7.35 7.75 9.75 7.50 13.00 8.60 8.75 11.80 7.10 15.70 7.85 8.60 11.80 7.35 7.75 9.75 7.30 13.00 8.60 8.75 11.30 6.90 15.70 7.85 8.60 12.30 3.00 3.50 3.70 3.00 7.50 2.70 4.20 5.30 2.70 3.00 3.50 3.70 2.80 7.50 2.70 4.20 4.80 2.50 10.00 10.00 1.60 3.20 6.00 1.60 3.20 6.50 7.50 8.00 9.30 7.80 12.00 7.20 8.80 10.50 7.20 12.00 6.60 9.00 11.30 7.50 n/a(2) 9.30 7.60 12.00 7.20 8.80 10.00 7.00 12.00 6.60 9.00 11.80 Notes: (1) The majority of AIA Hong Kong’s assets and liabilities are denominated in US dollars. The 10-year government bond assumptions shown above are those of US dollar-denominated bonds. (2) The assumed asset allocations did not include equities. 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. 289 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. ASSUMPTIONS (continued) 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 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 premiums, 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-operating expenses, based on actual acquisition and maintenance expenses in the year ended 31 December 2018. 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. 5.5 Expense Inflation The expected long-term expense inflation rates used by Business Unit are set out below: Expense inflation assumptions by Business Unit (%) Business Unit AIA Australia Australia New Zealand AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam As at 31 December 2018 As at 31 December 2017 2.75 2.00 2.00 2.00 6.00 3.50 3.00 3.50 2.00 6.50 1.20 2.00 5.00 3.00 2.50 2.00 2.00 6.00 3.50 3.00 3.50 2.00 6.50 1.20 2.00 5.00 Unallocated Group Office expenses are assumed to inflate by the weighted average of the Business Unit expense inflation rates. 290 | AIA GROUP LIMITEDFINANCIAL STATEMENTS5. ASSUMPTIONS (continued) 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. 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. 291 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATION5. ASSUMPTIONS (continued) 5.10 Taxation The projections of distributable earnings underlying the values presented in this report are net of corporate income tax, based on current taxation legislation and corporate income 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 income tax rates used by each Business Unit are set out below: Local corporate income tax rates by Business Unit (%) Business Unit AIA Australia Australia New Zealand AIA China AIA Hong Kong AIA Indonesia AIA Korea AIA Malaysia AIA Philippines AIA Singapore AIA Sri Lanka AIA Taiwan AIA Thailand AIA Vietnam As at 31 December 2018 As at 31 December 2017 30.0 28.0 25.0 16.5 25.0 27.5(1) 24.0 30.0 17.0 28.0 20.0 20.0 20.0 30.0 28.0 25.0 16.5 25.0 24.2 24.0 30.0 17.0 28.0 17.0 20.0 20.0 Note: (1) From fiscal years 2018 to 2020, AIA Korea is subject to an assumed corporate income tax of 27.5%, which includes an Accumulated Earnings Tax following the subsidiarisation of the branch in AIA Korea. Based on current regulations, the corporate income tax rate will revert to 24.2% from fiscal year 2021. The tax assumptions used in the valuation reflect the local corporate income 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 31 December 2018 is calculated after deducting any remittance taxes payable on the anticipated distribution of both the ANW and VIF. 292 | AIA GROUP LIMITEDFINANCIAL STATEMENTS5. ASSUMPTIONS (continued) 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. 6. EVENTS AFTER THE REPORTING PERIOD In September 2017, the Group reached an agreement to acquire Commonwealth Bank of Australia’s (CBA) life insurance business in Australia, including a 20-year strategic bancassurance partnership with CBA in Australia. The acquisition remains in progress, subject to securing all necessary regulatory and governmental approvals. The transaction aims to expand the Group’s distribution capabilities and customer reach in Australia. The total gross consideration to be paid with respect to the proposed transaction is expected to be approximately US$2.0 billion payable in cash on completion of the proposed transaction and subject to certain adjustments at completion. After taking into account the expected proceeds from reinsurance agreement and the expected free surplus of the acquired business, the final net cash outlay by AIA is expected to be approximately US$1.0 billion. On 16 January 2019, the Group issued Hong Kong dollar-denominated fixed rate medium-term notes that are unlisted. The offering comprised of HK$1,300 million of 3.5-year notes at an annual rate of 2.95 per cent and HK$1,100 million of 12- year notes at an annual rate of 3.68 per cent. In aggregate the US dollar-equivalent is approximately US$307 million. On 15 March 2019, a Committee appointed by the Board of Directors proposed a final dividend of 84.80 Hong Kong cents per share (twelve months ended 30 November 2017: 74.38 Hong Kong cents per share), and a special dividend of 9.50 Hong Kong cents per share (twelve months ended 30 November 2017: nil) for the additional month in the accounting period due to the change of the Group’s financial year-end date from 30 November 2018 to 31 December 2018. 293 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONSUPPLEMENTARY EMBEDDED VALUE INFORMATIONThe Company has changed its financial year-end to 31 December with the first set of consolidated financial statements adopting the new year-end date for the thirteen months ended 31 December 2018. To facilitate a meaningful comparison of our performance in 2018 and 2017, we are also reporting supplementary financial information on a calendar year basis covering the twelve months ended 31 December 2018 for the current period and the twelve months ended 31 December 2017 for the prior period, and these are set out in note 47 to the financial statements. The financial information in the Financial and Operating Review as set out on page 18 to page 35 has been prepared on a like-for-like basis, that also covers the twelve months period from 1 January 2018 to 31 December 2018 for the current period and the twelve months period from 1 January 2017 to 31 December 2017 for the prior period. This set of management discussion and analysis covers the financial results for the thirteen months period from 1 December 2017 to 31 December 2018 for the current period and for the twelve months period from 1 December 2016 to 30 November 2017 for the prior period. When reporting the Group’s consolidated figures, there is currency translation effect as we report in US dollars. We have provided growth rates and commentaries on our key operating performance on a CER basis unless otherwise stated, as this provides a clearer picture of the performance of the underlying businesses. BUSINESS REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018 US$ millions, unless otherwise stated VONB VONB margin ANP Operating profit after tax Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 4,067 59.3% 6,770 5,684 3,512 56.8% 6,092 4,647 YoY CER 14% 2.2pps 10% 20% YoY AER 16% 2.5pps 11% 22% VONB increased by 14 per cent to US$4,067 million with all our reportable market segments delivering positive VONB growth. Agency distribution remains our main source of new business and accounted for 71 per cent of the Group’s total VONB for the thirteen months ended 31 December 2018. The focused execution of our Premier Agency strategy has continued to drive VONB growth of 16 per cent from the agency channel. VONB from partnership distribution delivered solid growth of 8 per cent, building on the exceptionally strong performance from Hong Kong’s retail IFA channel for the six months ended 31 May 2017 as previously highlighted. ANP grew by 10 per cent to US$6,770 million and VONB margin was up by 2.2 pps to 59.3 per cent. OPAT grew by 20 per cent for the thirteen months ended 31 December 2018, primarily due to the additional one-month of profit relative to the result for the twelve months ended 30 November 2017, the new business growth over time and the proactive management of our in-force portfolio. 294 CONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018| AIA GROUP LIMITEDADDITIONAL INFORMATIONNEW BUSINESS PERFORMANCE VONB, ANP and Margin by Segment US$ millions, unless otherwise stated VONB VONB Margin ANP VONB VONB Margin ANP YoY CER YoY AER Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 VONB Change Hong Kong Thailand Singapore Malaysia China Other Markets Subtotal Adjustment to reflect consolidated reserving and capital requirements After-tax value of unallocated Group Office expenses 1,763 61.5% 2,793 1,559 53.2% 2,849 472 360 256 988 450 72.8% 64.1% 63.6% 90.0% 35.1% 4,289 62.6% 648 562 396 1,098 1,273 6,770 381 311 220 828 408 73.6% 71.8% 62.5% 85.5% 41.2% 518 433 348 968 976 3,707 60.0% 6,092 13% 18% 13% 8% 16% 13% 14% 13% 24% 16% 16% 19% 10% 16% (59) n/m n/m (65) n/m n/m n/m n/m Total 4,067 59.3% 6,770 3,512 56.8% 6,092 (163) n/m n/m (130) n/m n/m n/m 14% n/m 16% VONB grew by 14 per cent to US$4,067 million for the thirteen months ended 31 December 2018, building on a strong performance of 28 per cent growth in VONB for the twelve months ended 30 November 2017. ANP was higher by 10 per cent to US$6,770 million. VONB margin increased by 2.2 pps to 59.3 per cent and PVNBP margin remained stable at 10 per cent compared with the twelve months ended 30 November 2017. Agency distribution remains our main source of new business and accounted for 71 per cent of the Group’s total VONB for the thirteen months ended 31 December 2018. The focused execution of our Premier Agency strategy has continued to drive strong VONB growth of 16 per cent from the agency channel. This was delivered through strong ANP growth of 10 per cent to US$4,341 million and a higher VONB margin of 69.7 per cent. VONB from partnership distribution delivered solid growth of 8 per cent, building on the exceptionally strong performance from Hong Kong’s retail IFA channel for the six months ended 31 May 2017. Hong Kong delivered VONB growth of 13 per cent to US$1,763 million for the thirteen months ended 31 December 2018 with strong performance across both domestic and Mainland Chinese visitor customer segments. VONB margin increased by 8.3 pps to 61.5 per cent as our product mix continued to shift towards higher-margin long-term savings and protection products. AIA’s wholly-owned operation in China delivered VONB growth of 16 per cent to US$988 million for the thirteen months ended 31 December 2018. This strong performance reflects the disciplined execution of our Premier Agency strategy, focusing on quality recruitment together with continuing productivity enhancements. Thailand reported VONB growth of 18 per cent to US$472 million for the thirteen months ended 31 December 2018. Sales momentum continued as we continued to transform the agency through our Financial Adviser programme. 295 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018Singapore delivered VONB growth of 13 per cent for the thirteen months ended 31 December 2018, mainly driven by our core agency channel and strategic partnership with Citibank. VONB margin was lower at 64.1 per cent as a result of lower profitability from our HealthShield business as previously highlighted and higher volumes of single premium unit-linked business ahead of a regulatory change in October 2018. Despite reduced consumer activity and changes to tax regulations during the period, Malaysia reported VONB growth of 8 per cent to US$256 million for the thirteen months ended 31 December 2018. Other Markets reported VONB growth of 13 per cent to US$450 million for the thirteen months ended 31 December 2018. Highlights included strong growth from Australia (including New Zealand), Korea, the Philippines and Taiwan. The VONB results for the Group are reported after a deduction of US$222 million for the consolidated reserving and capital requirements over and above local statutory requirements and for the present value of unallocated Group Office expenses. IFRS FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018 OPAT(1) by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Other Markets Group Corporate Centre Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 1,958 1,061 599 345 939 871 (89) 5,684 1,636 865 504 272 639 758 (27) 4,647 YoY CER 20% 16% 16% 18% 42% 17% n/m 20% YoY AER 20% 23% 19% 27% 47% 15% n/m 22% Note: (1) Attributable to shareholders of the Company only excluding non-controlling interests. OPAT for the thirteen months ended 31 December 2018 was US$5,684 million, up by 20 per cent as compared with the twelve months ended 30 November 2017, primarily due to the additional one-month of profit for December 2018, new business growth over time and the proactive management of our in-force portfolio. Hong Kong delivered strong result reflecting growth in our business and improved claims experience, partly offset by a shift in product mix towards participating business, as previously highlighted in our Interim Report 2018. China achieved excellent OPAT growth, primarily driven by the growing scale of our business and positive claims experience. OPAT in Thailand increased as a result of our business growth and improved persistency. Singapore reported an increase in OPAT despite pressure on profitability from double-digit medical inflation in the market. Malaysia also had strong OPAT in line with business growth. 296 | AIA GROUP LIMITEDADDITIONAL INFORMATIONOther Markets delivered strong OPAT growth. Highlights included strong performances from Australia (including New Zealand), the Philippines, Taiwan and Vietnam. Operating ROE for the thirteen months ended 31 December 2018 was 15.7 per cent compared with 14.2 per cent for the twelve months ended 30 November 2017, driven by OPAT growth partly offset by higher average shareholders’ allocated equity for the thirteen months ended 31 December 2018. TWPI by Segment US$ millions, unless otherwise stated Hong Kong Thailand Singapore Malaysia China Other Markets Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 12,501 4,232 2,906 2,245 4,366 6,859 9,434 3,517 2,421 1,823 3,092 5,860 33,109 26,147 YoY CER 33% 14% 17% 15% 37% 18% 25% YoY AER 33% 20% 20% 23% 41% 17% 27% TWPI increased to US$33,109 million for the thirteen months ended 31 December 2018 compared with the twelve month period ended 30 November 2017 due to business growth. IFRS Operating Profit Investment Return US$ millions, unless otherwise stated Interest income Expected long-term investment return for equities and real estate Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 6,623 2,105 8,728 5,440 1,656 7,096 YoY CER 19% 25% 20% YoY AER 22% 27% 23% IFRS operating profit investment return increased to US$8,728 million for the thirteen months ended 31 December 2018 compared with US$7,096 million for the twelve months ended 30 November 2017. The growth was primarily driven by the increased size of our investments portfolio. Operating Expenses US$ millions, unless otherwise stated Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Operating expenses 2,366 1,969 YoY CER 19% YoY AER 20% Operating expenses grew to US$2,366 million for the thirteen months ended 31 December 2018 mainly due to the additional month compared to the twelve months ended 30 November 2017. The expense ratio for the thirteen months ended 31 December 2018 was 7.1 per cent compared with 7.5 per cent for the twelve months ended 30 November 2017 as we continued to benefit from increasing scale. 297 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018 Net Profit(1) US$ millions, unless otherwise stated OPAT Short-term fluctuations in investment return related to equities and real estate, net of tax(2) Reclassification of revaluation gain for property held for own use, net of tax(2)(3) Corporate transaction related costs, net of tax(3) Implementation costs of new accounting standards, net of tax(3) Other non-operating investment return and other items, net of tax(3) Total Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 5,684 (1,908) (212) (148) (43) (210) 3,163 4,647 1,741 (84) (25) (6) (153) 6,120 YoY CER 20% n/m n/m n/m n/m YoY AER 22% n/m n/m n/m n/m n/m (49)% n/m (48)% Notes: (1) Attributable to shareholders of the Company only excluding non-controlling interests. (2) Short-term fluctuations in investment return include the revaluation gain for property held for own use. This amount is then reclassified out of net profit to conform to IFRS measurement and presentation. (3) The comparative information has been adjusted to conform to current period presentation. IFRS NON-OPERATING MOVEMENT AIA’s IFRS net profit definition includes mark-to-market movements from our equity portfolio. IFRS net profit for the thirteen months ended 31 December 2018 decreased by 49 per cent to US$3,163 million. The decrease was due to negative short-term fluctuations from equities and real estate of US$1,908 million for the thirteen months ended 31 December 2018, particularly in respect of our other participating business with distinct portfolios compared with positive movements of US$1,741 million for the twelve months ended 30 November 2017. Other non-operating items for the thirteen months ended 31 December 2018 included corporate transaction related costs of US$148 million, representing tax expenses in relation to the subsidiarisation of AIA Korea and costs associated with the acquisition of Sovereign, and implementation costs of new accounting standards of US$43 million. Movement in Shareholders’ Allocated Equity US$ millions, unless otherwise stated Opening shareholders’ allocated equity Net profit Purchase of shares held by employee share-based trusts Dividends Revaluation gains on property held for own use Foreign currency translation adjustments Other capital movements Total movement in shareholders’ allocated equity Closing shareholders’ allocated equity Average shareholders’ allocated equity 298 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 35,658 3,163 (12) (1,589) 11 (550) 114 1,137 36,795 36,227 29,632 6,120 (10) (1,376) 78 1,061 153 6,026 35,658 32,645 | AIA GROUP LIMITEDADDITIONAL INFORMATION The movement in shareholders’ allocated equity is shown before fair value reserve movements. AIA believes this provides a clearer reflection of the underlying movement in shareholders’ equity over the period, before the IFRS accounting treatment of market value movements in available for sale bonds. Average shareholders’ allocated equity increased by US$3,582 million to US$36,227 million for the thirteen months ended 31 December 2018 compared with US$32,645 million for the twelve months ended 30 November 2017 as a result of a higher opening position for 2018 arising from significant mark-to-market gains in our equity portfolio during 2017. At 31 December 2018, shareholders’ allocated equity grew to US$36,795 million compared to US$35,658 million at 30 November 2017, after the payment of shareholder dividends of US$1,589 million, reflecting the depreciation of local currencies against our US dollar reporting currency of US$550 million and net profit of US$3,163 million which included negative mark-to-market movement from our equity portfolio. IFRS EARNINGS PER SHARE (EPS) Basic EPS based on IFRS OPAT attributable to shareholders was 47.29 US cents for the thirteen months ended 31 December 2018. Basic EPS based on IFRS net profit attributable to shareholders, including mark-to-market movements from our equity and investment property portfolios, was 26.31 US cents for the thirteen months ended 31 December 2018. IFRS EPS – Basic Profit (US$ millions) Weighted average number of ordinary shares (millions) Basic earnings per share (US cents) IFRS EPS – Diluted Net Profit(1) OPAT(1) Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 3,163 6,120 5,684 4,647 12,020 26.31 12,000 51.00 12,020 47.29 12,000 38.73 Net Profit(1) OPAT(1) Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 Profit (US$ millions) Weighted average number of ordinary shares(2) (millions) Diluted earnings per share(2) (US cents) 3,163 6,120 5,684 4,647 12,055 26.24 12,037 50.84 12,055 47.15 12,037 38.61 Notes: (1) Attributable to shareholders of the Company only excluding non-controlling interests. (2) Diluted earnings per share including the dilutive effects, if any, of the awards of share options, restricted share units, RSPUs and RSSUs granted to eligible directors, officers, employees and agents under the share-based compensation plans as described in note 39 to the financial statements. 299 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018IFRS BALANCE SHEET Consolidated Statement of Financial Position US$ millions, unless otherwise stated Assets Financial investments Investment property Cash and cash equivalents 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 Shareholders’ allocated equity Movement in Shareholders’ Equity US$ millions, unless otherwise stated Opening shareholders’ equity Net profit Fair value (losses)/gains on assets Purchase of shares held by employee share-based trusts Dividends Revaluation gains on property held for own use Foreign currency translation adjustments Other capital movements Total movement in shareholders’ equity Closing shareholders’ equity 300 As at 31 December 2018 As at 30 November 2017 Change AER 186,142 176,220 4,794 2,451 24,626 11,793 4,365 2,289 21,847 10,970 229,806 215,691 172,649 156,979 4,954 12,797 3,958 12,382 190,400 173,319 39,406 400 39,006 36,795 42,372 378 41,994 35,658 6% 10% 7% 13% 8% 7% 10% 25% 3% 10% (7)% 6% (7)% 3% Thirteen months ended 31 December 2018 Twelve months ended 30 November 2017 41,994 3,163 (4,125) (12) (1,589) 11 (550) 114 (2,988) 39,006 34,984 6,120 984 (10) (1,376) 78 1,061 153 7,010 41,994 | AIA GROUP LIMITEDADDITIONAL INFORMATION Total Investments US$ millions, unless otherwise stated As at 31 December 2018 Percentage of total As at 30 November 2017 Percentage of total Total policyholder and shareholder 171,337 88% 160,327 87% Total unit-linked contracts and consolidated investment funds Total investments 23,938 195,275 12% 100% 24,231 184,558 13% 100% The investment mix remained stable for the thirteen months ended 31 December 2018 as set out below: 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 Total unit-linked contracts and consolidated investment funds As at 31 December 2018 Percentage of total As at 30 November 2017 Percentage of total 4,765 81 18,418 672 2 20% – 77% 3% – 4,704 107 18,953 456 11 19% 1% 78% 2% – 23,938 100% 24,231 100% 301 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018 Policyholder and Shareholder Investments US$ millions, unless otherwise stated Participating funds and Other participating business with distinct portfolios(1) Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Investment property and property held for own use Cash and cash equivalents Derivatives Subtotal Participating funds and Other participating business with distinct portfolios Other policyholder and shareholder(1) Government and government agency bonds Corporate bonds and structured securities Loans and deposits Subtotal – Fixed income investments Equities Investment property and property held for own use Cash and cash equivalents Derivatives Subtotal other policyholder and shareholder Total policyholder and shareholder As at 31 December 2018 Percentage of total As at 30 November 2017 Percentage of total 14,121 30,183 2,179 46,483 13,892 888 395 148 8% 18% 1% 27% 8% 1% – – 11,054 28,188 2,282 41,524 11,884 757 272 73 61,806 36% 54,510 49,317 41,835 5,132 96,284 5,789 5,794 1,384 280 109,531 171,337 29% 24% 3% 56% 3% 4% 1% – 64% 100% 44,978 42,244 5,584 92,806 5,879 5,292 1,561 279 105,817 160,327 7% 18% 1% 26% 7% 1% – – 34% 28% 26% 4% 58% 4% 3% 1% – 66% 100% Note: (1) Presentation of Participating funds and Other participating business with distinct portfolios and Other policyholder and shareholder is consistent with note 20 to the financial statements. The comparative information has been adjusted to conform to current period presentation. Please refer to note 20 to the financial statements for additional information. ASSETS Participating business is written in a segregated statutory fund, with regulations governing the division of surplus between policyholders and shareholders. “Other participating business with distinct portfolios” is supported by segregated investment assets and explicit provisions for future surplus distribution though the division of surplus between policyholders and shareholders is not defined in regulations. We have enhanced our investment disclosures to reflect the nature and greater size of this business by grouping its assets together with participating business. Comparative information is also shown for 30 November 2017. Total assets increased by US$14,115 million to US$229,806 million at 31 December 2018, compared with US$215,691 million at 30 November 2017. Total investments including financial investments, investment property, property held for own use, and cash and cash equivalents increased by US$10,717 million to US$195,275 million at 31 December 2018, compared with US$184,558 million at 30 November 2017. 302 | AIA GROUP LIMITEDADDITIONAL INFORMATION Of the total US$195,275 million investments at 31 December 2018, US$171,337 million were held in respect of policyholders and shareholders and the remaining US$23,938 million were backing unit-linked contracts and consolidated investment funds. Fixed income investments, including debt securities, loans and term deposits held in respect of policyholders and shareholders, totalled US$142,767 million at 31 December 2018 compared with US$134,330 million at 30 November 2017. The average credit rating of the fixed income portfolio of A remained consistent with the position at 30 November 2017. Government and government agency bonds represented 44 per cent of fixed income investments at 31 December 2018, compared with 42 per cent at 30 November 2017. Corporate bonds and structured securities accounted for 50 per cent of fixed income investments at 31 December 2018, compared with 52 per cent at 30 November 2017. Equity securities held in respect of policyholders and shareholders totalled US$19,681 million at 31 December 2018, compared with US$17,763 million at 30 November 2017. The US$1,918 million increase in carrying value was mainly attributable to new purchases offset by negative mark-to-market movements. Within this figure, equity securities of US$13,892 million were held in participating funds and other participating business with distinct portfolios. Cash and cash equivalents increased by US$162 million to US$2,451 million at 31 December 2018 compared with US$2,289 million at 30 November 2017. The increase largely reflected positive net cash inflows from our operating business, net proceeds of the issuances of medium-term notes totalling US$1,490 million during the period, partly offset by the redemption of medium-term notes of US$500 million upon maturity and the payment of shareholder dividends of US$1,589 million. Investment property and property held for own use in respect of policyholders and shareholders totalled US$6,682 million at 31 December 2018 compared with US$6,049 million at 30 November 2017. Deferred acquisition and origination costs increased to US$24,626 million at 31 December 2018 compared with US$21,847 million at 30 November 2017, largely reflecting new business growth. Other assets increased to US$11,793 million at 31 December 2018 compared with US$10,970 million at 30 November 2017, reflecting an increase in reinsurance recoveries, accrued interest and prepayments. LIABILITIES Total liabilities increased to US$190,400 million at 31 December 2018 from US$173,319 million at 30 November 2017. Insurance and investment contract liabilities grew to US$172,649 million at 31 December 2018 compared with US$156,979 million at 30 November 2017, reflecting the underlying growth of the in-force portfolio offset by negative mark-to-market movements on equities backing unit-linked and participating policies and negative foreign exchange translation. Borrowings increased to US$4,954 million at 31 December 2018, due to the net proceeds of the issuances of medium- term notes totalling US$1,490 million during the period, partly offset by the redemption of medium-term notes of US$500 million upon maturity. Medium-term notes with a notional amount of US$500 million issued in 2014 will mature in March 2019 as disclosed in note 29 to the financial statements. Leverage ratio, which is defined as borrowings expressed as a percentage of total borrowings and equity, was 11.2 per cent, compared with 8.5 per cent at 30 November 2017. Other liabilities were US$12,797 million at 31 December 2018, compared with US$12,382 million at 30 November 2017, reflecting an increase in deferred tax liabilities and investment-related payables. 303 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONCONDENSED BUSINESS AND FINANCIAL REVIEW FOR THE THIRTEEN MONTHS ENDED 31 DECEMBER 2018ANALYSIS 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 31 December 2018 Number of shareholder accounts % of total number of shareholder accounts Number of shares % of total number of shares 15,959 3,485 396 228 8 20,076 79.49 17.36 1.97 1.14 0.04 100.00 6,083,233 7,949,364 3,045,370 5,312,881 12,054,672,933 12,077,063,781 0.05 0.07 0.03 0.04 99.81 100.00 FINANCIAL CALENDAR Announcement of 2018 Annual Results for the thirteen-month period ended 31 December 2018 15 March 2019 Book Close Period for the AGM Date of the AGM Announcement of 2019 Interim Results 14 May 2019 to 17 May 2019 (both days inclusive) 17 May 2019 23 August 2019 ANNUAL GENERAL MEETING The AGM will be held at 11:00 a.m. (Hong Kong time) on Friday, 17 May 2019 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 websites of both the Hong Kong Stock Exchange at www.hkex.com.hk and the Company at www.aia.com on Friday, 17 May 2019 after the AGM. DIVIDENDS The Board has recommended an increase in the payment of a final dividend of 14 per cent to 84.80 Hong Kong cents per share for the thirteen-month period ended 31 December 2018 (for the twelve-month period ended 30 November 2017: 74.38 Hong Kong cents per share), consistent with AIA’s established prudent, sustainable and progressive dividend policy. The Board has also recommended the payment of a special dividend of 9.50 Hong Kong cents per share for the additional month in the accounting period due to the change of the Company’s financial year-end date from 30 November 2018 to 31 December 2018. The dividends reflect the strength of our financial results and the Board’s continued confidence in the future prospects of the Group. Subject to shareholders’ approval at the AGM, the final dividend and the special dividend will be payable on Thursday, 6 June 2019 to shareholders whose names appear on the register of members of the Company at the close of business on Wednesday, 22 May 2019, being the record date for determining the entitlements to the final dividend and the special dividend. Relevant Dates for the Final Dividend and the Special Dividend 21 May 2019 Ex-dividend date Record date Payment date 22 May 2019 6 June 2019 304 INFORMATION FOR SHAREHOLDERS| AIA GROUP LIMITEDADDITIONAL INFORMATION ANNUAL STATEMENT ISSUED PURSUANT TO THE OFFSHORE FUND TAX EXEMPTION REGIME IN SINGAPORE An indirect wholly-owned subsidiary of the Company, AIA Investment Management Private Limited, was incorporated in Singapore on 15 June 2016. Its businesses include the management of certain assets of the Company and its subsidiaries and branches, and it is required by the Income Tax (Exemption of Income of Prescribed Persons Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010 to issue an annual statement to each shareholder of the Company. To comply with the above legal requirement in Singapore, an annual statement containing the profit and market capitalisation information of the Company is available on the Company’s website. You may visit the Company’s website by clicking “Annual Statements issued pursuant to The Offshore Fund Tax Exemption Regime In Singapore” under the sub- section headed “Shareholder Centre” in the section headed “Investor Relations” to view the annual statement. SHARE REGISTRAR If you have any enquiries relating to your shareholding, please contact the Company’s share registrar with the contact details set out 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 (for general enquiries) aia.ecom@computershare.com.hk (for printed copies of the Company’s corporate communications) Website: www.computershare.com ANNUAL REPORT This Annual Report is printed in English and Chinese and is available on 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 above. The Company makes every effort to ensure consistency between the Chinese and English versions of this Annual Report. In the event of any inconsistency, however, the English version shall prevail. For environmental and cost reasons, shareholders are encouraged to elect to receive corporate communications (as defined in the Listing Rules) electronically. You may at any time send written notice to the Company c/o the Company’s share registrar or via email at aia.ecom@computershare.com.hk specifying your name, address and request to change your choice of language or means of receipt of all corporate communications. INVESTMENT COMMUNITY AND NEWS MEDIA Enquiries may be directed to: Investment Community Lance Burbidge Evelyn Lam Feon Lee Rachel Poon +852 2832 1398 +852 2832 1633 +852 2832 4704 +852 2832 4792 News Media Stephen Thomas Mark Walters Emerald Ng +852 2832 6178 +852 2832 1978 +852 2832 4720 305 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONINFORMATION FOR SHAREHOLDERS FORWARD-LOOKING STATEMENTS This document may contain 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, 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 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. 306 | AIA GROUP LIMITEDADDITIONAL INFORMATIONINFORMATION FOR SHAREHOLDERSBOARD OF DIRECTORS Independent Non-executive Chairman and Independent Non-executive Director Mr. Edmund Sze-Wing Tse Executive Director, Group Chief Executive and President Mr. Ng Keng Hooi 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 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee Mr. Cesar Velasquez Purisima AUDIT COMMITTEE Mr. John Barrie Harrison (Chairman) Mr. Jack Chak-Kwong So Mr. George Yong-Boon Yeo Dr. Narongchai Akrasanee 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 Ms. Swee-Lian Teo Dr. Narongchai Akrasanee Mr. Cesar Velasquez Purisima REMUNERATION COMMITTEE Mr. Jack Chak-Kwong So (Chairman) Mr. George Yong-Boon Yeo Mr. Mohamed Azman Yahya Mr. Edmund Sze-Wing Tse Risk Committee Mr. Chung-Kong Chow (Chairman) Mr. John Barrie Harrison Professor Lawrence Juen-Yee Lau Ms. Swee-Lian Teo Mr. Edmund Sze-Wing Tse Mr. Ng Keng Hooi REGISTERED OFFICE 35/F, AIA Central No. 1 Connaught Road Central Hong Kong WEBSITE www.aia.com COMPANY SECRETARY Mr. Mitchell New AUTHORISED REPRESENTATIVES Mr. Ng Keng Hooi Mr. Mitchell New SHARE REGISTRAR Computershare Hong Kong Investor Services Limited 17M Floor Hopewell Centre 183 Queen’s Road East, Wanchai Hong Kong PRINCIPAL BANKERS The Hongkong and Shanghai Banking Corporation Limited Citibank, N.A. Standard Chartered Bank AUDITOR PricewaterhouseCoopers Certified Public Accountant 307 CORPORATE INFORMATIONANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONADDITIONAL INFORMATIONactive agent An agent who sells at least one policy per month. active market A market in which all the following conditions exist: (cid:127) the items traded within the market are homogeneous; (cid:127) willing buyers and sellers can normally be found at any time; and (cid:127) 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 of other activities, such as general insurance business, less the value of intangible assets. It excludes any amounts not attributable to shareholders of AIA Group Limited. ANW for AIA is stated after adjustment to reflect consolidated reserving requirements. ANW by market is stated before adjustment to reflect consolidated reserving requirements, and presented on a local statutory basis. Actual exchange rates. 2019 Annual General Meeting of the Company to be held at 11:00 a.m. (Hong Kong time) on Friday, 17 May 2019. adjusted net worth or ANW AER AGM AIA or the Group AIA Group Limited and its subsidiaries. AIA Company Limited, a company incorporated in Hong Kong and a subsidiary of the Company. AIA International Limited, a company incorporated in Bermuda and an indirect subsidiary of the Company. 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 partnership between AIA and Discovery Limited, a specialist insurer headquartered in South Africa. American International Group, Inc. The AIA Leadership Centre located in Bangkok, Thailand. AIA Co. AIA International AIA Vitality AIG ALC 308 GLOSSARY| AIA GROUP LIMITEDADDITIONAL INFORMATIONamortised cost annualised new premiums or ANP ASPP available for sale (AFS) financial assets 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. 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. For group renewable business, it includes any premium payable on existing schemes that exceeds the prior year’s premiums. Agency Share Purchase Plan, adopted by the Company on 23 February 2012, a share purchase plan with matching offer to facilitate and encourage AIA share ownership by agents. 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. Board CER Company The board of Directors. Constant exchange rates. Change on constant exchange rates is calculated for all figures for the current year and for the prior year, using constant average exchange rates, other than for balance sheet items as at the end of the current year and as at the end of the prior year, which is translated using the constant exchange rates AIA Group Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the Main Board of the Hong Kong Stock Exchange (stock code: 1299). consolidated investment funds Investment funds in which the Group has interests and power to direct their relevant activities that affect the return of the funds. Corporate Governance Code Corporate Governance Code set out in Appendix 14 to the Listing Rules. cost of capital or 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 participating funds, there is no associated cost of capital included in the VIF or VONB. CoC for AIA is stated after adjustment to reflect consolidated capital requirements. CoC by market is stated before adjustment to reflect consolidated capital requirements, and presented on a local statutory basis. 309 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARY Dealing Policy Directors’ and Chief Executive’s Dealing Policy of the Company deferred acquisition costs or DAC deferred origination costs or DOC Acquisition costs 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. Such assets are tested for recoverability at least annually. Origination costs are expenses which are incurred in connection with the origination of new investment contracts or the renewal of existing investment contracts. For contracts that involve the provision of investment management services, these include commissions and other incremental expenses directly related to the issue of each new contract. Origination costs on contracts with investment management services are deferred and recognised as an asset in the consolidated statement of financial position and expensed to the consolidated income statement on a systematic basis in line with the revenue generated by the investment management services provided. Such assets are tested for recoverability. Director(s) The director(s) of the Company. embedded value or 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. EV for AIA is stated after adjustments to reflect consolidated reserving and capital requirements and the after-tax value of unallocated Group Office expenses. EV by market is stated before adjustments to reflect consolidated reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. EPS Earnings per share. equity attributable to shareholders of the Company on the embedded value basis or EV Equity EV Equity is the total of embedded value, goodwill and other intangible assets attributable to shareholders of the Company. ESPP ExCo fair value through profit or loss or FVTPL Employee Share Purchase Plan, adopted by the Company on 25 July 2011 (as amended), a share purchase plan with matching offer to facilitate and encourage AIA share ownership by employees. The Executive Committee of the Group. 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. 310 | AIA GROUP LIMITEDADDITIONAL INFORMATIONfirst half The six months from 1 January to 30 June. first year premiums free surplus group insurance Group Office HKFRS HKIA HKICPA Hong Kong First year premiums are the premiums received in the first year of a recurring premium policy. As such, they provide an indication of the volume of new policies sold. ANW in excess of the required capital. Free surplus for AIA is stated after adjustment to reflect consolidated reserving and capital requirements. 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 Financial Reporting Standards. Insurance Authority established under the Insurance Companies (Amendment) Ordinance 2015 or prior to 26 June 2017, the Office of the Commissioner of Insurance. Hong Kong Institute of Certified Public Accountants. The Hong Kong Special Administrative Region of the PRC; in the context of our reportable segments, Hong Kong includes Macau. Hong Kong Companies Ordinance Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended from time to time. Hong Kong Insurance Ordinance or HKIO Insurance Ordinance (Chapter 41 of the Laws of Hong Kong), as amended from time to time. It provides a legislative framework for the prudential supervision of the insurance industry in Hong Kong. Hong Kong Stock Exchange or HKSE The Stock Exchange of Hong Kong Limited. IAIS IAS IASB IFA International Association of Insurance Supervisors. International Accounting Standards. International Accounting Standards Board. Independent financial adviser. 311 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARYIFRS Standards and interpretations adopted by the IASB comprising: (cid:127) (cid:127) (cid:127) International Financial Reporting Standards; IAS; and Interpretations developed by the IFRS Interpretations Committee (IFRS IC) or the former Standing Interpretations Committee (SIC). ING Malaysia ING Management Holdings (Malaysia) Sdn. Bhd. interactive Mobile Office or iMO 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. interactive Point of Sale or iPoS iPoS is a secure, mobile point-of-sale technology that features a paperless sales process from the completion of the customer’s financial-needs analysis to proposal generation with electronic biometric signature of life insurance applications on tablet devices. It is part of iMO. investment experience Realised and unrealised investment gains and losses recognised in the consolidated income statement. investment income Investment income comprises interest income, dividend income and rental income. investment return Investment return consists of investment income plus investment experience. IPO Initial Public Offering. liability adequacy testing Listing Rules LOMA 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. Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. LOMA is an international trade association for the insurance and financial services industry. Million Dollar Round Table or 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 Model code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules. 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. 312 | AIA GROUP LIMITEDADDITIONAL INFORMATIONn/a n/m Not available. Not meaningful. operating profit after tax or OPAT Operating profit is determined using, among others, expected long-term investment return for equities and real estate. Short-term fluctuations between expected long-term investment return and actual investment return for these asset classes are excluded from operating profit. The investment return assumptions used to determine expected long-term investment return are based on the same assumptions used by the Group in determining its embedded value and are disclosed in the Supplementary Embedded Value Information. operating return on EV or operating ROEV Operating return on EV is calculated as EV operating profit, expressed as a percentage of the opening embedded value. operating return on shareholders’ allocated equity or operating ROE Operating return on shareholders’ 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 shareholders’ allocated equity. OTC Over-the-counter. Other participating business with distinct portfolios Business where it is expected that the policyholder will receive, at the discretion of the insurer, additional benefits based on the performance of underlying segregated investment assets where this asset segregation is supported by an explicit statutory reserve and reporting in the relevant territory. Participating funds persistency Philam Life Participating funds are distinct portfolios where the policyholders have a contractual right to receive, at the discretion of the insurer as to the timing, 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 allocation of benefits from the assets held in the participating funds is subject to minimum policyholder participation mechanisms established by 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 (PHILAM LIFE) Company, a subsidiary of AIA Co. policyholder and shareholder investments Investments other than those held to back unit-linked contracts as well as assets from consolidated investment funds. pps PRC protection gap Percentage points. The People’s Republic of China. The difference between the resources needed and resources available to maintain dependants’ living standards after the death of the primary wage- earner. 313 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARY puttable liabilities PVNBP margin 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 interests in any such funds which have to be consolidated by AlA are treated as financial liabilities. VONB excluding pension business, expressed as a percentage of present value of new business premiums (PVNBP). PVNBP margin for AIA is stated after adjustments to reflect consolidated reserving and capital requirements and the after-tax value of unallocated Group Office expenses. regulatory minimum capital Net assets held to meet the minimum solvency margin requirement set by the HKIO that an insurer must meet in order to be authorised to carry on insurance business in or from Hong Kong. renewal premiums Premiums receivable in subsequent years of a recurring premium policy. rider A supplemental plan that can be attached to a basic insurance policy, typically with payment of additional premiums. Risk-Based Capital or RBC RBC represents an amount of capital based on an assessment of risks that a company should hold to protect customers against adverse developments. RMF RSPUs RSSUs RSU Scheme Risk Management Framework. Restricted stock purchase units. Restricted stock subscription units. Restricted Share Unit Scheme, adopted by the Company on 28 September 2010 (as amended), under which 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. second half The six months from 1 July to 31 December. SFO share(s) Securities and Future Ordinance (Chapter 571 of the laws of Hong Kong), as amended from time to time. For the Company, shall mean ordinary share(s) in the capital of the Company. shareholders’ allocated equity Shareholders’ allocated equity is total equity attributable to shareholders of the Company less fair value reserve. Singapore The Republic of Singapore; in the context of our reportable segments, Singapore includes Brunei. single premium A single payment that covers the entire cost of an insurance policy. 314 | AIA GROUP LIMITEDADDITIONAL INFORMATIONSO Scheme solvency solvency ratio Sovereign takaful Tata AIA Share Option Scheme, adopted by the Company on 28 September 2010 (as amended), under which the Company may award share options to employees, directors (excluding independent non-executive directors) or officers of the Company or any of its subsidiaries. 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. AIA Sovereign Limited (formerly ASB Group (Life) Limited) and its subsidiaries, including Sovereign Assurance Company Limited, a licensed insurer in New Zealand. Islamic insurance which is based on the principles of mutual assistance and risk sharing. Tata AIA Life Insurance Company Limited. total weighted premium income or 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. unit-linked investments Financial investments held to back unit-linked contracts. unit-linked products universal life 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. 315 ANNUAL REPORT 2018 | OVERVIEWFINANCIAL AND OPERATING REVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONGLOSSARY value of business acquired or VOBA value of in-force business or VIF value of new business or VONB VONB margin working capital 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. 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. VIF for AIA is stated after adjustments to reflect consolidated reserving and capital requirements and the after-tax value of unallocated Group Office expenses. VIF by market is stated before adjustments to reflect consolidated reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. 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 consolidated reserving and capital requirements and the after-tax value of unallocated Group Office expenses. VONB by market is stated before adjustments to reflect consolidated 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 consolidated reserving and capital requirements and the after-tax value of unallocated Group Office expenses. VONB margin by market is stated before adjustments to reflect consolidated reserving and capital requirements and unallocated Group Office expenses, and presented on a local statutory basis. 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. 316 | AIA GROUP LIMITEDADDITIONAL INFORMATIONA I 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 8 AIA.COM

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